Agenda and minutes

1.1.        The Board agreed the minutes as a correct record of the meeting held on 4 February 2019.

2.1       There were no apologies for absence.

3.1       There were no disclosures of interest.

Notification of any items which the Chair considers urgent and proposes to take at the appropriate part of the agenda.

4.1       The Chair requested confirmation from officers as to the length of terms of the Pension Board members.

4.2       Ian Gutsell (IG) confirmed that the employer representatives from Brighton & Hove City Council (Cllr Carmen Appich) and Rother District Council (Cllr Doug Oliver) had been appointed for two years; and the additional three new Board members (Stephen Osborn, Lynda Walker and Niki Palermo) had been appointed for four years each. Furthermore, Diana Pogson (Pensioners Rep) had already served a year of her four term so had three years left. IG explained that this would ensure a staggered process of appointments to the Board in future.

5.1       The Board considered the draft agenda of the Pension Committee’s next meeting.

5.2       The Board RESOLVED to note the report.

6.1       The Board considered a report seeking nominations for the Vice Chair positions on the Pension Board.

6.2       The Board RESOLVED to:

1)    Nominate Diana Pogson as the employee Vice Chair

2)    Nominate Stephen Osborn as the employer Vice Chair.

·         GMP (Guaranteed Minimum Pension) Reconciliation

·         Membership Data Cleanse

·         Administration System Review

·         Annual Benefits Statement (ABS) Exercise.

·         Key Performance Indicators (KPIs)

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7.1.        The board considered a report providing an update on matters relating to Pension Administration activities.

7.2.        Councillor Carmen Appich (CA) asked why JLT (Jardine Lloyd Thompson), who have recently merged with Mercer, had been chosen to conduct the Guaranteed Minimum Pension (GMP) Reconciliation process on behalf of the East Sussex Pension Fund (ESPF).

7.3.        Kevin Foster (KF) explained that JLT had been commissioned by the Fund, following a procurement process, to provide the work on the basis that they had been deemed to be the best provider and had a track record of doing similar work for other pension authorities.

7.4.        Lynda Walker (LW) asked why a reference scheme test had replaced the guaranteed minimum pension system in 1997, and whether the ESPF was in a good position relative to other Local Government Pension Schemes (LGPS) in regards to the GMP reconciliation process.

7.5.        Andrew Marson (AM) explained that the original GMP system of requiring pension schemes contracted out of the State Second Pension Scheme (S2P) to provide a Guaranteed Minimum Pension for contracted out employees broadly similar to the pension amount an employee would have received if they had not been contracted out had proven very complex; so instead a reference scheme test was introduced to allow comparison whether a pension scheme’s benefits were greater overall than the S2P benefits and if so it was permitted to contract out. This was felt to be a more straightforward approach. LGPS had easily passed the test and had remained contracted out. AM said that ESPF’s GMP Reconciliation programme was making good progress in relation to others around the country.

7.6.        The Chair explained that GMPs were calculated as weekly amounts and asked whether the discrepancy threshold of £2 meant a discrepancy of 4p a week of pension, which would amount to £2.08 over the course of the year or whether it would be 3p a week, which would mean £1.56 per year. AM said he would confirm how the figure of £2 is arrived at.

7.7.        Diana Pogson (DP) asked when the process may be complete. AM said it depended on HM Revenue & Customs’ (HMRC) own deadlines, which have continuously moved in the past. He said that the reconciliation and rectification process, i.e., resolution of over and under payments to scheme members, should be complete by 31 March 2020 based on current HMRC guidance.

7.8.        The Chair asked whether the number of critical errors contained within the data held by ESPF is recorded and reported as a percentage, as is a requirement of pension schemes in the private sector.

7.9.        AM explained that the quality of the data held by ESPF is periodically scored as a percentage and this will be run again in September after the Annual Benefit Statements have gone out. He said that the quantity of errors has reduced considerably – with over 10,000 data items having been corrected – and the Fund has improvement the quality of its data  ...  view the full minutes text for item 7.

• The Internal Audit Strategy for Pensions;
• External Control Assurance;
• Pension Fund Governance and Investments.

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8.1.        The Board considered a report containing the draft ESPF Internal Audit Strategy, and Internal Audit reports on Pension Fund Governance and Investments and Pension Fund External Control Assurance.

8.2.        LW asked how the East Sussex Internal Audit is not duplicating the work of other internal audit teams in the other 10 ACCESS local authorities in auditing externally managed investments held under the ACCESS pooling agreement.

