Revising XYZ Pension Fund's Investment Strategy under LDI Challenges

XYZ Pension Fund, a large defined benefit plan with $15 billion in assets, has adopted a liability-driven investment (LDI) strategy. The fund currently faces challenges in meeting its long-term return objectives due to changing interest rate environments and increasing longevity risk among its retiree population. In light of these challenges, the fund's board has asked you, as their chief investment officer, to propose a revised investment strategy that balances the need for return generation while maintaining sufficient liquidity to meet future liabilities.

In your response, discuss the implications of various asset class allocations on the fund's ability to manage interest rate and longevity risks. Additionally, address how the adoption of innovative financial instruments (such as interest rate swaps or longevity bonds) could enhance the fund’s investment strategy. Conclude with a discussion on the governance structure necessary for effective implementation of your proposed strategy, considering the roles of various stakeholders within the fund.