UK pension funds could achieve £270 million in deficit reduction for every £1 billion invested in infrastructure debt
London, 04 Oct 2016
Macquarie publishes new white paper ‘Appraisal of private debt opportunities: A holistic approach for UK pension funds’
Macquarie Infrastructure Debt Investment Solutions (MIDIS) has published a new white paper demonstrating the impact that investments in private debt markets could have on UK pension funds’ ability to meet liability obligations and, in particular, how infrastructure debt can play a significant role in a liability-driven investment (LDI) strategy.
In recent years, persistent low interest rates have prompted UK pension funds to increase allocations to the private debt market – including real estate debt, direct corporate lending and infrastructure debt – to help achieve the main objective of earning enhanced returns relative to investments in public corporate or government bonds.
According to Macquarie, for every £1 billion that UK pension funds allocate from corporate bonds to infrastructure debt, a reduction in pension fund deficits of approximately £270 million could be achieved.
The white paper presents a holistic framework for pension funds to appraise opportunities to invest in private debt markets. MIDIS’ framework goes beyond simply comparing the headline yield on a debt investment and also considers the liability matching properties - which support a pension fund’s ability to generate additional returns by mitigating the need for cash and gilt allocations for interest rate and inflation hedging.
The white paper demonstrates this by examining a case study of a pension fund making an allocation to UK inflation-linked infrastructure debt, which has particular LDI benefits, due to its long duration cashflows with contractual inflation-linkage.
Andrew Robertson, Co-Head of MIDIS, explains: “By comparing the debt investments originated in MIDIS’ UK inflation-linked pooled fund with the constituents of a corporate bond index, we estimate the combined LDI benefits and illiquidity premium are equivalent to a yield enhancement of approximately 1.3 per cent per annum above corporate bonds.”
James Wilson, Co-Head of MIDIS, added: “Pension fund solvency levels have been impacted by recent falls in gilt yields and they need to find more affordable ways of hedging their interest rate and inflation exposures. In view of the LDI benefits identified in the white paper, and the scale of financing requirements for UK infrastructure, we believe that infrastructure debt represents an asset class which can play a significant role in addressing the record deficits being reported by defined benefit pension schemes.”
MIDIS was first launched in 2012 from London and has subsequently built a significant presence across the UK and Europe. MIDIS has been awarded mandates in excess of £4 billion globally, including through the first ever pooled fund with a specific focus on UK inflation-linked infrastructure debt.
MIDIS recently announced the expansion of its business into the United States, launching the business in New York. The transatlantic growth of the team follows the launch of MIDIS’ second UK inflation-linked infrastructure debt fund in April 2016.
Macquarie Group (Macquarie) is a global provider of banking, financial, advisory, investment and funds management services. Founded in 1969, Macquarie operates in 64 office locations in 28 countries and employs more than 14,300 people. Assets under management total approximately £278 billion at 30 June 2016.
About Macquarie Infrastructure Debt Investment Solutions
In early 2012 Macquarie established the Macquarie Infrastructure Debt Investment Solutions (MIDIS) platform to leverage the infrastructure expertise within Macquarie into an investor-aligned global infrastructure debt investment management business. The MIDIS platform has been successful in securing mandates with insurer and pension scheme clients and has a track record of investing at attractive yields.