Agenda and minutes

To receive any apologies for absence.

No apologies for absence were received at the meeting.

To receive any declarations of interest.

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

The Pension Fund Committee is primarily responsible for all functions of the Council as the administering authority of the Dorset Pension Fund.  The committee will consist of 9 Members comprising 5 Members appointed by Full Council (not more than 2 being also appointed to Cabinet); 3 persons nominated by the Bournemouth Christchurch and Poole Council and 1 person nominated by the unions who have membership that includes officers.

The Committee’s Terms of Reference was received, noted and understood.

To confirm the minutes of the meeting held on 12 March 2020.

The minutes of the meeting held on 12 March 2020 were confirmed by the Chairman.

Cllr Jon Orrell submitted two questions to the Committee and the following responses were given:

Question 1: Is the council exposed to losses from investments in the commercial property sector that is predicted to experience turbulence, as loans face default in the hostile environment of lockdowns, and the shift to online sales?

Response: In order to diversify sources of investment return and risk, the pension fund has investments across a variety of different asset classes including commercial property which in turn has a wide diversification both geographically and across sectors.  This strategy of diversification means that exposures to losses in any one asset class or sector are reduced but not eliminated.  The shift towards online sales was already in progress before the pandemic and consequently the pension fund has less exposure to property in the retail sector than in the benchmark or industry average.

Question 2: Is the council putting future pension provision at risk by continuing fossil fuel investments given that if the country adheres to mandatory carbon reduction targets, thus leaving oil in the ground, these will become stranded assets?

Response: The pension fund’s Investment Strategy Statement requires its investment managers to consider and manage financially material risks arising from environmental, social, and corporate governance issues such as those risks you identify.  In addition, a review of the investment strategy will be considered later on the agenda of this meeting including how the pension fund can help the transition towards a low carbon future.

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

The deadline for submission of the full text of a question or statement is 8.30 am on Monday, 7 September 2020.

Details of the Council’s procedure rules can be found at: Public Participation at Committees.

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

The following statement was read by officers on behalf of the Chairman:

“We have received a number of questions from members of the public relating to the pension fund’s investments in fossil fuels.  The review of the investment strategy to be considered later on the agenda of this meeting will address these matters and therefore we do not intend to respond to each question in turn now.  However, a full record of all questions and responses will be published as part of the minutes of this meeting.”

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 consider at the meeting.

To consider the review of the pension fund’s investment strategy.

The Committee considered a report from officers that reviewed and proposed changes to the pension fund’s investment strategy.

The LGPS is a ‘defined benefit’ scheme so benefits are calculated based on age, length of membership and salary, not investment performance.  Benefits are funded from contributions from scheme members and their employers, and from the returns from investing these contributions before they are needed to pay pensions.  Contribution levels are set nationally for scheme members and locally for scheme employers, so effectively the risk of investment underperformance is borne by scheme employers.

Every three years the actuary sets contribution rates for employers based on assumptions about the pension fund’s assets and liabilities and expected investment returns.  Following the results of the latest triennial actuarial valuation, investment consultants, Mercer, were engaged to review the current investment strategy and strategic asset allocation

Mercer’s concluded that the discount rate of 5.0% used would be challenging to achieve with the current target allocation.  Some changes to the strategic allocation were therefore recommended in order to improve the chances of achieving this target rate of return without unduly increasing risk.  Members of the committee had attended a training session where Mercer explained the reasons for these proposed changes.

The main recommended changes were to increase overall equity exposure from 45% to 50% of total assets, reduce the proportion of UK specific equity holdings, increase the proportion of actively managed equity holdings and reduce the allocation to corporate bonds.

Mercer also considered two potential approaches to enable the pension fund to move towards a low carbon future - divestment, which meant completely divesting from companies involved in the sourcing and refining of fossil fuels, and decarbonisation, which meant a reduction in allocations to companies which are high carbon emitters and looked to influence the demand for fossil fuels and their financing, not just their supply.

Mercer’s favoured approach was decarbonisation as opposed to divestment from all fossil fuel companies.  Decarbonisation could deliver significantly greater reductions in the ‘carbon footprint’ of investments, it allowed for continued influence with companies, and would be more straightforward to implement.

The Chairman highlighted that the proposed investment in the Brunel sustainable equities portfolio would substantially reduce the carbon footprint of the pension fund, as would the reduction in UK and passive allocations.  This was the start of a process which was likely to see over time further reductions in UK and passive allocations and further increases to sustainable equities as confidence in this product grew.

The Independent Adviser explained that the proposed changes were the result of a number of iterations between him, officers, the Chairman and Mercer.  The result of this process was a good balanced strategy.

