‘High risk’ pension investment strategy to be reduced

Shetland Islands Council will be advised to adopt a new investment strategy in order to protect its long term pension fund.

The council’s executive committee today agreed to split the pension fund into more, smaller investments to reduce its 80 per cent dependence on “high-risk” equities which can produce high returns but are vulnerable to market “volatilities”.

According to a plan drawn up by investment consultants Hymans Robertson, the fund will be split six ways including investments in British and overseas equities, bonds, property and a diversified grown fund. The proposed new strategy will retain the fund managers BlackRock and Schroders who already have investment management agreements with the Pension Fund.

The meeting also heard that net income to the fund for 2013-14 is expected to be £1.371 million less than was budgeted for, owing to higher payouts and lower contributions than expected, which was largely due to council reorganisation.

A report by executive manager of finance James Gray says the proposed investment strategy will improve the level of return, but in volatile and falling markets the strategy will be protected against the full negative impact.

The committee heard that the strategy would help achieve a fully-funded pension scheme by 2027, when the pension fund is forecast to reach maturity. Beyond this point it is expected that payments out of the pension fund will exceed contributions into it for the first time.

Hymans Robertson senior investment consultant David Walker said that 2027 was the key date when the contributions paid out to the pensioners would match the payments going in.

Meanwhile, the pension fund, stands at £330 million which is “quite a bit more than the council funds.”

The new investment spread would “improve the balance of risk and return”, while the existing structure had been “very efficient in terms of the cost of fees.”

When questioned about contingencies in event of the referendum decision, Mr Walker said that the fund was pretty well globalised and there would be no effect whatever the outcome.

The question was also asked if the pension fund could be ploughed back into the council’s own infrastructure, but the committee was told that there was “no possibility” of this owing to governance and rules on local investments. SIC chief executive Mark Boden said that he would “exercise extreme caution before investing the pension fund locally.”