Agenda item

The Assistant Investments Manager presented the report. Over the quarter the funding level had decreased by 4%, because the value of the assets had fallen and a fall in the discount rate had increased the liabilities. Over the year since September 2014 the funding level had fallen from 83% to 72%, primarily because of the fall in gilt yields increasing the value of the liabilities. These figures were based on the 2013 valuation level, so are different to those given in the interim valuation report. The asset portfolio had underperformed the returns required by the Funding Strategy over the year, but returns were in was in line with the Strategy over three years. He invited the Committee to approve the revised Statement of Investment Principles (Appendix 4 of the report). The minor changes in the revised Statement reflected changes in the hedge funds and currency hedging mandates agreed by the Committee.

Mr Turner commented on the Mercer investment report. He said that market conditions had been difficult, with a general flight from risky assets, such as equities, into more secure assets, such as gilts. This had caused the “double-whammy” of a fall in the value of assets and an increase in the value of the liabilities. It was likely that US interest rates would rise next week, the first increase in ten years. This would the opposite of what most countries were doing. It was not clear how markets would respond to the rise. It might make it difficult for the Fund’s managers to continue to generate the level of outperformance they had achieved over the last 4-5 years. He drew attention the table of manager performance on agenda page 219. The relative performance of Jupiter appeared good, but the asset class in which they invested had fallen further than some others. Pyrford and Standard Life, despite their negative returns in the quarter, were playing the role they were expected to in the strategy. Mercer would introduce changes to this table to give a more informative picture of performance.

In response to a question from a Member he said that in the buoyant equity markets of the past view years it had been relatively to generate good returns. In the future, managers like Pyrford, who had an unconstrained approach, would be increasingly useful in navigating market volatility.

The Independent Investment Adviser suggested that the performance table was misleading because Pyrford and Standard Life had relatively high cash-based benchmarks. Mr Turner agreed this was the case.

A Member referred to the Government’s wish that funds should focus on returns in the long term rather than the short time, and suggested that a lack of monitoring in the short term might result in an unpleasant surprise in the long term. Mr Turner said he agreed, but he thought the Government was trying to lessen the burden on administering authorities by reducing the amount of detail they had to consider. The Investment Manager said that the Government was worried that a focus on the short term resulted in funds changing managers too frequently, resulting in higher costs. Officers would continue to monitor managers quarterly in order to identify whether there was a trend of poor performance.

A Member expressed concern about the use of bank accounts by terrorist organisations. These accounts might be with a bank in which the Fund was invested, giving rise to a reputational and investment risk to the Fund. He wanted assurance that any banks in which the Fund had an investment were trying to prevent such use. The US Treasury had a project on terrorist funding and on recruitment by terrorist organisation, which would be reviewing internet and phone companies; there might be reputational and investment risk to Fund here as well. The Head of Business, Finance and Pensions replied that this was a real risk. He thought that the most the Fund could do was to ask its investment managers how they addressed this risk when considering investments. The Member responded that if the companies managing internet infrastructure did not know who was using it, then they were not in control of their business, which raised questions about whether it was appropriate to invest in them. He acknowledged this was a difficult issue for an individual fund, but felt it should be a concern for the wider investment community.

RESOLVED:

1. To note the information set out in the report.

2. To note the LAPFF Quarterly Engagement Report.

3. To agree the minor updates to the Statement of Investment Principles (SIP)  as explained in section 7 of the report and to approve the revised SIP in Appendix 4.