Agenda item

1.1.        This item was introduced by Ola Owolabi (OO).

1.2.        In reference to Item 6: LGPS pooling draft submission, The Chair said it was clear that governance was the key issue facing the ACCESS group. He said that the Government appeared to expect that administrating authorities would transfer their funds to a pooled fund and take no further part in the process. However, this would likely frustrate Local Government Pension Schemes (LGPS) wanting to monitor and take action on the performance of their fund.

1.3.        The Chair observed that it was disappointing that the Government had undertaken this exercise for the purpose of making savings, but these were unlikely to be realised for over 15 years and the pool would initially be a net cost to its members; there seemed to have been no reason for this apparent failure to realise savings.

1.4.        Sue McHugh (SM) asked whether ACCESS was a separate legal entity, or a collective of individual organisations. OO said that the Government had dictated that the participating administrating authorities would need to create a legally separate organisation regulated by the Financial Conduct Authority (FCA) that would select investment managers on their behalf. ACCESS authorities are in the process of agreeing the legal structure of their investment pool before 15 July 2016.  Marion Kelly (MK) added that the FCA regulations for the recruitment of board members would apply to ACCESS so it was unlikely that elected members would be able to sit on the board.

1.5.        Councillor Kevin Allen (KA) asked whether Marcus Jones MP had responded to the letter from ACCESS highlighting the concern around the lack of democratic accountability of the pooled funds.  OO said that the Department of Communities and Local Government (DCLG) has responded verbally to the Chairs of ACCESS Group and would be meeting with representatives on 12 May 2016 to discuss the structure of the pooled fund, the role of the FCA, and the role of members – further meetings were planned in the coming weeks. MK explained that administering authorities had lobbied the Government extensively over this issue.

1.6.        The Chair said he had heard that there may be some delay to the 15 July 2016 submission deadline due to the increasing concerns about the lack of involvement of elected members in the pooled funds, in particular whether this was in contravention of the fiduciary duties of elected members towards their electorate. He observed that there was the potential for conflict if some elected members of participating authorities were satisfied with the performance of the pooled funds and others were not. MK said that some unions had planned to use EU legal directives to challenge the decision to pool funds.

1.7.        Angie Embury (AE) said that UNISON had been providing information to its members on the issues around the governance of the new pool structures; she offered to circulate relevant documents to the rest of the Board. AE added that UNISON had provided significant training to its members on this matter; The Chair agreed that UNISON appeared to have taken the issue of pension fund pooling seriously.

1.8.        The Chair said that it was increasingly apparent that very little of the pooled funds would be invested into infrastructure – as originally envisaged – because they did not offer the best return on investment, and there would not be a continuous stream of new projects to invest in.

1.9.        The Chair asked, in relation to Item 7: Quarterly performance report, whether the administering authority was happy with the overall return on funds. MK explained that it was important that the performance of the investment managers was in line with the benchmark. Because ESPF was one of the best funded pension funds, one of its key investment strategies was to ensure that no unnecessary risk was taken, so it is hard to compare benchmarks with other funds that may feel they need to take more risk and prioritise additional growth.

1.10.      The Chair queried whether the administrating authority was satisfied that the benchmarks for individual fund managers were reasonably challenging for the fund managers. MK explained that benchmarks are set during the procurement process based on advice by Hymans Robertson using absolute return investment managers as an example. Over the past five years, the sector as well as the administrating authority has developed a greater understanding of what benchmarks are appropriate; however, many investment managers have been managing ESPF portfolios for many years and it is difficult to adjust their benchmarks midway through their contracts. However, MK agreed a conversation about that would be very helpful.

1.11.      SM expressed concern that employer contribution rates to the ESPF from 2017 may be adversely affected by the triannual evaluation taking place during a period of market volatility. MK said that increases in the contribution from employers due to market volatility re smoothed by having a stabilisation mechanism (to cap employer contribution rates). Hymans Robertson was performing scenario planning that would demonstrate what the outcomes for the fund would be based on different assumptions for the new triannual period starting in 2017. These potential outcomes will be presented to employers at the Employer Forum in November 2016. MK added that for any pension fund the ultimate aim was to have sufficient available cash to pay scheme members’ pensions when they fall due.

1.12.      In reference to Item 9: Reporting breaches policy and procedure, the Chair asked what constituted a ‘material breach’.  MK said that officers refer to the Pension Regulator’s guidance on a regular basis to see what it considers to be a material breach; the Regulator also recommends that, if in doubt, you should report a breach.

1.13.      Jason Bailey (JB) added that small employers being unable to pay member and employer contributions on time were a significant cause of breaches; in some cases, small employers had ended up three years in arrears. MK reassured the Board that – whilst there were sometimes late payments – the administrating authority had a strong relationship with its employers and would be very aware of any potential financial difficulties that they faced.

1.14.      Councillor Brian Redman (BR) asked, in reference to Item 10: Discretionary policy statement, what the purpose was of collecting discretionary policy statements from employers. MK said that it was a LGPS regulation that they be collected by the administering authority, but it was worthwhile doing so as the administrating authority wanted to be assured that employers have the correct discretionary policies in place (e.g., early retirement on compassionate grounds) and that they are bearing the costs of them.

1.15.      Referring to Item 12: External Audit Plan for 2015/16, the Chair commented that a materiality of £27m seemed very high. MK assured the Board that this was just the level at which the accounts would have to be changed, and that any significant errors beneath that level would be reported to the Pension Board (and other appropriate bodies) in the interests of transparency. OO added that the £27m need not be a single error but could be the acumulation of individual errors; he was confident that the threshold would not be reached either way.

1.16.      The Board RESOLVED to note this report.