• Home
  • About
  • Subscribe
  • LATIF
  • Conferences
  • Dashboard
  • Edit My Profile
  • Log In
  • Logout
  • Register
  • Edit this post

Room 151

  • 151 BRIEF

    What's New?

  • Inflation ‘biggest concern for LGPS professionals’

    May 20, 2022

  • LGA calls for government support as regulators face staffing issues

    May 19, 2022

  • WMCA signs £4bn investment agreement with L&G

    May 18, 2022

  • Bill will give UK Infrastructure Bank power to lend directly to councils

    May 18, 2022

  • £400bn pension group collaborates on climate transition initiative

    May 17, 2022

  • CIPFA rejects proposal for vote on publication of fraud hub report

    May 17, 2022

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews
  • Briefs

John Harrison: Four steps for LGPS in the age of Covid-19

0
  • by John Harrison
  • in Blogs · LGPS
  • — 26 May, 2020

Covid-19 has had a devastating effect on people and markets. John Harrison offers a way forward for LGPS through asset allocation, income, performance and governance.

The global Covid-19 pandemic has been devastating. The continuing human cost in lives lost is horrific and the economic cost of sudden and widespread lockdowns to limit the spread of the virus may take years to correct. The very foundations of modern society have been shaken, with perhaps profound implications for the future. It is a future that is even more uncertain than usual and one that poses challenges for LGPS investment committees as they meet on Zoom.

The immediate impact of Covid-19 on funding positions will clearly have been negative. Equity markets and other risk assets fell sharply as investors realised the potential depth and breadth of the crisis. Government bonds, by contrast, held up well.

The impact on the funding position of individual LGPS funds will vary greatly depending on the extent of hedging or equity protection strategies used, but it is likely that the funding level of the average LGPS fund worsened by as much as 15% between December 2019 and March 2020. Authorities in England and Wales will be relieved their triennial valuation date was a year earlier, unlike those north of the Border.

Sentiment and fundamentals

The first few weeks of the new financial year have seen a partial recovery in financial markets, although it is hard to have much confidence in market valuations. While we can be sure that global economic growth will be significantly negative in 2020, the impact in each region and speed of potential recovery is impossible to predict accurately. The outlook for company profitability is even less certain. Almost every metric used to value equity markets—earnings, dividends, cash flows, asset values—is impossible to forecast accurately, so short-term market movements are more indicative of sentiment than fundamentals.

The broad strokes we can predict are not encouraging. Governments across the developed world have adopted drastic fiscal measures, increasing debts to finance health spending and provide support for businesses and workers. This is likely to increase the tax burden for many years to come. In time it may also prove to be inflationary, although the more immediate concern given the collapse in economic activity is to avoid deflation.

It seems likely that social distancing will remain for some time, which has implications for the way we all work, travel and socialise. This will challenge business models in a wide range of sectors—most obviously leisure, transport, hospitality. It may also change the way we work and how we shop, which would have longer term implications for office and retail properties.

What to do?

What should LGPS funds be doing in this environment? In my view there are four things investment committees should focus on.

First, make sure asset allocation is rebalanced regularly. The LGPS has limited scope to make significant changes to strategy because we need the long term returns from growth assets to make our pensions promises affordable.

Many funds have been gradually allocating more to illiquid asset types, but this takes time and is probably not best achieved during market turbulence. Market volatility will also make most derivative-based equity protection strategies more expensive.

What we can do cost effectively, though, is make sure market movements do not push asset allocation too far away from the agreed long-term strategy. Regular rebalancing enables funds to take advantage of short-term falls in equity markets and widening yield spreads.

Second, review your income position. Investment income will be under pressure as companies are forced to cut dividends and property tenants are unable to pay rents. Many income streams will not recover quickly, if at all. At the same time some employers within the fund may struggle to continue making pensions contributions. Pensions Committees should consider whether they need to make adjustments to offset this double income pinch – for example, by suspending reinvestment of investment income.

Performance and governance

Third, discuss with your asset pool how the characteristics of various investment capabilities impact on investment performance. In equities, there have been huge swings in relative performance during the crisis, with value styles performing poorly.

In bonds, yield spreads have widened and a number of corporate issuers are now below investment grade. In property sector weightings are important, with retail and offices potentially more vulnerable to valuation adjustments.

Fourth, consider whether the fund’s current governance arrangements are suited to more volatile market conditions. As a general rule, LGPS funds have been wary of delegating asset allocation decisions to their pools. Is this still the best structure or should pools be encouraged to launch a broader range of multi-asset capabilities more responsive to changing market conditions?

The Covid-19 pandemic represents the first significant period of market stress since LGPS asset pools were created. It is too early to say whether or not pooling helped funds cope with the crisis, but in due course we may find that the requirements of partner fund have changed.

John Harrison is

Share

You may also like...

