Agenda item

4.1       Officers noted that Item 9: Pensions Administration System – Business Case was listed on the Pension Committee agenda as to follow. This report, which includes commercially confidential material, will be circulated amongst Pension Board members in advance of the 08 February Pension Committee meeting.

4.2       With reference to Item 6: Fund Performance Schroder (Property), DZ asked why Schroder’s performance target is set so low above the benchmark. DZ also queried Schroder’s own estimate of its performance to date this year as showing “strong absolute returns” when returns appear to be much lower than in previous years, and when Schroders has actually underperformed against its benchmark over the past three months.  It was agreed to bring this to the attention of the Pension Committee.

4.3       Members discussed Item 10: LGPS Investment Pooling. The Chair noted that the emerging landscape of pooled funds is now looking quite coherent. The main issue for East Sussex will be to identify the pooling option that gives us the strongest voice. Hence governance arrangements will be a key factor. OO agreed that having the opportunity to influence the development of the pool will be key, and a significant issue in making the decision to join a pool is whether governance arrangements have or have not already been determined. With the exception of the Welsh pool it is unlikely that the Government will permit any pool with less than £25 billion invested to proceed, so we need to be sure that the pool we join can exceed this floor.

4.4       In response to a question from DZ about the likely scale of savings from pooling, OO told members that officers were working on this and should have some estimates by summer 2016. MK cautioned members not to expect too much here: even if pooling will eventually produce savings, these are likely to be in the long term (10 years plus). This is because the investments most readily pooled (e.g. passive) already have low management fees, so there will be little opportunity to make savings. High fee investment vehicles will take much longer to pool and there is no certainty that fund managers for whom the LGPS is not a particularly significant client will acquiesce to demands for their fees to be lowered for larger scale LGPS investments. Some types of investment (e.g. private equity, property) will take time to pool because of the illiquidity of the assets involved.

4.5       BR and AE queried whether there were risks involved in pooling with pension funds that are relatively under-funded. MK noted that the plan is to pool investments to realise economies of scale, but not to merge funds, so individual funds will retain their own risks. Neither is there an obvious link between a fund’s deficit and the competence of its management: relative underfunding is likely to be a consequence of investment decisions taken many years ago (such as taking a ‘holiday’ from employer contributions in the 1980s) rather than recent actions. Of much greater importance is pooling with like-minded funds, and it is reassuring that the Access partners already employ many of the same investment managers as ES.

4.6       DZ asked what the response from the fund management industry had been to the pooling plans. MK replied that it seems likely that many investment managers will resist appreciably lowering their fees, as they have generally successfully resisted attempts by individual funds to negotiate lower rates. Some niche funds may choose to disengage from the LGPS market rather than engaging with pooled funds.

4.7       Members discussed Item 12: Pension Fund Budget Report – 2016/17. OO explained that there had been an under-spend on Guaranteed Minimum Pension (GMP) reconciliation in 15/16 due to this work being delayed. The under-spend will be carried forward to undertake this work in future years.

4.8       In response to a query from BR, OO explained that the uplift in actuarial fees for 16/17 reflects the additional cost of the triennial valuation. The fee negotiated for the coming valuation is slightly lower than the amount paid three years ago.

4.9       In response to a query from the Chair, OO told members that there was a zero cost estimate for work on fund pooling in 15/16 because the expenditure to date had mainly been in terms of officer time. The estimate for costs over the next three years is based on the per-authority costs of establishing the London Common Investment Vehicle.

4.10     OO told the Board that the projected reduction on investment manager fees in 16/17 was mainly due to the decision to cease to contract with Lazard. The funds formerly managed by Lazard are now invested in less expensive vehicles (e.g. 50% are in passive). If the stock market performs relatively poorly over the next 12 months, this will reduce the fees paid.

4.11     Members considered Item 13: Environmental, Social, Governance and Investment Strategy. BR noted that there had been a lively discussion of this issue at the recent LAPF conference in Bournemouth. DZ added that there was a good deal of public interest in the issue of ethical investment and a potential reputational risk here for the county council. AE agreed, noting that fracking was a particular issue for scheme members in Brighton & Hove. KA noted that the fund position was a difficult one to communicate in a way that would reassure concerned scheme members. However, all members agreed that fund’s position on this was a reasonable one given the fiduciary duty to maximise the income from investments.