Agenda and draft minutes

Surrey Pension Fund Committee
Friday, 13 March 2020 10.00 am

Venue: Council Chamber, County Hall, Penrhyn Road, Kingston upon Thames, Surrey, KT1 2DN

Contact: Amelia Christopher  Email: amelia.christopher@surreycc.gov.uk

Items
No. Item

1/20

APOLOGIES FOR ABSENCE AND SUBSTITUTIONS

2/20

MINUTES OF THE PREVIOUS MEETING: 20 DECEMBER 2019 pdf icon PDF 371 KB

3/20

DECLARATIONS OF INTEREST

    All Members present are required to declare, at this point in the meeting or as soon as possible thereafter

    (i)            Any disclosable pecuniary interests and / or

    (ii)           Other interests arising under the Code of Conduct in respect of any item(s) of business being considered at this meeting

    NOTES:

    ·         Members are reminded that they must not participate in any item where they have a disclosable pecuniary interest

    ·         As well as an interest of the Member, this includes any interest, of which the Member is aware, that relates to the Member’s spouse or civil partner (or any person with whom the Member is living as a spouse or civil partner)

    ·         Members with a significant personal interest may participate in the discussion and vote on that matter unless that interest could be reasonably regarded as prejudicial.

    Minutes:

    There were none.

4/20

QUESTIONS AND PETITIONS pdf icon PDF 82 KB

    To receive any questions or petitions.

     

    Notes:

    1.  The deadline for Member’s questions is 12.00pm four working days before the meeting (9 March 2020).

    2.  The deadline for public questions is seven days before the meeting (6 March 2020).

    3.  The deadline for petitions was 14 days before the meeting, and no petitions have been received.

     

    Additional documents:

    Minutes:

    The Chairman noted that the Committee had received a large number of additional correspondences relating to the Fund’s investment in fossil fuels, which would be replied to in due course. He explained that the Fund’s position on the matter was outlined in the Committee’s response to the open letter (Annex B) and he also read out a short statement concerning investment decisions as it was of widespread interest:

     

    All investment decisions are in accordance with the published fund Investment strategy. This is to protect the Fund’s interests and is in line with our fiduciary duty. This Committee makes the final decisions on any changes to the strategy following due process of consultation and discussion.

     

    Surrey Pension Fund Committee members have received many representations through attendance at our meetings, email and other means of communications. Many of these relate to Environment, Social and Governance (ESG) matters and investments.

     

    In response, the Committee, at the meeting of 20 December 2019, authorised a sub-group to review our Responsible Investment Policy and make recommendations to enhance the focus on ESG.

     

    I can announce to the Committee and the public that this process has started and indeed the Strategic Finance Manager (Pensions) has spent much of this week moving this forward. Project planning and resource organisation are both well advanced. 

     

    The objective is to develop a holistic approach to all ESG considerations and develop robust guidelines that will guide our future investment choices.

    This Committee will consider all recommendations brought forward by the sub-group and determine which, if any to adopt.

     

    Six questions were received from members of the public. The responses can be found attached to these minutes as Annex A.

     

    Supplementary questions were asked from six members of the public and responses can be found below.

     

    1. Supplementary question asked by Jenifer Condit:

    The Committee’s written responses to Chris Neill and Barry Staff’s submitted questions in December 2019 stated that divesting in the hydrocarbon industry in fossil fuel companies made no impact on the environment. She commented that continuing to invest in large oil and gas company shares lowered those companies’ cost of capital and therefore enabled them to obtain new investment to expand their business i.e. to exploit more oil reserves. She noted that all four of the actively managed equity pools Majedie, Marathon, Western and BCPP were assessed against indices which were not ‘low carbon’ or ‘sustainable’ in nature. She asked the Committee if they thought divesting still had no impact on the environment.

     

    Response:

    The Chairman responded that the Pension Fund and Committee received informed views on how best to invest the Fund. He explained that the Fund were pursuing engagement as opposed to divestment which was outlined in the Committee’s response to the open letter. The Low Carbon Fund (Indexed Equity Funds) was only one aspect of its asset allocation to minimise risk and maximise returns. The Independent Advisor noted that divesting in large oil and gas companies would raise those companies’ cost of capital. He explained  ...  view the full minutes text for item 4/20

5/20

FORWARD PLAN pdf icon PDF 65 KB

    The Committee is asked to review its Forward Plan.

    Minutes:

    Witnesses:

     

    Neil Mason - Strategic Finance Manager (Pensions)

     

    Key points raised in the discussion:

     

    1. The Chairman highlighted the upcoming review of the Investment Strategy Statement (ISS) the Investment Core Beliefs/Responsible Investment Policy review and Index Linked Gilts review to be presented to the Committee in June.
    2. The Vice-Chairman queried whether any of those items to be reviewed in June would involve decisions to be made at the Committee or whether additional work was needed. In response, the Strategic Finance Manager (Pensions) explained that he expected a principled approach to be reported at the June Committee meeting and that the Committee would be at a decision-making point by the September Committee meeting. He added that an ESG consultant would shortly be in position, resources and timelines would be discussed with them.

