Agenda item

This report is a summary of all manager issues that need to be brought to the attention of the Pension Fund Board, as well as manager investment performance.

Declarations of Interest:

None.

Key Points Raised During the Discussion:

1.    The Strategic Manager, Pension Fund and Treasury introduced the report, explaining to Members an issue with a recent Board decision to subscribe to the BlackRock DivPep V Fund.  While the Board had previously agreed to invest USD 20m, BlackRock’s understanding was that the Board was going to invest £20m.  The structured fee level was higher for investing with USD 20m, so officers held back from confirming subscribing to this fund.  Following a discussion, the Board agreed not to go ahead with the BlackRock DivPep V Fund investment.

2.    The Pensions Manager explained the auto enrolment statistics.  Members queried the effect on cash flow but the Pensions Manager stated that this wouldn’t be known until mid-November.  The Chief Finance Officer informed the Board that the People, Performance and Development Committee had built £1m into the Medium Term Financial Plan based on an opt-out rate of 10%.  This would need to be reviewed as opt-out had been higher than 10%.

3.    At the previous Surrey Pension Fund Board meeting, it had been agreed that a stock lending programme with Northern Trust should commence.  The legal agreement was being scrutinised by Mercer.  The Mercer representative highlighted a clause regarding indemnification which was very advantageous to Northern Trust.  Negotiations are ongoing and the outcome will be reported to the next Board meeting.

4.    There was a debate regarding the Standard Life Capital Secondary Opportunities Fund.  The Surrey Pension Fund Adviser stated that the concept of focusing on secondary opportunities was good.  The Mercer stated that it would be useful to have an indication from Standard Life regarding the level of discounts that it thought was available in the market.  However, he was comfortable with Standard Life as a private equity manager and was supportive of the proposal to invest.  The Board was informed that Standard Life had presented to a number of local authority pension funds on this opportunity but it was not known whether any had bought in.  There was some concern that the total exposure to Standard Life would be high if this investment was made.  The Strategic Manager, Pension Fund and Treasury informed the Board that the Secondary Opportunities were specifically for private equity products while GARS was concerned with the Diversified Growth fund, a separate entity.  The Chairman questioned whether the Board would be taking a credit risk by investing in the Fund.  The Mercer representative explained that there would be some credit risk as the opportunities are generally off-shore and so do not have as much protection.  The Chief Finance Officer pointed out that the Pension Fund was underweight on the private equity asset class.  It was agreed to defer a decision on this investment until after meeting with Standard Life at Item 13.

5.    There was a discussion with regard to a proposed investment in the Capital Dynamics Global Clean Energy and Infrastructure Fund.  The Board expressed concern that the fee was a little high as some other similar funds dealing with solar energy have a fee of 50-60bps.  It was agreed that it would be worthwhile to test whether Capital Dynamics would be prepared to negotiate on fees.

6.    The Strategic Manager, Pension Fund and Treasury introduced the Darwin Property Fund investment opportunity.  He explained that it is a property type opportunity, but which had a number of characteristics in common with private equity.  The Mercer representative explained that the people running the Darwin Group were experts in the field and that Mercer considered this to be an interesting return opportunity.  The fund however, had a number of very specific risks, which needed to be clearly understood by the Board.  The Chairman informed the Board that some other local authority pension funds had already invested in this Fund.  There was some concern that the current management was not tied into the Fund and could leave while the Pension Fund is locked in for ten years.  The Chairman pointed out that this was a private equity investment and investors were usually in these for the long term.  The Strategic Manager, Pension Fund and Treasury stated that the documentation listed a penalty cost if the Pension Fund disinvested before the end of five years.  The Board went on to debate fee levels, the duration of any lock-in time and the amount to be invested.

7.    The Strategic Manager, Pension Fund and Treasury informed the Board that an initial report from the actuary suggested that the Pension Fund is now at least 70% funded.  Following the full results, the contribution rate would be reviewed.  The actuary would attend the Board meeting on 15 November 2013 and the AGM on 22 November 2013.  Before that, he would communicate with the Borough and District Councils and other scheme employers. 

8.    The Surrey Pension Fund Adviser reported back on his meetings with Fund Managers.  He stated that Franklin Templeton had recorded good results overall.  He was slightly uncomfortable with the level of fees.  The Surrey Pension Fund Adviser also reported that the new Fund Managers for UBS had had a good year.  The Chairman highlighted that the UBS contract had been under watch two years ago and had been kept on after UBS agreed to a reduction in fees, so the Pension Fund was receiving good value.  The Surrey Pension Fund Adviser reported that Majedie had also seen good performance over the past year.  Majedie was particularly good at sensing market changes and repostioning its fund.  The Surrey Pension Fund Adviser reported that Marathon was also doing well.  It had benefited from a strong process for cash flow and income generation.  It is playing different parts of the economic cycle. 

9.    The Strategic Manager, Pension Fund and Treasury introduced the Financial and Performance Report and informed the Board that the current estimated market value of the Fund had since improved further from the reported value on page 47 of the report.  A question was raised over what value Mirabaud was adding to the overall Pension Fund portfolio.

10.  The Strategic Manager, Pension Fund and Treasury highlighted that the Pension Fund was slightly overweight on equities.  The Chairman stated that she was not currently worried about this position.

11.  Members queried the fee levels for Fund Managers as listed on page 52.  The Mercer representative informed the Board that it would need to look at the added value of Fund Managers and that many of them had outperformed their benchmarks net of fees.  The Chairman assured the Board that the Surrey Pension Fund was not soft on its investment managers.

Actions/Further Information to be Provided:

The Pensions Administration Strategy and the Pensions Administration Service Level Agreement to be presented to the Board on 15 November 2013.

RESOLVED:

      i.        To APPROVE the report and the decisions as laid out;

     ii.        To not go ahead with the investment of USD 20m in BlackRock DivPep V Fund;

    iii.        To negotiate for a desired fee level of 125bps before bringing back a recommendation to the Board to make a USD 25m commitment to the Global Clean Energy and Infrastructure Fund;

   iv.        To negotiate the fee level before bringing back a recommendation to the Board to make a £20m commitment to the Darwin Property Fund, with a lock-in period of nine years.

Next Steps:

None.