Agenda item

Report of the Director for Corporate Services and the County Treasurer (S151)

The Panel received a joint report of the Director for Corporate Services and the County Treasurer seeking approval to the Staffordshire Pension Fund’s (‘the Fund’), Annual Investment Strategy (AIS) for the investment of internally managed cash.

They were informed that, under the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016, Administering Authorities were required to include policies for how they would manage Pension Fund cash as part of their Investment Strategy Statement (ISS). However, the Fund considered it good practice to prepare a separate Annual Investment Strategy (AIS) for cash balances, with reference made to it within the ISS.

The Panel noted that the Pension Fund had a small strategic asset allocation to cash of 1%, recognising that cash balances were needed for the day-to-day management of the Pension Fund. This cash was managed by Officers in the County Council’s Treasury and Pension Fund Team, to provide liquidity and pay bills as they arose.  The management of this cash would continue to remain with the Fund and would not be transferred to LGPS Central Ltd under the LGPS pooling agenda.

The cash held increased from time to time, pending investment in other major asset classes e.g., property and private debt. The proposed AIS therefore needed to allow for such situations occurring and the Panel would need to review the strategic asset allocation benchmark to cash on a quarterly basis, together with any associated ranges.

The proposed main objectives for the AIS were to invest cash prudently, and to have regard to the security and liquidity of its investments before seeking the highest rate of return, or yield. The objective when investing cash was to strike an appropriate balance between risk and return, thereby minimising the risk of incurring losses from defaults but also taking into account the risk of receiving unsuitably low investment income.

To allow for the practical management of the treasury transactions each day, it was proposed that the change in investment limits and the choice over the investments made be delegated to the County Treasurer (S151 Officer), who chairs the County Council’s Treasury Management Panel. Outside of this, the Pensions Panel would need to assess any specific requirements and consider any changes that may be required to the AIS.

The Panel noted that DLUHC Guidance on Local Government Investments specified the types of financial instruments that local authorities could invest in. The Fund’s AIS had followed the county Council’s AIS in dividing investments between Standard and Non-Standard Investment categories.  Standard Investment categories included investments that were made with approved counterparties and did not require further approval from the County Treasurer (S151), as Chair of the Treasury Management Panel or the Pensions Panel. These investments tended to be for a period of less than a year and were the most frequently used. In the case of the Pension Fund, Standard Investments were made with the UK Government (central government or local authority, parish council or community council); short-term money market funds (MMFs); and the Fund’s banking provider (currently Lloyds Bank).  The Non-Standard Investments included: Covered Bonds, issued by banks and building societies against mortgage assets and guaranteed by a separate group of companies; Repos (Repurchase Agreements), comprising the purchase of securities with the agreement to sell them back at a higher price in the future;         UK Government Gilts; and Collective Investment Schemes.

With regard to risk, the Panel were informed that cash was only a small component of the overall investments of the Fund and the wider aspects of risk were considered in the ISS, where cash was shown to form a small part of the Fund’s Strategic Asset Allocation.  Looking at cash in isolation, treasury management usually recognised that the two prime risk areas were security and liquidity. It was considered that focussing primarily on these two risks was appropriate for the Fund’s relatively low 1% allocation to cash, for day-to-day cash management purposes. However, the AIS provided the flexibility to consider higher yields using Non-Standard Investments. Should the Pensions Panel decide to make a higher strategic allocation to cash at some point in the future, where seeking a higher return would become more important, the balance of risk and reward would need to be revisited and the AIS reviewed.

The Panel noted that the main circumstances where a revised strategy would be prepared included a significant change in:

•    the Fund’s Strategic Asset Allocation;

•    the economic environment;

•    the financial risk environment; and

•    the regulatory environment.

In response to a question from Carolan Dobson as to why it was proposed that any change in investment limits or the investment counterparties set out in the AIS, be delegated to the County Treasurer (S151), rather than to the Panel or the County Treasurer in consultation with the Chairman of the Panel, the Assistant Director for Treasury and Pensions explained that this was for operational reasons. On a day to day basis, due to fluctuating cash balances, it was impractical to have to seek the approval of the Panel or consult with the Chair in advance of investing cash, if changes to limits or investments with new counterparties were warranted. All temporary cash investments would only be made within the framework of the AIS, which has been approved by the Panel.

The Assistant Director agreed to raise this matter with the Director for Corporate Services and the County Treasurer and report back should any change to the previously agreed process be considered necessary.

In response to a question from Cllr Greatorex regarding the rate of interest on cash balances held with Lloyds Bank, the Director indicated that the rate currently stood at 0.4% pa.

RESOLVED – That the Staffordshire Pension Fund’s (‘the Fund’), Annual Investment Strategy (AIS) for the investment of internally managed cash in 2022/23, be approved.