Agenda item

(a)        The Committee noted the updated funding and hedging position for the Fund and the progress being made on the various elements of the Risk Management Framework.

(b)        The Committee noted the restructuring of the LDI strategy has been completed and a positive mark-to-market gain has been realised.

(c)        The Committee noted that the Officers are working with their advisors in order to finalise a collateral waterfall process at Insight to better manage collateral requirements. Further, it has been provisionally agreed that c.£50m will be removed from the Insight QIAIF to be invested elsewhere in the portfolio.

Mr Middleman stated that the Fund unwound a relative value trade with Insight resulting in an overall gain of £26.7m (net of costs) after this trade was completed. This represented around 75% of the total gain that the Fund expected at the start over a period of c50 years. However, as reported at the last meeting, it was decided to cash it in now in order to remove any risk of loss in future. Mr Middleman also mentioned that the expenses for this trade was £269k which was significantly better than the initial estimated range of £0.8-£2.2m.  This is a very good outcome and demonstrated how good governance can make significant gains for the Fund.

Mr Middleman noted that Mercer have calculated (and Insight have confirmed) that £100m of excess collateral can be released out of the risk management strategy without affecting the overall hedging position. There have been various discussions about how the Fund uses this. It was decided to use £50m to remain in a collateral waterfall which would be developed further with Insight and £50m elsewhere in the portfolio. This approach has been working well with positive outcomes that will set the Fund up well for the future.

As the Fund has protections and hedging in place so that they are in a better position than otherwise with the current volatility in the markets.

            Mr Hibbert asked what the increased costs are for the protections compared to what the Fund had put in place previously. Mr Middleman stated that there are two factors that have affected the costs of the protections – the level of protection and the perceived volatility of markets. When putting the protection in place the cost versus benefit was considered and felt appropriate given the expected (risk adjusted) returns.  However, it is right to say the financing of the protections now is costlier given the market volatility but this is offset by the value of the protection being of a higher value (given the volatility of markets and the level of the market positions)

The reality is that with any protection, there will always be a cost (as by definition you are giving something up to protect against the downside) but the critical aspect is that you are “insuring” against a bad outcome in terms of contributions for employers. He noted that everything is working, but there hasn’t been a need to trigger any protections yet.   However, given the volatility in the markets the protection is more valuable than when it was implemented.

RESOLVED:

(a)        The Committee noted the updated funding and hedging position for the Fund and the progress being made on the various elements of the Risk Management Framework.

(b)        The Committee noted the restructuring of the LDI strategy has been completed and a positive mark-to-market gain has been realised.

(c)        The Committee noted that the Officers are working with their advisors in order to finalise a collateral waterfall process at Insight to better manage collateral requirements. Further, it has been provisionally agreed that c.£50m will be removed from the Insight QIAIF to be invested elsewhere in the portfolio.

The Chairman thanked everyone for their attendance and updates at the Committee meeting and noted that the next Committee meeting is on 20^th February.