UK local government pension schemes responsible for more than 5 million public sector workers saw asset values nudge up last year, trailing bumper stock market growth the year before, while some said they were preparing to shift assets into infrastructure under a government plan to help them invest more in roads, bridges and renewable energy projects.

Collectively, local government pension schemes (LGPS) in England and Wales are one of the world’s biggest defined benefit (DB) schemes, comprising over 14,000 employers, 5.6 million members, and with assets worth more than £270 billion.

As of December, all but four of 90 LGPS schemes had reported results for 2017/18. On a like for like comparison, excluding these four, IEEFA analysis shows that net asset values grew by 4.8% last year, to £270 billion, compared with inflation of 2.3%.

That compares with stellar growth the year before, of 21.4%, on the back of roaring share prices.

Among individual schemes, Wiltshire County Council LGPS saw the biggest rise in net asset value last year, by 9.7%, while Brent, West Yorkshire and Kingston upon Thames all fell.

Among eight LGPS schemes that reported returns in 2017/18 to a range of asset classes including infrastructure, IEEFA analysis showed that median returns to equities were 3.5%, compared with 4.5% to infrastructure, and minus 0.3% to hedge funds. The best performing assets classes were property (10.2%) and private equity (11.5%).

One way to beat inflation, recognised by several LGPS funds, is to invest in public infrastructure projects with index-linked returns, such as renewable energy projects, which in Britain receive payments per unit of power generation that rise annually.

Allocations to infrastructure remained low last year, at £6.6 billion reported to date, or 2.4% of total assets, up from 2.1% the year before, IEEFA analysis of available data showed.

However, many asset owners were planning to invest in infrastructure for the first time. Such growing interest is linked with a UK government plan to help LGPS do complex deals in infrastructure, by pooling asset management of the 90 schemes into eight collective investment vehicles, and so scale up expertise and clout. That pooling process went live in 2018. The eight resulting pools have median assets under management of £37 billion each, compared with a median £2.1 billion in the underlying schemes.

In London alone, LGPS schemes announcing infrastructure investment targets for the first time last year included Lewisham, Southwark, Camden, Havering, Islington, Lambeth and Wandsworth. Of these, some made specific plans to invest in renewable energy infrastructure, including Lewisham, to allocate 2% of assets under management to renewables, Southwark, to allocate 5% of assets to “sustainable infrastructure”.

Besides inflation protection, other attractions of renewable energy infrastructure investment include exposure to a low-carbon transition which is seen making such assets more attractive.

One standout leader in preparedness for a low-carbon transition was the Environment Agency pension fund, which joined a handful of LGPS pension funds in reporting climate risk exposure for the first time, under new, voluntary guidelines published by the international Taskforce on Climate-related Financial Disclosure (TCFD).

Other pension funds that reported climate risks under TCFD, also with large renewable energy infrastructure investments, included Greater Manchester, South Yorkshire and West Midlands. Meanwhile, Croydon said that onshore and offshore wind now accounted for 4% of assets under management, Haringey quoted a target to invest 5% of assets to renewables, and Lancashire said that energy including renewables accounted for half infrastructure investments worth nearly £1 billion.

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