     

    RESOLVED:

     

    The Committee noted the report.

     

    Actions/further information to be provided:

     

    None.

     

6/20

PENSION FUND BUSINESS PLAN 2020/21 pdf icon PDF 127 KB

    The 2020/21 Business Plan is the framework for the Fund to meet its strategic objectives, consistent with its Mission Statement.

    Additional documents:

    Minutes:

    Witnesses:

     

    Neil Mason - Strategic Finance Manager (Pensions)

     

    Key points raised in the discussion:

     

    1. The Chairman noted that strategic objectives were agreed for investment, funding, governance and delivery derived from the Mission Statement and each report was newly colour coded reflecting the relevant strategic objective.
    2. The Strategic Finance Manager (Pensions) noted that the Business Plan was an evolving document in response to directives, Government regulations or conclusions of the Committee.

     

    RESOLVED:

     

    The Pension Fund Committee approved the draft Business Plan in respect of the 2020/21 financial year.

     

    Actions/further information to be provided:

     

    None.

     

7/20

LOCAL BOARD REPORT pdf icon PDF 98 KB

    In accordance with Fund’s governance objectives in the 2020/21 Business Plan.

     

     

    Additional documents:

    Minutes:

    Witnesses:

     

    Mr Nick Harrison - Chairman of the Local Pension Board

    Nick Weaver - Head of Pensions Administration

    Neil Mason - Strategic Finance Manager (Pensions)

     

    Key points raised in the discussion:

     

    1. The Chairman of the Local Pension Board informed the Committee that the Board recently met the new Head of Pensions Administration, who provided Members with his initial view on key issues within the service.
    2. The Chairman of the Local Pension Board summarised that the Board:

    ·         discussed the Service Improvement Plan which was ambitious in its proposed timescales to deliver key projects.

    ·         noted the two challenging Internal Audit reviews and a further audit position statement was expected.

    ·         focused on the Key Performance Indicators (KPIs), concluding that it did not think the Pensions Administration team were making sufficient progress on the backlog.

    ·         that there were several changes to existing risks on the register and a new one was added concerning inaccurate KPI’s as a result of the lack of management control over the backlog - Risk A23.

    ·         acknowledged that the figures showed that routine work was being cleared in preference to critical work and asked for deaths, new pensions and transfers to be prioritised and completed in good time - JLT were successfully working through their tranche of the backlog.

    1. The Vice-Chairman commented that much of the report was focused on Pensions Administration. He felt that there was greater scope for the Local Pension Board (LPB) to be a point of governance in response to the Committee spending increasing amount of time on ESG matters. He commented that it would be useful to add the reputational risk of the Fund to the Fund’s Risk Register as reviewed by the LPB.
    2. The Head of Pensions Administration acknowledged that there was a lot to do and it was vital to balance ensuring the fundamentals were correct whilst improving the service. It was important to complete one large piece of work at a time and address the backlog and KPIs which did not add up.
    3. In response to a Member query on whether the Committee could help speed up progress within Pensions Administration through more resources or learning from other funds, the Chairman of the Local Pension Board was satisfied with the approach taken by the Head of Pensions Administration.
    4. The Head of Pensions Administration stressed that he wanted the Pensions Administration team to be empowered to understand and take responsibility for ownership of projects rather than greater outsourcing to external administration teams. 
    5. The Strategic Finance Manager (Pensions) reminded the Committee of the governance structure in which the Pension Fund and Pensions Administration teams regularly met to review actions taken to the Local Pension Board, which were later scrutinised by the Committee.

     

    RESOLVED:

     

    That the Committee:

     

    1. Approved the proposed change to the Risk Register.

     

    1. Noted the minutes of the Local Pension Board meeting of 13 February 2020.

     

    Actions/further information to be provided:

     

    The Chairman of the Local Pension Board would work with officers to add a new risk to the Fund’s Risk Register concerning  ...  view the full minutes text for item 7/20

8/20

REVISED PENSION ADMINISTRATION STRATEGY pdf icon PDF 94 KB

    In accordance with Fund’s governance objectives in the 2020/21 Business Plan.

     

     

    Minutes:

    Witnesses:

     

    Neil Mason - Strategic Finance Manager (Pensions)

    Key points raised in the discussion:

     

    1. The Chairman noted that the Committee were asked to approve the final Administration Strategy as it had reviewed it at the last Committee meeting. In response, the Strategic Finance Manager (Pensions) added that no material changes were made to the final report after the extended period of consultation with employers.

     

    RESOLVED:

     

    The Pension Fund Committee approved the final Administration Strategy.

     

    Actions/further information to be provided:

     

    None.

     

9/20

COMPANY ENGAGEMENT AND VOTING pdf icon PDF 197 KB

    In accordance with Fund’s investment objectives in the 2020/21 Business Plan.

