Agenda item

This item was preceded by a training session on Pension Fund Governance delivered by Andrew Singh of KPMG. Key points highlighted included:-

·         The LGPS was the largest funded occupational pension scheme in the UK;

·         It was administered locally through 90 local pension funds;

·         The LGPS had a different legal status to trust based schemes in the private sector;

·         Statutory guidance with respect to governance was issued by the Secretary of State;

·         Three best practice principles ensured effective and efficient decision making;

·         LBH was the administering authority (scheme manager) with legal responsibility for managing and maintaining its LGPS – there was a requirement to establish a body known as a Local Pension Board;

·         The Local Government Pension Scheme Advisory Board, established in 2013, encouraged best practice and increased transparency;

·         The role of the Pensions Board was to assist the Administering Authority in its role managing the Fund and ensure the Pensions Committee complied with the regulations;

·         The Pensions Committee’s role was to represent key stakeholder interests. It also had responsibility for decisions on the Fund’s policy and strategy. The Committee had delegated authority to officers in a number of areas;

·         The LCIV was an investment pool set up to manage the pooled assets of 32 London Local Authority Pension Funds, including Hillingdon;

·         London Local Authority Pension Funds were required by regulation to invest via the pool if funds were available – the Hillingdon Fund had 58% of assets invested via the LCIV at present; the remaining assets were invested with third party asset managers;

·         KPMG was an independent investment advisor to the Council;

·         Key considerations for 2020 included exit credit legislation, responsible investment, competition and market authority, pooling, good governance review and McCloud legislation.

James Lake, Chief Accountant, presented the investment strategy and fund manager update. Members were informed the Fund was in a strong position with a total valuation of £1.127 bn; an increase of £31m, primarily through  increases in equity values, from £1.096 bn at the end of the previous quarter. There was an overall investment return of +3.02% over the quarter, translating into 0.68% ahead of benchmark. The reported latest fund value as at 31 December 2019 was £1.122bn, refreshed to 1.126bn due to updated information ; a decrease of £5m, now £1nb  in valuation compared to end of quarter under review. Figures as at 29 January 2020 were 1.121 bn; the slight reduction was attributed to current concerns in the market regarding Coronavirus. Longer term figures were positive indicating an increase of 7%-8% annually.

It was noted that investment performance continued to be suppressed by the underperformance of UBS UK Equity portfolio that delivered a return of -1.19% compared to the benchmark. In relation to Long Dated Inflation Linked Property, there was positive news – it was anticipated that 70% of the commitment would be drawn down by the end of February 2020. In response to Members’ requests for clarification, it was confirmed that the plan was to disinvest from LGIM & Ruffer to facilitate this re-investment. It was also confirmed that the reference to ‘recession’ on page 10 of the agenda pack was purely speculative.

James Lake also advised that the proposed removal of RPI as a measure of inflation from indexed linked gilts would be addressed as part of the strategic asset allocation as this was likely to impact on the Pensions Fund in the future. The Committee was informed that this matter would be discussed further in March 2020 with a view to reaching an outcome prior to the Government recess in July. It was possible that RPI would be aligned to CPI or an alternative thereafter. Further clarification was sought regarding the relative advantages of passive and active investments and whether active investments were preferable in a falling market. It was recognised that this was hard to predict; however, the Funds’ active managers – UBS and Epoch would be expected to provide defensiveness should markets fall. It was noted that the London LCIV was likely to launch a value equity product but this was currently on hold. Members were advised that concerns regarding the operation and governance of the London CIV would mean active mandates would need to be considered outside the LCIV which had led to the decision to consider passive options which would instead operate alongside the LCIV. It was acknowledged that the LCIV was currently undergoing a review of its governance and it was hoped that the situation would improve in the future.

The Committee observed that the Fund was investing quite heavily in UK rather than global equities at present. It was confirmed that this was primarily for historic reasons and the UK focus would be assessed as part of the strategy review..

Clare Scott, Investment Advisor, requested clarification regarding changing the duration of index-linked gilts and whether Committee approval was required for this as it was a change in the duration of an existing asset rather than a change in allocation. Members confirmed that powers had been delegated to officers in terms of allocations and durations within an asset classes . Officers were requested to continue to monitor said investment decisions and bring them back to Committee for consideration and  noting.

RESOLVED That Pensions Committee:

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

2.    Noted the Fund performance update.