1. Redington
13-15 Mallow Street
London EC1Y 8RD
T. 020 7250 3331
www.redington.co.uk
TUC Member Trustee Network Annual Conference 2011
Investing in Infrastructure – Combining Responsibility with Returns
November 15th 2011

2. 2
Investing in Infrastructure – Combining Responsibility with Returns
Why invest in infrastructure?
• Earn high-quality, long-dated inflation-linked
cashflows at attractive real yields
• Obtain returns no longer offered by traditional asset
classes
• Reach full funding with lower risk
• Support projects which provide high value add for
society
What to consider when investing?
• How will you access infrastructure returns:
 Choosing the right structure to make infrastructure
Flight Plan Consistent
 What are the advantages of bespoke investment
structures?
 Which risk profiles are acceptable?
Which opportunities are available?
• Wide range of attractive opportunities with different
risk/return profiles, such as:
 Social housing
 Private Finance Initiatives
 Water infrastructure

3. 3.0
3.5
4.0
4.5
5.0
5.5
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
%
30-year gilt yield
30-year swap rate
The markets we are in: declining yields
Long-term yields have fallen, pushing up the
value of pension funds’ liabilities...
Why Invest in Infrastructure?
The markets we are in
3
1
Source: Bloomberg, Redington
31-Oct11

4. 40
60
80
100
120
140
160
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
RebasedatJan07=100
FTSE 100
Emerging markets equity*
Developed world equity**
4
Why Invest in Infrastructure?
The markets we are in
The financial crisis has set equities on a rollercoaster ride
with low and volatile medium and long-term returns. Risky
assets have increasingly failed to deliver adequate
outperformance.
2
Source: Bloomberg, Redington
The markets we are in: underperforming equities
*Emerging market equity = MSCI Emerging Markets Index
**Developed world equity = MSCI Developed World ex. UK
31-Oct11

5. -0.25
0
0.25
0.5
0.75
1
1.25
1.5
1.75
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
%
Yield on 30-year inflation-linked gilt
30-year real swap rate
5
Why Invest in Infrastructure?
The markets we are in
Source: Bloomberg, Redington
Real yields have declined, making it more difficult for
pension funds to access attractive and secure long-
term returns that will allow them to reach full funding.
3
The markets we are in: low real yields
31-Oct11

6. 75%
85%
95%
105%
115%
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
FundingLevel(Assets/Liabilities)
Funding level
Full funding
250
300
350
400
450
Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11
£bn
Assets Liabilities
The effect on pension schemes: declining funding levels
Why Invest in Infrastructure?
The effect on pension schemes
1. Falling long-term yields 2. Risky assets underperforming 3. Declining real rates
FTSE 100 companies’ aggregate pension assets and liabilities Aggregate funding level of FTSE 100 pension schemes
As asset performance failed to keep pace with rising liabilities, funding levels declined.
Pension funds must therefore focus on making the right decisions to achieve full funding in a difficult environment.
Source: Aon Hewitt Pension Risk Tracker, Redington Source: Aon Hewitt Pension Risk Tracker, Redington
6
31-Oct11 31-Oct11

7. Full funding
Getting the returns you need
Current position
Infrastructure assets can help schemes
achieve full funding because they offer...
• Attractive rates of real return
• Inflation linkage
• Long-dated, high quality and often secured
cashflows
Pension funds must find ways to:
• Earn attractive long-term real
returns sufficient to achieve full
funding
• Obtain inflation-linked cashflows
• Strike an attractive risk/return
balance
• Consider where you want to be positioned in the capital structure (debt or equity)
• Determine the return you require and the level of risk you are comfortable with to choose the
right type of infrastructure asset to invest in
Making the best of infrastructure
7
Why Invest in Infrastructure?
Getting the returns you need

8. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
GBPMillions
Liabilities Path Actual Liabilities Assets Path Actual Assets
Liability Basis
Contributions & Asset Returns
Time Horizon
The Flight Plan is an effective tool for making focussed asset allocation decisions and identifying
the best opportunities.
It allows schemes to identify the assets which contribute most towards their progress to full
funding – we call them Flight Plan Consistent Assets.
Why Invest in Infrastructure?
Flight Plan
8
The Flight Plan
• Maps out the path of a
scheme’s assets and
liabilities from their
current position to full
funding
• Requires three key
variables to build: the
assumed rate of return
on assets, the cash
contribution schedule,
and the target date for
full funding.

