UK - An investment review of the Lothian pension fund is recommending changes to its investment strategy including an 11 percentage point increase in alternatives.

The £2.6bn Lothian Pension Fund, administered by Edinburgh City Council, currently has a benchmark allocation of 66% in equities, 10% in bonds and 24% in alternatives, which includes a 12% allocation to property.

Documents published ahead of the next meeting of Edinburgh Council’s Pensions and Trusts Committee showed the revised investment structure would comprise 60% in equities, with 45% in global stocks, while the bond allocation would be halved to 5% and invested solely in index-linked gilts with no fixed-interest bonds.

The 11% of assets resulting from these cuts would be transferred to the ‘diversifying growth assets’ portfolio to reach 35% of which up to 15% would be invested in property and up to 25% in alternative asset classes that currently include private equity, infrastructure and active currency.

That said, although the investment strategy review recommends the new strategy to “improve diversification for the overall fund”, Hymans Robertson warned “we would not recommend moving to the revised structure in the near-term”.

It suggested the committee should “think carefully about the timing issues when considering change”, and stated the fund should “aim to increase the allocation to alternatives gradually over time as opportunities present”.

Figures from the committee documentation revealed the latest actuarial valuation of the Lothian Pension Fund on 31 March 2008 reported a funding level of 85%, the same as in 2005, with a deficit of £524m. 

However, a projection of the funding level taken at 31 December 2008 showed the figure had dropped to 74% in the nine month period, even though in the fourth quarter investment return was -1%, significantly outperforming the benchmark return of -9%.

In addition, projections for the funding level of the Lothian Buses Pension Fund, which is also considering an increase to alternatives, fell from 96% at March 2008 to 80% by the end of the year. (See earlier IPE article: Lothian buses may increase alternatives)

Elsewhere an update on the class action activity the pension fund is involved in showed it is considering grounds for appeal against the dismissal of the Vodafone case in December, while it is waiting to see if it will be chosen as lead plaintiff in a case against Elan although it admitted this would be “unlikely”. (See earlier IPE article: Lothian action against Vodafone is dismissed)

If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com

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