Statement of Investment Principles
Approved by Pensions Committee on 14th June 2016
Introduction
1. The Local Government Pension Scheme Regulations require an administering authority to prepare, maintain and publish a written statement of the principles that govern its decisions about the investment of fund money.
2. The Pensions Committee has consulted the Fund’s Investment Advisor when preparing this statement.
3. The Committee reviews the Statement annually, or more frequently if required.
Governance
4. South Tyneside Council is the administering authority of the local government pension fund set up for the Tyne and Wear County area.
5. The Council has set up a Pensions Committee and has required it to control and resolve all matters relating to the administration of the Fund and the management and investment of the assets of the Fund.
6. The Committee has eighteen members. The Council nominates eight members and the other four district councils within the County area nominate one member each. The trades unions and the employers (excluding the district councils) each nominate three members, who sit in an advisory capacity.
7. A training programme is available for Members of the Committee.
8. The local authority members are remunerated in accordance with each council’s scheme of allowances.
9. The Council has set up a Local Pensions Board whose role is to assist the Pensions Committee to secure compliance with legislation and with any requirement imposed by the Pensions Regulator in relation to the Fund, and to ensure the effective and efficient governance and administration of the Fund.
10. The Board is comprised of four employer representatives and four member representatives.
11. A training programme is available for Members of the Board.
12. The decisions and actions of the Committee are reviewed by the Council’s Audit Committee and the Overview and Scrutiny Coordinating and Call In Committee.
13. Responsibility for the Pension Fund is included within the portfolio of the Council’s Cabinet Lead Member for Resources and Innovation.
14. Aon Hewitt has been appointed as Actuary.
15. Hymans Robertson has been appointed as Investment Advisor.
16. The Committee meets quarterly to consider investment matters.
17. The performance of the Total Fund and the individual managers is measured independently by Portfolio Evaluation.
18. The detailed formal monitoring of the investment of the Fund is undertaken by an Investment Panel, which is comprised of three Committee members, two of the Fund’s officers and the Investment Advisor. The Panel meets quarterly to consider the investment objective and policy, opportunities to take tactical asset allocation positions and each manager’s performance and process. It reports to the Committee on its findings and makes recommendations on any action that is required.
19. If the Committee accepts a Panel recommendation to review and change the investment objective or policy, or the management structure, or a manager’s appointment, the Committee will require the Panel to implement that change.
20. The Fund’s officers undertake the day to day monitoring of the investment of the Fund.
Investment Objectives and Policy
21. The Fund has a service plan that sets out the development of the structure and processes that govern the investment of the Fund.
22. The investment objective is:
· To invest the Fund money in assets of appropriate liquidity to produce income and capital growth that, together with employer and employee contributions, will meet the cost of benefits
· To keep contributions as low and as stable as possible through effective management of the assets.
23. The Committee monitors the suitability of its investment policy on an ongoing basis in the light of the Fund’s developing liabilities and finances. Asset liability modelling studies are carried out to assist in setting the policy and benchmark. These studies examine the Fund’s financial position, the profile of its membership, the nature of its liabilities and include an analysis of the expected ranges of outcomes from differing investment policies.
24. The Committee has implemented a mechanism that allows Fund level tactical asset allocation decisions to be taken. The aim is to identify and benefit from valuation anomalies in asset classes that may take a number of years to correct. This operates between the long term strategic asset allocation that is set by the asset liability modelling studies and the short term positions that are adopted by the investment managers.
25. Stock selection decisions and tactical asset allocation decisions within mandates are taken by investment managers, in accordance with their management agreements.
26. The current strategic asset allocation is based upon a study carried out in 2013/14 by Hymans Robertson, based upon the liabilities shown by the 2013 valuation.
27. Having considered the outcome of this work, the Committee concluded that a diversified portfolio, of which about 58.5% is invested in quoted UK and overseas equities, 7.5% in private equity, 19.0% in bonds and cash, 12.5% in UK and global property and 2.5% in infrastructure, represented a suitable strategic asset allocation benchmark for the Fund. The degree and nature of risks attaching to such a portfolio, when taken in conjunction with the expected returns, were considered by the Committee to be appropriate for the Fund.
28. The Pensions Committee in February 2016 decided to adjust the strategic benchmark as noted above and move to a tactical weighting in UK Property of 6% plus 1% for a potential residential investment, equivalent to a 1% underweight position in UK Property, which was previously 8%. There would also be a 0.5% increase in the allocation to Global Property. This would take the overall property weighting to 12.0%.
29. In addition, it was agreed that a 0.5% allocation to a trade finance vehicle, as agreed by the Committee at its meeting on 20th November 2015, should be implemented
30. The projected investment returns that were used in the 2013/14 study and the strategic benchmark are shown in appendices.
31. The Investment Advisor confirmed in November 2014 that this approach remained appropriate.
The Investment Management Structure
32. The Committee considers that the Fund must have an investment management structure that provides exposure to a suitably diversified, but complementary, range of investment styles and processes.
33. It is the view of the Committee that the strategic benchmark is best implemented by investing the entire Fund on a specialist basis, with a combination of active and passive stock selection.
34. The structure includes discretionary mandates for the active management of UK equities, Pan European equities, Global equities, Japanese equities, Asia Pacific ex Japan equities, Emerging Market equities and Bonds.
35. Following consideration of the efficiency, liquidity and level of transaction costs likely to prevail within each market, the Committee has determined that a proportion of the Fund should be managed on a passive basis.
36. At Pensions Committee in November 2014 the Committee agreed to increase the target allocation to passive from 18% to 27%, with a range of 22% to 32%.