9. 9
Growth
“Flight
Plan
Consistent
Assets”
Matching
Why Invest in Infrastructure?
Flight Plan Consistent Assets
Fuel efficiency: achieve an efficient risk/return balance

10. 10
-6
-4
-2
0
2
4
6
8
0 5 10 15 20 25 30
GBPMillions
Years
Initial investment
Attractive real
returns
Inflation-linked
cashflows
Providing a match
for liabilities
Inflows
Outflows
Source: Redington
Flight Plan Consistent Asset – Example Cashflow Profile
Why Invest in Infrastructure?
Flight Plan Consistent Assets
Key Characteristics
Flight Plan Consistent
Assets
• Enable schemes to
access attractive real
returns and long-dated
inflation-linked cash
flows .
• The attractive real
returns are the result
of a significant
illiquidity premium
Key Characteristics
Attractive real returns and inflation-linked cashflows High-quality, often secured cashflows
Illiquid Varying degrees of complexity/might be difficult to access

11. Infrastructure
• Take advantage of attractive yields on long-term secured
property leases
• Yields may be in excess of yields on corporate bonds issued by
same borrower
• Long-dated index-linked cashflows
Secured Leases
• Ground rent created when freehold land or building is sold on
long lease
• Typically “pepper-corn” rent for land only (not buildings)
Ground Rents
• Low-cost rental housing provided for disadvantaged people in
need of housing
• Generally provided by local councils and housing associations
Social Housing
• Investing in public sector projects through, for example, Private
Finance Initiatives (PFIs), bespoke investments structures or by
purchasing a suitable infrastructure asset
• Wide range of possible assets, from roads to power generation
Traditional Infrastructure
Why Invest in Infrastructure?
Flight Plan Consistent Assets
• Offers long-dated, inflation-linked cashflows
from secured borrowers (i.e. housing
associations) with quasi-government
guarantee
• Long-term, potentially inflation-linked
revenue streams
• Offers attractive returns, limited credit
risk and high level of security
Other Flight Plan Consistent Assets
11

12. We will focus on Social Housing and Traditional Infrastructure
to illustrate the different factors that need to be taken into account.
• Pricing mechanism: availability vs. demand
• Stage of development: infant vs. mature
Traditional Infrastructure
• Redington is cooperating closely with third parties
with strong infrastructure expertise and resources
to provide attractive investment solutions for
pension funds.
Social Housing
• Redington has been a pioneering force for turning
Social Housing into an investable asset class for
pension funds.
Accessing infrastructure
What to Consider when Investing?
Accessing infrastructure
Investing in infrastructure is usually relatively complex.
It is essential to focus on getting the details right to ensure
that the actual returns and cashflows meet the pension fund
investor’s expectations and requirements.
Specific Risk/Return Profile
of the individual asset
12
• Capital structure
• Solution type: bespoke vs. pooled
Investment Structure
Used to access the returns and
cashflows
1
2
• Social housing
• Private finance initiatives
• Water infrastructure
Examples
of infrastructure assets
3

13. Making infrastructure Flight Plan Consistent
What to Consider when Investing?
Making infrastructure Flight Plan Consistent
13
Pension funds must be clear about the way in which they want
to access infrastructure investments.
Before the financial crisis
• Infrastructure investments have historically been
structured with little equity and high levels debt
provided by banks. Pension funds often invested in the
leveraged equity as a growth asset with relatively low
security of returns and usually no inflation linkage.
After the financial crisis
• Banks have increasingly withdrawn from providing debt
financing. Pension funds have increasingly stepped in to
replace bank financing. Smaller schemes have focussed
on investing in infrastructure debt.
• Large pension funds have purchased whole
infrastructure assets (100% equity) to obtain full
ownership and enjoy all benefits such as inflation-linked
and high-quality returns.
• Full ownership allows pension funds to make
infrastructure assets Flight Plan Consistent.
The Right Structure to Earn the Returns You Want
90% Debt
Whole
Business
100% Equity
10% Equity
Provided
by banks
Pension
funds
Before the financial crisis After the financial crisis
Pension funds
Flight Plan Consistent

