Agenda item

Andrew Singh, Senior Investment Consultant with KPMG, presented a training item to the Committee which covered Roles and Responsibilities within the Pension Fund, a Recap of the Fund's Investment Strategy and the Fund's Asset Classes. The report focused on the investment of the Fund's assets and included an overview of fund performance as at 31 March 2018, an update on strategy decisions made in March 2018, sub funds available within the London CIV, recent voting and engagement. 

The key objectives of the investment strategy were outlined and the Fund's asset allocation and managers were highlighted. Members were advised that the Actual Asset Allocation as at the end of June 2018 incorporated nine different classes including equity, property, diversified growth etc.

With regard to future plans, the Committee was advised that the Fund was required by regulation to move the assets to a pooled vehicle (such as the LCIV) over time. Benefits of this approach should include lower management fees and greater overall investment governance. In terms of the agreed evolution of the Investment Strategy, the plan was to:

·         Reduce equity exposure, adjust regional weights and consider a 'resource efficient' or low carbon indexation;

·         Increase exposure to long dated inflation-linked assets;

·         Consider LCIV diversified credit options (recently launched);

·         Consider options for maintaining strategic allocation to illiquid credit (LCIV recently launched a strategy).

Members commented that the content of the Investment Training item was both readable and digestible and provided a useful contextual background. They were informed that the training framework would be available in the Autumn of 2018.

Members requested clarification regarding the testing of the funding position evolution model and were advised that a team of people designed it and assessed it using hard data which was loaded onto a system and rolled forward using liability terms. The tool would not replace the actuary but was intended to give an indication and act as an early warning system. 

The Pensions Committee Members were presented with a second report which considered the alternative approaches to implementing an allocation to long dated inflation-linked income. The Committee had previously reviewed the investment strategy and agreed to a strategic allocation of 5% to assets that provided a long dated income stream linked to inflation. KPMG had been asked to analyse the possible implementation options available for this allocation, noting a preference for new mandates to be accessed via the London Pension Collective Investment Vehicle (LCIV) if possible.

Members were informed that the LCIV did not currently offer a long dated inflation-linked income fund. However, they had indicated that they may be able to help access to an LLP fund in the short term although would not be on the platform; they planned to develop a long dated inflation-linked blend over the next few years. Details were unclear at this stage.

The Committee had also asked KPMG to identify the LLP funds which were best aligned with the Fund's requirements. KPMG had identified three funds which they believed could offer appropriate exposure. Members considered the queue length for each of these options; members suggested that a shorter queue length was a key benefit, members also discussed fund sizes and sector allocation

In terms of anticipated costs, Members were informed that investing in long lease property should be viewed as a medium to long term decision given the significant transaction costs involved (c.6-8%) and should be considered carefully. The bulk of the costs were payable upfront (stamp duty) and transition costs were uncertain but could be significant.

Three broad options were highlighted for the Committee to consider to implement an exposure to long dated inflation-linked assets. These were:-

·         Option 1 - Hold the assets earmarked for the long dated inflation-linked income in index-linked gilts and await the launch of the LCIV inflation linked income fund (expected in 2 to 3 years). Members were advised that this option would provide inflation protection but a low return.

·         Option 2a - Move forward with the LGIM LLP fund due to the potential link through the LCIV. There was a degree of uncertainty in selecting this course of action and it was noted the fund had a long queue and it is unclear if this product would be on the platform in the future which could result in further transition costs.

·         Option 2b - Move forward outside of the LCIV Umbrella. This option would increase the choice of fund available and could enable faster deployment into the asset class by selecting a fund which had a shorter investment queue. This option would enable to the fund to select the most suitable manager for the fund requirements to best meet fiduciary duty. However, this approach could potentially expose the Committee to criticism and/or reputational risk by progressing investment outside of the LCIV.

In terms of recommendations, KPMG suggested that the Committee consider moving the investment forward in the short term ahead of the LCIV making an inflation-linked income fund available. KPMG were of the opinion that the LGIM fund offered a compromise between the risk of investing outside of the LCIV and implementation of the Committee's strategic decision in the near term. Members were reminded that this option came at the cost of a longer queue time for investment than some of the other LLP funds available.

Members agreed that reputation was an important factor. However, it was vital to consider timings of LCIV offerings and to enable the Pension fund to achieve the best return to meet fiduciary duty to meet its funding strategy now. Members were informed that LGIM and BlackRock were larger concerns than the AEW. AEW's shorter queue could possibly be attributed to the fact that it was relatively new and a smaller concern, some of the members felt the short queue made this fund a viable option. Members were advised that LBH had been using the AEW for a number of years in another capacity and had been satisfied with their work. 

It was suggested that officers be instructed to continue with the manager selection exercise including conducting due diligence around the three shortlisted managers before the next Committee.

In Part II of the agenda, the Committee received information on the current market update which covered both the current market climate and the performance of various investment vehicles, together with updates on Managers' reports.

RESOLVED:

1.    That the Committee considered and discussed any issues raised in the training item;

2.    That the Committee discussed the Fund performance update;

3.    That the manager selection process continue including due diligence process associated with the Long Dated inflation-linked property fund for approval at the next committee;

4.    That the implementation of any decisions be delegated to the Officer and Advisor - Investment Strategy Group.