Agenda item

This item was preceded by a training item from KPMG on roles and responsibilities of the Pensions Committee. Key points highlighted were as follows:-

·         At 31 December 2018, the Pensions Fund held approximately 1 billion pounds in assets and 1.4 billion in liabilities; less assets than liabilities - a situation which had been the same for a number of years. Annual employer contributions were around £33m in 2017/18. A formal valuation by the Scheme Actuary was due to take place at the end of March 2019. Funds were invested in Equity, Diversified Growth, Real Assets, Credit and Private Credit;

·         Within the Fund there were 62 contributing employers, the largest being the London Borough of Hillingdon Council. In 2017/18, Hillingdon Council accounted for c. 71% of contributions paid in and c. 79% of members (approximately 5,500 employees);

·         More than 50% of the Pensions Fund was invested in the London CIV and the rest in third party managing companies;

·         The Governance Structure was outlined. It was explained that the purpose of the Pensions Board was to scrutinise the Pensions Committee and ensure it complied with regulations in relation to the Fund. The Pensions Committee was in turn responsible for setting strategic funding and investment policies for the Fund. Officers supported the Committee and progressed the implementation of Committee decisions;

·         The London Collective Investment Vehicle (LCIV) was set up to manage the pooled assets of 32 London Local Authority Pension Funds, including the Hillingdon Fund. The Fund had 55% of assets invested via the LCIV at present;

·         LGPS investment regulations changed in 2016 thereby removing prescriptive regulations and facilitating pool funding;

·         A key directive of the 2016 investment regulations was to maintain an Investment Strategy Statement (ISS) which was published on the website;

·         Recent guidance from Central Government encouraged individual funds to pool their assets quicker. New regulations from DWP in  2018 had lifted the bar for private sector pension schemes on EGS reporting.

Members commented that the steer from Central Government was useful but the Committee needed to make its own decisions.

David O'Hara, KPMG advisor, addressed the Committee. In late 2018 the Committee had agreed that there was a need to review the strategic allocation to Diversified Growth Funds (DGF) currently managed by Ruffer. It was reported that Ruffer had performed poorly over the last 12 months. Moreover,DGF’s were not a cheap option as fees were high. The Committee did not have full confidence in the DGF allocation delivering the required performance objective and had asked KPMG to explore possible alternatives. Three alternative strategic allocation options were discussed:-

1.    Index-Linked Gilts + Equity - it was considered that this option would deliver broadly the same risk as the current arrangement;

2.    Index-Linked Gilts + Infrastructure Equity - this option would decrease Diversified Growth exposure and would allocate a higher percentage of the Fund to Infrastructure Equity. Members were informed that the London CIV was in the process of launching an infrastructure fund. It was felt that this approach would reduce the risk as infrastructure was considered to be less volatile;

3.    Index-Linked Gilts + Long-dated Inflation Linked Income - the Committee was advised that the London CIV was launching a Long-dated Inflation Linked Income fund. The money would be invested in property which could represent an over-concentration of investment in one area.

Councillors commented that option 1) would increase the Fund's equity exposure while option 3) would increase exposure to property - both options were not consistent with the Committee's desired approach. Members agreed that option 2) appeared the most attractive as it would build up protection against inflation. It was felt that the London CIV could offer more global options within the CIV umbrella. Zak Muneer, Pension Board Member, queried whether increased investment in infrastructure equity would be advisable with concerns discussed previously on exposure to emerging market infrastructure. It was confirmed that the London CIV infrastructure fund would be concentrated in core developed infrastructure markets in Europe and Scandinavia rather than in more risky markets such as China. The allocation would need to be explored thoroughly by the Committee prior to any decision being made.

It was noted that the Fund had underperformed to the benchmark over the last quarter to September 18 and the fund had lost value in the more recent period to December 18 largely due to a fall in equity markets in the quarter.  The defensive characteristics of our managers appeared to be working effectively, with the exception of Ruffer. It was anticipated that the Fund would perform better in January 2019.

Sian Kunert, Head of Pensions Treasury and Statutory Accounts, agreed to further explore the LCIV sub fund offerings and index-linked bond options in order to weigh up the costs and returns. She would report back to the Committee at the next meeting.

RESOLVED That the Committee:-

1.    Considered and discussed issues raised in the training item;

2.    Discussed the Fund performance update and agreed any required decisions in respect of mandates or Fund Managers'

3.    Agreed to reduce strategic asset allocation in relation to Diversified Growth Fund allocation to zero and increase allocation to both index-linked bonds and infrastructure by 5%;

4.    Delegated the implementation of any decisions to the Officer and Advisor - Investment Strategy Group;

5.      Sian Kunert, Head of Pensions Treasury and Statutory Accounts, explore the LCIV infrastructure sub fund and index-linked gilts to weigh up the costs and returns and report back to the Committee at the next meeting.