Agenda item

If Members wish to discuss Appendix 4, they are invited to pass the following resolution:

Having been satisfied that the public interest would be better served by not disclosing relevant information, the Committee resolves that in accordance with the provisions of Section 1000(A)(4) the public 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 1 of Schedule 12A of the Act as amended.

The Assistant Investments Manager presented the report. He highlighted three matters:

·  paragraph 4.13: State Street had been invited to attend the next meeting of the Investment Panel to discuss the decrease in the overall size of the State Street pooled funds in which the Fund is invested

·  paragraph 4.14: because the reporting of Partners performance data would be lagged by a quarter, the Investment Panel had recommended that Officers verbally update the Panel and the Committee verbally on the latest performance of Partners

·  paragraph 6.4: since the end of the reporting quarter volatility in equity and bond markets had had a negative impact on the Fund

Mr Finch drew attention to the information in paragraph 6.4 that the 0.5% decline in long-dated gilt yields since June could increase the liabilities of the Fund by 7-10%. In the three months to the end of June the performance of the Fund had lagged the Local Authority average because of its higher exposure in bonds. Hedge funds had slightly underperformed, but were likely to have helped overall performance during the period since quarter end. The drivers of performance in the period were outside the control of the Committee and the portfolio managers. A Member asked about the prospects for bond rates and their impact on the Fund. Mr Finch said that bond rates were at an historic low and in his view were likely to remain low. The actuary uses bond rates in the valuation so the low level of rates will increase the value of liabilities. The Fund had to fund liabilities for a period of 60-80 years, and, as he had mentioned, the decline in long-dated gilts since June could already have had a significant impact on the liabilities of the Fund. On the other hand, it was now thought that basing pension increases on CPI rather than RPI could reduce liabilities by as much as 1.5% rather than the initially projected 0.5%. In addition, there was a breathing space for the Fund, since contribution rates did not have to be reset until April 2013, by which time European debt problems should have been clarified.

A Member said that State Street should have notified the Fund about the large redemptions from their pooled fund. An enhanced indexation fund needed to be of a scale to offset the transaction costs. The Assistant Investments Manager agreed that they should have notified the Fund and their failure to do so would be taken up with them. Mr Finch added that State Street’s broader investment base provided some comfort, but it was necessary to get a better understanding of what they were doing, which was why they had been invited to the next meeting of the Investment Panel.

A Member asked about rebalancing bonds against equities. The Investments Manager said that the situation was being carefully monitored; at present the ratio was just under the tolerance level. In such volatile markets it was not sensible to rebalance too soon as this would increase transaction caost.It was likely that rebalancing would take place in due course.

The Chair asked how the impact on the Fund of the changes in financial assumptions detailed in section 6 of the report would be communicated to employers. The Investments Manager replied that the finance managers of the employers would be invited to an investment forum.

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