Agenda item
Report on Fund Liquidity
To approve the recall of dividend and rental income from two of the Fund’s managers (GMO and Schroders) into the LBTH Pension Fund.
Minutes:
Alan Finch, Service Head, Financial Service, Risk and Accountability and Interim Section 151 Officer presented to the report which asked Committee to give delegated authority to officers to withdraw cash as required.
Mr Finch advised the Committee that during the forthcoming 12-18 months the balance of the Council’s pension fund transactions would move towards collecting less cash and paying out more cash. This was a normal progression as the fund moved toward maturity and Members were advised that the pension fund, presently, was maturing faster than previously anticipated, causing a shift in the fund's cash-flow position.
To meet the anticipated cash short-fall, the Fund, in the short-term, would require access to funds to pay out benefits and, in the long-term, a review of the investment strategy would also be required.
The options available to improve short-term fund liquidity were presented at paragraph 6 of the report. Of these, the option to use income generated from invested assets was preferred as its impact on the fund was least. It was proposed to access cash through two streams of income; by recalling the dividend from GMO mandate and using rental income from Schroders property fund.
These two fund managers had been selected as the pension fund received rental income from Schroders and GMO was not a pooled fund therefore equities could be easily withdrawn and fees avoided.
In considering the proposal, Members noted the following matters:
· the maturity of the fund had been accelerated by a reduction in contributions from its members; this had brought forward the date of movement towards negative cash flow. In previous years, projected maturity calculations had indicated maturity 3-4 four years hence. In the last year, numbers contributing to the pension scheme had decreased and those drawing pensions had increased accelerating the move towards negative cash-flow. At present it was estimated that this would occur in 12 - 18 months’ time.
· the transition from positive cash flow to negative cash flow was a natural part of the life cycle of pension funds. In this case fund maturity was approaching sooner than had been anticipated and therefore the time was appropriate to approach the committee to request authority to release cash.
· the rationale for the choice of fund managers (GMO and Schroder) was not connected with the underperformance of these managers. Mr Finch noted that these managers had been reviewed by the Investment Panel recently and it had been concluded that they were doing what they were supposed to as part of the overall pension fund strategy. These managers had been chosen however, because they provided a ready source of cash and avoided transaction costs that would be incurred if other options of cash release were selected.
· Noting that diverting this income from the fund would affect the balance of the fund, the Committee enquired how equilibrium in the fund strategy would be re-established and was advised that it would be necessary to review the funding strategy in the longer term. However in the shorter term the amount to be drawn down would not affect the fund.
· the Fund was presently liquid; however the report had been brought to Committee for a decision to ensure cover if the Fund should become cash flow negative earlier than expected.
· the measure was intended to be a short-term measure. Mr Finch advised that while the pension fund was young (i.e. in large surplus) monies from investments could be given to managers for re-investment but as the fund matured this fund would be required to pay out benefits. In the past it had not been necessary to request approval for the recall of monies from the fund because the fund was heavily in surplus.
The Committee raised a number of concerns relating to cash flow and received the following advice:
· some reduction in cash flow had resulted from freezing employee salaries in the last three years however the reduction of members contributing to this scheme during that period had had a larger effect on cash-flow.
· Mr McKay advised that a cash flow negative situation did not constitute a crisis as the fund continued to receive income and was able to pay out monthly commitments. He noted also that five years ago later maturity had been expected. However the dynamics had changed nationally because of the financial crisis of recent years. He advised that the authority had anticipated this change.
· Mr Shonola advised that two years ago the fund had received £42 million and paid out £32 million leaving a surplus of £10 million. However last year due to staff reductions income had reduced to £3.7 million.
· the Committee was asked to approve that the income from these investments be retained as a short-term measure as this was the best of the options available.
· the sums that might be needed were not known at present; however managers would only be instructed to recall funds required to meet identified liabilities.
Members were concerned that the decision might be used as an unlimited agreement and therefore subject to abuse. They were advised that the request had been made to provide a short-term only solution to fund liquidity; the whole of the funding strategy would be reviewed following the scheduled triennial actuarial valuation. At this time a full report would be brought to Committee. Additionally a quarterly report would be brought to Committee.
At the Vice-Chair’s request, it was agreed that written response would be given detailing how the expected negative cash flow had evolved.
RESOLVED
That the recall of dividend and rental income from fund managers GMO and Schroder into the LBTH pension fund bank account to help meet the cost of in-year liabilities be approved
Supporting documents: