Agenda and minutes

Apologies for absence were received from Councillors Singh and Stark.

To elect a Vice-Chair of the Pension Committee for the 2019-2020 Municipal Year.

RESOLVED –

THAT Councillor Lorna Russell be elected as Vice-Chair of the Pension Committee for the 2019-2020 Municipal Year.

There were no declarations.

There were no deputations.

a)    Councillor Hai

The Chair welcomed Councillor Hai to the meeting as a new member of the Pension Committee.

b)    New Adviser

Councillor Madlani welcomed Adrian Brown, from MJ Hudson, who was attending the meeting with Karen Shackleton as an observer. Adrian Brown was a new adviser, and was keen to attend a number of LGPS meetings, in order to gain experience and an understanding of how the meetings tended to operate.

c)     Investor Belief Statement workshop

Following on from the SRI event, it was noted that a workshop had been set up on the Fund's Investor Belief Statement which would take place on 2^nd October from 6-8pm.  This would be supported by Karen Shackleton, Dave Lyons and Nimisha Sodha. It would include important and pressing issues such as Ethical, Social and Governance (ESG), Climate Change and transparency and governance. An invitation had been sent out to Committee Members who the Chair encouraged to attend.

d)    New London Collective Investment Vehicle (LCIV) Chief Investment Officer

The Committee noted that Mark Thompson would be joining the LCIV team as their permanent Chief Investment Officer (CIO) on 2^nd September 2019 He had over thirty years of experience in the financial services industry, including holding the position of CIO at HSBC Bank UK Pension Scheme for over eight years, where there was a £28bn DB scheme and a £4bn DC scheme. Michael Pratten would remain interim CIO until Mark arrived.

There was no urgent business.

The Pension Committee’s Terms of Reference are attached for noting.

RESOLVED –

THAT the Terms of Reference of the Pension Committee be noted.

To approve and sign the minutes of the meeting of the Pension Committee held on 27^th February 2019.

It was noted that with regard to item 9 “Performance Report”, paragraph (g) on page 17 there was a typographical error and the figure in the fifth line should read “The fund had increased by 5.1%...”

RESOLVED –

THAT the minutes of the meeting held on 27^th February 2019 be approved and signed as a correct record, subject to the above amendment.

Report of the Executive Director Corporate Services

This report presents the performance of the Pension Fund investment portfolio and that of the individual investment managers for the quarter ended 31 March 2019.

Consideration was given to the report of the Executive Director Corporate Services.

The Committee noted the performance of the Camden Pension Fund investment portfolio and the individual investment managers for the quarter ended 31^st March 2019 (quarter 1 of 2019).

The Committee noted in particular that

-        The Fund portfolio had a market value of £1.658bn at 31^st March 2019 compared with £1.562bn at 31^st December 2018.

-        The UK Consumer Price Index (CPI) measure of inflation fell to 1.9% in March 2019, which was down from 2.1% in December 2018, and was the lowest rate since January 2017.

-        Total fund liabilities were estimated to be £1.928bn as at 31^st March 2019, with assets valued at £1.658bn giving a theoretical estimated funding ratio of 86%. The last full valuation was carried out based on March 2016 data and reported to Committee in September 2016. At the time, this showed a marginal improvement in funding to 76.2%, a 0.6% increase on the previous triennial valuation.

-        The proxy measure suggested liabilities had grown by 18% (or £289m) since the last valuation date. Although gilt yields were higher than at the time of the valuation (thereby decreasing the liabilities discounted by this rate), investment returns had been higher and assets had grown by £409m (or 33%) during the same timeframe.

-        As at Q1 (2019), the Fund assets had outperformed long term target set at the triennial valuation in 2016 by 15% (£215m).

Committee Members noted Appendix A “Camden Client Ranking by Manager” which detailed Camden’s exposure as clients to the overall fund or strategy managed by each Investment Manager. In future, where Camden represented greater than 5% of the Investment manager’s fund and there was a material increase due to client outflows, this would be reported to Committee on an exceptions basis.

The Committee also noted Appendix B, which presented a more comprehensive overview of the financial markets by the Independent Investment Advisor and reported the performance of the individual Investment Managers in more detail. Karen Shackleton, Independent Investment Advisor highlighted the salient points as follows:

(a)        London CIV - Baillie Gifford - This sub-fund had a good Q1, delivering a return of +12.42%, and outperformed the Index by +2.23% for the quarter but had underperformed by -2.64% for the 12 months. In terms of assets under management, the LCIV sub-fund stood at £2,470 million as at end March, an increase of £379 million since the previous quarter end. London Borough of Camden’s investment represented 11.33% of the Fund.

