Agenda and minutes

To receive any declarations of interest.

No declarations of disclosable pecuniary interests were made at the meeting.

To confirm the minutes of the meeting held on 27 November 2019.

The minutes of the meeting held on 27 November 2019 were confirmed and signed.

To receive questions or statements on the business of the committee from town and parish councils and members of the public.

The public questions together with the responses from the Chairman of the Pension Fund Committee are set out in the Appendix to the minutes.

To consider any items of business which the Chairman has had prior notification and considers to be urgent pursuant to section 100B (4) b) of the Local Government Act 1972. The reason for the urgency shall be recorded in the minutes.

There were no urgent items.

To receive a presentation from Brunel Pension Partnership, the pension fund’s investment pooling manager, introducing its recently published Climate Change Policy.

The Committee received a presentation from Faith Ward, Laura Hobbs and Catherine Dix, Brunel Pension Partnership, the pension fund’s LGPS investment pooling manager.  The presentation summarised Brunel’s recently launched climate change policy.

Climate change presented a systemic and material risk to the stability of every economy and country, and therefore would impact Brunel’s clients, their beneficiaries and all portfolios holdings.

Investing to support the Paris agreement goals that deliver a below 2C°temperature increase was consistent with securing long-term financial returns and aligned with the best long-term interests of their clients.

To achieve a net-zero carbon future by 2050 (or before) required systemic change in the investment industry, and equipping and empowering investors was central to this change.

Carbon was not fully priced into the costs of goods and service, and therefore the market reaction to these matters was distorted.  It was not just a supply side problem as 76% of emissions came from the demand side.

Brunel’s policy was not to have a blanket divestment from all fossil fuel companies but instead “engagement with teeth” with companies was favoured.  Divestment was part of their ‘toolkit’ but only in a targeted way.  Brunel would undertake a ‘stocktake’ of their approach in 2023.

Examples of successful engagement and investor pressure were given.  Blackrock, the world’s largest asset manager and historically not very open about their approach to climate change risks, had recently joined Climate Action 100+.  Barclays, the world’s largest financier of fossil fuels, had recently announced changes to properly assess the climate change risks of new lending, and to phase out lending to companies not aligned with the goals of the Paris climate change agreement.

Some fossil fuel companies would be part of the transition to a lower/zero carbon economy.  It was important to distinguish between ‘good’ companies, such as Repsol and Shell who were looking to engage and change, and ‘bad’ companies, such as Chevron and Exxon who, to date, were not.

The Independent Adviser supported Brunel’s belief that engagement was better than blanket divestment, and that institutional investors should persevere to deliver change.  Divestment was likely to benefit state owned suppliers such as Saudi Arabia and Russia, who could not be influenced in the same way as publicly owned companies.  Brunel had low carbon and sustainable investment products available and the Committee should consider these as part of the review of the pension fund’s investment strategy.

Concerns were raised about the level of targets and the speed by which they would be met.  Brunel clarified that their aim was to be “well below two degrees” and for this to be achieved well before 2050.  They would like to do more but they wanted to make deliverable commitments.

A member did not believe that oil companies were necessarily the best option for providing renewable sources of energy and felt that often local companies would be a better option.  Brunel replied that such community led solutions were not currently suitable investment opportunities for pension funds due to their lack of  ...  view the full minutes text for item 47.

To consider the quarterly report of the Independent Adviser on the outlook for the pension fund’s investments.

The Committee considered a report by the Independent Adviser that gave his views on the economic background to the pension fund’s investments, the outlook for different asset classes and the key risks for markets.

Since the report was written markets had fallen steeply in response to the Coronavirus pandemic.  He reminded the Committee that there had been lots of downs before from which markets had recovered.

To date there had been a supply side shock to economies but there would also be a demand side shock if businesses and individuals reduce their spending.  If the virus could be contained there should be improvements to economies in the summer, but there would not necessarily be a ‘catch up’ of all lost output.

Central banks had been quick to intervene but cutting interest rates may not help much.  In the UK the fiscal stimulus from the recent budget was welcome.  The strategy of borrowing to invest was appropriate and should be replicated in other economies, such as Germany.

The pension fund’s funding level would have fallen from the results of the triennial actuarial valuation as at 31 March 2019.  The actuary had used a demanding discount rate of 5% which needed to be taken into account when the committee reviewed the pension fund’s investment strategy at its next meeting.

The Vice-Chairman asked if there was an opportunity to invest whilst markets were low.  The Independent Adviser noted that cash balances were relatively high and that a return of some collateral from the inflation hedging mandate was also expected that could be reinvested.  It was agreed that up to £50m be invested in the Brunel global equities passive portfolio in two tranches, subject to a review of expected future cashflows by officers.

In response to concerns about the pension fund’s exposure to the retail sector it was noted that the property portfolio was significantly ‘underweight’ its benchmark exposure to this sector.

