East Sussex Pension Fund

Annual Report and Accounts

 

 

2019-2020

 

 

Contents

 

1.      Chairmans report 3

2.      Independent adviser’s report 5

3.      Introduction.. 6

4.      Overall Fund Management 7

5.      Financial performance. 13

6.      Investment policy and performance. 16

5.      Scheme Administration.. 23

6.      Actuarial report on funds. 26

7.      Fund account, net assets statement and notes. 32

a.    East Sussex Pension Fund Account 32

b.    Net Assets Statement for the year ended 31 March 2019. 33

c.    Notes to the East Sussex Pension Fund Accounts for the year ended 31 March 2019. 34

8.      Asset pools. 68

9.      Pensions administration strategy report 72

10.    Funding strategy statement 73

11.    Investment strategy statement 74

12.    Communications policy statement 78

14.    External auditor’s report 79

 

1.  Chairmans report

Welcome to the East Sussex Pension Fund Annual Report for 2019/20

As Chairman of the East Sussex Pension Fund (ESPF) Committee, I have the pleasure in introducing the Pension Fund’s Annual Report and Accounts for 2019/20. I cannot do so without reflecting on the continuing COVID-19 pandemic that is having a devastating impact nationally and globally. The accounts focus on the financial implications of activity in 2019/20 and beyond, but the impact on humanity is truly beyond anything we have all experienced. I send my thoughts to all who have been affected by the pandemic.

The membership of the ESPF at March 2020 was 76,792 people (active – 23,835, deferred – 31,622 and pensioners – 21,335) and in the region of 130 employer organisations, with £3.496bn funds under management at 31 March 2020 to meet the accrued benefits.

This year saw the latest triennial actuarial valuation for the Fund. Hymans Robertson calculated the Fund’s assets at 31 March 2019 at £3.6bn. When compared to the projected liabilities of the Fund at £3.4bn, this represented a 107% funding level, indicating a strong solvency position, and reflecting strong investment returns. COVID-19 has negatively impacted on the Fund’s valuation, as the global economy struggles to understand and respond to the pandemic. However, the long-term 20-year assumptions within the valuation put the Fund in a strong position to weather the current uncertainties.

The Pension Committee is responsible for managing the Fund, with the assistance of the Pension Board, East Sussex County Council officers, external advisors and fund managers. In responding to the national review of Good Governance, undertaken by Hymans Robertson, reporting to the Scheme Advisory Board and the Ministry of Housing, Communities and Local Government, the Committee, during 2019, established programme to work to review its own governance arrangements. The Committee has subsequently approved revised terms of reference for the Pension Board and itself, together with refreshing a range of policies and strategies, including Communication and Administration. The review also recognised that the number of officers supporting the Fund needed to be expanded; a new structure has been approved and recruitment is underway to fill new roles. All these actions place the ESPF in a great position to move forward and tackle the challenges ahead.

The ESPF has experienced some stakeholder and external pressures to divest from companies involved in the production of fossil fuels. The Pension Committee’s Investment and Environmental, Social and Governance (ESG) Working Group, together with Hymans Robertson, have undertaken a review of the Fund’s Investment Strategy. This has reflected on the impact of the pandemic and helped to explore and frame the Fund’s approach to better aligning its investments with the risks and opportunities presented by sustainability and the energy transition. As a consequence, the Fund has made a number of substantial changes to its investment approach, raising its commitment to infrastructure assets, including renewable assets, acquiring exposure to Impact Funds who invest in companies addressing some of the world’s major challenges, and adopting an approach to passive index funds better aligned with the goals of the Paris Agreement. The Committee has also updated its investment beliefs, which are set out in its Investment Strategy Statement, and more fully articulated its Responsible Investment Policy.

The Committee believes in applying long-term thinking in pursuit of long-term sustainable returns from well governed assets; while using evidence based long-term investment appraisal to inform decision making in the implementation of its responsible investment principles, consistent with its fiduciary responsibilities. It will continue to evaluate and manage the Fund’s carbon exposure in order to mitigate risks associated with Climate Change, while seeking to reconcile its need for income to pay pensions with the fact that many of the more carbon intensive companies and sectors provide a significant proportion of the market’s dividend income.

ESPF continues to favour engagement with companies and sectors over blanket divestment as it believes that this is the most effective strategy for promoting change and protecting its long run investment interests. However, the extent of its exposure to them will reflect an ongoing assessment of progress in engaging with the energy transition, and the associated risks and rewards of holding these assets in the Fund. The Fund does not own stocks directly but seeks to influence company and sector policies via its chosen investment managers. Its Climate engagement is broadly aligned with that of the Institutional Investor Group on Climate Change (IIGCC), representing over $33 trillion in assets, of which it is a member.

East Sussex has continued to be an active member in the ACCESS (A Collaboration of Central, Eastern and Southern Shires) investment pool, together with 10 partner LGPS Funds. By the end of 2019/20 a total of £21.4bn (49%) was invested on the ACCESS platform, in the following assets:

	£ billion
Passive investments*	10.5
UK Equity Funds	1.6
Global Equity Funds	7.2
UK Fixed Income	0.8
Diversifed Growth	1.3
Total Pooled Investments	21.4

*The passive investment funds are held on a pool governance basis under one investment manager as these assets are held in life fund policies, which cannot be held within an authorised contractual scheme.

The Pension Committee and Pension Board have worked tirelessly to transform the ESPF landscape. I would like to take this opportunity to express my thanks for all the support and input provided by Committee and Board members and officers. I look forward to continuing to work with members and officers in the new financial year as the Fund seeks to meet the challenges of an ever-changing national and global environment.

In presenting the Annual Report, I hope you find it helpful in underspending the Fund.

 

 

 

Councillor Gerard Fox

Chairman of the East Sussex Pension Fund

September 2020 

 

 

2.       Independent adviser’s report

The Fund receives formal advice on investment matters from its actuarial and investment consultants.  My role as Independent Advisor is primarily to act as a separate source of insight to Officers and Committee members.  Our collective objective is, of course, to invest the Fund’s assets to pay members’ pensions in full and on time.  I am additionally able to provide stakeholders with some independent assurance that the Fund is being appropriately and properly managed.

Last year I ended my report by saying that the fund was in a good position financially, but that the Fund’s increasing maturity makes it likely that net cashflow will deteriorate over time and this would require increasing attention.  At March 2019 the actuarial valuation found that the Fund’s assets were well in excess of its liabilities, which is undoubtedly a healthy position.  On the other hand, member and employers’ contributions were slightly less than pension pay-outs and the gap was made up by investment income.  I make further comments on this below.

I said last year that the onus for maintaining economic prosperity would for political reasons increasingly fall on fiscal rather than monetary policy.  I expected interest rates to stay ultra-low and I viewed the combination as a positive fundamental background for financial assets.  I commented that valuations were historically high and that the risk of unpleasant surprises remained, but I thought damage from these sources would be limited by the US Federal Reserve’s willingness to keep monetary policy loose.

In 2019 this played out as expected and, by the end of January this year, markets were reaching new highs.   In the last few months of the financial year the decision by the authorities in many countries to slow the spread of COVID-19 by enforcing social isolation has precipitated both a sudden recession and also significant stress in financial markets.  It has been exacerbated by the halving of the oil price at the same time as a result of the collapse of the OPEC-led oil cartel.  Your Fund was not immune from these events, which will have had an adverse impact on the Fund’s funding level, but I should emphasise that it still stands at a high level. 

Authorities round the world reacted swiftly to mitigate the economic risks of this policy by announcing a rise in spending of an order not seen since the Second World War.  At the same time, where possible, central banks reduced interest rates to almost zero in order to protect the financial system.  However, there is little more they can do on this front and so economic recovery is now largely dependent on how quickly the fiscal measures take effect.   

Looking forward, at the time of writing it is not clear how or when recovery will take place.   Whatever happens, the Fund will suffer a significant and immediate reduction in investment income from dividend cuts and real estate rents as companies struggle to conserve cash.  As the Fund’s funding position can be considered solvent, there is no cause for immediate alarm, but the need for careful cashflow planning has become paramount.

It is too early to give definitive views what this means in the longer term.  It looks as if government will play a substantially larger role in society and there may be some retreat from globalisation.  This probably means higher inflation and higher bond yields, though that has not happened yet and  it may take some years to come through.  From the Fund’s perspective there will be winners and losers, which underlines the importance of investing in a genuinely diversified portfolio.

I commented in my last report on governance matters, both internally and in respect of shared service providers such as the ACCESS investment implementation pool and the administration service provider, Orbis.  Over the last year both the Pension Committee and Pension Board have spent considerable time on this, culminating in two governance reviews, one to bring the Fund’s procedures into line with the LGPS Scheme Advisory Board’s 2019 recommendations on good governance, and the second focused more narrowly on investment governance.  Internal Audit have also, in a separate report, identified a number of internal shortcomings requiring improvement.

These are all important reviews, because the Fund depends heavily on these shared service providers to administer the Fund on your behalf.  It is good to see progress, but it is also important that the recommendations made in these three reviews are implemented as fully as possible.  Good governance costs money but the value of having well thought-out processes in place is shown when, like now, times are turbulent.  It is the best assurance you can have that the Committee and Officers will continue to make good decisions even when events are trying to throw them off course.

I attend every Committee meeting and I see that the Committee members, supported by Officers, consider in detail possible courses of action.  In this year in particular they have spent substantial time outside meetings on the sometimes very complex issues before them.  In my view they are performing their duties carefully and conscientiously in circumstances which are far from easy.

 

William Bourne

Independent Advisor

 

3.       Introduction

Local Government Pension Scheme

The LGPS is a statutory scheme, established by an Act of Parliament, the Superannuation Act 1972 and, since April 2014 the Public Service Pensions Act 2013. The Local Government Pension Scheme Regulations 2013 came into force on 1 April 2014. Membership of the LGPS is open to all employees of local authorities except teachers, fire fighters and police, who have their own separate schemes. It is also open to employees of other employers specified within the legislation.

The LGPS is a registered public service pension scheme under Chapter 2 of Part 4 of the Finance Act 2004 meaning that members receive tax relief on contributions. The Scheme complies with the relevant provisions of the Pension Schemes Act 1993, the Pensions Act 1995 and the Pensions Act 2004.

East Sussex County Council has a statutory responsibility to administer and manage the East Sussex Pension Fund on behalf of all the participating employers of the Fund in East Sussex, and in turn the past and present contributing members, and their dependents.

A major responsibility of the County Council as the administering authority is to undertake a valuation of the Pension Fund’s assets and liabilities (triennial valuation). The main purpose of this exercise is to assess the size of the Fund’s current and future liabilities against the Fund’s assets, and then set the employer contribution to the Fund for each participating employer for the following three-year period. The most recent actuarial valuation of the Fund was carried out as at 31 March 2019. The funding level at this at this valuation is 107%.

It is important to note that ultimate responsibility for both the administration of the Pension Fund and the investment of all monies associated with the Fund remains with East Sussex County Council, as administering authority for the East Sussex Pension Fund. This has been delegated to the East Sussex Pension Committee supported by the East Sussex Pension Board.

 

4.  Overall Fund Management

Scheme management and advisers

Responsibility for the East Sussex Pension Fund is delegated to the County Council’s Pension Committee Members with support from the East Sussex Pension Board. The Pension Board comprises members representing employers and members in the Fund with an Independent Chairman. The Pension Committee receives advice from the County Council’s Chief Finance Officer, Actuary, Investment Consultants and an independent Investment Advisor.

2019/20 Pension Committee Members
East Sussex County COUNCILLORS:	Gerard Fox (Chairman)	Conservative
	Simon Elford	Conservative
	Nigel Enever	Conservative
	David Tutt	Liberal Democrates
	Trevor Webb	Labour
2019/20 Pension Board Members
Independent Chairman:	Ray Martin
Employer Representatives:	Councillor Carmen Appich	Brighton & Hove City Council
	Councillor Chris Collier	Districts & Borough Councils
	Stephen Osborn	Educational Bodies
Member Representatives:	Niki Palermo	Active & Deferred
	Diana Pogson	Pensioners
	Lynda Walker	Active & Deferred
SCHEME ADMINISTRATOR:	East Sussex County Council
ADMINISTRATION PROVIDER:	Orbis Business Operations
BANKERS TO THE FUND:	NatWest Bank
AUDITOR:	Grant Thornton
PENSION FUND OFFICERS
TREASURER:	Ian Gutsell Chief Finance Officer (Section 151 Officer) East Sussex County Council
HEAD OF PENSION FUND:	Michelle King (Interim)	Michelle.King@eastsussex.gov.uk
Head of Investments:	Russell Wood	Russell.Wood@eastsussex.gov.uk
LGPS Governance and STATUTORY compliance:	Michelle King (Interim)	Michelle.King@eastsussex.gov.uk
Pension ADMINSTRATOR:	Paul Punter	Paul.Punter@eastsussex.gov.uk

 

AdviSORS to the FUND
ACTUARY:	Hymans Robertson 20 Waterloo Street Glasgow G2 6DB
LEGAL ADVISORS:	Appointed from National LGPS Framework for Legal Services
INVESTMENT ADVISER:	Hymans Robertson
INDEPENDENT ADVISER:	William Bourne
Asset Pool:	ACCESS Pool
Asset Pool Operator:	Link Funds Solution
FUND MANAGERS:	Adams Street Partners
	Harbourvest
	Longview Partners*
	M&G**
	Newton*
	Pantheon
	Ruffer*
	Schroders
	UBS
CUSTODIAN:	Northern Trust
AVC PROVIDER:	Prudential
Bodies to which the fund is member, subscriber or signatory:
	Pensions and Lifetime Savings Association
	Local Authorities Pension Fund Forum
	CIPFA Pensions Network
	Club Vita
	Local Government Association (LGPC)
	Local Government Pension Scheme National Framework: ·         Passive Investments, ·         Legal Services, ·         Actuarial and, ·         Investment Consultants ·         Stewardship Advisory Services
	Principles for Responsible Investing
	Institutional Investors Group on Climate Change
	Climate Action 100+

* Appointed through the ACCESS Pool operator

** Coporate Bonds mandate appointed through ACCESS other mandates directly appointed.

 

 

Risk management

Risk management is the process of identifying risks, evaluating their likelihood and potential impact and determining the most effective methods of controlling or responding to them. The Administering Authority has an active risk management programme in place. The Fund’s approach is to manage risk rather than eliminate it entirely. 

Risk is identified and managed as follows:

Covid 19 Risk – The onset of Coronavirus and Covid19 is placing significant pressures on both Employers to the Fund and the Pension Administration Service. The increased demand for Pension Administration Services may increase the likelihood of breaching service performance targets and presents resourcing constraints since staff may be subject to the illness themselves. In addition, the migration to remote working has seen an increase in the likelihood of Cyber Scams and Data Protection. 

The Pension Regulator issued a notice on the 2 April 2020 to Scheme Managers of Public Service Pension Schemes to carry out a risk assessment of their Pension Administrator in relation to Covid 19. The Scheme Manager is required to assess whether the ESPF business continuity plan is still adequate and to establish from the Pension Administrator what contingency plan is in place to mitigate their impact of increases in work volumes or unavailable staff.

A collaborative approach is required to work with your administrators to make sure they deliver critical processes: reducing the burden by limiting any non-critical demands and queries; and, confirm the priorities of activities to be carried out, in the order set out below:

·         paying members’ benefits

·         retirement processing

·         bereavement services, as well as any administrative functions required to support these

·         any processes needed to ensure benefits are accurate

This includes the agreement of changes in operating procedures such as allowing electronic signatures and documents and encouraging other third-party providers to do the same. The legal validity of electronic signatures has been endorsed in a recent statement from government.

The Chancellor, Rishi Sunak, in his March Statement advised a suite of financial relief measures to alleviate economic duress arising from the global lockdown and the corresponding liquidity squeeze. It is clear that despite attempts by the Government to prevent a permanent structural impact, a number of companies that existed prior to the lockdown will not exist after the lockdown due to the severity of this economic shock. It follows that the ESPF has seen an increase in employers advising they need to defer the payment of employer contributions to the Fund, noting that employee contributions are legally prohibited from deferral. The Fund is working on a policy on the deferral of employer contributions and has managed the early requests on a case by case basis. 

In managing the economic consequence of a global lockdown and the increasing need to build up cash reserves has given rise to dividend retention. This impacts the cashflow balances of pension funds which are required to service pension promises. The ESPF has therefore commenced cashflow modelling to ensure it can manage within its cash envelope and to mitigate against forced sales of assets to service pension promises. 

Covid 19 has also impacted the progress of the Data Improvement Programme and the Annual Benefit Statement exercise for 2019/20. It has been difficult to make contact with employers in lockdown and those staff are generally redirected to business critical tasks of the employer.

In summary, the Covid 19 Risk is a global risk affecting a number of risk indicators, so it has been necessary to rebalance both the pre-mitigation and post mitigation response as set out in summary in the table below.

Management Risk - A significant risk is the potential insolvency of scheme employers, leaving outstanding liabilities in the Fund. To this end the Fund requires all admission bodies that wish to join the Fund to be guaranteed by a scheme employer(s) or to provide a bond to protect the Fund in the event of insolvency. In the monitoring of employers, consideration is given to the Funding Strategy Statement (FSS), which outlines the Fund’s approach to how employer liabilities are measured, and one of the aims of the FSS is to reduce the risk from employers defaulting on its pension obligations. The Fund monitors the financial sustainability of the scheme employers and takes this into account in the valuation exercise. Some funding risks can be mitigated by the Investment Strategy and the funding and investment strategies focus on the expected real returns from the assets, thus mitigating the effect of inflation on the value of the pension liabilities.

