UK public sector pensions have been in the headlines recently as commentators and professionals clamour to put forward their suggestions for a structure that will deliver the performance needed to provide pensions for our millions of public sector workers.
Given the current state of the Local Government Pension Scheme (LGPS) – which across 89 funds has £150bn of assets, but on the most recent estimates at least a £50bn deficit – it’s not hard to see why this is such an area of interest.
Our recent annual report showed a funding level of 93% at the end of March 2014 and an increase in assets of £196m to £4.9bn during 2013-14. In part, our performance has been spearheaded by our asset and liability management (ALM) approach to investment.
We believe that it is not enough to look at asset growth in isolation – managers must also pay close attention to liabilities. At the LPFA we currently have 71 pensioners aged over 100, so for us, the concept of ‘long-term’ does not mean five or 10 years, or even 50 – it’s longer than that. Some of our active members will be receiving their pensions in the next century; this is why we place such a strong emphasis on having a genuine long-term approach to investment.
The first step in developing an effective ALM strategy is to gain a clear understanding of your liabilities and improved membership data has provided us with reliable and accurate cashflow information to do this. Over time we have been increasing our illiquid allocations in property, private equity and infrastructure, which better match liabilities.
We are also focusing more closely on direct investments and having a long-term focused equity investment strategy. We have made this decision on the back of in-depth economic analysis and empirical evidence that shows high quality, blue chip stocks tend to generate superior and sustainable returns over the long term. This research has formed the basis of our ‘buy-and-hold’ investment strategy. Once invested, we expect to hold each investment in the long term, regularly monitoring its fundamentals, but not concerning ourselves with short-term price movements. Having a low turnover of stocks translates into reduced transaction costs, while in-house portfolio management delivers savings on both base and performance fees.
We are also reducing our dependence on costly external fund managers. In the case of hedge funds, investors have long complained that the traditional ‘two-and-20’ fee model does not sufficiently align interests, and we are keen that the balance shifts back towards the limited partner.
Returning to the LGPS, we are advocating that the ALM approach – specifically in voluntary partnerships between funds – becomes the preferred future structure for the scheme. Clearly it is not possible for all funds, particularly smaller ones, to invest heavily in best-in-class expertise at board and executive level, but we believe that all funds should be able to access this type of knowledge. This is why we are promoting voluntary ALM partnerships across the LGPS.
Susan Martin is chief executive of the London Pensions Fund Authority
Comments