Agenda item

This report provides updates on the following matters in respect of the three months to 31 December 2020:

·         Investment asset allocation

·         Independent Advisor’s Market Commentary

·         Update on the Fund’s accounts and annual report

·         Funding position update

·         Investment Performance

·         London Collective Investment Vehicle (LCIV) Update

·         Stewardship Update

The Head of Pensions and Treasury introduced the report which provided an update on the Pension Fund and investments. It was highlighted that the Pension Fund audit completion report had been circulated and published as a supplementary appendix to the report.

In relation to performance in the last quarter, it was explained that the fund outperformed the benchmark by approximately 50 basis points with an absolute return of 6.81%, largely due to growth in equities, the Multi-Asset Credit fund, and private equities. It was noted that the fund value was now nearly £1.6 billion.

It was noted that the Pensions Committee and Board had received a report on the 2019-20 Pension Fund audit at a previous meeting and that the audit completion report provided some minor updates. It was reported that there were no significant issues. It was explained there had been one outstanding item relating to the reconciliation of membership data but this had now been resolved; this just needed final confirmation and so had not been updated in the audit completion report.

The Pensions Committee and Board noted that the Pension Fund audit opinion had been delayed; it was enquired whether this was solely due to delays caused by the Covid-19 pandemic or whether these delays were likely to recur. The Head of Pensions and Treasury explained that the auditors had been ready to sign off the audit in November 2020 but that the National Audit Commission had issued a directive that the audit opinion for the Pension Fund and the Council should be issued at the same time. It was noted that the delays had mainly resulted from Covid-19 and it was not anticipated that these issues would recur.

It was confirmed that the section of the report on the portfolio allocation against benchmark, on page 74 of the agenda pack, should state that there had been a £97 million increase in the value of the Pension Fund between September and December 2020.

Some members noted that the report provided an update on companies operating in Occupied Palestinian Territory/ Israeli Settlements and enquired whether the Pension Fund had a policy for these sorts of investments. The Head of Pensions and Treasury explained that the Pension Fund had an Investment Strategy Statement and a policy on Environment, Social, and Governance (ESG) issues which provided guidance in these situations.

Some members stated that this was not just an ethical consideration and that investments should adhere to international law; some concerns were also raised that the language used in section 16 of the report, particularly 16.6 and 16.7, was slightly vague. It was noted that the UN had identified a list of companies that were involved in illegal activity and that due diligence had established that the Pension Fund had some investments with some of these companies. It was acknowledged that it was difficult to disengage from these investments but some members felt that the Pension Fund should move away from these investments. It was suggested that the Palestine Solidarity Campaign could send a deputation to a Pension Committee and Board meeting to explain their views.

The Head of Pensions and Treasury explained that the Pensions Committee and Board had previously decided to deal with ESG issues through the Local Authority Pension Fund Forum (LAPFF). It was noted that LAPFF engaged with businesses on behalf of the fund and this method was proven to be a better, long term way to result in changes to organisations’ practices. It was also stated that the companies that had been identified were not necessarily carrying out illegal activity.

The Independent Advisor commented that the problem with disengaging from investments was that the shares would be bought by another party with no interest in the issues and this would not result in any changes. It was also noted that, a number of times in the past, the Pensions Committee and Board had considered whether to invest passively or actively and had always chosen to invest passively; as a result, the fund’s investments were based on indices and this could involve a small investment in a number of things that may not have been chosen if the fund had an active investment. It was added that, even with active management, it was difficult to choose exactly where all investments were made, particularly on a larger scale.

The Pensions Committee and Board enquired what actions the Pension Fund could take, whether this issue would only be resolved by removing all investments from the relevant manager, and how this would impact the Pension Fund. The Independent Advisor noted that Legal and General Investment Management (LGIM) manages all of the Pension Fund’s equity portfolio and some non-equity elements. It was explained that LGIM was the main provider and that the Pension Fund’s portfolio had been developed over nine years based on the principles set out in the Investment Strategy Statement. The Independent Advisor commented that removing these investments would be a monumental change and that this would be a drastic option. It was added that the ultimate role of the Pension Committee and Board was to ensure a financial return for the pension scheme. Some members acknowledged that there had been significant improvements in ESG issues and investments in recent years but that, due to globalisation, the issues were often more complex in practice.

