Agenda and minutes

To receive any apologies for absence.

Apologies were received from Cllr Bobbie Dove, Bournemouth, Christchurch and Poole Council.

To confirm the minutes of the meeting held on 30 November 2021.

The minutes of the meeting held on 30 November 2021 were confirmed by the Chairman.

To disclose any pecuniary, other registrable or personal interest as set out in the adopted Code of Conduct.  In making their decision councillors are asked to state the agenda item, the nature of the interest and any action they propose to take as part of their declaration.

If required, further advice should be sought from the Monitoring Officer in advance of the meeting.

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

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

Questions and statements from town and parish councils and members of the public are included in an appendix to these minutes.

To receive questions or statements on the business of the committee from

Dorset Council and BCP Council elected members. 

There were no questions from members.

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.

The following items of business were considered by the Chairman as urgent pursuant to section 100B (4) b) of the Local Government Act 1972. The item was considered to be urgent because of the impact the Russian invasion of Ukraine could have on investments.

On behalf of all members of the Committee, the Chairman condemned Russia’s unwarranted and illegal war on Ukraine.

The pension fund had relatively limited exposure to Russia through holdings in an emerging markets equity fund managed by Brunel Pension Partnership, the pension fund’s Local Government Pension Scheme (LGPS) investment pooling manager.  Before the invasion approximately 3% by value of this pooled investment vehicle was invested in Russian companies which for Dorset equated to approximately £5m or 0.13% of the pension fund’s total assets.

Brunel were committed to divesting fully from Russia and their underlying investment managers had begun to divest before markets closed, with all remaining assets written down to zero value.

Noted

To consider the annual report of the pension fund’s independent governance adviser on the governance of the pension fund.

The Committee received the annual update on governance compliance from Peter Scales, MJ Hudson, the pension fund’s Independent Governance Adviser.

Overall good standard of governance had been maintained despite the pandemic and the introduction of new pensions administration systems which were always extremely challenging to implement.

Significant changes to the governance framework for LGPS funds were expected and these changes were expected to lead to significant additional pressure on administering authorities.

Officers would report to the next meeting of the Committee the results of a ‘stock take’ against the recommendations of the LGPS Scheme Advisory Board (SAB) good governance review.

SAB were working with government to get greater clarity on the potential implications of the government’s ‘levelling up’ White Paper for LGPS funds. This was likely to be another factor to consider as part of the review of investment strategy.

References in the White Paper to “local” investment were understood to mean countrywide and it was questioned why this did not exclude London and the South East. Concerns were also raised that the proposals could undermine the principle that investment decisions were based primarily on the requirements of the pension fund.

It was suggested that minutes of the Local Pension Board should be reported to the Committee and an annual statement from the Local Pension Board should be included in the pension fund’s annual report.

Noted

To consider the quarterly report on pension fund administration.

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

Key Performance Indicators (KPI) had been adversely impacted by the change in administration system and staff shortages, but it was difficult to determine how much of any underperformance was attributed each factor.  Improvements had been made but it was expected to take some months to fully recover to previous levels of performance.

Good progress had been made implementing and developing the new system. There was regular contact with the provider, Civica, who had responded well when particular areas of concern had been raised with them. Officers were confident that data going into the forthcoming actuarial valuation would be of a good quality.  Interim updates between quarterly meetings could be provided to Committee members to provide further assurance if required.

Officers were working with Human Resources (HR) colleagues to identify what could be done to improve retention and recruitment, including a benchmarking survey of other employers, reviewing the provision of training and development for staff and assessing the impact of home working.  Retention and recruitment continued to be a challenge in all parts of the council, not just pensions administration.

Paul Kent, the chairman of the Local Pension Board (LPB), intended to step down from this role after the LPB’s next meeting on 23 March 2022.  Mr Kent’s experience and knowledge had been a great benefit to the governance of the pension fund and a letter of thanks to him for his contribution would be written.  The decision to appoint a remunerated independent chairman of the LPB as a replacement for Mr Kent and, if yes, the level of remuneration would be delegated to the Chairman and Vice-Chairman.

