Agenda item

Every three years the Fund is required by the regulations to undertake a triennial valuation which sets the long-term funding strategy. As future investment returns are a key component of the funding strategy, the investment strategy is also reviewed to ensure it can deliver the expected return.

The Group Manager for Funding, Investments & Risk introduced the report to the Board and highlighted the following points from it.

Actuarial Valuation 2022

The average deficit recovery for the Fund has reduced from 13 years in 2019 to 12 years in 2022 which is line with the medium-term target. The funding level has also improved from 94% in 2019 to 96% in 2022.

The discount rate used to value the past service a liability is based on the expected return on the assets relative to CPI. At 31 March 2019 the equivalent discount rate was CPI +1.75% p.a. This was reduced to CPI +1.50% in 2022 due to a fall in investment return expectations. This compares to a best estimate for investment returns of CPI+2.5% which shows the degree of prudence built into the assumptions.

Some smaller employers have had to leave the fund as their final member leaves. Still have around 450 employers and the valuation remains a resource intensive process.

Revised Investment Strategy

The 2022 strategic investment review was undertaken at a challenging time for investment markets. Therefore, the strategic focus re-examined the overall level of return and risk, the role of Risk Management Strategies in the overall policy framework and our net zero/climate targets.

The revised strategic allocation is based on the following:

a)  Risk Appetite: The Committee concluded that to maintain as stable as possible employer contributions, increasing returns and therefore risk was not warranted given the funding objective and funding level.

b)  Preferred strategic benchmark: The current strategic benchmark allocations between equities, liquid and illiquid growth assets, and fixed income achieves the appropriate balance of risk and return to provide stability of contributions.

c)  Diversification: The liquidity analysis concluded that the Fund was nearing its maximum allocation to illiquid assets. Therefore, alternative allocations between equities and other liquid growth assets did not improve the risk and return expectations sufficiently to warrant changing allocations.

The main asset allocation change is the initial target allocation of 3% to Local, Social Impact assets. This would be funded from the 32.5% already held in illiquid assets. The focus of the portfolio will be the South West which is a sufficiently local regional footprint as restricting to the Avon area could be too narrow to have sufficient impact through a diversified portfolio. National opportunities would also be considered to provide greater flexibility to meet the investment objectives.

The Investment Panel will review the Hedging Strategy in July 2023 and the Fund’s climate targets are due to be reviewed during September / October 2023 following an engagement exercise with stakeholders.

Steve Harman commented that it was positive to see the funding level had risen to 96% and asked how that compared with other Funds.

The Group Manager for Funding, Investments & Risk replied that historically the Fund would be placed around midway in comparison with others and that she felt this was probably still the case. She added that she was aware that some Funds were achieving funding levels of 110% - 115%, but would be asking them what they were doing to lock in their funding. She said that realistically the Fund would only want to be targeting a 100% funding level.

The Chair asked if the Fund was coping in terms of having enough cash available within it.

The Group Manager for Funding, Investments & Risk replied that the Fund was in a good position in this regard currently as all pre-payments had just come in. She added that annual cash management was becoming more important as they were not always in control of specific draw downs for private market portfolios.

Helen Ball asked what was hoped to be achieved through the Local, Social Impact investing.

The Group Manager for Funding, Investments & Risk replied that they were seeking to achieve an overall positive return for the Fund. She said, for example, that investing could take place in Housing, Climate Solutions and Renewables (Infrastructure). She added that investment would be carried out at arm’s length through external managers and that they would report back to the Board on progress in due course.

The Board RESOLVED to note:

i)  The outcome of the actuarial valuation

ii)  The revised investment strategy.