The £3.5bn (€4.2bn) Derbyshire Pension Fund is set to approve recommendations to boost its real asset exposure after returns in 2014 hit 6.9%, below benchmark targets and peer averages.

The local government pension scheme (LGPS) provides pensions for public sector workers in central England.

Its independent investment consultant, Peter Williams, suggested the pension fund increase its allocation to property to 10%, 3 percentage points higher than the fund’s benchmark allocation and double its current holdings.

Derbyshire, which manages some of its investments in-house, saw its internal investment team also suggest an increase in allocation but only to the benchmark 7%.

It agreed at a meeting in March that it would begin a procurement exercise for an external discretionary manager for direct property investment, hoping to have one in place by July.

Williams’ recommendations, which have been approved by the fund’s board, said the UK property market had appreciated very strongly over the year to March 2015, meaning he believed the fund should hold 6% in direct holdings and 4% in indirect.

The pension fund is also considering two proposals that could see an additional £15-£20m invested in indirect property, it said.

Both the independent consultant and in-house investment teams also urged the scheme’s board to increase its infrastructure allocation to the benchmark 1.5% level from the current 0.8%.

However, the consultant said private equity holdings of 0.7% should be fully divested, disagreeing with the in-house team, and recommended moving completely away from the 1.5% benchmark allocation.

Williams said: “Performance in [alternatives] needs to be evaluated over the long term and we note that the three year and five year figures are very good.

“This suggests that the in-house team are good at selecting investments, but are not finding it easy to identify good opportunities for increasing the exposure to these categories.”

Williams also said the fund should reduce its 5.8% cash holdings to 2.5% and closer to its 2% benchmark target, however, the pension scheme admitted this would be difficult given current market valuations do not support significant net investment.

The fund also approved recommendations to reduce overall equity allocation from 67.7% to 63.5% driven mainly by reductions in North American, European and UK equities, although with a slight increase to emerging markets.

Over 2014, the pension fund found its 6.9% mainly from its North American equity allocation with strong results also in index-linked bonds and its alternatives holdings.

The performance still fell short on the benchmark 7.6% return and the 8.1% average return among LGPS funds according to the WM Company.

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