The proportion of Local Government Pension Scheme assets held in shares has fallen below 50% according to new data released by the body that oversees the scheme.
The LGPS Advisory Board’s scheme annual report for 2023-24, published yesterday, also shows an increase in investment and administration costs across the 87 pension funds in England and Wales.
Here are some of the main findings of the report.
Financial performance
The report shows the scheme achieved a net return on investment of 8.9% in 2023-24. In comparison, inflation, which is used to set the annual increase in pensions, was 2.5%.
This was the scheme’s best investment return since 2020-21, when a 20.7% return reflected the stock market’s bounce back from the crash at the start of the covid pandemic. Last year the figure stood at -1.8%.
Meanwhile, the value of the scheme’s assets rose by 10.1% to £390bn.
The report suggests the scheme’s funding position is likely to improve when the results of this year’s triennial valuation emerge later this year, which may increase pressure on pension funds to reduce employer pension contributions.
At the last triennial valuation, which took place as of 31 March 2022, the scheme in England and Wales had an overall funding level of 107%, meaning it had more than enough assets to meet its future pension payments.
The annual report collated the funding positions of 69 pension funds as of 31 March 2024, finding they had an average funding rate of 108%. However, “when weighted by assets under management, the average funding position of the 69 funds was 113%”.
Asset allocation
The proportion of LGPS assets invested in equities fell below 50% in 2023-24.
The report says equities represented 49% of investments, compared with 51% in 2022-23 and 52% the year before that. Comparable data for previous years is not available.
The fall in equity investments echoes the findings of an LGC deep dive into the latest annual reports of a sample of LGPS funds. It found a number had moved away from equities as they sought to decrease the amount of risk in their portfolio, often in an attempt to lock in positive funding levels recorded at the 2022 triennial valuation.
The annual report also highlights a “significant” increase in investments in bonds, from 12% of the total in 2022-23 to 16% last year. The report says this reflected a significant improvement in yields.
The next largest asset classes were property (7%), infrastructure (6%) and private equity (6%).
According to information provided by Pensions & Investment Research Consultants, based on data from 62 LGPS funds, including one in Scotland, equities have delivered the best results over the longer term, but in the medium term private equity performed the best, with results around 4% above quoted equity.
It added that property performance had been poor in the recent past, and “bonds, the worst performing of the major asset classes, continue to deliver a return below CPI [inflation] over the last 10 years”.
Costs
The LGPS saw its total investment management costs rise by 2.9% to £50m, while total administration and governance costs increased by 5.7% to £291m. The report says this was “primarily due to an increase of £19m in administration costs”.
Roger Phillips (Con), chair of the SAB, said it was “unsurprising” that investment management costs had increase at a time when the total value of assets had also increased.
He added: “Costs for both administration and governance have grown which is again unsurprising as funds are dealing with an increasingly complex and growing workload in administering the pension records of 6.68 million members.
“This is at a time they are also delivering significant projects such as implementing the McCloud remedy [for unlawful age discrimination in public sector pension schemes], preparing for dashboards and ensuring compliance with The Pensions Regulator’s new general code.”
Membership
Membership of the LGPS grew by 2.8%, representing its fastest rate since 2020. It had 6.7 million people, compared with 6.5 million the year before.
The report said active membership of the scheme – people who are currently paying into it – also grew at its fastest rate since 2020.
Life expectancy
The report includes an LGPS life expectancy index which suggests LGPS members have greater life expectancy than the general population.
The index “indicates that LGPS pensioners have generally shown greater resilience and that life expectancies of LGPS pensioners are returning to pre-pandemic levels”.
Life expectancy in retirement for LGPS members, as measured from the age of 65, was 20.2 years for men and 22.9 years for women in 2023. This compares to 18.6 years for men and 21.1 years for women in the general population.
The report adds: “Analysis from the LGPS Life Expectancy Index in 2021, 2022 and 2023 suggests that pensioners are seeing a more pronounced bounce back towards pre-pandemic life expectancies than the general population. This could be linked to socio-economic factors within the LGPS membership alongside the financial buffer that comes with receiving a guaranteed retirement income from an LGPS fund”.