Illiquid alternatives dominate Q4 in the UK LGPS space

In a continuation of the year’s trends, the final quarter of 2024 saw the 39 individual local government pension schemes and LGPS pools surveyed by MandateWire targeting alternative asset classes, with a strong preference for property and infrastructure, as well as private debt.

Of the 26 mandates awarded in Q4, 18 went to alternatives, up from 14 in Q3. This portion comprised seven property and six infrastructure contracts, the remainder being commitments to timber and private equity.

LGPS pools awarded more than half of the property and infrastructure mandates won, with the £52.3bn ($66bn) Border to Coast Pensions Partnership and the £61bn ($76.5bn) LGPS Central both launching domestic property funds in the quarter.

In a decision that deviated from the norm, the £790mn ($991.3bn) Shetland Islands Pension Fund divested from property, terminating its £68.9mn ($86.5mn) mandate with Schroder Investment Management. According to Colin Bain, treasury accountant, the change was made in response to an increase in funding level from 92 per cent to 120 per cent.

“We are looking at strong equity allocation and more fixed return allocation. [The property mandate] was a fallout from that,” he said. At the same time, the pension fund is looking to increase the size of its private debt mandate.

Private debt investments made up the majority of LGPS funds’ future investment plans, with six of the 32 proposed allocations and searches targeting the sector.

Among those planning to allocate was the £1.6bn ($2bn) Enfield Pension Fund, which agreed a new 4 per cent allocation to the asset class.

The £2bn ($2.5bn) London Borough of Islington Pension Fund announced plans to launch a search for a new European private debt manager, while the £31.6bn ($39.7bn) London CIV was implementing its second private debt fund, Private Debt II, due to demand. Taken together, alternative asset classes form the focus of around two-thirds of all planned allocations and reweightings, and manager searches.

ESG forward thinking

Across all mandates awarded in Q4, the majority incorporated environmental, social and governance investments, with pension funds considering climate commitments, human rights and social housing in their decision-making. ESG-focused investments also accounted for almost one-third of future investment plans.

In response to concerns over investments in companies deemed complicit in human rights abuses in the occupied Palestinian territory by the UN Human Rights Council, the £2bn ($2.5bn) London Borough of Islington Pension Fund decided in the quarter to restructure its passive equity portfolio. The pension fund will withdraw assets from two pooled passive equity funds within the LCIV and form a ‘pool of one’. The new index will give the pension fund the freedom to customise its benchmark and make its own amendments and exclusions to companies invested in.

LGPS pools were particularly active within the ESG space in Q4. Commenting on BCPP’s first £48.5mn ($60.9mn) commitment to Capital Dynamics’ Clean Energy Fund, chief investment officer Joe McDonnell said: “Capital Dynamics offers not only a strong investment opportunity, but also the ability to have a tangible impact on the future pipeline of renewable energy infrastructure that the UK sorely needs if it is to reduce its reliance on oil and gas, and meet net zero goals.”

Meanwhile, in a flurry of manager hiring, the £50bn ($62.7bn) ACCESS pool appointed Orchard Street Investment Management to handle its £100mn ($125.5mn) impact real estate strategy, and LCIV hired two further managers for its Renewable Infrastructure Fund and three for its Nature-Based Solutions Fund. LCIV’s interim chief investment officer Rob Treich told MandateWire that the pool may appoint additional managers as the natural capital vehicle grows.

Pooling demands

In November, chancellor Rachel Reeves gave her first Mansion House speech, in which she reiterated the government’s plans to accelerate pension fund consolidation. Of 11 mandates terminated in Q4, more than a quarter involved the shifting of assets into pools.

Amid increasing government pressure to consolidate assets, LGPS are calling on their pools to develop investment opportunities and risk management strategies that meet their needs. The £4.4bn ($5.5bn) Suffolk Pension Fund’s annual report stated the fund is “awaiting new investment opportunities” within ACCESS to attain its strategic allocation to illiquid debt.

Also part of ACCESS, the £4.8bn ($6bn) Cambridgeshire Pension Fund and the £6.2bn ($7.8bn) Hertfordshire Pension Fund both called for the pool to develop a currency hedging strategy.

“We’ve asked our pool to put in place an alternative structure that would be available for all funds,” Mark Whitby, head of pensions at Cambridgeshire Pension Fund, told MandateWire in December. “It had been set up for a discussion with the pool, to be actively pursued, but the recent government consultation is going to compete in headspace.”

Pooling proposals are due to be submitted by LGPS in Q1 2025. At the same time, all LGPS in England and Wales will be preparing for their next triennial valuation, due as at March 31 2025.