Hewitt Associates, a global human resources consulting and outsourcing company, has commented on the measures announced in the UK Chancellor's Budget on the Green Investment Bank and also on the implications of increased Gilt issuance.
On the Green Investment Bank
Brendan Walshe, investment consultant at Hewitt Associates, said: "We welcome the formation of the Green Investment Bank, as announced in the Budget, and also the critical stewardship role which Infrastructure UK will play in developing a strategic approach across infrastructure sectors.
It is widely accepted that infrastructure expenditure can generate significant economic, social, environmental and international competitiveness benefits. Indeed the Eddington Transport Study in 2006 clearly highlighted that there was a significant economic cost of doing nothing. It is also widely accepted that there should be a natural synergy between pension funds (which are holders of long-term capital) and investments in infrastructure projects (which ultimately are long-term assets). However, investors and fiduciaries need to be comfortable with both the characteristics of the investment and also its attractions when compared with other opportunities across asset classes.
The initial remit of the Green Investment Bank appears to be focused on large complex projects where there is a significant risk of a financing gap emerging over the next few years. While the term 'large complex projects' may initially seem to move the goalposts too far along the risk spectrum for many fiduciaries, the Government's commitment to identify ways of mitigating financial risks to enable access for investors to projects, is commendable.
The consultation document that Infrastructure UK proposes to issue later this year on the Green Investment Bank will be eagerly awaited. We believe that given current industry sentiment there is a tremendous opportunity to address some of the structural issues that hinder investment and also the opportunity to promote suitable investment structures, with acceptable investment characteristics, that enable more pension funds investors (within the DB and the rapidly growing DC markets) to invest in infrastructure projects."
On increased Gilt issuance
Tapan Datta, senior asset allocation specialist at Hewitt Associates, said: "The latest announcement and accompanying release of data from the Debt Management Office (DMO) shows that issuance in 2010-11 at £187bn is likely to be lower than the £227bn in the 2009-10 financial year. However, this, by any standard other than the very recent past, remains extraordinarily high.
The size of the gilt market is still set to more than double to over £1tn in the four years since the issuance boom began in 2008. Importantly, allowing for the effects of quantitative easing, which has absorbed close to £200bn of gilts in the 2009-10 financial year, effective supply is much higher in the coming financial year, which is likely to lead to more difficult market conditions.
Though the aggregate picture of long-dated issuance is an improvement relative to the previous two financial years, it may still be regarded as disappointing from a pension fund point of view in that it may not have gone quite far enough. However, in the context of the very large borrowing needs of the government, the DMO has faced a difficult balancing act. In these circumstances, targeting close to a half of planned issuance in the form of long dated bonds looks perfectly reasonable.
Given the falling share of long-dated conventional gilt issuance and rising share of long dated index-linked issuance, significantly increasing the proportion of index linked issuance (relative to conventional) would help to move issuance maturities higher in the aggregate. Pension funds would be pleased to see additional supply of these bonds and particularly so if this resulted in less downward pressure on yields than has resulted from strong demand.
However, on DMO projections for 2010-11, the projected proportion of index-linked as a proportion of total gilts outstanding — though moving a little higher now — will still be lower than that seen three to four years ago."
