Apologies had been received from Councillor O’Malley and Councillor Naylor had been nominated as his substitute for the meeting.

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.

There were no declarations of interest.

To approve the minutes of the meeting held on 25 June 2012.

The minutes of the last meeting were agreed as a correct record and the Chairman 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 over the quarter ending on 30 June 2012, investment activity and the latest portfolio valuation.

The Committee heard that performance was in line with expectations and that Henderson had outperformed the benchmark weight in UK corporate bonds.  This was linked to their active management in this area which sought to outperform the market.

The Committee was satisfied that no further information was required.

It was RESOLVED that 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.  (Commentary and presentation to be given by William Marshall, Hymans Robertson.)

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 of Hymans Robertson provided the Committee with an overview of the market.  He reported that in terms of manufacturing performance management indicators the general trend was more negative over recent quarters than it had been previously as there were concerns over global growth and the situation in the Eurozone.  Indicators worldwide appeared to have reached a plateau.  In Quarter 2 there had been a movement from equities to safer havens such as bonds.  However in quarter 3 equities were seen to be improving.  This potentially arose from further Quantitative Easing and other economic stimuli.  The 3-month LIBOR-OIS spread demonstrated an easing of pressure and better liquidity so that in the short term there was no sign of market stagnation.  Government bond yields were falling which could prove problematic to the pension industry as a whole but short term moves within the Eurozone bond markets were more positive.  In terms of property investment, rental income had performed well but was coming under more pressure as voids increased.  The key trend for property was that quality lets were being rewarded.

The Committee noted that the asset allocation within the Fund was broadly in line with targets.  Mr Marshall outlined the range of approaches being used by the different Fund Managers.  The Committee also considered the need to:-

• (comparatively) assess the passive fund management approaches being used by L&G and HGI, monitoring and evaluating performance against targets;
• put in place a more  formal re-balancing regime for the Fund (in the light of the additional mandate just appointed), a proposal for which would be brought to the next meeting.

The Committee also received an update on the reform of the Local Government Pension Scheme (LGPS). Staff Observer, Mike Potts commented that the there was a general view that good progress had been made and the three main Trades Unions had encouraged their membership to vote in favour of the reform proposal.  The Committee considered that while career-averaging (and associated other changes currently proposed) was a key to affordability of the LGPS, it was likely that the scheme would need to be further reviewed in future years.

Having discussed the information received, the Committee was satisfied that no further information was required.

It was RESOLVED that:

1.  The quarterly reports of L&G and Henderson be NOTED.

2.  That Henderson’s and L&G’s investment policies be APPROVED.

3.  That the current asset allocation be AGREED.

To introduce Baillie Gifford & Co as the manager who has been appointed to the Diversified Growth mandate.  (Presentation to be given by Tom Wright and Chris Murphy of Baillie Gifford & Co.)

The Committee received a report of the Director of Finance and Corporate Services the purpose of which was to introduce Baillie Gifford, the fund manager appointed to the Diversified Growth mandate.

Tom Wright and Chris Murphy of Baillie Gifford gave a presentation to the Committee on the structure, and objectives of their Firm and of their Diversified Growth Fund.  They stressed the independence of the Baillie Gifford partnership and its active investment management.  They had many public sector clients and long-standing relationships with a number of these.  The fund itself contained seventeen asset classes which were diversified across a range of higher expected return investments and a number of tactical ‘safe haven’ investments.  The asset allocation would be changed if alternative opportunities became apparent and asset holdings would be increased or reduced within the fund as market conditions changed.  In the event that the DGF itself invested in other Baillie Gifford managed funds, there would be no doubling of fees.  It was considered important for the fund to be well-diversified in the present climate so that there was no over-reliance on one asset class.  Currently the fund was providing a return on investment of 15% but this could not be expected to continue at this level.

The Committee heard that the current fund size was £2.5 billion with a capacity of £5 billion.  The performance objective for the next five years was to achieve equity-like returns in the longer-term, protection of capital in downturns and the avoidance of lurches in value.

Members thanked Mr Wright and Mr Murphy for their informative presentation.

It was RESOLVED that the report be NOTED.

To consider the ISA 260 report prepared by the Auditor in relation to the 2011/12 Pension Fund accounts, prior to the issue of the Auditors’ Opinion.

The Committee received a report of the Director of Finance and Corporate Services the purpose of which was to allow consideration of the Annual Governance Report prepared by the Auditor in relation to the 2011/12 Pension Fund accounts, prior to the issue of the Auditors’ Opinion.

Paul Grady and Paul Jacklin from the Audit Commission presented the Annual Governance Report.  They stated that the Pension fund Statements had been prepared to a high standard and compared favourably with those of peer authorities.  No material changes were made between the draft and final Statements and a few disclosure errors had been corrected as detailed within the report.  In terms of the findings on significant risks, assurances had been obtained from Legal & General on their valuation, amendments were needed to ensure that all transactions were flowing correctly through the Pension Fund bank account, data migration testing had confirmed that Pension fund data was migrated accurately in the upgraded software.  Consequently, the Auditor was making one recommendation for improvement in relation to the accuracy of income and expenditure transactions flowing correctly through the Pension Fund bank account.

It was RESOLVED that:

1. The final report of the Auditor to those charged with governance be NOTED
2. The letter of Representation for signature be APPROVED
3. The action plan be AGREED.

To approve the 2011/12 Pension Fund Accounts and Pension Fund Annual Report (including any amendments to the statutory content of the Annual Report).

The Committee received a report of the Director of Finance and Corporate Services the purpose of which was to seek approval for the 2011/12 Pension fund Accounts and Pension Fund Annual Report.

The Head of Capital Finance advised the Committee that the Pension Fund Accounts had been prepared in line with the code of practice and adjusted in accordance with the Auditor’s report, with all disclosure errors corrected.  A key point for the Committee’s attention was that net assets had increased but at a lower rate than in previous years.  Transfer value levels both in and out had changed with a significant item in 11/12 being the transfer of legal staff to the Merton fund.  She emphasised that the Auditor had stated that the Accounts gave a fair view.

The Committee noted that as the Pension Fund was seeking a return on investment the nature and extent of risks arising from the financial instruments would be higher than what would be acceptable for the Council’s Statement of Accounts.

It was RESOLVED that:

1. The Accounts of the Pension Fund for the 2011/12 financial year be APPROVED.
2. The Pension Fund Annual Report for the 2011/12 financial year (including any additional amendments to the statutory content of the Annual report) be APPROVED.

To include a short training session for members on one topic within the Knowledge & Skills Framework.

Reports of the Director of Finance and Corporate Services attached.

The Committee received a report of the Director of Finance and Corporate Services reporting the ongoing decision of the Committee to include training reports within the agenda of meetings.

William Marshall of Hymans Robertson made a well-received presentation to the Committee on Investment Performance and Risk Management.  This included an outline of the Myners’ Principles, the importance of monitoring asset returns relative to the liabilities, the main pension scheme risks, the pension fund’s approach to risk management and the interpretation of performance reporting from investment managers.

It was RESOLVED that the report be NOTED.