Markets forced public sector funds to mull direction change in Q4 2022

The 26 individual local authority pension schemes tracked during the quarter focused on private markets and environmental, social and governance-themed investments, often combining the two topics when assessing and accessing new investments. 

In addition, as schemes continued to transfer assets into their respective pooling vehicles, some questioned the manager structures or lack of suitable investment options within those pools.  

Changing environment forced deeper reviews 

Eight of the 26 LGPS surveyed over the quarter were reviewing their investment strategies in the fourth quarter.

The LCIV’s high turnover would be raised with the LCIV and discussed at the next meeting, with a task force proposed to review issues

Lambeth Pension Fund

Among them was the £5.4bn Avon Pension Fund. It had intended for its 2022-23 review to be relatively light and mainly focus on climate targets and social/local impact investing. 

But due to significant changes in the economic and market environment in 2022, the fund reported in December that it had found it “necessary to review the asset allocation and risk management strategies more holistically in light of a higher interest rate and inflation environment”.

Results of the review will be discussed through the first quarter of 2023.  

Other schemes were further along in the review process. Following a review of its investment structure, the circa £756mn Powys County Council Pension Fund introduced a new 10 per cent allocation to infrastructure and private debt, with investment likely to take place via the £15.2bn Wales Pension Partnership. 

Infrastructure was the most popular asset class of the quarter in terms of investment commitments. Of the 10 allocations made in the quarter, 20 per cent were directed towards infrastructure.  

Half of all investment commitments made in the quarter incorporated ESG criteria, and with that it is perhaps unsurprising that both the infrastructure allocations made were to sustainable infrastructure funds.  

The £2.9bn Wandsworth Pension Fund committed to the Octopus Energy Transition Fund and the Sandbrook Climate Infrastructure Fund, with assistant director of resources Paul Guilliotti telling Pensions Expert’s sister title MandateWire in November that the amount the scheme would invest with each manager had increased as the pension committee members were “keen” to support a transition to renewable energy.

Guilliotti added that the pension fund chose its own managers rather than investing via its chosen pool, the circa £26.7bn London CIV, as the LCIV had not proffered a suitable sustainable infrastructure strategy. 

Pooling problems

The Wandsworth scheme was not the only LGPS pointing to flaws with its investment pool during the quarter.

Questions were also asked at the £1.8bn London Borough of Lambeth Pension Fund over the high level of staff turnover within its chosen pool, the LCIV. 

“The LCIV’s high turnover would be raised with the LCIV and discussed at the next meeting, with a task force proposed to review issues,” minutes from the pension fund stated.

Discussion surrounding the turnover issues followed the announcement in April that LCIV chief executive Mike O’Donnell will step down in 2023, and came as the pension fund was working with the pool to bolster its own property exposure. 

Meanwhile, in November, MandateWire reported that the £3.5bn Worcestershire County Council Pension Fund had placed its pooled emerging markets portfolio, managed by LGPS Central, on watch. 

According to scheme documents, the emerging markets equity portfolio had been performing poorly and LGPS Central has been considering upping the number of managers that run the portfolio to four from the current three – BMO Global Asset Management, UBS Asset Management and Vontobel Asset Management. 

The Worcestershire scheme’s consultant, MJ Hudson’s Philip Hebson, had expressed concern over such a move. 

Pooling activity

A month after MandateWire reported on the Worcestershire scheme’s dissatisfaction with LGPS Central’s emerging market equity offering, the pension pool released a search for an additional manager to join the portfolio. 

A spokesperson from LGPS Central said the appointed manager would replace BMO. 

This was one of three manager searches released by the six LGPS pools MandateWire reported on during the quarter. 

The other two were an equity overlay search released by the £46bn Northern LGPS in December, and a UK real estate search issued by the £38.3bn Border to Coast Pensions Partnership in November.

Further searches are planned for the early stages of 2023, with the Access Pool, which handles £35bn in pension assets for 11 LGPS funds worth a collective £59bn, also announcing in November that it was working on search requirements for UK alternatives managers.

Following consultations with the 11 participating schemes, Access plans to first pool private debt, followed by private equity and then infrastructure. 

It was a busy end to the year for BCPP. As well as seeking a property manager, the pool hired bond, proxy voting and property advisers in the quarter, outlined its roadmap to net zero, and was responsible for two-thirds of the manager appointments made in the quarter.

The pool was the source for four of the six mandates awarded by UK LGPS pools in the fourth quarter of 2022. 

Specifically, BCPP appointed Goldman Sachs Asset Management as its emerging markets ex-China equity manager, committed €100mn (£88mn) to the Clean Hydrogen Infra Fund run by Hy24, and hired Northern Trust and BlackRock for transition management services.

The remaining two appointments of the quarter came from the aforementioned LGPS Central, which committed £220mn to an evergreen, inflation-linked UK infrastructure debt fund run by Abrdn, and the £38bn Brunel Pension Partnership, which contributed to the first close of the Orchard Street Social and Environmental Impact Partnership.