Agenda item

The purpose of this report is to present to the Committee the 3-year plan and budget for the period 2024-27. 

The Head of Pensions introduced this report to the Committee and highlighted the following areas from within Annex 1.

Management Summary

·  Global markets were broadly favourable during 2023. The Fund’s portfolio value increased by 9% to £5,700m and we enter 2024 in a robust financial position with 97% funding.

·  The Fund reviewed its investment strategy and executed material changes in 2023-24: equities are now split 50:50 across active and passive with materially lower fees.

·  The Fund has reduced equity hedging from 100% to 50% to raise longer term growth potential.

·  The Fund confirmed £175m for Local Impact investing, initiated with a £50m investment in solar farms.

·  The new investment strategy confirmed more ambitious climate targets with the Fund’s net zero date for its investments brought forward from 2050 to 2045. This target is underpinned by tangible near-term actions for the period 2024-30.

·  Service performance in aggregate remains below required levels with only 5 of 18 service measures completed within target timescales. This is a result of high staff vacancy rates at the start of the period, regulatory changes e.g. McCloud, and the emergence of new challenges such as the Pension Increase issue which had to be promptly resolved.

To address the service challenge, we are driving key areas of action:

• People: the Fund will complete a new organisational structure and continue recruitment to build full capacity of 92 FTEs.

• Digital: we will develop digital communications and improve My Pension Online to enable simpler self-serve and drive operational efficiency.

• Control: we will review internal processes to drive control improvements and reduce operational risks.

Governance

·  Good Governance Review (GGR) – The Scheme Advisory Board’s review sets out recommendations to improve governance of LGPS. Statutory guidance necessary for the recommendations to take legal effect is expected to be published this year. The Fund has taken action to comply with draft requirements and during 2024 the Fund will implement any additional requirements from the Scheme Advisory Board’s GGR.

·  Knowledge & Skills

o  Both Committee and Board members committed in 2023 to complete Hyman’s Learning Academy modules and this now forms a mandatory part of the Fund’s Training policy.

o  Achieving compliance in line with our policy will be a priority for 2024-25.

·  Audit

o  Audit attention is increasing and the 2024-25 Audit Plan will focus on a few critical areas, including Pensions Payroll and Internal Control Framework.

Regulatory Update

Projects for McCloud and the Pensions Dashboard are already in place.

·  McCloud regulations came into force in October 2023, with the Fund applying the rules to new cases such as retirements. For the McCloud Remedy (retrospective application to those members who have left or retired) numbers of impacted members still needs to be confirmed and guidance from DHLUC is not yet final. There remains significant work to implement the remedy in full in terms of calculations and communications, which the Fund will complete before the regulatory deadline in Q3 2025.

·  For the Pensions Dashboard, the LGA issued draft guidance in November 2023. The required connection date will likely be July-September 2025 and exact staging dates will be published in due course by the Money & Pensions Service. The Fund will comply with all requirements of the Pensions Dashboard.

Budget

The 2024-25 budget of £31.4m is £0.4m (-1%) below the £31.8m budget of 2023-24. The essence of the 2024-27 budget is that reduced investment costs – driven by shifting assets from active to passive and lower assets with managers on performance fees – create headroom for higher administration costs and additional FTEs required to improve service and controls in the Fund.

Charles Gerrish asked for clarification as to who pays the expenses, was it the Employers, the Fund or the Administration.

The Head of Pensions replied that it was the Fund that pays for everything, although indirectly this comes from the Employers. He added that should these expenses increase the contributions from Employers would not.

Jackie Peel asked if the current under budget position was likely to lead to a strain on the budget in the coming years.

The Head of Pensions replied by saying that it is the Committee’s role to sign off the budget and will therefore have a role in assessing the need in future years. He added that it was a quirk for coming in under budget for this year.

Jackie Peel commented that she noted the intention to increase FTE to 92 and asked if we benchmark this information with other Funds, is there an ideal number, would this be enough?

The Head of Pensions replied that the current capacity within the Fund was 85 FTE and that 80 FTE were in place at the present time so they are seeking to achieve 85 FTE and then further increase to 92 FTE when possible. He added that that these resources are needed prior to further digitalisation coming to fruition.

The Governance & Risk Advisor added that over the years the Fund has taken part in the CIPFA (Chartered Institute of Public Finance and Accountancy) benchmarking exercise, but said that many funds have now ceased taking part which therefore makes comparing data difficult. She said that all funds take part in completing the SF3 form which collects information on 87 Local Government Pension Scheme funds' income, expenditure, membership, retirements, and other activities allowing for good data comparison.

She explained to the Committee that administrative costs for the Fund were in general in the mid to low end bracket. She said that it was unlikely to find a perfect model for numbers of staff needed as different funds will operate in their own way. She added that the Fund has 450 employers within it, which was quite a high number overall and that this needed to be taken into account.

Wendy Weston referred to the Pensions Increase project and asked for an update on its progress. She also spoke about the Guaranteed Minimum Pension and asked how many members does this affect and how many have so far been rectified.

