Pension trustees should take action in preparation for increasing their investment in infrastructure, according to XPS Pensions Group.

Its report, Open-ended Infrastructure: How your pension scheme can benefit, called for trustees to review their current portfolio to consider if it would benefit from an equity-like return with diversification from equities and some illiquidity premium, and urged them to undertake training and look at the features of specific funds that might be considered.

The report also encouraged trustees to consider liquidity in their strategy and to look at the longer-term evolution of their journey plan, and consider how an illiquid asset will complement their strategy both now and in the future.

In its summary, XPS found that there has been a clear progression in terms of availability of funds to meet a wider range of pension scheme requirements, ranging from more accessible diversified infrastructure through to sustainable and impact funds.

These assets remain illiquid investments, but with good quality offerings catering for a wider range of requirements, the scope for pension schemes to benefit from investing in infrastructure and share the benefit that this will create for society is significant, the report stated.

XPS noted that, whilst open-ended infrastructure gives some element of flexibility around this aspect, it is not a means of bypassing the fundamentally illiquid nature of the underlying investments.

However, it added that where there is a role for a longer-term asset with a higher return profile, open-ended infrastructure is a worthy contender, with a strong economic case and favourable attributes that align with pension schemes.

The report also stated that the immediate opportunity would appear to be primarily for defined benefit schemes, given more structural challenges that the defined contribution (DC) market is seeking to overcome in terms of providing mainstream investment in illiquid assets.

However, there is scope for open-ended funds to be modified for DC investors, through the addition of greater cash balances and other modest operational adjustments, according to XPS. This has been seen in practice with DC property funds and demonstrates the wider benefits that are likely to flow from the greater availability of open-ended funds, it noted.

XPS investment consultant, Rakhee Raja-Mistry, commented: “With more capital entering the market, infrastructure fund managers may seek to climb up the risk spectrum to deliver higher return targets. Proper assessment of managers including their processes and track records can help investors get a clear idea of the type of assets held and the manager’s discipline.”

XPS investment consultant, Tom Platt, added: “Whilst many might think that investing in open-ended funds is an attractive approach due to the scope for greater liquidity, conversely their appeal for many pension schemes comes from the ability for capital to be invested for longer periods without having to recycle proceeds into new funds.”

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