Suffolk Pension Fund Annual Report and Accounts 2017-18 Pension Fund Annual Report 2017-2018 1 CONTENTS Pension Fund Committee Chairman’s Report Pension Board Chairman’s Report Head of Finance Report Management Structure Management Report Investment Report Governance Report Corporate Social Responsibility and Voting Report Administration Report Employers in the Fund ACCESS Pension Fund Accounts 2017-18 Additional Statements (published on the Pension Fund website www.suffolkpensionfund.org ) Governance Policy Statement Governance Compliance Statement Investment Strategy Statement Funding Strategy Statement Actuarial Report Administration Strategy Voting Policy Statement Communication Policy Pension Fund Annual Report 2017-2018 2 Pension Fund Committee Chairman’s Report As Chairman of the Suffolk Pension Fund Committee, I am pleased to introduce the Pension Fund’s Annual Report and Accounts for 2017-18. The value of the Suffolk Pension Fund was £2.762 billion at 31 March 2018, which was an increase of £114m in the year. The Fund administers the local government pension scheme in Suffolk on behalf of 262 separate employers and just over 60,000 scheme members. The Pension Fund Committee is responsible for managing the Fund, with the assistance of council officers, external advisors and professional investment managers. Council elections brought some changes to the Pension Fund Committee and I would like to extend my thanks to all the members of the Committee for their service to the Pension Fund during the year. The Fund achieved an investment return of 4% in 2017-18, which was 0.8% lower than the benchmark return for the mix of asset classes in which the Fund invests. These returns are in line with the actuary’s assumptions for future investment returns. The estimated funding level is 92.2% as at 31 March 2018. Over three years the annual return has been 7.6% per annum, and over ten years 7.0%. The 2016-17 financial year produced very strong investment returns, particularly from overseas investments, with the devaluation of sterling following the Brexit vote significantly increasing the value of the Fund’s overseas assets. The Committee considered measures at its March 17 meeting to protect some of the currency and equity gains it had achieved. These were implemented in April 2017. At its meeting in December 2017, the Committee made a further decision to decrease the equity exposure of the Fund by reducing its equity investment allocation to 42% (from 46.5%) thereby reducing the market volatility risk the Fund is exposed to. This was implemented in December just before the equity markets fell in January 2018. The pooling of assets through ACCESS (A Collaboration of Central, Eastern and Southern Shires) with other Pension Funds has continued in its development. The combined assets under management at 31 March 2018 was £43 billion. A Joint Committee was formally established, which I chair, to oversee the governance and the work of the pool, and the operator. After a competitive tendering process, Link Financial Services was appointed as the FCA regulated operator and work has commenced in creating the sub-funds to pool assets with the other funds in the pool. The physical pooling of assets will commence during 2018. A collaborative tendering exercise was carried out during the year with the other ACCESS Pension Funds that invest in index tracking funds to appoint a sole investment manager to oversee these mandates. UBS were appointed and approximately £11 billion of assets were transitioned during January and February 2018 with significant management fee savings secured. Councillor Andrew Reid Chairman of the Pension Fund Committee May 2018 Pension Fund Annual Report 2017-2018 3 Pension Board Chairman’s Report It is a pleasure to introduce the Suffolk Pension Board’s annual report, which is incorporated within the Suffolk Pension Fund annual report and accounts for 2017-18. The Board was established in 2015 to help ensure that the Suffolk Pension Fund is managed and administered effectively, efficiently, and complies with the code of practice on the governance and administration of public service pension schemes issued by the Pension Regulator. This means making sure the Fund is compliant with all relevant legislation with the aim to safeguard the interest of all Pension Fund members and associated employer organisations. There are six members of the Suffolk Pension Board, with half of the Board members representing the employers in the Fund and the other half representing scheme members (active members, pensioners and deferred pensioners). The Board continues to engage with the employers of the Fund organising the annual Employers’ meeting in September in conjunction with the Pension Fund Committee. This year the meeting covered the work of the Pension Board and the Pension Fund Committee. The actuary covered the funding position and the current conditions and developments which could affect the 2019 triennial valuation and in addition presented a very useful session on interpreting the pension accounting requirements for employers