Agenda item

The Committee considered a Pension Investment update report.

The Chief Financial Officer introduced the report and made the following comments:

·         The Pension Fund was now valued at £2.5bn which was higher than anticipated by the Actuary. This was largely as a result of the improved performance in the equities markets. He thanked his staff for their work and in particular Mark Forrester and Philip Hebson, the Independent Investment Advisor

·         Nomura had made a number of changes to their team and there was now greater confidence in their management structure. In particular, there had been positive performance in Japan and the developed markets

·         JP Morgan – Bonds had outperformed their target by 0.3%. The aim was to continue this outperformance in the future

·         JP Morgan – Emerging Markets had had a difficult time due to their overall investment strategy however their performance was steadily improving and had outperformed the market by 0.4%

·         Schroders had traditionally been one of the better performing investment management firms and had outperformed the market for the last quarter by 2.9%

·         There had been changes to the management team at First State however these changes would not impact on the decision to appoint them as the Infrastructure Manager to the Fund.

In the ensuing debate, the following principal points were raised:

·         In response to a query about the performance of JP Morgan – Bonds and their approach to risk, Phillip Hebson commented that following intervention by officers, he was more confident about their future performance. He hoped that the company would take a less risk-averse approach to its investment strategy in the future. The Chief Financial Officer added that he would wish to see a prolonged period of improved performance before removing them from 'on watch' however at least the firm were moving in the right direction

·         The positive performance across all the different asset classifications was welcomed. The Chief Financial Officer added that overall performance was £450m above benchmark. The Venn Group investment focused on a different type of asset class with more short term commercial lending. It was important to continue to monitor performance in this area given the more active management

·         It was surprising to see that yield was slightly down on benchmark returns. Phillip Hebson commented that the asset mix of the Pension Fund Portfolio had had an impact on yield, particularly in respect of its reduced investment exposure in bonds. The Pension Fund Portfolio asset mix was different to the benchmark and its performance varied against it. However it had been agreed not to rebalance the Portfolio

·         The Portfolio Evaluation Performance Report indicated that the Total Risk of the Fund was consistent with that of a typical multi asset class Fund – was this a positive or negative statement? The Chief Financial Officer commented that members could take assurance from this statement in that the Pension Fund had taken a managed approach to control risk across a diversified multi-asset portfolio. Phillip Hebson added that the Fund's risk portfolio had been assessed during the Strategic Asset Allocation Review. The risk profile was out of line with the typical fund but less so that 5-10 years ago however the Fund remained in a positive financial position

·         In response to a query, the Chief Financial Officer indicated that the Pension Fund was now 93% funded

·         The Pension Fund appeared to be in a strong position therefore should a review be undertaken of its exposure to risk in any potential falls in equities markets? The Chief Financial Officer considered that it was appropriate at this stage to review the Fund's approach to investment and protect existing equities valuations

·         As the Fund approached 100% funding, a decision needed to be made as to whether more resilience should be built into the Fund and with the aim of reducing volatility in employer contributions

·         Whilst the Fund had benefitted greatly from the rise in the equity market, this could easily change and the Fund had a responsibility to council taxpayers to ensure that the gains made to date were not lost

·         Any reduction in contributions as a result of equity protection should include a consideration for a reduction to the employees' contributions

·         Philip Hebson stated that any decision taken in respect of equity protection should bear in mind the additional complication that the Pension Fund remained an open fund. Clearly members would not wish for the Fund to fall back to a position of being 70% funded therefore a different approach to managing the risk needed to be considered.

RESOLVED that:

a)    the Independent Financial Adviser's fund performance summary and market background be noted;

b)    the update on the Investment Managers placed 'on watch' by the Pension Investment Advisory Panel be noted; and

c)    the update regarding First State be noted.