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Investment Strategy
The current investment strategy is set out in the published Statement of Investment Principles (PDF 204KB - opens new window). The SIP was last amended to reflect current best practices and was formerly approved by the Board in December 2008 to reflect the changes in investment strategy and the new management arrangements.
A fundamental investment strategy review was undertaken in 2005 in the light of the actuarial valuation outcomes, and significant changes were agreed, together with an implementation plan and risk framework. As a result, the LPFA Board undertook a tender process to select new style portfolios and investment managers. These new mandates became effective from 1st January 2006.
Target Asset Allocation
Active sub-fund at 31 March 2008
The current and target asset class allocation is shown below.
| Class | Policy Target |
Current |
|---|---|---|
| Global Equities | 65% |
60% |
| Target Return | 20% |
20% |
| Alternative Assets | 15% |
18% |
| Cash | 0% |
2% |
100% |
100% |
Pensioner sub-fund at 31 March 2008
The current and target asset class allocation is shown below.
| Class | Policy Target |
Current |
|---|
| Global Equities | 12.5% |
13% |
| Cashflow Matching | 87.5% |
85% |
| Cash | 0% |
2% |
100% |
100% |
Funding Strategy
The LPFA published its Funding Strategy Statement (PDF 345 KB - opens new window) (FSS) in 2005. The purpose of the FSS is to establish a clear and transparent scheme-specific strategy which will identify how employers’ pension liabilities are best met in future years, to keep their contribution rates as nearly constant as possible and to take a prudent longer-term view of funding those liabilities.
The FSS was prepared in collaboration with the Fund actuary, Hymans Robertson, and in consultation with all the employers participating in the Scheme. The FSS will be kept under regular review and will be revised in the event of any significant or material changes arising.
Actuarial Valuation
The scheme is required to undertake an actuarial valuation each three years as a statutory obligation. The most recent actuarial valuation was completed for the three years to 31st March 2007.
The main purposes of the valuation are:
- To review the financial position of the scheme against the LPFA’s funding objectives;
- To enable the completion of all relevant certificates and statements in connection with the LGPS Regulations 1997 and other relevant regulations; and
- To comment on the circumstances that may give rise to future volatility in the scheme’s funding level or employers’ contributions.
A key process in the valuation is a review of the long-term economic and demographic assumptions used to conduct the valuation. Among the long-term assumptions used in the most recent actuarial valuation were:
| Assumptions | Active sub-fund |
Pensioner sub-fund |
|---|---|---|
| Discount Rate | 6.3% pa. |
1.5% pa above swaps curve* |
| Salary Growth | 4.4% pa. |
1.5% pa above inflation curve |
| Inflation Rate | 2.9% pa. |
Market expectation of long-term inflation as measured by reference to Sterling LIBOR nominal breakeven inflation curve** |
| Asset Outperformance | 1.75% pa. above gilt yields |
1.5% pa above swaps curve |
*The swaps curve is the yield available on the sterling LIBOR nominal swaps curve as provided by Barclays Capital as at the valuation date.
**Sterling LIBOR nominal breakeven inflation curve is provided by Barclays Capital at the valuation date (i.e. the inflation curve) .
When the assumptions and methodology have been confirmed the scheme's liabilities are calculated. For each sub-fund the valuation of the liabilities is compared to the market value of the assets to determine the respective funding levels.
| Year | Active sub-fund |
Pensioner sub-fund |
|---|---|---|
| 1993 | 90% |
97% |
| 1995 | 105% |
99% |
| 1998 | 108% |
100% |
| 2001 | 103% |
99% |
| 2004 | 74% |
91% |
| 2007 | 82% |
86% |