The Interim Chief Finance Officer submitted a report, the purpose of which was to provide information with regard to infrastructure, particularly in relation to local investment.
The Panel was advised that the Fund had historically avoided direct investment in the Tees Valley area. The reason for this was primarily to ensure that the Fund did not find itself inhibited by conflicts of interest in the management of those assets.
The Fund had however in the 1990s committed £5 million to the Teesside Private Equity, an arms-length investment which backed enterprises both locally and nationally. The advantage of investing locally would mean that the economic activity of providing affordable pensions would benefit a wide range of local stakeholders.
The Chancellor of the Exchequer had indicated that Local Government Pension Schemes should do more to invest in infrastructure. It was highlighted that a report had been submitted to the Tees Valley Combined Authority in February 2016 naming Teesside Pension Fund as a possible source of funding for infrastructure projects.
At the current time, no measures were in place to enforce LGPSs to invest in infrastructure, but it could be that in the future the Fund might be obligated to increasing investment in infrastructure.
In order to assist further infrastructure investment, the Treasury and Department of Communities and Local Government had provided the following definition:
"Infrastructure assets are the facilities and structures needed for the functioning of communities and to support economic development. When considered as an investment asset class, infrastructure investments are normally expected to have most of the following characteristics:
Substantially backed by durable physical assets,
Long life and low risk of obsolescence,
Identifiable and reliable cash flow, preferably either explicitly or implicitly inflation-linked,
Revenues largely isolated from the business cycle and competition, e.g. through long term contracts, regulated monopolies or high barriers to entry, and/or
Returns to show limited correlation to other asset classes.
Key sectors for infrastructure include transportation networks, power generation, energy distribution and storage, water supply and distributions, communications networks, health and education facilities, and social accommodation.
Conventional commercial property is not normally included, but where it forms part of a broader infrastructure asset, helps urban regeneration or serves societal needs it may be. Infrastructure service companies would not normally be included. The development, construction and commissioning of infrastructure assets is included in the broad definition.
Individual infrastructure investors will have further additional criteria they apply before making investments, such as current yield, time to income generation, management strength, risk mitigation measures, and amount of leverage."
Currently, there was no formalised protocol for local public bodies to approach the Fund with local investment opportunities. It was suggested that any local area investment proposals be submitted to the Fund for consideration; however it was emphasised that, in accordance with the Fund's fiduciary duties, proposals could only be evaluated and accepted or declined on the individual project's investment potential.
Any proposals received must have a viable business plan to allow for a detailed investment evaluation to be carried out, including detailed costings, benefits, risks and timescales. The proposal would be internally assessed with external advice taken where required, to identify portfolio suitability and risk return trade off, with riskier projects potentially requiring a partial guarantee from the leading project authorities.
If a project was considered as a potential viable fund investment, the Chief Finance Officer (or whoever was the lead responsible officer for the Fund), would submit a report to the Investment Panel for consideration, to approve the necessary resources required for a second stage of detailed due diligence and the resources required. Once the second stage was completed, a detailed report with regard to the investment would be submitted to the Panel for final approval.
It was highlighted that, in accordance with the current LGPS reforms to pool assets and for collective investment vehicles to carry out the "stock selection" investment decisions for Funds in the future, once the Borders to Coast Pension Partnership (BCPP) was able to evaluate and invest in infrastructure assets, all proposals would be put to BCCP for consideration.
The Panel was advised that using Fund assets to facilitate local area investment could both benefit the Tees Valley area and could add value to the Fund's asset mix; however not all projects would be suitable and no such investment would be undertaken without the approval of the Investment Panel.
A member queried why the Fund had only a small proportion of infrastructure in its portfolio. The Board was advised that the Fund had not invested in Infrastructure Funds because, until very recently, they charged high management fees and bonus fees, such as 2% management fees and a 20% bonus fee on performance returns over 8%. Some Infrastructure Funds had reacted to the Government initiative towards collaborative working and pooling assets in the LGPS by offering an LGPS specific classification of their Fund with reduced fees.
Pooling would provide more opportunity to resource a dedicated due diligence team. Nationally, Central Government were looking to put a national infrastructure vehicle in place for all pools. TPF would be able to join in particular schemes with other pools that would be of benefit to the Fund.
The Board was advised that the Local Authority Pension Fund Forum (LAPFF) were putting together an All Party Parliamentary Group to look at the issue of investment in infrastructure.
The Interim Chief Finance Officer advised the Board that investment in infrastructure represented a long term return and, in the case of investing locally, that the primary consideration would be if the business case demonstrated the ability to generate an acceptable economic return and the objectives of the proposal were deliverable.
ORDERED that the report be noted.