Councillors and committees

Agenda item

INVESTMENT STRATEGY REVIEW

Surrey Pension Fund Committee members will be presented with an investment strategy review paper seeking recommendations to implement work to be carried out by the Fund’s investment consultant, Mercer, following the report presented to the Committee on 15 September 2017.

Minutes:

[The Committee took the agenda in a different order to facilitate discussion]

 

Declarations of interest:

 

None

 

Witnesses:

John Harrison, Advisor

Sheila Little, Strategic Director of Finance

Neil Mason, Senior Pensions Advisor

Phil Triggs, Strategic Finance Manager (Pension Fund and Treasury)

Hemal Popat, Mercer

Steve Turner, Mercer

 

Key points raised during the discussion:

 

1.    The Committee was briefed on a number of options available with respect to future protection of the Fund portfolio. It was highlighted that the Fund was exposed if there was some form of market correction related to equities. The Committee reviewed the options for downside protection with respect to equity through a form of derivative. It was also noted that there were options around alternative indexation with respect to passive investments, and an allocation to long-term illiquid assets.

 

2.    The Chairman informed the Committee that these options had been in response to conversations at the Committee meeting on 17 September 2017 about protecting investments. He expressed the view that these options would be a matter of consideration regardless of the current funding level, and were seen as a way of protecting against market correction. It was noted that equity returns had been strong since the 2008 financial crisis, and that the cost of buying protection were at low levels at the present time.

 

3.    It was commented that the Fund had a large allocation to equities and this had seen an increase in value by £75 million over the previous quarter. The Committee was informed that over £1 billion was invested in UK equities without any protection. Mercer estimated that there one in 20 likelihood of those investments losing 30% of their value through market correction.

 

4.    The Committee was also advised that protection would be considered by the actuary when reviewing measures in place to address a deficit position. This would have a positive impact in respect to the triennial valuation and how the funding level was assessed.

 

5.    A range of questions were asked regarding the technicalities of the protection. The Committee was informed that active investment managers would have some forms of protection against poor investment outturns, though not against an overall market drop. It was clarified that downside protection would not be affected by the move into pooled arrangements with the Border to Coast Pension Partnership (BCPP) as equities would be retained with Legal and General. Clarity regarding the arrangements for equities and pooling was cited as one of the reasons that the paper was being brought to the Committee at this stage. It was noted that East Riding had put protection in place and three other funds in BCPP were considering similar arrangements with Mercer.

 

6.    The Committee was informed that diversifying away from equity market risk would take a long time to implement, and the protection was beneficial as it could be implemented quickly at a minimum cost to the Fund. The Committee debated the extent to which selling upside would protect against downside, and the extent to which it wanted to protect equity investments through this mechanism. Mercer highlighted that other funds had chosen to buy protection lasting up to 9-12 months after the next valuation, in order to achieve the maximum benefit from having it in place.

 

7.    The Committee explored options relating to the cost of the protection, and was informed that there were a number of arrangements that could be put in place. It was suggested that receiving a premium and paying out a premium of 3% would create a nil overall cost to the Fund, though this would require having to sell more upside in order to fund the protection.

 

8.    The Committee discussed that this was a time-limited tactical investment decision, and that it would not be considered over a long term basis. It was noted that the Committee’s role in securing long term security of its investments made equities a good investment, as they frequently out-performed other investments over the longer term. 

 

9.    The Chairman invited Committee views. There was some concern that there was insufficient detail in the papers to consider making a decision, and that that the financial risks were not wholly clear. Concern was also raised as to what extent the proposals covered all equities, and what the cost would be in respect to this. At the same time, the Committee had broad support for protecting its equity investments, and indicated it would consider a proposal that would minimise the cost to the Fund with a clear outline of the benefits and risk. It was agreed to consider this at a future extra-ordinary meeting of the committee.

 

10.  The Committee discussed alternative indexation, and it was acknowledged that this frequently out performed a market-based approach. The Committee was informed that the Fund could look to invest with Legal and General, which would use a multi-factor approach. The Fund’s Independent Advisor expressed the view that market capitalisation indices were structurally sub-optimal, and that a Market Capitalisation Index had benefits as it took into account the liquidity of markets.

 

11.  The Committee was informed that the budget contained in the papers took account of the cost of transition, and that the fees would reduce as a result of moving to a market indexation approach. It was noted that Legal and General would need to set up a specific vehicle for the Fund. It was noted that the first priority would remain equity protection for the Fund.

 

12.  The Committee discussed the proposals related to private debt. It was noted that private debt was categorised broadly into senior (lower risk, lower return) and junior (higher risk, higher return). The Committee explored the structure of the proposals, and queried whether the proposals exposed the fund to sub-prime debt. It received assurances that the underlying loans were secured against the assets of the companies, and that one default would not significantly affect the value of the investments.

 

13.  The Committee discussed the length of time it would take to make the transition following a decision and it was noted that this would be a number of years. Committee Members felt that the decision could be deferred until the BCPP was operational.

 

Actions/ further information to be provided:

 

None.

 

Resolved:

 

·         That the Committee meet on 29 November 2017 to consider options for downside protection with respect to equity risk.

 

·         That the Committee approve the implementation work to be carried out by Mercer with regard to the selection of suitable investment managers for alternative indexation investing.

 

·         That the Committee defer an allocation of private debt until the Border to Coast Pension Partnership (BCPP) vehicle is available.