LPFA nearly fully funded thanks to liability management

Pensioner-with-caneThe £4.7 billion (€5.6 billion) London Pensions Fund Authority (LPFA) expects to be nearly fully funded after its 2013 valuation as a result of liability management, good returns and managing inflation and interest-rate risks.

Indicative results for the scheme, which manages pensions for 20,000 employers in London’s public sector, suggest LPFA will be 95% funded.

LPFA’s 2010 valuation showed a funding level of its active members sub-fund of 83% - up from 82% the year before. The valuation of its pensioner sub-fund showed a marked deterioration, from 86% to 77%, as asset values failed to keep pace with the value of the liabilities.

The primary drivers behind the improvement, LPFA says, are “refinements to the asset and liability strategy, good investment returns over the inter-valuation period and appropriate management of interest rate and inflation risks”.

LPFA has hedged its inflation and interest rate risk through an active liability-driven investment strategy since 2006.

In February this year it made a large tactical switch to reduce its interest rate hedge and increase its inflation hedge, crystallising a book profit of some £200 million, and reducing the negative impact of any future potential inflation increases.

Overall membership of the scheme is down as a result of opt-outs and job losses related to austerity measures.

©2013 funds europe