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Changes to public sector pension scheme asset allocation

23 March 2017

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Public sector pension funds have increased their exposure to alternative assets over the last three years.

According to new research from State Street Corporation, which looked at the asset allocation of 105 UK public sector pension funds over a three-year period to the end of 2016, exposure to alternatives has increased by 61%.

The organisation said the figures highlight the importance of multi-asset tools and capabilities, as the 89 participating funds in the UK's Local Government Pension Scheme (LGPS) prepare to transition into eight asset pools by April next year.

Traditional assets classes, such as equities and fixed income, remain core holdings for these funds, with equities accounting for 48% and fixed income accounting for 14% of their overall allocation.

The asset allocation of the 89 member funds participating in the LGPS pooling initiative are likely to see considerable changes to their current portfolio construction over the coming years, State Street said.

Other key findings include overall scheme assets increasing by 13% to £251.8bn, overall exposure to equities increasing by 9% to £120.7bn, allocation to domestic equities allocation decreasing by 5%, accounting for £37.9bn, and a significant increase in exposure to emerging market equities, up 33% to £446.5m.

Andy Todd, head of UK pensions and banks, asset owner solutions, State Street said: "Mounting cost pressures and persisting lower-for-longer yields have led pension fund investment committees to seek 'higher yielding' assets to assist them in meeting their strategic investment targets.

"This research highlights how these pension funds are becoming increasingly comfortable navigating complex asset classes such as alternatives as well as emerging market equities.

"These changes to the investment landscape are systematic, which means we are likely to see a continued trend toward such investments."

JR Lowry, head of State Street Global Exchange EMEA, added: "LGPSs are in a period of extreme change and technology will be the next stage of their evolution.

"As they reshape to adapt to their new size and structure, they have a significant opportunity to overhaul outdated legacy systems and benefit from new economies of scale."

First published 23.03.2017