accounts. There was also a session on the self-service module for members and an overview of employers responsibilities regarding ill health retirements. The event received plenty of positive feedback and had its best-ever attendance. The Board continues to focus on the monitoring and holding to account the administration function of the Fund. With growing membership and ever-increasing complexity, scheme administration relies very heavily on the diligence and experience of the Pension Fund officers to ensure that members receive meaningful information and accurate benefits at the appropriate time. The Pension Fund continues to deliver these and to improve communications with members with further developments of the member self service module which allows members to have instant access to their records, enabling them to update their personal data, run pension projections and access their annual benefit statements. As part of its governance responsibilities the Board also monitors the compliance of the employers to meet their obligations for returning data and paying over the pension contributions on time which contributes to the effective administration of the scheme. The Board has received at each meeting, an update on the progress of the ACCESS (A Collaboration of Central, Eastern and Southern Shires) pool which will have a significant impact on resources of the Fund in future years. The next annual employers meeting will be held on 21 September 2018. Richard Smith MVO Chairman of the Suffolk Pension Board May 2018 Pension Fund Annual Report 2017-2018 4 Report from the Head of Finance Foreword to Annual Report and Accounts I am delighted to be introducing my first annual report and accounts after taking over the S151 responsibility from Geoff Dobson who retired on 31 May 2017. This has been a challenging year for the Fund with the volatility of the investment markets and the ongoing work to establish the ACCESS asset pool. The Suffolk Pension Fund Annual Report and Accounts sets out the Pension Fund’s income and expenditure and its assets and liabilities for the financial year ended 31 March 2018, the governance arrangements for administering the scheme and the work carried out by the Pension Fund Committee, Pension Fund Board and the Pension Fund officers throughout the year. There are also a number of policy statements and these disclosures which form part of the prescribed content of the Annual Report, are published as separate documents on the website of the Fund (www.suffolkpensionfund.org). Business Plan The Committee approves a business plan at the start of each financial year. This provides a mechanism for the Committee to ensure that its responsibilities for the Fund are carried out effectively. They key actions for 2017-18 are as below: Actuarial Valuation and Funding Strategy Statement The Fund is required to obtain an independent actuarial valuation of its assets and liabilities every three years. The most recent valuation took place during 2016-17. The actuarial deficit was £216 million at March 2016 (£468 million – March 2013) and the assets represented 91.1% of its liabilities at that date. The Funding Strategy that was approved in February 2017, following the 2016 actuarial valuation sets out the Pension Fund Committee’s approach to funding the liabilities of the Fund, in order to recover the deficit and bring the Fund to a fully funded position over the medium to long-term. The statement is developed on the basis of prudence, stability and affordability as the Pension Fund Committee recognises there is a balance to be struck between the Fund’s need for maintaining prudent funding levels and the employers need to manage their budgets and resources. The approach taken has tried to stabilise the contributions to mitigate any adverse impact that an increase to the contribution rate might have, by phasing in additional contributions over time where necessary. The next actuarial valuation will be undertaken as at March 2019 and the results of the valuation will determine the employer contributions that are required for the three years starting April 2020. The estimated funding level at March 2018 was 92.2% and the actuarial deficit at that date was £241 million. Higher investment returns compared with expected asset returns used in the financial assumptions in the valuation have had a positive effect on the current valuation although this has been in part offset by lower gilt yields and higher inflation which has increased the deficit. Investment Strategy The Fund’s investment objectives are set out in its investment strategy statement to achieve the objectives of the funding strategy statement as part of the triennial valuation exercise. There are significant levels of diversification between different asset classes to ensure that the assets of the Pension Fund, when taken in conjunction with future contributions, are sufficient to ensure that all future pension and retirements benefits will be fully covered by the Fund’s assets when they fall due, whilst maintaining the Fund’s relatively low risk approach.