Agenda item

Details were provided of the Fund’s investment performance for the first quarter of 2017/18. Additional detail was provided in an appended report from the Fund’s external advisers, AllenbridgeEpic. Baillie Gifford provided further commentary on its performance and view of the economic outlook.

The market value of the Fund ended the June quarter at £936.6m (even taking account of a £32.1m group transfer payment related to Bromley College) and had further increased to £973.1m at 31st August 2017. Compared to an average of 0.7% across the 60 LGPS funds in PIRC’s universe, the fund returned 2.7% for the first quarter against a benchmark of 0.4% and for the medium and long-term strongly returned at 26.8% for 2016/17 against a 24.6% benchmark - the highest return of the 60 Funds in PIRC’s LGPS universe. The Fund’s returns over three, five, and ten years were also the highest, and second highest over 20 years.

A Member noted that Baillie Gifford had slightly added to its holdings in sovereign debt, funded by reduced holdings in high yield bonds. Although sovereign debt would reduce returns, the change was made to reduce risk exposure against a potential rise in interest rates (sovereign returns providing protection against high yield bonds reacting to any interest rate change). 

It was suggested that returns of 12% would have been earned from passive investments in FTSE and that many returns had been driven by foreign exchange. Referring to the sale of £32.1m of Blackrock global equities for transfer of assets/ liabilities to the Local Pensions Partnership (Bromley College merger with Greenwich Community College), the Member had hoped that poorly performing Standard Life assets would have been sold. DGF assets had also performed badly and global equities held by Blackrock had improved. He stated the fund had forgone an estimated £2.2m capital appreciation in selling the global equities and felt this had been a wrong decision seemingly based on poor performance over a three-month period.

The decision to sell had been taken by the Director of Finance based on the advice from the Fund’s advisers, Allenbridge, which indicated the overweight position of global equities, the need to reduce the overall risk to the fund and their view that equity markets were near a peak, and in consultation with the Chairman and Vice-Chairman. The Member suggested it was not necessary to act on advice and in support another Member suggested the transfer should have been taken from DGF funds in the first instance. Reference was made in response to page 2 of the minutes of the previous meeting when Members were advised that much depended on the position of markets at the time of transfer as to which assets to sell to generate the required cash, and that it was best not to be too rigid in selling DGFs to fund the transfer. 

As the Fund portfolio had a relatively high level of equities, Allenbridge highlighted In their report advice from Mercer (the Fund’s Actuary) that equity markets were at or near their recent peaks and that any significant fall could impact not only the value of the Fund, but actuarially, the funding level and potentially, the level of employer contributions. Allenbridge suggested that taking protection by way of equity futures/options over part of the equity portfolio (Equity Downside Protection)was one way of limiting the downside risk, without needing to sell holdings. Allenbridge outlined further details of such an approach in their report and how arrangements would work in practice. A full knowledge and understanding of the reasons for using derivatives in this way was necessary with the ability to make appropriate timing decisions on the protective hedges. Allenbridge recommended a review of the actual asset allocations upon confirming and funding the MAI and property mandates. Should a significant overweight position continue which could negatively impact funding levels in a profound market decline, Allenbridge felt that further discussion on long term strategic asset allocations should be opened by the Sub-Committee.

A Member was unable to support Equity Downside Protection and cautioned against looking again at restructuring; the existing structure should first settle down and he suggested strengthening recommendation 2.1(b) of Report FSD17078 with a rejection of Equity Downside Protection and any automatic further review. Allenbridge referred to the new long term strategy including MAIF and Property but highlighted a potential scenario in future where the Fund could still be overweight in equities at over 60% and underweight in fixed income should equity markets fall. The Member agreed that the allocation should be kept under review and the Sub-Committee was happy to proceed with the strategy recently agreed. The Chairman added that much depended on interpreting “review”; Allenbridge were expected to monitor the market position and “review” could be interpreted in this context or as a full scale review. Another view suggested it was about taking stock as equity values change. Members agreed this interpretation in the context of any future review following the transfer to Property and MAIF. 

Information on general financial and membership trends of the Pension Fund was outlined in the report along with summarised information on early retirements. A net deficit of £26.1m occurred during 2016/17 (mainly due to transferring out Bromley College) and total membership numbers rose by 733. In the first quarter of 2017/18, a net surplus of £0.2m has arisen, and membership numbers increased by 139.

In view of the Fund performing well last year the deficit should reduce if the performance be maintained (it was not possible to reduce contributions in view of good performance during the current triennial period (2017/18 to 2019/20) - they could only be increased). The Fund continued to be on track to recover the deficit over 12 years. 

On other matters, the Council was using its main custodian, BNY Mellon, for performance measurement information - a summary of manager performance being appended to Report FSD17078 (the WM Company - State Street - no longer provided performance measurement services to clients for whom they did not also act as custodian). For LGPS comparator information, PIRC now provided a service to most LGPS funds, including L B Bromley.

In relation to The Markets in Financial Instruments Directive II (MiFID II), coming into force on 3rd January 2018 and a recent Policy Statement by the Financial Conduct Authority (FCA), Local Authorities would be classified as ‘Retail’ investors by default. However, such a classification was likely to result in a reduced investment return achievable by the Council and to be classed as an elective professional client for the purposes of Pension Fund investment activities it was necessary to satisfy certain quantitative and qualitative criteria. To opt-up to elective professional status, it would be necessary for the Council to submit an assessment questionnaire/application to all counterparties it does or may wish to invest with, including investment advisers. As such the Sub-Committee was asked to delegate the Director of Finance with authority to submit the relevant opt-up requests.

In regard to the Council’s commissioning programme and outsourcing of services, Mears and Creative Support Ltd had become admitted body employers within the Fund. Officers were also liaising with contractors related to Libraries and IT for obtaining admitted body status.

Passenger Transport Services staff also transferred to GS Plus on

1st December 2015 and would become members of the Royal Borough of Greenwich Pension Fund. The two fund actuaries were currently finalising the transfer value (estimated at £1.2m as at 31st March 2017) and a transfer payment would be made in due course.

Concerning Fund Manager attendance at future meetings, Report FSD17078 proposed the following timetable:

·  21st November 2017 – no fund manager attendance in view of the need to award multi-asset income fund manager(s)

·  14th December 2017 – again, no fund manager attendance in view of the need to award a property fund manager

·  20th February 2018 – MFS (global equities)

·  22nd May 2018 – Fidelity (fixed income).

[Post-meeting note - due to the retirement of a key member of the Baillie Gifford team, they have been invited to come to the February meeting instead to introduce their replacement. A revised timetable will be proposed at the February meeting].

RESOLVED that:

(1) the contents of the report be noted;

(2) comments regarding equity downside protection included within AllenbridgeEpic’s report be noted and that no action on equity downside protection be taken at this time; 

(3) authority be delegated to the Director of Finance to apply to opt-up to elective professional status under MiFID II as detailed in section 3.4 of Report FSD17078; and

(4) Fund Manager attendance at 2017/18 meetings of the Sub-Committee be agreed as outlined above.