LONDON - British local government pension schemes are attempting to reduce funding shortfalls by shifting asset allocation away from higher-risk asset classes such as equities into yield-focused investments such as bonds.
Many of those schemes want to move from world stock markets - which have delivered negative returns for the past two years - into asset classes perceived to have a better return profile in the near future.
Asset consultants confirmed large numbers of local authority plans commissioned investment reviews or asset-liability studies following the release of valuation reports in the first quarter.
"They are tending to review their strategy and move into bonds and property as a diversifier. There is an expectation that future returns from equities will not be as high as the last 20 years," said Valerie Burdett-Callen, a consultant with Punter Southall & Co. Ltd., London.
That's bad news for money managers specializing in stocks running money for local authority plans, some of which already have been terminated from their mandates.
One example is the L160 million ($250 million) Powys County Council Pension Plan, Llandrindod, Wales, which recently terminated two equity managers - Baring Asset Management Ltd., London, and Lombard Odier International Portfolio Management Ltd., London - and moved to a higher weighting in fixed income.
"We've just had valuation results and they've not been that good. The plan is currently funded to 68%, down from 77% at the last valuation (three years ago)," said John NcNeil, head of finance services.
Lombard Odier managed a U.K. equities mandate worth L22 million for the pension scheme, while Barings ran an overseas equities portfolio valued around L21 million.
Similarly, the L2.1 billion East Riding of Yorkshire Council Pension Plan, Goole, England, terminated Schroder Investment Management Ltd., London, in April for two equities mandates worth a combined L496 million. A spokesperson for Schroder declined to comment.
The London Borough of Hackney, already facing dire financial problems, is likely to restructure its L400 million pension plan this year following the outcome of an asset-liability study.
The valuation reports commissioned by most local councils in England and Wales this year showed about three-quarters of local authority pension plans had slipped into deficit, according to Helen Kilpatrick, the director of resources at the L800 million West Sussex County Council Pension Fund, Chichester, England.
In addition to shifting asset mixes, local authorities all over Britain - including several London boroughs, the Powys County Council and the West Sussex County Council - have raised taxes to increase contributions to dramatically underfunded pension plans.
The London Borough of Bromley Pension Scheme raised taxes in April to fund an increase in pension plan contributions. The scheme administrator, Kevin Reeves, said the council was aiming to boost the scheme to 100% funding from the current 70%.
Other English schemes in financial trouble include the L1.5 billion Kent County Council Superannuation Fund, Maidstone, which has a L519 million shortfall; the L1 billion Surrey County Council Pension Plan, Surrey, which is underfunded to the tune of L328 million; and the West Sussex plan, which has a L125 million shortfall.