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HICL: Labour nationalisation would hit 8.7 million pensions

23 May 2019

HICL Infrastructure says the pensions of millions of public sector workers would be affected by Labour party plans to buy energy and water companies on the cheap.

HICL Infrastructure (HICL) has warned that Labour’s plans to nationalise large parts of UK infrastructure, including energy distribution and water, will affect 8.7 million pensions invested in the sector, most of which are held by public sector workers.

HICL, which owns a third of Affinity Water, the UK’s largest water-only company that operates in south-east England, made clear its concerns in its annual results published yesterday.

Its chairman Ian Russell said there was a dichotomy between the Treasury looking for new ways to fund infrastructure and Labour raising the prospect of nationalisation.

‘Setting aside the practical barriers to nationalisation, such as necessary compensation that would be payable to infrastructure owners, including UK pensioners and savers, the narrative around nationalisation ignores the many benefits of private capital,’ he said.

Russell noted that since 1990, the water sector in England and Wales is a top performer for customer service and bill levels when compared to European counterparts, as well as providing billions in cost savings.

Research by the Global Infrastructure Investor Association shows 8.7 million individual UK pensions, of which 59% belong to serving or former public sector employees, across 118 UK pension funds are invested in UK infrastructure, which has long been appealing to pension fund managers due to its steady income streams.

Russell said these figures ‘do not take into account individual UK savers who have invested in infrastructure funds, including 50% of HICL’s shareholders, through their private pensions, saving products, and direct shareholders’.

‘Future discussion on the merits and consequences of nationalisation must recognise and address the impact on end investors in infrastructure,’ he said.

Harry Seekings of InfraRed Capital Partners, who manages the £3 billion investment company, said it was responding to government consultations on the future of funding UK infrastructure.

‘While we believe a wholesale nationalisation programme faces considerable hurdles to implementation, the perception of this risk and the adverse impact of it on investor and stakeholder sentiment is understandable,’ he said.

HICL’s shares have taken a hit in the past week with nationalisation fears wiping out their 7% premium and leaving the stock at just above net asset value (NAV). The results though showed good underlying performance with a total return on net assets of 10.8% in the year to 31 March.

However, the costs of replacing collapsed contractor Carillion on 15 projects hit cashflow and lowered cover for dividends. Payouts  grew 2.5% leaving HICL on an attractive 5.2% yield with the company aiming to pay quarterly dividends totalling 8.25p this year and 8.45p in 2021.  

Russell said asset pricing ‘continues to be elevated due to the strong demand for assets, the limited supply of core infrastructure investments and the low interest rate environment’, but there were still well-priced opportunities.

It has continued to invest in public-private partnership (PPP) projects but only in mainland Europe and North America not the UK, ploughing £29 million into three projects over the year.

Jefferies analyst Matthew Hose – who has a ‘hold’ recommendation on the stock – said: ‘While HICL is performing well and continues to sensibly navigate market conditions, UK political risk tensions are still bubbling beneath the surface,’ he said.

‘In our view, this is likely to stop the fund recapturing its previous high rating.’

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