Pension investment in infrastructure is set to increase as pension schemes mature and investment capabilities increase, although better processes and mechanisms to define and collect consistent data are needed, the Pensions Policy Institute (PPI) has found.

The PPI’s report, A deep dive into infrastructure, found that there has been increased appetite for and consideration of infrastructure in recent years due to returns being resilient to market cycles and economic stress.

Indeed, the PPI said that infrastructure is expected to be the second-fastest growing form of private-capital assets under management, with widespread recognition of the potential benefits of investing in infrastructure.

According to the PPI, the greatest appeal lies with schemes and specialist insurers who hold, and expect to continue to hold, the liabilities for closed defined benefit schemes, with infrastructure set to form a "significant" core holding for specialist buyout insurers.

However, the PPI noted that whilst DB schemes have recognised the benefits of infrastructure investment for a while, in the past few years, defined contribution (DC) schemes are starting to explore this type of investment more.

“DC interest in infrastructure has been strengthened as economic crisis have increased the value of assets which help volatility management,” it stated, noting that calls for greater consideration of environmental, social and governance (ESG) factors have also generated more interest in investment into transitional infrastructure projects.

It also suggested that the government’s focus on value for money, alongside encouragement of greater investment in illiquids and UK projects, and increases in scheme scale, are likely to increase interest in this area from DC schemes.

However, the PPI warned that it is “challenging” to identify precisely how much UK pension schemes allocate to infrastructure at present, partly because of the way that asset allocation data is collected and defined.

According to the PPI, the methods through which schemes invest in infrastructure can also make it challenging to identify the level of allocation as schemes may invest through multi-asset funds that include infrastructure, rather than directly, and may not report the underlying asset mix of these funds in data collections.

The PPI found that data on DB scheme allocation to infrastructure is even more challenging to find, as the main source of aggregated information on DB asset allocation, the Pension Protection Fund (PPF) Purple Book, includes infrastructure within the ‘other’ category.

Given this, it argued that, for policy to monitor and assess the development and impact of infrastructure as an asset class on outcomes for members, there is a "clear need" for better processes and mechanisms to define and collect consistent data on infrastructure allocations and performance within and across schemes.

The PPI also acknowledged that barriers to increasing pension scheme investment in infrastructure remain, warning that current levels of knowledge and expertise may not be enough to deal with the complexities of investment in infrastructure.

It also suggested that investors need to move away from static technical assessments and financial models to an assessment that layers on wider factors for a thorough understanding of the risks and returns.

“Infrastructure investments can be complex and require specialised expertise to evaluate, structure and manage effectively,” it said. “Pension schemes, particularly smaller schemes, may lack the in-house expertise and resources required to effectively assess and manage infrastructure opportunities.

“Outsourcing management of infrastructure investment to external managers or funds may entail additional costs and due diligence tasks.”

Given this, the PPI suggested that larger schemes have greater ability to develop in-house expertise, as well as greater capacity to access external expertise when needed.

It also clarified that while there are questions as to whether there is yet a great enough coverage and level of knowledge to effectively engage with the increasingly complex decisions surrounding allocation to infrastructure, it is expected that as scale grows in the DC market, the challenges posed by insufficiently available expertise should become less significant as these new capabilities are built over time.

Finding the right opportunities is another area of concern though, as the PPI found that, despite interest from buyout insurers, investment is currently seen as constrained by the capacity to find and take on new assets.

"Interviewees reported that, at the moment, there is a shortfall of suitable assets in the UK and that investment teams spent much of their time seeking out new opportunities and trying to increase capacity in the infrastructure market through helping projects to come forward," the PPI said.

"Specific issues cited include the limits on the capacity of equity sponsors and planning restrictions."

Whilst the growth agenda of the new government was seen as a positive development, some also had concerns that the more stable political outlook might also attract more foreign investment into the UK market with a potential compression of returns from infrastructure for new UK investors.

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