NOTES OF PENSIONS COMMITTEE
Date: 5th October 2011
Time: 10.00 – 1.55 pm
Place: Room 128, Shire Hall
Members Present: Councillors J Batchelor, S Count (Chairman), A Melton, D Seaton
Officers: S Dainty, K McWilliam, P Potter, R Sanderson, P Tysoe
Apologies: Councillor N Guyatt,
Officer apologies: R Bridge, N Dawe
76. APPOINTMENT OF CHAIRMAN
Following the interim appointment at the last meeting of Councillor Guyatt (due the
resignation of the Councillor Oliver, the Cabinet Member for Resources and Performance),
and his resignation at the end of that meeting, it was now necessary to appoint a new
chairman.
The Committee agreed to appoint Councillor Steve Count, the current Cabinet Member for
Resources and Performance, as the chairman for the remainder of the Municipal Year.
77. DECLARATIONS OF INTERESTS
Councillor A Melton declared a personal interest as his wife was clerk to Chatteris Town
Council and a member of the pension scheme, and his daughter was a serving police
officer with Cambridgeshire Constabulary.
Councillor D Seaton declared a personal interest as his father was a member of the
Pension Scheme.
Councillor Batchelor declared a personal interest as a member of the Pension Scheme.
78. MINUTES 13th JULY 2011
The Minutes of the meeting held on 13TH July were approved as a correct record.
79. EXCLUSION OF PRESS AND PUBLIC
It was resolved to exclude the press and public from the meeting during consideration of
the reports and presentations included on the agenda on the grounds that they contained
exempt information under Paragraph 3 of Part 1 of Schedule 12A of the Local Government
Act 1972, as amended, (information relating to the financial or business affairs of any
particular person (including the authority holding that information) and that it would not be
in the public interest for this information to be disclosed as it contained commercially
sensitive information.
1
80. INVESTMENT MANAGEMENT REPORT
This report provided the Pensions Committee with information on the Fund’s investments
and other issues that had arisen for the quarter ended 30th June.
In replay to a question of why the more up to date information could not be reported,
bearing in mind the current turmoil in the world markets, it was explained that the most
recent quarter had only ended a few days previous to the meeting and therefore the data
had not been audited. However presentations by Newton and Schroders later in the
meeting would provide more up to date information on their own performance to the end of
September.
The summarised investment performance of each of the main investors (Amundi, Newton,
State Street Equities & Gilts, State Street Global Equities, Schroders Equities and Bonds
and Schroders Property) working on behalf of the Pensions Fund, showing the
benchmark, target, and actual performance. The graphs in the report illustrated each
investment manager’s cumulative performance against their respective benchmark.
The Committee noted the following performance issues:
Overall, the Fund had grown in value within the quarter by £36M to £1.637bn, and
returned 1.8% compared to the local authority average for the quarter of 1.4%.
At 30th June 2011, the Fund held cash balances of £37.2M yielding 1%. There was no
strategic allocation to cash, and some of the cash held would be used to fund private
equity drawdowns throughout the year, leaving the remaining cash balance available
for investment.
Issues raised included:
Discussion on the property market and the under performance of Schroders against
the target and benchmark since the property market decline from 2009. It was
explained that while they had small holdings in European property funds (5 out of
25) their performance was measured against the British Property Market target
which had a different performance timescale and when the British property market
had fallen sharply, the European market was performing better, but that recently the
British market had levelled out again. This therefore accounted for their worse
performance compared to the overall property benchmark. In addition, in the
previous year the Euro had increased against sterling which had also resulted in a
currency impact at that time.
Concern was expressed regarding the further impact on the Pensions Fund as a
result of the fall of the Euro. It was explained that the fall in the Euro had not had a
large effect, as the decision had been taken not to hedge currency risks in the
Cambridgeshire Pensions Fund and the profits and losses in currencies tended to
even out over time.
In terms of training and conferences, details were as set out under section 4 in respect of
the UBS Steps Training Programme seminars, The LGPS 3 day trustee Training
Fundamentals and the Local Authority Pension Fund Forum Trustee Conference.
