County Hall Beverley East Riding of Yorkshire HU17 9BA Telephone (01482) 393939 www.eastriding.gov.uk Darren Stevens Interim Director of Corporate Resources
To: Local Pension Board Members Your Ref: Our Ref: Agenda/LPB/IE/KM Enquiries to: Iain Edmiston E-Mail: [email protected] Tel. Direct: (01482) 393208 Date: 26 October 2017
Dear Councillor
I hereby give you notice that a meeting of the LOCAL PENSION BOARD will be held at COUNTY HALL, BEVERLEY on FRIDAY, 3 NOVEMBER 2017 AT 2.00PM.
The business to be transacted is as set out below.
Yours sincerely
for Darren Stevens Interim Director of Corporate Resources
Pensions Committee 10.30am – 12pm
Employer Annual General Meeting 12.30pm – 1.30pm
Lunch 1.30pm – 2.00pm
East Riding Pension Fund Local Pension Board (2.00pm – 3.30pm)
A G E N D A
1. Chairman’s welcome.
2. Election of Chairman.
3. Declarations of Interest.
4. Approval of Minutes from the Local Pension Board meeting held on 30 June 2017. (pages 1 - 4)
5. Review of Local Pension Board’s Terms of Reference. (pages 5 - 9)
Caroline Lacey Chief Executive
6. Local Pension Board Work Plan 2018. (pages 10 - 12)
7. Local Pension Board Training Programme 2018. (pages 13 - 25)
8. Update on Scheme Employer Year End Return Exercise 2016-17. (pages 26 - 30)
9. Pension Fund Annual Report and Accounts 2016-17. (pages 31 - 182)
10. Consultation on Academies Objectives. (pages 183 - 242)
11. Items for Information:
(i) Pension Committee Minutes (pages 243 - 248)
21 July 2017 29 September 2017
(ii) LAPFF Business Meetings – June 2017 (pages 249 - 251)
12. Any other item(s) the Chairman decides are urgent.
The Board is asked to consider excluding the press and public from the meeting for consideration of the following items on the grounds that they are likely to involve the disclosure of exempt information as defined in paragraph 3 of Part 1 of Schedule 12A of the Local Government Act 1972. In making its decision, the Board is asked to confirm that, having regard to all circumstances, it is satisfied that the public interest in maintaining the exemption outweighs the public interest in disclosing the information.
13. Pension Fund Annual Performance Review 2016-17. (pages 252 - 267)
14. Shareholders Voting Records – Quarters Ended 30 June 2017 and 30 September 2017. (pages 268 - 287)
15. Update on Border to Coast Pension Partnership. (pages 288 - 293)
Under the Openness of Local Government Bodies Regulations 2014 members of the public may film, record, take photographs or use social networking during Council meetings that are open to the public. Members of the public who do not wish to be filmed during meetings should make this known to the committee manager prior to the start of the meeting. Democratic Services kindly requests advance notice from anyone wishing to film, record or take photographs during open meetings so that suitable provision can be made.
East Riding of Yorkshire Council will, on request, provide this document in Braille, audio or large print format. If English is not your first language and you would like a translation of this document into any other language, please telephone (01482) 393939. 4
EAST RIDING OF YORKSHIRE COUNCIL
LOCAL PENSION BOARD
30 JUNE 2017
PRESENT: Councillor A Burton (in the Chair), Caroline Bell, Julie Davey and Martin Eaden.
Also in attendance: Darren Stevens (Interim Director of Corporate Resources), Julian Neilson (Head of Finance), Graham Ferry (Pensions Manager), Mark Lyon (Head of Investments) and Jennifer Gregory (Assistant Pensions Manager).
Also in attendance: Press - 0 Public - 0
The Board met at Goole Leisure Centre.
65 APOLOGIES FOR ABSENCE - Apologies for absence were submitted on behalf of Peter Doherty and Natasha Halsall.
66 ELECTION OF CHAIRMAN - Nominations were sought for the position of Chair however in the absence of two members of the Board it was considered appropriate to elect a Chairman for this meeting only.
Resolved - (a) That Councillor Burton be elected Chairman for this meeting, and
(b) that the election of Chairman be added to the agenda for the next meeting.
67 DECLARATIONS OF PECUNIARY AND NON-PECUNIARY INTEREST - All members of the Board declared a non-pecuniary interest in Minutes 69 to 79 as members of the Local Government Pension Scheme.
68 MINUTES - Resolved - That the minutes of the meeting of the Local Pension Board held on 17 February 2017 be approved as a correct record.
69 REVIEW OF INTERNAL CONTROLS AND ASSURANCE REPORTS - The Interim Director of Corporate Resources submitted a report that covered the findings of the work undertaken to assess the internal controls and procedures in place at:
• Schroder Investment Management Limited, the Pension Fund’s external investment manager.
• State Street Global Services, the Pension Fund’s global custodian.
• Investments Section, the Pension Fund’s internal Investment Manager, and
• Pensions Administration section.
The conclusions of each of the reports were that each of these managers had adequate risk controls and procedures in place.
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The reports provided assurance that controls in place over investment and cash operations, custody, and pension administration were effective.
Resolved - That the report be noted.
70 REVIEW AND OUTCOME OF THE PROCUREMENT PROCESS FOR ACTUARIAL SERVICES - The Interim Director of Corporate Resources submitted a report which informed the Board that the contract for the provision of actuarial services to the East Riding Pension Fund was awarded to Hymans Robertson for the period from 1 April 2017 to 31 March 2020 with an option to extend until 31 March 2023 through Norfolk County Council’s National LGPS Framework for Actuarial, Benefits and Governance Consultancy Services.
The Fund was looking to introduce further initiatives with Hymans Robertson to further improve Fund performance, some of which would enable the Fund to encourage employers to have a greater understanding of their ongoing funding position rather than have it assessed once every three years as part of the triennial valuation.
Following the 2016 valuation, the Fund was commended by Hymans Robertson for the high quality of data submitted by the Fund. The Fund would continue to develop methods of regular data cleansing using the Hymans software tools to ensure data remained of the highest quality.
Resolved - That the report be noted.
71 ACTUARIAL VALUATION AS AT 31 MARCH 2016 - The Interim Director of Corporate Resources submitted a report which provided the Actuarial Valuation for the East Riding Pension Fund as at 31 March 2016. It confirmed the initial draft results of the 2016 Actuarial Valuation which were presented to the Pensions Committee and the Local Pension Board on 4 November 2016 and subsequently issued to Scheme employers during December 2016.
The employer contribution rates for 2017-20 had been set and confirmed by the Fund’s Actuary, Hymans Robertson, in the Rates and Adjustments Certificate section of the 2016 Actuarial Valuation Report. The Report was issued to all Scheme employers on 31 March 2017 and published on the East Riding Pension Fund website.
Resolved - That the report be noted.
72 PENSION FUND RISK REGISTER - The Interim Director of Corporate Resources submitted a report which presented the six monthly review of the Pension Fund’s risk register and associated scoring matrix. Minor amendments had been made to the existing risks and no new risks had been identified.
As well as the Risk Register, the report contained the record of breaches of the legal requirements that govern the Pension Fund. There were two new breaches recorded as a result of failure to provide the relevant information to Scheme members.
Resolved - That the contents of the Risk Register be noted.
73 UPDATE ON SERVICE LEVEL AGREEMENTS WITH SCHEME EMPLOYERS - The Interim Director of Corporate Resources submitted a report which reminded the Board that on 26 February 2016 approval was given for the introduction of a Service Level Agreement between the East Riding Pension Fund and its Scheme employers to
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help manage the performance of Scheme employers and to improve engagement due to the increasing numbers of Scheme employers within the Fund. On further investigation, the Fund would like the Board to consider using a Pension Administration Strategy as allowed under Regulation 59 of the Local Government Pension Scheme Regulations (2013) as an alternative to an SLA. The draft Pension Administration Strategy was attached to the report and outlined key methods of communications between the Fund and its Scheme employers and set out the levels of performance required from both parties. Under Regulation 59, the Fund was required to consult with the Scheme employers regarding the contents of the Pension Administration Strategy which will increase employer engagement and encourage ownership of their statutory responsibilities. The Board was requested to consider a formal process for Scheme Employers identified as underperforming so that unsatisfactory performance could be well managed and the risk to the Fund minimised.
Resolved - (a) That the Board approve the implementation of a Pension Administration Strategy for all Scheme employers instead of an SLA;
(b) that a formal process for underperformance be agreed and implemented to deal with the Scheme employers that consistently underperform the targets agreed in the Pension Administration Strategy, and
(c) that the Board note the proposal to introduce a charge for the additional administration caused by the underperformance and that it is levied on the Scheme Employer.
74 SCHEME EMPLOYER YEAR END RETURN EXERCISE 2016-17 - The Interim Director of Corporate Resources submitted a report which detailed the progress to date for the 2016-17 year end exercise. All Scheme employers were required to submit year end returns which included member pay details so that the East Riding Pension Fund could issue annual benefit statements on time. The Board was reminded that in 2014-15 the Fund had breached Regulation 89 by not issuing Annual Benefit Statements by 31 August 2015 and this was reported by the Fund to The Pensions Regulator.
As at 30 June 2017, of the 260 data files required, 206 files had been accepted, 10 were currently being processed, 34 had been rejected and a further 10 had not been received from the employer.
Resolved - (a) That the report be noted, and
(b) that a further update be brought to the next meeting.
75 DRAFT ANNUAL REPORT OF THE LOCAL PENSION BOARD FOR THE PENSION FUND REPORT AND ACCOUNTS - The Interim Director of Corporate Resources submitted a report which informed the Board that East Riding of Yorkshire Council as administrating Authority had the prime responsibility for establishing the East Riding Pension Fund Local Pension Board and it was therefore appropriate and consistent with good governance for the Board to produce an annual report for inclusion in the East Riding Pension Fund Annual Report and Accounts for 2016-17. The reporting requirements were for the Board and the Fund to determine. A draft report had been prepared for consideration and members gave their views on the contents.
As part of the Board’s ongoing training requirements it was suggested that the Board attend the Pensions Committee meeting and Annual General meeting to be held on 3 November 2017.
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Resolved - (a) That the draft annual report be approved, and
(b) that the autumn meeting of the Local Pension Board be rescheduled to coincide with the Pension Committee meeting and Annual General meeting on 3 November 2017.
76 ITEMS FOR INFORMATION - The Board were presented with the Pension Committee minutes from 17 March 2017 and 5 May 2017 and the reports of the LAPFF business meetings held in January 2017 and April 2017.
Resolved - (a) That the minutes of the Pensions Committee held on 17 March 2017 and 5 May 2017 be received, and
(b) that the reports on the LAPFF business meetings held in January 2017 and April 2017 be noted.
77 EXCLUSION OF THE PRESS AND PUBLIC - Resolved - That the press and public be excluded from the meeting for considerations of Minutes 78 and 79 on the grounds that they are likely to involve disclosure of exempt information as defined in Paragraph 3 of Part 1 of Schedule 12A of the Local Government Act 1972. In making this decision the Board confirmed that having regard to all the circumstances it was satisfied that the public interest in maintaining the exemption outweighed the public interest in disclosing the information.
78 CORPORATE GOVERNANCE AND VOTING ACTIVITY FOR THE QUARTER ENDED 31 MARCH 2017 - The Interim Director of Corporate Resources submitted a report which informed the Board of the voting record of the Internal and External Investment Managers for the quarter ended 31 March 2017.
Schroders had provided the voting record for the discretionary equity portfolios for the quarter ending 31 March 2017. All proposals were voted in line with the stated policy.
Resolved - That the report be noted.
79 UPDATE ON BORDER TO COAST PENSION PARTNERSHIP - The Interim Director of Corporate Resources submitted a report which reminded the Board that the new LGPS Investment Regulations required LGPS funds to pool their assets in order to achieve cost savings whilst maintaining investment performance. The Pension Fund had taken a leading role in the creation of the Border to Coast Pension Partnership (BCPP). The Government had confirmed that the BCPP’s proposal meets its requirements for pooling and was content for the implementation of the proposal to progress. Partner Funds had approved the creation of the BCPP Limited corporate entity which now had been incorporated, the acquisition of an equal shareholding, and have executed the legal documentation in their capacity as shareholders. External advisors had been appointed for all workstreams which has enabled detailed work to progress further. The expected operational date has been moved back from April 2018 to June 2018 due to the delay in the receipt of Government approval.
Resolved - (a) That the report be noted, and
(b) that further reports on progress be brought to future Local Pension Board meetings.
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EAST RIDING OF YORKSHIRE COUNCIL 5 Report to: East Riding Pension Fund Local Pension Board 3 November 2017
Wards: Not applicable
REVIEW OF THE LOCAL PENSION BOARD’S TERMS OF REFERENCE
Report of the Interim Director of Corporate Resources
A. Executive Summary
The Public Service Pensions Act 2013 requires pension boards to be established to assist administering authorities with all aspects of governance and administration of the Local Government Pension Scheme (LGPS). A report setting out the proposed composition and Terms of Reference for the East Riding Pension Fund Local Pension Board (the Board) was approved by the Pensions Committee on 6 February 2015. The proposed composition and Terms of Reference for the Board were recommended to Full Council and were adopted on 25 February 2015.
On 2 October 2015 the Board approved the Terms of Reference and on 4 November 2016 the Board agreed to increase the number of meetings per year from two to three in 2017. Section 5 of the Terms of Reference was subsequently amended and the current Terms of Reference are attached as Appendix 1.
The Board is now requested to review the Terms of Reference and consider any required amendments following the Board’s second year of operation under the Terms of Reference.
B. Recommendations
It is recommended that:
(i) The Board review the Terms of Reference and consider whether to continue to meet three times in 2018; and (ii) The Terms of Reference continue to be reviewed on an annual basis.
C. Equality Implications
There are no equality implications.
Darren Stevens Interim Director of Corporate Resources
Contact Officer: Julian Neilson Head of Finance Telephone Number: 01482 394100 E-mail: [email protected] Contact Officer: Graham Ferry Pensions Manager Telephone Number: 01482 394171 Email: [email protected]
5
EAST RIDING PENSION FUND PENSION BOARD
TERMS OF REFERENCE
1. Introduction
The purpose of this document is to set out the Terms of Reference for the Pension Board (the Board) of the East Riding Pension Fund.
2. Responsibility and Role of the Board
The responsibility of the Board, as defined by sections 5(1) and (2) of the Public Service Pensions Act 2013, is to assist the Administering Authority (East Riding of Yorkshire Council) as Scheme Manager in ensuring the effective and efficient governance and administration of the Local Government Pension Scheme (LGPS) including:
securing compliance with the LGPS Regulations and other legislation relating to the governance and administration of the LGPS; securing compliance with requirements imposed in relation to the LGPS by the Pensions Regulator; and, such other matters as the LGPS Regulations may specify.
The Administering Authority retains ultimate responsibility for the administration and governance of the scheme. The role of the Board is to support the Administering Authority to fulfil that responsibility and secure compliance with any requirements imposed by the Pensions Regulator.
In its role, the Board will have oversight of the administration and governance of the Fund including:
the effectiveness of the decision making process; the direction of the Fund and its overall objectives; the level of transparency in the conduct of the Fund’s activities; and, the administration of benefits and contributions.
Subject to further details, the activity of the Board will include:
reviewing the Fund’s governance and policy documents; reviewing compliance with the Fund’s governance and policy documents; reviewing the administrative and investment performance of the Fund; reviewing shareholder voting and engagement arrangements; reviewing the Fund’s Risk Register; reviewing Audit and Assurance reports; and, reviewing the Fund’s website.
6 3. Membership
The Board shall consist of six voting members and be constituted as follows:
three Employer Representatives – Administering Authority (1), other scheme employers (ie organisations other than the Administering Authority who, under the Regulations, can participate in the LGPS) (2); and, three Scheme Member Representatives – active members (1), pensioner members (1), active/pensioner or deferred member (1).
Elected Members and Officers involved in the management and administration of the Fund are not permitted to become Board members.
Members of the Board will serve for a term of three years following which they may either retire from the Board or seek nomination for an additional term. The term of office may otherwise come to an end:
for Scheme Member Representatives if they cease to be a member of the relevant group; and, for Employer Representatives who are councillors if they cease to hold office as a Councillor.
The Chair of the Board will be elected by the Board at its first meeting and will serve for a period of three years.
The Board may, with the approval of the Administering Authority, co-opt persons to advise and support them. Co-optees are not Board members and do not have voting rights. Due to the specialist knowledge and understanding required, Members will not be permitted to send substitutes to meetings when they are unable to attend themselves.
4. Appointment of Board Members
Three Employer Representatives:
. one Employer Representative will be a Councillor from East Riding of Yorkshire Council who is not a member of the Pensions Committee and will be selected by the Council having taken account of their relevant experience, their capacity to represent other scheme employers and their knowledge and understanding of the LGPS; and, . two Employer Representatives to be nominated by the employer’s forum – having demonstrated their relevant experience, their capacity to represent other scheme employers and their knowledge and understanding of the LGPS. In the event of there being more than two nominations, the Scheme Manager will carry out a selection process.
7 Three Scheme Member Representatives:
To be identified as follows: the Administering Authority shall contact all Scheme Members including unions and professional associations affiliated to the Authority advising them of the role, the necessary knowledge and understanding required and the process applying toward becoming a Board Member; individual Scheme Members may put themselves forward; there will then be a selection process carried out by the Scheme Manager to assess relevant experience, their capacity to represent scheme members and their knowledge and understanding of the LGPS.
Members in all categories will only be appointed to the Pension Board by the Administering Authority if they either meet the knowledge and skills requirements set out in the relevant regulations and guidance (see Section 9) or commit to do so within three months of the appointment date.
5. Meetings
The Board shall meet three times a year, at the Council’s Offices in Goole during working hours.
An extraordinary meeting will be called when the Chair considers this necessary and/or in circumstances where the Chair receives a request in writing by 50% of the voting membership of the Board.
6. Quorum
A quorum will comprise three of the six members of which at least one shall be an Employer Representative and one a Scheme Member Representative.
7. Decision Making
Each Member of the Board will have an individual voting right but it is expected that the Board will, as far as possible, reach a consensus.
8. Standards of Conduct and Conflicts of Interest
The principles included in the East Riding of Yorkshire Council’s Code of Conduct for Members will apply to all Members of the Board. The Code is set out in the Council’s Constitution http://www2.eastriding.gov.uk/council/committees/the- council/council-constitution-political-control-and-councillor-information/. In accordance with s5(5) of the Public Service Pensions Act 2013, a Board Member must not have a financial or other interest that could prejudice them in carrying out their Board duties. Conflicts of interest shall be managed taking into account both the regulations set out in East Riding of Yorkshire Council’s Constitution and the advice provided by the Pensions Regulator. This does not include a financial or other interest arising merely by virtue of being a member of the LGPS.
8 9. Knowledge and Skills
Following appointment, each Member of the Board should be conversant with:
the legislation and associated guidance of the LGPS; and, any document recording policy about the administration of the LGPS which is for the time being adopted by the Fund.
The Administering Authority will provide a training programme which all Board Members will be required to attend.
10. Accountability
The Board will refer all relevant recommendations and decisions to the Pensions Committee of the Administering Authority and, where appropriate to Full Council. It will present a report on its work each year within the Pension Fund’s Annual Report and Accounts . 11. Publication of Pension Board Information
The Administering Authority will publish up to date information on the Council’s website including:
the names of the Board Member; the Board’s Terms of Reference; and, papers, agendas and minutes of Board meetings.
12. Data Protection
The Administering Authority is and remains the data controller responsible for Data Protection Act compliance.
13. Expense Reimbursement
Board Members will be reimbursed travel and subsistence costs in line with the Administering Authority’s Members Allowance Scheme.
The establishment of the Local Pension Board was approved on 25 February 2015 by East Riding of Yorkshire Council.
9 EAST RIDING OF YORKSHIRE COUNCIL
Report to: East Riding Pension Fund Local Pension Board 6 3 November 2017 Wards: Not applicable
LOCAL PENSION BOARD WORK PLAN 2018
Report of the Interim Director of Corporate Resources
A. Executive Summary
The Public Service Pensions Act 2013 requires local pension boards to be established to assist administering authorities with all aspects of governance and administration of the Local Government Pension Scheme (LGPS). To meet those requirements, the East Riding Pension Fund Local Pension Board (the Board) determined its own work plan for 2017 and covered a number of topics at each meeting.
The Board is now requested to agree the work plan for 2018 including future meeting dates.
B. Recommendations
It is recommended that:
(i) The Board agrees the dates of meetings for 2018; and (ii) The Board considers and agrees the items to be included on the work plan for 2018.
1. Introduction
1.1 Regulation 106(1) of the LGPS Regulations 2013 specifies that pension boards will have responsibility for assisting the administering authority:
- Secure compliance with:
the Regulations; any other legislation relating to the governance and administration of the LGPS; and the requirements imposed by The Pensions Regulator in relation to the LGPS, and
- Ensure the effective and efficient governance and administration of the LGPS.
1.2 The Terms of Reference set out the activity of work to be considered by the Board in order to meet the Board’s responsibilities in paragraph 1.1, and this is reproduced at paragraph 2.1.
1.3 The Board is empowered to agree its priorities and determine its own schedule of work within the work plan.
2. Work plan
2.1 The work plan of the Board will include:-
reviewing the Fund’s governance and policy documents;
10 reviewing compliance with the Fund’s governance and policy documents; reviewing the administrative and investment performance of the Fund; reviewing shareholder voting and engagement arrangements; reviewing the Fund’s risk register; reviewing Audit and Assurance reports; and, reviewing the Fund’s website.
2.2 Although, the activity of work in paragraph 2.1 has been designed to ensure the Board’s responsibilities set out in paragraph 1.1 are met, it is the Board’s decision which areas of work will take precedence and the agreed work plan should be a responsive tool, which will be updated on a rolling basis following each meeting.
2.3 Based on the timetable for 2017 and to enable the Board to consider issues and make recommendations to the Pensions Committee at the appropriate time, the following draft work plan and timing of meetings is proposed:
February 2018
(i) Review of the Fund’s Investment Strategy Statement (ahead of consideration by the Pensions Committee on 16 March 2018). (ii) Review of the Governance Policy Statement (ahead of consideration by the Pensions Committee on 16 March 2018). (iii) Review of performance of internal and external manager. (iv) Review of Procedure on Reporting Breaches of the Law to the Pensions Regulator. (v) Compliance with the General Data Protection Regulation (GPDR). (vi) Review of Communications policy. (vii) Review of Fund’s risk register.
June 2018
(i) Review of internal controls and assurance reports. (ii) Update on Pension Administration Strategy. (iii) Update on ERPF online services. (iv) Scheme Employer Year end return exercise 2017-18. (v) Draft Annual Report of the Local Pension Board for Pension Fund Report and Accounts. (vi) Re-election of Board members.
2 November 2018
(i) ISA 260 plus Annual Report and Accounts. (ii) Review of Terms of reference. (iii) Pension Fund Annual Performance Review 2017-18. (iv) Local Pension Board Work Plan 2019. (v) Local Pension Board Training Program 2019. (vi) Review of Fund’s risk register.
Each Meeting
(i) Shareholder voting and engagement activities. (ii) Minutes from Pensions Committee. (iii) LAPFF Business meetings.
11 2.4 The Board may wish to highlight areas which arise through the course of the year, for example, to monitor the performance of employers in submitting monthly employer and employee contribution returns and suggest ways to improve data quality through working with employers.
3. Next Steps
3.1 Once the Board has agreed the work to be carried out over the next 12 months, the work plan will be published on the East Riding Pension Fund website (www.erpf.org.uk) along with details of future meeting dates.
3.2 Board members are requested to review Board content on the website including biographies and make suggestions for further content. The website currently includes the following information:-
Details of the Board members including interests; Code of Conduct for the East Riding Pension Fund Local Pension Board; Work plan 2017; Agenda and Minutes of Pension Board meetings; Terms of Reference for the Board; and Job Description and Person Specification.
Darren Stevens Interim Director of Corporate Resources
Contact Officer: Julian Neilson Head of Finance Telephone Number: 01482 394100 E-mail: [email protected]
Contact Officer: Graham Ferry Pensions Manager Telephone Number: 01482 394171 Email: [email protected]
12
EAST RIDING OF YORKSHIRE COUNCIL 7 Report to: East Riding Pension Fund Local Pension Board 3 November 2017
Wards: Not applicable
LOCAL PENSION BOARD TRAINING PROGRAM 2018
Report of the Interim Director of Corporate Resources
A. Executive Summary
The purpose of this report is for Members of the East Riding Pension Fund Local Pension Board (the Board) to consider specific Local Government Pension Scheme (LGPS) topics for their Training Program for 2018. Training sessions, based on the agreed topics, will be arranged to meet individual and group training requirements.
B. Recommendations
It is recommended that:-
(i) Board members assess their current level of knowledge and understanding by completing the training questionnaire attached as Appendix 1; and (ii) Board members determine whether the training identified for 2018 meets their knowledge and understanding requirements and identify any additional training needs.
C. Equality Implications
There are no equality implications.
1. Introduction
1.1 The Public Service Pensions Act 2013 requires that every individual who is a member of a Local Pension Board must have a certain level of knowledge and understanding about the scheme regulations and policies in order to fulfil their role. This requirement is covered in greater detail in The Pension Regulator’s Code of Practice No 14: Governance and Administration of Public Service Pension Schemes (2015).
1.2 In the context of the LGPS, Board members require knowledge and understanding of the legislative framework of the LGPS, the roles and responsibilities of the administering authority and scheme employers as well as investment matters, actuarial valuations, accounting and auditing.
1.3 Board members assessed their knowledge and understanding requirements by completing a questionnaire in October 2015. Officers have used the questionnaires to rate the knowledge of the Board members on specific scheme topics and arranged training sessions in 2016 and 2017 to meet individual and group training requirements.
13
2 Next steps
2.1 Board members are requested to assess their current level of knowledge and understanding by completing once more the questionnaire attached as Appendix 1. This will enable Officers to assess the effectiveness of the training that Board members have undertaken to date and to identify the key topics to be covered in the training sessions to be held in February and June 2018.
2.2 Board members are also requested to consider whether their future training needs can be met by annual attendance at the Border to Coast Pensions Partnership (BCPP) Members Training sessions. The program for the session held in September 2017 is attached as Appendix 2 for information on the topics covered.
2.3 It is noted that the majority of Board members have completed The Pensions Regulator Public Service Toolkit e-learning modules. Since completing the modules, the Pensions Regulator has refreshed the website at www.thepensionsregulator.gov.uk/public-service- schemes and the training session for February 2018 will provide an overview of the new information that is now available on the website.
Darren Stevens Interim Director of Corporate Resources
Contact Officer: Julian Neilson Head of Finance Telephone Number: 01482 394100 E-mail: [email protected]
Contact Officer: Graham Ferry Pensions Manager Telephone Number: 01482 394171 Email: [email protected]
14 15 16 17 18 19 20 21
7b BCPP Members Training (Day 1)
BCPP Members Training 11th September, The Principal Hotel, York, 2017
Day 1: 10am – 4pm
09.30 – 09.50 Registration and coffee Main Room
09.50 – 10.00 Welcome Main Room
10.00 – 11.00 Benefits Framework and the Relationship between the Admin Main Room Authority and Scheme Employers
Brief history LGPS Types of Member / Employer 2014 Scheme Admin Authority & Employer Discretions The role of the Local Pension Board The role of the Regulator How to measure an Administrators Performance
Tim Hazlewood
11.00 – 12.00 Actuarial Matters Main Room
The Purpose of a Valuation Assets and Liabilities Cashflow / Maturing nature of the Scheme What and why are there different valuation methodologies Assumptions and Calculations External Reporting / standardised reporting (SAB / GAD - S13) what does it all mean. Cost Cap
Mercer
12.00 – 13.00 Lunch TBC
22
13.00 – 13.45 The Investment Framework Main Room
The Management and Investment of Funds Regs 2016. Funding Strategy Statement Investment Strategy Statement Pooling Governance Compliance Statements Annual Reports and Auditing
Investec Asset Management
13.45 – 14.50 13.45 – 14.15 14.20 – 14.50 Stream A Traditional Asset Classes – Equities Traditional Asset Classes – Bonds (Main Room) Equities Gilts Risk / Return Profiles Corporate Bonds
Columbia Threadneedle Aviva Investors
13.45 – 14.15 14.20 – 14.50 Stream B Traditional Asset Classes – Bonds Traditional Asset Classes – (Breakout Equities Room) Gilts Corporate Bonds Equities Risk / Return Profiles
Aviva Investors Columbia Threadneedle
14.50 – 15.00 Break TBC
15.00 – 16.05 15.00 – 15.30 15.35 – 16.05 Stream A Property Alternative Investments (Main Room)
JP Morgan Asset Management Aberdeen Asset Management
15.00 – 15.30 15.35 – 16.05 Stream B Alternative Investments Property (Breakout Room)
JP Morgan Asset Management Aberdeen Asset Management
19.00 Dinner followed by Keith Wade, Chief Economist Schroders
23
BCPP Members Training (Day 2)
BCPP Members Training 12th September, The Principal Hotel, York, 2017
Day 2: 9am – 4pm
08.30 – 08.50 Registration and Coffee Main Room
08.50 – 09.00 Welcome Main Room
09.00 – 10.00 Asset Strategy Main Room
Return Drivers Risk / Diversification / Correlation Alpha / Beta Passive / Active Benchmarks / Performance Measurement Role of strategic asset allocation
Hymans Robertson
10.00 – 11.00 Responsible Investment Main Room Evolution Corporate Governance and Stewardship Why considering ESG issues matters RI – ISS How to manage RI obligations in a post pooling world. Collective Power – LAPFF / BCPP.
Legal and General Investment Management – Sacha Sadan
24
11.00 – 11.15 Break TBC
11.15 – 12.00 LGPS Governance Framework Main Room LGPS Governance Framework Functions of the Committee and the Board BCPP Governance Framework Role of the Scheme Advisory Board
Aon Hewitt - Karen McWilliam
12.00 – 13.00 Lunch TBC
13.00 – 14.00 Duties and Responsibilities of Committee and Board Members Main Room
The LGPS in its legal context General Local Authority Legal Issues LGPS Specific Duties and Responsibilities Wider Duties and Responsibilities What Happens when things go wrong.
Eversheds- Gary Delderfield
14.00 – 15;00 Pooling national & BCPP Progress Main Room Chair Joint Committee / CEO BCPP Ltd
15:00 – 16:00 What’s on the National Agenda for the LGPS LGA – Jeff Houston
Important Booking details: To book at place at the training, please email [email protected] with the following details:
Full Name Position Committee member / LPB member / Officer Fund Officer Contact details for any Queries
Additional action required by you to book accommodation:- Discounted rates have been negotiated at the hotel at £139 pp to take advantage of these:- Please directly contact: The Principal Hotel, Station Rd York on 01904 653 681 and quote either Aviva Investors OR BCPP to obtain group discount rate on your room.
25
EAST RIDING OF YORKSHIRE COUNCIL 8
Report to: East Riding Pension Fund Local Pension Board 3 November 2017
Wards: Not applicable
UPDATE ON SCHEME EMPLOYER YEAR END RETURN EXERCISE 2016-17
Report of the Interim Director of Corporate Resources
A. Executive Summary
This report details the progress to date of the 2016-17 year end exercise. All Scheme employers are required to submit year end returns which include member pay details to enable the East Riding Pension Fund (“the Fund”) to issue annual benefit statements by 31 August 2017.
B. Recommendation
That the report be noted.
C. Equality Implications
There are no equality implications.
1. Background
1.1 Regulation 80(4) of the Local Government Pension Scheme (LGPS) Regulations 2013 sets out the information that each Scheme employer must provide to the administering authority in respect of each employee who has been an active member during a Scheme year including details of the total employee and employer contributions paid for each of their members. Regulation 80(3) stipulates that this information must be provided to the administering authority within three months of the end of each Scheme year. This information is known as the year end return and the year end return for 2016-17 from each Scheme employer was required by 30 June 2017.
1.2 Under Regulation 89, the Fund is required to issue annual benefit statements to each of its active, deferred, deferred pensioner and pension credit members within five months of the end of each Scheme year. To meet the 31 August deadline, it is vital that the year end returns are completed accurately and promptly by all Scheme employers so that the Fund can validate all the data received, load the data to all member records and investigate all errors and warnings before issuing annual benefit statements within two months. Administering authorities that do not meet the deadline must report the breach of Regulation 89 to The Pensions Regulator.
1.3 In 2014-15 the Fund breached Regulation 89 by not issuing annual benefit statements by 31 August 2015 and this was reported by the Fund to The Pensions Regulator. This
26 breach had occurred because many Scheme employers had not been able to meet the statutory deadline of submitting their year end return and also due to a delay in the development of the software to load member data by Civica, the Fund’s pensions administration system provider.
1.4 As a result, and following consultation with the four Unitary employers in the Fund that are responsible for the payroll of the majority of the active members, a timetable for the submission of the 2015-16 year end returns was agreed to ensure that no further breach occurred in 2016. This timetable brought forward the date for Scheme employers to submit year end returns by over two months to ensure that the Fund would be able to issue the annual benefit statements by 31 August.
1.5 This revised timetable ensured that 27,912 active annual benefit statements were issued by 31 August 2016 for all Scheme employers that submitted a year end return by 17 June 2016. The Fund recognised that it was vital to ensure that Scheme employers continued to submit prompt and accurate returns to allow sufficient time for the Fund to load the data to all member records and investigate all errors and warnings before issuing annual benefit statements.
2. Timetable for completion of 2016-17 year end exercise
2.1 The timetable for the completion of the 2016-17 year end exercise was agreed and issued to all Scheme employers during December 2016. A reminder of the timetable was also issued to all Scheme employers during February 2017 and a full specification of the required data and a checklist to help employers compile the data was sent out by email in the same month.
2.2 The timetable was similar to the 2015-16 timetable, when 171 of the expected 240 year end returns were received by 19 April 2016 and a further 54 by 27 May 2016. The timetable was agreed as follows:-
Scheme employers to submit year end returns by 24 April 2017;
25 April 2017 to 26 May 2017 – the Fund to check year end returns to validate data for loading to the member records;
the Fund to notify Scheme employers by 30 May 2017 where there were any queries and Scheme employers to have until 16 June 2017 to resubmit an accurate year end return;
19 June 2017 to 21 July 2017 – the Fund to load correct year end returns received by 16 June 2017; and
24 July 2017 - Data to be sent to Print and Design for the issue of annual benefit statements by 31 August 2017.
3. Data quality
3.1 The year end return exercise for 2015-16 created a significant number of data queries which had arisen from the member data submitted on the year end return and highlighted a number of issues with the quality and format of data on the year end returns. This
27 meant that the Fund had 3,804 individual member queries to investigate and, where required, obtain additional information from Scheme employers which put an additional strain on Fund resources.
3.2 This also meant that the Fund could not issue annual benefit statements by 31 August 2016 to the Scheme members where the data held could not be verified. It was therefore vital to ensure that the year end returns submitted for 2016-17 were not only prompt but also accurate and the list of checks and validations undertaken by the Fund for each return submitted was updated. A checklist for employers to follow, which focused on the typical issues identified at 2015-16, was drawn up and issued directly to Scheme employers in February 2017.
4. Current position
4.1 Compared to the 240 Scheme employers submitting year end returns for 2015-16, a total of 267 year end returns for 2016-17 were expected to be submitted by 24 April 2017. At that date, 153 returns had been received by the Fund and a further 88 returns were received by 16 June 2017 with only 26 returns outstanding.
4.2 The Fund concentrated resources on validating the 153 returns received by the first deadline date of 24 April 2017 and were then able to carry out validations on the 88 returns received by 16 June 2017. By 30 June 2017, only 16 Scheme employers had not submitted accurate year end returns. The Scheme employers are listed in Appendix 1.
4.3 Validations carried out within the 2016-17 year end exercise highlighted a dramatic increase in data accuracy. From the 251 year end files which were accepted and loaded, a total of 1,419 individual member queries were identified for the Fund to investigate. This was due to the Fund adopting a stricter approach to the validation of year end data submitted, ensuring that only accurate data was loaded onto a member record.
4.4 There were over 70 Scheme employers that submitted year end returns failing the validation process and those Scheme employers had to resubmit an accurate year end return by 16 June 2017. Scheme employers that had not submitted a year end return by 30 May 2017 were sent an email reminding them of the requirement to issue a year end return and informing them that failure to do so would result in annual benefit statements not being issued to their members by 31 August 2017.
4.5 The annual benefit statements for 28,727 active members were delivered to home addresses by 24 August 2017, a week ahead of the deadline of 31 August 2017.
5. Next Steps
5.1 Feedback has been provided to individual Scheme employers of any errors or issues identified to avoid these same errors occurring at the next year end. The Scheme employers that failed to submit an accurate year end return by 16 June 2017 were advised that they would need to inform their members that they would not be receiving annual benefit statements by 31 August 2017.
5.2 The Fund is currently in the process of preparing a report to notify the Pensions Regulator of those Scheme employers listed in Appendix 1 where the Fund is of the view
28 that their failure to submit an accurate year end return has led to a material breach of the law. Details of the breach will also be reported in the Pension Fund Risk Register.
Darren Stevens Interim Director of Corporate Resources
Contact Officer: Julian Neilson Head of Finance Telephone Number: 01482 394100 E-mail: [email protected]
Contact Officer: Liz Vollans Assistant Pensions Manager Telephone Number: 01482 394175 E-mail: [email protected]
29 Appendix 1
Scheme employers that did not provide an accurate year end file by 30 June 2017
Buckingham Primary Academy Eastfield Primary Academy Elliston Primary Academy Humberston Cloverfields Academy Laceby Acres Primary School Lincs Inspire Ltd Littlecoates Primary Academy Sevenhills Academy Sirius Academy (West) Southcoates Primary Academy Springfield Academy The Riverside Group Ltd Thoresby Primary Academy University of Lincoln Welholme Primary Academy Westcott Primary Academy
30
EAST RIDING OF YORKSHIRE COUNCIL 9 Report to: East Riding Pension Fund Local Pension Board 3 November 2017 Wards: Not applicable
PENSION FUND ANNUAL REPORT AND ACCOUNTS 2016–17
Report of the Interim Director of Corporate Resources
A. Executive Summary
The final version of the Pension Fund Annual Report and Accounts 2016–17 is attached as Appendix 1. The accounts have been audited and an unqualified audit opinion was issued on 14 September 2017.
KPMG’s Annual Audit Letter 2016–17 is attached as Appendix 2 and makes no recommendations with regards to the Pension Fund Annual Report and Accounts.
B. Recommendation
That the report be noted.
1. Introduction
1.1 The Pension Fund Annual Report and Accounts 2016 – 17 have been audited.
1.2 The Annual Report summarises the performance of the fund which was valued at £4.53bn at 31 March 2017 and returned 21.1% for the year ended 31 March 2017 compared to the strategic benchmark of 20.1%.
1.3 KPMG issued an unqualified opinion on the accounts on 14 September 2017 and concluded that the Council has good processes in place for producing the annual financial accounts supported by good quality working papers.
1.4 In reaching this opinion, KPMG audited the financial and non-financial information in the Pension Fund Annual Report to check there are no material mis-statements or inconsistencies. Their Annual Audit Letter 2016-17 confirms they have nothing to report in respect of the information in the Annual Report.
1.5 A copy of KPMG’s Annual Audit Letter 2016–17 is attached as Appendix 2 and makes no recommendations in respect of the Pension Fund accounts. Darren Stevens Interim Director of Corporate Resources
Contact Officer: Julian Neilson Head of Finance Telephone Number: 01482 394100 E-mail: [email protected] Contact Officer: Mark Lyon Head of Investments Telephone Number: Ext. 4135 E-mail: [email protected]
31
2016/2017 Annual Report & Accounts
32 Pensions Regulator Scheme Registration Number 10079121 East Riding Pension Fund Annual Report and Accounts 2016/2017 contents
Section Page
Foreword 3
The Local Government Pension Scheme 4
Scheme Management and Advisers 7
Risk Management 9
Financial Performance 22
Investment Policy and Performance 38
Scheme Administration Report 52
Report of the Actuary 55
Actuarial Valuation 58
Governance 59
Statement of Responsibilities 66
Accounts 67
Funding Strategy Statement 92
Statement of Investment Principles 120
Investment Strategy Statement 125
Communication 136
Local Pension Board 139
Auditor Report 142
Contacts 143
33 contents 2 East Riding Pension Fund Annual Report and Accounts 2016/2017 foreword
The Fund was created on the reorganisation of local government in 1974 and East Riding of Yorkshire Council became the Administering Authority on 1 April 1996. At 31 March 2017 the Fund was valued at £4,534.6m, having paid out £144.1m during the year for the benefit of Scheme members. This is an increase in the Fund value of £821m from 31 March 2016, due to significant capital appreciation in the majority of equity markets following the outcome of the US Presidential Election, strength in corporate earnings, and a further improvement in investor risk sentiment. In addition, sterling returns from overseas investments received a significant boost due to the depreciation of the currency in the aftermath of the EU referendum. The Fund also benefited from the strong performance of its internal and external investment managers. At 31 March 2017 the number of employers in the Fund was 257 (2016: 238). The increase during the year was due mainly to the continued conversions of schools to academy status. All employees, other than teachers, of the Administering Authority and the majority of the Scheme Employers are entitled to participate in the Scheme. Employees of Scheme Employers classed as designating bodies, such as town and parish councils, and employees of the 39 Admission Bodies may be nominated for membership by their employer. Teachers, police officers and firefighters have separate pension arrangements. Although membership is not compulsory, it is automatic for all employees who have a contract of employment that is for at least 3 months and who are under age 75. Employees have freedom of choice to leave the Scheme and make alternative pension arrangements. At 31 March 2017 the total membership records administered by the East Riding Pension Fund was 109,685, an increase of 6.1% in the year (2016: 103,375). For active members, each separate employment contract is classed as a record where an individual has multiple employments, and the number of active member records has increased by 0.6% to 39,475 (2016: 39,227). For pensioner members each pension entitlement is classed as a record where an individual is in receipt of more than one pension and the number of pensioner member records, including the pensions paid to spouses and dependants of the former scheme members, has increased by 7.2% to 28,625 (2016: 26,698). All the membership figures in the report are based on the up to date position recorded on the pension administration system, with all previous years restated on a consistent basis. The average pension in payment is £4,661.60 per annum, equivalent to a weekly payment of £89.40. The Fund generated a return of 21.1% for the year ended 31 March 2017, compared to the strategic benchmark return of 20.1%. Over the three years to 31 March 2017, the Fund returned 10.5% per annum, compared to the strategic benchmark return of 10.0% per annum, and the long term investment objective of 7.1% per annum. The Pension Fund continues to be managed in a cost effective manner with total pension administration and investment management costs equating to just 0.12% (2016: 0.13%) of funds under management. The key challenges for the Fund in the year ahead are maintaining strong investment performance in a lower return environment and continuing the preparations for the creation of Border to Coast Pensions Partnership, the Fund’s chosen entity to satisfy the Government’s requirement for pooling. The Fund is participating fully in the pooling process and will strive to ensure that any changes will be communicated to both scheme members and employers. I would like to extend my appreciation to everyone involved in the management of the Fund whose efforts have resulted in a continuation of the standard of service that members of the Fund have come to expect.
Julian Neilson Head of Finance East Riding of Yorkshire Council 1 September 2017
34 foreword 3 East Riding Pension Fund Annual Report and Accounts 2016/2017 the local government pension scheme
Legal Framework The Local Government Pension Scheme (LGPS) has been in existence since 1922 and has developed into a comprehensive scheme providing pensions for all members and their spouses, civil partners or eligible cohabiting partners and eligible children. The current scheme, LGPS 2014, is a Career Average Revalued Earnings (CARE) scheme. The scheme rules for LGPS 2014 are contained within the LGPS Regulations 2013 (Statutory Instrument Number 2013 No. 2356) and subsequent amendments and the Local Government Pension Scheme (Transitional Provisions, Savings and Amendment) Regulations 2014 (Statutory Instrument Number 2014 No. 525). Amendments to LGPS 2014 are made under the Public Service Pensions Act 2013. Details of the main provisions of LGPS 2014 can be found at http://lgpsregs.webdigi.co.uk/schemeregs/index.php The Regulations specify the type and amounts of pension and other benefits payable in respect of scheme members who leave, retire or die, and also fix the member contributions rates payable on an ongoing basis. Employees have the freedom to opt-out and make their own pension provision. Employer contribution rates are set by the Fund’s Actuary every three years following the valuation of the Fund, in order to maintain the solvency of the Fund. New rates were set by the Actuary from 1 April 2017 to 31 March 2020 following the 2016 Actuarial Valuation. Whilst the Regulations are fixed on a national basis, the LGPS is managed by a designated Administering Authority, and throughout England and Wales there are 89 such authorities. East Riding of Yorkshire Council is responsible for administering ‘The East Riding Pension Fund’ for the benefit of its own employees and the employees of the scheme employers and admission bodies. Full details of the employers participating within the Fund are shown on pages 5 to 6. Teachers, Police Officers and Firefighters are excluded from the LGPS as they are members of separate statutory pension schemes. HM Revenues and Customs has granted the LGPS ‘exempt approval’ for the purposes of the Income and Corporation Taxes Act 1988. Since April 2006, the LGPS has been classified as a registered public service pension scheme under Part 4 of Chapter 2 of the Finance Act 2004. It complies with the relevant provisions of the Pension Schemes Act 1993, the Pensions Act 1995, and the Pensions Act 2004 and meets the government’s new standards under the automatic enrolment provisions of the Pensions Act 2008.
The East Riding Pension Fund Local Pension Board As required under section 5 of the Public Service Pensions Act 2013 and regulation 106 of the LGPS Regulations 2013 (as amended), the East Riding Pension Fund Local Pension Board (ERPFLPB) was established on 25 February 2015 and is made up of three employer representatives and three member representatives. The ERPFLPB is responsible for assisting East Riding of Yorkshire Council (as administering authority) in securing compliance with the LGPS regulations, overriding legislation and guidance from the Pensions Regulator. Details of the activities of the ERPFLPB can be found can be found on the East Riding Pension Fund website at http://www. erpf.org.uk/local-pension-board-information/
35 the local government pension scheme 4 East Riding Pension Fund Annual Report and Accounts 2016/2017
Fund Membership The 257 employers, including East Riding of Yorkshire Council, with an interest in the Pension Fund in 2016/17 are listed below:
ADMINISTERING AUTHORITY East Riding of Yorkshire Council
SCHEDULE 2 EMPLOYERS (217) Ainthorpe Primary Academy Francis Askew Primary School Neasden Primary Academy Anlaby Common Parish Council Franklin College New Waltham Academy Appleton Primary Academy Ganton School Newbald Parish Council Archbishop Sentamu Academy Goole High School Newington Academy Ashwell Academy Goole Town Council Newland St John’s CE Academy Aspire Academy Greatcoates Primary Academy North Cave Parish Council Barton upon Humber Town Council Grimsby Institute of Further and Higher North East Lincolnshire Council Beverley and North Holderness Internal Education North Eastern Inshore Fisheries and Drainage Board Hall Road Academy Conservation Authority Bellfield Academy Havelock Academy North Lincolnshire Council Beverley Grammar School Healing Primary School North Lindsey College Beverley Town Council Healing Science Academy Limited Oasis Academy Henderson Avenue Biggin Hill Primary Academy Hedon Town Council Oasis Academy Immingham Bishop Burton College Hessle High School Oasis Academy Nunsthorpe Bottesford Town Council Hessle Penshurst Primary School Oasis Academy Parkwood Bricknell Primary Academy Hessle Town Council Oasis Academy Wintringham Bridgeview School Hibaldstow Academy Old Clee Primary Academy Bridlington Town Council Highlands Primary Academy Ormiston Maritime Academy Brigg Town Council Holy Family Catholic Academy Ormiston South Parade Academy Broughton Town Council Hornsea Town Council Ouse and Humber Drainage Board Buckingham Primary Academy Hull College Outwood Academy Brumby Bude Park Primary Academy Hull Culture and Leisure Limited Outwood Academy Foxhills Bursar Primary Academy Hull Studio School Patrington CE Primary Academy Burton upon Stather Parish Council Hull Trinity House Academy Pearson Primary School Cambridge Park Academy Humber Bridge Board PHASE Canon Peter Hall Academy Humber University Technical College Phoenix House PRU Chiltern Primary School Humberside Fire Authority Pocklington Junior School Christopher Pickering Primary School Humberside Magistrates’ Courts Committee Priory Primary Academy Cleethorpes Academy Humberston Academy Quay Academy Cleeve Primary Academy Humberston Cloverfields Academy Reynolds Primary Academy Collingwood Academy Humberston Park Academy St Augustine Webster Academy Coritani Academy Hunsley Primary School St Bede’s Academy Cottingham High School Huntcliff Academy St Bernadette’s Academy Craven Primary Academy ICT 4 Collaboration St George’s Primary Academy Crowle Academy Immingham Town Council St James’ CE Academy Dawes Lane Academy Ings Primary School St Joseph’s Academy Dorchester Primary Academy John Leggott College St Mary Queen of Martyrs VC Academy Driffield School John Whitgift Academy St Mary’s Academy Driffield Town Council Kelvin Hall School St Mary’s Catholic Academy Dunswell Primary Academy Kingston Upon Hull City Council St Nicholas Primary Academy Easington CE Primary Academy Kingstown Works Limited St Norbert’s Academy East Ravendale Academy Kingswood Academy St Peter’s CE Primary Academy East Riding College Kingswood Parks Primary Academy St Richards RC Primary School Eastfield Primary Academy (Immingham) Kirk Ella and West Ella Parish Council St Vincents VC Academy Eastfield Academy (Hull) Kirton in Lindsey Town Council Scartho Junior Academy Edward Heneage Academy Laceby Acres Scawby Academy Elliston Primary Academy Lisle Marsden Academy Sevenhills Academy Elloughton cum Brough Parish Council Littlecoates Primary Academy Sigglesthorne Primary Academy Emergency Services Fleet Management Longhill Primary Academy Signhills Academy (Humberside) Ltd Macaulay Academy Signhills Infants Academy Endike Primary School Malet Lambert Academy Sirius Academy North Endsleigh Holy Child VC Academy Market Weighton Town Council Sirius Academy West Enfield Academy of New Waltham Maybury Primary Academy South Axholme Academy Epworth Academy Melior Community College Academy South Hunsley School and Sixth Form College Estcourt Primary Academy Mersey Academy Southcoates Primary Academy Fairfield Academy Middlethorpe Academy Spring Cottage Academy
36 the local government pension scheme 5 East Riding Pension Fund Annual Report and Accounts 2016/2017
Springfield Primary Academy The Snaith School Wilberforce College Stamford Bridge School The Vale Academy William Barcroft Junior Academy Stepney Primary Academy Thoresby Academy Willoughby Road Primary Academy Stockwell Academy Thorpepark Academy Willows Academy Strand Academy Thrunscoe Primary Academy Winifred Holtby Academy Sullivan Centre Tollbar Academy Limited Winterton Academy Sutton Park Primary Academy Tweendykes Academy Winterton Town Council Swanland Primary School Academy Trust Ulceby St Nicholas Primary School Withernsea Primary Academy The Axholme Academy University of Lincoln Withernsea Town Council The Boulevard Academy Waltham Leas Primary Academy Wold Academy The Boulevard Centre Wansbeck Academy Woldgate School and Sixth Form Cottage The Chief Constable of Humberside Police Weelsby Primary Academy Woodlands Primary Academy The Green Way Academy Welholme Primary Academy Workforce Skills Limited The Marvell College Welton Parish Council Worlaby Academy The Parks Academy Westcott Primary Academy Wybers Wood Academy The Police and Crime Commissioner for Westwoodside Academy Wyke College Humberside Wheeler Academy Yarborough Primary Academy The St Lawrence Academy Whitehouse Pupil Referral Unit Yorkshire and Humberside Grid for Learning
ADMISSION BODIES (39) Barnado’s Humberside Independent Care Association Ongo Homes Limited Bulloughs Cleaning Services Limited Independent Cleaning Services Limited Pickering and Ferens Homes Churchill Contract Services Ltd (IET) (Chiltern) Pocklington School City Health Care Partnership CIC Independent Cleaning Services Limited Robertson Facilities Management Limited Civica UK Limited (Driffield) Robertson Facilities Management Limited PFI Compass Contract Services (UK) Limited Independent Cleaning Services Limited Sewell Facilities Management Limited (Thorpepark) (Hessle Academy Shoreline Housing Partnership Limited Independent Cleaning Services Limited Community Trust) Sodexo Limited (Wolfreton) Compass Contract Services (UK) Limited (The Sodexo Limited Nunsthorpe Interserve (Facilities Management) Ltd Vale) Taylor Shaw Limited ISS Facility Services - PFI ENGIE Services Limited The Deep (EMIH) Limited Lincs Inspire Limited Havelock Housing Association Limited The Humber NHS Foundation Trust Mellors Catering Services Limited Hull and Goole Port Health Authority The Riverside Group Limited Hull Charterhouse Trustees North East Lincolnshire Clinical Commissioning Group University of Lincoln Students’ Union Hull Resettlement Project Limited NPS Humber Limited University of York Humbercare Limited
37 the local government pension scheme 6 East Riding Pension Fund Annual Report and Accounts 2016/2017 scheme management and advisers
Fund Managers Director of Corporate Resources Schroder Investment Management (UK) Limited East Riding of Yorkshire Council 31 Gresham Street County Hall London Beverley HU17 9BA EC2V 7QA
Secretary to the Director of Corporate Resources Pensions Committee East Riding of Yorkshire Council County Hall Beverley HU17 9BA
Custodian State Street Bank and Trust Company 525 Ferry Road Edinburgh EH5 2AW
AVC Provider Prudential Craigforth, Stirling FK9 4UE
Actuary Hymans Robertson LLP 20 Waterloo Street Glasgow G2 6DB
Legal Adviser Director of Corporate Resources East Riding of Yorkshire Council County Hall Beverley HU17 9BA
Banker NatWest Bank 60 Market Place, Beverley HU17 8AA
Fund Accountant/ Director of Corporate Resources Director of Finance East Riding of Yorkshire Council County Hall Beverley HU17 9BA
Fund Auditor KPMG LLP (UK) 1 Sovereign Square, Sovereign Street, Leeds LS1 4DA
Scheme Administrator Director of Corporate Resources East Riding of Yorkshire Council County Hall Beverley HU17 9BA
Fund Adviser Mrs S Bates c/o Director of Corporate Resources East Riding of Yorkshire Council County Hall Beverley HU17 9BA
38 scheme management and advisers 7 East Riding Pension Fund Annual Report and Accounts 2016/2017
Performance State Street GS Performance Services Measurement 525 Ferry Road Edinburgh EH5 2AW
Officers Darren Stevens Julian Neilson Interim Director of Corporate Resources Head of Finance East Riding of Yorkshire Council East Riding of Yorkshire Council County Hall County Hall Beverley HU17 9BA Beverley HU17 9BA
Mark Lyon Graham Ferry Head of Investments Pensions Manager East Riding Pension Fund East Riding Pension Fund PO Box 164 PO Box 118 Church Street Church Street Goole DN14 5YZ Goole DN14 5YU
Management Arrangements of Fund The arrangements for the management of the Fund are: • The Pensions Committee meet at quarterly intervals to determine overall strategy, to review retrospectively detailed implementation of policy and to consider performance, with a further four meetings being held to consider other matters; • The fixed income portfolio is managed by the Corporate Resources Directorate; • The UK equity portfolio is managed by the Corporate Resources Directorate; • Overseas investments are managed by Schroder Investment Management, except for 60% of European equities which are managed by the Corporate Resources Directorate; • Alternative assets are managed by the Corporate Resources Directorate; • The Corporate Resources Directorate administers obligations to pensioners and Fund contributors.
Custodial Arrangements Investments are held by State Street Bank and Trust Company in the nominee name of The East Riding Pension Fund. State Street Bank and Trust Company are also empowered to carry out stock lending on behalf of the Fund (see note E to the accounts).
39 scheme management and advisers 8 East Riding Pension Fund Annual Report and Accounts 2016/2017
risk management
East Riding Pension Fund recognises the importance of effective risk management including the identification and management of its key risks. Risk is defined as a condition, act, situation or event with the ability or potential to impact on the Fund either by enhancing or inhibiting performance, attainment of objectives or meeting stakeholder expectations. Risk management is the process by which the Pension Fund systematically identifies, assesses and seeks to mitigate the risks associated with its activities, and is a key component of the overall governance process. Effective risk management is a clear indicator of good governance and a risk register is the primary control document for the identification, assessment and monitoring of key risks. The Fund’s key objectives are to: • ensure the long term solvency of the fund and that sufficient funds are available to meet all benefits as they fall due for payment; • administer the fund effectively and efficiently in accordance with regulations; and • communicate effectively with all key stakeholders The Fund’s risk management strategy includes a risk register which identifies its key risks, details the consequence of those risks, and highlights the controls which are currently in place to mitigate those risks. For each risk the register includes: • a brief description of each risk; • the potential consequences; • an estimate of the severity of the risk before any risk controls have been implemented; • a description of the controls currently in place to mitigate the risk; • the revised severity of the risk as a result of the controls already in place; and • additional control requirements that have been identified. The Fund’s risk register is reviewed on a semi-annual basis by the Pensions Committee and the latest risk register is included on pages 10 to 20. In the interests of brevity the risk scores, which are based on the likelihood of the risk occurring and the potential impact on the Fund, have been omitted from the table.
40 risk management 9 East Riding Pension Fund Annual Report and Accounts 2016/2017
The Fund’s risk register is included below.
No. Risk Consequences Controls
1 Inappropriate long- Failure to meet long Strategic asset allocation, including appropriate diversification term investment term investment rate of assets, determined on a triennial basis following the strategy including of return target. latest actuarial valuation. Agreed by Members, advisers, and issues such as: investment managers. Asset classes fail to • Active v. Passive provide adequate Tactical asset allocation determined on a quarterly basis by returns irrespective of Pensions Committee in light of financial market conditions and • In-house investment strategy or following advice from advisers and investment managers. v. External manager performance. management Statement of Investment Principles discloses the permitted asset Fund assets fail to classes, allocation, and ranges in order to provide an appropriate • Equities v. Bonds deliver returns in line level of diversification. • Investment in with the anticipated Fund-specific benchmark is used, informed by Asset-Liability Alternatives returns underpinning modelling of liabilities. valuation of liabilities • Liquidity of over the long-term. Regular review of long-term investment strategy to ensure it investments remains appropriate. Deterioration in funding position. Investment management responsibilities split between internal and external investment managers. Increase, and/or volatility, in employer Robust investment process including detailed research and contribution rates. analysis. Concentration risk Performance monitored by the Head of Finance and Interim in assets that have Director of Corporate Resources on a quarterly basis. similar characteristics. Detailed analysis of investment managers’ performance Insufficient liquid on an annual basis, using external provider of performance assets to meet measurements services, and reviewed by the Pensions Committee. liabilities as they fall Detailed analysis of Fund performance on an absolute basis due. and relative to the actuarial rate of return and the Fund specific benchmark. Independent assurance received on internal controls of the Fund’s investment managers on an annual basis. Analysis of Fund liquidity position on a weekly basis. 2 Under- Failure to meet long Analysis of market performance and investment managers’ performance term investment rate performance relative to their index benchmark on a quarterly of investment of return target. basis by independent company. managers relative Deterioration in Detailed analysis of Fund performance on an absolute basis to benchmark funding position. and relative to the actuarial rate of return and the Fund specific benchmark. Increase in employer contribution rates. Detailed analysis of investment managers’ performance on an annual basis, using external provider of performance measurements services, and reviewed by the Pensions Committee. Ability to switch funds under management between the internal and external investment managers. Continual focus on investment costs including fees, expenses, and transaction costs. Key personnel changes at investment managers are highlighted to the Pensions Committee on a quarterly basis. Ability to terminate external investment managers’ contract in its entirety.
41 risk management 10 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
3 Objectives within Potential risk of Treasury Management Policy establishes limits on investments. the Treasury financial loss in the Treasury Management Policy reviewed by the Pensions Management event of counterparty Committee on an annual basis. Strategy not met – default. Controls within systems audited on an annual basis. e.g. capital security, Inability to pay short liquidity, interest Restriction on institutions and counterparties. term liabilities. rate Operational Treasury Management Board meets on a regular Forced sale of assets basis to review investment criteria. to meet liquidity Maintain a minimum level of liquid investments to meet liquidity requirements. requirements. Damage to reputation. 4 Decrease in UK Reduction in future Monitoring of investment performance relative to the estimated government bond returns from UK growth in liabilities on an annual basis. yields government bonds. Some investment in bonds (and similar investments) helps to Increase in the value mitigate this risk. placed on liabilities through a reduction in the discount rate. Deterioration in funding position. Increase in employer contribution rates. 5 Pay and price Increase in the Fund’s Actuarial valuation process focuses on real returns on assets, net inflation liabilities. of price and pay increases. significantly higher Increase in the Monitoring of investment performance relative to the estimated than anticipated Fund’s cash flow growth in liabilities on an annual basis. requirements. Some investment in index-linked bonds (and other inflation- linked investments) helps to mitigate this risk. Deterioration in funding position. Pension Fund can invest in inflation protection products subject to LGPS investment regulations. Increase in employer Triennial strategic asset allocation review considers the contribution rates. appropriateness of assets. Employers pay for their own salary awards. Employers are reminded of the geared effect on pension liabilities of any bias in pensionable pay rises towards longer serving employees. 6 Pensioners in Increase in the Fund’s Mortality assumptions are set with some allowance for future receipt of pensions liabilities. increases in life expectancy. for longer Deterioration in Fund actuary monitors combined experience of around 50 funds funding position. to look for early warnings of fewer pension amounts ceasing than assumed in funding. Increase in employer Administering Authority encourage any employers concerned at contribution rates. costs to promote a later retirement culture. Each 1 year rise in the average age at retirement would save roughly 5% of pension costs. The Fund used the Actuary’s “Club Vita” data to provide more accurate mortality assumptions. The Pension Fund is part of Tell Us Once and LGPS NI database which reduces the likelihood of pensioners being overpaid and ensuring Fund pays death grants in accordance with the Regulations.
