Agenda item

Following the actuarial valuation, Mercer has been requested to conduct an investment strategy review of the Surrey Pension Fund.

Please contact the Committee Manager for a copy of the annex.

Declarations of Interest:

None.

Key Points Raised During the Discussion:

1.    The Mercer representatives outlined the conclusions of its investment strategy review of the Surrey Pension Fund.  It was explained that 5000 simulated projections of the future funding position had been undertaken with the use of a number of changing variables.  This had created the funnel chart on page 8 of the annex.  The simulations suggest that the funding position would reach 100% in 2021.  However, it is accepted that assumptions will not necessarily bear out and so a deficit risk has been calculated.  The Mercer representatives highlighted that the Pension Board and Officers needed to carefully consider the extent to which a deficit risk was tolerable and suggested ways in which it would be possible to (1) further diversify the Fund’s sources of return and (2) better manage any deficit risk.  The analysis represented showed the expected benefits of addressing these issues in combination.  Simply diversifying the sources of return has minimal impact on reducing deficit risk.

2.    The Mercer representatives proposed that an investment strategy for once the Fund is 100% funded should be considered sooner rather than later as it would take one to two years for a new Strategy to be fully implemented.  This would provide a “target” investment strategy for the future and provide a clear framework for helping to decide what changes to the current investment strategy should be made over time.

Mike Goodman left the meeting at 2.50pm.

3.    The Mercer representatives explained that the potential target return from the revised strategy appeared low but that a high return would not be required if the Scheme was 100% funded.  Members pointed out that the Scheme still needed to honour future liabilities.  The Mercer representatives assured the Board that the Strategy would still be designed to have an expected return that supported that Actuarial funding assumptions so would continue to help maintain the affordability of financially supporting the Fund.  They also suggested that the Fund should be less concerned about the level of real interest rates it locked into once it is 100% funded, if it was agreed to introduce improved risk management techniques to help better manage deficit risk.

4.    The Mercer representatives stressed that there were many opportunities for long-term investors such as the LGPS to tap into.

5.    A Member raised a concern about risks associated with infrastructure debt and derivatives.  The Mercer representatives assured Members that large, established investment management firms had solid experience with these types of assets.  The Chairman also responded that the Pension Fund Board did not know how to trade these assets (this would be delegated to an investment manager) but just needed to understand what they are.

6.    The Mercer representatives reiterated that they were not recommending a big bang approach to changing the investment strategy but that any agreed change should be undertaken in stages.

Stuart Selleck left the meeting at 3.15pm.

7.    The Chairman suggested that training on leveraged gilts and synthetic equities be given at the next meeting of the Board (Action Review ref: A7/14).

Actions/Further Information to be Provided:

None.

Resolved:

a.    That a further report on the Investment Strategy Review be brought to the next meeting of the Pension Board for consideration (Action Review ref: A8/14);

b.    That training on leveraged gilts and synthetic equities be provided at the next meeting of the Board.

Next Steps:

None.