Transcript

Good evening, everyone, and welcome to the Pensions of Committee Meeting, member and key participation and person in the meeting room. Only the committee member, person, meeting room will be able to vote. We have been advised by the committee officers that should technology difficulty from their full persuasion in the meeting and we may proceed in the obvious or the feeling necessary. I like to remind members of the meeting of the only spoke on my direction and to speak clearly into the switch of all silent mode. I'll ask the committee to introduce themselves, please, can you do also start any declaration of interest that you may have in the agenda item and the of the interest. Sorry, my name is Councillor Adamia. I'm chairing today pension committee. Nothing to declare. Councillor CUMBEL who said nothing to declare. Councillor Mayesha Begum, nothing to declare. Is there any apology or absence? Yes, Chair, there's apologies from Councillor Abdul Ullah and Mr. John Jones, the independent chair of the Pensions Board. Agenda item number one, declaration of interest page 78. We have already done this declaration of interest with the interest. Agenda number two, under restriction we need of the previous meeting five minutes, page nine by 18. Can I invite member of the approved the unrestricted minute of the meeting hold on 30 September

1. If member of to be made the clear will record that in to move in the next item. Members, could you show your consent that you agree to them to the minutes of the 30th of September. Item four now. Item three. Petition, zero minutes. Do you have any record, any petition? No, Chair, we've received no petitions. Agenda number four, submission referral from the Pension Board, supplementary agenda page number XXX. Can I invite John Johnson to present the report, please? All right. Consequently, no formal decisions could be made. However, the attendees were able to, were presented and broadly the reports were all in order. To Rosac and for Paul. Regarding the recommendations that they made around growing our own. Is that something that you guys can look into? The apprenticeship scheme. Yes, of course. Firstly, thank you very much for your time this evening. My name will be a docker. I'm a client director in our UK institutional team at Schroders looking after local authority pension funds. I'm actually representing today and standing in for my colleague, Jack Bladen, who is happily on paternity leave. I'm joined by my colleague, Lucinda Liss, who is the fund manager of your portfolio. We've put together some content this evening really just to give you an education on real estate as an asset class and what we're trying to achieve within your portfolio, how we look to do this. One thing we just wanted to check was how long we had for this slot. We can adjust it and flex it to your needs. You have 30 minutes. So 10 minutes for your presentation. 20 minutes for questions from members. Thank you. It's now 1846. Perfect. I will be concise then and not take up too much of your time before handing over to Lucy, who is the subject matter expert. But I just want to say that, as I mentioned, Schroders are your real estate manager. This is a role we've been privileged to perform since 2007. In that time, we've delivered average performance every year of 4.2%. I'm just going to turn to slide four and give you a brief introduction on considerations, why we see institutional investors investing in this asset class, what it does for your portfolio and the attributes that it offers. And then I'll pass over to Lucy, as I say, in the interest of time. So you'll see there that there's a picture of a number of buildings. And really what this asset class offers you, there are lots of technical terms, but essentially in this portfolio, we're investing in UK commercial property. It's a physical asset. So our objective really is to give you a diversified exposure to UK commercial property across a range of different subsectors within that. And I'll give you a high level overview of the sort of attributes of that. So much like if you own residential properties, if you're a landlord, you get an income from the rent that your tenant pays. And that is a key component of commercial real estate returns, a stabilized income return which underpins everything else. In addition to the income that you get, the managers which we work with, managers who we work with, are able to add value to the buildings that they own through active management. So that may be buying a property with some vacancies and space to let up. It may be refurbishing a building and renting that at higher rates. And that improves the valuation which they then are either able to hold or to sell. In addition to, and that's a sort of equity like component. So the income from your rent is more like the bonds in your portfolio. The ability of a manager to add value is more like the ability of a company to grow. But in addition to that, you do have sentiment, investor sentiment as well which is equity like in terms of sometimes people want to buy property when yields are low and there's an ability to borrow cheaply against that. At other times when there's more structural social change or interest rates go materially higher, there's a nervousness and people may sell. So that's sort of equity like component. And really what that means in some is that real estate gives a different return, a different type of return to your other investments in your portfolio and what your consultant may refer to as diversification. Now there are a number of additional slides but I'll just flick to slide seven where I'm going to look at the right-hand side of a chart which shows the long-term returns of real estate versus other asset classes. And you can see there that the real estate return on the right-hand side, so that's just the longest time series that we have available, gives an attractive overall annualized return there of 9.6 which would be above average as we would see it today where you might expect normalized real estate returns to be in the order of 7% but it