Agenda item

5.1.        The Board considered a report on the structure of the Pension Committee and comments on governance of the East Sussex Pension Fund (ESPF or the Fund).

5.2.        Ian Gutsell (IG), the Chief Finance Officer presented the report and noted a report from Councillor Tom Druitt (TD) calling on East Sussex County Council to consider representation from Brighton and Hove City Council (B&HCC) on the Pension Committee and a petition received titled ““Stop investing Brighton & Hove’s pension fund in fossil fuels”.

5.3.        Sarah Hazelhurst (SH) as the Lead Petitioner, spoke about the Pension Scheme investing in fossil fuels and the importance for institutions to act in response to the climate emergency. SH noted that when collecting signatures for the petition, the public were surprised to learn that there are no B&HCC elected members on the Pension Committee.

5.4.        TD called on the Board to request a review of the governance arrangements of the ESPF, noting that the duty of the Board is to assist the scheme members and to consider whether the Pension Committee is taking decisions in line with the legal requirements of a scheme manager of a Local Government Pension Scheme (LGPS). TD expressed concerns around climate change and the effect on eco systems and biodiversity. TD emphasised the importance of not exceeding 1.5 degree global temperature increase which is predicted to occur in 2025 if greenhouse gas emissions continue to be produced at the current rate. As B&HCC and East Sussex County Council (ESCC) had declared a climate emergency, and because fossil fuels fuel global warming,. TD said that B&HCC did not believe the Fund was fulfilling its fiduciary duty to its members. He argued that there was a need for B&HCC representation on the Pension Committee. as B&HCC fell outside the geographical area of East Sussex and so its residents did not currently have elected representation on the Pension Committee.

5.5.        Councillor Toby Illingworth (TI) noted that the legislation clearly states who can sit on the Pension Committee and conversations around divestment should occur at the Pension Committee not the Pension Board, since Pension Board is not able to make financial decisions regarding the ESPF.

5.6.        Neil Simpson (NS) noted that although the legislation states that only the administering authority (ESCC) can sit on the Pension Committee, there has been considerable reorganisation of local government at the time that B&HCC separated from ESCC. NS noted that this reorganisation has resulted in a lack of democratic representation for a substantial part of the fund membership who did not live in the East Sussex area. NS gave examples of other authorities who have co-opted representation on their Pension Committees who are not members of the administering authority, such as the West Midlands Pension Fund. He also suggested that the Pension Committee may not be a “finance committee” as set out in S.102 of the Local Government Act 1972, as it is not making decisions on the financial affairs of the local authority or its area but of scheme members. NS asked if there is potential to review the governance of the Pension Committee in light of these factors.

5.7.        IG noted that beneficiaries of the ESPF are worldwide and not just those living in East Sussex or Brighton and Hove. IG advised that ESCC as the administering authority supports all beneficiaries.

5.8.        TI noted that if the Pension Committee allowed representation from B&HCC, this could open the possibility for co-opted members from many other locations requesting representation, as the Fund has members living across the country and abroad.

5.9.        Sian Kunert (SK) said that there had been more than one legal opinion published that had concluded a pension committee is a finance committee and the Fund had also taken its own legal advice on the matter. SK noted that Pension Committees that do have co-opted members on the Committee in many of these cases will  have an investment sub-committee comprising solely of administering authority members to make investment decisions in order to get around the restrictions of S.102 of the 1972 Act.

5.10.     TD noted that beneficiaries who may now be living internationally or nationally outside of East Sussex or Brighton and Hove would all have once worked within East Sussex or Brighton and Hove, and therefore representation of both geographic areas should be considered for the appointment of Pension Committee. TD noted that since B&HCC is no longer part of ESCC, there is a democratic deficit giving rise to an asymmetry in representation on the Committee. TD questioned why the Pension Committee is subject to proportional representation regarding elected members from the administering authority and why the committee consists solely of elected members and not advisors or other co-opted members.

5.11.     TI noted that residents of Brighton & Hove are already represented via B&HCC membership of the Pension Board, which has the role of assisting the Fund and ensuring it is fulfilling its obligations to employers and scheme members.

5.12.     TD acknowledged that he represents B&HCC as an employer on the Pension Board however B&HCC has no representation on the Pension Committee where decisions on investments are made. TD asked whether consideration could be given to restructuring the Pension Committee similarly to local authorities who have co-opted members including councillors from other authorities on their Pension Committee.

5.13.     TD argued that divestment from fossil fuels will directly impact companies selling fossil fuels by reducing the value of their share price and impacting their ability to raise capital.

5.14.     The Chair noted that fossil fuel companies already have enough capital to invest in exploration of new oil and gas fields meaning that divestment from their stocks would have no impact on their capital reserves. This means divestment, or disengagement, will not encourage the fossil fuel companies to reduce their carbon footprint. Engagement with the companies has more impact on tackling climate change and engagement can only occur whilst the Fund is a shareholder.

5.15.     The Chair noted that all Pension Board members share concerns regarding climate change, however, total divestment, which is in effect disengagement, will not be in the best interests of scheme members and will not influence fossil fuel companies to change their behaviours in response to the climate emergency. The Chair noted that at the recent Pensions and Lifetime Savings Association Investment Conference 2022, it was collectively agreed by the delegates that engagement has more impact and influence over climate change than divestment.

5.16.     TI urged the Board to read the revised stewardship codes containing examples of how engagement produces better results regarding Environmental, Social and Governance (ESG) responsibilities, particularly in emerging markets.

5.17.     TD suggested that there are examples where engagement with fossil fuel companies has not been effective in changing their behaviour or strategy relating to climate change.

5.18.     Stephen Osborne (SO) noted that whilst the Fund considers ESG factors in its investment decisions, the objective of the Fund is to maximise financial benefit for scheme members and employers have their own objectives to reach carbon net zero. SO asked if any work has been done to consider whether the Fund’s investment strategy aligns with its employers’ climate objectives.

5.19.     SK explained that the Fund has increased communications including engaging with employers and members through the communication strategy of the Fund, which will be discussed in more detail at agenda item 13. It was noted that engagement has increased due to appointment of a new Communications Manager, more involvement through the Employers’ Forum where there is an investment topic presented, newsletters and surveys. The goal of the Pension Fund is to generate return, however, climate change is an identified financial risk which is included in the risk register and influences decision making, the fund is reporting on this area and the Fund will need to  set net zero target and plans in the coming  work plans to meet TCFD requirements.

5.20.     TD moved a motion to “Request that the Governance Committee review the governance arrangements of the Pension Committee, taking into account other examples”. The motion was carried.

5.21.     The Board RESOLVED to request that the Governance Committee review the governance arrangements of the Pension Committee, taking into account other examples.