Agenda and minutes

Apologies were received from Cllr Russell Mellor, Cllr David Jefferys, and Cllr Gareth Allatt.

Cllr Kira Gabbert attended as alternate for Cllr Jefferys and Cllr Pauline Tunnicliffe attended as alternate for Cllr Allatt.

Cllr Fawthrop declared an interest as a deferred Member of the Local Government Pension Scheme.

The minutes were agreed.

In accordance with the Council’s Constitution, questions to this Sub-Committee must be received in writing four working days before the date of the meeting. Therefore please ensure that questions are received by the Democratic Services Team by 5pm on Wednesday 18^th July 2018.

There were no questions.

Report FSD18059

Members received the annual report and accounts of the L B Bromley Pension Fund for year ending 31^st March 2018 which the Council is required to publish under the Local Government Pension Scheme Regulations 2013. The annual report included the following documents requiring the Sub-Committee’s approval: 

·  Governance Policy Statement

·  Funding Strategy Statement

·  Investment Strategy Statement

·  Communications Policy Statement.

The annual report had been audited by the Fund’s external auditor, KPMG LLP and included a draft statement from KPMG. The Council would publish the Annual Report on its website by 1^st December 2018.

The Bromley Pension Fund had total net assets of £967.0m as at 31^st March 2018 (£913.4m as at 31^st March 2017). The Fund outperformed its benchmark by 3.6% over the year (+6.1% against a benchmark return of +3.1%). Performance compared to the 61 LGPS funds in the PIRC local authority universe (average return of +4.5%) was excellent, ranking in the 3^rd percentile for the year. Rankings over the medium and long term were also excellent – first over three years and over ten years, and second over five years, 20 years and 30 years to March 2018.

Total membership of the fund increased from 16,404 at 31^st March 2017 to 16,920 at 31^st March 2018 when it comprised 6,198 employees, 5,185 pensioners and 5,537 deferred members. Payments into the Fund from contributions (employee and employer), transfers in, and investment income totalled £41.6m in 2017/18 (£44.9m in 2016/17) and payments from the Fund for pensions, lump sums, transfers out and administration totalled £40.9m (£71.0m in 2016/17). The large reduction in the value of payments made during 2017/18 is mainly the result of the group transfers out of Bromley College and GS Plus during 2016/17.

The accounts had been audited by KPMG and were made available in draft form on the Council’s website before the end of May 2018. KPMG anticipated issuing an unqualified audit opinion on the financial statements of the Pension Fund and a draft statement to that effect was included in the Annual Report. (Democratic Services note: the final opinion, issued after the meeting, was unchanged from the draft included in the Annual Report.)

In discussion it was highlighted that there were only four investment managers in the second paragraph under “Investment Managers” at page 13 of the Annual Report (of the year to 31^st March 2018), and that Schroders had been appointed since then.

RESOLVED that:

(1)  the Pension Fund Annual Report 2017/18 be noted and approved;

(2)  the Governance Policy Statement, Funding Strategy Statement, Investment Strategy Statement, and Communications Policy Statement, as outlined at paragraph 3.2 of Report FSD18059, be approved; and

(3) arrangements be made to ensure publication by the statutory deadline of 1^st December 2018.

Representatives of MFS will be attending the meeting for this item.

Initial Allenbridge assessment of second quarter performance

John Arthur (Allenbridge) provided a brief commentary on the Fund’s second quarter performance prior to the MFS presentation. In relation to Environmental, Social and Corporate Governance (ESG) considerations, the Director also updated Members on Government proposals to amend investment regulations for occupational pension schemes.

From outline figures on second quarter performance, the Fund slightly improved from benchmark but with a high level of volatility there was a greater level of uncertainty in markets. U.S. economic performance was good following tax cuts and subsequent volatility in Q1 passed; generally, the global economy was performing well. There had also been some political tensions in Europe e.g. new Italian Government.

