Agenda item

A presentation will be given at the meeting.

The Chair reminded Members that the Board had no regulatory role in relation to Project Brunel, but that its duty to advise the Avon Pension Fund on its efficiency and effectiveness did give the Board a role in monitoring the Fund’s involvement in the Project.

The Head of Business, Finance and Pensions updated the Board on the progress of Project Brunel and responded to questions from Members. A copy of his PowerPoint slides is attached to these minutes as Appendix 1.

He said that the origin of pooling went back to Government consultations in 2013 about the cost effectiveness of funds. There had been discussion about merging funds and about whether funds should be required to invest only in passive portfolios. However, the Government had not pursued these options. The Government had eventually opted for pooling and a requirement that funds should increase their ability to invest in infrastructure. Recently, the Government seems to have given the infrastructure investment criterion a lower priority. Some funds have challenged the idea of pooling, but the Government is not going back on this. Work on Project Brunel, which now comprises 10 funds, began in 2015. It was, and probably still remains, the most advanced of any of the pools. Early on it was agreed that the best form of governance would be a joint committee, under which certain functions were centralised, but with much remaining the same as at present, but the game was changed when DCLG said that the pool would have to be FCA-regulated. This required the establishment of a company to undertake the operations of the pool. The current estimate of net cost savings to the Project Brunel funds from pooling was up to £60m a year after a spike in costs during the transition period ending in 2023/24. These savings might not seem very great in relation to the size of the pool. This presented a challenge to the S151 Officers of the various authorities to demonstrate value for money.

Q: what is the payback period for transition costs?

A: this differs for every fund, but is in the range of 2024-2030. In the case of Avon it is 2022-24.

Q: is there a danger that some funds will not achieve the statutory local authority payback period?

A: yes, this being discussed with the Secretary of State.

Q: is there scope for improving the transparency of transaction costs?

A: work is being done on projecting transaction costs and tax liabilities. The Government will be asked to consider tax relief for funds, at least during the transition period, since they are incurring additional costs solely because of the Government’s requirements. However, it is unlikely the Government will grant this.

He said that at present the 10 funds in Project Brunel had about 170 investment mandates, which would be reduced to about 22 categories through which the funds would be able to pursue their individual investment strategies. The Environment Agency and the Avon Fund had well-developed policies on socially responsible investment, so pooling could be useful in setting in setting benchmarks on this and other issues.

Q: how will fund members be represented on the board of the investment company?

A: this will not be straightforward, because the company will operate commercially, while members’ benefits are guaranteed by the state and will be paid irrespective of company performance, giving little incentive for members to become engaged with the affairs of the company. A member representative could be appointed to the Oversight Board.

The Chair asked for a report back to the Board when the system of voting rights on the Brunel board and the representation of fund members had been decided.

The Head of Business, Finance and Pensions said that the Brunel company would appoint the investment managers. Obtaining FCA approval would take time, and it would be necessary to appoint key members of the company board in advance. Company board members and the investment staff are regulated by the FCA. Each of the 10 administering authorities would have a contract with the company. Each fund would be a shareholder and a contract manager, though those roles would be separated. An independent chair, who is a former investment adviser, had been appointed as chair of the shadow Oversight Board. The Oversight Board has approved everything that had gone into the business case. The final business case would be considered by the Avon Pension Fund Committee in December and would be put to Bath and North East Somerset Council on 14 February 2017.

Q: will access for the administering authorities’ internal or external auditors be specified in the contracts to allow verification of investment returns reported by the company?

A: scrutiny arrangements are yet to be fully developed. The Fund has never done its own checks on the returns reported by its investment managers, but has relied on the work of the managers’ auditors.

Q: could we not look at the transparency arrangements that other pools are developing and included disclosure and transparency provisions in the contracts?

A: CIPFA issued new guidance on accounting for investment manager fees last year. Every year the Fund receives the valuations of investment managers and the reports of their auditors on them.

Pooling will have an impact on the governance arrangements of the Avon Pension Fund with the establishment of a Joint Committee. It will also impact on the Pensions Team, as functions are transferred to the investment company and mechanisms are established within the Fund for monitoring the contract with the company.

Q: will the investment company’s risk register be shared with the Committee?

A: this will be decided by the company board and CEO when they have been appointed.

The Chair asked for a report back on any transparency obligations imposed on investment managers.

RESOLVED to note the update.