falls somewhere between your equities and your fixed income. It gives you an above inflation return underpinned by that income and as I say with the ability to add value. I will leave it there and pass over to Lucy to give you a bit more color on actually the different types of buildings that are owned within your portfolio and the specifics of your mandate and then we'll move on. Move on to slide eight. So obviously we're all familiar with real estate in so far as we all live in it, work in it and also spend our leisure time in it. If I'd have showed you this slide 15 years ago it would have probably just had three pictures on it which would have been an office, an industrial unit and a retail unit but the actual opportunity set of real estate has expanded and is continuing to expand hugely so now a lot of institutional investors and larger investors are actually looking to invest in the alternative sector so things like healthcare, student accommodation, social housing, self storage. The alternative sector assets tend to be driven more by demographics, technology and e-commerce rather than economic trends so they tend to be low correlated against the economy which means that they help volatility and also they tend to have a focus on operating assets so what that means is you don't have a traditional commercial lease, it's actually focused on the operating profit, the business and it means you can sort of align yourself to the success of that operator. Tower Hamlet's portfolio is well diversified if you look to the right hand side of the chart you'll see that it has about 18% in offices. Obviously offices have had a tough time as a sector recently given COVID and the way that working from home has increased but there is still demand for certain offices with strong ESG credentials in really well located places with strong amenities so within your portfolio we have been investing in offices where these fundamentals exist. Just under 10% is in retail, again retail has also had quite a tough time given the growth in online sales. The rents for retail have undergone a significant repricing over the last number of years and the assets repriced so actually the retail sector looks very compelling now albeit cautious in certain sub-sectors like shopping centres. The focus is really on convenience led assets and retail warehousing where they have more resilient income. The majority of the portfolio i.e. a third is in industrial, this went under a significant repricing from June 2022 and has now repriced and really is a favourite sector of ours given that there is a lot of potential rental growth given e-commerce and urbanisation trends and the sorts of funds that you are invested in for industrial are predominantly in the South East and within those urban locations. There is a bias towards alternatives, about 25% of the portfolio so that is in living and operational assets so that is where the care homes, healthcare, student housing etc come in and you are in a student fund, a care home fund, retirement living and social housing so there is a good diversified portfolio. Just in the interest of time I am going to skip the next slide that was really just to say that valuations have stabilised and now is actually a really good time to invest into real estate and given the performance of forecasts we are looking at total return over the next five years in excess of 8% so a real positive outlook for real estate going forwards. I was just going to spend a couple of minutes quickly just talking through the benefits of actually investing in directly and through a multi-manager approach so there is a couple of ways to invest in real estate, you can do it directly and earn the assets outright which gives you control over those assets but you need a large amount of money in order to diversify because property is very lumpy. The other way is through indirect assets so investing in a vehicle you don't have as much control but it means you can invest across more sectors so looking at the table on the right hand side your portfolio is currently valued at 234 million, if you were to take that amount of cash and put it into direct assets so if you bought Wenlock Works which sold for 104 million and another couple of assets you would only have exposure to 234 million pounds worth of real estate. If you invested that 234 million pounds into a balance fund such as Blackrock because of the amount of properties they own you would actually have exposure to £2 billion worth of property. What we do for you is actually take that 234 million and spread across a wide range of funds and that actually gives you exposure to £13.4 billion worth of assets so you get diversification across all sectors and so it gives you best performance because you're not relying on just two or three assets. So that gives you diversification, it reduces volatility, it helps you with transaction costs because it's split with other people. As a multi-manager we have obviously managed just under £4 billion so we're able to aggregate all of our clients together when we invest into a fund and go to them and basically ask for a fee reduction because of the quantum and also for a seat on the investment committee so that we can help influence some of the outcomes of the funds. We also have exposure to specialist property managers and we have a number of partnership vehicles where we can access sectors that you might not be able to just do in the marketplace so we sort of team up with best-in-class operators so that we can get that specialism for you. And then just overlaying that we obviously provide a robust governance practice so we give full fiduciary oversight which is sort of an IC or investment committee process ESG is integrated into our investment process so that's sort of what we bring to the table as a multi-manager. We have to pause, we may pause there and invite your questions. Does the committee have any question or comment it wish to speak? Thank you Olivia and Cindy for your presentation. Just, that was very interesting. I had one quick question on slide 8 when you had