Agenda item

This item was preceded by a training item from KPMG on Inflation. Key points highlighted included:-

·         Inflation was the rate of increase in prices for goods and services;

·         The retail price index (RPI) and the consumer price index (CPI) were common measures of inflation within the UK;

·         RPI and CPI measures were calculated using different methodologies;

·         RPI had been gradually discredited as a suitable measure of inflation but continued to be used widely, mainly for legacy reasons;

·         Many gilts were linked to RPI;

·         Over recent years, RPI had been around 1% higher than CPI;

·         Key drivers of RPI were housing, food and fuel;

·         The bulk of the Hillingdon Fund's pension payments were linked to inflation measured by CPI;

·         A spike in long-term inflation expectations would result in a sharp rise in the value placed on the Fund's liabilities;

·         This was one of the biggest risks the Fund was exposed to;

·         To combat risk, some asset classes provided a return profile which was directly linked to the level of inflation - these were inflation-linked bonds, long lease property and infrastructure;

·         UK index-linked gilts provided a return directly linked to UK RPI. There were very few CPI-linked bonds;

·         UK index-linked gilts provided a good hedge for UK pension funds;

·         US Treasure Inflation-Protection Securities (TIPS) were an alternative option for inflation protection but provided a less efficient hedge against UK inflation which the Hillingdon Fund was exposed to.

Members requested clarification regarding the low return on investment in index-linked bonds. Andrew Singh, KPMG advisor, informed the Committee that there was a good rationale for holding gilts as they provided protection against inflation as a risk; it was important to have a balance and index-linked bonds were the 'ballast' in the asset allocation while equities and private credit drove the return.

Given that the US dollar was stronger than sterling at present, Councillors enquired whether investment in TIPs was really such a risk. It was explained that it was more expensive to hedge US TIPS back to UK currency.

It was agreed that Sian Kunert, Head of Pensions, Treasury and Statutory Accounts, would set up an online area where all KPMG training items would be stored together.

Consideration was given to the Investment Strategy and Fund Manager Performance Report. It was confirmed that the total size of the Fund was now £1,044m. In response to Members' enquiries, it was confirmed that Ruffer had performed better in recent months; the situation would be reassessed in July 2019.

Committee Members commented on the statutory guidance regarding asset pooling in Pensions Funds. The steer was that Pensions Funds needed to accelerate investment into the pool. At present the Hillingdon Fund had a reasonable amount of flexibility but it was felt this would diminish as more funds were invested in the London CIV.

RESOLVED That the Committee:

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

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

3.    Agreed to invest 5% of DGF allocation in UK IL bonds through LGIM passive portfolio;

4.    Deferred a decision on investment in the London CIV Infrastructure sub fund pending resolution of outstanding matters;

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