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Asset management and stewardship

Stewardship and responsible investment

Collectively the £217bn LGPS funds are one of the largest 10 global sources of capital and can influence behavioural changes that lead to better stewardship by the global asset management community and the entities and places they invest in.

All LGPS funds have published their Statement of Investment Principles and comply with the Myners Principles as these are LGPS statutory requirements.

The UK Stewardship Code (second edition 2012) and global United Nations Principles of Responsible Investment (UNPRI) set out key principles of effective stewardship for asset owners to help them better to exercise their stewardship responsibilities.

Compliance with these UK and global sets of principles is not mandatory for LGPS funds but they have the support of the UK Government and Local Authority Pension Fund Forum (LAPFF).

As at 31st March 2016 some 20 (22%) were signatories to the Code and funds (8%) signatories to the UNPRI (see table below).

Two of LGPS funds E&W were named and ranked in the top 10 of the UK's institutional investors for taking account of climate change risk in their investments in the 2017 annual survey by the global 'Asset Owners Disclosure Project’. They were the Environment Agency (2nd in overall international ranking) and Greater Manchester 54th in overall international ranking) .

Signatory to UNPRI

Source: https://www.unpri.org/directory/

Account Name

Signatory Category

HQ Country

Signature Date

Kent County Council Superannuation Fund Asset Owner United Kingdom 11/04/2016
Lancashire County Pension Fund Asset Owner United Kingdom 10/03/2015
Greater Manchester Pension Fund Asset Owner United Kingdom 06/05/2014
West Midlands Pension Fund Asset Owner United Kingdom 28/06/2011
Merseyside Pension Fund Asset Owner United Kingdom 10/10/2007
London Pensions Fund Authority (LPFA) Asset Owner United Kingdom 16/07/2007
Environment Agency Pension Fund Asset Owner United Kingdom 14/07/2006

Signatories to UK Stewardship Code

Source: https://www.frc.org.uk/Our-Work/Corporate-Governance-Reporting/Corporate-governance/UK-Stewardship-Code/UK-Stewardship-Code-statements/Asset-Owners.aspx

 

Tier 1

Tier 2

Signatories provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary. Signatories meet many of the reporting expectations but report less transparently on their approach to stewardship or do not provide explanations where they depart from provisions of the Code.

Avon Pension Fund
Bedfordshire Pension Fund
Cumbria Local Government Pension Scheme
East Riding Pension Fund
Environment Agency Active Pension Fund
Greater Manchester Pension Fund
Lincolnshire Pension Fund
London CIV
South Yorkshire Pensions Authority
The Tyne and Wear Pension Fund
Warwickshire County Council Pension Fund
West Midlands Pension Fund
Wiltshire Pension Fund
Gwynedd Pension Fund
London Borough of Bexley Pension Fund
London Borough of Ealing Pension Fund
London Borough of Hackney Pension Fund
London Borough of Hillingdon Pension Fund
Merseyside Pension Fund
Somerset County Council

Investment allocation

Change in allocation chart based on aggregated Net Asset Statements year to 31 March 2016

Investment Assets 20152016Change
Fixed interest securities 5.0% 4.9% -0.1%
Index-linked securities 2.8% 2.6% -0.1%
Equities 36.8% 34.6% -2.2%
PIVs 42.8% 43.6% 0.8%
Property PIVs 4.3% 4.8% 0.6%
Property 2.7% 0.7% 0.3%
Private equity 1.9% 3.0% 0.3%
Derivatives 0.4% 1.0% 0.2%
Other 1.9% 2.1% 0.2%
Other balances 0.5% 2.2% -0.1%
Cash deposits 2.4% 0.4% 0.0%
Total   100.0% 100.0%  
  Change in allocation chart image
Click on the chart for a larger view in a new tab/window

Asset allocation charts based on aggregated Net Asset Statements as at 31 March 2016

