Statement of Investment Principles

Transcription

1 Statement of Investment Principles

2 Statement of Investment Principles Staffordshire Pension Fund 1.0 Introduction 1.1 This is the Statement of Investment Principles produced by Staffordshire County Council as administering authority of the Staffordshire Pension Fund ( the Fund ), to comply with the regulatory requirements specified in The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 (Regulation 12(1)). The Statement is subject to review from time to time and within six months of any material change in investment policy or other matters as required by law. 1.2 The statement has been approved by the Pensions Committee following consultation with advisors and employing bodies. The Pensions Committee is the main decision making body and comprises both elected councillors and non voting representatives from Trades Unions and from other employing bodies in the Fund. A full explanation of the governance arrangements setting out the respective roles of the Pensions Committee, Pensions Panel and the Employers Forum can be found in the separate document entitled Governance Policy Statement published on the web In preparing this Statement the Pensions Committee has consulted with its Advisers. In particular, there are close links between this statement and the separate Funding Strategy Statement ( FSS ) which can also be found on the web The FSS sets out the main aims of the Fund and sets employers contribution rates to achieve those aims on the basis of a Strategic Asset Allocation that is predominantly invested in equities. The FSS models the risks of the strategy and in particular the link between assets and liabilities. It also sets out the likelihood of achieving the objective in the long run. The FSS has an explicit stabilisation mechanism to limit the annual increase in contribution rates for Local Authorities and other employing bodies with strong covenants. 1.5 The Strategic Asset Allocation is reviewed at least every three years, as part of setting the funding strategy and to take account of developments in the investment environment.

3 2.0 Objectives 2.1 Primary Objective The primary objective of the Fund is: To ensure that sufficient funds are available to meet all pension liabilities as they fall due for payment. 2.2 Funding Objectives The FSS sets out the objectives of the Fund s funding strategy, such as: to ensure the long-term solvency of the Fund, using a prudent long term view. This will ensure that sufficient funds are available to meet all members / dependents benefits as they fall due for payment; to ensure that employer contribution rates are reasonably stable where appropriate; to minimise the long-term cash contributions which employers need to pay to the Fund by recognising the link between assets and liabilities and adopting an investment strategy that balances risk and return; to reflect the different characteristics of different employers in determining contribution rates. This involves the Fund having a clear and transparent funding strategy to demonstrate how each employer can best meet its own liabilities over future years; and to use reasonable measures to reduce the risk to other employers and ultimately to the Council Tax payer from an employer defaulting on its pension obligations.

4 3.0 Investment Strategy 3.1 What is the Fund s Investment Strategy? The Fund has built up assets over the years and continues to receive contribution and investment income. All of this must be invested in a suitable manner, which is the investment strategy. 3.2 Investment Objective To achieve a return on Fund assets which is sufficient, over the long-term, to meet the funding objectives set out in paragraph 2.0 on an ongoing basis. 3.3 Types of Investment The Pension Fund operates within a regulatory framework set out in the Local Government Pension Scheme (Management and Investment of Funds) Regulations This sets out the requirement to formulate the investment policy with a view to; (a) the advisability of investing fund money in a wide variety of investments; and (b) the suitability of particular investments and types of investment. The Pensions Committee receives advice on the above from its Investment Consultant. The issues that the Committee takes into account in considering different investments (or asset classes) include; Legality - is it excluded by regulations? (e.g. many derivatives) The nature and type of return (e.g. is the asset real?) The expected level of return The expected variability of return (volatility) The relationship of returns between asset classes The long term track record of the asset class Liquidity Credit Risk (i.e. risk of loss) Leverage Currency risk Complexity Use of active management where it can add value

5 3.4 Types of Investments to be held One of the Myners Principles is that there is a focus on asset allocation and in particular that all asset classes permitted have been considered. Following the Actuarial Valuation at 31 March 2013, the Pensions Committee reviewed the Fund s Strategic Asset Allocation and agreed that all asset classes were still appropriate and that no major changes to the individual allocations and permitted ranges were required. Asset Class Approval to invest Equity UK Global Private Equity Bonds Gilts Index Linked Gilts Other Investment Grade Bonds Cash Property Alternatives Hedge Funds Commodities Infrastructure Active Currency Other Alternatives

