Scotland’s £31 billion ($41 billion) Strathclyde Pension Fund, which manages the pension assets of 288,000 local government employees in the Glasgow area, is increasing its allocation to impact to 7.5 per cent of assets under management.
The new allocation gives the internally run direct impact portfolio (DIP) an additional £1 billion to target new investments with local, ESG impact over the next five years spanning SME private credit, growth equity, infrastructure, affordable housing and renewable energy. The pension fund said measurable impacts from DIP include 177,000 tons of CO2e emissions avoided, enough to power 317,000 homes.
The boosted allocation marks the steady growth of a portfolio that Strathclyde created in 2009 with an initial £5 million investment and a capacity of just £300 million. The investor was one of the first in the Local Government Pension Scheme (LGPS) to commit explicitly to investing for impact. Most recently, the portfolio produced an annual return of 4.1 per cent. It has returned 7.6 per cent annually since 2010.
The DIP’s returns compare very favourably against Strathclyde’s overall returns, although DIP tends to lag total fund performance because of its much lower equity allocation.
In its latest committee meeting, the Strathclyde board also agreed to an increase in the minimum targeted return for individual fund proposals in the DIP allocation to 6.5 per cent from 5 per cent. The portfolio now targets investment sizes of £30 million to £100 million and plans to increase the total amount of the co-investment programme to £300 million from £200 million. It will also increase the maximum individual co-investment ticket size to £25 million.
Highest funded level ever
In another important milestone, the pension fund has just posted its highest funding level ever recorded of 147 per cent.
“The triennial actuarial valuation is always a significant milestone in the evolution of a pension fund. But the 2023 valuation of Strathclyde Pension Fund was particularly so,” it stated.
“These are not just actuarial and accounting numbers. They translate into real-world value: reductions in employer contribution rates for SPF’s employer’s whose finances are currently hard-pressed; and reassurance for the Fund’s 286,000 members (another high-water mark) that their pensions are more secure than ever even in these difficult times.”
It has also been a good year for investment returns. The pension fund has returned 9.9 per cent for the year, increasing assets under management by £2.7 billion. Ten-year investment returns are 8.5 per cent. The growth-oriented portfolio is divided between a 52.5 per cent allocation to equity, while hedging/insurance (1.5 per cent,) credit (6 per cent,) short-term enhanced yield (20 per cent) and long-term enhanced yield (20 per cent) make up the rest of the portfolio.
The fund’s strong performance also facilitated some strategy changes which the committee agreed on towards the end of last year, including a reduction in investment risk in order to add more protection against future downturns and a shift of more than £4 billion of passive equity into Climate Transition Index funds. “This marked a a big step towards making the Climate Action Plan agreed by the committee last year a reality this year,” stated the fund.
Members received a pension increase of 10.1 per cent at the start of the year and will have received a further increase of 6.7 per cent after the year end, ensuring that the value of their pension is fully protected against inflation.
Strathclyde is part of the Local Government Pension Scheme (LGPS) and is one of 11 LGPS funds in Scotland.
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