There was a fairly even split of actuary firms used by the ten Brunel Pension Partnership clients and discount rates ranged between 4% and 5%.  If the actuary had set a lower discount rate at the last triennial review, this would have resulted in increased contribution rates for scheme employers.

A member agreed with  ...  view the full minutes text for item 63.

To receive an oral update on partnership governance and other matters from the Chief Executive Officer and Chief Stakeholder Officer of the Brunel Pension Partnership, the pension fund’s investment pooling manager.

The Committee received a presentation from Laura Chappell, Chief Executive Officer, and James Russell-Stracey, Chief Stakeholder Officer, of Brunel Pension Partnership, the pension fund’s investment pooling manager.  The presentation summarised the key current activities of the investment pooling partnership.

The process to replace Mark Mansley, Brunel’s former Chief Investment Officer, had concluded and there would be announcement to confirm the successful candidate’s appointment shortly.  The appointment would be within the agreed remuneration cap.

It was not uncommon for a high turnover of staff in ‘start-ups’ like Brunel where those responsible for setting up an organisation move on when the company is established.  Staff turnover in many of the other LGPS investment pools had been higher than in Brunel.

The final transitions of assets to Brunel’s management were expected to conclude in 2021.  Brunel were delivering savings for their clients and providing services within budget.

Brunel’s overriding objective was to generate investment performance for its clients to fund pensions but investments could be made which had positive non-financial impacts. 

Brunel’s approach to responsible investment was not to divest from whole sectors but instead engagement with companies was favoured with the option of targeted divestment from individual companies.  There will be a ‘stocktake’ of this approach in 2022.

Brunel would be reviewing its products to see if they could be better aligned with the objectives of the Paris Agreement on climate change.  In particular, they would be looking at whether alternative indices could be established for passive investments to track.

Brunel would be holding a series of investment workshops in the autumn for the investment officers at client funds.

The Independent Adviser asked for more visibility of the performance of underlying managers in Brunel’s quarterly reporting.  Members of the committee also felt that the reports could be more concise and ‘client friendly’ with less reliance on acronyms and jargon.

The Vice-Chairman thanked Brunel’s officers for their presentation and proposed that they be invited to at least one meeting of the Committee every year.

Resolved

       i.          That officers provide feedback from the Brunel investment workshops at the next meeting of the Committee

      ii.          That the format and content of the performance monitoring reporting from Brunel Pension Partnership be reviewed.

    iii.          That the Chief Executive Officer and Chief Stakeholder Officer from Brunel Pension Partnership be invited to at least one meeting of the Pension Fund Committee every year.

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

The Committee considered a report from Alan Saunders, the pension fund’s 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.

Markets had recovered a lot of ground since the steep falls in response to the coronavirus pandemic.  The recovery in markets had been extraordinary but was now consolidating and high levels of volatility were expected in the coming months.

In the US, equity markets were back to December 2019 levels largely driven by the technology sector, although there had been some sell offs in recent weeks.  In the UK, equity markets had lagged the US, as it had for the last to two to three years, which supported the Committee’s decision to reduce exposure to UK markets.

Risks were highlighted from the imminent withdrawal of the UK furlough scheme and concerns about the agreement of a trade deal between the UK and the EU.  A second spike in COVID 19 could encourage the UK government to maintain support for the economy but this could be damaging for market sentiment.

Noted

To consider the quarterly report of the pension fund administrator.  This includes an update on the funding position, the value and performance of investments and other topical issues.

The Committee considered a report from officers on the pension fund’s funding position, valuation, performance and asset allocation as at 30 June 2020.

The value of the fund’s investments at 30 June 2020 was just under £3.0 billion, compared to £2.7m at the start of the financial year.  This improvement was driven by rises across all listed markets after the falls in March and April 2020 in reaction to the impact of COVID 19.

Barnett Waddingham, the pension fund’s actuary, estimated assets to be 85% of the value needed to pay expected benefits accrued to 30 June 2020.  This compares to the funding level of 92% calculated by the actuary following their full assessment as at 31 March 2019.

As at 30 June 2020 approximately 40% of assets had transferred to Brunel’s management.  Implementation of the changes to the investment strategy agreed by the Committee were expected to increase this proportion significantly before the end of the year.

In recent years the pension fund had underperformed its combined benchmark in part because of the challenging market conditions for those investment managers with ‘cash plus’ benchmarks.  There would be a review of the suitability of all benchmarks used.

Resolved

That officers and the Independent Adviser review the benchmarks for all investments.

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.

End of year processes had completed and Annual Benefit Illustrations (ABIs) were issued ahead of the statutory deadline.  Paper statements are still issued to the vast majority of scheme members, and they are used as an opportunity to communicate important messages about the scheme.

