Agenda item

This paper updates Members on the different types of equity protection, the potential solutions and whether they are appopriate for the H&F Pension Fund.

Laura Brown, Legal & General - Investment Management (LGIM) provided a presentation and noted the following points:

-       Outlined the reason LGPS clients were protecting their equity portfolios

-       LGIM had a readymade pooled solution that was easy to implement subject to a reasonable fee

-       As equity markets had risen, cost of protection had fallen

-       Part of the strategy was to balance protection cost whilst retaining equity above 9% pa & minimising tracking error through aligning regional allocation to underlying equity benchmark

-       Funds controlled their own equity protection and managed how this was allocated. Furthermore, Funds could also adjust their protection strategy as underlying equities changed. However, LGIM managed collateral requirements using the index equities holdings as well as protection contracts. In addition, index equities could be transformed into cash futures

Kevin Humpherson, Deloitte asked what were the key factors that contributed to driving the protection costs down. Laura Brown explained that interest rates had dropped, this therefore had an impact on costs.

Phil Triggs, Director of Treasury & Pensions asked for LGIM’s views around the positioning of the current market. Graham Wardle, LGIM explained that that there needed to be sufficient return on the Fund’s equities – markets were currently challenging, especially with the volatility surrounding the withdrawal of the UK from the European Union. Therefore, as a result it was difficult to diversify equities in this market.

Hitesh Jolapara, Strategic Director of Finance & Governance asked how many Public-Sector funds had opted for this strategy. In response Graham Wardle said that 6 LGPS funds had signed up for an equity protection strategy with LGIM over the last year.

Kevin Humpherson asked for clarification around the cost implications and management fees involved if the Council had decided to consider this option. Graham Wardle explained that the index equity would have the same fee as agreed with LCIV. This would include a standard cost of 4.5 basis points on the amount of equity available. In addition, there would be an implementation fee.

Phil Triggs, referring to page 11 of the agenda pack explained that officers had various discussions with advisors on whether adopting this strategy would be beneficial for the Fund, however concluded that it would not be advisable to implement any form of equity protection strategy at this time.

Michael Adam, Co-opted Member noted that in the first quarter markets had fallen at a similar time. He questioned whether it was appropriate not to form an equity protection strategy given that there was still some risk for markets to fall further. However, he noted that the advice recommended by advisors was also an essential element to be considered prior to making a decision. Kevin Humpherson explained that at this stage it was difficult to predict the future of equities due to the complex nature of the current market. Furthermore, the Council’s Pension Fund had a low allocation to equities in comparison to the wider LGPS scheme, already having one of the lowest volatilities of the last ten years when compared to the LGPS universe.

The Chair explained that the Committee had noted the different types of equity protection strategies available to the Council and considered advice from professionals advising them of the potential solutions and whether they were appropriate for the Council’s Pension Fund. However, the Sub-Committee unanimously agreed that adopting this strategy would not be beneficial for the Fund at this stage.

RESOLVED:

That the Sub-Committee noted the different types of equity strategies available and approved that the Pension Fund would not be pursuing any form of equity protection strategy at this time