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McFayden said 2022 has been complicated by difficult external influences that will not be going away.
“As 2022 draws to a close, it’s clear that this year has been one of the most turbulent in recent times. Conflict in Europe, rising geopolitical tensions globally, the aftereffects of the pandemic, rocketing inflation and rising interest rates have conspired to increase market volatility,” she said.
“While not what many want to hear, we foresee high inflation and ongoing market volatility throughout 2023. LGPS funds will need to think about how they monitor and manage these risks, particularly for employers with shorter-term time horizons and those with weaker financial covenants.”
According to McFayden, new flexibility powers could be used in such situations, as well as formal monitoring arrangements.
The new year heralds the last few months of the LGPS valuation year in England and Wales (the process is just beginning in Scotland), but follow-up work will still be needed.
She said risks associated with climate change, wealth inequality, technological change, ageing populations and the threat faced by global liberal democracy deserve attention.
“At the same time, we believe these trends will create a wealth of new investment opportunities in areas such as the generation, storage and distribution of renewable energy; investments in housing and infrastructure driven by levelling-up policies; and in the adoption of digital technologies,” she said.
“Increased regulation also seems inevitable, but we hope it is applied pragmatically and acts as a catalyst for promoting best practice in long-term investment. On a more positive note, with the marked falls seen over 2022, many asset classes and markets are starting to look attractively valued from historic standards.”
“As we enter a new year and wish for a calmer period, administration challenges will continue to be at the forefront of pension mangers’ minds, with deadlines in relation to the Pensions Dashboard and McCloud becoming closer at a time when the LGPS continues to find resourcing a challenge,” said McFayden.
“The need to do more with the same, or less, resource will see funds taking difficult decisions, heightening the need for good governance, knowledge and understanding at all levels within a fund.”
She also said she hopes to see TPR’s Single Code of Practice and the E&W SAB Good Governance Project recommendations being implemented, particularly the consultation concerning each fund being compelled to have a workforce plan.
“Workforce planning could be an opportunity to take an LGPS-wide approach, if not to current resource challenges, then to those which may arise in future as member and employer needs change and increased automation are implemented,” she said.
