Pension Fund Annual Report & Accounts 2019/20
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Pension Fund Annual Report & Accounts 2019/20 Front cover photo: Stover Country Park, © Stover Country Park PENSION FUND ANNUAL REPORT & ACCOUNTS 2019/20 Contents Forward from the Chair of the Investment and Pension Fund Committee 4 Report of the County Treasurer 5 Market Commentary from the Independent Investment Advisor 11 Pension Board Annual Report 16 Investment Pooling – Brunel Pension Partnership 18 Cost Transparency 21 Knowledge and Skills 24 Risk Management 26 Stewardship and Engagement 33 Climate Change and Carbon Footprint 41 Management of Fund 47 Managers Reports 50 Pension Fund Budget 63 Contributions by Employer 65 Peninsula Pensions Administration Report 68 Financial Statements: Statement of Responsibilities for the Statement of Accounts 78 Approval of the Statement of Accounts 78 Summary of Scheme and its Management 79 Financial Statements 83 Employing Bodies 121 Statement of the Fund Actuary 124 Audit Report 126 Additional Information: Investment Powers 129 Statutory Statements 130 The Fund’s Largest Equity Shareholdings 131 Scheme and Benefit Information 132 Glossary 134 Appendix A: Statutory Statements 136 3 PENSION FUND ANNUAL REPORT & ACCOUNTS 2019/20 Forward from the Chair of the Investment and Pension Fund Committee This annual report sets out the activities of the pension fund for the year ending 31 March 2020. During the year the Committee has been monitoring the progress of the triennial Actuarial Valuation, which provides a detailed assessment of the Pension Fund’s funding position, as well as setting employer contributions for the next three years. This showed the Fund had achieved significant progress to reach a 91% funding level. We have also been planning further transition of the Fund’s assets to the Brunel Pension Partnership, the company that we created along with 9 other LGPS funds, in July 2018. The Committee has also continued to review and update the Fund’s investment strategy. This has included strengthening the Fund’s policies around how we deal with climate change in our investments. We have also agreed to increase our allocation to infrastructure investments, which will include a significant investment in renewable energy. The performance of the Fund was significantly impacted at the end of the year by the impact of the Coronavirus pandemic on world markets, which undid much of the previous good progress in improving the funding level. While this has had a significant impact on the value of the Fund in the short-term, the LGPS as a long-term investor is able to manage the peaks and troughs of market volatility. LGPS defined benefit pensions are not directly linked to stock market performance and are set out in statute. LGPS Scheme members can therefore be assured that both their contributions and their pension, whether in payment or built up to date, will be unaffected. Finally, I would like to thank my fellow committee and board members, our independent investment advisor, Anthony Fletcher, and our officers for their commitment and support over the last year. Councillor Ray Bloxham Chairman, Investment and Pension Fund Committee Investment and Pension Fund Committee Attendance 2019/20 Name Date Appointed Date Resigned Meetings Attended Voting Members Cllr Ray Bloxham (Chairman) May 2018 4 (of 4) Cllr Yvonne Atkinson May 2017 4 (of 4) Cllr Alan Connett May 2017 1 (of 4) Cllr Richard Edgell May 2009 4 (of 4) Cllr Richard Hosking May 2014 4 (of 4) Cllr Andrew Saywell Jan 2019 3 (of 4) Cllr Lorraine Parker Delaz Ajete May 2014 2 (of 4)* Cllr James O’Dwyer May 2015 4 (of 4) Cllr Judy Pearce May 2019 4 (of 4) Donna Healy May 2015 3 (of 4) Non-Voting Members Colin Lomax May 2003 July 2019 0 (of 1) Roberto Franceschini May 1992 4 (of 4) Jo Rimron May 2014 4 (of 4) Stephanie Teague July 2019 3 (of 3) * Cllr Mark Lowry attended on one occasion as Cllr Parker Delaz Ajete’s substitute. 4 PENSION FUND ANNUAL REPORT & ACCOUNTS 2019/20 Report of the County Treasurer Over the course of the 2019/20 year, the value of the Devon Pension Fund decreased from £4.302 billion (as at 31 March 2019) to £4.011 billion as at 31 March 2020, a decrease of around £291 million. Up until the end of December, the Fund was performing well with a return of +7.6% for the financial year to date. But then the world was hit by the coronavirus pandemic. Global markets suffered huge losses, including the biggest fall of US and UK markets in a single day since 1987. As a result, the Devon Pension Fund’s investment return for the year, net of fees, was -8.0%. This was below the Fund’s strategic benchmark of -4.9%. The impact of the coronavirus on the world economy has been huge and much uncertainty remains. It is likely to take several years for the global economy to recover and this will present significant challenges to the management of the pension fund. The performance of the administration