It was confirmed that for the UBS Steps Training Programme seminars: Councillor
Batchelor would be attending in addition to Councillors Count and Melton booked
onto the October training programme).
Rob Sanderson to arrange for details on the USB seminars to be re-sent to
Councillor Melton.
2
Councillor Seaton requested to be put down provisionally to attend the Bournemouth
event.
Steve Dainty made reference to a CIPFA Skills and Knowledge Framework
Programme stating that it was hoped to arrange a joint pensions committee training
day in due course. All members present expressed an interest in attending.
One Member queried the high cost of the conferences. In reply it was explained that they
provided the necessary information to enable Pension Committee Members to obtain the
skills necessary to make appropriate investment decisions with confidence for the benefit
of the members of the fund and local taxpayers. It was also highlighted that in future, as
part of their annual report, External Audit would assess the training provided to the
Pension Committee, in terms of developing their skills and knowledge base.
In addition officers commented that developing knowledge and understanding of current
issues investment and economic issues, could greatly enhance decision making,
potentially generating significant improvements in investment performance, which would
far outweigh the cost of training and attending seminars.
The Committee noted the report.
81. NEWTON ASSET MANAGEMENT UPDATE
The Committee received a report on the Newton Global Equities (NGE) mandate, as
requested at the meeting of the 13th July 2011 following concerns regarding the
underperformance of their active global equity mandate.
In introducing the report Paul Tysoe explained that Northamptonshire County Council
(NCC) also had an investment mandate operated by a different manager at Newton but
had the same concerns as CCC.
Details were provided of a meeting that had taken place between Newton and Paul Potter
from Hymans Robertson. The committee noted that NGE acknowledged that they had
been overly cautious in their stance during the difficult and volatile market conditions since
2009, in particular, their non participation in opportunistic market bounce backs which had
led to their underperformance. They reiterated however, their belief in the Newton
thematic approach, which focussed on key economic and market drivers over the medium
term. It was shown through tabled graphs that their recent performance had improved
strongly and was 2% (net of fees) ahead of their benchmark for the third quarter. There
was also evidence to suggest that their cautious stance in the equities market in the last
two years was somewhat vindicated by the sharp market setbacks experienced in recent
weeks.
In response to a question requesting more detail on the benchmark, it was explained that
the market was the benchmark and therefore when the stock market fell they
outperformed the benchmark due to their investment positioning which had given some
protection against the market.
Also highlighted were the merits of investing in the Newton Real Return Fund as detailed
in section 3.5.1 t o 3.7 of the report as a way of seeking diversification of the allocation of
funds to spread equity risk. For the reasons set out in the report and on the basis of the
value they believed that Newton could add to the fund going forward, neither Paul Potter
or the Pensions officers were recommending that the Newton mandate should be
terminated.
3
There was also discussion regarding the potential benefits of renegotiating the
agreements with Newton on behalf of both pensions funds as there was investment
commonality. The proposal suggested was to seek to reduce fund manager fees through
using only one investment manager with the same mandate. It was suggested that this
could save £50k a year (for each fund) and was proposed that a report should come
forward to both Pensions Committees recommending a joint investment proposal.
The chairman queried the position on what would happen if each committee came to a
different decision. In response it was indicated that for the initiative to work both Funds
would need to be happy to apply the same mandate, which reflects the existing separate
mandates, otherwise there would be little point in progressing a joint initiative.
It was resolved:
a) It was agreed to retain the Newton global equity mandate.
b) To receive a further report at the next meeting from Hymans Robertson regarding
the potential to slightly alter Newton’s mandate away from purely an equity fund
mandate to investing in the Newton Real Return Fund.
c) To receive a report at the November meeting from Paul Tysoe on a joint
investment proposal from Northamptonshire and Cambridgeshire County Councils
in relation to Newton in order to achieve economies of scale.
82. TACTICAL INVESTMENTS / OPPORTUNTIES FUND UPDATE
This was to have been an oral update from the LGSS Director of Finance. As he was
required to deal with an urgent issue that had arisen, the committee asked that he should
provide a written confidential report to be e-mailed to the committee as soon as possible
outside of the meeting.