all the different sort of portfolios that Tower Hamlets is currently investing in and I see we're quite low on residential in fact I couldn't see anything on residential maybe it's part of other. I just wanted to get your advice on how can, because Tower Hamlets has, we have a huge house building project how can the council sort of invest within its housing with the residential side so obviously that would help expedite our sort of interest and our sort of strategic plan as well as invest in the right way. Yeah so this is probably two problems I'll start and then you can. So in terms of the residential elements in this, in your portfolio you're right it does come under other. We don't actually have a significant amount of sort of residential in the true sense of the word. We have social housing, it's predominantly sort of student housing and care homes but we are actually at the moment going through a process where we are looking at the residential universe and seeing where the best performance and returns and risk profile is. So we will be allocating, we're in the process of allocating some money to that. But in terms of actually within the... Yeah no I was just going to add to what Lucy said and just say that more broadly, I'll caveat the whole mandate and then come on specifically to your question. More broadly we think strategically about where the opportunities are to meet your performance objectives and how best to invest to meet those objectives. So it's an active management strategy and a well-resourced team within the framework that this is a less liquid asset class and illiquid asset class compared to equities and fixed income. Within housing, Lucy's touched on what we do within the portfolio. There are also housing funds that exist to invest specifically to address the opportunities, social opportunities that you mentioned. Schroders in fact has got FCA approval and has just launched its own housing led impact fund. And one of the areas that they see of most need is in London. You mentioned Tower Hamlets and it's both an investment opportunity and social shortfall that is something that they're looking to address within that fund. Thank you very much Chair. Obviously if we go down looking at the levels of the portfolio, we still have 9.5% in retail. But retail as in retail units is tumbling downwards. One only has to look at the problems of Oxford Street. There's any mall in the country is blocked up and up and up. And I just wonder whether it's people still buy but they buy quite differently. And I'm wondering whether it's worth to examine whether reducing the 9.5 in retail in that way and increasing on logistics because people are still through warehouses and having stuff brought to them. Whether that is a thought or it's just too minimal. Yeah, so there is still a place for retail. I think it is very sub-sector dependent. So the type of retail that we think has a place is convenience retail. So the rents have been reprised, rebased and effectively it would be things like either retail warehousing where there's convenience led operators to not fashion. And also one of the funds we're investing in is called the Local Retail Fund, which is basically parades of shops. And actually that performs very well because it's day to day shopping. People need to go there and just do their daily shops and other sort of daily things. So it's very much convenience based. So there is still a place for retail. But very cautious in certain areas like general high street, like you say, and also shopping centers. In terms of logistics, we are very much looking to increase the allocation to industrial. And actually we are in the process of allocating some money to self-storage, which is a sort of sub-sector of industrial, which is basically it's an operating platform that sort of when I talked about earlier, so it's not traditional industrial, but it's a way of accessing a market or sector where there is an acute lack of supply. In terms of affordable housing, which we were talking about before, the fund actually has a 5% allocation to housing through the London Civ product, not through shortage. So there's a very substantial investment in housing, but not in this particular fund. Would you actually invest in housing in your fund, given that there's already a lot of housing anyway in the Tara Hamlets fund? Or would you speak to somebody before you did that? Lucy, you're probably better placed, but it's one thing. Within the parameters of this mandate, we're looking at opportunities that we think best fit to meet the return requirements. And there isn't an explicit social or impact objective within this. So we would be comparing, for example, affordable housing with the self-storage opportunity that Lucy mentioned. And just thinking about things from a risk-adjusted return perspective, which isn't to say at all, as you say, that there isn't a valid case for social or affordable housing or any flavor of that. It's just that from our perspective, it would have to have a more attractive risk-return profile than the other opportunities that we're looking at. I guess I'm suggesting that perhaps you want to speak to somebody before investing in affordable housing, given there is a big investment elsewhere. Yes, we would do that. We do look at the rest of this client's portfolios, what they're doing elsewhere, and not wishing to duplicate. Thank you for the report. The council has a policy and target to become net zero by 2035. So do you have any kind of target to become net zero? Yes, we do. Sorry, I didn't get a chance to get onto sustainability, but if you turn to page 19. So basically, the importance of sustainability obviously is within our investment process, and we sit down with all of our managers to actually ensure that they are meeting our sustainability policy, which is effectively to have all of them having 90% of the carbon emission reduction by 2030 for scope one and two, and then for scope one, two, and three by 2040. Obviously, it's not quite the same as having direct assets, so we have to rely on third party managers