42 risk management 11 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
7 Changing patterns Reducing employer Employers are charged the extra capital cost of non-ill health of early retirement payrolls due to retirement following each individual decision. redundancy exercises increases past Employer ill health retirement experience is monitored and, service liabilities and where appropriate, employers are advised of the option to take consequently deficit out ill health liability insurance. recovery.
Ill-health retirements significantly higher than anticipated. 8 Reductions in Insufficient deficit In terms of Scheme members opting out and recruitment freezes, contributing recovery payments. employer membership totals are monitored on a quarterly basis. members Therefore, there is no significant cause for concern as this will, in Increased employer effect, be caught at the next formal valuation. • Scheme members costs for future service opting out liabilities. However, there are protections where there is concern regarding including high redundancy exercises and outsourcing, as follows: Increased employer earners opting • For employers in the stabilisation mechanism, the employer costs where members out due to may be brought out of that mechanism to permit an in 50/50 section due in reductions in appropriate increase in contributions. HMRC limits service or retire on ill health. • For other employers, review of contributions is permitted • Recruitment between valuations and may require a move in deficit Increase in transfers freeze contributions from a percentage of payroll to fixed monetary out of the Fund may amounts. • Increase in impact on funding position and liquidity. • Actuarial calculation of employer contribution rates ensures employer that employers are in no worse position when schools convert redundancy to academies. exercises • Communicating benefits of being a scheme member via • Outsourcing website, newsletters, employer briefing notes and face to face projects including contact with members. conversions to • Within Phase 3 of UPM (the Fund’s new computerised pension academy status administration system) employers will be able to access their • Scheme members own staff records to model the impact of any future workforce electing to be in management projects. This will enable them to establish costs 50/50 section ahead of the event which should aid the decision making process. This will allow them to be more interactive and gain • Members opt- quicker access to data and information. out of LGPS for • Number of members electing for 50/50 section are monitored. greater flexibility under “Freedom • Information on website to help members understand how and Choice” “Freedom and Choice” impacts on their LGPS benefits. Information also included in pension estimate and deferred • Members opt out benefit documentation sent to members. due to increase • Newsletter sent to members in March 2016 advising end of in National contracting out and options for 50/50 and retirement planning Insurance for high earners. contributions following the end of contracting out
43 risk management 12 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
9 Securities Lending Borrower default Indemnity with State Street, the Fund’s global custodian, provides resulting in financial full protection in the event of borrower default. loss. Diversification of borrowers. Value of collateral Approval of list of counterparties. falling below the value of the securities lent. Approval of types of collateral. Loss on the Excess collateral (2 – 5% above the value of the securities lent) reinvestment of cash required. collateral. Mark to market on a daily basis with a commensurate change in Securities delivered to the value of the collateral. the borrower before the Cash is not accepted as collateral. collateral is received. Custodian will not release the securities until the collateral has Inability to settle a been received. transaction involving a Indemnity agreement ensures that transaction proceeds and security on loan. income are credited irrespective of any issues arising from the Not receiving income securities being on loan. (dividends or interest) Ability to recall stock, subject to investment manager discretion, from securities on loan. that is subject to a vote. Unable to exercise Use of tax experts to reclaim inappropriately levied tax. voting rights for securities on loan. Independent review of controls undertaken by Ernst and Young and reported through Independent Service Auditor’s Report. Potential loss from tax treatment of “manufactured overseas dividends”. 10 A company If the Admitted Body All new admitted bodies are required to undertake a risk admitted to is providing a service assessment to the satisfaction of the administering authority the Fund as an or assets in connection (and in the case of an admitted body providing a service or assets, admission body with the exercise of a the employing authority that was previously responsible for the may become function of a Scheme service or assets). financially unviable employer as a result Subject to the Fund’s internal auditors’ recommendations, the of the transfer of the admitted body is required to either put in place the necessary service or assets by indemnity or bond or, alternatively, provide evidence of an means of a contract appropriate guarantor. This will minimise the risk to the Fund or other arrangement, should an admitted body cease to exist. the contracting authority will pick up the pension liabilities and potentially will increase their employer contribution rate. Where the admitted body falls under a different category i.e. not providing a service or assets performed by a Scheme employer, all fund employers will pick up a share of the liabilities which may potentially make smaller bodies financially unviable.
44 risk management 13 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
11 Failure by Scheme Supply of poor quality Clear allocation of responsibilities. employer to carry data which may affect Regular reports to employers on performance. out statutory the calculation and Guidance issued and updated on a regular basis – Employer Bulletins functions payment of benefits. now issued monthly and include information and reminders on Incorrect employer statutory requirements. Bulletins also on website. contribution rates. Carried out data quality checks in accordance with the Pensions Missing and Regulator data requirements from 2013. incomplete member Training Officer runs employer training events every 3 months records. covering employer responsibilities and statutory duties. Pensions Administration Strategy to be incorporated into Phase 3 of Increased formal UPM as an interactive tool as part of the data submission process. complaints leading to members invoking the Within Phase 3 of UPM, the web module for employers will Internal Resolution incorporate data quality checks into the processes that employers Dispute Procedure can complete online. and potentially the Strict monitoring of Year end returns to ensure employers return Pensions Ombudsman. data according to timetable set by the Fund. Audit report on compliance with The Pensions Regulator Code of Increase in staffing Practice 14 cost in issuing reminders to Principal Pensions Officers run targeted workshops for employers – employers for data. for example – Year end returns. 12 Administering An employer may cease The Administering Authority believes that it would normally Authority failing to exist with insufficient be too late to address the position if it was left to the time of to commission funding or adequacy of departure. the Fund Actuary a bond. The risk is mitigated by: to carry out If the Admitted Body a termination is providing a service • Seeking a funding guarantee from another scheme employer, valuation for or assets in connection or external body, wherever possible. a departing with the exercise of a • Alerting the prospective employer to its obligations and Admission Body function of a Scheme encouraging it to take independent actuarial advice. and losing the employer as a result opportunity to call of the transfer of the • Vetting prospective employers before admission. in a debt service or assets by • Where permitted under the regulations requiring a bond to means of a contract or protect the scheme from the extra cost of early retirements on other arrangement, the redundancy if the employer failed. contracting authority will pick up the pension • Reviewing bond or guarantor arrangements at regular liabilities and potentially intervals. will increase their • Reviewing contribution rates if considered appropriate. employer contribution rate. To minimise the risk of orphaned employers giving rise to added Where the admitted costs, the Fund seeks a cessation debt, security, or guarantor. If body falls under a the added costs occur, the Fund actuary calculates the added different category i.e. cost spread pro-rata among all employers. not providing a service or assets performed by a Scheme employer, all fund employers will pick up a share of the liabilities which may potentially make smaller bodies financially unviable Orphaned employers give rise to added costs for the Fund.
45 risk management 14 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
13 Administering Employer paying The Administering Authority monitors membership movements Authority unaware incorrect contribution on a quarterly basis. of structural rate. The Actuary may be instructed to consider revising the rates and changes in an Employers funding Adjustments certificate to increase an employer’s contributions employer’s position deteriorates. (under Regulation 38) between triennial valuations. membership (e.g. large fall Possible short term Deficit contributions are expressed as monetary amounts and in employee increase in employer disclosed in Appendix G of the 2016 Valuation Report. members, large contribution rates Seek feedback from employers on scope to absorb short-term number of Effect of possible contribution rises. retirements, closing increase in employer’s An explicit stabilisation mechanism has been agreed as part of the to new entrants) contribution rate on funding strategy. Other measures are also in place to limit sudden service delivery and increases in contributions, including deficit spreading, phasing in of admission/scheduled contribution rises, and possible pooling of contributions. bodies. Finance Control Team monitors receipt of non-Unitary employer contributions against member data on a monthly basis. Employer Bulletins and factsheet issued covering impact of TUPE transfers and changes to membership levels. 14 Failure to comply Issue of out of date Individuals’ responsibilities are clearly identified. with the regulations literature. Service plan includes key targets and dates that are monitored i.e. current, new, Out of date software quarterly. external e.g. HMRC, leading to incorrect Formal structure in place for impact assessment of new legislation DWP, calculations. and codes of practice. Staff training and System testing and checking in place to ensure legislation changes guidance notes not up are implemented correctly. to date. Staff training and identification of training requirements through Failure to communicate the EDR process. changes to employers Annual audit of fundamental systems by the Internal Audit Section. who in turn may not Audit recommendations are followed up and implemented. meet their statutory requirements. Member of Pensions Advisory Network, NEPOF, LAPFF to assist in keeping abreast of new developments. Changes to national Attend seminars and conferences to keep abreast of latest pension requirements developments. are not communicated effectively. The Administering Authority is alert to the potential creation of additional liabilities and administrative difficulties for employers Loss of reputation. and itself. Financial penalties The Administering Authority considers all consultation papers Increased formal issued by the CLG and comments where appropriate. complaints leading to Any changes to member contribution rates or benefit levels will members invoking the be carefully communicated with members and employers to Internal Resolution minimise possible opt-outs or adverse actions. Dispute Procedure and UPM has a facility called the “test harness” which allows the system potentially the Pensions to be updated to test calculation results to ensure that software Ombudsman updates provide the correct results before being implemented. Fund inherits incorrect UPM has the facility to “lock down” records ensuring more audit Guaranteed Minimum controls are in place and that fixes to the system will be quicker. Pension (GMP) liabilities when contracting out The IDRP procedure has been streamlined to provide for defined benefit compensation payments earlier in the process resulting in savings schemes ends in April to costs and staff time. 2016. Project group to be set up to reconcile GMP data held by the Fund with data held by HM Revenue and Customs.
46 risk management 15 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
15 Changes in Potential financial Use of tax experts to advise on tax changes. legislation and loss. regulations Member of Pension Advisory Network, NEPOF, LAPFF to assist e.g. LGPS 2014 Increase in pension in keeping abreast of new developments. liabilities. scheme changes, Regular attendance at conferences and webinars. investment Increase in adherence regulations, costs. Regular contact with Fund advisers including external changes to investment manager, independent adviser, actuary, and tax treatment, Increase in workload. external auditors. changes to audit and reporting Reduction in Participation in government consultations. requirements, effectiveness of Regular contact with other LGPS funds to compare and inform new governance investment approach. best practice. arrangements etc. Introduction of the Local Pension Board to assist the Administering Authority in complying with changes to legislation and regulations. 16 Professional Potential financial Staff training and identification of training requirements standards and/or loss. through the EDR process. section procedures not applied Negative impact on Dedicated Pensions training officer provides bespoke training reputation. for internal staff and regular training events for employers.
Incorrect calculation Regular attendance and feedback from industry conferences. of pensions. Independent verification and quality control procedures Fraud/collusion by including external verification by the external audit and internal senior staff. audit.
Inaccurate Use of specialists to supplement in house expertise including information/data Pension Advisory network; external investment manager for leading to incorrect a proportion of the Fund’s assets; independent advisor to the decisions. Pensions Committee; and the Fund’s Actuary.
Risk of Compliance Manual updated on an annual basis and signed by underperformance all staff in the Investments Section. from investment managers. The Fund maintains close contact with its actuarial advisers. Actuarial advice is subject to professional requirements such Actuarial advice is as peer review and advice is delivered via formal meetings with not sought, or is not Elected Members, and recorded appropriately. heeded, or proves to be insufficient in some Dedicated WEB team now fully staffed following the Pensions way. Section review and are currently working on pilot testing the Employer web module incorporating the professional standards applied by the Pensions Section.
47 risk management 16 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
17 Unforeseen/ Failure to fulfil Internal Task Management system to monitor workflow. unplanned statutory customer demands requirements of the Pension Officers working with employers to provide placed on the pension scheme. information required. Pensions section Employers’ failure Clear allocation of responsibilities. to understand obligations and Training sessions organised for internal departments and/or liabilities under the employers. LGPS. Guidance issued and updated on a regular basis. Failure to meet targets, financial Six monthly meetings held with all Fund employers to address implications e.g. workforce issues. late payment equals interest, loss of Unitary Finance Officers to cascade employer plans early to reputation, poor avoid unforeseen occurrences. customer service Within Phase 3 of UPM employers will be able to access their own staff records to model the impact of any future workforce management projects. This will enable them to establish costs ahead of the event which should aid the decision making process. This will allow them to be more interactive and gain quicker access to data and information. 18 Insecure storage Breach of data Authentication controls including regular password changes and unsafe protection i.e. theft or and robust user administration procedures are in place. transmission of loss of data. data Access rights are restricted. Inability to verify Data is backed up on a daily basis. pensions data. Audit trails and reconciliations are in place. Transmission of data to incorrect recipient. Pension system is protected against viruses and other system threats. Inappropriate levels of access to confidential Software is regularly updated to ensure LGPS requirements are data. met. Regular data matching exercise. Potential for fraud. Adhere to the ICT Security Policy e.g. GCSX secure e-mail Inability for account used for transmission of sensitive data and all staff use employers to provide Government Protective Marking scheme for e-mails. data electronically. Pensions section has Data Protection Link Officer. Greater need to perform manual All staff completed data protection e-learning module in calculations. October 2015.
Increased formal complaints leading to members invoking the Internal Resolution Dispute Procedure and potentially the Pensions Ombudsman.
48 risk management 17 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
19 Failure of supplier Unable to access LGPS Procurement process assesses technical ability and financial e.g. IT supplier, member records; stability. Bloomberg, pay benefits; access Disaster recovery in place for each IT system e.g. Payments, Custodian, External information e.g. e-mails, Masterpiece, I Notes, Bloomberg. Investment training notes, payroll. Manager Failure to pay pensions, Back-up systems in place and completed daily. to collect contributions, Business continuity plans in place for UPM system. lack of funding. Regular meetings with IT development staff. Failure to settle trades, corporate actions, Regular performance monitoring. undertake stock Regular reconciliation of custody data to internal records. lending, and exercise voting rights. Funds under management can be transferred to the external Potential negative investment manager. impact on the WEB based facility to access IT system. Fund’s investment performance. Loss of staff work time. Unable to communicate with members and employers e.g. ABS, newsletters, employer updates. Custody risk including missed dividends or corporate actions, and delays in trade settlements. Unable to trade due to incomplete information. No updates, no support, lack of training and information.
20 Business disruption Failure to fulfil Remote working or alternative sites. e.g. unable statutory requirements Key control for accessing workspace should rest with Asset to access the of the pension scheme. management. building/workspace Employers’ failure to Disaster recovery plan would provide limited emergency office understand obligations space. and liabilities under the LGPS. Senior managers could work from home. Potential negative Senior managers have out of office contact details for all staff impact on the Disaster Recovery and Business Continuity plan for UPM in place Fund’s investment to provide web-based access to UPM and/or emergency office performance. space. Disaster Recovery and Business Continuity plan last updated January 2015. Pensions Section emergency contact lists extended to include team leaders and increased facility for senior staff to access UPM from home in the event of an emergency.
49 risk management 18 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
21 Failure to recruit Insufficient staff to Sickness reviewed monthly and dealt with in accordance with the and retain staff administer tasks on a sickness policy. including long term daily basis. Regular EDRs to identify well-being issues, skill gaps and training staff absence Re-prioritise workloads requirements. i.e. essential work Workforce development action plan in place to identify future only resulting in workforce requirements, training needs and recruitment/ reduced performance retention measures. and service provided to other areas e.g. Review of vacant posts and re-evaluation /regrading/ employers, scheme restructuring considered as appropriate. members and staff Succession planning within Sections. Potential for financial Detailed records of rationale for investment decisions. penalties if work not completed correctly Key processes are documented. Potential negative To complete succession planning toolkit for key members of staff. impact on the Fund’s investment Health and Safety policy. performance. Occupational Health. Potential for additional Maternity Risk Assessment form. costs to be incurred e.g. additional Managing holiday usage. temporary staff, Advertising extended to include local newspapers (Hull Daily transfer of investment Mail and Goole Times) resulting in an increase in the number and assets to an external quality of applicants. provider Potential introduction of trainee Investment Analyst posts offers greater resilience to the internal investment manager. 22 Insufficient training Failure to fulfil Induction and training programme for Members and Officers. for personnel statutory requirements responsible for the of the pension scheme. Regular training sessions for new and existing Pensions Committee Fund (Members and Local Pension Board members. and Officers). Employers’ failure to understand obligations Regular EDRs to identify training requirements and wellbeing and liabilities under issues. the LGPS. Relevant staff are encouraged to obtain formal investment Potential negative management qualifications e.g. CFA, IMC where relevant. impact on the Sickness absence policy. Fund’s investment performance. Mini induction on return to work from long term absence. Failure to attract Detailed records of rationale for investment decisions. suitably skilled and Key processes are documented. experienced members for the S101 Pensions Regular Employer pensions training and internal staff training Committee and the reviewed following pensions administration work review in March East Riding Pension 2015. Fund Local Pension Board. Pensions Administration Strategy to be produced following the completion of Phase 3 of UPM. Formal training programme for Pensions Committee members. Local Pension Board training programme linked to the Training Needs Analysis undertaken with Local Pension Board representatives.
50 risk management 19 East Riding Pension Fund Annual Report and Accounts 2016/2017
No. Risk Consequences Controls
23 Government Selected pooling Fund has assumed a leading role in the creation of its selected policy of pooling arrangement not pooling arrangement. investments across deemed to be “suitably Full participation in response to consultation. LGPS funds. ambitious” by Government. Full participation and decision making ability into how the pooling arrangement will be created and managed. Potential disruption to existing investment arrangements whilst new pooling arrangements are created. Additional costs of new vehicle outweigh the benefits of pooling.
24 Failure to report a Potential that All relevant persons aware of their legal duty to report a breach breach of the Law members of the through the Fund’s Procedure for Reporting Breaches including to The Pensions Pensions Committee members of the Pensions Committee and the Local Pension Regulator. and the Local Pension Board, and officers of Fund employers. Board will not be able to fulfil their roles Pensions section staff have undertaken e-learning programme on the Regulator’s website. Inadequate internal controls leading to All breaches including those reported to the Regulator and those poor governance, unreported are presented to the Pensions Committee and the administration, and Local Pension Board on a six monthly basis as part of the Pension inappropriate decision Fund Risk Register review. making practices Potential that member benefits calculated incorrectly due to poor record keeping. Scheme assets misappropriated or insufficiently safeguarded.
In addition, an investment management risk schedule is reviewed by the Pensions Committee on a quarterly basis which considers issues such as Fund performance, regulation and compliance, and personnel and structure. Other risks pertaining to the Fund are disclosed in the Funding Strategy Statement (pages 92 to 119) and Note X Disclosure Relating to Financial Instruments (pages 85 to 90).
51 risk management 20 East Riding Pension Fund Annual Report and Accounts 2016/2017
Internal Controls and Assurance The Statement of Investment Principles requires an annual written statement from the Investment Managers that they have adhered to the principles set out in the statement. Statements are received from the Director of Corporate Resources and Schroder Investment Management. In addition, assurance to assess the internal controls and procedures at Schroder Investment Management and State Street Global Services is also sought. Schroder Investment Management prepare an Audit and Assurance Faculty Report which covers the control objectives and procedures relating to its investment activities. The report is audited by PricewaterhouseCoopers in accordance with International Standard on Assurance Engagement (ISAE) 3402 and 3000 and the Institute of Chartered Accountants in England and Wales Technical Release AAF 01/06. The report concluded that controls were suitably designed and operated effectively throughout the period under review with the exception of one issue relating to the review of client reporting. Management have subsequently implemented a process review and introduced enhanced audit trails in order to prevent this from occurring in the future. The State Street audit, by Ernst and Young, was performed in accordance with the Statement on Standards for Attestation Engagements No 16 (SSAE 16) issued by the American Institute of Certified Public Accountants (AICPA) and the International Standard on Assurance Engagement (SAE) 3402 issued by the International Accounting and Assurance Standards Board. The report concluded that controls were suitably designed and operated effectively throughout the period under review.
Audit During the financial year the East Riding of Yorkshire Council Internal Audit section reviewed the operations of the Investments and Pension Administration sections to ensure there were adequate controls and procedures in place. The results of these audits are shown in the table below:
Control Effectiveness Risk Exposure
Investments Significant Assurance Minor
Pensions Administration Adequate Assurance Moderate
52 risk management 21 East Riding Pension Fund Annual Report and Accounts 2016/2017 financial performance
Analytical Review The following tables provide a brief review of the major movements in the Fund Account and the Net Assets Statement for the financial year. More detail is provided in the Investment Policy and Performance report on pages 38 to 51.
Fund Account 2015/16 2016/17 Notes
£000 £000
Net Contributions 26,761 25,296
Positive returns in the majority of asset classes enhanced by the impact Return on Investments 9,967 795,207 of the depreciation of sterling on the value of non-sterling investments
Net increase in the Fund 36,728 820,503
Net Asset Statement 2015/16 2016/17 Notes
£000 £000
Fixed Interest 370,011 444,537 Positive returns and net investment
Index-linked 23,917 34,477 Positive returns and net investment
Equities 1,539,039 1,895,273 Positive returns in all equity markets
Pooled Funds 1,620,236 2,001,321 Positive returns and net investment in Property and Alternatives
Investment income and net contributions predominantly reinvested in Cash 132,993 129,194 Bonds, Property and Alternatives
Other 13,423 15,050
Total Investment Assets 3,699,619 4,519,852
Analysis of pension contributions The following table provides an analysis of contributions
2015/16 2016/17 Total On Time Late Total On Time Late £000 £000 % £000 % £000 £000 % £000 % Employer – Primary 131,512 127,961 97.3 3,551 2.7 133,667 130,639 97.7 3,028 2.3 Employee – Primary 34,019 33,148 97.4 871 2.6 34,130 33,413 97.9 717 2.1 165,531 161,109 97.3 4,422 2.7 167,797 164,052 97.8 3,745 2.2
In 2016/17 84 monthly payments were received late, of which 61 were received within 1 month of the due date, 13 were received within 1 and 3 months, and 10 were received after 3 months. In 2015/16 131 monthly payments were received late, of which 110 were received within 1 month of the due date, 5 were received within 1 and 3 months, and 16 were received after 3 months.
53 financial performance 22 East Riding Pension Fund Annual Report and Accounts 2016/2017
Forecasts The following tables show the forecasts and outturn for the Fund Account and the Net Assets Statement for the 3 years to 31 March 2018
2015/16 2016/17 2017/18 Fund Account Forecast Actual Forecast Actual Forecast £000 £000 £000 £000 £000 Contributions 160,000 171,373 160,000 175,720 267,000 Payments (137,000) (144,612) (137,000) (150,424) (155,000) Admin expenses (1,619) (1,511) (2,050) (1,745) (2,269) Net investment income 105,000 118,800 110,000 141,171 153,600 Investment expenses (2,590) (2,819) (2,550) (3,279) (3,861) Oversight and governance expenses (400) (427) (400) (549) (400) Change in market value 155,442 (102,185) 170,888 659,609 108,168 Net increase in the Fund 278,833 38,619 298,888 820,503 367,238 Contributions and payments are based on current expectations; the administration, investment management, and oversight and governance expenses are based on current budgets; and the net investment income and change in market value are based on the long term forecast returns for each asset class.
2015/16 2016/17 2017/18 Net Asset Statement Forecast Actual Forecast Actual Forecast £000 £000 £000 £000 £000 Equities 2,526,968 2,206,046 2,721,544 2,743,467 2,924,536 Fixed Income 359,809 393,928 377,440 479,014 497,696 Cash 199,343 132,992 226,911 129,194 237,506 Property 238,011 422,460 254,195 499,467 527,937 Alternatives 499,156 530,769 542,083 653,660 699,416 Other - 13,423 - 15,050 - Total Investment Assets 3,823,287 3,699,618 4,122,173 4,519,852 4,887,091
The forecasts for total investment assets for 2015/16 and 2016/17 are based on the actual figures at 31 March 2014 multiplied by the annualised forecast long term returns for each asset class as determined by the strategic asset allocation review in 2013. The forecast for 2017/18 is based on the actual figures at 31 March 2017 multiplied by the annualised forecast long term returns for each asset class as determined by the strategic asset allocation review in 2016. Net contributions, less administration and investment management expenses, are added to the Cash figure to reflect new money into the Fund. The forecasts do not take into account potential additions or disposals of investments within these asset classes during this 3 year period as potential changes are not known with any degree of certainty. The long term annualised forecasts, which are shown net of costs, are as follows
2010 strategic review 2013 strategic review 2016 strategic review Asset Class % % %
Equities 7.8 7.7 6.6
Fixed Income 5.6 4.9 3.9
Cash 4.8 3.4 2.2
Property 6.5 6.8 5.7
Alternatives 8.5 8.6 7.0
Total 7.4 7.1 6.0
54 financial performance 23 East Riding Pension Fund Annual Report and Accounts 2016/2017
These long term forecasts are revised every 3 years in line with the actuarial valuation exercise and the subsequent strategic asset allocation review with the latest review completed in 2016/17.
Operational Expenses
2015/16 2016/17 2017/18
Budget Actual Budget Actual Budget
£000 £000 £000 £000 £000
Pensions Administration
Employees 993 1,099 1,255 1,290 1,428
Supplies and Services 304 141 328 249 492
Professional Fees 95 69 270 5 150
Central costs 177 202 199 201 199
1,569 1,511 2,052 1,745 2,269
Investment Management
Employees 696 693 696 645 796
Supplies and Services 234 157 199 265 363
External Fund Manager 1,391 1,644 1,822 2,039 1,993
Custodian 100 99 100 116 137
Stock Lending 150 156 150 127 150
Professional Fees 10 10 10 9 10
Central costs 59 60 70 70 70
LGPS Pooling Costs - - - 8 342
2,640 2,819 3,047 3,279 3,861
Oversight and Governance 400 427 400 549 400
Total 4,609 4,757 5,449 5,573 6,530
55 financial performance 24 East Riding Pension Fund Annual Report and Accounts 2016/2017
Analysis of Pension Overpayments
2012/13 2013/14 2014/15 2015/16 2016/17 Total
£ £ £ £ £ £
Overpayments recovered 9,889 4,507 7,146 10,352 92,544 124,438
Overpayments written off
Deaths 4,178 3,593 5,753 7,010 7,525 28,059
P GM - - - 27,812 11,427 39,239
Total 4,178 3,593 5,753 34,822 18,952 67,298
Annual Payroll 98,119,729 103,025,314 107,481,388 110,001,025 111,488,388 530,115,844
Write offs as % of Payroll <0.1% <0.1% <0.1% <0.1% <0.1% <0.1%
Number of cases - Written off 143 112 356 317 446 1,374
Number of cases - Recovered 13 16 15 18 314 376
Number of cases - in process of recovery 16 12 45 26 12 111
56 financial performance 25 East Riding Pension Fund Annual Report and Accounts 2016/2017 administrative management performance
East Riding of Yorkshire Council (ERYC) has been a member of the CIPFA Pensions Administration benchmarking club since 2005. On an annual basis the Pensions Section completes a comprehensive questionnaire containing a breakdown of budget costs between pensions administration and other functions within the section including communications, IT, accountancy and the commissioning of actuarial work. Data is also provided on LGPS members, Fund employers, workloads, staffing, IT arrangements, industry standard performance indicators and current best practice. The 2016 CIPFA Pensions Administration benchmarking club report, issued in November 2016, compared the performance of ERYC in 2015/16 with 38 local authorities who administer the Local Government Pension Scheme (LGPS). The key findings for 2015/16 were: • The annual cost of administering the LGPS per member. The key benchmark for Pensions Administration is the cost of administering the LGPS per member and the Fund’s cost for 2015/16 was £16.47 (2014/15: £15.88) compared to the average of £18.37 (2014/15: £19.17). The table below is an analysis of the Fund’s cost per member compared with the average cost for the authorities in the benchmarking club.
East Riding Pension Fund Average
£ £
Staff 7.80 8.62
Payroll 1.00 1.40
Direct costs e.g. communications and actuarial fees 0.94 2.15
Overheads e.g. IT, accommodation, central charges 6.95 6.34
Income (0.21) (0.41)
Net cost per member 16.47* 18.37*
* difference between the total cost and the sum of the sub averages is due to rounding and quality control methods applied by CIPFA • The annual cost of employing a full time equivalent (FTE) member of staff to administer the LGPS. The Fund’s staff cost for 2015/16 was £24,455 pa per FTE staff (2014/15: £24,265 pa) compared to the average of £33,807 pa (2013/14: £32,429 pa).
5 Year Analysis of Fund Membership Data
2013 2014 2015 2016 2017
Active Members 35,969 36,978 37,472 39,227 39,475
Deferred Beneficiaries 33,375 35,867 36,859 37,450 41,585
Deferred Members 31,791 34,293 35,113 35,358 38,817
F rozen Refunds 1,584 1,574 1,746 2,092 2,768
Pensions in Payment 24,404 25,656 26,408 26,698 28,625
Total Membership 93,748 98,501 100,739 103,375 109,685
57 administrative management performance 26 East Riding Pension Fund Annual Report and Accounts 2016/2017
5 Year analysis of Fund Membership
FUND MEMBERSHIP 110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000 Number of Members 30,000
20,000
10,000
2013 2014 2015 2016 2017
Year Ending 31 March
Active Members Deferred Members Pensions in Payment
Age Profile of Fund Membership at 31 March 2017
Age Band Preserved Active Beneficiary Deferred Pensioner Total Years Refund
<20 1,311 237 174 0 142 1,864
20-24 2,882 2 1,526 0 316 4,726
25-29 3,390 6 3,184 1 233 6,814
30-34 3,828 9 3,828 2 271 7,938
35-39 4,307 16 4,260 9 306 8,898
40-44 5,885 34 6,113 40 408 12,480
45-49 6,621 98 7,783 109 366 14,977
50-54 6,094 173 7,255 554 316 14,392
55-59 3,866 232 4,057 3,341 199 11,695
60-64 1,090 335 589 6,986 92 9,092
65-69 175 569 42 6,232 71 7,089
70-74 25 511 6 3,367 29 3,938
75-79 1 628 0 2,207 15 2,851
80-84 0 578 0 1,253 2 1,833
85-89 0 341 0 484 2 827
>90 0 149 0 122 0 271
Total 39,475 3,918 38,817 24,707 2,768 109,685
58 administrative management performance 27 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Ainthorpe Primary Academy 67 070700000000000000
Anlaby & Anlaby Common Parish Council 3010000000000000000
Appleton Primary Academy 91 080502000000000000
Archbishop Sentamu Academy 316 0 20 0 53 0 30 000406000000
Ashwell Pru Academy 88 000704000400000000
Aspire Academy 81 0 3 0 21 05000000000000
Barnardo's 5000001020000000000
Barton On Humber Town Council 14 000102000000000000
Bellfield Academy 67 070403000000000000
Beverley Grammar Academy 152 0 15 0 12 07000400000000
Beverley Town Council 13 000102000000000000
Biggin Hill Primary Academy 176 0 21 0507010000000000
Bishop Burton College 762 0 45 3 72 0 75 0 20 1 24 0 6 0 0 0 0 0 0
Bottersford Town Council 7000100000000000000
Bricknell Primary Academy 149 0 22 0700010000000000
Bridgeview School 48 030603000000000000
Bridlington Town Council 9 010100000000000000
Brigg Town Council 12 000300000000000000
Broughton Town Council 7000200000000000000
Buckingham Primary School 107 080900000000000000
Bude Park Primary Academy 110 090605000000000000
Bulloughs Cleaning Services Ltd 20 040000000000000000
Bursar Academy 64 060305000000000000
Burton Upon Stather Parish Council 3010000000000000000
Cambridge Park M&C Spec Academy 363 0 52 0 20 0 10 000400000000
Canon Peter Hall Academy 57 090501000000000000
59 administrative management performance 28 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Chiltern Primary 127 0 14 0905000000000000
Christopher Pickering Primary Academy 150 0 11 0805000000000000
Churchill Contract Services Ltd 32 020000000000000000
City Health Care Partnership CIC 15 030200000000000000
Civica - Revenue and Benefits 561 0 19 0 101 0 92 0 14 0 5 0 0 0 0 0 0 0 0
Cleethorpes Academy 106 0 11 0 16 0 2 0 0 0 0 0 0 0 0 0 0 0 0
Cleeve Primary Academy 184 0 17 0 12 04000000000000
Collingwood Academy 91 090205000500000000
Compass Contract Services UK Ltd (Hessle Academy Com Trust) 27 040300000000000000
Compass Contract Services UK Ltd (The Vale) 13 020100000000000000
Coritina Academy 25 010103000000000000
Cottingham Academy 225 0 16 0 24 0 11 020000000000
Craven Primary Academy 76 060405000000000000
Crowle Primary Academy 59 070201030000000000
Dorchester Primary Academy 121 0 13 0802000000000000
Driffield School 48 030603000000000000
Driffield Town Council 22 000302000000000000
Dunswell Academy 40 070100000000000000 Easington Academy 28 050200000000000000 East Ravendale Academy 32 040101000000000000 East Riding College 479 0 34 0 50 0 23 0 19 0 10 0 0 0 10 0 0 0 0 East Riding Of Yorkshire Council 23,733 0 2,396 1 2,574 0 2,340 0 807 0 370 0 78 0 94 0 52 0 0 Eastfield Academy 162 0 14 0 9 0 3 0 0 0 11 0 0 0 0 0 0 0 0 Eastfield Primary Academy 85 050402000600000000 Edward Heneage Academy 86 090405000000000000 Elliston Academy 191 0 17 0701000000000000
60 administrative management performance 29 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Elloughton Cum Brough Parish Council 14 000100020000000000 Emergency Services Fleet Management 259 0 1 0 15 0 34 030400000000 (Humberside) Limited Emih Ltd-The Deep 297 0 8 0 16 0 35 0 5 0 13 0 8 0 0 0 0 0 0 Endike Primary Academy 90 080902000000000000 Endsleigh Holy Child Rc Primary Academy 87 0 10 0902000000000000 Enfield Academy of New Waltham 54 030401000000000000 ENGIE Services Limited 420 0 8 0 21 0 73 0 18 0 4 0 0 0 0 0 0 0 0 Epworth Academy 61 090402000000000000 Estcourt Primary Academy 117 0 13 0505000000000000 Fairfield Academy 80 0 11 0501000000000000 Francis Askew Primary Academy 130 0 11 0902030000000000 Franklin College 278 0 22 0 18 0 15 0 7 0 12 0 0 0 0 0 0 0 0 Future Cleaning Services 0000000000000000000 Ganton School 257 0 17 0 28 08000000000000 Goole Academy 179 0 19 0 20 04000300000000 Goole Town Council 96 080609000000000000 Great Coates Primary Academy 58 060402000000000000 Grimsby Institute 1,419 -712 106 2 157 2 129 0 23 0 30 0 12 0 9 0 0 0 0 Hall Road Primary Academy 117 0 10 0503000000000000 Havelock Academy 625 0 43 0 82 0 72 0 18 0 0 0 0 0 0 0 0 0 0 Healing Primary Academy 72 080401000000000000 Healing Science Academy 202 0 16 0 21 0 11 030400000004 Hedon Town Council 17 010200000000000000 Henderson Ave Primary Academy 148 0 21 0 11 08030000000000 Hessle Academy 189 0 15 0 17 0 12 040000000000 Hessle Town Council 3000000000000000000
61 administrative management performance 30 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Hibaldstow Academy 33 040100030000000000 HICA 54 000002030000000 14 0 0 Highlands Primary Academy 137 0 13 0 13 07000000000000 Holy Family Catholic Academy 93 070705000000000000 Hornsea Town Council 40 000404000000000000 Hull & Goole Port Health Authority 46 0 1 0 0 0 11 000200000000 Hull Charterhouse Trustees 19 000302000000000000 Hull City Council 14,955 1 847 1 1,374 5 2,125 0 745 0 468 0 62 0 100 0 45 0 0 Hull College Of F.E 1,767 0 126 0 205 0 147 0 35 0 32 0 19 0 9 0 0 0 0 Hull Culture and Leisure Limited 1,108 0 112 0 130 0 150 0 29 0 29 0 0 0 10 0 0 0 0 Hull Resettlement Project Ltd 20 000000030400000000 Humber Bridge Board 325 0 5 0 46 0 27 0 11 0 0 0 0 0 9 0 2 0 0 Humber Foundation Trust 186 0 1 0 9 0 51 0 17 1 3 0 0 0 0 0 0 0 0 Humber University Technical College 31 010502000000000000 Humberside Fire Authority 845 0 25 0 93 0 104 0 46 0 9 0 0 0 10 0 0 0 0 Humberston Academy 153 0 16 0 12 05020000000000 Humberston Cloverfields Academy 97 0 15 0103000000000000 Humberston Park Academy 226 0 28 0 20 03000506000000 Hunsley Primary School 14 020200000000000000 Huntcliff School 111 0 11 0706000000000000 ICS Chiltern 1000000000000000000 ICS Driffield 3010000000000000000 ICS Wolfreton 2000000000000000000 ICT 4 Collaboration 76 0 1 0 5 0 11 0 5 0 10 0 4 0 0 0 0 0 0 Immingham Academy 142 0 10 0 16 0 10 000300000000 Immingham Town Council 45 010402000500000000
62 administrative management performance 31 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Ings Primary 21 020201000000000000 ISS Facility Services PFI 12 030000000000000000 John Leggott College 334 0 13 0 38 0 23 900600000000 Kelvin Hall School 332 0 15 0 39 0 19 000000000000 Kingstown Works 1,734 0 27 0 104 2 361 0 29 0 30 3 20 0 0 0 0 0 0 Kingswood Academy 139 0 7 0 13 08000400000000 Kingswood Park Primary 45 090304000000000000 Kirkella & Westella Parish Council 2000000000000000000 Laceby Acres 83 090400000000000000 Lincs Inspire Limited 370 0 14 0 36 0 33 050408000000 Lisle Marsden Academy 130 1 19 0600020000000000 Littlecoates Primary Academy 50 070301000000000000 Longhill Primary Academy 146 0 9 0 10 01050000000000 Macaulay Academy 152 0 17 0904000000000000 Malet Lambert Academy 341 0 9 0 34 07000500000000 Market Weighton Town Council 15 010102000000000000 Maybury Primary Academy 78 040703000000000000 Melior Community Academy 186 0 9 0 19 0 10 000000000000 Mellors Catering Services Ltd 2000000000000000000 Mersey Primary Academy 55 050500000000000000 Middlethorpe Academy 50 080302000000000000 N.E Inshore Fisheries 102 0 0 0 4 0 14 030900000000 Neasden Primary Academy 77 090103000000000000 New Waltham Academy 71 080502000000000000 Newbald Parish Council 4000100000000000000 Newington Primary Academy 94 070802000000000000
63 administrative management performance 32 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Newland St Johns CofE Primary Academy 81 0 13 0400000000000000 North Axholme Academy 102 080806000000000000 North Cave Parish Council 3010000000000000000 North East Lincolnshire Council 5,505 0 306 2 512 7 779 1 273 2 226 0 118 0 20 0 29 0 0 North East Lincs CTP 48 000004050000000000 North Lincolnshire Council 12,108 0 1,114 0 1,030 0 1,344 0 465 0 342 0 48 0 44 0 24 0 0 North Lindsey College 518 0 22 0 68 0 45 0 13 0 10 0 7 0 0 0 0 0 0 NPS Humber Ltd 681 0 1 0 16 0 88 0 37 0 54 0 0 0 10 0 0 0 0 Nunsthorpe Academy 83 0 13 0705000000000000 Old Clee Primary Academy 180 0 16 0 7 0 5 0 0 0 0 0 0 0 0 0 0 0 0 Ongo Homes 1,834 0 6 0 63 1 217 0 63 0 35 0 15 0 11 0 27 0 0 Ormiston Maritime Academy 246 0 24 0 22 08000400000000 Ouse & Humber Drainage Board 87 000706000900000000 Outwood Academy Brumby 158 0 11 0 19 02020000000000 Outwood Academy Foxhills 160 0 13 0 14 05000000000000 Parkwood Primary Academy 82 0 14 0601030000000000 Patrington Academy 42 090301000000000000 Pearson Primary 56 030604000000000000 Penshurst Academy 79 0 7 0 14 00000000000000 Phoenix House Pru 79 0 1 0 13 05000000000000 Pickering Homes Trust 203 0 3 1 4 0 28 0 6 0 0 0 14 0 9 0 0 0 0 Pocklington Junior School 20 020100000000000000 Pocklington School 102 0 1 0 10 08000400000000 Priory Primary Academy 103 080504000000000000 Quay Academy 80 0 14 0300000000000000 Reynolds Primary Academy 98 0 13 0502000000000000
64 administrative management performance 33 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Riverside 53 010206300000000000 Robertson FM 10 010100000000000000 Robertson FM PFI 20 020101000000000000 Scartho Academy 35 020300020000000000 Scawby Academy 67 080202030000000000 Sevenhills Academy 72 010806000000000000 Sewell Facilities Managmnt Ltd 6000000000000010000 Shoreline Housing Partnership 350 0 3 0 3 0 62 0 16 0 4 0 0 0 0 0 13 0 0 Sigglesthorne CofE Primary Academy 6010100000000000000 Signhills Academy 78 090403000000000000 Signhills Infants Academy 69 0 10 0101000000000000 Sirius Academy 323 0 20 0 35 0 28 0 1 0 10 0 7 0 0 0 0 0 0 Sodexo Nunsthorpe 7010000000000000000 South Axholme Academy 148 0 16 0 5 0 10 000400000000 South Cave Parish Council 7000002000000000000 South Hunsley Academy 390 0 32 0 39 0 19 000800000000 South Parade Academy 168 0 21 0907000000000000 Southcoates Primary 130 0 12 0505000000000000 Spring Cottage Academy 131 0 10 0 10 01000300000000 Springfield Primary Academy 98 090203000000000000 St Augustine Webster Academy 73 0 12 0303000000000000 St Bede'S Academy 126 0 12 0806000000000000 St Bernadettes Academy 59 080601000000000000 St Georges Primary 39 050103000000000000 St James CofE Primary Academy 62 070402000000000000 St Joseph's Catholic Academy 83 0 11 0202000000000000
65 administrative management performance 34 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
St Mary's Academy Brigg 43 080002000000000000 St Mary's Catholic Primary Academy 78 0 10 0500000000000000 St Marys Queen Of Martyrs Academy 79 080802000000000000 St Nicholas Primary Academy 62 080501000000000000 St Nordetts Academy 22 040200000000000000 St Peter's CofE Primary School 37 060101000000000000 St Richards RC Primary Academy 169 0 10 0 11 0 10 000000000000 St Vincents Rc Primary Academy 45 050302000000000000 Stamford Bridge Primary School 21 030100000000000000 Stepney Primary 51 030701000000000000 Stockwell Academy 64 050800000000000000 Strand Academy 73 0 11 0303000000000000 Sullivan Centre 7010000000000000000 Sutton Park Primary Academy 100 090604030000000000 Swanland Primary School 86 0 15 0300030000000000 Taylor Shaw Lt St Bedes 3010000000000000000 The Boulevard Academy 92 010906020400000000 The Boulevard Centre 42 030500000000000000 The Chief Constable Of Humberside 6,612 0 81 0 298 0 1,272 0 200 0 54 0 29 0 0 0 36 0 0 The Green Way Primary Academy 130 0 11 0608000000000000 The Marvell College 63 030406000000000000 The Parks Academy 88 060803000000000000 The PCC For Humberside 172 0 1 0 3 0 15 0 16 0 7 0 19 0 0 0 0 0 0 The Snaith School 176 0 19 0 10 06030000000000 The St Lawrence Academy 145 0 8 0 15 0 13 030500000000 Thomas Ferens Academy 277 0 9 0 31 05000000000000
66 administrative management performance 35 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Thoresby Academy 120 0 11 0 11 01030000000000 Thorpepark Academy 149 0 20 0703030000000000 Thrunscoe Academy 80 0 14 0102000000000000 Toll Bar Academy 365 0 21 0 21 0 42 2 7 0 1 0 14 0 0 0 0 0 0 Trinity House Academy 132 0 2 0 9 0 13 000000000000 Tweendykes Academy 309 0 24 0 19 0 12 030000000000 Ulceby St Nicholas Academy 9010100000000000000 Univ Lincoln Students Union 67 000219000100000 19 0 0 University of Lincoln 5,612 0 45 2 177 4 568 0 197 2 208 0 51 0 24 0 69 0 0 Vale Academy 121 0 9 0 11 08000000000000 Waltham Leas Academy 89 0 12 0400020000000000 Wansbeck Academy 45 050500000000000000 Weeslby Academy 116 0 15 0602000000000000 Welholme Primary Academy 154 0 18 0702000000000000 Welton Parish Council 1000000000000000000 Westcott Primary Academy 33 030300000000000000 Westwoodside Academy 48 060400000000000000 Wheeler Academy 213 0 20 0 12 05030000000000 Whitehouse Pupil Referral Unit 72 0 10 0500020000000000 Whitgift Academy 161 0 14 0 8 0 12 000100000000 Wilberforce College 195 0 11 1 16 2 14 040000000000 William Barcroft Junior Academy 6010100000000000000 Willoughby Rd Primary Academy 99 0 18 0502000000000000 Willows Academy 38 040300000000000000 Winifred Holtby 293 0 18 0 27 0 13 000500000000
67 administrative management performance 36 East Riding Pension Fund Annual Report and Accounts 2016/2017
Employer and Employee Primary Contributions by Band (Continued)
Contribution Bands
2.75% 5.50% 2.90% 5.80% 3.25% 6.50% 3.40% 6.80% 4.25% 8.50% 4.95% 9.90% 5.25% 10.50% 5.70% 11.40% 6.25% 12.50% £000
Employer up to up to £13’601- £13’601- £21’201- £21’201- £34’401- £34’401- £43’501 - £43’501 - £60’701 - £60’701 - £86’001 - £86’001 - £100’201 - £100’001 -
contributions >£151’800 >£151’800 £13’600 £13’600 £21’200 £21’200 £34’400 £34’400 £43’500 £43’500 £60’700 £60’700 £86’000 £86’000 £101’200 £101’200 £151’800 £150’000
Employers £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Winterton Academy 92 080409000000000000 Winterton Town Council 3010000000000000000 Wintringham Academy 190 0 21 0 20 0 14 050400000000 Withernsea Primary Academy Trust 165 0 26 0 13 04040000000000 Withernsea Town Council 16 0 0 0 4 0 1 0 0 0 0 0 0 0 0 0 0 0 0 Wold Academy 139 0 18 0803000000000000 Woldgate School and Sixth Form College 52 030401020000000000 Woodlands Academy 121 0 10 0506000000000000 Workforce Skills Limited 146 0 3 0 2 0 25 032000000000 Worlaby Academy 15 040000000000000000 Wybers Wood Primary Academy 96 0 13 0402000000000000 Wyke College 248 0 17 0 16 0 19 050900000000 Yarborough Academy 110 0 12 0911000000000000 Young Peoples Support CIC 71 0 1 0 14 02030000000000
68 administrative management performance 37 East Riding Pension Fund Annual Report and Accounts 2016/2017 investment policy and performance
Asset Allocation The strategic asset allocation of the Pension Fund is determined on a triennial basis in conjunction with the actuarial valuation exercise. It aims to meet the long term target rate of return with an acceptable level of risk and includes an appropriate diversification of asset classes. The strategic asset allocation is agreed by the Pensions Committee and the Fund’s advisers and investment managers. The strategic asset allocation of the Pension Fund effective during the year ended 31 March 2017 is as follows:
Strategic Allocation Range
Equities 60% +/- 10%
Bonds ¹ 19% +/- 5%
Property 10% +/- 3%
Alternatives 11% +/- 3%
¹ Including Cash The Pensions Committee determines the tactical asset allocation of the Pension Fund on a quarterly basis in light of financial market conditions and following advice from the Fund’s advisers and investment managers. The Pensions Committee also regularly reviews the long term investment strategy to ensure that it remains appropriate. Following the triennial review in 2016 – 17 the Fund’s new strategic asset allocation, effective 1 April 2017, is as follows:
Strategic Allocation Range
Equities 55% +/- 10%
Bonds ¹ 19% +/- 5%
Property 11% +/- 3%
Alternatives 15% +/- 3%
The asset allocation of the Pension Fund at the start and end of the financial year is set out below. The figures are based on market value and reflect the relative performance of investment markets and the impact of tactical asset allocation decisions made by the Pensions Committee. There have been no material changes to asset allocation during the financial year.
2016 2017
14% 15% 60% 61% Equities 12% 11% Bonds
14% Property 13%
Alternatives
69 investment policy and performance 38 East Riding Pension Fund Annual Report and Accounts 2016/2017
Geographical Analysis of Fund Assets as at 31 March 2017
UK Non-UK Total Asset Class £m £m £m
Equities 1,515.4 1,228.1 2,743.5
Fixed Income 199.6 279.4 479.0
Alternatives 755.4 397.7 1,153.1
Cash and cash equivalents 159.0 - 159.0
Total 2,629.4 1,905.2 4,534.6
Geographic Distribution of Equity Investment as at 31 March 2017
Europe £321.4m
United Kingdom £ 1,515.4m North Japan America £181m £ 342.9m
Other Far East £ 221.3m
Emerging Markets £161.5m
70 investment policy and performance 39 East Riding Pension Fund Annual Report and Accounts 2016/2017
Details of the Largest Equity Investments as at 31 March 2017
Market % Market % Top 15 UK Equities Value Investment Top 15 Overseas Equities Value Investment £m Assets £m Assets
Royal Dutch Shell Plc A and B shares 92.4 2.0 Roche Holding AG 12.4 0.3
BP Plc 62.7 1.4 JP Morgan European Smaller Companies Trust Plc 11.5 0.3
HSBC Holdings Plc 59.7 1.3 Montanaro European Smaller Companies Trust Plc 10.9 0.2
Glaxosmithkline Plc 57.6 1.3 Jupiter European Opportunities Trust Plc 10.5 0.2
British American Tobacco Plc 50.4 1.1 SAP SE 9.8 0.2
Unilever Plc 49.3 1.1 Novo Nordisk A/S 9.1 0.2
Astrazeneca Plc 47.2 1.0 Infineon Technologies AG 7.8 0.2
Vodafone Group Plc 43.7 1.0 Mitsubishi UFJ Financial Group Inc 7.4 0.2
Shire Plc 41.0 0.9 KDDI Corporation 7.0 0.2
Biotech Growth Trust Plc 34.9 0.8 BNP Paribas AG 6.7 0.1
Reckitt Benckiser Group Plc 33.5 0.7 AXA SA 6.5 0.1
Prudential Plc 32.6 0.7 Toyota Motor Corporation 6.1 0.1
Impax Environmental Markets Plc 32.0 0.7 CIE Financiere Richemont AG 5.9 0.1
Compass Group Plc 31.5 0.7 Itochu Corporation 5.7 0.1
Diageo Plc 31.1 0.7 Bridgestone Corp 5.7 0.1
Details of Institutional Unit Trusts as at 31 March 2017
Market % Global Equity Funds Value Investment £m Assets
Schroder Funds
SGST North America Equity Fund 342.9 7.6
Institutional Pacific Fund 171.0 3.8
Emerging Markets Fund 161.6 3.6
Developing Markets Fund 50.3 1.1
UK Smaller Companies Fund 41.2 0.9
Recovery Fund 16.9 0.4
European Smaller Companies Fund 17.0 0.4
Japan Smaller Companies Fund 7.1 0.2
Property Funds The Fund holds a portfolio of 34 Property investments valued at £499.5m as at 31 March 2017 in listed, pooled, and limited partnership structures. Each investment is selected on the basis of its expected risk-adjusted return and its contribution to the Fund’s target return for the asset class with sector and geographic exposure reflecting the preferred areas of investment.
71 investment policy and performance 40 East Riding Pension Fund Annual Report and Accounts 2016/2017
4,600 4,400 FUND VALUE 4,200 4,000 3,800 3,600 3,400 3,200 3,000 2,800 2,600 2,400 2,200 £m 2,000 1,800 1,600 1,400 1,200 1,000 800
2013 2014 2015 2016 2017 Year Ending 31 March
Performance data for the year ended 31 March 2017 1 UK 22.0% North America 35.0% Europe Ex - UK 28.3% Equities Japan 32.8% Pacific 36.3% Emerging Markets 35.2% UK Government 6.6% UK Corporate 10.7% Fixed Overseas Bonds 11.3% Income Emerging Market 25.1% Global High Yield 35.4% Property 3.5% Other Cash 0.3%
Source: WM Performance Statistics -5 0 5 10 15 20 25 30 35 40
1 The table shows the Fund’s benchmark returns in each asset class within the strategic asset allocation
72 investment policy and performance 41 East Riding Pension Fund Annual Report and Accounts 2016/2017
Equities • Global equity markets were relatively strong during the year due to a modest improvement in economic growth, positive investor sentiment, and an improvement in earnings expectations. Sterling returns from overseas markets were boosted by the sharp depreciation in sterling following the result of the EU referendum in June 2016. • The best performing equity region, in sterling terms, was Pacific ex-Japan due to a recovery in commodity prices and its proximity to Asian emerging markets which experienced an improvement in economic growth. • Emerging Markets also benefited from an improvement in economic growth in the region as well as its relatively high valuation discount to developed equity markets. • North America rebounded following the outcome of the US presidential election as the new administration’s rhetoric centred on fiscal stimulus through corporate and personal tax cuts and increased infrastructure spending, and protectionist trade policies which were expected to benefit US companies. • Japan benefited from continued loose monetary policy, domestic equity purchases by the government pension investment fund, relatively attractive valuations, improvements in corporate governance, and, in the latter part of the year, currency weakness. • Europe benefited from a modest improvement in economic growth, the absence of further sovereign debt shocks, and reduced fears regarding political instability in the region following a series of elections. This was partly offset by the outcome of the EU referendum and the potential negative impact on economic growth. • The UK was the worst performing equity region, although returns were still exceptionally strong, due to increased uncertainty as a result of the EU referendum and the potential instability during the forthcoming exit negotiations. This particularly affected smaller companies with a domestic focus but was partly offset by larger multinational companies benefiting from sterling depreciation.
Fixed Income • Fixed income markets were positive due to a further decrease in yields as investors continued to search for secure income. Sterling returns from overseas markets benefited from the sharp depreciation in the currency post-Brexit. • In the UK market, bond yields had increased in the first part of the financial year due to an improvement in economic data. However, there was a sharp fall post-Brexit due to an increase in demand for safe haven investments and expectations of weaker economic growth. Yields partially recovered in the latter part of the year but remained relatively low. • In the Overseas developed markets, local currency returns were negative as yields increased modestly due to expectations of a tightening in monetary policy as global economic growth continued to recover. However, the significant weakness in sterling against all of the major currencies resulted in relatively strong returns. • Emerging Market bonds were very strong driven by income and a reduction in yields. Local currency bonds benefited further from a stabilisation in emerging market currencies. • Investment-grade corporate bonds were relatively strong as spreads over government bonds reduced. High yield bonds performed exceptionally well as yields fell sharply following the commodity price-related weakness in the previous financial year.
Property • UK property returns were relatively modest as a result of the fall in capital values following the EU referendum due to increased uncertainty regarding occupancy demand. • The best performing sector was Industrial due to higher yields and relatively strong rental growth. The Logistics sub-sector benefited from a reduction in yields as investors sought property with long leases let to strong tenants with inflation-linked rental growth. • The worst performing sector was Offices as a result of sharp falls in capital values in Central London due to the potential negative impact of the UK’s exit from the EU, particularly in financial services.
73 investment policy and performance 42 East Riding Pension Fund Annual Report and Accounts 2016/2017
• European property markets out-performed the UK market following significant under-performance over the last 5 years. The Nordic markets were the strongest performing area with Italy being the weakest. In addition, relative strength in the Euro had a significant positive impact on sterling investors.
Market Outlook • Economic growth continues to tentatively improve in both developed and emerging economies. Interest rates and inflation expectations in the developed economies are likely to remain low, possibly with the exception of the US, as wage growth and labour productivity remain relatively weak. However, there are signs that unconventional monetary policies may be reversed as a precursor to a more normalised interest rate environment. There also appears to be more support for fiscal stimulus to replace monetary stimulus as it is considered to have a greater impact on the real economy. • Equity markets continue to benefit from loose monetary policy, an improvement in earnings expectations, and positive investor sentiment. However, valuations for the majority of developed markets are above their long term average and markets could be susceptible to a correction if economic growth deteriorates or monetary policy is tightened. Corporate balance sheets appear to be more stretched than in the past and profit margins could come under pressure from rising wage growth. On balance, equity markets are likely to generate returns below their long term historical average and there is a risk of a sharp correction in the short term. As a result, companies with robust balance sheets, visible revenue and earnings growth, and strong cash generation remain attractive in the current environment. • Bond markets have experienced a multi-year bull market driven by low interest rate and inflation expectations and unconventional monetary policy. Despite the recent rise in yields, bonds remain unattractive to a long term investor at the current time. Although bond yields may rise further there is unlikely to be a significant correction in bond markets in the short term as interest rates are expected to remain low, there are very few inflationary pressures, and if quantitative easing is scaled back it is likely to be gradual. Corporate bond spreads, both investment grade and sub-investment grade, are significantly below their long term average and susceptible to a correction in the event of a deterioration in credit quality. Alternative credit investments, such as direct lending or mezzanine debt, offer more attractive risk-adjusted returns and investors can take advantage of the illiquidity premium. • The UK property market has performed exceptionally well over the last few years but some sectors, most notably Central London offices and High Street retail, have, and will continue to, suffer as a result of the exit from the EU and the continued squeeze on households income respectively. Although rental growth remains relatively strong capital growth is likely to be more constrained. As a result, total returns are likely to moderate in the short term which should mean that defensive investments such as real estate debt and social housing are likely to perform relatively well. • It has become clear that investors will have to adjust to a lower return environment, particularly in traditional asset classes, over the next few years. As a result, a switch in focus from return generation to capital protection may be more appropriate.
74 investment policy and performance 43 East Riding Pension Fund Annual Report and Accounts 2016/2017
Investment performance The following table shows the performance of the Fund relative to its strategic benchmark:
Annualised performance 1 year 3 years 5 years 10 years
East Riding Pension Fund 21.1% 10.5% 10.6% 6.8%
Strategic benchmark 20.1% 10.0% 9.9% 7.2%
Source: State Street Investment Analytics The performance of the Fund can be analysed further by asset class:
Annualised performance 1 year 3 years 5 years 10 years
Equities
Fund 28.3% 11.9% 12.8% 8.3%
Strategic benchmark 26.0% 10.2% 11.0% 7.0%
Fixed Income
Fund 13.0% 8.6% 5.8% 6.9%
Strategic benchmark 15.7% 10.9% 7.2% 8.1%
Cash
Fund 1.5% 1.1% 1.0% 1.9%
Strategic benchmark 0.3% 0.3% 0.3% 1.2%
Property
Fund 4.5% 9.0% 7.2% 1.9%
Strategic benchmark 3.5% 9.7% 9.1% 3.5%
Alternatives
Fund 18.2% 11.5% 11.1% 7.0%
Strategic benchmark 16.6% 9.7% 9.5% 10.0%
Source: State Street Investment Analytics
75 investment policy and performance 44 East Riding Pension Fund Annual Report and Accounts 2016/2017
The management of the Fund’s assets are split between the internal investment manager and the external investment manager, currently Schroder Investment Management Limited, as follows:
Internal Investment Manager Schroder IM Asset Class 2015/16 2016/17 2015/16 2016/17 £000 £000 £000 £000
Equities 1,402,594 1,705,494 803,452 1,037,974
Fixed Income ¹ 514,320 601,833 12,600 6,375
Property 422,460 499,467 - -
Alternatives 530,769 653,660 - -
Total 2,870,143 3,460,454 816,052 1,044,349
¹ Including Cash The performance of the Fund by investment manager is as follows:
Annualised performance 1 year 3 years 5 years 10 years
Internal Manager 17.2% 8.9% 10.0% 5.7%
Strategic benchmark 17.1% 8.7% 9.3% 6.5%
Schroder IM 35.1% 15.8% 12.7% 10.0%
Strategic benchmark 34.1% 15.1% 12.2% 9.4%
Source: State Street Investment Analytics
Corporate Governance As a responsible investor, the East Riding Pension Fund wishes to promote corporate social responsibility, high standards of corporate governance, good practice, and improved corporate performance amongst all companies in which it invests. As a result, the Fund has adopted the Principles of the Financial Reporting Council’s (FRC) UK Stewardship Code. The Pension Fund’s Statement of Compliance with the Stewardship Code is shown on pages 46 to 49. The Fund views stewardship as part of the responsibilities of share ownership, and, therefore, an integral part of the investment strategy. The Fund believes that active stewardship will help to deliver high standards of corporate governance which will contribute positively to business performance over time by: • encouraging accountability between directors, shareholders, and other stakeholders; • strengthening the integrity of relationships between these bodies; and • improving transparency in the way companies are run. In practice, the Fund’s policy is to discharge its corporate governance responsibilities through engagement with investee companies, the utilisation of its voting rights, an interpretation of best practice guidelines, existing arrangements with its external investment manager, and through membership of the Local Authority Pension Fund Forum (LAPFF). Further details of LAPFF’s guidance on environmental, social, and governance issues can be found on www.lapfforum.org. In addition to the above, the Fund will take into account the guidance issued by LAPFF, and any other appropriate guidance and information, in determining any relevant social, environmental, or governance considerations when selecting, retaining, and realising any of its investments. However, the overriding objective for the Pensions Committee will be to discharge its fiduciary duty in managing the Fund’s investments in the best interests of the scheme’s beneficiaries.