Recommendations regarding the LPB made by the Independent Governance Adviser in his annual review would be adopted by the Committee.  There was a need to maintain good relationships between the Committee and LPB, and to ensure a good two-way flow of information.

Hymans Robertson had been commissioned to review the pension fund’s administration strategy and concluded that it was “an excellent document with no major concerns”.  The Independent Governance Adviser described it as 

a glowing endorsement of the work done by officers and a good example for other pension funds to use as a template.

Resolved

That:

i.       a letter of thanks be written to Paul Kent who is stepping down from his role as the chairman of the Local Pension Board.

ii.      authority is delegated to the Chairman and Vice-Chairman to review the need for a remunerated independent chairman of the local pension board and, if yes, the level of remuneration.

iii.    minutes of the Local Pension Board shall be reported to the Committee on a quarterly basis.

iv.    an annual statement from the Local Pension Board shall be included in the pension fund’s annual report.

To consider the quarterly report of the pension fund’s independent investment

adviser on the outlook for the pension fund’s investments.

The Committee considered a report from Steve Tyson, MJ Hudson, the pension fund’s Independent Investment Adviser, that gave his views on the economic background to the pension fund’s investments, the outlook for different asset classes and key market risks.

Inflation was expected to be higher for longer but not clear how high the peak would be and how long the peak will last.  The crisis in Ukraine would lead to more upward pressure on inflation and the pension fund’s inflation hedging strategy would need to be reviewed.

In time it was expected that markets would recover from the Ukraine crisis as had been the case for previous crises, but markets were expected to experience a period of volatility with modest returns for some time.

The independent investment adviser made clear that he would not advise buying Russian assets until the environment had totally changed. The Brunel Pension Partnership continued to prohibit its underlying investment managers from making any new investments in Russian assets.

Resolved

That the pension fund’s inflation hedging strategy be reviewed.

To consider the quarterly report on the funding position, the value and performance of investments and other related issues.

The Committee considered a report from officers on the pension fund’s funding position, asset valuation, investment performance and asset allocation as at 31 December 2021.

The value of the pension fund’s assets ended the quarter at £3.8 billion compared to £3.3 billion at the start of the financial year, with nearly two thirds of those assets now under the management of Brunel. Just under one third of the pension fund’s liabilities were hedged against inflation sensitivity using just under 12% of assets to do so.  If market conditions stayed as they were for the remainder of the financial year, asset values at 31 March 2022 were expected to be lower.

In September 2021 the Committee approved indicative commitments of £60m each to Brunel’s cycle 3 private equity and infrastructure portfolios.  It was agreed to increase the commitment to the infrastructure portfolio to £70m and to make an additional commitment of £20m to Brunel’s secured income portfolio.  These commitments would take time to be drawn down and would be funded from cash balances or redemptions from asset classes where the pension fund was above target, such as corporate bonds.

The funding position estimated by the actuary was that the value of the pension fund’s assets at 31 December 2021 covered 89% of the present value of liabilities. A full review of the funding position would be undertaken by the pension fund’s actuary as at 31 March 2022 and this would inform a review of the investment strategy. To dampen down the impact of volatility in markets, the actuary makes a smoothing adjustment to the market value of assets at the valuation date based on asset values over the six month period around the valuation date. Also, the rate used to discount expected liabilities to a present value is based on expected future investment returns which take into consideration current valuations.  There would be an opportunity for Committee members to raise questions directly with the actuary in the coming months prior to the conclusion of the valuation.

The investment return for the quarter was 4.2% compared to the combined benchmark return of 4.1%.  Over the longer term, annualised returns for three years were 10.3% compared to the benchmark return of 9.5%, and the benchmark and annualised returns for five years were 7.4%, matching the benchmark return.  Out performance of benchmarks was fundamentally a result of the performance of underlying managers.

