East Sussex Pension Fund

Annual Report and Accounts

 

 

2020-2021

 

 


 

 

 

 

 

 

Contents – to be populated

 


 

1.  Welcome from Chair of Pension Committee

 

Welcome to the East Sussex Pension Fund Annual Report for 2020/21

 

As chair of the East Sussex Pension Fund (the Fund) Pension Committee, I have the pleasure in introducing the Fund’s Annual Report and Accounts for 2020/21. The accounts focus on the financial implications of activity in 2020/21 but so much more has been achieved over the past year, including the Fund’s resilience to working from home through the pandemic and embedding new ways of working.

 

The Fund had £4,244m as funds under management at 31 March 2021 to meet the accrued benefits, with a funding position of 107% comparing assets to liabilities, putting the Fund in a very strong position. The investment return for the year to 31 March 2021 was 22%, which was an outperformance of the benchmark by 3%, with returns outperforming the benchmark in each of the 1, 3 and 5 year periods. The membership of the Fund at March 2021 was 78,466 people (active – 25,002, pensioner – 22,230 and deferred – 31,234) and 127 employer organisations.

 

The Fund has come a long way in 2020/21 with many changes made both internally and externally to respond to challenges faced and with the aspiration of achieving best practice across everything we do. The year started with the country still in lockdown from the COVID-19 pandemic, which meant our staff had to find new ways of working and supporting our members from home. The team got on with everything required of them, using remote access technology, providing a high-quality service, keeping up with performance targets and response times, proving that remote and hybrid working was possible. It was also challenging for the members themselves with changes in the way they could communicate with us and the move to more electronic methods to provide documentation. This has led to the department becoming almost paper free in the year.

 

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 Scheme Advisory Board Good Governance review, the Fund carried out a major review in 2019 and 2020 saw these findings being implemented. This included a major restructure of the team resources in recognition of increasing regulatory environment for LGPS Funds and increased reporting requirements to ensure the Fund has sufficient resources to implement the Fund’s strategies and policies. The Project also led to an overhaul of the terms of reference for the Pension Committee, Pension Board and officer delegations. In addition a number of key policies were implemented or refreshed to align with best practice including a new conflicts of interest policy and a complete redesign of the administration strategy.

 

The Fund made some significant changes in relation to responsible investment, and more specifically climate change risk, in the financial year with more work planned on this in the months and years. The Fund have taken climate strategy as one of the key focuses of its ongoing work, to develop an in depth understanding on the financial risks to the Fund of the climate emergency and focusing on ways in which the Fund can both reduce this risk but also find opportunities to help with the energy transition to find sustainable solutions.  As a result of this strategic focus, the Fund implemented a Statement of Responsible Investment Principles that clearly set of the Fund’s beliefs on responsible investment and climate risk and how the Fund would manage these risks and commitments from the Fund for implementation. One of the key risks identified during the work in this area was an unconscious exposure to companies that have a significant impact on climate risk and other risks with an ESG focus such as human rights or governance issues, leading the Fund to commit to moving all its investment away from traditional index linked passive fund. Instead the Fund moved this investment into a range of sustainable funds including two active impact funds that have a strong conviction on the companies in which they invest and a move into a smart beta fund which excludes companies that fail to meet its ESG standards and favours companies aligned with the Paris agreement. The climate strategy hasn’t ended with equities, which is the easier place to implement these changes, but has also moved into Infrastructure, where the Fund also entered into a new investment which minimises climate risk through modelling of climate change risk scenarios. The Fund continues to favour engagement with companies to have a say in how they are run and influence change, rather than reduce the investable market by excluding industries and this is in line with all guidance to the Fund from governmental bodies and investor advisory groups.

 

One of the major projects the Fund faced during 2020/21 was the transfer of the Pension Administration Team back into East Sussex from Surrey County Council.  The project took seven months to complete by 7 April 2021, with the change ensuring the Fund has increased control and governance of pension benefit payments and records and allows us to quality assure processes and to focus on our East Sussex Fund members. Overall, the project was a success, although we still have some staff to recruit into new roles as a result of the breadth of work required within Pensions Administration but we believe this will be so beneficial to the fund and its members.

 

The Fund 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 2020/21 a total of £20.4bn was invested on the ACCESS platform, with seven new sub funds launched., invested across 22 sub funds. A further £11.1bn is managed via ACCESS for passive equities. In total 57% of ACCESS Fund assets have been pooled.

 

The Pension Committee and Pension Board have worked tirelessly to transform the East Sussex Pension Fund 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. The Fund has refreshed its website and is now a ready source of up to date information, please log on to  www.eastsussexpensionfund.org for further information.

 

 

Councillor Gerard Fox

 

Chairman of the East Sussex Pension Fund


2.  Welcome from Chair of Pension Board

 

As the Independent chair of the Funds Pension Board, I am happy to highlight some of the key areas of focus of the Board over the 2020/21 financial year.

The past year has seen significant changes made to how the Fund operates. Pension Administration is now provided by an in-house team based in the Lewes council offices, where previously it was provided through the Orbis partnership with Surrey County Council. Additionally, following a review by the Committee, supported by the Pension Board, the resources made available to the Fund for governance, including the number of staff working for the Fund has increased substantially This has allowed for a review of the internal controls, policies and procedures. As a result, the Fund’s officers, with Pension Board members, were able to conduct a review of member data quality and improve the employer admissions and cessations processes.

Pension Board members provided oversight of the changes being made, by sitting on various working groups which reviewed, with Committee members, an improvement of the Fund’s Governance standards. The Pension Board and the Committee have been mindful of the good governance review conducted by the Scheme Advisory Board as part of this process to ensure best practice is being implemented.

The Board has supported the Fund in increasing its staff headcount to meet the new governance policy of the Fund. As part of this the Fund has been able to develop several new policies including a more detailed risk register. The new risk register has been reviewed and the Board agreed with the recommendation made to the Committee that it should be adopted. The Board is aware that further improvements will be made to this document, with oversight from the Board.

Members of the Pension Board have participated in the data improvement working group. The related workstream has, working with employers participating in the Fund, led to significant improvements in the quality of member data held. By improving the quality of member data records this reduces the risk that members will not be provided information about their benefits in a timely manner, simultaneously mitigating the risk that beneficiaries do not receive the correct amount owed to them on time.

As part of the review of the admissions and cessations processes, new templates have been created to ensure smoother onboarding of new scheme employers and admitted bodies. The Pension Board has engaged closely with officers and the Committee on this topic.

Other work that the Pensions Board has engaged in during the year is understanding the McCloud judgement on age discrimination, and how this will potentially impact members pension benefits, reviewing how employers manage the cost of ill-health retirement and providing an insurance option for them to use respect, reviewing quarterly the performance of the administration team against the agreed service standards, and, finally, reviewing the communications to members

 

Looking Forward

Much of the Pension Board’s business in 2021-22 will reflect its business in previous years i.e. its scrutiny of the administration team’s service to members and employers and its compliance with regulatory standards and expectations of The Pensions Regulator. For example, development of more detailed service performance indicators, efforts to further improve data quality and more detailed and frequent customer surveys.  Implementation of the changes because of the “McCloud case”, will also feature heavily at the Pension Board’s meetings,

In March 2021, The Pensions Regulator launched a consultation on its intention to combine its codes of conduct. The Pension Board responded to that consultation in May 2021, expressing its concern about the lack of clarity in a number of areas, including requiring the use of a new term "Governing Body”. The Pension Board will work with the Fund’s officers to respond to changes to the regulator’s code(s) to assess compliance and assist with changes required to ensure full compliance.

Going forward, the Board has representatives on the McCloud working group and will also have members as part of the communications working group. This will give Pension Board members increased opportunities to use their knowledge and understanding to assist with the development of the Fund’s processes and the adoption of best practice.

The Pension Board would like to thank the Fund’s administrators, officers and employers for the hard work they have put in, during difficult working conditions with the pandemic, to maintain the service to members, to improve the Fund’s governance, and to substantially improve the quality of member data held in the Fund’s records.

 

 

Ray Martin

Chair of Local Pension Board

 

3.  Introduction to the LGPS

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.  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.

