Agenda item

The Committee considered the Pension Investment Update.

Philip Hebson, the independent advisor to the Fund introduced the report and made the following points:

·         At the end of December 2020, the value of the Fund was £3.2bn with a funding level of 97%. Over the last 12-month period, the Fund had increased in value by 6.9%. Over a 5 year period, it had increased on an annualised basis by 10.4% and over 10 years on an annualised basis by 8%. The increase in value was significantly in excess of the actuary’s requirement for growth against their discount rate (rate of investment return). Considering the difficulties during the last year, the Fund was in good financial health

·         There was a slight underperformance against the Fund’s benchmark during the last quarter. Although the Fund had performed well against longer performance targets, it may be worth considering whether the Fund’s benchmark was fit-for-purpose

·         Work continued on a number of levels to look at increasing the Fund’s Property and Infrastructure investment allocation with a particular focus on Infrastructure investment which represented better value for money at present

·         The revised Equity Protection Strategy had established a more dynamic approach to the risk management of the Fund’s equity exposure to protect it from downside risk

·         Strategic Asset Allocation (SAA) – The Fund’s equity allocation (78%) was still high which reflected the strong performance of the equity markets over the last 12 months. It was anticipated that this would reduce over time as the Fund invests further in in property or infrastructure whether through LGPS Central or the Fund’s managers. The Fund was also looking at increased investment in private debt through the investment management team at Bridgepoint. The Fund was still not aligned to its SAA targets but these were being managed

·         It was clear that LAPFF had undertaken a lot of good engagement work holding companies to account. However, the Fund should look to press LAPFF to record significant outcomes from this engagement work.

In the ensuing debate, the following points were made:

·         In response to a query about the Fund’s lack of investment in Index-linked Gilts, Philip Hebson advised that such investments represented very poor value at present and the Fund covered its inflation risks in other ways. Government Bonds also represented extremely poor value. The Fund had an underweight allocation to Fixed Income and it was intended to close the gap to the SAA target

·         At some point in the near future the Fund would need to review the Equity Protection Strategy because it was never intended to be a long-term approach. The Pensions Investment Sub-Committee should examine the cost of the Strategy to establish whether it represented value for money. However, with the markets entering a period of volatility, it would not be appropriate to remove it at present. Philip Hebson commented that as the Fund had a high exposure to risk, the Strategy had managed that risk and PEL had referenced the success of the Strategy during difficult financial circumstances. However, such strategies were relevant to a particular set of circumstances and should not be retained for evermore

·         There had not been an appropriate time to consider investment in the bond market, however if there was an inflation rise then it might be a consideration.

RESOLVED that:

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

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 and Stewardship investment pooling and the Stewardship Code be noted; and

f)     The update on the LGPS Central report on the voting undertaken on the Funds behalf be noted.