PUBLIC Agenda Item No. 4 (a) DERBYSHIRE COUNTY COUNCIL PENSIONS AND INVESTMENTS COMMITTEE 22 October 2019 Report of the Director of Finance & ICT DERBYSHIRE PENSION FUND ANNUAL REPORT 1 Purpose of the Report To receive and to approve the publication of the Pension Fund Annual Report for 2018-19. 2 Information and Analysis In accordance with the Local Government Pension Scheme Regulations 2013, the Administering Authority must prepare and publish an Annual Report (the Report) for the pension fund (the Fund) on or before 1 December following the year end. The full Annual Report contains over 225 pages, including Appendices comprised of previously published (and approved information) and is not, therefore, attached to this report. Members have received a full copy of the Report via email and printed versions are available on request. The Report is split into nine sections and covers: Glossary of Terms and Abbreviations Introduction Key Statistics Fund Governance Financial Performance Investment Funding Scheme Administration Pension Fund Statement of Accounts The Fund’s Statement of Accounts also form part of the County Council’s Accounts which have already been considered and approved by the County Council’s Audit Committee. PHR-1009 PUBLIC The external auditor’s opinion, which confirms that the information contained within the Annual Report is consistent with the Fund’s Statement of Accounts for 2018-2019, is included in the Report. It also confirms that the statements have been properly prepared in accordance with accounting standards and give a fair view of the Fund’s transactions during the year and its assets and liabilities at the year end. This year, the Investment section of the Report contains a greater amount of detail with respect to LGPS Central Limited, the investment pooling company jointly owned by Derbyshire County Council and seven other Councils, and with respect to investment assets managed by the pooling company on behalf of the Pension Fund, in line with new CIPFA guidance on preparing the Annual Report. The Appendices include copies of the Fund’s: Governance Policy & Compliance Statement; Communication Policy Statement; Investment Strategy Statement; Funding Strategy Statement; Actuarial Valuation Report 2016; and a Schedule of Employees’ and Employers’ Contributions. The 2018-19 Annual Report of Derbyshire Pension Board is also included. 3 Considerations In preparing this report the relevance of the following factors has been considered: financial, legal and human rights, human resources, equality and diversity, health, environmental, transport, property and prevention of crime and disorder. 4 Background Papers Working papers held within Finance Division. 5 Officer’s Recommendation That Committee approves publication of the Pension Fund Annual Report as required by the Regulations. PETER HANDFORD Director of Finance & ICT PHR-1009 Pension Fund Annual Report for the Year Ended 31 March 2019 1 Pension Fund Annual Report for the Year Ended 31 March 2019 Page Glossary of Terms and Abbreviations 3 - 4 Introduction 5 - 6 Key Fund Statistics 7 Governance 8 - 18 Financial Performance 19 - 22 Investment 23 - 44 Funding 45 - 48 Scheme Administration 49 - 57 Statement of Accounts 58 - 10 3 Auditor’s Opinion 10 4 - 10 6 Appendix 1: Governance Policy and Compliance Statement 10 7 - 11 5 Appendix 2: Derbyshire Pension Board Annual Report 2018- 11 6 - 120 19 Appendix 3: Communications Policy Statement 121 - 129 Appendix 4: Investment Strategy Statement 130 - 141 Appendix 5: Funding Strategy Statement 142 - 182 Appendix 6: Actuarial Valuation Report 2016 183 – 222 Appendix 7: Employee and Employer Contributions 223 – 226 How to Contact Us 227 2 Glossary of Terms and Abbreviations Abbreviation Term ABS Annual Benefit Statement AUM Assets Under Management AVCs Additional Voluntary Contributions Bps Basis Points Charge CARE Career Average Revaluated Earnings CIPFA Chartered Institute of Public Finance Accountants CPI Consumer Price Inflation CPS Communications Policy Statement DCC Derbyshire County Council DPF, Pension Fund or Fund Derbyshire Pension Fund ESG Environmental, Social and Governance FRC Financial Reporting Council FRS Financial Reporting Statement FSS Funding Strategy Statement GMP Guaranteed Minimum Pension HMRC Her Majesty’s Revenues & Customs IAS International Accounting Standard IIMT In-House Investment Management Team IFRS International Financial Reporting Standard ISS Investment Strategy Statement LAPFF Local Authority Pension Fund Forum LGPS Local Government Pension Scheme LGPS Central LGPS Central Pool LGPS Central Partner Fund The LGPS pension funds of Cheshire, Derbyshire Leicestershire, Nottinghamshire, Shropshire, Staffordshire, Worcestershire and West Midlands; the collective