Lothian implements £300m strategy change as funding level drops
The £4.4bn (€5.3bn) Lothian Pension Fund has created a new £300m in-house global equity portfolio to focus on valuation and volatility beta strategies – adding to the fund’s exposure to high-dividend and low-volatility alternative beta portfolios.
The UK local government pension scheme (LGPS), which provides benefits to public sector workers in Eastern Scotland, said the new portfolio was shifted from its exposure to Asia Pacific equities.
It also said the actuarial valuation ending 31 March 2014 had been completed but left its scheme with a growing funding deficit.
Despite seeing assets rise by over 25% between 2011 and 2014, the scheme, which remains open to new members and future accrual, saw liabilities increase by one third.
It now hosts a funding deficit of £417m and a ratio of 91.3%, down from 96.1%.
Lothian placed blame at the feet of falling bond yields – which have remained low in the UK as record-low interest rates remained and quantitative easing distorted the central bank’s issuance.
“Since the 2014 actuarial valuation, investments have performed well and employer contributions have been greater than the cost of new benefits being accrued,” the fund said.
“However, falls in bond yields as well as the improvements in longevity have caused the funding level to fall.”
The LGPS fund also said its newly-established investment company had been created in February.
Edinburgh City Council had agreed to allow the 11-strong in-house investment staff to be located in a wholly-owned separate entity, in a bid to remove investment staff from council pay restrictions.
The city of Edinburgh hosts a number asset management firms with members of the board becoming increasinly concerned investment staff turnover was affecting the fund’s ability to implement its strategy.
Lothian said it was finalising the structure of the entity, enabling it to develop the in-house team further.
In line with this, the fund said it would be submitting its proposal to the Financial Conduct Authority (FCA) by the end of April.
Should the LGPS fund become FCA authorised, it would be allowed to make investment decisions without consultancy approval, as well as manage investments for third parties.
“Regulated activities will be limited to those required in operating the pension funds; such as certain derivative use, developing investment strategies for employer(s) and informal investment collaborations with other pension funds,” the fund said.
As part of its investment strategy change, Lothian said it had saved £200,000 in transition costs by running the exercise via its in-house team, using futures contracts to manage market exposure risk.
“The market conditions at the time were favourable and resulted in a much better outcome than expected in terms of market impact,” it said.