76 investment policy and performance 45 East Riding Pension Fund Annual Report and Accounts 2016/2017
The Fund subscribes to the Pensions Investment Research Consultants (PIRC) advisory voting service which provides voting recommendations based on industry best practice. Further details of PIRC’s voting guidance is shown in the “UK Shareowner Voting Guidelines 2016” guidance document which is available at www.pirc.co.uk. However, the Fund will interpret the application of these principles according to its own views of best practice. There are also other issues outside of these principles on which the Fund will take a view. The external investment manager will vote in accordance with its “Investment and Corporate Governance” policy which is available at www.schroders.com. The Fund’s investment managers can exercise their discretion not to vote in accordance with best practice. Where this discretion is exercised, the rationale for this decision is reported to the Pensions Committee. The exercise of any other rights attaching to a particular investment will be considered on a case by case basis. The Pensions Committee reviews the Fund’s corporate governance and voting activity on a quarterly basis. The voting activity of the Pension Fund during the financial year is summarised in the following table:
Number of Number of Voted in accordance Not voted in accordance meetings resolutions with stated policy with stated policy
UK 172 2,355 2,320 35
North America 304 3,824 3,740 84
Europe ex-UK 150 2,516 2,376 140
Japan 159 1,868 1,861 7
Pacific ex-Japan 51 466 466 -
Emerging Markets 72 653 601 52
Total 908 11,682 11,364 318
Statement of Compliance with the UK Stewardship Code for Institutional Investors This statement of compliance was updated in March 2017 in response to the FRC’s assessment of signatories’ quality of reporting against the Code and subsequent categorisation. The statement of compliance will be reviewed on an annual basis. East Riding Pension Fund has been categorised as a Tier 1 asset owner and Schroder Investment Management Limited has been categorised as a Tier 1 asset manager. This demonstrates that both signatories “provide a good quality and transparent description of their approach to stewardship and explanations of an alternative approach where necessary”. The East Riding Pension Fund supports the UK Stewardship Code and, as part of its commitment to best practice, seeks to apply the Principles in the Code to its investment activity. The management of the Fund’s assets is split between the internal investment manager and Schroder Investment Management Limited. Schroder’s Statement of Compliance with the UK Stewardship Code can be viewed at www.frc.org.uk.
Principle 1 – Institutional investors should publically disclose their policy on how they will discharge their stewardship responsibilities. The Fund takes its responsibilities as a shareholder seriously and seeks to adhere to the Principles of the Stewardship Code. It views stewardship as part of the responsibilities of share ownership, and, therefore, an integral part of the investment strategy. The Fund believes that active stewardship will help to deliver high standards of corporate governance which will contribute positively to business performance over time by: • encouraging accountability between directors, shareholders, and other stakeholders; • strengthening the integrity of relationships between these bodies; and • improving transparency in the way companies are run.
77 investment policy and performance 46 East Riding Pension Fund Annual Report and Accounts 2016/2017
In practice, the Fund’s policy is to apply the Code through engagement with investee companies, the utilisation of its voting rights, an interpretation of best practice guidelines informed through the use of the Pensions Investment Research Consultants (PIRC) voting advisory service, existing arrangements with its external investment manager, and through membership of the Local Authority Pension Fund Forum (LAPFF). Further details of PIRC’s voting guidance is shown in the “UK Shareowner Voting Guidelines 2016” guidance document which is available at www.pirc.co.uk and further information regarding the engagement activities of the LAPFF is available at www.lapfforum.org. The Pension Fund considers that social, environmental, and governance considerations can have a material impact on the value of its investments and should form part of its investment managers’ investment processes. Therefore, the Fund will take into account the guidance issued by LAPFF, which highlights corporate governance issues at investee companies and recommends appropriate voting action, and any other appropriate guidance and information, in determining any relevant social, environmental, or governance considerations when selecting, retaining, and realising any of its investments. However, the overriding objective for the Pensions Committee will be to discharge its fiduciary duty in managing the Fund’s investments in the best interests of the scheme’s beneficiaries. The Fund’s investment managers can exercise their discretion not to vote in accordance with best practice. Where this discretion is exercised, the rationale for this decision is reported to the Pensions Committee on a quarterly basis. The exercise of any other rights attaching to a particular investment will be considered on a case by case basis. In general, the Fund’s engagement activities will be based on the importance of the issue, the materiality of the Fund’s exposure to companies affected by the issue, and an assessment of the likelihood of success in the event of engagement. The Pensions Committee reviews the Fund’s corporate governance and voting activity and discusses the reasons for engagement, or lack of it, with its investment managers on a quarterly basis. In addition, the Fund publishes summary details of corporate governance and voting activity in its Annual Report and Accounts.
Principle 2 – Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publically disclosed. East Riding of Yorkshire Council, the administering authority of the East Riding Pension Fund, maintains and monitors a Register of Interests which is completed both by Members of the Pensions Committee and by the individual employees of the internal investment manager. These are published on the Council’s website and updated on a regular basis. In addition, Pension Committee members are required to make any declarations of interest prior to Committee meetings. These interests are disclosed in the Pension Fund’s Annual Report and Accounts. In accordance with the Fund’s Compliance Manual, individual employees of the internal investment manager require permission from the Head of Investments or, in the Head of Investments case, the Head of Finance prior to investing in any applicable investments on a personal basis. Individual employees are also required to disclose their personal investments on an annual basis. The Fund’s Compliance Manual is an internal control document and it is not considered appropriate to disclose this publicly. The interests and investments of the Fund’s independent advisor are disclosed to the Pensions Committee on a quarterly basis. The external investment manager’s policy on conflict of interests is disclosed in its Statement of Compliance with the UK Stewardship Code.
Principle 3 – Institutional Investors should monitor their investee companies. The Pensions Committee delegates responsibility for managing the Fund’s assets to the Investment Managers, who are expected to monitor companies and intervene where necessary. The Fund subscribes to the Pension Investment Research Consultants (PIRC) voting and advisory service which provides voting recommendations based on industry best practice and receives an “Alerts” service from the LAPFF which highlights corporate governance issues of concern at investee companies. However, the Fund’s investment managers are not bound
78 investment policy and performance 47 East Riding Pension Fund Annual Report and Accounts 2016/2017
to exercise their vote in accordance with these recommendations. Issues on which the Fund has chosen to engage on in the recent past include: • Directors’ remuneration. • Separation of the roles of Chairman and Chief Executive. • Independence of non-executive directors. • Supply chain management. • Environmental factors including carbon risk. • Labour relations. • Auditor rotation. The Fund is of the opinion that its corporate governance activities are significantly more effective if they are part of a larger group of like-minded investors, such as the LAPFF. The Fund is a supporter of the LAPFF’s work but is unable to commit resources to take a more active role in LAPFF’s engagement over and above its current membership role. The external investment manager discharges its corporate governance responsibilities in accordance with its Investment and Corporate Governance Policy, which is also based on industry best practice. The Fund’s investment managers present reports on their voting activity on a quarterly basis to the Pensions Committee which are then subject to challenge and debate. The Pensions Committee also receives regular reports summarising the issues being raised by LAPFF and its current areas of focus, with companies in which the Fund has current ownership specifically highlighted, which further informs this process. The Fund’s investment managers can exercise their discretion not to vote in accordance with industry best practice. Where this discretion is exercised, the rationale for this decision is reported to the Pensions Committee on a quarterly basis. The Fund’s investment managers may choose to be made insiders in a particular company for a short period of time. In these instances, no transactions are permitted to be made from the point of disclosure until the information has been disclosed to the wider market. The specific restrictions are disclosed in the Fund’s investment managers’ compliance documents. As stated above, the Fund’s internal investment manager’s Compliance Manual is considered to be a private document that will not be disclosed publicly.
Principle 4 – Institutional investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value. As highlighted above, responsibility for day-to-day interaction with companies is delegated to the Fund’s Investment Managers, including the escalation of engagement when necessary. Where special situations arise which are not covered by the Fund’s corporate governance strategy or where the policy is unclear, the Investment Managers will consult with the Director of Corporate Resources. Although willing to act alone, as the Fund typically holds a very small percentage of equity in individual companies, there are strong reasons to collaborate with other asset owners in order to present a stronger case. The Fund utilises its membership of the LAPFF, which co-ordinates collaborative engagement with companies, regulators and policymakers to protect and enhance shareholder value, in order to maximise its influence. If deemed appropriate, the Fund will participate in shareholder litigation. Any such actions and subsequent outcomes are reported to the Pensions Committee in order to monitor activity and assess effectiveness.
Principle 5 – Institutional investors should be willing to act collectively with other investors where appropriate. Collaborative engagement is a key part of a responsible investment strategy and the Fund will seek to work collectively with other institutional shareholders in order to maximise the influence it can have on individual companies. The Fund seeks to achieve this through membership of the LAPFF, which engages with companies over environmental,
79 investment policy and performance 48 East Riding Pension Fund Annual Report and Accounts 2016/2017
social and governance issues on behalf of its members, and also its relationship with the external investment manager. The Fund will also consider collaborating with other investors if it is considered to be appropriate and interested parties should contact the Fund’s Head of Investments, Mark Lyon if they would like to discuss this further. The external investment manager’s policy on collaborative engagement is disclosed in its Statement of Compliance with the UK Stewardship Code. Principle 6 – Institutional investors should have a clear policy on voting and disclosure of voting activity. The Fund views its voting rights as a valuable instrument to: • protect shareholder rights; • minimise risk to companies from corporate governance failure; • enhance long term value; and • encourage corporate social responsibility. As such, the Fund seeks to exercise all voting rights attaching to its investments, where practical. Whilst it is the Fund’s intention to follow the principles of UK corporate governance best practice, the Fund will interpret the application of these principles according to its own views of best practice. There are also other issues outside of these principles on which the Fund will take a view. As a general rule, the Fund will vote in favour of resolutions which are in line with the UK Corporate Governance Code or comply with best practice. The Fund will vote against resolutions which do not meet these guidelines, or which represent a serious breach of best practice, or which will have a negative impact on shareholders rights. The Fund may abstain on resolutions which may have an adverse impact on shareholder rights, or represent a less significant breach of these guidelines, or where the issue is being raised for the first time with a company. The specific voting outcome will depend on the particular circumstances of the company and the types of resolution on the meeting agenda. The external investment manager is responsible for the exercise of voting rights attaching to investments that are managed by them on behalf of the Fund. The external investment manager will vote in accordance with its “Investment and Corporate Governance” policy which is available at www.schroders.com. Reports summarising the Fund’s voting activity are presented to the Pensions Committee on a quarterly basis, and the Fund publishes summary details of voting activity in its Annual Report and Accounts. The Fund has chosen not to disclose its full voting record as it does not consider that this will add any value to an external party’s understanding of its corporate governance and voting policy and practices. However, the Fund is required to respond to a formal request for information via the Freedom of Information Act 2000. The Fund engages in stock lending and seeks to recall stock on loan prior to a shareholder vote if it is deemed to be cost effective, suitable and practical. Examples of this will include resolutions that are not considered to be in accordance with the UK Corporate Governance Code or where the Fund has a material holding and could potentially influence the outcome of the vote. Principle 7 – Institutional investors should report periodically on their stewardship and voting activities. The Pensions Committee reviews a detailed corporate governance and voting report, which includes the voting activity of both the internal and external investment managers, on a quarterly basis. In addition: • The Administering Authority publishes the agendas and minutes of Pension Committee Meetings on its website – www.erpf.org.uk. • The Fund publishes details of its stewardship and voting activities in its Annual Report and Accounts. This includes summary details of voting activity, and activity undertaken through the LAPFF as well as other collaborative engagement.
80 investment policy and performance 49 East Riding Pension Fund Annual Report and Accounts 2016/2017
Myners’ Principles The Myners’ Principles are a set of principles for good investment governance, originally created in 2001 and subsequently updated in 2008. The Local Government Pension Scheme (Investment and Management of Funds) Regulations 2009 required local government pension funds to produce a statement in their annual report regarding compliance with these Principles on a “comply or explain” basis. Although this is no longer required under the Local Government Pension Scheme (Investment and Management of Funds) Regulations 2016 it is still considered best practice.
Principle 1: Effective Decision-Making • Trustees should ensure that decisions are taken by persons or organisations with the skills, knowledge, advice, and resources necessary to take them effectively and monitor their implementation. • Trustees should have sufficient expertise to be able to evaluate and challenge the advice they receive and manage conflicts of interest.
Principle 2: Clear Objectives • Trustees should set out an overall investment objective for the scheme that takes account of the scheme’s liabilities, the strength of the sponsor covenant, and the attitude to risk of both the trustees and the sponsor, and clearly communicate these to advisers and investment managers.
Principle 3: Risk and Liabilities • In setting and reviewing their investment strategy, trustees should take account of the form and structure of liabilities. These include sponsor covenant strength, the risk of sponsor default, and longevity risk.
Principle 4: Performance Assessment • Trustees should arrange for the formal measurement of the performance of investments. • Trustees should also periodically make a formal policy assessment of their own effectiveness as a decision-making body and report this to scheme members.
Principle 5: Responsible ownership • Trustees should adopt or ensure their investment managers adopt the Institutional Shareholders’ Committee Statement of Principles on the responsibilities of shareholders and agents. • A statement of the scheme’s policy on responsible ownership should be included in the Statement of Investment Principles. • Trustees should periodically report to members on the discharge of such responsibilities.
Principle 6: Transparency and Reporting • Trustees should act in a transparent manner, communicating with stakeholders on issues relating to their management of investments, its governance and risks, including performance against objectives. • Trustees should provide regular communication to members in the form they consider most appropriate. The Pension Fund’s compliance with the Myners’ Principles is shown in the following table:
81 investment policy and performance 50 East Riding Pension Fund Annual Report and Accounts 2016/2017
Principle Evidence of compliance
Effective The Pensions Committee meets on a quarterly basis to discuss current issues, future policy, and tactical Decision asset allocation. Making Working Groups are formed when an issue requires particular attention. A Working Group was set up in November 2016 to consider the Pension Fund’s strategic asset allocation following the initial results of the latest triennial actuarial valuation. The Committee have appointed suitably qualified investment managers to manage the investments of the Fund on their behalf. The Fund takes advice from its independent advisor and external investment manager, both of whom attend the quarterly Pensions Committee meetings. This is in addition to the advice received from the Director of Corporate Resources and the Fund’s actuary. A formal training programme, in accordance with the requirements of the CIPFA Knowledge and Skills Framework, has been implemented.
Clear The overall Fund objective is directly linked to the risks and returns outlined in the Actuary’s report, Objectives with the expected return on investments contained within the Statement of Investment Principles. The Fund’s strategic asset allocation is specifically designed to achieve the fund objective, with tactical asset allocation reviewed at the quarterly meetings. Specific asset allocation weightings are detailed in the Statement of Investment Principles. In determining the Fund’s asset allocation, the Committee consider all asset classes in terms of their suitability and diversification benefits.
Risk and The Administering Authority has an active risk management programme in place including a Pension Liabilities Fund-specific risk register and risk management schedule. The Pension Fund’s risk register identifies the key risks inherent in the Pension Fund, an estimate of the severity of each risk, a summary of current control measures, and the identification of additional control measures. A description of the risk assessment framework used for potential and existing investments is included in the Statement of Investment Principles under “Risk and diversification of investments”. The Committee reviews the Pension Fund’s risk management schedule on a quarterly basis and the risk register on a semi-annual basis.
Performance The performance of the Fund’s investment managers is assessed on a regular basis, using data provided Assessment by WM Company, a specialist performance measurement organisation. Investments made by the Fund’s investment managers are reviewed by the Committee on a quarterly basis. The internal and external fund managers have Fund-specific performance benchmarks that are reviewed on a regular basis. Peer group benchmarks are used for comparison purposes only.
Responsible The Committee’s policies on corporate governance, socially responsible investment, and shareholder Ownership voting are outlined in the Statement of Investment Principles. Transparency The following core documents are published on the Pension Fund’s website: and Reporting - Pension Fund Annual Report and Accounts. - Statement of Investment Principles. - Investment Strategy Statement. - Governance Compliance Statement. - Funding Strategy Statement. - Corporate Governance and Voting Policy. - Pension Committee Agendas and Minutes.
82 investment policy and performance 51 East Riding Pension Fund Annual Report and Accounts 2016/2017 scheme administration report
Administration The main administration event for all Local Government Pension Scheme (LGPS) funds during 2016/17 was the triennial actuarial valuation exercise. Workshops were held during January 2016 for Scheme employers participating in the East Riding Pension Fund (“the Fund”) to increase their awareness of the timescales for providing accurate data to the Fund for both the 2016 actuarial valuation and the issue of annual benefit statements. The commitment of the Scheme employers to make improvements to the quality of data was demonstrated by the majority of the employers providing accurate year end data to the Fund by 19 April 2016. This enabled the Fund to validate all the data received, load the data to all member records and investigate all errors and warnings ahead of the timescales required for the actuarial valuation exercise and the issue of annual benefit statements to all active members. As a consequence, 27,912 annual benefit statements were issued to active members by the Fund ahead of the statutory deadline of 31 August 2016 for all Scheme employers who submitted a year end return by 17 June 2016. This was a significant improvement on the previous year when only 60% of the Scheme employers had provided year end data on time. For the 2016 actuarial valuation exercise, the Fund provided data from the Scheme employers to Hymans Robertson, the Fund’s actuary, ahead of schedule so that the actuary was able to issue initial draft whole Fund results to the Fund by November 2016. Individual Formal Valuation Draft Results schedules were issued by the Fund to all Scheme employers during the first week of December 2016, which was a month earlier than the previous valuation in 2013. The schedules set out the proposed individual employer contribution rates from 1 April 2017 to 31 March 2020 as well as each employer’s own funding position as at 31 March 2016. An employer forum was held on 15 December 2016 to enable Scheme employers to discuss their Results schedule with the Fund’s actuary. A number of Scheme employers requested additional information regarding their individual employer contribution rates and further discussions took place between individual employers, the Fund and the Fund’s actuary up until March 2017. The Fund issued the 2016 Actuarial Valuation Report to all Scheme employers on 31 March 2017. The Fund is a partner of the Tell Us Once service and submits data to the Local Government Association National Insurance Database on a monthly basis. The Tell Us Once service makes sure that the Fund is informed when a death is registered for a Scheme member, therefore allowing staff to update and process the necessary calculations more quickly and accurately. The Pensions section provides the administration function for the Fund and 257 Scheme employers and is made up of the following four teams: • The Member Maintenance team is responsible for the setting up, monitoring and maintaining of all members records, including calculating benefit entitlement for members leaving the scheme before retirement and dealing with incoming and outgoing transfer payments. They also deal with annual and ad-hoc projects, for example loading and checking year end returns for all active Scheme members and liaising with the Scheme employers to ensure accurate data is received and recorded. • The Systems and Web team is responsible for the development of the Universal Pensions Management (UPM) system, providing technical IT support to the section as well as liaising with all Scheme employers. The team is working towards web based communication with Scheme employers and Scheme members including developing on line self service facilities. • The Financial Control team undertake routine and non-routine tasks and deal with monthly, quarterly, annual and triennial events. They also monitor, collect and reconcile payments required from Scheme employers in respect of employee and employer pension contributions, and rechargeable amounts due to the Fund. The team has responsibility for the payment of all the East Riding Pension Fund pensioners. • The Retirement, Estimate and Death team pay benefits to retiring, early leaver members and in respect of deceased
83 scheme administration report 52 East Riding Pension Fund Annual Report and Accounts 2016/2017
members. They provide a comprehensive training role for the whole section and provide education, advice on the interpretation of the LGPS Regulations.
Staffing numbers in the Pensions section There are 47 full time equivalent (FTE) posts in the Pensions section with 33 staff responsible for pensions administration work. This equates to a staff to fund-member ratio of one FTE employee to 3,324 members, based on the total fund membership of 109,685. Throughout 2016/17 all staff have received comprehensive training to ensure they are fully conversant with the UPM system and to meet the deadlines for cleansing data for the 2016/17 year end returns to generate the data for the 2016 actuarial valuation, the 2016 annual benefit statements and annual allowance checks. This has allowed the Pensions section to develop new ways of working to maximise the efficiencies of the UPM system and to minimise the risk of errors with all work procedures auditable at each step of the process.
Communications The Systems and Web team has developed the ERPF Online services for Scheme employers to monitor their own outstanding work, submit data and update Fund records for their own members. Following a successful pilot exercise with Hull City Council during November and December 2016, a further 14 employers have attended a demonstration of the ERPF Online services and will be live on the system by September 2017. The 15 Scheme employers represent 80% of the active membership within the Fund. The remaining Scheme employers will be signed up by 31 March 2018. Eleven ERPF Employer Bulletins were issued to Scheme employers during 2016/17 and covered a number of key areas including: • revised guidance notes on completing pensions administration documentation; • a factsheet providing information and guidance on outsourcing a function of an organisation to a contractor; • pre-retirement workshops; • advice on responding to queries arising from the 2016 year end exercise; and • timetable for the submission of year end returns in 2017.
Audit The administration of pensions is regarded as one of the Council’s major financial systems and is reviewed on an annual basis. The latest Audit review concluded that there was significant assurance on the control framework, the overall control effectiveness is considered significant, and the exposure to risk is considered moderate.
Internal Dispute Resolution Procedure The Internal Dispute Resolution Procedure (IDRP) is a way of dealing with complaints from active, deferred or pensioner members of the Local Government Pension Scheme (LGPS) about decisions relating to their pension benefits made by either their employer or by East Riding of Yorkshire Council (“the Council”), as the administering authority for the Fund. IDRP is a two stage process: • Scheme employers and the Council as administering authority have to make decisions about a member’s benefits under the rules of the LGPS. If for any reason a member is not happy about a decision that has been made, or not been made, about their LGPS membership or benefits, then members are encouraged to contact the Assistant Pensions Manager at the Fund who will seek to clarify or correct any misunderstandings or inaccuracies. If the member is still not happy, they can apply to the Fund to have their complaint reviewed under stage 1 of the IDRP. For complaints against the administering authority, the review under stage 1 is undertaken by another administering authority specified by the Council. This ensures that the stage 1 decision is independent of the Council. The member must apply for a review under stage 1 within 6 months of the date of the notification of the decision the member wishes to make a complaint about. • If the member is dissatisfied with the stage 1 decision, they must move to stage 2 of the IDRP within 6 months of the stage 1 decision and this is reviewed by the Pensions Manager who will not have had any previous involvement in the complaint.
84 scheme administration report 53 East Riding Pension Fund Annual Report and Accounts 2016/2017
If the member is still dissatisfied, they can contact The Pensions Advisory Service (TPAS) and ask for their assistance. Where the complaint or dispute cannot be resolved after the intervention of TPAS, the member has three years in which to apply to the Pensions Ombudsman (TPO) for adjudication. TPO can investigate any type of complaint about a member’s pension, but the member must have been through stages 1 and 2 above of the IDRP before they contact TPO. In 2016/17, there were no complaints which went to stage 2 against decisions made by the administering authority. There were four complaints which went to stage 2 against decisions made by Scheme employers under stage 1. Three complaints were dismissed by the Pensions Manager at stage 2 and one complaint was upheld and referred back to the Scheme employer for reconsideration.
Compliments The Fund received 48 compliments from members and Scheme employers expressing their satisfaction with the level of service, expertise and quality of information provided by the Pensions section.
85 scheme administration report 54 East Riding Pension Fund Annual Report and Accounts 2016/2017 report of the actuary
This statement has been prepared in accordance with Regulation 57(1)(d) of the Local Government Pension Scheme (Administration) Regulations 2013.
Description of Funding Policy The funding policy is set out in the East Riding of Yorkshire Council Funding Strategy Statement (FSS) dated March 2017. In summary, the key funding principles are as follows: • to ensure the long-term solvency of the Fund using a prudent long term view. This will ensure that sufficient funds are available to meet all members / dependents benefits as they fall due for payment; • to ensure that employer contribution rates are reasonably stable where appropriate; • to minimise the long-term cash contributions which employers need to pay to the Fund, by recognising the link between assets and liabilities and adopting an investment strategy that balances risk and return (NB this will also minimise the costs to be borne by Council Tax payers); • to reflect the different characteristics of different employers in determining contribution rates. This involves the Fund having a clear and transparent funding strategy to demonstrate how each employer can best meet its own liabilities over future years; and • to use reasonable measures to reduce the risk to other employers and ultimately to the Council Tax payer from an employer defaulting on its pension obligations. The FSS sets out how the Administering Authority seeks to balance the conflicting aims of securing the solvency of the Fund and keeping employer contributions stable. For employers whose covenant was considered by the Administering Authority to be sufficiently strong, contributions have been stabilised to return their portion of the Fund to full funding over 20 years if the valuation assumptions are borne out. Asset-liability modelling has been carried out which demonstrates that if these contribution rates are paid and future contribution changes are constrained as set out in the FSS, there is still around a 66% chance that the Fund will return to full funding over 20 years.
Funding Position as at the last formal funding valuation The most recent actuarial valuation carried out under Regulation 62 of the Local Government Pension Scheme Regulations 2013 was as at 31 March 2016. This valuation revealed that the Fund’s assets, which at 31 March 2016 were valued at £3,714 million, were sufficient to meet 88% of the liabilities (i.e. the present value of promised retirement benefits) accrued up to that date. The resulting deficit at the 2016 valuation was £512 million. Each employer had contribution requirements set at the valuation, with the aim of achieving full funding within a time horizon and probability measure as per the FSS. Individual employers’ contributions for the period 1 April 2017 to 31 March 2020 were set in accordance with the Fund’s funding policy as set out in its FSS. A change in regulatory regime and guidance on contribution rates means that the Fund ‘Common Contribution Rate’ has been replaced by the ‘Whole Fund Primary and Secondary Rates’ for the 2016 valuation. The primary rate is the employer contribution required to pay for ongoing accrual of active members’ benefits and is the payroll weighted average of the underlying individual employer primary rates. The secondary rates for 2017 to 2020 represent the shortfall of an employer’s asset share to their funding target and the figures below are the total of the underlying individual employer secondary rates (before any pre-payment or capitalisation of future contributions).
Primary Rate % Secondary Rate £000
1 April 2017 to 31 March 2020 2017/18 2018/19 2019/20
16.7 44,210 43,199 42,367
86 report of the actuary 55 East Riding Pension Fund Annual Report and Accounts 2016/2017
Principal Actuarial Assumptions and Method used to value the liabilities Full details of the methods and assumptions used are described in the 2016 valuation report, available on the Fund’s website.
Method The liabilities were assessed using an accrued benefits method which takes into account pensionable membership up to the valuation date, and makes an allowance for expected future salary growth to retirement or expected earlier date of leaving pensionable membership.
Assumptions A market-related approach was taken to valuing the liabilities, for consistency with the valuation of the Fund assets at their market value. The key financial assumptions adopted for the 2016 valuation were as follows:
Financial assumptions 31 March 2013 31 March 2016
Discount rate % %
Return on long - dated gilts 3.0 2.2
Asset Outperformace assumption 1.6** 1.8**
Discount rate Assumption 4.6 4.0
Benefit Increases % %
Retail Price Inflation (RPI) 3.3 3.2
Assumed RPI/CPI* gap -0.8** -1.0**
Benefit Increase Assumption 2.5 2.1
Salary Increases % %
Retail Price Inflation (RPI) 3.3 3.2
Increases in excess of RPI 0.5** -0.8**
Salary Increase Assumption 3.8 2.3
* Consumer Prices Index ** Arithmetic addition *** Geometric addition The main demographic assumption to which the valuation results are most sensitive is that relating to the longevity of the Fund’s members. Based on the assumptions, the average future life expectancies at age 65 are as follows:
Males Females
Current Pensioners 21.7 years 24.2 Years
Future Pensioners* 23.7 years 26.4 years
*Currently aged 45 Copies of the 2016 valuation report and Funding Strategy Statement are available on request from East Riding of Yorkshire Council, the administering authority to the Fund.
87 report of the actuary 56 East Riding Pension Fund Annual Report and Accounts 2016/2017
Experience over the period since 31 March 2016 Since the last formal valuation, real bond yields have fallen placing a higher value on the liabilities. The effect of this has been broadly offset by the strong asset returns. Both events have roughly cancelled each other out in terms of the impact on the funding position as at 31 March 2017. The next actuarial valuation will be carried out as at 31 March 2019. The Funding Strategy Statement will also be reviewed at that time.
Douglas Green FFA Hymans Robertson LLP Fellow of the Institute and Faculty of Actuaries 20 Waterloo Street For and on behalf of Hymans Robertson LLP Glasgow 8 May 2017 G2 6DB
88 report of the actuary 57 East Riding Pension Fund Annual Report and Accounts 2016/2017 actuarial valuation
Legislation requires an actuarial valuation of the Fund every three years. The purpose of the valuation is to establish that the Fund is able to meet its liabilities to past and present contributors. The valuation is carried out in accordance with Regulation 62 of the Local Government Pension Scheme 2013 and the most recent valuation was carried out as at 31 March 2016 and resulted in a funding level of 88.0% (2013 : 78.2%). The next triennial valuation is due as at 31 March 2019 and any change in employers’ contribution rates as a result of that valuation will take effect from 1 April 2020. The results of the 2013 and 2016 valuations are set out in the tables below:
2013 2016
£m £m
Past Service Liabilities
Employees 1,559 1,538
Deferred Pensioners 739 835
Pensioners 1,640 1,853
Total Past Service Liabilities 3,938 4,226
Assets 3,078 3,714
Deficit -860 -512
The past service adjustment assumes that the deficit will be funded over a 20 year period. The improvement in the funding position in the three years to 31 March 2016 is mainly due to strong investment performance over the period. The liabilities have also increased due to a reduction in the future expected investment return, although this has been partially offset by lower than expected pay and benefit growth.
89 actuarial valuation 58 East Riding Pension Fund Annual Report and Accounts 2016/2017 governance
Governance Policy Statement East Riding of Yorkshire Council, as Administering Authority (and Scheme Manager) for the Local Government Pension Scheme is required by statute to publish a governance policy statement. The function of the Administering Authority is delegated to the Pensions Committee in accordance with the Constitution of the Council. The Pensions Committee consists of ten Members of the East Riding of Yorkshire Council. In addition, a Member from each of the other three unitary Councils in the East Riding Pension Fund, and four trade union representatives attend Committee meetings to ensure that views of other interested parties are properly considered by the Committee. Only the ten Members of the East Riding of Yorkshire Council have voting rights but all Members have equal access to relevant committee papers, documents and advice. In addition, the Members’ training programme is designed to help in evaluating expert advice. The Committee normally meets eight times a year, with at least four meetings devoted principally to investment business. The Committee does not establish any secondary committees or panels. There are no representatives of admitted bodies on the Committee, so the Committee holds an Annual Meeting to which all employers are invited. This provides them with the opportunity to raise any concerns they may have directly with the Committee, which then ensures they can be properly considered by the Committee. The Committee formally consults all employers on the Funding Strategy Statement every three years. There is no specific representation for deferred or pensioner members, but with the wide representation, including four trade union representatives, it is considered that their interests will be taken into account. The Statement of Investment Principles sets out how the Pension Fund will be invested, while the Annual Report, which is submitted to the Annual Meeting of the Fund, completes the cycle of accountability.
East Riding Pension Fund Local Pension Board The East Riding Pension Fund Pension Board is established under the provisions of Regulation 106 of the Local Government Pension Scheme Regulations 2013 (as amended). The role of the Board includes: • securing compliance with the LGPS Regulations and other legislation relating to the governance and administration of the LGPS; • securing compliance with requirements imposed in relation to the LGPS by the Pensions Regulator; and, • such other matters as the LGPS Regulations may specify. The terms of the Board reference are attached as Appendix 1. The Board meets three times a year and is made up of six members, three employer representatives and three scheme member representatives. This governance policy statement complies with Regulation 55 of the Local Government Pension Scheme Regulations 2013 and the guidance issued by the Secretary of State in ‘Governance Compliance Statements Statutory Guidance – November 2008’. The Governance Policy Statement was approved by the Pensions Committee on 18 March 2016, took effect from 1 April 2016, and is reviewed on an annual basis.
90 governance 59 East Riding Pension Fund Annual Report and Accounts 2016/2017
East Riding Pension Fund Pension Board - Appendix 1
Terms Of Reference
1. Introduction The purpose of this document is to set out the Terms of Reference for the Pension Board (the Board) of the East Riding Pension Fund.
2. Responsibility and Role of the Board The responsibility of the Board, as defined by sections 5(1) and (2) of the Public Service Pensions Act 2013, is to assist the Administering Authority (East Riding of Yorkshire Council) as Scheme Manager in ensuring the effective and efficient governance and administration of the Local Government Pension Scheme (LGPS) including: • securing compliance with the LGPS Regulations and other legislation relating to the governance and administration of the LGPS; • securing compliance with requirements imposed in relation to the LGPS by the Pensions Regulator; and, • such other matters as the LGPS Regulations may specify. The Administering Authority retains ultimate responsibility for the administration and governance of the scheme. The role of the Board is to support the Administering Authority to fulfil that responsibility and secure compliance with any requirements imposed by the Pensions Regulator. In its role, the Board will have oversight of the administration and governance of the Fund including: • the effectiveness of the decision making process; • the direction of the Fund and its overall objectives; • the level of transparency in the conduct of the Fund’s activities; and, • the administration of benefits and contributions. • Subject to further details, the activity of the Board will include: • reviewing the Fund’s governance and policy documents; • reviewing compliance with the Fund’s governance and policy documents; • reviewing the administrative and investment performance of the Fund; • reviewing shareholder voting and engagement arrangements; • reviewing the Fund’s Risk Register; • reviewing Audit and Assurance reports; and • reviewing the Fund’s website.
3. Membership The Board shall consist of six voting members and be constituted as follows: • three Employer Representatives – Administering Authority (1), other scheme employers (i.e. organisations other than the Administering Authority who, under the Regulations, can participate in the LGPS) (2); and • three Scheme Member Representatives – active members (1), pensioner members (1), active/pensioner or deferred member (1). • Elected Members and Officers involved in the management and administration of the Fund are not permitted to become Board members. • Members of the Board will serve for a term of three years following which they may either retire from the Board or seek nomination for an additional term. The term of office may otherwise come to an end:
91 governance 60 East Riding Pension Fund Annual Report and Accounts 2016/2017
• for Scheme Member Representatives if they cease to be a member of the relevant group; and • for Employer Representatives who are councillors if they cease to hold office as a Councillor. The Chair of the Board will be elected by the Board at its first meeting and will serve for a period of three years. The Board may, with the approval of the Administering Authority, co-opt persons to advise and support them. Co-optees are not Board members and do not have voting rights. Due to the specialist knowledge and understanding required, Members will not be permitted to send substitutes to meetings when they are unable to attend themselves.
4. Appointment of Board Members Three Employer Representatives: • one Employer Representative will be a Councillor from East Riding of Yorkshire Council who is not a member of the Pensions Committee and will be selected by the Council having taken account of their relevant experience, their capacity to represent other scheme employers and their knowledge and understanding of the LGPS; and • two Employer Representatives to be nominated by the employer’s forum – having demonstrated their relevant experience, their capacity to represent other scheme employers and their knowledge and understanding of the LGPS. In the event of there being more than two nominations, the Scheme Manager will carry out a selection process. • Three Scheme Member Representatives: To be identified as follows: the Administering Authority shall contact all Scheme Members including unions and professional associations affiliated to the Authority advising them of the role, the necessary knowledge and understanding required and the process applying toward becoming a Board Member; individual Scheme Members may put themselves forward; there will then be a selection process carried out by the Scheme Manager to assess relevant experience, their capacity to represent scheme members and their knowledge and understanding of the LGPS. Members in all categories will only be appointed to the Pension Board by the Administering Authority if they either meet the knowledge and skills requirements set out in the relevant regulations and guidance (see Section 9) or commit to do so within three months of the appointment date.
5. Meetings The Board shall meet twice a year, at the Council’s Offices in Goole during working hours. An extraordinary meeting will be called when the Chair considers this necessary and/or in circumstances where the Chair receives a request in writing by 50% of the voting membership of the Board.
6. Quorum A quorum will comprise three of the six members of which at least one shall be an Employer Representative and one a Scheme Member Representative. 7. Decision Making Each Member of the Board will have an individual voting right but it is expected that the Board will, as far as possible, reach a consensus. 8. Standards of Conduct and Conflicts of Interest The principles included in the East Riding of Yorkshire Council’s Code of Conduct for Members will apply to all Members of the Board. The Code is set out in the Council’s Constitution http://www2.eastriding.gov.uk/council/committees/the- council/council-constitution-political-control-and-councillor-information/. In accordance with s5(5) of the Public Service Pensions Act 2013, a Board Member must not have a financial or other interest that could prejudice them in carrying out their Board duties. Conflicts of interest shall be managed taking into account both the regulations set out in East Riding of Yorkshire Council’s Constitution and the advice provided by the Pensions Regulator. This does not include a financial or other interest arising merely by virtue of being a member of the LGPS.
92 governance 61 East Riding Pension Fund Annual Report and Accounts 2016/2017
9. Knowledge and Skills Following appointment, each Member of the Board should be conversant with: • the legislation and associated guidance of the LGPS; and • any document recording policy about the administration of the LGPS which is for the time being adopted by the Fund. The Administering Authority will provide a training programme which all Board Members will be required to attend. 10. Accountability The Board will refer all relevant recommendations and decisions to the Pensions Committee of the Administering Authority and, where appropriate to Full Council. It will present a report on its work each year within the Pension Fund’s Annual Report and Accounts. 11. Publication of Pension Board Information The Administering Authority will publish up to date information on the Council’s website including: • the names of the Board Member; • the Board’s Terms of Reference; and • papers, agendas and minutes of Board meetings. 12. Data Protection The Administering Authority is and remains the data controller responsible for Data Protection Act compliance. 13. Expense Reimbursement Board Members will be reimbursed travel and subsistence costs in line with the Administering Authority’s Members Allowance Scheme.
Pensions Committee as at 31 March 2017 Members Number of meetings attended (max 6) Councillor E Aird 6 Councillor I Billinger 4 Councillor B Birmingham (from May 2016) 3 Councillor D Healy (from October 2016) 3 Councillor J Holtby 6 Councillor R Meredith 4 Councillor C Mole 4 Councillor S Steel (from May 2016) 3 Councillor A Strangeway 5 Councillor N Wilkinson (from May 2016) 3
Unitary Councillor Representatives Councillor M Patrick (North East Lincolnshire) 5 Councillor I Glover (North Lincolnshire) 3 Councillor P Webster (Hull City) 0
Trade Union Observers R Weightman (UNITE) 4 D Hardman (Unison) (from October 2016) 2 F Hart (Unison) (from October 2016) 1 A Bentley (GMB) 0
93 governance 62 East Riding Pension Fund Annual Report and Accounts 2016/2017
Report of the Pensions Committee The Pensions Committee is responsible for the administration of the East Riding Pension Fund in accordance with Statutory Regulations, under delegation contained in the Constitution of East Riding of Yorkshire Council. During the past year the Committee consisted of ten Members of East Riding of Yorkshire Council. In addition, a Member from each of the other three unitary Councils and four trade union representatives attend Committee meetings to ensure that the views of the other major employers and individual members of the scheme are taken into account. A list of those who served on the Committee, and their attendance at Pensions Committee meetings, is on page 62. The Committee met quarterly to consider investment reports from the Director of Corporate Resources, the external manager, and the independent advisor. The Committee also met on a further two occasions to consider pension administration issues and to receive training as part of the member training programme. In addition, the Pension Fund Working Group, consisting of a small group of Members, Officers, and Advisors, met on two occasions to consider the strategic asset allocation of the Fund, following the latest triennial actuarial valuation, and to make recommendations to the Pensions Committee: • Approved the Investment Strategy Statement (ISS) which sets out in detail how the Fund is managed (pages 125 to 135) and the Governance Policy Statement, which sets out in detail how the Fund is governed (pages 59 to 62); • Approved the Funding Strategy Statement (FSS) which was revised following the latest actuarial valuation (pages 92 to 119); • Approved the proposed amendments to the Fund’s Communication Policy (pages 136 to 138); • Approved the extension of the contract for the Fund’s Global Custodian; • Approved the appointment of the contract for the Fund’s Actuarial Services; • Approved the Annual Report and Accounts 2015 – 16; • Reviewed the management of the Fund and analysed the performance of the Fund and individual investment managers; • Reviewed and approved the recommendations of the Pension Fund Working Group with regards to the strategic asset allocation review; • Reviewed the current status of the Fund’s outstanding UK and Overseas Withholding Tax reclaims; • Reviewed the Fund’s Treasury Management policy and treasury activity during the year; • Reviewed the Fund’s corporate governance and voting activity; • Reviewed the audit and assurance reports of the Fund’s investment managers and the global custodian; • Reviewed the Fund’s expenditure against budget for the 2015 – 16 financial year and approved the budget for the 2016 – 17 financial year; • Reviewed the Fund’s strategic risk register; • Reviewed a number of the Fund’s pension administration policies; • Reviewed the preliminary and final results of the Fund’s triennial actuarial valuation; • Reviewed the Government Actuary Department’s (GAD) Section 13 report with regards to the 2013 actuarial valuation; • Received training as part of the Member training programme (more details on page 64 and 65); • Approved the submission in response to the Government’s consultation regarding pooling in the LGPS; • Received a number of reports on the development of the Border to Coast Pension Partnership (BCPP), the pool selected by the Pension Fund to meet its requirements of the Government’s LGPS reform process; and • Approved the legal documentation relating to the creation of the Border to Coast Pension Partnership (BCPP). For the year ended 31 March 2017, the Fund generated a return of 21.1%, compared to the strategic benchmark return of 20.1%, and the Retail Price Index, which was 3.1% over the period. Significant capital appreciation in the majority of equity markets, the positive impact of currency depreciation on the sterling returns from overseas investments, and
94 governance 63 East Riding Pension Fund Annual Report and Accounts 2016/2017
strong stock selection from the Fund’s investment managers in the majority of asset classes were the main contributors to performance. Over the three years to 31 March 2017, the Fund has generated a return of 10.5% per annum, compared to the strategic benchmark return of 10.0% per annum, and the long term investment objective of 7.1% per annum. Strong stock selection from the Fund’s investment managers has been the main contributor to performance over this period. The Government issued a consultation document in November 2015 which required LGPS funds to enter into pooling arrangements with other LGPS funds in order to generate economies of scale and facilitate investment in infrastructure. The Pension Fund is actively participating in the Border to Coast Pension Partnership (BCPP), a pool of 12 LGPS funds with c. £43bn in assets. BCPP is currently developing the governance, investment and operational arrangements for the partnership and is expected to be operational by June 2018. It is important to note that this only relates to the pooling of assets and the associated management arrangements. The Pensions Committee will still be responsible for determining the Pension Fund’s strategic and tactical asset allocation and pension administration responsibilities will remain with East Riding of Yorkshire Council. It is anticipated that there will continue to be significant changes to the Local Government Pension Scheme in the next few years which will represent a considerable challenge to the Pension Fund. The Pensions Committee will strive to ensure the long term sustainability of the Pension Fund in the light of these proposed changes, and ensure members are made aware of the potential impact. Councillor John Holtby Chairman 1 September 2017
Training and Development As an administering authority of the Local Government Pension Scheme, East Riding of Yorkshire Council recognises the importance of ensuring that all officers and members charged with the financial management and decision making with regard to the pension scheme are fully equipped with the knowledge and skills to discharge their duties and responsibilities. Training is provided for officers and members to enable them to acquire and maintain an appropriate level of experience, knowledge and skills. The Pensions Committee has designated the Interim Director of Corporate Resources to be responsible for ensuring that the authority’s training policies and strategies are implemented with respect to the Pensions Committee and officers managing the Pension Fund. The Council has implemented a training programme for members which reflects the recommended knowledge and skill levels set out in the CIPFA Pensions Finance Knowledge and Skills Framework. The programme consists of: • Dedicated training sessions delivered by senior officers or external providers at the quarterly Pensions (Administration) Committee and Local Pension Board meetings; and • Dissemination of information relating to current investment themes by senior officers and the Pension Fund’s external investment manager at the quarterly Pensions Committee meetings. In addition, the Pensions Committee has an independent advisor whose knowledge and experience is used to assist the Committee in the development of the strategic asset allocation of the Pension Fund, and also to understand and challenge the tactical asset allocation recommendations of the investment managers. The following training has been provided during the financial year: • Current trends in asset allocation including Equities, Fixed Income, and Alternatives. • Current trends in Equities including passive v. active, smart beta and style investing, and emerging markets. • Current trends in Fixed Income including multi-asset credit, private debt, and alternative credit opportunities. • Current opportunities in Alternative investments including infrastructure, private equity, and real estate.
95 governance 64 East Riding Pension Fund Annual Report and Accounts 2016/2017
• Current trends in global macroeconomics including economic growth, inflation, and interest rates. • The impact of the potential changes to the Local Government Pension Scheme including changes to regulations and the move towards pooling of assets. • Corporate governance issues including executive remuneration, board diversity, corporate taxation, accounting standards, merger and acquisition activity, auditor independence, employee rights, and environmental issues. • Analysis of the Fund’s investment performance. • Overview of risks and risk management within the Pension Fund. • Strategic and tactical asset allocation. • Actuarial valuations. • Pension administration. The Fund has in place a robust recruitment and selection procedure to ensure it appoints officers who are both capable and experienced. Formal training programmes within the office and through external qualifications courses (e.g. Chartered Financial Analyst) are in place to develop the experiences and skills of officers. A dedicated training manager ensures pension administration staff remain up to date with all changes to regulations and procedures. Development needs are formally reviewed on a six monthly basis through the Council’s Employee Development Review process. In addition, officers maintain and develop their understanding and experience of investment and portfolio management as part of their career development. During the financial year this has included: • Continual critical analysis of external research; • Attendance at a number of conferences; • Meetings with economists and investment managers; • Active participation in internal investment strategy meetings; and • Membership and attendance at regional networks and the CIPFA Pensions Network. As the officer nominated by the Pensions Committee responsible for ensuring that the authority’s training policies and strategies are implemented, the Interim Director of Corporate Resources can confirm that the officers and members charged with the financial management of, and decision making for, the pension scheme collectively possessed the requisite knowledge and skills necessary to discharge those duties and make the decisions required during the reporting period.
96 governance 65 East Riding Pension Fund Annual Report and Accounts 2016/2017 statement of responsibilities for the financial statements
Responsibility for the Financial Statements, which form part of this Annual Report, is set out below. a) The Administering Authority The Administering Authority is East Riding of Yorkshire Council. The Administering Authority is required to: • make arrangements for the proper administration of the financial affairs of the Fund and to secure that an officer has the responsibility for the administration of those affairs. In this Authority, that officer is the Head of Finance; • manage its affairs to secure economic, efficient and effective use of resources and safeguard its assets; • approve the Statement of Accounts. b) The Head of Finance The Head of Finance is responsible for the preparation of the Fund’s Financial Statements in accordance with proper practices as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom based on International Financial Reporting Standards (the Code). In preparing these financial statements, the Head of Finance has: • selected suitable accounting policies and then applied them consistently; • made judgements and estimates that were reasonable and prudent; • complied with the Code. The Head of Finance has also: • kept proper accounting records which were up to date; • taken reasonable steps for the prevention and detection of fraud and other irregularities.
Certificate I hereby certify that the following accounts give a true and fair view of the financial position of the East Riding Pension Fund as at 31 March 2017 and its income and expenditure for the financial year then ended.
Julian Neilson Head of Finance and Section 151 Officer East Riding Pension Fund 1 September 2017
97 statementgovernance of responsibilities for the financial statements 66 East Riding Pension Fund Annual Report and Accounts 2016/2017 fund account, net assets statement and notes
Fund Account
2015/16 Note Dealings With Members and Employers 2016/17
£000 £000
166,286 Contributions 168,123
2,417 Augmentation 4,970
168,703 G Contributions receivable 173,093
2,146 Individual transfer values receivable 2,103
524 Group transfer values receivable 524
171,373 175,720
-135,359 H Benefits payable -144,115
-9,253 I Payments to and on account of leavers -6,309
26,761 Net additions/reductions (-) from dealings with Members 25,296
Returns on investments
119,370 K Investment income 141,798
-570 L Taxes on income -627
Profit and losses (-) on disposal of investments and changes in the -104,076 M 659,609 market value of investments
-4,757 J Management Expenses -5,573
9,967 Net Return on Investments 795,207
36,728 Net increase in the net assets available for benefits during the year 820,503
Net Assets of the Fund
3,677,391 Opening assets as at 1 April 3,714,119
36,728 Surplus on the pension fund for the year 820,503
3,714,119 Closing net assets as at 31 March 4,534,622
98 fund account, net assets statement and notes 67 East Riding Pension Fund Annual Report and Accounts 2016/2017
NET ASSETS STATEMENT
2015/16 Note 2016/17
£000 M INVESTMENT ASSETS Fixed Interest Securities 102,083 UK - Public Sector 122,066 59,620 UK - Other Quoted 54,113 73,073 Overseas - Public Sector 74,990 27,061 Overseas - Corporate Fixed Interest 45,198 35,836 Global High Yield - Quoted 45,235 52,370 Global High Yield - Unquoted 88,676 19,968 Emerging Market Government 14,259 370,011 444,537 Equities 1,172,291 United Kingdom 1,421,788 366,748 Overseas 473,485 1,539,039 1,895,273 Index Linked Securities 10,053 UK - Public Sector 18,580 4,392 UK - Corporate Bonds 4,865 9,472 Overseas - Public Sector 11,032 23,917 34,477 Pooled Investment Assets 667,007 Managed Funds 848,194 90,102 Property - Quoted 109,546 332,358 Property - Unquoted 389,921 77,497 Private Equity - Quoted 97,921 96,896 Private Equity - Unquoted 106,207 37,196 Infrastructure - Quoted 42,178 78,689 Infrastructure - Unquoted 122,987 75,584 Other Investments - Quoted 81,536 164,907 Other Investments - Unquoted 202,831 1,620,236 2,001,321 M Cash 118,020 Fixed Term Deposits 122,629 2,372 Internal Manager 190 12,601 External Manager 6,375 132,993 129,194 Other Investment Balances 212 Accrued interest on temporary investments 327 1,281 Unsettled sales 1,798 1,946 Income held by Custodian 1,561 9,984 Accrued dividends 11,364 13,423 15,050 3,699,619 TOTAL INVESTMENT ASSETS 4,519,852
INVESTMENT LIABILITIES -329 Cash with internal manager -33 -589 Unsettled purchases -2,748 -9 Tax on accrued dividends -56 -36 Liabilities with Custodian -97 -963 TOTAL INVESTMENT LIABILITIES -2,934 17,403 N CURRENT ASSETS 20,736 -1,940 O LESS CURRENT LIABILITIES -3,032 15,463 NET CURRENT ASSETS 17,704 3,714,119 NET INVESTMENT ASSETS 4,534,622 The Accounts summarise the transactions and deals with the net assets of the Fund and do not take into account liabilities to pay pensions and other benefits in the future. The above Net Assets Statement should be read in conjunction with the Actuarial Certificate and Funding Strategy Statement.
99 fund account, net assets statement and notes 68 East Riding Pension Fund Annual Report and Accounts 2016/2017
Notes to the Accounts
A Fund Status The Fund is a funded defined benefits scheme.
B Audit of the East Riding Pension Fund Accounts These accounts are subject to external audit
C Accounting Policies 1. General These Accounts have been prepared in accordance with the CIPFA/LASAAC Code of Practice on Local Authority Accounting in the United Kingdom 2016/17 based on International Financial Reporting Standards, which requires that the Fund’s Accounts comply with IAS 26 Accounting and Reporting by Retirement Benefit Plans, subject to the interpretations and adaptations detailed in the Code. The accounts do not take account of liabilities to pay pensions and other benefits in the future. 2. Changes in Accounting Policies The 2016/2017 Code does not require any changes to accounting policies for 2016 - 2017, although some further disclosures are required. Also, the requirement to produce the accounts to an earlier deadline may require the introduction of estimation techniques for some areas of income and expenditure. Previously, the Code has required the disclosure of the fair value hierarchy of an investment asset and this was shown within Note X Valuation Risk in the 2015 – 2016 accounts. The 2016/2017 Code requires additional disclosure for valuation risk including: • a description of the valuation method for each asset class; • details of transfers between the levels of fair value hierarchy during the year; and • for level 3 investments only (those where there is no observable market data) details of any quantitative data on significant inputs, sensitivity analysis for investment valuations, a reconciliation of opening to closing balances, and analysis between realised and unrealised gains or losses in the Fund Account. The 2016/2017 Code has aligned investment asset classification and descriptions with the Pensions SORP so ‘fixed interest securities’ are now described as ‘bonds’. The 2016/2017 Code requires the separate disclosure of members allowances, audit fees and taxation, where significant. The 2016/2017 Code requires the disclosure of key management personnel compensation. 3. Income a) Contributions income Contributions receivable are included in the Accounts in the year to which they relate. Any amounts due but not received are shown in the Net Assets Statement as a current asset. Employers’ pensions strain contributions are accounted for in the period in which liability arises. Employers’ contributions are based on a percentage of employees’ pensionable pay as recommended by the Actuary of the Fund in his valuation of 31 March 2016 effective from 1 April 2017. Further information regarding the Actuary’s Report and Actuarial Valuation, as at 31 March 2016, effective from 1 April 2017, can be found on pages 55 to 58 of these accounts. Employer deficit funding contributions are accounted for on the due dates on which they are payable under the schedule of scheme contributions set by the scheme Actuary or on receipt if earlier than the due date. Deficit funding payments are payable over a maximum of 20 years. b) Transfer values receivable
100 fund account, net assets statement and notes 69 East Riding Pension Fund Annual Report and Accounts 2016/2017
Transfer values receivable relate to amounts received for members joining the Fund during the financial year and are accounted for in the year of receipt. Transfer values are disclosed as individual transfers and group transfers. c) Investment income i. Dividend income Dividend income is accounted for on an accruals basis and any outstanding amount is included in the Net Assets Statement as an investment asset. Dividend income is recognised on the date the asset is quoted ex-dividend ii. Interest income Interest income is accounted for on an accruals basis using the effective interest rate of the financial instrument as at the date of origination. Accrued interest income is shown in the Net Assets Statement as an investment asset. iii Stock Lending Income Stock lending income is accounted for on an accruals basis and any outstanding amount is included in the Net Assets Statement as an investment asset iv. Distributions from pooled investment assets Distributions from pooled investment vehicles are recognised at the date of issue. Distribution income is accounted for on an accruals basis and any outstanding amount is included in the Net Assets Statement as an investment asset. v. Movement in the net market value of investments Changes in the net market value of investments, including all realised and unrealised profits/losses are shown as returns on investments. 4. Expenditure a. Benefits payable Pensions and lump sum benefits payable include all amounts known to be due as at the end of the financial year. Any amounts due but unpaid are shown in the Net Assets Statement as current liabilities. b. Transfer values payable Transfer values payable relate to amounts paid relating to members leaving the Fund during the financial year and are accounted for in the year of payment. 5. Expenses Expenses are accrued appropriately to ensure charges are incurred within the relevant accounting period. 6. Valuation of Assets Investments are included in the Net Assets Statement at their market value at the date of the Statement, with the exception of unquoted investments, which are shown at their fair value. Investments made through the UK Stock Exchanges are valued at bid market price at the close of business on 31 March 2017. Investments made on overseas stock exchanges are valued at bid price or last trade price. Cash comprises cash in hand and demand deposits. Cash equivalents are short term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to minimal risk of changes in value. Investments held in foreign currencies are translated in the Accounts by the application of the appropriate rate of exchange ruling at 31 March 2017. Note (T) lists the exchange rates applied to investments held as quoted in the Financial Times.
101 fund account, net assets statement and notes 70 East Riding Pension Fund Annual Report and Accounts 2016/2017
Unquoted investments are inherently difficult to value and rely, to a certain extent, on estimation techniques and non-market observable inputs; where market values are available at the date of the Statement these are used as above. Fair value is calculated as the net asset value as at the date of the Statement in accordance with recognised valuation standards e.g. Royal Institution of Chartered Surveyors (RICS). Where the net asset value at the date of the Statement is not available, fair value is calculated based on the last available set of audited financial statements, adjusted for subsequent cash flows. Where there has been a material reduction in the valuation of the investment since the date of the last available set of audited statements, the Fund will consider writing down the value of the investment. 7. Future Liabilities The Accounts summarise the transactions and net assets of the Fund and do not take into account liabilities to pay pensions and other benefits in the future. The adequacy of the Fund’s investments and contributions in relation to its overall obligations is dealt with in the report by the Actuary on pages 55 to 58 of these accounts and should be read in conjunction with the report. The Actuarial information disclosed on pages 55 to 58 complies with the accounting requirements of International Accounting Standard 19 Employee Benefits. 8. Taxation The scheme is a Registered Pension Scheme in accordance with Paragraph 1 (1) of Schedule 36 to the Finance Act 2004 and for UK taxation purposes is wholly exempt from income tax and capital gains tax. Income from overseas investments suffers withholding tax in the country of origin, unless exemption is permitted. Irrecoverable tax is accounted for as a fund expense as it arises. 9. Value Added Tax The Fund is reimbursed VAT by HM Revenue and Customs and the accounts are shown exclusive of VAT. 10. Management Expenses All pension administration expenses are accounted for on an accruals basis. All employee costs of the pension administration section are charged direct to the Fund. Associated management, accommodation and other overheads are apportioned to this activity and charged as expenses to the Fund. All investment management expenses are accounted for on an accruals basis. All employee costs of the investment section are charged directly to the Fund. Associated management, accommodation and other overheads are apportioned to this activity and charged as expenses to the Fund. The external manager’s fee is based on the market value of funds under management at the end of each quarter and is calculated on a sliding scale, where percentage fee diminishes on marginal value. Custody fees are agreed in the mandate for the provision of custodian services. All oversight and governance costs are accounted for on an accruals basis. All staff costs associated with governance and oversight are charged directly to the Fund. Associated management, accommodation and other overheads are apportioned to this activity and charged as expenses to the Fund. Investment management costs for the Fund’s unquoted pooled investments are obtained using financial information from the relevant investment manager. However, it should be noted that the accounting period to which this relates may differ from the Fund’s accounting period and, therefore, the costs incurred may not be directly comparable.
102 fund account, net assets statement and notes 71 East Riding Pension Fund Annual Report and Accounts 2016/2017
11. Currency Conversion Rates Overseas investments have been converted at the exchange rate quoted in the Financial Times at close of business on 31 March 2017 to arrive at sterling values in the Net Asset Statement. 12. Additional Voluntary Contributions An additional voluntary contribution (AVC) scheme is provided for the Fund by Prudential. Contributions are paid to Prudential by scheme members and are specifically for providing additional benefits for individual contributors. AVC’s do not form part of the Fund accounts in accordance with the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 see note U. 13. Actuarial Present Value of Promised Retirement Benefits The actuarial present value of promised retirement benefits is based on the triennial valuation of the Fund by the Actuary, with liabilities at 31 March 2017 being projected using a roll forward approximation from the latest formal funding valuation as at 31 March 2016. The Fund has opted to disclose the actuarial present value of promised retirement benefits as a note to the accounts, see note W. 14. Critical Judgements in Applying Accounting Policies Pension Fund Liability The Fund liability is calculated every three years by the Fund’s Actuary with the purpose of the valuation being to establish that the Fund is able to meet its liabilities to past and present contributors. The valuation is carried out in accordance with Regulation 62 of the Local Government Pension Scheme Regulations 2013 and complies with IAS 19. The principal actuarial assumptions and method used to value the liabilities are shown in the Report of the Actuary which can be found on pages 55 and 58. Unquoted Investments Unquoted investments are inherently difficult to value and rely, to a certain extent, on estimation techniques and non-market observable inputs; where market values are available at the date of the Statement these are used, otherwise unquoted investments are valued at fair value. Fair value is calculated as the net asset value as at the date of the Statement in accordance with recognised valuation standards e.g. Royal Institution of Chartered Surveyors (RICS). Where the net asset value at the date of the Statement is not available, fair value is calculated based on the last available set of audited financial statements, adjusted for subsequent cash flows. Where there has been a material reduction in the valuation of the investment since the date of the last available set of audited financial statements, the Fund will consider writing down the value of the investment. 15. Assumptions Made About the Major Source of Estimation Uncertainty The Statement of Accounts includes estimated figures that are based on assumptions and estimates, which take into account historical experience, current trends and other relevant factors. Therefore these estimated figures cannot be determined with certainty and actual results could be materially different from the assumptions and estimates. The items in the Statement of Accounts for which there is a significant risk of material adjustment in the forthcoming financial year are as follows: Actuarial present value of promised retirement benefits The calculation of the actuarial present value of promised retirement benefits is undertaken by the Actuary and is projected using a roll forward approximation from the latest formal funding valuation as at 31 March 2016. Estimates and assumptions are made in a number of judgements including discount rate, salary increases, inflation, pensions increase rate, longevity of current and future pensioners, type of member in scheme and commutation sums. Any variance in the estimates and assumptions in any of the elements used to calculate the actuarial present value of promised retirement benefits would impact on the quoted figure.
