Local Government Pension Scheme (LGPS) funds have reported a decline in value over the past quarter due to soaring inflation and “huge volatility” in the markets.
Over the last week, the pension funds of the London boroughs of Croydon, Hounslow and Westminster, plus Durham County Council, have all recorded that the value of their fund has decreased over the quarter to 30 September 2022.
The London Borough of Hounslow reported the highest decrease in the value of its pension fund at £114m, with the fund valuing £1.137bn at the end of September 2022. This is 9.1% lower than the fund’s value in March 2022 at £1.251bn.
Iain Campbell, senior investment consultant at Hymans Robertson, told Room151 that turbulent market conditions over the previous quarter have been “very challenging”, which has caused the underperformance of LGPS funds’ investments.
He said: “Inflation and interest rates continuing to climb was negative for bond markets, which were then worsened right at the end of the quarter with the huge volatility in gilt markets brought on by the ‘mini budget’.
“Equity markets were also down, though in some cases falls in sterling protected investors from this if they weren’t currency hedged. So not many places to hide, even for investors as diversified as the LGPS.”
A report by Durham County Council outlined that the value of its pension fund decreased by £74m to £3.152bn over the quarter to 30 September 2022.
It said: “This is a decrease of £74m or 2.29% in the second quarter of 2022/23 which is mainly due to the ongoing global effects of the war between Russia and Ukraine.”
There are not many places to hide, even for investors as diversified as the LGPS.
Negative returns over the quarter
In addition, the City of Westminster pension fund reported that the market value of its investments decreased by £37m to £1.691bn over the quarter to 30 September 2022, with the fund showing returns of -1.8% net of fees.
A report to be presented to the pension fund committee on 6 December outlined that as a result of the negative returns, the fund has underperformed the benchmark by -0.4% net of fees.
It said: “The underperformance continues to be driven by the continued heightened inflationary concerns, alongside the supply chain disruption caused by the ongoing conflict in Ukraine and strict lockdown measures in China.”
However, Campbell highlighted that the LGPS invests over the long-term. “A quarter’s negative returns on their own are nothing to be worried about. Markets do fluctuate over such short time periods regularly, so it is not unusual to see negative returns over a single quarter.”
Croydon Council’s pension fund also reported that the market value of its investments, at 30 September, decreased by £19.8m and have a return of -1.22% over the quarter.
“Whilst negative returns aren’t nice to see on a quarter-by-quarter basis, the key to LGPS investing is focusing on the long term, sticking to your strategy and using falls in markets as potential buying opportunities if markets suddenly look attractive.
“We’re starting to see markets show some value compared to recent history, however, note that we will still see some volatility over the next year or two,” Campbell added.
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