The Labour chancellor will tell an audience of City leaders and chief executives on Thursday 14th November 2024 that she will introduce a new pensions bill next year that will aim to pool assets from the 86 separate local government pension schemes (LGPS), which together represent one of the world’s largest defined-benefit schemes, with 6.5 million members and £360bn in assets.
The decision is meant to mirror similar set-ups in Australia and Canada, where public sector pension schemes have been consolidated into larger funds that are managed in-house by professional investors. The idea is that retirement funds can then invest larger sums of money into a wider range of riskier and long-term assets like infrastructure, startups and private equity, all while saving on expensive fees paid to bankers, lawyers and advisers.
Based on the available information, it appears very timely for the Strangford Lough Crossing (SLC) project to consider a recent report by the Society of Pension Professionals (SPP) and its recommendations, as it represents an excellent potential case study for productive infrastructure investment that could align with the government’s objectives while delivering clear economic and social benefits. Analyzed below in more detail:
Current SLC Situation:
- Existing Ferry Service Challenges:
- Operating costs have increased significantly (£2.49m in 2016/17 to £3.52m in 2023/24)
- Cost recovery only 41% in latest figures
- Survey shows 94% of respondents indicate current service is not fit for purpose
- Limited operating hours (no 24/7 service)
- Weather/technical disruptions (108 cancellations due to fog, 158 due to mechanical issues in 2023/24)
- Economic Impact:
- Significant delays for commuters
- Business impacts from unreliable service
- Healthcare access issues (7 miles direct vs 75km alternative route)
- Educational access limitations
- Tourism potential constraints
Options Available Under SPP Framework:
- Infrastructure Investment Vehicle:
The SPP paper discusses various mechanisms that could be used to fund major infrastructure projects like SLC:
a) Local Government Pension Scheme (LGPS):
- Already invests over 7% in infrastructure (£27bn of £364bn assets)
- Has proven capability in infrastructure investment
- Could be part of coordinated approach to fund SLC
b) Private Sector DB Schemes:
- Currently hold substantial surpluses (£225bn+ on low dependency basis)
- Looking for long-term stable investments
- Bridge project could offer appropriate risk/return profile
- Funding Structure Options:
a) Public-Private Partnership:
- Similar to successful models cited in SPP paper
- Could involve multiple pension funds
- Government could provide certain guarantees/support
b) Infrastructure Bond:
- SPP suggests consideration of specific infrastructure bonds
- Could be modeled on successful Green Gilt program
- Would allow broader institutional investment
- Risk Management:
The paper suggests several approaches that could be applied to SLC:
a) Government Support:
- Potential first-loss guarantee
- Revenue support mechanisms
- Planning/regulatory assistance
b) Risk Sharing:
- Between public/private sectors
- Clear allocation of construction/operational risks
- Long-term contracted revenue streams
Specific Application to SLC:
- Economic Case:
From the available data:
- Current ferry service costs £3.52m annually with 41% cost recovery
- Bridge would remove ongoing operational subsidy requirement
- Would deliver significant economic benefits (access to healthcare, education, employment)
- Survey shows strong community support
- Investment Structure:
Could utilize:
- LGPS investment (aligns with existing infrastructure mandate)
- Private sector pension fund investment
- Government support through guarantees
- Potential infrastructure bond issuance
- Risk Management:
- Construction risk could be managed through experienced contractors
- Operational risk lower than ferry service
- Revenue risk could be managed through appropriate toll structure
- Government could provide certain guarantees
- Social Benefits:
Aligns with SPP focus on:
- Productive infrastructure
- Clear social benefits
- Long-term stable returns
- Regional development
Recommendation:
The timing appears optimal to progress SLC under the new investment framework being developed for UK infrastructure investment because:
- Policy Alignment:
- Government actively seeking infrastructure investment opportunities
- Clear productive finance focus
- Strong social/economic benefits
- Investment Environment:
- Substantial pension fund capital available
- Low interest rate environment
- Need for long-term stable returns
- Project Readiness:
- Clear business case
- Strong community support
- Technical feasibility established
Next Steps:
- Engage with:
- Treasury/DfI regarding funding structure
- LGPS/private sector pension funds
- Infrastructure investment specialists
- Develop:
- Detailed business case aligned with new framework
- Risk allocation strategy
- Government support requirements
- Progress:
- Technical design
- Planning applications
- Stakeholder engagement
The SLC project appears to be an excellent candidate to demonstrate how the new UK infrastructure investment framework can deliver both social benefits and appropriate returns while meeting pension funds’ investment requirements.