If there has been one asset class we’ve heard more about over the past year it would have to be infrastructure. With the government desperate for external funding for building projects they simply cannot afford and institutional investors exploring all options in their search for income, it seems an ideal match for defined benefit schemes.
The asset class is not for everyone, however: direct investment is highly illiquid and carries unique risks such as unforeseen construction costs. Any scheme investing directly must therefore be in it for the long haul and aware of the risks.
This goes some way towards explaining my surprise when National Employment Savings Trust (NEST) CIO Mark Fawcett told me he was looking to get involved in direct infrastructure investment himself. Fawcett is currently in talks about signing up to the government-backed Pension Infrastructure Platform (PIP), and if he gets his way NEST will become the first UK defined contribution scheme to invest directly in the asset class.
Such a move will be an incredibly exciting development; not just for NEST, but for UK DC investment in general.
At the time of writing, only a handful of DB schemes have signed up to the PIP, yet here is a DC scheme eager to leave the big boys behind and get right to the front of the queue. And not just any DC scheme mind, but one less than two years old, whose membership consists largely of auto-enrolled workers experiencing pension saving for the first time. Finally, this is a scheme whose investment strategy has been called boring by many commentators.
Australia’s superannuation schemes are old hands at investing in “expensive” and illiquid asset classes such as infrastructure and private equity, but they have had more than 20 years to build up the necessary size and, increasingly, in-house expertise. They offer a glimpse into how NEST and similar schemes might look with several decades’ experience – and contributions – under their belts, but for such a young (and currently small) fund, these are uncharted waters.
Ongoing talks are focussing on how the platform could work for a DC scheme. While the 10 signatories so far (all large DB schemes) have made a “soft commitment” of £100m and so providing a minimum of £1bn in seed capital ahead of the planned launch in the first half of this year, NEST will not have the resources to stump up such a large sum. One option would be to allow the scheme to pay in smaller instalments which would reflect the nature of contributions, but other possibilities are being discussed.
Whatever course is decided upon does not ultimately matter; what counts is the innovative approach to access asset classes traditionally deemed unsuitable.
NEST is by no means an average scheme, but its willingness to think outside of what is expected of it suggest an exciting brave new world for pensions.
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