103 fund account, net assets statement and notes 72 East Riding Pension Fund Annual Report and Accounts 2016/2017
Unquoted Investments By definition these investments are not publicly quoted and the valuation depends on estimation techniques and non- marketable observable inputs. Unquoted investments are stated at market value where available, otherwise fair value is used. 16. Policy for Funding the Promised Retirement Benefits The funding policy is set out in the Funding Strategy Statement. Fund liabilities were assessed by the Actuary using an accrual benefits method which takes into account pensionable membership up to the valuation date and makes an allowance for expected future salary growth to retirement or expected earlier date of leaving pensionable membership. A market-related approach was taken to valuing the liabilities for consistency with the valuation of the Fund assets at their market value. The key financial assumptions adopted for the 2016 valuation were as follows:
Financial assumptions 31 March 2013 31 March 2016
Discount rate % %
Return on long - dated gilts 3.0 2.2
Asset Outperformace assumption 1.6** 1.8**
Discount rate Assumption 4.6 4.0
Benefit Increases % %
Retail Price Inflation (RPI) 3.3 3.2
Assumed RPI/CPI* gap -0.8** -1.0**
Benefit Increase Assumption 2.5 2.1
Salary Increases % %
Retail Price Inflation (RPI) 3.3 2.3
Increases in excess of RPI 0.5** -0.8**
Salary Increase Assumption 3.8 2.3
* Consumer Prices Index ** Arithmetic addition *** Geometric addition The key demographic assumption was the allowance made for longevity. The life expectancy assumptions are based on the Fund’s VitaCurves with improvements in line with the CMI 2010 model, assuming the current rate of improvements has reached a peak and will converge to long term rate of 1.25% p.a. Based on these assumptions, the average future life expectancies at age 65 are as follows:
Males Females
Current Pensioners 21.7 years 24.2 Years
Future Pensioners* 23.7 years 26.4 years
*Currently aged 45
D Concentration of Investments The Code requires disclosure where there is a concentration of investment which exceeds either 5% of the total values of the net assets of the scheme or of any class or type of security. One investment falls into this category as follows:
2015/16 2016/17 Number of Value % of Value % of Number of Units Units £000 Net Assets £000 Net Assets 28,986,702.366 285,773 7.7 Schroder North American Equity Fund 27,310,836.209 342,901 7.6
104 fund account, net assets statement and notes 73 East Riding Pension Fund Annual Report and Accounts 2016/2017
Investments which fall into the second category are as follows: 2015/16 2016/17 Number of Value % of Number of Value % of Shares £000 Asset Type Shares £000 Asset Type UK Bonds - Public Sector 10,407,000 12,268 12.0 Treasury 4% 2022 10,407,000 12,233 10.0 10,600,000 11,146 10.9 Treasury 2.0% 2025 10,600,000 11,515 9.4 0 0 0.0 Treasury 1.75% 2037 10,000,000 10,014 8.2 9,250,000 9,214 9.0 Treasury 1.5% 2026 9,250,000 9,600 7.9 8,200,000 8,633 8.5 Treasury 2.0% 2020 8,200,000 8,676 7.1 6,000,000 8,041 7.9 Treasury 4.25% 2036 6,000,000 8,523 7.0 6,100,000 8,026 7.9 Treasury 4.25% 2032 6,100,000 8,376 6.9 0 0 0.0 Treasury 0.5% 2022 8,000,000 7,975 6.5 7,300,000 7,527 7.4 Treasury 1.5% 2021 7,300,000 7,626 6.2 5,000,000 6,899 6.8 Treasury 4.25% 2040 5,000,000 7,414 6.1 0 0 0.0 Treasury 1.25% 2027 7,250,000 7,274 6.0 6,100,000 6,794 6.7 Treasury 2.75% 2024 6,100,000 6,956 5.7 0 0 0.0 Treasury 3.25% 2044 5,000,000 6,554 5.4 4,000,000 5,809 5.7 Treasury 4.75% 2038 4,000,000 6,199 5.1 6,000,000 7,691 7.5 Treasury 4.25% 2027 0 0 0.0 UK Bonds - Other 5,000,000 4,558 7.6 Aviva 5.125% 2050 5,000,000 5,104 9.4 5,000,000 4,801 8.1 SSE PLC 3.875% 2049 5,000,000 5,088 9.4 0 0 0.0 NGG Finance 2.125% 2028 5,000,000 4,915 9.1 0 0 0.0 HSBC 2.625% 2028 5,000,000 4,869 9.0 0 0 0.0 Morrison (WM) Supermarkets Plc 3.5% 2026 4,500,000 4,791 8.9 4,200,000 4,169 7.0 Lloyds Bank 1.75% 2022 4,200,000 4,336 8.0 4,000,000 4,061 6.8 Nationwide Building Society 3.25% 2028 4,000,000 4,301 7.9 4,000,000 3,619 6.1 Centrica 5.25% 2075 4,000,000 4,276 7.9 0 0 0.0 Severn Trent Plc 2.75% 2031 4,000,000 4,199 7.8 0 0 0.0 Yorkshire Building Society Plc 3.5% 2026 3,900,000 4,147 7.7 7,000,000 6,634 11.1 Standard Chartered Bank 5.375% 2049 4,000,000 4,057 7.5 3,650,000 3,778 6.3 NGG Finance 5.625% 2073 3,650,000 4,032 7.5 5,000,000 5,675 9.5 Southern Water Services Finance Ltd 5.0% 2021 0 0 0.0 5,000,000 5,168 8.7 Pennon Group 6.75% 2049 0 0 0.0 4,000,000 4,343 7.3 SSE PLC 5.0% 2018 0 0 0.0 3,350,000 3,718 6.2 Network Rail Infrastructure Finance Plc 3.0% 2023 0 0 0.0 3,060,000 3,300 5.5 Tesco Plc 5.5% 2019 0 0 0.0 3,000,000 2,983 5.0 Nationwide Building Society 6.0% 2049 0 0 0.0 Overseas Bonds - Public Sector 700,000,000 4,906 6.7 Japan 1.1% 2033 1,072,000,000 8,521 11.4 1,000,000,000 6,551 9.0 Japan 0.6% 2023 1,000,000,000 7,498 10.0 8,800,000 6,213 8.5 US Treasury 1.75% 2023 8,800,000 6,887 9.2 8,000,000 5,761 7.9 US Treasury 2.0% 2021 8,000,000 6,428 8.6 7,000,000 5,639 7.7 France 0.5% 2025 7,000,000 5,893 7.9 7,200,000 5,123 7.0 US Treasury 2.0% 2025 7,200,000 5,634 7.5 5,900,000 4,873 6.7 Germany 0.5% 2025 5,900,000 5,242 7.0 6,750,000 4,698 6.4 US Treasury 1.625% 2026 6,750,000 5,077 6.8 Overseas Corporate Securities 5,100,000 6,662 24.6 European Investment Bank 5.5% 2025 5,100,000 6,718 14.9 5,000,000 4,787 17.7 RWE AG 7% 2049 5,000,000 5,285 11.7 0 0 0.0 General Electric 4.5% 2044 5,700,000 4,877 10.8 5,000,000 4,265 15.8 Electricite de France 5.875% 2049 5,000,000 4,805 10.6 0 0 0.0 Bank Nederlandse Gemeenten NV 1.625% 2021 6,000,000 4,695 10.4 0 0 0.0 Siemens 3.125% 2024 5,000,000 4,018 8.9 0 0 0.0 Procter & Gamble 2.45% 2026 5,000,000 3,823 8.5 0 0 0.0 Allianz 3.875% Perpetual 5,000,000 3,458 7.7 0 0 0.0 Johnson & Johnson 3.7% 2046 4,000,000 3,120 6.9 0 0 0.0 European Investment Bank 1% 2026 3,000,000 2,868 6.3 8,195,000 5,604 20.7 Temasek Financial Ltd 3.375% 2042 0 0 0.0 3,000,000 3,525 13.0 Temasek Financial Ltd 4.625% 2022 0 0 0.0 1,850,000 2,218 8.2 Bank Nederlandse Gemeenten NV 5.375% 2021 0 0 0.0
105 fund account, net assets statement and notes 74 East Riding Pension Fund Annual Report and Accounts 2016/2017
2015/16 2016/17 Number of Value % of Number of Value % of Shares £000 Asset Type Shares £000 Asset Type Global High Yield 143,663.1374 23,626 26.8 Nomura US High Yield 143,663.1374 32,081 24.0 n/a 15,840 18.0 Oberon Credit Investment Fund 2 n/a 17,563 13.1 13,491,742 12,210 13.8 NB Global Floating Rate Income Fund 13,491,742 13,155 9.8 n/a 5,761 6.5 Permira Credit Solutions II n/a 12,558 9.4 n/a 6,829 7.7 Rantum Capital Private Debt Fund 1 n/a 11,707 8.7 n/a 0 0 Barings Global Private Loan Fund n/a 9,377 7.0 n/a 10,405 11.8 Oberon Credit Investment Fund 1 n/a 8,434 6.3 n/a 3,846 4.4 Bluebay Direct Lending UK Fund SLP n/a 6,929 5.2 n/a 5,000 5.7 Permira Credit Solutions II (Clean Viking) n/a 5,000 3.7 Emerging Market Government 45,237.05959 11,614 58.2 Pictet Global Emerging Debt 1 45,237.05959 14,259 100.0 82,000.82001 8,354 41.8 Pictet Institutional Emerging Debt 1 0 0 0.0 UK Index Linked - Public Sector 0 0 0.0 Treasury 0.125% 2036 5,000,000 7,343 39.5 4,550,000 5,365 53.4 Treasury 0.125% 2024 4,550,000 5,903 31.8 3,750,000 4,688 46.6 Treasury 0.125% 2029 3,750,000 5,334 28.7 UK Index Linked - Corporate Bonds 2,680,000 4,392 100.0 Network Rail Infrastructure Finance Plc 1.75% 2027 2,680,000 4,865 100.0 Overseas Index Linked - Public Sector 6,170,000 4,565 48.2 US Treasury 0.125% 2022 6,170,000 5,335 48.4 5,000,000 3,486 36.8 US Treasury 0.125% 2024 5,000,000 4,053 36.7 2,000,000 1,422 15.0 US Treasury 0.375% 2025 2,000,000 1,643 14.9 Managed Funds 28,986,702.366 285,773 42.8 Schroder North American Equity Fund 27,310,836.209 342,901 40.4 21,851,828.56 127,348 19.1 Schroder Institutional Pacific Fund 21,851,828.56 171,032 20.2 5,170,928.3978 117,820 17.7 Schroder Emerging Markets Fund 5,170,928.3978 161,548 19.0 2,084,293.4348 36,526 5.5 Schroder Institutional Developing Markets 2,084,293.4348 50,282 5.9 5,000,000 34,015 5.1 Schroder Institutional UK Smaller Co Fund 5,000,000 41,200 4.9 Property 27,347,333 36,755 8.7 Tritax Big Box REIT 26,742,545 38,643 7.7 418,806.85 31,849 7.5 Standard Life Property Pension Fund 418,806.85 30,136 6.0 24,756,828 27,047 6.4 Empiric Student Property 24,756,828 26,737 5.4 n/a 31,016 7.3 AEW UK South East Office Fund n/a 26,282 5.3 n/a 0 0.0 Horizon Long Lease Housing LP n/a 26,072 5.2 n/a 23,924 5.7 European Real Estate Debt Fund II n/a 20,463 4.1 17,110.835 22,013 5.2 GB Strategic Land Fund 17,110.835 18,729 3.7 Private Equity 1,500,000 17,250 9.9 Pantheon International Participations Red Plc 1,375,000 20,900 10.2 1,190,000 14,685 8.4 Pantheon International Participations Ord Plc 1,165,000 20,038 9.8 n/a 11,807 6.8 Glenmont Clean Energy Fund A n/a 12,773 6.3 1,210,000 8,823 5.1 NB Private Equity Partners Ltd Class A 1,150,000 12,139 5.9 809,993 9,404 5.4 HG Capital Trust Plc 760,000 11,924 5.8 Infrastructure n/a 18,560 16.0 Equitix Fund I LP n/a 18,809 11.4 n/a 12,393 10.7 Equitix Fund II LP n/a 13,797 8.4 n/a 0 0.0 ISQ Global Infrastructure Fund n/a 12,439 7.5 n/a 9,292 8.0 Innisfree PFI Secondary Fund n/a 12,292 7.4 n/a 9,555 8.2 Innisfree PFI Continuation Fund n/a 11,738 7.1 n/a 8,764 7.6 ICON Infrastructure Partners II n/a 10,152 6.1 n/a 7,171 6.2 Macquarie European Infrastructure Fund IV LP n/a 9,859 6.0 n/a 6,493 5.6 AMP Capital Infrastructure Debt Fund LP n/a 8,887 5.4 5,600,000 6,754 5.8 John Laing Infrastructure Fund Ltd 5,760,362 7,713 4.7 4,350,000 6,925 6.0 HICL Infrastructure Company Ltd 4,500,000 7,605 4.6 7,226,228 7,356 6.3 The Renewables Infrastructure Group 7,000,000 7,525 4.6
106 fund account, net assets statement and notes 75 East Riding Pension Fund Annual Report and Accounts 2016/2017
2015/16 2016/17 Number of Value % of Number of Value % of Shares £000 Asset Type Shares £000 Asset Type Other Investments 21,040,008 20,724 8.6 Doric Nimrod Air Three Ltd 21,040,008 21,671 7.6 n/a 13,915 5.8 Investec Aircraft Syndicate 1 n/a 18,220 6.4 n/a 12,866 5.3 Park Square Capital Credit Opportunities Fund II n/a 17,575 6.2 n/a 14,349 6.0 Investec Air India n/a 15,994 5.6 7,250,000 15,370 6.4 Doric Nimrod Air Two Ltd 7,250,000 15,660 5.5 n/a 8,675 3.6 Athyrium Opportunities Fund II (Non US) LP n/a 14,994 5.3 12,500,000 13,219 5.5 Twentyfour Income Fund 12,500,000 14,781 5.2 n/a 12,986 5.4 CRC Capital Release Fund Ltd n/a 12,017 4.2 Cash n/a 0 0.0 Invesco Global Asset Management n/a 15,000 12.2 n/a 15,000 12.7 Standard Life Sterling Fund n/a 10,000 8.2 n/a 10,000 8.5 Bank of Scotland n/a 10,000 8.2 n/a 10,000 8.5 Close Brothers n/a 10,000 8.2 n/a 10,000 8.5 Leeds Building Society n/a 10,000 8.2 n/a 0 0.0 Goldman Sachs International Bank n/a 10,000 8.2 n/a 0 0.0 DBS n/a 10,000 8.2 n/a 7,000 5.9 Nationwide Building Society n/a 7,000 5.7 n/a 7,000 5.9 Sumitomo Mitsui Banking Corporation n/a 3,000 2.4 n/a 9,748 8.3 Natwest n/a 2,493 2.0 n/a 15,000 12.7 Federated Investors n/a 2,000 1.6 n/a 8,652 7.3 State Street Global Services n/a 1,456 1.2 n/a 15,000 12.7 Goldman Sachs n/a 0 0.0 n/a 10,000 8.5 Insight Sterling Fund n/a 0 0.0
E Stock Lending State Street, the Fund’s Custodian, has authorisation to release stock to third parties as determined by the contract between State Street and the Fund. During the year to 31 March 2017 stock lending income of £0.422m (2016: £0.524m) was raised against expenditure for the activity of £0.127m (2016: £0.156m). At 31 March 2017 the total value of securities on loan was £185.9m (2016: £142.4m) and are analysed by asset class as follows:
31 March 2016 31 March 2017
£000 £000
41,641 Equities - UK 70,469
46,294 UK Bonds - Public Sector 84,664
46,466 Equities - Overseas 22,638
8,025 Overseas Bonds - Public Sector 8,168
142,426 185,939
Against the stock on loan the Fund held collateral at 31 March 2017 of £195.0m (2016: £149.0m) analysed by asset class as follows:
31 March 2016 31 March 2017
£000 £000
44,136 Equities - UK 75,298
47,691 UK Bonds - Public Sector 87,193
49,016 Equities - Overseas 24,138
8,181 Overseas Bonds - Public Sector 8,332
149,024 194,961
107 fund account, net assets statement and notes 76 East Riding Pension Fund Annual Report and Accounts 2016/2017
F Scheme Registration Number The Fund’s scheme registration number with the Pensions Regulator is 10079121.
G Contributions Receivable
2015/16 2016/17
£000 £000
106,478 Employers - Primary 107,786
27,452 Employers - Additional 30,850
33,840 Employees - Primary 33,943
933 Employees - Additional 514
168,703 173,093
37,362 Administering Authority 38,012
124,334 Scheme Employers 127,734
7,007 Admitted Bodies 7,347
168,703 173,093
Contributions relating to deficit funding payments amounted to £38,176,193 (2016: £38,240,710).
H Benefits Payable
2015/16 2016/17
£000 £000
110,001 Pensions 114,214
21,941 Commutations, compounded and lump sum retirement benefits 26,412
3,417 Lump sum death benefits 3,489
135,359 144,115
22,936 Administering Authority 24,265
102,528 Scheme Employers 109,157
9,895 Admitted Bodies 10,693
135,359 144,115
I Payments to and on account of leavers
2015/16 2016/17
£000 £000
398 Refunds to members leaving service 375
8,415 Individual transfer values payable 5,481
440 Group transfer values payable 453
9,253 6,309
108 fund account, net assets statement and notes 77 East Riding Pension Fund Annual Report and Accounts 2016/2017
J Management Expenses Administration expenses, including fees paid to advisers, are charged to the Fund, as provided in the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016. Central, Finance and IT costs are apportioned to the Fund on the basis of time spent on Fund work by East Riding of Yorkshire Council staff. The external manager’s fee is based on the market value of funds under management at the end of each quarter and is calculated on a sliding scale, where percentage fee diminishes on marginal value. Internal management costs are based on actual costs.
2015/16 2016/17
£000 £000
1,511 Pension Administration Expenses 1,745
2,819 Investment Management Expenses 3,279
427 Oversight and Governance 549
4,757 5,573
Of the investment management expenses in 2016/17, a total of £0.065m was in respect of performance related fees paid to the Fund’s internal investment manager (2015/16: £0.061m). Of the Oversight and Governance expenses in 2016/17, a total of £0.033m was in respect of audit fees (2015/16: £0.029m). For quoted equity investments worldwide, both internal and external managers pay a commission on the gross value of both purchases and sales in addition to bid offer spread. For certain investments, predominantaly fixed interest and and index-linked securities, the bid offer spread covers all the cost of investment. Investments purchased on the basis of Net Asset Value (NAV) include an element within the NAV for the cost of purchase. Cash is administered by both the internal and external manager to achieve the best interest return. No commission is paid to any money broker for this activity.
Investment Funds Under Total Costs as Commission Paid Total Costs Management Management % of FUM
2015/16 2016/17 2015/16 2016/17 2015/16 2016/17 2015/16 2015/16 2016/17 2016/17 2015/16 2016/17
£000 £000 £000 £000 £000 £000 £m % £m %%%
Internal 1,065 1,240 247 748 1,312 1,988 2,898,387 78.0 3,490,274 77.0 0.05 0.06 fund External 1,754 2,039 164 219 1,918 2,258 815,732 22.0 1,044,348 23.0 0.24 0.22 fund
Total Fund 2,819 3,279 411 967 3,230 4,246 3,714,119 100.0 4,534,622 100.0 0.09 0.09
The CIPFA guidance ‘’Accounting for LGPS Management Costs’’ recommends the disclosure of mangement fees for pooled investments that are not included in the investment management costs disclosed in the above table with a corresponding adjustment to the Fund Account and the Net Assets Statement. These management costs have been obtained using financial information available for each of the Fund’s unquoted pooled investments and in 2016/17 amounted to £14.238m, split between management fees (£12.455m) and performance fees (£1.783m) (2015/16 £13.407m, split between management fees of £10.655m and performance fees of £2.752m). However, it should be noted that the accounting periods of these investments may differ from the Fund’s accounting period and, therefore, the costs incurred may not be directly comparable. As a result, it has been deemed prudent to show these costs in a disclosure note rather than adjust the Fund Account and Net Assets Statement as per the recommended guidance. Externally managed funds are managed by Schroder Investment Management Ltd. It should be noted that the Net Assets Statement and any performance data disclosed in the Annual Report are disclosed net of all costs incurred.
109 fund account, net assets statement and notes 78 East Riding Pension Fund Annual Report and Accounts 2016/2017
K Investment Income
2015/16 2016/17 £000 £000 Fixed Interest Securities 2,665 United Kingdom 2,365 1,728 Overseas 1,782 1,561 Corporate Bonds 1,206 515 Global High Yield - quoted 546 1,110 Global High Yield - unquoted 4,703 7,579 10,602
Index Linked 43 United Kingdom 12 76 Overseas 14 38 Corporate Bonds 38 157 64
Equities 35,663 United Kingdom 39,992 8,432 Overseas 10,213 44,095 50,205
Managed Funds 25,851 Equities 28,535 4,276 Property - quoted 4,368 9,231 Property - unquoted 12,598 1,069 Private equity - quoted 1,487 987 Private equity - unquoted 121 1,905 Infrastructure - quoted 1,898 2,604 Infrastructure - unquoted 3,338 4,617 Other investments - quoted 4,485 7,895 Other investments - unquoted 8,829 9,984 Accrued Interest on Ex-dividend Investments 11,364 55,435 77,023
121 Underwriting 254 843 Currency Loss (-)/Gain 2,518 524 Stock Lending 422 632 Cash Deposits 708 0 Class Actions 2
119,370 TOTAL INVESTMENT INCOME 141,798
110 fund account, net assets statement and notes 79 East Riding Pension Fund Annual Report and Accounts 2016/2017
L Taxes on Income
2015/16 2016/17 £000 £000
Withholding Tax
570 Overseas Equities 627
570 627
M Reconciliation of Movements in Investments
Value at Reclassified Purchases at Change in Value at 2016/17 Sales Proceeds 01/04/2016 01/04/16 Cost Market Value 31/03/2017
Investment Assets £000 £000 £000 £000 £000 £000 Fixed Interest Securities UK - Public Sector 102,083 0 30,807 -14,561 3,737 122,066 UK - Other Quoted 59,620 0 30,061 -38,882 3,314 54,113 Overseas - Public Sector 73,073 0 10,975 -15,851 6,793 74,990 Overseas - Corporate 27,061 0 27,445 -11,590 2,282 45,198 Global High Yield - quoted 35,836 0 0 0 9,399 45,235 Global High Yield - unquoted 52,370 0 34,094 -2,817 5,029 88,676 Emerging Market Government 19,968 0 0 -9,360 3,651 14,259 370,011 0 133,382 -93,061 34,205 444,537 Equities UK 1,172,291 0 118,018 -93,844 225,323 1,421,788 Overseas 366,748 0 191,268 -183,401 98,870 473,485 1,539,039 0 309,286 -277,245 324,193 1,895,273 Index-Linked Securities UK - Public Sector 10,053 0 6,659 0 1,868 18,580 UK Corporate 4,392 0 0 0 473 4,865 Overseas - Public Sector 9,472 0 0 0 1,560 11,032 23,917 0 6,659 0 3,901 34,477 Pooled Investment Vehicles Managed Funds 667,007 0 19,089 -39,829 201,927 848,194 Property - Quoted 90,102 0 23,162 -8,339 4,621 109,546 Property - Unquoted 332,358 0 83,315 -23,643 -2,109 389,921 Private Equity - Quoted 77,497 0 652 -5,984 25,756 97,921 Private Equity - Unquoted 96,896 0 22,355 -22,939 9,895 106,207 Infrastructure - Quoted 37,196 0 2,306 -546 3,222 42,178 Infrastructure - Unquoted 78,689 0 40,219 -12,350 16,429 122,987 Other Investments - Quoted 75,584 0 38 -1,837 7,751 81,536 Other Investments - Unquoted 164,907 0 28,816 -20,684 29,792 202,831 1,620,236 0 219,952 -136,151 297,284 2,001,321
3,553,203 0 669,279 -506,457 659,583 4,375,608 Current Assets Sterling 109,643 0 878,239 -865,259 0 122,623 Euros 759 0 12,724 -13,471 -6 6 US Dollar 7,618 0 42,313 -49,963 32 0 118,020 0 933,276 -928,693 26 122,629
3,671,223 0 1,602,555 -1,435,150 659,609 4,498,237
111 fund account, net assets statement and notes 80 East Riding Pension Fund Annual Report and Accounts 2016/2017
Value at Reclassified Purchases at Sales Change in Value at 2015/16 01/04/2015 01/04/15 Cost Proceeds Market Value 31/03/2016
Investment Assets £000 £000 £000 £000 £000 £000 Fixed Interest Securities UK - Public Sector 99,824 0 40,317 -38,410 352 102,083 UK - Other Quoted 57,600 0 26,352 -22,048 -2,284 59,620 Overseas - Public Sector 62,300 0 21,782 -15,998 4,989 73,073 Overseas - Corporate 31,122 0 0 -2,334 -1,727 27,061 Global High Yield - quoted 26,049 0 9,809 -58 36 35,836 Global High Yield - unquoted 24,325 0 27,450 -2,639 3,234 52,370 Emerging Market Government 18,990 0 0 0 978 19,968 320,210 0 125,710 -81,487 5,578 370,011 Equities UK 1,296,231 0 30,416 -59,334 -95,022 1,172,291 Overseas 373,911 2,311 111,183 -108,423 -12,234 366,748 1,670,142 2,311 141,599 -167,757 -107,256 1,539,039 Index-Linked Securities UK - Public Sector 9,942 0 4,602 -4,577 86 10,053 UK Corporate Bonds 4,451 0 0 0 -59 4,392 Overseas - Public Sector 12,122 0 1,321 -4,651 680 9,472 26,515 0 5,923 -9,228 707 23,917 Pooled Investment Vehicles Managed Funds 689,321 -2,311 16,835 0 -36,838 667,007 Property - Quoted 78,732 0 4,060 0 7,310 90,102 Property - Unquoted 251,436 0 86,372 -25,934 20,484 332,358 Private Equity - Quoted 77,668 0 5,026 -3,450 -1,747 77,497 Private Equity - Unquoted 101,252 0 13,299 -28,750 11,095 96,896 Infrastructure - Quoted 34,141 0 3,540 0 -485 37,196 Infrastructure - Unquoted 68,724 0 11,825 -6,540 4,680 78,689 Other Investments - Quoted 88,326 0 1,082 -2,835 -10,989 75,584 Other Investments - Unquoted 117,696 0 55,907 -12,313 3,617 164,907 1,507,296 -2,311 197,946 -79,822 -2,873 1,620,236
3,524,163 0 471,178 -338,294 -103,844 3,553,203 Current Assets Sterling 112,345 0 556,700 -559,402 0 109,643 Euros 332 0 11,112 -10,662 -23 759 US Dollar 2,102 0 38,190 -32,465 -209 7,618 114,779 0 606,002 -602,529 -232 118,020
3,638,942 0 1,077,180 -940,823 -104,076 3,671,223
112 fund account, net assets statement and notes 81 East Riding Pension Fund Annual Report and Accounts 2016/2017
N Current Assets
31 March 2016 31 March 2017
£000 £000
5,904 Contributions due - Employers 7,025
2,798 Contributions due - Employees 2,856
385 Recharge of Pensions increase and supplementary allowance 869
6,718 East Riding of Yorkshire Council 8,217
1,598 Other Debtors 1,769
17,403 20,736
31 March 2016 31 March 2017
£000 £000
15 Central government bodies 742
12,115 Other local authorities 14,297
0 NHS Bodies 33
0 Public corporations and trading funds 0
5,273 Bodies external to government 5,664
17,403 20,736
O Current Liabilities
31 March 2016 31 March 2017
£000 £000
1,035 East Riding of Yorkshire Council 1,194
272 Overclaim of Recharges 1,126
633 Other creditors 712
1,940 3,032
31 March 2016 31 March 2017
£000 £000
589 Central government bodies 1,290
1,292 Other local authorities 1,602
0 NHS Bodies 0
0 Public corporations and trading funds 0
59 Bodies external to government 140
1,940 3,032
P Managerial Arrangements of Assets
31 March 2016 31 March 2017 £000 % £000 %
2,898,387 78 Internally managed 3,490,274 77
815,732 22 Externally managed (Schroder Investment Management Limited) 1,044,348 23
3,714,119 100 4,534,622 100
113 fund account, net assets statement and notes 82 East Riding Pension Fund Annual Report and Accounts 2016/2017
Q Contingent Liabilities and Contractual Commitments At 31 March 2017 the Fund had commitments to the purchase of investments of, £502,092,058 (2016: £406,136,878).
31 March 2016 31 March 2017 Foreign Currency £ Foreign Currency £
0 200,714,188 Sterling Denominated (£) 0 220,361,004
197,594,438 137,476,127 US Dollar Denominated ($) 235,979,536 188,708,146
85,701,000 67,946,563 Euro Denominated (€) 108,753,082 93,022,908
406,136,878 502,092,058
R Members Allowances Following modernisation of the Committee structures, allowances are not paid to Members directly in respect of Pension Committee attendance. The Chairman of the Pensions Committee is paid a special responsibility allowance. However, allowances are not cumulative and only the highest allowance for any committee responsibility is paid to the Member. Payments to Members are disclosed in the Statement of Accounts of East Riding of Yorkshire Council.
S Related Party Transactions In accordance with International Accounting Standard (IAS) 24 and International Public Sector Accounting Standard (IPSAS) 20 ‘Related Party Disclosures’ material transactions with related parties not disclosed elsewhere are detailed below: • The officer responsible for the proper administration of the financial affairs of the East Riding Pension Fund (the Section 151 officer) is also the Section 151 officer of the East Riding of Yorkshire Council. • The East Riding Pension Fund is administered by East Riding of Yorkshire Council. During the financial year the Council incurred costs of £5.573m (2016: £4.757m) comprising pensions administration costs of £1.745m (2016: £1.511m), investment management costs of £3.279m (2016: £2.819m) and oversight and governance costs of £0.549m (2016: £0.427m). The Council was subsequently reimbursed by the Fund for these expenses. The Council is also the largest employer of members of the Pension Fund and, during the financial year, made contributions of £38.495m to the Fund (2016: £37.362m). £8.790m (2016: £8.657m) of this total is in respect of contributions paid by members of the Pension Fund. As at 31 March 2017 the Council was a net debtor to the Fund of £7.023m (2016: £5.683m). • Under legislation introduced in 2003/04, Councillors were entitled to join the Pension Scheme. The LGPS (Transitional Provisions, Savings and Amendment) Regulations 2014 removed this entitlement for Councillors from the later of 1 April 2014 or the end of their current term in office (or to age 75 if earlier). Councillor I Billinger, a member of the Pensions Committee during 2016/17, made contributions to the Fund during the financial year. • No senior officers responsible for the administration of the Fund have entered into any contract, other than their contract of employment with the Council, for the supply of goods or services to the Fund. • During the financial year the Head of Investments was a member of the Investment Advisory Committee for the Montanaro European MidCap Fund, an open ended investment company managed by Montanaro Asset Management Limited, for which he was paid a fee. The Pension Fund had the following investments in funds managed by Montanaro Asset Management Limited:
114 fund account, net assets statement and notes 83 East Riding Pension Fund Annual Report and Accounts 2016/2017
Market Change in Market Value at 31 Purchases Sales Market Value at 31 March 2016 Value March 2017
£000 £000 £000 £000 £000
Montanaro UK Smaller Companies Investment Trust Plc 13,730 0 0 1,296 15,026
Montanaro Growth and Income Fund LP No. 3 11,193 67 0 1,717 12,977
Montanaro European Smaller Companies Investment Trust Plc 8,505 0 0 2,410 10,915
Montanaro European Smaller Companies Fund Plc 3,936 0 0 772 4,708
37,364 67 0 6,195 43,626
In order to avoid a potential conflict of interest all transactions undertaken by the Fund in investments managed by Montanaro Asset Management Limited are approved by the Head of Finance.
T Currency Conversion Rates Overseas investments have been converted at the exchange rates quoted in the Financial Times at close of business on 31 March 2017 to arrive at the sterling values in the Net Assets Statement. The exchange rates used per £1 sterling were:
Australian Dollar 1.6392
Canadian Dollar 1.6677
Danish Krone 8.6941
Euro 1.1691
Japanese Yen 139.3380
New Zealand Dollar 1.7888
Norwegian Krona 10.7400
Swedish Krona 11.1644
Swiss Franc 1.2516
US Dollar 1.2505
U Additional Voluntary Contributions The Fund’s approved Additional Voluntary Contribution (AVC) provider is Prudential and during the year to 31 March 2017 scheme members made contributions to this facility of £1,677,963 (2016: £1,782,929). The total value of the funds invested by Prudential on behalf of members of the East Riding Pension Fund at 31 March 2017 is £20,312,216 (2016: £20,919,638). AVC’s do not form part of the Pension Fund accounts in accordance with the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016.
V Statement of Investment Principles Please see pages 120 to 124.
W The Actuarial Present Value of Promised Retirement Benefits The actuarial present value of promised retirement benefits at 31 March 2017 was £6.127bn (31 March 2016: £5.278bn). Liabilities have been projected using a roll forward approximation from the latest formal funding valuation as at 31 March 2016. The Fund accounts do not take account of liabilities to pay pensions and other benefits in the future.
115 fund account, net assets statement and notes 84 East Riding Pension Fund Annual Report and Accounts 2016/2017
X Disclosures Relating to Financial Instruments The items in the Net Asset Statement are made up of the following categories of financial instrument.
31 March 2016 31 March 2017 £000 £000 Financial Assets at fair value through profit or loss 370,011 Fixed Interest Securities 444,537 1,539,039 Equities 1,895,273 23,917 Index-Linked Securities 34,477 1,620,236 Pooled Investment Vehicles 2,001,321 8,378 Foreign Currency 6 13,423 Other Investment Balances 15,050 3,575,004 Total Financial Assets 4,390,664
Loans and Receivables 124,615 Cash Deposits - Sterling 129,188 17,403 Current Assets 20,736 142,018 Total Loans and Receivables 149,924
Financial Liabilities at fair value through profit or loss -963 Other Investment Balances -2,934
Financial Liabilities at Amortised Cost -1,940 Current liabilities -3,032
3,714,119 Net Financial Assets 4,534,622
The methodology used for the valuation of investment assets is described in Note to the Accounts 6 Valuation of Assets. The Fund’s primary long term risk is that the Fund’s assets do not meet its liabilities i.e. the benefits payable to members. Therefore, the aim of the Fund’s investment management is to achieve the long term expected rate of return with an acceptable level of risk. The Fund achieves this by setting a strategic asset allocation on a triennial basis which is expected to achieve the target rate of return over the long term. The tactical asset allocation is determined by the Pensions Committee on a quarterly basis. The Fund has a dedicated strategic risk register which identifies the key risks within the Pension Fund and the risk controls that are in place to mitigate these risks. The risk register is reviewed by the Pensions Committee on a semi- annual basis. In addition, an investment risk management schedule is reviewed by the Pensions Committee on a quarterly basis which considers issues such as performance; regulation and compliance; and personnel and structure. The key risks inherent in the Pension Fund in relation to its financial assets are: Market risk Market risk is the risk that the value of an investment decreases as a result of changing market conditions. The risk is mitigated by: • An appropriate strategic asset allocation is determined on a triennial basis in conjunction with the actuarial valuation exercise. This aims to meet the target long term rate of return with an acceptable level of risk and includes an appropriate diversification of asset classes. The allocation is agreed by the Pensions Committee and the Fund’s advisers and investment managers. • The strategic asset allocation is disclosed in the Fund’s Investment Strategy Statement including the permitted asset classes, their allocations, and the permitted ranges.
116 fund account, net assets statement and notes 85 East Riding Pension Fund Annual Report and Accounts 2016/2017
• Tactical asset allocation is determined on a quarterly basis by the Pensions Committee in light of financial market conditions and following advice from the Fund’s advisers and investment managers. • The Pensions Committee regularly reviews the long term investment strategy to ensure that it remains appropriate. The investment policy of the East Riding Pension Fund does not permit any employer related investment, either in the assets, stock, land or property of the Principal Employers or the assets, stock, land or property of any associated employers. The Pensions Committee considers that employer related investments pose too great a risk to the security of the Fund. The Fund has adopted the CIPFA Code of Practice for Treasury Management in Public Services and maintains and operates a Treasury Management Policy comprising an overview of the principles and practices to which the activity will comply. The Treasury Management Policy is approved by the Pensions Committee on an annual basis and they also receive a half-yearly and annual report on treasury activity. The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 state the following regarding the use and investment of Pension Fund monies: • an administering authority must invest any fund money that is not needed immediately to make payments from the fund; • they may vary their investments; • their investment policy must be formulated with a view to the advisability of investing fund money in a wide variety of investments and to the suitability of particular investments and types of investments; • an administering authority must obtain proper advice at reasonable intervals about their investments; and • the authority must consider such advice in taking any steps about their investments. Performance risk Performance risk is the risk that the Fund’s investment managers fail to deliver returns in line with the underlying asset classes. This risk is mitigated by: • Investment management responsibilities are split between the internal and external investment managers. • Each investment manager has a robust investment process including detailed research and analysis. • Analysis of market performance and investment managers’ performance relative to their index benchmark on a quarterly basis by an independent third party. • Detailed analysis of investment managers’ performance on an annual basis. Valuation risk This is the risk that the valuations disclosed in the financial statements are not reflective of the value that could be achieved on disposal. The valuation of financial instruments has been classified into three levels, according to the quality and reliability of information used to determine fair values. • Level 1 – Level 1 valuations are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1 include quoted equities. • Level 2 – Level 2 valuations are those where quoted market prices are not available. Products classified as level 2 include property funds, fixed interest securities, index linked securities and unit trusts. • Level 3 – Level 3 valuations are those where at least one input which could have a significant effect on an instruments valuation is not based on observable market data. Products classified as level 3 include unquoted investments.
117 fund account, net assets statement and notes 86 East Riding Pension Fund Annual Report and Accounts 2016/2017
31 March 2016 31 March 2017
Level 1 Level 2 Level 3 TOTAL Level 1 Level 2 Level 3 TOTAL £000 £000 £000 £000 £000 £000 £000 £000
2,140,360 788,099 646,545 3,575,004 Financial Assets 2,275,050 1,285,356 830,258 4,390,664
142,018 0 0 142,018 Loans and Receivables 149,924 0 0 149,924
2,282,378 788,099 646,545 3,717,022 TOTAL 2,424,974 1,285,356 830,258 4,540,588
2,903 0 0 2,903 Financial Liabilities 5,966 0 0 5,966
2,279,475 788,099 646,545 3,714,119 TOTAL 2,419,008 1,285,356 830,258 4,534,622
Level 3 Analysis
Value at 01/04/16 Purchases at Cost Sales Proceeds Change in Market Value Value at 31/03/17 £000 £000 £000 £000 £000
646,545 198,058 -76,574 62,229 830,258
Level 3 Analysis
Value at 01/04/15 Purchases at Cost Sales Proceeds Change in Market Value Value at 31/03/16 £000 £000 £000 £000 £000
565,699 157,421 -107,745 31,170 646,545
The main characteristic of Level 3 assets is the absence of any observable market data. The inputs used to determine the fair value of Level 3 assets includes audited and unaudited financial information from the underlying investment managers. No investment assets transferred between the levels of fair value hierarchy during the year.
Credit risk This is the risk that the Fund’s counterparties fail to pay amounts due. Appropriate credit limits have been established by the Fund for individual counterparties for Treasury Management purposes. The Pension Fund Treasury Management Policy specifies the following framework for credit limits for individual counterparties:
31 March 2016 31 March 2017
Actual Maximum Actual £000 Limit £000 £000
0 UK Government No Limit 0
15,000 Institutions or Funds with a minimum rating of AAA/A2 20,000 15,000
2,000 Institutions with a minimum rating of AA/A2 15,000 10,000
10,000 Institutions with a minimum rating of A/A2 10,000 10,000
1,000 Local Authorities 10,000 10,000
10,000 Building Societies - top 15 ranked by asset value 10,000 10,000
118 fund account, net assets statement and notes 87 East Riding Pension Fund Annual Report and Accounts 2016/2017
The investment balances at the end of the financial year were:
31 March 2016 31 March 2017
£000 £000
0 UK Government 0
63,561 Institutions or Funds with a minimum rating of AAA/A2 28,457
2,091 Institutions with a minimum rating of AA/A2 25,000
34,368 Institutions with a minimum rating of A/A2 35,172
1,000 Local Authorities 12,000
17,000 Building Societies - top 15 ranked by asset value 22,000
118,020 122,629
Treasury credit risk has been managed dynamically during the year, responding to national and international events in financial markets. Security of principal sums invested continues to be the prime objective. The duration of investments is limited to a maximum of twelve months to enable a reasonable exit strategy to be implemented if necessary. The Pension Fund makes use of Money Market Funds which are instant access funds whose objectives match those of the Pension Fund, being security of principal and diversification of investments. The present restrictions within the approved Treasury Management Policy will continue until economic and market conditions normalise. Liquidity risk Liquidity risk is the risk that the Pension Fund is not able to meet its financial obligations as they fall due or can do so only at an excessive cost. The Pension Fund’s policy is to maintain sufficient funds in a liquid form at all times to ensure that it can cover all fluctuations in cash flow and meet its financial obligations. The accounts do not take into account liabilities to pay pensions and other benefits.
Not more than 3 - 12 1 - 5 More than No specific Total As at 31 March 2017 3 months months years 5 years maturity £000 £000 £000 £000 £000 £000
Assets
Cash 37,000 55,000 0 0 37,194 129,194
Investments 0 0 47,720 283,124 4,044,764 4,375,608
Other investment balances 15,050 0 0 0 0 15,050
Current assets 20,736 0 0 0 0 20,736
Total assets 72,786 55,000 47,720 283,124 4,081,958 4,540,588
Liabilities
Other investment balances 2,934 0 0 0 0 2,934
Current liabilities 3,032 0 0 0 0 3,032
Total liabilities 5,966 0 0 0 0 5,966
Liquidity gap 66,820 55,000 47,720 283,124 4,081,958 4,534,622
119 fund account, net assets statement and notes 88 East Riding Pension Fund Annual Report and Accounts 2016/2017
Not more than 3 - 12 1 - 5 More than No specific Total As at 31 March 2016 3 months months years 5 years maturity £000 £000 £000 £000 £000 £000
Assets
Cash 38,757 10,000 0 0 84,236 132,993
Investments 0 2,715 42,341 240,700 3,267,447 3,553,203
Other investment balances 13,423 0 0 0 0 13,423
Current assets 17,403 0 0 0 0 17,403
Total assets 69,583 12,715 42,341 240,700 3,351,683 3,717,022
Liabilities
Other investment balances 963 0 0 0 0 963
Current liabilities 1,940 0 0 0 0 1,940
Total liabilities 2,903 0 0 0 0 2,903
Liquidity gap 66,680 12,715 42,341 240,700 3,351,683 3,714,119
Interest rate risk Interest rate risk is the risk that a change in interest rates will result in a change in the valuation of an investment. The Fund’s direct exposure to changes in interest rates is as follows:
31 March 2016 31 March 2017
£000 £000
Asset Type
84,236 Cash and cash equivalents 37,194
393,928 Fixed interest securities 479,014
478,164 516,208
120 fund account, net assets statement and notes 89 East Riding Pension Fund Annual Report and Accounts 2016/2017
Foreign exchange risk Foreign exchange risk is the risk that an adverse movement in foreign exchange rates will impact on the value of the Fund’s investments denominated in foreign currencies. The following table summarises the Fund’s currency exposure:
USD EUR JPY CHF SEK DKK NOK AUD CAD Total As at 31 March 2017 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Bonds
Overseas Public Sector 28,934 17,915 19,425 0 1,784 0 0 3,669 3,263 74,990
Global High Yield 32,081 56,682 0 0 0 0 0 0 0 88,763
Emerging Market Government 14,258 0 0 0 0 0 0 0 0 14,258
Overseas Corporate 25,522 0 0 0 0 0 0 0 0 25,522
Equities
Overseas 0 216,340 173,830 51,715 12,779 13,293 5,528 0 0 473,485
Index-Linked Bonds
Overseas Public Sector 11,032 0 0 0 0 0 0 0 0 11,032
Pooled Investment Vehicles
Managed Funds 554,730 21,737 0 0 0 0 0 0 0 576,467
Property - unquoted 19,866 28,766 0 0 0 0 0 0 0 48,632
Private Equity - quoted 21,899 0 0 0 0 0 0 0 0 21,899
Private Equity - unquoted 34,220 49,785 0 0 0 0 0 0 0 84,005
Infrastructure - unquoted 21,326 34,375 0 0 0 0 0 0 0 55,701
Other investments - unquoted 146,321 41,165 0 0 0 0 0 0 0 187,486 Total 910,189 466,765 193,255 51,715 14,563 13,293 5,528 3,669 3,263 1,662,240
USD EUR JPY CHF SEK DKK NOK AUD CAD Total As at 31 March 2016 £000 £000 £000 £000 £000 £000 £000 £000 £000 £000
Bonds
Overseas Public Sector 29,347 18,371 17,156 1,709 0 0 0 3,411 3,079 73,073
Global High Yield 23,626 38,834 0 0 0 0 0 0 0 62,460
Emerging Market Government 11,614 0 0 0 0 0 0 0 0 11,614
Equities
Overseas 0 178,872 129,010 35,316 11,371 8,160 4,019 0 0 366,748
Index-Linked Bonds
Overseas Public Sector 9,472 0 0 0 0 0 0 0 0 9,472
Pooled Investment Vehicles
Managed Funds 440,119 17,333 0 0 0 0 0 0 0 457,452
Property - unquoted 17,660 21,152 0 0 0 0 0 0 0 38,812
Private Equity - quoted 16,591 0 0 0 0 0 0 0 0 16,591
Private Equity - unquoted 25,891 52,776 0 0 0 0 0 0 0 78,667
Infrastructure - unquoted 8,560 20,328 0 0 0 0 0 0 0 28,888
Other investments - unquoted 118,057 35,759 0 0 0 0 0 0 0 153,816 Total 700,937 383,425 146,166 37,025 11,371 8,160 4,019 3,411 3,079 1,297,593
121 fund account, net assets statement and notes 90 East Riding Pension Fund Annual Report and Accounts 2016/2017
Y Contingent Assets As at 31 March 2017 the Fund had submitted claims totalling £8.10m relating to the reclaiming of UK and overseas withholding tax on investment income received, of which £1.10m has been received to date. Professional costs to date have totalled £0.65m.
Z Accounting standards that have been issued but not yet adopted Accounting standards that have been issued before 1 January 2017 but not yet adopted by the Code relate to: • Amendment to the reporting of pension fund scheme transaction costs - requirement of a new disclosure of investment management transaction costs. • Amendment to the reporting of investment concentration - clarification on the approach to investment concentration disclosure. The above will be of minimum impact to the 2017/18 pension fund accounts.
AA Post Balance Sheet Event On 4 April 2017 three employers within the Fund used a discretion available in the 2013 LGPS Regulations to make a pre-paid single pension contribution lump sum payment to the Fund, totalling £136.9m, which discharges three years of pension payments until April 2020.
122 fund account, net assets statement and notes 91 East Riding Pension Fund Annual Report and Accounts 2016/2017
funding strategy statement
1 Introduction
1.1 What is this document? This is the Funding Strategy Statement (FSS) of the East Riding Pension Fund (“the Fund”), which is administered by East Riding of Yorkshire Council, (“the Administering Authority”). It has been prepared by the Administering Authority in collaboration with the Fund’s actuary, Hymans Robertson LLP, and after consultation with the Fund’s employers and investment adviser. It is effective from 1 April 2017.
1.2 What is the East Riding Pension Fund? The Fund is part of the national Local Government Pension Scheme (LGPS). The LGPS was set up by the UK Government to provide retirement and death benefits for local government employees, and those employed in similar or related bodies, across the whole of the UK. The Administering Authority runs the East Riding Pension Fund, in effect the LGPS for public sector bodies in the East Riding of Yorkshire, North Lincolnshire, North East Lincolnshire and Kingston-upon-Hull areas, to make sure it: • receives the proper amount of contributions from employees and employers, and any transfer payments; • invests the contributions appropriately, with the aim that the Fund’s assets grow over time with investment income and capital growth; and • uses the assets to pay Fund benefits to the members (as and when they retire, for the rest of their lives), and to their dependants (as and when members die), as defined in the LGPS Regulations. Assets are also used to pay transfer values and administration costs. The roles and responsibilities of the key parties involved in the management of the Fund are summarised in Appendix B.
1.3 Why does the Fund need a Funding Strategy Statement? Employees’ benefits are guaranteed by the LGPS Regulations, and do not change with market values or employer contributions. Investment returns will help pay for some of the benefits, but probably not all, and certainly with no guarantee. Employees’ contributions are fixed in those Regulations also, at a level which covers only part of the cost of the benefits. Therefore, employers need to pay the balance of the cost of delivering the benefits to members and their dependants.
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The FSS focuses on how employer liabilities are measured, the pace at which these liabilities are funded, and how employers or pools of employers pay for their own liabilities. This statement sets out how the Administering Authority has balanced the conflicting aims of: • affordability of employer contributions; • transparency of processes; • stability of employers’ contributions; and • prudence in the funding basis. There are also regulatory requirements for an FSS, as given in Appendix A. The FSS is a summary of the Fund’s approach to funding its liabilities, and this includes reference to the Fund’s other policies; it is not an exhaustive statement of policy on all issues. The FSS forms part of a framework which includes: • the LGPS Regulations; • the Rates and Adjustments Certificate (confirming employer contribution rates for the next three years) which can be found in an appendix to the formal valuation report; • actuarial factors for valuing individual transfers, early retirement costs and the capitalisation of added years contracts; and • the Fund’s Statement of Investment Principles and Investment Strategy Statement (see Section 4).
1.4 How does the Fund and this FSS affect me? This depends who you are: • a member of the Fund, i.e. a current or former employee, or a dependant: you will want to be sure the Fund is collecting and holding enough money for your benefits to be paid in full; • an employer in the Fund (or which is considering joining the Fund): you will want to know how your contributions are calculated from time to time, that these are fair by comparison to other employers in the Fund, and in what circumstances you might need to pay more. Note that the FSS applies to all employers participating in the Fund; • an Elected Member whose council participates in the Fund: you will want to be sure that the council balances the need to hold prudent reserves for members’ retirement and death benefits, with the other competing demands for council money; • a Council Tax payer: you will want to understand how your council seeks to strike the balance above, and also seeks to minimise cross-subsidies between different generations of taxpayers.
1.5 What does the FSS aim to do? The FSS sets out the objectives of the Fund’s funding strategy, which are: • to ensure the long-term solvency of the Fund, using a prudent long term view. This will ensure that sufficient funds are available to meet all members’/dependants’ benefits as they fall due for payment; • to ensure that employer contribution rates are reasonably stable where appropriate; • to minimise the long-term cash contributions which employers need to pay to the Fund, by recognising the link between assets and liabilities and adopting an investment strategy which balances risk and return (NB this will also minimise the costs to be borne by Council Tax payers); • to reflect the different characteristics of different employers in determining contribution rates. This involves the Fund having a clear and transparent funding strategy to demonstrate how each employer can best meet its own liabilities over future years; and • to use reasonable measures to reduce the risk to other employers and ultimately to the Council Tax payer from an employer defaulting on its pension obligations.
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1.6 How do I find my way around this document? In Section 2 there is a brief introduction to some of the main principles behind funding, i.e. deciding how much an employer should contribute to the Fund from time to time. In Section 3 we outline how the Fund calculates the contributions payable by different employers in different situations. In Section 4 we show how the funding strategy is linked with the Fund’s investment strategy. In the Appendices we cover various issues in more detail if you are interested: A. the regulatory background, including how and when the FSS is reviewed, B. who is responsible for what; C. what issues the Fund needs to monitor, and how it manages its risks; D. some more details about the actuarial calculations required; E. the assumptions which the Fund actuary currently makes about the future; and F. a glossary explaining the technical terms occasionally used here. If you have any other queries please contact Graham Ferry, Pensions Manager in the first instance at e-mail address [email protected] or on telephone number (01482) 394171.
2 Basic Funding issues (More detailed and extensive descriptions are given in Appendix D).
2.1 How does the actuary calculate a contribution rate? In essence this is a three-step process in which the actuary: 1. Calculates the ultimate funding target for that employer, i.e. the ideal amount of assets it should hold in order to be able to pay all its members’ benefits. See Appendix E for more details of what assumptions we make to determine that funding target; 2. Determines the time horizon over which the employer should aim to achieve that funding target. See the table in 3.3 and Note (c) for more details; and 3. Calculates the employer contribution rate such that it has at least a given probability of achieving that funding target over that time horizon, allowing for different likelihoods of various possible economic outcomes over that time horizon. See 2.2 below, and the table in 3.3 Note (e) for more details.
2.2 What is each employer’s contribution rate? This is described in more detail in Appendix D. Employer contributions are normally made up of two elements: a) the estimated cost of benefits being built up each year, after deducting the members’ own contributions and including administration expenses. This is referred to as the “Primary rate”, and is expressed as a percentage of members’ pensionable pay; plus b) an adjustment for the difference between the Primary rate above, and the actual contribution the employer needs to pay, referred to as the “Secondary rate”. In broad terms, payment of the Secondary rate will aim to return the employer to full funding over an appropriate period (the “time horizon”). The Secondary rate may be expressed as a percentage of pay and/or a monetary amount in each year. The rates for all employers are shown in the Fund’s Rates and Adjustments Certificate, which forms part of the formal Actuarial Valuation Report. Employers’ contributions are expressed as minima, with employers able to pay contributions at a higher rate. Account of any higher rate will be taken by the Fund actuary at subsequent valuations,
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i.e. will be reflected as a credit when next calculating the employer’s contributions.
2.3 What different types of employer participate in the Fund? Historically the LGPS was intended for local authorit y employees only. However over the years, with the diversification and changes to delivery of local services, many more types and numbers of employers now participate. There are currently more employers in the Fund than ever before, a significant proportion of whom are new academies. In essence, participation in the LGPS is open to public sector employers providing some form of service to the local community. Whilst the majority of members will be local authority employees (and ex-employees), the majority of participating employers are those providing services in place of (or alongside) local authority services: academy schools, contractors, housing associations, charities, etc. The LGPS Regulations define various types of employer as follows: Scheduled bodies - councils, and other specified employers such as academies and further education establishments. These must provide access to the LGPS in respect of their employees who are not eligible to join another public sector scheme (such as the Teachers Scheme). These employers are so-called because they are specified in a schedule to the LGPS Regulations. It is now possible for Local Education Authority schools to convert to academy status, and for other forms of school (such as Free Schools) to be established under the academies legislation. All such academies (or Multi Academy Trusts), as employers of non-teaching staff, become separate new employers in the Fund. As academies are defined in the LGPS Regulations as “Scheduled Bodies”, the Administering Authority has no discretion over whether to admit them to the Fund, and the academy has no discretion whether to continue to allow its non-teaching staff to join the Fund. There has also been guidance issued by the DCLG regarding the terms of academies’ membership in LGPS Funds. Designating employers - employers such as town and parish councils are able to participate in the LGPS via resolution (and the Fund cannot refuse them entry where the resolution is passed). These employers can designate which of their employees are eligible to join the scheme. Other employers are able to participate in the Fund via an admission agreement, and are referred to as ‘admission bodies’. These employers are generally those with a “community of interest” with another scheme employer – community admission bodies (“CAB”) or those providing a service on behalf of a scheme employer – transferee admission bodies (“TAB”). CABs will include housing associations and charities, TABs will generally be contractors. The Fund is able to set its criteria for participation by these employers and can refuse entry if the requirements as set out in the Fund’s admissions policy are not met. (NB The terminology CAB and TAB has been dropped from recent LGPS Regulations, which instead combine both under the single term ‘admission bodies’; however, we have retained the old terminology here as we consider it to be helpful in setting funding strategies for these different employers).
2.4 How does the measured contribution rate vary for different employers? All three steps above are considered when setting contributions (more details are given in Section 3 and Appendix D). 1. The funding target is based on a set of assumptions about the future, (e.g. investment returns, inflation, pensioners’ life expectancies). However, if an employer is approaching the end of its participation in the Fund then its funding target may be set on a more prudent basis, so that its liabilities are less likely to be spread among other employers after its cessation; 2. The time horizon required is, in broad terms, the period over which any deficit is to be recovered. A shorter period will lead to higher contributions, and a longer period to lower contributions (all other things being equal). Employers may be given a shorter time horizon if they have a less permanent anticipated membership, or do not have tax-raising powers to increase contributions if investment returns under-perform; and 3. The probability of achieving the funding target over that time horizon will be dependent on the Fund’s view of the
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strength of employer covenant and its funding profile. Where an employer is considered to be weaker, or potentially ceasing from the Fund, then the required probability will be set higher, which in turn will increase the required contributions (and vice versa). For some employers it may be agreed to pool contributions, see 3.4. Any costs of non ill-health early retirements must be paid by the employer, see 3.6. Costs of ill-health early retirements are covered in 3.7 and 3.8.
2.5 How does the Fund recognise that contribution levels can affect council and employer service provision, and council tax? The Administering Authority and the Fund actuary are acutely aware that, all other things being equal, a higher contribution required to be paid to the Fund will mean less cash available for the employer to spend on the provision of services. For instance: • Higher Pension Fund contributions may result in reduced council spending, which in turn could affect the resources available for council services, and/or greater pressure on council tax levels; • Contributions which Academies pay to the Fund will therefore not be available to pay for providing education; • Other employers will provide various services to the local community, perhaps through housing associations, charitable work, or contracting council services. If they are required to pay more in pension contributions to the LGPS then this may affect their ability to provide the local services. Whilst all this is true, it should also be borne in mind that: • The Fund provides invaluable financial security to local families, whether to those who formerly worked in the service of the local community who have now retired, or to their families after their death; • The Fund must have the assets available to meet these retirement and death benefits, which in turn means that the various employers must each pay their own way. Lower contributions today will mean higher contributions tomorrow: deferring payments does not alter an employer’s ultimate obligation to the Fund in respect of its current and former employees; • Each employer will generally only pay for its own employees and ex-employees (and their dependants), not for those of other employers in the Fund; • The Fund strives to maintain reasonably stable employer contribution rates where appropriate and possible. However, a recent shift in regulatory focus means that solvency within each generation is considered by the Government to be a higher priority than stability of contribution rates; • The Fund wishes to avoid the situation where an employer falls so far behind in managing its funding shortfall that its deficit becomes unmanageable in practice: such a situation may lead to employer insolvency and the resulting deficit falling on the other Fund employers. In that situation, those employers’ services would in turn suffer as a result; • Council contributions to the Fund should be at a suitable level, to protect the interests of different generations of council tax payers. For instance, underpayment of contributions for some years will need to be balanced by overpayment in other years; the council will wish to minimise the extent to which council tax payers in one period are in effect benefitting at the expense of those paying in a different period. Overall, therefore, there is clearly a balance to be struck between the Fund’s need for maintaining prudent funding levels, and the employers’ need to allocate their resources appropriately. The Fund achieves this through various techniques which affect contribution increases to various degrees (see 3.1). In deciding which of these techniques to apply to any given employer, the Administering Authority takes a view on the financial standing of the employer, i.e. its ability to meet its funding commitments and the relevant time horizon. The Administering Authority will consider a risk assessment of that employer using a knowledge base which is regularly monitored and kept up-to-date. This database will include such information as the type of employer, its membership profile and funding position, any guarantors or security provision, material changes anticipated, etc.
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For instance, where the Administering Authority has reasonable confidence that an employer will be able to meet its funding commitments, then the Fund will permit options such as stabilisation (see 3.3 Note (b)), a longer time horizon relative to other employers, and/or a lower probability of achieving their funding target. Such options will temporarily produce lower contribution levels than would otherwise have applied. This is permitted in the expectation that the employer will still be able to meet its obligations for many years to come. On the other hand, where there is doubt that an employer will be able to meet its funding commitments or withstand a significant change in its commitments, then a higher funding target, and/or a shorter deficit recovery period relative to other employers, and/or a higher probability of achieving the target may be required. The Fund actively seeks employer input, including to its funding arrangements, through various means: see Appendix A.
3 Calculating contributions for individual Employers
3.1 General comments A key challenge for the Administering Authority is to balance the need for stable, affordable employer contributions with the requirement to take a prudent, longer-term view of funding and ensure the solvency of the Fund. With this in mind, the Fund’s three-step process identifies the key issues: 1. What is a suitably (but not overly) prudent funding target? 2. How long should the employer be permitted to reach that target? This should be realistic but not so long that the funding target is in danger of never actually being achieved. 3. What probability is required to reach that funding target? This will always be less than 100% as we cannot be certain of future market movements. Higher probability “bars” can be used for employers where the Fund wishes to reduce the risk that the employer ceases leaving a deficit to be picked up by other employers. These and associated issues are covered in this Section. The Administering Authority recognises that there may occasionally be particular circumstances affecting individual employers that are not easily managed within the rules and policies set out in the Funding Strategy Statement. Therefore the Administering Authority may, at its sole discretion, direct the actuary to adopt alternative funding approaches on a case by case basis for specific employers.
