Agenda item

The Committee considered the Pension Investment Update.

In the ensuing debate, the following points were raised:

·         Philip Hebson, financial advisor to the Fund indicated that since the report was written, the UK/US/European markets had fallen by approximately a third and the Japanese market by approximately 30%. There were really big moves in the market on a daily basis caused by a combination of the Coronavirus outbreak, the Saudi Arabia/Russia disagreement over oil prices; and the ban on European travel to the US. The market had seen shocks like this before and plans were in place to cope. A rough estimate including a number of assumptions was that the funding level of the Pension Fund was now 80%

·         In relation to the Equity Protection Strategy, Philip Hebson advised that within the markets covered by the Strategy (US/UK/Europe) there had been significant falls. In particular there had been a significant fall of  the UK FTSE part of the Equity Protection Strategy and therefore the decision had been taken, given the magnitude of the fall, to cash in half of the protection which would enable a gain of 19.8m. which would potentially be reinvested from cash into equities. For the FTSE index, the Fund was at the bottom end of the protection, for Euro STOXX close to the bottom and for the US market within range. Conversations had taken place with River and Mercantile about the next move for the Fund. They had 3 alternative approaches, 2 of which involved the restructuring of the Strategy. The 3^rd approach accepted that the Strategy had achieved what it had set out to do and therefore the Fund would come off the protection where it was at the bottom of the protection range and reinvest funds to make good some of the losses in the markets. The stance that the Fund had always taken towards equity protection was to keep things simple therefore to restructure the strategy was not what was intended from the outset and would be expensive. In addition, the Fund would more likely be a buyer of equities rather than a seller and it was unknown how long the coronavirus outbreak would impact on markets

·         Philip Hebson commented that within the Strategic Asset Allocation Review the balance between passive and active equity investment was being reviewed. Having looked at the quality of some of the Fund’s passive investments in the current environment, his view was that funds should be reinvested in active equities

·         In response to a query, Philip Hebson stated that although the Chief Financial Officer had delegated authority to undertake changes to the Equity Protection Strategy, it was considered prudent to share the current thinking with the Committee to ensure that members were comfortable with the direction of travel

·         A member argued that there was no point in continuing with the Equity Protection Strategy with performance at the bottom of the market. Would the Strategy wind itself up automatically? Philip Hebson responded that the Strategy carried a time value at present as it did not expire until September which provided an opportunity to keep all options open but the question that needed to be asked was what would the Fund gain from any delay

·         Michael Hudson, the Chief Financial Officer added a note of caution that the approach to equity protection should take into consideration the assumptions of the Fund’s Actuary, Mercers. Mercers had indicated that if markets continued to fall then they would consider providing an interim valuation. The impact of the winding up the Strategy on the Valuation and employer contributions would need to be talked through with them

·         In response to a query, Michael Hudson confirmed that it was possible to withdraw individual elements of equity investment from the Strategy

·         It was queried whether LGPS Central had developed any UK active equity products. Philip Hebson responded that LGPS Central were in the process of developing a UK active equity product but was not quite ready to go live yet

·         The Chairman reiterated the statement received from the LGPS Board which set out that “There has been a lot of disturbing news lately about the fall in stock markets and the potential resultant impact on defined contribution pensions. LGPS defined benefit pensions are not linked to stock market performance and are set out in statute. Although short term investment values may vary, the LGPS as a long-term investor is securely managed to address any longer term impacts. LGPS Scheme members can therefore be assured that both their contributions and their pension, whether in payment or built up to date, will be unaffected.”

RESOLVED: that

a)    The Independent Financial Adviser's fund performance summary and market background be noted (Appendices 1 and 2to the report);

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

c)    The update on the Pensions Investment Sub Committee’s decision to invest £50m into the British Strategic Investment Fund (BSIF) which is a Fund with a mixture of Property and Infrastructure assets be noted;

d)   The update on the transition of the Active Corporate Bonds mandate into the LGPS 'Global active Investment Grade Corporate Bond Fund be noted;

e)    The funding position compared to the investment performance be noted;

f)     The update on the Equity Protection current static strategy be noted;

g)   The update on Responsible Investment activities (Appendix 4 to the report) and Stewardship investment pooling and the Stewardship code be noted;

h)   The update on the LGPS Central report on the voting undertaken on the Funds behalf be noted (Appendices 5 to 7to the report);

i)     The update on the development of a Climate Risk Monitoring Platform be noted;

j)     The proposed Environment Social and Governance (ESG) Audit be agreed; and

k)    The update on the feedback on the ‘spectrum of capital (Appendix 8to the report) be noted.