Agenda and minutes
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Contact: Keith Pringle 020 8313 4508
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APOLOGIES FOR ABSENCE AND NOTIFICATION OF SUBSTITUTE MEMBERS Minutes: There were no apologies.
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DECLARATIONS OF INTEREST Minutes: Councillor Russell Mellor declared a personal interest by virtue of receiving a Pension from the Local Government Pension Scheme.
Councillor Eric Bosshard declared a personal interest as a former Member of the Local Government Pension Scheme.
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Minutes: The minutes were agreed.
Members were also updated on certain matters.
In view of concerns related to the position of a number of Local Government Pension Schemes, and in the context of local decision making, it was suggested that an expected Government announcement might highlight an intention to require Local Authorities to take a passive investment approach for their pension funds. Such an approach was currently encouraged by Government.
Concerning proposals for Local Pension Boards, final Government guidance was awaited. There might be an option for two Local Authorities to join together to provide a Pension Board. Pension Board arrangements for L B Bromley would need to be agreed at Full Council on 23rd February 2015 and the Sub Committee would meet beforehand to consider proposals. Although a Local Pensions Board was expected to provide scrutiny, its need was questioned as a significant check/balance is already provided by a Fund’s Actuary.
In relation to L B Bromley’s Shadow Pension Fund, comprising £2.7m of the £10m allocated to Diversified Growth investment, any earnings or capital value changes on the £2.7m would be added to the earmarked reserve that had been set up.
For the Collaborative Investment Vehicle (CIV) proposed for boroughs by London Councils, some authorities had yet to commit to the initiative including L B Bromley.
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QUESTIONS BY MEMBERS OF THE PUBLIC ATTENDING THE MEETING In accordance with the Council’s Constitution, questions to this Committee must be received in writing four working days before the date of the meeting. Therefore please ensure that questions are received by the Democratic Services Team by 5pm on Wednesday 26th November 2014. Minutes: There were no questions.
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PENSION FUND PERFORMANCE Q2 2014/15 Additional documents: Minutes: Report FSD14076
Report FSD14076provided details of investment performance for Bromley’s Pension Fund in the 2nd quarter of 2014/15. More detail was provided in an appended report from the Fund’s Investment Adviser including commentary on developments in financial markets, their impact on the Council’s Fund, and future outlook.
Information on general financial and membership trends of the Pension Fund was also outlined along with summarised information on early retirements. Financial information included historic data on the fund’s value, previous allocations to fund managers, distributions of surplus revenue fund cash to fund managers, and movements in the value of the FTSE 100 index. Baillie Gifford also provided commentary on their performance and a view on economic outlook. Baillie Gifford representatives attended to discuss performance, economic outlook/prospects, and other matters concerning the portfolios under Baillie Gifford management.
Quarterly reports from all fund managers had been circulated to Sub-Committee Members with the meeting agenda.
At 30th September 2014 the fund value stood at £655.9m (and by 19th November 2014 this had risen to £688.8m). Overall, the fund returned +3.0% in the second quarter matching the benchmark return. This performance was in the 7th percentile of the local authority average.
Medium and long-term, the fund’s returns have remained particularly strong, achieving overall local authority average rankings in the 29th percentile for 2013/14 and the 4th percentile for 2012/13 (the fund being subject to transition and change in both years).
In noting the fund’s value, it was suggested the fund was not performing significantly better than the FTSE 100 Index. However, returns were helping to reduce the funding gap and passive investments would provide the necessary income. Returns were fed into the Pension Fund Revenue Account and amounts outstanding after funding liabilities were directed back into the Fund for investment. As such it was not possible to identify specific details of such returns as they are automatically re-invested and the need for a separate Pension Fund a/c to hold the re-investment sums was not considered necessary. There were also costs related to establishing a separate account. The actuarial target for overall returns to meet fund liabilities stood at 5.6% and the current level of returns should help reduce the fund deficit. It was also suggested that equivalent figures be provided for previous years to show a trend (seasonal comparisons).
It was also noted there would be fewer employees in the future and a reduced level of contributions. It would not be possible to take the same level of risk for the future as in previous years, the fund now technically having a negative cash flow, excluding returns from equities (these returns being re-invested back into the fund). It was also possible for employees to take pension benefits at age 55 and a cash flow problem could arise should there be a significant demand for early pensions. It might be necessary in future to merge with another pension fund having a positive cash flow to help meet ... view the full minutes text for item 16. |
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PENSION FUND - INVESTMENT REPORT Printed copies of reports from the Council’s Fund Managers are circulated to Sub-Committee Members with this agenda. Representatives of Baillie Gifford will be attending the meeting for this item. Minutes: In their presentation to the Sub-Committee, Baillie Gifford highlighted the valuations of their three portfolios – Global Alpha (global equities), Diversified Growth, and Fixed income – as at 30th November 2014, in comparison to valuation of the Portfolios at 30th September 2014.