6 3.5 Strategic Asset Allocation Review - December 2013 Staffordshire Pension Fund Due consideration was given to each of the 2 components involved in determining the Fund s Strategic Asset Allocation (SAA): a) Investment Strategy Appropriate balance of risk and return Proportion in growth assets (equities, property, alternatives) b) Portfolio Structure Allocation to individual asset classes Level of risk in stabilising portfolio (corporate bonds, index-linked gilts, cash) Diversification of growth portfolio It was concluded that: The Fund s existing strategic asset allocation is consistent with the funding and contribution strategy; There is little scope to reduce investment risk at the present time and therefore, the Fund s high exposure to growth assets and in particular, equity risk remains appropriate on a long term view; and Continuing to seek suitable opportunities to increase further asset class diversification into the growth portfolio could prove beneficial for the Fund Although the SAA review resulted in no structural changes to the allocation and strategic benchmarks in all asset classes, it was anticipated that there might be some evolutionary changes to the portfolio structure as a result of the work plan for 2014/15 and future years. Proposed areas for consideration were: UK Equities Property Currency Hedging Programme Seeking Diversification e.g Private Debt, Infrastructure Furthermore, it was recognised that changes in economic and market conditions and the interest rate environment more generally may present risks and/or opportunities that the Fund may need to react to. 3.6 Strategic Asset Allocation - Changes in 2014/15 (i) In 2014/15, minor changes were made to the Fund s UK : Global equity allocations. This was in recognition of the fact that the UK represents only 10% of the World s stock markets and the Fund arguably had a disproportionately high allocation to the UK. It also addressed concerns about the perceived concentration in the UK equity market. As a result:

7 A 5% reduction in the Fund s allocation UK equities was made, split 50:50 between the active and passive UK equity managers. A 5% increase in the Fund s allocation to Global equities was made, allocated entirely to the Global passive manager. (ii) A review of the Fund s UK active equity benchmark was undertaken and it was agreed that the current benchmark of the FTSE All Share Index plus a 1% outperformance target should be changed to the FTSE All Share Index (capped at 2%) plus a 2% outperformance target. This will allow the Fund s UK active equity manager to be more active and put their best ideas to greater use. (iii) The Fund s Dynamic Currency Hedging Programme was reviewed in 2014/15 and it was agreed that the current arrangements be terminated. It is envisaged that a cheaper passive currency hedging programme will be put in place through the Fund s Global Custodian in 2015/16. The Pensions Panel manages the actual allocation of the Fund in line with the SAA, subject to the tolerances shown in Appendix A. Any divergence from the target allocation is reviewed on a quarterly basis, at least. The SAA target and ranges are set out in Appendix A for information. 3.7 Investment Risk The main risk to the Fund is failing to meet its primary objective of having sufficient funds to meet its liabilities. This risk is managed through the Funding Strategy which models a range of outcomes using monte carlo simulation. The primary reason for the high variability (risk) in outcomes derives from the high proportion of the Fund invested in growth assets, in particular equities, as shown in Appendix A. In the long term this is considered to deliver returns that are commensurate with the risk and this helps to keep employer contributions lower than they would otherwise be. It relies upon the strong covenant of the major employing bodies in the Fund which allows for a long term perspective to be taken. Risks are regularly reported to the Pensions Panel/Committee and there is a separate risk register. The Committee receives an annual report each year from the Fund s independent performance measurer to show both performance and risk where risk is measured as the variability of returns both against liabilities and against equity or other benchmarks. The Pensions Panel receives reports which monitor such risks quarterly. Risks are managed in a variety of ways but the largest risk is the investment strategy itself, which is managed through the funding strategy and relies on the long term covenant of the main employing bodies in the Fund. The majority of the Fund is invested through external managers. Each has an investment management agreement in place which sets out the relevant investment benchmark, investment performance target, asset allocation ranges and any investment restrictions. This constrains the investment managers from deviating significantly from the intended approach, while permitting sufficient flexibility to allow the manager to reach their investment performance target.

8 The majority of the Fund is invested in liquid investments. Risks are also managed through diversification. For example; across asset classes e.g. bonds, property, private equity, hedge funds and cash; across managers and styles; and ensuring managers maintain a diversified portfolio of investments within their mandate. Overseas currency risk is currently managed by a currency hedging manager. Going forward, it will be managed by the Fund s Global Custodian in placing a passive hedge. Other risks are more fully detailed in the Funding Strategy Statement and the Risk Register. 3.8 Expected return on investments Assumptions about the expected long term returns from the main asset classes, which were used in the Strategic Asset Allocation modelling work post December 2013, are provided below as at 31 January The current expected long term returns from the main asset classes in which the Fund invests, together with the expected volatility of those returns, are provided below as at 31 January Expected Rate of Return (p.a) 31 January year Return (p.a.) 31 January 2015 Volatility of Return in Year 1 (p.a) 31 January 2015 Equity UK 6.1% 5.8% 17% Global 5.8% 5.5% 22% Private Equity 7.3% 7.1% 29% Bonds Long-dated Gilts 2.9% 1.6% 13% Index-linked Gilts 1.8% 0.2% 9% Corporate Bonds 3.9% 3.1% 12% Cash 3.2% 3.2% 1% Commercial Property UK 4.1% 3.7% 15% Alternatives 3.4% 4.7% 10%

