Agenda item

A report of the Director of Finance was presented to inform Members of the Teesside Pension Board of the revision to the Pension Fund’s strategic asset allocation, as agreed at the Pension Fund Committee meeting held on 10 March 2021.

The Pension Fund’s target strategic asset allocation was set out in its Investment Strategy Statement which was last updated in February 2019.

The Pension Fund had made slow progress towards its strategic asset allocation, for several reasons: the unattractiveness of bonds, the necessarily slow increase in investments in private equity, infrastructure and other alternatives, and the difficulty in significantly increasing the direct property portfolio.  No progress had been made to date in reducing the Pension Fund’s equity exposure. This was despite a phased sell-off of £125 million of US equities over the 15 months to 31 December 2020.

While the Pension Fund remained heavily invested in equities its assets were subject to significant volatility. While this could be tolerated to a certain extent given the Pension Fund’s long investment time horizon, this volatility could cause issues for the Pension Fund’s employers if the triennial valuation coincided with a low point in valuations.

Officers had worked with the Pension Fund’s investment advisors to review the strategic asset allocation, with a view to setting a long-term and a short/medium term target for asset allocation.  The latter target would allow the Committee and Board to judge more quickly whether appropriate progress was being made in reallocating the Pension Fund’s assets.

The revised strategic asset allocation, approved by the Pension Fund Committee at its 10 March 2021 meeting,  included the following features:

·         A significantly lower allocation to UK equities – this partly reflected the fact the UK market was increasingly concentrated on a number of sectors such as consumer staples, financials and commodities, meaning the market’s performance was to some extent linked to the performance of those sectors. It also reflects a recognition that future growth may be limited in the UK compared to other global regions.

·         A recognition that infrastructure investments could be classed as ‘protection’ rather than ‘growth’ assets – this acknowledged the long-term secure nature of the types of infrastructure the Pension Fund invested in.

·         Property debt was also reclassified as part of ‘other debt’ as a ‘protection’ asset, and so separated from property which remained classified as a ‘growth’ asset.

·         A short/medium term target of 65% equities by 31 March 2022. This might be challenging and would require careful implementation. The longer term equity target increased slightly from 50% to 55%.

Following the Committee’s agreement to the revised strategic asset allocation, the following steps were underway:

·         An updated Investment Strategy Statement (ISS) would be circulated to Pension Fund employers for comment.  Any substantive changes agreed to the revised ISS following the consultation would be presented to the next Committee meeting.  If there were no changes the ISS would be published in due course.

·         Officers would work to implement the revised strategic asset allocation and report back to future Committee meetings on progress.

AGREED that the information provided was received and noted.