Issue - meetings

Funding and Flight Path Update

Meeting: 11/02/2020 - Clwyd Pension Fund Committee (Item 102)

102 Funding and Flight Path Update pdf icon PDF 129 KB

To update Committee Members on the progress of the Cash and Risk Management Strategy

Additional documents:

Decision:

RESOLVED:

(a)  The Committee noted this report on the various elements of the Risk Management Framework, equity protection and currency hedging strategy.

(b)  The Committee were made aware of the risk from potential RPI reform and the balanced action taken to reduce this risk as well as the costs.

 

Minutes:

            Mr Page introduced himself to the Board and presented the flightpath introductory training session.  Further detailed sessions will be scheduled to deliver more detail on the various elements. The presentation covered the main objectives of the flightpath and the following key points were made;

-       The aim of the investment strategy is to deliver a return above inflation, CPI inflation in particular, given that the Fund’s liabilities rise with inflation.

-       Higher returns above inflation means that lower employer contributions are required to make good on the benefits for members. Conversely lower returns above inflation would mean higher contribution requirements for employers.

-       In order to generate return, risk must be taken. However, there is a need to find a balance between taking enough risk to ensure contributions are affordable, but not too much risk that may result in losses on the investments leading to higher contributions in the future.    The overarching objective is to be fair to current and future taxpayers by getting this reasonable balance.

-       The aim of the flightpath strategy is to manage investment risks to improve the affordability and stability of employer contributions.

-       The flightpath is a risk management approach rather than a de-risking mechanism, and works in tandem with the Fund’s well diversified investment strategy.

-       The flightpath seeks to manage (i.e. hedge) risks associated with both the assets and the liabilities. However, it does not manage all investment or liability risks; rather there is an assessment of whether the benefit of managing a particular risk outweighs the cost of doing so. Cost considerations relate to manager and consulting fees, transaction costs, initial and ongoing governance requirements and the overall impact and likelihood of a risk manifesting negatively so the overall objective is not met.

-       The Fund’s biggest risk is rising inflation, given that members’ benefits i.e. the Fund liabilities, are linked to inflation. This is managed through a Liability Driven Investment (LDI) strategy which aims to maximise the certainty of returns above inflation when market opportunities arise thought a yield-based trigger mechanism. The hedge level was previously at 20% for interest rates and 40% for inflation. The Fund has decided to reduce inflation exposure by 20% temporarily in light of RPI reform risk which was discussed in more detail after the training.

-       The flightpath also manages equity downside risk through an equity protection strategy, and the risk that sterling appreciates, reducing the value of overseas assets in GBP terms, through a currency hedging strategy.

-       The flightpath seeks to implement the risk management strategies in an efficient manner. This is evidenced by the collateral “waterfall” approach, which ensures the strategies are supported by enough collateral (essentially a cash like pool of assets backing the hedging framework) but not too much that it acts as a drag on Fund returns. Excess collateral is invested in higher yielding but daily dealing funds in order to generate higher returns but is available for collateral to maintain the hedging position if required at short  ...  view the full minutes text for item 102