37. The 27% allocation is to be comprised as follows:
· 9% to a fundamentally weighted, global equity product
· 18% to market capitalisation weighted products
· Of the 18% allocation to market capitalisation weighted products, 16% will be held in equities and 2% in bonds
· The 16% allocation to market capitalisation weighted equity products will be held in regional funds, with the majority in the UK equity market
· The 2% allocation to bonds is in emerging market bonds and in UK index linked gilts. The latter allocation is held in respect of assets linked to the liabilities of employers where a cessation valuation has been carried out.
38. An allocation of 7.5% has been made to private equity funds.
39. With regard to the 12.0% allocation to property, a 6% allocation to a UK direct property portfolio is managed on an advisory basis. There is also a 1.0% allocation to UK residential through a limited partnership and a 5.0% allocation to global property through investment in funds.
40. An allocation of 2.5% has been made to infrastructure funds.
41. There is a 0.5% allocation to trade finance through a fund.
42. The Fund’s officers monitor the overall allocation of the Fund’s assets, relative to the strategic benchmark, with assistance from the passive manager. In the light of this monitoring, the actual asset allocation is maintained within agreed margins around the strategic benchmark, taking into account any Fund level tactical asset allocation decisions, by the direction of cash flow or by the reallocation of assets between portfolios.
43. An independent custodian has been appointed to take responsibility for the safe keeping of the assets within each of the Fund’s stock market portfolios. The Fund’s officers monitor the operation of the custodian.
44. The Committee’s expectations in respect of returns from the Fund’s investments are expressed through achievable and prudent objectives and restrictions that have been set for each mandate. The objectives and restrictions have been discussed and agreed with each manager to allow them to implement their natural investment style and process. The use of any financial instruments is not prohibited, except where such prohibition is required by legislation or where it has been agreed with a manager that its use is inappropriate.
45. An appendix is attached that sets out details of the individual mandates.
46. When the appointment of investment managers is under consideration, the Fund requests and considers fees quotations on a range of structures, for example ad valorem, performance based and flat fees. The fees that have been accepted are those that the Fund considers will be the most economically advantageous to it over the life of the mandate.
47. The Investment Advisor is remunerated by reference to the time and resources expended in that role.
48. The managers are permitted to use redirection of commission arrangements where the Committee believes this practice to be a satisfactory approach for the manager to access resources in the most cost efficient way to the Fund.
Diversification
49. The strategic asset allocation benchmark and the investment objectives and restrictions placed upon the managers are designed to ensure that the Fund’s investments are adequately diversified.
50. Within each asset category in each portfolio, the manager concerned is responsible for appropriate diversification.
Suitability
51. The Committee has taken advice from the Investment Advisor to ensure that the strategic asset allocation benchmark is suitable for the Fund, given its financial position, statutory status and liability profile.
52. Within each mandate, the manager concerned is responsible for the suitability of individual investments.
Risk
53. The Committee recognises that there are a number of risks involved in the investment of the Fund. The approach is to monitor and control these risks as far as possible, consistent with earning a satisfactory return on investments. In particular:
· Solvency risk and mismatching risk are controlled by ongoing monitoring of the suitability of the investment policy in the light of the Fund’s developing liabilities and finances. Asset liability modelling studies are carried out to assist in setting the policy and strategic asset allocation. These studies examine the Fund’s financial position, the profile of its membership, the nature of its liabilities and include an analysis of the expected ranges of outcomes from differing investment policies.
· The strategic asset allocation has been translated into mandates and benchmarks for individual managers that are consistent with the investment policy.
· The investment managers hold a diversified portfolio of investments that reflect their views relative to their respective benchmarks.
· Manager risk is controlled through the investment objectives and restrictions in each manager’s agreement and through the ongoing monitoring of the managers.
· In appointing several investment managers, the Committee has considered the risk of underperformance of any single investment manager.
· The asset allocation and investment performance is monitored relative to the agreed benchmarks.
· The investment policy, the strategic asset allocation and the investment mandates are consistent with the Committee’s views on the appropriate balance between seeking an enhanced long-term return on investments and accepting greater short-term volatility and risk.
· Liquidity risk is controlled by estimating the net benefit outgo or inflow and ensuring that sufficient cash balances are available.
· Custodian risk is controlled through the restrictions set out in the custodian’s agreement and through the ongoing monitoring of the custodial arrangements.
· Currency and political risks are controlled through the approach to diversification.
· Counterparty risk is controlled through the restrictions followed by the managers with respect to the trading of securities and cash management.
Expected Return on Investments
54. The projected investment returns that were used in the 2013/14 asset liability study are shown in an appendix.
55. Applying these returns to the strategic benchmark leads to a median expected long term return for the Fund of about 6.0% per annum, net of fees, before managers’ outperformance targets are taken into account.
Realisation of Investments
56. The Fund maintains sufficient investment in liquid or readily realisable assets to meet the payment of benefits, together with a margin for unexpected cashflow requirements so that, whenever possible, the realisation of assets will not disrupt the overall investment policy.
57. When assets have to be realised out of a portfolio in order to meet cashflow requirements or to reinvest the proceeds elsewhere, the realisation of individual holdings is at the discretion of the manager of the portfolio.
Corporate Governance
58. The Fund has a specific policy on Corporate Governance. The approach is summarised below.
59. The Fund believes that good corporate governance and the informed use of voting rights are an integral part of the investment process that will improve the performance of the companies in which the Fund is invested.
60. It is important that the process is carried out in an informed manner. For this reason, it is believed that the investment managers are best placed to undertake it.
61. The process through which the Fund appoints a manager includes an assessment of each candidate’s approach to corporate governance.
62. Each manager is required to prepare a policy on corporate governance and on the use of voting rights. The Fund will review each policy and agree with the manager how it may be applied on its behalf.