More than half of LGPS survey respondents plan to increase their allocations to gilts, as improved funding levels and higher yields prompt an overhaul of portfolios, the latest annual LGPS Survey, produced jointly by Schroders and Room151, reveals.
Some 55% of respondents now plan to expand their allocations to UK government bonds, more than double the 24% who said the same in 2024.
Presenting the findings at Room151’s annual Investment Forum, Paul Myles, head of LGPS at Schroders, said that the combination of political reforms and the changing economic environment has triggered significant changes in LGPS portfolios.
“The Fit for the Future consultation is reshaping LGPS investment, as stronger pool capabilities reduce
reliance on external managers. Improving funding levels are also shifting allocations from listed equities
towards gilts, while momentum towards private markets is beginning to moderate” he shared.
Rising yields
The growing appetite for gilts comes against the backdrop of a stark rise in borrowing costs, with 10-year gilt yields climbing from around 4.45% at the end of October 2024 to a 19-year high above 5.5% in early October 2026.
The shift comes as private markets allocations are also becoming increasingly selective, with investors placing greater emphasis on the characteristics of individual investments.
Risk-adjusted returns are the overriding priority for 67%, while the exit environment (48%) and valuations (44%) are the biggest concerns. More broadly, appetite for private markets has moderated, with 34% of respondents expecting to increase private markets allocations, compared with 70% two years ago.
Against this backdrop, infrastructure remains resilient, with almost half (49%) identifying it as best placed to provide inflation-linked cashflows.
Improved funding levels have also shifted attitudes towards employer contributions, with more than 60% of respondents now expecting employer contribution rates to fall.
Shift towards implementation
A defining theme of this year’s survey is a strong desire for time to digest the changes and put reforms into action. “Give us the chance to catch up on implementing the current requirements before making further changes,” said one survey respondent, while others asked for “a rest from endless tinkering”, allowing the current model to settle.
In practice, this means the priority for pools has shifted to making sense of the new approach to local investment. Some 59% of pool respondents said balancing local ambitions with portfolio construction requirements was a key challenge, while [X%] of fund respondents said finding the right local opportunities was a key challenge.
There is also a push to hire more experts to help pools build up their in-house capabilities. Some 60% of survey respondents say pools are now hiring to take more services in-house, while only 13% expect to continue relying on external advice and management.
Despite the desire for stability, most respondents believe further consolidation is coming, though the focus is now likely to shift from pools to the funds themselves. Only 8% of respondents said there will be no further LGPS consolidation, though many hope further far-reaching changes will not come within this parliament.