owners of the LGPS Central Pool and the shareholders of LGPS Central Limited LGPS Central JC LGPS Central Pool Joint Committee LGPS Central PAF LGPS Central Pool Practitioners’ Advisory Forum LGPS Central SF LGPS Central Pool Shareholders Forum 3 LGPSC LGPS Central Limited MiFID II Markets in Financial Instruments Directive MHCLG Ministry of Housing Communities and Local Government P&IC or Committee Pensions and Investments Committee PAS Pensions Administration Strategy RPI Retail Price Inflation PRIIPs Packaged Retail and Insurance-based Investment Products SAAB Strategic Asset Allocation Benchmark SAB LGPS Shadow Advisory Board SERPS State Earnings-Related Pension Scheme SLA Service Level Agreement SORP Statement of Recommended Practice SSC Shared Service Centre TpR The Pensions Regulator 4 Introduction Derbyshire Pension Fund’s principal objective is to deliver secure, accurate and efficient administration of the Local Government Pension Scheme (LGPS), ensuring that sufficient assets are available to meet benefit payments for the Fund’s members both now and in the future. Assets are accumulated in the Pension Fund through a combination of contributions from employees and employers within the scheme and from investment returns. Derbyshire County Council (the Council) is the administering authority for the LGPS within Derbyshire, investing and administering the Fund on behalf of over 280 employers and over 100,000 members. The policies and strategies set out in this report have been agreed by Derbyshire’s Pensions and Investments Committee (the Committee) and aim to support the delivery of the Fund’s objectives. The role of Derbyshire Pension Board (the Board), in assisting the Council with the governance and administration of the Pension Fund, has continued to develop during 2018/19. The Board encourages and supports the adoption of best practice and increasingly contributes to the robust governance arrangements surrounding the Fund. The successful launch of www.derbyshirepensionfund.org.uk during 2018, has provided the Fund with a distinct on-line presence and has enhanced the ability of the Fund to communicate with all of its stakeholders. The website provides access to a wide range of information on the LGPS and to Fund specific information. At the end of March 2019, the value of the Fund’s assets was over £4.9bn. In a volatile year for markets, the Fund’s investments provided a return of 5.6% in line with the Fund’s benchmark return. A sharp sell-off in equity markets in the final quarter of 2018 was followed by a very strong recovery in the first quarter of 2019. Over 3, 5 and 10 years, the returns were 10.1% p.a, 8.4% p.a and 10.5% p.a respectively, outperforming the Fund’s benchmark over each of those time periods and comfortably ahead of the rate of inflation and the assumed long term investment return of 4% used in the last actuarial valuation to calculate the funding position of the Pension Fund. Whilst domestically developments concerning Brexit caused volatility in asset prices, globally the focus has been on the future direction of interest rates, trade negotiations and geopolitics. Uncertainty about the sustainability of global economic growth, with the global cycle appearing to have peaked at the end of 2017, and uncertainty about the sustainability of company earnings and equity market valuations, continued to provide challenges to asset allocators. Following a review of the Fund’s Strategic Asset Allocation Benchmark (the Benchmark), the allocation to growth assets (largely equities) was reduced and the allocations to income assets (property, infrastructure and multi-asset credit) and protection assets (government & investment grade bonds and cash) were increased. The benefit of holding a diversified 5 portfolio of assets was demonstrated during the period of equity market weakness in the fourth quarter of 2018 as returns from the Fund’s investments in bonds, property and infrastructure remained positive. The Fund has continued to work closely with its partners in the LGPS Central Pool, the LGPS pension funds of Cheshire, Leicestershire, Nottinghamshire, Shropshire, Staffordshire, Worcestershire and West Midlands, to develop the oversight arrangements for LGPS Central Limited (LGPSC), the company established to manage investments on behalf of the participating pension funds. The Partner Funds and LGPSC have jointly developed a Product Development Protocol to ensure that the launch of LGPSC products fits in with the delivery of fund investment strategies and that all parties are involved at every stage of the product development lifecycle. It is anticipated that the transition of the Fund’s assets into LGPSC products is likely to take several years. The Pension Administration Team implemented