83. INVESTMENT STRATEGY REVIEW
It was explained that Cambridgeshire’ current asset allocation was as follows:
Strategic Asset Allocation
UK Equities 30.5%
Global Equities 39.5%
Property 11%
Fixed Income 14%
Private Equity / 5%
Infrastructure.
and that the Investment Regulations required funds to maximise returns within reasonable
risk parameters, which should also be set against the return expectations of the latest
valuation. The 2010 valuation assumed a Fund return of 6.1%. It was highlighted that the
current strategies had a risk profile of 15.7% with an objective3 to deliver an annual return
of 8.2 %, which provided comfortable headroom against the assumed 6.1 target. The
proposed change to the existing strategy, slightly reduced the risk profile, whilst adding a
small increase to the return expectation. However the investment strategy change
reduced liquidity level from 83.5% to 72.5%, when the opportunistic fund was fully
achieved.
4
The proposals were to transfer 5% of the existing equity allocation mainly in the UK space
to a specific emerging market equity exposure and additionally reduce listed equity
allocations to fund an increase in infrastructure and over time to specific tactical
investment opportunities. In terms of the percentages proposed it was explained that 5%
of the fund represented approximately £80m.
The approach was expected to yield long term returns of between 9 -13% and was
therefore in line with equity expectations.
It was resolved:
To approve the proposed asset allocation with the changes to the current benchmark
set out below and to delegate to officers the implementation of the changes strategy.
To establish a 5% direct allocation to Emerging Market Equities.
To increase the allocation to private equity and infrastructure from 5% to 10%.
To earmark over time 5% of the Fund for specific tactical investment opportunities.
(would be the subject of the separate report from LGSS Director of Finance).
84. LGSS PENSIONS OPERATION RECONFIGURATION UPDATE
This report provided the additional information requested at the 13 th July meeting to
provide the Committee regarding the detailed cost saving figures, the estimated payback
figures, the basis of overhead cost allocations and the detail of the 16 areas where
Hymans Robertson recommended improvements to Governance. An update indicated
that the full report had now been agreed by Northamptonshire County Council’s Cabinet.
Councillor Seaton requested a copy of the full report and the Business Case.
It was highlighted that the detailed cost saving figures showed a break even position by
year 3 although confidence was expressed that this would be achieved earlier. The
savings set out on the last line on page 2 of the report would be split 50/50 across the two
councils. It was highlighted that overhead cost (recharges for office accommodation etc)
were not addressed in the paper and would need further investigation.
Issues raised / questions answered included:
Confirmation that the size of the two pension funds and the number of people in them
were roughly equitable and there were not significant differences.
The was a discussion regarding governance issues should the two committees
disagree on issues. And it was agreed that a joint training date would be useful in
order for members to share views / experiences.
The need for regular updates on both the implementation of the governance
recommendations and progress against proposed savings.
The Chairman drew attention to the good progress being made by Steve Dainty and
his team in reducing the benefit cases backlog. An oral update indicated that the
team had reduced the backlog from 12,000 (which had been the figure for a number
of years) to 8,000 and was on track to completely eliminate the backlog by 31st
March 2012.
It was resolved:
a) To note the report.
5
b) That Karen McWilliam should send the full version of the Hyman Robertson
Pensions Governance Review to all members of the committee following the
meeting.
c) That a copy of the business case should be sent to all Members. (Steve
Dainty to send to all Members)
d) Officers to progress a joint training date to share views on governance issues.
e) To agree to receive regular information update reports on progress against the
recommendations from Hymans Robertson and on the savings achieved
against the targets set out on pages 2-3 of the report. Steve Dainty / Karen
McWilliam.
f) To congratulate Steve Dainty and his team on the progress being made to
reduce the defined benefits cases backlog.
85. PENSION FUND – HUTTON UPDATE
This report updated the committee with the latest information available following the final
report of the independent Public Services Pension Committee chaired by Lord Hutton. The
report detailed the key design features of the common framework for public service
pension schemes, highlighting that the Government’s intention was for the Local
Government Pension Scheme to remain funded, while other major schemes remained
unfunded.
