The introduction of the federal government’s MySuper default product could lead to a decrease in superannuation trustees’ interest in infrastructure as an investment, an industry report has found.
The report, “Financing Australia’s infrastructure needs – superannuation investment in infrastructure”, found industry participants were concerned about the direct impact MySuper and other reform pressures could have on the infrastructure sector.
“More specifically, infrastructure was not seen as compatible with the strong focus on low-cost investments contained in the MySuper proposal – particularly as a consequence of new statutory duties for MySuper trustees,” the report said.
“Trustees would potentially find it more difficult to allocate funds to infrastructure investment in a regulatory and competitive environment heavily focused on cost.”
Participants also labelled the response of Australian government entities to super funds that invested in illiquid assets during the global financial crisis as a concern.
“Participants commented that a number of funds that heavily invested in illiquid assets were hit hard by the global financial crisis and as a result Australian government entities involved in the regulation of superannuation investment have responded conservatively,” the report said.
“It was noted that APRA (Australian Prudential Regulation Authority) has been pressing funds for more information and justification around investment in illiquid assets such as unlisted infrastructure and this additional compliance overhead acted as a deterrent against additional investment.”
The lack of clarity over what is considered a reasonable allocation to long-term illiquid assets was also a concern for some participants.
Outside of regulatory and industry pressure issues, participants pinpointed the key barriers for the infrastructure sector as lack of a clear pipeline and government commitment to infrastructure; lack of suitably structured projects; and inconsistent, complex and expensive bidding processes.
Institutional investors said if they were to invest the extensive time required to assess projects, there needed to be much more certainty around future project pipelines.
“In order to generate market confidence and simulate further interest . a national pipeline of funded projects needs to be created using the existing Infrastructure Australia priority project list as a basis,” the report said.
“The expanded role defined for Infrastructure Australia in the 2011 federal budget is an important initial step in providing a more definitive picture of the projects that will require further allocation of private financing.”
Meanwhile, the report found Australia’s super fund allocation to infrastructure compared positively to the rest of the world.
Australia is considered a leader in investment in infrastructure along with Canadian and Dutch pension funds.
The report was commissioned by the Financial Services Council and conducted by Ernst & Young Australia.
