Greater Gwent (Torfaen) Pension Fund Annual Report & Accounts Cronfa Bensiwn Gwent Fwyaf (Torfaen) Adroddiad Blynyddol a Chyfrifon 2019/2020 Published subject to audit Nigel Aurelius, CPFA Assistant Chief Executive Resources www.gwentpensionfund.co.uk Index Contents Page Number Statement of Responsibilities for the Pension Fund 1 Chairs Introduction 2 Chief Officers Introduction 3 Overview 4 Governance and Financial Performance 6 Asset Pooling 21 Investment Policy and Performance 26 Administration Report 36 Fund Policies 47 Greater Gwent (Torfaen) Pension Fund 55 Actuarial Statement Report on the Audit of the Financial Statements 57 Pension Fund Accounts 59 Appendices 95 Pension Fund Annual Report 2019/2020 Statement of Responsibilities for the Pension Fund Accounts The Council’s responsibilities as Administering Authority The Council is required to: make arrangements for the proper administration of its financial affairs and to secure that one of its officers has the responsibility for the administration of those affairs. In this Council, that officer is the Assistant Chief Executive (Resources); manage its affairs to secure economic, efficient and effective use of resources and safeguard its assets; approve the Pension Fund accounts. The Assistant Chief Executive (Resources)’s Responsibilities The Assistant Chief Executive (Resources) is responsible for the preparation of the Pension Fund accounts in accordance with proper practices as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom (the Code). In preparing the Pension Fund accounts, the Assistant Chief Executive (Resources) has: selected suitable accounting policies and then applied them consistently; made judgements and estimates that were reasonable and prudent; and complied with the Code. The Assistant Chief Executive (Resources) has also: kept proper accounting records which were up to date; taken reasonable steps for the prevention and detection of fraud and other irregularities. The Assistant Chief Executive (Resources)’s Certificate I certify that the Pension Fund accounts give a true and fair view of the financial position of the Greater Gwent (Torfaen) Pension Fund at the accounting date and its income and expenditure for the year ended 31 March 2020. Signed by: Nigel Aurelius, CPFA Assistant Chief Executive (Resources) Date 1 Pension Fund Annual Report 2019/2020 CHAIRS INTRODUCTION Welcome to this year’s Pension Fund Annual Report and Accounts. Whilst the subject of Pensions may not always be the hot topic of conversation around the dinner table, for those working in the area of pensions, it is ever changing, increasingly challenging and never ceases to provide surprise and uncertainty. This year has been no exception. The year has seen the prospect of further scheme changes via the application of the Governments overall cost cap control mechanism of the scheme. This was then, almost immediately, placed on hold by the ramifications of the McCloud age discrimination case affecting all public sector pension schemes before Brexit uncertainty and then the Covid-19 pandemic took centre stage. All these factors impact the Pension Fund and require us to think both longer term for our scheme members and the Fund employers whilst we must also be able to act more nimbly to support shorter term requirements. I am however delighted to have the opportunity to provide an introduction to this year’s Pension Fund Annual Report after such a year. We have, as ever, tried to place the service to our members at the forefront of what we do and in this context, I can only hope that this time next year, the world has returned to a more stable and safer place for the benefit of all of our scheme members, whether working or retired. Governance In 2019/20, the Fund’s Pensions Committee met regularly, with a particular focus on investment strategy, managing risks and collective pooling arrangements. Significant steps on our responsible investor journey have also taken place together with undertaking the latest Actuarial Valuation of the Fund which showed a healthy increase in funding level as at March 2019. The Fund continues to look to manage investment risk and it is pleasing that the diversified approach taken towards the Fund’s investments has provided some degree of protection against the extremely difficult market conditions experienced in the first 3 months of 2020 caused by the Covid-19 pandemic. Pooling The Wales Pension Partnership (WPP) is the all Wales collective investment pooling arrangement which implements the investment requirements of all 8 LGPS funds in Wales, once each has determined its own investment strategy. The aim is to achieve economies of scale in investment management fees together with improved investment returns. This year has seen further work and the Fund has placed its UK equities into the Pooling arrangements. Extensive work has also been taking place to develop a range of policies that support the wider