OECD | Pension360

Institutional Investors Cite Regulatory Risk, Transparency as Obstacles to Infrastructure Investment

The Organization for Economic Cooperation and Development (OECD) recently surveyed 71 pension funds on their interest in alternative investments.

[The full survey can be found here.]

The findings when it came to infrastructure investing were among the most interesting.

The survey found that the funds had increased their alternative investments across all categories between 2010 and 2013.

But when it comes to allocation, infrastructure still occupies the lowest rung on the totem poll.

The OECD sat down with institutional investors recently to ask why they might be hesitant to invest in infrastructure. From Investments and Pensions Europe:

At the recent OECD roundtable on long-term investment policy, institutional investors in attendance cited two main obstacles to infrastructure investment. First was the lack of a transparent and stable policy framework and regulatory risk was a top concern. Second was a lack of bankable investment opportunities.

Other important issues raised included clear and predictable accounting standards, long-term metrics for performance valuations and compensations, standardisation in project documentation, and transferability of loans and portability of guarantees. The expansion of financial instruments available for long-term investment (eg, bonds, equity, basic securitisation of loans), and the need for a clear risk allocation matrix to assign to the potential risk owner (government, investor or both) were also raised.

Ultimately, the primary concern for investors is investment performance in the context of specific objectives, such as paying pensions and annuities. Infrastructure can become an alternative asset class for private investors provided investors can access bankable projects and an acceptable risk/return profile is offered.

The study and roundtable were conducted as part of the OECD Long-term Investment Project.

OECD: Infrastructure Investing Low Among Largest Pensions

The world’s largest pension funds have significantly increased their allocations to alternative investments over the last four years. But allocations to infrastructure haven’t followed that upward trend, according to an OECD report.

Reported by Pensions & Investments:

Infrastructure investing activity remains low among the largest pension funds and public pension reserve funds worldwide, despite increased allocations to other alternative investments, a report from the Organization for Economic Co-operation and Development showed.

[…]

Average allocations to alternatives increased to 19.5% from 17.6% between 2010 and 2013 among the 10 largest pension funds surveyed, while infrastructure allocations were more stable. Of the 71 funds that responded to the OECD survey, unlisted equity and debt infrastructure investments totaled $80 billion, or 1% of total respondent assets, at the end of 2013, up slightly from $72.1 billion, or 0.9% of total respondent assets, at the end of 2012.

Mr. Paula and Raffaele Della Croce, lead manager on the OECD’s long-term investment project and co-author of the report, attributed the slow uptake to unstable regulatory frameworks and a lack of bankable projects.

“Pressure is on the policy side to provide the right conditions for investors to accept infrastructure,” Mr. Della Croce said in a telephone interview.

Although infrastructure investment activity remains low, plan executives are expressing interest in the asset category.

Large pension funds like the €20 billion ($24.5 billion) Etablissement de Retraite Additionnelle de la Fonction Publique, Paris, and $28 billion Afore Banamex, Mexico City, plan to establish new target allocations to infrastructure, according to the report.

Read the full OECD report here.

OECD Report: Longer Life Expectancy Threatening Pension Sustainability; More Reforms Needed

The Organization for Economic Cooperation and Development released a report Monday morning highlighting the challenges that longer life expectancy poses to pension systems around the world.

From CNBC:

The world’s retirement bill is coming due—and many countries aren’t ready to pay it.

That’s the conclusion of a report Monday from the Organization for Economic Cooperation and Development, a Paris-based group representing the world’s developed countries.

With populations aging and lifespans rising, government-supported pensions are cutting deeper into national budgets, crowding out spending on other programs and services. The added burden comes as the economies of the developed world are growing slowly, putting added pressure on the tax revenues needed to pay rising pension costs.

[…]

“The ongoing rapid demographic shift and the slowdown in the global economy highlight the need for continuing reforms,” OECD Secretary-General Angel Gurría said. “We must communicate better the message that working longer and contributing more is the only way to get a decent income in retirement.”

The report acknowledges numerous pension reforms by countries and states in recent years, but says more needs to be done. The report presented a handful of reform proposals. From the OECD:

Increasing the effective retirement age can help but more efforts are needed to assist older workers find and retain jobs. Public policies to reduce age discrimination, improve working conditions and increase training opportunities for older workers are essential.

Countries have also introduced reforms to strengthen funded private pensions. The report highlights the importance of increasing coverage rates in countries where funded pensions are voluntary. Auto-enrolment programs have been successful in raising coverage in the countries that have implemented them.

The report also calls for strengthening the regulatory framework to help pension funds and annuity providers deal with the uncertainty around improving life expectancy. It argues that regulators should make sure that providers use regularly updated mortality tables, which incorporate future improvements in mortality and life expectancy. Failure to account for such improvements can result in a shortfall of provisions of well over 10% of the pension and annuity liabilities.

Capital markets could offer additional capacity for mitigating longevity risk, but the transparency, standardization and liquidity of instruments to hedge this risk need to be facilitated. The regulatory framework will also need to reflect the reduction of risk exposure these instruments offer by ensuring they are appropriately valued by accounting standards and lowering the level of required capital for entities hedging their longevity risk.

Issuing longevity bonds and publishing a longevity index to serve as a benchmark for the pricing and risk assessment of hedges would support the development of longevity instruments.

Rebuilding trust is also an important challenge that policy makers face, says the OECD. Young people in particular need to trust the long-term stability of the pension system and the pension promise that is made to them. Communication campaigns and individual pension statements to explain the need for reform and facilitate choice by individuals are needed, says the OECD.

The full OECD report can be read here.

Photo by Horia Varlan via Flickr CC License