The Green Investment Bank - Environmental Audit Committee Contents

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 of assets.

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 change?

Will the bond look like any other UK government AAA bond?

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

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2011
Prepared 11 March 2011