Public pension systems could help provide a solution to the $2 trillion 10-year infrastructure investment gap plaguing the United States, according to a new white paper by Clive Lipshitz of Tradewind Interstate Advisors and Ingo Walter of New York University.
The study examined 25 of the country’s largest public pension plans, representing an aggregate of 55 percent of pension assets in the United States, to explore the role of infrastructure investing and prioritization within their portfolios.
According to the paper, the collective $4.3 trillion public pension system is facing the growing issue of underfunding, threatening the fiscal integrity of government entities as well as promises made to bondholders and beneficiaries, and affecting taxpayers. Meanwhile, underinvestment in maintenance and development of infrastructure is threatening economic growth.
Increasing allocations to the infrastructure asset class could provide a solution to both of these issues. Larger investment targets would encourage funds to regard infrastructure as its own category, rather than a subset of another portfolio — which in turn would offer better tracking of return and costs. Pension funds also could directly invest in infrastructure projects.
According to the study, pension systems also should increase their exposure to open-end funds, which generate more returns from operating cash flows instead of capital appreciation.
The fund examines several successful models, such as “asset recycling” used in Australia, and the Canadian allocations to infrastructure, which typically average around 10 percent, compared to the typical 0 percent to 2 percent of U.S. pension funds.
To read the full study, click here.