8.3.        Danny Simpson (DS) said that he will liaise with other internal audit officers to ensure that they are not duplicating work. OO added that an audit plan is being developed for ACCESS that will avoid duplication by enabling individual internal audit teams to use the assurance report of whichever internal auditor conducts the externally managed investment audit of ACCESS. He confirmed that these reports would comply with the Institute of Chartered Accountants’ AAF 01/06 Assurance Reports so could be used by East Sussex County Council’s Internal Audit team in lieu of its own assurance reports.

8.4.        SO asked whether it was unusual to have two internal audit reports without any actions arising.

8.5.        DS confirmed that it was unusual but external assurance – the subject of one of the reports – is usually straightforward to obtain substantial assurance for. The other four areas where internal audit seeks to provide assurance on (set out in 2.5 of the strategy) tend to be more complex. OO added that the substantial assurance of governance and investments was the result of several years of hard work in improving the governance arrangements of the ESPF.

8.6.        The Chair asked whether Internal Audit proactively liaises with the external auditor, Grant Thornton, when seeking to provide assurance.

8.7.        DS said that Internal Audit does not, but the external auditor may contact the team. IG added that the reliance of external auditors on seeking assurance from Internal Audit has diminished over the years and they generally seek their own assurance, however, Grant Thornton – which is newly appointed – has contacted the Internal Audit team this year.

8.8.        The Board RESOLVED to:

1)            note the report; and

2)            recommend the following changes to the draft Internal Audit Strategy:

·         change 2.3b) to read “provide strong governance and decision making”;

·         remove from 2.3c) reference to “improve value”; and

·         amend 2.5 to read “Pensions administration – people, processes and systems”, given the need to have assurance that there are competent people in place to manage the process and systems.

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9.1.        The Board considered a report seeking comment on the Draft Pension Fund Annual Report for 2018/19.

9.2.        DP asked whether it was realistic to lower the forecast management expenses for 19/20 when outturn for 18/19 was higher than forecast.

9.3.        OO explained that the increased costs for 18/19 included a number of one-offs that were not expected to be incurred again for 19/20, for example the additional costs under supplies and services due to the triennial valuation, GMP, etc.

9.4.        SO asked why there is no forecast for fees deducted at source.

9.5.        OO explained that these were very difficult to predict as they depended on the performance of the assets from which they were deducted, which vary in value depending on market conditions.

9.6.        CA asked whether any of the increase in return on investments from £86m in 17/18 to £260m for 18/19 was the result of pooling investments in ACCESS.

9.7.        OO confirmed that some of it would have been as with the capacity and potential to invest significant larger amounts collectively,  there are more opportunities to benefit from economies of scale as a result of investing  into specialist areas. The Chair added that increase is also due to the considerable increase in the markets, which had seen significant increases during the year. Due to the reliance of return on investment on the markets, the figure is likely to always be volatile.

9.8.        SO asked why payments from the fund varied by £30m between 17/18 and 18/19.

9.9.        OO said that this was due to employers moving in and out of the scheme at varying degrees of regularity. The Chair added that death benefits and transfers of employees can also result in significant changes to payments from year to year.

9.10.      The Chair asked whether there was a simplified version of the Pension Fund Annual Report and recommended it be sent out with the Annual Benefit Statement as people are more likely to read it.

9.11.      OO confirmed that a summary will be included within  the pension fund newsletter. IG added that the first 10 pages of the accounts are already a summary statement and the remainder of what is included is governed by reporting requirements.

9.12.      The Board RESOLVED to:

1)    note the report; and

2)    request that the following are included in the Pension Fund Annual Report - 2018/19:

·         an explanation for the increased outturn in expenses being caused by one-off expenditure.

·         An additional line underneath management expenses total to include the expenses total minus the fees deducted from source. 

3)    recommend that the newsletter summarising the Annual Report is dispatched alongside the Annual Benefit Statement.

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10.1.      The Board considered a report on the proposal to publish a revised statement regarding the Fund’s compliance with the Financial Reporting Council’s UK Stewardship Code.

10.2.      LW asked how the ESPF compared to comparative Funds in terms of its responsibilities as a shareholder.   

10.3.      OO estimated that of the 89 LGPS, ESPF would be in the top 25% in terms of the strength of its stewardship arrangements. He said  ESPF is one of few funds  that meets the reporting expectations for Tier 1 – Asset Owner allocation from the Financial Reporting Council (FRC).