This risk can manifest itself in several ways:

·         Failure to process pensions

·         Failure to collect contributions

·         Failure to have proper business continuity plans in place

·         Fraud or misappropriation

·         Failure to maintain up-to-date and accurate data and hold it securely

·         Failure to maintain expertise or over-reliance on key staff

·         Failure to communicate effectively with members and employers

·         Failure to provide the service in accordance with sound equality principles

 

Benefits Administration Risk- Relates mainly to the inability of the Fund to meet its obligations and pay benefits accurately and on time as agreed with employers or under statute. These could include non- or late payment of members’ benefits, incorrect calculation of benefits, breach of Data Protection Regulations and the failure to comply with Freedom of Information Act requests or Disclosure of Information requirements

All of the above could lead to adverse publicity, loss of reputation and ultimately statutory fines. In addition, the Fund is dependent on a sole supplier of pension administration software. There are processes in place to mitigate administration risks.

Internal Control Framework - Internal controls and processes are in place to manage administration, financial and other operational risks. The East Sussex County Council’s Internal Audit assesses the Fund’s internal control processes in order to provide independent assurance that adequate controls are in place.

Financial/Funding Risk - This is essentially the risk that the funding level drops and/or contribution rates must rise due to one or more of the following factors:

·         Investment Risk – This is the risk that the investment assets underperform the level assumed in the Triennial Actuarial Valuation. This can occur due to poor economic/market conditions, the wrong investment strategy or poor selection of investment managers. Investment risk is regularly considered by Members and Officers, advised by the East Sussex Pension Fund (ESPF) Investment Consultants. The annual investment strategy meeting reviews the current ESPF strategy and looks at risk in more detail. The main investment risks to the Fund are from interest rates, inflation and market volatility.

·         Liability Risk – This is the risk that there is a fall in the so-called “risk free” returns on Government bonds, which form the basis of assumptions about future investment returns. The assumed future investment return is used to “discount” future liabilities (i.e. over the next 0-80 years) back to today’s values (net present value). Therefore, falling bond yields means higher liabilities.

·         Inflation Risk – Notwithstanding other factors, Pension Fund liabilities increase in line with inflation, because the CPI is applied to pensions annually. Therefore, rising inflation causes the liabilities to increase.

·         Insufficient Funds Risk - This is the risk that there is insufficient money in the Fund to pay out pensions as they become due.

The ESPF Investment Strategy Statement (see page 69), sets out the governance requirements for the ESPF and it is reviewed annually by members. The Pension Fund receives external assurance reports from Investment Managers and the Custodian, detailing their internal control systems, scrutinised by their external auditors. Each report is reviewed when available and the conclusion of each was that the control procedures are suitably designed and operated during the 12-month period under review.

Demographic Risk - This is the risk of that the pensioners live longer and therefore the liabilities of the Fund increase.

Regulatory Risk - This risk could manifest itself in several ways. For example, it could be the risk that the liabilities will increase due to the introduction of an improved benefits package, or that investment returns will fall due to tighter regulation being placed on what can be invested in.  It could also arise through a failure to comply with LGPS or other regulations.

Governance Risk - This is the risk that governance arrangements of the Fund are sub-optimal. For example, this could arise through a lack of expertise on the Committee arising from insufficient training. Another possibility is that potential conflicts of interest between the Fund and the Council are not managed sufficiently well.

Employer Risk - This is the risk that an employer is unable to meet its financial obligations to the Fund, either during its membership of the Fund, or at its ceasing when the last contributing member leaves. Where a guarantor is in place they will pick up the cost of any default, but where there is not one, the cost must be spread across all employers in the Fund.

Third Party Risk - Contribution payments are monitored closely for accuracy and timeliness. A reporting process is in place to escalate any late/inaccurate payments to ensure all payments are received.

A Risk Register has been formally adopted by the East Sussex Pension Committee and a report of the key highlights is reported to the Pension Board at each quarterly meeting.

Some of the risks highlighted are shown in the table below - please note that this is not an exhaustive list. The full risk register can be seen within the quarterly Pensions Committee papers.      

The risk scores are calculated using the risk matrix below:

LIKELIHOOD	4
	3
	2
	1
		1	2	3	4
		IMPACT

5.  Financial performance

Analytical Review

The following tables provide a brief review of the major movements in the Fund Account and the Net Assets Statement for the financial year. More detail is provided in the Investment Policy and Performance report on pages 16 to 22.

	Restated 2018/19 £000	2019/20 £000
Fund Account
Net (Contributions)/withdrawals	(2,218)	(4,452)
Management Expenses	14,038	17,333
Return on Investments	(260,652)	140,238
Net Increase in Fund	(248,832)	153,119

 

	Restated 2018/19 £000	2019/20 £000
Net Asset Statement
Bonds	499,750	212,331
Equities	153,695	-
Pooled Funds	2,825,479	3,189,335
Cash	149,156	63,715
Other	(4,870)	(135)
Total Investment Assets	3,623,210	3,465,246
Non-Investment Assets	9,002	13,848
Net assets of the fund available to fund benefits at the year end.	3,632,212	3,479,094

 

Analysis of pension contributions

The table below shows the number of primary pension contributions received late in the financial year 2019/20.

Month	Payments Due	Payments Received Late
April	127	5
May	127	6
June	126	4
July	126	3
August	126	3
September	124	6
October	123	6
November	122	4
December	123	9
January	122	3
February	121	5
March	120	13

 

No interest was charged on any of the late payments.

 

Forecasts

The following tables show the forecasts and outturn for the Fund Account and the Net Asset Statement.

 

Fund Account	Restated 2018/19		2019/20		2020/21
	Forecast	Actual	Forecast	Actual	Forecast
	£000	£000	£000	£000	£000
Contributions	(136,900)	(127,810)	(141,600)	(138,719)	(118,600)
Payments	133,200	125,592	137,600	134,267	134,700
Administration expenses	1,086	916	940	1,106	1,080
Oversight and governance costs	733	740	709	1,208	1,365
Investment expenses:
fees invoiced to the fund	4,650	6,138	5,100	4.370	1,350
fees deduced at source	-	6,244	-	10,649	-
Net investment income	(39,300)	(25,919)	(27,000)	(26,487)	(27,200)
Change in market value	(231,700)	(234,733)	(206,300)	166,725	(134,600)
Net increase in the Fund	(268,231)	(248,832)	(230,551)	153,119	(141,953)

 

Contributions and payments are based on current expectations; the administration and investment management expenses are based on current budgets; and the net investment income and change in market value are based on the long-term forecast returns for each asset class.

 

Net Asset Statement	2018/19		2019/20		2020/21
	Forecast	Actual	Forecast	Actual	Forecast
	£000	£000	£000	£000	£000
Equities	2,341,400	2,134,847	2,273,600	1,332,597	1,403,200
Bonds	530,800	751,032	781,100	595,691	611,600
Property	373,000	339,442	356,400	318,129	329,600
Alternatives	222,700	245,135	265,200	321,996	341,000
Cash	135,800	149,156	195,200	63,715	43,900
Other	3,800	3,598	3,800	833,118	869.700
Total Investment Assets	3,607,500	3,623,210	3,875,300	3,465,246	3,599,000

 

The forecasts for total investment assets are based on the underlying assets within the pooled funds multiplied by the historic long-term returns for each asset class used. Net contributions, less administration and investment management expenses and oversight and governance costs, are added to the Cash figure to reflect new money into the Fund. The forecasts do not take into account potential additions or disposals of investments within these asset classes during the period as potential changes are not known with any degree of certainty.

 

Management Expenses

	2018/19		2019/20		2020/21
	Forecast	Actual	Forecast	Actual	Forecast
	£000	£000	£000	£000	£000
Orbis Finance Support Services	51	69	45	40	-
Orbis Business Operations Support Services	935	809	854	952	935
Supplies and Services	100	38	41	114	145
Administration total	1,086	916	940	1,106	1,080
Oversight and governance costs
Orbis Finance Support Services	263	210	234	267	385
Supplies and Services	470	529	475	941	980
Third Party Payments	150	100	130	97	150
Other Income	(150)	(98)	(130)	(97)	(150)
Oversight and governance total	733	741	709	1,208	1,365
Investment Management
Investment expenses:
fees invoiced to the fund	4,650	6,138	5,100	4.370	1,350
fees deduced at source*	-	6,244	-	10,649	-
Investment Management Total	4,650	12,382	5,100	15,019	1,350
Management Expenses Total	6,469	14,038	6,749	17,333	3,795

* During the year, the Pension Fund incurred management fees which were deducted at source for 2019/20 of £3.7m (£2.3m in 2018/19) on its private equity investments, fees of £1.3m (£1.3m in 2018/19) on its infrastructure investments, fees of  £2.6m (£0.0m in 2018/19) on investments in the ACCESS Pool and fees of £3.0m (£2.7m in 2018/19) on other mandates. These fees are deducted at the individual portfolio level rather than being paid directly by the Pension Fund.

 

Pension overpayments

When an overpayment of pension benefits has been identified the recovery of this debt needs to be persued. The details of the debt is collated and an invoice is raised to the relevant party for payment. The Fund follows the East Sussex County Councils procedure for recovering income which has escalation points set if the debt remains unpaid with the final stage this is passed on to the East Sussex legal team to persue. The table below shows the pension overpayments and recovieries for the past 5 years:   

 

Year		Overpaid Pensioners	Recoveries	Write Off	Outstanding
2019/20	Number	10	8	0	2
	Value £000	6	4	0	2
2018/19	Number	30	21	1	8
	Value £000	70	59	6	5
2017/18	Number	52	41	3	8
	Value £000	52	42	1	9
2016/17	Number	73	45	2	26
	Value £000	61	30	4	27
2015/16	Number	44	38	-	6
	Value £000	34	23	-	11

 

The Fund’s administrator this year introduced mortality screening of the active pensioners each month and this has reduced the number of overpayments significantly over the year. Recently the tell us once initiative has also been implemented with the aim to further reduce the overpayments made by the Fund.

6.  Investment policy and performance

Investment Policy

The Fund’s strategic asset allocation was unchanged during the year to 31 March 2020, set out below, strategic target and actual allocations, at the end of the 2019/20 financial year.

During the year, the Committee agreed to commit £40m to the UBS Archmore International Infrastructure Fund and £20m to the M&G InfraCapital Greenfield Partners II LP. These commitments were made to enable the Fund to meet its 4% target allocation to infrastructure.

 

 

 

An analysis of fund assets as at the reporting date

	UK £m	Non-UK £m	Global £m	Total £m
Equities	222	472	638	1,332
Bonds	357	-	239	596
Property (direct holdings)	-	-	-	-
Alternatives	349	-	291	640
Cash and cash equivalents	41	23	-	64
Other	-	-	833	833
Total	969	495	2,001	3,465

An analysis of investment income accrued during the reporting period

	UK £000	Non-UK £000	Global £000	Total £000
Equities	4,344	1,145	-	5,489
Bonds	32	376	6,425	6,833
Property (direct holdings)	-	-	-	-
Alternatives	11,973	-	1,531	13,504
Cash and cash equivalents	455	218	-	673
Other	-	-	47	47
Total	16,804	1,739	8,003	26,546

In the above tables:

‘Alternatives’ are taken to mean holdings in private equity, hedge funds, pooled property funds, infrastructure funds and derivatives.

‘Other’ denotes assets not falling into any other category, such as investments in vehicles where the underlying investments may comprise of assets of more than one type.

‘Global’ holdings are those that include an element of both overseas and UK listed assets.

Investments in pooled funds have been allocated to categories based on the nature and domicile of the underlying assets.

Responsible Invesment

The Fund understands the urgency of the need to address climate change following the release of the Intergovernmental Panel on Climate Change (IPCC) Special Report on Global Warming in 2019[1].  This sets out the likely consequences of global warming of 1.5^oC and the additional damage that global warming of 2^oC could cause.  Following the publication of this report there is understandable interest in what pension funds and other financial market participants are doing to uphold their responsibility to help reduce carbon emissions.

In order to provide a general framework for investment decision-making, the Pensions Committee has developed a set of investment beliefs. These are set out in the Fund’s ISS and are reviewed by the Committee on a regular basis.  A number of these beliefs – set out below - apply specifically to the consideration of ESG issues and Responsible Investment (RI) in its wider sense.

We will apply long-term thinking to deliver long-term sustainable returns.

We will seek sustainable returns from well-governed assets.

We will use an evidence-based long term investment appraisal to inform decision-making in the implementation of RI principles and consider the costs of RI decisions consistent with our fiduciary duties.

We will evaluate and manage carbon exposure in order to mitigate risks to the Fund from climate change. 

In light of these beliefs, and given the legal, regulatory, and practical constraints noted above, the Committee with its advisers has considered a number of possible routes to reduce carbon exposure within the Fund, including divestment, engagement, the use of low carbon indices and allocating to actively managed ‘sustainable’ funds.

The Committee currently regards full divestment from fossil fuels as an inferior option, as it is only possible as a one-off action and is likely to have limited effect.   When shares in the relevant companies are sold, the Fund loses its ability to influence the company to change its business model, and the new shareholders are likely to be less interested in putting pressure on the company.

While the Fund is actively looking to reduce the carbon exposure from its passive investments, it will only do so when it is able to evaluate all the risks involved from partial or total exclusions.  It continues actively to engage with fossil fuel companies collaboratively with other investors, and is considering a  search for an active sustainable mandate in the expectation of making some positive financial return from climate change.

At the end of 2019/20 the ESPF had 4% of it holdings exposed to fossil fuel companies, the fund expects to reduce this exposure through its work programmes in the next financial year as part of its work on Responsible investment.

 

 

 

 

Table 1: Fund’s Fossil Fuel exposure

	Actual Fossil Fuel Exposure (%)	Actual Fossil Fuel Exposure* (£m)	Benchmark Fossil Fuel Exposure (%)	Relative (%)	Management Style
UBS – North America	4.9	7.7	5.0	-	Passive
UBS – Europe (ex UK)	5.9	7.1	6.0	(0.1)	Passive
UBS – Japan	5.4	1.0	5.4	-	Passive
UBS – Asia Pacific (ex Japan)	9.5	1.6	9.9	(0.4)	Passive
UBS – Emerging Markets	9.7	3.5	9.8	(0.2)	Passive
UBS – UK	13.9	30.8	14.5	(0.1)	Passive
UBS – RAFI	11.4	41.3	11.5	(0.2)	Passive
UBS – Climate Aware	5.0	8.0	6.0	(1.1)	Passive
Longview - Global Equity	-	-	6.9	(6.9)	Active
Harbourvest - Private Equity	3.3	3.6	6.9	(3.6)	Active
Adams Street - Private Equity	2.2	3.0	6.9	(4.7)	Active
Newton - Absolute Return	1.2	5.1	-	-	Active
Ruffer - Absolute Return	1.2	5.1	-	-	Active
Schroders - Property	-	-	-	-	Active
UBS - Infrastructure	-	-	-	-	Active
Pantheon - Infrastructure	-	-	-	-	Active
M&G (InfraCapital) - Infrastructure	-	-	-	-	Active
M&G – Real Estate Debt	-	-	-	-	Active
M&G - UK Financing Fund	-	-	-	-	Active
M&G - Absolute Return Credit	2.6	6.1	10.3	(7.7)	Active
M&G - Corporate Bonds	9.6	13.9	-	9.6	Active
UBS - Over 5 Year IL Gilt Fund	-	-	-	-	Passive
Cash	-	-	-	-	Active
Total Fund	4.0	137.8	-	-	-

ESPF Asset Managers

The Fund employs a number of managers with differing styles and management approaches. This is a deliberate policy to avoid over-dependence on the fortunes of a single manager and to concentrate on managers' particular areas of expertise. All managers are expected to maintain well diversified portfolios. The Fund’s structure is broadly as follows:

·         UBS are the Fund’s largest single equity manager; all assets are managed passively against UK and Global equity market benchmarks. The allocation to the UBS All World Equity Fundamentally Weighted Index Fund offers additional diversification from the market capitalisation based passive management approach. In addition, the Fund invests in the UBS Climate Aware Fund which tracks an index with a climate change overlay.

·         The Fund has one active global equity manager (Longview). The Committee maintains the belief that a blend of active and passive management of equity mandates offer the most efficient way to access world equity markets.

·         The two absolute return managers are expected to add diversification away from the Fund’s other mandates, due to their flexible, unconstrained management approach and wide range of underlying assets.

·         A single property manager is employed (Schroders); however, the “fund of fund” approach provides manager diversification within the underlying holdings.

·         Corporate bonds and absolute return credit assets are managed by M&G. Index-linked bonds are managed passively by UBS.

·         The Fund’s allocations to infrastructure and unquoted equities are currently divided between five managers, three within infrastructure and two within unquoted equities.

·         M&G has been appointed to manage a real estate debt investment and starting drawing capital during the year.

Custodian

A specialist provider of Custodian Services, Northern Trust, is employed by the East Sussex Pension Fund.

The responsibilities of the Custodian are:

·         Collection of investment income.

·         Arranging for the custody of the schemes assets in compliance with the custody agreement.

·         Providing quarterly valuations of the schemes assets, details of all transactions and investment accounting.

·         Responsibility for cash management and investing the daily cash balances in a “Triple A” rated cash pool.

Investment Performance

Actual and benchmark performance for each of the Fund’s mandates is provided in the table below, over 12 months 3 years and 5 years^[1].  Results are considered by the Pension Committee on a quarterly basis and the Fund members on an annual basis as part of this report. 

*Relative performance is calculated on a geometric basis as opposed to the simpler arithmetic method the geometric method makes it possible to directly compare long-term relative performance with shorter-term relative performance.

[1] The table shows since inception returns in place of one year, three year and five-year performance for some of the managers, if the mandate has been in place for a shorter period.

 

5.       Scheme Administration

Service Delivery

East Sussex County Council as Administering Authority for the East Sussex Pension Fund undertake the day to day pensions administration through Orbis, which is a shared services partnership currently covering the three councils of East Sussex, Surrey and Brighton and Hove.

The Orbis pensions administration team are responsible for

·         administering the LGPS Scheme on behalf of the ESPF scheme employers in accordance with relevant legislation and Pension Committee decisions, also provision of services in connection with the uniformed fire officers;

·         calculation of pensions and lump sums for retiring members of the LGPS and provision of early retirement estimates;

·         maintenance of the database of pension scheme members and provision of annual benefit statements and deferred benefit statements;

·         administration of new starters, including transfers in;

·         administration and calculations relating to leavers;

·         payment of pensions and other entitlements.

