Meeting documents

To consider the report of the Chief Financial Officer (attached).  This includes Strategic Fund Allocation for the period 31 March 2017, cash flow and performance analysis and other topical issues.  As part of this item the Committee will receive the report from the Independent Adviser on investment outlook and asset allocation (Appendix 2 refers), the draft annual pension fund accounts for 2016-17 (Appendix 4) and the updated Funding Strategy Statement (Appendix 5).

The Committee considered a report by the Pension Fund Administrator on the

allocation of assets and overall performance of the Fund up to 31 March 2017.

The Independent Adviser presented his report at Appendix 1 and provided a commentary on the investment outlook, and how it was likely to affect each asset class. He noted that although his report was written before the results of the UK general election were known not much had changed since in markets, despite greater political uncertainty.

The Independent Adviser reported that signs of a wider global recovery now looked more positive, with signs of sustainable growth across Europe, not just Germany, and recovery in Emerging Markets.  However, Japan’s economy was still ‘stuttering’, and China’s transition to a consumer led economy remained a significant risk.  UK growth was expected to be approximately 1.5% for the next two years.

Equity markets had a very good year, even allowing for currency movements, and volatility had dampened down.  However, in the US there were now doubts about the deliverability of some of the President’s plans, and the fiscal boost previously anticipated by markets looked less likely.  He believed that the key risk was that the US Federal Reserve increased interest rates more quickly than markets expected, which could stop growth and lead to a sell-off of assets.

The Independent Adviser reported that property was the market most negatively affected by the result of the EU membership referendum but values had now largely recovered.  He informed members that expectations were for gilt yields to rise, given their continuing very low levels, but as yet this had not happened.

It was felt that there was still a high level of uncertainty about the outcome of the Brexit process.  A member asked the Independent Adviser about the reaction of markets to these political uncertainties.  The Independent Adviser replied that, whilst the City’s preference would be for the UK to remain in the single European market, as that now seemed unlikely, the second best outcome would be continued access to the market, with a long transition period before any new arrangements were implemented.  He added that generally tariffs on manufactured goods were not now particularly high but the concern was that there could be restrictions on access for UK services to the European market.  He also highlighted that trade agreements could take considerable time to negotiate.

A member raised his concerns that he felt current equity prices were not supported by fundamentals, and he highlighted that it had been a long time since the last significant market correction.  The Independent Adviser replied that, although most of the gains in the FTSE 100 over the last year had been driven by sterling’s depreciation, the member’s concerns could be warranted to some extent in UK and US markets, but less so in other markets, such as Europe and Emerging Markets, where valuations were supported by signs of sustainable economic growth.

The Fund Administrator highlighted the very strong absolute performance of the Fund’s assets over the financial year to 31 March 2017, primarily as a result of the impact of sterling’s depreciation on equity prices and the increase in the value of inflation hedging instruments.  Members were reminded that the value of the Fund’s liabilities would also have increased over this same period because of the same higher inflationary expectations.  He also informed members that the draft Fund accounts had been approved for publication on 15 May 2017, earlier than ever before, and that they were now subject to review by KPMG, the external auditors.

Resolved

(i)    That the activity and overall performance of the Fund be noted.

(ii)    That no changes to asset allocation be made at this time.

(iii)   That the publication of the draft Pension Fund accounts be noted.

(iv)   That the Funding Strategy Statement (FSS) March 2017 be approved as a basis     for consultation with the Fund’s employers.