Over the last two decades, society has changed the way it prepares for retirement. Current pension arrangements mean that over 12 million people working in the UK today will have inadequate retirement incomes. Put simply, we are living longer and saving less. At the same time UK spending on infrastructure has declined. Infrastructure debt finance not only brings together these two seemingly unrelated problems; it also helps to solve them.
Most personal pensions end their lives invested in “safe-haven” assets like government bonds. In return for their security, these pay out less money in the long run than traditionally “risky” assets like shares. Combine this with the fact that people – both young and old – aren’t putting enough money aside in their working life, and the financial wellbeing of our later years starts to look increasingly bleak.
Alongside this, the financial crisis prompted governments around the world to reduce the size of their balance sheets, scaling back funding for the likes of new and ambitious transport, energy and telecoms projects. As a result, the Organisation for Economic Co-operation and Development (OECD) has found that £45 billion per year of additional investment is needed if the UK’s economy and population are not to suffer.
So how are these two issues linked? On the one hand big institutions, like pension funds and insurers, are looking for ways to generate returns on their clients’ savings over ten, twenty, even thirty years. And on the other, urgently needed developments require immediate investment, but with the potential to deliver revenue down the line.
Creating platforms that allow both of these aims to be met makes sense. Not only do we generate a new funding market for borrowers, but we create an asset class that delivers the long-term, stable cash flows essential to the wellbeing of an ageing population. There is also the added advantage of fixed rate yields that are typically far more attractive than government bonds.
The fact these investments are backed by real assets offers further advantages. Firstly, default rates are low. And secondly, building infrastructure that otherwise would have been postponed creates wider social and economic benefits. For example, the Aberdeen Western Peripheral Route was talked about for years, but is now set to become a reality thanks to a £530 million financing deal we agreed on behalf of our clients. For the city, this means reduced congestion, higher levels of efficiency and economic growth, and with traffic diverted away from the centre that also means less local pollution.
For us as asset managers, these projects epitomise responsible investment. Ultimately, investing in infrastructure creates a virtuous circle, benefitting investors and citizens alike. By aligning our long-term interests to those of the wider economy, we are able to act as stewards for both our clients and society as whole.
 Framework for the analysis of future pension incomes — DWP; September 2013 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/254321/framework-analysis-future-pensio-incomes.pdf