14. North America
• The UK’s largest pension fund – the BT Pension Scheme – has
invested over £300m in renewable energy infrastructure.
• A number of other large UK schemes, such as the Universities
Superannuation Scheme (USS) and the Railways Pension Scheme
(RailPen) have infrastructure allocations.
United Kingdom
• ABP – the pension fund for government and education employees
and the largest in the Netherlands – allocates 2% of its €242
billion assets to infrastructure.
• To facility this, it has opened offices in Hong Kong to gain access
to Asian infrastructure projects.
Continental Europe
• The largest US pension fund – the California Public Employees
Retirement System (CalPERS) – adopted a new investment policy
in 2008 with a target allocation of 3% of assets or $7.2 billion in
infrastructure.
United States
• The Ontario Municipal Employees Retirement System (OMERS)
and Ontario Teachers Pension Plan (OTPP) are large players in
direct infrastructure investment.
• They succeeded in joint bid for the UK High Speed Rail 1 for £2.1
billion.
Canada
What to Consider when Investing?
What other pension funds are doing
• They now hold a 30-year concession to own
and operate the rail line.
• Other large infrastructure investors
include Danish pension fund ATP, which
among has invested in toll roads and
ports around the world.
Europe
14
• As part of this strategy, CalPERS took a 12.7%
stake in London’s Gatwick Airport.

15. Bespoke investment structures
What to Consider when Investing?
Bespoke investment structures
15
Source: Evolution
Securities, Redington
Asset Manager
• Manage day-to-day operations and supervise financial performance of each
investment/provide operational fund management services
Investment Manager
• Provide financial analysis and investment,
origination and structuring expertise
Example Bespoke Investment Structure
Investment Consultant
• Support for evaluating and structuring
investments
• Ensure investments’ risk/return profile and
investment structure are in line with Fund
requirements
Pension Fund
Tailored Investment Structure
(e.g. Fund/Special Purpose Vehicle)
Development 1 Development 2 Development 3
Equity/Debt Investment
Housing Association
Portfolio
Equity Investment

16. Risk profiles
Most Risk
Pricing mechanism
Least Risk
Sector
The risk that an infrastructure investment fails to provide
liability-matching returns depends on several factors.
• An asset that earns a
return simply because it is
available for use will be
less risky than an asset
where the return depends
on actual demand
• “Infrastructure” covers a wide range of different assets
which can be exposed to a wide range of risks such as
‐ availability risk
‐ construction & performance risk
‐ political & regulatory risk (e.g. changing regulatory
regimes)
‐ environmental risk (e.g. pollution)
‐ technological risk (e.g. obsolescence, technical
challenges)
• Pension fund investors must therefore thoroughly assess
the risk profile of the asset they want to invest in
Infrastructure Sector
Availability Regulatory Demand Economic Price
Most RiskLeast Risk
Pricing Mechanism
• Investors will be exposed to
more risk if they invest at an
early stage of development,
but can also expect a higher
return
Development Stage
What to Consider when Investing?
Risk profiles
16
Source: Evolution
Securities, Redington

17. Which Opportunities are Available?
Private Finance Initiatives
Example: Private Finance Initiatives
Private Finance Initiatives are a form of Public Private
Partnership where private firms provide funding, construction
and operations services for public sector projects.
17
• Contracts are long-dated and cashflows typically inflation-
linked
• Revenue streams backed by quasi-government guarantees
and secured on underlying assets
• Illiquidity gives rise to a premium return over gilts
• Large scope for socially responsible investment and creating
wealth for both beneficiaries and the wider community
• Bank balance sheet contraction has increased the universe of
opportunities for pension funds to provide debt financing
Private Finance Initiative investment features
Defence: Future Strategic
Tanker Aircraft
Health: Queen Elizabeth
Hospital, London
Typical investment structure:
Government
Pension Funds
(Investors)
Special Purpose
Vehicle (SPV)
Capital
Interest
payments
Build & manage
through private
contractors
Cash flow
generated from
assets

