The London Pension Fund Authority (LPFA) has seen an actuarial funding valuation boost of 10 percentage points on the back of strong investment returns and falling membership.

The fund saw its 2013 triennial valuation funding level reach 91%, up from 81%, with most of the improvement coming from its equity, and in particular global equity, as annual returns hit 13.5%.

The £4.8bn (€5.8bn) multi-employer defined benefit (DB) fund, formed out of the Greater London Pension Fund, also acts as a third-party administrator for local authority schemes.

It said it made headway with its strong focus on liability management, running several data exercises to improve its modeling of life expectancy, scratching £8m off its liabilities in stopping overpayments.

Chief executive Susan Martin said: “As a public sector fund, our membership is subject to change, and we have to understand and anticipate that, and adapt our asset-liability model accordingly.”

Although the fund saw its actuarial funding reach 91%, its own more conservative measure using swaps +0% leaves funding at 61%.

Martin said this would require the fund’s taking a more innovative approach to bridging the funding gap, particularly with its own measure of liabilities.

Over the triennial period, the LPFA built up an in-house investment team to focus on direct investments.

Martin said the LPFA was also going to continue expanding its illiquid portfolio via infrastructure pooling.

The fund was initially one of the founding members of the Pension Infrastructure Platform (PIP), a flagship project from the National Association of Pension Funds (NAPF) and the Pension Protection Fund (PPF).

However, the LPFA, along with two other large UK schemes, pulled out of the pooled infrastructure project after its cost and return projections became unviable.

As a result, Martin said it was now looking towards co-investments with other schemes in the Local Government Pension Scheme (LGPS).

“We are doing things ourselves, but we are also talking to other LGPS colleagues about a number of co-investments, and that’s the way we see the future,” she said.

The fund’s current split in investment portfolio has around 55% of assets in liquid investments, and 30% in illiquid, which it uses to provide inflation cover, while returning around 15%.

It also used several hedging products to maintain its exposure to interest rate and inflation risks.

“We used to have an interest-rate hedge, which we removed in February last year, and realised a profit margin of £78m,” Martin said.

“Outside of the triennial period, we have put in 25.5% of funds covered by interest-rate hedges.”

Last year, the LPFA also merged its two funds into one.

It has previously separated its active employers from its employers with closed DB schemes, under the assumption it would aid deficit reduction.

However, Martin said, by combining the funds, it would further enable the LPFA to meet its future liabilities and close the funding gap, with further investment flexibility.