9 In general, any alternative investment is assessed on its individual merits and on the potential it offers to improve the overall balance of risk and return for the Fund as a whole. The numbers given in the table are indicative of the characteristics sought. The expected return from alternatives is not required to match those of equities, if they offer a more stable pattern of returns (and a degree of diversification from equities). The Portfolios making up the Fund s assets are managed on both an active and a passive basis with the active portfolios expected to outperform their respective benchmarks over the long term. As a result, the investment return achieved by the Fund is expected to exceed the return on gilts (a proxy for the expected growth in liabilities) by a greater margin than assumed by the Actuary in the 2013 valuation. Details of the managers, their respective investment benchmarks and investment performance targets are included in Appendix B for information. 3.9 Realisation of investments The majority of stocks held by the Fund s Investment Managers are quoted on major stock markets and may be realised quickly if required. Property, Private Equity and Hedge Fund investments, which are relatively illiquid, currently make up a modest proportion of the Fund s assets Stock Lending Since May 1999, the Pension Fund has been part of its Custodian s stock lending arrangement, whereby securities held by the Pension Fund are loaned to a third party in return for a fee that helps the Pension Fund meet its funding objectives. There are risks in stock lending but the Pensions Panel considers that these are well managed by the custodian through its lending program. They are also satisfied that there are appropriate collateral arrangements in place; these were reviewed with effect from 1 November 2011 to better reflect current market practice. Overall, the Pensions Panel considers that the income from stock lending is beneficial to the Fund and that the risks are understood and well managed. Furthermore, they have agreed to place reliance on the co-ordinated actions of the national Financial Regulators in relation to the lending of certain bank, insurance and financial stocks. The policy will be kept under review with annual reports to the Pensions Panel. The manager(s) of pooled funds may undertake a certain amount of stock lending on behalf of unit holders. Where a pooled fund engages in this activity, the extent to which it does is disclosed by the manager. Although the Pensions Panel has no direct control over stock lending in pooled funds, it is comfortable that the extent and nature of this activity is appropriate to the circumstances of the Scheme.

10 3.11 Pension Fund Cash Cash management in the Pension Fund comprises two elements: (i) Cash held in the Pension Fund bank account. The Pension Fund has a 1% strategic allocation to cash which is primarily used for fulfilling the daily liquidity needs of the Fund. The cash is managed by Staffordshire County Council s Treasury and Pension Fund team in accordance with the Pension Fund s Annual Investment Strategy approved by the Pensions Panel before 31 March each year. (ii) Cash held in the Custodian s bank account. Each investment manager in the Fund with a segregated mandate will have a cash account with the Pension Fund s custodian for sterling and possibly foreign currency. Again, cash in these accounts is held primarily for the managers day to day liquidity needs but will fluctuate due to the timing issues of trade settlement, dividend income etc. Also, maximum cash limits are agreed with each manager as part of the Investment Management Agreement and so occasionally cash may increase in line with the managers views on investment markets. All cash balances held with the custodian are swept on an overnight basis into highly credit rated (AAA) money market funds, attracting an appropriate rate of interest.

11 4.0 Corporate Governance, Socially Responsible Investment and Myners Principles 4.1 Corporate Governance and Exercise of Voting Rights The Pensions Committee recognises its role as one of promoting best practice in corporate governance which is considered to be consistent with seeking long term returns. As a result, the Fund requires its UK Equity managers to comply with the Financial Reporting Council s UK Stewardship Code and asks that other investment managers should be required to follow it as far as possible. The Pensions Panel receives regular updates from Managers on details of votes cast on corporate resolutions for holdings in the relevant portfolios as part of their quarterly investment reports. 4.2 Socially Responsible Investment The Pension Committee s policy on socially responsible investment is to endorse the United Nations Principles of Responsible Investing (UNPRI) and seek to encourage its active equity managers to sign up to them to incorporate environmental, social and governance issues into their investment process. The 6 principles are; We will incorporate Environmental Social and Governance issues into investment analysis and decision-making processes We will be active owners and incorporate Environmental Social and Governance issues into our ownership policies and practices We will seek appropriate disclosure on Environmental Social and Governance issues by the entities in which we invest We will promote acceptance and implementation of the Principles within the investment industry We will work together to enhance our effectiveness in implementing the Principles We will each report on our activities and progress towards implementing the Principles At all of the Fund s active equity managers were signed up to UNPRI. Details of the Fund s individual investment managers corporate governance and socially responsible investment policies, as well as details on the UK Stewardship Code and UNPRI are available at the Staffordshire Pension Fund website at

