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
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. |
Investment allocation
Change in allocation chart based on aggregated Net Asset Statements year to 31 March 2016
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Asset allocation charts based on aggregated Net Asset Statements as at 31 March 2016
| Asset class | Asset 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 |
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Other asset allocation |
| Asset class | Asset 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 % 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.
