Issue - meetings

This report prepared by P-Solve, considers the continued suitability of the existing Matching Fund structure.

John Conroy, P-Solve, introduced the report, which explained the recent performance of the Matching Fund, and possible options for the fund. By way of introduction, he described the historical change which had seen fund trustees move away from being solely concerned, and to pay closer attention to their liabilities, with the introduction of mark to market into actuarial practices. He said that this had led to a period of extreme volatility and sharply rising contribution rates.

He said that the actuary based their estimate of liabilities on gilt yields: funds could use a different benchmark (corporate bonds, for instance) but this exposed them to what was termed basis risk. He said that it was considered prudent to have an element of the fund which moved in line with its liabilities; ideally, the whole fund would do so.

He said that recent unanticipated market conditions had seen an extraordinary fall in gilt yields, due to their attractiveness to foreign investors. The high price of gilts made selling out, before what seemed an inevitable fall in value, attractive, though an alternative would have to be found that served something of the same liability tracking function. Mr Conroy said that there were three options:

1. Leave the Matching Fund as it is, or;
2. Alter the investment in gilts to other fixed interest investments, with the consequent increase in basis and credit risk, or;
3. Wait and see, with a decision to be made following the outcome of the actuarial review in 2013.

He said that he did not wish to be prescriptive, but said that, in his view, the fund should be invested with the long term in mind, and its current strategy adhered to until the actuarial review was complete.

Councillor Iggulden expressed concern that the view taken of the fund’s liabilities was too negative, with the assumptions, over public sector pay, for instance, overly pessimistic (from the fund’s point of view). He said that the fund’s assets would, if inflation was as generally predicted likely, be best invested in equities that would not be adversely affected by it.

Jane West, Executive Director of Corporate Finance and Governance, said that, under the rules of the scheme, the Council’s level of contribution to the fund was set by the actuary, with the investment of that fund in the Committee’s hands. Jonathan Hunt, Tri-Borough Director of Treasury and Pensions, said that the contribution made per employee was, at 14.5% similar to those at the other two boroughs, with the larger element ordered by the actuary relating to Hammersmith and Fulham’s larger historical deficit.

The Chairman said that it appeared that a wait and see approach, with the Committee making a decision on the bond market in 2013, appeared to be the most sensible approach.

RESOLVED THAT

The report be noted.

This report prepared by P-Solve, considers the continued suitability of the existing Matching Fund structure.