2020/21 Pension Committee Members

East Sussex County COUNCILLORS:

 

Gerard Fox (Chairman)

 

Conservative

 

Simon Elford (to July 2020)

Andy Smith (from September 2020)               

Conservative

Conservative

 

Nigel Enever

Conservative

 

David Tutt

Liberal Democrats

 

Trevor Webb

Labour

 

 

 

 

 

 

2020/21 Pension Board Members         pensionboard@eastsussex.gov.uk

Independent Chairman:

Ray Martin

 

 

 

 

Employer Representatives:

Councillor Carmen Appich

(to September 2020)

Councillor Tom Druitt

(from October 2020)

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

Pensions@eastsussex.gov.uk

 

 

 

 

 

 

 

 

 

 

BANKERS TO THE FUND:

NatWest Bank

 

 

 

 

AUDITOR:

Grant Thornton UK LLP

London

 

 

 

 

PENSION FUND OFFICERS                          esccpensionsmanager@eastsussex.gov.uk

 

 

 

TREASURER / S151 OFFICER:

Ian Gutsell

HeaD OF PensionS:

HEAD OF PENSIONS ADMINISTRATION:

Sian Kunert

Paul Punter

 

INVESTMENTS AND ACCOUNTING:

Russell Wood

 

Governance and compliance:

Mike Burton

 

EMPLOYER ENGAGEMENT:

Tim Hillman

 


 

AdviSORS to the FUND

 

 

 

 

 

Actuary:

Until December 2020

Hymans Robertson

20 Waterloo Street

Glasgow

G2 6DB

From January 2021

Barnet Waddingham

163 West George Street

Glasgow

G2 2JJ

 

 

 

LEGAL ADVISORS:

Appointed from National LGPS Framework for Legal Services

 

 

 

INVESTMENT ADVISER:

Until January 2021

Hymans Robertson

From February 2021

Isio

 

 

 

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

Wellington

WHEB

Atlas

Storebrand

 

 

 

 

CUSTODIAN:

Northern Trust

 

 

 

 

AVC PROVIDER:

Prudential

 

 

 

 

Bodies to which the fund is member, subscriber or signatory:

 

 

Pensions and Lifetime Savings Association (PLSA)

 

Local Authorities Pension Fund Forum (LAPFF)

 

CIPFA Pensions Network

 

 

Club Vita

 

 

Local Government Association (LGA)

 

Local Government Pension Scheme National Framework:

·         Passive Investments,

·         Legal Services,

·         Actuarial Benefits and, Governance

·         Investment Consultants

·         Stewardship Advisory Services

 

Principles for Responsible Investing (PRI)

 

Institutional Investors Group on Climate Change (IIGCC)

 

Climate Action 100+

 

* Appointed through the ACCESS Pool operator

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


 

5.       Governance

 

Pension Committee

East Sussex County Council (Scheme Manager) operates a Pension Committee (the Pension 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 Pension 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 its duties. 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, as required by legislation.

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 2021 there were 4 meetings of the Pension Committee, 4 meetings of the Pension Board and one annual employers’ forum.

Member attendance at committee meetings during 2020/21

2020/21 Pension Committee Members

 

 

Nos. of meetings attended

East Sussex County Councillors:

Gerard Fox (Chairman)

4/4

 

Simon Elford[1]

1/1

 

Nigel Enever

4/4

 

Andy Smith

3/3

 

David Tutt

4/4

 

Trevor Webb

4/4

Member attendance at Board meetings during 2020/21

2020/21 Pension Board Members

 

 

Nos. of meetings attended

Independent Chairman:

Ray Martin

4/4

Employer Representative:

 

 

Brighton & Hove City Council

Councillor Carmen Appich[2]

1/1

 

Councillor Tom Druitt[3]

2/2

Districts & Borough Councils

Councillor Chris Collier

4/4

Educational Bodies

Stephen Osborn

4/4

Employee Representative:

 

 

Active & Deferred

Niki Palermo

3/4

Active & Deferred

Lynda Walker

4/4

Pensioners

Diana Pogson

4/4

 

Member attendance at ACCESS Pool joint committee meetings during 2020/21

2020/21 Joint Committee Members

 

 

Nos. of meetings attended

East Sussex County Councillors:

Gerard Fox

5/5

 

The Knowledge and Skills Framework

 The Fund’s 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 (SAB) and the Secretary of State for Housing, Communities and Local Government.

CIPFA/Solace 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. The SAB’s ‘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 has published 3 reports. The most recent report, published in February 2021, includes recommendations on the following areas:-

 

·         Conflicts of Interest – Funds will be expected to produce and publish a policy covering actual, potential and perceived conflicts of interest

·         Representation – Funds will produce and publish a policy on the representation of members and employers, explaining how voting rights work

·         Knowledge and Understanding – Highlighting that key individual should have the knowledge and understanding to fulfil their functions, including the s.151 Officer.

·         Service delivery –  This covers publishing details of decision makers’ roles and responsibilities, publishing an administration strategy, reporting on performance and including the Committee in business planning.

·         Compliance and Improvement – Undergoing a biannual Independent Governance review

The findings of the Good Governance Review have yet to be formally adopted in statutory form, however, the Administering Authority 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. The Trustee Toolkit, a separate aid produced by the Pensions Regulator, includes a newly released module of scams. Whilst the Trustee Toolkit is designed for Trustees of private occupational pension schemes, some aspects of it have value for those connected to public service pension schemes.

The 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.


6.          

6.  Report of the Pension Board

 

Report to:

 

 

Pension Committee

 

Date of meeting:

 

28 September 2021

By:

 

Chair of Local Pension Board

Title:

 

Report of Pension Board to Pension Committee

Purpose:

 

Report to Pension Committee, to consider understand the work completed by the Pension Board

 


RECOMMENDATIONS: The Pension Committee is recommended to:

1)     Note the report from the Pension Board which covers the work completed in year

1)

1.         Background

1.1        This document outlines the actions taken by the Local Pension Board of the East Sussex Pension Fund (ESPF). It also details the training undertaken in the past 12 months to enable individual Pension Board members to develop and maintain the required level of knowledge and understanding to enable them to fulfil their function of supporting the Administering Authority, which is also known as the Scheme Manager.

1.2        This document will allow the Pension Committee to build a more detailed understanding of the work being done by the Pension Board to improve the operation of ESPF.

 

2.         Membership and attendance

2.1        The membership of the Local Pension Board is

Employer Representatives

·         Stephen Osborn - Deputy Director of Finance, University of Brighton

·         Cllr. Chris Collier - East Sussex District and Borough Councils (until July 2021)

·         Cllr. Tom Druitt - Brighton & Hove City Council (from October 2020)

·         Cllr. Toby Illingworth- East Sussex District and Borough Councils (from July 2021)

Member Representatives

·         Lynda Walker – UNISON

·         Niki Palermo – GMB

·         Diana Pogson – Pensioners’ representative

Independent Chair

·         Ray Martin

2.2        Cllr Appich stepped down from the Board in September 2020 and was replaced by Cllr Druitt in October 2020. Cllr Collier stepped down from the Board in June 2021 and has been replaced by CllrIllingworth in July 2021.

2.3        Attendance at meetings has been high in the past year

 

7 September 2020

16 November 2020

15 February 2021

1 June 2021

Stephen Osborn

Y

Y

Y

Y

Cllr Chris Collier

Y

Y

Y

N

Cllr. Tom Druitt

 

Y

Y

Y

Lynda Walker

Y

Y

Y

Y

Niki Palermo

N

Y

Y

Y

Diana Pogson

Y

Y

Y

Y

Ray Martin

Y

Y

Y

Y

 

3.         Work of the Pensions Board

3.1        Meetings are held shorty before each Pension Committee meeting, where all papers relating to administration, governance, policy, audit and communications are first considered by the Board prior to final versions being presented at Committee for approval. This allows the Board to feed in on matters of governance and represent the views of members and employers in the documents that are then taken for approval.

3.2        Members of the Pension Board sit upon, and have attended meetings of, the Communications Working Group, the Data Improvement Working Group and the McCloud Working Group. By sitting on the working groups members of the Pension Board are able to use their knowledge and experience to support officers of ESPF during the development of new policies and procedures. One example of the input of Pension Board members is the creation of a new way Fund members can contact Pension Board members.

3.3        The Pension Board considers its work programme at each meeting taking into account the regular items it sees and what is planned for upcoming committee meetings and are able to request areas of focus to be added to the Board work plan. An example of this working is the request of Board in 2020 to see a regular paper on employer contributions to have transparency on late payments by employers; this report is now a standing item for Board as part of the employer engagement report.

 

4.         Actions  

4.1        The Pension Board has supported the Pension Committee with its review and oversight of the disaggregation of ESPF from the Orbis partnership. This has seen ESPF administration services become an in-house operation providing more control to the ESPF to manage its operations and ensure transparency of quality of service provided to the ESPF members. Going forward the Pension Board will continue to work with the Administration Team to develop an updated approach to measuring service standards for the Fund.

4.2        The Board has also been a strong advocate, alongside the Committee, for the Good Governance project which completed in November 2020. Throughout this the Pension Board supported requests for extending the staffing budget at the Fund, which resulted in the number of officers increasing substantially to reflect the workload and responsibility of the Pension Fund across four work streams of Governance, Employer Engagement, Administration and Accounts and Investments. The changes made have led to significant improvements in the overall governance of the Fund and further improvements are in hand.

4.3        At its quarterly meetings members of the Pension Board have reviewed new policies and procedures being developed. This has ensured that the approach being taken by the Administering Authority is consistent with the recommendations made as part of the Scheme Advisory Board’s good governance project along with statutory and regulatory requirements.

4.4        The independent chair represented the Board at the Employer forum in November 2020 with an overview of the work of the Board, updating the employers of the Fund on the key data quality work that has been achieved through the data improvement working group projects and implementation of the new administration strategy. 

 

5.         Training

5.1        In the past year members of the Pension Board took part in a survey conducted by Hymans Robertson to help understand their level of knowledge and understanding. The report received is broken down into the key areas, such as administration, and also measures the Pension Board against its peers in the other Funds that took part. This survey identified that particular focus should be given to pension administration and actuarial methods. It also showed that the ESPF’s Pension Board members’ knowledge and understanding scored 6th highest out of the 21 boards that took part.

5.2        Since the Hymans report was produced there has been a change of membership of the Pension Board. The Chair of the Pension Board is currently working with the Fund’s Training Co-ordinator to develop a new method of tracking individual Pension Board member’s knowledge and understanding which will allow for a more in-depth analysis of areas of focus.

