London public-sector pension fund aims to close liability gap

The London Pensions Fund Authority (LPFA), which manages total net assets of £3.2 billion for local authorities and other public sector bodies in the UK capital, plans to substantially revamp its investment strategy to make up for its liability deficit. The move follows some high-profile corporate pension fund restructuring last year that saw the emergence of liability-driven investment techniques. The most high-profile deal was conducted by UK retailer WH Smith.

While LPFA has opted to maintain an equity mandate, it has appointed Barclays Global Investors (BGI), European Credit Management (ECM) and Insight to manage cashflow-matching bond and derivatives portfolios, effective January 1. It dispensed with its previous bond mandate managed by Henderson Global Investors.

“Like many pension funds, we suffered a significant drop in our funding level due to our exposure to equities by the time we did our valuation in March 2004,” said Peter Scales, chief executive of LPFA. While the assets bottomed out at 74% of liabilities at the end of the equity bear market, it has since recovered to more than 80%.

“We’ve now split our strategy into specialist cashflow-matching mandates," said Scales. "For example, ECM manages a portfolio to deliver a series of liability-matching cashflows with maturities up to 40 years and with an outperformance target of 1.5% over those cashflows. So instead of investing in index-linked bonds and waiting for the redemptions, we’ve got something far more precisely linked to the cash we need for the payments we make using derivatives structures.”

Hugh Carter, a managing director overseeing UK strategic accounts at BGI in London, said it would be employing a mixture of gilts, corporate bonds, credit default swaps, interest rate swaps and inflation swaps to achieve the objectives of its mandate.