Communication to employers and members of administration is carried out where possible through access to the MyPensionsPortal for members to view their Annual benefit statements, nominations, personal details and carry out benefit calculations. The Orbis team also send annual newsletters to scheme member and employers.

The Pension Fund website www.eastsussexpensionfund.org provides scheme members and employers access to up to date information on the LGPS. Alongside this website, the East Sussex County Council also provides information on their website around how the Pension Fund is governed www.eastsussex.gov.uk/yourcouncil/pensions/governance/

Administration of the pensions fund is discussed quarterly at Pensions Committee to ensure the service is managed and governed well and key performance indictors reviewed at each meeting. In addition, Pensions Board consider the activities of the Pensions Administration team at each meeting. During 2019/20 ESPF set up an annual benefit working group as part of its Data Improvement Programme to deliver cleansing of employer common and specific data to ensure complete and accurate membership records. The ESPF looks to achieve value for money in the administration of the Fund by providing the service in a cost effective and efficient manner utilising technology appropriately. Achievement of KPIs and high services levels helps the fund monitor the effectiveness of the fund.

Internal Dispute Resolution Procedure

The LGPS is required by statute to make arrangements for the formal resolution of any disagreements on matters in relation to the scheme that may arise between, the managers of the Scheme and the, active, deferred and pensioner members of their representatives. 

There is access to a two-stage dispute resolution procedure. This procedure consists of an initial application to the person or persons appointed by the individual’s employer to consider the matter. If the complainant is still dissatisfied with the decision, they then have the right to refer the matter to the County Council to consider the matter under dispute. The person appointed for this role in the East Sussex Pension Fund is the Assistant Chief Executive.

 In addition to the dispute procedure, the Social Security Act 1990 and the Pensions Act 1995 have created a framework of national organisations to control occupational and personal pension schemes, to which LGPS members have access.

The following table summarises the number of disputes made through the Fund’s Internal Dispute Resolution Procedure at each stage of appeal:

	2019/20
First Stage	5
Upheld	4
Declined	1
Ongoing	-
Second Stage	-
Upheld	-
Declined	-
Ongoing	-

 

Key administration performance indicators

Performance Indicator	Impact	Measure	Target %	Achieved by Fund %
Death notification acknowledged, recorded and documentation sent	Medium	within 5 days	95%	100%
Award dependent benefits (Death Grants)	High	within 5 days	95%	98%
Retirement notification acknowledged, recorded and documentation sent	Medium	within 5 days	95%	97%
Payment of lump sum made	High	within 5 days	95%	98%
Calculation of spouses benefits	Medium	within 5 days	90%	99%
Transfers In - Quote (Values)	Low	within 10 days	90%	98%
Transfers In - Payments	Low	within 10 days	90%	99%
Transfers Out - Quote	Low	within 25 days	90%	99%
Transfers Out - Payments	Low	within 25 days	90%	98%
Employer estimates provided	Medium	within 7 days	95%	90%
Employee projections provided	Low	within 10 days	95%	93%
Refunds	Low	within 10 days	95%	99%
Deferred benefit notifications	Low	within 25 days	95%	100%

 

	2018/19	2019/20
Number Of Complaints	9	5

 

Financial indicators of administrative efficiency

Unit Costs Per Member	East Sussex Pension Fund		Benchmark Unit Costs £
	2018/19 £	2019/20 £
Excluding investment management expenses	22.09	30.07	38.69
Including investment management expenses	187.26	225.65	228.26

 

Key staffing indicators

At 31 March 2019, staffing numbers within Pension Administration were 17.6 full time equivalent members of staff.

This provides the fund with a staff to fund member ratio of 1:4,363.

With an average cases per member of staff of 1:499

 

Membership

The East Sussex Pension Fund was established in 1974 to cover the future pension entitlement of all eligible employees of the County Council and former District Councils. The Fund excludes provision for teachers, police officers and fire fighters, for whom separate arrangements exist. A number of other bodies also participate in the Scheme. These include Parish and Town Councils, Further Education Colleges, Academy Schools, Police and Fire Authorities (non-uniformed staff only) and Admitted Bodies. Admitted Bodies are those which are able to apply for membership of the Scheme under the Regulations. If the Pension Fund Committee agrees to the application, an Admission Agreement is drawn up admitting the body into the Scheme.

Note 28 to the accounts provide a list of all organisations currently contributing to the Fund. It includes their contribution rates, expressed as a percentage of employees’ pensionable pay, and additional annual payments for those participating bodies which would otherwise have a shortfall in contributions by the end of the recovery period.

Below is a summary of the number of employers in the fund analysed by scheduled bodies and admitted bodies which are active (with active members) and ceased (no active members but with some deferred members and pensioners).

	Active	Ceased	Total
Scheduled body	95	13	108
Admitted body	33	21	54
Total	128	34	162

During 2019/20 the number of contributing members within the Pension Fund increased by 0.8% from 23,646 to 23,835. In summary, the number of members contributing to the Scheme is:

	2018/19	2019/20
East Sussex County Council	7,978	7,980
Scheduled Bodies	15,332	15,561
Admitted Bodies	336	294
Total	23,646	23,835

The number of pensioners in receipt of payments from the Fund increased from 20,403 to 21,335 (or 4.6%).

The following table and bar chart provide a summary of contributing members, pensioners in payment and deferred pensioners over the last five years:

	March 2016	March 2017	March 2018	March 2019	March 2020
Active Members (contributors)	23,367	23,567	24,570	23,646	23,835
Pensioners (inc dependents)	17,942	18,812	19,597	20,403	21,335
Deferred Members	27,344	28,853	29,253	30,916	31,622
Total	68,653	71,232	73,420	74,965	76,792

 

 

Under the Local Government Pension Scheme (LGPS) (Administration) Regulations 2013, the East Sussex County Council administers the Pension Fund for approximately 76,000 individuals employed by 128 different organisations. Underpinning everything we do is a commitment to putting our members first, demonstrating adherence to good practices in all areas of our business and controlling costs to ensure we provide outstanding value for money.

Employer statistics by Employer type

Employer Type	Number of Employers  as a percentage of total	Percentage of total fund membership	Number of Employers in Group
Scheduled Bodies - Major Authorities	7.0%	85.9%	9
Academy Schools	32.8%	7.2%	42
Colleges	3.9%	4.5%	5
Other Scheduled Bodies	31.3%	0.8%	40
Admission Bodies	25.0%	1.6%	32

Note - all percentages have been rounded to the nearest one decimal place

 

 

 

New pensioners by pensioner type

New pensioner type	Number of new pensioner in group
Normal Retirments	452
Redundancies	141
Ill Helath	57
Employee’s Choice of Early Pensnsion	616
Total New Pensioners	1,266

 

6.          Actuarial report on funds

The East Sussex County Council (“the Administering Authority”) carried out an actuarial valuation of the East Sussex Pension Fund. (“the Fund”) as at 31 March 2019 as required under Regulation 62 of the Local Government Pension Scheme Regulations 2013 (“the Regulations”).

The actuarial valuation is a risk management exercise with the purpose of reviewing the current funding plans and setting contribution rates for the Fund’s participating employers for the period from 1 April 2020 to 31 March 2023. The report can be downloaded here which summarises the outcomes of the valuation and the underlying advice provided to the Administering Authority throughout the valuation process. 

For the purpose of reporting a funding level and an associated funding surplus/deficit for the 2019 valuation, an investment return of 4.0% p.a. has been used.  It is estimated that the Fund’s assets have a 75% likelihood of achieving this return.

The resulting funding position is as follows:

 

There has been an improvement in the reported funding level since 31 March 2016 from 92% to 107% and a change in the funding deficit from £240m to a surplus of £247m.

A breakdown of the key factors that have influenced the reported funding position from 31 March 2016 to 31 March 2019 are detailed below.

 

7.          Governance

Pensions Committee

East Sussex County Council (Scheme Manager) operates a Pensions Committee (the “Pensions Committee”) for the purposes of facilitating the administration of the East Sussex Pension Fund, i.e. the Local Government Pension Scheme that it administers.  Members of the Pensions Committee owe an independent fiduciary duty to the beneficiaries of the Pension Fund.  Such members are therefore required to carry out appropriate levels of training to ensure they have the requisite knowledge and understanding to properly perform their role.

Pension Board

The Scheme Manager is also required to establish and maintain a Pension Board, for the purposes of assisting with the ongoing compliance of the Fund. The Pension Board is constituted under the provisions of the Local Government Pension Scheme (Governance) Regulations 2015 and the Public Service Pensions Act 2013.  Members of the Pension Board should also receive the requisite training and development to enable them to properly perform their compliance role.

ACCESS Pool Joint Committee

The ACCESS Pool operates a Joint Committee which has been set up through an Inter Authority Agreement (IAA) which was formalised and executed by each Individual Authority between May and June 2017 and came into effect on the 31 July 2017 at the first formal Joint Committee meeting. The role of the ACCESS Joint Committee, which has one representative from each Fund is to:

·         Ensure pool delivers value for money;

·         Appointment and termination of the Operator;

·         Ensures pool meets needs of individual funds e.g. sub-funds the operator must provide to support individual fund strategies;

·         Set pool level policies e.g. sharing of costs;

·         Monitor Operator performance against KPIs;

·         Monitor investment performance;

Committee membership and attendance

During the year ended 31 March 2020 there were 5 meetings of the Pension Committee, 3 meetings of the Pension Board and one annual employers forum.

Member attendance at committee meetings during 2019/20

2019/20 Pension Committee Members
		Nos. of meetings attended
East Sussex County Councillors:	Gerard Fox (Chairman)	5/5
	Simon Elford	3/5
	Nigel Enever	5/5
	David Tutt	3/5
	Trevor Webb	2/5

Member attendance at Board meetings during 2019/20

2019/20 Pension Board Members
		Nos. of meetings attended
Independent Chairman:	Ray Martin	3/3
Employer Representative:
Brighton & Hove City Council	Councillor Carmen Appich	2/3
Districts & Borough Councils	Councillor Chris Collier*	1/1
	Councillor Doug Oliver*	1/1
Educational Bodies	Stephen Osborn	3/3
Employee Representative:
Active & Deferred	Niki Palermo	3/3
Active & Deferred	Lynda Walker	3/3
Pensioners	Diana Pogson	3/3

*Councillor Doug Oliver was replaced by Concillor Chris Collier during the year, one meeting took place when this post was vacant.

 

 

 

Member attendance at ACCESS Pool joint committee meetings during 2019/20

2019/20 Joint Committee Members
		Nos. of meetings attended
East Sussex County Councillors:	Gerard Fox	3/4

 

The Knowledge and Skills Framework

Objectives The Funds’ objectives relating to knowledge and understanding are to:

·         Ensure the Fund is appropriately managed and those individuals responsible for its management and administration have the appropriate knowledge and expertise;

·         Ensures that there is the appropriate level of internal challenge and scrutiny on decisions and performance of the Fund

·         Ensure the effective governance and administration of the Fund; and

·         Ensure decisions taken are robust and based on regulatory requirements or guidance of the Pensions Regulator, the Scheme Advisory Board and the Secretary of State for Housing, Communities and Local Government.

CIPFA Knowledge and Skills Framework – Pension Fund Committees Although there is currently no legal requirement for knowledge and understanding for members of the Pension Committee it is the Fund’s opinion that members of the Pension Committee should have no less a degree of knowledge and skills than those required in legislation by the Local Pension Board. As at date of writing, the ongoing SAB ‘good governance’ project signals a much stronger requirement on Pension Committee members knowledge and understanding.

The CIPFA framework, that was introduced in 2010, covers six areas of knowledge identified as the core requirements:

·         Pensions legislative and governance context;

·         Pension accounting and auditing standards;

·         Financial services procurement and relationship development;

·         Investment performance and risk management;

·         Financial markets and products knowledge; and

·         Actuarial methods, standards and practice.

Under each of the above headings the Framework sets out the knowledge required by those individuals responsible for Fund’s management and decision making.

CIPFA Technical Knowledge and Skills Framework – Local Pension Boards CIPFA extended the Knowledge and Skills Framework in 2015 to specifically include Pension Board members, albeit there is an overlap with the original Framework. The 2015 Framework identifies the following areas as being key to the understanding of local pension board members;

·         Pensions Legislation;

·         Public Sector Pensions Governance;

·         Pensions Administration;

·         Pensions Accounting and Auditing Standards;

·         Pensions Services Procurement and Relationship Management;

·         Investment Performance and Risk Management;

·         Financial markets and product knowledge;

·         Actuarial methods, standards and practices.

Links to The Scheme Advisory Board’s Good Governance project   In February 2019 the Scheme Advisory Board commissioned Hymans Robertson to consider options for enhancing LGPS governance arrangements to ensure that the Scheme is ready for the challenges ahead and at the same time retains local democratic accountability.  Following extensive consultation and engagement with the LGPS community the SAB published 2 reports.  The following recommendations from the second report relate directly to the attainment of knowledge and skills;

·         Key individuals within the LGPS, including LGPS officers and pensions committee members, to have the appropriate level of knowledge and understanding to carry out their duties effectively.

·         A requirement for s151 officers to carry out LGPS relevant training as part of their CPD requirements to ensure good levels of knowledge and understanding.

·         Administering authorities must publish a policy setting out their approach to the delivery, assessment and recording of training plans to meet these requirements.

·         Relevant professional bodies to produce appropriate guidance and training modules for s151 officers and to consider including LGPS training within their training qualification syllabus.

The findings of the Good Governance Review have yet to be formally adopted in statutory form, however, this Training Strategy recognises the principles behind the recommendations and seeks to embed them into the culture of the East Sussex Pension Fund. 

The Pensions Regulator’s E-learning toolkit The Pensions Regulator has developed an online toolkit to help those running public service schemes understand the governance and administration requirements set out in its code of practice 14 Governance and administration of public service pension schemes. 

The toolkit covers 7 short modules, which are:

·         Conflicts of Interests;

·         Managing Risk and Internal Controls;

·         Maintaining Accurate Member Data;

·         Maintaining Member Contributions;

·         Providing Information to Members and Others;

·         Resolving Internal Disputes;

·         Reporting Breaches of the Law.

The modules of the Regulator’s toolkit are by their very nature generic, having to cater for all public service pension schemes.  While they give a minimum appreciation of the knowledge and understanding requirements set out in the Code of Practice they do not cater for the specific requirements of the individual public service schemes.  

As a result the Regulator’s toolkit does not cover knowledge and skills requirements in areas such as Scheme regulations, the Fund’s specific policies and the more general pension’s legislation.

Pension Committee under the constitution of East Sussex County Council, has the responsibility “To make arrangements for the investment, administration and management of the Pension Fund”.  

Members of the Committee must, therefore, have an understanding of all aspects of running the Fund and how to exercise their delegated powers effectively. 

Members of the Pension Committee require an understanding of:

·         their responsibilities as delegated under the constitution of  East Sussex County Council as the administering authority for the fund;

·         the requirements relating to pension fund investments;

·         the management and administration of the Fund;

·         controlling and monitoring the funding level; and

·         effective governance and decision making in relation to the management and administration of the Fund.

There also exists a specific requirement under MiFID II, that those making investment decisions, must be able to demonstrate that they have the capacity to be treated as professional investors.

Expectations on Pension Committee Members

The role of Pension Committee member is an important one and there are certain expectations on those undertaking the role.  These include;

·         A commitment to attend and participate in training events and to adhere to the principles of the Training Strategy

·         The ability to use acquired knowledge to participate in meetings and to ask questions constructively of the information provided by officers, advisers and others

·         Judge the information provided in a fair and open minded way that avoids pre-determining outcomes

·         Operate within the terms of reference for the Pension Committee and the elected member code of conduct 

Local Pension Board  Under the constitution the Local Pension Board is required;

To provide assistance to East Sussex County Council as the LGPS Scheme Manager in securing compliance with:

·         LGPS Regulations and any other legislation relating to the governance and administration of the LGPS

·         requirements imposed in relation to the LGPS by The Pensions Regulator

·         the agreed investment strategy

·         any other matters as the LGPS regulations may specify.

The role of the Local Pension Board is to provide assistance to the administering authority to ensure that the fund is well run and complies with its legal responsibilities and best practice.  The Local Pension Board does not replace the administering authority or make decisions which are the responsibility of the administering authority.

Local Pension Board members must be conversant with:

·         the relevant LGPS Regulations and any other regulations governing the LGPS;

·         guidance issued by The Pensions Regulator and other competent authorities, relevant to the LGPS;

·         any policy or strategy documents as regards the management and administration of the Fund; and

·         the law relating to pensions and such other matters as may be prescribed.

 

 

 

 

8.       Fund account, net assets statement and notes

 

a.        East Sussex Pension Fund Account

 

Restated 2018/19				2019/20
£000	£000		Notes	£000	£000
		Dealings with members, employers and others directly involved in the fund
		Contributions	7
(92,084)		From Employers		(99,018)
(29,613)		From Members		(31,403)
	(121,697)				(130,421)
	(6,113)	Transfers in from other pension funds	8		(8,298)
	(127,810)				(138,719)
	122,183	Benefits	9		125,670
	3,409	Payments to and on account of leavers	10		8,597
	125,592				134,267
	(2,218)	Net (additions)/withdrawals from dealings with members			(4,452)
	14,038	Management expenses	11		17,333
	11,820	Net (additions)/withdrawals including fund management expenses			12,881
		Returns on investments
	(26,191)	Investment income	12		(26,546)
	272	Taxes on income	13a		59
	(234,733)	Profit and losses on disposal of investments and changes in the value of investments	14a		166,725
	(260,652)	Net return on investments			140,238
	(248,832)	Net (increase)/decrease in net assets available for benefits during the year			153,119
	(3,383,380)	Opening net assets of the scheme			(3,632,212)
	(3,632,212)	Closing net assets of the scheme			(3,479,093)

 

b.       Net Assets Statement for the year ended 31 March 2020

 

Restated 31 March 2019			31 March 2020
£000		Notes	£000
3,478,924	Investment  assets	14	3,401,666
5,362	Other Investment balances	21	340
(10,232)	Investment liabilities	22	(475)
149,156	Cash deposits	14	63,715
3,623,210	Total net investments		3,465,246
12,153	Current assets	21	16,622
(3,151)	Current liabilities	22	(2,774)
3,632,212	Net assets of the fund available to fund benefits at the year end.		3,479,094

 

The fund’s financial statements do not take account of liabilities to pay pensions and other benefits after the period end. The actuarial present value of promised retirement benefits is disclosed at Note 20.

