PLSA IC: Windfarms are the ‘perfect asset’ for pension funds

Windfarms are the “perfect asset” for pension funds, according to NatWest Group Pension Fund CEO and Co-CIO, Robert Waugh.

Speaking during a panel session on renewable energy infrastructure’s role in the energy transition at the PLSA Investment Conference 2022, Waugh detailed NatWest’s pension fund’s experience of owning a windfarm.

Firstly, he noted that as a pension fund, you have to work out what you want and that will depend on whether the fund is a defined benefit (DB) or defined contribution (DC) scheme.

For DB schemes, he said cashflows that are inflation-linked are important and, traditionally, this could have been met by index-linked gilts but renewable energy offers a modern alternative.

“The great advantage of renewables is you have got very low volatility of terminal value,” he said. “The most volatile asset is equity; we buy it today, we take a small dividend yield from it and hopefully in 10 years’ time we can sell it for an equivalent price but we don’t know what price we are going to sell it for.

“Actually, if you take a windfarm you have no residual value… as a pension fund that is the perfect asset; I’ve got inflation linkage in my subsidy and I’ve got power price linkage, which is another form of inflation linkage.

"We could argue about 18 per cent of inflation linkage comes from some form of eco-energy or power… those cashflows and that inflation linkage make it really appealing, no terminal value risk and at the same time you are helping the world go through a climate transition, which as a responsible owner we like to do.”

Asked what it was like to own a windfarm, Waugh said that it is mostly “fairly peaceful” but there are some operational risks that come with owning a physical asset rather than stocks and shares.

Also speaking on the panel was Greencoat Capital LLP partner, Matt Ridley, who summarised the opportunity in the area of renewable infrastructure: “Net zero is a huge challenge that is going to require a lot of innovation and a lot of investment in core assets – up to £130bn of capital just in the conventional assets that we see.

"There is a pretty strong investment opportunity. The reward I think is that you can access these cashflows and they are inflation-linked if you structure them in the right way and they are a long term and secure income.”

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