Members will be given a short training session linked to the subsequent presentation of the Investment Strategy Review by Hymans Robertson.
Minutes:
The Investment Fund Manager introduced a report prepared by Hymans Robertson, the Fund’s investment advisors regarding a range of proposals following the recent review of the Fund’s Investment Strategy and Structure. He provided the background to the management of the Strategy which following a number of years of underperformance of the Fund had resulted in a complete restructure of the Fund in 2012. This led to a greater diversified strategy with an increase in the number of fund managers and a move towards more passive equity and bond investments, providing more protection from underperformance by managers whilst at the same time ensuring the Fund provided a return that was sufficient to close its funding gap.
This strategy had over the past ten plus years worked well with an incremental improvement in the Fund’s funding levels to the extent that the Fund was now over 100% funded.
Appendix 1 to the report outlined the details of the current review and set out a number of current proposals from Hymans which amounted to a few easy to implement initial strategy changes with a number of further reviews to be carried out during the year.
For the benefit of the Committee Nick Jellema, Hymans Robertson provided a short contextual briefing as to the planned aims of the Review, which was to analysis the current investment strategy so as to assess its effectiveness in meeting the Fund’s objectives and to consider whether a different strategy would be more suitable. In short, to ensure the Fund can pay Members pensions and lump sums as they fall due, reduce the risk of deficits emerging to protect against significant increases in contribution rates and achieve sufficient investment returns to keep the costs of new benefits accruing reasonably.
Nick explained the approach adopted to conduct the review which he described as strategic versus structural considerations. This involved considering the three key asset classes (strategic) of Growth (such as equities), Income (such as property, infrastructure and credit) and Protection (such as UK gilts) and the proportion of investment between each. The Fund’s exposure to each of the asset classes was then considered (structural), evaluated through what was known as asset liability modelling, the purpose of which was to re-evaluate the current strategy against a number (in this case three) plausible alternatives, projecting a range of funding outcomes across a wide range of macroeconomic scenarios calculating key metrics such as the likelihood of full funding and downside funding risks. Each of the three alternative strategies were summarised in the appendix
Given the Fund was currently in surplus (106% funded) it was Hymans view that based on the modelling outcomes over a future 20-year period (to 2042), the probability of retaining a funding level in excess of 100% remained very high, with a slight upward trend in likelihood for the more de-risked strategies exampled in alternative strategy 1.
The key message from the findings was that the Fund had reached a position where the benefit of limiting downside risks outweighed the additional benefit of higher returns, and that reducing the overall level of investment risk would both limit the level of downside risk and increase the likelihood of maintaining full funding over the medium to long term. This conclusion was supported by John Raisin who supported the recommended way forward set out by Hymans.
The Investment Fund Manager concluded that the current investment strategy, in conjunction with the current funding plan, had a good chance of meeting the long-term funding objectives but that there were opportunities to improve the risk and return balance based on the analysis and findings conducted by Hymans which proposed that adopting a revised investment strategy that would increase the probability of achieving the long-term objective for the Fund and reduce the potential for adverse outcomes.
Going forward Hymans would work with officers to put together a plan to materialise the proposed changes as part of the structure review, and in those circumstances,
The Committee AGREED to:
(1) The adoption of alternative strategy 1 as set out in Appendix 1, which had the highest success measures, and would reduce downside relative to the current strategy,
(2) The changes proposed as part of the structure review, including reducing the strategic allocation to:
- Equities from 52% to 50%
- DGF from 15% to 13%
- Alternatives from 9% to 11%
- Property from 5% to 4%
- Global Credit from 8% to 11
(3) Appoint LCIV PIMCO as the Fund’s Global Credit Manager,
(4) Rebalance the current holdings to the revised strategic allocations, as outlined in section 5 of the report,
(5) A series of further strategy reviews over the next year as outlined in the Hymans Robertson report (Appendix 1), including:
- Consideration of any relevant investment options available via the London CIV
- A framework for regular rebalancing of investments
- Review of existing DGF managers
- Review of existing infrastructure manager
- Review of property investments, and allocations to residential / commercial property sectors, and
(6) The changes being reflected in an updated Investment Strategy Statement.