5.3        When the new members of the Pension Committee were appointed members of the Pension Board were invited to attend the induction session, which included an introduction to the role of the Fund’s lawyer, actuary and investment consultant.

5.4        All Board members are working towards ensuring they have completed the Pension Regulators Toolkit modules and will shortly be invited to carry out a self-assessment on their training needs.

5.5        Members of the Pension Board have attended a range of webinars covering topics ranging from governance to investment. In addition, Board members have attended training provided in house on McCloud, Covenant strength and outsourcing implications for employers within the LGPS. Members of the board regularly attend the CIPFA Pension Board member seminars that are run in the Spring and Autumn to update on all key regulatory changes and areas the Board may wish to ask questions on of their Funds.

 

 

Ray Martin

Chair of ESPF Local Pension Board

 

 

 

 


 

7.  Scheme Administration

Service Delivery

During 2020/21, East Sussex County Council as Administering Authority for the East Sussex Pension Fund undertook the day to day pensions administration through Orbis, which is a shared services partnership covering the three councils of East Sussex, Surrey and Brighton and Hove. The Administration of the Fund has moved back in house to be managed by East Sussex County Council from 6 April 2021.

During the 2020/21 year, the Orbis Pensions Administration team, with oversight from the East Sussex Head of Pensions Administration, were 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 sent 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 and the East Sussex Pension Fund.

Administration of the Fund is discussed quarterly at Pension Committee to ensure the service is managed and governed well with key performance indictors reviewed at each meeting. In addition, Pension Board consider the activities of the Pensions Administration team at each meeting. During 2019/20 the Fund 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 Fund 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. 

Where complaints cannot be resolved informally, there is access to a two-stage dispute resolution procedure. The first stage of this process is for the complainant to ask the Adjudicator appointed by the East Sussex Pension Fund to consider the matter under dispute. If the complainant is not satisfied with the response they can ask for a further review of the decision, along with any new evidence they might provide. The person responsible for reviewing stage 2 complaints is the Assistant Chief Executive. Ultimately the complainant has the right to refer their complaint to The Pension Ombudsman and seek assistance from the Pension Advice Service.

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

 

2020/21

First Stage

6

Upheld

0

Declined

1

Ongoing

5

 

 

Second Stage

1

Upheld

0

Declined

0

Ongoing

1

 

This table reflects the position for the 2020/21 financial year and is not the current position. The complaint at stage 2 was received in stage 1 of the same time period.

 

Key administration performance indicators

To be populated

Performance Indicator

Impact

Measure

Target

%

Achieved by Fund

%

Death notification acknowledged, recorded and documentation sent

Medium

within 5 days

95%

 

Award dependent benefits (Death Grants)

High

within 5 days

95%

 

Retirement notification acknowledged, recorded and documentation sent

Medium

within 5 days

95%

 

Payment of lump sum made

High

within 5 days

95%

 

Calculation of spouses’ benefits

Medium

within 5 days

90%

 

Transfers In - Quote (Values)

Low

within 10 days

90%

 

Transfers In - Payments

Low

within 10 days

90%

 

Transfers Out - Quote

Low

within 25 days

90%

 

Transfers Out - Payments

Low

within 25 days

90%

 

Employer estimates provided

Medium

within 7 days

95%

 

Employee projections provided

Low

within 10 days

95%

 

Refunds

Low

within 10 days

95%

 

Deferred benefit notifications

Low

within 25 days

95%

 

 

 

 

 

Number Of Complaints

 

 

 

Financial indicators of administrative efficiency

Unit Costs Per Member

East Sussex Pension Fund

Benchmark Unit Costs

£

2019/20

£

2020/21

£

Excluding investment management expenses

 

 

 

Including investment management expenses

 

 

 

 

Key staffing indicators

 

Membership

 

 

2019/20

2020/21

East Sussex County Council

 

 

Scheduled Bodies

 

 

Admitted Bodies

 

 

Total

 

 

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)

 

 

 

 

 

Pensioners (inc dependents)

 

 

 

 

 

Deferred Members

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

New pensioners by pensioner type

To be populated

 New pensioner type

Number of new pensioners in group

Normal Retirements

 

Redundancies

 

Ill Health

 

Employee’s Choice of Early Pensnsion

 

Total New Pensioners

 

 

2020 Annual Benefit Statement

The Fund is required to produce an Annual Benefit Statement (ABS) before the 31st of August each year for all active and deferred members. In 2020 due to Covid this deadline was extended to 31 October.

At 31 March 2020, the number of active members in the scheme requiring a statement was 22,262 and 29,727 deferred members. The number of members who were due to receive an ABS but we failed to issue prior to the deadline was 623 Active members and 67 deferred members. The Fund achieved a completion rate of 97.2% for active members and 99.8% for deferred members. After the Fund reporting itself to the regulator after the 2019 ABS process, 2020 was a great improvement and success for the Fund.  

8.          Actuarial report

East Sussex County Council Pension Fund

Actuary’s statement as at 31 March 2021

Barnett Waddingham LLP

29 June 2021

Introduction

The last full triennial valuation of the East Sussex County Council Pension Fund (the Fund) was carried out as at 31 March 2019 as required under Regulation 62 of the Local Government Pension Scheme Regulations 2013 (the Regulations) and in accordance with the Funding Strategy Statement of the Fund. The results were published in the triennial valuation report dated 31 March 2020.

Asset value and funding level

The results for the Fund at 31 March 2019 were as follows:

·         The market value of the Fund’s assets as at 31 March 2019 was £3,633m.

·         The Fund had a funding level of 107% i.e., the value of assets for valuation purposes was 107% of the value that they would have needed to be to pay for the benefits accrued to that date, based on the assumptions used. This corresponded to a surplus of £247m.

Contribution rates

The employer contributions rates, in addition to those paid by the members of the Fund, are set to be sufficient to meet:

·         the annual accrual of benefits allowing for future pay increases and increases to pensions in payment when these fall due;

·         plus an amount to reflect each participating employer’s notional share of the Fund’s assets compared with 100% of their liabilities in the Fund, in respect of service to the valuation date.

The primary rate of contribution on a whole Fund level was 18.0% of payroll p.a. The primary rate as defined by Regulation 62(5) is the employer’s share of the cost of benefits accruing in each of the three years beginning 1 April 2020.

In addition each employer pays a secondary contribution as required under Regulation 62(7) that when combined with the primary rate results in the minimum total contributions. This secondary rate is based on their particular circumstances and so individual adjustments are made for each employer.

Details of each employer’s contribution rate are contained in the Rates and Adjustments Certificate in Appendix 3 of the triennial valuation report.

Assumptions

The key assumptions used to value the liabilities at 31 March 2019 are summarised below:

Assumptions

Assumptions used for the 2019 valuation

Financial assumptions

Market date

31 March 2019

CPI inflation

2.3% p.a.

Long-term salary increases

2.3% p.a.

Discount rate

4.0% p.a.

Demographic assumptions

Post-retirement mortality

Base tables

Based on Club Vita analysis

Projection model

CMI 2018

Long-term rate of improvement

1.25% p.a.

Smoothing parameter

7.0

Initial addition to improvements

Males

Females

 

0.5% p.a.

0.25% p.a.


Full details of the demographic and other assumptions adopted as well as details of the derivation of the financial assumptions used can be found in the 2019 valuation report.

Updated position since the 2019 valuation

Update to funding basis and assumptions

The Fund appointed a new fund actuary with effect from 1 January 2021. For employers commencing participation in the Fund on or after 1 January 2021, the calculated contribution rate will be set to meet a funding target over a specified time horizon. The funding target is set based on a single set of financial assumptions. These assumptions are set so as to achieve broad consistency with the previous fund actuary’s approach.   

With effect from 1 January 2021, the salary growth assumption was reviewed and salaries are now assumed to increase at CPI plus 1.0% p.a. with no additional promotional salary scale. The derivation of CPI is discussed below. 

We have updated the derivation of the CPI inflation assumption to be 0.8% p.a. below the 20 year point on the Bank of England (BoE) implied inflation curve. The assumption adopted at the 2019 valuation was that CPI would be 1.0% p.a. below the 20 year point on the BoE implied inflation curve. This update was made following the Government’s response (on 25 November 2020) to the consultation on the reform of RPI, and the expectation that the UK Statistics Authority will implement the proposed changes to bring RPI in line with CPIH from 2030. This updated approach leads to a small increase in the value of liabilities.

The discount rate assumption is set with reference to the Fund’s long term investment strategy and therefore reflects the long term expected return on assets for the Fund. We have included in the discount rate assumption an explicit prudence allowance of 1.1%. This incorporates an allowance for current uncertainties in LGPS benefits (relating to the effects of the McCloud/Sargeant judgement and the cost cap).

Liabilities

The key assumption which has the greatest impact on the valuation of liabilities is the real discount rate (the discount rate relative to CPI inflation) – the higher the real discount rate the lower the value of liabilities. As at 31 March 2021, the real discount rate is estimated to be lower than at the 2019 valuation due to lower future expected returns on assets in excess of CPI inflation.

The update to the CPI assumption mentioned above leads to a small increase in the value of liabilities. The value of liabilities will also have increased due to the accrual of new benefits net of benefits paid.

It is currently unclear what the impact of the COVID-19 pandemic is on the Fund’s funding position. It is expected that COVID-related deaths will not have a material impact on the Fund’s current funding level, however, impact on future mortality rates may be more significant and we will be reviewing the Fund’s mortality assumption as part of the next valuation.

