Put your pension on a firm footing with infrastructure assets

Infrastructure produces reliable growth and is far less volatile than equities, says David Prosser.

Forth Bridge
Infrastructure often comes with a government guarantee
(Image credit: © Getty Images)

Should you invest your pension savings in infrastructure assets – the energy, transport and digital networks the UK needs to fund its future? The government is keen for savers to do so; last week’s Budget raised the possibility of increasing the legally binding cap on the charges made by occupational-pension funds, to allow for the launch of infrastructure investments, which can be more expensive.

Of course, just because the state sees savers as a handy source of infrastructure finance doesn’t mean you should sign up. But there are some good reasons to consider investing pension-fund money in infrastructure, whether via your employer’s scheme when this becomes possible, or though an individual pension arrangement. This is an asset class that offers a reliable stream of income over an extended period, often with the added bonus of a government guarantee.

Index-linked returns

Infrastructure funds finance the upfront cost of building, say, new roads, rail links, or broadband networks. Then they make their money back through charging infrastructure users over an extended period.

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These charges, including regular increases, often linked to inflation, are agreed in advance, so the fund knows what it will earn. And since the user is very often the state – on behalf of taxpayers – there is no question of the charges not being paid.

Research from EDHECinfra, which provides indices and data for investors in infrastructure, shows how valuable this model can be. Its research, based on the performance of 13 infrastructure funds over ten years to the first quarter of 2020, found that the sector had delivered an average annual return of 9.2%. While that was behind the 12.6% return delivered by the stockmarket over the same period, the outperformance of equities came at a cost: they were almost five times more volatile over the decade studied.

The promise of infrastructure, then, is a smooth return profile: decent returns delivered without fail year after year. That’s potentially very attractive to pension savers, both in the years prior to retirement when they’re aiming to build as large a fund as possible and when they begin drawing an income; at that stage volatility becomes really problematic.

Is there a downside? Well, one worry is implicit in last week’s Budget. Running an infrastructure fund is more labour-intensive than managing a portfolio of equities and those costs get passed on to investors. Higher charges are a drag on performance, especially over the longer term.

Use investment trusts

The other issue is liquidity. Infrastructure requires long-term commitment; that causes problems for open-ended funds, which must cope with investors moving money in and out of them, sometimes in large volumes.

If you are considering infrastructure for your pension, a closed-ended fund, such as an investment trust, is therefore preferable. That is simple enough in a personal pension, where you can easily pick and choose from a broad range of funds, but may be harder to manage through your employer’s scheme.

David Prosser
Business Columnist

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.