Written evidence submitted by BT Pension
Scheme Management Ltd |
BTPS welcomes the opportunity to submit evidence
as part of the Environmental Audit Committee's inquiry into the
Green Investment Bank (GIB). By way of background, BTPS is the
largest corporate pension fund in the UK with £34 billion
1. How has the Government engaged BT Pension
Fund in relation to proposals for a Green Investment Bank?
The British Telecom Pension Scheme first became aware
of the proposal to set up the GIB when it was announced in the
March 2010 budget. However we were not formally engaged by the
Government in relation to specific proposals for a GIB until we
were invited to, and subsequently participated in, the first GIB
stakeholder meeting at the Department of Business Innovation and
Skills on 3 December 2010.
In the absence of Government engagement from the
period March 2010 to December 2010, we proactively participated
in several roundtables hosted by the Aldersgate group, which key
Government officials also attended. We have also fed our thoughts
into E3G who have acted as somewhat of an interlocutor between
Government and the BT Pension Scheme. We have seen a number of
structure charts for the GIB where a significant investment by
pension funds is factored in, we are concerned by this as we have
not been as integral part of the development process.
While we understand that the National Association
of Pension Funds has presented evidence to the Environmental Audit
Select Committee, we would strongly urge policymakers to gain
a better understanding of the differing and specific requirements
of the UK's largest institutional investors in terms of investing
in infrastructure, including renewable energy, directly.
2. What is your view of how well Government
has engaged with your organisation on this? How well in your view
is the process actually "market testing" the way the
Green Investment bank will work? Is there anything about the process
th&t you would have changed?
While we understand the Government needs to consider
the design of a GIB to meet public sector spending requirements
and rules, we feel that there should be more focus on designing
a GIB which could unlock significant long-term private sector
investment, including from pension funds, from the outset. In
the absence of this, simple assertions from investment bankers
that the funding will be available may not be reflected in reality.
We would encourage an iterative process for designing
the GIB which includes all significant potential consumers of
its products or services rather than one which is created in a
silo by Whitehall officials and their advisers and then announced
in May 2011.
Although we are the UK's largest corporate pension
scheme, the executive arm is a small team with limited resource.
While we are happy to devote resource to engage Government at
this critical time in terms of designing the GIB, we would encourage
one department to take the lead rather than risk us having to
repeat the key messages across all the departments which are stakeholders
in this subject.
This would be time well spent as getting the structure
right from the start will be critical in terms of encouraging
pension funds to invest directly in UK infrastructure as an asset
class which is attractive to us due to long-term, inflation-linked,
stable cash flows. It should be clear to the design process of
the GIB, that if the structure is not right the level of support
that pension funds are able to give will be significantly reduced;
we may want the underlying exposure but the wrong structure will
restrict our ability to invest in size.
3. What are the key factors that the Government
should keep in mind when designing ways for pension funds to invest
in green infrastructure and the Green Investment Bank?
BTPS acknowledges the scale of funding required to
renew and replace the UK's energy infrastructure in order to meet
stretching climate change targets and ensure energy security.
We support the principle of setting up a GIB to drive new forms
of co-investment including direct investment and risk-sharing
including first loss, partial provision of subordinated debt (the
model adopted by the European Investment Bank), credit and policy
guarantees for long-term capital providers such as insurance and
pension funds and sovereign wealth funds.
The Government should bear in mind that pension funds
have long-term inflationary-linked liabilities, strict regulatory
requirements as well as fiduciary duties to manage the assets
to maximise the long term risk adjusted returns. Hence they do
not borrow cash, do not encourage leverage, and, post-crisis,
are relatively liquid. Pension funds are risk averse, consider
sustainable factors and are currently looking to increase investments
with low risk, stable and positive cash flows with a contractual
link to UK RPI(orCPI).
Along with other major long-term investors, the BT
Pension Scheme is reaching the realisation that currently available
infrastructure funds, the traditional method for investors to
gain exposure to infrastructure, are based on the private equity
structure and are inappropriate to meet our need for bond like,
inflation linked returns. The private equity structure incentivises
the manager to maximise leverage and remove the desired inflation
risk. These funds typically have a 15 year maturity, so managers
will tend to sell investments before the end of their economic
life in order to crystallise a performance fee.
This realisation is driving some of the world's large
pension schemes, including the Canadian and Dutch schemes, to
invest directly in infrastructure with a structure more aligned
to their needs. Indeed the BT Pension Scheme is considering increasing
its allocation to direct infrastructure in line with the planned
de-risking of the Scheme. The disadvantages of pension funds investing
directly in infrastructure are that they need to support larger
teams of people and absorb deal costs if a bid were to fail. It
is also worth bearing in mind that pension funds are unlikely
to have sufficient expertise to identify winners among renewable
technologies, and we will therefore look to the GIB to supply
expertise and guidance on this. We are also concerned on avoiding
a concentration of risk in a particular technology, in particular
one with significant operational challenges such as large-scale
offshore wind. We would also highlight that the process that the
government follows in selling its assets must be a clear one.
In an ideal world, the GIB would be a catalyst for
reshaping the infrastructure investment framework such that it
moves away from the current private-equity-like structure to something
much more attractive for pension funds. We would be pleased to
work with the GIB on this.
4. Are there any specific types of "products"
that it would be helpful for a Green Investment Bank to offer
to reduce the risk to pension funds directly investing in potential
Green Investment Bank projects?
We have been vocal about the importance of designing
products to meet the needs of pension funds. For example, based
on current proposals for the issuance of green bonds, we would
struggle to place them within our existing asset allocation and
hence convince our Trustees to buy these. We have a fiduciary
duty to invest in the most commercially competitive bonds after
considering price, credit risk and liquidity. This means that
any reduction in liquidity (inevitable given the small issue sizes
envisaged) needs to be compensated by higher yields. Our approved
asset classes for bonds include UK government inflation linked
and global credit and any UK issued "green bonds" that
we or any of our managers purchase need to fit into one of these
mandates. We have a number of outstanding questions on the issue
of green bonds including:
If we invest in green bonds, will there be liquidity
in the market if we need to alter our duration to match changes
in our scheme's liabilities?
Will the bonds yield R/CPI plus?
Will the bonds have a long tenor (+15 years)?
How easy will they be to value?
How can the Government assure investors that the
bonds will not linked to volatile carbon prices or individual
projects whose economics is based on policy which is subject to
Will the bond look like any other UK government AAA
In addition to the GIB providing specific products
to stimulate investment in the UK's energy infrastructure, pension
funds will need to get comfortable with the degree of policy risk
we are taking with such direct investments. Investments in renewable
energy projects are very long-term and only possible if assisted
by policies that support a relatively safe long-term assessment
of expected risks and returns. These policies need to be affordable
by government and designed to last longer than a term of parliament.
Where the credibility of support mechanisms for existing
investments is called into question, future private investment
in renewable energy will be severely curtailed and/or the price
of raising capital for these investments will increase. Therefore,
retroactive changes (such as were recently considered in Spain)
seriously hamper the wider prospects of attracting large-scale
private investment to the renewable energy sector. The experience
outlined here has caused many investors to put on hold, in some
cases indefinitely, their review of renewable investment opportunities
not just in Spain but globally. If we are not able to get comfortable
on this issue as a key concern of our trustees, then we will struggle
to support this initiative.
Please do not hesitate to contact us if you would
like to discuss any aspect of our response in more detail.
7 January 2011