(b)    Harris – Harris’ stock selection had a positive impact, contributing +0.29% to the relative return in Q1 2019, however, poor stock selection detracted -0.99%. The past twelve months for Harris had been challenging, with the fund trailing its target by 14.6%.  As at quarter end, the fund had 48.1% allocated in Europe, 39.6% in the US, with the balance in Asia/emerging markets.

(c)    Insight - The fund performed positively in absolute terms (+0.16%), but in relative  ...  view the full minutes text for item 9.

Report of the Executive Director Corporate Services

This report updates Pension Committee on the assumptions underpinning the triennial valuation – the salary growth assumption and the discount rate.

Consideration was given to the report of the Executive Director Corporate Services providing an update on the assumptions underpinning the triennial valuation for salary growth and the discount rate (asset outperformance assumption).

Douglas Green, from the Actuary, Hymans Robertson, was in attendance at the meeting and summarised the main points contained in Appendix 1 “2019 Valuation: Salary Growth Assumption” and Appendix 2 “2019 Valuation: Setting the discount rate”. 

The Committee noted that, with regard to salary growth results, Hymans had modelled three scenarios as set out below:

·       Scenario 1 - 2% increase per annum for the first 3 years followed by RPI (retail price inflation afterwards)

·       Scenario 2 - 2% increase pa for the first 3 years followed by RPI less 0.5%

·       Scenario 3 - 2% increase pa for the first 3 years followed by RPI less 1.0%

Hymans had calculated a flat (nominal) rate for each scenario which gave a single effective rate as set out in the table at paragraph 2.2 of the report on page 53.

It was noted that given the expectation for longer term pay growth, proximity to the 2016 assumptions and to avoid outlier results, officers had agreed that scenario 2 (RPI less 0.5%) would be used in the triennial valuation. This gave the same nominal rate of 2.8% as was used in the 2016 valuation. Hymans predicted this would have a small increase in the funding basis of the Fund (estimated to be 0.3% better).

The Committee noted that Appendix 2 set out that the Asset outperformance assumption (AOA) which was used to determine the 20 year + returns based on a prudent estimate of returns, i.e. expecting the portfolio to do better than this at least 66% (2/3rds) of the time. Returns within the first 20 years were determined by Hymans modelling, but a discount rate was needed to assess a target funding position at the 20 year time horizon. Hymans estimated the future investment return as a margin above the long term ‘risk-free’ interest rates, using gilts (government bonds) as the base for this rate.

Hymans modelled three asset scenarios that the Fund might be pursuing in 20 years’ time, after discussing the evolution of the asset allocation with the Fund’s investment consultant, KPMG. This assumed that the Fund progressed towards deficit recovery and, therefore, towards being fully funded. For the purposes of this exercise, it was assumed that assets in riskier asset classes, such as equities, were reduced and instead safer, less volatile, asset classes were increasingly used, such as fixed income and bonds.

On this basis, the Executive Director Corporate Services agreed that the Fund should maintain its AOA of 1.6% above gilts. This was acceptable in all scenarios, albeit in the last scenario it narrowly missed the prudent level by 1%. It was noted that this alternative strategy had a 19.5% allocation to gilts and 16.5% allocation to fixed interest. Given the current 3% level of gilts and no fixed income assets this might not happen for  ...  view the full minutes text for item 10.

Report of the Executive Director Corporate Services

This report reviews the Fund’s Diversified Growth Funds and makes recommendations about the future of these mandates.

This report has an appendix which contains information exempt within the meaning of Schedule 12A to the Local Government Act 1972 and is not for publication. The appendix has therefore been circulated to Committee Members only.

If the Committee wishes to discuss the contents of a closed exempt appendix it may pass the proposed resolution identified at the end of the agenda to exclude members of the public and the press from the proceedings for that discussion.

Consideration was given to the report of the Executive Director Corporate Services, which reviewed the Fund’s Diversified Growth Funds (DGFs) and made recommendations about the future of these mandates.

Committee Members were reminded that at the last meeting a strategic decision was taken to invest £80m in the London CIV’s Infrastructure sub fund managed by StepStone. This report presented the work of the Investment Consultant, KPMG, which analysed the options for funding this mandate and also reviewed all three of the Fund’s DGF managers.