3.2 The effect of paying lower contributions On request from an employer, the Administering Authority may permit an employer to pay contributions at a lower level than is assessed for the employer using the three step process above. At their absolute discretion the Administering Authority may: • extend the time horizon for targeting full funding; • adjust the required probability of meeting the funding target; • permit an employer to participate in the Fund’s stabilisation mechanisms; • permit extended phasing in of contribution rises or reductions; • pool contributions amongst employers with similar characteristics; and/or • accept some form of security or guarantee in lieu of a higher contribution rate than would otherwise be the case. Employers which are permitted to use one or more of the above methods will often be paying, for a time, contributions less than required to meet their funding target, over the appropriate time horizon with the required likelihood of success. Such employers should appreciate that: • their true long term liability (i.e. the actual eventual cost of benefits payable to their employees and ex- employees) is not affected by the pace of paying contributions;
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• lower contributions in the short term will be assumed to incur a greater loss of investment returns on the deficit. Thus, deferring a certain amount of contribution may lead to higher contributions in the long-term; and • it may take longer to reach their funding target, all other things being equal. Overleaf (3.3) is a summary of how the main funding policies differ for different types of employer, followed by more detailed notes where necessary. Section 3.4 onwards deals with various other funding issues which apply to all employers.
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3.3 The different approaches used for different employers
Community Admission Type of Transferee Scheduled Bodies Bodies and closed employer Admission Bodies Designating Employers
Open Closed Local Town Police, Fire, Sub-type Academies to new to new (all) Authorities Councils Colleges members members
Ongoing, assumes fixed Funding Target Ongoing, assumes long-term Fund participation Ongoing, but may move to contract term in the (see Appendix E) “gilts basis” - see Note (a) Basis used Fund (see Appendix E)
Primary rate (see Appendix D – D.2) approach
Stabilised Yes - see Yes - see Yes No No No No contributions? Note (b) Note (b) Note (b)
Maximum Colleges - 20 years (or 20 years (or Outstanding contract time horizon – 20 years 20 years 20 years 15 Other less if no less if no term Note (c) – 20 yrs guarantee) guarantee)
Secondary Monetary Monetary % of payroll Monetary amount Monetary amount rate – Note (d) amount amount
Reduce contributions by spreading the surplus over the remaining contract term. Surplus is not Preferred approach: contributions kept at Treatment of usually used to reduce Covered by stabilisation arrangement Primary rate. However, reductions may be the contributions surplus permitted by the Admin. Authority where the contract length exceeds 4 years, however the Admin. Authority may consider this on request
Probability of achieving c.66% 70% 66% 75% 75% 80% 50% target – Note (e)
Phasing of contribution Covered by stabilisation arrangement None Not usually None changes
Review of Administering Authority reserves the right to review contribution rates and amounts, and Particularly reviewed in rates – Note the level of security provided, at regular intervals between valuations last 3 years of contract (f)
New employer n/a Note (g) Note (h) Notes (h) & (i)
Participation is Cessation is assumed not to be generally Can be ceased subject assumed to expire at Cessation of possible, as Scheduled Bodies are legally to terms of admission the end of the contract. participation: obliged to participate in the LGPS. In agreement. Cessation Cessation debt (if any) the rare event of cessation occurring debt will be calculated on calculated on ongoing cessation debt (machinery of Government changes for a basis appropriate to the basis. Awarding payable example), the cessation debt principles circumstances of cessation Authority will be liable applied would be as per Note (j). – see Note (j). for future deficits and contributions arising.
Note (a) (Basis for CABs and designating employers closed to new entrants)s In the circumstances where: • the employer is a designating employer, or an admission body but not a transferee admission body; and • the employer has no guarantor; and
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• the admission agreement is likely to terminate, or the employer is likely to lose its last active member, within a timeframe considered appropriate by the Administering Authority to prompt a change in funding. the Administering Authority may set a higher funding target (e.g. using a discount rate set equal to gilt yields) by the time the agreement terminates or the last active member leaves, in order to protect other employers in the Fund. This policy will increase regular contributions and reduce, but not entirely eliminate, the possibility of a final deficit payment being required from the employer when a cessation valuation is carried out. The Administering Authority also reserves the right to adopt the above approach in respect of those designating employers and admission bodies with no guarantor, where the strength of covenant is considered to be weak but there is no immediate expectation that the admission agreement will cease or the designating employer alters its designation. Note (b) Stabilisation Stabilisation is a mechanism where employer contribution rate variations from year to year are kept within a pre- determined range, thus allowing those employers’ rates to be relatively stable. In the interests of stability and affordability of employer contributions, the Administering Authority, on the advice of the Fund actuary, believes that stabilising contributions can still be viewed as a prudent longer-term approach. However, employers whose contribution rates have been “stabilised” (and may therefore be paying less than their theoretical contribution rate) should be aware of the risks of this approach and should consider making additional payments to the Fund if possible. The stabilisation mechanism is only available to employers who have tax raising powers (unitary authorities, town and parish councils) or a government guarantee (academies). This stabilisation mechanism allows short term investment market volatility to be managed so as not to cause volatility in employer contribution rates, on the basis that a long term view can be taken on net cash inflow, investment returns and strength of employer covenant. The current stabilisation mechanism applies if: • the employer satisfies the eligibility criteria set by the Administering Authority (see below); and • there are no material events which cause the employer to become ineligible, e.g. significant reductions in active membership (due to outsourcing or redundancies), or changes in the nature of the employer (perhaps due to Government restructuring), or changes in the security of the employer. On the basis of extensive modelling carried out for the 2016 valuation exercise (see Section 4), the stabilised details are as follows:
Type of employer Unitary Authorities * Town and Parish Councils * Academy ***
Actual contribution in 2016-17, Actual contribution in 2016-17, Actual contribution in 2016-17, Starting rate** expressed as % of pay expressed as % of pay expressed as % of pay
Max cont increase from 1% 2% 2% 2017-18 onwards**
Max cont decrease** 1% 2% 2%
* The actuary analyses the position for all four Unitary Authorities, and will identify if any Council is in a materially more mature position (i.e. high liabilities relative to payroll). Any such “mature” Council will be required to increase contributions at a higher rate than standard, or else pay an additional contribution at the outset which broadly matches that excess increase. ** In practice, the required Council contributions will be split between percentage of pay and monetary lump sum. This table shows just % of pay for ease of summary and comparison. The academy contribution rates are subject to a minimum of at least the Primary rate. The stabilisation criteria and
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limits will be reviewed at the 31 March 2019 valuation, to take effect from 1 April 2020. However the Administering Authority reserves the right to review the stabilisation criteria and limits at any time before then, on the basis of membership and/or employer changes as described above. Note (c) (Maximum time horizon) The maximum time horizon starts at the commencement of the revised contribution rate (1 April 2017 for the 2016 valuation). The Administering Authority would normally expect the same period to be used at successive triennial valuations, but would reserve the right to propose alternative time horizons, for example where there were no new entrants. The requirement for a shorter recovery period for colleges is on the basis that colleges have neither tax raising powers nor a government guarantee. Where stabilisation applies, the resulting employer contribution rate changes from year to year in line with the stabilisation mechanism, as opposed to being directly affected by the deficit recovery period. Admission Bodies without a funding guarantee will have a maximum deficit recovery period of the expected future working lifetime of the remaining active scheme members, allowing for expected leavers. Note (d) (Secondary rate) For employers where stabilisation is not being applied, the Secondary rate for each employer covering the three year period until the next valuation will typically be set in lump sum monetary terms. The payment of Secondary rate contributions set in lump sum monetary terms must be paid in monthly instalments by employers. Transitional arrangements will be allowed in 2017/18 only at the Fund’s discretion. Requests will only be considered from employers who paid by annual lump sum payment in 2016/17 and are not in arrears as at 31 March 2017. For some employers, the Secondary rates are expressed as a percentage of payroll, as opposed to monetary lump sums, as follows: • Academies (due to their anticipated continued payroll growth); and • Employers within pools (see 3.4) where it would not be practical to split out each employer’s deficit payment amount. For other employers, the Administering Authority may in its discretion agree that Secondary rates can be a percentage of salaries instead of monetary lump sums. In those cases, the Administering Authority reserves the right between valuations to amend such rates and/or to require these payments in monetary terms instead, for instance where: • the employer is relatively mature, i.e. has a large Secondary rate (e.g. above 15% of payroll); or • there has been a significant reduction in payroll due to outsourcing or redundancy exercises; or • the employer has closed the Fund to new entrants. Note (e) (Probability of achieving funding target) Each employer has its funding target calculated, and a relevant time horizon over which to reach that target. Contributions are set such that, combined with the employer’s current asset share and anticipated market movements over the time horizon, the funding target is achieved with a given minimum probability. A higher required probability bar will give rise to higher required contributions, and vice versa. The way in which contributions are set using these three steps, and relevant economic projections, is described in further detail in Appendix D. Different probabilities are set for different employers depending on their nature and circumstances: in broad terms, a higher probability will apply due to one or more of the following: • the Fund believes the employer poses a greater funding risk than other employers;
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• the employer does not have tax-raising powers; • the employer does not have a guarantor or other sufficient security backing its funding position; and/or • the employer is likely to cease participation in the Fund in the short or medium term. Note (f) (Regular Reviews) Such reviews may be triggered by significant events including but not limited to: significant reductions in payroll, altered employer circumstances, Government restructuring affecting the employer’s business, or failure to pay contributions or arrange appropriate security as required by the Administering Authority. The result of a review may be to require increased contributions (by strengthening the actuarial assumptions adopted and/or moving to monetary levels of deficit recovery contributions), and/or an increased level of security or guarantee. Note (g) (New Academy conversions) At the time of writing, the Fund’s policies on academies’ funding issues are as follows: i. The new academy will be regarded as a separate employer in its own right and will not be pooled with other employers in the Fund. The only exception is where the academy is part of a Multi Academy Trust (MAT) in which case the academy’s figures will be calculated as below but can be combined with those of the other academies in the MAT; ii. The new academy’s past service liabilities on conversion will be calculated based on its active Fund members on the day before conversion. For the avoidance of doubt, these liabilities will include all past service of those members, but will exclude the liabilities relating to any ex-employees of the school who have deferred or pensioner status; iii. The new academy will be allocated an initial asset share from the ceding council’s assets in the Fund. This asset share will be calculated using the estimated funding position of the ceding council at the date of academy conversion. The share will be based on the active members’ funding level, having first allocated assets in the council’s share to fully fund deferred and pensioner members. The asset allocation will be based on market conditions and the academy’s active Fund membership on the day prior to conversion; iv. The new academy’s initial contribution rate will be calculated using market conditions, the council funding position and, membership data, all as at the day prior to conversion. The Fund’s policies on academies are subject to change in the light of any amendments to DCLG guidance. Any changes will be notified to academies, and will be reflected in a subsequent version of this FSS. In particular, policies (iv) above will be reconsidered at each valuation. Note (h) (New Admission Bodies) With effect from 1 October 2012, the LGPS 2012 Miscellaneous Regulations introduced mandatory new requirements for all admission bodies brought into the Fund from that date. Under these Regulations, all new Admission Bodies will be required to provide some form of security, such as a guarantee from the letting employer, an indemnity or a bond. The security is required to cover some or all of the following: • the strain cost of any redundancy early retirements resulting from the premature termination of the contract; • allowance for the risk of asset underperformance; • allowance for the risk of a fall in gilt yields; • allowance for the possible non-payment of employer and member contributions to the Fund; and/or • the current deficit. Transferee admission bodies: For all TABs, the security must be to the satisfaction of the Administering Authority as well as the letting employer, and will be reassessed on an annual basis. See also Note (i) below.
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Community admission bodies: The Administering Authority will only consider requests from CABs (or other similar bodies, such as section 75 NHS partnerships) to join the Fund if they are sponsored by a Scheduled Body with tax raising powers, guaranteeing their liabilities and also providing a form of security as above. The above approaches reduce the risk, to other employers in the Fund, of potentially having to pick up any shortfall in respect of admission bodies ceasing with an unpaid deficit. Note (i) (New Transferee Admission Bodies) A new TAB usually joins the Fund as a result of the letting/outsourcing of some services from an existing employer (normally a Scheduled Body such as a council or academy) to another organisation (a “contractor”). This involves the TUPE transfer of some staff from the letting employer to the contractor. Consequently, for the duration of the contract, the contractor is a new participating employer in the Fund so that the transferring employees maintain their eligibility for LGPS membership. At the end of the contract the employees revert to the letting employer or to a replacement contractor. Ordinarily, the TAB would be set up in the Fund as a new employer with responsibility for all the accrued benefits of the transferring employees; in this case, the contractor would usually be assigned an initial asset allocation equal to the past service liability value of the employees’ Fund benefits. The quid pro quo is that the contractor is then expected to ensure that its share of the Fund is also fully funded at the end of the contract: see Note (j). Employers which “outsource” have flexibility in the way that they can deal with the pension risk potentially taken on by the contractor. In particular there are three different routes that such employers may wish to adopt. Clearly as the risk ultimately resides with the employer letting the contract, it is for them to agree the appropriate route with the contractor: i) Pooling Under this option the contractor is pooled with the letting employer. In this case, the contractor pays the same rate as the letting employer, which may be under a stabilisation approach. ii) Letting employer retains pre-contract risks Under this option the letting employer would retain responsibility for assets and liabilities in respect of service accrued prior to the contract commencement date. The contractor would be responsible for the future liabilities that accrue in respect of transferred staff. The contractor’s contribution rate could vary from one valuation to the next. It would be liable for any deficit at the end of the contract term in respect of assets and liabilities attributable to service accrued during the contract term. iii) Fixed contribution rate agreed Under this option the contractor pays a fixed contribution rate and does not pay any cessation deficit. The Administering Authority is willing to administer any of the above options as long as the approach is documented in the Admission Agreement as well as the transfer agreement. The Admission Agreement should ensure that some element of risk transfers to the contractor where it relates to their decisions and it is unfair to burden the letting employer with that risk. For example the contractor should typically be responsible for pension costs that arise from • above average pay increases, including the effect in respect of service prior to contract commencement even if the letting employer takes on responsibility for the latter under (ii) above; and • redundancy and early retirement decisions. Note (j) (Admission Bodies Ceasing) Notwithstanding the provisions of an admission agreement, the Administering Authority may consider any of the following as triggers for the cessation of an admission agreement with any type of body: • the Administering Authority has the discretion to defer taking action for up to three years, so that if the employer acquires one or more active Fund members during that period then cessation is not triggered. The
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current Fund policy is that this is left as a discretion and may or may not be applied in any given case; • The insolvency, winding up or liquidation of an admission body; • Any breach by an admission body of any of its obligations under the agreement that they have failed to remedy to the satisfaction of the Fund; • A failure by an admission body to pay any sums due to the Fund within the period required by the Fund; or • The failure by an admission body to renew or adjust the level of the bond or indemnity, or to confirm an appropriate alternative guarantor, as required by the Fund. On cessation, the Administering Authority will instruct the Fund actuary to carry out a cessation valuation to determine whether there is any deficit or surplus. Where there is a deficit, payment of this amount in full would normally be sought from the admission body; where there is a surplus it should be noted that current legislation does not permit a refund payment to the admission body. For non-transferee admission bodies whose participation is voluntarily ended either by themselves or the Fund, or where a cessation event has been triggered, the Administering Authority must look to protect the interests of other ongoing employers. The actuary will therefore adopt an approach which, to the extent reasonably practicable, protects the other employers from the likelihood of any material loss emerging in future: (a) Where a guarantor does not exist then, in order to protect other employers in the Fund, the cessation liabilities and final deficit will normally be calculated using a “gilts cessation basis”, which is more prudent than the ongoing basis. This has no allowance for potential future investment outperformance above gilt yields, and has added allowance for future improvements in life expectancy. This could give rise to significant cessation debts being required. (b) Where there is a guarantor for future deficits and contributions, the details of the guarantee will be considered prior to the cessation valuation being carried out. In some cases the guarantor is simply guarantor of last resort and therefore the cessation valuation will be carried out consistently with the approach taken had there been no guarantor in place. Alternatively, where the guarantor is not simply guarantor of last resort, the cessation may be calculated using the ongoing basis as described in Appendix E. (c) Again, depending on the nature of the guarantee, it may be possible to simply transfer the former Admission Body’s liabilities and assets to the guarantor, without needing to crystallise any deficit. This approach may be adopted where the employer cannot pay the contributions due, and this is within the terms of the guarantee. Under (a) and (b), any shortfall would usually be levied on the departing Admission Body as a single lump sum payment. If this is not possible then the Fund would spread the payment subject to there being some security in place for the employer such as a bond indemnity or guarantee. In the event that the Fund is not able to recover the required payment in full, then the unpaid amounts fall to be shared amongst all of the other employers in the Fund. This may require an immediate revision to the Rates and Adjustments Certificate affecting other employers in the Fund, or instead be reflected in the contribution rates set at the next formal valuation following the cessation date. As an alternative, where the ceasing Admission Body is continuing in business, the Fund at its absolute discretion reserves the right to enter into an agreement with the ceasing Admission Body. Under this agreement the Fund would accept an appropriate alternative security to be held against any deficit, and would carry out the cessation valuation on an ongoing basis: deficit recovery payments would be derived from this cessation debt. This approach would be monitored as part of each triennial valuation: the Fund reserves the right to revert to a “gilts cessation basis” and seek immediate payment of any funding shortfall identified. The Administering Authority may need to seek legal advice in such cases, as the Body would have no contributing members.
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3.4 Pooled contributions From time to time, with the advice of the Fund’s actuary, the Administering Authority may set up pools for employers with similar or complementary characteristics. This will always be in line with its broader funding strategy. The current pools in place within the Fund are as follows: • smaller CABs (as a way of sharing experience and smoothing out the effects of costly but relatively rare events such as ill-health retirements or deaths in service). • Local authority maintained schools generally are also pooled with their relevant Unitary Authority. However there may be exceptions for specialist or independent schools. • Academies within a Multi Academy Trust may be pooled for contribution setting purposes, at the MAT’s request. However the position of each academy would continue to be tracked individually. • Smaller transferee admission bodies may be pooled with the letting employer, provided all parties (particularly the letting employer) agree. See 3.3 Note (i). Those employers which have been pooled are identified in the Rates and Adjustments Certificate. Employers who are permitted to enter (or remain in) a pool at the 2016 valuation will not normally be advised of their individual contribution rate unless agreed by the Administering Authority. Community admission bodies that are deemed by the Administering Authority to have closed to new entrants are not usually permitted to participate in a pool.
3.5 Additional flexibility in return for added security The Administering Authority may permit greater flexibility to the employer’s contributions if the employer provides added security to the satisfaction of the Administering Authority. Such flexibility includes a reduced rate of contribution, an extended time horizon, or permission to join a pool with another body (e.g. the Local Authority). Such security may include, but is not limited to, a suitable bond, a legally-binding guarantee from an appropriate third party, or security over an employer asset of sufficient value. The degree of flexibility given may take into account factors such as: • the extent of the employer’s deficit; • the amount and quality of the security offered; • the employer’s financial security and business plan; and • whether the admission agreement is likely to be open or closed to new entrants.
3.6 Non ill health early retirement costs It is assumed that members’ benefits are payable from the earliest age that the employee could retire without incurring a reduction to their benefit (and without requiring their employer’s consent to retire). (NB the relevant age may be different for different periods of service, following the benefit changes from April 2008 and April 2014). Employers are required to pay an immediate lump sum payment (‘strain’) wherever an employee retires before attaining this age. The actuary’s funding basis makes no allowance for premature retirement except on grounds of ill-health.
3.7 Ill health early retirement costs In the event of a member’s early retirement on the grounds of ill-health, a funding strain will usually arise, which can be very large. Such strains are currently met by each employer, although individual employers may elect to take external insurance (see 3.8 below).
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3.8 External Ill health insurance If an employer provides satisfactory evidence to the Administering Authority of a current external insurance policy covering ill health early retirement strains, then the employer’s contribution to the Fund each year is reduced by the amount of that year’s insurance premium, so that the total contribution is unchanged. The employer must keep the Administering Authority notified of any changes in the insurance policy’s coverage or premium terms, or if the policy is ceased.
3.9 Employers with no remaining active members In general an employer ceasing in the Fund, due to the departure of the last active member, will pay a cessation debt on an appropriate basis (see 3.3, Note (j)) and consequently have no further obligation to the Fund. Thereafter it is expected that one of two situations will eventually arise: a) The employer’s asset share runs out before all its ex-employees’ benefits have been paid. In this situation the other Fund employers will be required to contribute to pay all remaining benefits: this will be done by the Fund actuary apportioning the remaining liabilities on a pro-rata basis at successive formal valuations; or b) The last ex-employee or dependant dies before the employer’s asset share has been fully utilised. In this situation the remaining assets would be apportioned pro-rata by the Fund’s actuary to the other Fund employers. c) In exceptional circumstances the Fund may permit an employer with no remaining active members to continue contributing to the Fund. This would require the provision of a suitable security or guarantee, as well as a written ongoing commitment to fund the remainder of the employer’s obligations over an appropriate period. The Fund would reserve the right to invoke the cessation requirements in the future, however. The Administering Authority may need to seek legal advice in such cases, as the employer would have no contributing members. There are a number of ceased employers whose assets and liabilities are covered by the four Unitary Authorities (as opposed to all Fund employers) in set proportions. The relevant liabilities are calculated at each valuation and the pro-rata asset share allocated to the Unitary Authorities.
3 .1 0 Policies on bulk transfers Each case will be treated on its own merits, but in general: • The Fund will not pay bulk transfers greater than the lesser of (a) the asset share of the transferring employer in the Fund, and (b) the value of the past service liabilities of the transferring members; • The Fund will not grant added benefits to members bringing in entitlements from another Fund unless the asset transfer is sufficient to meet the added liabilities; and • The Fund may permit shortfalls to arise on bulk transfers if the Fund employer has suitable strength of covenant and commits to meeting that shortfall in an appropriate period. This may require the employer’s Fund contributions to increase between valuations.
4 Funding strategy and links to investment strategy
4.1 What is the Fund’s investment strategy? The Fund has built up assets over the years, and continues to receive contribution and other income. All of this must be invested in a suitable manner, which is the investment strategy.
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Investment strategy is set by the Administering Authority, after consultation with the employers and after taking investment advice. The precise mix, manager make up and target returns are set out in the Statement of Investment Principles (being replaced by an Investment Strategy Statement under new LGPS Regulations), which is available to members and employers. The investment strategy is set for the long-term, but is reviewed from time to time. Normally a full review is carried out as part of each actuarial valuation, and is kept under review annually between actuarial valuations to ensure that it remains appropriate to the Fund’s liability profile. The same investment strategy is currently followed for all employers.
4.2 What is the link between funding strategy and investment strategy? The Fund must be able to meet all benefit payments as and when they fall due. These payments will be met by contributions (resulting from the funding strategy) or asset returns and income (resulting from the investment strategy). To the extent that investment returns or income fall short, then higher cash contributions are required from employers, and vice versa. Therefore, the funding and investment strategies are inextricably linked.
4.3 How does the funding strategy reflect the Fund’s investment strategy? In the opinion of the Fund actuary, the current funding policy is consistent with the current investment strategy of the Fund. The asset outperformance assumption contained in the discount rate (see Appendix E3) is within a range that would be considered acceptable for funding purposes; it is also considered to be consistent with the requirement to take a “prudent longer-term view” of the funding of liabilities as required by the UK Government (see Appendix A1). However, in the short term – such as the three yearly assessments at formal valuations – there is the scope for considerable volatility and there is a material chance that in the short-term and even medium term, asset returns will fall short of this target. The stability measures described in Section 3 will damp down, but not remove, the effect on employers’ contributions. The Fund does not hold a contingency reserve to protect it against the volatility of equity investments.
4.4 How does this differ for a large stable employer? The Fund’s actuary has developed four key measures which capture the essence of the Fund’s strategies, both funding and investment: • Prudence – the Fund should have a reasonable expectation of being fully funded in the long term; • Affordability – how much can employers afford; • Stewardship – the assumptions used should be sustainable in the long term, without having to resort to overly optimistic assumptions about the future to maintain an apparently healthy funding position; and • Stability – employers should not see significant moves in their contribution rates from one year to the next, to help provide a more stable budgeting environment. The key problem is that the key objectives often conflict. For example, minimising the long term cost of the scheme (i.e. keeping employer rates affordable) is best achieved by investing in higher returning assets e.g. equities. However, equities are also very volatile (i.e. go up and down fairly frequently in fairly large moves), which conflicts with the objective to have stable contribution rates. Therefore, a balance needs to be maintained between risk and reward, which has been considered by the use of Asset Liability Modelling: this is a set of calculation techniques applied by the Fund’s actuary to model the range of potential future solvency levels and contribution rates.
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The Fund’s actuary was able to model the impact of these four key areas, for the purpose of setting a stabilisation approach (see 3.3 Note (b)). The modelling demonstrated that retaining the present investment strategy, coupled with constraining employer contribution rate changes as described in 3.3 Note (b), struck an appropriate balance between the above objectives. In particular the stabilisation approach currently adopted meets the need for stability of contributions without jeopardising the Administering Authority’s aims of prudent stewardship of the Fund. Whilst the current stabilisation mechanism is to remain in place until 2020, it should be noted that this will need to be reviewed following the 2019 valuation.
4.5 Does the Fund monitor its overall funding position? The Administering Authority monitors the solvency position annually and reports these to the regular Pensions Committee meetings. The changes are also reported in the annual report and accounts of the Fund and are presented at the Annual General Meeting.
5 Statutory reporting and comparison to other LGPS Funds
5.1 Purpose Under Section 13(4)(c) of the Public Service Pensions Act 2013 (“Section 13”), the Government Actuary’s Department must, following each triennial actuarial valuation, report to the Department of Communities & Local Government (DCLG) on each of the LGPS Funds in England & Wales. This report will cover whether, for each Fund, the rate of employer contributions are set at an appropriate level to ensure both the solvency and the long term cost efficiency of the Fund. This additional DCLG requirement may have an impact on the strategy for setting contribution rates at future valuations.
5.2 Solvency For the purposes of Section 13, the rate of employer contributions shall be deemed to have been set at an appropriate level to ensure solvency if: (a) the rate of employer contributions is set to target a funding level for the Fund of 100%, over an appropriate time period and using appropriate actuarial assumptions (where appropriateness is considered in both absolute and relative terms in comparison with other funds); and either (b) employers collectively have the financial capacity to increase employer contributions, and/or the Fund is able to realise contingent assets should future circumstances require, in order to continue to target a funding level of 100%; or (c) there is an appropriate plan in place should there be, or if there is expected in future to be, a material reduction in the capacity of fund employers to increase contributions as might be needed.
5.3 Long Term Cost Efficiency The rate of employer contributions shall be deemed to have been set at an appropriate level to ensure long term cost efficiency if: i. the rate of employer contributions is sufficient to make provision for the cost of current benefit accrual, ii. with an appropriate adjustment to that rate for any surplus or deficit in the Fund. In assessing whether the above condition is met, DCLG may have regard to various absolute and relative considerations. A relative consideration is primarily concerned with comparing LGPS pension funds with other LGPS pension funds. An absolute consideration is primarily concerned with comparing Funds with a given objective benchmark.
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Relative considerations include: 1. the implied deficit recovery period; and 2. the investment return required to achieve full funding after 20 years. Absolute considerations include: 1. the extent to which the contributions payable are sufficient to cover the cost of current benefit accrual and the interest cost on any deficit; 2. how the required investment return under “relative considerations” above compares to the estimated future return being targeted by the Fund’s current investment strategy; 3. the extent to which contributions actually paid have been in line with the expected contributions based on the extant rates and adjustment certificate; and 4. the extent to which any new deficit recovery plan can be directly reconciled with, and can be demonstrated to be a continuation of, any previous deficit recovery plan, after allowing for actual Fund experience. DCLG may assess and compare these metrics on a suitable standardised market-related basis, for example where the local funds’ actuarial bases do not make comparisons straightforward.
Appendix A – Regulatory framework
A1 Why does the Fund need an FSS?? The Department for Communities and Local Government (DCLG) has stated that the purpose of the FSS is: “to establish a clear and transparent fund-specific strategy which will identify how employers’ pension liabilities are best met going forward; to support the regulatory framework to maintain as nearly constant employer contribution rates as possible; and to take a prudent longer-term view of funding those liabilities.” These objectives are desirable individually, but may be mutually conflicting. The requirement to maintain and publish a FSS is contained in LGPS Regulations which are updated from time to time. In publishing the FSS the Administering Authority has to have regard to any guidance published by Chartered Institute of Public Finance and Accountancy (CIPFA) (most recently in 2016) and to its Statement of Investment Principles / Investment Strategy Statement. This is the framework within which the Fund’s actuary carries out triennial valuations to set employers’ contributions and provides recommendations to the Administering Authority when other funding decisions are required, such as when employers join or leave the Fund. The FSS applies to all employers participating in the Fund.
A2 Does the Administering Authority consult anyone on the FSS? Yes. This is required by LGPS Regulations. It is covered in more detail by the most recent CIPFA guidance, which states that the FSS must first be subject to “consultation with such persons as the authority considers appropriate”, and should include “a meaningful dialogue at officer and elected member level with council tax raising authorities and with corresponding representatives of other participating employers”. In practice, for the Fund, the consultation process for this FSS was as follows: a) A draft version of the FSS was issued to all participating employers in December 2016 for comment; b) Comments were requested within 30 days; c) There was an Employers Forum on 15 December 2016 at which questions regarding the FSS could be raised and answered;
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d) Following the end of the consultation period the FSS was updated where required and then published, in March 2017.
A3 How is the FSS published? The FSS is made available through the following routes: • Published on the website, at erpf.eastriding.gov.uk; • A copy sent by email to each participating employer in the Fund; • A copy sent to union representatives; • A full copy included in the annual report and accounts of the Fund; • Copies sent to investment managers and independent advisers; and • Copies made available on request.
A4 How often is the FSS reviewed? The FSS is reviewed in detail at least every three years as part of the triennial valuation. This version is expected to remain unaltered until it is consulted upon as part of the formal process for the next valuation in 2019. It is possible that (usually slight) amendments may be needed within the three year period. These would be needed to reflect any regulatory changes, or alterations to the way the Fund operates (e.g. to accommodate a new class of employer). Any such amendments would be consulted upon as appropriate: • trivial amendments would be simply notified at the next round of employer communications; • amendments affecting only one class of employer would be consulted with those employers; and • other more significant amendments would be subject to full consultation. In any event, changes to the FSS would need agreement by the Pensions Committee and would be included in the relevant Committee Meeting minutes.
A5 How does the FSS fit into other Fund documents? The FSS is a summary of the Fund’s approach to funding liabilities. It is not an exhaustive statement of policy on all issues, for example there are a number of separate statements published by the Fund including the Statement of Investment Principles/Investment Strategy Statement, Governance Strategy and Communications Strategy. In addition, the Fund publishes an Annual Report and Accounts with up to date information on the Fund. These documents can be found on the web at http://www.erpf.org.uk.
Appendix B – Responsibilities of key parties The efficient and effective operation of the Fund needs various parties to each play their part.
B1 The Administering Authority should:- 1. operate the Fund as per the LGPS Regulations and guidance from the Pensions Regulator; 2. effectively manage any potential conflicts of interest arising from its dual role as Administering Authority and a Fund employer; 3. collect employer and employee contributions, and investment income and other amounts due to the Fund; 4. ensure that cash is available to meet benefit payments as and when they fall due; 5. pay from the Fund the relevant benefits and entitlements that are due;
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6. invest surplus monies (i.e. contributions and other income which are not immediately needed to pay benefits) in accordance with the Fund’s Statement of Investment Principles/Investment Strategy Statement (SIP/ISS) and LGPS Regulations; 7. communicate appropriately with employers so that they fully understand their obligations to the Fund; 8. take appropriate measures to safeguard the Fund against the consequences of employer default; 9. manage the valuation process in consultation with the Fund’s actuary; 10. provide data and information as required by the Government Actuary’s Department to carry out their statutory obligations (see Section 5); 11. prepare and maintain a FSS and a SIP/ISS, after consultation; 12. notify the Fund’s actuary of material changes which could affect funding (this is covered in a separate agreement with the actuary); 13. monitor all aspects of the fund’s performance and funding and amend the FSS and SIP/ISS as necessary and appropriate; and 14. enable the Local Pension Board to review the valuation process as part of the Board’s role to support the Administering Authority as set out in their terms of reference.
B2 The Individual Employer should: 1. deduct contributions from employees’ pay correctly; 2. pay all contributions, including their own as determined by the actuary, promptly by the due date; 3. comply with statutory obligations by providing the Fund with accurate and timely member data 4. have a policy on discretions and exercise these within the regulatory framework; 5. make additional contributions in accordance with agreed arrangements in respect of, for example, augmentation of scheme benefits, early retirement strain; 6. notify the Administering Authority promptly of all changes to its circumstances, prospects or membership, which could affect future funding; and 7. pay any exit payments on ceasing participation of the Fund.
B3 The Fund Actuary should: 1. prepare valuations, including the setting of employers’ contribution rates. This will involve agreeing assumptions with the Administering Authority, having regard to the FSS and LGPS Regulations, and targeting each employer’s solvency appropriately; 2. provide data and information as required by the Government Actuary’s Department to carry out their statutory obligations (see Section 5); 3. provide advice relating to new employers in the Fund, including the level and type of bonds or other forms of security (and the monitoring of these); 4. prepare advice and calculations in connection with bulk transfers and individual benefit-related matters; 5. assist the Administering Authority in considering possible changes to employer contributions between formal valuations, where circumstances suggest this may be necessary; 6. advise on the termination of employers’ participation in the Fund; and 7. fully reflect actuarial professional guidance and requirements in the advice given to the Administering Authority.
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B4 Other parties: 1. investment advisers (either internal or external) should ensure the Fund’s SIP/ISS remains appropriate, and consistent with this FSS; 2. investment managers, custodians and bankers should all play their part in the effective investment (and dis-investment) of Fund assets, in line with the SIP/ISS; 3. auditors should comply with their auditing standards, ensure Fund compliance with all requirements, monitor and advise on fraud detection, and sign off annual reports and financial statements as required; 4. legal advisers (either internal or external) should ensure the Fund’s operation and management remains fully compliant with all regulations and broader local government requirements, including the Administering Authority’s own procedures; 5. the Department for Communities and Local Government (assisted by the Government Actuary’s Department) and the Scheme Advisory Board, should work with LGPS Funds to meet Section 13 requirements; and 6. the Pensions Regulator should work with the Fund to promote and improve understanding of, the good administration of work-based pension schemes such as the LGPS.
Appendix C – Key risks and controls
C1 Types of risk The Administering Authority has an active risk management programme in place. The measures that it has in place to control key risks are summarised below. The Fund’s Risk Register can be found on pages 10 to 20.
Risk Summary of Control Mechanisms
Fund assets do not meet Key mechanisms include strategic and tactical asset allocation. expected liabilities when they fall due. Securities lending activities Indemnities provide full protection in the event of a borrower default. have an adverse impact on the Fund’s assets Impact of Government policy The Fund has assumed a leading role in the creation of its selected pooling on pooling investments across arrangement and has participated fully in consultation. LGPS funds Changing patterns of pension Assumptions are set at valuation and employers are charged strain costs. payments Failure to carry out Quality checks, training and testing measures are all in place. Employers are administrative duties informed of statutory responsibilities. Failure to provide Local Induction and training programmes in place. Pension Board and Committee members and officers with LGPS knowledge and understanding Failure to establish and IT systems are operated to ensure secure storage and safe transmission of operate internal controls data. Disaster recovery and business continuity plans in place. Failure to report a breach Procedure for reporting breaches in place and training for members and of the law to the Pensions officers carried out. Regulator (TPR)
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Financial stability of an Procedures in place including risk assessments, the requirement for a bond to admitted body be in place and cessation valuations reports. Failure to recruit and retain Responsible staff have undertaken training and follow procedures in line with staff ERYC requirements. Review of vacant posts and restructuring is considered as appropriate. Significant reduction in Membership totals are monitored and material changes of membership are individual scheme employer referred to the Fund actuary. membership
Appendix D – The calculation of Employer contributions In Section 2 there was a broad description of the way in which contribution rates are calculated. This Appendix considers these calculations in much more detail. All three steps below are considered when setting contributions: 1. The funding target is based on a set of assumptions about the future, eg investment returns, inflation, pensioners’ life expectancies. However, if an employer is approaching the end of its participation in the Fund then its funding target may be set on a more prudent basis, so that its liabilities are less likely to be spread among other employers after its cessation of participation; 2. The time horizon required is, in broad terms, the period over which any deficit is to be recovered. A shorter period will lead to higher contributions, and vice versa (all other things being equal). Employers may be given a lower time horizon if they have a less permanent anticipated membership, or do not have tax-raising powers to increase contributions if investment returns under-perform; and 3. The required probability of achieving the funding target over that time horizon will be dependent on the Fund’s view of the strength of employer covenant and its funding profile. Where an employer is considered to be weaker, or potentially ceasing from the Fund, then the required probability will be set higher, which in turn will increase the required contributions (and vice versa). The calculations involve actuarial assumptions about future experience, and these are described in detail in Appendix E.
D1 What is the difference between calculations across the whole Fund and calculations for an individual employer? Employer contributions are normally made up of two elements: a) the estimated cost of ongoing benefits being accrued, referred to as the “Primary rate” (see D2 below); plus b) an adjustment for the difference between the Primary rate above, and the actual contribution the employer needs to pay, referred to as the “Secondary rate” (see D3 below). The contribution rate for each employer is measured as above, appropriate for each employer’s funding position and membership. The whole Fund position, including that used in reporting to DCLG (see section 5), is calculated in effect as the sum of all the individual employer rates. DCLG currently only regulates at whole Fund level, without monitoring individual employer positions.
D2 How is the Primary rate calculated? The Primary element of the employer contribution rate is calculated with the aim that these contributions will meet benefit payments in respect of members’ future service in the Fund. This is based upon the cost (in excess of members’ contributions) of the benefits which employee members earn from their service each year.
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The Primary rate is calculated separately for all the employers, although employers within a pool will pay the contribution rate applicable to the pool as a whole. The Primary rate is calculated such that it is projected to: 1. meet the required funding target for all future years’ accrual of benefits*, excluding any accrued assets, 2. within the determined time horizon (see note 3.3 Note (c) for further details), 3. with a sufficiently high probability, as set by the Fund’s strategy for the category of employer (see 3.3 Note (e) for further details). * The projection is for the current active membership where the employer no longer admits new entrants, or additionally allows for new entrants where this is appropriate. The projections are carried out using an economic modeller developed by the Fund’s actuary: this allows for a wide range of outcomes as regards key factors such as asset returns (based on the Fund’s investment strategy), inflation, and bond yields. The measured contributions are calculated such that the proportion of outcomes meeting the employer’s funding target (by the end of the time horizon) is equal to the required probability. The approach includes expenses of administration to the extent that they are borne by the Fund, and includes allowances for benefits payable on death in service and on ill health retirement.
D3 How is the Secondary rate calculated? The combined Primary and Secondary rates aim to achieve the employer’s funding target, within the appropriate time horizon, with the relevant degree of probability. For the funding target, the Fund actuary agrees the assumptions to be used with the Administering Authority – see Appendix E. These assumptions are used to calculate the present value of all benefit payments expected in the future, relating to that employer’s current and former employees, based on pensionable service to the valuation date only (i.e. ignoring further benefits to be built up in the future). The Fund operates the same target funding level for all employers of 100% of its accrued liabilities valued on the ongoing basis, unless otherwise determined (see Section 3). The Secondary rate is calculated as the balance over and above the Primary rate, such that the total is projected to: 1. meet the required funding target relating to combined past and future service benefit accrual, including accrued asset share (see D5 below) 2. within the determined time horizon (see 3.3 Note (c) for further details) 3. with a sufficiently high probability, as set by the Fund’s strategy for the category of employer (see 3.3 Note (e) for further details). The projections are carried out using an economic modeller developed by the Fund’s actuary: this allows for a wide range of outcomes as regards key factors such as asset returns (based on the Fund’s investment strategy), inflation, and bond yields. The measured contributions are calculated such that the proportion of outcomes with at least 100% solvency (by the end of the time horizon) is equal to the required probability.
D4 What affects a given employer’s valuation results? The results of these calculations for a given individual employer will be affected by: 1. past contributions relative to the cost of accruals of benefits; 2. different liability profiles of employers (e.g. mix of members by age, gender, service vs. salary); 3. the effect of any differences in the funding target, i.e. the valuation basis used to value the employer’s liabilities; 4. any different time horizons;
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5. the difference between actual and assumed rises in pensionable pay; 6. the difference between actual and assumed increases to pensions in payment and deferred pensions; 7. the difference between actual and assumed retirements on grounds of ill-health from active status; 8. the difference between actual and assumed amounts of pension ceasing on death; 9. the additional costs of any non ill-health retirements relative to any extra payments made; and/or 10. differences in the required probability of achieving the funding target.
D5 How is each employer’s asset share calculated? The Administering Authority does not account for each employer’s assets separately. Instead, the Fund’s actuary is required to apportion the assets of the whole Fund between the employers, at each triennial valuation. This apportionment uses the income and expenditure figures provided for certain cash flows for each employer. This process adjusts for transfers of liabilities between employers participating in the Fund, but does make a number of simplifying assumptions. The split is calculated using an actuarial technique known as “analysis of surplus”. Actual investment returns achieved on the Fund between each valuation are applied proportionately across all employers, to the extent that employers in effect share the same investment strategy. Transfers of liabilities between employers within the Fund occur automatically within this process, with a sum broadly equivalent to the reserve required on the ongoing basis being exchanged between the two employers. The Fund actuary does not allow for certain relatively minor events, including but not limited to: 1. the actual timing of employer contributions within any financial year; and 2. the effect of the premature payment of any deferred pensions on grounds of incapacity. These effects are swept up within a miscellaneous item in the analysis of surplus, which is split between employers in proportion to their liabilities. The methodology adopted means that there will inevitably be some difference between the asset shares calculated for individual employers and those that would have resulted had they participated in their own ring-fenced section of the Fund. The asset apportionment is capable of verification but not to audit standard. The Administering Authority recognises the limitations in the process, but it considers that the Fund actuary’s approach addresses the risks of employer cross-subsidisation to an acceptable degree.
Appendix E – Actuarial assumptions
E1 What are the actuarial assumptions? These are expectations of future experience used to place a value on future benefit payments (“the liabilities”). Assumptions are made about the amount of benefit payable to members (the financial assumptions) and the likelihood or timing of payments (the demographic assumptions). For example, financial assumptions include investment returns, salary growth and pension increases; demographic assumptions include life expectancy, probabilities of ill- health early retirement, and proportions of member deaths giving rise to dependants’ benefits. Changes in assumptions will affect the measured funding target. However, different assumptions will not of course affect the actual benefits payable by the Fund in future. The combination of all assumptions is described as the “basis”. A more optimistic basis might involve higher assumed investment returns (discount rate), or lower assumed salary growth, pension increases or life expectancy; a more optimistic basis will give lower funding targets and lower employer costs. A more prudent basis will give higher funding targets and higher employer costs.
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E2 What basis is used by the Fund? The Fund’s standard funding basis is described as the “ongoing basis”, which applies to most employers in most circumstances. This is described in more detail below. It anticipates employers remaining in the Fund in the long term. However, in certain circumstances, typically where the employer is not expected to remain in the Fund long term, a more prudent basis applies: see Note (a) to 3.3.
E3 What assumptions are made in the ongoing basis? a) Investment return / discount rate The key financial assumption is the anticipated return on the Fund’s investments. This “discount rate” assumption makes an Asset Out-performance Assumption (“AOA”) of Fund returns relative to long term yields on UK Government bonds (“gilts”). There is, however, no guarantee that Fund returns will out-perform gilts. The risk is greater when measured over short periods such as the three years between formal actuarial valuations, when the actual returns and assumed returns can deviate sharply. Given the very long-term nature of the liabilities, a long term view of prospective asset returns is taken. The long term in this context would be 20 to 30 years or more. For the purpose of the triennial funding valuation at 31 March 2016 and setting contribution rates effective from 1 April 2017, the Fund actuary has used a long term AOA of 1.8% per annum relative to long term gilt yields. In the opinion of the Fund actuary, based on the current investment strategy of the Fund, this AOA is within a range that would be considered acceptable for the purposes of the funding valuation. This is a higher AOA than that used at the 2013 valuation (1.6%), which reduces the funding target all other things being equal. b) Salary growth Pay for public sector employees is currently subject to restriction by the UK Government until 2020. Although this “pay freeze” does not officially apply to local government and associated employers, it has been suggested that they are likely to show similar restraint in respect of pay awards. Based on long term historical analysis of the membership in LGPS funds, and continued austerity measures, the salary increase assumption at the 2016 valuation has been set to be a blended rate combined of: 1. 1% p.a. until 31 March 2020, followed by 2. the retail prices index (RPI) per annum thereafter. This is a change from the previous valuation, which assumed a flat assumption of RPI plus 0.5% per annum. The change has led to a reduction in the funding target (all other things being equal). c) Pension increases Since 2011 the consumer prices index (CPI), rather than RPI, has been the basis for increases to public sector pensions in deferment and in payment. Note that the basis of such increases is set by the Government, and is not under the control of the Fund or any employers. As at the previous valuation, we derive our assumption for RPI from market data as the difference between the yield on long-dated fixed interest and index-linked government bonds. This is then reduced to arrive at the CPI assumption, to allow for the “formula effect” of the difference between RPI and CPI. At this valuation, we propose a reduction of 1.0% per annum. This is a larger reduction than at 2013, which will serve to reduce the funding target (all other things being equal). (Note that the reduction is applied in a geometric, not arithmetic, basis). d) Life expectancy The demographic assumptions are intended to be best estimates of future experience in the Fund based on past experience of LGPS funds which participate in Club Vita, the longevity analytics service used by the Fund, and endorsed by the actuary.
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The longevity assumptions that have been adopted at this valuation are a bespoke set of “VitaCurves”, produced by the Club Vita’s detailed analysis, which are specifically tailored to fit the membership profile of the Fund. These curves are based on the data provided by the Fund for the purposes of this valuation. It is acknowledged that future life expectancy and, in particular, the allowance for future improvements in life expectancy, is uncertain. There is a consensus amongst actuaries, demographers and medical experts that life expectancy is likely to improve in the future. Allowance has been made in the ongoing valuation basis for future improvements in line with the 2013 version of the Continuous Mortality Investigation model published by the Actuarial Profession and a 1.25% per annum minimum underpin to future reductions in mortality rates. This is a similar allowance for future improvements than was made in 2013. The approach taken is considered reasonable in light of the long term nature of the Fund and the assumed level of security underpinning members’ benefits. e) General The same financial assumptions are adopted for most employers, in deriving the funding target underpinning the Primary and Secondary rates: as described in (3.3), these calculated figures are translated in different ways into employer contributions, depending on the employer’s circumstances. The demographic assumptions, in particular the life expectancy assumption, in effect vary by type of member and so reflect the different membership profiles of employers.
Appendix F – Glossary
Actuarial The combined set of assumptions made by the actuary, regarding the future, to calculate the assumptions/ value of the funding target. The main assumptions will relate to the discount rate, salary growth, basis pension increases and longevity. More prudent assumptions will give a higher target value, whereas more optimistic assumptions will give a lower value. Administering The council with statutory responsibility for running the Fund, in effect the Fund’s “trustees”. Authority Admission Bodies Employers where there is an Admission Agreement setting out the employer’s obligations. These can be Community Admission Bodies or Transferee Admission Bodies. For more details (see 2.3). Covenant The assessed financial strength of the employer. A strong covenant indicates a greater ability (and willingness) to pay for pension obligations in the long run. A weaker covenant means that it appears that the employer may have difficulties meeting its pension obligations in full over the longer term. Designating Employers such as town and parish councils that are able to participate in the LGPS via resolution. Employer These employers can designate which of their employees are eligible to join the Fund. Discount rate The annual rate at which future assumed cashflows (in and out of the Fund) are discounted to the present day. This is necessary to provide a funding target which is consistent with the present day value of the assets. A lower discount rate gives a higher target value, and vice versa. It is used in the calculation of the Primary and Secondary rates. Employer An individual participating body in the Fund, which employs (or used to employ) members of the Fund. Normally the assets and funding target values for each employer are individually tracked, together with its Primary rate at each valuation. Funding target The actuarially calculated present value of all pension entitlements of all members of the Fund, built up to date. This is compared with the present market value of Fund assets to derive the deficit. It is calculated on a chosen set of actuarial assumptions.
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Gilt A UK Government bond, ie a promise by the Government to pay interest and capital as per the terms of that particular gilt, in return for an initial payment of capital by the purchaser. Gilts can be “fixed interest”, where the interest payments are level throughout the gilt’s term, or “index-linked” where the interest payments vary each year in line with a specified index (usually RPI). Gilts can be bought as assets by the Fund, but their main use in funding is as an objective measure of solvency. Guarantee / A formal promise by a third party (the guarantor) that it will meet any pension obligations not guarantor met by a specified employer. The presence of a guarantor will mean, for instance, that the Fund can consider the employer’s covenant to be as strong as its guarantor’s. Letting employer An employer which outsources or transfers a part of its services and workforce to another employer (usually a contractor). The contractor will pay towards the LGPS benefits accrued by the transferring members, but ultimately the obligation to pay for these benefits will revert to the letting employer. A letting employer will usually be a local authority, but can sometimes be another type of employer such as an Academy. LGPS The Local Government Pension Scheme, a public sector pension arrangement put in place via Government Regulations, for workers in local government. These Regulations also dictate eligibility (particularly for Scheduled Bodies), members’ contribution rates, benefit calculations and certain governance requirements. The LGPS is divided into 101 Funds which map the UK. Each LGPS Fund is autonomous to the extent not dictated by Regulations, e.g. regarding investment strategy, employer contributions and choice of advisers. Maturity A general term to describe a Fund (or an employer’s position within a Fund) where the members are closer to retirement (or more of them already retired) and the investment time horizon is shorter. This has implications for investment strategy and, consequently, funding strategy. Members The individuals who have built up (and may still be building up) entitlement in the Fund. They are divided into actives (current employee members), deferreds (ex-employees who have not yet retired) and pensioners (ex-employees who have now retired, and dependants of deceased ex-employees). Primary rate The employer contribution rate required to pay for ongoing accrual of active members’benefits (including an allowance for administrative expenses). See Appendix D for further details.
Profile The profile of an employer’s membership or liability reflects various measurements of that employer’s members, ie current and former employees. This includes: the proportions which are active, deferred or pensioner; the average ages of each category; the varying salary or pension levels; the lengths of service of active members vs their salary levels, etc. A membership (or liability) profile might be measured for its maturity also.
A formal document required by the LGPS Regulations, which must be updated at least every Rates and three years at the conclusion of the formal valuation. This is completed by the actuary and Adjustments confirms the contributions to be paid by each employer (or pool of employers) in the Fund for Certificate the three year period until the next valuation is completed.
Types of employer explicitly defined in the LGPS Regulations, whose employers must be offered membership of their local LGPS Fund. These include Councils, colleges, universities, academies, Scheduled Bodies police and fire authorities etc, other than employees who have entitlement to a different public sector pension scheme (e.g. teachers, police and fire officers, university lecturers).
The difference between the employer’s actual and Primary rates. In broad terms, this relates to Secondary rate the shortfall of its asset share to its funding target. See Appendix D for further details.
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Any method used to smooth out changes in employer contributions from one year to the next. This is very broadly required by the LGPS Regulations, but in practice is particularly employed Stabilisation for large stable employers in the Fund. Different methods may involve: probability-based modelling of future market movements; longer deficit recovery periods; higher discount rates; or some combination of these.
An actuarial investigation to calculate the liabilities, future service contribution rate and common contribution rate for a Fund, and usually individual employers too. This is normally carried out in full every three years (last done as at 31 March 2016), but can be approximately Valuation updated at other times. The assets value is based on market values at the valuation date, and the liabilities value and contribution rates are based on long term bond market yields at that date also.
Funding Strategy Statement and new employers During 2016/17, there were 29 new employers joining the Fund including 17 academies, three parish councils and one town council. As part of the management of admitted bodies, risk assessments are carried out to ensure that there is a strong covenant in place and that a new employer has the ability to meet its long term Fund commitments. There were eight new admitted bodies in the Fund and five of the bodies provided evidence of a strong covenant by having a guarantor agreement in place. For the remaining three new admitted bodies, risk assessments were carried out and a bond was put in place for each admitted body.
150 funding strategy statement 119 East Riding Pension Fund Annual Report and Accounts 2016/2017 statement of investment principles
The Fund’s Statement of Investment Principles shown below was in effect during the financial year ended 31 March 2017. This was replaced by the Fund’s Investment Strategy Statement, shown on pages 125 to 135, with effect from 1 April 2017.
Introduction The East Riding Pension Fund is required to maintain a Statement of Investment Principles (SIP) in accordance with the Local Government Pension Scheme (LGPS) Regulations. The SIP for the East Riding Pension Fund is set out below, and complies with the Local Government Pension Scheme Regulations. East Riding of Yorkshire Council is the administering authority for the East Riding Pension Fund. The Council has delegated all its functions as administering authority to the Pensions Committee. The Pensions Committee agreed this SIP at its meeting on 18 March 2016 and it took effect from 1 April 2016. The East Riding Pension Fund is also required to maintain a Funding Strategy Statement (FSS) in accordance with the Local Government Pension Scheme (LGPS) Regulations. The FSS for the East Riding Pension Fund, which was in effect for the financial year ended 31 March 2017, took into account the results of the actuarial valuation effective 1 April 2014. The FSS, which was approved by the Pensions Committee at its meeting on 21 March 2014, complies with these Regulations. In preparing the SIP and the FSS, the Pensions Committee has taken professional advice from its advisors and investment managers, whom it considers are suitably qualified and experienced in investment matters. The principal employers and trade unions are represented at the Pensions Committee, enabling their views to be taken into account.
Scheme Governance The Pensions Committee consists of ten Members of the East Riding of Yorkshire Council. In addition, a Member from each of the other three unitary Councils and four trade union representatives attend Committee meetings to ensure that the views of other interested parties are properly considered by the Committee. The Pensions Committee is assisted by the Local Pension Board, as required by the Local Government Pension Scheme (Amendment) Governance Regulations 2015. The six principles set out in the CIPFA Pensions Panel “Investment Decision Making and Disclosure in the Local Government Pension Scheme in the United Kingdom – A Guide to the Application of the Myners’ Principles” are complied with in the arrangements made for managing the investments of the Fund. The six principles, and the Pension Fund’s evidence of compliance, can be viewed at erpf.eastriding.gov.uk. The Council has a formal training programme in place to ensure that Members and Officers charged with the financial management and decision making with regard to the Pension Fund are fully equipped with the knowledge and skills to discharge their duties and responsibilities.
Pensions Committee’s investment powers The Pensions Committee’s investment powers are set out in the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 as amended by the Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 2013. This SIP is consistent with these powers and does not restrict the Pensions Committee’s investment powers.
Investment managers and advisor The investment managers employed by the Pensions Committee to manage the assets of the East Riding Pension Fund are the Director of Corporate Resources and Schroder Investment Management. They are responsible for the day-to-day
151 statement of investment principles 120 East Riding Pension Fund Annual Report and Accounts 2016/2017
investment management of the Fund’s assets. The external investment manager, Schroder Investment Management, is authorised by the Financial Conduct Authority (FCA) to conduct investment business under the terms of the Financial Services and Markets Act 2000. In addition, Mrs. S. Bates is employed by the Pensions Committee to provide independent advice, and Hymans Robertson has been appointed as the Fund’s actuary. The East Riding of Yorkshire Council, as Administering Authority for the East Riding Pension Fund, has signed client agreements with the external investment manager and independent advisor. The Pensions Committee regularly monitors the operations and performance of the investment managers acting for the East Riding Pension Fund in relation to their investment performance, value for money, best advice, and adherence to this SIP.
Sub-Delegation The external investment manager may only delegate its duties to a third party with the prior permission of the Pensions Committee. Any third party employed by the investment manager must adhere to this SIP.
Types of investments to be held and the balance between these investments Based on expert advice, the Pensions Committee has determined a benchmark mix of asset types, which are considered suitable for the Fund. The following guidelines are set for the Fund’s asset allocation mix:
Asset Class Allocation Range Benchmark Equities 60% +/- 10%
UK 38% +/- 5% FTSE All Share
Overseas 22% +/- 5%
North America 6% FTSE Developed North America
Europe ex-UK 6% FTSE Developed Europe ex UK
Japan 3% FTSE Japan
Pacific 2% MSCI Pacific ex Japan
Emerging 5% MSCI Emerging Markets
BONDS AND CASH 19% +/- 5%
UK Government 5% FTSE UK Gilts All Stocks
UK Corporate 2% iBoxx £ Corporate Bonds All Stocks
Overseas 4% JP Morgan GBI ex UK
Emerging Markets 2.5% JP Morgan GBI – Emerging Markets
Global High Yield 2.5% JP Morgan Global High Yield Index
Cash 3% LIBID 7 day
ALTERNATIVES 21% +/- 5%
Property 10% +/- 3% AREF/IPD UK Quarterly All Property Index
Other 11% +/- 3%
Private Equity 4% FTSE All Share + 3%
Infrastructure 3% UK Index-linked + 3%
Other 4% 3 month LIBOR +3%
Total 100%
In exceptional circumstances, these limits can be allowed to vary by up to +/- 10% within each category. In the event that any asset class range is breached the Pensions Committee will be informed and the Fund’s investment managers will endeavour to bring the asset allocation back within the range within an appropriate period of time.
152 statement of investment principles 121 East Riding Pension Fund Annual Report and Accounts 2016/2017
The Pensions Committee believes that the Fund’s portfolio is adequately diversified, and has taken professional advice to this effect from their investment managers and independent advisor. Fund managers are required to maintain a proper balance between these different categories of investments at all times. This is to ensure that the Pensions Committee’s policy towards risk is safeguarded. The Pensions Committee reviews the tactical asset allocation of the Fund on a quarterly basis, following advice from the investment managers and independent advisor.
Risk and diversification of investments It is the Pensions Committee’s policy to invest the assets of the East Riding Pension Fund to spread the risk by ensuring a reasonable balance between different categories of investments. The Pensions Committee takes a long term approach to investment and invests in asset classes and individual investments that are expected to generate an attractive risk- adjusted return for the Pension Fund. The Pensions Committee reviews the asset allocation of the Pension Fund on a quarterly basis. The Pensions Committee’s policy towards the kinds of investments that are held is explained under ‘The suitability of investments’ below. To ensure that equity portfolios are sufficiently diversified, and to reduce the risk to members and beneficiaries of over investment in any single particular stock, the investment managers are not permitted to invest more than 10% of the Fund in the shares of any one company or investment. The Pensions Committee has approved an increase in the lower limit set by the Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 2013 for investment through limited partnerships to the maximum 30%, for a period of 5 years, and the decision is to be reviewed annually as part of the consideration of the SIP. This increase in the limit is required to facilitate investment in the range of investments set out in ‘Types of investments to be held and the balance between these investments’ above, and, by allowing greater diversification, should reduce overall portfolio risk. The investment policy of the East Riding Pension Fund does not permit any employer related investment, either in the assets, stock, land or property of the Principal Employers or the assets, stock, land or property of any associated employers. The Pensions Committee considers that employer related investments pose too great a risk to the security of the Fund. An investment risk management schedule is reviewed by the Pensions Committee on a quarterly basis. The schedule considers issues such as performance; regulation and compliance; and personnel and structure. The Pension Fund’s risk register identifies the key risks inherent in the Pension Fund; an estimate of the severity of each risk; a summary of current control measures; and the identification of additional control measures. The risk register is reviewed by the Pensions Committee on a semi-annual basis.
The suitability of investments The categories of investments described earlier are considered suitable for the Fund, subject to the specified limits, and the above restrictions. The investment managers may invest in these investments without prior consultation with the Pensions Committee. Sub-underwriting is a satisfactory investment where the Fund holds, or intends to hold, the relevant issue. The use of derivatives for currency or other hedging purposes requires the approval of the Pensions Committee.
The expected return on investments The Actuarial valuation, at 31 March 2013, was prepared on the basis of an expected real return on assets of 1.3% over the long term, a nominal return of 4.6% assuming inflation to be 3.3%. The Pensions Committee has set the investment objective of producing a nominal long term return of 7.1% p.a. (3.8% p.a. real) assessed on a rolling three year basis. In order to achieve this, the strategic asset allocation approved by the Pensions Committee is:
153 statement of investment principles 122 East Riding Pension Fund Annual Report and Accounts 2016/2017
Equities 60%
Bonds and Cash 19%
Alternative Investments 21%
In order to monitor the investment objective, the Pensions Committee requires the provision of detailed performance measurements of the Fund’s investments. This is provided by an independent monitoring service, the WM Company, which presents its report to the Committee on an annual basis and provides quarterly performance data. In addition, the Pensions Committee conducts a formal annual performance review of each of its investment managers.
Pensions Committee’s policy on socially responsible investment The Fund’s investment managers have discretion as to the timing and amount of the realisation of investments.
Corporate Governance As a responsible investor, the East Riding Pension Fund wishes to promote corporate social responsibility, high standards of corporate governance, good practice, and improved corporate performance amongst all companies in which it invests. As a result, the Fund has adopted the Principles of the Financial Reporting Council’s (FRC) UK Stewardship Code. The Pension Fund’s Statement of Compliance can be viewed at erpf.eastriding.gov.uk.
The Fund views stewardship as part of the responsibilities of share ownership, and, therefore, an integral part of the investment strategy. The Fund believes that active stewardship will help to deliver high standards of corporate governance which will contribute positively to business performance over time by: • encouraging accountability between directors, shareholders, and other stakeholders; • strengthening the integrity of relationships between these bodies; and • improving transparency in the way companies are run.
