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UK pension funds "waking up to potential returns" from infrastructure investment, says expert

The founding of the industry-backed Pensions Infrastructure Platform's (PIP's) first investment fund shows that UK pension funds are beginning to warm up to the low risks and potential returns of investing in infrastructure, an expert has said.

Seven institutional investors have already committed £260 million to the PPP Equity PIP Limited Partnership fund, which will initially be capped at £500m. The fund has the backing of industry body the National Association of Pension Funds (NAPF) and its founding investors include the Pension Protection Fund (PPF), British Airways Pensions, Lloyds TSB and the Strathclyde and West Midlands Pension Funds.

Infrastructure investment expert Derek Stroud of Pinsent Masons, the law firm behind Out-Law.com, welcomed the initial interest of the fund's founding investors. He said that the early success of the fund could indicate that UK pension funds were getting ready to follow in the footsteps of those in other countries, which have traditionally invested around 10 times as much in infrastructure as those in the UK.

"Canadian and Australian pension funds have been ahead of the game for years and it may be the UK is belatedly catching up," he said. "Constructed and operating infrastructure projects can offer a 20-25 year period of relatively safe returns and will largely be inflation-proofed so you can see why this would be an attractive proposition, particularly where a pension fund's fixed-interest pool is probably suffering from low interest rates."

"It seems UK pension funds are now waking up to the potential returns and reduced risk of investing in infrastructure and are learning from Australian and Canadian funds, which have the highest asset allocation to infrastructure around the world. UK pension funds typically allocate only 1% to infrastructure, which it is claimed is around 10 times less than funds in Australia and Canada," he said.

The creation of the PIP was announced in November 2011, when the Treasury signed a Memorandum of Understanding with the pensions industry agreeing to work together to help establish an efficient investment platform for pension fund managers. It is managed by fund manager Dalmore Capital, and is the first pooled infrastructure fund for pension funds in the UK. It is expected to invest at the low-risk end of the infrastructure asset spectrum.

"A combination of low interest rates currently on offer from more traditional investment vehicles, and a requirement for a safe and steady return, will shape the way public sector funds weigh up future investments," said Stroud.

"The Government is also very keen to encourage investment in infrastructure projects and sees pension funds as an ideal source, so it's a case of trying to marry up the two. On top of that there is a whole host of private fund managers who have infrastructure funds and are in fund-raising mode at the moment and this is an area where investors see most opportunity," he said.

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