The National Pensions Reserve Fund (NPRF) made a return of 9.3 per cent last year, underperforming its benchmark by two percentage points.

The fund, which was set up to part-fund the State's future pension costs, was valued at €11.7 billion at the end of the year having made a return of €951 million and received a contribution from the State of nearly €1.2 billion, or 1 per cent of GNP.

But its performance lagged behind the 11.3 per cent of its benchmark - which is made up of a number of indices reflecting its asset split - mainly due to a decision to get out of bonds and into cash toward year-end.

However, the NPRF noted that since it was set up in 2001, it has outperformed its benchmark by a cumulative 8.9 per cent.

It invested €1.4 billion in global equity markets last year, completing the phased entry approach it has adopted since 2002. Of the different asset classes, equities delivered a 10.4 per cent return for the fund last year, its bond investments yielded a return of 11.3 per cent while the cash element of the fund returned 2.1 per cent.

The fund, which is expected to be worth in the region of €140 billion at maturity in 2025, is also to change the way in which it allocates its monies over the next five years.

It is moving away from its original target asset split of 80 per cent equities and 20 per cent bonds to include alternative asset classes in its portfolio in a bid to increase its prospective return without raising its risk profile.

By 2009 it aims to have 18 per cent of its monies, or some €4.2 billion, invested in areas such as property, which is expected to make up 8 per cent of the fund; private equity, which will account for a further 8 per cent; and commodities which will represent 2 per cent. However, it had decided not to invest in hedge funds for the moment.

"This is because of the rapid growth in the asset class which could crowd out successful strategies, the difficulties in identifying consistent top quartile managers and the lack of regulation in the sector," it said, adding it would examine the issue again at a later date.

The quoted equity component of the fund will fall to 69 per cent, with large cap equities accounting for 63 per cent of this and small cap equities and emerging markets equities making up the remainder.

The bond component of the fund is expected to stand at 13 per cent by 2009, although in the short-term the fund remains wary of investing in bonds against a backdrop of rising interest rates.

Meanwhile, the fund remains keen to get involved in Irish infrastructure projects - for which it has earmarked funds of €200 million - but plans to change the way in which it goes about it. In future, rather than joining a particular consortium to tender for a project, the fund will make equity or debt finance available to the winning bidder in return for a satisfactory return.

This follows the conflict of interest that arose when the NPRF joined a consortium bidding to upgrade part of the M50 motorway in Dublin.