Agenda item

The Committee considered a report of the Director of Corporate Resources which was accompanied by appendices produced by the Fund’s Independent Investment Advisor and Investment Consultants Hymans Robertson. The report recommended a small number of changes to the Leicestershire Fund’s strategic investment benchmark and portfolio structure. A copy of the report and appendices marked ‘8’ are filed with these minutes.

The Committee welcomed Emma McCallum and Andy Green from Hymans Robertson (Hymans) to the meeting.

Leicestershire Pension Fund targeted a 5.9% investment return per annum. However, due to market conditions, in particular low interest rates and credit spreads the Fund’s investments were currently expected to earn 5.5% per annum. Members were assured that the Fund’s 2019 valuation of the funding level and deficit calculation was based upon an 80% likelihood of meetings the investment return, equivalent to 3.8% per annum. This meant that the revised 5.5% assumption was still comfortably ahead of the Fund’s target. Furthermore, falling inflation and the expected move from RPI to CPI was also expected to result in a small improvement in the funding level, however not materially. As a result, given current market circumstances, Hymans recommended no significant changes to the Fund’s asset strategy.

Arising from the discussion the following points were noted:-

i.       The switch from RPI to CPI post 2030 meant it would be possible to hedge the sensitivity of CPI pension increases with index-linked gilts, however, index-linked gilts remained expensive. As a result the Committee supported reduction of the strategic allocation to index-linked gilts, with reallocation to manage the currency hedge programme managed by Aegon.

ii.     Hymans assumed returns relative to expected CPI, assuming a 1% difference between expected RPI and CPI, which was consistent with the assumption made by the Fund’s Actuary in 2019. Overall the Fund and advisors did not believe the move from RPI to CPI would overly impact on the value of liability for the Fund, or assets with small holdings in index-linked gilts.

iii.    The Fund remained underweight in property, which was considered appropriate due to current market conditions and illiquidity. It was evident that Covid-19 had accelerated the transition away from the high-street in regard to commercial property, and it was difficult to predict its return with a 20% fall of its capital value, despite supermarkets strong position.

iv.   It was recommended that the Fund look at alternative property investments which covered purpose built rental accommodation blocks, as such property had proved most resilient during the crisis. The diversification away from commercial property holdings was considered positive by the Committee and it was agreed that there needed to be a focus on climate friendly sustainable properties. The Fund would consider such diversification via either LGPS Central or existing managers as opportunity arose.

v.               It was recommended that the Fund consider an allocation to Adams Street Partners secondaries fund. This was considered more suitable than Aberdeen Standard secondaries due to its earlier stage of the programme, which would result in more throughput for the Fund. Secondly, Adams Street would look at specific holdings that they were already aware of and hold bigger assets in a small number of funds which would provide better visibility of what was being invested in.

vi.             Hymans had considered different allocations per region for currency hedging. On balance it was felt the difference between strategic and longer-term analysis was not worth the complexity in the long term.  Furthermore, Aegon’s mandate allowed the manager to implement its judgement regarding weighting, for example as at end of December it had increased weighting to 60% rather than 50% on the dollar, due to consideration of regional differences and hedging as it saw fit.

vii.            It was further recommended that the Fund reduce its foreign currency hedge weighting from 50% to 30%. Due to the size of the programme (£850m) it was expected the positioning would need to be gradual across months. The Director of Corporate Resources would consult with Aegon and the Fund’s investment consultants regarding the best approach.

viii.          In response to queries regarding Ruffer Investment Manager the Fund’s Investment Consultants were looking into the background of decisions that had been made regarding investment in Bitcoin. It was believed that Ruffer saw such investment as an alternative to gold as it had no economic dependency of a developed economy linked to it.

RESOLVED:

a)    That the revised strategic benchmark for the Fund, as shown below, be approved;

b)That the Investment Subcommittee consider, over the course of 2021, the changes necessary to align the Fund’s investment with the revised strategic allocation and relevant product launches by LGPS Central and other investment managers;

c) That the Director of Corporate Resources, following consultation with Aegon and the Fund’s investment consultants, be authorised to determine the appropriate time to reduce the Fund’s foreign currency exposure within the Aegon Currency Hedge mandate from 50% to 30%.