Put your pension on a firm footing with infrastructure assets

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

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. 

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.

Recommended

Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Wholesale gas prices are on a downward trajectory, but does this mean lower energy bills later this year?
27 Jan 2023
Best regular savings accounts – January 2023
Savings

Best regular savings accounts – January 2023

You can earn an attractive rate on the best regular savings accounts. We tell you the best on the market to take advantage of right now
27 Jan 2023
Equity release v downsizing – which is best?
Personal finance

Equity release v downsizing – which is best?

Equity release hit a record high in 2022. But is downsizing a better way to hold on to your money?
27 Jan 2023
Self-assessment tax returns: what you need to know about getting your tax bill right
Income tax

Self-assessment tax returns: what you need to know about getting your tax bill right

Understanding how self assessment works can help you ensure you pay the right amount of tax, as well as avoid penalties for missing the deadline.
27 Jan 2023

Most Popular

House prices could fall 30%. Should investors be worried about a repeat of 2008?
Investments

House prices could fall 30%. Should investors be worried about a repeat of 2008?

Some analysts are predicting that house prices could fall as much as 30%, which, when compared to the fact that prices have jumped 28% since April 201…
24 Jan 2023
Will energy prices go down in 2023?
Personal finance

Will energy prices go down in 2023?

Wholesale gas prices are on a downward trajectory, but does this mean lower energy bills later this year?
27 Jan 2023
Council tax increases 2023 – how much more will you pay?
Tax

Council tax increases 2023 – how much more will you pay?

Your council tax bill will go up in April - we reveal the councils that have confirmed what this year’s increase will be.
23 Jan 2023