eastsussex.gov.uk East Sussex Pension Fund Annual Report and Accounts 2019/2020 Contents 1. Chairmans report...............................................................................................................................3 2. Independent adviser’s report............................................................................................................ 5 3. Introduction .......................................................................................................................................6 4. Overall Fund Management ................................................................................................................ 7 5. Financial performance .................................................................................................................... 13 6. Investment policy and performance ............................................................................................... 16 5. Scheme Administration................................................................................................................... 23 6. Actuarial report on funds ................................................................................................................ 26 7. Fund account, net assets statement and notes ............................................................................ 33 a. East Sussex Pension Fund Account......................................................................................................... 33 b. Net Assets Statement for the year ended 31 March 2019.................................................................... 34 c. Notes to the East Sussex Pension Fund Accounts for the year ended 31 March 2020 .............. 35 8. Asset pools ...................................................................................................................................... 69 9. Pensions administration strategy report ....................................................................................... 73 10. Funding strategy statement ............................................................................................................ 74 11. Investment strategy statement ....................................................................................................... 75 12. Communications policy statement................................................................................................. 79 14. External auditor’s report ................................................................................................................. 80 2 1. Chairmans report Welcome to the East Sussex Pension Fund Annual Report for 2019/20 As Chairman of the East Sussex Pension Fund (ESPF) Committee, I have the pleasure in introducing the Pension Fund’s Annual Report and Accounts for 2019/20. I cannot do so without reflecting on the continuing COVID-19 pandemic that is having a devastating impact nationally and globally. The accounts focus on the financial implications of activity in 2019/20 and beyond, but the impact on humanity is truly beyond anything we have all experienced. I send my thoughts to all who have been affected by the pandemic. The membership of the ESPF at March 2020 was 76,792 people (active – 23,835, deferred – 31,622 and pensioners – 21,335) and in the region of 130 employer organisations, with £3.479bn funds under management at 31 March 2020 to meet the accrued benefits. This year saw the latest triennial actuarial valuation for the Fund. Hymans Robertson calculated the Fund’s assets at 31 March 2019 at £3.6bn. When compared to the projected liabilities of the Fund at £3.4bn, this represented a 107% funding level, indicating a strong solvency position, and reflecting strong investment returns. COVID-19 has negatively impacted on the Fund’s valuation, as the global economy struggles to understand and respond to the pandemic. However, the long-term 20-year assumptions within the valuation put the Fund in a strong position to weather the current uncertainties. The Pension Committee is responsible for managing the Fund, with the assistance of the Pension Board, East Sussex County Council officers, external advisors and fund managers. In responding to the national review of Good Governance, undertaken by Hymans Robertson, reporting to the Scheme Advisory Board and the Ministry of Housing, Communities and Local Government, the Committee, during 2019, established programme to work to review its own governance arrangements. The Committee has subsequently approved revised terms of reference for the Pension Board and itself, together with refreshing a range of policies and strategies, including Communication and Administration. The review also recognised that the number of officers supporting the Fund needed to be expanded; a new structure has been approved and recruitment is underway to fill new roles. All these actions place the ESPF in a great position to move forward and tackle the challenges ahead. The ESPF has experienced some stakeholder and external pressures to divest from companies involved in the production of fossil fuels. The Pension Committee’s Investment and Environmental, Social and Governance (ESG) Working Group, together with Hymans Robertson, have undertaken a review of the Fund’s Investment Strategy. This has reflected on the impact of the pandemic and helped to explore and frame the Fund’s approach to better aligning its investments with the risks and opportunities presented by sustainability and the energy transition. As a consequence, the Fund has made a number of substantial changes to its investment approach, raising its commitment to infrastructure assets, including renewable assets, acquiring exposure to Impact Funds who invest in companies addressing some of the world’s major challenges, and adopting an approach to passive index funds better aligned with the goals of the Paris Agreement. The Committee has also updated its investment beliefs, which are set out in its Investment Strategy Statement, and more fully articulated its Responsible Investment Policy. The Committee believes in applying long-term thinking in pursuit of long-term sustainable returns from well governed assets; while using evidence based long-term investment appraisal to inform decision making in the implementation of its responsible investment principles, consistent with its fiduciary responsibilities. It will continue to evaluate and manage the Fund’s carbon exposure in order to mitigate risks associated with Climate Change, while seeking to reconcile its need for income to pay pensions with the fact that many of the more carbon intensive companies and sectors provide a significant proportion of the market’s dividend income. ESPF continues to favour engagement with companies and sectors over blanket divestment as it believes that this is the most effective strategy for promoting change and protecting its long run investment interests. However, the extent of its exposure to them will reflect an ongoing assessment of progress in engaging with the energy transition, and the associated risks and rewards of holding these assets in the Fund. The Fund does not own stocks directly but seeks to influence company and sector policies via its chosen investment managers. Its Climate engagement is broadly aligned with that of the Institutional Investor Group on Climate Change (IIGCC), representing over $33 trillion in assets, of which it is a member. 3 East Sussex has continued to be an active member in the ACCESS (A Collaboration of Central, Eastern and Southern Shires) investment pool, together with 10 partner LGPS Funds. By the end of 2019/20 a total of £21.4bn (49%) was invested on the ACCESS platform, in the following assets: £ billion Passive investments* 10.5 UK Equity Funds 1.6 Global Equity Funds 7.2 UK Fixed Income 0.8 Diversifed Growth 1.3 Total Pooled Investments 21.4 *The passive investment funds are held on a pool governance basis under one investment manager as these assets are held in life fund policies, which cannot be held within an authorised contractual scheme. The Pension Committee and Pension Board have worked tirelessly to transform the ESPF landscape. I would like to take this opportunity to express my thanks for all the support and input provided by Committee and Board members and officers. I look forward to continuing to work with members and officers in the new financial year as the Fund seeks to meet the challenges of an ever-changing national and global environment. In presenting the Annual Report, I hope you find it helpful in underspending the Fund. Councillor Gerard Fox Chairman of the East Sussex Pension Fund September 2020 4 2. Independent adviser’s report The Fund receives formal advice on investment matters from its actuarial and investment consultants. My role as Independent Advisor is primarily to act as a separate source of insight to Officers and Committee members. Our collective objective is, of course, to invest the Fund’s assets to pay members’ pensions in full and on time. I am additionally able to provide stakeholders with some independent assurance that the Fund is being appropriately and properly managed. Last year I ended my report by saying that the fund was in a good position financially, but that the Fund’s increasing maturity makes it likely that net cashflow will deteriorate over time and this would require increasing attention. At March 2019 the actuarial valuation found that the Fund’s assets were well in excess of its liabilities, which is undoubtedly a healthy position.