Agenda and minutes

Apologies had been received from Cllr Churchill and Cllr Gibbons had been nominated as her substitute.

In accordance with the Members’ Code of Conduct, Members are requested to declare any interests orally at the start of the meeting and again immediately before consideration of the matter. Members are reminded to specify the agenda item number to which it refers and the nature of the interest being declared.

No declarations of interest were made.

To approve the minutes of the meeting held on 20 November 2012 – attached

The minutes of the meeting held on the 20^th November 2012 were agreed as an accurate record and the chair was authorised to sign them.

To report performance, investment activity and the latest portfolio valuation.

The Committee received a report of the Director of Finance and Corporate Services, the purpose of which was to report performance, investment activity and the latest portfolio valuation. Malcolm Smith, Senior Accountant, and William Marshall, Investment Consultant, were in attendance to present the report.

The Committee heard that the Fund was predominantly passive in outlook and that in general, relative performance was as expected within the parameters. The variation to the index within property was generally favourable. The Baillie Gifford return of approximately 3% for the quarter was on track for the annual performance target. It was also up 2.5% in January, which would be viewed in the context of the wider market performance.

It was noted that the Baillie Gifford Diversified Growth Fund (in which the Fund has a holding) had closed to new investors.

The 31 December overweighting shown in equities was prior to end-of-quarter re-balancing and would usually revert to more normal levels in January (subject to any subsequent market movements). The difference between the internal benchmark of the Henderson Pacific Rim equity fund (4.8% as stated in the footnote) and that of the Fund as a whole (for that region) was noted.

It was RESOLVED that the contents of the report be NOTED.

To note the fund managers’ quarterly reports, approve the proposed investment policies and agree the Fund’s overall approach to asset allocation.

The Committee received a report of the Director of Finance and Corporate Services, the purpose of which was to provide the fund managers’ quarterly reports for consideration, seek approval of the proposed investment policies and the Fund’s overall approach to asset allocation.

William Marshall, Investment Consultant, was in attendance on behalf of the Fund’s investment advisors, Hymans Robertson, to provide a market update.

The report dated one month from the quarter end showed a potential requirement for rebalancing between property and equity. Property was persistently underweight at -1.4% at the quarter end at -1.7%, one month on, however this was still within the range of +/-4%. It would not justify selling other asset classes to rebalance at this stage as it was broadly in line with the strategic benchmark when aggregated with other classes, however it would be closely monitored.

Cash was currently being held in preparation for a transfer value to Royal Borough of Kingston upon Thames relating to staff for the H&R / Payroll shared services. The Fund would be underweight in cash once this was paid.

The Committee discussed the circumstances under which different types of rebalancing took place and noted that decisions related to property rebalancing would be taken by the Committee.

Mr Marshall updated the Committee on market returns up to the end of February 2013 and provided outcomes of relevant news stories including the review of future RPI, overseas bond investments and the Italian election. Markets had been strong with developed equity returns in double digits for the year-to-date. Bonds were down, over the equivalent period (but not by a significant amount) and the weakness in sterling was due to concerns about the economy.

The sentiment of the economy was that not much had changed over the last quarter. There had been a significant percentage decrease in Government bond yields since the last valuation. 30-year Government bond yields were generally trading within range and had seen a slight increase between September and December last year. Eurozone 10-year government bond yields had narrowed making borrowing easier for Italy and Spain.

Sterling investment-grade credit reflected the additional cost of corporate debt compared to government debt. Corporate bonds had done well as investments which was beneficial to the Fund given its level of corporate bond exposure. The UK property IPD Index was broadly on track.

It was RESOLVED that the contents of the report be NOTED.

To report on the work undertaken comparing the respective approach of the Fund’s managers, L&G and HGI, to passive management.

The Committee received a report of the Director of Finance and Corporate Services, the purpose of which was to compare the respective approach of the Fund’s managers L&G and Henderson, to passive management.

William Marshall presented some slides summarising the results of a questionnaire enquiry sent on the Fund’s passive managers.

Over 55% of the Fund was now managed passively and the L&G and Henderson approaches showed some differences.  (Henderson continued to manage bonds actively and UK and European equities on an enhanced index basis.)

Passive management aimed to deliver the benchmark as opposed to add value and was becoming increasingly prevalent, with 42% of all UK pension fund mandates managed passively. The benefit of the market capitalisation benchmark was that it becomes self- rebalancing.

The Committee heard that one of the key roles of a passive fund manager was to track and respond appropriately to index changes while also maintaining the benchmark. It was clarified that Henderson were trying to match the benchmark for Emerging Markets rather than outperform through their optimisation approach, which reflected a relatively small proportion of universe stocks.

The Committee discussed comparisons of the proportion of passive funds, fees (including external costs) and approaches to stock lending between L&G and Henderson. It was agreed that a more detailed report on this issue would be brought back to the Committee.

It was RESOLVED that the contents of the report be NOTED.

To inform the Committee of (i) the appointment of Grant Thornton UK LLP as the Fund’s Auditor for the 2012-13 Audit of Accounts and (ii) the proposed audit fee.

The Committee received a report of the Director of Finance and Corporate Services, the purpose of which was to inform the Committee of the appointment of Grant Thornton UK LLP as the Fund’s Auditor for the 2012-13 Audit of Accounts and the proposed audit fee.

The Committee heard that the Auditors would be in attendance at the next meeting and all questions could be directed at that time. Attention was drawn to the reduction in fees as a result of the new arrangements. It was clarified that fees would be paid in accordance with the contract between the Council and the Audit Commission.

It was RESOLVED that the contents of the report be NOTED.

To inform the Committee in outline of the Actuary’s proposed approach to the 31 March 2013 Fund Valuation.

The Committee received a report of the Director of Finance and Corporate Services, the purpose of which was to inform the Committee in outline of the Actuary’s proposed approach to the 31 March 2013 Fund Valuation.

Steve Law and Peter Summers, on behalf of Hymans Robertson, were in attendance to make a presentation to the Committee. The Committee heard about the role of an actuary, the purpose of valuation and various assumptions that must be made.

The Committee discussed mortality and longevity analysis and the shift in the balance of active and retired members. It was anticipated that the launch of auto-enrolment would improve the outlook, other things being equal.

Possible variations on the 2013 outlook of funding levels and contribution rates were discussed. There was a need to consider the approach of different type of employers within the Fund, particularly as it was likely to increase with the inclusion of Academies as new employers.

It was RESOLVED that the contents of the report and presentation be NOTED.

To inform the Committee of the latest developments regarding the revised LGPS scheduled for implementation from April 2014.

Reports of the Director of Finance and Corporate Services - attached

The Committee received a report of the Director of Finance and Corporate Services the purpose of which was to inform the Committee of the latest developments regarding the LGPS scheduled for implementation from April 2014.

The Committee were advised that no formal comments were submitted by the Council and that the differences in the timescales of the regulation and legislation implementation were intended to be complementary.

It was RESOLVED that the contents of the report be NOTED.