Assets

Returns over the year to 31 March 2021 have been strong, helping to offset the significant fall in asset values at the end of the previous year. As at 31 March 2021, in market value terms, the Fund assets were more than where they were projected to be based on the previous valuation.

Overall position

On balance, we estimate that the funding position (allowing for the revised funding basis) has improved compared to the funding position as at 31 March 2019.

Future investment returns that will be achieved by the Fund in the short term are more uncertain than usual, in particular the return from equites due to actual and potential reductions and suspensions of dividends.

There is also uncertainty around future benefits due to the McCloud/Sargeant cases and the cost cap process.

The Fund could opt to monitor the funding level using LGPS Monitor on a regular basis.

 

Barry McKay FFA

Partner, Barnett Waddingham LLP


 

9.  Employers

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

93

24

117

Admitted body

34

30

64

Total

127

54

181

 

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

7.1%

85.0%

9

Academy Schools

31.5%

8.0%

40

Colleges

3.9%

5.0%

5

Other Scheduled Bodies

30.7%

0.5%

39

Admission Bodies

26.8%

1.5%

34

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

 

 

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. All scheme employers will be consulted before any changes are made to this document.  The latest version of the administration strategy statement will always be available on the ESCC website.

Employers are able to contact the Pension Fund directly depending on the type of request. The Employer Engagement Team will deal with employers directly on day to day questions and queries. The Pensions Admin team will deal with any employee requests that come via the employer.  The employers have been informed of direct contact details for all requests and questions to the pension Fund.

The Local Government Pension Scheme regulations require employers who participate in the Local Government Pension Scheme (LGPS) to draw up and publish a discretions policy and to keep it under review. Discretions are powers that enable employers to choose how to apply the scheme in respect of certain provisions. All new employer admissions to the Scheme will complete a discretions policy on joining and discretion policies will be reviewed every 3 years in line with each valuation cycle.

All new admissions to the LGPS will be provided with a guide to outsourcing and admissions. This guide will provide information to all new potential admissions to the Fund and will lay out the necessary process that will need to be adhered to before admissions can be undertaken. All new admissions will be sent the relevant legal agreements and documentation that will require signing before proceeding.

Any employer with a potential TUPE or outsourcing must contact the employer engagement team where support and advice will be provided on the necessary steps that will need to be undertaken. Relevant information, timings and paperwork will need to be completed before any TUPE/outsourcing can commence. Employers will be provided a direct contact throughout the whole project to answer questions and provide support.

A reminder is sent to all employers annually to provide details of the employers responsibilities and obligations to the Fund. The admin strategy also provides details for employers of their responsibilities.

Employers have a responsibility that they must meet as part of the East Sussex Pension Fund. The table below provides details on monthly/annual deadlines that must be met.

 

                                                                             Employer Deadlines                                                       

 

 

Employer Responsibility

 

 

Deadline

 

Complete and submit LGPS31 forms (contribution forms)

18th day of the month following that to which the payment relates

Payment of correct contributions

19th day of the month following that to which the payment relates

Provide end of year data requirements

By 30th April following the year end (unless already onboarded to i-Connect)

 

 

If the above deadlines are not met then warnings are issued. If an employer breaches the above deadlines on more than 1 occasion in a 12 month period then administration charges can be levied.

Employer contribution amounts are provided to all employers at the Employer Forum following the valuation. A reminder of the new rates are also annually sent to employers in March. The new amounts are sent in March in preparation for the new rates to be applicable from the April contribution payment


 

10.      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 Fund has an active risk management programme in place, which is subject to periodic review. The Fund’s approach is to manage risk rather than eliminate it entirely. 

Risk is identified and managed as follows:

Separation from Orbis risk – The administration of the Fund has been brought in-house. This has involved setting up a new database so member data can be hosted by the Fund, as opposed to Surrey County Council (Surrey CC) under the terms of the previous agreement. Extensive testing was carried out to ensure the smooth transfer of data, helped by the Fund using the same technology for the database as Surrey CC. Data is securely hosted and backed up daily. There is a testing data set to allow for upgrades to be checked without risk to member data and the Fund’s ability to calculate and pay benefits.

Other services previously provided to the Fund through the agreements with Surrey and the Orbis collective have been identified. New agreements have been created to ensure the ongoing provision of these services and short term support with outstanding projects. An agreement has also been reached to ensure the effective deletion of member data relating to members of the East Sussex Fund that was held by Surrey CC.

Management Risk - A significant risk is the potential insolvency of scheme employers, leaving outstanding liabilities in the Fund. This risk is increased due to the ongoing impact of the Covid-19 pandemic. 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

 

To aid the pace of onboarding new admission bodies, work has been undertaken to streamline the process and develop bond templates.

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 and those which are connected to benefit administration, such as employer 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. The Fund is committed to using best practice and will account for recommendations made as part of audits.

Financial/Funding Risk - This is 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 Fund’s 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 (Appendix 2), sets out the governance requirements for the ESPF and it is reviewed annually by the Administering Authority. 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/Mortality Risk - This is the risk of that the pensioners live longer and therefore the liabilities of the Fund increase. Frequent interactions with the Fund Actuary mitigate this risk as the Fund can be informed of changes to mortality tables where this may impact the assumptions previously made.

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. Changes in the Regulatory environment are routinely reviewed by Fund Officers.

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. Over the past year steps have been taken to update the Fund’s internal controls following a review of compliance with TPR’s Code 14 and the relevant legislation; this includes:-

·         Improving the risk register;

·         creating a new risk management policy; and

·         updating the Internal Dispute Resolution Procedure

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.

The Fund has developed a Pension Administration Strategy, outlining the responsibilities of both the Fund and employers. This includes a framework for escalating concerns and ensuring compliance with Admission Agreements.

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. The full risk register can be seen within the quarterly Pensions Committee papers.       


11.      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 XX to XX.

 

2019/20

£000

2020/21

£000

Fund Account

 

 

Net (Contributions)/withdrawals

(4,453)

(3,253)

Management Expenses

17,333

17,296

Return on Investments

140,238

(778,984)

Net Increase in Fund

153,118

(764,941)

 

 

2019/20

£000

2020/21

£000

Net Asset Statement

 

 

Bonds

212,331

128,765

Equities

                 - 

                 - 

Pooled Funds

3,189,335

4,045,225

Cash

63,715

56,736

Other

(135)

(418)

Total Investment Assets

3,465,246

4,230,308

Non-Investment Assets

13,848

13,727

Net assets of the fund available to fund benefits at the year end.

3,479,094

4,244,035

 

Analysis of pension contributions

The table below shows the number of primary pension contributions received late in the financial year 2020/21.

Month

Payments Due

Payments Received Late

April

120

8

May

120

3

June

120

3

July

120

2

August

120

4

September

122

3

October

123

3

November

125

3

December

126

8

January

126

3

February

128

3

March

128

7

 

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

2019/20

2020/21

2021/22

 

Forecast

Actual

Forecast

Actual

Forecast

 

£000

£000

£000

£000

£000

Contributions

(141,600)

(138,719)

(118,600)

(137,521)

 

Payments

137,600

134,266

134,700

134,268

 

Administration expenses

940

1,106

1,080

1,680

 

Oversight and governance costs

709

1,208

1,365

1,831

 

Investment expenses:

 

 

 

 

 

fees invoiced to the fund

5,100

4.370

1,350

3,409

 

fees deduced at source

10,649

10,376

 

Net investment income

(27,000)

(26,487)

(27,200)

(39,070)

 

Change in market value

(206,300)

166,725

(134,600)

(739,914)

 

Net increase in the Fund

(230,551)

153,118

(141,953)

(764,941)

 

 

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

2019/20

2020/21

2021/22

 

Forecast

Actual

Forecast

Actual

Forecast

 

£000

£000

£000

£000

£000

Equities

2,273,600

1,332,597

1,403,200

1,864,834

 

Bonds

781,100

595,691

611,600

572,345

 

Property

356,400

318,129

329,600

319,533

 

Alternatives

265,200

321,996

341,000

414,980

 

Cash

195,200

63,715

43,900

56,736

 

Other

3,800

833,118

869,700

1,001,880

 

Total Investment Assets

3,875,300

3,465,246

3,599,000

4,230,308

 

 

Management Expenses

 

2019/20

2020/21

2021/22

 

Forecast

Actual

Forecast

Actual

Forecast

 

£000

£000

£000

£000

£000

Orbis Finance Support Services

45

40

-

-

-

ESCC Support Services

-

-

-

231

-

Orbis Business Operations Support Services

854

952

935

894

 

Supplies and Services

41

114

145

555

 

Administration total

940

1,106

1,080

1,680

 

 

 

 

 

 

 

Oversight and governance costs

 

 

 

 

 

Orbis Finance Support Services

234

267

385

508

 

ESCC Support Services

-

-

-

28

 

Supplies and Services

475

941

980

1,273

 

Third Party Payments

130

97

150

87

 

Other Income

(130)

(97)

(150)

(65)

 

Oversight and governance total

709

1,208

1,365

1,831

 

 

 

 

 

 

 

Investment Management

 

 

 

 

 

Investment expenses:

 

 

 

 

 

fees invoiced to the fund

5,100

4.370

1,350

2,416

 

fees deduced at source*

-

10,649

-

11,369

 

Investment Management Total

5,100

15,019

1,350

13,785

 

 

 

 

 

 

 

Management Expenses Total

6,749

17,333

3,795

17,296

 

* During the year, the Pension Fund incurred management fees which were deducted at source for 2020/21 of £3.7m (£2.3m in 2019/20) on its private equity investments, fees of £1.3m (£1.3m in 2019/20) on its infrastructure investments, fees of  £2.6m (£0.0m in 2019/20) on investments in the ACCESS Pool and fees of £3.0m (£2.7m in 2019/20) 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 pursued. 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 pursue. The table below shows the pension overpayments and recoveries for the past 5 years:   

 

Year

Overpaid Pensioners

Recoveries

Write Off

Outstanding

2020/21

 

 

 

 

 

 

 

 

 

 

 

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.


