The fund has been run since 2006 on a liability-driven investment strategy and 87% of its assets are invested in fixed income-related products, including inflation-linked and interest rate swaps. The remainder is invested in global equities.
The fund uses three separate firms to manage its swaps.
Mike Taylor, chief executive of the LPFA, said: “Our objective three years ago was to hedge out as much inflation and interest rate risk as we could afford.
“At that time, however, we were unable to hedge out longevity risk and now need to include that into our thinking. Longevity risk has proved more problematic than we anticipated.”
The credit crunch, Taylor added, has also caused significant market dislocation, meaning “the swaps we bought three years ago are now very lucrative”.
“Interest rates and inflation are moving in the right direction and the question we now face is whether or not we should sell those swaps and lock in the gains we have made,” he said.
This is not uncommon thinking. Andy Harrison at Barclays Global Investors – one of the three investment houses, along with Insight and ECM – managing the LPFA’s swap strategy, said: “A lot of investors now want to sell their swaps at current market levels.
“Investors that have had their swaps in place for some time have made significant gains from those contracts and many want to take a profit on that and turn it into cash.”