The report set out details of a number of recommendations relating to governance, data
collection and central Government monitoring of schemes which included that each
scheme and individual LGPS Fund should have a properly constituted, trained and
competent Pension Board, with member nominees, responsible for meeting good
standards of governance including effective and efficient administration. Following the
publication of the final report, the Government indicated that it agreed with the
recommendations and had set about the process necessary to instigate changes to the
various schemes. These were likely to take place in two stages, Interim changes from 1st
April 2012 and more fundamental changes taking effect from 1ST April 2015.
Increased longevity and the imbalance between employer and employee contributions
were seen as strong reasons to make short-term changes to pension contributions
pending a more fundamental redesign of the schemes. The Government indicated that
contribution rates would rise for those earning £15,000 or more in order to deliver cost
savings by the end of the 2014/15 financial year, roughly equivalent to 3.2% of
pensionable pay which would be used to reduce the employers contribution by a similar
amount.
Due to the funded nature of the LGPS, the Government had sanctioned discussions
between the Local Government Group and relevant Unions with a view to them agreeing
on a joint proposal that would still deliver the necessary savings. No agreement had so far
been reached and in the meantime, the Employers side had written to the Treasury
suggesting alternatives to the blanket increase of 3.2% including:
having more graduated bands for employee contributions over £15,000
increasing the retirement age from 65 to 66 with affect from 2014 and accrual of
benefits at a different rate.
6
As a result of no agreement being reached on a joint approach, it was noted that the
Department for Communities and Local Government was now required to propose a
scheme and present it by 30th September and following a consultation period, a decision
was expected by the end of this year with legislation in place for 1st April 2012. For the
LGPS it was anticipated that the legislation would deal with the whole of the 3 year
period from 2012-15. It was expected that the Government would protect those whose
earnings are less than £15,000 pa. by not increasing their contribution rate. The aim was
that legislation would be in place by April 2014, with the changes taking effect from 1st
April 2015.
It was confirmed that a number of Trades Unions, including Unison, GMB and Unite, had
reacted to the prospective changes by announcing that they intended to ballot members
on a collective day of strike action to take place on 30th November 2011, with the
potential for further action next year.
It was resolved:
a) To note the report.
b) To request that a regular information update report be provided for future
meetings. (Steve Dainty to action)
86. PENSION FUND – COMMMUNICATION UPDATE
This report provided an update on progress being made with the Pensions Fund
Communication Policy and the proposed branding concept.
The committee supported the branding concept as a very positive step as in the past it
was considered that there had been sufficient communications with staff and this would be
more and more crucial in future.
It was resolved to agree to the proposed branding concept subject to:
joint headings being based on alphabetical order Cambridgeshire before
Northamptonshire
Standard letter heads - consideration of Northamptonshire being in purple on top
of the page (Steve Dainty to action)
87. ADMISSIONS AND CESSATIONS REPORT
The Committee received and noted a report on the admission of the following 14
Academies and 3 Admission Bodies to the Cambridgeshire Local Government Pension
Scheme: Ernulf Academy, Longsands Academy, Sawtry Community College, St Ivo, St
Peters School, Abbey College, Bassingbourn Village College, Cottenham Village College,
Hinchingbrooke School, Melbourn Village College, Nene Park Academy, The Centre
School, The Voyager Academy, Witchford Village College, Action for Children, Dell and
Pabulum Catering and noted the proposed withdrawal of the Methodist Homes for the
Aged
In response to questions in relation to academy schools it was clarified that the
admissions related to non teaching administrative staff and that while in the past schools
would have benefitted from smoothed employer rates, this would not now be the case and
7
the defined contribution cost to academies would increase. It was confirmed that they
would take any deficits with them.
The report was noted.
88. PENSION FUND – CASH FLOW
Over the last 12 months a number of strategies had emerged, both locally and nationally
which it was considered could have a noticeable effect on the level of active membership
of the Pension Fund of which the most significant was the reduction in the public sector
workforce in response to the economic situation, and the proposed increase of 3.2% in the
employee pension contribution as a result of the Hutton Report. Until these major
influences occurred, it had been accepted that all Local Government Pension Funds were
immature and that the yearly income collected through both employer and employee
contributions exceeded the amount paid out in benefits.
