Agenda and draft minutes

The Chair will draw attention to the emergency evacuation procedure as set out under Note 5.

The Democratic Services Officer drew attention to the Emergency Evacuation Procedure.

At this point in the meeting declarations of interest are received from Members in any of the agenda items under consideration at the meeting. Members are asked to indicate:

(a) The agenda item number in which they have an interest to declare.

(b) The nature of their interest.

(c) Whether their interest is a disclosable pecuniary interest or an other interest, (as defined in Part 4.4 Appendix B of the Code of Conduct and Rules for Registration of Interests)

Any Member who needs to clarify any matters relating to the declaration of interests is recommended to seek advice from the Council’s Monitoring Officeror a member of his staff before the meeting to expedite dealing with the item during the meeting.

There were none.

Councillor Shaun Stephenson-McGall and Councillor Chris Dando had given their apologies to the Panel.

John Finch (Independent Member) attended the Panel remotely.

There was none.

There were none.

There were none.

The Panel RESOLVED that the minutes of the meeting held on 5th June 2024 be confirmed as a correct record and signed by the Chair.

The Fund currently has a 9% strategic allocation to the Brunel Secured Income portfolio, which is split c.40% operational infrastructure and c.60% long-lease property (LLP). LLP strategies benefit from rents linked to inflation metrics and for this reason are considered a good fit for defined benefit schemes with long- term inflation linked liabilities.

The Investments Manager introduced the report to the Panel and highlighted the following points from it.

·  The overall strategic allocation to Secured Income is 9% and the portfolio is currently valued at £627m. LLP represents approximately 60%, or £376m, of this value, which itself is 6% of total fund assets.

·  At its December-23 meeting the Panel discussed the challenges facing the LLP market. Notably, the investor base of a number of LLP funds had become concentrated due to redemptions from investors looking to shore up liquidity positions post the 2022 gilts crisis.

·  At its meeting in December the Panel was minded to retain its allocation to the Secured Income portfolio in its existing make-up of 60% LLP / 40% Operational Infrastructure and requested Brunel present their views on the return outlook for LLP, taking account of current demand from new investors and how redemptions and asset disposals have been serviced to date.

The Panel, having been satisfied that the public interest would be better served by not disclosing relevant information, RESOLVED, in accordance with the provisions of the Section 100(A)(4) of the Local Government Act 1972 that the public should be excluded from the meeting for this item of business, because of the likely disclosure of exempt information as defined in paragraph 3 of Part I of Schedule 12A of the Act as amended.

The Panel RESOLVED to note the report and the information contained in the Brunel Presentation in Exempt Appendix 1.

To support its strategic investment objective the Fund has set climate targets that require regular monitoring so we can evaluate progress and to develop our climate policy as improved data emerges and new investment solutions are developed. The Fund monitors its progress against its net zero targets annually.

The Investments Manager introduced the report to the Panel and highlighted the following points.

The Fund has four decarbonisation and transition alignment targets that support the ambition to achieve Net Zero by 2045. Progress against each is summarised as follows:

1.

·  Listed equities - target 43% emissions reduction by 2025 and 69% by 2030 (versus 2020 baseline)

·  Ahead of 2025 target with 60% reduction, need another 22% reduction from here to reach 2030 target. Progress will rely more heavily on underlying company decarbonisation than asset allocation.

2.

·  Corporate Bonds - target 60% emissions reduction by 2030 (versus 2020 baseline)

·  Ahead of target pathway as achieved 47% reduction so far. Require a further 24% in carbon footprint to reach 2030 target reduction.

3.

·  Ensure 70% of financed emissions in material sectors are subject to engagement and stewardship actions for all listed equities by end 2024 and 90% by June 2027

·  On track - 87% of material sectors’ financed emissions are aligned or subject to active engagement.

4.

·  By 2030 we will divest from developed equity holdings in high impact sectors that are not achieving NZ or not aligning to achieve NZ by 2050

·  No action taken to date. 88% of financed emissions within the listed equity portfolio are aligned or subject to active engagement (up from 76% last year). Companies not aligned will be captured under the Fund’s 2030 divestment commitment.

Transition alignment of the underlying assets is also measured by Mercer shows the exposure to assets that are ‘well aligned’, those that have ‘transition capacity’ (not aligned as yet but can align) and those that are ‘not well aligned’ (and probably will find it difficult to align). The Fund has a low exposure to the ‘not well aligned’ category and a high allocation to the well aligned (particularly across the equity portfolios). The focus of engagement to achieve real world impact must be on our exposure to the most carbon intensive transition capacity assets.

Hill Gaston, Mercer addressed the Panel and highlighted the following points from within the Net Zero Monitoring 2023 Update.

Progress to date

·  2021 – Set targets: Total Fund 2050 net zero target

·  Adopted listed equity portfolio carbon reduction targets of 43% by 2025 and 69% by 2030, versus 2020 baseline position

·  2022-23 - Revised target: Total Fund 2045 net zero target

·  Monitor progress vs. 2025 and 2030 decarbonisation targets

·  Investment Manager decisions - Helped inform decision to switch from Brunel Emerging Market Fund to Brunel Global High Alpha Equity and Global Sustainable Equity Funds

·  Stewardship & Engagement - Identified most strategically important companies to engage with from a climate perspective.

o  Engagement and divestment targets adopted for listed equity.