18. • Bought by HSBC in August 2011 (for warehousing)
for £74m
• Provides water for 300,000 people in Cambridgeshire
• 2010/2011: Revenue of £20m with profits of £7m
before tax with no external debt except for a revolving
credit facility to cover working capital
• Attractive purchase opportunity for a large pension fund or a
consortium of funds
• Redington advised two UK schemes who bid for this asset. However,
although this bid was acceptable on price, it could not compete with
the winning cash bid which had an accelerated timetable and no due
diligence
Which Opportunities are Available?
Water infrastructure
Example: Water infrastructure
The UK water sector provides excellent examples of
infrastructure assets attractive for pension fund investors,
providing the security, returns and cashflows that pension
funds need.
• Economic environment has small impact on returns:
water is a necessity and will therefore be demanded
irrespective of economic growth.
• Inflation-linked cashflows and returns: water companies ‘
regulatory regime means they can increase prices in line
with the agreed price review which in turn is based on a
formula related to RPI.
• Low regulatory risk: The regulator’s desire to increase
competition in the area could have a negative impact on
returns but the Government is likely to block any such
move.
Water sector: key characteristics
Case study: Cambridge Water
18

19. Which Opportunities are Available?
Social Housing
Example: Social Housing
Social Housing is a form of low cost, rental housing typically
provided by local councils and non-profit organisations called
housing associations.
19
• Housing associations issue inflation-linked debt secured on a
pool of housing units to finance activities
• Interest payments are matched by rental income that is
typically increased yearly at RPI + 0.5%
• Illiquidity gives rise to a premium return over gilts
• Enjoys a large degree of government support, with rental
payments often heavily subsidised
• Combines social responsibility with returns
Social Housing investment features
Background
• Traditionally financed by state support and bank loans
• Financial crisis imposed losses and higher capital
requirements on banks, limiting their ability to lend
• The government is burdened by debt and a large deficit,
causing it to reduce spending
• This ‘funding vacuum’ has given pension funds an
opportunity to step in and provide financing

20. Social housing: risk profile
Which Opportunities are Available?
Social housing: risk profile
• The diagram shows a typical
social housing portfolio for a
pension fund investor with a
blended real return of ca. 3-4%
p.a.
• The portfolio consists of different
housing types with specific
risk/return profiles
• By adapting the share of the
different housing types in the
portfolio, an investor can tailor
the portfolio’s return and the risk
characteristics so that they fit
requirements
Social Housing is typically a low-risk asset class but the returns
and the risk on a portfolio can be tailored (to some extent) to
meet pension funds’ requirements.
20
Source: Evolution Securities, Redington

21. Redington Publications
21
Spring Collection Highlights: LDI 2.0, Secured Leases,
Ground Rents, Equity Release Mortgages, Social
Housing, Insurance-Linked Securities, Infrastructure
http://www.redington.co.uk/Redington/media/PDFs/
knowledge/Other%20Publications/Redington-Spring-
Collection-2010.pdf
Spring/Summer 2011 Collection: Enhanced Matching Assets,
Socially Responsible Investing and Long-Term Growth Assets
http://www.redington.co.uk/Redington/media/PDFs/knowledge/Other%20Publications/Reding
ton-Spring-Summer-Collection-2011.pdf
Keeping up with the latest in Flight Plan Consistent Assets
Redington publications

22. Contacts
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Contacts
22
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Telephone: +44 (0) 20 7250 3331
Redington
13-15 Mallow Street
London EC1Y 8RD
Robert Gardner
Founder &Co-CEO
robert.gardner@redington.co.uk
www.redington.co.uk
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