Agendas, reports and minutes
Pensions Committee and Board
Date: Thursday, 8 February 2018
Minutes: Read the Minutes
Minutes of Meeting of the Pensions Committee and Pension Board held in the Council Chamber, Council Headquarters, Glenurquhart Road, Inverness on Thursday 8 February 2018 at 10.30 am.
Mrs H Carmichael, Mrs C Caddick, Mr C Fraser, Mr R Gale, Mr A Jarvie, Mr B Lobban, Mr D Louden, Mr P Saggers, Mr B Thompson
Ms L Munro, Highland Council, Mr G Cruickshank,Highland Council, Mr C Nicolson,Comhairle nan Eilean Siar, Mr E Macniven,GMB, Mr M Murphy,UCATT
Non Member in attendance:-
Mr R Laird
Officials in attendance:
Mr E Foster, Head of Corporate Finance and Commercialism, Corporate Resources Service
Mr S Fraser, Joint Secretary (Employers Side)
Mr C MacCallum, Payroll & Pensions Manager, Corporate Resources Service
Mrs M Grigor, Finance Manager (Corporate Budgeting, Treasury and Taxation)
Ms C Stachan, Accountant, Corporate Resources Service
Mrs L Dunn, Principal Administrator, Chief Executive’s Service
Mr A MacInnes, Administrative Assistant, Chief Executive’s Service
Also in attendance:-
Mr R Bilton, Hymans Robertson
Mr J Boyd, Grant Thornton (External Auditor)
Mr K Ettles, AON Hewitt, Investment Consultant
An asterisk in the margin denotes a recommendation to the Council. All decisions with no marking in the margin are delegated to the Committee.
Mr R Gale in the Chair
1. Apologies for Absence/ Leisgeulan
Apologies for absence were intimated on behalf of Mr A MacKinnon of the Pensions Committee and Ms L Leonard, Ms L MacKay and Mr D Macdonald of the Pension Board.
2. Declarations of Interest/ Foillseachaidhean Com-pàirt
There were no declarations of interest.
3. 2017 Actuarial Valuation Presentation/ Taisbeanadh Luachaidh Actuaraidh 2017
Mr Robert Bilton of Hymans Robertson was in attendance to give a presentation on the results of the 2017 Actuarial Valuation of the Pension Fund and the Funding strategy.
The valuation was undertaken in order to comply with legislation, set employer contribution rates, determine money needed to meet accrued liabilities, calculate the solvency level of the Fund, manage risks to the Fund and employers and to review the Funding Strategy Statement.
The 2017 valuation had been carried out in the background of strong asset returns, historically low interest rates, lower future growth expectations, local authority budget constraints, new benefit structure and increased employer engagement.
Key assumptions for the funding target for the Fund were explained and in terms of the Fund’s solvency level, the Fund was in a strong place with a funding level of 101% as at 31 March, 2017.
To determine how to set funding plans in order that the Fund could meet its liabilities, there had been a need to determine funding targets, how long was needed to reach the target and how much risk could be taken to reach the target.
It was advised that compared to the 2014 valuation, funding levels were likely to be slightly higher; cash amounts of deficits were likely to be slightly smaller; contribution rates in the long term for secure employers would be frozen, and contribution rates for shorter term employers were likely to be higher due to lower growth forecasts. The final valuation report would be signed off by 31 March 2018.
In discussion, the following main points were raised:-
• It was confirmed that the Pension Fund had no exposure to Carillion Plc that had recently gone into liquidation, as an employer in the fund;
• There were a few local authorities whose pension funds were performing better than Highland Council’s Pension Fund and the reasons for this were queried. It was explained that there might be historical reasons for variances, such as higher contribution rates resulting in stronger performing Funds and other local authorities had different assumptions for their funding targets for the future. While comparisons were useful as a guide to how well your Fund was performing against other Funds, the main aim was for the Authority to have a funding strategy in place to pay the benefits to Members of the Pension Scheme;
• As part of the Valuation process, Employers contribution rates would be assessed to ensure that each Employer was making the right level of contribution rate;
• In terms of pooling of Pension Fund assets as happened in England and Wales to reduce fees and increase returns for Funds, it was still too early to tell what savings would be made by doing this, but it would be monitored;
• The 101% funding level was commended which was as a result of contributions to the Fund and investments performing well; and
• The combined employee/employer contribution rate to the Fund had increased from 16% to 19% over the last ten years. It was queried what the likely contribution rates for the next ten years would be. It was explained that this would depend on many uncertainties such as investment performance and economic background. The current rate was relatively low compared to other Local Government Pension Schemes.
