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UK public funds pump money into alternatives

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UK public sector pension schemes increased their overall exposure to alternative assets by nearly two-thirds in the three years to the end of 2016, according to State Street.

At the end of the year the 105 public pension funds in England, Scotland, Wales, and Northern Ireland had collectively invested £16.6bn (€19.1bn) in asset classes including infrastructure, real estate, and private equity, according to State Street’s research. This amounts to roughly 6.6% of the total assets in the local government pension scheme (LGPS).

Andy Todd, head of UK pensions and banks at State Street, said the rise was “significant”, although the starting point was low.

“Pension funds do want to investigate these asset classes – some of them, maybe, for the first time,” he said.

“When you look at alternatives they tend to be long term asset classes,” Todd added. “Ultimately, the LGPS funds are open defined benefit schemes, so they have an investment time horizon that is arguably infinite.”

The UK government has tasked LGPS funds in England and Wales to pool their assets to save costs and give more scale to invest in infrastructure projects in the country. Some have begun scaling up their resources in alternatives already: the London Pension Funds Authority and Greater Manchester Pension Fund have created a joint infrastructure fund, and were joined last year by the Berkshire Pension Fund.

The £35bn Northern pool – involving the Greater Manchester Pension Fund, West Yorkshire Pension Fund, and Merseyside Pension Fund – has said it wants a long-term allocation of 15% to infrastructure, increasing by 10 percentage points the combined funds’ current allocation to the asset class.

State Street’s research also found that, in the three years to the end of 2016, LGPS funds’ total exposure to UK equities declined by 5% to £37.9bn (15% of total assets).

In contrast, the allocation to emerging markets equities rose by a third – albeit from a low base. LGPS funds had £446.5m invested in emerging market equities at the end of 2016, State Street reported, accounting for just 0.2% of overall assets.

Todd said of the overall results: “This research highlights how these pension funds are becoming increasingly comfortable navigating complex asset classes such as alternatives as well as emerging market equities. These changes to the investment landscape are systematic, so we will likely see a continued trend toward such investments.”

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