Windfarms, music rights, sewers – where’s your pension money going?

Our pensions are vital to our health and happiness and they’re most people’s second biggest financial commitment – but how much do we know about where our money is actually invested?  In the current climate of low interest and rising inflation, fund managers are having to be more imaginative with how they invest our combined £2trillion in pension assets.

Bonds are increasingly popular, with pension funds, along with insurance companies in the US, the euro zone, Japan and Britain buying at least $640bn of bonds this year, but equities and multi-asset funds continue to be attractive. These days, though, more and more pension funds are investing in infrastructure projects, plus property, alternative energy sources and in some cases, smaller companies.  As well as earning better returns and spreading risk, the aim is to reduce volatility.

According to a survey published last year by Willis Towers Watson, an advisory and risk management company, nearly half (47%) of UK pension funds were invested in equities, 36% in bonds, 16% in other investments and 1% in cash.

However, interest in alternative investments such as property, infrastructure, green energy and private equity is growing.  Public sector pension funds are particularly enthusiastic here.  Exposure to alternatives has increased by 61%, according to new research from State Street Corporation, a provider of financial services to institutional investors, which looked at the asset allocation of 105 UK public sector pension funds.

Infrastructure projects are an increasingly popular choice for pension fund managers these days.  The Thames Tideway Tunnel, also known as London’s “super sewer,” the biggest overhaul of the capital’s sewerage system since the Victorian era, is being backed by a number of pension funds.

Mike Weston, chief executive of the Pensions Infrastructure Platform (PiP), which describes itself as “the infrastructure business developed by pension funds for pension funds,” said: “The involvement of UK pension scheme investors in the Thames Tideway Tunnel project is fantastic news, with UK pension schemes investing over a third of a billion pounds into the project.”

The government is keen to see more pension funds follow this example and it’s introducing changes to the law while pensions funds have expressed a frustration that there aren’t enough such schemes for them to invest in.

More specifically there’s growing interest among pension funds in alternative energy sources. Last year BlackRock, the world’s largest asset manager, revealed that its Renewable Income UK (RIUK) fund had already invested over £600m in some 40 wind and solar projects.  In total the firm manages assets worth over £3.7bn in the renewable power sector.  According to BlackRock, the RIUK fund’s popularity is due to its stable, inflation linked income. It argues that renewable power is now one of the most active sectors for deal flow in the growing infrastructure asset class.

Last year the Greater Manchester Pension Fund, a fund for employees of various institutions in the city and The London Pensions Fund Authority (LPFA), a leading local government pension fund administrator, agreed to increase their shareholding in energy supplier SSE’s Clyde Windfarm, one of the largest onshore wind farms in Europe.  Meanwhile, Abundance, an ethical peer-to-peer investment platform recently launched a pension fund that invests solely in renewable energy.

More unusual still is a recent move by Railpen, the investment manager for the Railways Pension Scheme.  One of the UK’s largest and longest established pension funds, it recently announced that it was investing in music copyright.  The fund, which is responsible for investments of around £27 billion on behalf of some 350,000 members, will buy music copyrights and receive royalties collected by Kobalt Capital, a subsidiary of a music royalties collection and technology company.

“With low expected returns from many traditional asset classes, we are prepared to allocate in alternative investments that can help us to pay members’ pensions well into the future,” Craig Heron, deputy investment director, RPMI Railpen, told CNBC in November.

Also in November, Greg Clark, the business secretary, announced that pension funds will be able to invest in start-ups, part of a strategy to stimulate investment in industry.  Rules will be changed, said Mr Clark, to allow pension funds to accept a greater degree of risk in their portfolios.  Isomer Capital was founded two years ago to bring pension fund money into start-ups and venture capital projects in the way, its founders say, that has already happened in Silicon Valley.

The opportunities to invest in new sectors are growing as pension fund managers look more widely at where to put our money.  Meanwhile, governments and regulators are happy to facilitate and even encourage a trend that offers potential for capital growth and good returns.

But, given that these are new and untested areas, the risk could also increase.  These might be interesting times for pension fund managers. Ultimately, though, companies and those paying into their pensions will have to take a greater interest in where their money is being invested.

Simon Brooke

2018-04-11T07:33:55+00:00 Blog|