In practice, the Fund’s policy is to discharge its corporate governance responsibilities through engagement with investee companies, the utilisation of its voting rights, an interpretation of best practice guidelines, existing arrangements with its external investment manager, and through membership of the Local Authority Pension Fund Forum (LAPFF). Further details of LAPFF’s guidance on environmental, social, and governance issues can be found on www.lapfforum.org.
Pensions Committee’s policy on socially responsible investment In addition to the above, the Fund will take into account the guidance issued by LAPFF, and any other appropriate guidance and information, in determining any relevant social, environmental, or governance considerations when selecting, retaining, and realising any of its investments. However, the overriding objective for the Pensions Committee will be to discharge its fiduciary duty in managing the Fund’s investments in the best interests of the scheme’s beneficiaries.
Pensions Committee’s policy on shareholder voting The Fund supports the principles underpinning the UK Corporate Governance Code and has adopted the Principles of the FRC UK Stewardship Code. The Fund subscribes to the Pensions Investment Research Consultants (PIRC) advisory voting service which provides voting recommendations based on industry best practice. Further details of PIRC’s voting guidance is shown in the “UK Shareowner Voting Guidelines 2016” guidance document which is available at www.pirc.co.uk . The Fund also takes into account guidance and information from the LAPFF which highlights corporate governance issues at investee companies and recommends appropriate voting action.
154 statement of investment principles 123 East Riding Pension Fund Annual Report and Accounts 2016/2017
However, the Fund will interpret the application of these principles according to its own views of best practice. There are also other issues outside of these principles on which the Fund will take a view. As a general rule, the Fund will vote in favour of resolutions which are in line with the UK Corporate Governance Code or comply with best practice. The Fund will vote against resolutions which do not meet these guidelines, or which represent a serious breach of best practice, or which will have a negative impact on shareholders rights. The Fund may abstain on resolutions which may have an adverse impact on shareholder rights, or represent a less significant breach of these guidelines, or where the issue is being raised for the first time with a company. The specific voting outcome will depend on the particular circumstances of the company and the types of resolution on the meeting agenda. The external investment manager will vote in accordance with its “Investment and Corporate Governance” policy which is available at www.schroders.com. The Fund’s investment managers can exercise their discretion not to vote in accordance with best practice. Where this discretion is exercised, the rationale for this decision is reported to the Pensions Committee. The exercise of any other rights attaching to a particular investment will be considered on a case by case basis. The Pensions Committee reviews the Fund’s corporate governance and voting activity on a quarterly basis and the Fund publishes summary details of corporate governance and voting activity in its Annual Report and Accounts.
Stock Lending The Fund engages in stock lending, via its custodian, State Street Global Services, in order to generate additional income. In accordance with the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009, the securities that are transferred under stock lending arrangements do not exceed 25% of the total value of the investment portfolio. The Fund will seek to recall stock on loan prior to a shareholder vote if it is deemed to be suitable and practical. Examples of this will include resolutions that are not considered to be in accordance with the UK Corporate Governance Code or where the Fund has a material holding and could potentially influence the outcome of the vote.
Compliance and Monitoring of the SIP The investment managers are required to adhere to the principles set out in this Statement of Investment Principles. The Pensions Committee will require an annual written statement from the investment managers that they have adhered to the principles set out in this statement. The Statement of Investment Principles of the East Riding Pension Fund is revised by the Pensions Committee on an annual basis.
155 statement of investment principles 124 East Riding Pension Fund Annual Report and Accounts 2016/2017 investment strategy statement
Introduction The East Riding Pension Fund (“the Fund”), which is administered by the East Riding of Yorkshire Council (“the Administering Authority”), is required to maintain an Investment Strategy Statement (“ISS”) in accordance with Regulation 7 of the Local Government Pension Fund (Management and Investment of Funds) Regulations 2016. The Administering Authority has delegated all its functions as administering authority to the Pensions Committee (“the Committee”). The ISS has been prepared by the Committee having taken advice from the Director of Corporate Resources. The ISS, which was approved by the Committee on 17 March 2017, is subject to periodic review at least every three years and without delay after any significant change in investment policy. The Committee has consulted on the contents of the Fund’s investment strategy with such persons it considers appropriate. The Fund is also required to maintain a Funding Strategy Statement (“FSS”) in accordance with Regulation 58 of the Local Government Pension Scheme Regulations 2013 (as amended). The FSS for the Fund has been revised to take into account the results of the actuarial valuation, effective 1 April 2017. The FSS, which was approved by the Pensions Committee on 17 March 2017, complies with these Regulations.
Investment Strategy The primary investment objective is to ensure that the Fund will have sufficient assets to meet all pension liabilities as they fall due. In order to meet this overall objective, the Fund’s investment strategy is to: • Maximise the return from investments whilst maintaining risk within acceptable levels with a current long term nominal return objective of 6% p.a.; • Maintain and improve the future funding level of the Fund with the aim of achieving a funding level of 100%; and • Enable employer contributions to be kept as stable as possible. In order to discharge its responsibilities, the Pensions Committee will take advice, where appropriate, from a wide range of sources including, but not limited to, the Director of Corporate Resources, the independent advisor, the Fund’s investment managers, and the Council’s S151 and Monitoring Officers.
Investment of money in a wide variety of investments It is the Pensions Committee’s policy to invest the assets of the East Riding Pension Fund to spread the risk by ensuring a reasonable balance between different categories of investments. The Pensions Committee takes a long term approach to investment and invests in asset classes and individual investments that are expected to generate an attractive risk- adjusted return for the Pension Fund. The Fund may invest in a wide range of investments including quoted and unquoted assets in Equities, Fixed Income, Property and Alternatives either directly or through pooled investments. The Fund may also make use of derivatives, either directly or in pooled investments, for the purposes of efficient portfolio management or to hedge specific risks, in order to protect the value of the Fund’s assets. The Fund’s strategic asset allocation is set out below. The table also includes the ranges within which the asset allocation may vary without reference to the Pensions Committee, and the maximum percentage of total Fund value that can be invested in these asset classes. The asset allocation is consistent with the Committee’s views on the appropriate balance between generating a satisfactory long-term return on investments whilst taking account of market risk and the nature of the Fund’s liabilities.
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Asset class Strategic allocation Range Maximum EQUITIES 55% +/- 10% 70%
UK equities 33% +/- 5% 40%
Overseas equities 22% +/- 5% 30%
North America 6%
Europe ex-UK 6%
Japan 3%
Pacific ex-Japan 2%
Emerging Markets 5%
BONDS AND CASH 19% +/- 5% 30%
UK Government bonds 5%
UK Corporate bonds 2%
Overseas bonds 4%
Multi-Asset Credit 5%
Cash 3%
ALTERNATIVES 26% +/- 5% 35%
Property 11%
Other 15%
Private Equity 6%
Infrastructure 4%
Other Alternatives 5%
The Regulations do not permit more than 5% of the Fund’s value to be invested in entities which are connected with that authority within the meaning of section 212 of the Local Government and Public Involvement in Health Act 2007(e). The investment policy of the Fund does not permit any employer-related investment, other than is necessary to meet the regulatory requirements with regards to pooling. The Pensions Committee believes that the Fund’s portfolio is adequately diversified, and has taken professional advice to this effect from their investment managers and independent advisor. The strategic asset allocation includes ranges for each asset class within which the asset allocation can vary. In the event that any asset class range is breached, the Pensions Committee will be informed and the Fund’s investment managers will endeavour to bring the asset allocation back within the range within an appropriate period of time. The asset allocation will not be permitted to exceed the stated maximum for each asset class.
The suitability of particular investments and types of investments The Pensions Committee will review the suitability of the asset allocation of the Fund on a quarterly basis, following advice from the investment managers and independent advisor to ensure the returns risk and volatility are appropriately managed and meet the requirements of the overall investment strategy. It is intended that the Fund’s investment strategy will be reviewed at least every three years following the latest actuarial valuation of the Fund. The investment strategy takes due account of the maturity profile of the Fund and the current funding position. The actuarial valuation, at 31 March 2016, was prepared on the basis of an expected real return on assets of 1.9% over the long term, a nominal return of 4.0% assuming inflation (CPI) to be 2.1%. The Pensions Committee has set the investment objective of producing a nominal long term return of 6% p.a. (3.9% p.a. real) assessed on a rolling three year basis. The Committee used the following long term assumptions about investment returns (as at December 2016) when determining an appropriate investment strategy, following the results of the latest actuarial valuation and advice from its
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investment managers and independent advisor:
Asset class Expected return (% p.a.) Expected Volatility (%) EQUITIES
UK equities 6.8% 17.0%
Overseas equities
North America 5.8% 18.0%
Europe ex-UK 6.0% 20.8%
Japan 3.9% 21.1%
Pacific ex-Japan 6.6% 24.2%
Emerging Markets 8.2% 29.0%
BONDS AND CASH
UK Government bonds 2.9% 5.0%
UK Corporate bonds 3.8% 6.1%
Overseas bonds 2.7% 9.3%
Multi-Asset Credit 6.0% 9.0%
Cash 2.2% 0.2%
ALTERNATIVES
Property 5.7% 11.9%
Other
Private Equity 8.4% 20.7%
Infrastructure 5.6% 7.8%
Other Alternatives 6.4% 9.5%
At 31 December 2016, the expected return of this portfolio was 6% p.a. with an expected volatility of 11% p.a. The Pensions Committee has set the following benchmarks against which performance of the Fund will be measured:
Asset class Benchmark EQUITIES
UK equities FTSE All Share
Overseas equities
North America FTSE Developed North America
Europe ex-UK FTSE Developed Europe ex-UK
Japan FTSE Japan
Pacific ex-Japan MSCI Pacific ex-Japan
Emerging Markets MSCI Emerging Markets
BONDS AND CASH
UK Government bonds FTSE UK Gilts All Stocks
UK Corporate bonds iBoxx £ Corporate Bonds All Stocks
Overseas bonds JP Morgan GBI ex-UK
Multi-Asset Credit 3 month LIBOR + 4%
Cash LIBID 7 day
ALTERNATIVES
Property AREF/IPD UK Quarterly Property Fund Index
Other
158 investment strategy statement 127 East Riding Pension Fund Annual Report and Accounts 2016/2017
Private Equity FTSE All Share + 3%
Infrastructure UK Index-linked + 3%
Other Alternatives 3 month LIBOR + 5%
In order to monitor the investment objective, the Pensions Committee requires the provision of detailed performance measurements of the Fund’s investments. This is provided by the Fund’s custodian, State Street Global Services, on a quarterly basis. In addition, the Pensions Committee conducts a formal annual performance review of each of its investment managers.
The approach to risk The Fund’s primary long term risk is that the Fund’s assets do not meet its liabilities i.e. the benefits payable to its members. Therefore, the aim of the Fund’s investment management is to achieve the long term target rate of return with an acceptable level of risk. The Fund achieves this through setting the strategic asset allocation on a triennial basis, following the latest actuarial valuation, which is expected to achieve the target rate of return over the long term. The Fund’s appetite for risk will vary depending on market conditions and the types of investments available to it but will be commensurate with meeting the long term target investment rate of return. The Fund has a dedicated strategic risk register which identifies the key risks inherent in the Pension Fund, an estimate of the severity of each risk, and the risk controls that are in place to mitigate these risks. The risk register is reviewed by the Pensions Committee and the Local Pension Board on a semi-annual basis. In addition, a risk management schedule is reviewed by the Pensions Committee on a quarterly basis which considers issues such as performance, regulation and compliance, and personnel. The key risks inherent in the Pension Fund, and how these risks are mitigated, are:
Risk Description Mitigants Market Value of an investment decreases Strategic asset allocation, with as a result of changing market suitable diversification and conditions. appropriate ranges, determined on a triennial basis. Tactical asset allocation on a quarterly basis taking into account current market conditions. Derivatives may be used for portfolio management purposes or to hedge specific risks, in order to protect the value of the Fund’s assets from risks that may materialise.
Performance The Fund’s investment managers Analysis of market performance and fail to deliver returns in line with the investment managers’ performance underlying asset classes. relative to their index benchmark on a quarterly basis. Detailed analysis of investment managers’ performance on an annual basis.
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Valuation Valuations disclosed in the The valuation of investments financial statements, particularly is derived using a conservative for unquoted investments, are not valuation methodology and, where reflective of the value that could be applicable, market observable data. achieved on disposal. Credit The Fund’s counterparties or service Appropriate credit limits are providers e.g. custodian fail to pay established, and regularly reviewed, amounts due. by the Fund for individual counterparties. Regular performance monitoring of service providers and indemnities secured where appropriate. Liquidity The Fund is not able to meet its The Fund maintains sufficient liquid financial obligations as they fall due funds at all times to ensure that it or can do so only at an excessive can meet its financial obligations. cost. Interest rate A change in interest rates will result The Fund regularly monitors its in a change in the valuation of the exposure to interest rates, and may Fund’s assets and liabilities. consider hedging, through the use of derivatives, in order to protect the value of the Fund’s assets from risks that may materialise. Foreign exchange An adverse movement in foreign The Fund regularly monitors its exchange rates will impact on the foreign exchange exposure, and may value of the Fund’s investments. consider hedging, through the use of derivatives, in order to protect the value of the Fund’s assets from risks that may materialise. Demographic Changes, such as increased longevity Demographic assumptions are or ill-health retirement, will increase conservative, regularly monitored, the value of the Fund’s liabilities. and reviewed on a triennial basis. Regulatory Changes to regulations and The Fund ensures that it is aware of guidance may increase the cost of any actual or potential changes to administering the Fund or increase regulations and guidance and will the value of the Fund’s liabilities. participate in consultations where appropriate. Governance The administering authority is The Fund regularly monitors unaware of changes to the Fund’s membership information and membership which increases the communicates with employers. value of its liabilities.
Approach to pooling investments In order to satisfy the requirements of the “Local Government Pension Scheme: Investment Reform and Guidance” issued by the Department for Communities and Local Government (“DCLG”) in November 2015 the Pension Fund has elected to become a shareholder in Border to Coast Pensions Partnership (BCPP) Limited. BCPP Limited will be an FCA-regulated Operator and Alternative Investment Fund Manager (“AIFM”).
160 investment strategy statement 129 East Riding Pension Fund Annual Report and Accounts 2016/2017
BCPP is a partnership of the following administering authorities: • Bedfordshire Pension Fund • Cumbria Pension Fund • Durham Pension Fund • East Riding Pension Fund • Lincolnshire Pension Fund • North Yorkshire Pension Fund • Northumberland Pension Fund • South Yorkshire Pension Fund • South Yorkshire Passenger Transport Pension Fund • Surrey Pension Fund • Teesside Pension Fund • Tyne and Wear Pension Fund • Warwickshire Pension Fund The partner Funds submitted their proposal to Government on 15th July 2016 and have received written confirmation from the Minister to confirm that the proposal meets the criteria laid down in the guidance issued in November 2015. The proposed governance structure of BCPP is as follows:
Local Administering Pensions Committees Pension Authorities and Investment Boards Sub-groups Statutory Officers Group
Shareholders Joint Committee Officer (Company matters) (Investor matters) Operations Group
Operator Company
Collective Investment Vehicle
The Fund will hold BCPP to account through the following mechanisms: • A representative on the Shareholder Board, with equal voting rights, who will provide oversight and control of the corporate operations of BCPP Limited. • A representative on the Joint Committee who will monitor and oversee the investment operations of BCPP Limited.
161 investment strategy statement 130 East Riding Pension Fund Annual Report and Accounts 2016/2017
• Officer support to the above representatives from the Officer Operations Group and the Statutory Officer Group The Pension Fund will retain the decision making powers regarding asset allocation and will delegate the investment management function to BCPP Limited. It is anticipated that a significant proportion of the Fund’s investments will be made through BCPP Limited once it is fully operational. It is expected that BCPP Limited will be operational from April 2018 but assets will transfer into the pool on a phased basis. Where it is not practical or cost effective for assets to be transferred into the pool, they will continue to be managed at the Fund level. This is expected to predominantly include unquoted investments such as limited partnerships. Whilst these assets are unlikely to be transferred, it is expected that once these investments mature the proceeds will be reinvested into BCPP. At the current time, it is estimated that c. 70% of the Fund’s assets will be invested in BCPP subject to it having suitable management arrangements in place. The Fund will perform an annual review of assets that are determined to be held outside of BCPP to ensure that they continue to demonstrate value for money. Following this review, it will submit a report on the progress of asset transfers to the Scheme Advisory Board, in line with the guidance.
Approach to environmental, social and corporate governance (ESG) factors Environmental, social and corporate governance factors relate to non-financial factors that can have a material impact on the value of a Fund’s investments. They include factors such as carbon emissions, labour relations and shareholder rights. The Pension Fund, and its investment managers, considers that ESG considerations can have a material impact on the value of its investments. As a result, the consideration of ESG factors are incorporated into its investment managers’ investment processes. The Fund will take into account the guidance issued by LAPFF, which highlights corporate governance issues at investee companies and recommends appropriate voting action, and any other appropriate guidance and information, in determining any relevant social, environmental, or governance considerations when selecting, retaining, and realising any of its investments. However, the overriding objective for the Pensions Committee will be to discharge its fiduciary duty in managing the Fund’s investments in the best interests of the scheme’s beneficiaries. The Fund will take non-financial considerations, including ESG factors, into account in the selection, retention and realisation of investments but not where it is considered to have a detrimental financial impact. The Fund has made, and will continue to make, “social investments” whereby an investment can have a positive social impact as well as generating a suitable financial return. However, the overriding consideration for any such investment is whether it generates an acceptable risk-adjusted return for the Fund. The Fund has not excluded any investments on purely non-financial considerations and will continue to invest in accordance with the Regulations in this regard. The Fund does not pursue investment policies that are contrary to UK foreign policy or UK defence policy. It is considered that the Pensions Committee, which receives advice from its investment managers and independent advisor, represents the views of the Fund membership and that the views of the Local Pension Board will be taken into account as part of their review of this document.
The exercise of rights attaching to investments
As a responsible investor, the East Riding Pension Fund wishes to promote corporate social responsibility, high standards of corporate governance, good practice, and improved corporate performance amongst all companies in which it invests. As a result, the Fund has adopted the Principles of the Financial Reporting Council’s (FRC) UK Stewardship Code as shown below:
Principle 1 – Institutional investors should publically disclose their policy on how they will discharge their stewardship responsibilities. The Fund takes its responsibilities as a shareholder seriously and seeks to adhere to the Principles of the Stewardship Code. It views stewardship as part of the responsibilities of share ownership, and, therefore, an integral part of the investment
162 investment strategy statement 131 East Riding Pension Fund Annual Report and Accounts 2016/2017
strategy. The Fund believes that active stewardship will help to deliver high standards of corporate governance which will contribute positively to business performance over time by: • encouraging accountability between directors, shareholders, and other stakeholders; • strengthening the integrity of relationships between these bodies; and • improving transparency in the way companies are run. In practice, the Fund’s policy is to apply the Code through engagement with investee companies, the utilisation of its voting rights, an interpretation of best practice guidelines informed through the use of the Pensions Investment Research Consultants (PIRC) voting advisory service, existing arrangements with its external investment manager, and through membership of the Local Authority Pension Fund Forum (LAPFF). Further details of PIRC’s voting guidance is shown in the “UK Shareowner Voting Guidelines 2016” guidance document which is available at www.pirc.co.uk and further information regarding the engagement activities of the LAPFF is available at www.lapfforum.org. The Pension Fund considers that social, environmental, and governance considerations can have a material impact on the value of its investments and should form part of its investment managers’ investment processes. Therefore, the Fund will take into account the guidance issued by LAPFF, which highlights corporate governance issues at investee companies and recommends appropriate voting action, and any other appropriate guidance and information, in determining any relevant social, environmental, or governance considerations when selecting, retaining, and realising any of its investments. However, the overriding objective for the Pensions Committee will be to discharge its fiduciary duty in managing the Fund’s investments in the best interests of the scheme’s beneficiaries. The Fund’s investment managers can exercise their discretion not to vote in accordance with best practice. Where this discretion is exercised, the rationale for this decision is reported to the Pensions Committee on a quarterly basis. The exercise of any other rights attaching to a particular investment will be considered on a case by case basis. In general, the Fund’s engagement activities will be based on the importance of the issue, the materiality of the Fund’s exposure to companies affected by the issue, and an assessment of the likelihood of success in the event of engagement. The Pensions Committee reviews the Fund’s corporate governance and voting activity and discusses the reasons for engagement, or lack of it, with its investment managers on a quarterly basis. In addition, the Fund publishes summary details of corporate governance and voting activity in its Annual Report and Accounts.
Principle 2 – Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publically disclosed. East Riding of Yorkshire Council, the administering authority of the East Riding Pension Fund, maintains and monitors a Register of Interests which is completed both by Members of the Pensions Committee and by the individual employees of the internal investment manager. These are published on the Council’s website and updated on a regular basis. In addition, Pension Committee members are required to make any declarations of interest prior to Committee meetings. These interests are disclosed in the Pension Fund’s Annual Report and Accounts. In accordance with the Fund’s Compliance Manual, individual employees of the internal investment manager require permission from the Head of Investments or, in the Head of Investments case, the Head of Finance prior to investing in any applicable investments on a personal basis. Individual employees are also required to disclose their personal investments on an annual basis. The Fund’s Compliance Manual is an internal control document and it is not considered appropriate to disclose this publicly. The interests and investments of the Fund’s independent advisor are disclosed to the Pensions Committee on a quarterly basis. The external investment manager’s policy on conflict of interests is disclosed in its Statement of Compliance with the UK
163 investment strategy statement 132 East Riding Pension Fund Annual Report and Accounts 2016/2017
Stewardship Code.
Principle 3 – Institutional Investors should monitor their investee companies. The Pensions Committee delegates responsibility for managing the Fund’s assets to the Investment Managers, who are expected to monitor companies and intervene where necessary. The Fund subscribes to the Pension Investment Research Consultants (PIRC) voting and advisory service which provides voting recommendations based on industry best practice and receives an “Alerts” service from the LAPFF which highlights corporate governance issues of concern at investee companies. However, the Fund’s investment managers are not bound to exercise their vote in accordance with these recommendations. Issues on which the Fund has chosen to engage on in the recent past include: • Directors’ remuneration. • Separation of the roles of Chairman and Chief Executive. • Independence of non-executive directors. • Supply chain management. • Environmental factors including carbon risk. • Labour relations. • Auditor rotation. The Fund is of the opinion that its corporate governance activities are significantly more effective if they are part of a larger group of like-minded investors, such as the LAPFF. The Fund is a supporter of the LAPFF’s work but is unable to commit resources to take a more active role in LAPFF’s engagement over and above its current membership role. The external investment manager discharges its corporate governance responsibilities in accordance with its Investment and Corporate Governance Policy, which is also based on industry best practice. The Fund’s investment managers present reports on their voting activity on a quarterly basis to the Pensions Committee which are then subject to challenge and debate. The Pensions Committee also receives regular reports summarising the issues being raised by LAPFF and its current areas of focus, with companies in which the Fund has current ownership specifically highlighted, which further informs this process. The Fund’s investment managers can exercise their discretion not to vote in accordance with industry best practice. Where this discretion is exercised, the rationale for this decision is reported to the Pensions Committee on a quarterly basis. The Fund’s investment managers may choose to be made insiders in a particular company for a short period of time. In these instances, no transactions are permitted to be made from the point of disclosure until the information has been disclosed to the wider market. The specific restrictions are disclosed in the Fund’s investment managers’ compliance documents. As stated above, the Fund’s internal investment manager’s Compliance Manual is considered to be a private document that will not be disclosed publicly.
Principle 4 – Institutional investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value. As highlighted above, responsibility for day-to-day interaction with companies is delegated to the Fund’s Investment Managers, including the escalation of engagement when necessary. Where special situations arise which are not covered by the Fund’s corporate governance strategy or where the policy is unclear, the Investment Managers will consult with the Director of Corporate Resources. Although willing to act alone, as the Fund typically holds a very small percentage of equity in individual companies, there are strong reasons to collaborate with other asset owners in order to present a stronger case. The Fund utilises its membership of the LAPFF, which co-ordinates collaborative engagement with companies, regulators and policymakers to protect and enhance shareholder value, in order to maximise its influence.
164 investment strategy statement 133 East Riding Pension Fund Annual Report and Accounts 2016/2017
If deemed appropriate, the Fund will participate in shareholder litigation. Any such actions and subsequent outcomes are reported to the Pensions Committee in order to monitor activity and assess effectiveness.
Principle 5 – Institutional investors should be willing to act collectively with other investors where appropriate. Collaborative engagement is a key part of a responsible investment strategy and the Fund will seek to work collectively with other institutional shareholders in order to maximise the influence it can have on individual companies. The Fund seeks to achieve this through membership of the LAPFF, which engages with companies over environmental, social and governance issues on behalf of its members, and also its relationship with the external investment manager. The Fund will also consider collaborating with other investors if it is considered to be appropriate and interested parties should contact the Fund’s Head of Investments, Mark Lyon if they would like to discuss this further. The external investment manager’s policy on collaborative engagement is disclosed in its Statement of Compliance with the UK Stewardship Code.
Principle 6 – Institutional investors should have a clear policy on voting and disclosure of voting activity. The Fund views its voting rights as a valuable instrument to: • protect shareholder rights; • minimise risk to companies from corporate governance failure; • enhance long term value; and • encourage corporate social responsibility. As such, the Fund seeks to exercise all voting rights attaching to its investments, where practical. Whilst it is the Fund’s intention to follow the principles of UK corporate governance best practice, the Fund will interpret the application of these principles according to its own views of best practice. There are also other issues outside of these principles on which the Fund will take a view. As a general rule, the Fund will vote in favour of resolutions which are in line with the UK Corporate Governance Code or comply with best practice. The Fund will vote against resolutions which do not meet these guidelines, or which represent a serious breach of best practice, or which will have a negative impact on shareholders rights. The Fund may abstain on resolutions which may have an adverse impact on shareholder rights, or represent a less significant breach of these guidelines, or where the issue is being raised for the first time with a company. The specific voting outcome will depend on the particular circumstances of the company and the types of resolution on the meeting agenda. The external investment manager is responsible for the exercise of voting rights attaching to investments that are managed by them on behalf of the Fund. The external investment manager will vote in accordance with its “Investment and Corporate Governance” policy which is available at www.schroders.com. Reports summarising the Fund’s voting activity are presented to the Pensions Committee on a quarterly basis, and the Fund publishes summary details of voting activity in its Annual Report and Accounts. The Fund has chosen not to disclose its full voting record as it does not consider that this will add any value to an external party’s understanding of its corporate governance and voting policy and practices. However, the Fund is required to respond to a formal request for information via the Freedom of Information Act 2000. The Fund engages in stock lending and seeks to recall stock on loan prior to a shareholder vote if it is deemed to be cost effective, suitable and practical. Examples of this will include resolutions that are not considered to in accordance with the UK Corporate Governance Code or where the Fund has a material holding and could potentially influence the outcome of the vote.
Principle 7 – Institutional investors should report periodically on their stewardship and voting activities. The Pensions Committee reviews a detailed corporate governance and voting report, which includes the voting activity of
165 investment strategy statement 134 East Riding Pension Fund Annual Report and Accounts 2016/2017
both the internal and external investment managers, on a quarterly basis. In addition: • The Administering Authority publishes the agendas and minutes of Pension Committee Meetings on its website – www.erpf.org.uk. • The Fund publishes details of its stewardship and voting activities in its Annual Report and Accounts. This includes summary details of voting activity, and activity undertaken through the LAPFF as well as other collaborative engagement.
Compliance and monitoring The investment managers are required to adhere to the principles set out in this Investment Strategy Statement. The Pensions Committee will require an annual written statement from the investment managers that they have adhered to the principles set out in this statement. The Investment Strategy Statement of the East Riding Pension Fund will be reviewed by the Pensions Committee at least every 3 years and more regularly if considered appropriate.
166 investment strategy statement 135 East Riding Pension Fund Annual Report and Accounts 2016/2017 communications policy
Introduction The East Riding Pension Fund (ERPF) communicates with more than 250 scheme employers and 109,685 scheme members in relation to the Local Government Pension Scheme (LGPS). These members are split into the following categories and the figures shown are as at 31 March 2016: • 39,475 Active scheme members; • 41,585 Deferred scheme members; and • 28,625 Pensioner members.
Objectives The ERPF aims to deliver a consistently high level of customer service and performance to our stakeholders and recognises that effective communication plays a vital role in driving efficiencies within the Fund. It is also important to acknowledge that different stakeholders require information delivered via different methods and wherever possible, we will look towards electronic communication for both members and employers. All our communications aim to: • provide clear, accurate and relevant information in a timely manner; • cut out jargon; • use a multi-channel approach to communication, ensuring a best fit for the stakeholder; • ensure members are able to make informed decisions regarding their pension with the information made available; • be compliant with all legislative requirements when communicating with members; and • work towards having electronic communication at the centre of our policy.
Our stakeholders When communicating with our members, our objectives are: • Scheme members • Representatives of members • Prospective members • Scheme employers • Prospective scheme employers
How we communicate The ERPF are increasingly using electronic methods to communicate. Our website (www.erpf.org) is a principal source of information for both scheme employers and members. We also communicate by email with our stakeholders. In addition to electronic methods, and where appropriate, we use paper based communication methods such as letters, Annual Benefit Statements (ABSs) and other scheme literature such as the New Member Welcome Pack. Direct telephone numbers are quoted on all our letters which means our stakeholders can communicate verbally with the pension fund staff. In addition, scheme employers are provided with direct contact details for all pension fund staff on a regular basis. Scheme members who require alternative formats (such as Braille or audio) can request this to ensure access to relevant information at all times.
167 communications policy 136 East Riding Pension Fund Annual Report and Accounts 2016/2017
For members with extenuating circumstances due to ill health we will, at the scheme employer’s request, provide a visit to discuss options and implications.
Developments Over the last 12 months, the ERPF have developed and piloted ERPF online services for scheme employers. The next 12 months will see these online services rolled out to all scheme employers. ERPF online services will move the ERPF to paperless administration and improve data quality and response times. It will also increase data security as information will be shared using a secure portal. It is our aim to have all scheme employers signed up and using ERPF online services by March 2018. ERPF online services will also be supported by the introduction of monthly contributions postings from April 2018. Submitting information on a monthly basis instead of on an annual basis will provide more up to date member data and help identify discrepancies between the Fund and scheme employer records more quickly. This will be vital for rolling out ERPF online services for scheme members as they will have access to the information that the ERPF holds for them. Online services will allow us to move more of our communications including ABS, payslips and P60s to electronic methods. In line with our commitment to electronic communication, we are currently developing a new website for our scheme members and scheme employers which will be launched during 2017-18.
Communication events for scheme members When communicating with scheme members, the ERPF’s objectives are to: • encourage and retain membership of the scheme; • highlight the benefits of LGPS 2014; • provide more opportunities for two-way communication; • reduce the number of enquiries and complaints; and • reassure stakeholders.
Resource Audience Delivered via Frequency
Dedicated area of Prospective scheme members/ www.erpf.org.uk with Member website Constant active/deferred /pensioner information designed specifically for members
Monday to Thursday; 9.00 to Pension enquiries Prospective scheme members/ The direct telephone number or 17.00. Friday; 9.00 to 16.30 (via telephone or email) active/deferred /pensioner dedicated e-mail address
Scheme members are welcome Prospective scheme members/ to visit the pension fund offices Monday to Thursday; 9.00 to Visits in person active/deferred /pensioner and have a 1-1 discussion with a 17.00. Friday; 9.00 to 16.30 member of staff
Prospective scheme members/ Electronic -Available online at Scheme member guides Constant active/deferred /pensioner www.erpf.org.uk
Newsletters for active, Active/deferred Post/Electronic As and when required deferred and pensioner Members/pensioner
Prospective scheme members/ Available online at Annual report & accounts Electronic active/deferred/pensioner www.erpf.org.uk
Active/deferred As and when required – usually Bespoke communications Post/Electronic /pensioner following regulatory change
Annual Benefit Statement for active and deferred Active/ deferred Post Annual members
168 communications policy 137 East Riding Pension Fund Annual Report and Accounts 2016/2017
Pre-retirement presentations (in A minimum of 10 sessions per Active Face to face presentation partnership with Affinity year connect)
Payslips for pensioner April & May each year or where Pensioner Post the monthly pension changes by members more than £1
April & May each year or where the monthly pension Pensioner Post Annual changes by more than £1
Communication events for scheme employers and prospective employers When communicating with scheme employers, the ERPF objectives are to: • improve relationships; • help them understand costs/funding issues; • work together to maintain accurate data; • ensure the smooth transfer of staff; • ensure they understand the benefits of being an LGPS employer; and • assist them in making the most of the discretionary areas within the LGPS.
Resource Delivered via Frequency
Dedicated section of www.erpf.org.uk includes Employer website information designed specifically for scheme Constant employers
Email bulletins to scheme employers with Employer bulletins As and when required but at least six per year important regulatory and procedural information
Designed for new scheme employers entering the New employer meetings fund or those taking back payroll/HR services in- As and when required house
A set of employer guides that go through forms and Available on www.erpf.org.uk Employers guides processes needed to administer the LGPS Emailed on request
An opportunity for employers to cover new and/or Employer workshops As and when required complex topics in a workshop environment
An annual round up of scheme events and a Employers annual meeting presentation from the actuary explaining the Annual valuation results if a valuation year
Annual report & accounts Electronic Available online at www.erpf.org.uk
The policy This policy is made under Regulation 61 of the LGPS Regulations 2013. The ERPF will revise this policy on an annual basis and following any material change in policy.
Feedback The ERPF welcomes feedback on this policy and any communications. Please email us at [email protected] or contact us at: Systems and Web Team, East Riding Pension Fund, Council Offices, Church Street , Goole DN14 5BG Tel: (01482) 394039
169 communications policy 138 East Riding Pension Fund Annual Report and Accounts 2016/2017 report of the east riding pension fund local pension board
The Public Service Pensions Act 2013 required Local Pension Boards to be established to assist administering authorities with all aspects of governance and administration of the Local Government Pension Scheme (LGPS). The Terms of Reference for the East Riding Pension Fund Local Pension Board (“the Board”) were approved by the Pensions Committee on 6 February 2015 for recommendation to Full Council and were adopted on 25 February 2015.
Recruitment to the Board Under the Terms of Reference, the Board consists of six voting members constituted as follows: • three Employer Representatives – Administering Authority (1), other scheme employers (ie organisations other than the Administering Authority who, under the Regulations, can participate in the LGPS) (2); and, • three Scheme Member Representatives – active members (1), pensioner members (1), active/pensioner or deferred member (1).
During 2016/17, there was a new Employer representative selected as a result of one of the Employer representatives standing down. Peter Doherty was selected as replacement for Brendan Arnold who had left his position at Hull City Council.
Information on the key features of being an Employer or Scheme Member representative and the role of the Board can be found on the East Riding Pension Fund (“the Fund”) website at http://www.erpf.org.uk/local-pension-board-information/ job-description-and-person-specification.
Employer representatives during 2016/17 Councillor A Burton, East Riding of Yorkshire Council;
Natasha Halsall - Pensions Manager, University of Lincoln;
Brendan Arnold - Director of Finance, Infrastructure and Transformation, Kingston upon Hull City Council (up to 1 July 2016); and
Peter Doherty - Executive Director of Finance and Corporate Services, North Lindsey College (from 17 February 2017).
Scheme Member representatives Caroline Bell – active member;
Julie Davey – active member; and
Martin Eaden – pensioner member.
Board Meetings During 2016/17, the Board has met three times to consider reports from the Director of Corporate Resources on Investment and Pension administration issues and to receive training as part of the Board’s training programme. At the meeting held on 4 November 2016, nominations were sought for the position of Chair following Brendan Arnold standing down having served as Chair of the Board since 2 October 2015. Councillor Burton agreed to act as Chair on a meeting by meeting basis.
The Board have:- • reviewed the internal controls and procedures in place at:
170 report of the east riding pension fund local pension board 139 East Riding Pension Fund Annual Report and Accounts 2016/2017
• Schroder Investment Management Limited (the Fund’s external investment manager); • State Street Global Services (The Fund’s global custodian); • the Investments section (the Fund’s internal investment manager); and • the Pensions Administration section. • reviewed the Fund’s Statement of Investment Principles and the Governance Policy Statement for 2016-17; • reviewed the Fund’s Investment Strategy Statement and the Fund’s Governance Policy Statement effective from 1 April 2017; • reviewed the performance of the Pensions Administration section; • reviewed the work of the Fund’s actuary; • received updates on the scheme employer year end return exercise 2015-16; • agreed the annual report of the Board for 2015/16 for the Pension Fund Report and Accounts; • reviewed the Board’s Terms of Reference; • agreed a programme of work and training for 2017; • reviewed reports on Local Authority Pension Fund Forum meetings; • reviewed the draft Pension Fund Annual Report and Accounts 2015-16; • reviewed the Annual Performance Report and Review 2015-16; • reviewed the formal funding basis for the 2016 valuation and received updates on the 2016 valuation results; • reviewed the Funding Strategy Statement; • reviewed the Fund’s corporate governance and voting activity; • reviewed minutes from the Pensions Committee; • reviewed the Fund’s Communications policy; • reviewed the Fund’s Risk Register including record of breaches; and • received updates on the Border to Coast Pension Partnership (BCPP) and the requirement for asset pooling. The Board are keen to ensure their work assists the Pensions Committee and attended the Pension Committee meeting on 4 November 2016 to gain a greater understanding of how the Committee carries out its delegated function of making arrangements for the investment and management of the Fund.
The attendance rates at the meetings were as follows:- • 83% on 1 July 2016; • 67% on 4 November 2016; and • 100% on 17 February 2017. Training All Board members are required to complete self assessment training questionnaires to identify their level of knowledge and understanding. Based on an analysis of their training needs, a training programme is in place for members.
Training sessions take place before each meeting and the following training has been delivered:- • Pensions administration – 1 July 2016 delivered by Tim Hazlewood (PENtag Limited); • Investment performance and risk management – 1 July 2016 delivered by Stephen Lee (Investec Asset Management); • Actuarial valuation 2016 – 4 November 2016 delivered by Hymans, the Fund’s actuary; and • Pensions governance - 17 February 2017 delivered by Tim Hazlewood (PENtag Limited).
171 report of the east riding pension fund local pension board 140 East Riding Pension Fund Annual Report and Accounts 2016/2017
The attendance rates at the training sessions were as follows:- • 83% on 1 July 2016; • 67% on 4 November 2016; and • 100% on 17 February 2017. • The training sessions were also attended by members of the Pensions Committee. Individually, members have been requested to complete all the modules in The Pensions Regulator’s Public Service toolkit and five of the six members have provided copies of their Development record as evidence of completing the following modules:-
1. Conflicts of interest;
2. Managing risk and internal controls;
3. Maintaining accurate member data;
4. Maintaining member contributions;
5. Providing information to members and others;
6. Resolving internal disputes; and
7. Reporting breaches of the law. Costs The cost of the implementation and running of the Board has been minimal, having been included in existing officer workloads.
Work plan for 2017 Topics will include:- • Review of internal controls assurance reports; • Review and outcome of the procurement process for actuarial services; • Actuarial Valuation as at 31 March 2016; • Pension Fund Risk Register; • Update on Service Level Agreements with Scheme Employers; • Scheme Employer Year End Return exercise 2016/17; • ISA 260 plus Annual Report and Accounts 2016/17; • Fund Performance 2016/17; and • Review of the Board’s Terms of Reference.
The challenges facing Scheme employers and the Fund are likely to increase in 2017/18 with the results of the 2016 Valuation effective from 1 April 2017. The Board will endeavour to assist the Fund to ensure that both members and employers continue to receive accurate and timely information of any changes.
Details of the Board activities including papers, agendas and minutes of Board meetings can be found at http://www.erpf. org.uk/local-pension-board-information.
East Riding Pension Fund Local Pension Board July 2017
172 report of the east riding pension fund local pension board 141 East Riding Pension Fund Annual Report and Accounts 2016/2017 auditor report
Independent auditor’s report to the members of East Riding of Yorkshire Council on the pension fund financial statements published with the Pension Fund Annual Report and Accounts
We have examined the pension fund financial statements for the year ended 31 March 2017 on pages 67 to 91.
Respective responsibilities of the Head of Finance and the auditor
As explained more fully in the Statement of the Head of Finance’s Responsibilities, the Head of Finance is responsible for the preparation of the pension fund financial statements in accordance with applicable law and the Code of Practice on Local Authority Accounting in the United Kingdom 2016/17.
Our responsibility is to report to you our opinion on the consistency of the pension fund financial statements included in the Pension Fund Annual Report and Accounts with the pension fund financial statements included in the annual published statement of accounts of East Riding of Yorkshire Council, and their compliance with applicable law and the Code of Practice on Local Authority Accounting in the United Kingdom 2016/17.
In addition, we read the information given in the Pension Fund Annual Report and Accounts to identify material inconsistencies with the pension fund financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Our report on the administering authority’s annual published statement of accounts describes the basis of our opinion on those financial statements.
Opinion
In our opinion, the pension fund financial statements are consistent with the pension fund financial statements included in the annual published statement of accounts of East Riding of Yorkshire Council for the year ended 31 March 2017 and comply with applicable law and the Code of Practice on Local Authority Accounting in the United Kingdom 2016/17.
Matters on which we are required to report by exception
The Code of Audit Practice requires us to report to you if: • the information given in the Pension Fund Annual Report and Accounts for the financial year for which the financial statements are prepared is not consistent with the financial statements; or • any matters relating to the pension fund have been reported in the public interest under section 24 of the Local Audit and Accountability Act 2014 in the course of, or at the conclusion of, the audit.
We have nothing to report in respect of these matters.
John Prentice For and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants KPMG LLP 1 Sovereign Square, Sovereign Street, Leeds, LS1 4DA
14 September 2017
173 auditor report 142 East Riding Pension Fund Annual Report and Accounts 2016/2017 contact points
Information relating to any pension matters including individual benefit or contribution enquiries should be addressed to the Pensions Section at the address below or by telephoning (01482) 394150
The Pensions Manager East Riding Pension Fund Pensions Section PO Box 118 Church Street Goole East Riding of Yorkshire DN14 5BG
Enquiries relating to investment matters should be addressed to the Investments Section at the address below or by telephoning (01482) 394135
The Head of Investments East Riding Pension Fund Investment Section PO Box 164 Church Street Goole East Riding of Yorkshire DN14 5YZ
General information can be found on the East Riding Pension Fund website ww.erpf.org.uk
174 contact points 143
Annual Audit Letter 2016/17 East Riding of Yorkshire Council kpmg.com/uk
September 2017
175 Contents
Report sections The contacts at KPMG in connection with this report are: Summary 3
Appendices John Prentice Director 1. Summary of reports issued 5 KPMG LLP (UK) 0113 231 3935 2. Audit fees 7 [email protected]
This report is addressed to the Authority and has been prepared for the sole use of the Authority. Lizzie Wharton We take no responsibility to any member of staff acting in their individual capacities, or to third Manager parties. Public Sector Audit Appointments issued a document entitled Statement of Responsibilities of Auditors and Audited Bodies summarising where the responsibilities of KPMG LLP (UK) auditors begin and end and what is expected from audited bodies. We draw your attention to this 0113 231 3538 document which is available on Public Sector Audit Appointment’s website (www.psaa.co.uk). [email protected] External auditors do not act as a substitute for the audited body’s own responsibility for putting in place proper arrangements to ensure that public business is conducted in accordance with the law and proper standards, and that public money is safeguarded and properly accounted for, and used economically, efficiently and effectively.
We are committed to providing you with a high quality service. If you have any concerns or are dissatisfied with any part of KPMG’s work, in the first instance you should contact John Prentice, the engagement lead to the Authority, who will try to resolve your complaint. If you are dissatisfied with your response please contact the national lead partner for all of KPMG’s work under our contract with Public Sector Audit Appointments Limited, Andrew Sayers ([email protected]). After this, if you are still dissatisfied with how your complaint has been handled you can access PSAA’s complaints procedure by emailing [email protected], by telephoning 020 7072 7445 or by writing to Public Sector Audit Appointments Limited, 3rd Floor, Local Government House, Smith Square, London, SW1P 3HZ.
176 2 | Section one Summary
This Annual Audit Letter VFM conclusion summarises the outcome We issued an unqualified conclusion on the Authority’s arrangements to secure value for money (VFM conclusion) for from our audit work at East 2016/17 on 14 September 2017. This means we are satisfied that Riding of Yorkshire Council during the year the Authority had appropriate arrangements for securing economy, efficiency and effectiveness in the use of its in relation to the 2016/17 resources. audit year. Although it is To arrive at our conclusion we looked at the Authority’s arrangements to make informed decision making, sustainable resource deployment addressed to Members of and working with partners and third parties. the Authority, it is also intended to communicate VFM risk areas these key messages to key We undertook a risk assessment as part of our VFM audit work to identify the key areas impacting on our VFM conclusion and external stakeholders, considered the arrangements you have put in place to mitigate these including members of the risks. We did not identify any areas of residual audit risk needing us to carry out additional work. public, and will be placed on Our work identified the following matters: the Authority’s website. — Like most of local government, the Authority faces a challenging future driven by funding reductions and an increase in demand for services. The Authority reported an outturn position of £3m surplus in 2016/17 and has set a balanced budget for 2017/18. but from 2018/19, the Authority has identified funding gaps. The Authority continues to make progress towards reducing these gaps and the financial health of the Authority is underpinned by substantial earmarked reserves. However further significant savings will still be required to achieve annual budgets. — As reported in 2015/16, partnership working within local government and with the health sector remains an area of focus and challenge. The Authority remains committed to and actively engaged with both the Devolution agenda, and the development and implementation of the Sustainability and Transformation Plan. However national and regional factors mean that limited progress has been made in relation to both. The local economy for the provision of social care remains fragile due to the pressures of rural communities, the impact of Brexit and of the National Living Wage.
Audit opinion We issued an unqualified opinion on the Authority’s financial statements on 14 September 2017. This means that we believe the financial statements give a true and fair view of the financial position of the Authority and of its expenditure and income for the year. The financial statements also include those of the pension fund.
177 3 | Section one
Financial statements audit We identified no audit misstatements in the Authority’s financial statements. The Authority has recognised the additional pressures which the earlier closedown in 2017/18 will bring and has strengthened its financial reporting by finalising this year’s accounts in a shorter timescale.
Other information accompanying the financial statements Whilst not explicitly covered by our audit opinion, we review other information that accompanies the financial statements to consider its material consistency with the audited accounts. This year we reviewed the Annual Governance Statement and Narrative Report. We concluded that they were consistent with our understanding and did not identify any issues.
Pension fund audit There were no significant issues arising from our audit of the pension fund and we issued an unqualified opinion on the pension fund financial statements as part of our audit report. The Fund increased in value by £820m in year, consisting of investment returns of £795m and net contributions of £25m. This represents a return of 21.1% against a benchmark of 20.1%. The key challenge for the Fund in 2017/18 is the move to pooling. Whole of Government Accounts (if applicable) We reviewed the consolidation pack which the Authority prepared to support the production of Whole of Government Accounts by HM Treasury. We reported to the National Audit Office that the Authority’s pack was consistent with the audited financial statements. Certificate We issued our certificate on 14 September 2017. The certificate confirms that we have concluded the audit for 2016/17 in accordance with the requirements of the Local Audit & Accountability Act 2014 and the Code of Audit Practice.
Audit fee Our scale fee for 2016/17 was £138,498 for the Authority and £28,491 for the Pension Fund, excluding VAT. An additional fee of £4,993 excluding VAT, for providing assurance to admitted bodies over IAS 19 figures, has been approved by Public Sector Audit Appointments Limited and invoiced to the Pension Fund. Further detail is contained in Appendix 2.
178 4 | Appendix 1 Summary of reports issued
This appendix summarises the reports we issued since our last Annual Audit Letter. These reports can be accessed via the Audit Committee pages Certification of Audit Fee Letter on the Authority’s website at Grants and Returns www.eastriding.gov.uk. The Audit Fee Letter This report set out the proposed summarised the audit work and draft outcome of our fee for the 2017/18 certification work on financial year. the Authority’s 2015/16 grants and returns.
2017 Jan Feb Mar Apr
External Audit Plan The External Audit Plan 2016/17 set out our approach to the audit of the Authority’s financial statements and work to support the VFM conclusion.
179 5 | Appendix 1
Annual Audit Letter This Annual Audit Letter provides a summary of the results of our audit for 2016/17.
May Jun Jul Aug Sep Oct Nov
Report to Those Charged with Governance The Report to Those Charged with Governance summarised the results of our audit work for 2016/17 including key issues arising as a result of our observations. We also provided the mandatory declarations required under auditing standards as part of this report. Auditor’s Report The Auditor’s Report included our audit opinion on the financial statements (including the pension fund accounts) along with our VFM conclusion and our certificate.
180 6 | Appendix 2 Audit fees
This appendix provides information on our External audit fees 2016/17 final fees for the 2016/17 audit. (£’000)
To ensure transparency about the extent of our fee relationship with the Authority we have summarised below the outturn against the 2016/17 planned audit fee. External audit Audit fee Our final fee for the 2016/17 audit of the Authority was £138,498 which is in line with the planned fee. Our final fee for the 2016/17 audit of the Pension Fund was £33,484. This compares to a planned fee of £28,491. The reason for this variance is the cost of providing assurance to Pension admitted bodies over IAS 19 figures. Fund audit fee Our fee variation has been approved by Public Sector Audit Appointments and has been invoiced to the Pension Fund. Certification of grants and returns
Under our terms of engagement with Public Sector Audit Audit- Appointments we undertake prescribed work in order to related certify the Authority’s housing benefit grant claim. This services certification work is still ongoing. The final fee will be confirmed through our reporting on the outcome of that work in January 2018. The indicative fee for this work is £11,303. Non-audit Other services work During 2016/17 we charged £7,800 for additional audit- related services for the certification of the Teachers’ Pension return, Pooling of Housing Capital Receipts return, 0 50 100 150 Affordable Housing Programme grant return and Local Transport Plan Major Projects grant return which are outside the Public Sector Audit Appointment’s certification regime. We also charged £26,400 for tax advice. This work was not related to our responsibilities under the Code of Audit Practice. This is a continuation of work from previous year on recovery of tax and has been approved by the PSAA.
181 7 | kpmg.com/uk
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182 EAST RIDING OF YORKSHIRE COUNCIL 10
Report to: East Riding Pension Fund Local Pension Board 3 November 2017
Wards: Not applicable
CONSULTATION ON ACADEMIES OBJECTIVES
Report of the Interim Director of Corporate Resources
A. Executive Summary
On 17 July 2017 the Local Government Pension Scheme Advisory Board (SAB) issued a consultation paper seeking responses from Local Government Pension Scheme (LGPS) Pension Fund managers and Pension Committees on draft objectives for the development of options for academies to address issues arising from the policy objective to convert all schools to academies.
The proposed draft objectives were:-
. Protect the benefits of scheme members through continued access to the LGPS;
. Ring fence local tax payers and other Scheme employers from the liabilities of the academy trust sector;
. Improve the efficiency and effectiveness of administrative practices; and
. Increase the accuracy and reliability of data.
In achieving the above any options for changes should not:-
Significantly alter cash flows at the fund level; and
Significantly alter assets at the pool level.
At its meeting on 29 September 2017, the Pensions Committee agreed that the proposed draft objectives should represent the SAB’s objectives for the academies project and that the Committee did not wish to add any new objectives. The Committee’s response was sent to the SAB on 29 September 2017, the closing date for responses to the consultation.
B. Recommendation
That the report be noted.
C. Equality Implications
There are no equality implications.
183
1. Background
1.1 The SAB is investigating the potential impact that the policy objective to convert all schools to academies in England will have on LGPS pension funds. If all local authority maintained schools in England were to convert to academy status the projected number of academies with staff in the LGPS would be nearly 22,000. Since the Academies Act 2010, there have been over 6,200 academy conversions across the 80 English LGPS pension funds with 164 (as at 31 March 2017) of those academies participating in the East Riding Pension Fund (ERPF).
1.2 As part of its investigation, the SAB commissioned an independent report by PricewaterhouseCoopers. The report “Options for Academies in the LGPS” was issued in May 2017 and is attached as Appendix 1. The report provided a third party perspective on the issues faced by the LGPS and associated stakeholders in relation to academies. As well as LGPS pension funds, the stakeholders consulted included Multi and Single Academy Trusts, external payroll and administration providers, Fund actuaries, Department for Education, Government Actuary’s Department and Trade Unions.
1.3 The three key themes emerging from the report were:-
policy, governance and outsourcing; administration and operations; and contributions and finance.
1.4 To address the issues, the SAB agreed with PricewaterhouseCoopers three broad types of alternative approaches to handle the provision of support staff working in academies:-
improving LGPS processes, IT and guidance; using new regulations to implement changes within the LGPS; and implementing changes outside the LGPS.
2. Consultation – Academies Objectives
2.1 The SAB commenced the consultation on Academies Objectives (attached as Appendix 2) on 17 July 2017 and it finished on 29 September 2017. The consultation was only sent to LGPS Pension Fund managers and Pension Committees on the basis that the views of other stakeholders including academies were fully taken account of in the PricewaterhouseCoopers report.
2.2 The SAB was effectively seeking consensus from the English LGPS Pension Funds to develop options to address issues highlighted in the PricewaterhouseCoopers report with regard to the policy objective to convert all schools to academies. The aim was that the objectives set out by the SAB were the ones that would achieve a suitably balanced approach within the LGPS. The alternatives of regulation or forced consolidation would lead to increased cost, uncertainty and delays due to the existing pressures already on the Department for Communities and Local Government to deliver long awaited draft legislation for changes to the LGPS highlighted in 2014.
2.3 The consultation was limited to two questions. The first question was a Yes/No as to whether respondents agreed to four draft objectives. It was also stated that any options
184 should not significantly alter either the cash flows at fund level or the assets at pool level. If all academies’ assets and liabilities were moved entirely out of individual LGPS Pension Funds into a new public service scheme for academies, for example, overall costs across the LGPS could increase. The ceding LGPS Pension Funds would see a sudden and significant worsening of their cashflow and maturity profile which could lead to forced disinvestment initially with an emphasis on income producing assets rather than growth assets.
2.4 The first proposed draft objective was to protect the benefits of scheme members through continued access to the LGPS. This objective was welcomed as increased academisation potentially reduces LGPS access as Multi and Single Academy Trusts can create arms-length companies to outsource employment. These companies may not be required to provide LGPS membership to new employees and cost savings can be made by academies offering a lower cost private pension scheme. Academies are not fully aware of the implications of outsourcing on their own funding position and there is a need for a central resource where academies should go for clarity on LGPS issues. At a local level, the ERPF has been pro-active with regard to providing fact sheets to academies on outsourcing and encouraging contact with the ERPF prior to undertaking outsourcing exercises.
2.5 The next proposed draft objective was to ring fence local tax payers and other Scheme employers from the liabilities of the academy trust sector. This is a key objective and reason to keep academies within the LGPS, for example, the creation of academy sub- funds would reduce the covenant risk to LGPS employers that effectively would no longer be guaranteeing any academy failing with LGPS pension deficits. This would help to allay concern that the Department for Education guarantee only appears to be enforceable in certain circumstances.
2.6 An approach to ring fence outside the LGPS could result in central government taking on substantial relevant LGPS liabilities in full or in part compared to an approach to ring fence within the LGPS. Leaving assets in the funded LGPS would retain a dedicated asset base and the discipline for academies of paying for benefit promises as members earn them whereas unfunded schemes require the cost of pension benefits to be met as they are paid, by future generations of taxpayers.
2.7 The third proposed draft objective was to improve the efficiency and effectiveness of administrative practices. All stakeholders acknowledge the complexity of the LGPS administrative requirements and the difficulty that academy staff face in meeting those requirements, for example, pensionable pay definitions and Scheme employer responsibilities. The ERPF has worked closely with academies through the provision of specific LGPS training and information packs to address these issues but progress can be frustrated as some academies will not identify the right “pension” contacts within an academy. As a consequence, academies are keen to outsource the “complexity” to third party payroll and administration providers who do not fully understand the regulations and over-promise to academies.
2.8 The implementation of ERPF Online services will greatly assist academies in submitting complex pensions information. Feedback from academies and third party payroll providers using ERPF Online services has already been positive as there are help screens for the completion of all ERPF administration forms.
185 2.9 The final proposed draft objective was closely allied to the last objective and that is to increase the accuracy and reliability of data. The ERPF experience in the last year is that the quality of data overall from academies has improved although there are a small number of academies where the quality of data remains poor. Data quality issues are now addressed immediately for new academies by the ERPF as all new employers have to sign up to ERPF Online services. This ensures that all data submitted by the academy is validated so that any inaccurate data is rejected.
2.10 Respondents who answered no to the first question were asked to explain, with regard to the four proposed draft objectives, what they would change or add and why. From the ERPF perspective, the issue of setting employer contribution rates for academies created significant workloads for pension officers and frustration for academy representatives at the time of the 2013 actuarial valuation. However, that issue is now resolved and virtually all academies saw significant reductions in their employer contribution rates at the 2016 valuation.
2.11 At its meeting on 29 September 2017, the Pensions Committee considered the proposed draft objectives and agreed that these objectives should represent the SAB’s objectives for the academies project. The Committee also agreed that it did not wish to add any new objectives. The Committee’s response was sent to the SAB on 29 September 2017, the closing date for responses to the consultation.
3. Conclusion
3.1 The ERPF experienced a significant number of academy conversions in the early years of the academy conversion programme and quickly adapted to the pace of academy conversion by concentrating resources on ensuring academy contacts were up to date, being pro-active with regular employer bulletins, and by developing ERPF Online services to deal with the dramatic increase in employer numbers.
3.2 In the event that the remaining local authority maintained schools within the ERPF area were to convert to academy status, the ERPF is well prepared to absorb the increase in workloads of having potentially an additional estimated 150 academies participating in the LGPS.
3.3 From a pensions administration perspective, officers of the ERPF would therefore support the four proposed draft objectives for the SAB to adopt for its academies project and would not propose any additions or deletions in response to the consultation.
Darren Stevens Interim Director of Corporate Resources
Contact Officer: Julian Neilson Head of Finance Telephone Number: 01482 394100 E-mail: [email protected]
Contact Officer: Graham Ferry Pensions Manager Telephone Number: Ext. 4171 E-mail: [email protected]
186 Options for Academies in the LGPS
Local Government Pension Scheme Advisory Board
May 2017
187 188 Local Government Pension Scheme Advisory Board
Contents
1 Executive summary 1 2 Scope and methodology 3 2.1 Scope 3 2.2 Research sources and methodology 3 3 Current issues: overview 4 3.1 Categorising the issues raised 4 3.2 MAT landscape and Complexity of Stakeholder interactions 4 3.3 Variation in LGPS contribution rates 6 4 Current issues: policy and governance 7 4.1 Introduction 7 4.2 DfE policy for academies programme 7 4.3 Representation for academies on LGPS matters 8 4.4 Outsourcing by academies and reduced LGPS access 9 5 Current issues: administration and operations 13 5.1 Introduction 13 5.2 Issues relating to data and service providers 13 5.3 Interaction between parties 16 5.4 Resourcing issues 19 6 Current issues: contributions and finance 21 6.1 Introduction 21 6.2 DfE / DCLG guidance 22 6.3 Communication of funding approaches, accounting impact and actuarial fees 23 6.4 Further funding approach is: data restrictions, fair treatment and actuarial duty, LGPS employer status 24 6.5 Pooling for funding and exit valuations 26 6.6 Consistency with Local Authority rates, typical 2016 valuation results, budget mis-match 27 6.7 DfE guarantee, academy movements, case for individual academy tracking 30 6.8 Freedom of MATs to consolidate and select between LGPS Funds 31 7 Initial analysis of alternative approaches 32 7.1 Outline comparison between three different types of approach 32 7.2 Detailed comparison of impact of the three different types of approach on current issues 36
Appendices 37 Appendix 1: Local Authority academy* conversion map 38 Appendix 2: Data summaries for academies 39 Appendix 3: Data summaries for MATs 40 Appendix 4: List of Stakeholder interviews conducted November 2016 – February 201741
Options for Academies in the LGPS PwC | Contents 189 Local Government Pension Scheme Advisory Board
Appendix 5: References 42 Appendix 6: Sample 2016 valuation funding rates 43 Appendix 7: Funding approaches – illustrative example 44
4 | PwC Options for Academies in the LGPS 190 Local Government Pension Scheme Advisory Board
1 Executive summary
Introduction This report is addressed to the Local Government Pension Scheme Advisory Board (“the SAB”), which has requested a review of current issues faced by the LGPS and associated Stakeholders in relation to academies participating in around 80 English LGPS Funds. The review also addresses three broad types of alternative approaches to resolving these issues, analysing the potential benefits and disadvantages of each.
Both Single Academy Trusts (“SATs”), sometimes referred to as standalone academies, and Multi Academy Trusts (“MATs”) are Scheme employers as defined in the LGPS regulations. Broadly, they must contractually enrol all their support staff into a LGPS Fund. Under regulations, the relevant Fund is normally determined by the geographical area in which the staff work, and the majority of academies are created by a conversion from a local authority clearly linked to a specific Fund. The academy programme began with the Academies Act 2010 and the number of academies with staff in the LGPS had grown to over 6,200 by December 2016, an average increase of 1,000 academies per year. Strictly speaking, the number of new LGPS employers is lower, at around 1,200 MATs (sponsoring 4,400 academies) and 1,800 SATs, around 3,000 employers in total.
