Agenda item

The Committee received a Pension Investment Update.

In the ensuing debate, the following points were made:

·         Philip Hebson commented that against the backdrop of the recent market turbulence the Pension Fund had recorded overall performance of 3% ahead of the benchmark over the year to the end of March 2020 and 3.6% in the last quarter. There was an element of caution in that the Fund had fallen in value and the out-performance of the Fund was largely driven by the Equity Protection Strategy (EPS). However, there were quarters where there had been a substantial increase in the value of the Fund which was good news but the EPS provided a drag against benchmark performance. It did indicate that the benchmarking mechanics were not working effectively to show the true health of the Fund. Bespoke benchmarks worked well for certain investment classes eg Equities but were not so effective for alternatives such as Property and Infrastructure. It was an issue that would be raised with PEL along with LGPS Central and River & Mercantile, to see if a more appropriate method of performance measurement was available

·         The current success of the performance of the Fund largely related to actions taken before Covid-19. It was therefore important to build resilience and protect the Fund’s funding position in the event of a second wave of the pandemic or any other environmental issues

·         There did seem to be a degree of slowness in investing in infrastructure and the Fund did rely heavily on equity investment which was riskier albeit the Fund was benefiting from the alternative benchmarked passive investments. Philip Hebson commented that a useful appropriate and understandable approach for monitoring property and infrastructure investments had yet to be determined. The speed of deployment was also an issue that would be taken up with LGPS Central so that any investments that come forward have to be quick to draw down

·         Was there anything coming out of the Climate Risk Monitoring Report and ESG Audit Report that would feed into the benchmark arrangements? Philip Hebson responded that it mainly depended on the actions that the Fund decided to take on investment options

·         Philip Hebson confirmed that the last element of the transition of Corporate Bond to LGPS Central had now been completed. He anticipated that the transition costs would take 7 years to break-even on the reduced costs. It was therefore important for this sub-fund to outperform the market to enable the break-even point to be reached sooner

·         Rob Wilson updated members on the latest funding position. In March 2019, the Fund was 90% funded but by March 2020 it had fallen to 81%. It was surprising how quickly the market had bounced back because by May 2020, it was 88% funded compared to liabilities

·         Was the market growth an ongoing trend or had the Fund’s performance been masked by impact of the Equity Protection Strategy? Rob Wilson explained that the positive performance of the Fund was partly as a result of the positive performance of the equity market but also due to increased diversification into other markets as well as from the impact of the Equity Protection Strategy. He added a note of caution that performance had plateaued out in June and the Strategy was due to expire at the end of August

·         In addition to post balance sheet events, there was also the question of re-evaluation because employer contributions were based on a significantly better position that it was now. Rob Wilson responded that conversations had taken place with the actuary and a robust evaluation at year end would be undertaken. Given the bounce back in the market since and the fund being 88% funded in June 2020, it did not seem likely that a re-evaluation was necessary. In addition, the actuary had advised in the comments in the Accounts that in the present circumstances it might be better to pause and reflect

·         What was the timeframe for the development of the Climate Risk Monitoring Platform (CRMP)? Rob Wilson responded that the LGPS Central report was expected by the end of September. A small working group would be established to look at the draft report in conjunction with the ESG audit report would then be reported to the December Committee. The CRMP should provide the Fund a number of scenarios on the impact of climate change and investment in sustainable assets. Philip Hebson added a caveat that the departure of Michael Marshall from LGPS Central might have an impact on the timeframe for that report

·         Would there be an opportunity to look at investment in localised renewable energy opportunities to build resilience at a local level? In response the Chairman suggested Toni Fagan be included in the working group to develop the Climate Risk Monitoring platform. Toni Fagan welcomed being involved in the group. It was agreed that the working group consist of no more than 3 members

·         Rob Wilson commented that the Equity Protection Strategy had de-activated its investment in the FTSE Mandate when it reached the trigger point at the bottom end of the protection cap and the resultant savings of £27m had been reinvested in the UK Passive portfolio. The protection was still in place for the S&P and Eurostox markets. Discussions were ongoing with River and Mercantile with a view to continue the Strategy or take a more selective approach to applying the Strategy

·         In response to a query, Rob Wilson confirmed that delegated powers were in place to make any necessary changes to the profile of the Equity Protection Strategy

·         Rob Wilson indicated that at present, the Fund had a higher exposure to the Equity markets compared to the targets set out in the Strategic Asset Allocation.

RESOLVED: that

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

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

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

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

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

f)     The update on Responsible Investment activities (Appendix 3) and Stewardship investment pooling and the Stewardship Code be noted;

g)   The update on the LGPS Central report on the voting undertaken on the Funds behalf be noted (Appendices 4 to 6);

h)   The update on the development of a Climate Risk Monitoring report and the proposed Environment Social and Governance (ESG) Audit be noted and the timeline and process specified below be agreed:

                     i.        Receipt of draft report Late September;

                    ii.        Set up a small working group of no more than 3 Members and Officers to review October to Mid November; and

                   iii.        Final report with recommendations to Committee in December 2020.