Agenda item

10:25

The Committee reviewed its Investment Strategy Statement on an annual basis and carried out a fundamental review of its asset allocation every three years following on from the tri-ennial Fund Valuation.  The Committee had before it a report (PF7) which brought together the latest review of the Investment Strategy Statement including a new annex covering the Policy regarding Climate Change, and the formal advice of our Independent Financial Adviser in respect of the fundamental asset allocation.

In introducing the report, Mr Collins explained that, due to the restrictions on the investment cycles in respect of the allocations to the private market allocations within Brunel, the Committee were asked to approve a number of immediate proposals on asset allocations effective from 1 April 2020, as well as approving the draft Investment Strategy Statement and Climate Policy for formal consultation. 

The key change to the Investment Strategy Statement was the addition of a separate annex in respect of the Council’s Climate Change Policy.  This Policy had been informed by the Climate Change Workshop held in November, plus 2 meetings of the Climate Change Working Group established at the December meeting of this Committee.  The draft Climate Change Policy should be seen as an initial position statement which would be subject to regular review reflecting the rapidly changing environment in which this initial policy has been established.  In particular, the Policy itself recognised a number of shortfalls in the current availability of international accepted metrics used to assess the suitability of investments against the requirements of the Paris Agreement, and therefore included commitments to work with Brunel and others in the investment industry to establish such metrics.  This will in turn would allow more specific targets to be set within the Policy in future years.  The Pension Fund should be Carbon Neutral by 2050 and the Council by 2030 and therefore the Fund should be looking at more sustainable options to invest in through Brunel.  The Chairman added that if the Strategy was adopted today by the Committee, it would then go out to consultation to all stakeholders.

Councillor Mathew expressed concern over the lack of knowledge of what the other members of Brunel were demanding in relation to Climate Change.  Mr Collins reported that the Climate Change Policy had been signed off by 10 members of Brunel.  There had been a lot of cross working and communication with Brunel and other funds in the partnership and the direction of travel was consistent, timescales remained the only problem.  At the December Meeting the Committee would be looking at responsible investment and climate change.

In relation to page 21 of the report, Councillor John Sanders requested that the Committee receive a report on what engagement had taken place, together with the results.  The Chairman reported that Brunel would be attending the next two meetings of the Committee and that the second meeting would be talking about environmental issues.

The Committee expressed the need for reliable metrics.

Jo Robb felt that the Pension Fund pegging itself to the Paris Treaty was not fast enough, especially with the up-coming reallocation of assets and requested that the document be more explicit in the language used to express that the Oxfordshire were more ambitious than the 2050 objectives.

In response Mr Collins reported the Implementation Strategy would be coming to the June Meeting of the Pensions Fund with a view to setting intermediate targets and that the issue would then come to every meeting so that the Committee could look at targets and reset them as necessary.  The appropriate funds to invest needed to be in place and it would take time to shift the money.  Brunel would be attending the next two meetings of the Committee so members would be able to question them on those issues.

The independent Financial Adviser, Mr Peter Davies outlined his report on the Strategic Asset Allocation, together with further modelling of options and the implications of the current cashflow projections from MJ Hudson.  The report of the Independent Financial Adviser was included as Annex 2 to the report, with the Executive Summary of the report from MJ Hudson included as an appendix.

The key objectives of the fundamental review of the asset allocation were to ensure that the Fund had sufficient liquid resources to meet the pension liabilities as they fell due, and that all surplus assets were invested to ensure the appropriate level of return for any given level of risk.  The asset allocation agreed should also be fully consistent with the Investment Strategy Statement, including the new Climate Change Policy.

The work undertaken by MJ Hudson which itself was informed by cash flow projections produced by the Fund Actuary found that in the short term, whilst cash flow from dealings with members was expected to go negative (i.e. total payment of pensions would exceed the current level of pension contributions), the levels involved could be met from within current cash balances and did not require a major switch to income releasing assets.

