Agenda item

The Committee considered the Pension Investment update.

In the ensuing debate, the following points were raised:

·         Philip Hebson commented that there had been a bounce back in the performance of the equity markets in Quarter 2, following the falls experienced post Covid 19 in Quarter 1. The market recovery had been aided by the quantitative easing measures introduced by the Government. It was too early at this stage to get a realistic valuation of the property and infrastructure portfolio. Performance in Quarter 3 indicated that the US markets had recovered better than the UK and European markets but it should be noted that the US market was made up of different indices to the other markets

·         In response to a query, Philip Hebson confirmed that the UK indices were not reflective of the range and performance of UK PLCs, with a significant weighting towards oil and mining etc

·         Philip Hebson indicated that fortnightly update meetings were held with representatives of River and Mercantile to discuss the Equity Protection Strategy. The performance of the US markets sat within the parameters of the range set out in the Strategy. Europe and the UK indices were close to the point where downside protection would need to be activated. However, these indices were set within a tighter range and it was expected that there would be a further movement either upwards or downwards within these markets. At present, the Strategy was providing the expected levels of protection

·         It was queried why the duration of the Equity Protection for the UK market had not been extended to 18 months similar to the European market. Philip Hebson advised that attempts had been made to ensure that the Strategy fitted the Fund’s underlying equity position. The issue was the longer the duration of the contract, the more expensive that protection became. In addition, given expected levels of volatility in the market, the Fund would be more comfortable with shorter contract periods

·         Would a clear outcome of the US presidential election be beneficial to markets at least in the short term? Philip Hebson responded that there was a viewpoint that an outright win for Biden would be bad for the US markets but a Biden win with a Republican Congress would be positive. There appeared to be doubt about the possibility of a Trump victory. If there was a challenge to the outcome of the election then the uncertainty created would have a negative impact on markets, albeit in the short term

·         Philip Hebson explained that conversations were being held with representatives of LGPS Central with a view to increasing the Fund’s investment in property and Infrastructure. The outcome would be reported back to Committee with recommendations as to how investment would be moved forward

·         Philip Hebson indicated that the funding level was currently at 91% which gave an indication that the Fund was in a relatively healthy position. The key issue for the Fund going forward was impact of the level of Government debt and the ability of the different sectors, or perhaps more specifically individual companies to recover economically from the economic crisis

·         Rob Wilson explained that the Fund still had a high equity weighting compared to property and infrastructure investment. This reflected the positive equity market rebound over the last quarter whereas property and infrastructure had remained relatively stable based on valuations and the impact of Covid 19

·         There was a danger of undertaking an overly critical attitude to the approach taken by companies to Responsible Investment without understanding other less overt environmental aspects of their business and recognising the success of that business. Philip Hebson commented that it was a case of carefully examining each individual company to get a full picture of their business approach because in many cases the ethical issues around Responsible Investment were very nuanced

·         In response to a query, Rob Wilson commented that by being part of the LAPFF Forum, the Fund was able to engage with companies as part of the collective LGPS Funds to influence behaviour. However, there was always a question mark about the effectiveness and robustness of engagement as opposed to the impact of disinvestment

·         The Fund had committed itself to an engagement approach whether aggressive or soft so the Committee would await the outcome and recommendations of the ESG Audit working group on this matter.

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 funding position compared to the investment performance be noted;

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

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

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

g)   The update on the development of a Climate Risk Monitoring report and the Environment Social and Governance (ESG) Audit procurement exercise be noted.