ARE PENSION FUNDS THE ANSWER?

Here’s the dilemma.  You’re in government and the economy is flagging.  You need to invest in infrastructure.  For that you need to borrow long term.  Banks stopped doing that a few years ago.  The only insurance company that was providing similar loans (Aviva) has just hit its FSA –imposed limit for unsecured loans.

Who else has got cash spare?  Pension funds! Surely they can help. Despite rumours to the contrary, banks are incredibly risk-averse (or so it has seemed to me over my time as a PFI adviser) when it comes to making long-term loans. If a loan goes bad, a bank has a shed-load of shareholders to answer to.  But the average member of the public doesn’t really have a great deal of sympathy with shareholders and doesn’t generally appreciate the link between the value of shares and their pensions, so unless of course the bank’s profligacy threatens the world economy, nobody really cares.  Oh, hang on…..

But put yourself in the position of a pension fund.  If you make an investment (or loan) that turns out to be worth less than you thought, your error directly impacts on pensioners.  And the PR fallout from something like that would be immense.  Hardly surprising then that government attempts to convince private pension funds that investment in infrastructure is good for them have, on the whole failed.    

So,the government has now turned its attention to public sector pension funds. And it appears to have found the equivalent of the bundle of cash under the mattress that everyone had forgotten about. According to last week’s Municipal Journal, Ministers are planning to consult on the removal of a 15% cap that the Local Government Pension Scheme has on the amount of its assets that it can invest in Limited Liability Partnerships.  There are indications that without this cap, it would like to invest more.  This somewhat begs the question of why the 15% cap was introduced in the first place and whether those objectives are no longer relevant.  Putting that to one side, the idea seems a reasonable one. But so did the overtures to private funds and so far that has produced a sum total of not a lot in terms of infrastructure funding.

I say “not a lot”, because there is one project that has just gone to market, the new hospital for North Tees and Hartlepool NHS Foundation Trust, a project which we have been advising on.  And there is interest from two pension funds.  It’s some way off getting the diggers in, but with a bit of imagination there seems to be a structure that might just fly.  The issue that is foremost in pension funds’ minds is risk.  They just don’t like it.  So they are not interested in the slightest in the building or running of the hospital.  Someone else has to do that (and take any associated risks).   So, if that company can be found, with the price, we could be on to something. And if so, maybe, just maybe, others will follow.

The problem is, going back to the PR – sympathy for shareholders may not be that great, but do something that might reduce pensions……

 This is a guest post from Paul Smith, Assistant Director at BDO.

Paul spent 6 years as Director of Financial Management at Leeds Teaching Hospital.  In 1999 he moved to Capita Consulting where he was involved in PPP/PFI in the Health, emergency services and MoD sectors.  In January 2003 Paul moved to RSM Robson Rhodes and has been involved in a number of PPP/PFI projects in the Local Authority and Health sectors.  Paul joined BDO  in 2005 as an Assistant Director specialising in PPP/PFI.

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