Resolved

That up to £50m be invested in the Brunel global equities passive portfolio in two tranches, subject to a review of expected future cashflows by officers.

To consider the quarterly report of the Fund Administrator.  This includes an update on the funding position, the value and performance of investments, the cash position and other topical issues.

The Committee considered a report by the Fund Administrator on the pension fund’s funding position, valuation, performance and asset allocation as at 31 December 2019.  The value of the fund’s investments at 31 December 2019 was just under £3.2 billion.

Barnett Waddingham, the pension fund’s actuary, had completed their triennial review as at 31 March 2019 and the funding level had improved from 83% at the last triennial valuation to 92%.  The Funding Strategy Statement had consequently been updated for approval by the Committee.

Markets had seen significant falls in the last few weeks prior to the meeting and this had an adverse impact on the value of the pension fund’s assets and its funding position.  The actuary had been asked to carry out an indicative update on the funding position as at 31 March 2020, and thereafter on a quarterly basis until the next full triennial review.

Following the conclusion of the triennial valuation, there would be a review of the pension fund’s investment strategy and strategic asset allocation.  This was primarily to ensure that the pension fund had the right mix of assets to give a good probability of meeting or exceeding the discount rate of 5% used by the actuary in the valuation.

Investment consultants, Mercer, had been appointed to assist with this review.  The recommendations of this review will be discussed at the next meeting of the Committee in June 2020.  If any new asset classes were proposed, appropriate training would be made available to members.

Resolved

That the updated Funding Strategy Statement (FSS) be approved for publication.

To consider a report by the Fund Administrator on progress to date on the investment pooling project.

The Committee considered a report by the Fund Administrator on the progress to date in the implementation of the Full Business Case (FBC) for the Brunel Pension Partnership, as approved by the Committee on 9 January 2017.

To the date of the meeting, investments valued at approximately £1.3bn had transferred to Brunel’s management, representing just over 40% of the pension fund’s total assets of £3.2bn.  This included the transfer at the end of January 2020 of the remaining assets under the management of Investec Asset Management.

Laura Chappell, formerly Brunel’s Chief Compliance and Risk Officer, was appointed as the company’s new Chief Executive Officer (CEO), replacing Dawn Turner, who left the company at the end of September 2019.

Noted

To consider the annual report of the Fund Administrator on the pension fund’s Treasury Management Strategy for 2020-21.

The Committee considered a report by the Fund Administrator setting out the Treasury Management Strategy (TMS) for 2020-21.

Although the pension fund had no strategic allocation to cash, cashflows needed to be managed to ensure there was sufficient liquidity to meet liabilities as they fell due and to invest any surplus balances appropriately.  The TMS provided the framework within which officers must manage those cashflows and ‘treasury’ investments.

The TMS for the pension fund broadly followed the TMS for Dorset Council, the administering authority for the pension fund, where applicable.

Resolved

That the Treasury Management Strategy for 2020-21 be approved.

To consider the quarterly report of the Fund Administrator on pension fund administration.

The Committee considered a report from officers on operational and administration matters relating to the pension fund.

Discussions regarding potential remedies for the McCloud judgement continued.  The estimated impact on funding level was likely to be relatively small, but remedies were likely to create a very large administrative burden.

Administering authorities in the LGPS had an obligation to provide access to an in-house Additional Voluntary Contribution (AVC) arrangement for their scheme members.  Hymans Robertson had been appointed to conduct a review of the current arrangements.

Performance against Key Performance Indicators (KPIs) was generally good.  The two exceptions both related to ‘transfers out’.  At times of high demand on the service, performance against these two KPIs was allowed to slip temporarily so that activities that impacted scheme members directly were prioritised.

Noted

To note the dates for the meetings of the Committee in 2020:

18 June 2020                    London (venue to be confirmed)

10 September 2020           County Hall, Dorchester

26 November 2020            London (venue to be confirmed)

Resolved

That meetings be held on the following dates:

18 June 2020                    County Hall, Dorchester.

10 September 2020           County Hall, Dorchester

26 November 2020            London (venue to be confirmed)

To move the exclusion of the press and the public for the following item in view of the likely disclosure of exempt information within the meaning of paragraph 3 of schedule 12 A to the Local Government Act 1972 (as amended).

The public and the press will be asked to leave the meeting whilst the item of business is considered.

Decision

That the Press and the Public be excluded for item 55 in view of the likely disclosure of exempt information within the meaning of Paragraph 3 of Part 1 of Schedule 12A to the Local Government Act 1972 (as amended).

To consider an exempt report by the Fund Administrator.

The Committee considered a report from officers summarising the risks to the pension fund’s inflation hedging arrangements from proposed reforms to inflation indexation, namely the proposed replacement of the Retail Price Index (RPI) with the Consumer Prices Index adjusted for housing costs (CPIH).  Options to mitigate those risks were discussed.

Resolved

That the Committee approve the change to the Insight guidelines to reduce inflation hedging from 40% of exposure to 30% from 2030.