Pension fund investment returns lag benchmarks despite strong quarterly performance
The Kingston upon Thames Pension Fund's investment returns have fallen short of their benchmarks over the three and five-year periods, despite a strong quarterly performance. The fund's market value increased to £1.51 billion in the quarter ending June 30, 2026, with a quarterly return of 7.6%, outperforming its benchmark of 7.3% by 0.3%.
However, the one-year return of 13.7% was below the benchmark of 14.7%. Over three years, the fund returned 10.8% annually, underperforming its benchmark of 11.1%. The five-year performance was 6.4% annually, lagging behind its benchmark of 8.2%.
Katherine Gray, Head of Pensions Investments and Treasury, presented the Investment Performance Report, noting that while quarterly performance was strong, the focus should remain on long-term returns. She explained that the underperformance over longer periods was partly due to legacy diversified growth funds and the general struggle of growth managers in AI-dominated equity markets. Columbia Threadneedle, a key equity manager, has also experienced recent underperformance against its benchmark.
Charlie Sheridan, client relationship manager at London CIV, acknowledged that some fund manager performance had not met expectations and that efforts were underway to improve this. He specifically mentioned diversified growth funds, which were sort of funds which can invest across a whole different range of asset classes in one fund, and they hadn't performed very well. They hadn't kept up with the benchmark.
He also noted that Columbia Threadneedle hasn't done particularly well
and that growth managers generally have struggled in the AI-dominated equity markets.
Equity Funds had differing outcomes with Fidelity outperforming its benchmark by 0.9% p.a. In contrast, Columbia Threadneedle underperformed by 2.5% p.a. The strategy for addressing this includes the launch of the core equity fund as a step in that direction.
The new LCIV Core Global Equity Fund is designed to provide a scalable 'one-stop' equity allocation, targeting long-term outperformance of around +1.5% p.a., relative to the MSCI All Country World Index
. The transition of existing active equity holdings into this fund is expected to happen during late September/October 2026
.
As of 30 June 2026, the asset allocation is as follows:
- Listed Equity: 48.9%
- Property: 7.6%
- Infrastructure: 5.0%
- Private Credit: 4.0%
- Credit: 21.1%
- UK Government Bonds: 10.2%
- Cash: 3.2%
Private Equity and Infrastructure are underweight compared to their targets, while Listed Equity is overweight. The report notes that The agreed allocation to private equity is pending while LCIV sets up a suitable fund; in the interim, the 5% allocation to Private Equity will be held in Listed Equities.
The report also highlighted the fund's cash flow negative position, meaning that benefit payments exceed contributions received. This gap is bridged by investment income, which is crucial for the fund's financial stability. The fund aims to generate an additional £10-15 million in investment income through private debt investments, index-linked gilts, and property rentals.
Despite the underperformance against benchmarks over longer periods, the fund remains well-funded with a funding level of 128% as of June 30, 2026, a slight decrease from 137% at the March 2025 triennial valuation. This decrease is attributed to higher-than-anticipated inflation impacting liabilities. The CPI inflation assumption for the 31 March 2026 valuation was 2.3%, and for the 31 March 2025 valuation it was 2.3%. The report also notes that High levels of inflation in the UK resulted in higher than expected LGPS benefit increases of 10.1% in April 2023 and 6.7% in April 2024. However, inflation has reduced towards historical levels and the Bank of England's target (2% pa), with LGPS benefits increasing by 1.7% in April 2025. Observed inflation has been higher than anticipated over 2026, resulting in LGPS benefit increases of 3.8% in April 2026.
The Pension Fund Panel noted the report, with discussions focusing on the drivers of returns, the comparison of employer contribution rates with other local authorities, and the importance of managing cash flow, especially with a move towards longer-term investments. Katherine Gray stated that Kingston was in a healthy funding position, ahead of the pack, and that the employer contribution rates were comparable to others when considering funding levels.
She further elaborated that Kingston's in a really healthy position. We are, from the memory of 140% funded. 137% funded at the last valuation. You are ahead of the pack.
She also mentioned that Kingston's employer contribution rate of 16.5%... We're completely on par to others in that same sort of – when you do that same test [comparing funding level versus contribution rates].
Read the full report here: Public reports pack Wednesday 23-Sep-2026 10.00 Pension Fund Panel.pdf