 

Treasurers Certificate

 

I certify that the accounts of the East Sussex Pension Fund provide a true and fair view of the Pension Fund at 31 March 2020 and of the movements for the year then ended.

 

 

 

 

Ian Gutsell

Chief Finance Officer (Section 151 Officer)

Business Services Department

XX September 2020

c.        Notes to the East Sussex Pension Fund Accounts for the year ended 31 March 2020

1:  Description of fund 

The East Sussex Pension Fund (“the fund”) is part of the Local Government Pension Scheme and is administered by East Sussex County Council. The County Council is the reporting entity for this pension fund.

The following description of the fund is a summary only. For more detail, references should be made to the East Sussex Pension Fund Annual Report 2019/20 and the underlying statutory powers underpinning the scheme, namely the Public Service Pensions Act 2013 and The Local Government Pension Scheme (LGPS) Regulations.

a)     General

The scheme is governed by the Public Service Pensions Act 2013. The fund is administered in accordance with the following secondary legislation:

-       The Local Government Pension Scheme Regulations 2013 (as amended)

-       The Local Government Pension Scheme (Transitional Provisions, Savings and Amendment) Regulations 2014 (as amended)

-       The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016.

It is a contributory defined benefit pension scheme administered by East Sussex County Council to provide pensions and other benefits for pensionable employees of East Sussex County Council, the district councils in East Sussex County and a range of other scheduled and admitted bodies within the county area. Teachers, police officers and Fire fighters are not included as they come within other national pension schemes.

It is also empowered to admit the employees of certain other bodies, town and parish councils, educational establishments, contractors providing services transferred from scheduled bodies and community interest bodies. The Fund does not provide pensions for teachers, for whom separate arrangements exist. Uniformed police and fire staff are also subject to separate pension arrangements.

The Council has delegated its pension functions to the East Sussex Pension Committee. Responsibility for the administration and financial management of the Fund has been delegated to the Chief Finance Officer along with the Head of Pensions. The Scheme Manager is also required to establish and maintain a Pension Board, for the purposes of assisting with the ongoing compliance of the Fund. The role of the Board is to assist the East Sussex Pension Fund in complying with all the legislative requirements making sure the scheme is being effectively and efficiently governed and managed.

Independent investment managers have been appointed to manage the investments of the Fund. The Fund also invests in illiquid investments such as private equity, infrastructure and private debt. The Committee oversees the management of these investments and meets regularly with the investment managers to monitor their performance against agreed benchmarks.

b)    Membership

Membership of the LGPS is voluntary and employees are free to choose whether to join the scheme, remain in the scheme or make their own personal arrangements outside the scheme.

Organisations participating in the East Sussex Pension Fund include:

-       Scheduled bodies, which are local authorities and similar bodies whose staff are automatically entitled to be members of the fund

-       Admitted bodies, which are other organisations that participate in the fund under an admission agreement between the fund and the relevant organisation. Admitted bodies include voluntary, charitable and similar bodies or private contractors undertaking a local authority function following outsourcing to the private sector.

 

 

 

 

 

 

 

There are 128 employer organisations within East Sussex Pension Fund including the County Council itself, as detailed below:

East Sussex Pension Fund	31 March 2019	31 March 2020
Number of employers with active members	133	128
Number of employees
County Council	7,978	7,980
Other employers	15,668	15,855
Total	23,646	23,835
Number of pensioners
County Council	9,318	9,500
Other employers	11,085	11,835
Total	20,403	21,335
Deferred pensioners
County Council	14,008	13,860
Other employers	16,908	17,762
Total	30,916	31,622

c)     Funding

Benefits are funded by contributions and investment earnings. Contributions are made by active members of the fund in accordance with The LGPS Regulations 2013 and range from 5.5% to 12.5% of pensionable pay for the financial year ending 31 March 2020. Employee contributions are matched by employers’ contributions, which are set, based on triennial actuarial funding valuations. The last such valuation was at 31 March 2019. Currently, employer contribution rates range from 0.0% to 49.2% of pensionable pay.

d)    Benefits

Prior to 1 April 2014, pension benefits under the LGPS were based on final pensionable pay and length of pensionable service.From 1 April 2014, the scheme became a career average scheme, whereby members accrue benefits based on their pensionable pay in that year at an accrual rate of 1/49th. Accrued pension is uprated annually in line with the Consumer Prices Index.

There are a range of other benefits provided under the scheme including early retirement, disability pensions and death benefits. For more details, please refer to the East Sussex Pension Fund Website.

2:  Basis of preparation

The Statement of Accounts summarises the fund’s transactions for the 2019/20 financial year and its position at year-end as at 31 March 2020. The accounts have been prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom 2019/20 which is based upon International Financial Reporting Standards (IFRS) as amended for UK public sector.

Accounting standards issued but not yet adopted - Under the Code of Practice on Local Authority Accounting in the United Kingdom 2019/20, the Fund is required to disclose information setting out the impact of an accounting change required by a new accounting standard that has been issued on or before 1 January 2020 but not yet adopted by the Code.

There were no amendments for 2019/20 for the accounts of the Pension Fund.

The accounts report on the net assets available to pay pension benefits. They do not take account of obligations to pay pensions and benefits which fall due after the end of the financial year nor do they take into account he actuarial present value of promised retirement benefits The code gives administering authorities the option to disclose this information in the net asset statement, in the notes to the accounts or appending an actuarial report prepared for this purpose. The Pension Fund has opted to disclose this information in Note 20.

The Accounts have been prepared on a going concern basis.

The Pension Fund publishes a number of statutory documents, including an Investment Strategy Statement, a Funding Strategy Statement, Governance Policy Statement, Communications Policy Statement, Employers Contributions, and Statements of Compliance. Copies can be obtained by contacting the Council’s Pensions team or alternatively are available from - http://www.eastsussex.gov.uk

ACCESS pool – There is no specific accounting policy for the Pool.  The ACCESS Pool is not a legal entity in itself but is governed by the Inter Authority Agreement signed by each Administering Authority. The formal decision-making body within the ACCESS Pool is the ACCESS Joint Committee, which has let the management of the asset pool to Link Fund Solutions Ltd, appointed to provide a pooled operator service.   There is no direct investment in the third party, only a contractual arrangement to provide services, so no investment balance to carry forward in the net asset statement.

3: Summary of significant accounting policies

Fund account – revenue recognition

a)     Contribution income

Normal contributions are accounted for on an accruals basis as follows:

·         Employee contribution rates are set in accordance with LGPS regulations, using common percentage rates for all schemes, which rise according to pensionable pay.

·         Employer contributions are set at the percentage rate recommended by the fund actuary for the period to which they relate.

Employer deficit funding contributions are accounted for on the basis advised by the fund actuary in the rates and adjustment certificate issued to the relevant employing body.

Additional employers’ contributions in respect of ill-health and early retirements are accounted for in the year the event arose. Any amount due in the year but unpaid will be classed as a current financial asset. Amounts not due until future years are classed as long-term financial assets.

b)    Transfers to and from other schemes

Transfers in and out relate to members who have either joined or left the fund.

Individual transfers in/out are accounted for when received or paid. Transfers in from members wishing to use the proceeds of their additional voluntary contributions (see below) to purchase scheme benefits are accounted for on a receipts basis and are included in Transfers In (Note 8).

Bulk (group) transfers are accounted for in accordance with the terms of the transfer agreement.

c)     Investment income

               i)        Interest income

Interest income is recognised in the fund account as it accrues, using the effective interest rate of the financial instrument as at the date of acquisition or origination.

              ii)        Dividend income

Dividend income is recognised on the date the shares are quoted ex-dividend. Any amount not received by the end of the reporting period is disclosed in the net assets statement as a current financial asset.

             iii)        Distributions from pooled funds

Distributions from pooled funds are recognised at the date of issue. Any amount not received by the end of the reporting period is disclosed in the net assets statement as a current financial asset.

             iv)        Movement in the net market value of investments

Changes in the net market value of investments are recognised as income and comprise all realised and unrealised profits/losses during the year.

Fund account – expense items

d)    Benefits payable

Pensions and lump-sum benefits payable include all amounts known to be due as at the end of the financial year. Any amounts due but unpaid are disclosed in the net assets statement as current liabilities.

e)   Taxation

The fund is a registered public service scheme under section 1(1) of Schedule 36 of the Finance Act 2004 and as such is exempt from UK income tax on interest received and from capital gains tax on the proceeds of investments sold. Income from overseas investments suffers withholding tax in the country of origin, unless exemption is permitted. Irrecoverable tax is accounted for as a fund expense as it arises.

f)   Management expenses

The fund discloses its pension fund management expenses in accordance with the CIPFA guidance Accounting for Local Government Pension Scheme Management Expenses (2016), as shown below. All items of expenditure are charged to the fund on an accruals basis as follows:

              i)        Administrative expenses

All staff costs of the pensions administration team are charged direct to the fund. Associated management, accommodation and other overheads are apportioned to this activity and charged as expenses to the fund.

 

             ii)        Oversight and governance costs

All staff costs associated with governance and oversight are charged direct to the fund. Associated management, accommodation and other overheads are apportioned to this activity and charged as expenses to the fund.

            iii)        Investment management expenses

Investment management expenses are charged directly to the fund as part of management expenses and are not included in, or netted off from, the reported return on investments. Where fees are netted off quarterly valuations by investment managers, these expenses are shown separately in Note 11A and grossed up to increase the change in value of investments.

Fees of the external investment managers and custodian are agreed in the respective mandates governing their appointments. Broadly, these are based on the market value of the investments under their management and therefore increase or reduce as the value of these investments change.

Where an investment manager’s fee has not been received by the balance sheet date, an estimate based upon the market value of their mandate as at the end of the year is used for inclusion in the fund account. In 2019/20, £0.3m of fees is based on such estimates (2018/19: £0.2m).

Net assets statement

g)    Financial assets

Financial assets are included in the net assets statement on a fair value basis as at the reporting date. A financial asset is recognised in the net assets statement on the date the fund becomes party to contractual acquisition of the asset. From this date any gains or losses arising from changes in the fair value of asset are recognised in the fund account.

The values of investments as shown in the net assets statement have been determined at fair value in accordance with the requirements of the Code and IFRS13 (see Note 16). For the purposes of disclosing levels of fair value hierarchy, the fund has adopted the classification guidelines recommended in Practical Guidance on Investment Disclosures (PRAG/Investment Association, 2016).

h)    Foreign currency transactions

Dividends, interest and purchases and sales of investments in foreign currencies have been accounted for at the spot market rates at the date of transaction. End-of-year spot market exchange rates are used to value cash balances held in foreign currency bank accounts, market values of overseas investments and purchases and sales outstanding at the end of the reporting period.

i)      Derivatives

The fund uses derivative financial instruments to manage its exposure to specific risks arising from its investment activities. The fund does not hold derivatives for speculative purposes.

j)      Cash and cash equivalents

Cash comprises cash in hand and demand deposits and includes amounts held by the fund’s external managers.

Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to minimal risk of changes in value.

k)     Financial liabilities

A financial liability is recognised in the net assets statement on the date the fund becomes party to the liability. The fund recognises financial liabilities relating to investment trading at fair value as at the reporting date, and any gains or losses arising from changes in the fair value of the liability between contract date, the year-end date and the eventual settlement date are recognised in the fund account as part of the Change in Value of Investments.

Other financial liabilities classed as amortised costs are carried at amortised cost i.e. the amount carried in the net asset statement are the outstanding principal repayable plus accrued interest. Any interest charged is accounted for on an accruals basis.

l)      Actuarial present value of promised retirement benefits

The actuarial present value of promised retirement benefits is assessed on a triennial basis by the scheme actuary in accordance with the requirements of IAS 19 and relevant actuarial standards.

As permitted under the Code, the fund has opted to disclose the actuarial present value of promised retirement benefits by way of a note to the net assets statement (Note 20).

m)   Additional voluntary contributions

East Sussex Pension Fund provides an additional voluntary contributions (AVC) scheme for its members, the assets of which are invested separately from those of the pension fund. The fund has appointed Prudential as its AVC provider. AVCs are paid to the AVC provider by employers and are specifically for providing additional benefits for individual contributors. Each AVC contributor receives an annual statement showing the amount held in their account and the movements in the year.

AVCs are not included in the accounts in accordance with Regulation 4(1)(b) of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 but are disclosed as a note only (Note 23).

n)    Contingent assets and contingent liabilities

A contingent liability arises where an event has taken place prior to the year-end giving rise to a possible financial obligation whose existence will only be confirmed or otherwise by the occurrence of future events. Contingent liabilities can also arise in circumstances where a provision would be made, except that it is not possible at the balance sheet date to measure the value of the financial obligation reliably.

A contingent asset arises where an event has taken place giving rise to a possible asset whose existence will only be confirmed or otherwise by the occurrence of future events.

Contingent assets and liabilities are not recognised in the net assets statement but are disclosed by way of narrative in the notes.

4:  Critical judgements in applying accounting policies

Unquoted private equity investments

It is important to recognise the highly subjective nature of determining the fair value of private equity investments. They are inherently based on forward-looking estimates and judgements involving many factors. Unquoted private equities are valued by the investment managers using International Private Equity and Venture Capital Valuation Guidelines 2015. The value of unquoted private equities at 31 March 2020 was £244.5 million (£206.8 million at 31 March 2019).

Pension fund liability

The pension fund liability is calculated every three years by the appointed actuary, with annual updates in the intervening years. The methodology used in line with accepted guidelines and in accordance with IAS 19. Assumptions underpinning the valuations are agreed with the actuary and are summarised in Note 19. This estimate is subject to significant variances based on changes to the underlying assumptions.

Use of Financial Instruments

The Fund uses financial instruments to manage its exposure to specific risks arising from its investments. In applying the accounting policies set out within the notes that accompany the financial statements the Council has had to make certain judgements about complex transactions or those involving uncertainty about future events. The critical judgements made in the financial statements are based around determining a fair value for the alternative investments shown in the Net Asset Statement. It is important to recognise valuations for these types of investments are highly subjective in nature. They are inherently based on forward‐looking estimates and judgements that involve many factors.

5:  Assumptions made about the future and other major sources of estimation uncertainty

The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported for assets and liabilities at the balance sheet date and the amounts reported for the revenues and expenses during the year. Estimates and assumptions are made taking into account historical experience, current trends and other relevant factors. However, the nature of estimation means that the actual outcomes could differ from the assumptions and estimates.

 

 

The items in the Net assets statement at 31 March 2020 for which there is a significant risk of material adjustment in the forthcoming financial year are as follows:

Item	Uncertainties	Effect if actual results differ from assumptions
Actuarial present value of promised retirement benefits	Estimation of the net liability to pay pensions depends on a number of complex judgments relating to the discount rate used, the rate at which salaries are projected to increase, changes in retirement ages, mortality rates and expected returns on pension fund assets. As a result of Coronavirus pandeminc there is a increase in the uncertainty around the mortalty provisions within the Fund, however it is too early to assess this figure at the current time so has not been included in our calculations. A firm of consulting actuaries is engaged to provide the fund with expert advice about the assumptions to be applied.	The effects on the net pension liability of changes in individual assumptions can be measured. For instance, for the 2019 Valuation the actuary advised that: A 0.2% increase in the discount rate assumption would result in a decrease in the pension liability by approximately £113 million (3%).  A 0.2% increase in benefit increases and CARE revaluation would increase the value of liabilities by approximately £95 million (3%). A 0.25% change in mortality rates would increase the liability by approximately £22 million (0.7%).
Private equity	Private equity investments are valued at fair value in accordance with International Private Equity and Venture Capital Valuation Guidelines (2015). Investments are not publicly listed and as such there is a degree of estimation involved in the valuation.	The total private equity investments in the financial statements are £244.5 million. There is a risk that this investment may be under or overstated in the accounts depending on use of estimates applied in the valuation models by the fund managers. The sensitivity of this figure is discussed further in Note 16 and Note 18.
Pooled Property Investments	As a result of the coronavirus impact, the property market remains uncertain and capital and rental values may change rapidly in the short to medium term. An investment manager employed by the pension fund to provide investment valuations has declared a ‘material valuation uncertainty’ in respect of the Pooled Property Investments. These investments are valued at 31 March 2020 at £325.92m. The total value of the fund assets at 31 March 2020 is £3,479.1m, so this investment type represents just over 9.4% of total assets.	Advice from the Fund Manager of the Pooled Property Portfolio is that the indicative effect of the Covid-19 pandemic on these valuations could result in a reduction of up to 10% in the reported value at year end which is £32.59m for the fund as a whole.

6: Events after the balance sheet date

The spread of Coronavirus pandemic had a significant impact on markets in the period prior to year-end and will continue to impact global growth prospects for 2020 and beyond. A unique and challenging landscape has emerged for Governments and their economies to navigate which may impact on the assets and / or liabilities of the Pension Fund.

 

There have been no events since 31 March 2020, and up to the date when these accounts were authorised that require any adjustments to these accounts.