If all local authority maintained schools in England were to convert to academy status the projected number of academies with staff in the LGPS would be nearly 22,000. This may only happen gradually, but the current issues with LGPS participation could escalate proportionately if no alternative approaches are introduced.
Methodology: current issues and alternative approaches A list of representative Stakeholders was agreed with the SAB Secretariat and these were invited to a series of 24 meetings or conference calls held in late 2016 and early 2017 to discuss current issues. The full list is in Appendix 4 and covers MATs and SATs, LGPS Funds, external payroll and administration providers, Fund actuaries, Government Departments and Trade Unions.
The current issues discussed with Stakeholders were recorded and analysed: Section 3 provides an overview. Three key themes emerged: 1) policy, governance and outsourcing, 2) administration and operations, and 3) contributions and finance. Sections 4, 5 and 6 provide a comprehensive record and analysis of the issues raised
A number of the Stakeholder meetings generated comments on the potential benefits and issues of introducing alternative approaches to handling pension provisions for support staff. Three broad type of approach were agreed with the SAB Secretariat as being: 1) improving LGPS processes, IT and guidance, 2) using new regulations to implement changes within the LGPS, and 3) implementing changes outside the LGPS. A key part of this analysis was to consider the differing perspectives of key Stakeholder groups for whom the extent of the benefit of a new approach could vary. The results are set out in Section 7.
Our thanks to everyone who participated, including actuaries who provided early analysis of 2016 valuations.
Conclusions and next steps This report, by the nature of the task set, identifies and highlights problems/issues experienced by stakeholders. Many Stakeholders were pleased with procedures developed or suppliers chosen to mitigate known issues. Even so, there are clear and costly inefficiencies that we expect to worsen as more academies are created: this is in part simply due to the number and variety of interactions now taking place.
Academy LGPS contributions reflect local history and analysis: no overarching approach has yet been taken.
As instructed, we make no recommendation between the three broad types of approach, or as to appropriate timetables. However, the next page shows a Section 7 table that defines the potential benefits of new approaches to the management of academies within the LGPS. The table is colour coded to indicate which Stakeholders would benefit from which approaches, larger circles indicating larger benefits and empty circles identifying potential disadvantages. Next steps can be predicated from this table, leading to a process to first define the detail of, and then implement, appropriate actions.
Options for Academies in the LGPS PwC | 1 191 Local Government Pension Scheme Advisory Board
Table 1.1: Future approaches: potential benefits and disadvantages
Broad type of approach: Improved LGPS Implemented Implemented processes and new using new outside the LGPS guidance regulations within the LGPS Structural simplification, with long term operational cost savings, would be achievable. ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ Reduction in pension workload for Academy / MAT staff, so resource could be better channelled towards teaching. ౿ ౿ ౿ Assets retained in LGPS, supporting intergenerational equity by comparison with unfunded arrangements. ౿ ౿ ౿ ౿ ⃝ ⃝ Academy contribution rates for support staff could be easier to calculate, more predictable and consistent ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ Few or no political complexities to negotiate before implementation commences. ౿ ౿ ౿ ౿ ౿ ౿ ⃝ ⃝ ⃝ Implementation itself would be practical and timely. ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ Cashflow and related investment issues at LGPS Fund level, or at an Asset Pool level, would be controllable. ౿ ౿ ⃝ Outsourcing facilitated, allowing lower costs in respect of new staff if they were offered pensions outside the LGPS. ౿ ౿ ౿ ౿ ౿ ౿ Outsourcing less likely to be facilitated, tending to maintain access to LGPS for new staff. ౿ ⃝ ⃝
Support staff pensions for existing staff would remain on a similar footing to teachers’ pensions after academisation. ౿ ౿ ౿ Covenant risk / exit debt exposure minimised by local government. ౿ ౿ ౿ Central government would accept minimal extra exposure for DfE guarantee, and avoid taking on LGPS liabilities. ౿ ౿ ⃝ Assets paid over to HMT could reduce the UK deficit in the year of asset transfer. ⃝ ⃝ ౿ Approaches to pension provision in England, Wales, Scotland and Northern Ireland would remain consistent. ౿ ౿ ⃝ Policy and governance issues identified by Stakeholders could be largely resolved – see Section 4. ౿ ౿ ౿ ౿ ౿ ౿ Administration and operational issues identified by Stakeholders could be largely resolved – see Section 5. ౿ ౿ ౿ ౿ ౿ ౿ Contributions and financial issues identified by Stakeholders could be largely resolved – see Section 6. ౿ ౿ ౿ ౿ ౿ ౿
౿ SATs, MATs, and the Department for Education ౿ LGPS Funds, Administering Authorities, DCLG and the LGA
౿ LGPS members ౿ Taxpayers, HMT, other central government ౿ Suppliers, other Stakeholders
2 | PwC Options for Academies in the LGPS 192 Local Government Pension Scheme Advisory Board
2 Scope and methodology
2.1 Scope The scope of the review covered the English Local Authority LGPS Funds which have academy employers and their related Stakeholders.
A list of key Stakeholder types was compiled and agreed with the LGA as Scheme Advisory Board Secretariat. Approaches were then made to either the Stakeholder Group or a manageable sample of a Group to invite participation in the review, working within the constraints of the review’s timeline and budget. Further invitations to contribute were made by arranging a breakout session at the Torquay LGPS pension managers conference in November 2016. The table below provides an overall summary of the type and number of Stakeholders who took part in addition to the LGA’s own contributions. Please refer to Appendix 4 for a full listing of Stakeholders. Support staff working at academies are themselves key Stakeholders, and their voice was in effect heard through meetings with participating Trade Unions.
Stakeholder Group Number of Stakeholder meetings Multi and Single Academy Trusts 6 Administering Authorities 6 + Conference session Administration and payroll providers 3 Actuarial advisors 4 Government Departments: DfE, Government Actuary’s Department 2 Trade Unions 2
2.2 Research sources and methodology The most valuable research resource was the participating Stakeholders who were interviewed by PwC employees at either face to face meetings or via conference calls. These were conducted with reference to a standard generic agenda. Specific prompting of what the Stakeholders wished to raise was avoided to minimise interviewer bias over participants’ independent views on what the most important issues were. We would like to thank all Stakeholders for their time and commitment to the review.
The current issues arising from academies participating in the LGPS which were suggested by the Stakeholders were logged and written up in the form of a Meeting Note shared with participants to confirm it correctly captured their points. These Notes were subsequently shared with the LGA. In Section 3 we describe the high level emerging themes under which the issues raised were eventually categorised.
Another area of research were certain documents to which the PwC team was referred by Stakeholders and others which the team obtained independently. These are listed in Appendix 5. Finally we requested data on the number of MATs and academies from the DfE and from typical employer contribution rates from the actuarial firms acting as LGPS Fund actuaries. The data collated is summarised in Appendices 1, 2, 3 and 6.
The methodology for analysing the benefits of three broad types of alternative approaches that might be introduced to handle the pension provision of academy support staff is discussed in Section 7. This considers the extent of the benefits to be gained from each approach from the varied perspective of key Stakeholder groups and also identifies potential disadvantages.
Options for Academies in the LGPS PwC | 3 193 Local Government Pension Scheme Advisory Board
3 Current issues: overview
3.1 Categorising the issues raised Stakeholders have articulated a wide range of issues that they currently experience and that they anticipate arising as more academies are established. These issues need to be appropriately categorised to make it easier to find solutions.
There are several ways of grouping the issues. As an initial example, our terms of reference envisaged a grouping under the four headings of administrative issues, funding issues, investment issues and legal issues. However, after meeting a wide range of Stakeholders, we have concluded that the most effective grouping is into three categories. These are:
Policy and governance: these issues are experienced as arising from the policies designed to secure the success of academies and Multi Academy Trusts (MATs), and related guidance, which on pensions has developed over the years. The December 2016 publication from the DfE “MATs: Good practice guidance and expectations for growth” states that “the strength of MATs in building teams that have finance, HR, IT and site management expertise means that more teachers and leaders can focus on what they do best: great teaching.”
Whilst some Stakeholders have identified pension issues arising from the policy of academisation, notably around access to pensions, outsourcing and the legal interpretation of nuanced situations, distinct other issues arise from limitations in guidance and from limited expertise within MATs in the complex area of pensions, and from governance processes around pensions that are as yet underdeveloped.
Administration and operations: a range of issues is experienced by the many people working to deliver LGPS pensions. The number of academy and MAT employers is increasing rapidly at the same time as the relatively new 2014 career average benefit structure demands more granular calculations.
People directly charged with administering the LGPS encounter issues associated with data quality and consistency. But communication and operational issues go beyond pure pension administration to include issues experienced by academies, MATs and various providers, notably payroll providers.
Contributions and finances: the delivery of LGPS pensions by 80 separately financed LGPS Funds in England has inevitably overlaid questions of consistency in establishing and regularly recalculating the employer contributions payable by academies and MATs.
These issues have a primarily actuarial angle, and encompass pooling academies for funding purposes, employer covenant and the value of the guarantee provided by the Secretary of State at the DfE and accounting.
When reading Sections 4, 5 and 6 of this report presenting “Current Issues” under the three categories above, bear in mind that the format we are using of identifying and describing issues can create a “pessimism bias”. We have aimed to report issues as stated to us, rather than to validate or quantify each one. Some issues reported by some Stakeholders were not seen as a problem by others, and, many Stakeholders were pleased with procedures developed or suppliers chosen to mitigate known issues. 3.2 MAT landscape and Complexity of Stakeholder interactions In the following Sections covering the three groups of current issues there is much discussion of the nature of interactions between certain types of Stakeholder, including how Funds have varied approaches to individual academies who belong to Multi- Academy Trusts (MATs). In order to gain a good understanding of these interactions it is first worthwhile briefly considering the current MAT and standalone academy landscape and how that might evolve. A number of data summaries about MATs are included in Appendix 3 of this report with the following headlines at November 2016:
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There were 6,269 academies and 70% of these belonged to a total of 1,121 MATs, The percentage of academies converting in 15/16 belonging to a MAT was somewhat higher at 97% Just over 80% of MATs have between 1 and 5 academies Just 20 MATs sponsor more than 20 academies The vast majority of MATs operate in one local authority but 88 operate in 3 or more authorities.
The diagram below is a representation of some of the interactions discussed in later Sections via two illustrative MATs of differing sizes (see following page for a detailed narrative on these). The double ended orange arrows represent the interactions between parties.
Diagram 3.1
3.2.1 “MAT1” (typical size in 2016) On the left hand side of the diagram (see previous page) we depict "MAT1" which only participates in a single LGPS Fund due to the geographical proximity of its three academies. This MAT is typical in that it has close to the mean and modal number of academies (i.e. 3 to 5 academies) and is in one Fund. This MAT has managed to consolidate three original payroll providers down to two so the Fund has two providers to interact with. The MAT has only just started to use outsourcing so the Fund has one contractor as an admission body linked to the MAT. This Fund chooses to interact mainly with the individual academies so there is no interaction marked between the Fund and the MAT.
3.2.2 “MAT2” (top quartile size in 2016) On the right hand side of the diagram we depict a more complex set up for the larger "MAT2" which is in a small minority by participating in as many as three LGPS Funds given its sponsorship of nine academies spread over three English counties. This MAT has three payroll providers such that one of its Fund has to deal with a single provider but the other two Funds have to interact with two providers. The Fund on the far right chooses to interact directly with the MAT so this interaction is shown. It so happens that the three Funds each have different actuarial firms as Fund actuaries and although the MAT has no direct interaction with any of the actuaries, it is subject to quite different funding methodologies and assumptions across the three actuaries and receives three separate accounting reports. Finally, the MAT has three contractors which are for services to academies in three different Funds and has three different admission agreements in place.
3.2.3 Commentary The diagram illustrates the complexity of the current interactions arising from academies participating in the LGPS. In practice noting the data on the previous page these interactions are currently seen across 80 Funds and over 1000 MATs and 6000 academies.
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Whether this complexity increases significantly in future as more schools convert to academies depends on many factors (in the absence of a fundamental new approach to LGPS participation). These include:
What proportion of academies ultimately belong to MATs. The number of MATs and their geographical spread across counties and London Boroughs. Whether Funds interact with MATs rather than academies belonging to MATs. The number of payroll providers used by MATs and standalone academies. The prevalence of outsourcing and how contracts are set up. 3.3 Variation in LGPS contribution rates In Section 6 we analyse pension contribution and finance issues in detail. But below, we present an analysis of employer contributions which academies will be paying to LGPS Funds from April 2017 for their non-teaching staff, following the soon to be completed actuarial valuations of LGPS Funds as at 31 March 2016.
The chart below is a sample for 21 Local Authorities collected for this review from three actuarial firms acting as Fund actuaries. The sample is not comprehensive, but conclusions can be drawn with reasonable confidence:
When contributions were set for new academies, the circumstances of the individual LPGS Fund, both deficit and actuarial method and assumptions were highly influential. This tended towards modest initial differences between LEA school and new academy contribution rates, even though academy funding levels were lower, as explored in Appendices 6 and 7. Median academy contribution rates are typically now lower than Council rates. This often reflects academy experience (eg staff age, turnover or outsourcing) since inception. Academy rates within some but not all LGPS Funds vary substantially. This can reflect SAT / MAT staffing decisions (eg outsourcing) or, for example in free schools, the lack of an initial deficit. Pooling is in place in a small number of LGPS Funds. The cost of pensions for teaching staff is a predictable 16.4% of pay for all school employers in the Teachers Pension Scheme (TPS). The difference reflects the LGPS maintaining assets targeted to meet its liabilities and the somewhat stronger actuarial assumptions typically used by the LGPS. Underlying TPS and LGPS benefit structures, net of member contributions, differ only modestly in structural cost.
Overall, the chart suggests issues that can arise from an academy programme funding approach which is driven by per pupil allowances, with no allowance for support staff pension cost variation.
Sample of academy employer contribution rates at the 2016 LGPS valuation
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4 Current issues: policy and governance
4.1 Introduction In this Section we consider the issues arising in relation to DfE’s overall policy for the academies programme, associated guidance to School Business Leaders, governance arrangements and the prevalence of outsourcing of academy functions. 4.2 DfE policy for academies programme 4.2.1 The academies programme and LGPS complexities
i. LGPS complexities can be a hold up or barrier to schools converting to academies. The key concern should be the best interests of the children not LGPS challenges. ii. The workload in educating new academies about LGPS participation mechanics can be substantial. This is one off work each time an academy is created. iii. Recently published MAT design principles support the development of institutions sponsoring a large number of academies which will tend to cover multiple LGPS Funds even though not envisaged as part of the original academies programme. Multiple Fund participation is hard for the MAT to manage.
A number of Stakeholders expressed the view that LGPS complexities worked against the overall success of the academies programme.
4.2.2 Extent of access to general pensions information and pensions governance structures
i. Pension guidance to School Business Leaders is light or silent on some practical points, so fuller technical guidance would be useful to improve their knowledge. Provision of guidance should still be consistent with the government’s academies programme overall. ii. There is central guidance that suggests that Trusts have Finance and HR leads. But this guidance is silent on pensions, not recognising the pension related work being taken on.
One Stakeholder noted that in general the DfE guidance to School Business Leaders is supposed to avoid financial assurance overkills but thought that it might be possible to integrate better pension guidance into an overall guidance pack, which we understand is the aim of the new Information Pages.
Current guidance does not suggest an appropriate approach to either resourcing or overseeing pensions work within a MAT or standalone academy. This work covers areas including administration, pensions accounting and audit. In practice we understand often sits between HR and Finance teams but our interviews with MATs did not suggest specific governance structures had been established to formally manage pensions risk issues. In Section 5 we examine LGPS employer responsibilities such as data provision and pay definition decisions and note at 5.2.5 that, since MATs rather than the individual academies they sponsor are legally the LGPS employer, you would expect them to have complete oversight of duties performed on its behalf.
Lack of guidance is a theme which also appears in later sections of this report. In section 4.4 it is mentioned in relation to Outsourcing. Later in Sections 5 and 6 issues around guidance on administration data issues and funding issues respectively are considered. A number of Stakeholders welcomed the current review as an opportunity to mitigate perceived weaknesses in the provision of pensions information.
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4.2.3 Policy on failing academies
i. DfE policy is that where failed academies are re-brokered, then a swift transfer to a new sponsor is the most effective approach, but LGPS participation arrangements can cause delay. ii. DfE policy is that MATs should be financially able to take on failed academies without an adjustment for LGPS deficit (although with a support grant against other expenses) and this may be perceived as unfair. iii. The bid process to sponsor a failed academy can be difficult for MATs due to lack of clarity on whether historic pension liabilities crystallise as a debt. iv. The scope and strength of the guarantee by the DfE Secretary of State is sometimes questioned. v. The DfE Secretary of State guarantee is not in place for Further Education colleges that convert to academies, although it is in place for sixth form colleges.
LGPS complexities were cited as a particular barrier to following the DfE’s policies on failed academies. New sponsors can be reluctant to move quickly to take on a failed academy if they cannot obtain clarity, whether from the centre or through the relevant LGPS Fund, as to whether there is an associated new LGPS liability exposure.
The status of the DfE guarantee has not been accepted by many Funds and advisors to be of sufficient strength and permanence to allow academy employers to be treated equivalently to tax raising bodies. Some would prefer a Crown guarantee. But the existing guarantee has already been called upon in two instances, and other Funds and advisors take a much more positive view of the DfE guarantee.
Please refer to Section 6.7 (within “Contributions and Finance”) for further feedback on how the guarantee is thought to operate in an unfair manner since MATs are effectively means tested for their ability to meet a LGPS exit payment or “debt” before the guarantee triggers.
4.2.4 Provider management and support
i. The DfE should work with payroll providers to improve their services to academies in a similar way to the work done with auditors.
Some stakeholders suggested that the DfE should work more closely with industries such as payroll providers providing important support services to academies. The critical nature of the role of payroll providers and the quality of administration data sent to LGPS Funds is covered in the following Section 5. 4.3 Representation for academies on LGPS matters
i. MATs are not yet the voice of academies on LGPS issues. MATs should enable collective representation of academies when bringing together members and employers e.g. for consultation about LGPS scheme changes, but this is not yet happening. ii. The Scheme Advisory Board has no member representation from academies. At present, primary and secondary education has no voice, in contrast to higher education. Universities have collective bodies that facilitate their representation.
MATs and standalone academies generally do not yet belong to collective bodies and this would appear to limit their ability to be represented effectively on important matters affecting them and where appropriate lobby for change. Participation in the LGPS by MAT and Academy Trust support staff is clearly a very significant matter on which it might be desirable for the academy sector to have at least some engagement. Our Stakeholder
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interviews indicated that a small number of larger MATs has already had some engagement with the DfE on LGPS matters.
The lack of representation issues raised via the review leads to a key question of whether a sector body e.g. an association led by MATs would be able to act effectively on behalf of the academy sector as a whole.
Ultimately a position for the academy sector on the LGPS Scheme Advisory Board might serve to assist with changes needed to address many of the issues raised by Stakeholders. This would likely require a review of the Board membership representing Scheme employers of which there are six voting members with appointments approved by the Secretary of State for DCLG. This number effectively cannot be increased without amending the maximum of twelve Board members and broadly equal employer and member representation required under LGPS governance regulations which commenced in 2015.
The existing Scheme employer representatives on the Board are for the Higher and Further Education sector (via UCEA, the Universities and Colleges Employers’ Association) and also for Metropolitan Administering Authorities, London Councils, English County Council Administering Authorities, Welsh Administering Authorities, Non Administering Authorities. 4.4 Outsourcing by academies and reduced LGPS access Outsourcing and LGPS issues were raised in many Stakeholder meetings. These are presented here under four headings:
understanding legislative requirements and process and associated advisor fees impacts from the associated increasing number of commercial LGPS employers (on top of increasing academy numbers), and impacts on procurement efficiency reduced LGPS access over time
In terms of context for the significance of this issue we have not obtained data on the number of contractors but would expect this to cover at least many hundreds of admission agreements and understand that the number is continually rising. Such data to inform future work might be obtained by approaching each LGPS Fund.
4.4.1 Understanding of legislative requirements and process, associated fees
i. Many academies are keen to use outsourcing and are encouraged to by providers failing to highlight the pension complexities. Some payroll providers do not fully understand the regulations and over-promise to academies. ii. Some MATS or standalone academies do not understand their legal responsibility for support staff to have LGPS access when their employment is transferred. iii. Requirements such as the need for admission agreements and guarantors are sometimes ignored. This leads to a significant training requirement and staff turnover at the academies mean training is often wasted. iv. Some academies proceed with outsourcing contracts without proper engagement with the relevant LGPS Fund resulting in later disputes over pension obligations. v. Rules and regulations relating to outsourcing are rigid. Many LGPS Fund do not allow contributions or admission agreements to be backdated. vi. Legal and specialist pension advice is required regarding Fair Deal and regulations relating to TUPE transfers. This advice can be costly.
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vii. One LGPS Fund charges around £10,000 per application for admitted body status regardless of whether the proposed provider already participates in the Fund. The pension scheme does not did not provide advance warning about this cost. viii. It is necessary to pay fees on a per-academy basis for an outsourced catering service operating in more than one academy. However it is understood that the Fund actuary is changing this fee structure in the future.
Some academies do not appear to be familiar with New Fair Deal guidance which explicitly protects pension provision for staff in “academies” whose employment is compulsorily transferred. They believe it is possible to avoid LGPS participation by either outsourcing or setting up their own new companies i.e. trading subsidiaries with staff being offered a lower cost private pension scheme. However use of non-LGPS provision and associated cost savings is only permissible for new hires. Trade Union Stakeholders were particularly concerned that LGPS access is being reduced illegitimately in some cases: see further comments in 4.4.4.
Some academies had been confused by basic differences in how closed admission agreements under which their contractors participate compared to their own participation e.g. the payment of monetary amounts for deficit contributions.
It has not always been clear where academies should go for clarity on LGPS issues. The proposed Information Pages should help here, particularly when seeking a central viewpoint, independent of any single LGPS Fund. Some Stakeholders who were familiar with required processes were frustrated by the complexity and the time needed. It was suggested that Funds should adopt a more open and flexible approach and for guidance to academies on likely planning timescales. Some thought that pensions paperwork should be backdated rather than allowed to delay a commercial contract commencing (see 4.4.3 for more specific details on process risks and issues).
The cost of actuarial and legal advice on outsourcing contracts was also raised as a challenge.
4.4.2 Increased number of commercial LGPS employers i.e. admission bodies
i. Academy outsourcing for non-teaching support staff is another factor increasing the number of commercial LGPS employers each with a new admission agreement for each. ii. More admissions increases the administrative, legal, covenant risk workloads of Funds. iii. Determining an appropriate funding approach for outsourcing contractors which is compatible with the funding approach for academies themselves is not yet a major issue but there should be forward planning on this. For example in a LGPS Fund which had pooling for academies it might be possible to develop a pooled contractor rate. iv. Academisation and outsourcing is generating a multitude of employers. This tends to fragment the delivery of services, making it more difficult to provide efficient LGPS operations.
Key points to emerge in relation to the increased use of outsourcing by MATs and academies were concerns on the workload of LGPS Funds’ pensions teams and the need for forward planning on appropriate funding approaches for this growing LGPS employer category, acknowledging its links to the academy category.
We note that sometimes MATs arrange with contractors to work at a single academy under contract but it is also not uncommon for a single contract e.g. school meals provisions to cover a few academies. For such contracts Funds and actuaries sometimes still insist on use of multiple admission agreements i.e. a separate agreement in relation to each individual academy staff group. This approach of treating an individual academy as though it were legally a LGPS employer in its own right is also seen in other contexts in other Sections of this report (e.g. data collection and funding arrangements in Sections 5 and 6 respectively).
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Any new structural approaches to how academies participate in the LGPS e.g. ring-fencing them in designated sub-funds of existing Funds or moving them to a designated smaller number of LGPS Funds cannot be analysed without also considering the impact on the participation in LGPS by contractors on outsourced academy project. One key reason for this is the academy employer’s role as a guarantor to the contractor (see next sub- section).
4.4.3 Impact on procurement efficiency
i. Arranging a contract is a long and time pressured process. ii. Outsourcing of services by academies leading to high numbers of admission agreements. Sometimes contracts are let at individual academy level, and if one academy lets several contracts, the number quickly builds up. It is unusual to see a whole MAT contract. This issue is likely to become more significant, given the need to respond to funding pressure. iii. Approaches to procurement exercises varies between different MATs. Those MATS running procurement centrally (rather than at individual academy level) are generally more efficient and more knowledgeable on associated risk and compliance issues including LGPS pension provision. iv. Complexity on LGPS pensions limits the MAT’s ability to outsource services. This complexity arises from contribution rates, the need to offer guarantees to contractors and the potential risk of exit costs. v. Even if the contractor is working in a large number of the MAT’s academies, there may only be a small number of academies located in each LGPS Fund leading to multiple admission processes.
The LGPS aspects of outsourcing stemming from a requirement for the contractor to continue LGPS membership of affected support staff were noted by many Stakeholders to be very challenging for staff with limited pensions backgrounds and expensive to address. This is partly because an outsourcing contract can cover multiple LGPS Funds or even where it is with a single LGPS Fund can lead to multiple admission agreements if the services cover several academies.
MATs or standalone academies do not always have the expertise to understand or the risk appetite to agree to commercial requests from contractors to provide indemnities limiting contractor risk e.g. guarantees over the exit valuation deficit payable by default the contractor at contract end. This can lead to contract negotiations failing just because of pension issues.
MATs or standalone academies may also not appreciate the requirement for them to act as guarantor to their LGPS Fund should their contractor be unable to pay its LGPS contributions for any reason. Hence even if advised by the Fund to do so, they will not always ensure that appropriate security (e.g. a bond) is sought from the contractor to mitigate the risk of unpaid contributions falling back on the MAT.
4.4.4 Reduced LGPS access
i. Some actions detrimental to LGPS access but perceived as necessary to operate within funding constraints may be taken more easily after academisation. ii. Academies and MATs can use arms-length companies to outsource employment and these companies may not be required to provide LGPS membership to new employees. Hence academisation reduces overall access to the LGPS.
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Some MATs cite national funding constraints as a key driver for exploring various types of cost reduction mechanisms and pension cost reductions are potentially achievable by using outsourcing with different pension provision for new employees. Some Stakeholders thought that larger MATS seeking efficiencies were more likely to take such actions and MATs sharing information between each other on cost reducing mechanisms would be another important influence on its future prevalence.
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5 Current issues: administration and operations
5.1 Introduction In this Section we consider the administration and operational issues resulting from the participation of many academies and MATs in LGPS Funds. These issues have been identified by the Stakeholders interviewed for the review and can be categorised broadly into the following three themes: the quality of data and payroll providers, interactions between parties and resourcing issues. 5.2 Issues relating to data and service providers 5.2.1 Quality of data from payroll providers and academies
i. The competency of providers is key to the smooth provision of data, however some private payroll providers have bad reputations: their advice to academies can be flawed and there have been cases where Funds have not received pay rate data or they have been sent incorrect data. ii. The quality of data provision and contributions collection from academies is a significant issue for Funds. But the exchange of information between academies and Funds can be poor. iii. Funds can produce information packs for academies detailing the data the fund requires but it appears that this information is not forwarded to the provider.
Stakeholders have recognised that some outsourced payroll providers have poor reputations among academies and LGPS Funds for providing low quality or insufficient data and flawed advice. This was noted to have a direct impact on members who are kept waiting for benefit information. In contrast, local authority providers have greater experience and specialist resource with LGPS experience.
Quality issues can arise as a direct consequence of the issues discussed in the following sections 5.2.2 and 5.2.3, which consider inadequate contracts with payroll providers and lack of monitoring by academies and MATs of the competency of providers.
A Stakeholder suggested that a solution to address this issue would be to require minimum quality standards for payroll providers.
5.2.2 Payroll and administration providers: contract issues
i. Contracts between payroll providers and academies can be reasonably standardised, subject to individual requirements, but some contracts are inadequate in scope and do not provide data items required by the Funds such as final pensionable salary. ii. There can be confusion over who is responsible for providing data and Funds can even end up with two sets of the same data. iii. Specific issues can be caused by the need to provide historic data and conversions which occur mid-academic year. iv. Contracts between Funds and outsourced administration providers should have fee increases to reflect the increase in resource required to cope with increasing employer numbers. Otherwise the provider will spend time seeking ways to reduce their costs. v. Initially academies within MATs may use several different payroll providers due to pre-existing
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contracts which can be difficult to break or have notice periods.
The issue of standardisation of contracts between payroll providers and academies is related to section 5.2.4 where the non-uniformity of data requests from different Funds and the existence of a central data format specification is discussed. Funds often have no sight of the contract between academies and payroll providers and it is expected that greater standardisation of contracts and delivery requirements of a payroll provider would reduce the risk of incorrect or poor quality data provision.
A particular issue for MATs is the difficulty in breaking pre-existing contracts between academies within the MAT and their payroll providers, with longer (three to five year) contracts being the most difficult to exit early. Six month notice periods are common and it can be a timely process to rationalise providers used by academies joining a MAT and, after this, it is necessary to carry out additional work to ensure that figures are correct. A centralised reporting approach with a single payroll provider enables a MAT to operate efficiently as it grows. However it is recognised that the opinions of different MATs vary and in some cases there are many different providers used within a single MAT for a number of years.
As the process of academisation continues there is an increasing number of participating employers within an LGPS Fund and additional administrative resource is required to cope with this. A limited number of LGPS Funds use third party administration providers. For these Funds if the associated contract and fee terms does not sensibly reflect the required increase in resource, then the provider will see their profits reduce and in any case seek ways to increase their fee or reduce costs with likely impact on performance.
5.2.3 Payroll providers: selection and monitoring issues
i. Academies do not carry out adequate due diligence on payroll providers’ competency in pensions administration and specific LGPS experience prior to appointment. ii. Academies often do not have Service Level Agreements (SLAs) in operation, due to a lack of scale and in-house expertise that is required to manage and monitor contracts. iii. Many academies do not monitor the performance of their payroll providers.
Most Stakeholders believe that academies do not carry out adequate due diligence on prospective providers and that they should seek more than verbal assurance as proof of competencies.
Academies that do not monitor the ongoing performance of their payroll provider may be unaware of administrative breaches caused by late provision of data to the Fund, or breaches may only be identified after a long period or via a member complaint (e.g. if they had retired but had not started to receive their pension).
5.2.4 Non-uniformity of data requests of LGPS Funds
i. Non-uniformity of data requests from LGPS Funds to payroll providers causes inefficiency and complications in collecting, processing and reporting data. This is a growing issue due to the emergence of national payroll providers to academies with a dispersion of clients across England. ii. Payroll provider reports don’t fully meet the requirements of academies and it can be difficult to obtain modifications for example to support monthly real time reporting. iii. Some Funds already require MATs to provide monthly data returns (which is also required by TPS), so there is inconsistency against most Funds currently requiring annual returns. iv. A particular MAT receives a significant number of ad hoc queries from the Fund, such as requests for data items and to carry out pensionable pay/cumulative pension pay/’50:50’ calculations to feed into member requests. These pay calculations have to be done by the employer. The MAT does not understand why the Fund also requires pay estimates into the future e.g. to the end of 2017. v. Historical data requests can be difficult to deliver.
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vi. Data submission options vary between Funds. Some academies submit data by spreadsheets by choice or because a data portal is not available. Spreadsheet submissions can be time-consuming for Funds to process.
Stakeholders have identified that all Funds should require the same items so a standard data specification ought to be possible to be used by all for clarity between parties. Non-uniformity has led to a confusion among providers as to why different Funds require different data items and to a feeling among Funds that payroll providers are unable to meet their needs. Funds should be able to process a standardised data output in a bespoke manner on receipt.
For MATs with academies in different Funds and national private payroll providers this lack of standardisation can be a particular problem resulting in inefficiency and increased costs for Funds due to the perceived bespoke nature of their requests.
However, standardisation of contracts overall is expected to be more difficult due to a lack of expertise of some academy staff and complexities beyond core LGPS compliance such as auto-enrolment considerations.
Many Stakeholders have identified that a potential solution would be for standardised compulsory guidance that can be followed by the Funds and payroll providers. The LGA have defined a single format specification which covers all the information needed to fulfil legislative requirements. Although this is just a voluntary guide rather than regulation (see Appendix 5 for a link), the LGA have stated that they would expect it to be followed by administering authorities. But this doesn’t appear to happen in practice and Funds can rely on Regulations which give them the ability to specify not only their data requirements but also to some extent when the data must be submitted.
Some Fund and academy representatives thought there was scope to make efficiency improvements by wider availability and compulsory use of portals for data submission to Funds.
5.2.5 Complexity of regulations and employer duties
i. Parts of the LGA HR and Payroll guides are open to interpretation and explicitly expect employers to make policy decisions. Links to these guides are given in Appendix 5: References. ii. The structure of some academies can result in greater exposure to challenging LGPS issues e.g. special needs and boarding schools have a higher proportion of non-teaching staff. iii. It can be unclear whether certain types of employee should be a member of the LGPS or the TPS e.g. music teachers and trainee teachers have been enrolled in the LGPS. iv. Pensionable pay definitions are hard to understand particularly since the launch of LGPS 2014. It is not surprising if standalone academy staff without a pensions background or specific training find them challenging. v. LGPS forms are very wordy and complex. It is not surprising if standalone academy staff without a pensions background or specific training or support from payroll providers find them challenging. vi. There is information asymmetry. Smaller MATs and individual academies rarely have a full understanding of LGPS financial issues. This is particularly the case at the point of conversion. vii. It is not clear whether it is the academies or the MAT that is the employer within the LGPS. Funds often treat academies within MATs as separate employers and if an academy is to join the MAT part way through the year, it is not possible to include them in the consolidated accounting report.
Several Stakeholders mentioned the complexity of LGPS forms and guides. One of the most challenging areas
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was around pay definitions and calculations. Academies and MATs would in theory be liable for any errors they make which have an identifiable impact on their staff’s pension benefit outcome.
One private payroll provider interviewed who is a member of the payroll provider network linked to the Public Service Schemes Employer’s Group (PSSEG) noted that the LGA’s HR and payroll guides to the LGPS cite various issues where matters area for the “employer to determine” since that is how the Regulations are drafted. Thus academy employers are expected to make decisions (and confirm these to their payroll providers) on areas they may not understand and may make inconsistent decisions across the academy sector. Two examples are how to calculate “whole time equivalent salary” needed to determine Final Salary and whether an employee with more than one contract with a single employer should be classed as having a single employment record. The latter point is important as it determines the level of member contribution to be deducted since these vary by salary tier.
As noted earlier in this Section many Funds tend to interact with individual academies rather than MATs on data matters and even employer decisions which we note in this sub-section to be complex. But this raises questions over accountability and legal responsibility because legally the academy is not a LGPS employer. The MAT is the LGPS employer and this suggests it should have a complete oversight of any interactions made or employer duties carried out on its behalf. But our Stakeholder interviews have not noted any specific processes in this area. 5.3 Interaction between parties 5.3.1 Establishing appropriate academy contact for Funds
i. Identifying the right contacts when an academy converts can be challenging and it can be particularly difficult to identify contacts within an outsourced private payroll provider as Funds often don’t have sight of these contracts. ii. New academies receive an information pack including information on what data Funds need and associated administration processes but this often does not appear to be forwarded on to the academies’ payroll provider. iii. Funds sometimes approach CEOs of MATs to resolve outstanding issues not answered by academy contacts. iv. The Fund will only recognise responses from one member of the MAT team and it can be time consuming to update relevant contact details via the Fund portal.
It is generally necessary for Funds to establish a designated payroll contact within academies or MATs, or with their outsourced provider where appropriate. Sometimes it can be difficult for academies and MATs to identify the relevant staff member and some Business Managers nominate themselves which is not appropriate when LGPS issues are not part of their role.
LGPS Funds can provide training or information packs to these contacts to ensure that they are able to meet their data requirements. However, some Stakeholders have experienced that it has been difficult to establish who it is appropriate to contact within the private provider, as they have no sight of the details of the contract, and it appears that academies have not passed on relevant information provided by Funds.
LGPS Funds have found that these designated contacts can sometimes be inaccessible and it has been necessary to escalate unresolved issues by approaching the CEOs of MATs to resolve issues. Funds feel that academies and MATs should take greater accountability as ultimately it is the responsibility of the employer, rather than the outsourced payroll provider, to meet the data requirements of the Fund.
Academies and MATs have found that sometimes Funds will only speak to their designated contacts and as a result it can be difficult to respond to requests quickly, particularly in the cases where the contact has left or changed role.
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5.3.2 Direct interaction between Funds and academies or MATs
i. Some academies will not take responsibility for pension queries and may refuse to speak to Funds. ii. Some Funds take a strict interpretation of employers’ responsibilities such that they will only communicate with academies and not with their providers. iii. A MAT finds it difficult to arrange appropriate communication structures with Funds to cover both detailed and high level issues. iv. Information provided by Funds to schools in the run up to academy conversion is very limited. Funds require long complex forms to be completed with little support and can be hard to contact. v. Education departments are warned in formal meetings of issues to expect for academy conversions but the employer’s manual appears to be looked at fairly rarely both before and after conversion. vi. Funds providing training is one type of interaction with academies but the material is not always at the correct level. vii. MATs get frustrated about having to interact with two or more LGPS Funds due to geography. viii. Actuaries have no direct contact with MATs and academies, all contact is made via the Fund.
Some LGPS Funds have found that it is difficult to resolve issues with academies and have had to contact a senior member of the academy, such as the Financial Director, to seek resolutions.
A strict interpretation of it being ultimately the academy or MAT’s responsibility to fulfil certain duties and provision of data in particular has resulted in some Funds only contacting the academies or MATs directly, and not contacting their payroll providers. Other Funds are more pragmatic and have a dual relationship which can improve efficiency and performance. It might be instructive to obtain data from all LGPS Funds on which approach they currently take to inform future guidance. Some items e.g. paperwork for a redundancy case would always have to be obtained from the employer.
Within some MATs a particular issue is that, by default, Funds contact the academies, which most consider appropriate regarding details on annual returns (ignoring the strict legal position of the MAT being the LGPS employer). However it is also generally important to have a central, specialist contact for example to confirm employer discretion policies or provide consultation responses. Experience differs across different Funds. Issue 5.3.2 (iii) above refers.
MATs can find it frustrating that, due to geographic borders, their academies are within more than one LGPS Fund as it is more time consuming to meet the requirements of multiple funds and this could even constrain strategic planning on whether to relocate a head office function. A potential solution of this issue would be a single LGPS Fund for all academies and this is discussed in further in later Sections.
Some Funds interact with academies and their providers by providing training. The need for this training and Stakeholder’s experiences of the success of these training sessions is discussed in Section 5.3.5. Academies have identified that some information provided by Funds is too limited to assist with completing complex documentation.
Even though the actuary provides services to the MAT there is no direct contact between the MAT and the actuary with all contact made via the Fund. MATs have found that, even when opting to have a single consolidated valuation report, the actuary charges on a per-academy basis and requires separate data for each academy. The fees charged by each actuary per academy vary quite a lot and there has not been a significant saving via the introduction of consolidated reporting.
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5.3.3 Issues with payroll providers interacting with LGPS Funds on behalf of academies and MATs
i. Funds have to interact with three types of payroll providers: Local authority payroll teams, MAT in-house payroll teams and private providers but they are not always notified of changes to providers. ii. Some Funds offer training to payroll providers but there is limited motivation for providers to attend because any particular session would only assist fully with service delivery to the few clients within the particular Fund. iii. The biggest threat to pensions administration from academies in the LGPS is the use of outsourced payroll providers who have no relationship with LGPS Funds’ administration teams. iv. As each new academy joins a MAT it would normally keep its existing payroll contract until expiry. However it is widely believed to be more efficient for an academy to interact with Funds if there is a single provider.
Many Stakeholders interviewed were keen to emphasis the complex landscape of payroll providers which LGPS Funds are expected to interact with. Some thought that payroll providers who operate nationally would not be able to build particularly strong relationships with local pension teams at Funds and would not be expected to meet face to face or attend training where offered on a particular Fund’s expectations.
There was some expectation that the number of payroll providers might follow on the projected number of MATs as MATs take the opportunity to consolidate providers but only after current individual contracts expire.
5.3.4 The need for academies to take part in specific LGPS training
i. Many Funds offer information packs to academy employers but the scope of these is not standardised. ii. Academies staff have a limited understanding of pension obligations. The staff often have other roles that may not be an obvious fit with responsibility for pension arrangements and feel out of their comfort zone. iii. Some academies are overwhelmed by their additional responsibilities. Many decide to outsource both HR and payroll services. Some phone up their LGPS Fund to ask for help they are no longer entitled to.
The complexity of the Local Government Pension Scheme and the difficulty that academy staff face in meeting the requirements of an LGPS Fund is recognised by a variety of Stakeholders, from academies and MATs themselves to administering authorities and LGPS Funds. To illustrate this point with specific examples the complexity of regulations and definitions are briefly discussed in section 5.2.5.
Some LGPS Funds provide specific training to academy staff and their payroll providers and the extent of this training varies between Funds. However the LGPS Funds that provide this training have found that attendance by academies is low and very low by payroll providers. A few Stakeholders have found that the sessions were too broad and didn’t cover the complex issues they were most interested in sufficient detail. For MATs and payroll providers with academies in more than one LGPS Fund, there is more limited motivation to attend these Fund- led training sessions as they are only relevant to the academies within that Fund. This latter issue relates in part to n0n-standardisation of data requests between LGPS Funds discussed in section 5.2.2,.
There is lack of pensions expertise within academies, compared to local authorities who may have dedicated pension officers and this is worsened by the budgets constraining academies and preventing them from employing a pensions specialist. Issues associated with resourcing at academies and MATs are discussed further in section 5.4.2.
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5.4 Resourcing issues 5.4.1 Resourcing issues for LGPS Funds
i. LGPS Funds are under-resourced to cope with the increasing numbers of employers and workload as a result of academy conversions. The extent of the issue varies between LGPS Funds due to differing rates of academisation in different areas and varied ability to increase budgets to increase staff headcount. ii. Funds who have outsourced administration to a private company faced increase workloads in relation to processing contribution receipts into the Fund. iii. There can appear to be a lack of understanding by the DfE of the consequences of academisation on LGPS administration teams. DfE might want to consider possible sanctions on academies who do not take their employer responsibilities towards the LGPS seriously. iv. Funds find it challenging to establish contacts at academies, MATs and their payroll provider upon academisation and significant resource is required to provide training to these contacts. Frequent turnover of staff can aggravate this issue as Funds find it difficult to keep in touch with academies and have to establish and retain the new contacts. v. Chasing academies and their payroll providers for payments can be time consuming.
Initially administering academies was not problematic for Funds but the proliferation of academisation and projected further increase has created issues, particularly for smaller LGPS Funds. In some cases there has been no increase or even a reduction in staff resource or budget in the Fund to manage the additional workload.
We understand that some Funds find it easier to get increased budget approvals wherever the Fund budget is viewed by the Administering Authority as a Fund matter unrelated to the Authority’s budget. This approach was confirmed as correct under the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009 in a letter from the Scheme Advisory Board and addressed to Administering Authorities, Fund Pension Committee Chairs, Chief Executive and Chief Financial Officers. However some Stakeholders indicated that there are a large number of Funds where Fund budget changes are effectively aligned to the Administering Authority’s own budget changes which will clearly depend on factors wholly unrelated to Fund resourcing pressures.
The resourcing issue may be expected to reduce over time as most academies join MATs, though this is somewhat dependant on their ability to centralise processes. However the amount of time is still uncertain. Fund led initiatives and changes in approaches should address this issue more directly. Part of this would be likely to concern clarification over the MAT rather than an individual academy being treated as the employer for LGPS purposes. These alternative approaches are considered in Section 7.
Stakeholders recognise that if MATs participating in multiple LGPS Funds could consolidate their liabilities into a single LGPS Fund, both administration and funding issues would reduce. This alternative approach is considered in later Sections.
Some MATs consider that some LGPS Funds appear under resourced and take a long time to respond to individual member queries.
5.4.2 Resourcing issues for academies and MATs
i. The onerousness of initial data cleansing and ongoing administration processes are barriers to developing a MAT and the process of gathering and consolidating accounting reports becomes increasingly time consuming as MATs grow. ii. Academies and MATs have found it difficult to establish internal pension expertise and budget constraints mean that it is not affordable to employ a pensions manager. iii. Employee queries about their LGPS benefits generate additional work for a MAT where the
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Fund requires the MAT to be involved in the response. iv. Some MATs still have a low degree of centralisation and feel they have a limited ability to centralise processes. This results in a high proportion of work being carried out by individual academies.
The complexities of the LGPS and associated employer responsibilities can prevent or deter schools from converting to academies. Stakeholders recognise that schools objectives should be to act in the best interests of the pupils and to focus on great teaching rather than concerns with the operational difficulties of becoming an academy.
The academies and MATs who took part in our Stakeholder interviews described difficulties establishing internal pensions expertise and centralised processes. In particular, due to budget and resourcing constraints it is not affordable to hire a pensions manager even though desirable. Instead individuals assigned pension responsibilities to straddle Finance and HR divisions.
For MATs with academies in more than one Fund, the operating processes can be particularly time consuming and some academies and small MATs interviewed said that they would not consider allowing academies that are in other LGPS Funds to join.
Stakeholders suggested that a dynamic and user friendly portal similar to the TPS portal could resolve some member queries without requiring input from the academies and MATs.
5.4.3 Resourcing issues for Fund actuaries
i. There has been a requirement for actuaries to produce FRS102 accounting reports for each academy, including those in MATs annually in August. ii. The EFA have historically requested individual academy results each April/May for inclusion on a consolidated basis in the DfE’s accounts.
If these requirements were to continue further actuarial resource would be required as the number of schools converting to academies increases over time. This could put strain on required reporting and audit timetables. However, it is understood that from 2016 only one FRS 102 report was required for a MAT and that the EFA will no longer require individual results. That would still leave the MAT needing to commission an accounting report for each Fund in which it participates (which is in excess of 20 for the largest MAT). So the projected number of MATs and their distribution across LGPS Funds would appear to be a key driver for the resource required to produce actuarial accounting reports. But another factor is whether the actuarial firms retain their current approach of tracking the actuarial position of individual academies (see Section 6 for a discussion of why this is done and the implications for ceasing this practice).
A mitigation of this issue is that the actuaries have been able to achieve internal economies of scale by developing their systems and standardising reports.
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6 Current issues: contributions and finance
6.1 Introduction The delivery of LGPS pensions by 80 separate LGPS Funds in England causes questions of consistency in initially establishing and then regularly re-calculating contributions payable by academies and MATs.
In this section we consider financing issues, which primarily have an actuarial angle. They encompass a number of themes: pooling for funding, employer covenant, the role and value of the DfE guarantee to the LGPS and the legal definition of an LGPS employer. There are related issues concerning recognition of LGPS accounting deficits on academy or MAT balance sheets.
Fundamentally each LGPS Fund has the responsibility to determine the ongoing contribution rate for each employer in its Fund and potentially a payment on exiting the Fund. Its approach for key employer groups also needs to be documented via its Funding Strategy Statement (FSS). As we discuss later, this responsibility can be made more difficult if it is unclear whether an individual academy or a MAT should be taken as the employer for this purpose.
The process of setting contributions is determined to some degree by Regulations requiring:
triennial valuations of the each LGPS Fund with contributions adjusted up or down from an overall average to reflect individual employer circumstances, and special valuations for an individual employer’s notional section of the relevant LGPS Fund under certain changed circumstances.
The Regulations are, however, silent on many aspects of funding including:
what initial assets and liabilities should be assigned to a new employer in an LGPS Fund what account should be taken to allow for employer risk e.g. to inform an appropriate recovery period permissibility of pooling for funding such that two or more employers are assigned the same contribution rate and may also share experience risk.
In practice Funds and actuaries have not been bound by standardised guidance on funding in relation to academies: a range of funding approaches have been and are currently adopted across the Funds (see sub- section 6.2 for more detail). To some degree these are documented in Funds’ FSSs. Prior to 2013 the treatment of academies was considered by some commentators to be unfairly penal and was seen as linked to how supportive some ceding Councils were of academisation and to perceived covenant risk. Approaches from 2013 onwards, when the Department for Education published a guarantee to LGPS Funds in relation to academy employers, have generally been less penal for academies.
Some funding approaches have, at the point of converting schools to academies, resulted in low funding levels (ratio of assets to liabilities) for the new employers as measured on a funding valuation basis, for example, below 50%. Although accounting bases differ from funding bases, there has also been a knock on effect of large accounting deficits sitting on academy balance sheets. At March 2016 the combined IAS19 pensions accounting deficit of all academies in England was measured as £4 bn in DfE’s accounts (or assets equated to only 55% of IAS19 accounting liabilities). This combined deficit is a volatile number year to year a market conditions vary.
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6.2 DfE / DCLG guidance The following issues with central guidance on funding published to date were reported by Stakeholders:
i. Central guidance on funding related matters is limited and is open to interpretation leading to a variety of approaches by Funds and their actuaries. ii. DfE stated principles of contributions being aligned with Council rates seem incompatible with its reluctance to endorse risk sharing and Councils’ own preference for separation of risk. iii. Some interpretations of DfE stated principles expecting a common contribution rate has led to low asset transfers and initial funding levels for academies. iv. There is no central guidance on whether an exit valuation is required when a MAT continues in the LGPS Fund but one of its academies leaves or fails. v. The DfE has published some guidance on whether academies should inherit a funding level influenced by that of the ceding council but this key policy area needs further clarity before any revised LGPS Fund led approaches are considered.
A number of Stakeholders and the actuarial firms in particular had familiarity and frustrations with some publications issued by DfE and DCLG commenting on funding approaches for academies in the LGPS. Our high level review of these publications identified several jointly issued policy briefing notes over the period 2011 to 2014 covering funding approaches. Those identified for this review are listed in Appendix 5 (“References”) although it is possible that further publications exist.
The publications illustrate the departments’ concerns over academies being required to pay contribution rates which are higher than local authorities and the desirability of similar rates. They also indicate an awareness of a number of different funding approaches, particularly for the determination of initial deficit on conversion, but do not come to any clear conclusion on which approach should be followed by actuaries or on the need for compulsion for pooling for funding (discussed in sub-section 6.4). Key publications have emerged as follows:
Joint Secretary of States letter about desirability of similar rather than higher rates for academies post conversion (December 2011) Issue of DfE guarantee to LGPS Funds under certain circumstances of failed academies (July 2013) DCLG consultation on Pooling for funding for academies (October 2013) DfE meeting with actuarial firms (September 2014) DfE/DCLG notes on funding approaches and possibility of re-calculation of deficits and requests for more information on reasons for higher contributions emerging (July and September 2014).
Overall, the sequence of publications may have caused some confusion and permitted a wide range of actuarial funding approaches to be employed with no final outcome emerging from the Pooling for funding consultation. Further, the CIPFA guidance: “Preparing and maintaining a Funding Strategy Statement in the LGPS” published September 2016 as the 2016 triennial valuations were being concluded has not set specific principles to be followed for academy employers. It only essentially refers to these as forming a growing number of non local authority employers, the financial standing of which must be considered by Funds.
Many Stakeholders believe there is much scope to rationalise this policy area. Later in Section 7 of this report we consider further on the advantages and disadvantages of fresh guidance on funding and other LGPS participation matters.
6.2.1 Contrast with Teachers Pension Scheme For most academies a high proportion of pension contributions payable relates to the unfunded Teachers Pension Scheme (TPS) due to the proportionately higher teacher payroll compared to support staff. The TPS rate payable can of course change, as it did with effect from September 2015 when it increased from 14.1% to 16.4% of pensionable pay for all TPS employers. However, even if LGPS total costs are smaller, most of the complexity and uncertainty of academies’ and MATs’ pensions costs relate to issues only seen in relation to the
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LGPS: deficit and contribution fluctuations, employer status, multiple LGPS Fund memberships and balance sheet impact.
6.2.2 Significance of LGPS Funding approach choice In the next sub-section 6.3 we present the issues raised by Stakeholders about how a range of funding approaches are poorly communicated and understood by academies and MATs. However it may first be instructive to consider how the funding approaches which have been applied in practice differ from each other and may be expected to lead to a wide potential range of different funding levels and contribution rates. We understand that three approaches are most commonly applied and have summarised them below:
Name of approach Description of assets transferred
Share of Fund (or also known Assets are transferred to the new notional section of the Fund for the new as “Same funding level”) academy so that its funding level (i.e. ratio of assets to liabilities) is exactly in line with the ceding council’s funding level pre conversion.
Non active cover (or also Non active liabilities are fully retained in the council section and assets of known as “Active cover” equal value are also retained to achieve a 100% funding level in relation to these liabilities. The remaining assets available are pro-rated in line with the active liabilities of the academy compared to those of the council. The resulting funding level of the new academy is then less than that of the ceding council.
Common contribution rate The total contribution rate payable by the new academy is set to be equal (or “same rate”) to the total contribution paid by the council. To achieve this the future service contribution rate is first calculated for the academy’s active members and then the additional past service contribution rate is “artificially” set to make up the required total. The actuary then calculates what amount of deficit (i.e. difference between assets and liabilities) would equate to the past service contribution rate taking into account the academy payroll and the Fund’s policy on the length of the recovery period for academies. The final step is to calculate the asset value required to correspond to the deficit amount. The resulting funding level of the new academy can be considerably lower than that of the ceding council, but the exact funding level can appear somewhat arbitrary.
Each of the approaches has its own separate rationale and may be regarded in different ways in terms of fairness. Please refer to Appendix 7 for a worked numerical example to illustrate how different initial contribution rates can emerge under the approaches.
It is, however, necessary to bear in mind that there are a number of factors driving whether or not initial differences between the contribution rates of academies and ceding councils will persist over a number of triennial valuation cycles. A key factor is the relative immaturity of a typical academy’s position in the LGPS. We consider this important point further in sub-sections 6.4, 6.5 and 6.6. 6.3 Communication of funding approaches, accounting impact and actuarial fees The following issues were reported by Stakeholders.
i. Communication of funding approaches, including whether an academy is pooled with other academies and if so which ones, is not always clear.
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ii. It can be difficult for academies and MATS to understand actuarial and contribution notifications. It is also hard to understand how a funding pool operates i.e. what actually is cross subsidised, the “rules of the pool” and how to get further information to inform a decision of whether to stay in the pool. iii. Some time after academisation, complaints to LGPS Funds can emerge typically involving staff or governors at academies not having understood financial variations. These can include future contribution rate changes at triennial valuations, and annual accounting complexities, and the cost of generating actuarial numbers. iv. There is a lack of transparency on what funding arrangements to expect at and post conversion to academy status, and on the associated actuarial fees. MATs do not have the expertise to challenge the approaches which can sometimes result in large increases to contribution rates after an academy conversion. v. Adherence to the same funding principles across two different LGPS employers or employer groups can be misunderstood as necessarily leading to the same contribution rates. This is largely because councils and academies and MATS have different membership and risk profiles. Academies typically have less mature profiles and can recover a specified deficit amount more quickly for a given percentage of payroll as its liabilities tend to be smaller in comparison with its active payroll.
The feedback received suggests a degree of dissatisfaction by a range of Stakeholders who understandably look at contributions and finance issues from different perspectives.
The typical viewpoint of academies and MATs interviewed was that the lack of transparency over which funding method is applied by a particular LGPS Fund and how sensitive their resulting contribution rate was to the approach followed was unreasonable. This poor communication even extended sometimes to whether an academy was being assigned to a pool. The actuarial fees charged at conversion and annually for accounting were also mentioned as an issue particularly given the limited degree of interaction with the actuarial firm and explanation provided on the work delivered.
Actuaries consider that they have not always been given a coherent policy or guidance to follow and have therefore followed different approaches in conjunction with what their clients, i.e. the LGPS Funds feel is appropriate (see previous sub-section 6.2 for an overview of common approaches). Some actuaries suggest that DfE policy aims should be clarified before the LGPS Funds can introduce any new approaches on how academies should participate in the LGPS (as raised via issue 6.2 (v)). Many also consider that both academies and ceding councils need to be educated on what the implications of any change to funding approaches could mean for them. A specific example given was the implications for aligning funding principles: see issue 6.3 (v) in box above. 6.4 Further funding approach is: data restrictions, fair treatment and actuarial duty, LGPS employer status The following issues were reported by Stakeholders.
i. At conversion, the LGPS Fund must consider who the relevant non active members are. It is hard to determine the deferreds and pensioners, as administrative records state their employer as the Council not the school. Hence, liabilities of deferred pensioners and pensioners relating to the school’s history are almost always retained by the Council. ii. Some Funds believe a fair treatment for academies on funding requires similar approaches to be applied to those used for Council employers. One example is a Fund where academies’ contributions are subject to a stabilisation mechanism used for the Councils albeit the academies were subject to a lower recovery period. iii. The primary responsibility of an individual LGPS Fund at the point of creating a new academy is to the local taxpayers and members who remain in the Council section.
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iv. MATs feel that they have to “fight their own corner” in managing their exposure to pension liabilities. The Fund actuary’s primary responsibility seems to be to its main client: the LGPS Fund, not the MATs or an academy. v. It is not always clear whether a Fund perceives the academy or the MAT to which it belongs as the LGPS employer. The treatment of individual academies within MATs as LGPS employers for ongoing valuation assessments by Fund actuaries is at odds with legal advice to one MAT Stakeholder confirming that it is an academy sponsor who is the LGPS employer. vi. Churn of membership, or individual experience such as earnings increases for individuals, can lead to unexpected implications for funding levels of academies. Billing academies for high pay increases is a tool used by at least one Fund as consistent with a lower overall actuarial assumption for pay increases. vii. When an existing academy joins a MAT or moves between MATs there is no process to legally transfer liabilities. At least one Fund is asking MATs to sign a funding agreement to accept the liabilities.
6.4.1 Historic data, liabilities transfer acknowledgement Many Stakeholders believed that it was often impractical to attempt to trace pensioner and deferred members who had previously been employed by a school and so would not expect any standardised funding approach to require identification and transfer of corresponding liabilities.
Another practical point mentioned was that the LGPS was not set up to transfer liabilities/deficit formally within a Fund in the circumstances of an academy movement into or between MATs and so it may be best practice to require the receiving MAT to sign an agreement.
When a new academy is created in the first place via an LEA school conversion a commercial transfer agreement is signed following a DfE legal template which does acknowledge LGPS liabilities being taken on albeit their calculation is not specified. We understand this template has not been updated since November 2013 and refers to 2008 LGPS regulations which have since been repealed. It requires the following “The Company shall be responsible for any LGPS deficit relating to the Eligible Employees membership of the LGPS referable to service up to and including Transfer Date”. See Appendix 5 for a web link.
6.4.2 Fair treatment, actuarial duty There are different views on which elements of the funding approach applied to a council, e.g. stabilisation not normally available to non-council employers, should be extended to academies on “fairness” or other grounds. One Stakeholder cited general equality principles of the Academies Act 2010 as requiring limited divergence of contribution rates.
Some of the MATs thought their treatment was compromised by the Fund actuary’s perceived primary duty to local authority employers.
6.4.3 LGPS employer definition Several issues spanning both administration processes (Section 5) and finances (this Section) arise from whether the Fund and its actuary treat academies belonging to a MAT as individual employers or as one single employer. From an ongoing funding perspective, the actuarial firms confirmed that they normally issue individual academy contribution results and track each academy’s notional section of the Fund rather than just monitoring the MAT as a whole even where pooling for funding applies (see next sub-section). One MAT Stakeholder had taken legal advice which stated that under LGPS Regulations only an academy sponsor (i.e. a MAT or a SAT) is an LGPS employer. Hence MATs appear able to challenge Funds and their actuaries on:
whether covenant risk is incorrectly being considered as the risk of individual academy failure rather than the lower risk of MAT failure. whether issuing different contribution rates for academies in the same Fund within a MAT breaches Regulations.
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The LGA and DfE are aware of this anomaly. Publications from DfE have varied references to the issue. For example the FAQ document aimed at academy trusts (see Appendix 5) indicates that it is the academy trust which is the LGPS employer. However the DfE policy notes (see sub-section 6.2 and Appendix 5) refer mostly to contributions being set for academies (not trusts) with some degree of consistency with the relevant ceding council. But that type of requirement is difficult to interpret in the case of a MAT which could have academies from multiple councils in the same Fund. It appears that Fund actuaries are reluctant to consider only MATs as the employer prior to updated Regulations or guidance being produced which have explicit processes to be followed when an individual academy leaves or joins a MAT.
