A steady influx of new members is posing ever tougher investment challenges for the Greater Manchester Pension Fund (GMPF), the largest local authority pension fund in the UK.
The scheme, which has £7.3bn (€10.6bn) of assets under management and about 200,000 members, faces the challenge of coping with increasing numbers of members from 10 local authorities.
Peter Morris, director of pensions at the GMPF, says that during the past few years the number of employees joining the scheme has increased dramatically. “This is complicating matters on the administrative front. Also, because these members work and behave differently to some of our more established employees, the formulation of investment strategy is more difficult,” he says. “The administering authority is responsible for the investment strategy but this not always the view of our employees.”
In addition to a growing membership, increasing liabilities and difficult investment markets have had a significant impact on the way the fund operates.
GMPF INVESTMENT STRATEGY: EQUITY/NON-EQUITY SPLIT
GMPF INVESTMENT STRATEGY: UK/OVERSEAS EQUITY SPLIT
GMPF INVESTMENT STRATEGY: NON-EQUITY SPLIT
GMPF INVESTMENT STRATEGY: OVERSEAS EQUITY SPLIT
Source: Local Authority Conference 2005
In 1994, the management panel decided to place the pension scheme’s assets into two separate investment funds. This step was taken to allow a small number of employees with a different liability profile from the majority to pursue a more conservative investment strategy. So the bulk of the pension assets, representing about £6.9bn, are held in the main fund and invested across different classes; the remaining assets, about £420m, go into a designated fund that invests mainly in UK index-linked vehicles managed in-house, with a small proportion held in cash.
The disappointing performance of equity markets in the recent past resulted in the main fund suffering significant losses in value. The lowest return was recorded in March 2003, when assets dropped to £5bn. However, an efficient investment strategy has resulted in a considerable recovery in value that has brought the fund to its current position.
Efficiency helps recovery
About 80 per cent of the fund assets are invested through external asset managers. A review of investment strategy took place during 2000 and 2001, which led the fund to adopt a specific benchmark and appoint three external investment managers: UBS Global Asset Management, Capital International and Legal & General Investment Management. The three are still in charge of managing the fund’s portfolio.
“We have a very simple structure where we’ve got three external managers looking after the bulk of our securities,” says Mr Morris “All three operate on a multi-asset basis, and they have benchmarks reflecting what we think their strengths are.”
At the end of 2004, the fund had a total of £5.2bn assets managed externally, of which just over £3bn was being run by UBS. Legal & General is in charge of £1.2bn, while Capital International’s portfolio represents just under £900m (see table below).
For a fund of GMPF’s size to retain just three external managers might be unusual but Mr Morris says he is happy with the arrangement. The fund has performed well in relative terms in the past few years and, on the governance front, Mr Morris maintains that it is easier to maintain control with just three managers rather than multiple managers.
The GMPF follows an asset allocation strategy that is similar to that of many other local authority and corporate pension funds in the UK. Equities are still a major part of the portfolio, accounting for 65 per cent of total assets. UK stocks represent 63 per cent of the fund’s total exposure to equity markets, although exposure to international stocks has increased in the recent past.
“Last year we dropped from 67.5 per cent to 65 per cent in equities and also shifted some assets from the UK to overseas. Generally speaking, we made small incremental changes rather than something more significant,” says Mr Morris. “We have a strong UK bias and, in terms of the overseas side, one third is invested in the US, one third in Europe and one third in Japan and the Far East.”
Increasing diversification of the fixed income portfolio means the fund now combines UK and overseas index-linked investment vehicles, and government and corporate bonds.
UK property is another important asset class and Mr Morris says the fund is considering the possibility of adding some exposure to overseas real estate through property funds – “which doesn’t mean we are going to do it, but we are looking at it”.
The presence of other alternative investments in the fund portfolio is quite limited: a 3 per cent commitment to venture capital investments.
“As part of our annual review we look at the so-called alternative asset classes. We have seen other pension funds doing this and there has been a lot of talk about this,” he says. “We have considered hedge funds several times in the past, and several times we have said ‘not yet for us’,” he adds.
Beating the benchmarks
In 2004, the main fund achieved a return of 26.3 per cent and outperformed the benchmarks of all the major asset classes except overseas index-linked and UK government bonds. In the past 10 to 15 years, according to the WM Pension Fund Performance Measurement Service, the main fund’s performance was just under 1 per cent above average. However, the GMPF has been the top-performing UK local authority pension fund over both a five-year and 15-year period to date.
Increasing liabilities mean that future investment strategy will be aimed at improving absolute returns in a bid to generate healthy funding levels. The GMPF has recently published a funding strategy statement that points out that short-term market volatility could result in investment returns falling short of the fund’s target. The statement also describes the strategy the fund will follow to secure long-term stability.
“As a local authority, we have requirements in terms of diversification and suitability of investments,” says Mr Morris. “I think probably the main difference between us and the private sector is that we can recover our deficits over a longer time frame, and that allows us to take longer-term decisions in investment strategy matters.”
Mr Morris emphasises the importance of adding value through strategic asset allocation, saying that, even though the administering authority determines the investment strategy, external managers should help more when it comes to making some decisions. “One of the things we find is that fund managers don’t want to take too much advantage of the opportunities to be found in making asset allocation decisions and they are passing that decision back to us,” he says. “I think it is very important that they help us with the investment strategy.”
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