Pension Fund Investment in Infrastructure: A Resource Paper

Source: Larry W. Beeferman, Pensions and Capital Stewardship Project, Labor and Worklife Program, Harvard Law School, an Occasional Paper, December 2008

What is termed “infrastructure” appears to offer pension funds opportunities for investment that might yield substantial and predictable returns matching their long-term liabilities. But there are diverse ways by which infrastructure is defined and an increasing number and variety of facilities or services are being lumped under that term. Infrastructure appears to be attractive as a means for diversifying pension fund investment portfolios, but it does not readily fit within a distinct asset class. This complicates the task of assessing how it diversifies a fund’s portfolio and helps achieve its financial objectives. Whatever the infrastructure investment vehicle, its profile of reward and risk ultimately derives from those of the underlying individual infrastructure project investments. At the project level many factors shape the profile. There are an increasing range and variety of investment vehicles from mutual fund-like public traded vehicles to private equity-like limited partnerships to direct investment. They differ greatly in terms of the demands they make on pension funds’ organizational capacity and resources and decision-making and oversight capabilities. Historical data on returns and risks of investment vehicles is limited and constrained by the largely commercial nature of the sources of that data. There are few scholarly studies. Those studies suggest that claims about longterm, relatively stable and not insubstantial returns have some merit, but much more needs to be done to substantiate those claims. Fees charged for investment through various vehicles vary widely from mutual fund-like to private-equity fund-like fees. Particularly with regard to the latter there are concerns about whether such fees are excessive and, as a related matter, whether there are serious conflicts of interest in how the vehicles are managed.

Investments in infrastructure, like other kinds of investments, potentially pose concerns about the job impacts and labor practices of both the companies that are the object of investment and the public entities, the privatization of whose facilities or operations provides the occasion for private investment. These concerns are a special source of apprehension for public sector pension funds whose members might be affected. Wholly apart from action pension funds might take, political debate over privatization has resulted in the imposition of both process and substantive labor-related requirements by legislative bodies or executive officials either as a matter of broad policy or decision-making in particular contexts. While some may argue that such action moots out any need for involvement by pension funds, a number of funds have concluded that they as prospective owners of privatized facilities need to address job impacts and labor practices and have formulated policies to do so. A number of those policies relate to how the fund should take cognizance of potential loss of or harm to public sector jobs; others pertain to the workplace issues at privatized facilities. Generally speaking, these policies avoid hard and fast rules in favor of provisions that encourage or incentivize managers of investment vehicles to take serious enough account of job and labor issues. Correspondingly, they aim to spur pension fund decision-makers to seriously bear in mind how those managers have acted without compelling those decision makers to not invest with or disinvest from managers whose behavior falls short. Such flexibility is seen as a means for accommodating the requirements of fiduciary duty.

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