UK - The Lothian Buses Pension Fund, a part of the Lothian Pension Fund overseen by Edinburgh City Council, has been advised to reduce its allocation to equities by 15% and switch the money into alternative assets.

Edinburgh Council's pensions and trusts committee commissioned a review of the £178.1m (€205.1m) pension fund's investment strategy, based on the results of its 2008 actuarial valuation and an asset liability modelling exercise.

A report by the fund's investment adviser Hymans Robertson, which will be presented to the committee at its next meeting, recommended the investment strategy of the fund should be slightly altered to place more focus on alternative assets.

Recommendations include:

Reducing equity exposure from 70% to 55%; Increasing the alternative asset allocation from the 10% invested in property to 25%; this extra 15% in alternatives be invested in different asset classes such as infrastructure and commodities, and Its allocation to bonds should remain at 20%.

The report claimed the increased allocation to alternatives would "improve diversification for the overall fund", although the choice of investments would be delegated to the Investment Strategy Panel, and restricted by the proposed ranges of investment for the broader asset classes.

That said, the report added "there should be no rush to switch from equities to alternative investments due to the recent significant falls in equity markets", and recommended "further analysis" be conducted on suitable benchmark indices, investment manager arrangements and performance targets.

An investment review of the £116.9m Scottish Homes Pension scheme, a closed fund administered by Lothian Pension Fund since 2005, has meanwhile concluded, "there is a less than 50% chance of achieving the target funding level in 2017 if the current strategy is maintained".

The pension fund currently invests 30% in equities, 60% in gilts and 10% in property, but following its actuarial valuation - which reported a draft funding level of 84.8% - the pensions and trusts committee is being warned increases in contributions and/or the level of equities "are required to give a better, arguably a 'reasonable', chance of achieving the funding level in 2017".

The report noted "there is support for an increase in the level of equities from the current level of 30% up to 40%, with a corresponding reduction in the proportion invested in bonds. However, this would expose the fund to a slightly more downside risk of further falls in the funding level".

The report concluded: "Overall, the level to which the proportion of the fund invested in equities is increased should be considered in conjunction with the final results of the 2008 actuarial valuation, up to a maximum of 40%".

The actuarial valuation of the main £2.6bn Lothian Pension Fund is still ongoing, although it reported a draft funding level of 84%, a drop from 85% at the last valuation in 2005.

A review of the performance of all three pension funds revealed in the six months to 30 September 2008, the Lothian pension fund returned -8.2%, and Lothian Buses Pension Funds reported a return of -9.2%, while the Scottish Homes Pension Fund performed slightly better with a negative yield of 3.9%.
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