team has improved significantly following the restructure in 2018/19, and it is anticipated that this trend will continue as staff adapt to the new ways of working. Peninsula Pensions is now well-positioned to manage and respond to the ever increasing workloads and demands caused by a growth in the number of members and employers joining the fund, increases in requests for information and to ensure continued compliance with future regulations changes. The situation with Covid-19 presented a different challenge to overcome. Early action was taken to identify and mitigate potential risks from an operational perspective, and communications were issued to all fund members and employers explaining how the team intended to communicate and operate during the pandemic. Communication and technology, including ‘Member Self-Service’ (our online communication portal) and remote working, have enabled the team to continue to conduct business as usual and there has been no impact on service provision. Along with nine other Local Government Pension Scheme (LGPS) funds, the Devon Pension Fund is a shareholder in the Brunel Pension Partnership Ltd, a company set up to pool investment assets in order to reduce investment costs and improve risk management. Since the company was set up two years ago the Devon Fund has been gradually transitioning its investment assets. During the Autumn of 2019, the management of the global equities and emerging markets portfolios transitioned from Aberdeen Standard Investments across to Brunel, and management of the property fund assets transferred from La Salle to Brunel. By 31 March 2020, around 65% of the Devon Fund’s investment assets were under Brunel’s management. The Devon Pension Fund will continue to be responsible for deciding the strategic allocation between different asset classes to meet local investment objectives, but the Brunel Pension Partnership will be responsible for selection and monitoring of the external investment managers who will manage the investments. Summary of Financial Statements The financial statements and their purpose are summarised as follows: • Fund Account – The Fund Account sets out the Pension Fund’s income and expenditure for the year to 31 March 2020. The first section sets out the income received in contributions from employers and employees, and the expenditure on pension benefit payments. In recent years the annual income from contributions has been lower than the annual expenditure on benefit payments, with the gap bridged by investment income. However, in 2019/20 contributions income was higher as a result of a significant payment from one employer to pay off their pension deficit. The second section of the Fund Account shows the income received from the Fund’s investments and the cost of managing those investments. Investment income from listed equities and bonds is retained by the external investment managers for re-investment, but income from property, infrastructure and private debt is returned as cash and can be used to offset any shortfall between contributions and benefit payments. The Fund Account also shows that there has been a decrease in the capital values of the Fund’s investment assets of £395 million over the last year. 5 PENSION FUND ANNUAL REPORT & ACCOUNTS 2019/20 • Net Asset Statement – The Net Asset Statement sets out the net assets of the Fund, in line with the IFRS based Code of Practice on Local Authority Accounting in the United Kingdom (the Code) and the latest Statement of Recommended Practice (SORP). Pooled investments include pooled Equity, Fixed Interest, Property, Infrastructure and Private Debt Funds and they are incorporated into those categories in reviewing the Asset Allocation of the Fund in a later section of my report. Investment Performance As indicated above, the asset value of the Fund at the end of the 2019/20 financial year was £4.011 billion. This represents an investment return of -8.0% net of fees, compared with the Fund’s internally set strategic benchmark target of -4.9%. As set out above, the impact of the coronavirus on world markets has been severe, resulting in significant negative returns over the last quarter. The Fund’s strategic benchmark is set as an average of the benchmarks for each of the investment portfolios, weighted according to the Fund’s strategic asset allocation targets. The diversified growth funds have a cash plus target, meaning that their benchmark will be to achieve a positive return against cash. Given the market circumstances of the quarter to March, achieving a positive return was an unrealistic expectation, and their performance also did not hold up as well as would have been expected. The negative returns they experienced were the major reason that the Fund underperformed its strategic benchmark. The specialist equity funds also significantly underperformed, with their more concentrated holdings including a couple of companies severely impacted by the crisis.