The Committee therefore received an update regarding the implications to the Fund using
three scenarios using a projection over a 22 year period using assumptions as detailed in
the report with the following results:
A) No change in active membership levels – the Fund would remain cash flow positive
for the entire 22 year period
B) 30% reduction in active membership - The Fund would remain cash flow positive
until 2026 (15 years), and then become negative. So for the medium term the Fund would
appear to be solvent, however the difference over the period 2011 – 2026 is very small so
in reality cash flow negativity is a possibility
C) 33% reduction in active membership - cash flow negativety immediately and would
require the need to review the Investment Strategy.
It was highlighted that there was anecdotal evidence to suggest a reduction in
membership nationally, following a reduced workforce and members starting to become
financially stretched. The more difficult forecast was the effect a 3.2% increase in
employee contributions. Officers orally reported that that while they did not believe C) was
likely to happen, a 20% reduction could occur, if steps were not taken to market the
scheme robustly to remind people that the scheme was still a very good scheme in order
to deter people from leaving. It was agreed that this marketing should involve partnership
working with the unions who supported LGPS and ensuring appropriate publicity materials
were included as part of induction arrangements.
It was agreed that the fall in membership and opt out rates would need to be closely
monitored to ensure that should a detrimental level be reached appropriate action was
taken in a timely manner and the committee was pleased to note that as part of the current
reconfiguration of the Pension Section, a marketing strategy was being developed to
promote the Local Government Pension Scheme.
It was resolved:
a) To note the possible implications of a significant reduction in membership
resulting from a reduction in the workforce and an increase in opt outs and to agree to
the commencement of a monitoring exercise to determine membership trends.
b) To receive regular information monitoring updates at future meetings on
membership subject to accurate data being available.
8
c) to ensure that until the Active Enrolment Regulations come into force (2013) to
ensure a proactive approach was adopted to ensure there was sufficient publicity
regarding the benefits of new employees joining the LGPS, including an initial letter
being included in the induction pack and a slot on induction programmes.
d) seeking to work with the unions on joint communications to publicise benefits of
LGPS
Action: Steve Dainty
89. CIPFA SKILLS AND KNOWLEDGE FRAMEWORK
This had been discussed earlier in the meeting.
90. INVESTMENT MANAGERS’ REPORTS
A) NEWTON ASSET MANAGEMENT
The committee received details of their performance as detailed in the tabled booklet
provided for all members present.
It was agreed that Paul Tysoe should be sent details of their Investment conference
on 18th November for forwarding to all Members of committee who were all invited
to attend.
B) SCHRODERS ASSET MANAGEMENT
The committee received details of their performance as detailed in the tabled booklet.
Note: The meeting had become inquorate during this presentation due to the number of
members who had, had to leave during the meeting and the over-run in the duration of the
meeting.
91. PENSION FUND ANNUAL REPORT
The report was noted as set out on the agenda.
92. BRIEFING NOTE ON STATE STREET AND EQUITEX
The committee received a report as an update to the Briefing Note on Investment
Managers received at the June 2010 meeting provided a summary of the Funds’
investments with State Street and Equitix.
It was indicated that over the period of the investment State Street had succeeded in
producing returns very close to those of the underlying markets. In terms of Equitex
infrastructure fund it was noted that it was not possible to make any meaningful
assessment of performance of funds of this nature in the early investment phase but that
more analysis would be possible once the fund had been in existence for five years or
more.
The update was noted.
9
93. AMUNDI AMENDED INFORMATION REQUESTED FROM 13TH JULY MEETING
At the June meeting there had been a query regarding a discrepancy between the Quarter
2 and Since Inception figures for Amundi.
It was explained that the June figures used in the report had been provisional figures and
were therefore provided net rather than gross, which had caused the discrepancy. The
corrected gross performance information included in slides on the agenda were noted.
94. DATES OF NEXT MEETINGS
The meetings currently scheduled were as noted as follows:
th
9 November (10am)
nd
22 February (10am)
st
21 May (10 a.m.)
It was suggested that due to the amount of business to be transacted consideration might
need to be given to:
starting the meeting earlier
The meeting being scheduled to continue longer and possibly being all day meetings.
Scheduling additional meetings.
10