Agenda item

To provide Committee Members with an update on the proposals for the Flightpath Strategy for discussion and approval.

a)    That the Committee approve in principle the proposed changes and delegate decision making to Officers subject to the implemented changes not varying significantly and an update is given at the next Committee meeting.

b)    That the Committee notes the actions being taken within the current framework.

Mr Middleman (Fund Actuary – Mercer) and Mr Lane (Strategic Risk Adviser – Mercer) presented a report which gave:

·         an overview of the existing Flight Path strategy

·         confirmation that the current framework was operating well

·         outlined of the review undertaken following the triennial actuarial valuation and Brexit. The following three strands were reviewed:

o   current mandate, with a view to identifying efficiencies

o   equity options, to protect current position

o   the triggers – with resulting adjustments being recommended to the Committee.

Mr Middleman explained that the current framework is in place to protect the Fund, capture favourable conditions and potentially bank any gains whilst ensuring that protection is not purchased at any price. The Committee approved the existing framework two years ago and it has made a significant difference to the Fund value. The Fund deficit would have been £125 million greater if the flight path had not been implemented. However, the review, which was discussed at the 27 September 2016 Committee, was necessary because there is a need to ensure that it remains fit for purpose and whether it could be improved further.

Mr Lane then outlined the report to the Committee with input, as appropriate from Mr Middleman and Mr Harkin (Fund Investment Consultant – JLT Group).

Mrs Brookes (Pension Board) asked whether the protection afforded by the use of equity options had always been available and whether the Fund had previously considered it. Mr Lane replied that the equity option market is an established market and that it was being considered now due to market conditions. Mr Latham added that that the current focus on the LGPS is on comparing returns on investments. There is a reputational risk if equities continue to climb whilst our returns continue to drag.

Mr Lane stated that if the equities market suffers a significant drop then we should outperform other LGPS funds due to the level of protection that the CPF has.

Discussions then moved onto the creation of a Funding and Risk Management Group (FRMG) to review the various triggers within the flight path. In response to a question by Mr Hibbert, Mrs McWilliam assured the Committee that terms of reference for FRMG were being developed by officers and advisers, and the Committee would receive ongoing reports on the work of the Group.

Mr Lane explained that inflation and yield triggers would be looked at every valuation cycle unless there was a major change, for example, in Bank of England economic assumptions.

Following further discussion it was suggested that the recommendation to Committee be amended to add ‘in principle’ which would enable officers and advisors to work on the details rather than requiring further approval from the Committee. 

Mr Harkin (Fund Investment Consultant – JLT Group) replied that the proposed group would work in a similar fashion to the existing Tactical Asset Allocation Group.

RESOLVED:

(a)       That the Committee approve in principle the proposed changes and delegate decision making to Officers subject to the implemented changes not varying significantly and an update is given at the next Committee meeting.

(b)       That the Committee notes the actions being taken within the current framework.