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LGPS assets grow 21% but active equity disappoints

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The UK’s Local Government Pension Scheme (LGPS) grew its asset base by more than 20% in the 2016-17 financial year, according to its latest annual report.

Over the course of the period the combined assets for the 91 local authority pension schemes in England and Wales increased to £263bn (€299bn).

It was a marked increase compared to the LGPS’ last formal actuarial valuation in March 2016, when the scheme was valued at £216bn.

The LGPS’ Advisory Board said the increase was largely due to “favourable financial market conditions”.

In commentary accompanying the annual report Pensions & Investment Research Consultants (PIRC) said the returns recorded by individual underlying local authority funds ranged from 13.9% to 26.8%.

“Generally funds with a higher equity component were towards the top of the range, with those that had a higher commitment to absolute return strategies towards the bottom,” PIRC said.

However, the consultancy said many active equity managers “struggled to add value in the peculiar market conditions”. Most global equity managers underperformed during 2016-17 “and some quite significantly”.

PIRC added: “Local authority funds still retain a high commitment to active management with the average fund having just under a quarter of its assets managed passively.

“The increased focus on cost reduction may promote a further move towards index-tracking, however this may be balanced by the asset allocation decisions being made, with funds continuing to increase exposure to assets for which there is no passive alternative.”

Aggregate asset allocation did not change substantially over the 12-month period, but the LGPS’ figures showed a 2.9% fall in equity exposure. Investment in “pooled equity vehicles” increased by 3.7%.

While the report did not give a reason for the shift, the 2016-17 period was the first in which there was substantial activity regarding the pooling of investments.

Less than 1% of total assets were invested directly in infrastructure, the LGPS reported. One of the main aims of pooling investments is to increase the schemes’ ability to invest in large-scale infrastructure projects.

During the year, total membership increased from 5.3m to 5.7m, an increase of 7.5%. The number of employers contributing to the LGPS rose by 8.5% to just over 14,000.

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