Agenda item
Investment Strategy Review / Strategic Asset Allocation Review 2017/18 and Carbon & Environmental Footprints Analysis Outcome of the Fund
- Meeting of Pensions Committee, Thursday, 21st September, 2017 7.00 p.m. (Item 5.1)
- View the background to item 5.1
Minutes:
The Committee considered a report which detailed an analysis and the results of the asset liability modelling study and the strategic asset allocation review carried out by the Fund’s advisers Mercer. This review follows on from the Fund’s 2016 Triennial Actuarial Valuation. This report presents the analysis and results of the asset liability modelling study and the strategic asset allocation review carried out by the Fund’s advisers Mercer. This review follows on from the Fund’s 2016 Triennial Actuarial Valuation.
The purpose of the review is to assess the ability of the current funding and investment strategy to close the deficit gap, as well as fund future benefits in an affordable and stable way. The review encompassed an asset liability study which assesses the suitability of alternative investment strategies for the pension fund’s liability profile.
This report also summarised the carbon and environmental footprint analysis carried out by Trucost, (Trucost is part of the S&P (Standard & Poor) Global family, operated by S&P Dow Jones Indices) for the Fund’s aggregate equities portfolio with holdings data as at 31st March 2017. Morgan Stanley Composite Index (All Country World Index) MSCI ACWI was used as a benchmark for this analysis.
The Committee received a presentation from Steve Turner, Fund’s Investment Consultant of Mercer, on the Investment Strategy Transition Summary and Next Steps. The presentation provided a recap on the proposed strategic changes suggested by Mercer, particularly in relation to the Scheme’s equity portfolio, detailed the rationale for making such changes and provided an analysis into the operational aspects of a transition exercise to implement the recommended portfolio changes that have not been agreed to date.
The Committee during a question and answer session: Noted:
· Members raised questions about their carbon footprint and how it compared to the Benchmark and also how Benchmarks are reached. Benchmarks are given to Fund Managers (Morgan and Morgan – Global Contact) and a carbon and environmental footprint analysis are carried out. An analysis was carried out on the Fund equity holdings with LGIM, GMO, BG (GEA), Ruffer and BG (DGF).
· The Carbon footprint for GMO portfolio is 340.71 compared to the benchmark of 468.68. The portfolio is 27.30% less carbon intensive than its benchmark, MSCI ACWI. The current benchmark is 468.68.tonnes CO2e per £1m of revenue.
· Members noted that there was no clear indication on how the Fund’s carbon footprint fared in particular in comparison to other LGPS. The meeting was advised that the market in the Europe Index were less carbon intensive and that the whole market is considered rather than just low carbon incentives. At current there is difficulty with comparing carbon output and this due to there being limited data. Members requested that the London Boroughs of Hackney and Waltham Forestbe approached and be requested to share their carbon footprint.
· Members welcomed that the LGPS TH was in the forefront in relation to reducing their carbon footprint and noted that this affected 15% of their total assets and third of their Equity Portfolio. The performance in this area will be continued to be monitored.
· That MSCI Low Carbon Target index was the most appropriate benchmark for the low carbon investments.
· Members raised questions about currency hedging and were advised that positive returns are reinvested and equities are sold when there are losses. During a low market the value of equities may reduce. The operational risk are managed LGIM and contracts to sell currencies are taken every 3 months and are rolled over.
· That their portfolio consisted of combined currency hedging, passive and low carbon
· Members made comments about recommended changes and noted that these could be undertaken with existing managers and that they needed to be guarded about fees levied in relation to new products. The Committee noted that the CIV did not have a direct impact on changes and existing funds will remain with LGIM
· That the Global Equities market included 55% in the USA, 7% to 8% in Japan/UK and the remainder was in Europe and Asia.
· Asked about the underperformance of the oil sector and what would be the effects on the Low Carbon market if this was to be reverse. The meeting was advised that other clients had invested in low carbon assets despite oil prices being high. Investment in low carbon should be phased and these assets should be retained when there are price changes in the oil sector.
· Members noted that Infrastructure was an area which Pensions Fund were increasingly looking to invest in and requested that information be provided about this area.
· The meeting noted that environmental pressure groups had met with a number of members about the Council’s Carbon footprint and were reminded that they had held discussion and received presentations in this area and will continue review the subject.
EXCLUSION OF THE PRESS AND PUBLIC
Following due consideration and receipt of legal advice the decision was taken to exclude the public from the meeting for a short period of time. This was to facilitate the presentation of one of the slides which contained information that could prejudice the commercial interests of a third party. Due consideration was given to the impact on the Council should such information be released into the public domain and therefore it was considered that the public interest in knowing the information was out-weighed by the public interest in maintaining the exemption.
The Committee agreed to adopt the following motion
“That, under the provisions of Section 100A of the Local Government Act 1972, as amended by the Local Government (Access to Information) Act 1985, the press and public be excluded from part of the Presentation on the grounds that it contains information defined as Exempt in Part 1 of Schedule 12A to the Local Government Act, 1972.”
Cllr. Andrew Wood left the meeting at 7.30pm.
RESOLVED:
1. To note the outcome of the carbon and environmental footprint analysis;
2. To note the outcome of the investment strategy review as presented by the Fund Investment Consultant, Mercer; and
3. Agree to make the following changes to the investment strategy and amend the Investment Strategy Statement (ISS) accordingly
a) To agree to reduce Equities allocation from 60% to 50%
b) To agree to disinvest from passive UK Equities
c) To agree to invest into Low Carbon Passive Global Equity (15%)
d) To agree to invest into Passive Global Equity (15%)
Supporting documents:
- Investment Strategy Review / Strategic Asset Allocation Review 2017/18 and Carbon & Environmental Footprints Analysis Outcome of the Fund, item 5.1 PDF 220 KB
- Restricted enclosure View the reasons why document 5.1/2 is restricted