Agenda item

A review of the investment strategy is being undertaken alongside the 2022 triennial valuation. The Committee will discuss the possible changes to the strategy in a committee workshop in 1Q23 and the revised strategy will be agreed at the Committee meeting in March 2023.

The Group Manager for Funding, Investment & Risk introduced this report to the Panel. She informed them that the objective of the review is to:

·  Determine the optimal asset allocation to deliver the return required in the funding plan to maintain stable and affordable contributions.

·  Ensure the Risk Management Strategies remain appropriate and add value to the overall strategy given the change in the market environment.

·  Consider if new investment opportunities including Social/Local investing could be built into the strategy.

·  Consider whether the net zero ambition can be accelerated, and the climate related targets brought forward, without detracting from the overriding return objective.

Steve Turner, Mercer addressed the Panel and highlighted areas from within Appendix 1.

Key areas of focus for the review:

Review of the Fund’s core investment beliefs and principles: How this influences the design of the investment strategy and its implementation, taking into account key investment and ESG objectives and any potential constraints. We acknowledge that the Fund’s investment beliefs may evolve as a result of the investment strategy review, which we would look to capture.

Overriding objective: The investment strategy needs to have a minimum expected return that supports achieving the discount rate of CPI +2.4% p.a. (margin above CPI is subject to change as part of the valuation), with a desired level of probability and acceptable level of downside risk.

Other principles and goals: Achieving the Fund’s climate targets (e.g. net zero carbon emissions by 2050 and interim reduction targets) and broader Environmental Social and Governance (ESG) commitments/ambitions. We will consider the impact of asset allocation decisions on the ability to meet targets, and whether potentially strengthening climate targets (e.g. considering net zero by 2045) would constrain the asset allocation in any way.

Asset allocation: is the portfolio fit for purpose?

Review of underlying asset classes and their roles, and revisiting the rationale for their inclusion in the strategy in light of current markets and long term prospects.

Pauline Gordon asked if the allocation to Private Markets had gone up in terms of the proportion of assets within the scheme as a result of falls in most other asset classes and should the illiquid Private Market assets be pulled down.  

Steve Turner replied that this had not been as much of a dramatic impact on the Fund because it is not as heavily exposed to hedging assets. He said that adding a Local Social Impact portfolio at around 1 – 2% initially was being considered and that if agreed small amounts would be allocated to it at a time.

The Head of Pensions commented that from a risk management perspective it would be interesting to include in the review whether asset allocation without LDI could achieve CPI +2.4% with similar risk.

Pauline Gordon commented that they would be assessing a different set of figures now, versus if the review had taken place 12 months ago.

Steve Turner replied that there had been a big shift in numbers over the past six months and had seen total returns on asset classes increased.

Jackie Peel commented that she liked the clean sheet approach being taken and said that the target -v- risk factors have to be balanced. She added that the decision needs to clear as to why we include what we will do in the asset allocation and if possible she would welcome a guide to the Investment Strategy.

The Group Manager for Funding, Investment & Risk replied that they would discuss whether an appendix to the Investment Strategy statement could be produced.

The Director, One West acknowledged that the timescales involved in the review were quite tight with the Committee meeting expected to take place on 17^th March 2023. He said that if the review was not complete by this date that it would be allowed to continue. He added that he wanted to enable all stakeholders to have an active voice in the review.

The Panel RESOLVED to note the report from Mercer and specifically sections 4.3 and 4.7 of the officer’s report.