·  Today - Monitor Progress vs. 2025 and 2030 decarbonisation targets: On track

·  Strengthening targets - Recommendation to:

o  Engage with Brunel on most intensive companies not already under engagement by CA100+ or Brunel.

o  Engage with Brunel on initial private market metrics and timeline for fuller disclosures. Explore adopting Brunel private market targets following this exercise.

·  2024 and  ...  view the full minutes text for item 22.

This paper reports on the performance of the individual portfolios and seeks to update the Panel on routine aspects of the Fund’s investments. The report contains performance statistics for periods ending 30 June 2024.

The Senior Investments Officer introduced the report to the Panel and highlighted the following points.

·  The Fund’s assets were £5,858m on 30 June 2024 and delivered a net investment return of -0.3% over the quarter which lagged the 2.2% rise in the benchmark. The relatively flat nature of returns reflects some positive performances from some of the listed Brunel portfolios, however these were offset by negative returns elsewhere in the portfolio, such as private markets and the risk management strategies.

·  The estimated funding level stood at 102% at 30 June (c. £120m surplus).

·  Rebalancing: During the period, following the reduction in the equity protection hedge ratio, and to increase the amount of cash held in anticipation of future private markets calls, officers redeemed £50m from the Risk Management portfolio. Aggregate private markets call, excluding the final drawdown from the Secured Income portfolio, totalled £17 million. The Secured Income portfolio is now fully drawn.

·  Local Impact Portfolio - £50m investment into Octopus Affordable Housing has now been completed. Octopus are now in the process of building out their pipeline.

Steve Turner, Mercer addressed the Panel and set out the points below from their report.

·  The funding level is estimated to have increased over the quarter to c. 102% as the value of the assets fell by less than the estimated present value of the liabilities. The funding level is estimated to be c. 5% higher over the year to 30 June 2024.

·  We believe the US economy is slowing which should lead to further labour market loosening. This should lead to lower inflation allowing the Fed to cut interest rates. We believe this creates an environment where risk assets should perform strongly. We continue to remain wary about equity valuations and corporate earnings forecasts, particularly given higher bond yields. However, we continue to believe further upside is likely and that favourable macroeconomic conditions balances stretched valuations.

·  Underperformance relative to the strategic benchmark over the one year period was mainly due to the active equity funds underperforming, as well as negative returns from the Equity Protection strategy (as underlying equity returns were positive).

·  Elsewhere underlying relative performance was mixed. The main drivers of underperformance over three years were the active equity, Equity Protection, Overseas Property and Secured Income mandates.

·  Less concentration in technology stocks since July 2024.

·  Apple performed above the index by 22% in Q2. Fund has zero exposure – is this a big risk position? Conversation to be had with Brunel at some point on this matter.

The Head of Pensions referred to slide 13 of appendix 1 and asked if further detail could be given in due course to describe the 3 year underperformance figure of 4.8% across LDI, active funds and Brunel.

He commented that a higher allocation to passive may well be prudent and that the main difference would be the associated costs.

The Panel RESOLVED to note the information as set out in the report.

The Funding and Risk Management Group (FRMG) is responsible for agreeing the operational aspects relating to the Fund’s Risk Management Framework (RMF) thereby ensuring that strategic objectives continue to be met. This report informs Panel of issues considered and decisions made by FRMG as well as any recommendations.

The Group Manager for Funding, Investment & Risk introduced the report to the Panel and highlighted these points from within it.

·  The long-term strategic target is to achieve a 70% hedge ratio for interest rates and inflation (as a proportion of the Fund’s assets). However, hedging has become more capital intensive since the gilts crisis as we are required to hold a larger collateral buffer to support the strategy in times of market stress. Therefore, the interim target is capped at c. 40%. Given the interest rate hedge is at 40% (and the inflation hedge is at c.22%) the trigger framework is currently suspended.

·  In the June meeting the Panel reviewed the liquidity requirements for the Fund over the next few years. Given the increased commitment to private markets it was agreed that the hedge ratios could not increase without depleting the collateral headroom. However, Mercer have explored whether the inflation hedging could be increased in isolation towards 40% without impacting the collateral buffer.

·  Mercer’s assessment and proposal are set out in Exempt Appendix 2 (this paper was originally prepared for the FRMG). By changing the instruments that Blackrock can use to implement the hedge, a higher hedging ratio could be achieved, capped at 40% without impacting the collateral buffer.

·  The existing inflation trigger levels will not be changed as they represent attractive levels to lock in inflation, therefore no immediate action is expected to take place upon reactivation of the inflation triggers.

The Panel, having been satisfied that the public interest would be better served by not disclosing relevant information, RESOLVED, in accordance with the provisions of the Section 100(A)(4) of the Local Government Act 1972 that the public should be excluded from the meeting for this item of business, because of the likely disclosure of exempt information as defined in paragraph 3 of Part I of Schedule 12A of the Act as amended.

The Panel RESOLVED to:

i)  Agree to reinstate the inflation triggers to up to a 40% hedge ratio without impacting the collateral buffer as set out in Exempt Appendix 2.

ii)  Note the performance of each of the underlying RMF strategies and current collateral position.

This report sets out the forward agenda for the Panel for 2024/25. It is provisional as the Panel will respond to issues as they arise and as work is delegated from the Committee.

The Group Manager for Funding, Investment & Risk introduced the report to the Panel.

The Panel RESOLVED to note their forward agenda.