 

 

7: Contributions Receivable

 

	Restated 2018/19	2019/20
	£000	£000
By category
Employee’s contributions	29,613	31,403
Employer’s contributions
Normal contributions	74,626	80,302
Deficit recovery contributions	16,437	17,662
Augmentation contributions	1,021	1,054
Total	121,697	130,421
By authority
Scheduled bodies	77,498	83,613
Admitted bodies	3,576	4,303
Administrative Authority	40,623	42,505
Total	121,697	130,421

 

8: Transfers in from other pension funds

 

	2018/19	2019/20
	£000	£000
Group transfers	-	-
Individual transfers	6,113	8,298
Total	6,113	8,298

 

9: Benefits payable

 

	Restated 2018/19	2019/20
	£000	£000
By category
Pensions	99,457	104,544
Commutation and lump sum retirement benefits	19,722	18,555
Lump sum death benefits	3,004	2,571
Total	122,183	125,670
By authority
Scheduled bodies	69,441	73,625
Admitted bodies	3,778	3,690
Administrative Authority	48,964	48,355
Total	122,183	125,670

 

10: Payments to and on account of leavers

 

	2018/19	2019/20
	£000	£000
Refunds to members leaving service	412	389
Group transfers	-	-
Individual transfers	2,997	8,208
Total	3,409	8,597

 

 

 

11:  Management expenses

 

	2018/19	2019/20
	£000	£000
Administrative costs	916	1,106
Investment management expenses	12,382	15,019
Oversight and governance costs	740	1,208
Total	14,038	17,333

 

11a: Investment management expenses

	2018/19	2019/20
	£000	£000
Management fees	11,750	14,746
Custody fees	124	54
Transaction costs*	508	219
Total	12,382	15,019

*In addition to these costs, indirect costs are incurred through the bid-offer spread on investments within pooled investments.

Investment management expenses are charged directly to the fund as part of management expenses and are not included in, or netted off from, the reported return on investments. Where fees are netted off quarterly valuations by investment managers, these expenses are grossed up.

During the year, the Pension Fund incurred management fees which were deducted at source for 2019/20 of £3.7m (£2.3m in 2018/19) on its private equity investments, fees of £1.3m (£1.3m in 2018/19) on its infrastructure investments, fees of  £2.6m (£0.0m in 2018/19) on investments in the ACCESS Pool and fees of £3.0m (£2.7m in 2018/19) on other mandates. These fees are deducted at the individual portfolio level rather than being paid directly by the Pension Fund.

12: Investment income

 

	2018/19	2019/20
	£000	£000
Income from bonds	1,055	154
Income from equities	8,526	1,507
Private equity income	1,547	1,531
Pooled property investments	11,921	11,972
Pooled investments - unit trusts and other managed funds	2,266	10,705
Interest on cash deposits	856	673
Class Actions	20	4
Total	26,191	26,546

 

13:  Other fund account disclosures

13a: Taxes on income

	2018/19	2019/20
	£000	£000
Withholding tax – equities	(177)	(59)
Withholding tax – pooled	(95)	-
Total	(272)	(59)

 

13b: External audit costs

	2018/19	2019/20
	£000	£000
Payable in respect of external audit for 2018/19	20	3*
Payable in respect of external audit for 2019/20	-	27
Payable in respect of other services	-	5
Total	20	35

*The final fee for 2018/19 was agreed after the audit opinion was received for 2018/19. 

 

14:  Investments                                                                                                                       

 

	2018/19	2019/20
	£000	£000
Investment assets
Bonds	499,750	212,331
Equities	153,695	-
Pooled Investments	2,232,435	2,579,793
Pooled property investments	339,442	318,129
Private equity/infrastructure	245,135	291,413
Commodities	6,125	-
Multi Asset	2,342	-
Derivative contracts:
Forward Currency Contracts	425	-
	3,479,349	3,401,666
Cash deposits with Custodian	149,156	63,715
Other Investment balances (Note 21)	4,937	340
Total investment assets	3,633,442	3,465,721
Investment Liabilities (Note 22)	(9,392)	(475)
Derivative contracts:
Forward Currency Contracts	(840)	-
Total Investment Liabilities	(10,232)	(475)
Net investment assets	3,623,210	3,465,246

 

 

14a:  Reconciliation of movements in investments and derivatives

	Market value 1 April 2019	Purchases during the year and derivative payments	Sales during the year and derivative receipts	Change in market value during the year	Market value         31 March 2020
	£000	£000	£000	£000	£000
Bonds	499,750	68,143	(379,592)	24,030	212,331
Equities	153,695	81,336	(244,125)	9,094	-
Pooled investments	2,232,435	1,055,608	(493,067)	(215,183)	2,579,793
Pooled property investments	339,442	10,551	(15,342)	(16,522)	318,129
Private equity/infrastructure	245,135	57,631	(41,228)	29,875	291,413
Commodities	6,125	992	(7,925)	808	-
Multi Asset	2,342	6,030	(7,534)	(838)	-
	3,478,924	1,280,291	(1,188,813)	(168,736)	3,401,666
Derivative contracts
■ Forward currency contracts	(415)	12,995	(12,095)	(485)	-
	3,478,509	1,293,286	(1,200,908)	(168,221)	3,401,666
Other investment balances:
■ Cash deposits	149,156			2,496	63,715
■ Other Investment Balances	4,937				340
■ Investment Liabilities	(9,392)				(475)
Net investment assets	3,623,210			(166,725)	3,465,246

 

 

 

	Market value 1 April 2018	Purchases during the year and derivative payments	Sales during the year and derivative receipts	Change in market value during the year	Market value         31 March 2019
	£000	£000	£000	£000	£000
Bonds	497,920	226,590	(173,971)	(50,789)	499,750
Equities	363,116	132,273	(370,742)	29,048	153,695
Pooled investments	1,828,109	1,456,879	(1,262,282)	209,729	2,232,435
Pooled property investments	344,411	21,721	(33,705)	7,015	339,442
Private equity/infrastructure	200,960	43,126	(44,550)	45,599	245,135
Commodities	4,487	10,836	(9,211)	13	6,125
Multi Asset	3,921	7,763	-	(9,342)	2,342
	3,242,924	1,899,188	(1,894,461)	231,273	3,478,924
Derivative contracts
■ Forward currency contracts	480	6,452	(8,160)	813	(415)
	3,243,404	1,905,640	(1,902,621)	232,086	3,478,509
Other investment balances:
■ Cash deposits	133,789			2,647	149,156
■ Other Investment Balances	1,777				4,937
■ Investment Liabilities	(3,198)				(9,392)
Net investment assets	3,375,772			234,733	3,623,210

 

14b:  Analysis of investments

	2018/19	2019/20
	£000	£000
Bonds
UK
Corporate quoted	137,675	-
Public sector quoted	295,107	212,331
Overseas
Public sector quoted	66,968	-
	499,750	212,331
Equities
UK
Quoted	23,830	-
Unquoted	-	-
Overseas
Quoted	129,865	-
	153,695	-
Pooled funds - additional analysis
UK
Unit trusts	288,663	396,834
Overseas
Unit trusts	1,943,772	2,182,959
	2,232,435	2,579,793
Pooled property investments	339,442	318,129
Private equity/infrastructure	245,135	291,413
Commodities	6,125	-
Multi Asset	2,342	-
Derivatives	425	-
	593,469	609,542
Cash deposits	149,156	63,715
Other investment balances (Note 21)	4,937	340
	154,093	64,055
Total investment assets	3,633,442	3,465,721
Investment Liabilities (Note 22)	(9,392)	(475)
Derivatives	(840)	-
Total Investment Liabilities	(10,232)	(475)
Net investment assets	3,623,210	3,465,246

 

14c:  Investments analysed by fund manager

	Market value 31 March 2019		Market value 31 March 2020
	£000	%	£000	%
Investments in the ACCESS Pool
ACCESS - Global Equity (Longview)	274,988	7.6%	238,840	6.9%
ACCESS - Absolute Return (Ruffer)	-	-	418,469	12.1%
ACCESS - Real Return (Newton)	-	-	414,784	12.0%
ACCESS - Corporate Debt (M&G)	-	-	144,259	4.2%
	274,988	7.6%	1,216,352	35.2%
Investments held directly by the Fund
Prudential M&G	137,680	3.8%	-	-
East Sussex Pension Fund Cash	73,289	2.0%	24,736	0.7%
UBS Infrastructure Fund	19,522	0.5%	16,720	0.5%
Prudential Infracapital	1,969	0.1%	20,676	0.6%
Pantheon	14,770	0.4%	30,109	0.9%
M&G UK Financing Fund	738	0.0%	-	-
Schroders Property*	360,424	9.9%	343,707	9.9%
Harbourvest Strategies	98,066	2.7%	106,192	3.1%
Adams St Partners	115,216	3.2%	122,874	3.5%
M&G Absolute Return Bonds	251,283	6.9%	239,101	6.9%
Ruffer LLP**	402,202	11.1%	-	-
Newton Investment Management	422,002	11.7%	-	-
Longview Partners	349	0.0%	-	-
UBS Passive Funds	1,450,712	40.1%	1,305,987	37.6%
M&G Real Estate Debt VI	-	-	38,793	1.1%
	3,348,222	92.4%	2,248,894	64.8%
	3,623,210		3,465,246

* Schroders mandate is to oversee the East Sussex Pension Fund’s investments in a range of underlying property funds this is not a single investment into a Schroders property fund.

** Ruffer LLP managed a segregated mandate for East Sussex Pension Fund, the Fund was invested directly into the underlying assets which Ruffer were responsible for investing.

The following investments represent more than 5% of the investment assets of the scheme -

Security	Market Value 31 March 2019	% of total fund	Market value   31 March 2020	% of total fund
	£000		£000
ACCESS - Absolute Return (Ruffer)	-	0.0%	418,469	12.0%
ACCESS - Real Return (Newton)	-	0.0%	414,784	11.9%
UBS Fundamental Index	429,415	11.9%	363,155	10.4%
M&G Absolute Return Bonds	251,283	6.9%	239,101	6.9%
ACCESS - Global Equity (Longview)	274,988	7.6%	238,840	6.9%
UBS UK Equity	271,296	7.5%	221,992	6.4%
UBS Over 5 year Index Gilt Linked	207,494	5.7%	212,331	6.1%
Newton Real Return (Pooled Fund)	422,001	11.6%	-	0.0%

14d:  Stock lending

The East Sussex Pension Fund has not operated a stock lending programme since 13^th October 2008.

15:  Analysis of derivatives

Objectives and policies for holding derivatives

Derivatives can be used to hedge liabilities or hedge exposures to reduce risk in the fund. Derivatives maybe used to gain exposure to an asset more efficiently than holding the underlying asset. The use of derivatives is managed in line with the investment management agreement agreed between the fund and the various investment managers.

a)             Futures

The scheme’s objective is to decrease risk in the portfolio by entering into futures positions to match assets that are already held in the portfolio without disturbing the underlying assets.

 

 

 

b)            Forward foreign currency

In order to maintain appropriate diversification and to take advantage of overseas investment returns, a significant proportion of the fund’s quoted equity portfolio is in overseas stock markets. The fund can participate in forward currency contracts in order to reduce the volatility associated with fluctuating currency rates.

c)             Options

The fund wants to benefit from the potentially greater returns available from investing in equities but wishes to minimise the risk of loss of value through adverse equity price movements. The fund buys equity option contracts that protect it from falls in value in the main markets in which the scheme invests.

Open forward currency contracts

Settlement	Currency bought	Local value	Currency sold	Local value	Asset value	Liability value
		000		000	£000	£000
	-	-	-	-	-	-
					-	-
Net forward currency contracts at 31 March 2020						-
Prior year comparative
Open forward currency contracts at 31 March 2019					425	(840)
Net forward currency contracts at 31 March 2019						(415)

 

16:  Fair value – basis of valuation

The basis of the valuation of each class of investment asset is set out below. There has been no change in the valuation techniques used during the year. All assets have been valued using fair value techniques, which represent the highest and best price available at the reporting date

Description of asset	Valuation hierarchy	Basis of valuation	Observable and unobservable inputs	Key sensitivities affecting the valuations provided
Market-quoted investments	Level 1	Published bid market price ruling on the final day of the accounting period	Not Required	Not Required
Quoted bonds	Level 1	Fixed interest securities are valued at a market value based on current yields	Not Required	Not Required
Futures and options in UK bonds	Level 1	Published exchange prices at the year-end	Not Required	Not Required
Exchange traded pooled investments	Level 1	Closing bid value on published exchanges	Not Required	Not Required
Unquoted bonds	Level 2	Average of broker prices	Evaluated price feeds	Not Required
Forward foreign exchange derivatives	Level 2	Market forward exchange rates at the year-end	Exchange rate risk	Not Required
Overseas bond options	Level 2	Option pricing model	Annualised volatility of counterparty credit risk	Not Required
Pooled investments – Equity and bonds Funds	Level 2	Closing bid price where bid and offer prices are published Closing single price where single price published	The valuation is undertaken by the investment manager or responsible entity and advised as a unit or security price. Observable inputs are used. The valuation standards followed in these valuations adhere to industry guidelines or to standards set by the constituent documents of the pool or the management agreement.	Not Required
Pooled investments – Property Funds	Level 3	Closing bid price where bid and offer prices are published Closing single price where single price published Investments in unlisted property funds are valued at the net asset value (NAV). The underlying real estate assets values have been derived by independent valuers on a fair value basis and generally in accordance with the Royal Institute of Chartered Surveyors’ Valuation Standards.	The significant inputs and assumptions are developed by the respective fund manager.	Valuations could be affected by the frequency of the independent valuations between the funds.
Unquoted equity – Private Equity / Infrastructure	Level 3	Comparable valuation of similar companies in accordance with International Private Equity and Venture Capital Valuation Guidelines (2012)	Observable inputs are subject to judgment by the respective manager, but are applied in accordance with the appropriate industry guidelines.   Valuations are audited as at 31 December, and the valuations as at 31 March reflect cash flow transactions since 31 December.	Valuations could be affected by material events occurring between the date of the financial statements provided and the pension fund’s own reporting date, by changes to expected cashflows, and by any differences between audited and unaudited accounts

 

Sensitivity of assets valued at level 3

Having analysed historical data and current market trends, and consulted with independent investment advisors, the fund has determined that the valuation methods described above are likely to be accurate to within the following ranges, and has set out below the consequent potential impact on the closing value of investments held at 31 March 2020.

Asset Type	Assessed valuation range (+/-)	Values at 31 March 2020	Value on increase	Value on decrease
		£000	£000	£000
Pooled Investment (a)	7%	30,583	32,759	28,407
Pooled property investments (b)	14%	318,129	362,031	274,227
Private Equity/Infrastructure (c)	27%	307,447	390,458	224,436
Total		625,576	752,489	498,663

(a)   All movements in the assessed valuation range derive from changes in the net asset value of the underlying real estate assets, the range in the potential movement of 7% is caused by how this value is measured.

(b)   All movements in the assessed valuation range derive from changes in the net asset value of the underlying real estate assets, the range in the potential movement of 14% is caused by how this value is measured.

(c)   All movements in the assessed valuation range derive from changes in the underlying profitability of component companies, the range in the potential movement of 27% is caused by how this profitability is measured.

16a:  Fair value hierarchy

Asset and liability valuations have been classified into three levels, according to the quality and reliability of information used to determine fair values. Transfers between levels are recognised in the year in which they occur.

Level 1

Assets and liabilities at Level 1 are those where the fair values are derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as Level 1 comprise quoted equities, quoted fixed securities, quoted index linked securities and unit trusts.

Listed investments are shown at bid prices. The bid value of the investment is based on the bid market quotation of the relevant stock exchange.

Level 2

Assets and liabilities at Level 2 are those where quoted market prices are not available; for example, where an instrument is traded in a market that is not considered to be active, or where valuation techniques are used to determine fair value.

Level 3

Assets and liabilities at Level 3 are those where at least one input that could have a significant effect on the instrument’s valuation is not based on observable market data.

Within the East Sussex Pension Fund’s investments those that meet this criterion are the Funds illiquid investments in Pooled property Funds, Private Equity/Infrastructure and some equity investments.

The pricing policies for these investments are set by the Fund’s Investment Managers that has invested into these assets.

The following table provides an analysis of the financial assets and liabilities of the pension fund grouped into Levels 1 to 3, based on the level at which the fair value is observable.

	Quoted market price	Using observable inputs	With Significant unobservable inputs
Values at 31 March 2020	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Financial assets at fair value through profit and loss	222,079	2,539,802	640,125	3,402,006
Non-financial assets at fair value through profit and loss	-	-	-	-
Financial liabilities at fair value through profit and loss	-	(475)	-	(475)
Net investment assets	222,079	2,539,327	640,125	3,401,531

 

	Quoted market price	Using observable inputs	With Significant unobservable inputs
Values at 31 March 2019	Level 1	Level 2	Level 3	Total
	£000	£000	£000	£000
Financial assets at fair value through profit and loss	554,112	2,311,927	618,247	3,484,286
Non-financial assets at fair value through profit and loss	-	-	-	-
Financial liabilities at fair value through profit and loss	-	(10,232)	-	(10,232)
Net investment assets	554,112	2,301,695	618,247	3,474,054

16b: Transfers between levels 1 and 2

During 2019/20 the fund has not transferred any financial assets between levels 1 and 2. 

16c: Reconciliation of fair value measurements within level 3

 

*Reconciliation to Change in market value during the year in Note 14a

Level	Unrealised gains/(losses)	Realised gains/(losses)	Change in market value during the year
1 and 2	(269,121)	100,003	(169,118)
3	(11,034)	13,427	2,393
Total	(280,155)	(113,430)	(166,725)

 

 

 

 

*Reconciliation to Change in market value during the year in Note 14a

Level	Unrealised gains/(losses)	Realised gains/(losses)	Change in market value during the year
1 and 2	58,452	134,401	192,853
3	10,365	31,515	41,880
Total	68,817	165,916	234,733

 

17:  Financial instruments

17a:  Classification of financial instruments

Accounting policies describe how different asset classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of financial assets and liabilities (including cash) by category and net assets statement heading. No financial assets were reclassified during the accounting period.

