Agenda item

The Committee considered a report of the Director of Corporate Resources which provided information on the outcome of the annual review of the Leicestershire County Council Pension Fund’s (the Fund) strategic investment allocation and structure. The report also provided guidance regarding the Fund’s approach to local investment, as required by Government’s draft regulations, as well as the approach to engagement and divestment. A copy of the report marked ‘Agenda Item 7’ is filed with these minutes.

 

The Chairman welcomed Mr. David Walker from Hymans Robertson, who delivered a presentation as part of this agenda item.

 

Arising from discussion, the following points were made:

 

i.          A Member questioned whether the mix of active equity managers, some operating defensively and others more aggressively, might be neutralising each other’s performance, resulting in benchmark-like returns despite higher active management fees. Officers and advisers acknowledged that the risk had been identified through blending active managers but noted that LGPS Central’s role was to ensure the mix of styles was complementary and continued to justify active risk. Whilst the last five years had been challenging for most active managers due to narrow market leadership, longer term evidence still supported selective active management where conviction existed.

ii.          Questions were also raised regarding active bond mandates, specifically whether reported outperformance figures were net of fees, and whether the Fund was receiving sufficient value for money. Officers advised that typical fees were in the region of 20–30 basis points, and that while performance had been mixed, passive bond investing had drawbacks. Alternative index-based bond solutions existed but were less common and could incur higher turnover costs. The buy and maintain approach was highlighted as attractive due to low turnover and benchmark agnostic flexibility.

iii.          In relation to valuation matters, members queried the feasibility of employers requesting interim funding valuations in light of strong market performance since the last formal valuation. Officers advised that while regulations allowed for such requests, they were expected to be rare, and any such review would need to be considered case by case and in line with the Funding Strategy Statement. It was noted that interim reviews were often impractical due to their complexity.

iv.          Members also sought clarification on currency risk, particularly regarding the impact of US dollar movements on overseas investments. Officers explained that the Fund operated a currency hedge of approximately 30% on major foreign currency exposures, including the US dollar, providing partial protection against currency volatility.

 

v.          A Member wished to avoid misleading messaging such as “diversification produced little gain” which could be misinterpreted, particularly because as there was strong pressure on members to diversify at a scheme level and because, under fiduciary duties, diversification did not necessarily yield “little gain”. Officers responded that at the Fund’s current level of diversification, and given the sheer number of strategies, the marginal benefit of each additional strategy had reduced. Also noted was the Fund had been simplified over the last decade, moving from well over 25 managers to around 20 and slightly fewer asset classes.

 

vi.          A Member queried whether the small differences in the projections simply reflected that the four alternative portfolios were themselves only marginally different from the current strategy and suggested that it might have been useful to model a wider range of options, both more defensive and more adventurous strategies, to test outcomes more meaningfully. Hymans explained that, given a strategy review had been conducted around 12 months earlier, the team had aimed to avoid drastic changes to limit costs and to maintain a steady approach to funding and investment. It was acknowledged that larger changes could have been modelled but stated the chosen approach was a prudent, gradual evolution reflecting current market conditions.

 

vii.          A Member noted the models appeared to be closely grouped and asked whether the previously noted “very slight difference” associated with a derisked strategy would remain minimal under more extreme (for example, geopolitical) scenarios and queried whether the divergence between a derisked strategy and a risk averse or riskier strategy would widen under such stress conditions. Hymans replied that larger variations could be tested, but any investment strategy needed to align with the funding strategy and actuarial assumptions. If variations were too large, the actuary might need to revisit assumptions around expected return and prudence. As an example, moving 20% into government bonds would likely reduce volatility further but could materially lower expected returns, potentially creating issues in maintaining the funding strategy.

 

viii.          A Member asked whether any mechanisms existed to encourage equity managers to increase exposure to commodities rather than the riskier elements of the market. An officer explained that most of the Fund’s equity exposure was passively managed, meaning investments followed the index and managers could not actively reallocate to commodities.

 

ix.          A Member voiced support for increasing protection assets but questioned whether gilts could still be considered “minimal risk” given the large rise in UK government debt from pre-financial crisis levels. Hymans stated that gilts continued to be regarded as effectively risk free in terms of default risk, and although not without risk, gilts remained appropriate as liability matching assets due to their fixed or inflation linked payment profiles. The main reason LGPS funds had previously avoided gilts was simply poor returns over the last decade, but market conditions had now improved but cautioned that gilt values could still fall in any given year.