Brunel warned that many of its portfolios were expected to underperform their benchmarks in the quarter to 31 March 2022 largely due to markets favouring ‘value’ stocks over ‘growth’ stocks.  Brunel were having frequent conversations with two underlying managers where there were performance concerns but these had not yet reached a position where termination was being considered. 

Resolved

That commitments are made to Brunel’s cycle three private markets’ portfolios for Private Equity (£60M), Infrastructure (£70M) and Secured Income (£20m).

To receive an update from Cllr John Beesley in his capacity as the

Committee’s representative on the Brunel Oversight Board.

Cllr John Beesley, the pension fund’s representative on the Brunel Oversight Board (BOB), updated the Committee on governance matters relating to the investment pooling partnership.

BOB had met twice since the last meeting of the Committee in September 2021. The main topic for the first of these two meetings on 2 December 2021 had been feedback from the Conference of Parties (COP) in Glasgow on climate change.  The main topic for the second of these two meetings on 27 January 2022 was Brunel’s budget for 2022-23.  Future meetings would look at portfolio underperformance and the climate action stock take.

Noted

To consider the report of the external auditor for 2019/20.

The Committee considered the final report of Deloitte, the pension fund’s independent external auditor, on the financial statements for 2019-20.  No substantive matters and been identified and an unqualified opinion would be issued. The auditor’s report for 2020-21 for the pension fund accounts and the main local authority accounts had still not been received. 

Collectively the audit profession was trying to respond to the Redmond review and build capacity. Deloitte had a lack of capacity, particularly in local government audit, and were themselves also subject to a scheduled review by the Financial Reporting Council (FRC) during which they were not expected to sign off any audits.  Deloitte’s audit partner had offered to come to the Committee or respond to any further questions.

The delays had caused frustration for BCP and other scheme employers whose own audits had been held up due to their reliance on Deloitte to complete their work in relation to the pension fund accounts.

Noted

To approve the pension fund’s Treasury Management Strategy for 2022/23.

The Committee considered a report by officers setting out the Treasury Management Strategy (TMS) for 2022-23.

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 these cashflows and cash investments, and broadly followed the TMS for Dorset Council, the administering authority for the pension fund, where applicable.

The TMS for 2022-23 was largely unchanged from 2021-22, except for a proposed increase in the minimum balance readily available in same day access bank accounts and/or money market funds from £10m to £20m.  This was to better manage the risk of needing to borrow funds or sell assets at short notice to meet liabilities and commitments, particularly private market capital calls.

Dorset Council’s treasury management advisers, Arlingclose, had a contract for three years with the ability for the Council to extend by a further one year.

Resolved

That the Treasury Management Strategy for 2022-23 be approved.

To confirm the dates for the meetings of the Committee in 2022/23:

    10am Tuesday 14 June 2022 – County Hall, Dorchester

    10am Wednesday 21 September 2022 – County Hall, Dorchester

    10am Tuesday 29 November 2022 – County Hall, Dorchester

    10am Tuesday 14 March 2023 – County Hall, Dorchester

Members were disappointed that the meeting had not been held in the offices of one of the pension fund’s investment managers in London as originally intended.  The decision to change the meeting location had been made because of concerns about accessibility for members of the public to attend in person and the ability to webcast meetings from outside County Hall as the technology was not very portable.

Proposals for the location of the Committee meetings and training sessions for 2022-23 would be developed by the Chairman, Vice-Chairman, Executive Director – Corporate Development and Service Manager - Treasury and Investments.

Two options would be considered (1) to hold training sessions in London but hold all meetings of the Committee open to the public in County Hall or (2) look for venues in London that will have the facilities to allow members of the public to attend in person and for meetings to be webcast.

