As part of the government’s policy to promote economic growth, the UK Department for Work and Pensions (DWP) wants to build an evidence base around how defined benefit (DB) pension schemes could increase the amount invested in productive asset classes including infrastructure. In its response to DWP, EDHEC Infra & Private Assets underlines the advantages of infrastructure for long-term investors, particularly pension funds, but draws the Department’s attention to the risks of this category of assets, which it considers to be poorly captured by investors.

We show that while on aggregate infrastructure has a lower volatility than its public counterparts, there have also been multiple cases of infrastructure companies going bankrupt or face significant write downs. Robust data enables an investor to be aware of these risks and, more importantly, manage them in a timely manner. As long as fair value and risk are not properly measured, UK DB plans will continue to either not invest in infrastructure or fail to invest wisely and face the consequences of not managing the risks, as the recent episode of the multi-billion-pound loss faced by Thames Water investors some of which are UK pension plans, illustrates.

With poor quality data, UK DB plans also face the risk of mistreatment of pension rights. The annuity guarantees or lump sum calculations based on incorrect data can lead to an unfair valuation of pension rights and distort the benefits received by the pensioners. In the same way, fair valuation of all private assets, including infrastructure, is an important issue in the area of pension fund consolidations or buy-outs.

However, in recent years, there have been major advancements in the quality of the data available to the investors and regulators. As a result, it is possible to do much better both in terms of valuations, but also financial and climate risk measurements. Robust data will also allow a fair consolidation of funds which won’t depend on the methodological choices used by the individual funds.

We therefore think that there is now nothing to prevent the adoption of serious infrastructure valuation practices that use the right “comparables” to estimate the risk premium and therefore the right discount rates to use in infrastructure valuation. In the same way, relevant market indices for this class of investment enable pension fund capital to be allocated efficiently and the risk of this allocation to be managed.

In this context, it seems important to us that The Pensions Regulator should set up best practice rules and require pension funds to show that they have a serious investment process for this asset class, which should not remain marginal in institutional investors’ allocations due to its macro and microeconomic benefits.