Agenda item

The Investment Manager presented the report.

At the invitation of the Chair the Investment Manager commented on the issues raised by the Board in its response to the Funding Strategy Statement (FSS) consultation as detailed in section 4.10 of the report.

(a)  Solvency

The Board had suggested that it might be prudent for the Fund to target greater than 100% solvency to smooth out the risk arising from market fluctuations. The actuary advised that that the Fund did not need to do that, as there was enough freedom in its discount rates and assumptions not to require higher solvency ratios, except in the case of some smaller employers who might be exiting the Fund.

(b)  Deficit recovery

The Board had suggested that a reduction in the debt recovery period from 16 to 13 years could impact on employer contributions and trigger a negative reaction from the Fund’s key stakeholders. However, the deficit recovery period could be tailored to employers’ specific needs. As part of the valuation process every employer’s results were reviewed. In general, the aim was to reduce the deficit recovery period for employers to at least 12 years. With some employers, such as Academies, it was more difficult, because they were facing very large increases in future service rates because of the McCloud decision and because of their employee profile and a reduction in the discount rate.

(c)  Future regulatory changes

All known potential regulatory changes had been included in the FSS. The policy on McCloud had been made more specific, and all employers had been notified of their estimated McCloud-related additional costs. Because It is not known when the changes arising from the McCloud decision will be applied and because they will be backdated, employers will be asked to pay these costs from 1^st April 2020.

(d)  Climate change

The Board had recommended that the FSS should refer to climate change. However, it was felt that climate change was more appropriately addressed in the Investment Strategy Statement. The level of prudence included in the asset outperformance assumption is a contingency for all investment risk including climate change. There is a great deal of discussion in the actuarial profession about the impact of climate change on demographics and insurance, but nothing really meaningful has emerged at this stage. A Member noted that climate change was now frequently referred to in Pension Committee documents and was to be discussed at a Pensions Committee workshop in December, so it was a subject that naturally attracted the attention of the Board, which wanted to understand how it impacted on the Fund and the work of the Pensions Committee. The Head of Business, Finance and Pensions suggested that this had to be seen in perspective. The main task of the Pension Fund Committee was to ensure that sufficient returns were made on investments to pay pensions. Therefore, the Investment Strategy had to address risk, including climate risk. The Pensions Committee was currently reviewing its investment strategy and the workshop was part of that review. The draft of the new Investment Strategy would be considered by the Pensions Committee in March 2020. The Fund’s officers had done a great deal of work on assessing climate change risk, though this work had not been widely publicised. There is in certain quarters a hope and an expectation that the Fund will do something dramatic in relation to climate change in its Investment Strategy, but what it can do is always subject to its primary duty of being able to pay pensions.

(e)  Efficacy

The Board had recommended that the FSS should include policy statements on how the financial savings from APF asset pooling into BPP would affect future employers’ contributions from 2019 onwards. The Investments Manager said that this was not felt to be appropriate. The FSS was about the wider picture of costs, the expected rate of return, the deficit and the level of contributions. Savings would be taken into account at the next valuation. It was expected that higher returns would be achieved through pooling, which would have a direct impact on the funding position.

The Chair asked whether there had been any recent cases of employers being unable to pay their contributions. The Investments Manager replied that this had not happened recently, though it had in the past. When an employer was felt to be particularly vulnerable, they were helped to leave the Fund so that their liabilities and costs could be capped. Employers usually became vulnerable because they had had a big fall in the number of employees while still having significant liabilities to the Fund. The Fund tries to move some employers facing difficulties onto the lower risk strategy, to try to reduce their investment risk and match their cash flow with their liabilities, but this is not easy at a time when bond yields are so low. The Chair asked whether the monitoring of at-risk employers is reported to the Pensions Committee. The Investment Manager replied that this was done annually. A report will be made in March 2020 after the completion of the valuation. There were a lot of meetings with individual employers taking place at present. Covenant assessment was an ongoing process, and there was a particular focus on further and higher education bodies, because they are not guaranteed, and on any community admission bodies that are not guaranteed.

The Chair noted that there are about four actuarial firms that dominate the LGPS market. One of those firms seems to offer to deliver the result that the client wants. The Government Actuary’s Departments has an exercise to standardise the results of valuations. He used to work for a fund that was ranked 50 out of 89 in the GAD table on the ground that it had been too ambitious in its assumptions. He asked whether the GAD table was shared with the Avon Pensions Committee. The Investment Manager said that it was, and that Avon was generally ranked somewhere in the middle of the table. In her view GAD’s assumptions were not relevant to any fund’s investment strategy, and that their approach was purely a mechanism for standardisation. It does not help a fund to decide what to do, but just shows a fund’s level of prudence. The Chair said it might be considered a reasonably good measure of prudence.

RESOLVED to note the process undertaken to finalise the Funding Strategy Statement.