Agenda item

This item provides the Pension Fund Committee with an opportunity to discuss the outcome of the redemption process of the London Borough of Hammersmith and Fulham Pension Fund’s allocation to Aviva’s Infrastructure Income portfolio with representatives of the company. 

Phil Triggs (Tri Borough Director of Treasury and Pensions) introduced the item and noted that Aviva had agreed to join today’s meeting to present to the Committee. He explained that final redemption payments totalling £13.9m were made in September 2024, circa £3.4m or 15% lower than the estimated figure of £22.7m (excluding redemption charge) if the full redemption had been received on time at the intended date of 31 December 2023. Taking income into account, this amounted to circa £2.5m for the LBHF fund.

Aviva had reimbursed the management fees on 25^th November, covering the period starting 1^st January to 30^th September 2024. However, due to the delayed redemption, the Fund experienced a net loss of approx. £2.5mil from 1^st January 2024. This loss was primarily driven by a decline in market value since 31^st December 2023 to the date the final funds were received.

Jill Barber (Aviva) thanked the Committee for the opportunity to attend the Pension Fund meeting and acknowledged communication could have been improved, offering her apologies for this.

The Chair asked whether Aviva accepted the analysis provided by officers, that the Fund had incurred a net loss of £2.5 mil. Daniel McHugh (Aviva) noted that the Fund’s asset value would fluctuate over time. From a private markets perspective infrastructure assets had experienced rising capital values over the last 10 years, up until 2023, due to a low-interest rate environment. However, the subsequent increase in interest rates, negatively impacted private market value, particularly infrastructure assets, supressing their capital values.

It was highlighted that for assets such as private markets and infrastructure, selling them in a structured manner to achieve the best market price often required time. This process involved marketing the assets, negotiating contracts and finalising disposals. During this period price movements could pose a risk. In 2023 significant price volatility was observed with investment volumes in private markets declining by at least 15% compared to previous years. Aviva felt that the estimated loss figure provided was noted to be unrelated to the Fund’s ability to generate cash proceeds necessary to meet the redemption requirements.

Phil Triggs (Tri Borough Director of Treasury and Pensions) provided further information on the calculation of the loss. He explained that advice was sought from Isio (the Fund’s investment consultant), who provided a definitive market valuation as of 31^st December 2023. Based on this valuation, it was determined that if the funds had been received on time, the Fund would have realised an additional £2.5mil. The loss of £2.5mil occurred between 1^st January and September 2024, the date when the final redemption payment was made.

Additionally, he noted that no assets were sold, nor were any proceeds generated by 31^st December 2023, which contributed to the 9-month delay extending into 2024. He emphasised this as a key factor in the timeline for the redemption process.

The Chair requested Aviva to further clarify whether it accepted that the losses incurred were due to its shortcomings, specifically its failure to sell assets within the timeframe stipulated in the contract, rather than being solely attributed to external market conditions.

Daniel McHugh (Aviva) explained that Aviva had executed the process of raising capital and proceeds in a diligent and professional manner. They emphasised that their actions were in alignment with the documentation which specified no targets but rather an obligation to optimise returns where possible. Aviva further noted that the loss referenced was based on an estimated figure at a specific point in time and highlighted that such valuations could fluctuate in either direction.

Michael Adam (Co-opted Member) expressed concerns regarding the timing of the additional markdown in 2024. While he acknowledged the significant shift in market prices following the gilts crisis during 2022, he enquired about the events in 2024 that led to the further write down. Daniel McHugh (Aviva) noted that throughout 2023, the valuation of the Fund turned negative due to a combination of factors, including rising interest rates and broader market conditions. While the specific details of the capital value reductions at the fund level or the reasons for the further deterioration in 2024, were not available to hand, it was noted that various factors and variances could have contributed to the impact of the vale.

Phil Triggs (Tri borough Director of Treasury and Pensions) again clarified that the primary focus should be on the delay incurred in the time period between 31^st December 2023 and September 2024. He stated that the events of 2023 were not relevant for this discussion, and that Aviva were bound by the contract to achieve the necessary sales in the 18-month period leading up to 31 December 2023.

Marian George (Independent Investment Advisor) acknowledged the frustration in the room regarding the Fund’s performance and the delays in payment. She emphasised that much of this frustration stemmed from Aviva’s poor communication and the lack of clarity on whether the assets being sold had experienced impairment. She further highlighted that the Committee felt a level of complacency regarding the valuations and felt that the lack of effective communication was a key factor driving the dissatisfaction.

Aviva apologised if the Committee felt that misinformation was provided and appreciated the reasons behind their frustration due to communication. Daniel McHugh (Aviva) explained that these were complex transactions, with the final figure being influenced by market conditions at the time of sale. The process required time to identify the right buyers and complete thorough due diligence. The primary objective was to maximise the proceeds returned to the Fund’s investors, and it would not have been in Aviva’s interest to act otherwise.

Councillor Laura Janes expressed concern that communication from Aviva could have been significantly better and requested further clarification on whether misinformation had been provided to the Committee in July 2024. Jill Barber (Aviva) responded that while she did not believe misinformation was provided, Aviva acknowledged at the time that information could have been clearer. She emphasised that Aviva acted in the best interest of all the Fund’s investors.

Councillor Laura Janes further remarked that the Council received far less information than they were entitled to, which she deemed unacceptable despite Aviva’s acknowledgement that things could have been better. In response Jill Barber (Aviva) clarified that the information shared with the Committee was accurate and provided with the expectation that redemption payments would be made on time. However, she admitted that the information provided was insufficient and accepted that this was a shortcoming on Aviva’s part.

Councillor Adam Peter Lang expressed his disappointment, stating that he felt Aviva had not acted professionally and should be concerned about the impact on their reputation. He emphasised that the Council was accountable to its members and a loss of £2.5mil was a significant amount. He further stressed that reputation was critical in any business and urged Aviva to reflect on the seriousness of the situation.

Andrew Singh (Isio) explained that the markdown of assets was driven by the net asset value (NAV) of the Fund. While he acknowledged some truth in the statement that valuation figures were estimates, he emphasised that private market funds, including Aviva relied on third party specialists to provide accurate estimates based on market conditions and transaction volumes. As such these valuations should carry a degree of reliability. He noted that the NAV had declined by further 15% between December 2023 and September 2024 and expressed concern about the lack of clarity surrounding this decline. Andrew Singh noted that it would be important to gain a better understanding of the factors contributing to this drop.

Daniel McHugh (Aviva) noted that this was a very detailed piece of work and stated that they did not have the specific information readily available. They assured the Committee that this information would be provided outside of the Committee.

Marian George (Independent Investment Advisor) advised that a full written analysis be provided to Phil Triggs as soon as possible so this could be circulated to the Committee.

Action: Aviva

The Chair expressed continued dissatisfaction with the lack of clear answers provided by Aviva. He noted that it was surprising and disappointing for a Fund manager to attend the Committee meeting without being able to provide clarity on the single key question.

RESOLVED

The Pension Fund Committee discussed the shortcomings of the redemption process (Infrastructure Income portfolio) with Aviva