to do that. So we engage with them and send out surveys and basically create scorecards for each manager, and where we see gaps in our policy, we will work with them to meet those improvements, and we haven't had to do this, but where they don't, we would look to disinvest if we couldn't actually get them up to our policy level, but we've never had to do that so far. Yes. Thank you, Chair, and thank you, Lucinda and Olivia. Just a quick question. In terms of benchmarks, there's a table on your portfolio that says PAN and we've got 4.9 return against a benchmark of 2.9, and our welcome view, our benchmark is 5.2, so technically speaking, we're still below our benchmark. Can you comment on that, please? Should I take this? I mean, so I think, are you looking at slide 15? I'm just trying to find the number. For the benchmark of this particular strategy, we use a peer group analysis. So it's an aggregation of the underlying investments, essentially, that are available to us and is a broad reflection of the market. So it's the parameters that are set within the investment management agreement that we've been managing the fund to, recognizing that, as I mentioned, this is a piece of the wider jigsaw for your overall portfolio, but this is an indication of how we're doing relative to the opportunity set in the market and to our peer group, essentially. Thanks. Can I just welcome Masa to comment on the 5.2 relative to what the markets say? So I think page 14 is probably the best representation of performance, and so dark blue bars, performance of Schroder's portfolio for the fund, and then the benchmark in orange. So the benchmark is representative of the MSCI index, but it's a collection of essentially all the balanced funds in the universe. So the benchmark that we've asked Schroder's to look to capture and outperform is just reflective of the balanced fund peer group. So instant inception, so obviously over the long term, performance is pretty much in line with the benchmark. It is actually pretty hard to outperform net fees. So really what we're looking for from this mandate from Schroder's is basically just to capture a broad property market returns, and if they're able to outperform that student as a bonus net fees, obviously. So Steve, sorry, relative to your report as per Q1 last year, we had a benchmark of 5.2%, which showed that this portfolio is actually underperforming based on that benchmark. Can you comment on that? So if that was Q1, obviously time has moved on. No, that's per annum. So 4.9% per annum. Is that what date? This was last, because we didn't receive the Q2 report, so I can't comment on that, but this was the last September report. So that was September last year? Yeah, no. So we haven't issued a report for this September? Q1 this year. Yeah, Q1, so I don't have the figures to that date, but your performance may well have been a little bit behind. So I think quite a big driver in performance has been the recovery in the property market. Yeah, today? Sorry, Steve, it's 4.9%, it's correct per annum, for Shroder, but our benchmark shows 5.2% in your report. I mean, we can pick that up when it comes to performance. I don't think we've issued a comparable return figure for the benchmarking trailers. The benchmark varies every quarter. There's not a fixed benchmark every year. Yes, Razak. Thanks. Can you comment on page 13, where you're showing a style breakdown? On the pie chart, the first pie chart, you've got a cash 7.6%. Can you just let the committee understand what that pie chart actually signifies? Yes, of course. So the pie chart shows the style breakdown of the portfolio, so core balanced and core specialist funds. So core is investments where there's low or no gearing, higher quality assets that are relatively liquid and have limited asset management opportunities. Then the value add, which is the light blue value add, has some gearing and focuses on assets with slightly more risk where you can carry out asset management initiatives, and that will produce or hopefully provide better performance and returns. The cash in this portfolio at the moment is above benchmark, and that's deliberate. We have been accumulating cash because we believe with the market having repriced and property now becoming fair value, that now is a very good time to invest. So we've actually been accumulating that so that we can invest into things like self-storage and hotel funds. So that's why it's probably a slightly higher cash element than you'd normally see. I was just going to add saying the funds that Lucy mentions at the end, those would be commitments that we've made from that cash, which would still feature as cash as a line item because it hasn't yet been drawn by the fund, but which is allocated to those funds. That's just 100% of it. Thank you. Thank you for your presentation. You are welcome to stay or the meeting or you can go leave now. Are you happy to stay here? Thank you. Agenda item number six, Tower Hamlet for the consideration. Agenda number 1.6, Pension Administration Report. 6.1. Yes, 6.1, sorry. Administrative Report, September 2020, page number 14 and 54. Can I invite Paul Wood to present your report, please? I will just focus on the key points of the report. If I can ask the committee to go to paragraph 3, 30th of September 2024, and it does show a disproportionate growth in the number of undecideds. And we are obviously looking to survey this in a particular group just to supersede this one. Paragraph 3.4 shows the workflows produced to be under-resourced. And moving on to 3.7, that deals with the issue of data quality 12. Again, Haywood, a software supplier, are planning to retire the current member self-service application, and that Paul has the upcoming information forum chair. And finally, paragraph 3.13 and 3. Thank you, Chair. Thank you, Chair. Just a quick question for Paul. Where we got Table 1B, I just want to understand the total figures at the bottom. Does this include all potential members who have not opted in as well, or is it just people that are opted? So you've got some