The bank that would deliver real rewards on all sides

The Government has made clear its commitment to driving £250 billion of infrastructure investment over the next few years. As we await George Osborne’s third Budget, the question on many people’s lips is how can we meet this ambitious goal whilst continuing to cut the budgetary deficit? How do we achieve growth and jobs without piling more debt on to the national balance sheet?

To address this issue, Localis has published a report, in partnership with Lloyds Banking Group, Credit Where Credit’s Due. It advocates the creation of a £30 billion National Infrastructure Bank, which would loan funds to public and private sector infrastructure projects, guarantee other banks’ loans for infrastructure projects and make direct investments. Through its sheer size, the NIB would spread risk by investing in a wide range of projects while helping to finance the bridges and roads, communication networks and energy plants that the country needs.

Although we suggest that central government should be prepared to invest its own capital (potentially via quantitative easing), we contend that pension funds could and should play the leading role in capitalising this new institution. With promising signs that a formal agreement between the Treasury and leading pension funds to deliver greater infrastructure investment is close, we argue that by following the example of Australia and Canada — where leading public and private funds invest up to 16 per cent of their assets in infrastructure — UK pension funds can not only secure attractive returns but also help provide a much needed jolt to the economy.

With Britain’s two largest private funds committing less than 3 per cent of their portfolios to infrastructure, more, it seems, can be done. The second-largest — the University Superannuation Scheme — has already indicated its commitment to invest further in domestic infrastructure, and more private funds should follow its lead. More than £10 billion of new projects could be funded if less than an additional 1 per cent of total UK pension fund assets were switched to infrastructure, which would be beneficial for the economy in both the short and long run, and also good for investors and trustees.

Public pension funds have much to gain from infrastructure investments. With up to 28 per cent of the value wiped off individual local government pension schemes between 2007 and 2009, public pension funds are reticent to invest further in what sometimes is regarded as uncharted territory. Yet with demographics moving against public funds — increasingly as much is being paid out in benefits as is coming in through contributions — there is a pressing need for them to link to more stable returns.

So it is good to see that local government schemes are upping their commitments. Essex County Council’s pension fund has doubled its investment in infrastructure since 2009-10, for example. We believe that the trend for greater use of infrastructure as an asset class will be encouraged by the creation of a National Infrastructure Bank, and we hope the Chancellor agrees.

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