Agenda item
UPDATE ON EQUITY PROTECTION PROVIDER SEARCH
The Committee to receive a verbal presentation from Mercer.
Minutes:
The Committee received a presentation from Sam Wreford, Alex Pearce and Ciaran Madine of Mercer, on Equity Protection Strategy. At the meeting in February 2018, the Committee agreed to pursue an equity protection strategy. The aim of the Strategy is to protect funding gains and reduce the risk of funding level deterioration which could lead to an increased contribution. The Protection will focus on the period up to December 2019 or March 2020 and would be likely to protect against losses of between 10% and 25% of the value of the equity portfolio. The Committee noted the following
· That Equity Markets were close to all-time highs and also at present the largest risk. The purchase of Insurance will ensure that the Fund is protected from Markets such as 2008.
· That there were several factors to be taken into consideration when designing a strategy and these include how much downside protection is desired and how much upside is required to be given up to pay for the downside protection. Members were advised that the proposed Protection Strategy was set at a middle range and this was to ensure the capture of some upside in equity markets.
· That on Mercers assumptions, there is a 13.5% probability of a fall in equities worse than 10% and a 5.9% probability of a fall worse than 25%.
· That the Actuary’s valuation and the setting of the contribution rate take place every three years and potentially equities could come down at the date of the valuation but recover during the subsequent 3 year period. Members were advised that 3 years was a relatively short period in the context of the fund’s liabilities. Taking out protection to December 2019 or March 2020 would cover the period of the valuation and contribution setting.
· That three Managers were approached to undertake the mandate and these were Insight Investments, Legal and General Investment Management (LGIM) and Schroders. A number of areas were looked when selecting the Managers which included fees and value for money, experience with dealing with similar mandates and current infrastructure. Schroders was noted as being able to offer a bespoke fund. Members noted that Investment Banks were traditionally resistant to trade with Local Authorities.
· Members raised questions about bankruptcies and were advised that Investment Banks in these instances collateralized the contract so that money moved back and forth between the two parties to the contract according to daily movements in markets.
· Members agreed that consideration of an Equity Protection Strategy should be ongoing and be part of their Investment Strategy Review and be added onto their Work Programme.
· Members noted that they had a large Equity Portfolio and that the Strategy was a good method of reducing equity market risk.
· Members noted that the Equity Protection Strategy was to be implemented and that the Pensions Committee had delegated to the Chief Finance Officer and Monitoring Officer
Sam Wreford, Alex Pearce and Ciaran Madine were thanked for their presentation and left the meeting.
RESOLVED
That the Equity Protection Strategy is implemented and that consideration of an Equity Protection Strategy is ongoing and is made part of the Investment Strategy Review and is also added onto the Committee’s Work Programme.