The UK’s public sector pension schemes significantly increased their exposure to alternative assets over the last three years, a study has found.
Research by State Street looking at the asset allocation trends of the UK’s 105 public sector schemes across England, Wales and Scotland, revealed exposure to alternatives increased by 61% over the three-year period to the end of 2016.
This translates into a £16.6bn move into assets such as venture capital, distressed debt, and forestry and timberland during the period.
But the biggest allocation was to private equity which, according to State Street’s analysis, accounted for £8.4bn in 2016; up 68% over the three-year period.
State Street claimed the uptick in alternatives has been driven by mounting cost pressures and persisting lower-for-longer yields which have led schemes to seek higher yielding alternative assets to meet strategic investment targets.
State Street head of UK pensions and banks, asset owner solutions, Andy Todd said: “We expect to see a strong focus on increasing cost efficiencies and a shift in asset allocation to generate alpha in the current low yield environment.
“Historically alternatives have often been seen as ‘higher yielding’ assets; and as these member funds feel increasingly comfortable with these assets – which are often seen as complex when compared to traditional bonds and equities – a natural trend toward such investments may emerge.”
Despite the findings, equities and fixed income remained core holdings in portfolios. The study found equities accounted for 48% and fixed income 14% of overall allocations. Over the three-year period allocation to fixed income increased 31%, representing £34.7bn in assets. For equities, overall exposure increased by 9%.
State Street said the asset allocation of the 89 member funds in England and Wales participating in the Local Government Pension Scheme (LGPS) pooling initiative will likely see considerable changes to their current portfolio construction over the coming years.
Todd added: “This research highlights how these pension funds are becoming increasingly comfortable navigating complex asset classes such as alternatives as well as emerging market equities. These changes to the investment landscape are systematic, so we will likely see a continued trend toward such investments.”
Elsewhere the study revealed over the period overall scheme assets increased by 13% to £251.8bn. Allocation to domestic equities allocation decreased by 5%, accounting for £37.9bn, but there was a significant increase in emerging market equities, up 33% to £446.5m.