Resolved

That meetings be held on the following dates and proposals for the location of the meetings and training sessions for 2022-23 be developed by the Chairman, Vice-Chairman, Executive Director – Corporate Development and Service Manager - Treasury and Investments:

·        10am Tuesday 14 June 2022

·        10am Wednesday 21 September 2022

·        10am Tuesday 29 November 2022

·        10am Tuesday 14 March 2023

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.

Resolved

That under Section 100A(4) of the Local Government Act 1972, the public be excluded from the meeting for the business specified in minute 14 because it was likely that if members of the public were present there would be disclosure to them of exempt information as defined in Paragraph 3 of Part 1 of Schedule 12A to the Act and the public interest in withholding the information outweighs the public interest in disclosing that information.

To discuss the engagement of investment consultants to support a review of the pension fund’s investment strategy following the conclusion of the triennial valuation.

The Committee discussed the need to engage investment consultants to support the review of the pension fund’s investment strategy following the conclusion of the triennial valuation.

Resolved

That officers commence a procurement exercise to engage investment consultants to support a review of the pension fund’s investment strategy following the conclusion of the triennial valuation.

Pension Fund Committee: Questions from town and parish councils and members of the public

Caz Dennett, Dorset Action on Pensions

Question 1 – Evidence of the effectiveness of an Engagement Strategy (412 words)

On 14 December 2021, a delegation from South West Action on Pensions (SWAP) and members of the Brunel Pension Partnership management team met together. During the meeting Brunel’s Chief Responsible Investment Officer, Faith Ward, strongly emphasized her commitment to their policy of ‘engagement’ with fossil fuel linked companies, rather than to divesting funds from them.

Although SWAP have a clear preference for rapid and total divestment (by the end of 2023), we are interested in how such ‘engagement’ with fossil fuel investments might lead to some climate positive or net zero outcomes. In a recent podcast*, David Vickers, Chief Investment Officer at Brunel, who was also present at the meeting which I attended said: “We believe in engagement, but there comes a point where, if you are not having an impact, you disinvest.”

In 2021 Dr. Ellen Quigley was commissioned by Cambridge University to research the advantages and disadvantages of fossil fuel divestment, and in doing so to understand the efficacy of engagement vs divestment in terms of de-carbonising the University’s Pension Fund. The Fund totalling £3.5 billion is the largest university endowment in Europe, and in 2019 2.8% was invested in the fossil fuel sector.

Her research found that regarding shareholder engagement “on the basis of its historic evidence it would not appear to be a sufficient tactic on its own for the scale and speed of change required to decarbonise the fossil fuel sector”**

Furthermore, “To be consistent with the Paris Agreement goal, a large majority of proven fossil fuel reserves would need to be left in the ground (a third of oil reserves, half of gas reserves, and 80% of coal reserves) between 2010 and 2050 in order to keep within a safe warming threshold. Research suggests that existing fossil fuel infrastructure, in addition to that which is currently planned, permitted, or under construction, would already exceed the carbon budget needed to retain a 66% chance of staying below 1.5˚C.”

Question: Given that engagement is very unlikely to work with fossil fuel companies when the core of their business is to extract and sell fossil fuels for financial gain, and that since 2018 all major gas and oil companies have approved projects that are not consistent with the Paris Climate goals, will the Pension Committee ask Brunel Pension Partnership to provide incontrovertible evidence that their policy of engagement is effective in altering the core business models of the oil 7 gas giants that are set to destroy our planet?

*David Vickers Podcast: https://www.brunelpensionpartnership.org/2021/12/14/net-zero-porfolios-not-enough-says-david-vickers-in-lgim-podcast-what-net-zero-means-to-brunel/

**University of Cambridge Report https://www.cam.ac.uk/sites/www.cam.ac.uk/files/sm6_divestment_report.pdf

Response:

The Dorset County Pension Fund conducts a major review of its long-term investment strategy every three years. This process begins with an analysis of our overall funding position conducted by our actuaries, Barnet Waddingham. It will be based on the value of our assets  ...  view the full minutes text for item 156.