Agenda item

The purpose of this report is to present to Committee the 3-year plan and budget for the period 2025-28. 

The Head of Pensions introduced the report to the Committee and highlighted the following objectives for the year ahead and the 2025-28 period.

Investments & Funding

·  Proposed changes to the LGPS – ‘Fit for the Future’ - In 4Q24 the government launched its ‘Fit for the Future’ proposals for the LGPS and pools. Following consultation we await the government’s final plans – expected during Q2 2025. The direction of travel leads towards greater authority over investments by the pools which will select all asset managers and provide investment advice for LGPS funds including the Avon Pension Fund.

·  Triennial Valuation This will be struck based on the Fund’s financial position on 31 March 2025 and it sets out the Fund’s valuation and funding plan. It will embed prudence into assumptions for future investment returns, to reduce the risk of the funding level going back below 100% over the medium term.

·  With the funding level currently 105%, the Fund and its employers face a strategic choice between: a) sustaining the current investment strategy with lower employer contributions, vs b) adopting a lower risk investment strategy which could lock in greater certainty of employer contributions near their current level.

·  Local Impact Portfolio - The Fund will continue to deploy capital into its local investments across its three subsectors: renewable infrastructure, affordable housing, small company (SME) funding. Having already deployed £40m, the Fund expects to deploy the full £175m by the end of the 2026-27 financial year.

Governance

·  Good Governance Review (GGR) - The Scheme Advisory Board’s review (now within Fit for the Future proposals) sets out recommendations to improve LGPS governance. Statutory guidance for the recommendations to take legal effect is expected to be published this year. The Fund has already taken action to comply with the draft requirements and during 2025 the Fund will complete this process.

·  The Audit Plan for 2025-26 will focus on the following areas: System Access Control / Payroll – year-end processes / Contributions & Member Information / Business Continuity Preparedness / Transfers Out from Deferred Pensions / Follow ups, risk management & governance.

Business Change

·  Change Programme - The newly formed Business Change team’s key focus for 2025-26 is to work with the Administration and Technical teams to deliver the following projects: Pensions Dashboard connection / McCloud remedy / Pension administration software hosting transition / Member portal upgrade.

We will progress transformation and digitalisation projects where resources allow.

Budget & Cashflow Forecast 2025-28

·  The 2025-26 budget of £34.6m is £3.2m (+10%) above the £31.4m budget of 2024-25.

·  Investment Fees - 2025-26 investment management fees of £24.7m are £2.0m (9%) higher than the £22.7m for 2024-25.

·  Increased investment fees are driven by: a) higher asset values, b) the build out of the Local Impact portfolio and c) additional capital invested in private market portfolios. In aggregate this represents a 4 bps increase on investment management fees to 42 bps, projected to stay at this level for the following 2 years.

·  Cashflow - As Fund membership matures, monitoring cash flow trends becomes increasingly critical. The Fund has now passed through an inflection point from being cash flow positive (contributions exceed benefits) to cash flow negative. The Fund is expected to experience £22.9m of net cash outflows in 2025-26, with full details outlined in Appendix 3.

·  Due to the likelihood of the fund heading into actuarial surplus from the new valuation period commencing April 2026, for planning purposes deficit recovery payments have been set to zero from 1 April 2026.

Charles Gerrish asked if the consultation relating to Aerospace & Defence Investments had been costed into this current budget.

The Group Manager for Funding, Investment & Risk replied that it was not.

The Head of Pensions added that although not specifically included there is money reserved in the budget for work such as this consultation.

The Committee RESOLVED to approve the 3 Year Plan & Budget 2025-28 for the Avon Pension Fund.