 

Restated 31 March 2019				31 March 2020
Fair value through profit and loss	Assets at amortised cost	Liabilities at amortised cost		Fair value through profit and loss	Assets at amortised cost	Liabilities at amortised cost
£000	£000	£000		£000	£000	£000
			Financial Assets
499,750	-	-	Bonds	212,331	-	-
153,695	-	-	Equities	-	-	-
2,232,435	-	-	Pooled investments	2,579,793	-	-
339,442	-	-	Pooled property investments	318,129	-	-
245,135	-	-	Private equity/infrastructure	291,413	-	-
6,125	-	-	Commodities	-	-	-
2,342	-	-	Multi Asset	-	-	-
425	-	-	Derivative contracts	-	-	-
-	149,156	-	Cash	-	63,715	-
-	499	-	Cash held by ESCC*	-	1,746	-
4,937	-	-	Other investment balances	340	-	-
-	11,654	-	Debtors   *	-	14,876	-
3,484,286	161,309	-	Total Financial Assets	3,402,006	80,337	-
			Financial liabilities
(840)	-	-	Derivative contracts	-	-	-
(9,392)	-	-	Other investment balances	(475)	-	-
-	-	-	Cash held by ESCC	-	-	-
-	-	(3,151)	Creditors	-	-	(2,774)
(10,232)	-	(3,151)	Total Financial Liabilities	(475)	-	(2,774)
3,474,054	161,309	(3,151)	Total Financial Instruments	3,401,531	80,337	(2,774)

 *Reconciliation to Current Assets Note 21

	2018/19	2019/20
	£000	£000
Cash held by ESCC	499	1,746
Debtors	11,654	15,481
Current Assets	12,153	16,622

 

 

 

 

 

 

 

 

 

17b:  Net gains and losses on financial instruments

	31 March 2019	31 March 2020
	£000	£000
Financial assets
Fair value through profit and loss	225,623	(167,355)
Amortised cost – realised gains on derecognition of assets	-	-
Amortised cost – unrealised gains	2,995	665
Financial liabilities
Fair value through profit and loss	6,115	(35)
Amortised cost – realised gains on derecognition of assets	-	-
Amortised cost – unrealised gains	-	-
Total	234,733	(150,691)

 

18:  Nature and extent of risks arising from financial instruments

Risk and risk management

The fund’s primary long-term risk is that the fund’s assets will fall short of its liabilities (i.e. promised benefits payable to members). Therefore, the aim of investment risk management is to minimise the risk of an overall reduction in the value of the fund and to maximise the opportunity for gains across the whole fund portfolio. The fund achieves this through asset diversification to reduce exposure to market risk (price risk, currency risk and interest rate risk) and credit risk to an acceptable level. In addition, the fund manages its liquidity risk to ensure there is sufficient liquidity to meet the fund’s forecast cash flows. The fund manages these investment risks as part of its overall pension fund risk management programme.

Responsibility for the fund’s risk management strategy rests with the pension fund committee. Risk management policies are established to identify and analyse the risks faced by the fund’s pensions operations. Policies are reviewed regularly to reflect changes in activity and in the market conditions.

a)         Market risk

Market risk is the risk of loss from fluctuations in equity and commodity prices, interest and foreign exchange rates and credit spreads. The fund is exposed to market risk from its investment activities, particularly through its equity holdings. The level of risk exposure depends on market conditions, expectations of future price and yield movements and the asset mix.

The objective of the fund’s risk management strategy is to identify, manage and control market risk exposure within acceptable parameters, whilst optimising the return on risk.

In general, excessive volatility in market risk is managed through the diversification of the portfolio in terms of geographical and industry sectors and individual securities. To mitigate market risk, the fund and its investment advisors undertake appropriate monitoring of market conditions and benchmark analysis.

The fund manages these risks in two ways:

-       the exposure of the fund to market risk is monitored through a factor risk analysis, to ensure that risk remains within tolerable levels

-       specific risk exposure is limited by applying risk-weighted maximum exposures to individual investments.

Equity futures contracts and exchange traded option contracts on individual securities may also be used to manage market risk on equity investments. It is possible for over-the-counter equity derivative contracts to be used in exceptional circumstances to manage specific aspects of market risk.

Other price risk

Other price risk represents the risk that the value of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or foreign exchange risk), whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all such instruments in the market.

The fund is exposed to share and derivative price risk. This arises from investments held by the fund for which the future price is uncertain. All securities investments present a risk of loss of capital. Except for shares sold short, the maximum risk resulting from financial instruments is determined by the fair value of the financial instruments. Possible losses form shares sold short is unlimited.

The fund’s investment managers mitigate this price risk through diversification and the selection of securities and other financial instruments is monitored by the fund to ensure it is within limits specified in the fund investment strategy.

Other price risk – sensitivity analysis

Following analysis of historical data and expected investment return movement during the financial year, in consultation with the fund’s investment advisors, the fund has determined that the following movements in market price risk are reasonably possible for the 2019/20 reporting period:

Asset Type	Potential Market Movements (+/-)
Index Linked	9%
Other Bonds	7%
UK equities	28%
Global equities	28%
Absolute Return	14%
Pooled property investments	14%
Private Equity	28%
Infrastructure funds	20%

The potential price changes disclosed above are broadly consistent with a one-standard deviation movement in the value of the assets. The sensitivities are consistent with the assumptions contained in the investment advisors’ most recent review. This analysis assumes that all other variables, in particular foreign currency exchange rates and interest rates, remain the same.

Had the market price of the fund investments increased/decreased in line with the above, the change in the net assets available to pay benefits in the market price would have been as follows.

Asset Type	Values at 31 March 2020	Value on increase	Value on decrease
	£000	£000	£000
Index Linked	212,331	231,441	193,221
Other Bonds	413,943	443,397	384,489
UK equities	221,992	284,150	159,834
Global equities	1,110,605	1,421,574	799,636
Absolute Return	833,253	949,908	716,598
Pooled property investments	318,129	362,031	274,227
Private Equity	228,472	292,444	164,500
Infrastructure funds	62,941	75,529	50,353
Net derivative assets	-	-	-
Total assets available to pay benefits	3,401,666	4,060,474	2,742,858

 

Asset Type	Values at 31 March 2019	Value on increase	Value on decrease
	£000	£000	£000
Index Linked	207,489	226,163	188,815
Other Bonds	388,958	412,279	365,637
UK equities	272,028	318,273	225,783
Global equities	1,247,034	1,459,030	1,035,038
Absolute Return	779,575	880,920	678,230
Pooled property investments	339,442	386,964	291,920
Private Equity	211,928	271,268	152,588
Infrastructure funds	32,469	38,963	25,975
Net derivative assets	(414)	(414)	(414)
Total assets available to pay benefits	3,478,509	3,993,446	2,963,572

Interest rate risk

The fund invests in financial assets for the primary purpose of obtaining a return on investments. These investments are subject to interest rate risks, which represent the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

The fund’s interest rate risk is routinely monitored by the Fund and its investment advisors in accordance with the fund’s risk management strategy, including monitoring the exposure to interest rates and assessment of actual interest rates against the relevant benchmarks.

The fund’s direct exposure to interest rate movements as at 31 March 2020 and 31 March 2019 is set out below. These disclosures present interest rate risk based on the underlying financial assets at fair value.

Interest rate risk sensitivity analysis       

The fund recognises that interest rates can vary and can affect both income to the fund and the value of the net assets available to pay benefits. A 100 basis point (bps) movement in interest rates is consistent with the level of sensitivity applied as part of the fund's risk management strategy. The fund's investment adviser has advised that this is consistent with an annual one standard deviation move in interest rates, where interest rates are determined by the prices of fixed interest UK government bonds.

The analysis that follows assumes that all other variables, in particular exchange rates, remain constant, and shows the effect in the year on the net assets available to pay benefits of a +/- 100 BPS change in interest rates:

Asset type	Carrying amount as at 31 March 2020	Impact of 1% increase	Impact of 1% decrease
	£000	£000	£000
Cash and cash equivalents	63,715	63,715	63,715
Cash balances	1,746	1,746	1,746
Fixed interest securities	413,943	418,082	409,804
Index linked securities	212,331	212,331	212,331
Total change in assets available	691,735	695,874	687,596

 

Asset type	Carrying amount as at 31 March 2019	Impact of 1% increase	Impact of 1% decrease
	£000	£000	£000
Cash and cash equivalents	149,156	149,156	149,156
Cash balances	499	499	499
Fixed interest securities	404,890	408,939	400,841
Index linked securities	346,143	346,143	346,143
Total change in assets available	900,688	904,737	896,639

 

Income Source	Interest receivable 2019/20	Value on 1% increase	Value on 1% decrease
	£000	£000	£000
Cash deposits/cash and cash equivalents	673	1,328	18
Fixed interest securities	6,665	6,665	6,665
Index linked securities	169	2,292	(1,954)
Total change in assets available	7,507	10,285	4,729

 

Income Source	Interest receivable 2018/19	Value on 1% increase	Value on 1% decrease
	£000	£000	£000
Cash deposits/cash and cash equivalents	856	2,353	(641)
Fixed interest securities	2,605	2,605	2,605
Index linked securities	700	4,161	(2,761)
Total change in assets available	4,161	9,119	(797)

 

This analysis demonstrates that a 1% increase in interest rates will not affect the interest received on fixed interest assets but will reduce their fair value, and vice versa. Changes in interest rates do not impact on the value of cash/cash equivalent balances but they will affect the interest income received on those balances.

 

 

 

 

Currency risk

Currency risk represents the risk that future cash flows will fluctuate because of changes in foreign exchange rates. The fund is exposed to currency risk on any cash balances and investment assets not denominated in UK sterling. Following analysis of historical data in consultation with the fund investment advisors, the fund considers the likely volatility associated with foreign exchange rate movements not more than 13%. A 13% strengthening/weakening of the pound against the various currencies in which the fund holds investments would increase/decrease the net assets available to pay benefits as follows:

Currency exposure - asset type	Values at 31 March 2020	Potential Market movement	Value on increase	Value on decrease
	£000	£000	£000	£000
Overseas unit trusts	2,182,959	218,296	2,401,255	1,964,663
Total change in assets available	2,182,959	218,296	2,401,255	1,964,663

 

Currency exposure - asset type	Values at 31 March 2019	Potential Market movement	Value on increase	Value on decrease
	£000	£000	£000	£000
Overseas index linked	51,036	6,635	57,671	44,401
Overseas fixed interest	15,932	2,071	18,003	13,861
Overseas quoted securities	129,865	16,882	146,747	112,983
Overseas unit trusts	1,675,160	217,771	1,892,931	1,457,389
Total change in assets available	1,871,993	243,359	2,115,352	1,628,634

 

b)         Credit risk

Credit risk represents the risk that the counterparty to a transaction or a financial instrument will fail to discharge an obligation and cause the fund to incur a financial loss. The market values of investments generally reflect an assessment of credit in their pricing and consequently the risk of loss is implicitly provided for in the carrying value of the fund’s financial assets and liabilities.

In essence, the fund’s entire investment portfolio is exposed to some form of credit risk, with the exception of the derivatives positions, where the risk equates to the net market value of a positive derivative position. However, the selection of high quality counterparties, brokers and financial institutions minimise credit risk that may occur through the failure to settle a transaction in a timely manner.

Contractual credit risk is represented by the net payment or receipts that remains outstanding, and the cost of replacing the derivative position in the event of a counterparty default. The residual risk is minimal due to the various insurance policies held by the exchanges to cover defaulting counterparties.

Credit risk on over-the-counter derivative contracts is minimised as counterparties are recognised financial intermediaries with acceptable credit ratings determined by a recognised rating agency.

The fund believes it has managed its exposure to credit risk, and has had no experience of default or uncollectable deposits in recent years.

Summary	Asset value as at 31 March 2019	Asset value as at 31 March 2020
	£000	£000
UK Treasury bills	86	86
Bank current accounts
NT custody cash accounts	149,070	63,629
Total overseas assets	149,156	63,715

c)         Liquidity risk

Liquidity risk represents the risk that the fund will not be able to meet its financial obligations as they fall due. The fund therefore takes steps to ensure that the pension fund has adequate cash resources to meet its commitments. This will particularly be the case for cash from the cash flow matching mandates from the main investment strategy to meet the pensioner payroll costs; and also cash to meet investment commitments.

The fund has immediate access to its pension fund cash holdings and the fund also has access to an overdraft facility for short-term cash needs. This facility is only used to meet timing differences on pension payments. As these borrowings are of a limited short-term nature, the fund’s exposure to liquidity risk is considered negligible.

All financial liabilities at 31 March 2020 are due within one year.

Refinancing risk

The key risk is that the fund will be bound to replenish a significant proportion of its pension fund financial instruments at a time of unfavourable interest rates. The fund does not have any financial instruments that have a refinancing risk as part of its treasury management and investment strategies.

19:  Funding arrangements

The latest actuarial valuation of the fund was carried out as at 31 March 2019. The purpose of the triennial valuation is to calculate the contribution rates required to be made by each employer participating in the fund, which together with investment growth will be sufficient to meet the fund's future liabilities. The 2019 valuation shows the fund has a past service deficit, being 107% funded in respect of past liabilities. This compares with 92% funded at the 2016 valuation.

East Sussex Pension Fund (“the Fund”)

Actuarial Statement for 2019/20

This statement has been prepared in accordance with Regulation 57(1)(d) of the Local Government Pension Scheme Regulations 2013. It has been prepared at the request of the Administering Authority of the Fund for the purpose of complying with the aforementioned regulation.

Description of Funding Policy

The funding policy is set out in the Administering Authority’s Funding Strategy Statement (FSS), dated March 2020. In summary, the key funding principles are as follows:

• to ensure the long-term solvency of the Fund using a prudent long term view. This will ensure that sufficient funds are available to meet all members’/dependants’ benefits as they fall due for payment;
• to ensure that employer contribution rates are reasonably stable where appropriate;
• to minimise the long-term cash contributions which employers need to pay to the Fund by recognising the link between assets and liabilities and adopting an investment strategy which balances risk and return (this will also minimise the costs to be borne by Council Tax payers);
• to reflect the different characteristics of different employers in determining contribution rates. This involves the Fund having a clear and transparent funding strategy to demonstrate how each employer can best meet its own liabilities over future years; and

·         to use reasonable measures to reduce the risk to other employers and ultimately to the Council Tax payer from an employer defaulting on its pension obligations.

The FSS sets out how the Administering Authority seeks to balance the conflicting aims of securing the solvency of the Fund and keeping employer contributions stable. For employers whose covenant was considered by the

Administering Authority to be sufficiently strong, contributions have been stabilised to have a sufficiently high

likelihood of achieving the funding target over 20 years. Asset-liability modelling has been carried out which

demonstrate that if these contribution rates are paid and future contribution changes are constrained as set out in

the FSS, there is at least a 71% likelihood that the Fund will achieve the funding target over 20 years.

Funding Position as at the last formal funding valuation

The most recent actuarial valuation carried out under Regulation 62 of the Local Government Pension Scheme

Regulations 2013 was as at 31 March 2019. This valuation revealed that the Fund’s assets, which at 31 March

2019 were valued at £3,633 million, were sufficient to meet 107% of the liabilities (i.e. the present value of

promised retirement benefits) accrued up to that date. The resulting surplus at the 2019 valuation was £247

million.

Each employer had contribution requirements set at the valuation, with the aim of achieving full funding within a time horizon and probability measure as per the FSS. Individual employers’ contributions for the period 1 April 2020 to 31 March 2023 were set in accordance with the Fund’s funding policy as set out in its FSS.

Principal Actuarial Assumptions and Method used to value the liabilities

Full details of the methods and assumptions used are described in the 2019 valuation report.

Method

The liabilities were assessed using an accrued benefits method, which takes into account pensionable membership up to the valuation date, and makes an allowance for expected future salary growth to retirement or expected earlier date of leaving pensionable membership.

Assumptions

A market-related approach was taken to valuing the liabilities, for consistency with the valuation of the Fund assets at their market value.

The key financial assumptions adopted for the 2019 valuation were as follows:

Financial assumptions	31 March 2019
Discount rate	4.0%
Salary increase assumption	2.3%
Benefit increase assumption (CPI)	2.3%

 

The key demographic assumption was the allowance made for longevity. The life expectancy assumptions are based on the Fund's VitaCurves with improvements in line with the CMI 2018 model, an allowance for smoothing of recent mortality experience and a long term rate of 1.25% p.a. Based on these assumptions, the average future life expectancies at age 65 are as follows:

 

	Males	Females
Current Pensioners	22.6 years	23.9 years
Future Pensioners*	22.5 years	25.3 years

*Figures assume members aged 45 as at the 2019 valuation.

Copies of the 2019 valuation report and Funding Strategy Statement are available on request from East Sussex County Council, the Administering Authority to the Fund.

Experience over the period since 31 March 2019

Markets were disrupted by COVID 19 which resulted in difficult market conditions towards the end of the financial

year. As a result, the funding level of the Fund as at 31 March 2020 has reduced versus that reported in the

previous formal valuation.

The next actuarial valuation will be carried out as at 31 March 2022. The Funding Strategy Statement will also be reviewed at that time.

20:  Actuarial present value of promised retirement benefits

Introduction

CIPFA's Code of Practice on Local Authority Accounting 2019/20 requires Administering Authorities of LGPS funds that prepare pension fund accounts to disclose what IAS26 refers to as the actuarial present value of promised retirement benefits. I have been instructed by the Administering Authority to provide the necessary information for the East Sussex Pension Fund (“the Fund”).

The actuarial present value of promised retirement benefits is to be calculated similarly to the Defined Benefit Obligation under IAS19. There are three options for its disclosure in the pension fund accounts:

• showing the figure in the Net Assets Statement, in which case it requires the statement to disclose the resulting surplus or deficit;
• as a note to the accounts; or
• by reference to this information in an accompanying actuarial report.

If an actuarial valuation has not been prepared at the date of the financial statements, IAS26 requires the most recent valuation to be used as a base and the date of the valuation disclosed. The valuation should be carried out using assumptions in line with IAS19 and not the Fund’s funding assumptions.

Present value of Promised Retirement Benefits

Year ended	31 March 2019	31 March 2020
Active members (£m)	2,277	1,634
Deferred pensions (£m)	1,039	1,023
Pensioners (£m)	1,552	1,721
Total	4,868	4,378

The promised retirement benefits at 31 March 2020 have been projected using a roll forward approximation from the latest formal funding valuation as at 31 March 2019. The approximation involved in the roll forward model means that the split of benefits between the three classes of member may not be reliable. However, I am satisfied that the total figure is a reasonable estimate of the actuarial present value of benefit promises.