For the Diversified Growth Portfolio, Baillie Gifford’s objective was to outperform UK base rate by at least 3.5% per annum (net of fees) over rolling five year periods with an annualised volatility of less than 10% over the same periods. On performance to 30th September 2014 for Diversified Growth funds, Baillie Gifford had achieved a net return for the fund of 6% per annum since inception, outperforming the UK base rate by 4%. The presentation also highlighted the performance of Baillie Gifford’s Diversified Growth Pension Fund between 31st December 2008 and 30th September 2014 to illustrate a positive performance delivered with low volatility. Performance attribution and commentary on certain DGF asset classes in the 12 months to 30th September 2014 was also outlined, with an indication that the fund returned 7.8% gross of fees over the year. In discussion the impact of fees was outlined to Members. It was also noted that the Active Currency asset class had delivered a return of 1.3%. In theory it was possible to lose money on any one of the asset classes but the involvement of research was highlighted and currency as an asset class was suited to Baillie Gifford’s investment approach. Overall performance of economies was the ultimate driver and a difference could be made over the long term. It was explained that a typical holding period by Baillie Gifford for a currency asset was six months rather than have a short term approach to the asset class. In terms of outlook for the future, Baillie Gifford was encouraged by improvements in economic data in parts of the developed world and improving fundamentals gave grounds for optimism. However, Baillie Gifford felt that risks remained. It was felt that the end of Quantative Easing (QE) and increase in interest rates might have a negative impact on higher yielding assets. The US in particular was curtailing its use of QE although it was suggested to Members that the extent of QE across other parts of the world could rise, with Europe in particular increasing QE.
Further detail on Baillie Gifford’s Diversified Growth Fund Portfolio was appended to the presentation. This included details of asset types the Fund invests in, asset class returns within the fund, and asset attribution. The portfolio continued to be invested across a broad range of asset classes. There were substantial allocations to more defensive asset classes e.g. cash, investment grade bonds and structured finance. Baillie Gifford remained confident that the fund could deliver a worthwhile return in a range of environments. Returns had been supported by improving economic factors with most asset classes performing well. However, the pace of recovery remained modest, continuing to diverge across regions. Emerging market assets experienced sharp falls ... view the full minutes text for item 17. |
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REVISED INVESTMENT STRATEGY - PHASE 3 Additional documents:
Minutes: Report FSD14077
Members considered a report which included information related to illiquid fixed income assets, potentially part of the 20% protection allocation under Phase 3 of the investment strategy.
An update from the Fund’s Investment Advisers, AllenbridgeEpic was appended to Report FSD14077. A copy of the Advisers’ paper on Options for Phase 3 of the Investment Strategy (Fixed Income), as presented to the Sub Committee’s previous meeting, was also appended to the report.
An approach for funding any new investments was covered in a further appendix to the report provided under Part 2 of the agenda. In view of this and the likelihood of discussions on the report involving exempt information, it was agreed to move consideration of this item to Part 2 of the agenda.
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LOCAL GOVERNMENT ACT 1972 AS AMENDED BY THE LOCAL GOVERNMENT (ACCESS TO INFORMATION) (VARIATION) ORDER 2006 AND FREEDOM OF INFORMATION ACT 2000 The Chairman to move that the Press and public be excluded during consideration of the items of business referred to below as it is likely in view of the nature of the business to be transacted or the nature of the proceedings that if members of the Press and public were present there would be disclosure to them of exempt information. Minutes: RESOLVED that the Press and public be excluded during consideration of the items of business referred to below as it is likely in view of the nature of the business to be transacted or the nature of the proceedings that if members of the Press and public were present there would be disclosure to them of exempt information.
The following summaries refer to matters involving exempt information |
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REVISED INVESTMENT STRATEGY - PHASE 3 To consider an appendix under exempt proceedings. Minutes: Report FSD14077
Members considered what investment approach (or otherwise) should be taken in regard to illiquid fixed income assets as any potential part of the 20% protection allocation under Phase 3 of the investment strategy.
This matter was previously heard in private, but it was agreed by the Pensions and Investment Sub Committee and Senior Officers (at the meeting of the Sub Committee on 24th February 2015) that the minutes relating to this matter could now be made public. These are noted below.
Mr Stevenson outlined benefits and risks associated with illiquid assets.
Illiquid assets could deliver predictable cash flows at higher returns than those currently available in sovereign credit markets. The assets offered inflation protection and longer investment horizons to meet long term liabilities. Stagflation could result from the current fall in oil prices - inflation was falling and interest rates were low. There would be no growth without consumer demand and interest rates could stay low for a considerable period.
Risks centred around any future possibility that the pension fund might need to pay out benefits e.g. due to change in Government/LGPS regulations, or transfer of assets related to an admitted body or bodies. Any future Council driven voluntary redundancy programme could also pose liquidity risk. The advantages of illiquidity could also be lost if interest rates were to rise. A more cautious approach could involve stepping “a toe in the water” of illiquid assets and additionally considering other investments involving different risks.
A particular illiquid fund was recommended involving no “queues”. It was suggested the opportunity be strongly considered, the fund closing to new business at the end of March 2015. The alternative approach would be to make existing assets work harder.
Illiquid investment could involve infrastructure, including renewable energy e.g. wind and solar projects, and it was confirmed that the fund AllenBridgeEpic had in mind owned wind farms. A Member was pessimistic on most renewables in view of the industry’s need for Government subsidy.
Members had concerns about the illiquid investment suggested by AllenBridgeEpic, and instead asked for approaches to be made to Baillie Gifford and Fidelity to explore options for achieving a higher return on existing fixed income assts. In the meantime, AllenBridgeEpic agreed to continue searching for illiquid asset options at an appropriate level of risk which could be attractive to the Sub-Committee.
RESOLVED that:
(1) report FSD14077 be noted;
(2) in view of Member concerns for the illiquid asset fund highlighted by AllenBridgeEpic, existing conventional fixed income assets be retained, and Baillie Gifford and Fidelity be approached to explore options for a higher return from the assets; and
(3) AllenBridgeEpic continues to search for illiquid asset options at an appropriate level of risk, reporting back to the Sub-Committee in due course.
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