Lothian Pension Fund strategy

We plan our investments to meet the long-term objective of delivering stable returns to pay pensions now and in the future. This plan is called the investment strategy. Our investment strategy spreads investments across different investment types and different countries, sectors and companies to reduce the risk.

Investment strategies

To provide for differing employer needs, we have four investment strategies.

  • Most employers are in the main strategy, a long‐term investment strategy aiming to maximise investment return within reasonable and considered risk parameters and minimise costs to employers. The investment strategy is set at broad asset class levels, which are key in deciding investment risk and return. During 2018, these classes were replaced by equities, real assets, non‐gilt debt, gilts and cash to reflect the risk and return characteristics of each group better.
  • A small number of employers are in the mature employers strategy which invests in UK index linked gilts to reduce funding level and contribution rate risk as these employers approach exit from the Fund. The mature employers strategy represent less than 1% of total assets.
  • The 50/50 strategy allows a small group of less mature employers to have a 50/50 mix of the main and mature employers strategy. These represent just over 1% of total assets.
  • The final strategy is for buses and was introduced on 31 January 2019 when Lothian Buses Pension Fund was consolidated into Lothian Pension Fund. It is the same strategy that the Buses Pension Fund followed previously when it was managed separately.

After the 2017 actuarial valuation we carried out a comprehensive review of strategy focusing on the main strategy. This is because the mature employers' strategy is entirely invested in gilts, the 50/50 strategy is invested in a combination main and the mature strategy, and Buses remains unchanged with its previously agreed strategy. The review concluded that we should continue with our strategy of 65% invested in lower risk equities whilst continuing to monitor the impact of bond yields. Opportunities to reduce risk, by reducing equities by up to 15%, should be considered if bond yields and funding levels increase significantly. The Fund's investment strategy was approved by the Pensions Committee in December 2018.

Strategy at 31 March 2019

Lothian Pension Fund's four strategies and asset allocation
  Main strategy Mature employers 50/50 Strategy Buses strategy Total Fund
Equities 65.0% 0.0% 32.5% 51.5% 63.1%
Real Assets 18.0% 0.0% 9.0% 18.0% 17.7%
Non-Gilt Debt 10.0% 0.0% 5.0% 10.5% 9.9%
Gilts 7.0% 100.0% 53.5% 20.0% 9.3%
Cash 0.0% 0.0% 0.0% 0.0% 0.0%
Total 100% 100% 100% 100% 100%

A key objective of the strategy is to reduce risk and this is largely achieved by reducing risk within the equity pool of assets. Implementation of the strategy has involved shifting from regional to a global manager structure. Significant steps including introducing internally managed portfolios has meant 2018/19 represents a much more “steady state” in terms of the structure within the equity exposure.

The activity in recent years (2012‐2015) has increased internally managed global equity strategies to reduce investment risk and these assets areas expected to perform relatively well when equity markets are weak and produce good positive absolute returns in rising equity markets.

We manage almost 85% of listed equities in-house with most of these as low cost, low turnover strategies, which are expected to enhance our risk‐adjusted returns over the long-term. We also hedge exposures to the currencies of overseas listed equities with the explicit aim of reducing volatility rather than seeking to generate improved returns.

The Fund therefore maintains exposure to currencies that are expected to reduce volatility, such as the US Dollar and Japanese Yen which tend to fall as equities rise, and hedges exposure to currencies that are expected to increase volatility, such as the Australian Dollar which tends to rise as equities rise.

Annualised returns 31 March 2019

Figures are percentage per year
  1 year 5 year 10 years
Main strategy 9.6 10.9 11.8
Benchmark* 9.1 10.1 11.5
Mature employers strategy 4.9 - -
Benchmark 4.6 - -
Retail Price Index (RPI) 2.5 2.3 3.0
Consumer Price Index (CPI) 2.0 1.4 2.2
*Comprises equity, index‐linked gilts and cash indices as well as an inflation‐linked index for the alternatives allocation


Our objectives of the Fund are:

  • over long‐term economic cycles (typically 5 years or more) the achievement of the same return as that generated by the strategic allocation
  • over shorter periods, the Fund should perform better than the strategic allocation if markets fall significantly.

The performance of the mature employers strategy was broadly in line with benchmark over the year, returning +4.9%. Performance of this strategy has also been broadly in line with benchmark since it began in March 2016, with a return of +8.4% per annum.

Our return has exceeded the objective of meeting the benchmark return over the economic cycle, with both the 5 and 10 year return ahead of benchmark. The direction of the Fund’s performance when markets are increasing and decreasing is one way of measuring volatility. The lower volatility objective and strategy for the main strategy was put in place in December 2013 and over this period market volatility has been relatively benign, for the most part. Nevertheless, performance since the change in structure (with the launch of the global low volatility equity portfolio and the shift from regional passive to active) indicates that the Fund is delivering returns with lower volatility than its benchmark.

For the main strategy, performance from March 2014 to March 2019 has been:

  • better than the strategic allocation when markets fell (18 out of 60 months) with average performance of 0.41% better than the strategic benchmark and,
  • marginally worse than the strategic allocation when markets were rising (42 out of 60 months) with average performance 0.09% behind the strategic benchmark.

Risk analysis also shows that the portfolio is positioned well if markets fall significantly.

Manager Mandates 2019
Manager Mandate % %
In-house UK all cap equities 1.9  
In-house UK mid cap equities 1.6


Total UK equities     3.5
In-house European ex-UK equities 1.6  
In-house US equities 2.1  
Total regional overseas equities     3.7
In-house Global high dividend equities 12.9  
In-house Global low volatility equities 16.1  
In-House Global stable multi-factor relative value equities 12.8  
Harris Global equities 3.6  
Nordea   3.9  
Total global equities     50.9
In-house Currency Hedge -  
Total Currency Hedge     -
Total listed equities     50.9
In-house Private equity unquoted 1.0  
In-house Private equity quoted 1.0  
Total private equity     2.0


In-house Index linked gilts 7.6  
In-house Mature employers gilts 1.5  
In-house Property 0.5  
Standard Life Property 6.6  
Total Property     7.1
In-house Infrastructure unquoted 10.8  
In-house Infrastructure quoted 0.3  
In-house Timber 1.6


Total other real assets     12.7
Baillie Gifford Corporate bonds 0.4  
In-house Private debt 2.1  
Sovereign bonds   2.1  
Total Debt Assets     5.1
In-house Cash 5.9  
In-house Transitions 0.0