Reform UK has called for the sprawling Local Government Pension Scheme to reduce the \u201cegregious\u201d fees it pays fund managers by moving assets into low-cost global equity index and bond trackers.<\/p>\n
Really-long-time strategy<\/p>\n
Strategic asset allocation is pretty much the most important investment decision any institutional investor can make. It explains around 100 per cent of fund returns<\/a>.<\/p>\n To choose an SAA and set a fund benchmark, pension funds (and their consultants) go through a long-term capital market assumption process that involves them guessing what market returns might be for the next ten or twenty years and what sort of market volatility they will be able to endure. For example, they might use BlackRock\u2019s expectations<\/a> that US stocks and UK gilts to provide respective annualised returns of 4.3 per cent and 4.7 per cent per annum in sterling terms (with volatility of returns of 17.5 per cent and 5.4 per cent) over the next ten years, to inform their benchmark design.<\/p>\n They also have to look at an actuarial assessment of their projected cash flows (modelling when their current and former employees will retire and then die, along with how inflation may develop). So, for example, a fund paying out vast quantities of cash to pensioners each year might have a different tolerance to risk versus a fund that isn\u2019t expecting to have distributions exceed contributions for years to come.<\/p>\n Despite all being local government pension funds, the answers that LGPS funds arrive at as to what the \u2018right\u2019 benchmark might be varies enormously. We\u2019ve illustrated this below with a marimekko chart that splits the year-end allocations of all LGPS funds between equities, bonds, etc. The dotted lines represent averages: <\/p>\n <\/p>\n At one end of the asset allocation spectrum sits Kensington & Chelsea\u2019s fund with 75 per cent global equities, 13 per cent property, 7 per cent private equity and 4 per cent bonds. At the other is Clwyd\u2019s, which had a measly 14 per cent net allocation to equities and 37 per cent in bonds among other allocations.<\/p>\n And this is what we understand Reform UK think it should look like:<\/p>\n <\/p>\n Over the last ten years public equity markets have been on a tear, buoyed by US stocks. This proposed new benchmark might produce stronger returns over the next ten years. Or it might produce weaker returns. We\u2019re not sure. These are things about which reasonable people can disagree.<\/p>\n It seems incongruous though to measure pension funds\u2019 historic investment returns against those of a public equity-heavy strategic asset allocation that may or may not be appropriate for the future. But this is what Reform have done. MainFT, again<\/a>:<\/p>\n The party said the 13 council pension funds \u2014 which include Lancashire, Kent and Staffordshire and altogether manage \u00a366bn of assets \u2014 had underperformed [the index they reckon might work for the next ten years] by an average of 1.9 per cent a year since 2019.<\/p>\n If we\u2019re going to play this game of making LGPS fund performance look rubbish surely we can bung in a bit of crypto, or at least some gold (Reform leader Nigel Farage would surely have approved<\/a>)?<\/p>\n Performance: it\u2019s all relative<\/p>\n While strategic asset allocation will determine the overall shape of returns and fund volatility, institutional investors can try their luck boosting returns further by hiring active fund managers and charging them with beating the benchmark you set them.<\/p>\n As Robin<\/a> is at pains to tell us all again<\/a> and again<\/a> and again<\/a>, active fund managers (at least in mutual fund form) tend to do a bad job in aggregate matching \u2014 let alone outperforming \u2014 their fees.<\/p>\n How do actual investment returns from LGPS administering authority funds measure up to the actual benchmarks chosen by LGPS administering authorities at the end of their strategic asset allocation processes? <\/p>\n We sifted through the annual reports of the 51 funds that have so far released them (in either draft or final form) on the LGPS Board website<\/a>. All funds report the performance of total portfolio and their policy benchmark over the past year, but anything can happen in twelve months and we wanted longer-term data. We found total fund benchmark returns for longer periods in the annual reports of 35 funds. These capture around half of the total assets managed in the LGPS system. We may have missed some, but grabbed the longest period for each and show these all in the chart below:<\/p>\n<\/a><\/p>\n
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