Asset classAsset type £000s%£000s%
Fixed interest Fixed interest UK 7,633,795 3.5% 10,554,872 4.9%
  Fixed interest Overseas 2,921,077 1.3%    
Index-linked Index-linked UK (where stated) 4,946,377 2.3% 5,718,862 2.6%
  Index-linked Overseas 772,485 0.4%    
Equities Equities UK 32,532,367 15.0% 75,099,382 34.7%
  Equities Overseas 42,567,015 19.7%    
PIVs   94,630,676 43.7% 94,630,676 43.7%
Property Property PIVs 10,477,407 4.8% 16,942,688 7.8%
  Property (Direct investment) 6,465,281 3.0%    
Other   14,028,183 6.5% 14,028,183 6.5%
Total         216,974,663 100.0%

Total asset allocation

 
Total asset allocation chart image Other asset allocation chart image
 

Other asset allocation

Asset classAsset type £000s%
Other Cash Deposits 4,812,724 38.8%
  Private equity 4,539,679 36.6%
  Other balances 879,689 7.1%
  Other (including aggregated private equity/infrastructure/other) 847,064 6.8%
  Infrastructure 1,327,864 10.7%
  Derivatives 1,621,163 13.1%
Total     12,418,763 100.0%

Net return on investment based on aggregated Fund accounts year to 31 March 2016

Net return on Investment

Net return on investment % is calculated by dividing the net return on investment by the average value of the fund over the year - this differs from calculated performance.
The average return on investment, and total for the scheme on an aggregate basis, for the year ended 31 March 2016 was 0.4% (2015 12.4%). The average investment expenses were 0.3% over the period (2015 0.3%), therefore the net return on investment was 0.1% (2014 12.1%).

The above chart shows the distribution around 0.1%, for 2016 , with most funds falling in a range of between 2.0% and -2.0%. For 2015 the distribution was around 12.1%, with most funds falling in a range of between 7.0% and 16.0%.

Investment Performance

Pensions & Investment Research Consultants Ltd (PIRC) has set up the Local Authority Pension Performance Analytics (LAPPA) service in response to the withdrawal of State Street (WM) from the creation of their highly valued and widely used Local Authority peer group Universe analysis service.

The intention is to create a quarterly local authority aggregate analysis that will initially replace the State Street Universe reporting whilst, it is hoped, will also improving upon the data quality and depth of analysis. The focus in the first period will be to set up the new composite and creating a historical time series. By the end of the first year of the new aggregate production it is expected that the service will have been expanded to include fund specific reporting against the aggregate.  Please see LAPPA website for further details. The following market commentary was provided by PIRC:

LA Market Environment

The average local authority pension fund produced a zero return in 2015-16.

The year was an extremely challenging one for investors. All equity markets with the exception of the US delivered negative returns. The UK, which remains the average funds’ largest market exposure, performed poorly, delivering -4% on average. Despite the outright majority achieved by the Conservatives in the general election on May UK equities struggled because of the high weighting of this market to oil majors and commodities, both of which continued to struggle as oil prices fell.
Sterling investors were insulated from some of the poor performance of overseas equity markets by the weakening of Sterling through the year. Funds that had hedged their currency would have seen much lower returns.

After the strong results of the previous year bond performance seemed comparatively flat – delivering only small single-digit returns. Long dated bonds produced the best of the returns.

Alternative investments had another good year. Private equity was the best performing asset, hedge funds averaged zero returns and diversified growth funds mostly failed to reach zero. Property performed strongly again, returning 11% for the year.

During the year there was a small net outflow from fixed income assets with the money being invested into property and alternatives as funds continued to diversify their investments. Despite the impending move to Pooling structures there appeared to be no slowdown in the level of manager change over the latest year.

Longer Term

Despite the disappointing latest year results longer term performance is holding up well. Over the last 20 years, the average fund has achieved a return of 7% pa. This was 3% pa above inflation and well ahead of actuarial return assumptions.

There is a similar picture over the short and medium term with funds returning 7% pa over the last 5 and 6% pa over the last 10 years.