Thereafter, the Committee NOTED the presentation and that consideration would be given to issuing a press release to commend the 101% Funding Level of the Highland Council Pension Fund as at 31 March 2017.
4. Funding Strategy Statement/ Aithris Ro-innleachd Mhaoineachaidh
There was circulated Report No. PC/01/18 by the Director of Corporate Resources which sought approval on the proposed Funding Strategy Statement for the Highland Council Pension Fund.
The funding strategy set out how it was intended to set Employers’ contribution rates to meet the liabilities of the Pension Fund.
Reference was made to a correction required in the strategy in respect of the effective date. The funding strategy would be effective from 1 March 2018, and not 1 April 2018 as detailed in the strategy.
The Committee APPROVED implementation of the Funding Strategy Statement with effect from 1 March 2018.
5. Responsible Investing/ Tasgadh Cunntasach
There was circulated Report No. PC/02/18 by the Director of Corporate Services which presented a report by the Fund’s Investment Advisors, Aon Hewitt on Environmental, Social and Governance (ESG) considerations. Mr Kenneth Ettles from Aon Hewitt was in attendance.
In discussion, the following main points were raised by Members:-
• The Norwegian Government Pension Scheme had strong ethical standards and it was queried if this could be used as an exemplar for ESG considerations for the Highland Council Pension Fund;
• Investment Managers were employed to make investment decisions on behalf of the Pension Fund with the aim of achieving capital growth and investment income so the Fund could meet its liabilities. Funds had a fiduciary responsibility to ensure that the investment policy was in the best interests of Pension Scheme Members. A view was expressed that the Fund should achieve the best possible investment returns and ESG factors chosen for moral reasons should not be included in investment policy. Investment Managers were expected to base their decisions on factors which were relevant to performance of investments. If these factors fell within ESG parameters, then Managers would already be expected to consider these. Therefore, time and money could be saved by not having a formal ESG policy;
• It was expected that the Investment Sub-Committee would look at all aspects of investing and take decisions in the best interests of the Members of the Pension Scheme;
• It was felt that the Fund had the right balance with an integration of ESG principles, but that this was not the driving force when making investment decisions in the best interests of the Fund; and
• It was suggested that in addition to Investment Sub-Committee Members receiving training on ESG issues, Pensions Committee and Pension Board Members should also be invited to this training.
Thereafter, the Committee NOTED the report on ESG issues and AGREED that:-
i. a training session on ESG issues be arranged for Members of the Pensions Committee, Pension Board and Investment Sub-Committee;
ii. the assessment of ESG issues should be an ongoing issue; and
iii. Members should continue to question the fund managers on ESG related issues when they presented to the Investment Sub-Committee.
6. Statement of Investment Principles/ Aithris air Prionnsapalan Tasgaidh
There was circulated Report No. PC/03/18 by the Director of Corporate Services which sought approval on the proposed Statement of Investment Principles for the Highland Council Pension Fund.
The Statement of Investment Principles was prepared as required by the Local Government Pension Scheme (Management and Investment of Funds) (Scotland) Regulations 2010 (No. 233).
In discussion, the following main points were raised:-
• It was noted that the proposed changes to the asset allocation would leave about one third of the portfolio in illiquid assets. It was advised that this was broadly in line with most similar pension schemes. There would still be sufficient liquid assets to meet any short term cashflow requirements;
• Returns from equity markets had been extremely good, but the risks to equity markets had changed. Therefore it was proposed to reduce investments in equities to lower the risk and increase diversification by investing in illiquid strategies and absolute return strategies where returns were expected to be broadly in line with equities but with lower risk;
• It was queried why it was proposed to still invest 12% of the Fund in Gilts when expected returns were poor. It was advised that this was to provide balance, protection and diversification within the portfolio as Gilts tended to rise in value when other asset classes such as equities dropped in value. They also provided income;
• It was queried what the expected movement in interest rates in the short to medium term and how would this affect the price of Gilts. It was expected that interest rates would rise modestly faster over the next five years in the region of 0.5% per annum;
• a point was made that while the exceptional performance of the Fund had been driven by asset classes such as equities, the Fund had also been extremely well managed. If the professional advice was ignored this could be to the detriment of the Fund and those scheme members who relied on it for their pensions;
• It was queried if the Fund had investments in the German stock market as this had seen significant gains in recent times. It was confirmed that the Fund had a passive equity allocation in European equities, some of which would be in German equities; and
• It was queried which equities would be sold within the portfolio. It was advised that the recommendation would be to sell the passive equities managed by Legal and General.