12.      Investment policy and performance

The Fund’s strategic asset allocation was revised following decisions taken at the June 2020 Committee meeting, with a number of changes implemented over the 2020/2021 financial year.

The changes to the strategic asset allocation involved restructuring the Fund’s equity allocation whilst maintaining the 40% overall weighting. This 40% allocation was to be retained through the addition of active impact equity, as well as smart beta passive equity with an Environmental, Social and Governance (ESG) tilt, to replace the Fund’s ‘Climate Aware’ and ‘Fundamentally Weighted’ allocations. These changes were made in line with the Fund’s ESG objectives. In addition, the Fund’s strategic allocation to infrastructure increased from 2% to 8%, with this being partial achieved over the period through a 2% allocation to unlisted infrastructure. The remainder will be considered further and built up over time.

In order to achieve the strategic allocations mentioned above, the Fund made allocations of 5% (c. £200m) to Wellington Global Impact Fund and WHEB Sustainability Fund respectively, as well as a 10% (c. £400m) allocation to Storebrand Global ESG Plus Fund. These allocations were funded through termination of the Fund’s Fundamentally Weighted Equity Index Fund, and the Climate Aware Equity Fund, as well as a reduction in the UK equities allocation held with UBS, in order to align more broadly to a global market cap index. The residual excess funds were rolled into the Fund’s allocation in Longview Global Equity, increasing its strategic allocation from 7% to 10%. In addition, the Fund made a 2% (c. £80m) investment to the ATLAS Global Infrastructure Fund to meet the 2% strategic allocation to listed infrastructure, funded by modest reductions to the absolute return and index linked gilt target allocations.

The Committee demonstrate their consideration of ESG and climate related issues through the abovementioned equity restructuring. Similarly, the Fund’s fossil fuel exposure is estimated on a quarterly basis, with this estimated as c.2% of total Fund assets as at 31 March 2021.

Asset Allocation

The Fund’s asset allocation maintains a significant allocation to equities, which are expected to be a core driver of returns over the long term, but typically the most volatile. However, the equity portfolio is diversified across regions and styles to target a balanced exposure. The increase to the Fund’s infrastructure allocation provides additional diversification to the portfolio, as well as contractual type returns, which are expected to provide a more certain return once fully deployed. Infrastructure is also expected to provide an inflation-linked source of income. The Fund also maintains a significant allocation to property, providing further diversification from traditional investment markets such as equities and bonds.

Credit mandates such as corporate bonds, index-linked gilts and absolute return credit also provide diversification, due to differing return drivers than equities, while also offering source of liquidity. The absolute return mandates combine a number of asset classes in order to provide a smoother path of returns, offering the manager flexibility to alter allocations to benefit from varying market conditions.

 


 

Investment Managers

The Fund employs a number of investment managers across the various mandates, with differing approaches or styles, as well as sectoral and geographic focus, and benchmarks. This is in order to ensure sufficient diversification, limiting downside risk during periods of market volatility. The Fund’s investment manager structure is broadly as follows:

·         The Fund’s equity mandate is split across a number of managers, having previously been largely allocated to UBS. The allocation is broadly split 50/50 in terms of active and passive, with the active sleeve allocated half to a global equity mandate with Longview, and half to active impact equity strategies split equally between Wellington and WHEB. The passive sleeve is split 50/50 passive regional funds, weighted broadly in line with global market capitalisation, and ESG systematic/smart beta, with the regional fund allocation held with UBS, and the Smart Beta ESG invested in Storebrand. At the March 2021 meeting, the Committee indicated a slight preference for active management and a continued focus on ESG with the intention of investing in a new ‘core’ active manager as well as an allocation to Osmosis Resource Efficiency, which is likely to be implemented in H2 2021.

·         Absolute return mandates are held with Newton and Ruffer and allow managers to flexibly alter allocations to a variety of underlying asset classes based on specific market conditions.

·         The Fund’s property mandate is held with Schroders, with a ‘fund of funds’ approach adopted, adding an additional layer of diversification to the mandate.

·         Corporate bonds, absolute return credit and commercial real estate debt mandates are managed by M&G, while the Fund’s passive index-linked gilts mandate is held with UBS.

·         The Fund’s infrastructure holdings are split between M&G, UBS, Pantheon (all unlisted) and ATLAS (listed), who adopt varying styles and focus areas.

·         Private equity mandates are split between Adams Street and HarbourVest with new allocations due to be made with each manager over the course of 2021.

The Committee intend to undergo a full strategy review in H2 2021 and will potentially implement new mandates and additional investment managers to achieve a more efficient portfolio towards the end of 2021.

The Fund has the following objectives for its investment managers:

·         Each (active) manager delivers on its objective, net of fees.

·         Each mandate adds a layer of diversification and offers different qualities to the Fund, be that through varying approaches, and focus areas (geographic and sectoral).

·         Consider all financial and non-financial risks and considerations including Environmental, Social and Governance (ESG) factors (including but not limited to climate change).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 2020/21 financial 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 scheme’s assets in compliance with the custody agreement.

·         Providing quarterly valuations of the scheme’s 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 Allocations pooled and unpooled

 

Mandate

Q1 2020 (£m)

Actual (%)

Target (%)

Q1 2021 (£m)

Actual (%)

Target (%)

ACCESS - Global Equity (Longview)

238.8

6.90%

7.00%

458.8

10.80%

10.00%

ACCESS - Absolute Return (Ruffer)

418.5

12.00%

10.50%

510.0

12.10%

10.00%

ACCESS - Real Return (Newton)

414.8

11.90%

10.50%

492.3

11.70%

10.00%

ACCESS - Sterling Corporate Bond (M&G)

144.3

4.10%

3.50%

158.4

3.70%

3.50%

Total Investments held in ACCESS

1,216.4

34.90%

31.50%

1,619.5

38.30%

33.50%

Equities (passive):

 

 

 

 

 

 

UBS - Fundamental Indexation

363.2

10.40%

11.50%

-

-

-

UBS - Global Emerging Markets

36.2

1.00%

1.50%

62.2

1.50%

1.50%

UBS - Regional Equities

312.4

9.00%

8.00%

299.9

7.10%

7.00%

UBS - UK Equities

220.9

6.30%

7.00%

66.7

1.60%

1.50%

UBS - Climate Aware

160.0

4.60%

5.00%

-

-

-

Equities (active):

 

 

 

 

 

 

Storebrand - Global ESG Plus

-

-

-

454.5

10.70%

10.00%

Wellington - Global Impact

-

-

-

222.8

5.30%

5.00%

WHEB- Sustainability

-

-

-

222.7

5.30%

5.00%

Total Equities

1,092.7

31.3%

33.0%

1,328.8

31.5%

30.0%

Bonds:

 

 

 

 

 

 

UBS - 5yr ILG

212.3

6.10%

5.00%

128.8

3.00%

3.00%

M&G - Alpha Opportunities

239.1

6.90%

8.00%

285.1

6.70%

7.00%

Total Bonds

451.4

13.00%

13.00%

413.9

9.70%

10.00%

Other Investments:

 

 

 

 

 

 

Schroder - Property

351.8

10.10%

10.00%

347.8

8.20%

10.00%

M&G - Infrastructure

20.7

0.60%

1.00%

32.7

0.80%

2.00%

Pantheon - Infrastructure

30.1

0.90%

2.00%

38.1

0.90%

2.00%

UBS - Infrastructure

16.7

0.50%

1.00%

37.7

0.90%

2.00%

Atlas - Infrastructure

-

-

-

77.3

1.80%

2.00%

Adams Street - Private Equity

135.6

3.90%

2.80%

154.5

3.60%

2.75%

HarbourVest - Private Equity

109.5

3.10%

2.80%

110.5

2.60%

2.75%

M&G Real Estate Debt VI

38.8

1.10%

3.00%

42.4

1.00%

3.00%

Cash account

23.9

0.70%

0.00%

31.4

0.70%

0.00%

Total Other Investments

727.1

20.90%

22.60%

872.4

20.50%

26.50%

Total

3,487.60

100%

100%

4,234.60

100%

100%

 

 


 

An analysis of fund assets, by geography, as at the reporting date of 31 March 2021

 

UK

£m

Non-UK

£m

Global

£m

Total

£m

Equities

        1,828

        -

          1,039

        2,867

Bonds

        287

           -  

          285

           572

Property (direct holdings)

           -  

           -  

            -  

             -  

Alternatives

        362

           -  

          373

           735

Cash and cash equivalents

          21

          35

            -  

            56

Other

           -  

           -  

          1

           1

Total

2,498        

        35

       1,696

        4,231

An analysis of investment income accrued during the reporting period 2020/21

 

UK

£000

Non-UK

£000

Global

£000

Total

£000

Equities

      10,531

      78

1,570             

        12,179

Bonds

          2,784

        -

       10,386

        13,170

Property (direct holdings)

           -  

           -  

            -  

             -  

Alternatives

    9,486

           -  

       1,458

      10,944

Cash and cash equivalents

        1,484

        18

            -  

           1,502

Other

           -  

           -  

            47

            47

Total

    24,485

      96

       13,461

      37,842

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.