Later in sub-sections 6.6 and 6.7 we consider the implications of the LGPS employer definition uncertainty in relation to the validity of exit valuation debts and the operation of the DfE guarantee. 6.5 Pooling for funding and exit valuations
i. Pooling for funding of groups of academies exists within some but not many LGPS Funds. Access to pooling at a MAT level or at Local Authority level is very restricted for academy sponsors across LGPS Funds ii. Pooling for funding could produce bad behaviours by individual employers. It should not be seen as a panacea. iii. Pooling for funding purposes is not currently uniquely defined as seen by the different approaches taken by two actuarial firms to sharing experience within the pool. This suggests a communications challenge to fully explain to pool participants the nature of associated cross subsidies. iv. Many academies are supportive of pooling for funding but can be uncomfortable with The associated cross-subsidies between academies. A decision on whether or not an academy should “pay its own way” should be a DfE policy matter. This requires clarity before any revised LGPS Fund led approaches are considered. v. Many academies are supportive of pooling for funding but there is varying awareness that this approach often means academies are supporting the experience of other academies which they may regard as competitors. In a few triennial valuations time, the academies’ sections of LGPS Funds will be much more mature and contribution rates may fluctuate more due to many factors including experience items and assumptions. Outsourcing is also highly relevant to issues (iv) and (v). vi. Although pooling creates winners and losers the simplicity of paying a reduced number of different contribution rates or even a single rate across the MAT would be very beneficial when budgeting. Individual rates require more time to spend monitoring budgets. vii. The amount of actuarial work to carry out the triennial funding valuation depends on the number of employers, with every employer receiving notification of its result. Pooling for funding approaches reduce the amount of work a little and this may be expected to have some impact on the actuarial fee. But work reduction is limited if each academy’s position continues to be tracked individually. Further inefficiencies arising from data and interfaced issues for increased academy numbers are likely to be more significant than increased actuarial work. viii. Where Pooling for funding purposes shares all experience across pool participants, there has to be a mechanism to calculate an exit position. A split by pay approach is simpler but may not be deemed sufficiently robust. An alternative is a more complex split by liabilities. Some clarity or regulation is required if an existing academy is part of a MAT i.e. to standardise procedures around exit valuations and the responsibility for the deficit. ix. There is a need for guidance or Regulation on whether an exit valuation is required when an exit event occurs for an academy which is part of a MAT and who should pay any resulting exit payment due. x. The treatment of individual academies within MATs as LGPS employers for exit valuation assessments by Fund actuaries is at odds with legal advice to a MAT confirming that it is an academy sponsor i.e. a single or multi-academy Trust which is the LGPS employer and not the
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academy itself. This is an important issue which should be acknowledged in future guidance to Funds and actuaries. Currently most formally classify individual academies as individual employers which means that their risk of failure is considered individually and their exit generally triggers an exit valuation.
6.5.1 Pooling for funding Pooling for funding is a large subject which the DCLG has explored in the past, most noticeably via a consultation commenced in October 2013 but which we understand did not have a published outcome. See Appendix 5 for weblink.
The issues raised by Stakeholders cover a wide range of areas including variation in the availability of pooling (linked often to a Fund’s choice of actuarial firm) and the level at which pooling occurs (e.g. MAT level, single local authority, several local authorities within the same Fund).
The actuarial firms also confirmed that even for a well-defined pooling group, there are different technical approaches depending on whether the objective is simply to align contribution rates or to truly share all funding risk across participants. The main influence on the amount of actuarial work to assess contribution rates is the ongoing need to track and report on individual academies separately rather than whether pooling for funding is in force.
There was a varied degree of understanding by MATs and academies of what pooling for funding could mean for the level and variability of their contribution rates. Some thought that any funding approach which reduced the number of different contribution rates paid by larger MATs was helpful for budgeting purposes.
6.5.2 Exit valuations Most Stakeholders recognised that the design of an ongoing funding approach needs to be compatible with an acceptable process to manage both academies changing academy trust within the same Fund or leaving a Fund altogether.
We have been unable to identify any guidance or Regulation dealing with an academy leaving the Fund by virtue of failure or change of sponsor (and this point was made under issue 6.2 (iv)). Most actuarial firms have however generally followed the “exit valuation” process as if an exit event had formally occurred under Regulation so that the Fund can pursue an immediate exit payment. The firms also believe there is a strong need for guidance or regulation in this area and any compulsory calculation method would need to be communicated to and ultimately accepted by affected parties (i.e. the MAT or other pool members).
The Funds and actuaries currently receive complaints from MATs who understandably take the view that unless the MAT itself exits the Fund an employer exit has not occurred. This is another area of challenge relating to the LGPS employer uncertainty covered in 6.4.3. 6.6 Consistency with Local Authority rates, typical 2016 valuation results, budget mis-match The following issues were reported by Stakeholders.
i. Different LGPS Funds apply different funding approaches to academies compared to Councils in relation to deficit recovery periods and discount rates. This causes inconsistency of contribution rates, which some academies regard as lack of equity between different classes of employers with equal rights in the LGPS. One of the most penal approaches is to assume a recovery period for ongoing funding deficits of just 7 years i.e. much shorter than Council recovery periods to fit in with the master funding cycle for academies ii. There appears to be some inconsistency in how the four actuarial firms adjust funding
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valuation discount rates to allow for covenant risk of certain LGPS employer groups including academies. This may partly reflect different views on the reliance that can be placed on the DfE guarantee to LGPS Funds in relation to academy failure. iii. Academies with younger non-teaching workforces can find pension costs less of a barrier to conversion due to their lower pension liabilities. Special schools with many assistants who are LGPS members can find the opposite. iv. Councils can be somewhat more exposed to contribution rate increases given the profile of their residual membership after a large number of academy conversions. There may be limited awareness of this by some Councils. v. Alignment of academy rates with Council rates could currently result in higher contributions for academies on average. Further analysis may be required. vi. Lack of consistency between academy or MAT contribution rates and those of the ceding Council is considered to be a problem by many parties. However simply aligning rates with Council rates would still lead to academies across England paying many different rates given the variability in Council rates across Funds. vii. The only way to achieve consistency of contribution rates between LEA schools and academies is to use a pool to cover both in a given area but this can be impractical and in conflict with cross-subsidy issues. A key barrier is linking all membership data back to school employers. However some Funds particularly in London have achieved this approach. viii. Academies’ budgets are set by considering per pupil allowances and these appear to make no allowance for uncertain LGPS pension costs. The TPS is more predictable). ix. Senior management at academies and MATs require more education on funding principles. There is sometimes a misconception that paying lower contributions now reduces the ultimate cost of benefit provision. However, this is not the case since all LGPS employers retain responsibility for their underlying benefit obligations. These do not change as a result of a short term pace of funding decision.
6.6.1 Consistency with local authority rates Consistency of applied funding approaches and resulting contribution rates was another big topic, on which Stakeholders had various views.
One objection was to actuaries using different discount rates to that assumed for councils and using shorter recovery periods which appear to relate partly to different interpretations of the effectiveness and permanence of the DfE guarantee announced in 2013.
However the actuaries also noted that senior management at academies did not always appear to appreciate that paying lower contributions in the short term did not alter the ultimate cost of providing the LGPS benefits.
Various advantages and disadvantages of alignment with council rates or LEA school rates were suggested (see issues box). The demographic profile of each entity is important with the flow of active members from councils to academies leading to a more mature profile for councils tending to increase their contributions.
6.6.2 Analysis of sample 2016 valuation contribution rates This review has taken place whilst 2016 LGPS triennial valuation contributions were being finalised and we asked the actuarial firms to look at typical differences between academy results and local authority results in terms of both contribution rates and funding level. We requested at least a few cases from each firm, asking that they sought to make them broadly representative of their full list of LGPS Funds.
The sample results for contributions applying for the 3 years to March 2020 are shown in the chart below covering 21 Local Authorities. For the majority the average academy rate was lower than the local authority thought to be most closely associated. The chart also suggests that the average rate was generally above the
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current Teachers Pension Scheme (TPS) rate in force until April 2019 although some academies were on lower rates of between 11% and 15% (see further comment on these in 6.6.3).
Chart 6.1
16 out of the sample of 21 Local Authorities (or 76%) were thus reported to be about to set lower average rates for academies than for Councils. The detailed data behind the chart is shown in Appendix 6 which also contains limited information on the funding levels of academies and authorities. In all cases the academies had a lower funding level despite also having a lower contribution rate. We understand that this arises primarily due to the differing ratios of funding deficit to active member payroll.
6.6.3 Budget mis-match and type of school variations Some Stakeholders emphasised the severe mis-match between drivers for the budgets awarded to academy sponsors and those for its LGPS pension costs.
Schools vary with three particular effects noted:
Schools with younger non-teaching workforces tend to have lower future service and past service contribution rates due to the future service rate being broadly linked to salary weighted average age in the LGPS (unlike the TPS) and the quantum of the past service deficit tending to be lower with short service workforces. Free schools which do not have a historical link to an authority start with no past service deficit and tend to have the lowest contribution rates sometimes as low as c.12% (see previous chart) for the youngest workforces. Special needs schools with a higher proportion of non-teaching staff might expect the highest combined pension costs as LGPS rates often exceed TPS rates.
These observations suggest that LGPS pension costs can be more of a problem for some academy types than others.
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6.7 DfE guarantee, academy movements, case for individual academy tracking The following issues were reported by Stakeholders.
i. It does not make business sense for MATs to take on new schools that are in a failing position and have LGPS pension deficits. The DfE could provide upfront finance to reduce or remove these deficits on a re-brokering. ii. When academies move from one MAT to another, contribution and other issues emerge. The effect can be greater if more than one LGPS Fund is involved. iii. Tracking of notional assets and liabilities for each academy in a funding pool is required unless all pool participants can accept some sort of average funding level assumption to determine an academy’s position on exit. iv. The DfE is concerned with composition of MATs and the circumstances under which an academy could leave a MAT and this may have implications for the LGPS. The possibility of leavers would ideally not necessitate individual tracking of all academies. v. The DfE guarantee reduces the disincentive for LGPS Funds to accept academies or MATs who may approach them. This is at odds with the stated principle (whether or not it’s the right principle) of academies using the LGPS Fund suggested by geographical location. vi. MATs feel exposed to payment of exit debts in the event of a single academy failure. The DfE guarantee is understood to be something of a last resort. This is particularly a concern of better financed MATs potentially perceived to have deeper pockets. vii. The DfE guarantee only appears to be enforceable by Funds in limited circumstances when a MAT is unable to afford to meet a failing academy’s LGPS debt. viii. Uncertainty over the DfE guarantee makes it more difficult for GAD to carry out its solvency assessment for each Fund as part of its Section 13 valuation.
6.7.1 Academy movements and individual tracking Academy movements were cited as leading to many financial complications. There can be various reasons for an academy no longer participating in or “exiting” a Fund e.g. due to financial insolvency or due to the wish to change MAT and thereby change LGPS Fund. Several Stakeholder meetings included a discussion on individual tracking of academy positions. This was understood to be no longer required for accounting purposes under the latest EFA accounting direction. But would always be required even under a move to compulsory pooling for funding unless an average rather than individual funding level were applied to determine an academy’s exit position. Such a particular type of cross-subsidy would probably require clear written agreement by pool participants to be effective.
6.7.2 Rebrokering policy and the DfE guarantee The DfE’s expectation that MATs taking on an academy requiring a new sponsor should take on its LGPS deficits without financial support on the deficit (as opposed to the support grant which is available) was considered unfair by some Stakeholders.
The DfE has made a general statement and via correspondence with individual MATs that it does not regard using its budgets to meet LGPS debts as an appropriate use of tax-payer money, so it would only invoke its guarantee to LGPS Funds on a last resort basis i.e. where a related MAT (if any) cannot cover the debt. But this policy may have unintended consequences for the strategic planning for growth by MATs. Some MATs made a specific point about well finance MATs holding reserves for specific business reasons (which would not include picking up pension debts from new academies joining them).
The Government Actuary’s Department noted that any uncertainty over the operation of the guarantee could affect its ability to report on the solvency of the LGPS as required under Section 13 of the Public Service Pensions Act 2013.
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6.8 Freedom of MATs to consolidate and select between LGPS Funds The following issues were reported by Stakeholders.
i. MATs should be able to follow a simple process to consolidate their LGPS liabilities residing in multiple Funds by approaching a single LGPS Fund prepared to accept them. However existing processes to achieve consolidation and the actuarial agreement to transfer assumptions in particular are time-consuming and expensive and should be simplified. ii. Several LGPS Funds are reluctant to accept consolidating transfers of liabilities from MATs in multiple Funds. This is because the elected members on the Pensions Committees either reject outright or require a punitive risk based approach to be applied as they do not have confidence in the long term of the DfE guarantee. iii. There is inconsistency across Funds on how the costs to an employer of early retirement strains are calculated and the assumptions use to derive exit debts. Hence employers such as MATs who participate in more than one LGPS Fund may regard this as being unfair or inconsistent (over and above regular funding inconsistencies). iv. Funds have cases of academies within MATS closing to new entrants because they enrol new into a different well-funded Fund in the expectation of a lower contribution in that Fund.
We understand that a very small number of MATs have tried to use existing Regulations which can facilitate a consolidation of participation into a reduced number or single LGPS Funds thereby reducing the complexity of its LGPS exposure. The Regulations require consent of Funds affected and a business case to be approved by the Secretary of State (DCLG). But to our knowledge no MAT has yet made a request to the SoS to conclude this process.
There are many considerations for a LGPS Fund which is approached to enable a consolidation. The actuarial assumptions used to calculate the incoming bulk transfer and the likely initial funding level on the Fund’s own assumptions will be important. Another factor will be the extent of the Fund’s belief in the ongoing value of the DfE guarantee.
Stakeholders also reported approaches to Funds by MATs to request that certain active members started to be enrolled into a different Fund from the one in which its existing staff participate. The motivation is generally a belief that the target Fund is well funded or uses weaker funding assumptions than the existing Fund and that lower contribution rates may be charged.
We have not looked into any specific such cases which have occurred but we would support the belief of one Fund that enrolling employees into any Fund outside of the geographical area in which the academy is situated is not permitted under Regulations (assuming a consolidation application), see above, has not been made or accepted). Overall this process would seem to be contrary to consolidation of Fund participation and amount to de-consolidation.
Should a particular Fund or DCLG as the LGPS’s responsible authority wish to “correct” inappropriate enrolments, then this would appear to be a substantial administrative task. The alternative response for Funds would be to adapt the funding approach of the original Fund to reflect the cessation of the flow of new entrants as would happen for certain other types of LGPS employers (closed admission bodies).
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7 Initial analysis of alternative approaches
7.1 Outline comparison between three different types of approach 7.1.1 Introduction We have given initial consideration to a range of alternative approaches that might be introduced to handle the pension provision of support staff working in academies and MATs.
Our agenda for Stakeholder meetings, agreed with the SAB Secretariat, identified three broad types of alternative approaches. In these meetings we invited comment on their potential benefits and the issues that might arise if different types of approach were to be undertaken. The generic agenda set these out as follows, and included examples:
Examples of process led Examples of approaches Examples of more fundamental approaches requiring new regulations approaches
Additional guidance to Ring fence academies into Use one or a few new/existing host standardise “approaches” across separate sub funds. LGPS Funds (or LGPS Funds’ academies and promote efficiency. administrators) for all academies for All academies in a single LGPS funding and administration, or just Fund to have a common Improved guidance on scheme for administration. payroll and HR requirements for contribution rate. academies and MATs . Provide for the recharge of all or part All academies to submit monthly of scheme costs to DfE. data as per the Teachers Scheme. Create new public service scheme for academies, either funded or unfunded.
For the analysis in this section, after discussion with the SAB Secretariat, we have redefined these as:
Improving LGPS processes and IT, and delivering effective guidance on supporting academies. Using new regulations within the LGPS to drive changes. The nature and extent of these would be further developed. Requirements might include establishing new sub-funds for academies as ring fenced sections of LGPS Funds, with elements of consolidation of new academy sections, perhaps on a geographic basis (this idea therefore moving from the third column above and being moderated by not specifying the use of just one or of a new LGPS Fund). Common contribution rates for academies within given LGPS Funds might also be considered. The defining point about the approach type is that it would be entirely within the LGPS Implementation outside the LGPS. This more fundamental type of approach would be in line with the second and third items in the right hand column above, thus including the recharging of all or part of pension costs to the DfE, or creating a new public service scheme for academy staff, potentially an unfunded arrangement as is operated for teachers.
In table 7.1 we compare the effect that the three different types of approach, as redefined in the bullet points above, could have on the current issues identified by Stakeholders. We have also identified the potential wider benefits and issues associated with the three types of approach. Several Stakeholders discussed these with us, but the analysis is ours.
The table should enable the Scheme Advisory Board and others to consider which type of approach should be pursued. We stress that we have been asked not to make a recommendation between the types of approach. Indeed, a decision between the three types of approach may depend on which potential benefits and
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Stakeholders’ interests are prioritised, and may require further analysis to synthesise a specific preferred approach rather than merely a type of approach. This is particularly true of the two types of approach that go beyond improving LGPS processes and issuing guidance.
In tables 7.1 and 7.2 (which provides more detail), different types of Stakeholder are identified by the use of colour. The two core Stakeholder groups are taken to be those working in education and those working in the public sector to deliver LGPS pensions. For simplicity, the tables allot each their own columns, but other Stakeholders share columns. We have drawn out some differentiation between other Stakeholders, however, since different types of approach have different implications for LGPS members, taxpayers (and HMT) and other Stakeholders, such as suppliers. The following key clarifies the use of colour:
౿ Single Academy Trusts, Multiple Academy Trusts, and the Department for Education
౿ LGPS Funds, their Administering Authorities, and the Department for Communities and Local Government (DCLG) and the Local Government Association (LGA)
౿ LGPS members ౿ Taxpayers, HMT, other central government ౿ Suppliers, other Stakeholders
Current issues as described in Sections 4, 5 and 6 have largely been stated as negatives. But the tables turn this round by stating, in the first column, the benefits to be gained from resolving the corresponding issues. Different Stakeholders will gain differing levels of benefit from different types of solution. Accordingly, the tables show spots of three sizes for relevant Stakeholders, broadly:
Potential benefit capable of being wholly or largely achieved, resolving that type of issue for that type ౿ of Stakeholder. ౿ Potential benefit capable of being partly achieved, partly resolving that type of issue for that type of Stakeholder.
౿ A modest part of the potential benefit should be achievable for that type of Stakeholder. An empty circle indicates a potential disadvantage for that type of Stakeholder. In contrast, a blank ⃝ just indicates that the issue is not likely to be significant to the type of Stakeholder.
The potential benefits of each type of approach are not listed in a specific order. But the order in table 7.1 stresses two important points: the benefits of structural simplification and the hope of channelling resources towards teaching rather than the complexities of dealing with pensions. It also stresses the importance of implementation.
We have not quantified the value of long term benefits gained or implementation costs. These would depend on the precise solution within each type of approach.
7.1.2 Notes on the analysis in table 7.1 Structural simplification: The aim should be to achieve both operational and financial simplification. This implies direction rather than guidance, although guidance is helpful and would be an initial step even if the main approach was to establish a new approach within the LGPS, by new regulations, or outside the LGPS. Most Stakeholders would benefit from structural simplification, although it may be largely neutral to members and it should ultimately reduce the fees of professional service suppliers.
Pension workload for Academy / MAT staff: An ultimate benchmark might be to reduce the time expended by staff and governors in operating and understanding the LGPS so that it is no more than is needed for the Teachers Pension Scheme – indeed proportionately less, given lower LGPS membership numbers in most types of schools.
Intergenerational equity: Approaches that leave assets in the LGPS would retain a dedicated asset base and the discipline of paying for benefit promises as members earn them, subject to managing LGPS assets efficiently
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and controlling LGPS deficits that are now modest by comparison with liabilities. Unfunded schemes require the cost of pension benefits to be met as they are paid, by future generations of taxpayers.
Contribution rate predictability and consistency: The logic now underpinning employer contribution rates reflects several important aspects, such as individual LGPS Fund deficits at academisation, and individual academy experience. No overarching approach has been applied. Such an approach might or might not led to lower rates overall: it would create winners and losers, but consistency with school budgets might be targeted.
Commencement: Reaching a point where a new approach can start to be implemented within the LGPS would be practical, to the benefit of most Stakeholders. There would be political complexities to negotiate before establishing new regulations, and these would be much greater if the approach were to be outside the LGPS, which would presumably have to compete for time in the context of Brexit. Guidance and new processes should be quick to start implementing.
Implementation: The complexities of implementation of any new approach should not be underestimated. Guidance would be simpler. The practicalities of an approach within the LGPS would depend on the degree of uniformity that was sought, and the transitional processes and timescales for introducing them. Most obviously, Academy / MAT contribution rates differ widely at present, and a large number of contractual arrangements have been agreed between LGPS Funds, Academies, MATs, providers and outsourcing organisations. Actuarial and legal analysis would have to underpin change. An approach outside the LGPS has the potential to be yet more complicated to implement.
Cashflow and related investment issues: It would be possible to design a new approach within the LGPS that substantially maintained currently expected cashflows at an Asset Pool level, even if the approach involved the organisation of sub-Funds for academies staff only and thereby reduced the expected cashflows of some LGPS Funds. For this reason, the main contrast is against approaches that might remove current assets and future cashflows from the LGPS altogether.
Outsourcing: The extent to which different approaches facilitate service outsourcing by Academies and MATs should be kept in mind as guidance is developed or new approaches designed. Greater clarity is likely to result from any type of approach: this is likely to increase outsourcing, making tight education budget settlements easier to work within, but act to the disadvantage of new employees who would not have New Fair Deal type protection. So different stakeholders would be affected differently, as the table indicates. Approaches involving improved processes and guidance may be somewhat less likely to facilitate outsourcing.
Pension benefits for existing staff: The three types of approach seem likely to be neutral in their impact on existing LGPS members, but Academy support staff turnover is sometimes high so this group will reduce in size substantially over 5 – 10 years. Approaches outside the LGPS would presumably change the control of benefits and member contributions and might be seen as an opportunity for change.
Covenant risk / exit debt exposure / DfE guarantee: Some types of approach within the LGPS could significantly reduce covenant risk to Local Government and other LGPS employers, particularly if the approach involves the creation of academy sub-funds which they no longer guaranteed. Approaches outside the LGPS are also likely to do reduce their covenant risk. Conversely, an approach outside the LGPS could result in central government talking on substantial relevant LGPS liabilities in full or in part. Types of approach within the LGPS could be established that had a modest implication for the DfE guarantee, with such approaches probably implying more input by central government / GAD into funding principles.
UK deficit: If assets were paid from the LGPS to the Exchequer, their treatment would require careful consideration, with the Royal Mail a precedent. There would be a benefit in national accounts in the year of payment, with this subsequently fully offset by payments required in future decades.
UK wide consistency: The academy programme is already unique to England, but approaches to support staff pensions outside the LGPS would introduce a further differentiation.
Other current issues reported by Stakeholders: Several issues are covered above, with the summary table showing only an overall analysis for the two main Stakeholders. More detail is provided in a second table.
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Table 7.1
Future approaches: potential benefits and disadvantages Broad type of approach: Improved LGPS Implemented using Implemented processes and new new regulations outside the LGPS guidance within the LGPS
Structural simplification, with long term operational cost savings, would be achievable. ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ Reduction in pension workload for Academy / MAT staff, so resource could be better channelled towards teaching. ౿ ౿ ౿ Assets retained in LGPS, supporting intergenerational equity by comparison with unfunded arrangements. ౿ ౿ ౿ ౿ ⃝ ⃝ Academy contribution rates for support staff could be easier to calculate, more predictable and consistent ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ Few or no political complexities to negotiate before implementation commences. ౿ ౿ ౿ ౿ ౿ ౿ ⃝ ⃝ ⃝ Implementation itself would be practical and timely. ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ ౿ Cashflow and related investment issues at LGPS Fund level, or at an Asset Pool level, would be controllable. ౿ ౿ ⃝ Outsourcing facilitated, allowing lower costs in respect of new staff if they were offered pensions outside the LGPS. ౿ ౿ ౿ ౿ ౿ ౿ Outsourcing less likely to be facilitated, tending to maintain access to LGPS for new staff. ౿ ⃝ ⃝
Support staff pensions for existing staff would remain on a similar footing to teachers’ pensions after academisation. ౿ ౿ ౿ Covenant risk / exit debt exposure minimised by local government. ౿ ౿ ౿ Central government would accept minimal extra exposure for DfE guarantee, and avoid taking on LGPS liabilities. ౿ ౿ ⃝ Assets paid over to HMT could reduce the UK deficit in the year of asset transfer. ⃝ ⃝ ౿ Approaches to pension provision in England, Wales, Scotland and Northern Ireland would remain consistent. ౿ ౿ ⃝ Policy and governance issues identified by Stakeholders could be largely resolved – see Section 4. ౿ ౿ ౿ ౿ ౿ ౿ Administration and operational issues identified by Stakeholders could be largely resolved – see Section 5. ౿ ౿ ౿ ౿ ౿ ౿
Contributions and financial issues identified by Stakeholders could be largely resolved – see Section 6. ౿ ౿ ౿ ౿ ౿ ౿
౿ SATs, MATs, and the Department for Education ౿ LGPS Funds, Administering Authorities, DCLG and the LGA
౿ LGPS members ౿ Taxpayers, HMT, other central government ౿ Suppliers, other Stakeholders
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7.2 Detailed comparison of impact of the three different types of approach on current issues Table 7.2 below provides more detail on our analysis of current issues. It summarises issues identified in Sections 4, 5 and 6, and in the first column expresses the benefit of addressing the issue.
In the three right hand columns, we show the extent to which each type of approach would be likely to address the type of issue, again differentiating by Stakeholder type.
Grey shading indicates that we have not given consideration as to how the third type of approach (i.e. outside the LGPS) would address detailed current issues.
Table 7.2
Broad type of approach: Improved LGPS New regulations Implemented processes and new within the LGPS outside the LGPS guidance
Section 4: Policy and governance issues
Reduced complexities on transition to Academy status. ౿ ౿ ౿ ౿ ౿
Reduced complexities for larger MATs, spanning geographies. ౿ ౿ ౿ ౿ ౿
Lower barriers, real or perceived, when reassigning or rebroking failed Academies to a different MAT. ౿ ౿ ౿ ౿ ౿
DfE guarantee delivers more reassurance to Academies, MATs and Funds, without being more ౿ ౿ called upon. ౿ ౿ ౿ ౿
A stronger voice for MATs on pension matters, with improved LGPS governance processes. ౿ ౿ ౿ ౿ ౿ ౿
Section 5: Administration and operational: current issues
Improved quality of data provision and contribution collection processes ౿ ౿ ౿ ౿ ౿ ౿
Improved assessment of competencies of payroll providers prior to contract inception and ongoing ౿ ౿ ౿ ౿ ౿ ౿
Uniformity of Fund data requests promotes efficiency, reduces complications ౿ ౿ ౿ ౿ ౿ ౿
Clarified LGPS employer duties under regulation, reducing confusion and complications ౿ ౿ ౿ ౿ ౿
Clarity of communication structures between MATs and Funds and contact maintenance enhances ౿ ౿ ౿ ౿ interactions
Appropriate LGPS training for academies would enhance understanding of processes and ౿ ౿ ౿ ౿ responsibilities
Authorising resources for Funds reflecting number of LGPS employers including contractors ౿ ౿
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Broad type of approach: Improved LGPS New regulations Implemented processes and new within the LGPS outside the LGPS guidance
Increased centralisation of pension processes with MATs might produce cost savings and reduce ౿ ౿ resource pressures
Section 6: Contributions and finances: current issues
Guidance on actuarial and funding issues clarified, understanding and consistency increases ౿ ౿ ౿ ౿ ౿ ౿
Contribution rates charged by different Funds to MATs may vary less than now ౿ ౿ ౿
Initial contribution rates for ATs and MATs differ little from LEA schools ౿ ౿ ౿ ౿
Contribution rates for ATs and MATs fluctuate little at new funding valuations ౿ ౿ ౿
Contribution rates continue to reflect underlying true costs, avoiding cross subsidies between MATs ౿ ౿
Scope for conflicts of interest between Funds and ATs / MATs reduced ౿ ౿ ౿ ౿ ౿ ౿
Volume and cost of actuarial work, in the longer term, reduced ౿ ౿ ౿
Danger of MATs having to pay high exit payments reduced ౿ ౿ ౿
Covenant provided to Funds by AAs / MATS strengthened ౿ ౿ ౿ ౿
Transfer of Academies between MATs is simplified ౿ ౿ ౿ ౿
MATs are offered practical opportunities to consolidate into a single Fund ౿ ౿ ౿ ౿ ౿
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Appendix 1: Local Authority academy* conversion map
*Including free schools (not including University Technical Colleges and studio schools)
Source: edubase – http://www.education.gov.uk/edubase/home.xhtml
“All open and state funded schools”, “All open academies and free schools” data download
Date: as at (02/12/2016)
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Appendix 2: Data summaries for academies
The following data is as at 2 December 2016. Academy conversion
Inside London Outside London Total
Academy* 5,529 29% 720 28% 6,249 29%
Non Academy 13,799 71% 1,873 72% 15,672 71%
Total 6,249 100% 15,672 100% 21,921 100%
*Including free schools (not including University Technical Colleges and Studio Schools) Academy conversion by religious group
Religion Total Schools Percentage converted to academy*
No Religious affiliations 15,104 31%
Church of England 4,647 19%
Roman Catholic 1,968 25%
Christian 108 66%
Jewish 48 33%
Muslim 27 63%
Sikh 11 91%
Hindu 5 100%
Greek Orthodox 2 100%
Quaker 1 100%
*Including free schools (not including University Technical Colleges and Studio Schools) Academy conversion by actuary**
Actuary Percentage converted in London Percentage converted outside London
Mercer 43% 24%
Hymans Robertson 25% 30%
Barnett Waddingham 24% 36%
Aon Hewitt 24% 23%
**Actuaries as at 2013 valuation Source: edubase – http://www.education.gov.uk/edubase/home.xhtml “All open and state funded schools”, “All open academies and free schools” data download Date: as at (02/12/2016)
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Appendix 3: Data summaries for MATs
Analysis of number of academies: Academy Trust composition by phase of education process
Primary Secondary AP & Special Overall
Trust Type Number % Number % Number % Number %
MAT 2,863 79 1,289 56 230 72 4,382 70
Standalone 704 19 1,013 44 88 28 1,805 29
Awaiting trust 73 2 7 0 2 0 82 1 information*
Grand Total 3,649 100 2,309 100 320 100 6,269 100 *awaiting trust information recent November openers
Number of Local Authority Areas within which MATs operate
Number of local authority areas in which MATs are active Number of MATs
1 899
2 134
3+ 88
Total 1,121
MAT Size by number of academies Size of MAT Number of Number of (schools) MATs Academies & free schools*
1 264 264
2 300 600
3 to 5 364 1,340
6 to 10 136 988
11 t0 20 37 510
21 to 30 9 215
31+ 11 465
Grand total 1,121 4,382
*in MATs of this size Source: edubase – http://www.education.gov.uk/edubase/home.xhtml Date: as at (09/11/2016) Note: The exact dates for MAT and academy data are different. The number of academies converted does not include University Technical Colleges and studio schools
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Appendix 4: List of Stakeholder interviews conducted November 2016 – February 2017
Stakeholder number Type of Stakeholder Stakeholder Name
1 MAT Oasis UK [47]
2 MAT Kent Catholic Schools Partnership [22]
3 MAT Academies Enterprise Trust [66]
4 MAT Olympus Trust [7]
5 MAT Share MAT [4]
6 Academy Dunraven School
7 Academy North Chadderton School
8 Administering authorities Torquay delegates various
9 Administering authorities Staffordshire
10 Administering authorities Avon
11 Administering authorities Norfolk
12 Administering authorities Essex
13 Administering authorities Kent
14 Administering authorities LPFA
15 Administering authorities Lewisham
16 Fund actuaries Barnett Waddingham
17 Fund actuaries Mercer
18 Fund actuaries Hymans Robertson
19 Fund actuaries Aon Hewitt
20 Govt. Department Government Actuary’s Department (GAD)
21 Payroll providers SfP
22 Administration providers LPP
23 Administration providers Capita
24 Govt. Department Department for Education (DfE)
25, 26 & 27 Unions Unite, Unison, GMB
Notes: (i) Numbers in [ ] represent the number of academies in each MAT; (ii) The LGA attended the meeting with DfE. (iii) DCLG were not invited to a meeting but were advised of the review process and the GAD meeting.
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Appendix 5: References
Published by Title Date
Secretaries of State for Joint letter of understanding: “Academies and the Local Government December 2011 Education and Pension Scheme (LGPS)” Communities and Local Government
DfE Ministerial Statement on guarantee to LGPS Funds in relation to July 2013 academy failure
DCLG Consultation on “Pooling arrangements for academies within the Local October 2013 Government Pension Scheme”
DfE Commercial Transfer Agreement : Legal agreement between a Local November 2013 Authority, predecessor school governing body and academy trust
DfE/DCLG Academies and the Local Government Pension Scheme FAQ Edition 4 February 2014 http://www.lgpsregs.org/timelineregs/Statutory%20Guidance%20an d%20circulars/AcademiesFAQ4Final140214.pdf
DfE/DCLG Policy note: “Academies and LGPS: deficit calculations and recovery July 2014 periods”
DfE/DCLG Policy note: “LGPS & Academies: consistency of approach” September 2014
Local Government “LGPS payroll guide to the 2014 scheme” February Association 2015/Updated May http://www.lgpslibrary.org/assets/gas/ew/Pv3.9c.pdf 2016
EFA Academies financial handbook 2016 Effective July 2016 https://www.gov.uk/government/publications/academies-financial- handbook
CIPFA Preparing and maintaining a funding strategy statement in the LGPS September 2016 2016 edition
DfE Convert to an academy: guide for schools December 2016 https://www.gov.uk/guidance/convert-to-an-academy-information- for-schools/1-before-you-apply
DfE Guidance: “Multi-academy trusts: Good practice guidance and December 2016 expectations for growth”
42 | PwC Options for Academies in the LGPS 234 Local Government Pension Scheme Advisory Board
Appendix 6: Sample 2016 valuation funding rates
Funding Level* Contribution rates
Sample Local Academy Local Local Academy Academy Academy Number Authority Authority Authority minimum maximum average School**
1 - - 25.2% - 14.6% 37.5% 23.3%
2 - - 25.8% - 17.3% 28.8% 23.1%
3 - - 34.0% - 23.0% 31.3% 28.5%
4 - - 27.2% - 11.8% 25.3% 23.0%
5 - - 25.8% - 16.9% 28.7% 24.7%
6 - - 20.6% - 15.6% 28.3% 23.7%
7 - - 20.6% 25.3% 25.3% 25.3% 25.3%
8 - - 24.1% - 18.3% 21.6% 20.0%
9 - - 24.4% - 19.6% 24.4% 23.3%
10 - - 24.6% - 24.2% 24.2% 24.2%
11 - - 19.8% - 13.0% 29.2% 21.5%
12 - - 22.1% - 16.1% 24.9% 21.0%
13 - - 20.8% - 15.5% 27.9% 20.5%
14 - - 35.0% - 35.0% 35.0% 35.0%
15 - - 22.5% - 12.3% 40.2% 22.5%
16 - - 30.9% - 24.6% 39.6% 29.8%
17 78% 64% 24.1% - 20.9% 20.9% 20.9%
18 77% 74% 24.2% - 18.8% 18.8% 18.8%
19 80% 74% 21.5% - 18.8% 18.8% 18.8%
20 88% 74% 20.2% - 18.8% 18.8% 18.8%
21 83% - 87% 77% 21.0% - 18.3% 18.3% 18.3%
22 85% - 91% 62% 19.8% - - 11.4% 30.2% 21.3% 23.1%
* Where data has been provided by the LGPS actuary ** Local authority schools contribution rates are listed if they differ from that of the local authority
Options for Academies in the LGPS PwC | 43 235 Local Government Pension Scheme Advisory Board
Appendix 7: Funding approaches – illustrative example
The table below shows a simple example of how the initial funding level and total contribution rate of a new academy outside of a pooling for funding arrangement can vary under three plausible funding approaches used for academies. In each case the starting point is the ceding council having assets of £85m and liabilities of £100m which implies a funding deficit of £15m (i.e. £100m less £85m) and a funding level of 85% (i.e. 85/100). Within this, the academy is assumed to have liabilities of £2.8m for actives and no identifiable non-active liabilities.
We consider two sub-scenarios under the different approaches to illustrate a plausible range of outcomes. Under (i) the future service rate for the academy is unchanged due to an identical active membership profile but the recovery period applied is shorter. Under (ii) the future service rate for the academy is 2% lower due to a less mature membership profile and the recovery period is unchanged.
Initial Share of Fund (1) Non active cover (2) Common rate(3) position (post conversion) (post conversion) (post conversion) (pre conversion)
Council Council Academy Academy Council Academy Academy Academy Academy (i) (ii) (i) (ii) (i) (ii)
Payroll £20m £18m £2m £2m £18m £2m £2m £2m £2m
Actives £40m £37.2m £2.8m £2.8m £37.2m £2.8m £2.8m £2.8m £2.8m Non-actives £60m £60.0m £0.0m £0.0m £60.0m £0.0m £0.0m £0.0m £0.0m Total liabilities £100m £97.2m £2.8m £2.8m £97.2m £2.8m £2.8m £2.8m £2.8m
Assets £85m £82.6m £2.4m £2.4m £83.2m £1.8m £1.8m £1.9m £0.5m Deficit £15m £14.6m £0.4m £0.4m £14.0m £1.0m £1.0m £0.9m £2.3m
Funding Level 85% 85% 85% 85% 86% 63% 63% 68% 18%
Future service 16.0% 16.0% 16.0% 14.0% 16.0% 16.0% 14.0% 16.0% 14.0% Past service 3.8% 4.1% 1.8% 1.1% 3.9% 4.4% 2.6% 3.8% 5.8%
Total 19.8% 20.1% 17.8% 15.1% 19.9% 20.4% 16.6% 19.8% 19.8% contribution rate
Recovery 20 20 12 20 20 12 20 12 20 period
Notes: (1) Under the share of fund approach, the academy must be given a funding level of 85%. Hence assigned assets are calculated as 2.8 x 0.85=£2.4m and then the funding deficit is 2.8 -2.4= £0.4m. The total contribution rate for the academy tends to be lower than the council since the ratio of its assigned deficit to its payroll is lower. (The council ratio is £15m vs. payroll of £20m but the academy ratio is £0.4m vs £2m payroll.)
(2) Under the non-active cover approach, the first step is to hold assets for the Council to fully cover its non-active liabilities. Thus £60m is reserved. The academy gets a pro-rata split of the remaining assets of £25m i.e. the academy is allocated 2.8/40 x 25 =£1.8m and then the funding deficit is 2.8-1.8=£1.0m.
44 | PwC Options for Academies in the LGPS 236 Local Government Pension Scheme Advisory Board
The funding level is 1.8/2.8= 63%. In this example, the total contribution rate for the academy is higher than the Council and higher than the academies’ total contribution rates under method (1).
(3) Under the common rate approach, the academy must be given a total contribution rate of 19.8%. Hence the past service contribution rate is 19.8% less 16.0% i.e. 3.8% under (i) or 19.8% less 14.0% i.e. 5.8% under (ii). Assets equivalent to these past service rates are then £1.9m or £0.5m under (i) and (ii) respectively. Finally the funding levels are calculated as 1.9/2.8=68% or 0.5/2.8=18%. So the example shows that under this approach the academy can start with a relatively low transfer of assets and initial funding level but still have the same contribution rate.
Options for Academies in the LGPS PwC | 45 237 Contributors to the report
The following individuals contributed to the preparation of this report
Mark Packham Justine Davies James Hartley Head of Public Sector Pensions Public Sector Pensions Specialist Actuarial Modelling Specialist T: +44 (0) 117 309 2151 T: +44 (0) 292 080 2438 T: +44 (0) 117 0309 2141 M: +44(0) 7764 989003 M: +44(0) 7749 713001 M: +44(0) 7803 858616 E: [email protected] E: [email protected] E: [email protected]
This document has been prepared only for the Local Government Pension Scheme Advisory Board and solely for the purpose and on the terms agreed. We accept no liability (including for negligence) to anyone else in connection with this document. © 2017 PricewaterhouseCoopers LLP. All rights reserved. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 170227-174734-CT-UK 238
The Consultation Process and How to Respond
Scope of the consultation Topic of this consultation: Local Government Pension Scheme (LGPS) – Academies Objectives Scope of this consultation: This consultation seeks responses from interested parties on draft objectives for the development of options for academies. Geographical scope: England
Basic Information To: This consultation is aimed at LGPS Pension Fund managers and Pension Committees. Body responsible for the consultation: LGPS Advisory Board
Duration: 17th July 2017 to 29th September 2017 (10 weeks)
Background Getting to this stage: The Scheme Advisory Board (SAB), in support of its work plan for 2016/17, intends to investigate the issues and develop options to address those issues with regard to the policy objective to convert all schools to academies and what this would mean for LGPS pension funds and their host authorities. In progressing this work the Board will ensure that officials at DfE and DCLG are fully aware of its scope and potential outcomes as the cooperation of these Departments will be instrumental in achieving any positive outcomes.
Help with queries
Questions about this consultation should be sent to the email addresses given below.
Who this consultation is aimed at?
The following consultation is aimed at all LGPS Pension Managers and Pension Committees in particular relating to academy employers in the scheme. The consultation is available publicly via the Scheme Advisory Board's website www.lgpsboard.org.
The Board has issued the consultation to the following contacts directly:
LGPS Pension Administration Managers LGPS Chairs of Pension Committees LGPS Fund Investment Contacts
1
239 How to respond
1. You should respond to this consultation by 29th September 2017.
2. You can respond by email to [email protected] and [email protected]. Email responses are preferred.
When responding, please ensure you have the words “LGPS Academies objectives” in the email subject line.
Alternately you can write to: LGPS Academies Objectives Consultation Scheme Advisory Board Secretariat Local Government Association Layden House, 76-86 Turnmill Street, London, EC1 M 5LG
3. When responding, please state whether you are responding as an individual or representing the views of an administration authority.
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240 Consultation
Introduction
1.1 This document commences a period of consultation on draft objectives covering the development of options for academies being progressed by the Scheme Advisory Board.
1.2 The closing date for responses is 29th September 2017.
Background and context
1.3 At its meeting of 26th June 2017, the Scheme Advisory Board proposed the draft objectives below and agreed that a consultation should be opened to interested parties, in anticipation of considering the submissions at its next meeting in autumn 2017.
1.4 The proposed draft objectives are: Protect the benefits of scheme members through continued access to the LGPS Ring fence local tax payers and other scheme employers from the liabilities of the academy trust sector Improve the efficiency and effectiveness of administrative practices Increase the accuracy and reliability of data
In achieving the above any options for changes should not: Significantly alter cash flows at the fund level Significantly alter assets at the pool level
1.5 The Board agreed that the above draft objectives should be shared with DCLG and DfE and a consultation with all stakeholders should be opened and run until mid-September at the earliest.
Consultation Question
1.6 Do you agree that the above should represent the Board’s objectives for the academies project? Choose an item.
1.7 If no, please explain what you would change or add and why.
Click here to enter text.
Respondent details
1.8 Please complete the table below with administrating authority and contact details:
3
241 Administering Authority: Click here to enter text.
Contact name: Click here to enter text.
Email address: Click here to enter text.
4
242
EAST RIDING OF YORKSHIRE COUNCIL 11(i)
PENSIONS COMMITTEE
21 JULY 2017
PRESENT: Councillors Meredith (Chairman), Aird, Billinger, Birmingham, Healy, Mole, Stathers, Strangeway and Wilkinson.
Councillor M Patrick - North East Lincolnshire Council Mr S Brown - Unison Mr L Bolton - Schroder Investment Management Ltd Mr R Worrall - Independent Advisor Councillor Horton attended the meeting as a portfolio holder.
Also in attendance: Press - 0 Public - 0
The Committee met at County Hall, Beverley.
1221 DECLARATIONS OF PECUNIARY AND NON-PECUNIARY INTERESTS - Councillor Billinger declared an interest in Minutes 1223 to 1230 as a member of the Local Government Pension Scheme.
1222 MINUTES - Resolved - That the minutes of the Pensions Committee held on 5 May 2017 be approved as a correct record.
1223 LOCAL AUTHORITY PENSION FUND FORUM - BUSINESS MEETING - The Interim Director of Corporate Resources submitted a report that summarised the business meeting of the Local Authority Pension Fund Forum. The fund joined the Local Authority Pension Fund Forum (LAPFF) in November 2009. Membership of the LAPFF currently consists of 72 local authority pension funds representing circa 85% of LGPS assets under management, including all funds in the Border to Coast Pension Partnerships (BCPP). The business meeting held in June 2017 discussed a number of current corporate governance and investment issues.
Resolved - That the report be noted.
1224 PENSION FUND ANNUAL REPORT AND ACCOUNTS 2016-17 - The Interim Director of Corporate Resources submitted a report which provided a copy of the pension fund accounts for 2016-17 which had been submitted for audit. These were approved by the Head of Finance on 30 June 2016.
During the year to March 2017:
The Fund increased in value to £4,534.6m (2015-16 £3,714.1m). The number of employers increased to 256 (2015-16 238). Membership increased by 6.1% to 109,685 (2015-16 103,375). The average pension paid was £4,661.60 per annum (2015-16 £4,605.35). The Fund generated a return of 21.1% compared to the benchmark return of 20.1%.
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The annual report and audited accounts would be presented to the Pensions Committee on 3 November 2017.
Resolved - That the report be noted.
1225 REVIEW OF INTERNAL CONTROLS AND ASSURANCE REPORTS - The Interim Director of Corporate Resources submitted a report that covered the findings of the work undertaken to assess the internal audit control and procedures in place at:
Schroder Investment Management Ltd, the Pension Funds External Investment Manager; State Street Global Services, the Pension Funds Global Custodian; Investments Section, the Pension Funds Internal Investment Manager, and Pensions Administration Section.
The conclusions of each of the reports were that each of these managers has adequate risk controls and procedures in place. The Statement of Investment Principles (SIP) and Investment Strategy Statement (ISS) from 1 April 2017 required an annual written statement from the investment managers that they have adhered to the principles set out in the SIP. The letters of compliance were attached to the report for the financial year ending 31 March 2017 from the Interim Director of Corporate Resources and Schroder Investment Management.
The Pension Funds Independent Advisor, periodically provided an updated list of directorships and shareholdings. Any potential conflict of interest with the Pension Fund would be disclosed in the Investment Risk Management Schedule of the relevant quarterly report.
Resolved - That the report be noted.
1226 PENSION FUNDS RISK REGISTER - The Interim Director of Corporate Resources submitted a report that presented the six monthly review of the Pension Funds Risk Register and associated schooling matrix. Minor amendments had been made to the existing risks and no new risks had been identified. The Risk Register with proposed changes highlighted and the record of breaches of the legal requirements that govern the Pension Fund were attached to the report. There were two new breaches recorded as a result of a failure to provide the relevant information to scheme members.
The Local Pension Board reviewed the Risk Register at its meeting on 30 June 2017 and made no recommendations.
The Risk Register identified the key risks inherent in the Pension Fund using the principles made down in the Council’s Risk Management Strategy. The record of breaches of the legal requirements that govern the Pension Fund are updated on a semi-annual basis in conjunction with the Pension Funds Risk Register.
Resolved - (a) That the amendments to the Risk Register be approved, and
(b) that the Pension Funds Risk Register be reviewed every six months.
1227 EXCLUSION OF THE PRESS AND PUBLIC - Resolved - That the press and public be excluded from the meeting for consideration of Minutes 1228 - 1230 on the grounds that they are likely to involve disclosure of exempt information as defined in Paragraph 3 of Part 1 of Schedule 12A of the Local Government Act. In making its decision the Committee
Democrat_CR/PENSIONS\MINUTES\21jul17.docx (ie/sm) 244 Pensions 21 July 2017 confirmed having regard to all the circumstances it was satisfied that the public interest in maintaining the exemption outweighed the public interest in disclosing the information.
1228 UPDATE ON BORDERS TO COAST PENSION PARTNERSHIP - The Interim Director of Corporate Resources submitted a report which reminded the Committee that the new LGPS investment regulations required LGPS funds to pool their assets in order to achieve cost savings whilst maintaining investment performance. The Pension Fund had taken a leading role in the creation of the Border to Coast Pension Partnership (BCPP).
The Government had confirmed that BCPP’s proposals meets its requirements for pooling and is content for the implementation of the proposals to progress.
The Partner Funds have approved the creation of the BCPP Limited Corporate Entity which has now been incorporated, the acquisition of an equal share holding, and have executed the legal documentation in their capacity as shareholders.
External advisors had been appointed for all work streams which has enabled detailed work by the Member Steering Group, Officer Operations Group, and the Project Team to progress further. The expected operational date has been moved back from April 2018 to June 2018 due to the delay in the receipt of Government approval.
Resolved - (a) That the report be noted, and
(b) that further progress reports be brought to future Pension Committee meetings.
1229 CORPORATE GOVERNANCE AND VOTING ACTIVITY - The Interim Director of Corporate Resources submitted a report which informed the Committee of the voting records of the Internal Investment Manager for the quarter ending 30 June 2017. Schroder’s had provided a voting record for their discretionary portfolios for the quarter ended 30 June 2017.
Resolved - That the report be noted.
1230 REVIEW OF THE PORTFOLIO AND TRANSACTIONS FOR THE QUARTER ENDED 30 JUNE 2017
INTERNALLY MANAGED FUNDS - The Interim Director of Corporate Resources submitted a report which summarised the position of the full whole Fund for the quarter ended 30 June 2017 and considered the internally managed portfolio and associated transactions in more depth. The value of the fund as at 30 June 2017 was £4,717.7m an increase of £195.1m.
EXTERNALLY MANAGED FUNDS - Mr L Bolton presented a report to the Committee of the portfolio of investments managed by Schroder Investment Management Ltd.
INDEPENDENT ADVISOR - Mr R Worrall commented on the suitability of the Investment Managers’ asset allocation recommendations.
Consideration was given to the recommended tactical asset allocation from the Internal and External Managers.
Resolved - (a) That future investment policy be reviewed in light of advice from the External Manager, Independent Advisor and Interim Director of Corporate Resources, and
(b) that the Strategic Asset Allocation be noted and that the allocation for this quarter be agreed at 57% equities, 17% bonds and cash and 26% alternatives.
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11(i) EAST RIDING OF YORKSHIRE COUNCIL
PENSIONS COMMITTEE
29 SEPTEMBER 2017
PRESENT: Councillors Holtby (Chairman), Healy, Meredith, Mole, Stathers and Strangeway.
Councillor I Glover - North Lincolnshire Council Ms P Foster - Unison Councillor Horton attended the meeting as a portfolio holder.
Also in attendance: Press - 0 Public - 0
The Committee met at County Hall, Beverley.
1231 DECLARATIONS OF PECUNIARY AND NON-PECUNIARY INTERESTS - No declarations were made.
1232 MINUTES - Resolved - That the minutes of the Pensions Committee held on 21 July 2017 be approved as a correct record.
1233 IMPACT OF MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE (MIFID II) - The Interim Director of Corporate Resources submitted a report that informed the Committee that the Markets in Financial Instruments Directive (MiFID II) reclassified local authorities from “per se professional” clients to “retail” clients with effect from 3 January 2018. This reclassification was expected to restrict the type of investments available to the Pension Fund.
Local authorities could opt-up to “elective professional” status upon satisfaction of the criteria for opting up. An industry standard template has been designed to enable a smoother process.
The report highlighted the impact of MiFID II, reviewed the opt-up template and supporting documentation in more detail, and recommended that the completion of the relevant documentation was delegated to the Head of Investments.
RESOLVED - (a) that the report be noted, and
(b) that the completion of the relevant documentation to satisfy the MiFID II opt up criteria be delegated to the Head of Investments.
1234 CONSULTATION ON ACADEMIES OBJECTIVES - The Interim Director of Corporate Resources submitted a report that advised the Committee that the Local Government Pension Scheme Advisory Board (SAB) had issued a consultation paper seeking responses from Local Government Pension Scheme (LGPS) Pension Fund managers and Pension Committees on draft objectives for the development of options for academies to address issues arising from the policy objective to convert all schools to academies. The proposed draft objectives were:-
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Protect the benefits of Scheme members through continued access to the LGPS; Ring fence local tax payers and other Scheme employers from the liabilities of the academy trust sector; Improve the efficiency and effectiveness of administrative practices; and Increase the accuracy and reliability of data.
In achieving the above, any options for changes should not:-
Significantly alter cash flows at the fund level; and Significantly alter assets at the pool level.
The Committee was requested to confirm whether the proposed draft objectives should represent the SAB’s objectives for the academies project and whether any of the objectives should be removed and/or any new ones added. The closing date for responses to the consultation was 29 September 2017.
RESOLVED - (a) that the Committee agree that the proposed draft objectives represent the SAB’s objectives for the academies project, and
(b) that the Committee do not wish to add any new objectives.
1235 SCHEME EMPLOYER YEAR END RETURN EXERCISE 2016-17 - The Interim Director of Corporate Resources submitted a report that detailed the progress to date of the 2016-17 year end exercise. All Scheme employers were required to submit year end returns which included member pay details to enable the East Riding Pension Fund to issue annual benefit statements by 31 August 2017.
The Year End Return Exercise for 2015-16 created a significant number of data queries which had arisen from the member data submitted on the year end return and highlighted a number of issues with the quality and format of data on the year end returns.
Compared to the 240 Scheme employers submitting year end returns for 2015-16, a total of 267 year end returns for 2016-17 were expected to be submitted by 24 April 2017. At that date, 153 returns had been received by the Fund and a further 88 returns were received by 16 June 2017 with only 26 returns outstanding. Validations carried out within the 2016-17 year end exercise highlighted a dramatic increase in data accuracy. By 30 June 2017, only 16 Scheme employers had not submitted accurate year end returns.
RESOLVED - That the report be noted.
1236 PENSION ADMINISTRATION STRATEGY - The Interim Director of Corporate Resources submitted a report that covered the work undertaken by the East Riding Pension Fund Local Pension Board to help manage the performance of Scheme employers in the East Riding Pension Fund. The Board endorsed the implementation of a draft Pension Administration Strategy as allowed under Regulation 59 of the Local Government Pension Scheme (LGPS) Regulations (2013). The draft Pension Administration Strategy outlined the key methods of communication between the Fund and its Scheme employers and sets the levels of performance required from both parties. Under Regulation 59, the Fund was required to consult with Scheme employers regarding the content of the Pension Administration Strategy. The intention of the Strategy will increase employer engagement and encourage ownership of their statutory responsibilities.
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To support the Strategy, the Committee was requested to consider a formal process for Scheme employers identified as underperforming, so that unsatisfactory performance could be well managed and the risk to the Fund minimised.
RESOLVED - (a) that the implementation of the draft Pension Administration Strategy for all Scheme employers be approved;
(b) that the formal process for under performance be agreed and implemented to deal with Scheme employers that consistently underperform the targets agreed in the Pension Administration Strategy; and
(c) that where a Scheme employer continues to underperform following intervention from the Fund, the Committee agree to the introduction of a charge for the additional administration caused by the underperformance to be levied on the Scheme employer.
1237 EXCLUSION OF PRESS AND PUBLIC - Resolved - That the press and public be excluded from the meeting for consideration of Minute 1238 on the grounds that it is likely to involve disclosure of exempt information as defined in Paragraph 3 of Part 1 of Schedule 12A of the Local Government Act. In making its decision the Committee confirmed having regard to all the circumstances it was satisfied that the public interest in maintaining the exemption outweighed the public interest in disclosing the information.
1238 UPDATE ON BORDER TO COAST PENSION PARTNERSHIP - The Interim Director of Corporate Resources submitted a report that reminded the Committee that the new LGPS Investment Regulations required LGPS funds to pool their assets in order to achieve cost savings whilst maintaining investment performance. The Pension Fund had taken a leading role in the creation of the Border to Coast Pension Partnership (BCPP).
The design phase of the operating model had been completed. Tender documents had been issued, or would be issued shortly, for the major service providers, and the FCA application was expected to be made in November 2017.
The Chair and Chief Executive of BCPP Limited had been appointed and the remaining senior executive and non-executive positions were expected to be appointed by November 2017.
The property was expected to be selected in shortly and the lease entered into by December 2017 with an expected three month fit-out period enabling occupation by April 2018.
The project was running slightly behind time but was still expected to be completed by June 2018. The project was broadly in line with the original budget.
RESOLVED - (a) that the report be noted, and
(b) that further reports on progress be brought to future Pension Committee meetings.
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11(ii) EAST RIDING OF YORKSHIRE COUNCIL
Report to: East Riding Pension Fund Local Pension Board 3 November 2017
Wards: Not applicable
LOCAL AUTHORITY PENSION FUND FORUM – BUSINESS MEETING
Report of the Interim Director of Corporate Resources
A. Executive Summary
This report summarises the business meeting of the Local Authority Pension Fund Forum (LAPFF) held in June 2017.
B. Recommendations
That the report be noted.
1. Background
1.1 The Fund joined the Local Authority Pension Fund Forum (LAPFF) in November 2009. Membership of the LAPFF currently consists of 72 local authority pension funds representing c. 85% of LGPS assets under management (c. £200bn), including all funds in the Border to Coast Pension Partnership (BCPP). The LAPFF held a business meeting in June 2017 to discuss a number of current corporate governance and investment issues.
2. Business Meeting
2.1 The issues discussed at the meeting were:
2.2 Executive Remuneration
. Voting alerts. Following the introduction of new UK regulations in 2014 requiring a binding vote on companies’ pay policies at least every 3 years, a majority of companies are holding votes on their pay policies at their 2017 AGMs. LAPFF has identified the ten companies with the highest oppose votes on their remuneration reports in 2016 that are holding pay votes this year. During the quarter, LAPFF issued voting alerts on five of these companies.
. For Carillion, Smith and Nephew, and GlaxoSmithKline LAPFF found that despite improvements their remuneration policies did not align with LAPFF’s expectations. Concerns included undue emphasis on variable rather than fixed pay, operation of discretion over pay awards, and the use of “golden hellos or parachutes”. The Pension Fund has holdings in Smith and Nephew and GlaxoSmithKline.
. Voting alerts on BP and Shell noted areas of concern but balanced against positive changes in terms of strategic signalling towards an orderly transition to a low carbon economy. The Pension Fund has holdings in BP and Shell.
249 . Engagement with the US Securities and Exchange Commission (SEC). LAPFF joined with the Council of Institutional Investors in writing to the SEC to share concerns about several provisions in the Financial Choice Act 2017. These include making it harder to file shareholder resolutions, an advisory rather than mandatory vote on executive compensation, and limits on the claw back of unearned executive compensation.
2.3 Environmental Issues
. Climate change.
. LAPFF have signed a joint letter with 200 other global investors (representing assets of $15trillion) urging the G7 to stand by the Paris Agreement on Climate Change and push ahead with its implementation.
. LAPFF issued a voting alert relating to the re-election of a director at NRG Energy who has publicly stated that climate change is not real. The Pension Fund does not have a holding in NRG Energy.
. Climate disclosure.
. LAPFF issued voting alerts recommending the approval of shareholder resolutions on climate change disclosure at a number of companies. Of the companies highlighted, the Pension Fund has holdings in Chevron and Exxon Mobil.
. LAPFF had several meetings with companies about their strategies for the transition to a lower carbon global economy. Of the companies highlighted, the Pension Fund has holdings in BP, Shell, and Rio Tinto.
2.4 Board Diversity
. Enquest. LAPFF has issued a voting alert due to a lack of board diversity. The Pension Fund does not have a holding in Enquest.
2.5 Other issues
. Cyber risk. LAPFF has identified cyber risk as an area of risk management where company boards could improve. As a result, it is to undertake engagement activities with companies where the risk is considered to be material or where evidence demonstrates that it may not be being sufficiently addressed. It has compiled a list of 25 companies where cyber risk is considered to be high and where the LGPS has significant holdings. Of these companies the Pension Fund has holdings in Vodafone, Lloyds TSB, BT Group, HSBC, Prudential, Standard Chartered, WPP, Aviva, ITV, RBS, Tesco, Facebook, Verizon Communications, Alphabet, Apple, Microsoft, Amazon, Visa, AIA, Citigroup, HDFC Bank, and Samsung Electronics.
. Carillion. LAPFF met with the company to ask whether the company will commit to replacing a director who has recently left the Board with someone with a similar level of experience in environmental matter and human rights in the supply chain and to also commit to producing a human rights impact assessment. The Pension Fund does not have a holding in Carillion.
250 . Wells Fargo. LAPFF issued a voting alert recommending funds support a review and report on business standards at the company following the findings of US regulators and subsequent fines regarding abuses against customers. The Pension Fund has a holding in Wells Fargo.
. Vodafone. LAPFF met with the company to discuss a number of issues including cyber security, executive pay, mergers and acquisitions, tax planning and board composition. There was a particular focus on the senior independent director who has a prior affiliation to the company’s auditor. The Pension Fund has a holding in Vodafone.
. Easyjet. LAPFF met with the company to discuss a number of issues including the impact of the UK leaving the EU, executive pay including long term incentive plans and the Board’s use of upside discretion, carbon emission reduction and employment terms for pilots following a well-publicised industrial dispute. The Pension Fund has a holding in Easyjet.
. Financial Reporting Council (FRC) and Reliable Accounts. The FRC has asserted in the past that accounting standards were consistent with company law, as the Companies Act applies to directors and these directors are able to use another set of books and records in addition to the published accounts. However, as part of the Companies Act applies to auditors who are required to use the information in the latest set of accounts this negated the FRC’s argument. LAPFF has written to the senior partners of the six largest accounting firms to set this record straight.
3. Conclusion
3.1 The LAPFF continues to engage with companies, other institutional shareholders, and regulatory organisations with respect to a number of corporate governance issues.
3.2 The LAPFF provides the ideal forum to deal with these types of issues as it has both the resources and the influence with which to effect change. This is demonstrated by the vast number of collaborative initiatives and consultation responses that the LAPFF has participated in.
3.3 It is also demonstrated by the significant increase in membership in recent years as local authority pension funds are increasingly seeing the benefit of collaboration and pooling of interest. Darren Stevens Interim Director of Corporate Resources
Contact Officer: Julian Neilson Head of Finance Telephone Number: 01482 394100 E-mail: [email protected]
Contact Officer: Mark Lyon Head of Investments Telephone Number: 4135 E-mail: [email protected]
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