Meeting documents

Apologies for absence were received from Mike Byatt, Andy Canning and Ronald Coatsworth (Dorset County Council).

There were no declarations by members of disclosable pecuniary interests under the Code of Conduct.

To confirm and sign the minutes of the meeting held on 24 November 2016.

The minutes of the meeting held on 24 November 2016 were confirmed and signed.

Public Speaking

There were no public questions received at the meeting in accordance with Standing Order 21(1).

There were no public statements received at the meeting in accordance with Standing Order 21(2).

To consider and approve the Full Business Case for the Brunel Pension Partnership (attached).

The Committee considered a report by the Fund Administrator setting out the Full

Business Case (FBC) for the Brunel Pension Partnership (BPP).  He highlighted the

clear legal requirement for Local Government Pension Scheme (LGPS) funds to pool

investments, including the provision for the Secretary of State to intervene should

funds not meet this requirement satisfactorily.  He also reminded members that the

feedback from the Department for Communities and Local Government (CLG) on

earlier proposals had been that the pooling vehicle must be subject to Financial

Conduct Authority (FCA) regulation.

The Fund Administrator told members that the key sensitivity to the Financial Case

was the level of estimated savings from investment manager fees.  The level of

estimated savings had been ‘stress tested’ by Bfinance, investment consultants, who

had extensive knowledge of the market and had worked with the Fund previously.  A

member asked if the pessimistic scenario of minus 2 basis points (0.02%) was too

low.  The Fund Administrator replied that he was reasonably confident that the level

of savings achieved would be within the sensitivity range set out in the FBC.

The Fund Administrator confirmed that progress on developing BPP was significantly

advanced compared to most other pools but the timetable for implementing the FBC

was tight.  Progress would be reported to the Committee as a standing item on the

agenda of all future meetings.  It was agreed that the standing item would

include details of the five major risks facing the project.

The Independent Adviser commented that the FBC reflected a great deal of good

quality work to get to this stage.  He also highlighted that the estimated savings

needed to be viewed in the context of the size of the deficit.  He asked for clarity of

the precise legal status of the Collective Investment Vehicle (CIV).  The Chairman

asked officers to liaise with Osborne Clarke, the project’s legal advisers, to provide a

detailed explanatory note.

One member noted the significant costs of transition and queried whether central

government should be asked for financial support as investment pooling was now a

legal requirement for LGPS funds, not a choice.  The Chairman confirmed this had

been raised with Marcus Jones MP, Minister for Local Government, who had replied

that no funding was available from CLG and that funds were effectively ‘investing to

save’.  The Chairman added however that funds would continue to lobby government

for an exemption to the application of Stamp Duty Land Tax (SDLT) on the transfer of

assets from individual funds to their respective pooled vehicles as this was viewed as

an unintended windfall gain for HM Treasury.

The Interim Chief Treasury and Pensions Manager reported that a recruitment agency had been appointed to recruit the chairman of BPP Ltd by March 2017, and two non-executive directors (NEDs) thereafter.  A third NED would be appointed at a later date, and would represent the shareholders (the ten member funds).  Members requested that the Committee be informed of the process and deadlines for appointing the shareholders’ representative NED  ...  view the full minutes text for item 5.

To consider a report from Insight Investments setting out the impact of regulatory changes for hedging instruments (attached).

The Committee considered a report from Gary Wilkinson, Paul Richmond and Robert

Chin, Insight Investments, which explained the likely impact for the Fund’s

investments from forthcoming regulatory changes under European Market

Infrastructure Regulation (EMIR).

Mr Chin explained that over-the-counter (OTC) derivatives had historically been

traded bilaterally between two parties.  Following the 2008 financial crisis, EMIR

introduced new requirements for central clearing, collateral and margin payments to

address regulators’ concerns about the lack of transparency of entities’ exposure to

OTC risk, how entities mitigate this risk, and systemic risk i.e. the failure of one entity

 leading to the failure of others.

Mr Chin said that the changes would be introduced for most market participants from

March 2017 but pension schemes had an exemption until August 2017, which was expected to be extended until August 2018.  He added that although inflation swaps were not currently subject to the new requirements, Insight Investments were preparing for clearing should that be required.  There was also a requirement for foreign currency swaps and foreign currency forward agreements to be documented and subjected to collateral payments from March 2017 and January 2018 respectively.

The Finance Manager (Treasury and Pensions) informed members that currency forward agreements were entered into on behalf of the Fund by Banque Pictet, the Fund’s custodian for overseas holdings.  Banque Pictet had advised that the Swiss Financial Market Infrastructure Act (FMIA), which expressly excludes currency swaps and currency forward transactions from the variation margin requirements, applied to these transactions not EMIR.  Following discussion with Insight Investments, the Finance Manager (Treasury and Pensions) had asked Banque Pictet to review this advice and to explain in detail why Swiss regulations and not EMIR were applied to the Fund.  The Chairman asked that the Committee be informed if Banque Pictet were unable to satisfactorily confirm the regulatory requirements that applied and meet those requirements accordingly.

A member asked if these regulatory changes would still apply when the UK leaves the EU.  Mr Richmond replied that the general expectation was that EMIR would be replicated in UK law.

The Independent Adviser suggested that currency hedging be covered by the forthcoming strategic asset allocation review.  The Fund Administrator said that currency and liability hedging would both be covered by the review.

Noted

To consider the results of the 2016 actuarial valuation and discuss the proposal for future changes to employer contribution rates (attached).

The Committee received an update on the results of the triennial valuation from the Interim Chief Treasury and Pensions Manager.  He reported that the final results of the valuation had been received on 21 December 2016 and that Graeme Muir, Barnett Waddingham, the Fund’s Actuary, had explained that the delay had been primarily caused by the need for Government Actuaries Department (GAD) section 13 comparison work, and some queries with the data provided to the Actuary.

The Interim Chief Treasury and Pensions Manager reported that late notice of the results had presented employers with significant challenges setting their budgets for 2017/18.  In order to mitigate this challenge, the Actuary had agreed a stepped increase in contribution rates for some employers, and for those increases to be implemented over a five year, not a three year, period.

The Interim Chief Treasury and Pensions Manager said that Graeme Muir would attend the next meeting of the Committee on 1 March 2017 for a ‘wash-up’ session to discuss the final results of the valuation, and how to avoid late notification of results for future valuations.  Chief Financial Officers for the largest employers would also be invited to attend.

One member asked if there would be any changes to employee contribution rates.  It was noted that any changes to employee contribution rates would be made by central government based on the overall funding position of all LGPS funds.

Noted

To confirm the dates for the meeting of the Committee in 2016:-

            1 March                       -           Committee Room 2, County Hall, Dorchester

            21 June                       -           Committee Room 1, County Hall, Dorchester

            13 September             -           Committee Room 1, County Hall, Dorchester

            23/24 November         -           London (venue TBC)

Resolved

That meetings be held on the following dates:

1 March 2017                          County Hall, Dorchester

21 June 2017                          County Hall, Dorchester

13 September 2017                County Hall, Dorchester

22/23 November 2017            London (to be confirmed)

To answer any questions received in writing by the Chief Executive by not later than 10.00 am on 4 January 2017.

No questions were asked by members under Standing Order 20(2).