The LPF is designed to provide members with a defined pension benefit when they retire. To do so, the Fund must achieve results that will meet its long-term financial obligations. In other words, the Fund has to earn enough investment return so that, together with contributions, the pension earned over each member's working lifetime can be paid out at retirement. To honour this promise, the Fund is seeking a long-term annualized return in excess of 6% on its investments. We must balance the earning potential of high-growth investments with the need to provide a stable, secure, and predictable retirement Fund with lower risk assets.
The Fund's investment assets are managed externally by professional investment managers and advice from external professionals including legal experts and investment consultants. Each manager has a specific investment mandate - such as stocks, bonds, real estate or infrastructure - and that manager is governed by the guidelines set out by the Board of Trustees in the Fund's Statement of Investment Policies and Procedures (SIP&P). The objective of each investment manager is to obtain an average annual rate of return greater than its designated benchmark. The benchmark is the yardstick against which the investment performance can be compared for the purposes of determining investment skill within their respective sector.
The Fund continuously seeks out investments that provide higher expected long-term rates of return in order to maximize the value of our members' pensions, while managing risk and volatility through diversification and other strategies. The Pension Committee and Board of Trustees monitors the Fund's performance on a continuous basis and takes the necessary steps to safeguard the assets. For example, in recent years, we've found that increasing our holdings in private companies, real estate properties, and infrastructure assets has proven to be a very successful strategy for growing the Fund.
The average annual rate of return for the five years ending December 31, 2018 was 8.4%. During 2018, the Fund earned an annual rate of return of 1.0%. Returns for 2018 were impacted by poor equity market performance with returns ranging from -4% to -11%. Despite this backdrop, the Fund was able to generate a positive return due to the strong performance and thoughtful diversification across various types of non-traditional investments. We expect the long-term performance results of the Fund to continue to exceed the greater than 6.0% annual goal.
Although past performance is not necessarily an indicator of future results, we are continuing with our strategy of a diversified portfolio for continued growth. The Fund continues to search for ways to earn stable, less-volatile returns by expanding investments in the types of alternative arrangements explained above. Over the long-term, the Fund’s asset mix is expected to produce higher stable returns that will continue to strengthen the Fund and benefit members.