undecided, deferred, and active, and then other categories. Does that include every member potentially added to the fund? To be reflected in the membership. So is there a column or an amount that we can see the members not opted in so we could see what's the percentage in terms of members? Thanks. Just one more. The reason why I'm asking, I just want to understand the take-up rate. So is there a way that the committee can understand what the take-up is for pensions? That will help us with our analysis. Thank you, Chair. Thank you. Can I just request going forward that we have this information within this table, if possible, so we can do a comparison of the data? Thank you, Chair. It is possible that we will put a request to HR to... Agenda number 6.2, Scheme Engagement and Communication Report, page number 47 by 60. Can I invite Paul to present your report, please? Thank you, Chair. This report on pages 61 to 92 are progressing with the arrangements for the proposed event, and the event has been scheduled to take place twice in January, so on the 9th of January and then again on the 24th of term attendance at the upcoming event. I'd like to leave it there and for the report to be taken as read, and I'm happy to take any questions. Thank you, Chair. Does the committee have any question or comment they wish to ask? Can I report the recommendation noted, which is page number 57 on the agenda? Thank you, Chair. I just want to understand where we have risks as a current risk and then a target risk, and I'm happy to take any questions. Thank you, Chair. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Does the committee have any question or comment they wish to speak? Councillor Sides. Thank you, Chair. I just want to understand where we have risks as a current risk and then a target risk. Looking at the first one, for example, we are on 16 at the moment and the target is 9. Where does that leave us? Is that still an amber risk? Does it go to green? What does 9 mean? Heading towards target. I think my question was where we have a target of risk number 9, target level 9, where does that leave us as that risk? Is 9 considerably low? Is it high as a target? I want to understand because if it's still in mid-range or if it's still high, why are we not targeting to aim more towards a lower number with the lower risk you ought to? Thank you. Dura, look. Thanks, Chair. Can I just start? We take this in two parts, so I'll just explain the risk register. So those are not rug ratings. Those are likelihoods in the four different levels. So yellow is the best before green. And the reason why it's yellow is there's always a chance of data going wrong. However, you are right. Once we've done those reconciliations and you'll see a presentation later on on how we are tackling that data issue, the next stage now is to make sure those controls are in place so we don't get those issues going forward. I'll invite Ahsan to comment on that kind of issue. So in theory, just to pick up that first risk, Councillor Saeed, that you've highlighted, it's about reconciling our member data and doing all the right things in terms of payable reconciliations, member data reconciliations. So as long as we can evidence that, I think it will be fine in terms of the audit sign-off. I mean, they will comment on our internal control environment. So they will see how often we do things, what kind of environment we have and review our sign-off processes. So as long as we can evidence that this is taking place and the reconciliations are there, it shouldn't be an issue when it comes to audit. But they will look into how often we do these things, how well we got these things set up and how good these reconciliations are. So they will review the reconciliations themselves. So it's a case of evidencing that we are doing these reconciliations and at the same time they will comment on the control environment in terms of how well they think that's set up. Can the report and recommend it to noted which is on page number 61 on the agenda? Agenda item number 61 for pension fund recreation and cash flow. And that is compared to 123% funding level at the last actual evaluation in 2022. So the solvency and the contribution rates will be determined by the archery. Thank you, Chair. Question on 3.13. I just want to understand the movement. So when we say we've got a positive position of 10.6 up from 1.3 in the first two years, is this kind of movement normal? And can you explain that a little bit more? Thank you, Chair. Well, normal, I guess, depends. I'm going to be a bit annoying and ask a question on the previous point. I was looking at the appendix that I've missed something. That's all right. So appendix on the cash flow, Paul, I just want to understand in the actuals for this year, we've got other miscellaneous payments of 37.2 million pounds and then nothing in the actuals, nothing in the forecast. I just want to understand, what is this 37.2 million pound? Finestrative expenses, creditors, that's for AVC Lumsum. So you've got death grants for admitted bodies. You've got death grants for the authority. Thank you. Does the committee have any question or comment it wish to speak? No. All right then. The report and recommender noted which are page number 99, agenda. Agenda number eight, any other business one minute. The press and public meeting about a chair to move on the motion that the member to second the motion. I second it formally. All right then. In the view of the contact of the morning item on the agenda, the committee in recommendation on the I second it formally. All right then. In the view of the contact of the morning item on the agenda, the committee in recommendation on the adopt the following motion. Under the previous of the section 108 and the local government act 1970 as amended by the local government access to information act 1985, the press and public and the from the remanded or the meeting on the consideration of the session to business at the ground, the consideration information of the exam and part one and session 12A and the local government act 1972.