Agenda item

Report of the Corporate Director Finance.

The Adviser to the Panel provided a training discussion on the options available to the Panel to review the current Investment Strategy and the Statement of Investment Principles following the actuarial review at 31 March 2010.

The Adviser reported that:

·                     the Panel should consider reviewing the current Investment Strategy and the process for undertaking the review;

·                     the objective of the Pension Fund was to achieve a return that was sufficient to minimise employers’ contributions to the scheme and to meet the funds’ liabilities subject to appropriate level or risk and liquidity;

·                     the objective of the Investment Strategy was to seek a balance between investment in risky assets, such as, equities which delivered excess returns on investment and risk free assets, such as gilts.  The strategy should have defined objectives that considered where assets sat and seek to optimise the right balance of asset classes in the Pension Fund;

·                     the fund was heavily weighted in equities and another recession would have a negative impact on the Fund as experienced in the 2008/09 financial year.  Gilts were not particularly responsive to volatility in the economy and their performance would remain strong.  To minimise the risk borne by the fund, it was recommended that the Panel consider adopting a long term approach to the risk return strategy of the fund;

·                     five per cent of the existing fund consisted of other employers that participated in the current pension scheme managed by Harrow Council.  These employers were admitted or scheduled bodies that had gained admission to the fund in accordance with the prescribed admissions criteria.  As a result of the fund membership, these employers may have different covenants that impacted upon the fund.  The Panel may wish to consider separating these covenants from the scheme and adopting a more cautious strategy in the future;

·                     the Actuary to the Panel had considered the process for reviewing the current Investment Strategy and concluded that there had been no material change in cash flows since 2007.  It was recommended that these cash flows should be used to monitor potential future outcomes.  A long term model of the strategy that provided a snapshot of the position based on a range of scenarios over 20 years had been devised.  As a result, the range of outcomes for future investment strategies could be modelled and an optimum strategy selected.

Following comments and questions by Members of the Panel, officers and the Adviser confirmed that:

·                     most pension schemes reviewed investment strategies every three years and the current Investment Strategy was monitored on a regular basis.  Reviewing the Strategy provided the opportunity to challenge what had been agreed previously and consider putting a process in place to review the Strategy more frequently;

·                     Members were advised to wait to review strategy until the outcomes of the public sector pension schemes review by the former work and pensions secretary John Hutton;

·                     the Actuary would react to a significant reduction in the level of risk in the asset portfolio by reducing the discount rate, which would directly affect the level of deficit within the fund and increase contribution rates to the fund by employers.  Scheduled bodies, such as a higher education establishment, were statutory bodies that had a right to participate in the pension scheme.  Admitted bodies became members of the fund as part of a Transfer of Undertakings (Protection of Employment) (TUPE) transfer.  Funding levels for these bodies were generally better than in local government and the pay back period for deficits was shorter;

·                     the allocations to particular asset class was the key consideration for the future as opposed to the return generated by the level of performance by individual fund managers.  It was recognised that opportunities to vary the strategy without impacting on expected returns were limited as equities currently provide a higher expected return than other asset classes.  It was recommended that opportunities to seek greater diversification of asset classes within the fund while maintaining expected returns be explored;

·                     officers would circulate the model previously used to review the Investment Strategy to the Panel with a possibility of using it as a benchmark for future strategies;

·                     the valuation process was ongoing.  An actuarial report on the valuation of the fund for 2010 would be presented to a future Panel meeting.

RESOLVED:  That

(1)               the report be noted;

(2)               officers prepare a report with detailed proposals on the current investment strategy and the Statement of Investment Principles for the next Panel meeting on 24 November 2010.