Pension Funds and Investments in Infrastructure May 28, 2009 Sheila Beckett Senior Advisor Budget and Financial Accountability Program.

Pension Funds and Investments in InfrastructureMay 28, 2009

Sheila BeckettSenior Advisor

Budget and Financial Accountability Program

Pension Funds and Investments in Infrastructure

Texas ERS Investment Philosophy “Investment decisions shall adhere to the whole

portfolio approach as provided in the Texas Trust Code and the exclusive benefit requirements of the Texas Constitution. Consistent with those requirements, the Board of Trustees shall establish investment policies, objectives, and strategies for the purpose of obtaining the optimum return on the Fund’s portfolios in keeping with the assumption of prudent risk.”

Pension Funds and Investments in Infrastructure

Texas ERS Duty of Care

“The Board of Trustees, as fiduciaries of the Employees Retirement System of Texas funds, will:

a. Manage the assets for the exclusive benefit of the members of the retirement plans;

b. Establish prudent investment policies defining investment objectives and strategies;

c. Seek to maximize investment return while maintaining the safety of principal;

d. Diversify the assets to reduce risk of loss;

e. Monitor and document investment performance; and

f. Efficiently manage the costs associated with implementation of its investment program.

Pension Funds and Investments in InfrastructureTexas ERS Duty of Care continued

Investments shall be made exercising the judgment and care, under the circumstances prevailing at the time of the investment, that persons of ordinary prudence, discretion, and intelligence exercise in the management of their affairs, not in speculation, but when making a permanent disposition of their funds, considering the probable income from the disposition and the probable safety of their capital. In determining whether a trustee has exercised prudence with respect to an investment decision, such determination shall be made taking into consideration the investment of all the assets of the trust, or the assets of the collective investment vehicle, as the case may be, over which the trustee had management and control, rather than a consideration as to the prudence of the single investment of the trust, or the single investment of the collective investment vehicle, as the case may be.”

Pension Funds and Investments in Infrastructure

What is Infrastructure?

• Economic Infrastructure

• Social Infrastructure

Pension Funds and Investments in Infrastructure

Economic Infrastructure

• Transportation• Utilities• Communication• Renewable Energy

Pension Funds and Investments in Infrastructure

Social Infrastructure

• Education Facilities• Health Facilities• Security Facilities• Recreation Facilities

Pension Funds and Investments in Infrastructure

Ways of investing in infrastructure

• Primary vs. secondary market• Equity vs. debt finance• Listed vs. unlisted companies• Direct vs. indirect investment• General partner vs. limited partners• Domestic vs. international• Single-sector vs. multi-sector

Source: OECD Working Papers on Insurance and Private Pensions No. 32

Pension Funds and Investments in InfrastructureBarriers to Pension Funds Investing in Infrastructure

• Novelty• Lack of knowledge and experience• Insufficient data• Lack of familiarity with investment vehicles• Lack of transparency• Direct investment• Short lifespan of investment funds• Culture• Fees• Conflicts of interest and other governance issues

Source: OECD Working Papers on Insurance and Private Pensions No. 32

Pension Funds and Investments in Infrastructure

Estimated Market Cap Comparison (2007)

• Global Infrastructure Market $2.8 trillion

• Global Equity Market Cap $44 trillion

Source: Standard and Poors

Pension Funds and Investments in Infrastructure

Pension Funds and Investments in Infrastructure

Pension Funds and Investments in Infrastructure

Source: Peng/Newell 2007

Pension Funds and Investments in Infrastructure

Source: Peng/Newell 2007

Pension Funds and Investments in Infrastructure

Policy Recommendations

• Legislation establishing pension fund as a trust for exclusive benefit

• Legislation establishing prudent person and whole portfolio approach

• Oppose efforts by outsiders to direct investments or divert funds

Pension Funds and Investments in Infrastructure

Questions?

Pension Funds and Investments in Infrastructure

References

OECD Working Papers on Insurance and Private Pensions No. 32, “Pension Fund Investment in Infrastructure”, Georg Inderst, January, 2009.

Harvard Law School, Occasional Paper Series, Capital Matters No. 3, December, 2008, Larry Beeferman, “Pension Fund Investment in Infrastructure: A Resource Paper”

Contact Information

Office of Technical Assistance

www.treasuryota.us

Phone: 202 622 7610

[email protected]