MIDIS reports on the impact private debt market investments could have on UK pension fund liabilities.

A new white paper has been published showing the impact private debt market investments could have on UK pension funds' ability to meet liabilities.

The paper, published by Macquarie Infrastructure Debt Investment Solutions (MIDIS), looks specifically at how infrastructure debt can play a significant role in a liability-driven investment (LDI) strategy.

In recent years, persistent low interest rates have prompted UK pension funds to increase allocations to the private debt market – including real estate debt, direct corporate lending and infrastructure debt – to help achieve the main objective of earning enhanced returns relative to investments in public corporate or government bonds.

According to Macquarie, for every £1 billion that UK pension funds allocate from corporate bonds to infrastructure debt, a reduction in pension fund deficits of approximately £270 million could be achieved.

The white paper presents a framework for pension funds to appraise opportunities to invest in private debt markets.

It goes beyond comparing the headline yield on a debt investment and also considers the liability matching properties - which support a pension fund's ability to generate additional returns by mitigating the need for cash and gilt allocations for interest rate and inflation hedging.

James Wilson, co-Head of MIDIS, said: "Pension fund solvency levels have been impacted by recent falls in gilt yields and they need to find more affordable ways of hedging their interest rate and inflation exposures.

"In view of the LDI benefits identified in the white paper, and the scale of financing requirements for UK infrastructure, we believe that infrastructure debt represents an asset class which can play a significant role in addressing the record deficits being reported by defined benefit pension schemes."

MIDIS was first launched in 2012 from London and has subsequently built a significant presence across the UK and Europe.

It has been awarded mandates in excess of £4 billion globally, including through the first ever pooled fund with a specific focus on UK inflation-linked infrastructure debt.

First published 06.10.2016

Lindsay.sharman@wilmingtonplc.com