Spotlight on Surrey Pension Fund

Surrey Pension Fund’s Phil Triggs speaks to Laura Blows about the changes and challenges facing the pension fund

What issues has Surrey County Pension Fund been focusing on recently?
Much of the year has been spent compiling accurate data for the actuary for his triennial valuation process. Surrey has a history of prudence with regard to the actuarial assumptions employed in actuarial funding level calculations. We would prefer to see the ‘warts and all’ scenario and adopt an appropriate strategy to bridge the funding gap, rather than relax the assumptions for a rose-tinted spectacles picture. I am confident in the investment and funding strategies to which we are currently adhered. To bridge a funding gap requires additional contributions as well as outperformance in growth assets. Both of these are currently contributing significantly. To achieve our goals, we must tread the fine line of achieving solid returns from actively managed growth assets, but within acceptable risk parameters. The fund is comfortably cash flow positive, so we are still in the enviable position of being able to look long term without needing to cash in investments or, indeed, utilise investment income from dividends or interest.

The other current project is fund governance, which has been subject to significant change since my start at the authority. A brand new pension fund board with full council committee status and decision-making powers was set up via a change to the council’s constitution in March 2013. The new board has assumed responsibility for all aspects of the pension fund: investment strategy and monitoring, liability management, administration and the corporate governance aspects of the equity portfolio. Much work has been done on responsible investment and areas surrounding formal adoption of the Stewardship Code. The board has resolved to vote its own shares according to its own voting policy and to engage positively on responsible investment issues with the companies in which it holds shares, either through direct engagement or via the Local Authority Pension Fund Forum (LAPFF). The fund will also set up the required scrutiny body, currently subject to a consultation process, such that pension fund board strategy decisions can be subjected to the appropriate examination and questioning by suitably qualified persons.

Could you talk me through your pension fund investment strategy and whether this has changed lately?
Given the serious attention needed to bridge the funding gap, growth assets feature significantly in Surrey’s asset allocation. Equities take up 60 per cent of total allocation with five external active managers and a passive index-tracker employed. The fund recently switched 9 per cent of its equity portfolio to diversified growth funds. The objective was to achieve a better risk adjusted return whilst achieving a lower volatility of return. The fund runs its own portfolio of private equity funds, taking up 5 per cent, which has performed very well against its 10-year annualised equity based benchmark. Property fund of funds takes up 7 per cent and the remaining 19 per cent is allocated to fixed income. The fund chose to switch half of its UK gilts portfolio into unconstrained total return pooled funds in February this year, as the board considered that UK gilt prices had just about completed their stratospheric rise and could move in only one direction. Whilst gilt values will generally move in line with liabilities, the board did not wish to lose significant value within its fixed income allocation and a total return benchmark in unconstrained funds was the result. An investment review post actuarial valuation will look at further diversification within the portfolio with infrastructure funds a possibility if suitable vehicles can be identified. Surrey’s benchmark investment performance is impressive. The year to 30 June 2013 saw an outperformance of 4.1 per cent.

You recently had your auto-enrolment staging date. What level of opt out rates did you have and do you have any tips for schemes preparing now?
The County Council, being the largest of the Surrey Pensions Fund’s employers, had its staging date on 1 April 2013, choosing not to use the transitional delay option. The other 120 fund employers will have their own staging dates according to the number of employees they employ spanning from now until October 2017. The County Council had around 1,800 eligible jobholder employees that were auto-enrolled on 1 April 2013. To date, around two-thirds of this number has not chosen to opt out, resulting in a sizeable membership increase and thus improving cashflow and fending off fund maturity. It goes to show the government’s design of such a process is tailored for staff who hate filling in forms or making decisions: the so called nudge politics in action. It appears to work.

From 2015 The Pensions Regulator will be setting the standards for public sector governance and admin. What effect do you think this will have and what is your view about this?
The government’s reforms to the governance and administration of public service schemes are intended to bring administration practices in line with those in the private sector with member and employer representatives and the publication of consistent information. I think that the governance of LGPS funds will gradually move into line with the private sector with committee/board members assuming a more private sector trustee-like status amidst the same requirement to be suitably trained and knowledgeable in all pension fund areas. Surrey has taken on the commitment of ensuring good training programmes for its board members via online portals and presentations at quarterly board meetings. Moving under the auspices of The Pensions Regulator is regarded as a positive development.

The government has been looking into ways to make LGPS more efficient, with mergers and fund superpools suggested as ways to improve efficiency. Do you agree with this?
Accurate costings arising from such a merger and the quantification of future potential benefits are required. The costs could be considerable: they include the set up costs for the super fund administrative authorities and fund transition costs, although strictly the business case should only take into account transition costs over and above the ‘business as usual’ level.

With any change, the project and viable payback period must be demonstrated. There is currently no suggestion that merger costs would be borne by anyone apart from the LGPS funds themselves. This makes an accurate cost benefit analysis an absolutely vital ingredient in the decision making process. As things stand, we are not really sure how strong the business case for merger is.

Evidence from other countries suggests that scale benefits could improve net-of-fees investment performance. But, there is no definitive proof that bigger is better. Much of the current debate suggests that the super fund merger is about gaining more bargaining power on manager fees and, additionally, there possibly exists a so called “governance dividend” arising from more responsive governance arrangements, more in-house specialist resource and more diversification by fund manager and asset class associated with larger funds. Interestingly, there is also much negative experience associated with large funds overseas that the cheerleaders conveniently ignore.

Looking ahead, what do you think the future hold for LGPS schemes? What will you be focusing on?
The LGPS is at a critical juncture. Whilst we have a strong employer covenant and are still relatively immature, thus enabling a substantial proportion of return seeking growth assets, our challenges at the moment are considerable. We have a brand new LGPS scheme (Career Average Revalued Earnings) to deliver by next April.

We are still navigating a low gilt yield and low investment return environment that could be with us for some time yet. Improved longevity and higher inflation are significant future threats and local authority budgets will remain squeezed over the long term. The LGPS call for evidence requires some form of contingency plan in the event that immediate plans for change are enacted. Given the possible time frames and the looming general election, this could be sooner rather than later.

Written by Laura Blows

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