LGPS warned to review asset balance in wake of Brexit result
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Europe House, London Photo: European Union
Actuaries have warned LGPS funds need to be considering their investments because volatility in the wake of the referendum vote could affect the performance of growth assets.
Barry McKay, a partner at Hyman Robertson, said: “The uncertainty and volatility in the markets is … likely to result in a period of lower absolute returns for growth assets.
“This is likely to have consequences on the attractiveness of growth dependent assets versus income generating assets.
“At this time, funds should be considering whether they have the right balance between growth and income assets whilst also ensuring they have the right downside protection in place.”
McKay said the referendum vote would not produce “direct changes to the cost of the LGPS”.
“Despite the drop on markets over the past week, in the short term this is unlikely to have an impact on schemes. The assumptions used for the 2016 formal valuations are based on market conditions at 31st March 2016, however this only affects the pace of funding and not the cost of the benefits.
“Instead the cost of the LGPS depends largely on the scheme design, longevity, inflation and investment returns. The first two factors are unaffected by Brexit. It remains to be seen how Brexit will impact inflation and future investment returns in the long term.”
However, McKay warned the schedule for the LGPS pooling project could slip.
“Asset pooling will still be very much part of the future of the LGPS, however, we expect HMT will be very busy in the months to come as they work on the EU exit process.
“This may take some of their resource away from LGPS pooling and could result in a more flexible timetable.”
George Muir, a partner at actuaries Barnett-Waddingham, said lower values for sterling and potential pressure on inflation could be factors for the Local Government Pension Scheme after the referendum result.
“Market volatility does have an impact on accounting costs and given the uncertainty that Brexit brings then we do expect much more volatility at least in the short term,” said Muir.
“Universities and colleges with a 31 July year end look like having an exciting set of numbers.
“Longer term, the costs of the LGPS are influenced more by inflation and economic growth – lower levels of sterling are likely to lead to some upward pressure on UK inflation which will increase costs unless there is a corresponding increase in asset returns, which looks a bit more challenging if you believe that Brexit is likely to mean lower levels of economic growth.”
Muir added: “We are of course carrying out funding valuations as at 31 March 2016 and … a key issue will be whether the post valuation events are reflected in the assumptions.”
