Agenda item

Consider report by Chief Financial Officer. (Copy attached).

There had been circulated a report by Chief Financial Officer providing the Committee and Board with an update on the outcome of the Strategic Investment Review and presenting the resulting recommendations for the revised asset allocation.  The investment strategy was key to ensuring assets continued to grow to meet the long term liabilities of the Fund and, as far as possible, that contribution rates from employers remained stable.  A review of the current strategy had been undertaken by KPMG and the findings were detailed in Appendix 1 to the report.  As part of the review, the currency hedge arrangement had also been assessed and the findings were detailed in Appendix 2 to the report. 

Mr Robertson advised that the Fund had performed well over the last five years.  However, it remained significantly exposed to equity markets which could be volatile and did not offset the Fund’s exposure to inflation and interest rate rises.   To align the Fund’s asset performance, in line with increasing liabilities, a number of adjustments to the pattern of investment was proposed.  KPMG’s report set out the suggested changes which would evolve the strategy.

Mr O’Hara, Director – Investment Advisor and Mr Ashraf,  KPMG, were present at the meeting.  Mr O’Hara advised that the Pension Fund Investment & Performance Sub-Committee had discussed, at their meeting on 22 August, alternative strategies.  Strategy 3(b) detailed in the report, was agreed as their preferred strategy.  This strategy reduced UK and Overseas equities to 50%; Diversified Alternatives to 10% and Diversified Credit Opportunities to 10% (from 65%, 15% and 10.5% respectively), combined Corporate Bonds (2.25%) and Fixed Interest Gilts (2.25%) and replaced with Index Linked Gilts 5%.  This strategy also introduced investment in Long Lease Property (10%) and Credit Opportunities (10%).   Mr O’Hara explained that this strategy would be stable and robust in a difficult market environment and give a similar level of return to the existing portfolio.    If the Committee and Board agreed to the alternative investment strategy, there would be a detailed discussion with the Fund’s Actuary.   Mr Robertson added that if the Actuary did not approve the alternative strategy then it would not be implemented and there would be further discussion with the Committee and Board.

Mr O’Hara went on to discuss the currency hedge and the underlying concern that the hedge did not serve the Fund’s best interest and also had a significant cost.  Mr O’Hara explained that investments in overseas markets came with a currency risk as exchange rates fluctuated.  The rationale for hedging the currency exposure was to reduce volatility in the Fund’s asset returns.  In the short term, currency hedging worked well, particularly against the US Dollar and Japanese Yen.  However, KPMG’s perspective was that the Fund could manage volatility and that the hedge should be removed.  Moreover, new legislation was being introduced which would make the management of the hedge more expensive and difficult.  Mr O’Hara further advised that one caveat for reduction of the hedge was that it be gradually reduced over the next 12 months. 

In answer to questions, Mr Robertson advised that a number of alternative strategies had been considered by the Sub-Committee.  Following discussion, the Sub-Committee had concluded that strategy 3(b) was the preferred strategy.  It has also been agreed that the strategy would be introduced in a phased manner which could be changed to reflect market conditions.  The Fund’s liquidity in respect of transfers out of the Pension Fund had been factored into the scale of the investment recommended.    The Actuary would be consulted on the proposals and should be able to give a decision quickly.  There would then be the need to procure a manager to implement the new strategy.   It was agreed that the Actuary’s views and timeline for implementation of the new strategy would be presented to the next meeting of the Pension Fund Committee and Pension Board.

DECISION

AGREED:-

(a)        The investment strategy as detailed in paragraph 5.2 of the report;

(b)       The removal of the Currency Hedge on a phased basis;

(c)        To delegate authority to the Chief Financial Officer, in agreement with the Chair of the Pension Fund Committee and the Fund’s Actuary, based on the advice of the Investment Advisor to implement the revised strategy;

(d)       To delegate authority to the Chief Financial Officer, in agreement with the Chair of the Pension Fund Committee, and based on advice of the Investment Advisor the removal of the Currency Hedge at the most appropriate time; and

(e)        That a further report be presented at the next meeting of the Pension Fund Committee and Pension Board.