Report and accounts 2015:Layout 1 16/6/15 15:48 Page 1 West Midlands Pension Fund West Midlands Pension Fund Annual Report 2015 Report and accounts 2015:Layout 1 16/6/15 15:48 Page 2 West Midlands Pension Fund Annual Report 2015 Contents 63653 56 59 67 89 106 98 124 128 2 Introduction 36 Investment Policy 89 Pensions Administration and Performance Strategy 6 Management and Financial Performance 53 Scheme Administration 98 Funding Strategy Statement Report - Scheme Management and 106 Statement of Advisors (as at 31 March 2015) 56 Actuarial Report Investment Principles - Risk Management 59 Governance Arrangements 124 Communications - Financial Performance - Governance Compliance Policy Statement - Administrative Management Statement Performance 128 Further Information - Member Training - Corporate Responsibility 67 Statement of Accounts Report and accounts 2015:Layout 1 16/6/15 15:48 Page 3 2 West Midlands Pension Fund Annual Report 2015 Introduction Introduction from the Chair of the Pensions Committee and the Strategic Director of Pensions Councillor Thomas (Bert) Turner Chair Of Pensions Committee This has been a year of dramatic change for the Local Government We are acutely aware of the need to demonstrate effective cost Pension Scheme (LGPS). The year began with the biggest change in control, particularly at a time where many of our employers are local government pensions for a generation: the switch to pensions experiencing significant budget pressures. During the year, we being based on career-average salaries instead of final salaries. undertook a restructure of our investment portfolio, withdrawing from We worked hard to prepare for this change during the preceding arrangements which did not meet our strategy or offer the best value year, and that work paid off as – despite the need to make major for money. We have also strengthened our in-house investment changes to IT systems, to train staff and communicate the changes to management team, and are excited to be launching a new in-house members and employers, not to mention the added complexity of actively-managed global equities portfolio during the forthcoming effectively operating four different benefit schemes – we were able year. Taken alongside other restructuring activities in the recent past, to continue providing pensions to over 80,000 pensioners, and and planned for the near future, these initiatives will have generated supporting another 195,000 active and deferred members to provide savings of almost £25 million per year on investment management for their retirement. fees. These savings are crucial, because ultimately they will go towards paying members’ pensions, and alleviate the pressure on The agenda of regulatory change has not let up during the year, with employers’ budgets. new governance arrangements being introduced for all public sector pension schemes. For the LGPS, this has meant the establishment of The cost of administration is also a key focus for us. As a result of local pensions boards (with effect from April 2015), and a national tight financial controls, we have been able to reduce the cost of Scheme Advisory Board. We are proud to have been a forerunner in administration and governance per member from £19.16 in 2013/14 establishing and recruiting our own local Pensions Board, and are to £18.70 in 2014/15. This is particularly noteworthy given the pleased with the knowledgeable and committed individuals we have continued growth in the number of employers during the last year – attracted to this important role. up from 420 to 471 – as well as an increase in scheme members of Wider changes in the pensions industry also continue to impact upon more than 7,000. us. The newly-introduced ability to access pension savings more flexibly from April 2015, including the ability to withdraw a cash lump-sum, could apply to members of our Fund. Whilst we believe that the LGPS offers an excellent means of providing for an income in retirement, and one that is not easy to match, we are mindful of, and planning for, any potential impact. This has been a good year for our investments, with total returns amounting to 15.1%, compared to a benchmark return of 11.6%. The main contributors to the outperformance were good relative performances from the private equity and absolute return portfolios. Over the last five years, annualised returns have amounted to 8.0%, significantly ahead of both inflation and pay growth. One of the key ways in which we are keeping administration costs down is through our focus on developing an electronic business model. During the year, we have continued to promote our online web portal for members, with the number of registrations rising to 23,157 by the end of the financial year. We have also redesigned and modernised our website, which has resulted in pleasing feedback from users, and next year we will be introducing automatic electronic compilation for remittance of contributions. We are grateful to all of our employers and members for embracing this medium of transacting. Report and accounts 2015:Layout 1 16/6/15 15:48 Page 4 3 Management