 

x.          A Member questioned the rationale for making changes when the current strategy was performing well, noting that gilts carried some risk and could provide lower returns. He questioned whether the cost of transitioning into gilts would be justified. Hymans explained that the strategic increase to fixed interest gilts would be funded from an existing underweight position in multi asset credit (MAC). The fund was already around 2% below its MAC target, and the cash holdings would be used to fund the gilt allocation, resulting in minimal transaction costs. 

 

xi.          In response to a query as to whether the underweight position in MAC reflected a lack of suitable opportunities in that area, officers clarified that, although the long-term target for MAC had been 9%, the position had been reduced when Central undertook a review of the fund after one of its managers left. The allocation had been held at just under 7% during 2025. As the review now recommended reducing the target to 7%, the Fund would already be close to its intended level, and the gilt allocation could be funded from cash without meaningful frictional cost.

 

xii.          It was reported that feedback from partner funds indicated broad support for treating the investment pool as a single, large scale investment area rather than prioritising geographically localised investments. This approach reflected the difficulty of sourcing strong opportunities within narrow geographic boundaries and the benefits of the pool creating suitable investment products across its wide region, and members had voiced concern that government initiatives might encourage lower return investments for policy reasons, something that required monitoring. Central explained that it was designing a pool-wide solution, as well as a separate solution for funds within strategic authorities that wished to invest on a more geographically defined basis.

 

xiii.          It was noted that only the West Midlands currently had a strategic authority in operation, though the East Midlands authority was in development. It was noted that within the pool-wide definition, investments would span private markets, meeting high standards equivalent to globally diversified private market allocations. The scale of the pool meant even a 1% allocation represented close to £1 billion across clients. A Member voiced concern that while a small 1% allocation to “local” was manageable, future government guidance might impose significantly higher mandatory local investment levels, such as 5% or even 20%, which could materially affect the fund’s risk and return profile. It was acknowledged that the definition of “local” would be critical, particularly if it were set to narrowly, which might lead to investments on lesser terms or in assets that failed to meet prudential standards.

 

xiv.          A Member suggested exploring whether Leicestershire could collaborate with Derbyshire and Nottinghamshire pension funds, forming an “East Midlands plus” area that was larger than Leicestershire but smaller than the full national pool, to achieve scale without being excessively broad. Hymans noted that discussions were ongoing among partner funds regarding whether minimum requirements might be appropriate across different geographic areas, acknowledging that the Pool’s footprint was very wide.

 

xv.          A Member asked whether all members of the pool, regardless of size, would be treated as equal partners in decision-making and investment prioritisation, and queried whether funds contributing more capital should receive proportionate consideration for local allocations if comparable opportunities existed across the region. Central explained that, under the pool-wide solution, decisions would be driven primarily by the quality of investment opportunities and their alignment with risk return criteria, rather than by the relative size of individual participating funds.

 

xvi.          A Member encouraged the Committee to take a holistic approach, suggesting that part of its fiduciary duty was to support the economic wellbeing of members who largely lived within Leicester, Leicestershire, and Rutland, and warned that other combined authorities (for example, East Midlands and West Midlands) might define “local” narrowly, favouring their own regions. If so, the Fund’s failure to follow suit could result in its members’ money disproportionately benefiting residents elsewhere. It was noted that Leicester and Leicestershire lacked a strategic authority, however, it was explained that combined authorities were tasked with identifying growth strategies but did not themselves decide on pension fund investments, and that opportunity identification would still lie with individual funds, supported by Central’s processes. It was further explained that a process would be required to determine how the Committee could operate in this area. It was reiterated that there was a need to work with local authorities that did not have a strategic authority, and to develop some form of pipeline for investment ideas.

 

RESOLVED:

 

a)    That the changes to the 2026 target SAA allocation as described at paragraph 22 to 28 of the report, and summarised at the table at point 28, which includes a 1% initial allocation to Local Investments across the four asset classes, private equity, property, infrastructure and private credit, be approved.

b)    That it be agreed that two asset class reviews be undertaken:  depending for listed equity and investment grade credit, with outcomes of the reviews to be presented to the relevant Committee meeting during 2026.