Agenda item

37.1         The Board considered a report on the Pension Committee’s agenda for its 27 February meeting. The reports were introduced by Ola Owolabi (OO), Head of Accounts and Pensions.

37.2         In reference to Item 9: Investment Strategy Statement (ISS), the Chair invited representatives of Divest East Sussex to speak about their document titled "Managing Climate Risk: Proposed Additions for ESPF's new Investment Strategy".

37.3         Councillor Kevin Allen (KA) and Angie Embury (AE) questioned why under the section “How social, environmental or corporate governance considerations are taken into account in the selection, non-selection, retention and realisation of investments” the fund appears to be excluded from divesting, boycotting or sanctioning foreign governments or UK defence industries when the funds’ members may object to investing in UK defence industries. OO said that the wording was in line with the requirements of the LGPS Management & Investment of Funds Regulations 2016  which prohibits funds from being able to disinvest from UK defence industries and foreign governments for non-financial reasons.

37.4         KA said that the Pension Committee should consider acting as a front runner in reducing investment in fossil fuels if it can be done whilst upholding its fiduciary duty.

37.5         Sue McHugh (SM) said that the Pension Committee’s fiduciary duty towards the ESPF means it cannot take a blanket decision to not invest in an any industry without strong enough evidence that it will not impact negatively on investment returns. The financial risk sits with the ESPF and employers rather than individuals, so the Committee members should not take a decision that they might do in their capacity as an individual if it causes financial risk to the pension fund and its employers.

37.6         OO explained that the investment managers working on behalf of the ESPF will invest according to the Fund’s beliefs as set out in the ISS. The Local Authority (LAPFF) has a strong ethical stance and also helps to guide where investments should be made on behalf of other local government pension funds.

37.7         SM asked, in reference to the section “Investment of money in a wide variety of investments”, how much of the total value of all investments was in entities which are connected with East Sussex County Council (noting that the legal maximum was 5%). OO confirmed that no investments were in entities connected to the Council. He added that the viability of local investment had previously been looked at but none were found to yield a reasonable return.

37.8         AE asked how ACCESS fund pooling would affect the varied investment strategies of individual member funds. OO explained that all 11 funds will retain their strategies and invest in the same asset classes as decided by their respective Pension Committee. The difference will be that each asset class, e.g., absolute return or property, will be managed by a single investment manager – instead of 11 individual managers – who will invest on behalf of all of the ACCESS members that allocate funds into that asset class. This will deliver benefits of scale by reducing the investment manager fees.

37.9         The Chair asked what infrastructure projects ESPF is investing in. John Shepherd (JS) said that the 2% of the fund allocated to infrastructure is held by investment mutual funds that hold a portfolio of worldwide infrastructure investments, rather than holding a large stake in an individual infrastructure project.

37.10     In reference to Item 10: Funding Strategy Statement (FSS), the Chair asked whether there was a significant difference between the new FSS and the previous strategy. OO confirmed that there was no significant difference but the employer contribution rate has reduced since the outcome of the triennial valuation and the FSS needed to be amended to reflect that.

37.11     Councillor Brian Redman (BR) questioned whether the salary growth projections up to 2019 in the triennial evaluation were an underestimate given the potential higher inflation and the increasing demand for public sector wage rises it will create. OO said that the projection took into consideration not just the next three years but also long term projections to help ensure that the ESPF will not be underfunded by 2019. The Chair added that the Institute of Fiscal Studies had recently reported that the percentage of GDP spent on the public sector had reached an all time low, there has been a retrenchment of the overall number of public sector workers in the past few years, and austerity is expected to continue for the next 6-8 years. This meant that it is unlikely that there would be an excessive increase in public sector pay. However, the report also projected tax increases in the next few years, and AE suggested that this could put pressure on demands for pay increases.

37.12     In reference to Item 11: Pension Fund Cost Analysis, the Chair observed that it was difficult to know whether the pension administration was good value for money because of the imprecision of benchmarking. He added that there was not a lot of variation in the costs since 2012/13 but it appeared that performance was going in the right direction.

37.13     Brian Smith (BS), Head of Operations, said that the CIPFA benchmarks were a comparison of 38 local authorities that had volunteered their performance figures and were not a complete picture; however, they were the best available comparison.

37.14     In reference to Item 14: Pension Fund Budget for 2017/18, the Chair asked how the budget would remain exactly the same for the next financial year. OO explained that this would be achieved by renegotiating fees with investment managers and the increase in the value of the fund.

37.15     The Chair asked whether the budget outturn for this financial year would be in line with the budget projections. OO expected that there would be an underspend as the Guaranteed Minimum Pension (GMP) reconciliation money committed for 2016/17 will not be committed this year.

37.16     BR asked whether the £100,000 committed to GMP reconciliation this year would be carried over to next year. OO said the £100,000 will be reinvested into the fund and the £120,000 for 2017/18 was a separate amount.

37.17     The Chair said that the £66,000 reduction in actuarial fees next year would be due to the fact that there was a triannual valuation during 2016/17. The £30,000 reduction in specific actuarial work on behalf of employers would be for the same reason. 

37.18     OO noted that there was an error in the variance in the cost of investment consultancy for 2017/18 which was £0 and not £8,000.

37.19     The Board RESOLVED

1) to note the Pension Committee reports; and

2) to recommend that the Pension Committee approve the Investment Strategy Statement (ISS) subject to the addition of an expanded description of how the ESPF influences investment managers to consider ESG factors when making investments.