Agenda item

This report provides the Pensions Committee and Board (PCB) with the following updates on the Pension Fund’s performance for the quarter ended 30 September 2024:

Overview of fund performance including funding position update

Independent advisor’s market commentary

Investment manager performance

Asset allocation

The quarterly investment performance update for the pension fund, as of September 30, 2024, was presented, with Tim Mpofu providing an overview. The report included an appendix item on the exempt agenda. The recommendations in the report proposed two actions: first, to note the investment performance information and second, to invite London CIV and CBRE to present an indirect real estate pooling solution at the next Pensions Committee and Board meeting.

As of September 30, 2024, the pension fund's assets under management had grown to £1.92 billion, showing stable growth over the past five years. While the fund had slightly underperformed its benchmark in most periods, it was performing well in line with its long-term objectives. The most recent funding level estimate was 146%, a significant improvement from the funding level of 113% at the last triennial valuation. The next actuarial valuation exercise was to take place in March 2025, which could potentially result in changes to employer contributions and investment strategy.

Regarding the asset allocation, the fund had a significant overweight position in equities, which had performed well recently. However, this meant the fund was taking on more risk compared to its Strategic Asset Allocation. To address this, rebalancing options were being considered by Officers in consultation with Mercer, which included topping up underweighted asset classes such as multi-asset credit and index linked gilts. It was noted that some rebalancing activity might need to wait until the new year due to timing issues associated with the respective trading dates.

Alex Goddard, Mercer, elaborated on the need for rebalancing, explaining that the strong returns in equities had led to the overweight position. Some asset classes, like property, were illiquid, making rebalancing more difficult. One proposed rebalancing action was to top up the multi-asset credit allocation, which was underweight by 2.2% as of September 30, 2024. This could be done by the end of January. Additionally, the possibility of increasing the allocation to index-linked gilts was discussed, as they could help offset risks in the portfolio during periods of market stress or interest rate changes.

The fund also had £23 million in cash as of September 30, 2024, invested in short-term money market instruments, yielding an attractive return. It was proposed to allocate some funds to cash as part of the rebalancing process, enabling adjustments to other parts of the portfolio in the coming year.

The Committee expressed concern about reducing the equity position until a proper review of the private equity holdings had been conducted. It was argued that holding gilts could increase liabilities if interest rates moved unfavourably, with the potential for weak capital gains. The concern was that locking interest rates into the portfolio for a 30-year liability would not be sustainable for managing the pension fund, which caused significant discomfort to members.

-       In response to questions about the fund's performance, it was noted that the fund had performed in line with the benchmark, which showed a 16% return, while equity markets had outperformed with a return of 23-24%. This highlighted a consistent underperformance, with the fund losing money compared to the market. There was also a lack of strategic rationale for increasing property holdings at that time, and it was suggested that further discussions on asset allocation were needed.

-       It was clarified that there were no plans to reduce the strategic allocation to equities. The agreed allocation was 40%, and a review of the investment strategy was planned. If there were opinions that the allocation should be higher, that would be the appropriate time to discuss it. Currently, the allocation was at 46%, significantly above the target, following a period of substantial gains in funding levels.

Councillors sought to understand the recommended amount of cash to hold, agreeing with Keith Brown that holding cash long term was not a smart strategy, though it could be acceptable in the short term. They also questioned whether the focus on index-linked gilts should be limited to UK-based ones, or if other options could be considered.

-       Regarding the index-linked gilts, it was confirmed that it was possible to invest in overseas index-linked assets, such as US Treasury Inflation-Protected Securities (TIPS). However, it was explained that one of the main reasons for holding index-linked gilts was their strong alignment with UK liabilities, as their coupon income rises with UK inflation, and they are sensitive to UK interest rates. While overseas options would move similarly, they wouldn't match UK liabilities as closely. Therefore, most schemes typically stick to UK-based index-linked gilts.

Councillors asked for clarification on how long cash should be held, even in small amounts.

-       It was suggested that cash be held for a short period, likely until the end of January, if pending investment in MAC. If more cash were held for rebalancing, such as for property, it would likely be for a few additional months as options for secondary market trades were explored. It was emphasized that this would not be a long-term strategy, and the situation would be reviewed at the next committee meeting.

RESOLVED:

This report was noted and agreed to invite London CIV and CBRE to the next committee meeting.