The Head of Pensions replied that around 1,200 members were affected by the Pensions Increase, 700 have already been rectified, with the remaining 500 to be actioned across the remainder of the year.

The Pensions Operations Manager added that in terms of the Guaranteed Minimum Pension, the data of 14,000 members now differs between us and HMRC and that a deeper data dive would be ongoing until the end of April. She added that pre 1994 information was not available for around 4,000 members.

Councillor Toby Simon said that he would like to see a benchmarking table on the number of staff employed by different funds so that a comparison can be made.

The Governance & Risk Advisor replied that an Annual Report is usually presented to the Committee in September and said that benchmarking data would form part of the report.

The Pensions Operations Manager addressed the Committee and highlighted the following areas from within Appendix 4.

2023 state and what we have achieved.

·  Service quality below standards and backlogs:

o  Stabilised service and building enablers for future improvement.

o  Focus on backlog resolution and oldest cases - however service quality remains materially below target standards.

·  Vacancy rate:

o  Salary review with Aon complete – market supplements applied.

o  Improved recruitment process (support from Aon & BANES)

o  Key posts recruited for – and temporary positions made permanent.

o  Vacancy rate in Q1 2024 of 9%, down from 16%

·  Management Information (MI)

o  Improved MI which is now informing operational decisions

o  Now embedded in day-to-day decisions

New challenges in 2023 and what we have achieved.

·  McCloud regulations without full SAB guidance.

o  McCloud regulations adopted and followed from 1 October 2023.

o  Workaround implemented for system issue – now resolved.

·  Payroll

o  Stabilised Payroll team - Payroll Manager now appointed.

·  Pensions Increase project.

o  700 members compensated in phase 1 and monthly pensions now correct.

o  500 members will be resolved in phases 2/3/4 during 2024.

Charles Gerrish asked if the payments made to the 700 members had caused any of them a tax problem, in terms of going above the 40% threshold, and if so, what mitigation can be sought.

The Pensions Operations Manager replied that she was not aware of any such incidents and said that each member had received a breakdown of the payments that could be supplied to HMRC if necessary.

The Chair asked if any challenges to these payments had yet been received.

The Pensions Operations Manager replied that there had been none as yet, but said that this information would still be reaching some members.

Work in progress

·  Service levels have stabilised – but remain well below required standards ? though good progress addressing older backlogs and using improved MI.

·  Resource constraints prevented Employer website and Bulk processing projects from progressing.

·  The Fund continues to build service enablers: people capacity, skills, technology.

Objectives

·  Compliant with regulations

·  Enablers for future service improvement

·  Improve members’ service experience

·  Greater operationally efficiency

Councillor Joanna Wright asked what the impact would be if the deadline in relation to McCloud was not met.

The Pensions Operations Manager replied that the draft statutory guidance regulations had only been issued in the last week and that they now had to consult on those. She added that a Project Officer has been put in place to oversee this work.

Councillor Wright asked what action would be taken if the deadline for completion was missed.

The Pensions Operations Manager replied that as with any missed deadline the Fund would be required to self-report to the Pensions Regulator. She added that at this stage she did not feel that the deadline would be extended.

She stated that she was proud that the Fund took the regulations head and began implementation from October 2023 and felt they were in a better position than a lot of other funds.

Councillor Mike Drew asked if she felt that the Fund would reach its full staffing capacity within the current structure, and would that be enough to carry out the work required.

The Pensions Operations Manager replied that the planned increase in staff was due to the number of projects that need to be completed over the next 12 months and this would enable staff to transfer between work areas if necessary. She added that she felt that the right level of staffing for the Fund will be achieved.

Strategic Roadmap

·  Context

•   During 2024 the Administration team will need to deliver regulatory projects – e.g. McCloud, GMP – along with obligations such as Annual Benefit Statements - Such projects absorb capacity of experienced resource and limit capacity for transformational change.

•  New teams – Business Change, Payroll, Digital Services – will progress digital projects starting in the second half of 2024.

•  Focus will be on ‘key member events’ – such as joining the fund, retirement – seeking to drive self-serve to improve member experience and the Fund’s operational efficiency.

•  For each event, we will assess the end-to-end process and how we transform the whole process across different systems: Altair, iConnect, My Pension Online, Employer website, etc.

SLA Performance

·  Aggregate SLA performance is broadly stable – though we have been challenged with deaths & retirements.

·  Plan for SLA improvements over 2024 – 2026.

Nick Weaver commented that he would like to have a bit more of an understanding as to how the work regarding McCloud will affect the roadmap. He asked how many cases have been identified so far where the underpin has kicked in and more money has been paid to them.

The Pensions Operations Manager replied that they were happy now in terms of members that are retiring and the underpin can be applied which is seen as business as usual. She added that work was ongoing and said that around 1 in 5 cases were already receiving higher payments. She said that 20,000 members were in scope and the expectation was that between 500 – 700 would be entitled to receive the underpin.

The Committee RESOLVED to approve the 3 Year Plan & Budget 2024-27 for the Avon Pension Fund.