Ahead of Room151’s LGPS North conference in Manchester, the senior investment manager at GMPF discusses how pension funds can stay well-funded amid market volatility.
Against a backdrop of soaring inflation and market volatility, many Local Government Pension Scheme (LGPS) funds are in a cashflow neutral or negative position, which can make staying well-funded a significant challenge to tackle.
However, Abdul Bashir, senior investment manager at the Greater Manchester Pension Fund (GMPF), told Room151 that the LGPS is in a “good starting position” to meet the challenge as the scheme is already “pretty well funded as a whole”.
“Certainly, from GMPF’s perspective, we started from 100% funded, so we don’t need to make extra gains,” Bashir added.
He also detailed that GMPF’s employers typically have a low credit risk, which allows the fund to withstand volatility for a more prolonged period. “This gives us a longer-term horizon, so we’re not worrying too much about intra-year volatility,” Bashir said.
Bashir will be discussing how LGPS funds can remain well-funded at Room151’s LGPS North conference in Manchester on 27 April 2023.
Strong governance
Bashir detailed that funds having a strong governance structure and a simplified investment process will also enable them to stay well-funded in a cashflow neutral or negative position.
“The other thing is governance structures, certainly for GMPF, we’ve got a very strong governance structure, which means we are able to react to things very quickly, such as stress in the liability-driven investment market.
“If you’ve got a team on board who can deal with that, it means you can potentially run more complex strategies if you wanted,” Bashir said.
“So, to boil it down I would say, a good starting position, strong governance a long-term horizon and simplicity” will allow LGPS funds to stay well-funded in a cashflow neutral or negative position, he added.
Liquidity is becoming ever more important and the reason why it’s becoming more important is because the maturity profile of our liabilities is becoming more mature.
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Long-term asset allocation and liquidity risks
At Room151’s LGPS conference, Bashir will also be talking about long-term asset allocation and how it ensures GMPF’s asset mix has enough value to meet the pension fund’s fiduciary duty.
Speaking to Room151, Bashir highlighted that long-term asset allocation does present inflationary and liquidity risks to pension funds.
He said: “Liquidity is becoming ever more important and the reason why it’s becoming more important is because the maturity profile of our liabilities is becoming more mature.
“So, that means that the portfolio has to have a certain amount of cash available to be able to pay out those liabilities every year. So, it’s not just about the 10 years. We need to think about how much money we need for cash on hand or liquid assets to be able to not only pay pensions but also for funding alternative portfolios.”
Bashir added that to deal with these risks GMPF holds around 3% of its portfolio in cash, which is held in high quality, liquid, short-term money market funds or cash at the bank.
“That’s quite large actually, versus the private sector and probably even some LGPS funds as well. But, we see that as a bit of insurance really for a potential liquidity crisis,” he said.
Abdul Bashir will also be speaking about the 60/40 funding model at Room151’s LGPS North conference on 27 April 2023 in Manchester. The conference will also offer insights into illiquid assets and local investing.
If you are interested in registering for the conference there is still a chance for a handful of LGPS practitioners to join us and you can register here.
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