Infrastructure is gaining attention among African pension schemes as both a diversification tool and a way to better match long-term liabilities. In this article, we explore: 

• Is Infrastructure the ideal asset class for pension schemes?
• Why pension schemes should consider infrastructure investment.
• How to invest in infrastructure: Public-Private Partnerships and the “Colombia model”.
• Infrastructure investment trends across Africa.
   

Pension schemes in Africa have generally invested in a conservative manner with government debt and listed equity forming the majority of portfolio allocation, perhaps diversified with direct property for the larger schemes. As a result, portfolio concentration is high and many schemes underutilise the broader range of asset-classes, both traditional and alternative, where regulations allow. Additionally, pension schemes in Africa have had to (and most likely will continue to have to) grapple with high inflation. Another form of inflation that pension schemes will – thankfully – need to tackle is rising life expectancy.

Ultimately, the case for investing in alternative asset classes like infrastructure stems from the recognition that listed assets do not fairly represent a country’s full economic activity. The fixed income available in African countries is overwhelmingly government (or other public entity) debt rather than corporate debt. And stock markets show significant overweight relative to GDP to certain sectors, most notably financial.

Defining Infrastructure

Infrastructure is the basic physical systems of a business or nation: transportation, communication, sewage, water and electric systems are all examples of infrastructure. These systems tend to be high-cost investments and are vital to a country's economic development and prosperity.  Infrastructure projects may be publicly funded, privately financed, or delivered through public-private partnerships (PPPs).

Public-Private Partnerships (PPPs)

Public-private partnerships, or PPPs, are gaining traction across Africa as countries seek to balance their infrastructure ambitions without excessive debt. PPP projects often have requirements for part of the financing to be in local currency, and this is where a local institutional investor such as a pension scheme can actively participate. This creates a favourable environment for local capital providers to participate in infrastructure investment. PPP offers a way for a pension scheme to lend to government in a targeted way (as opposed to the untargeted way that purchasing government debt represents) and gain from investing alongside other private sector investors.

Global Examples

Pension schemes in Australia and Canada were among the first to invest in infrastructure. In the UK, two major pension consortiums have formed to facilitate infrastructure investment: The Pensions Infrastructure Platform (PIP), established in 2011, and GLIL Infrastructure, formed in 2015 by several major Local Authority pension schemes. Both PIP and GLIL have approximately £1.5bn each under management. More recently, some South African pension schemes have begun investing in infrastructure. In South America, pension schemes in Colombia are regular investors in infrastructure projects.

Why Infrastructure Works for Pensions

Infrastructure can be accessed in a fixed income or equity manner, and for pension schemes it is the fixed income approach that is generally the more appropriate. Such an investment provides:

• A fixed income investment with longer maturity than usually available
• A yield higher than that offered by government debt
• Diversification from traditional assets
• An income stream backed by a physical asset
• Optional index-linking, providing inflation protection. 
   

Infrastructure investments may be structured as index-linked instruments rather than conventional fixed income. A long-dated index-linked bond is often considered the best available match to a pension scheme’s long-term liabilities, whether in a Defined Benefit (DB) or Defined Contribution (DC) context. In this sense, a long-dated index-linked bond can serve as the closest available equivalent to a “risk-free” asset for pension planning.

Infrastructure as a Win-Win

An infrastructure investment can be win-win: pay higher pensions to tomorrow’s pensioners and improve the environment in which they retire. However, there are aspects concerning infrastructure that require extra management:

• It is an unlisted and illiquid asset class, which limits scheme allocation as a percentage of total portfolio
• It has a large minimum size for allocation in absolute terms
• It is complex, needing specialist expertise.
   

Many of these challenges can be overcome through a consortium approach and should not prevent serious consideration of infrastructure as a viable asset class for pension schemes. Moreover, development agencies such as the World Bank and the African Development Bank are spending substantial time and money to assist pension schemes interested in making meaningful infrastructure allocations.

Conclusion

Infrastructure is a highly compelling option for pension schemes looking to diversify portfolios, match liabilities more effectively, and contribute to sustainable development. With the right structures and partnerships in place, infrastructure can become a long-term, inflation-protected income stream that aligns with both financial goals and societal benefit.

At Lux Actuaries, we work with pension schemes across Africa and the Middle East to build resilient investment strategies that reflect both regulatory realities and long-term liabilities. To explore whether infrastructure is the right fit for your portfolio, get in touch with our investment consulting team.