Agenda item

·        Note of Strategy Day Review on 29 September Pension Committee (including the Committee approval of fund manager mandate reallocation)

·        Agenda for 24 November Pension Committee

4.1       This item was introduced by Ola Owalabi (OO).

4.2       Strategy Day OO told the Board that the Pension Committee (PC) had held a successful Strategy Day in September. PC members received a number of presentations, discussed the Fund’s investment strategy, and agreed the termination of the Fund’s contract with Lazard and the re-allocation of the relevant holdings to other investment managers.

4.3       In response to a query from David Zwirek (DZ) as to why the funds managed by Lazard had not been transferred to Longview, given Longview’s recent exceptional performance, OO told members that the PC had opted to move to funds with a lower risk profile than Longview, which is a very ‘active’ and hence relatively high risk investor. MK added that there were additional risks associated with over-investing in the current market leader, as markets operate in cycles and very high performance is rarely sustained over time.

4.4       Members discussed the policy of having a ‘trigger point’ which would require de-risking investments to be made should the Fund hit a pre-determined funding level (e.g. 85%). MK noted that the East Sussex Pension Scheme hit its trigger point last year and some de-risking was successfully undertaken.

4.5       Members discussed the decision to terminate the contract with Lazard, with BR commenting that the process seemed to have taken a very long time. OO told the Board that, although Lazard had been on ‘watch’ for a considerable period, it had only relatively recently been placed in the ‘replace’ category, and action to terminate following this re-classification had been relatively swift. The Chair remarked that replacing an investment manager was not a decision that should be taken lightly as there would always be considerable costs involved.

4.6       Fossil Fuels Cllr Kevin Allen (KA) informed members that a Notice of Motion proposing fossil fuel disinvestment had recently been debated at a Full Council meeting of Brighton & Hove City Council. The Notice of Motion was not passed, but the subject will clearly remain topical. DZ agreed, noting that there had been a good deal of local media focus on the issue in recent months. Angie Embury (AE) concurred, saying that this was an issue that some of her members have expressed concerns about, particularly in terms of investment in firms involved in fracking. MK told the Board that the Local Authority Pension Forum is very active in ethical and socially responsible investment, lobbying firms to act responsibly. RH added that one of the major difficulties in ethical investment lay in identifying major international firms that consistently and universally act in ethical ways.

4.7       Fund Performance MK told members that Schroders are now on ‘watch’, but this is due to recent changes in senior management not to the fund’s performance.

4.8       Re-procurement of Investment Consultancy and Actuarial Services MK informed members that the council had tendered for this contract and had received a pleasing number of expressions of interests. The new contract will commence in January 16 which should give just enough time for the new contractor to arrange the triennial valuation. Replacing the actuary at this critical point was unavoidable; it would have been impossible to extend the current contract any further.

4.9       In response to a question from SM on what would happen if the valuation happened to be at a time when assets (e.g. equities) had suffered a temporary dip, MK told members that a smoothing process is employed to ensure that short term market fluctuations do not unduly influence the valuation.

4.10     Risk Register MK explained that it is the Board’s role to monitor and suggest changes to the Risk Register.

4.11     DZ commented that he struggled to see how risk 12: fees and charges of investment managers could be rated as Green given the level of charges the Fund incurs. This risk ought to be Amber, not least so that PC members remain focused on the need to challenge excessive fees. Other Board members agreed with this approach. MK commented that this was a difficult risk to quantify, as there were no obvious actions to mitigate the risk that have not already been employed. BR added that recent Government moves to pool LGPS funds are clearly intended to address the problem of investment manager fees, and suggest that the Government sees little prospect of fees being reduced without pooling taking place.

4.12     The Chair questioned the Amber rating of risk 5: custodian bank goes bust, noting that this could create complex problems, particularly as the custodian does not necessarily hold individual pension scheme investments separately from those of other schemes. KA agreed, suggesting that impact score for this risk should be amended from 3 to 4, more accurately reflecting the consequences of the custodian failing even if the overall risk score remains at Amber.

4.13     The Chair proposed including an additional risk – that of an investment manager failing/going bust. This is by no means an incredible scenario (e.g. Barings), and would cause major and long term problems for the Fund.

4.14     SM queried the risk assessment relating to the triennial valuation. The Chair noted that the risk relating to this (risk 8: assets not enough to meet liabilities) was rated as Red even though it seemed relatively unlikely that the valuation would show a significantly worse position than under the current valuation. However, there was a pressing risk that employers would be unable to make significant additional contributions to the Fund, and this should be recorded as a separate risk – and potentially scored as Red, since it is both likely and bound to have a high impact. MK agreed that, should the valuation require significant increases in employer contributions it was very likely that some employers would not be in a position to pay. Employers have a statutory responsibility to fund the LGPS and would have to sell assets and could potentially go into liquidation as a consequence. It is uncertain under what circumstances the Government would back an LGPS should some of its non-local authority employers go into liquidation.BR added that there were particular risks here for parish councils, which typically have very few assets and therefore have little capacity to make higher contributions.

4.15     SM pointed out that risk 16: communication with employers would read better as “inadequate communication with employers”

4.16     RESOLVED – that the Pension Board proposes the following suggestions in relation to the draft Pension Fund Risk Register:

·         Risk 5 – custodian bank goes bust. Amend impact score from 3 to 4 to reflect how difficult this scenario would be to deal with (overall risk score would remain Amber)

·         Introduce a separate risk of Investment Manager goes bust (impact score will be high).

·         Risk 8 – assets not enough to meet liabilities. Consider amending likelihood score down.

·         Introduce a separate risk of employers unable to pay increased contributions (both likelihood and impact likely to be high).

·         Risk 12 – fees and charges of investment managers, actuary and investment adviser are excessive and not proportionate. Consider amending overall risk to Amber (e.g. by increasing likelihood to 2)

·         Risk 16 – communication with employers. Amend title of risk to “inadequate communication with employers.”