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. 

 

1 year

3 year (p.a.)

5 year (p.a.)

Mandate

Fund

Benchmark

Relative*

Fund

Benchmark

Relative*

Fund

Benchmark

Relative*

Access Pool Equities

 

 

 

 

 

 

 

 

 

Longview – Global

35.50%

38.90%

-3.40%

-

-

-

-

-

-

Access Pool Absolute Return

 

 

 

 

 

 

 

 

 

Newton Real Return

18.70%

2.90%

15.80%

-

-

-

-

-

-

Ruffer Absolute Return

25.10%

2.90%

22.20%

-

-

-

-

-

-

Access Pool Bonds

 

 

 

 

 

 

 

 

 

M&G – Corporate

9.80%

8.20%

1.60%

-

-

-

-

-

-

Equities

 

 

 

 

 

 

 

 

 

UBS – UK Equity

26.40%

26.70%

-0.30%

3.00%

3.20%

-0.20%

 

 

 

UBS – All World Equity

38.80%

39.50%

-0.70%

12.30%

12.50%

-0.20%

-

-

-

Bonds

 

 

 

 

 

 

 

 

 

UBS - 5yr ILG

0.80%

2.60%

-1.80%

2.90%

3.60%

-0.70%

-

-

-

M&G -  Alpha Opportunities

19.30%

3.40%

15.90%

4.30%

3.40%

0.90%

4.80%

2.20%

2.60%

Other Investments

 

 

 

 

 

 

 

 

 

Schroder – Property

2.70%

2.50%

0.20%

2.10%

2.40%

-0.30%

3.90%

4.20%

-0.30%

M&G – Infrastructure

9.50%

2.70%

6.80%

-

-

-

-

-

-

Pantheon – Infrastructure

0.70%

2.70%

-2.00%

-

-

-

-

-

-

UBS – Infrastructure

-20.80%

2.70%

-23.50%

-2.40%

2.80%

-5.20%

0.60%

1.90%

-1.30%

Adams Street - Private Equity

36.30%

40.70%

-4.40%

22.30%

14.00%

8.30%

18.90%

14.90%

4.00%

HarbourVest - Private Equity

9.30%

40.70%

-31.40%

14.80%

14.00%

0.80%

13.70%

14.90%

-1.20%

M&G – Real Estate Debt VI

1.30%

4.40%

-3.10%

-

-

-

-

-

-

 

*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.


Responsible Investment

 

Responsible Investment (RI) is an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and to generate sustainable, long-term returns (according to Principles for Responsible Investment). Stewardship is the responsible allocation and management of capital across the institutional investment community to create sustainable value for beneficiaries, the economy and society.

 

Task Force on Climate-related Financial Disclosures (TCFD)

The Financial Stability Board created TCFD to improve and increase reporting of climate-related financial information in 2015. The Fund committed to reporting under TCFD in its Statement of Responsible Investment Principles which were approved in September 2020. TCFD is structured around four thematic areas of Governnace, Strategy , Risk Management  and metrics and targets.

 

 

Below the Fund try to report against these core elements in its first attempt to report agint these disclosure requirements. Where the Fund has gaps in reportable data, this is highlighted in the sections, with a plan on how this will be progressed in future years reporting.

 

Governance

East Sussex County Council (ESCC) is the administering authority for the Fund, under the Constitution the Pension Committee has delegated authority to exercise the powers in respect of the  management of the Fund. The Fund is neither owned nor controlled by ESCC, Fund assets are earmarked for pension payments and ringfenced from ‘Council Money’. There are around 130 employers and more than 78,000 members, whose pension payments are funded by through the assets of the Fund, employer and member contributions and investment returns. The Pension Committee (the Committee), comprising elected councillors, is responsible for fund oversight and policy setting.

 

The Committee has focused a substantial amount of time to develop its understanding and response to the ESG impacts that it is facing. This work has driven the Fund into codifying its beliefs in this area. The Fund believe that RI supports the purpose of the LGPS and that climate risk does pose a material financial risk to the Fund. Responsible investment is therefore a substantial factor driving returns alongside other investment considerations.

As RI and climate risk is a driving factor in the value of the Funds assets and long term return expectations in line with the Funds Investment Strategy Statement and Funding Strategy Statement to keep the Fund in surplus, the Committee set out a Statement of Responsible Investment Principles (SRIP) which is published within the Fund’s Investment Strategy Statement (ISS) available on the Fund website www.eastsussexpensionfund.org/resources.

The SRIP explains the Funds approach to the oversight and monitoring of the Fund’s investment activities from a Responsible Investment (RI) and Stewardship perspective.

The Principles that are set out in detail within the SRIP are:

Principle 1

We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2

We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3

We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4

We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5

We will work together to enhance our effectiveness in implementing the Principles.

Principle 6

We will each report on our activities and progress towards implementing the Principles.

 

In 2019 the Pension Committee set up an ESG working group to take forward research and build up the Funds principles, however in 2020 this working group was absorbed into the Investment Implementation Working group to ensure all investment decisions have ESG and climate risk embedded at the outset, rather than a secondary consideration.

 

 

Strategy

 

Risk Management

 

As part of the risk register the Pension Fund have specifically recognised Climate risk and details the risk and mitigations in place to manage this in the quarterly report. Specific aspects of this risk are outlined below.

 

 Potential Triggers of risk

 Consequences of risk

Risk Control / Response

Incorrect assumptions on current exposure , risk profiles and scenarios analysis leading to poor decision making

Volatile investment returns

Statement of Responsible Investment Principles outline investment beliefs within ESG, implementation of decisions and monitoring of EGS factors.

Risk to income yields by restricting the market due to ESG concerns without considering the bigger picture of the investment strategy to compensate

Loss of market value

Investment Working Group and ESG working group consolidated into a single group to ensure ESG is in the heart of all investment decisions

Investment environment changes radically, and Fund is slow to respond

Reputational risk where EGS beliefs and strategy are not aligned with expectation of members

Trim unconscious exposure to companies with poor ESG rating through agreed removal of traditional index funds ensuring active managers have a strong conviction in the underlying companies including on ESG matters and less traditional passive indexes / smart beta funds have robust screening processes in place to ensure ESG principles are taken into account

Risk to wider social and economic risks by focusing on a single issue

Increased workload responding to questions and challenges over ESG risks taking officer time away from manging the fund effectively

Tracking of the portfolio as underweight in fossil fuel exposure to benchmarks

Poor transparency on underlying investment manager investments decisions on behalf of the fund

Increase in investment risk taken due to unassessed ESG issues

Production of annual reports on the carbon footprint of the Fund and review of managers from EGS perspective including transition pathway of underlying companies

Failure of fund managers to explain or comply against voting guidelines

 Weaker control leading to poorer governance

Signatory to Stewardship code with commitment to comply with the new 2020 code

Poor corporate Governance or corruption in underlying investments

unconscious exposure to companies in violation of UN policies, human rights violations, poor governance structures

Challenging managers on their holdings with regard ESG issues

 

Introduction of an ESG assessment for all managers reported in July 2021 including improvement actions for each manager on ESG methodology, reporting or collaboration. This will be updated and reported annually

Risk of regulatory policy changes resulting in fines to underlying investments

Engaging via managers and investor groups including LAPFF with companies and driving them forward to comply with key ESG concerns using the greater voice by combined investment power

Uncertainty in energy transition impacts and timing

unconscious exposure to high carbon emitters

Statement of Responsible Investment Principles outline investment beliefs within ESG, implementation of decisions and monitoring of EGS factors and has a strong focus on climate change

Risk of stranded assets where invested in fossil fuel companies

Reputation issues around how the Fund is progressing the move to a decarbonised global economy.

Investment Working Group and ESG working group consolidated into a single group to ensure ESG is in the heart of all investment decisions

Lack of reliable carbon measurement data for investment pooled funds and or underlying holdings of those pooled funds.

Volatile investment returns

Restructuring of the equity portfolio to avoid high risk companies and exploit opportunities, including decision to invest in impact fund in September 2020

Risk of natural disasters on underlying investments

Reputational risk where Climate risks, reporting, mitigations and strategies are not aligned with member views or poorly communicated

Trim unconscious exposure to companies with high Carbon emission, poor energy transition plans and or fossil fuel companies, through agreed removal of traditional index funds

Risk of changes in oil prices

Loss of income to the fund from missed opportunities in oil price rally to accommodate the infrastructure to enable to the world to comply with the energy transition

Member of Institutional Investors group on climate change

Increased capital costs of underlying investment companies to transition to greener energy solutions or lower carbon emitting supply chain models and production methods

Loss of market value

The fund carry out annual carbon footprinting to better understand the carbon exposure and energy transition plans within the portfolio

Fines or penalties incurred by underlying holdings by company or sector

Major ecological disaster in the UK could lead to increased morality quicker than anticipated within the funding models impacting on cash outflows and increased workloads for lump sum payments

Signatory to UN PRI with first planned submission in 2022 and commitment to report TCFD's with a first attempt in the Annual Report for 2020/21

Increased global temperature and or erratic climate events causing devastation to underlying holdings

Possible increase to ill health retirement cases leading to a change in cash flows and possible enhancements beyond those anticipated

The Fund has planned for climate scenario modelling in late 2021 which will help better understand this risk and allow further consider approaches in tackling these risks.

