2019 ANNUAL REPORT 1 2 Contents Chair’s Introduction 4 Management structure 6 Attendance & training 9 GMPF Local Pension Board 12 Top 20 equity holdings 15 Investment report 16 Approach to Climate Risk 34 Voting activity 38 Financial performance report 39 Statement of accounts 44 Actuarial statement 86 Scheme administration 89 Employer contribution rates 99 The LGPS at a glance 118 Glossary 121 Policy Statements 125 - Funding Strategy Statement 126 - Governance Policy 146 - Governance Compliance Statement 150 - Core Belief Statement 156 - Investment Strategy Statement 158 - Responsible Investment Policy 168 - Communications Policy 178 - Pension Administration Strategy 182 Useful contacts 189 3 Chair's Introduction Welcome to the 2018/19 Annual Report of the Greater Manchester Pension Fund (GMPF). The time covered during this report has been one of the most turbulent in the world of pensions in recent memory. Ongoing concerns over global trade wars and a rush to sell-off IT stocks have contributed to significant volatility in global equity markets, particular over the Christmas period. Along with much of the rest of the country, we are also continuing to experience uncertainty surrounding any deal around Brexit. However, thanks to the hard work of our managers, advisors and partners, I am pleased to announce that the current value of the Fund stands at £23.8 billion. This is both a higher funding level than that identified in the previous valuation and on track compared to actuarial expectation. In September, we also received the welcome news that GMPF is now ranked as the 11th biggest pension fund in the UK (up from 12th last year) and the 153rd biggest in the world (up from 160th last year) according to the annually updated index of Global Pension Funds. Whilst the returns for this year were behind benchmark the performance long term for GMPF is ahead of both specific and peer group benchmarks. Main Fund Benchmark return Period return % pa % pa 2018/19 5.6% 6.7% 5 years 8.6% 8.5% 10 years 10.6% 10.3% 25 years 8.1% 7.6% This doesn’t mean that we intend to rest on our laurels. At the time of this report’s release GMPF is working with our Director of Pensions and our consultants, Hymans Robertson, to look at what can be done to make sure that GMPF’s governance remains not only the best in UK local government, but an exemplar for pension funds worldwide. It is our hope that success in this task would bring about a “governance dividend”, benefitting stakeholders through improved risk adjusted investment returns and greater resilience in the face of investment and regulatory uncertainty. I expect to be able to update you on the progress of this endeavour in the near future. It has also become increasingly apparent this year that the Pension Fund’s response to the generational challenge presented to us by climate change and environmental protection is an area of significant concern for many of our members and stakeholders. The GMPF has no direct investment in fracking companies, and we pledged in 2017 to become 100% net carbon neutral by 2050. GMPF has undertaken exercises to understand our own carbon footprint in order to have a clear baseline from which to measure our progress going forward. Progress will be regularly evaluated, taking care to ensure that we avoid stranded assets and can deliver pensions to our members in a way that remains affordable and sustainable for employers and taxpayers. We are also the biggest local government pension investor in renewable and efficient energy, with a half a billion allocated in a number of areas including biomass assets and a significant stake in the Clyde wind farm, one of the largest off-shore facilities of its kind in Europe. These efforts to date have been recognised by the House of Commons Environmental Audit Committee, noting we have the highest levels of engagement to manage the risks that climate change poses and we are continuing to actively seek opportunities wherever possible to meet our goal for carbon neutrality before the 2050 deadline. We will also use our position on the Local Authority Pension Fund Forum to challenge companies in which we have an interest to direct their own efforts towards environment sustainability and other issues of concern to the Fund and its members. We stand by our track record of engagement over the past year, including joining the campaign set up by the New Zealand Super Fund to encourage social media companies to strengthen controls to prevent the live streaming and distribution of objectionable content following the horrific shooting that took place in Christchurch. The Fund also co-filed a resolution requesting that BP set out a business strategy consistent with the goals of the Paris Agreement on climate change, which we understand will be supported by BPs board at their Annual General Meeting this year. It is because of this history of successful and productive dialogue that 80% of our members agree that a consultative approach is more effective than divesting holdings to others who may not share our commitment to responsible investment and engagement. With this in mind, we also refreshed and published on our website our Responsible Investor Policy, with support from our Ethical, Social & Governance advisor PIRC. Let nobody tell you otherwise, fighting the climate crisis is one of our highest priorities. Failure to deliver on this will not just threaten the viability of the Pension Fund, it will threaten the viability of our economy, our society, and our planet as a whole. 4 This needs to be addressed within the fiduciary duty that the Fund and its trustees owes to its members, stakeholders and ultimately the taxpayer. We have to demonstrate that our investment decisions do not threaten its financial performance, and the fact of the matter is over the last 3 years, we achieved over £400 million more in returns than if we had divested from equities in such companies such as BP or Centrica, formerly known as British Gas. Earlier in the year we signed up to ‘Just Transition’ because we know delivering a just transition will be key to the UK’s success in building a zero-carbon and resilient economy. However, we also know we need to do this in a sustainable way that supports an inclusive economy, with a particular focus on workers and communities across the country. The Paris Agreement on climate change states that its Parties take into account “the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with nationally defined development priorities”. Accordingly, with such clear evidence that disinvestment rushed at this stage would cause material financial detriment to the fund, we need to find a ‘Just Transition’, which ensures we do not transfer the burden of this cost to the employers and taxpayers of Greater Manchester alike, which would result in significant Council tax hikes, and importantly avoids job loses for residents across the conurbation who are employed in these industries. As part of a recent review of investment strategy we are currently implementing £2.5 billion of the fund assets being divested to a low carbon approach targeting a significant reduction in carbon footprint and intensity. This is the undoubtedly the biggest divestment commitment but more importantly actual action taken by any Local Authority Pension Fund taken anywhere in the UK. GMPF, in partnership with the Merseyside and West Yorkshire Pension Funds, is continuing to blaze a trail in asset pooling of local government pension schemes, particularly in alternative assests. The Northern Local Government Pension Scheme (LGPS), formerly known as the “Northern Pool”, now stands as one of Britain’s largest public investment funds with combined assets of over £46 billion, almost a fifth of the total LGPS assets. Even at this early stage, the work of the Northern LGPS has pooled almost £2 billion in private equity and infrastructure vehicles. However, as many of you may be aware, we have been troubled since the beginning of the year by new requirements from the government for all pools to create an asset management entity, regulated by the Financial Conduct Authority, with responsibility for selecting managers for the member funds. Our view on this, supported by legal advice from public law expert Jason Coppell QC, is clear. The Northern LGPS can call on significant internal expertise and has a track record of running efficient investment models from a cost perspective. Far from lowering our costs, establishing an FCA-regulated company would set us back £10-15 million. Representatives from the Fund are currently in constructive discussions with the Ministry for Housing, Communities and the Local Government and the LAPFF All Party Parliamentary Group on the issue. We are also making good on our commitment to harnessing the financial power and unique long-term outlook of pension funds to drive regeneration and investment in Greater Manchester and beyond, while at the same time providing a commercial return that will allow us to continue to meet our obligations to our 370,000 members. The highlight of our efforts last year was undoubtedly the topping out of the Deansgate Square development in November. Based in the southern edge of the city centre, the development consists of four skyscrapers, one of which now stands as not only the tallest building in Manchester, but the tallest building in the country outside of London. Once complete it will provide first-class accommodation and amenities in the very heart of Manchester, and become the catalyst for the regeneration of an area of the city that has lain derelict for years.