The above figures include both vested and non-vested benefits, although the latter is assumed to have a negligible value. Further, I have not made any allowance for unfunded benefits.

It should be noted the above figures are appropriate for the Administering Authority only for preparation of the pension fund accounts. They should not be used for any other purpose (i.e. comparing against liability measures on a funding basis or a cessation basis).

Assumptions

The assumptions used are those adopted for the Administering Authority’s IAS19 report and are different as at 31 March 2020 and 31 March 2019. I estimate that the impact of the change in financial assumptions to 31 March 2020 is to decrease the actuarial present value by £449m. I estimate that the impact of the change in demographic and longevity assumptions is to decrease the actuarial present value by £125m.

 

Financial assumptions

Year ended	31 Mar 2019	31 Mar 2020
	% p.a.	% p.a.
Pension Increase Rate	2.5%	1.9%
Salary Increase rate	2.9%	1.9%
Discount Rate	2.4%	2.3%

Longevity assumption

Life expectancy is based on the Fund's VitaCurves with improvements in line with the CMI 2018 model, an

allowance for smoothing of recent mortality experience and a long term rate of 1.25% p.a. Based on these

assumptions, the average future life expectancies at age 65 are summarised below:

	Males	Females
Current Pensioners	22.6 years	23.9 years
Future Pensioners*	22.5 years	25.3 years

*Future pensioners are assumed to be aged 45 at the latest formal valuation as at 31 March 2019.

Please note that the longevity assumptions have not changed since the previous IAS26 disclosure for the Fund.

Commutation assumptions

An allowance is included for future retirements to elect to take 50% of the maximum additional tax-free cash up to HMRC limits for pre-April 2008 service and 75% of the maximum tax-free cash for post-April 2008 service.

Sensitivity Analysis

CIPFA guidance requires the disclosure of the sensitivity of the results to the methods and assumptions used. The sensitivities regarding the principal assumptions used to measure the liabilities are set out below:

Sensitivity to the assumptions for the year ended 31 March 2020	Approximate % increase to liabilities	Approximate monetary amount (£m)
0.5% increase in pensions increase rate	9%	384
0.5% increase in salary increase rate	1%	33
0.5% decrease in discount rate	10%	420

The principal demographic assumption is the longevity assumption. For sensitivity purposes, I estimate that a 1-year increase in life expectancy would approximately increase the liabilities by around 3-5%.

21:  Current assets

	31 March 2019	31 March 2020
	£000	£000
Other Investment Balances
Sales inc Currency	3,313	-
Investment Income Due	1,704	193
Recoverable Taxes	345	147
Total	5,362	340

 

	31 March 2019	31 March 2020
	£000	£000
Current Assets
Contributions receivable from employers and employees	10,167	13,436
Sundry Debtors	1,487	1,440
Cash	499	1,746
Total	12,153	16,622

 

 

 

 

 

22:  Current liabilities

	31 March 2019	31 March 2020
	£000	£000
Investment Liabilities
Purchases including currency	(8,893)	-
Managers Fees	(1,339)	(475)
Total	(10,232)	(475)

 

	Restated 31 March 2019	31 March 2020
	£000	£000
Current Liabilities
Pension Payments (inc Lump Sums)	(574)	(264)
Cash	-	-
Professional Fees	(55)	(434)
Administration Recharge	(1,046)	(1,194)
Sundry Creditors	(1,476)	(882)
Total	(3,151)	(2,774)

23: Additional voluntary contributions

	Market value 31 March 2019	Market value 31 March 2020
	£000	£000
Prudential	16,821	21,221

The Pension Fund Scheme provides an Additional Voluntary Contribution (AVC) facility for scheme members. In 2019/20 some members of the pension scheme paid voluntary contributions and transfers in of £2.277m (£2.580m 2018/19) to Prudential to buy extra pension benefits when they retire. £3.050m was disinvested from the AVC provider in 2019/20 (£2.303m 2018/19). Contributions and benefits to scheme members are made directly between the scheme member and the AVC provider. The AVC funds are not, therefore, included in the Pension Fund Accounts.

 

 

24:   Agency Services

The East Sussex Pension Fund pays discretionary awards to former employees on behalf of some employers in the Fund. The amounts paid are provided as a service and are fully reclaimed from the employer bodies. The sums are disclosed below.

	2018/19	2019/20
	£000	£000
East Sussex County Council	4,905	4,899
Brighton & Hove City Council	2,349	2,291
Eastbourne Borough Council	345	304
Magistrates	179	209
Wealden District Council	212	176
Hastings Borough Council	168	174
Rother District Council	104	115
Lewes District Council	78	73
South East Water	61	35
Brighton University	28	26
Mid-Sussex District Council	-	19
Westminster (used to be LPFA)	17	18
East Sussex Fire Authority	16	17
Capita Hartshead	16	16
London Borough of Camden	7	7
London Borough of Southwark	6	6
The Eastbourne Academy	5	6
Eastbourne Homes	3	6
West Midlands Pension Fund	5	5
West Sussex County Council*	1,060	4
Torfaen Borough Council	4	4
Sussex University	3	3
Varndean College	2	2
London Borough of Ealing	2	2
Newhaven TC	1	1
East Sussex College Group	1	1
Plumpton College	-	1
Total	9,577	8,420

* Brighton and Hove City College transferred to West Sussex County Council on the 1 April 2017 East Sussex are still administering the Brighton and Hove City College members at the request of West Sussex until the records were transferred to their administrators March 2019.

25:  Related party transactions

East Sussex County Council

The East Sussex Pension Fund is administered by East Sussex County Council. Consequently, there is a strong relationship between the council and the pension fund.

Each member of the Pension Committee is required to declare their interests at each meeting.

The Treasurer of the Pension Fund and members of the County Council and the Pension Committee have no material transactions with the Pension Fund.

The Council incurred costs in administering the fund and charged £1.2m to the fund in 2019/20 (£1.0m in 2018/19). The Council`s contribution to the fund was £42.5m in 2019/20 (£45.9m in 2018/19). All amounts due to the fund were paid in the year. At 31 March 2020 the Pension Fund bank account was in debit by £1.7m. The average throughout the year was £6.0m (£4.3 in 2018/19).

 

 

25a: Key management personnel

The Chief Finance Officer of East Sussex County Council holds the key position in the financial management of the East Sussex Pension Fund.

	31 March 2019	31 March 2020
	£000	£000
Short-term benefits	17	18
Post-employment benefits	3	3
Total	20	21

 

26:  Contingent liabilities and contractual commitments

Outstanding capital commitments (investments) at 31 March 2020 totalled £322.0m (31 March 2019: £200.7m).

These commitments relate to outstanding call payments due on unquoted limited partnership funds held in the private equity and infrastructure parts of the portfolio. The amounts ‘called’ by these funds are irregular in both size and timing, typically over a period of between four and six years from the date of each original commitment. 

At 31 March 2020, the unfunded commitment was £158.4m for private equity, £133.5m for infrastructure and £30.1 for private debt. The commitments are paid over the investment timeframe of the underlying partnerships. As these partnerships mature they are due to distribute capital back to investors.  Commitments are made in US Dollars or Euros and the figures presented here are based on relevant Sterling exchange rates as at 31 March 2020.

Exit Payments

There were 12 employers whose contracts were due to end by the 31 March 2020 where an exit credit may need to be paid out. The Fund needs to obtain final information from the employers and then will need to commission the final cessation report from the actuaries to ascertain if an exit payment is due for these employers.

GMP Reconciliation Project

The Guaranteed Minimum Pension (GMP) Reconciliation project was split into number stages for Local Government Pension Schemes (LGPS). The Fund has nearly completed Stage 2, which reviews data inconsistencies, raised issues with HMRC and agrees outcomes, with 100% of the matching work completed. GMP elements of LGPS pension where State Pension Age is prior to 6 April 2016 has not increased in respect of the period 6 April 1978 to 5 April 1988. While the Post 1988 GMP element in respect of the period 6 April 1988 to 5 April 1997 might be increased up to a maximum of 3%. The Government increase the State Pension for the member fully on the Pre 1988 GMP element and for Post 1988 GMP element has only increased if CPI is above 3%.

The effect of LGPS pensions not showing the correct amount of GMP for its members would mean that their pension might be increased incorrectly. This can result in underpayments and overpayments, at a member specific level. Stage 3 of the GMP Reconciliation Project, i.e., Rectification will amend LGPS pensions in line with the reconciled Stage 2 GMP information. This stage will also involve a significant member communication exercise to explain the changes taking place.

We are not in a position to be able to finalise the GMP reconciliation at this point we received with the final Scheme Reconciliation Service data cut, showing the final position of membership and liabilities held on their records from HMRC in July 2020. The contracted provider Mercers are currently performing a final reconciliation on this data with a report due to go to the November Pension Committee meeting for consideration. As such, we are unable to quantify the under/overpayment liability values as at 31 March 2020.

27:  Contingent assets

There are 9 admitted body employers in the Fund that hold insurance bonds to guard against the possibility of them being unable to meet their pension obligations. These bonds are drawn in favour of the pension fund and payment will only be triggered in the event of employer default. In addition to these bonds, pension’s obligations in respect of 12 other admitted bodies are covered by:

·         8 guarantees by local authorities participating in the Fund;

·         3 Parent company guarantee;

• 1 deposit held by East Sussex County Council

At 31 March 2020, the Fund has invested £367.4 million in private equity funds managed by Adams Street and HarbourVest. The Fund has also invested £29.9 million in the M&G real estate debt fund VI and £71.4 million in the infrastructure funds managed by UBS, Pantheon and Infracapital.

Following Rulings given by the European Court of Justice, along with a number of other local authority pension funds, the East Sussex Pension Fund is pursuing the recovery of tax paid on certain dividends. If successful, this may be of material benefit to the Fund. The amount, which may be recoverable, is not currently quantifiable.

 

28:  Impairment losses

During 2019/20, the fund has not recognised any impairment losses.

29:  East Sussex Pension Fund – Active Participating Employers

 

 

30:   Investment Performance

The County Council uses an independent Investment performance measurement service, provided by Pensions & Investment Research Consultants Ltd (PIRC), which measures the performance of the Fund compared with 58 other local authority pension funds. Pension Fund investment is a long-term business so as well as showing the annual performance of the Fund, comparison to peers over longer periods is also detailed below.

Performance relative to the Fund’s strategic benchmark

	1 year (%)	3 years (%p.a.)	5 years (%p.a.)	10 years (%p.a.)
Fund	(4.3)	1.6	5.1	6.8
Benchmark	(5.0)	1.2	4.4	5.8
Relative	0.7	0.4	0.7	1.0

 

Investment performance relative to peer group

	1 year (%)	3 years (%p.a.)	5 years (%p.a.)	10 years (%p.a.)
Fund	(4.3)	1.6	5.1	6.8
Local Authority Average	(4.8)	1.9	5.2	6.9
Relative	0.5	(0.3)	(0.1)	(0.1)

 

The Fund outperformed the (weighted) average local authority fund over the year by 1.3% (0.7% outperformance 2018/19), ranking the East Sussex Fund in the 48^nd percentile (23^rd 2018/19) in the local authority universe. Over three years the fund performed inline (0.7% underperformance 2018/19) and was placed in the 55^th percentile (65^th 2018/19). Over five years the fund outperformed by 0.1% (0.2% outperformance in 2018/19) and was placed in the 37^th percentile (32^nd 2018/19). Over ten years the fund years, the fund underperformed by 0.1% (0.3% underperformance 2018/19) and was placed in the 45^th percentile (60^th 2018/19).

Relative performance is calculated on a geometric basis as follows:

 

( ( 1 + Fund Performance ) / ( 1 + Benchmark Performance ) ) - 1

 

As opposed to the simpler arithmetic method, the geometric method makes it possible to directly compare long-term relative performance with shorter-term relative performance.

 

 

31:   Prior Period Adjustments

Fund Account  

 

The 2018/19 contributions from employers and benefits totals have been restated to £92,084k and £122,183k respectively. The net (additions)/withdrawals from dealings with members, net (additions)/withdrawals including fund management expenses, net (increase)/decrease in net assets available for benefits during the year and the closing net assets of the schemes have all been adjusted by £651k to £2,218, £11,820, £248,832 and £3,632,212 respectively. This is due to the removal of unfunded pension payments from the Fund Account and a liability raised for this in the Net Asset Statement.          

 

2018/19			Restated 2018/19		Change
£000	£000		£000	£000	£000
		Dealings with members, employers and others directly involved in the fund
		Contributions
(101,093)		From Employers	(92,084)			9,009
(29,613)		From Members	(29,613)			-
	(130,706)			(121,697)		-
	(6,113)	Transfers in from other pension funds		(6,113)		-
	(136,819)			(127,810)		9,009
	130,541	Benefits		122,183		(8,358)
	3,409	Payments to and on account of leavers		3,409		-
	133,950			125,592		(8,358)
	(2,869)	Net (additions)/withdrawals from dealings with members		(2,218)		651
	14,038	Management expenses		14,038		-
	11,169	Net (additions)/withdrawals including fund management expenses		11,820		651
		Returns on investments
	(26,191)	Investment income		(26,191)		-
	272	Taxes on income		272		-
	(234,733)	Profit and losses on disposal of investments and changes in the value of investments		(234,733)		-
	(260,652)	Net return on investments		(260,652)		-
	(249,483)	Net (increase)/decrease in net assets available for benefits during the year		(248,832)		651
	(3,383,380)	Opening net assets of the scheme		(3,383,380)		-
	(3,632,863)	Closing net assets of the scheme		(3,632,212)		651

 

 

Net Assets Statement   

The 31 March 2019 balances for current liabilities and net assets of the fund available to fund benefits at the year end have been restated due to the removal of unfunded pensions from the Fund Account to £3,151k and £3,632,212k respectively a movement of £651k.       

31 March 2019		Restated 31 March 2019	Change
£000		£000	£000
3,478,924	Investment assets	3,478,924	-
5,362	Other Investment balances	5,362	-
(10,232)	Investment liabilities	(10,232)	-
149,156	Cash deposits	149,156	-
3,623,210	Total net investments	3,623,210	-
12,153	Current assets	12,153	-
(2,500)	Current liabilities	(3,151)	(651)
3,632,863	Net assets of the fund available to fund benefits at the year end.	3,632,212	(651)

 

Note 7

 

The 2018/19 employers normal contributions have been restated to £74,626k with the breakdown by Scheduled bodies, Admitted bodies and Administrative Authority have been restated to £77,498k, £3,578k and £40,623k respectively. Due to the removal of reimbursements for unfunded pension payments from the Fund Account.

	2018/19	Restated 2018/19	Change
	£000	£000	£000
By category
Employee’s contributions	29,613	29,613	-
Employer’s contributions
Normal contributions	83,635	74,626	9,009
Deficit recovery contributions	16,437	16,437	0
Augmentation contributions	1,021	1,021	0
Total	130,706	121,697	9,009
By authority
Scheduled bodies	81,178	77,498	3,680
Admitted bodies	3,582	3,576	6
Administrative Authority	45,946	40,623	5,323
Total	130,706	121,697	9,009

 

Note 9

 

The 2018/19 pensions and commutation and lump sum retirement benefits have been restated to £99,457k and £19,722K respectively. The breakdown by scheduled bodies, admitted bodies and administrative authority have been restated to £69,441k, £3,778k and £48,964k respectively. Due to the removal of unfunded pension payments from the Fund Account.

	2018/19	Restated 2018/19	Change
	£000	£000	£000
By category
Pensions	107,805	99,457	8,348
Commutation and lump sum retirement benefits	19,732	19,722	10
Lump sum death benefits	3,004	3,004	-
Total	130,541	122,183	8,358
By authority
Scheduled bodies	72,886	69,441	3,445
Admitted bodies	3,808	3,778	30
Administrative Authority	53,847	48,964	4,883
Total	130,541	122,183	8,358

 

Note 17

 

The 2018/19 creditors balance has been changed to £3,151k due to the creation of a creditor for unfunded pension payments.

 

31 March 2019				Restated 31 March 2019			Change
Fair value through profit and            loss	Assets at amortised cost	Liabilities at amortised cost		Fair value through profit and loss	Assets at amortised cost	Liabilities at amortised cost
£000	£000	£000		£000	£000	£000	£000
			Financial Assets
499,750	-	-	Bonds	499,750	-	-	-
153,695	-	-	Equities	153,695	-	-	-
2,232,435	-	-	Pooled investments	2,232,435	-	-	-
339,442	-	-	Pooled property investments	339,442	-	-	-
245,135	-	-	Private equity/infrastructure	245,135	-	-	-
6,125	-	-	Commodities	6,125	-	-	-
2,342	-	-	Multi Asset	2,342	-	-	-
425	-	-	Derivative contracts	425	-	-	-
-	149,156	-	Cash	-	149,156	-	-
-	499*	-	Cash held by ESCC*	-	499	-	-
4,937	-	-	Other investment balances	4,937	-	-	-
-	11,654*	-	Debtors   *	-	11,654	-	-
3,484,286	161,309	-	Total Financial Assets	3,484,286	161,309	-	-
			Financial liabilities
(840)	-	-	Derivative contracts	(840)	-	-	-
(9,392)	-	-	Other investment balances	(9,392)	-	-	-
-	-	-	Cash held by ESCC	-	-	-	-
-	-	(2,500)	Creditors	-	-	(3,151)	(651)
(10,232)	-	(2,500)	Total Financial Liabilities	(10,232)	-	(3,151)	(651)
3,474,054	161,309	(2,500)	Total Financial Instruments	3,474,054	161,309	(3,151)	(651)

 

Note 22

 

The 2018/19 sundry creditors balance has been changed to £1,476k due to the creation of a creditor for unfunded pension payments.

 

	31 March 2019	Restated 31 March 2019	Change
	£000	£000	£000
Current Liabilities
Pension Payments (inc Lump Sums)	(574)	(574)	-
Cash	-	-	-
Professional Fees	(55)	(55)	-
Administration Recharge	(1,046)	(1,046)	-
Sundry Creditors	(825)	(1,476)	(651)
Total	(2,500)	(3,151)	(651)

 

 

 

 

9.       Asset pools

Background  

ACCESS (A Collaboration of Central, Eastern and Southern Shires) is made up of 11 Local Government Pension Schemes (LGPS) Administering Authorities:

Collectively the pool has assets of £44 billion (of which 49% has been pooled) serving 3,534 employers with over 1.1 million members including 288,248 pensioners.

