Market volatility adds note of caution to positive LGPS valuations

Volatile stock markets ahead of US president Trump’s ‘Liberation Day’ speech could weigh on asset price estimates for the LGPS triennial valuation.

US stock markets dropped to their lowest levels this year in anticipation of further tariff announcements, adding to an unusually challenging investment environment for the LGPS.

LGPS assets and liabilities are assessed every three years based on market prices as of 31 March, in line with Section 62 of the Local Government Pension Scheme Regulations 2013.

This year, the timing proved unfortunate, with the S&P 500 falling to 5,611 points, close to its lowest level of 2025.

LGPS funds have relatively high exposure to stock markets, with more than half of the average portfolio invested in equities, according to Scheme Advisory Board data.

The recent market turbulence raises questions about the outlook for US equity markets and highlights the need for greater diversification in investment portfolios.

This is not the first time pension funds have suffered from poor timing at the point of valuation. In 2020, USS faced public scrutiny after its valuation coincided with a global market crash caused by the Covid pandemic, leading to a near £10 billion fall in asset values.

While final figures for the LGPS are yet to be published, this month’s market volatility is unlikely to have such a dramatic impact. Rising bond yields have pushed liabilities to record low levels, offsetting some of the impact of falling asset values.

Overall, the LGPS is still expected to be in a strong position, with most funds sitting on a healthy surplus. ISIO’s latest low-risk funding index predicts funding levels will rise from 67% in 2022 to 125% by December 2024.

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However, these positive figures mask weaker than expected investment performance across many LGPS funds, often due to their exposure to growth stocks. Although this strategy has served funds well over the past decade, the latest downturn follows a long period of exceptional returns in US equity markets.

In recent months, strategies with significant US exposure have started to dip. For example, Border to Coast’s Global Equity Alpha Fund, which delivered 11.6% over the past year, is now down 1.45%. Brunel’s High Alpha Global Equity Fund fell by 2.4%, compared to a 12-month return of 3.6%.

Whether this is a temporary blip or the start of a broader shift in global equity markets remains to be seen. Pension fund committees and advisers will be weighing up their options as they consider asset allocation decisions for the years ahead.