Social consequence on members welfare and longevity within the fund

 

The Fund continue to have some occasional exposure to high carbon emitting or fossil fuel sector companies from a tactical perspective to use its vote to help drive the sector forward through engagement and voting using the power of a collective voice. A number of Fund managers are Climate 100+ engagement partners leading on this work with top emitting  companies, while all managers are IIGCC members for collaborate weighting of AUM to influence action

 

Very small outstanding percentage exposure with fossil fuel companies that extract oil and gas or coal, which if the sector fall to zero value, the impact of the Fund would be negligible in market movement perspectives.

 

Metrics and targets

The Fund has used a third party provider Vigeo Eiris to undertake comparative analysis of the Fund’s equity and fixed income managers carbon footprinting (carbon footprint is the measure of the volume of carbon dioxide (CO2 eq.) emitted by issuers) and energy transition (the shift from a carbon based economic model to a green and sustainable one) metrics. For the purpose of the analysis performed by Vigeo Eiris this only take in to consideration Scope 1 and 2 emissions not Scope 3 where these are defined as:

Scope 1 covers direct GHG emissions from sources that are owned or controlled by the issuer.

Scope 2 covers indirect GHG emissions caused by the organisation's consumption of electricity, heat, cooling or steam purchased or brought into its reporting boundary.

Scope 3 covers other indirect emissions (not included in scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions. Table X below details the high level scores that the Fund’s managers achieved.

The table below shows the movement  in the carbon emissions and energy transition ratings in the benchmarked portfolios from the March 2020 and March 2021 report .  


 

Independent adviser’s report

East Sussex Pension Fund - Independent Advisor’s report 2021

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 advice and expertise 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.

When I wrote last year’s report, the COVID pandemic had just caused authorities to impose the first national lockdown.  I said that the future course of markets was unclear, but that investment income was highly likely to decline and good cashflow planning would be increasingly important.  I also mentioned two governance reviews in the process of being implemented.

Twelve months later we find ourselves still in a form of lockdown with some uncertainty what the future holds.  Massive government response in the form of monetary easing and fiscal support has failed to avert the steepest economic decline in 300 years.  However, it has benefited the value of the Fund’s assets and, from a financial perspective, the Fund remains in a healthy position with a funding level above 100%.

The Fund has seen significant change in several areas during the year.  Officers initiated a major initiative looking at how best to mitigate the financial effects of a transition to a lower carbon economy.  It is still work in progress but the first step of moving 20% of the assets from a traditional passive equity strategy to a number of better aligned active ones has been implemented.  The immediate impact is to reduce the carbon footprint by about 50% but, in my view, the more important one is that the portfolio is now better positioned for the  lower carbon economy which is surely on the way.  This in my view justifies the higher costs of actively managed strategies.

This journey the Fund is taking in this respect still has some way to go.  Not only are there the remaining passive assets to review, but other asset classes such as private equity and private credit will also need to be considered.  All pension funds will quite soon be required to consider different climate change scenarios and LGPS funds will have to comply with new climate change risk disclosure requirements by 2023.  I also emphasise that climate change science is evolving rapidly: data in the future may be more reliable, for example by virtue of being audited, and there is always the possibility that it leads to different conclusions to those being drawn today.

The other major change has been in the Fund’s actuarial advisor and investment consultant.  After a full OJEU procurement process, contracts for both these roles were signed with new service providers.  There is always a balance to be struck between the benefits of continuity and those of change, but the investment consultant’s role in particular is changing and reducing with the advent of pooling.  The new arrangements should save the Fund considerable money as well as providing some fresh input into the investment process.

A degree of economic recovery is almost certain following both the deep falls and also the level of government stimulus provided.  Even if the headline data do not yet show it, global indicators such as shipping rates and volumes, and the back-up in bond yields over the past six months, show that it is in progress.   China is likely to be first in the queue, while Europe looks like being near the back.  The UK may also be a laggard as a result of the extra friction and costs involved with BREXIT.

The prospect of recovery is not bad for equities but it is often the case that they do better in anticipation rather than the actual event.  Equity indices may therefore go sideways rather than continuing to rise, particularly if there is a reduction in the valuations of the tech stocks which now comprise so much of the indices. 

The Fund has a substantial weighting in alternative investments of various sorts.  These have, with the exception of real estate, weathered the pandemic well.  The two Diversified Growth Funds provide both some ballast in the place of bonds and also some mitigation of inflation risk, and have performed well, in Ruffer’s case spectacularly so.  The infrastructure weighting serves a similar purpose, with longer duration but less flexibility, and has been increased during the year.  The private equity programme has remained on course and private credit has been more resilient than I had expected after the March 2020 wobble.

Investment income generated by the portfolio declined as companies cut dividends.  However, as much of this has historically been reinvested, the impact on the Fund’s cashflow has been limited.  An exercise in cashflow planning took place during the year and, under the new arrangements, the Fund is able to increase the level of investment received if required.  As the Fund matures, pension pay-outs will gradually exceed contributions and investment income will become increasingly important.

In the longer term, an increase in inflation remains a major risk for the Fund.  Investing in assets which have some correlation with inflation is the best way of mitigating this.  Infrastructure, inflation linked bonds and - to a lesser extent - real estate, equities and diversified growth funds form part of the Fund’s defence.  I do not believe that it is an immediate risk but it is almost inevitable that inflation will rise eventually.

Turning to administration, the Fund has taken the decision to end the shared service arrangements with Orbis and build back its own dedicated resources in order to provide a better level of service to members.  I know this has not been an easy decision to take, but I also see that committee and pension board members are keeping a careful eye on the process to ensure that the Fund is providing good value for money.

My final duty in this report is to provide some assurance as to the overall governance arrangements for the Fund.  Over the past two years the Fund has spent considerable time and resources on this area, against a background of ever increasing complexity and regulatory requirements.  For example, the Pensions Regulator is reviewing and combining its Codes of Practice, new statutory guidance is expected which will both implement the Scheme Advisory Board’s Good Governance recommendations (mentioned last year) and update requirements on pooling, and the Taskforce for Climate Disclosure’s recommendations are expected to cover LGPS funds by 2023.  On top of that are the administrative complications resulting from a number of legal test cases such as McCloud.

While the Fund can never be complacent against such a changing background, I believe its governance processes and structures are of a good standard, and that the increase in resourcing being planned will allow them to operate as intended.  There is every prospect that the Fund will continue to pay pensions on time and in full in accordance with its ultimate purpose.  I view that as a tribute to the hard work put in by Officers, Committee and Local Pension Board members past and present over the past two years in particular.

William Bourne

Independent Advisor

8th April 2021


 

13.      Asset pools

Background  

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

1. Cambridgeshire

5. Norfolk

8. Hertfordshire

2. Kent

6. Essex

9. Suffolk

3. Hampshire

7. Northamptonshire

10. Isle of Wight

4. West Sussex

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

Graphic depiction of the principles which the ACCESS pool adheres to when making decisions.

 

Governance

Strategic oversight and scrutiny responsibilities remain with the Administering Authorities as does all decision making on their individual Funds asset allocation and the timing of transfers of assets from each Fund into the arrangements developed by the ACCESS Pool.

The Joint Committee (JC) has been appointed by the eleven Administering Authorities under s102 of the Local Government Act 1972, to exercise specific functions in relation to the pooling of LGPS assets. The JC’s functions include the specification, procurement, recommendation of appointment of pool Operators (for active asset management) and pool-aligned asset providers (for passive asset management), to the Administering Authorities. The Joint Committee also reviews ongoing performance.

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

The Joint Committee is further supported by the Officer Working Group (OWG) and the ACCESS Support Unit (ASU).

The Officer Working Group consists of officers with specialist LGPS investment skills, identified by each of 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 and supplier relationship, administration and technical support services. 2020/21 saw the approval of two additional roles to increase support capacity of the ASU which is hosted by Essex County

Council. Appointments were made to these positions in March 2021 and July 2021.These roles are also supplemented with additional technical support from Officers within the ACCESS Authorities.

The diagram below is an extract from the ACCESS governance model below:

The Operator

Appointed in 2018 Link Fund Solutions Ltd (Link) provide the 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. ACCESS has to exceed these milestones with an additional £4 billion of assets pooled and greater savings of £8 million

.As at 31 March 2021, 57% of assets have been pooled:

Pooled Assets

As at 31 March 2021, ACCESS has pooled the following assets:

 

£ billion

Passive investments*

11.1

UK Equity Funds

2.2

Global Equity Funds

14.6

UK Fixed Income

2.1

Diversified Growth

1.5

Total Pooled Investments

31.5

*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 2020/21

·         Approval and launch of a range of sub-funds reflecting the strategic asset allocation needs of the ACCESS Funds.

·         Provision of updates of progress of pooling to Government.

·         Appointment of Engine MHP to review and advise in the further development of the Communications Policy.

·         Appointment of Minerva to provide advice and guidance to develop Environmental, Social and Governance and Responsible Investment guidelines for ACCESS.

·         In conjunction with Link Fund Solutions, held the second investor day for Elected members and officers of the individual Authorities. There were presentations by Link Fund Solutions as the ACS operator and Northern Trust as the depositary.