The ACCESS Administering Authorities are committed to working together to optimise benefits and efficiencies on behalf of their individual and collective stakeholders, operating with a clear set of objectives and principles that drives the decision making process.

Objectives

1.     Enable participating authorities to execute their fiduciary responsibilities to Local Government Pension Scheme (LGPS) stakeholders, including scheme members and employers, as economically as possible.

2.     Provide a range of asset types necessary to enable those participating authorities to execute their locally decided investment strategies as far as possible.

3.     Enable participating authorities to achieve the benefits of pooling investments, preserve the best aspects of what is currently done locally, and create the desired level of local decision-making and control.

Principles

 

Governance

The ACCESS Pool is not a legal entity in itself but is governed by the Inter Authority Agreement signed by each Administering Authority. The Inter Authority Agreement sets out the terms of reference and constitution of ACCESS.

The formal decision-making body within the ACCESS Pool is the ACCESS Joint Committee. The Joint Committee has been appointed by the 11 Administering Authorities under s102 of the Local Government Act 1972, with delegated authority from the Full Council of each Administering Authority to exercise specific functions in relation to the Pooling of Pension Fund assets.

The Joint Committee is responsible for ongoing contract management and budget management for the Pool and is supported by the Section 151 Officers Group, Officer Working Group and the ACCESS Support Unit.

The Section 151 Officers of ACCESS Authorities provide advice to the Joint Committee in response to its decisions ensure appropriate resourcing and support is available to implement the decisions and to run the ACCESS Pool.

The Officer Working Group are officers identified by the Administering Authorities whose role is to provide a central resource for advice, assistance, guidance and support for the Joint Committee.

The ACCESS Support Unit (ASU) provides the day-to-day support for running the ACCESS Pool and has responsibility for programme management, contract management, administration and technical support services. The permanent staff roles within the ASU are employed by the Host Authority (Essex) with additional technical support from Officers within the ACCESS Pension Funds.  

Strategic oversight and scrutiny responsibilities remain with the Administrating Authorities as does all decision making power to their own Funds asset allocation and the pooling of assets that each Fund holds within the arrangements developed by the ACCESS Pool.

The diagram below sets out the overarching ACCESS governance arrangements.

The Operator

Link Fund Solutions Ltd were appointed in 2018 to provide a pooled operator service overseeing an Authorised Contractual scheme for the sole use of ACCESS Authorities. Link are responsible for establishing and operating an authorised contractual scheme along with the creation of a range of investment sub-funds for active listed assets and the appointment of the investment managers to those sub-funds. This is designed to enable Administering Authorities to execute their asset allocation strategies

Pool Aligned Assets: UBS

Appointed following a joint procurement in 2017, UBS act as the ACCESS Authorities’ investment manager for passive assets. 

Progress

ACCESS submitted its pooling proposal to Government in July 2016 with detailed plans for establishing the pool and moving assets into the pool and regularly submitted progress reports to Government. These are all published on the pool’s website (www.accesspool.org).

Included in the proposal is an indicative timeline of when assets will be pooled and ACCESS has made excellent progress against the first milestone of having £27.2 billion assets pooled with estimated savings of £13.6 million by March 2021.

As at 31 March 2020, 49% of assets have been pooled:

Pooled Assets

As at 31 March 2020, ACCESS has pooled the following assets:

	£ billion
Passive investments*	10.5
UK Equity Funds	1.6
Global Equity Funds	7.2
UK Fixed Income	0.8
Diversifed Growth	1.3
Total Pooled Investments	21.4

*The passive investment funds are held on a pool governance basis under one investment manager as these assets are held in life fund policies, which cannot be held within an authorised contractual scheme.

Key milestones achieved in 2019/20

·         Recruitment of an interim Director to lead the ACCESS Support Unit.

·         Establishment of business as usual functions of the ACCESS Support Unit being undertaken by the ACCESS Support Unit officers and technical leads officers.

·         Approval and launch of a range of sub-funds further rationalising the existing range of mandates whilst reflecting the strategic asset allocation needs of the ACCESS Funds.

·         Re-procurement of a legal advisor for ACCESS.

·         Provision of updates of progress of pooling to Government and responding to consultations.

·         Commencement of a review of Environmental, Social and Governance and Responsible Investment guidelines for ACCESS.

·         In conjunction with Link Fund Solutions, held the first investor day for members and officers of the individual funds to hear from the investment managers in the ACCESS pool.

·         Commencement of a review to formulate an approach to pooling and managing illiquid assets such as private equity and infrastructure. This will involve reviewing various structures and platforms and assessing these to identify the best fit to meet with the Funds current and future requirements.

Objectives for 2020/21

ACCESS is well placed to continue to develop the pool and progress will continue unbated despite the restrictions imposed by the COVID-19 lockdown. Virtual meetings are well established and productive. It is anticipated that 2020/21 will see key activities within the following themes:

·         Actively managed listed assets: the completion of pooling active listed assets within the Authorised Contractual Scheme (ACS).

·         Alternative / non listed assets: the initial implementation of pooled alternative assets.

·         Passively managed assets: ongoing monitoring and engagement with UBS.

·         Governance: the application of appropriate forms of governance throughout ACCESS.

·         ACCESS Support Unit (ASU): the size and scope of the ASU will be kept under review.

 

Financial Management Expected v Actual Costs and Savings

The table below summarises the financial position for 2019/20 along with the cumulative position since the commencement of ACCESS activity in early 2016.

A budget for ongoing operational costs is set by the Joint Committee and is financed equally by each of the 11 Authorities. 2019/20 saw an underspend primarily due to lower than anticipated costs of external advice combined with the establishment of the ACCESS Support Unit reducing the reliance on external project management support.

	2019/20		2019/20
	Actual	Budget	Actual	Budget
	In Year	In Year	Cumulative to date	Cumulative to date
	£’000	£’000	£’000	£’000
Set Up Costs	-	-	1,824	1,400
Transition Costs	-	-	674	2,499
Ongoing Operational Costs	811	1,203	2,208	2,469
Operator & Depository Costs	3,247	2,000	3,632	2,500
Total Costs	4,058	3,203	8,338	8,868
Pool Fee Savings	(13,456)	(13,200)	(20,515)	(18,450)
Net (Savings Realised)/Costs	(9,398)	(9,997)	(12,177)	(9,582)

 

Operator and depositary fees are payable by each Authority in relation to assets invested  within the Authorised Contractual Scheme established by Link Fund Solutions as pool operator. The initial ACCESS business plan to MHCLG anticipated Operator costs of 2bps.

The 2019/20 fee savings have been calculated using the CIPFA price variance methodology and based on the asset values as at 31 March 2020. This approach highlights the combined level of investment fee savings, across all ACCESSS Authorities stemming from reduced charges.

In summary, since inception ACCESS has demonstrated excellent value for money, maintaining expenditure broadly in line with the MHCLG submission whilst delivering savings ahead of the timeline contained in the original proposal.

Investment management costs split between pooled and non-pooled assets

	ACCESS Pool*		Non-ACCESS Pool		Total
	Direct	Indirect	Direct	Indirect
Management Fee £000	472	2,580	2,482	8,069	13,603
Transaction Costs £000	30	-	189	-	219
Custody £000	-	-	54	-	54
Other Costs £000	27	-	1,116	-	1,143
Total £000	529	2,580	3,841	8,069	15,019

* This includes pool aligned assets such as the jointly procured passive manager for ACCESS authorities.

Environmental, Social and Governance (ESG) and Responsible Investment (RI)

The ACCESS Authorities believe in making long term sustainable investments whilst integrating environment and social risk considerations, promoting good governance and stewardship.

Whilst the participating authorities have an overriding fiduciary and public law duty to act in the best long term interests of their LGPS stakeholders  to achieve the best possible financial returns, with an appropriate level of risk they also recognise the importance of committing to responsible investment alongside financial factors in the investment decision making process.

Over the course of the last year a number of ACCESS Authorities have reviewed and developed their individual ESG /RI policies. Building on this ACCESS will, in the current year review its own ESG /RI guidelines to reflect both the requirements of the Authorities and the expectations associated with this fundamental aspect of institutional investment.

The ACCESS pool has a set of voting guidelines which seeks to protect and enhance the value of its shareholdings by promoting good practice in the corporate governance and management of those companies.

The voting guidelines sets out the principles of good corporate governance and the means by which ACCESS will seek to exercise its influence on companies. During the year ACCESS voted at 383 meetings on 6,000 resolutions.

10.              Pensions administration strategy report

The Local Government Pension Scheme Regulation 59(1) of the (Administration) Regulations 2013 covers the requirement for an administering authority to prepare a written statement of policies as it considers appropriate in the form of a Pensions Administration Strategy. The East Sussex Pension Fund Pension Administration Strategy is kept under review and revised to reflect changes to LGPS regulations and Fund policies. 

The Pensions Administration Strategy document sets out a framework by way of outlining the policies and performance standards to be achieved when providing a cost-effective inclusive and high quality pensions administration service. In particular it sets out:

·         The roles and responsibilities of both the Fund and the employers within the Fund.

·         The level of service the Fund and employers will provide to each other

·         The performance measures used to evaluate the level of service

This administration strategy statement will be reviewed in line with each valuation cycle and the next review will be as at 1 April 2020. All scheme employers will be consulted before any changes are made to this document.  The latest version of this administration strategy statement will always be available on the ESCC website: https://www.eastsussex.gov.uk/yourcouncil/pension-fund-policies/    and the ESPF website: http://www.eastsussexpensionfund.org/east-sussex-pension-fund/about-us/forms-and-publications/  

 

11.              Funding strategy statement

The Funding Strategy Statement (FSS) focuses on how employer liabilities are measured, the pace at which these liabilities are funded, and how employers or pools of employers pay for their own liabilities. The FSS is prepared in accordance with Regulation 58 of the Local Government Pension Scheme Regulations 2013, CIPFA guidance and in collaboration with the Fund’s actuary, Hymans Robertson LLP, after consultation with the Fund’s employers and investment adviser. The FSS sets out how the Administering Authority has balanced the conflicting aims of:

·         affordability of employer contributions,

·         transparency of processes,

·         stability of employers’ contributions, and

·         prudence in the funding basis.

The FSS is a summary of the Fund’s approach to funding its liabilities, and this includes reference to the Fund’s other policies; it is not an exhaustive statement of policy on all issues. The FSS forms part of a framework of which includes:

·         the LGPS Regulations;

·         the Rates and Adjustments Certificate (confirming employer contribution rates for the next three years);

·         actuarial factors for valuing individual transfers, early retirement costs and costs of buying added service; and

• the Fund’s Investment Strategy Statement

The Funding Strategy Statement was reviewed during the year to reflect funding principles agreed for the 2019 actuarial valuation, with the new version signed off in March 2020. The FSS can be found in full  at www.eastsussex.gov.uk/yourcouncil/pension-fund-policies/. The new funding principles applied to employer contributions payable from 1 April 2020.

Contribution rates payable by participating employers over the year to 31 March 2019 were set at the 2016 valuation in line with the principles summarised in the Funding Strategy Statement dated February 2019.  Similarly, the approach used to set asset allocations for new bodies, to calculate the bond requirements for admitted bodies and to determine any cessation debts payable by exiting employers has been in line with that Funding Strategy Statement.

The Fund monitors the change in the funding position at a whole Fund level on a regular basis.

The next review of the Funding Strategy Statement will take place over the 2022/23 year as part of the 2022 valuation exercise.

The FSS that was in place in relation to 2019/20 is included as an appendix to this report.

 

12.              Investment strategy statement

The Local Government Pension Scheme (LGPS) (Management and Investment of Funds) Regulations 2016 require administering authorities of pension funds to prepare, maintain and publish a written statement setting out the investment strategy for their Fund.

They must consult with persons they deem appropriate when drawing up their statement. Any material change in investment strategy must be included in a revised Investment Strategy Statement (ISS). The statement also covers the extent to which social, environmental and ethical considerations (see below) are taken into account in the selection, retention and realisation of investments. A summary of the policy (if any) in relation to the exercise of the rights (including voting rights) attaching to investments.

The East Sussex Pension Fund ISS was first published in February 2017 when it replaced the Fund’s Statement of Investment Principles. The statement is reviewed on a continuous basis to ensure it accurately reflects the Investment Strategy of the Fund (the latest version is available on the website). https://www.eastsussex.gov.uk/yourcouncil/pension-fund-policies/

The Committee of the East Sussex Pension Fund has an overriding statutory and fiduciary duty to ensure it has sufficient funds available to pay pensions.  In light of that obligation, and in order to maximise investment return, the Fund has a diverse range of investments and does not restrict investment managers from choosing certain stocks taking into consideration that the Fund’s investment strategy is regularly monitored.

Responsible Investment

Responsible Investment is a fundamental part of the Fund’s overarching investment strategy as set out in its ISS. That is, to maximise returns subject to an acceptable level of risk whilst increasing certainty of cost for employers, and minimising the long term cost of the scheme. The Fund believes that consideration of Environmental, Social and Corporate Governance (“ESG”) factors are fundamental to this, particularly where they are likely to impact on the overarching investment objective.

The investment strategy of the Fund is documented in its Investment Strategy Statement, as part of this document we have included our Responsible Investment (RI) Policy, which describes the Fund’s core principles of responsible investment and how we will ensure that these are met. Our core principles are:

·         We will apply long-term thinking to deliver long-term sustainable returns.

·         We will seek sustainable returns from well-governed assets.

·         We will use an evidence-based long-term investment appraisal to inform decision-making in the implementation of RI principles and consider the costs of RI decisions consistent with our fiduciary duties.

• We will evaluate and manage carbon exposure in order to mitigate risks to the Fund from climate change.

The RI Policy also states the Fund’s position on engagement versus exclusion:

East Sussex Pension Fund has never sought to implement a policy that explicitly excludes certain types of investments, companies or sectors except where they are barred by UK law. The Fund believes that its influence as a shareholder is better deployed by engaging with companies, in order to influence behaviour and enhance shareholder value. The Fund believes that this influence would be lost through a divestment or screening approach. Ultimately the Fund will always retain the right to disinvest from certain companies or sectors in the event that all other approaches are unsuccessful and it is determined that the investment is no longer aligned with the interests of the Fund or that the issue poses a material financial risk. Under pooling, it is likely that any such decision will need to be made in conjunction with other members of the ACCESS pool.

The Fund’s approach to engagement recognises the importance of working in partnership to magnify the voice and maximise the influence of investors as owners. The Fund appreciates that to gain the attention of companies in addressing governance concerns; it needs to join with other investors sharing similar concerns. It does this primarily through:

·         Membership of representative bodies including LAPFF, IIGCC, Climate action 100+;

·         Membership of the Pensions and Lifetime Savings Association (PLSA);

·         Giving support to shareholder resolutions where these reflect concerns which are shared and affect the Fund’s interests;

• Joining wider lobbying activities when appropriate opportunities arise.

The Pension Committee over the last 3 years has allocated considerable time to consider the potential impact of climate change on the Fund’s investments. In so doing, the Committee has:

·         commissioned a carbon footprint measurement service that provided data on the levels of carbon emissions,

·         committed to putting 15% of the Funds passive equity investments into the UBS Climate Aware Fund, and it is anticipated that the investment in the Climate Aware Fund will reduce the CO² emissions of the East Sussex Pension Fund,

·         been recognised tier 1 signatory to the UK Stewardship Code by the Financial Reporting Council (FRC),

• shortlisted for the 2018 LAPF Investment Awards for Best Approach to ESG/Impact Investing,

The committee will continue to monitor developments in this area and the long-term implications for the financial health of the Fund.

Voting

The Fund expects its investment managers to monitor investee companies, engage with company management where necessary and report on voting, governance and engagement activity.

Active mandate

Longview are currently responsible for the Fund’s actively managed equity mandate.  The table below summarises the combined voting statistics for the Fund’s Global equity mandate over the year:

 

 

 

It should be noted that given the nature of the actively managed Longview fund, there are significantly less stocks held in the portfolio, resulting in less vote-able meetings.

Votes were withheld in nine cases relating to the election of board directors. Longview voted against management on 204 proposals covering a range of issues, such as ongoing compensation concerns and the election of individuals that, in Longview’s opinion, serve on too many boards. As requested by the Fund, Longview voted against any proposal to authorise political donations.

Passive mandates

UBS are responsible for the Fund’s passively managed equity mandates.  The table below summarises the combined voting statistics over the year for the regions that the Fund’s equity mandate is invested in.

 

 

 

UBS voted against management on 8,424 proposals covering a range of issues, such as candidates proposed for director not being sufficiently independent and rights issues.

 

Ruffer Absolute Return fund

Ruffer are responsible for one of the Fund’s two absolute return mandates. The table below summarises the voting statistics over the year for the equity holdings that the Fund is invested in through the Ruffer mandate.

 

Ruffer voted against management on 46 proposals covering a range of issues, such as executive remuneration and election of non-executive directors.

Newton Absolute Return fund

Newton are responsible for one of the Fund’s two absolute return mandates. The table below summarises the voting statistics over the year for the equity holdings that the Fund is invested in through the Newton mandate.

 

 

13.              Communications policy statement

The Local Government Pension Scheme Regulations 2013 (Regulation 61) requires each pension fund administering authority to prepare and publish a policy statement setting out its approach to communicating with scheme members, representatives of members, prospective members and scheme employers.

The East Sussex Pension Fund policy statement sets out our existing communication activities.     

This Policy can be seen on the East Sussex County Council Website. https://www.eastsussex.gov.uk/yourcouncil/pension-fund-policies/

 

 

14.              External auditor’s report

Independent auditor’s report to the members of East Sussex County Council on the pension fund financial statements published with the Pension Fund Annual Report

To Follow

 

 

for and on behalf of Grant Thornton UK LLP, Local Auditor

London

XX September 2020