MJ Hudson identified that our current asset allocation fells someway short of the efficient frontier, and indeed short of the current Strategic Asset Allocation.  This reflected the underweights in the private markets whilst we waited for Brunel to identify suitable investment opportunities, and those Funds to call down the committed cash.  Moving towards the strategic asset allocation would both improve the potential investment returns as well as reducing risk/volatility through the greater diversification of the portfolios.  MJ Hudson therefore produced a number of options which brought the asset allocation closer to the efficient frontier, either by increasing investment returns for the same level of risk/volatility or reducing risk/volatility whilst achieving the same levels of investment return.

The report and recommendations of the Independent Financial Adviser then built on the conclusions from MJ Hudson to produce a more detailed proposal for changes to the asset allocation.  In bringing forward his proposals, the Independent Financial Adviser also look to ensure that any changes were consistent with the revised Investment Strategy Statement and Climate Change Policy.  Included in the proposals from MJ Hudson and endorsed by the Independent Financial Adviser was a proposal to implement a new investment in the Private Debt Portfolio offered by Brunel.  The Independent Financial Adviser was recommending an immediate commitment of £80m or around 3% of the Fund.  This could be topped up in April 2021 to the 5% recommended in the MJ Hudson report following further detailed review of the proposal.  The MJ Hudson report also recommended a 5% allocation to multi asset credit.  At the present time, this portfolio was not available through Brunel, but should be developed during 2020/21.  This enabled further consideration of the proposal to be made before any final decision is made.

The MJ Hudson report also proposed further increases in the allocations to Infrastructure and Private Equity.  The report from the Independent Financial Adviser indicated reservations on this proposal due to the increase in illiquidity that would result.  In particular, further work needed to be undertaken to assess the ability of the Fund to meet its existing commitments to the private markets and pay pension liabilities as they fall due in the event of another financial crisis of the level experienced in 2008.  As the existing asset allocation already required significant allocations to the private market and infrastructure portfolios, any delay in agreeing an increase in these allocations was not seen to be critical and could be implemented in April 2021 if necessary.

In respect of ensuring consistency with the draft Climate Change Policy, the report from the Independent Financial Adviser is recommending an immediate switch of 5% of the Fund from the UK passive portfolio to the global low carbon passive portfolio.  The proposal reflected the high weighting to the fossil fuel and mining sectors within the current UK passive index, and the lower levels of carbon intensity within the low carbon fund.  At this stage it was not recommended to make further allocations to the low carbon or sustainable equities portfolio, until further work could be completed on developing the metrics to assess the suitability of the products against the principles established in the draft Climate Change Policy.  Once this work was completed, further transitions could be proposed, or further requests could be made to Brunel for the development of additional portfolios which more closely reflect the need to align all investments with the requirements of the Paris Agreement.  It should also be noted that the allocation to infrastructure to bring the actual investment in line with the current asset allocation will include a significant investment in renewable infrastructure. 

Councillor Mark Lygo question why only 5% of the Fund from the UK passive portfolio to the global low carbon passive portfolio was being moved and not the available 7%?  Mr Davies explained that he felt that 5% was a significant amount and that there could potentially be other funds the Committee wished to commit to.  The Chairman questioned the reasoning behind leaving 2%.

District Councillor Jo Robb questioned whether 2% could be earmarked for Storebrand with scope 3 emmissions.

Councillor Mark Lygo moved and Councillor Kevin Bulmer seconded that an immediate switch of 7% of the Fund from the UK passive portfolio to the global low carbon passive portfolio instead of the recommended 5%.

The motion was put to the vote and was carried nem con.

RESOLVED:  to

(a)       approve the draft Investment Strategy Statement including the Climate Change Policy as the basis for formal consultation and

(b)       approve the interim changes to the Strategic Asset Allocation as recommended by the Independent Financial Advisor and summarised in paragraphs 39 – 45 of his report, subject to the remaining 2 ¾% being earmarked for low carbon funds with scope 3 omissions.