·         Determined an approach to pooling and managing the illiquid assets covering private equity, private debt, infrastructure and property.

·         Additional resources appointed to the ASU to support the activities of the ACCESS Pool.

Objectives for 2021/22

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 2021/22 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.

·         Finalise and implement the Environmental, Social and Governance and Responsible Investment guidelines for 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 2020/21 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. 2020/21 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.

 

2020/21

2020/21

 

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

863

1,079

3,071

3,548

Operator & Depository Costs

3,672

4,077

7,304

6,577

Total Costs

4,535

5,156

12,873

14,024

Pool Fee Savings

(21,747)

(13,600)

(42,262)

(32,050)

Net (Savings Realised)/Costs

(17,212)

(8,444)

(29,389)

(18,026)

 

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 2020/21 fee savings have been calculated using the CIPFA price variance methodology and based on the average asset values over the year. This approach highlights the combined level of investment fee savings, across all ACCESS 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 an enhanced level of 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

 

 

 

 

 

Transaction Costs £000

 

 

 

 

 

Custody £000

 

 

 

 

 

Other Costs £000

 

 

 

 

 

Total £000

 

 

 

 

 

 

 

 

 

 

 

* 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 environmental 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.

ACCESS has reviewed its own ESG/RI guidelines to reflect both the requirements of the Authorities and the expectations associated with this fundamental aspect of institutional investment. Minerva have been appointed as part of this review to provide advice on guidelines and implementing these in a pooling environment.

Minerva will also provide advice on future appropriate reporting requirements to provide transparency to stakeholders, monitor adherence to the Guidelines and inform discussion on ESG/RI matters.

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 868 meetings on 11,351 resolutions.


14.               Fund account, net assets statement and notes

 

a.        East Sussex Pension Fund Account

 

2019/20

 

 

2020/21

£000

£000

 

Notes

 £000

 £000

 

 

Dealings with members, employers and others directly involved in the fund

 

 

 

 

 

Contributions

7

 

 

(99,018)

 

From Employers

 

(100,042)

 

(31,403)

 

From Members

 

(31,435)

 

 

(130,421)

 

 

 

(131,477)

 

(8,298)

Transfers in from other pension funds

8

 

(6,044)

 

(138,719)

 

 

 

(137,521)

 

 

 

 

 

 

 

125,670

Benefits

9

 

128,707

 

8,596

Payments to and on account of leavers

10

 

5,561

 

134,266

 

 

 

134,268

 

 

 

 

 

 

 

(4,453)

Net (additions)/withdrawals from dealings with members

 

 

(3,253)

 

 

 

 

 

 

 

17,333

Management expenses

11

 

17,296

 

 

 

 

 

 

 

12,880

Net (additions)/withdrawals including fund management expenses

 

 

14,043

 

 

 

 

 

 

 

 

Returns on investments

 

 

 

 

(26,546)

Investment income

12

 

(39,089)

 

59

Taxes on income

13a

 

19

 

166,725

Profit and losses on disposal of investments and changes in the value of investments

14a

 

(739,914)

 

140,238

Net return on investments

 

 

(778,984)

 

153,118

Net (increase)/decrease in net assets available for benefits during the year

 

 

(764,941)

 

(3,632,212)

Opening net assets of the scheme

 

 

(3,479,094)

 

(3,479,094)

Closing net assets of the scheme

 

 

(4,244,035)

 


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

 

31 March 2020

 

 

31 March 2021

 £000

 

Notes

 £000

 

 

 

 

3,401,666

Investment  assets

14

4,173,990

340

Other Investment balances

21

357

(475)

Investment liabilities

22

(775)

63,715

Cash deposits

14

56,736

3,465,246

Total net investments

 

4,230,308

16,622

Current assets

21

15,675

(2,774)

Current liabilities

22

(1,948)

3,479,094

Net assets of the fund available to fund benefits at the year end.

 

4,244,035

 

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 2021 and of the movements for the year then ended.

 

 

 

 

Ian Gutsell

Chief Finance Officer (Section 151 Officer)

Business Services Department

18 October 2021


c.        Notes to the East Sussex Pension Fund Accounts for the year ended 31 March 2021

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 Scheme Manager”). 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 2020/21 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.

The Fund 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.

The Fund 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 the Fund and its advisers meet 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 127 employer organisations within East Sussex Pension Fund including the County Council itself, as detailed below:

East Sussex Pension Fund

31 March 2020

31 March 2021

Number of employers with active members

128

127

Number of employees

 

 

County Council

7,980

8,163

Other employers

15,855

16,839

Total

23,835

25,002

Number of pensioners

 

 

County Council

9,500

9,805

Other employers

11,835

12,425

Total

21,335

22,230

Deferred pensioners

 

 

County Council

13,860

13,805

Other employers

17,762

17,429

Total

31,622

31,234

Total number of members in pension scheme

76,792

78,466

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 2021. 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 2020/21 financial year and its position at year-end as at 31 March 2021. The accounts have been prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom 2020/21 which is based upon International Financial Reporting Standards (IFRS) as amended for UK public sector. The accounts have been prepared on a going concern basis.

Accounting standards issued but not yet adopted - Under the Code of Practice on Local Authority Accounting in the United Kingdom 2020/21, 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. IFRS 16, introduced on 1 January 2019, is due to be adopted by the Code for accounting periods commencing on or after 1 April 2022. This new accounting standard largely removes the distinction between operating and finance leases by introducing an accounting model that requires lessees to recognise assets and liabilities for all leases with a term of more than 12 months unless the underlying asset is of low value. This will bring assets formerly off-Balance Sheet onto the Balance Sheet of lessees. Implementation of IFRS16 is not expected to have a material impact on the pension fund because it does not hold any assets as a lessee.

There were no amendments for 2020/21 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 the 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 Pension Fund publishes a number of statutory documents, including an Investment Strategy Statement, a Funding Strategy Statement, Governance and Compliance Policy Statement and Communications Policy Statement. Copies can be obtained by contacting the Council’s Pensions team or alternatively are available from https://www.eastsussexpensionfund.org/

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 there is 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 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 2020/21, £0.8m of fees is based on such estimates (2019/20: £0.3m).

Net assets statement

g)    Financial assets

All investment assets are included in the financial statements 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 the contractual acquisition of the asset. Any amounts due or payable in respect of trades entered into but not yet complete at 31 March each year are accounted for as financial instruments held at amortised cost and reflected in the reconciliation of movements in investments and derivatives in Note 14a. Any gains or losses on investment sales arising from changes in the fair value of the 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 2021 was £265 million (£229 million at 31 March 2020).

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 is 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 forwardlooking 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 reported amounts. Estimates and assumptions are made take into account historical experience, current trends and other relevant factors. However, actual outcomes could be different from the assumptions and estimates made. The items in the net asset statement for which there is a significant risk of material adjustment the following year are as follows:

Item

Uncertainties

Effect if actual results differ from assumptions

Actuarial present value of promised retirement benefits (Note 20)

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 pandemic there is an increase in the uncertainty around the mortality 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 £25 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 £265.0 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.

Illiquid investments including Infrastructure and Pooled investments

These investments are valued at fair value utilising market data from comparable debt, Commercial mortgage-backed securities (CMBS) market and sector curves to appropriately benchmark the investments. Due to volatility in the market with COVID-19 CMBS have been excluded at 31 March 2021 due to limited market data being available. This affects investments valued at 31 March 2021 of £42.4m. The total value of the fund assets at 31 March 2021 is £4,244.0m, so this investment type represents just under 1.0% of total assets.

The total pooled investments affected in the financial statements is £42.2 million. There is a risk that this investment may be under or overstated in the accounts due to the use of the estimates applied in the valuation by the fund manager. The sensitivity of this figure is discussed further in Note 16.

6: Events after the balance sheet date

There have been no events since 31 March 2021, and up to the date when these accounts were authorised that require any adjustments to these accounts.

7: Contributions Receivable

 

 

2019/20

2020/21

 

£000

£000

By category

 

 

Employee’s contributions

31,403

31,435

Employer’s contributions

 

 

Normal contributions

80,302

83,643

Deficit recovery contributions

17,662

15,336

Augmentation contributions

1,054

1,063

Total

130,421

131,477

By authority

 

 

Scheduled bodies

83,613

84,803

Admitted bodies

4,303

3,653

Administrative Authority

42,505

43,021

Total

130,421

131,477

8: Transfers in from other pension funds

 

 

2019/20

2020/21

 

£000

£000

Group transfers

                -

                -

Individual transfers

8,298

6,044

Total

8,298

6,044

 

9: Benefits payable

 

 

2019/20

2020/21

 

 £000

£000

By category

 

 

Pensions

104,544

108,927

Commutation and lump sum retirement benefits

18,555

17,194

Lump sum death benefits

2,571

2,586

Total

125,670

128,707

By authority

 

 

Scheduled bodies

73,625

76,492

Admitted bodies

3,690

3,781

Administrative Authority

48,355

48,434

Total

125,670

128,707

 

10: Payments to and on account of leavers

 

 

2019/20

2020/21

 

£000

£000

Refunds to members leaving service

389

242

Group transfers

                -

                -

Individual transfers

8,207

5,319

Total

8,596

5,561

 

11:  Management expenses

 

 

2019/20

2020/21

 

£000

£000

Administrative costs