Agenda item

This report is a summary of manager issues for the attention of the Pension Fund Committee, as well as an update on investment performance and the values of assets and liabilities.

Note: Part 2 annexes at item 20.

Speakers:

Lloyd Whitworth, Head of Investment & Stewardship

James Sparshott, LGIM

Adrian Brown, Independent Advisor

Kathy Vawter, LGIM

Steve Turner, Mercer

Milo Kerr, Border to Coast

Neil Mason, Assistant Director – LGPS Senior Officer

Key points raised in the discussion:

1.    The Head of Investment & Stewardship noted that the improved funding ratio of 143%, the dual effects of a lower discounted liability number and a higher asset number. Using the assumptions for that analysis at the last valuation, the funding ratio was 100%. The Fund underperformed the benchmark particularly the BCPP Global Alpha Fund and LGIM Europe Ex-UK.

2.    The LGIM representative noted that they wrote to pooled Fund clients in June regarding the changes to the treatment of withholding tax on dividends concerning LGIM Europe Ex-UK. Investors in Swiss and Belgian companies incurred withholding tax on dividends of 35% and 30%. LGIM concluded that withholding tax paid on dividends from Swiss and Belgian holdings was no longer expected to be recoverable. An adjustment was made in June to the net asset value of the pooled funds by removing the accruals in those holdings. LGIM would continue to try and reclaim the tax for its clients and had engaged with HM Revenue and Customs. Other local authority funds were similarly affected.

3.    The Chairman sought clarification that it was a one-off reversing out the accruals, delivery should be on track against the benchmarks going forward. The LGIM representative agreed and confirmed that they would continue to deliver market returns to the reference benchmark which was itself being reviewed.

4.    A Committee member suggested that if no progress was being made on these issues, then investments should be withdrawn from those countries. The LGIM representative explained that the adjustment made in June reduced the net asset value of the funds, reflecting the decision and that they would continue to try and recover the withholding tax. The value of the LGIM Europe Ex-UK fund had been reduced by the amount of withholding tax, being -2.65%.

5.    The Chairman noted that it was a passive fund. The LGIM representative explained that they would continue to mirror the reference benchmark and weightings of the different countries that make up the LGIM Europe Ex-UK.

6.    A Committee member presumed that the tax liability changed the nature of investing, so the appropriate investment level would need to be reviewed. The Independent Advisor clarified that the matter concerned tax on dividends and not capital, the adjustment would take the drag out of the performance numbers.

7.    The Independent Advisor queried what the legal view was about treating customers fairly regarding the adjustment. The LGIM representative noted that the legal opinion was that adjusting in one go was the best way to treat customers fairly, otherwise some may have withdrawn or adjusted their holdings. The Head of Investment & Stewardship emphasised that those were accruals over several years when the Fund was not involved in the LGIM Europe Ex-UK fund, units were being bought and sold at an inflated price.

8.    Referring to the MSCI World Index, the Independent Advisor noted that the Fund had given itself a tough benchmark for private markets. The Head of Investment & Stewardship noted that the impact had been discussed in previous meetings.

9.    A Committee member requested an update on the escalation to the Chief Investment Officer (CIO) concerning the BCPP Global Equity Alpha being the largest contributor to the Fund’s underperformance. The Head of Investment & Stewardship noted that the Independent Advisor and Mercer met with the CIO, followed by meetings with BCPP and a workshop with partner funds. The Mercer representative noted frustration as it was not clear that BCPP were taking onboard the feedback from partner funds, however they were looking to introduce a new global equity manager. The BCPP representative noted the upcoming workshop to discuss partner funds’ concerns further. Procurement was underway for the new manager, other changes needed would be considered.

10.  A Committee member asked what the recourse was should BCPP not address the concerns. The Head of Investment & Stewardship explained that there were alternatives such as LGIM global funds, and the BCPP in-house managed global fund. The Mercer representative noted that it was unrealistic to leave the pool.

11.  A Committee member queried whether the LGIM’s alternatives would put the Fund in a difficult position in terms of the Government's desire for more pooled funds. The Chairman noted that could be the case; the alternative was to get the fund manager to address the concerns. The Assistant Director – LGPS Senior Officer explained that LGIM passive funds were classified as being under pooled management by the Government due to joint procurement with ten partner funds. Regarding BCPP, he clarified that the Fund was an owner and not just a customer, so could challenge issues.

RESOLVED:

Noted the main findings of the report in relation to the Fund’s valuation and funding level, performance returns and asset allocation.

Actions/further information to be provided:

None.