governance arrangements of the Pool. The Torfaen Fund has to date already placed almost half of its assets within collaborative arrangements with further moves planned for next year in respect of Fixed Interest and other equity classes. Responsible Investing I mentioned last year that the Fund is undertaking more work than ever in the area of Responsible Investing and 2019/20 has seen further tangible progress towards our goal to reduce carbon emissions across the Fund by moving all our passive, index tracker funds (almost £600m) into a low carbon product designed to reduce emissions on that part of the Fund by 80%. Notwithstanding this step, and conscious of the demands of climate change, the Fund continues to look at ways it can further reduce its carbon footprint which remains an ongoing priority into the future. Chair of Pensions Committee Councillor Glyn Caron 2 Pension Fund Annual Report 2019/2020 CHIEF OFFICERS INTRODUCTION Administration This year has been a busy year with a variety of governance and reporting requirements on the agenda including consideration of the Pensions Regulator Report on Governance and Administration Risks in the LGPS, agreement of a Responsible Investment Policy Framework including a Climate Change Policy, appointment of Northern Trust as the new global custodian, developments with the implementation of the cost cap and the effect of the McCloud judgement, the implementation of quarterly reviews of the risk register, the 2019 Actuarial valuation and continuing work to reconcile Guaranteed Minimum Pensions. This is of course all in addition to the core work of the section which is focussed on administering the benefits of members including the payments to our pensioners. At the same time, the need for improved cost efficiencies and transparency has continued via increased performance reporting for the Pensions Regulator and Scheme Advisory Board. Membership numbers have again increased during the year by 1.5% to 61,120 as at 31st March 2020 with both active (+1.1%) and pensioner (+4.3%) membership increasing but offset in part by a reduction in deferred members (-0.7%). The net effect is that active contributors remain at about 40% of the total fund membership with the balance split fairly equally between pensioners and deferred benefits. Workloads have continued to increase in most areas with over 14,000 (+7.5% on 2018/19) core tasks being undertaken around retirements, deferred members, transfers and deaths in service. The ‘My Pension Online’ (MPO) service now has approaching 22,000 (35%) scheme members signed up with almost 50% of active members using the service. Active and Deferred members once again received their Annual Benefit Statements via the member portal and Pensioners are now also able to access their payslips and P60s via ‘MPO’. The Team has also continued to work closely with employers, to encourage the use of Employer Self Service. Investments In the last 12 months, the Fund has agreed a revised strategic asset allocation together with an updated Funding Strategy Statement from 1 April 2020. The year has however been extremely challenging with the positive progress of the first 9 months all washed away by falls of between 25%- 30% in Equity markets in early 2020 as the ramifications of the Covid-19 pandemic became evident and many economies effectively shut down. This period has been one of the most dramatic on record and the road to recovery will take time and will be uncertain. Over the 12 month period, the Fund had a negative investment return of -7.05% with a fall in the final quarter of almost 15%. This could have been higher but the Funds diversification to Alternatives and Fixed Interest acted as a cushion to some of the extreme equity falls. The Fund market value therefore reduced from £2,929 million to £2,728 million by the year end. Longer term performance as shown elsewhere within this report was also adversely affected by such large short term changes. The strategy for the Fund however remains long term and the spread of investments will rebuild lost ground over future reporting periods. I would like to thank all the staff of the Pension Fund for their commitment and hard work towards delivering a quality service, especially during the current challenging environment. Staff continue to place the scheme members first and this is clearly valued by our members, together with those charged with the governance of the Fund. And finally. This year sees the retirement of Graeme Russell as the Head of Pensions to the Fund. Graeme has been involved with the Fund for nearly thirty years from Gwent County Council days. He leaves the Fund in good health and well positioned to continue to take the advantages that pooling within the Wales Pension Partnership presents. On behalf of the Greater Gwent (Torfaen) Pension Fund I wish Graeme a long and happy retirement and thank him for his considerable contribution over such a long period.