Steve Turner, Mercer, noted that there were some significant barriers to disinvesting in this case. It was added that, in the letter from the Palestine Solidarity Campaign, it had been suggested that it was possible to exclude certain stocks; it was noted that this had been done by the Avon Pension Fund who had invested in the Global Low Carbon Equity Index Fund. However, it was explained that the Avon Pension Fund had the same investment in this area as the Haringey Pension Fund; the investment did not exclude any stocks and it was questioned whether the point made by the Palestine Solidarity Campaign was technically correct.

Some members noted that the Pension Fund had undertaken to reduce its exposure to high carbon activity in the past few years which had been highly successful; it was suggested that a similar approach could be taken with this issue. Some other members noted that there were specific, low carbon investment options and, although there had been improvements in ESG, there were no specific investment options for this issue.

The Head of Pensions and Treasury explained that the UN Human Rights Office report listing companies with business activity connections to Israeli settlements did not provide a legal opinion on business activities. It was noted that the Palestine Solidarity Campaign was asking the Pension Fund to implement screening and due diligence processes to consider illegal activity when making investment decisions and to state in the Investment Strategy Statement. It was explained that this would be unusual and may not be possible under the Ministry for Housing, Communities, and Local Government guidelines. It was also noted that LGIM made decisions based on their processes and would not get involved in political matters. Although the Pension Fund could have discussions with LGIM, the only way to completely avoid these investments was to disinvest over £800 million, which was over half of the fund.

The Head of Pensions and Treasury explained that it would be difficult and possibly risky for the Pension Fund to include specific references to special interest groups or topics within the Investment Strategy Statement. The Independent Advisor added that LGIM was unlikely to be invested in anything that had been definitely deemed illegal as this would result in reputational damage. It was also reiterated that the ultimate responsibility of the Pensions Committee and Board was to ensure the best financial returns for the fund.

Some members acknowledged that it would not be possible to immediately remove any exposure but that there could be a commitment to reduce exposure in the future, specifically when considering future investments. The Head of Pensions and Treasury explained that the issue would be committing to something that was not necessarily within the control of the Pensions Committee and Board. It was commented that it would be more achievable to include a generic statement within the Investment Strategy Statement which did not mention specific, special interest groups or issues. Some members of the Pensions Committee and Board felt that it would not be achievable to implement this and other members felt that it would be an aspirational objective.

The Assistant Director of Finance noted that there were several paragraphs in the Investment Strategy Statement which related to ESG considerations. It was noted that the points made about legality were interesting and, although this was not included in the Investment Strategy Statement at present, it may be useful to consider. It was highlighted that legal advice would be required but that it should be possible for the Pensions Committee and Board to consider some wording around legality at a future meeting.

Leigh Lloyd-Thomas, BDO, noted that an audit progress report had been issued in November 2020 and it had been anticipated that the audit would be finalised before the statutory deadline at the end of November 2020. However, following direction from the National Audit Commission prohibiting Pension Fund accounts to be signed off without the main Council accounts. It was noted that the audit completion report had been circulated and it was anticipated that the Pension Fund and Council accounts would be signed off by the end of March 2021.

It was explained that the audit completion report provided an update and highlighted any outstanding work. It was highlighted that no outstanding work was material and it would not prevent the auditors from giving a true and fair opinion on the Pension Fund accounts. It was explained that the auditor had requested some additional information in relation to Pension Fund liabilities relating to recent legal cases such as GMB, McCloud, and Goodwin. The other issue that the auditor wanted to confirm related to whether the valuations of investments in illiquid and unquoted assets, such as property, infrastructure, and private equity, had included the impact of Covid-19. It was explained that, following some additional work, the auditor was content that each of these investments had updated valuations which took account of Covid-19.

It was explained that BDO was prepared to give a true and fair opinion; it was noted that the Council accounts were due to be closed after the Corporate Committee meeting on 17 March 2021 and that the Pension Fund would be closed shortly afterwards.

RESOLVED

To note the information provided in respect of the activity in the three months to 31 December 2020.