  • Room151 teams up with Arlingclose to explore Prudential and Treasury Codes in webcast special 27th Sep, 2021
  • Going beyond the standard metrics for climate change 2nd Mar, 2021
  • COP26 verdict: Pact underlines the role of ‘local communities’ in climate action 22nd Nov, 2021
  • A property fire sale triggered by Prudential Code could ‘shatter’ confidence in local economies 7th Dec, 2021

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 3 hours ago

    2022 LGPS valuations: difficult discussions in uncertain times: Michelle Doman looks at the impact of inflationary pressures, the war in Ukraine, climate risk and Covid-19 on employer contributions. At the start of 2022, for Local Government Pension… dlvr.it/SQlvy9 pic.twitter.com/Dd0lrHjWNb

    Room151 6 hours ago

    Investing today: nowhere to hide: Partner Content: Alex Stanley from Ardea Investment Management suggests that investors have few places to hide amid a synchronised sell-off in both bonds and equities. However, there are catalysts that[...] dlvr.it/SQlNVC pic.twitter.com/KkGGnduzPL

    Room151 1 day ago

    Treasury to restrict PWLB loans to councils at risk of non-repayment: The Treasury has released new guidance that restricts local authorities’ access to Public Works Loan Board (PWLB) advances if there is a “more than negligible risk” of a council’s… dlvr.it/SQhLTV pic.twitter.com/vBsS7xMJdb

    Room151 1 day ago

    Mixed reaction to proposed government intervention powers: There has been a mixed reaction to the government’s legislative plans to strengthen its intervention powers over local authority finances. The Levelling Up and Regeneration Bill has proposed… dlvr.it/SQhLMB pic.twitter.com/50foWxpPGs

    Room151 1 day ago

    Post-Brexit struggles for national and local government regulators. @LGAcomms @NAOorguk Click the link below to read 🔻🔻 room151.co.uk/brief/lga-call… #Brexit #government pic.twitter.com/s3c8ySGy5G

    Room151 1 day ago

    CIPFA: a question of transparency: Roman Haluszczak’s campaign for publication of the independent report into the collapse of CIPFA’s London Counter Fraud Hub has been rejected again by the institute. He is now calling for[...] dlvr.it/SQgC5V pic.twitter.com/08fWsHFF4g

    Room151 2 days ago

    Back to the future for the PWLB: The Public Works Loan Board is tightening its lending criteria to ensure that loans will be repaid by local government borrowers. But, asks Peter Findlay, shouldn’t they have been doing[...] dlvr.it/SQcmmm pic.twitter.com/bVv4fe0Xlv

    Room151 2 days ago

    Great piece from Peter Findlay on the PWLB’s tightening of its lending criteria. He raises some pointed questions for the Treasury and explains why the ‘casino council’ characterisation was simplistic and inaccurate. #PWLB #localgov room151.co.uk/treasury/back-…

    Room151 2 days ago

    The Queen's speech highlighted the need for accelerating UK infrastructure investment into levelling up projects and cutting emissions. @UKInfraBank #QueensSpeech #ClimateAction #emissions Click the link below to read 🔻🔻 room151.co.uk/brief/bill-wil… pic.twitter.com/hFmF2veVIa

    Room151 2 days ago

    Huge funding heading to the @WestMids_CA from @landg. @andy4wm #LevellingUp #netzero #regeneration Click the link below to read 🔻🔻 room151.co.uk/brief/wmca-sig… pic.twitter.com/ajhZhia6mx

    Room151 2 days ago

    LGPS governance, Cagney and Lacey style: What regulatory response can be expected following the publication of the Good Governance project’s Phase 3 report and the closure of the Single Code of Practice consultation? Susan Black offers[...] dlvr.it/SQbfXf pic.twitter.com/xwqHOEu2AP

    Room151 3 days ago

    More evidence of the importance of emerging markets in the journey to net-zero. @BordertoCoast @BrunelPP @northernlgps @EAPensionFund @WYPF_LGPS Click the link below to read 🔻🔻 #LGPS #NetZero #NetZeroCarbon #EmergingMarkets room151.co.uk/brief/400bn-pe… pic.twitter.com/qCm0EGxzLn

  • Categories

    • 151 News
    • Agent 151
    • Audit
    • Blogs
    • Business rates
    • Chris Buss
    • Cllr John Clancy
    • Council tax
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Education
    • Forum
    • Funding
    • Governance
    • Graham Liddell
    • Housing
    • Ian O'Donnell
    • Infrastructure
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • Levelling up
    • LGPS
    • Mark Finnegan
    • Net Zero
    • Private markets
    • Recent Posts
    • Regulation
    • Resources
    • Responsible investing
    • Richard Harbord
    • Risk management
    • Social care
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Transport
    • Treasury
    • Uncategorized
    • William Bourne
  • Archives

    • 2022
    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story Struggling to apply scenario analysis to climate change? There is a smarter way
  • Next story LGPS and the infrastructure funding gap

© Copyright 2022 Room 151. Typegrid Theme by WPBandit.

0 shares