The investment environment for social security reserve funds is evolving. As an asset class, infrastructure investment has become more attractive. Driving this shift are broader trends of low and negative interest rates, a perceived overvaluation of equity and property assets, and the general difficulty of finding sufficient and appropriate income generating assets.

The ISSA report highlights these trends and outlines the governance measures to be put in place to ensure infrastructure asset choices are appropriate for the scheme.

Setting objectives and the appropriate governance structure

As the point of departure for a general discussion on the investments made by social security institutions, the ISSA Guidelines on Investment of Social Security Funds cover the governance journey from investment beliefs, mission and objectives, to putting in place an investment strategy and managing this.

While the principles also apply to infrastructure investment, a dedicated individual guideline has been added to these ISSA guidelines to reflect the additional governance issues that should be considered for this type of asset.

The risks associated with such infrastructure investments are often new and different from existing asset classes; for example, construction risk and managing voids. The choice of asset will also reflect the risk appetite and ability to manage the different risks inherent to varying choices of infrastructure asset.

Wide choice of what to invest in, and how to invest

Infrastructure assets include transport, energy and communication assets (e.g. ports, railways, renewable energy, cable networks), and also what is commonly classified as “social infrastructure” (e.g. schools, hospitals, social housing). Each type of asset has different characteristics and risk profiles, which will impact on how they are managed.

The report compares a direct investment approach with the use of external managers and the factors that drive these respective choices. It then considers the different approaches to building a portfolio, including a core or core plus approach, co-investment, an Investor Club model and listed infrastructure options.

Benchmarking and foreign investment

A challenge of infrastructure investment is how to assess performance. As regards benchmarking, a number of options are discussed. Also, when domestic options are limited, the report sets out the issues to take into account when investing abroad.

Infrastructure investment is a growing global trend and may well suit social security reserve funds. It also responds to a growing focus on Socially Responsible Investment. The report concludes with an overview of this trend and highlights the types of assets and the geographical spread of recent investment.