12 4.3 Local Authority Pension Fund Forum (LAPFF) Staffordshire Pension Fund From 1 April 2013, Staffordshire Pension Fund has been a member of LAPFF. LAPFF exists to promote the investment interests of local authority pension funds, and to maximise their influence as shareholders while promoting social responsibility and high standards of corporate governance at the companies in which they invest. Formed in 1990, the Forum brings together a diverse range of 64 local authority pension funds with combined assets of over 150 billion. 4.4 Myners Investment Principles Details of the extent to which the Pensions Committee complies with the six principles set out in the Chartered Institute of Public Finance and Accountancy s publication, Investment Decision Making and Disclosure in the Local Government Pension Scheme 2009 a guide to the application of the 2008 Myners principles to the management of LGPS funds, are set out in Appendix C. If you have any comments on this Statement of Investment Principles or require any more information on the subjects contained within it, please contact: Melanie Stokes Strategic Investment Manager (Treasury and Pensions) Phone: melanie.stokes@staffordshire.gov.uk

13 APPENDIX A - Strategic Asset Allocation Benchmark % UK Equities - Listed 15.0 Tolerance Global Equities - Listed 53.0 Total Equity /- 3% Bonds* /- 3% 8% UK Corporate Bonds - 5% UK Index-linked Gilts Property /- 3% Hedge Funds 2.0 Private Equity 3.5 Diversified Alternatives Funds 2.5 Total Alternatives** 8.0 <10% Cash 1.0 3% maximum Total Notes: * An equally weighted split between long-dated conventional gilts (6.5%) and long-dated index-linked gilts (6.5%) is viewed as the Fund s benchmark neutral position. **Subject to the identification of appropriate opportunities, the Pensions Panel have approved that: An aggregate investment of up to 10% of the Fund (including existing investments in Hedge Funds and Private Equity) may be made in appropriate Alternative Investments.

14 Appendix B. Investment Managers Benchmark Indices and Investment Targets Investment Manager Asset Class Benchmark Target Active Portfolios Standard Life Investments UK Equities FTSE All Share Index (capped by 2%) 2% above benchmark over rolling 3 year period Aberdeen Asset Management Global Equities MSCI All Countries World Index 2% above benchmark over rolling 3 year period JP Morgan Asset Management Global Equities MSCI All Countries World Index 2% above benchmark over rolling 3 year period Longview Partners Global Equities MSCI All Countries World Index Sarasin & Partners Global Equities MSCI All Countries World Index 2% above benchmark over rolling 3 year period 2% above benchmark over rolling 3 year period Insight Asset Management UK Corporate Bonds 3 month LIBOR Maintain minimum initial yield of 2.5% Russell Investments Emerging Markets Equities MSCI Emerging Markets Index To outperform the benchmark Colliers CRE Property IPD UK Monthly Property Index To outperform the benchmark Goldman Sachs Morgan Stanley Schroder s Fund of Funds Hedge Fund Diversified Alternatives Fund Diversified Completion Fund 3 month LIBOR 6% above benchmark 1 month LIBOR 5.5% above benchmark (gross) 3 month LIBOR 4% per annum over rolling 5 year period (net) Various Private Equity - - Record Currency Management Dynamic Currency Hedging 0% hedged To outperform the benchmark

15 Indexed (Passive) Portfolios State Street Global Advisors UK Equities FTSE All Share Index Match benchmark State Street Global Advisors Global Equities * FTSE All World Developed Index Match benchmark Legal & General Investment Management Index-linked Bonds FTSE-A Over 5 years Index-Linked Gilts Index Match benchmark *investments are made in a range of sub-funds which are periodically rebalanced to reflect the weightings in the FTSE All World Developed Index

16 Appendix C Assessment against Myners Principles Principle Examples of Compliance Comply/ Explain 1 Effective Decision Making Decisions are taken by persons or organisations with the skills, knowledge, advice and resources necessary to make them effectively and monitor their implementation; and Those persons or organisations have sufficient expertise to be able to evaluate and challenge the advice they receive, and manage conflicts of interest The Fund has a Governance Structure with clear responsibilities set out in the Constitution including a sub Committee (the Panel) which deals specifically with investment matters. Advice comes from a variety of sources including the Actuary, an Investment Consultant and two Independent Advisors. The Governance structure has been assessed against the Government template on a comply or explain basis (as published in the Governance Policy Statement). Members have been given a copy of the CIPFA knowledge and skills framework and approved adopting the web based assessment tool. This has formed the basis of identifying future training needs. Members have received appropriate training on various topics throughout the year. COMPLY Room for Development Consider publishing 3 year Business Plan