The Committee noted that the KPMG report was split into two appendices. Appendix 1 presented the KPMGs Review of DGF Portfolio and Appendix 2 contained details about individual fund managers and KPMG’s judgements about each manager’s capabilities, which was not available to the public (Part II).

Dave Lyons, Head of Public Sector Investment Advisory KPMG LLP, summarised the main points contained in Appendix 1 and explained that it set out an overview of each of the Fund’s three DGF fund managers presenting each fund’s basic facts, teams, investment approach and philosophy, risk management and client servicing capabilities. It also presented the same details on the CIV’s three DGF managers: Newton, Pyrford and Baillie Gifford.

The Fund’s three DGF managers were:

Ruffer –   They invested in protective and growth assets and set out two key objectives - not to lose money in any year and that their fund's growth was greater than returns on cash. In the past year they had failed on both objectives.

Standard Life Global Absolute Return Strategies (GARS) - looked to capture short term opportunities. They ran with approximately 30 strategies based on opportunities in the coming 3 year window.

Barings - used strategic and dynamic asset allocation to return their cash plus target with reduced volatility. They identified the best ten year asset classes, 12-18 short term trends, and had dynamic implementation. They aimed to capture 70% of equity volatility over the medium to long term.

KPMG compared a subset of DGF managers which showed that, of the Fund’s three DGF managers, since December 2013 Barings had performed best. Ruffer had a similar performance to Barings over the same period but Standard Life had struggled over the past five years. All funds however, had had lower performance that LIBOR + 3% and had, therefore, failed to deliver their minimum performance criteria regardless of their individual objectives.

Appendix 1 also gave an analysis of the 5 largest drawdowns in equity markets over the past 5 years.  Barings was the most correlated to equity markets of all the DGFs which was expected given they aimed to capture 70% of market movements. Standard Life performed the best of all DGFs in the subset which was predictable given their strategy and implementation.

As previously mentioned, the Committee noted that Appendix 2 to the report contained confidential information, relating to details about individual fund managers and KPMG’s judgements about each manager’s capabilities. Committee Members had read the appendix and would take the contents into account when  ...  view the full minutes text for item 11.

Report of the Executive Director Corporate Services

This report details the pension fund cash flow and membership statistics for the previous year and over the longer term.

Consideration was given to the report of the Executive Director Corporate Services.

The Committee noted details of the pension fund cash flow and membership statistics for the previous year and over the longer term.

RESOLVED –

THAT the contents of the report be noted.

Report of the Executive Director Corporate Services

This report presents an update to the risk register for the Pension Fund, with an action plan stating how risks will be managed.

Consideration was given to the report of the Executive Director Corporate Services.

The Head of Treasury and Financial Services explained that the Risk Register identified key risks that the Fund faced in achieving its objectives. By considering risks and assessing their likelihood and impact the Fund could focus on what action was needed to manage them.

With regard to the Risk Register set out in Appendix 1, it was noted that changes had been ‘tracked’ so new text or risks were shown underlined. Scores that had changed were also shown with tracked changes which helped to identify new changes and showed old text crossed through.

The Committee agreed that Risk 53, on page 148 should be amended to read “Climate risk” as it related to both fossil fuel impact and climate change.

ACTION BY: Executive Director Corporate Services

Referring to Risk 16 “Asset manager or bank failure”, Karen Shackleton informed the Committee that this risk would decrease as more funds moved to the London CIV, although this in turn would result in a potential increase to the London CIV risk. 

The Chair informed the meeting that at the annual general meeting of the London CIV held earlier that day, a report on the London CIVs budget had been discussed which included business objectives and prospective business for the financial year. Councillor Madlani suggested that the report should be submitted to a future meeting of the Committee for information.

ACTION BY: Executive Director Corporate Services

Dave Lyons, KPMG, referred to Risk 51 on page 147 and said that this was a “potential” risk rather than “possible” risk as investments with the London CIV would be regularly reviewed. 

The Committee asked officers to monitor Risk 42 “Changes to scheme members” on page 162. The Head of Treasury and Financial Services suggested that a comment could be added to the Risk Register to the effect that there would a small financial impact and a large shared service payment.

RESOLVED –

THAT the Risk Register be agreed as set out in Appendix 1.