Since the 2008 crash, economies had cut interest rates with extensive bond buying to encourage growth. The recovery had been the slowest on record but the economic picture was now becoming stable. The UK economy was growing stronger and central banks had dropped the level of bond buying with less money being pushed into the system. There was now substantive economic growth and a greater level of volatility. Assets were growing and it would have to a major political event(s) to impact the global economy.

With economies on the latter stages of recovery, markets had raised in Q2. Mr Arthur expected returns to be slightly volatile and medium term there was a reasonable level of returns. Although one of the best performing in England and Wales, it would not be easy for the Fund during the end stage of economic recovery. 

ESG considerations on investments for occupational pension schemes

The Government had consulted on proposals to clarify and strengthen trustees’ investment duties and mandate for ESG considerations related to investments for occupational pension schemes. An amendment to the Occupational Pension Schemes (Investment) Regulations 2005 would require trustees to state their policies on evaluating risks for an investment long term. This would include risks related to sustainability arising from corporate governance or from environmental or social impact. Trustees would also have to consider and respond to members' ethical and other concerns.

Although the intentions were sound, there was a risk of the principles being politicised. Clarification would be provided on strengthening investment responsibilities and trustees would need to consider ESG in their investments. The regulations would also require ESG related decisions to be non-detrimental to the Fund financially. In response to the consultation, the Director indicated that any variation to regulations should be based upon strong evidence and not be overly bureaucratic. L B Bromley Fund Managers already take the long term into account in investments, ensuring that ESG related risks are limited as far as possible to diminish factors that might prevent a maximised return. Baillie Gifford had indicated that there was a greater chance of achieving good sustainable performance success with more freedom given to Managers. In regard to an updated Investment Strategy Statement (ISS), the Chairman confirmed that the section in the current ISS, that Members were being requested to confirm  ...  view the full minutes text for item 47.

Report FSD18061

Further to the Government requirement for administering authorities to pool assets into investment pools (to deliver management fee savings and increase capacity/capability for infrastructure investments), Members were asked to consider a transfer of the Fund’s Global Equities portfolio managed by Baillie Gifford into the equivalent portfolio in the London Collective Investment Vehicle (which the L B Bromley Pension Fund joined in October 2016).  Assets such as equities and bonds (easier to transfer or sell) were expected to be pooled first. 

In view of matters considered as exempt material which the Chairman wished to discuss with the Sub-Committee, Members agreed to consider the item under Part 2 proceedings of the meeting.

Report FSD18060

Comprising high level risks (underpinned by more detailed registers within individual business plans), the Pension Fund Risk Register (appended to Report FSD18060) feeds into the Corporate Risk Register via the Corporate Risk Management Group.

The Fund’s agreed Asset Allocation Strategy (reviewed in 2016/17) balances the risks associated with a high allocation to growth assets, particularly equities, with the need to improve the funding level and maintain employer contribution rates at a relatively stable level, whilst also meeting the Fund’s cash-flow requirements.

A summary of the main investment risks comprised:

·  Concentration/credit – the risk of underperformance or default from a significant allocation to any single investment or type of investment;

·  Illiquidity – the risk that the Fund has insufficient liquid assets to meet its cash flow requirements;

·  Currency risk – the risk that the currencies of the Fund’s assets underperform relative to sterling;

·  Interest rate risk – the risk that the values or future cash flows from investments fluctuate as a result of changes in market interest rates; and

·  Manager underperformance – the failure by the investment managers to achieve their benchmark rate of investment return.

A Member felt that governance around the CIV is a risk missing from the Register. Although the Fund continues to retain ownership of its investments in the London Collective Investment Vehicle (LCIV), Members supported the view and it was RESOLVED that:

(1)  the current Pension Fund Risk Register be noted along with existing controls in place to mitigate the risks; and

(2)  further commentary be added to the Register to reflect an additional risk of governance related to the London Collective Investment Vehicle.

The exempt minutes were agreed.