UK budget may hit funding for infrastructure revamp

By Chris Vellacott and William James

LONDON, March 21 (Reuters) - Britain's government may havedamaged its own ambitions to revamp the country's infrastructureusing private sector money after new economic policies hobbled akey industry's incentive to invest.

Policies announced on Wednesday in the annual budgetscrapping the requirement for millions of retirees to buy anannuity with their savings has weakened a key pillar of businessstrategy for the British life and savings industry.

Insurers are keen investors in infrastructure projects likebridges and housing because the long-term, steady revenues fromroad tolls and rents fit well with obligations to pay incomeover decades to their annuity clients.

"If what's been announced results in a material reduction inannuities, it is almost bound to impact on the life and pensionsappetite for investing in long-term assets," said a senior boardmember at a blue chip insurance group on condition of anonymity.

The reforms to pensions announced by the governmenteffectively meant Britain's insurers lost control of a captivemarket worth up to 15 billion pounds per year that would havegone into their annuity products.

PLEDGE FROM BIG INSURERS

Six big UK insurers - Legal & General, Prudential, Aviva, Standard Life, Resolution and Lloyds Banking Group unit Scottish Widows - pledgedin December to invest 25 billion pounds in transport and energyprojects over the next five years.

Industry sources say that commitment still stands but ifannuities are likely to make up a smaller component of theinsurers' business mix, future commitments to infrastructure areuncertain.

"It's the last thing on your mind when you're trying to workout whether you have a business model in this particular space.The rug's been taken from under them in terms of their abilityto finance this sort of project," said Eamonn Flanagan,insurance industry expert at Shore Capital.

Britain's government has made boosting private sectorinvestment in infrastructure a priority as it grapples withcrumbling and overcrowded roads, railways and airports whiletrying to curb public spending.

A spokesman for the Treasury denied the impact of newpolicies on insurers' annuities businesses would undermine theirincentive to back infrastructure projects.

"UK infrastructure will continue to be an attractiveinvestment for companies here and around the world, with around15 billion pounds of inward investment in UK infrastructuresince May 2010," the spokesman said.

He added that the willingness of insurers to commit money toinfrastructure last year was largely due to new European capitalrequirements for insurers - known as Solvency II - having provedless burdensome than initially feared, freeing up more money toinvest.

But in a document detailing new pensions policy titled"Freedom and Choice in Pensions", the government concedes therecould be an impact on future appetite for infrastructureinvestments from the reforms.

The document says the current stock of UK annuities is wortharound 210 billion pounds with 11 billion pounds being added onaverage every year.

While existing annuities will not be affected by thereforms, new retirees could invest less into these products.This, the document says, could affect demand for assets used toback annuities - including infrastructure.

However, some infrastructure experts said demand for UKinfrastructure is sufficient to keep money flowing into newprojects for now.

"There is still a huge number of investors that seeinfrastructure as a great investment to match their long-termliabilities," said Tony Roper, head of secondary infrastructureat investment manager InfraRed Capital Partners.

(Editing by Stephen Powell)