The report provided a summary of the investment performance of Bromley’s Pension Fund in Quarter 2 of the 2022/23 financial year and included information on general financial and membership trends of the Pension Fund, including early retirements, as well as details of training options for Members and key developments in the Local Government Pension Fund (LGPS) expected during the next 5 years.
The Committee received an update from John Arthur, Senior Advisor: MJ Hudson who confirmed that 2022 had been a difficult year for investors after central banks across the world had raised interest rates to curb rising inflation. Whilst this had been anticipated, inflation levels had been higher than expected due to the geopolitical situation and spiralling wholesale gas prices which had served to destabilise the markets. The Senior Advisor: MJ Hudson advised that in his view, inflation was now peaking and would reduce in the short to medium-term provided there were no more unexpected events impacting the markets. Increased interest rates also offered investment opportunities with the 10-year forecast on UK Gilts now projected at 4.2% for 2022 against 0.0% for 2021. MJ Hudson had undertaken stress testing of cashflow assumptions for more persistently high inflation which provided reassurance that the Bromley Pension Fund was covered to the 2026/27 financial year using investment income currently distributed from the underlying portfolios, and that a further year could be covered should income from Global Equities be distributed to the fund. The performance of Bromley Pension Fund’s two equity managers, Baillie Gifford and MFS Global Equity had varied widely over the past year with MFS Global Equity outperforming its benchmark by 6.9% whilst Baillie Gifford’s investments had underperformed by -21.3% during the same period. This demonstrated the impact of different philosophies and investment styles in varying market conditions and illustrated how the two equity funds could act in counterpoint to each other.
In considering the update, the Chairman emphasised that active engagement with the challenges presented by the economic climate would be critical moving forward. The Bromley Pension Fund was a resilient scheme between 110-120% funded, even allowing for the reduction in investment values over the past year, and continued to have strong cashflow. The Senior Advisor: MJ Hudson underlined the need to determine the level of risk the Local Authority was prepared to accept in its investment strategy as lower risk investments generally yielded low returns. Furthermore, the Committee may also like to review the proportion of the fund given over to equity investment if there were concerns over the volatile economic climate. A Member stressed the importance of maintaining a simple investment strategy and highlighted that the nature of long-term investment meant that short-term losses often recovered over time. The Chairman observed that this was borne out by independent research which had identified that the relative simplicity of Bromley’s fund management practices had supported its long-term stability.
The Committee discussed the Asset Allocation Review which had been commissioned to reassess the Fund’s Strategic Asset Allocation from an asset-only perspective and suggest potential alternative portfolios that optimised risk and return based on updated long-term capital market assumptions, expected cashflow requirements and other constraints. The review made two recommendations comprising rebalancing the portfolio to the Strategic Asset Allocation to reduce volatility and to implement a 50% currency hedge on the global equities’ portfolio based on the current standing of global currencies. Four potential portfolios to de-risk the fund had also been proposed which comprised 5% allocation to infrastructure; 5% allocation to social/affordable housing; 5% allocation to private debt; and 5% allocation to global credit (hedged), all of which were designed to offer greater diversification and increased yield, albeit with a slightly lower expected return relative to the Strategic Asset Allocation and increased illiquidity.
The Chairman underlined the need to consider the findings of the Asset Allocation Review alongside the actuarial review of the Bromley Pension Fund when this information became available and proposed that rebalancing of the fund’s Strategic Asset Allocation be reviewed by the Committee on a regular basis moving forward. Following discussion, this was supported by Members, and it was agreed that the Committee would review rebalancing of the fund’s Strategic Asset Allocation on a six-monthly basis. A Member voiced support for action being taken to de-risk the portfolio as it was incumbent on the Committee to take a prudent and responsible approach to investment on behalf of the Bromley Pension Fund members. The Member requested the Senior Advisor: MJ Hudson provide an analysis of how the fund would look if rebalancing had taken place regularly over the past four years and this would be taken forward following the meeting.
With regard to the four potential portfolios to de-risk the fund, Members generally expressed a preference for investing in social housing over infrastructure, although some infrastructure options might be worth exploring, such as renewable energy. A Member suggested that if social housing was considered a viable investment, investment in a future phase of the Meadowship Homes scheme could offer a low-risk long-term investment that would also contribute towards the delivery the Local Authority’s housing objectives. Members discussed this possible investment opportunity which would also represent an investment in the Borough and its residents; however, it was recognised that any such scheme was liable to create a conflict of interest and the Committee would need to be mindful of its fiduciary duty and pursue only the best investment options for the fund. Investment in social housing in the Borough which bought rather than built houses also had the potential to impact the local housing market and disadvantage buyers. It was noted that whilst the Government had asked local authorities to plan for investing 5% of local pension funds in social investment across England and Wales, there was no requirement to invest any funds as yet, and a Member underlined the importance of considering other secure fixed income investments to de-risk the portfolio, such as UK gilts. Another Member argued against the recommendation to implement a 50% currency hedge on the global equities’ portfolio in light of the difficulties predicting the dynamic between global currencies over time.
In summation, the Committee agreed not to make any decisions regarding the recommendation to the Asset Allocation Review at this time and to revisit it at the next meeting of the Pensions Committee on 22 February 2023, including the proposal to invest in a future phase of the Meadowship Homes scheme.
· The contents of the report and information contained in the related appendices be noted including:
a) Appendix 7 which sets out the key developments in LGPS expected during the next 5 years;
b) Appendix 8 which is the response of the Bromley Pension Fund to the Task Force for Climate Related Financial Disclosures (TCFD) consultation; and,
c) Appendix 9 which formalises Bromley’s Discretionary Policy on the Abatement of Pensions.
· Members’ comments on Appendix 10: Asset Allocation Review document considered in conjunction with Appendix 11: Notes of the MJ Hudson meeting of 2 November 2022 be noted.