UK budget may hit funding for infrastructure revamp

By Chris Vellacott and William James

LONDON, March 21 (Reuters) - Britain's government may have damaged its own ambitions to revamp the country's infrastructure using private sector money after new economic policies hobbled a key industry's incentive to invest.

Policies announced on Wednesday in the annual budget scrapping the requirement for millions of retirees to buy an annuity with their savings has weakened a key pillar of business strategy for the British life and savings industry.

Insurers are keen investors in infrastructure projects like bridges and housing because the long-term, steady revenues from road tolls and rents fit well with obligations to pay income over decades to their annuity clients.

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

The reforms to pensions announced by the government effectively meant Britain's insurers lost control of a captive market worth up to 15 billion pounds per year that would have gone into their annuity products.

PLEDGE FROM BIG INSURERS

Six big UK insurers - Legal & General (LSE: LGEN.L - news) , Prudential (Frankfurt: PRU.F - news) , Aviva (Other OTC: AIVAF - news) , Standard Life (LSE: SL.L - news) , Resolution and Lloyds Banking Group unit Scottish Widows - pledged in December to invest 25 billion pounds in transport and energy projects over the next five years.

Industry sources say that commitment still stands but if annuities are likely to make up a smaller component of the insurers' business mix, future commitments to infrastructure are uncertain.

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

Britain's government has made boosting private sector investment in infrastructure a priority as it grapples with crumbling and overcrowded roads, railways and airports while trying to curb public spending.

A spokesman for the Treasury denied the impact of new policies on insurers' annuities businesses would undermine their incentive to back infrastructure projects.

"UK infrastructure will continue to be an attractive investment for companies here and around the world, with around 15 billion pounds of inward investment in UK infrastructure since May 2010," the spokesman said.

He added that the willingness of insurers to commit money to infrastructure last year was largely due to new European capital requirements for insurers - known as Solvency II - having proved less burdensome than initially feared, freeing up more money to invest.

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

The document says the current stock of UK annuities is worth around 210 billion pounds with 11 billion pounds being added on average every year.

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

However, some infrastructure experts said demand for UK infrastructure is sufficient to keep money flowing into new projects for now.

"There is still a huge number of investors that see infrastructure as a great investment to match their long-term liabilities," said Tony Roper, head of secondary infrastructure at investment manager InfraRed Capital Partners.

(Editing by Stephen Powell)