Following discussion, Mr R Gale, seconded by Mrs C Caddick, MOVED the recommendations detailed in the report.
As an AMENDMENT, Mr P Saggers, seconded by Mr A Jarvie, moved that the Statement of Investment Principles detailed in the report be amended by the deletion of paragraph 16.7 of the report, which stated:-
“Where it is consistent with its fiduciary duty, the Fund would follow the principles below:
• Incorporate ESG issues into investment analysis and decision-making processes – this would require to be done by the investment managers and monitored by the Fund.
• Be an active owner and incorporate ESG issues into ownership policies and practices - this will be mainly achieved by exercising voting rights and the engagement activity of managers.
• Seek appropriate disclosure of ESG issues by entities in which the Fund is invested - this will be achieved through investment manager engagement.
On a vote being taken, the MOTION received 7 votes and the AMENDMENT received 2 votes with no abstentions, and the MOTION was therefore CARRIED, the votes having been cast as follows:-
For the Motion:
Mrs C Caddick, Mrs H Carmichael, Mr C Fraser, Mr R Gale, Mr B Lobban, Mr D Louden, Mr B Thompson
For the Amendment:
Mr A Jarvie, Mr P Saggers
The Committee APPROVED the:-
i. Statement of Investment Principles; and
ii. following changes to the strategic benchmark in order to increase the expected return and reduce volatility in the portfolio as follows:-
• reduce equities from 61% to 56%;
• reduce bonds from 20% to 12%; and
• reinvest the proceeds in illiquid and liquid alternative assets.
7. Annual Audit Plan 2017/18 (External Audit Report)/ Plana Sgrùdaidh Bliadhnail 2017/18 (Aithisg Sgrùdaidh bhon Taobh A-muigh)
There was circulated Report No. PC/04/18 by Grant Thornton which presented their annual audit plan setting out the work they plan to undertake as part of the audit of the pension fund.
The report set out the overarching principles of the audit; audit approach and materiality and provided details of the risk based audit methodology to be used for the audit.
The Committee NOTED the content of the report.
8. Risk Management Review and Update Report/ Aithisg Ath-sgrùdaidh agus Ùrachaidh Rianachd Cunnairt
There was circulated Report No. PC/05/18 by the Director of Corporate Services which provided an update on the Fund’s risk register and compliance with the Pension Fund Regulator requirements on internal controls.
The Committee NOTED the updated risk register extract and compliance with the Pension Fund Regulator requirements.
9. Pension Fund Contributions and Administration/ Tabhartasan agus Rianachd Maoin Peinnsein
There was circulated Report No. PC/06/18 by the Director of Corporate Services which updated Members on matters relating to the administration of the Highland Council Pension Fund.
The Committee NOTED the details of the report.
10. Membership of Investment Sub-Committee/ Ballrachd na Fo-Chomataidh Tasgaidh
The Committee APPROVED the following change to the membership of the Investment Sub-Committee as follows:-
• Mrs C Caddick to replace Mr C Fraser.
11. Investment Sub Committee: Minutes of Meeting/ Fo-chomataidh Tasgaidh: Geàrr-chunntas na Coinneimh
There had been circulated Minutes of Meeting of the Investment Sub-Committee held on 1 December 2017 - the terms of which were APPROVED.
The meeting ended at 12.30 p.m.
- Item 4 - Funding Strategy Statement Report, 282.13 KB
- Item 5 - Responsible Investing Report, 1.37 MB
- Item 6 - Statement of Investment Principles Report, 129.37 KB
- Item 7 - Annual Audit Plan 2017/18 Report, 381.19 KB
- Item 8 - Risk Management Review and Update Report Report, 62.88 KB
- Item 9 - Pensions Fund Contributions and Administration Report, 36.15 KB
- Item 11 - Investment Sub Committee: Minutes of Meeting Report, 42.22 KB