UK – The £2.9bn (€4.2bn) London Pensions Fund Authority has outlined its new investment strategy following what it admits have been disappointing returns.

The shift entails new style mandates and a strategy more closely linked to liabilities, the LPFA says in its new annual report.

It said: “On the basis of the valuation results and funding strategies agreed with employers, the board has reviewed the investment strategies, portfolio structures, benchmarks, risks and management arrangements for each of the Sub-funds.

“In overall terms, the strategy needs to deliver higher investment returns which can be sustained over the longer term to recover under-funding and stabilise employer contribution rates.”

It has initiated an open tender process for new style portfolios and mangers.

“Future strategy will be linked closely to the liability profiles that have emerged from the valuation process and by the solvency position of individual employers,” it added.

“This will inevitably lead to a longer term view of investment to generate returns related to liabilities and funding, rather than in relation to other funds or market indices. Investment returns need to be increase whilst not further increasing risk unduly.”

The authority said the 15% allocation to bonds is replaced by a new mandate (20%) with a target return of inflation (RPI) +5%.

This portfolio will contain a mixture of assets including bonds – but they will be “managed to deliver positive returns in excess of the liabilities”.

The allocation to other assets of 15% is unchanged but the components - principally property unit trusts and private equity - will be reviewed to ensure cash is invested on a timely basis and for added returns.

The LPFA added that the overall asset allocation of the Pensioner sub-Fund is still under review as liabilities and contribution income streams are finalised. But it expected to introduce a system to “secure overall returns of index linked gilts +1.5%, while continuing to match cash flows in the medium term”.

“Potential managers will be drawn from the current tender process.”