Agenda item

Following the actuarial valuation, Mercer has advised the Board to establish a liability driven investment framework. As a first step in establishing this framework, the Pensions Fund Board’s external advisor recommended that we consider investing in a leveraged gilt portfolio. Following training from four expert fund managers in this sector, this report seeks approval to invest £90m from our existing passive and index-linked gilt portfolios to a three times leveraged gilt portfolio with Legal and General Investment Management.

Declarations of Interest:

None.

Key Points Raised During the Discussion:

1.    The Chairman explained that this report had been marked to follow on the agenda and had been circulated the day before the Board meeting because the informal presentations on leveraged gilts to the Board had only recently taken place on 12 September 2014.  Time had then been required to consider the information provided and prepare the report, which recommended the appointment of LGIM as the Fund’s liability hedging manager.

2.    A recap was provided on the rationale for why the Fund was considering putting in place a risk management framework.

3.    A discussion took place on the potential benefits of the additional flexibility that could be provided by Schroders (in terms of capital efficiency and higher degree of leverage) and versus the merits of using LGIM, and the competitive nature of their proposal.  On balance, it was considered that the higher degree of leverage that could be provided by Schroders was not necessarily needed.  The leverage that could be provided via LGIM was sufficient and considered more in line with a “keep things simple” approach.

4.    The Chairman stressed that the report and recommendation were from officers but that the Board was under no obligation to agree with the recommendation.  In response to queries about the figure of £90m, which was the proposed amount of capital to be initially invested in the mandate, the Chairman explained that this simply reflected the current value of the passively managed Index-Linked gilts portfolio with LGIM.

5.    A Member questioned if there was merit in deferring a decision on which manager to appoint until the next Board meeting.  The Board was reminded of the comprehensive discussions and previous training sessions that had taken place on risk management and, as a result, it was agreed not to defer at this stage.

6.    There was a query about the description of the LGIM solution as an ‘insurance policy’.  The Mercer representative explained that the investment with LGIM would technically be written as a unit-linked ‘insurance’ contract, as was the case with the existing assets by LGIM on behalf of the Fund.  It was noted that the Fund had received legal advice from Sackers regarding the suitability of the proposed structures from the LDI managers being considered.  All the managers could implement a structure that was consistent with the relevant LGPS investment regulations, including LGIM.  Taking all things into consideration, the Mercer representative confirmed that he supported the officers’ recommendation to appoint LGIM for the mandate.  Their overall fee proposal was the most competitive and there were clear arguments to support the expectation that it would be most straight-forward to use LGIM in terms of initial implementation and ongoing management of the mandate.

EXCLUSION OF THE PUBLIC

RESOLVED: That under Section 100(A) of the Local Government Act 1972, the public be excluded from the meeting for the following items of business on the grounds that they involve the likely disclosure of exempt information under paragraph 3 of Part 1 of Schedule 12A of the Act.

 PART 2

IN PRIVATE

THE FOLLOWING ITEMS OF BUSINESS WERE CONSIDERED IN PRIVATE BY THE COMMITTEE.  HOWEVER, THE INFORMATION SET OUT BELOW IS NOT CONFIDENTIAL.

7.    The Board asked a number of questions regarding the confidential annex to the report, which were answered by the officers and advisors present.

The Board meeting adjourned at 10.20am for training and reconvened in public session at 10.45am.

Actions/Further Information to be Provided:

None.

Resolved:

That the Pension Fund Board APPROVES:

      i.        The setting up of a framework for a liability driven investment (LDI) strategy with the establishment of a leveraged gilt portfolio.  This will be funded by the existing passive and index-linked gilts held with Legal & General, amounting to a maximum of £90m.

     ii.        The appointment of Legal & General Investment Management with the intention of eventually implementing an LDI strategy.  This will serve as a platform for future strategy requirements as the Fund approaches a full funding level.  The appointment should be subject to final full due diligence being completed in terms of the legality of the LGIM solution within the LGPS regulations.

    iii.        The level of liability protection may be increased as the funding level moves further towards 100% with triggers set for consideration of these future decisions, and further Board training to be provided.

Next Steps:

None

The Board meeting adjourned at 10.48am for training and reconvened at 11.30am.