17 Principle Examples of Compliance Comply/ Explain 2 Clear Objectives Room for Development An overall investment objective should be set for the Fund that takes account of the scheme s liabilities, the potential impact on local tax payers, the strength of the covenant for nonlocal authority employers, and the attitude to risk of both the administering authority and scheme employers, and these should be clearly communicated to advisors and investment managers The Actuary takes account of a range of factors including the scheme s liabilities, the potential impact on local tax payers, the strength of the covenant for nonlocal authority employers, and the attitude to risk of both the administering authority and scheme employers in setting contribution rates as part of the valuation process. These are all included in the Funding Strategy Statement. The investment benchmarks are set in relation to the agreed overall asset allocation used in the valuation and are challenged by independent advisors. Assets have been chosen having regard to the suitability and diversification which is set out in the Statement of Investment Principles. Advisors have been appointed through a competitive process and their performance is assessed annually. COMPLY

18 Principle Examples of Compliance Comply/ Explain 3 - Risk and Liabilities Room for Development In setting and reviewing their investment strategy, administering authorities should take account of the form and structure of liabilities These include the implications for local taxpayers, the strength of the covenant for participating employers, the risk of their default and longevity risk The approach to the valuation is clearly set out in the Funding Strategy Statement which addresses the key issues of; Financial assumptions, longevity and strength of covenant The Committee has set a scheme specific benchmark and understands well the risk of its investment strategy. The Committee has taken a long term view of the funding requirement using appropriate stochastic modelling to balance the target of 100% funding with affordability. The modelling fully captures the likely risk of failure/success. The Committee also receives a risk register each year and has joined Club Vita which ensures that longevity risk is better understood and monitored. COMPLY

19 Principle Examples of Compliance Comply/ Explain 4 - Performance Assessment Arrangements should be in place for the formal measurement of performance of the investments, investment managers and advisors Administering Authorities should also periodically make a formal assessment of their own effectiveness as a decision making body and report on this to scheme members The Pensions Panel has explicitly considered investment benchmarks which the managers have all considered appropriate and has also considered the active/passive investment split. Target performance and risk are explicitly included in manager contracts. Fund performance is measured quarterly by an independent performance measurer, appointed following a competitive tender process. An independent company reviews and reports on the Investment Consultant twice a year. COMPLY Room for Development Effective decision making is underpinned by CIPFA s Knowledge and Skills Framework. Members of the Committee / Panel are self assessed against this framework and training is provided as appropriate. The introduction of Pensions Boards into the Governance structure has enhanced the scrutiny of effective decision making.

20 Principle Examples of Compliance Comply/ Explain 5 - Responsible Ownership Adopt or ensure their investment managers adopt the Financial Reporting Council s (FRC) UK Stewardship Code on the responsibilities of shareholders and agents Include a statement of their policy on responsible ownership in the statement of investment principles Report periodically to scheme members on the discharge of such responsibilities The adoption of the FRC UK Stewardship Code principles on the responsibilities of shareholders and agents is explicitly included in investment manager s contracts. The Statement of Investment Principles (SIP) includes a statement on responsible ownership. This refers to the United Nations Principles for Responsible Investment (UNPRI) which has been adopted by the Committee as a target but not explicitly signed up to. Active Equity Investment Managers are mandated to sign up to the UNPRI The Fund is a member of the Local Authority Pension Fund Forum (LAPFF). The Pensions Panel receives a copy of the LAPFF quarterly engagement report as part of its meeting papers. COMPLY Room for Development The Pensions Panel receives information outlining the voting activity undertaken by the Fund s investment managers, with any points of interest highlighted as part of a separate SRI / ESG report each quarter.

21 Principle Examples of Compliance Comply/ Explain 6 - Transparency and Reporting Act in a transparent manner, communicating with stakeholders on issues relating to their management of investment, its governance and risks, including performance against stated objectives Provide regular communication to scheme members in the form they consider most appropriate The Fund publishes (in accordance with statue) a range of documents setting out its governance, policies and aims including; Governance Policy Statement, Communications Strategy, Funding Strategy Statement, Statement of Investment Principles, Annual Report and Accounts. The Web-site includes more information The Fund has assessed itself against the Government s Standards of Governance for Local Authority Pension Funds and judged itself compliant. COMPLY Room for Development