Investment Scheme Pensions Funding Statement of and Financial Policy and Administration Actuarial Governance Statement Administration Strategy Investment Communications Further Performance Performance Report Report Arrangements of Accounts Strategy Statement Principles Policy Statement Information Introduction Geik Drever Strategic Director of Pensions We are particularly pleased to note that trustees achieved a combined total of 865 hours of training during the year. In general, this has been a good year for the Fund, which has seen us rise to the numerous challenges placed before us, and leaves us well-positioned to face the challenges of the future. There will be many such challenges, including the ongoing focus on the cost of the LGPS, further regulatory changes both to the LGPS and in the wider pensions industry, the impact of declining cashflow and market returns and, last but not least, the issue of the pensions deficit and the funding strategy to make good that deficit. We would like to take this opportunity to thank the members of the Pensions Committee, the Investment Advisory Sub-Committee and the Joint Consultative Forum for their work during the year, and whose advice, support and challenge have been invaluable. We would also like to extend our thanks to the Fund’s staff, whose professionalism and dedication to the service of our members throughout a period of change has been unfaltering and truly Responsible investment sits at the heart of our approach to managing impressive. our members’ funds, and we have further strengthened this with the Councillor Thomas (Bert) Turner recruitment of a Responsible Investment Officer this year. Where Chair Of Pensions Committee companies do not meet the high standards that we and fellow Date: June 2015 investors expect, we challenge them. We believe in an approach that combines three key elements: voting globally, engagement through Geik Drever partnerships and shareholder litigation. Strategic Director of Pensions Date: June 2015 We are a founder member and active participant of the Local Authority Pension Fund Forum, which is a significant and influential player in the responsible investment arena. Our Assistant Director of Investments also plays a crucial role on the Board of the United Nations-backed Principles for Responsible Investment. In December 2014, we enhanced governance in this area, further still, by introducing a Statement of Investment Beliefs. We were delighted to win the Local Government Chronicle Investment Award for Skills and Knowledge this year for our trustee training programme. We are also proud to have achieved and maintained Customer Service Excellence and Investors in People awards: two accreditations that unambiguously reflect our focus on providing a high quality service to our members and employers, and on investing in the skills and knowledge of our staff and trustees. Report and accounts 2015:Layout 1 16/6/15 15:48 Page 5 4 West Midlands Pension Fund Annual Report 2015 Introduction 277,558 473 £11.5bn TOTAL SCHEME MEMBERS* ACTIVE SCHEME EMPLOYERS NET ASSETS OF THE FUND £500.2m 8 2,110 104,250 TOTAL CONTRIBUTIONS PENSIONER MEMBERS CONTRIBUTING MEMBERS 91,198 DEFERRED MEMBERS *includes unpaid/unclaimed refunds and beneficiaries The Fund’s Core Objectives • to be a top-performing fund; • to achieve target investment returns; • to provide excellent customer service; • to meet our funding strategy The figures shown in the following section, which do not form the statutory accounts of West Midlands Pension Fund, have been extracted from the full accounts of the City of Wolverhampton Council. You can obtain a copy of the full accounts of the City of Wolverhampton Council by contacting the City of Wolverhampton Council team or through the Council's website. Contact details can be found on page 7 of these stand-alone annual report and accounts. Report and accounts 2015:Layout 1 16/6/15 15:48 Page 6 5 Management Investment Scheme Pensions Funding Statement of and Financial Policy and Administration Actuarial Governance Statement Administration Strategy Investment Communications Further Performance Performance Report Report Arrangements of Accounts Strategy Statement Principles Policy Statement Information Introduction Drivers of Change The Fund has identified the following eight 3) The Impact of Declining Cashflow on 6) Risk Management key drivers of change that will impact on Investment Strategy Given the financial constraints currently its operating environment over the medium At present, the Fund receives more in faced by the public sector as a whole, and term. contributions and investment income than the local government sector in particular, it pays out in benefits; however, as it the risk of employers facing critical financial 1) LGPS Reforms continues to mature, the ratio of pensioners hardship is inevitably heightened. Significant changes to the governance of to actively-contributing members will Monitoring, and providing support to the Fund and of the LGPS generally take increase, meaning that the cash surplus will employers, will be key to managing this.