Local authority returns negative for second year

UK- Local Authority pension funds have registered a second consecutive year of negative returns according to the performance measurement consultants WM Company.

The 93 schemes, which manage a combined £85bn, averaged a return of –0.5% for the year to March. “Although local authority funds managed to outperform the FTSE all share, this was not sufficient to counteract the effects of a negative equity market,” says WM executive director Karen Thrumble.

Poor performance has taken three-year performance to 2% and below the level of inflation.

“This low level of return is a concern for any type of defined benefit pension fund, but local authorities cannot close their schemes to new members, an approach many companies have embraced in order to cut costs.

“If returns continue at low levels there could be considerable financial pressure on authorities in the short to medium term,” says Thrumble.

Although this was the third year local authority funds outperformed the index, many have chosen to switch from active to passive management.

In addition, funds have become less enthusiastic about UK equities and have moved more than £2bn into overseas equities. WM says this was in part tactical and due to managers buying up ‘cheap’ foreign equities.

But a move towards specific benchmarks has exacerbated the trend. During the year, one in ten local authority funds swapped peer group for customised benchmarks and a number have subsequently increased overseas holdings at the expense of the UK portion.

UK bonds produced a positive return of 2.8% compared to 3% for UK index-linked bonds. Overseas fixed income produced a more modest 2.2%. Once again property was the best performing asset and with a return of 9.3% for the year.

Fortunately local authorities in the WM universe only have a 0.9% exposure to venture capital and private equity which, between them, fell 14.7%.

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