Agenda item

To receive a presentation from CEM Benchmarking on the investments performance of the Clwyd Pension Fund

The Chairman welcomed John Simmonds from CEM benchmarking to introduce the company and give an update on the investment performance of the Clwyd Pension Fund. Mr Simmonds introduced CEM benchmarking and stated that it exists primarily to compare the costs of operating large Pension Funds around the world. He noted that 150 of the top Pension Funds work with CEM benchmarking. They currently benchmark 33 LGPS Funds.

They compare the performance of the Clwyd Pension Fund with the rest of LGPS. The key points that Mr Simmonds addressed were;

·         Two key metrics: performance versus other Funds and more importantly versus the liabilities

·         The Pooling objective is predominately to achieve economies of scale.

·         The Clwyd Pension Fund investment net return for 2017 was 21.5% which was identical to the LGPS median in that year.

·         The 5 year net return was slightly below the median over 5 years but better than the median over 3 years.

·         The “policy return” is the return from asset allocation decisions which will continue to sit with the Pension Fund Committee after pooling.  For the Fund these have been below the median mainly because of the lower equity allocation over the periods being measured.

·         A critical component is the level of risk as a measure versus the liabilities.  Based on that measure it can be seen the Fund is at the lowest level of risk which is positive as it means deficit outcomes are more predictable (all things being equal)

·         Net added value for the Fund from active management was upper quartile.

·         The costs of investments versus peer group are higher than the average but this is a reflection of asset mix.  If this is removed by normalising versus a benchmark portfolio the differential in cost is much smaller.

·         Costs are likely to rise for other Funds as the pools get more access to private market and alternative investments.

·         The “cost effectiveness” of the Fund i.e. Net added value  versus cost shows that for the Fund gets positive added value for the cost spent (materially so in the last 12 months),

Mrs McWilliam asked Mr Simmonds the process in which he measures and determines the risk factor. Mr Simmonds explained that they test at the relationship between the liabilities versus the level of volatility of asset risk. Mrs McWilliam asked if officers were surprised where the Fund sits when comparing funding level with asset-liability mismatch risk.  Mr Latham confirmed that this is what would be expected given the level of focus on risk control via the Flightpath.

Mr Everett queried whether the position shown is where the Fund would want to be.  Mr Middleman confirmed that the objective of the Fund was to control risk to provide more stable outcomes to employers as the tolerance to contribution volatility is much diminished with the shrinkage of budgets.   The position of lower relative risk meets that objective so it is a position the Fund wants to be but if it can be improved further then that should be an aspiration of the Fund. An example of this is maintaining the equity protection strategy which is not allowed for in the analysis and reduces asset volatility.  Mr Middleman believes this is where the LGPS is considering more generally as other Funds are focusing more closely on risk control as seen by the number of equity protection strategies being considered and implemented. 

The Chairman asked Mr Simmonds whether he had any thoughts on how the Government will measure the performance of the Pools going forward.  Mr Simmonds noted that the objectives would need to be clear at the outset e.g. cost savings have been delivered as promised, but it would be difficult to measure improved governance in isolation as you would have to be able to measure the position before pooling on a like for like basis which may not possible.

Pools will need to supply data in a consistent format so the “success” can be objectively measured and this should be based on whether the Funds are getting value for money.  He noted that the transparency of costs shown by the Clwyd Fund is a very positive approach to help with this. Equally, any performance measurement will need to include some measure of risk versus liabilities to be a worthwhile comparator.  CEM is working with Pools to develop this benchmarking analysis. 

The Chairman thanked Mr Simmonds for the presentation.