Agenda item

Presentation by Alison Hamilton, Barnett Waddington LLP

With reference to paragraph 4.2 (a)(ii) of the Minute of 10 December 2015, the Chairman welcomed the Pension Fund’s Actuary, Alison Hamilton, Barnett Waddingham LLP, to the meeting, to give a presentation on Cashflow Modelling.  A copy of the presentation was circulated at the meeting.   Ms Hamilton began the presentation by advising that the Fund received contributions from the employer, employee and investment returns.  The investment returns currently were not drawn down in cash but reinvested straight away by the investment managers.  Outgoing payments from the Fund were pension promises and fund administration.   With reference to Scottish Borders Council Pension Fund there was a funding level of 101% with a total contribution rate of 18%, which was an appropriate funding plan. Published accounting data for the retirement pension trend showed an increasing amount of pensions being paid out of the Fund.  However, there was a decreasing amount of income being paid into the Fund.   Ms Hamilton went on to discuss different scenarios which could affect the Pension Fund:  including reduction in the 1% income yield, increased retirement age, currency hedging and a reduction in payroll. Ms Hamilton concluded by stating that the Pension Fund was in a strong position.  However, there was a requirement for the Fund to consider management of cashflow prior to the next valuation in March 2017. 

Mr Ettles added that the value of the Fund on 31 December 2015 was £554m.  The key point for the Pension Fund Committee and Pension Board to note was that the Fund was maturing; the pensioner population had grown as overall proportion of liabilities and outgoing payments had increased relative to contributions.   This meant that there would be a cashflow shortfall and the Committee had to consider mechanisms for managing this shortfall.  Mr Ettles further advised that the three options for meeting the cashflow obligations were to: Disinvest assets in advance, this would be easy to implement and administer.  Disadvantages were that the Fund might disinvest at an inopportune time and there would be dealing costs.   The second option was to disinvest assets at the required time to meet the shortfall.  This was the current approach and was again simple to implement and administer.  Similarly to option one, assets might be sold at an inopportune time and there would again be dealing costs.    The final option was to use investment income.  The Fund would elect to receive income from assets in advance to meet projected shortfall.  This option would be straightforward to implement and there would be no dealing costs.  The income could be taken from equities that were overweight.   There was currently investment income of £12m which could meet predictable cashflow shortfall.  There followed a discussion on which asset class would be the most appropriate for disinvestment.  Mr Ettles highlighted LGT which had a wide variety of assets with a 2% yield, property was yielding 2.5% and the Alpha Opportunities Fund yield was 3%.    Members agreed to the disinvestment of assets and discussed the different options.   Ms Mirley advised that a further report would be presented to the June meeting on delegated powers, monitoring requirements and the framework to allow officers to proceed with the disinvestment if and when required.

DECISION

AGREED:-

(a)        to disinvestment of assets from equities; and

(b)       to request the Chief Financial Officer submit a further report to the June meeting of the  Pension Fund Committee and Board on delegated powers, monitoring requirements and a framework for disinvestment.