Superannuation and Infrastructure Funds

by Shaun McGushin

Discussions around the role that superannuation funds can play in investing in infrastructure Assets in Australia has gathered momentum as the significant funding deficit in Australia’s infrastructure requirements becomes more apparent to all. This is further expounded by the Australian Infrastructure Plan released by Infrastructure Australia earlier this year.

Superannuation funds are seen as a natural investors for infrastructure assets having regard to the relatively stable long term cash flows which infrastructure assets can provide. However, the latest statistics suggest that only one third of superannuation funds invest in infrastructure, and infrastructure assets represent only a small proportion (around 5%[1], equating to approximately $70 billion to $85 billion) of the total investments held by superannuation funds, although there are substantial differences across the range of funds.[2] This is the case despite performance figures showing that Australian infrastructure funds achieved a net return of approximately 10% over the longer term.[3]

Australia and Canada have been the two leading countries for superannuation or pension funds investing in infrastructure. By way of comparison to Australia, investment in infrastructure by Canadian pension plans amounts to approximately 4.6% and again there are substantial differences across the range of funds. This figure has been steadily growing since 1.9% in 2007. Although this growth has been led by larger pension funds, research shows that 34% of small Canadian pension funds intend to increase infrastructure investment.[4]

There are no significant legal barriers for super funds to invest in infrastructure projects, whether by way of an equity investment or becoming a financier. However, there are certain restrictions contained in the Superannuation Industry (Supervision) Act 1993 (Cth) and its associated regulations such as liquidity requirements, expected returns, risk profiles and asset allocations, which mean that there will be a limit on the proportion of total investments that super funds can invest in infrastructure assets. It has been estimated that for a typical retail master trust fund, direct infrastructure should be between 5-15% of a fund’s allocation.[5]

“Superannuation funds have increasingly understood the benefits of infrastructure investments as a stable, yield-generating, defensive asset class. A key challenge is how, when and where to efficiently deploy financial and human capital in the complex infrastructure space, especially in the current climate with historically high prices and a growing abundance of competing capital … Superannuation funds striving for out-performance are looking at more complex, non-core deals, dislocation opportunities and emerging markets, whilst being increasingly mindful of ESG factors.” Mark Hector, Portfolio Manager, First State Super

See the original article here.

[1] Association of Superannuation Funds of Australia (ASFA) – Financial System Inquiry Submission, March 2014 p.63.  This appears to be the position as at 2011.  As at December 2014, 12% of superannuation investments of registrable superannuation entities were in property and infrastructure – APRA Insight, Issue One 2015, p.6.

[2] Organisation for Economic Co-operation and Development – Pension Fund Investment in Infrastructure: A Comparison between Australia and Canada, July 2013 p. 15.

[3] Ibid pp. 15.

[4] Ibid pp. 4, 30.

[5] Infrastructure Partnerships Australia, The Role of Superannuation in Building Australia’s Future, p.14.