Data quality was generally very good, with scores slightly up from last year.  The aim is to maintain these levels but there could be some challenges this year.  There are good relationships with employers and good data which gave confidence that benefits had been paid correctly.

Hymans Robertson had concluded their review of the in-house Additional Voluntary Contribution (AVC) arrangements for scheme members.  Hymans Robertson recommended that the current service provider, Prudential, be retained but kept under review, and that the default standard investment, currently a ‘with profits’ product, be reviewed.  Officers would appreciate any input from Committee members into the review of the default option.

A further consultation was issued by government on 7 September 2020 covering the exit cap and other proposed reforms, which the government was keen to implement very quickly.  The proposed reforms would now cover all scheme members over 55 years old made redundant where there is a strain cost even if below the cap.  The reforms would be very complex to administer as scheme members could potentially have four different options to choose from.

Officers would be responding to the consultation on behalf of the pension fund but scheme employers would be encouraged to respond too.

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 which could result in thousands of benefit calculations being revisited.

The Local Government Association (LGA) Scheme Advisory Board (SAB) were also very concerned about these matters and would be engaging directly with the Ministry of Housing, Communities and Local Government (MHCLG).

Amendments to LGPS regulations come in to force on 23 September 2020.  The amendments will allow administering authorities to review scheme employer contributions between triennial valuations and provide greater flexibility for the repayment of deficits by exiting employers.

The Local Pension Board has reviewed the risk register specifically in relation to the impact of COVID 19.  To date there had been no serious impact on scheme employers and contributions.  Home working arrangements were not ideal for the service and presented additional data protection risks to manage.

Homeworking had had a negative impact on performance as measured by the Key Performance Indicators (KPIs) but not as great as feared.  The main priority was to avoid falling behind in the payment of benefits.  Transfers into the pension fund were a challenge as they involved a lot of paperwork being sent to the office.

Concerns were raised about how to improve performance as it was confirmed that the administration team would continue to work from home until  ...  view the full minutes text for item 67.

To confirm the date of the next meeting of the Committee:

          26 November 2020.

Resolved

That meetings be held on the following dates:

26 November 2020

11 March 2021

Questions from Caz Dennett, South West Action on Pensions (SWAP)

Dorset Council’s C&EE Strategy outlines how the Council will deliver a realistic and achievable approach to ensuring a carbon-neutral Dorset by 2040, with the aim to reduce the bulk of its carbon emissions before this date. It states to achieve this there will be a need for “imaginative and innovative solutions”.  The draft strategy makes no mention of accounting for the carbon emissions produced by Dorset Pension Fund’s fossil fuel investments (currently 7.3% of the pension pot). 

Question 1: When will Dorset Council include the carbon emissions from fossil fuel investments made by Dorset Pension Fund in its calculated carbon footprint, to ensure an accurate and truthful measure? 

Response: Responsibility for all matters relating to the administration of the Local Government Pension Scheme (LGPS) in Dorset is delegated to the Pension Fund Committee which comprises five Dorset Council councillors, three BCP Council councillors and one scheme member representative nominated by the trades unions.  We believe that it is more informative to consider the carbon emissions consequences of the pension fund’s investments separately from those of the Council. 

Question 2: Can Dorset Council imagine divesting the Pension Fund from fossil fuels and adopt this as a solution that helps achieve a net zero-carbon Dorset? 

Response: A review of the pension fund’s investment strategy has just concluded and will be considered later on the agenda of this meeting.  This review has considered how the pension fund’s investment strategy can help the transition towards a low carbon future whilst still ensuring there are sufficient assets to pay pensions as they fall due.

Questions from Len Herbert on behalf of Extinction Rebellion

Extinction Rebellion has three asks. The first of these is to ‘Tell the Truth’ about the climate and ecological emergency by communicating the urgency for change. This includes that policies and actions are communicated widely and openly to allow for stakeholder and public engagement.

When South West Action on Pensions (SWAP) formed to cover the Brunel Pension Partnership area, attempts were made to compare divestment progress between the partners. It is striking that Dorset is the partner with the least, easily available, information. Many of the others allow an understanding of the overarching policy, the relative amounts invested in high and low carbon funds, the target carbon intensity decrease and the monitoring process.

The Annual Report 2018-19 contains only brief references (in the Appendix p.153 ) to engagement with companies on climate risks.  The Investment Strategy Statement (March 2018) makes no reference to climate.  The section on ‘Responsible Investment’ on the Pension Fund website dates back to 2015.

Some information can be gleaned from the minutes of Sep 2019 and March 2020 in the responses to public participation questions and the reported presentations and discussions. It is clear that the committee is indeed beginning to engage with the climate emergency issues but that the communication has some way to catch up.

One piece of information that has proved particularly elusive is  ...  view the full minutes text for item 69.