Agenda item

The Committee considered the Pension Investment Update.

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

·         The estimated funding level of the Fund had reached 99% as at March 2021 and had risen slightly since then. At present, markets were “treading water” because of concerns about the impact of Covid going forward as well as inflation and higher interest rate risks. However, he considered that at this stage, there was little cause for concern for the funding level

·         The Fund continued to have a high equity exposure which emphasised the importance of the Equity Protection Strategy. The Strategy had been revised over the last 12-18 months to create a more proactive and flexible approach to enable the Fund to capture more  upside as the markets rose whilst also providing  downside protection should the markets fall

·         In order to protect the funding level, asset allocation changes were being considered into investment areas with less downside risk, for example possible investment in property and infrastructure or alternatives. It was important for the Fund not to end up with large cash amounts which left it exposed to market risk. The continued strong performance of the equity markets made this decision more difficult

·         The economy should be boosted post Covid albeit some sectors might not recover. It was likely that certain restrictions in the labour market would remain post Covid in the short term and some of the changes to working practices could remain into the future.

In the ensuing debate, the following points were raised:

·         In response to a query about the number of occasions that the Equity Protection Strategy had been triggered since March 2021, Philip Hebson indicated that all the three strategies (UK, US and Europe) had been reset at some point during this period. The Fund was proactively managing the Strategy and officers were meeting representatives of River and Mercantile on a regular basis

·         The Fund’s actuary was particularly supportive of the Equity Protection Strategy as it helped reduce risk and the impact on employer contributions. Philip Hebson added that it was important that the basic working mechanisms of the Strategy were understood and that the resetting of the Strategy was priced appropriately.  There had been an element of risk aversion amongst market investors and River and Mercantile had played an important role in securing counter-parties for the Strategy

·         In response to a query, Philip Hebson suggested that the key lesson from investment opportunities in recent times was to ensure that the Fund acted swiftly and decisively when an investment opportunity presented itself

·         It was queried whether other funds had undertaken similar risk mitigation approaches. Philip Hebson advised that this Fund had a particularly high exposure to the equity markets and was almost fully funded and therefore the Strategy was suitable but other funds were not in such a position and had taken a different approach to balancing risks

·         In response to a query about the potential to invest in European bonds, Philip Hebson commented that there was very little value in the bonds market at present and the Fund was looking to invest in private debt instead

·         Was it likely that the equity markets would remain high? Philip Hebson commented that he foresaw potential issues facing the equity markets in the future

·         From an employer’s perspective, there was a degree of anxiety about maintaining high levels of risk in the current market and a desire to move away from equity investment over the next three years. Philip Hebson advised that risk management was a critical part of investment management. There was a good understanding that the Fund needed to maintain a balanced approach to risk in its portfolio

·         The role of the LAPFF had gathered momentum in recent times. The Forum was made up of 79 pension funds which exerted influence and included the LGA as a shareholder. Philip Hebson added that the Forum mainly consisted of councillors with a few senior officers from the larger pension fund organisations

·         In response to a request, Rob Wilson would establish whether the outcome of the voting undertaken by Hermes for LGPS Central on behalf of the Fund could be shared with the Committee in future reports.

RESOLVED that:

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

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, Local Authorities Pension Fund Forum (LAPFF) (Appendix 3 of the report) and Stewardship investment pooling be noted; and

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