Local authority pension funds have moved away from equities to bonds and alternative assets over the last decade, Sheffield Political Economy Research Institute has found.

The Institute’s recent report, Local authority pension fund investment since the financial crisis, provided evidence on asset allocations by local authority pension funds in the UK, based on their own annual data. The report highlighted that local authority pension funds have moved “sharply away” from investing in UK equities.

Data showed that local authority funds’ asset allocation to equities (both UK and overseas) fell by 18 per cent from 71 per cent in 2005 to 53 per cent in 2016. Similarly, investment in equities for private sector defined benefit funds dropped from 52.6 per cent in 2006 to 36.8 per cent in 2016.

Over the eleven year period, the top 25 largest local authority funds saw a fluctuation in allocation of equities, starting at 62 per cent in 2005 dropping to 56 per cent and 47 per cent in 2009 and 2013, respectively and then rising to 53 per cent in 2016.

Moving away from equities, funds displayed a move into more secure, but lower return assets such as bonds. From 2005 to 2016, local authority pension funds’ allocation of bonds remained relatively stable from 18 per cent at the beginning of the period to 16 per cent at the end. Private sector DB schemes also upped their bond allocation from 22.6 per cent in 2006 to 41.1 per cent in 2016.

Most notably, however, all schemes made an immediate move to bonds in 2009 after the financial crisis. Nonetheless, this has now reversed to pre-crisis levels.

Also considering alternatives, (including infrastructure, private equity and hedge funds), the Institute noted that all types of schemes increased their allocation to this type of asset over the period. In 2016 private sector DB fund and local authority pension funds’ investment in alternatives were at 11,8 per cent and 8.7 per cent, respectively; the highest they had been to date.

“Interestingly, however, the [alternatives] allocation for the largest local authority funds fell between 2013 and 2016 from 23 to 19 per cent,” the report highlighted.

Authors of the report, Craig Berry and Adam Barber concluded: “It is clear that local authority funds have not demonstrated the same degree of conservatism in their investment strategies as private sector defined benefit funds since the financial crisis. They have de-equitised to some extent, but not moved into bonds, and appear more willing to invest in alternative assets. The largest funds in particular have demonstrated an interest in infrastructure investments – while in the private sector, the move to alternative assets is largely explained by increased hedge fund investments.”

However the report noted that: “While there is probably scope for local authority funds to invest more in less conventional and riskier asset classes, including reorienting their investment to their localities to some extent, we should not assume that local authority pension funds are immune from the kind of economic and demographic pressures which have driven conservatism among private sector funds.

“Local authority pension funds will for the foreseeable future be seen as one of most important sources of long-term investment in the UK, and will continue to be seen as a (potential) source of capital for locally-oriented investment. Yet the policies and practices which might enhance local authority pension funds’ capacity in this regard remain under-developed.”

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