          ACTION BY: Executive Director Corporate Services

Report of the Executive Director Corporate Services

This report brings Members up to date with engagement activity undertaken by the Fund and LAPFF (the Local Authority Pension Fund Forum) since the last Committee meeting.

Consideration was given to the report of the Executive Director Corporate Services.

Committee Members noted the engagement activity undertaken by the Fund and LAPFF (the Local Authority Pension Fund Forum) since the last Committee meeting.

During the last quarter LAPFF engaged with 100 companies on issues ranging from human capital management and board composition to climate change reporting and sustainability. The Government had also announced plans to replace the Financial Reporting Council (FRC) with the Auditing, Reporting and Governance Authority (ARGA). This announcement followed the Kingman Review which recommended the FRC should be disbanded, a position held by LAPFF for many years.

It was noted that all fund managers had confirmed that they were signatories to the United Nations Principles for Responsible Investment (UNPRI) and Baillie Gifford, Insight and Standard Life were also signatories to the United Kingdom Sustainable Investment & Finance Association (UKSIF). Councillor Madlani declared an interest for the sake of transparency as he was a member of UKSIF.

The Chair asked officers to circulate the LAPFF meeting dates to Committee Members.

ACTION BY: Executive Director Corporate Services

A LAPFF Forum meeting had been held on 17^th July 2019, the details of which would be reported to the next meeting.

ACTION BY: Executive Director Corporate Services

It was noted that the KPMG statement on the position of the FRC would be circulated to Committee Members.

          ACTION BY: Executive Director Corporate Services

RESOLVED –

THAT the contents of the report be noted.

Report of the Executive Director Corporate Services

This report provides a quarterly update on developments at the London Collective Investment Vehicle (CIV) in creating sub-funds for the spectrum of asset classes, on-boarding of assets and development of the CIV’s staff resource. Progress with the London CIV contributes to the Government’s pooling agenda and drive to reduce costs in the Local Government Pension Scheme (LGPS).

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Consideration was given to the report of the Executive Director Corporate Services.

The Committee noted a quarterly update on developments at the London Collective Investment Vehicle (CIV) in creating sub-funds for the spectrum of asset classes, on-boarding of assets and development of the CIV’s staff resource. Progress with the London CIV contributed to the Government’s pooling agenda and drove to reduce costs in the Local Government Pension Scheme (LGPS).

As mentioned at item 5 above, “Announcements”, a permanent Chief Investment Officer (CIO), Mark Thompson was recently appointed who would be joining in September 2019. He would be taking over from Michael Pratten who had been serving in the role on a temporary basis. Mark Thompson had over thirty years’ experience in financial services and was CIO at HSBC Bank UK Pension Scheme for over eight years. The Fund would also shortly recruit a Head of Real Assets to oversee the soon to be launched property and infrastructure funds.

It was noted that a meeting would be held on 16^th October 2019 to discuss Responsible Investment policy, details of which would be circulated to Committee Members.

          ACTION BY: Executive Director Corporate Services        

RESOLVED –

THAT the contents of the report be noted and any comments on progress be given to the Chair and officers.

          ACTION BY: Committee Members

                              Executive Director Corporate Services

Report of the Executive Director Corporate Services

This report sets out items scheduled for future agendas of this Committee together with a record of training/ meetings attended and a list of future training opportunities.

Consideration was given to the report of the Executive Director Corporate Services which set out items scheduled for future agendas of the Committee together with a record of training/meetings attended and a list of future training opportunities.

It was noted that the date of the meeting listed in Appendix 1 as 5^th February was incorrect and had been changed at the previous meeting to 3^rd March 2020. Also the dates shown for the July and November 2020 meeting were incorrect.  The Committee would be meeting during those months, but the dates would not be confirmed until next year when the timetable for all Council meetings were set for the 2020-2021 Municipal Year.

It was noted that the LAPFF conference would take place from 4^th to 6^th December 2019 in Bournemouth and Committee Members were asked to indicate their interest in attending now so places and accommodation could be booked.

ACTION BY: Committee Members

The Committee’s attention was drawn to the dates for meetings with Investment Managers shown at the bottom of Appendix 1 on page 202. Councillor Madlani encouraged all Committee Members to attend these meetings.

          TO NOTE: Committee Members

Councillor Johnson referred to Appendix 2 and informed the meeting that she had attended most of the Specialist Pension Services (SPS) seminars, which she had found useful. 

RESOLVED –

THAT the report be noted.

There was no urgent business.