10.4.      The Chair asked whether the Fund subscribes to Local Authority Pension Fund Forum (LAPFF)

10.5.      OO confirmed that the Fund is a member of LAPFF, and fund managers are recommended by ESPF to vote in accordance with LAPFF guidelines. The Fund receives a report at the end of year to see how fund managers voted. LAPFF also nominated ESPF for an Environmental, Social and Governance award. 

11.          The Board RESOLVED to note the report.

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11.1.      The Board considered a report on the current regulatory environment, and consultations that could impact the LGPS.

11.2.      CA asked what the Section 151 officer’s response was to the Good Governance Review. 

11.3.      IG said that the response had included a recommendation for the development of  guidance for officers, including Section 151 Officer, and Members around conflict of interest and their roles within the pension board and pension committee, and the role of the administrating authority in relation to pension funds, rather than of structural changes to the arrangements.

11.4.      CA asked whether other employers than East Sussex County Council should respond to the Good Governance review consultation.

11.5.       IG said that it is open for all employers and that Board members should encourage the employers to do so. CA said she would raise it with her Section 151 Officer.

11.6.      The Chair commented that it seemed odd that the valuations for LGPS were recommended to go from every three to every four years when the private sector funds were moving to annual valuations.

11.7.      OO explained that the purpose of the Government’s proposal was to align the LGPS scheme valuation with other public sector schemes and allows for outcomes of each valuation to be looked at in parallel, and for Government to make consistent decisions for the public sector as a whole. He said it was a considerable risk to the accuracy of the valuation, as it would increase the chance of receiving information on employers that was very out of date. There may be a need for the administering authority having the option to perform an interim valuation if circumstances require changes to contribution rates.

11.8.      The Board RESOLVED to note the report.

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12.1.      The Board considered a general update on matters relating to the Board activities.

12.2.      The Board RESOLVED to:

1)    note the report

2)    request the inclusion of communications of the Board to employers as part of the item on Communications Policy Statement.

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13.1.      The Board considered the ESPF’s Risk Register.

13.2.      CA asked whether the mitigations put in place were reducing the likelihood and impact of risks.

13.3.      OO explained that the risk register only showed risks that had not turned green. There were many risks that had been reduced considerably through mitigations but they were deliberately excluded from the register to make it a more useful document. It was also the case that some risks, like not achieving the Annual Benefit Statement deadline, would remain with the same post mitigation score until the deadline has passed.

13.4.      CA said that it seemed surprising to see so much risk given the substantial assurance provided by the internal audit reports.  

13.5.      IG explained that the risk register was designed to show a degree of openness and understanding on the part of the ESPF around the fact that, whilst the risks mat not occur, the Fund is aware of them and has taken steps to prepare for them. Risks such as cyber attacks will always be there and likely remain as red scored risks, but the mitigations demonstrate that the Fund recognises and is taking action against it as a possibility.  DS said that Internal Audit recognises that some risks can never be fully mitigated against, so as long as there is evidence of an appropriate level of mitigation then Internal Audit will not raise any concerns. 

13.6.      DP asked why several risks did not reduce even after mitigations.

13.7.      The Chair said this was probably because the scale for impact and likelihood were only from 1-3 so it may not always show a change unless it is fairly significant.

13.8.      Councillor Gerard Fox (GF) said that paying pensions and making financial investments both pose a significant risk, so mitigations may only ever reduce the likelihood or impact of something happening by a small amount.

13.9.      SO asked whether the Fund was investing in any management portfolios like those of Neil Woodford with a high portion of illiquid assets.

13.10.   OO confirmed that the fund was not investing in any such illiquid funds, although the fund does as a long term investor aim to benefit from an illiquidity premium in appropriate long term assets such as property and private equity.

13.11.   GF added that after many years of a low interest rates and continued bull markets investors are likely to be chasing higher risk assets in order to achieve a return on their investments like the Woodford fund and high yield bonds.

13.12.   The Board RESOLVED to:

1)    note the report;

2)    request that the risk register shows whether a risk is increasing or decreasing over time.

14.1     The Board considered its work programme.

14.2     The Board RESOLVED to note the report.

To consider excluding the public and press from the meeting for the remaining agenda item on the grounds that if the public and press were present there would be disclosure to them of exempt information as specified in paragraph 3 of Part 1 of the Local Government Act 1972 (as amended), namely information relating to the financial or business affairs of any particular person (including the authority holding that information).

15.1     The Board RESOLVED to exclude the public and press.

16.1     The Board considered a report on the activities undertaken by the ACCESS Pool group.

16.2     The Board RESOLVED to note the report.