Agenda item
PRESENTATION FROM MERCER, FUND INVESTMENT CONSULTANT
Minutes:
The Committee received a presentation from Steve Turner and Sam Watford of Mercer, on the Investment Strategy Review. The aim of the review is to consider the allocation between asset classes; risk and returns, ensure there is reasonable balance between the two objectives and to identify improvements to the investment strategy to help achieve these objectives. This review will be the key determinant of overall investment performance. The Committee during a question and answer session: Noted.
· That the current funding level had improved over a 5 year period and at current was at 86%, this was attributed to strong asset returns.
· That their Asset Portfolio needed to keep pace with rising inflation.
· Equities had risen consistently during the past eleven months and that this had only occurred once in the last thirty years. The Forward looking Equity Market Returns are unlikely to be as strong as they have been over the last 7 years.
· Members raised questioned about the Funds Deficit and asked whether steps should be made to close it. In response members were advised that their Actuaries should be consulted and that decision should be based on the actuaries’ Discount Rate. The Board was advised that periods during High Funding Levels were good points to make changes and that risk should be identified before strategies are implemented.
· That rising Inflation is a key risk to the Fund and that an Inflation Protection Strategy should be in place. There has been the biggest spread of inflation ever chronicled during the period from 2012 to date.
· That Equities made up 60% of their Portfolio and are expected to provide 75% of the Funds excess returns and account for 56% of the Fund’s risk on the VaR. This outturn is due to the depreciation of Sterling. There is uncertainty on how long this will be sustained.
· The best estimated expected return for Gilts was + 4.1% p.a. and this return surpassed the requirements of the Actuaries. There is a 73% probability of achieving Gilts +2.0%. There is a 66% probability that the +2.0% outperformance will close the deficit within the next eight to ten years
· Members raised questions about the recession in 2008/2009 and asked what would be the implications if this economic downturn was to re-occur. In response, members were advised that they would be a dip in their Assets and their liability will be affected. This economic situation will be damaging for the Pensions Fund and most LGPS. Members noted that the Fund had long term investments and were advised that during an economic downturn, their deficit may increase and this will affect payments towards the deficit and also future performance. The Board was advised that Valuing was important and that all potential outcomes should be narrowed and that this could be undertaken in various ways.
· Members questioned the process and implications of moving UK Equity into Global Equity. The Board was advised that the Fund UK Insurance Contract will be used to purchase assets; the Fund will be based in the UK and the assets brought will be purchased using the currency of the said country.
· That only 50% of currency exposure should be hedged. This is to ensure that positive returns are made on the remaining 50% unhedged currency when Sterling appreciates.
· That Assests had increased by £400 million between the years of 2013 – 2017 and Liabilities had increased by £300 million during the same period. The latter was reported not to be a significant amount. The increase in Assets value was due to performance and contribution from employees. Members requested that further information be provided about contributions.
· The assessed Value at Risk(VaR) indicates that there is a 5% chance that the current deficit £223m could be increased by at least £329m over a 1 year period to £552m. This is based on the deficit as a March 2017.
· That LGPS TH low carbon investment was being overseen by DGI and Baillie Gifford and that the performance managers had released £2b of additional capacity to investors.
· Members raised questions about the LGPS TH current deficit and long term financial strategy and questioned whether the Local Authority would need to consider the deficit whilst setting their budget. Members were advised that early contribution from the Local Authority would be beneficial to the LGPS cash flow.
· Members raised questions about triennial revenues and risk involved and asked what happens at a point in time when there is a change in risks and how it is ensured that the best decisions are made at such times. The Board was advised that there is continual monitoring of Funds and this is part the overall financial planning and Actuaries testing on what could occur in future financial markets were based on probabilities.
· Members noted that a Local Election was to take place next year and this may affect the composition and knowledge base of the Pensions Committee and agreed that it would be prudent to ensure that all recommendations agreed by the Committee are undertaken before May 2018. The Board noted that training will be provided to all members of the Pensions Board and Pensions Committee in the new municipal year and were reminded that both Bodies would need to prove that their members have the requisite competency which will allow them to be classified as a ‘Professional Client’.
· That a review of their current equity portfolio be undertaken and that the Fund invest more globally over a period of time. The passive global equity fund at LGIM should be utilised in the interim and the usage of the new global equity available from the CIV should also be considered to achieve the above.
· That investments in high grade credit and long-lease properties be considered; it is anticipated that between 66% - 80% of returns will come from income and will be linked to inflation rather than capital appreciation, which at current is poor.
· That LGPS were to invest in Pensions Fund and that Infrastructure would be a good investment. Members were advised that they should put pressure on the CIV.
· Members raised questions about Interest rates exposure and were advised that Gilt Yields will rise causing the NPV of future benefit liabilities to fall.
Members thanked Steve Turner and Sam Watford for their presentation.
The Board agreed to have a short break at 11.55am.
Supporting documents:
- Restricted enclosure View the reasons why document 8./1 is restricted