Agenda item

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

Declarations of Interest:

None.

Key Points Raised During the Discussion:

1.    The Strategic Manager – Pension Fund & Treasury introduced the report which had been discussed informally with Board members.  There was a lengthy debate, with key points including:

2.    The Chairman queried why some investment advisors (including Mercer) were recommending that LGPS funds establish a liability-driven investment strategy when funds were still a relatively long way from being fully funded.  The Mercer representative explained the need to start implementing changes now to prepare for a change to the investment strategy once the fund was fully funded.  If the Board waits until it gets to 100% funding, it will very likely miss the opportunity to move to a new strategy when the time is right as the building blocks won’t be in place.

3.    The Mercer representative highlighted the proposed strategy on page 271 of the agenda packs.

4.    The Chairman suggested that she didn’t disagree with the strategy but with the timing.  She queried the definition used for growth assets which she felt were not currently 91.2% of investments.  The Mercer representative highlighted the breakdown of growth assets on page 265 of the agenda packs.  There was some debate amongst Members, officers and advisors about the definition applied, in particular in relation to Corporate Bonds.  The Mercer representative explained that he considered the main role of this asset class for the Fund was as a return-seeking asset.  It was acknowledged that some downside protection was provided relative to adverse movements in the value of the liabilities but that this would not be significant given the low level of interest sensitivity and lack of any direct linkage to inflation.

5.    The Chairman suggested that the Surrey Pension Fund was not currently taking excessive risks, given the level of funding.  The Mercer representative suggested that as the funding level improves it is possible to take risk off the table and that a clear plan should be in place to achieve this.

6.    The Hymans Actuary suggested that there was a question over whether a large deficit matters and whether the Fund should therefore be seeking to reduce risk.  The Mercer representative agreed that Surrey needs to decide if it is happy with the current level of deficit risk.  The liabilities are likely to continue to increase, even with good performance by investments.

7.    The Pensions Regulator stated that it was not clear if the Regulator would have any remit over investment strategies.

8.    The Hymans actuary suggested that if it is intended to de-risk in the future, governance should be put in place early on.  Procedures should state what the actuary is expected to do and what the Fund’s advisors are expected to so.

9.    Members were unhappy to give full approval to the suggested changes at the present meeting.  The Chairman requested that three fund managers be invited to an informal meeting of the Board to help it to understand the approach being recommended.  It was also suggested that a fee exercise be conducted (Action Review ref: A20/14).

Actions/Further Information to be Provided:

      i.        Three fund managers to be invited to an informal meeting of the Board to help it to understand the approach being recommended.  A fee exercise also to be conducted.

     ii.        The Board to receive training on synthetic equities.

Resolved:

a.    That the Pension Fund Board agrees to investing in a more risk aware manner relative to the Fund’s liabilities with a view to the establishment of a liability driven investment (LDI) strategy framework.  If implemented, this should be set up on a relatively small scale initially with the level of liability protection increased as and when the funding level moves towards 100%.

b.    That the Pension Fund Board agrees to explore leveraged gilts.

c.    That the Pension Fund Board agrees to explore more diversified sources of return with a view to introducing Infrastructure Debt as a new asset category and increasing the existing allocation to diversified growth funds (DGF).

d.    That the Pension Fund Board does not agree at this time to setting up a framework for a synthetic equity portfolio.  However, the Chairman suggested that this would be a useful area to receive training on in the future (Action Review ref: A21/14).

e.    That the Pension Fund Board agrees to implementing such changes in the short term, thus preparing a platform for the future strategy requirements, with the ultimate view to locking in some of the improvement in the funding level that has been seen since the valuation date of 31 March 2013.

f.     That the Pension Fund Board agrees to receive ongoing training and Board reports in order to facilitate a definitive decision making process on these strategy issues at future Board meetings.  This will include an informal meeting before the next formal Board meeting at which three fund managers will be present to help the Board understand the process being recommended.

Next steps:

None.