Agenda and minutes

The Democratic Services Officer read out the 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 complete the green interest forms circulated to groups in their pre-meetings (which will be announced at the Council Meeting) 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 2, A and 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 Officer or a member of his staff before the meeting to expedite dealing with the item during the meeting.

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Before discussing the exempt minutes of 11 September 2015, Members are invited to consider the arguments set out in the Public Interest document and to pass the following resolution:

“The Committee having been satisfied that the public interest would be better served by not disclosing relevant information, RESOLVES that the public shall be excluded from the meeting during the discussion of the exempt minutes of the meeting of 11 September 2015, in accordance with the provisions of section 100(A)(4) of the Local Government Act 1972, because of the likely disclosure of exempt information as defined in paragraph 3 of Part 1 of Schedule 12A of the Act as amended.”

The public and exempt minutes of the meeting of 11 September 2015 were approved as a correct record and signed by the Chair.

The Investments Manager introduced this item. She reminded members that at the previous meeting they had examined the concept of better matching the Fund’s asset base to its liabilities and thereby reducing volatility in the funding position. They had considered the use of index-linked gilts to help with the management of inflation risks throughout the portfolio. At the end of the discussion the Panel had asked for further work to be done, in particular on how the framework would impact on the Fund’s portfolios in terms of cash flow. Mercer’s had accordingly prepared another presentation, which had been circulated with the agenda. She said that if the decision was taken to adopt the proposal in principle, the implementation would be spread over a period of years and would be taken into account in the next valuation.

Mr Turner and Mr Giles commented on the Mercer document Risk management framework – further training and scenario analysis, which had been circulated with the agenda.

Mr Turner said the aim was to address the volatility in and growth of the deficit with a long-term plan to manage risk in an effective way. He reminded Members that since the last valuation the funding level had been as high as 87%, but had now come down to about 75%. Liabilities had increased. At the previous meeting the Panel had decided to implement the first step, which was to switch the Fund’s current holdings in fixed interest and overseas and overseas government bonds into index-linked gilts (to hedge 12% of the Fund). Mercer was in addition proposing that leveraging should be used to allow the Fund to match 36% of funded liabilities. The presentation gave details of the hedging instruments that could be employed. These were divided into physical instruments (fixed-interest gilts, corporate bonds, and index-linked gilts) and synthetic/derivative instruments (interest rate swaps, inflation swaps and gilt repos).

The report by Mercer was debated with significant discussion around the concept of leverage, the risks arising from leverage and how they would be managed including credit and counterparty risk and how the cash flows would be effectively hedged.

Responding to comments from the Independent Investment Adviser and from Members about the timing of investments, Mr Turner said timing was important, but there would never be a magic bullet to cope with short-term market changes; what was important was having a long-term plan to increase the level of protection. He did not think that interest rates would rise significantly in the near future. However, the deficit had risen, which would affect the valuation this year, and as the scheme is still open the liabilities will continue to grow.

The Chair asked Mr Turner about the supply of instruments to hedge the liabilities as supply might dry up as an increasing number of pension schemes invested in them, with the implication that the Fund should invest in them as soon as possible. Mr Turner thought that an increase in demand of a magnitude that would exhaust the supply  ...  view the full minutes text for item 19.

The Assistant Investments Manager presented the report. He said that there were target allocations for the different asset classes in the Fund, which were permitted to drift within defined ranges. Rebalancing was important to ensure that the Fund’s assets remain invested in line with the target investment strategy. It also forced the selling of relatively expensive assets and the purchase of relatively cheap assets, tending to add value over time.

The Fund’s current rebalancing policy was given in Appendix 1. For liquid assets the present policy allowed rebalancing between growth and stabilising assets when the balance deviated by +/-2%, and automatic rebalancing took place when the deviation was +/- 5%. Mercer had reviewed the policy, and were proposing narrower ranges and a more robust decision-making framework to reflect their views on the market outlook for different asset classes. The table on agenda page 163 showed the proposed rebalancing ranges. Two rebalancing ranges were set for each asset class in addition to the neutral range, according to whether the assets were deemed unattractive or attractive. Mercer’s dashboard on page 127 summarised their view of the attractiveness of different asset classes. .

The proposed delegations for the operation of the policy were set out in subparagraphs 4, 5 and 6 of paragraph 6.1 of the report.

The Investments Manager explained that rebalancing was used for cash management.

A Member commented that the ‘attractive’ range proposed for emerging markets of 9-15% appeared high and out of line with the +/-1% ‘neutral’ range. She suggested that it might be the right time to increase the benchmark allocation of 10% for emerging markets, where good growth was to be expected in the longer term. Mr Turner said that benchmark for equities overall was 50%, of which emerging markets accounts for about one fifth of this and was a significant allocation.

RESOLVED to recommend to the Committee:

1. the revised rebalancing policy set out in Appendix 3 Section 1.

2. the implementation of the policy to be delegated to officers in consultation with the investment consultants where appropriate, as set out in Appendix 3 Section 2.

Before discussing exempt appendix 3, Members are invited to consider the arguments set out in the Public Interest document and to pass the following resolution:

“The Committee having been satisfied that the public interest would be better served by not disclosing relevant information, RESOLVES that the public shall be excluded from the meeting during the discussion of exempt appendix 3, in accordance with the provisions of section 100(A)(4) of the Local Government Act 1972, because of the likely disclosure of exempt information as defined in paragraph 3 of Part 1 of Schedule 12A of the Act as amended.”

The Assistant Investments Manager introduced this item and summarised the key performance information. He reported that Schroders were still rated amber on the RAG monitoring report, but their relative one-year performance had improved significantly. The mandates with Signet and Gottex had been terminated, so they no longer appeared in the RAG report.

Mr Turner commented on the Mercer investment performance report.

A Member said that she would like to know the ESG ratings of the Fund’s investment managers. Mr Turner said this information could be provided.

RESOLVED to note the report.