    Minutes:

    Witnesses:

     

    Mamon Zaman - Senior Pensions Finance Specialist

     

    Key points raised in the discussion:

     

    1. A Member welcomed the report as it provided more detail on the Fund’s strengthening engagement.
    2. Responding to the table in the report which showed Surrey’s vote share on resolutions against management as highlighted by the Chairman, the Senior Pensions Finance Specialist pointed out that some votes were successful and others were not. Most companies would go into their voting process in June so more outcomes would be reported from then.
    3. The Chairman positively noted that all companies under engagement had progressed in the five initial objectives of the project.
    4. He informed the Committee that he had attended the last BCPP Joint Committee meeting in which partners including LAPFF and Robeco were addressing ESG issues - he reminded Members that they were welcome to attend. The Senior Pensions Finance Specialist invited Members to attend the LAPFF business meetings, the next one was scheduled for 25 March 2020. 

     

    RESOLVED:

     

    The Pension Fund Committee:

     

    Reaffirmed that ESG Factors were fundamental to the Fund’s approach, consistent with the Mission Statement through:

    • Continuing to enhance its own Responsible Investment Approach
    • Commending the outcomes achieved for quarter ending 31 December 2019 by Robeco in their Active Ownership approach and the LAPFF in its Engagement with multinational companies as at 31 December 2019.
    • Noting the outcomes in relation to ESG issues, through Surrey Pension Fund’s share voting for the quarter ending 31 December 2019.

     

    Actions/further information to be provided:

     

    1. The Committee will explore the Vice-Chairman's response to the sixth supplementary question in which he suggested that the Committee should ensure a fixed definition of terms on climate related matters and ESG to ensure a clearly defined Responsible Investment approach.
    2. The Senior Pensions Finance Specialist will send invites to the Committee for the upcoming LAPFF business meeting.

     

10/20

CASH-FLOW ANALYSIS pdf icon PDF 92 KB

    In accordance with Fund’s funding objectives in the 2020/21 Business Plan.

    Minutes:

    Witnesses:

     

    Neil Mason - Strategic Finance Manager (Pensions)

     

    Key points raised in the discussion:

     

    1. The Chairman informed Members that the actuary was working on a more comprehensive cash-flow analysis, detailing the benefits paid, the contributions received income and net cash-flow. In response, the Strategic Finance Manager (Pensions) had spoken to investment consultants and the actuary on a more holistic cash-flow analysis.
    2. The Chairman explained that 10% of scheme member contributions was still to be invested and the Fund was cash-flow positive. He noted that the regular provision of the figures on the current membership was useful.
    3. The Strategic Finance Manager (Pensions) highlighted the typographical error in the heading, as quarter two began from 1 July 2019 and not 1 September 2019. The Fund had a substantial cash-flow reserve, which was invested in line with advice from investment consultants and the Fund’s cash management plan.

     

    RESOLVED:

     

    The Pension Fund Committee:

     

    1. Noted the cash-flow position for quarters two and three.
    2. Determined that no change is required to the investment or funding strategy as a result of the current cash-flow position.

     

    Actions/further information to be provided:

     

    None.

     

11/20

2019 VALUATION UPDATE pdf icon PDF 104 KB

    In accordance with Fund’s funding objectives in the 2020/21 Business Plan.

     

     

     

     

    Additional documents:

    Minutes:

    Witnesses:

     

    Neil Mason - Strategic Finance Manager (Pensions)

     

    Key points raised in the discussion:

     

    1. The Chairman noted that the Committee had seen the draft valuation report before and were asked to approve the final draft report. He pointed out the Hymans Robertson report regarding the Fund’s expected compliance with the Government Actuary’ Department (GAD) scheme-level Section 13 valuation. He noted the letter from the four actuarial advisors to LGPS funds replying to the 2016 Section 13 valuation. The letter highlighted their dissatisfaction with Section 13 which they argued did not work as all pension funds were different and the Chairman noted that GAD did not pursue the grievances in the letter.
    2. The Strategic Finance Manager (Pensions) discussed that Section 13 was a regulatory requirement for funds and he responded to a Member explaining that the letter was a joint response to GAD from the four actuarial advisors, which was brought to the attention of the Committee to note the reservations of GAD’s methodology regarding Section 13.
    3. He explained that GAD had a league table on their metrics on the reduction of deficit recovery rates and reducing contributions. Those metrics were unsuited to the Surrey Pension Fund which had retained its deficit recovery rates at twenty years - whilst not contravening its Funding Strategy Statement (FSS).
    4. He added that the final 2019 valuation would be approved once the rates and adjustment certificate was finalised - prior to the 31 March 2020 deadline.He noted that since 31 March 2019 the funding level had increased by 3% to 99% and consultation was had witha small group of colleges, higher education institutions and community admission bodies to offer assurance and security on the changes to their recovery periods and meeting their funding requirements.

     

    RESOLVED:

     

    The Pension Fund Committee:

     

    1. Approved the draft 2019 valuation.
    2. Authorised the delegation of authority to the Director of Corporate Finance, in consultation with the Chairman of the Pension Fund Committee, to approve the 2019 valuation and funding strategy statement, once the rates and adjustments certificate is finalised (prior to the 31 March 2020 deadline).
    3. Noted the report from Hymans Robertson regarding the expected compliance of the Fund with the Government Actuary’s Department (GAD) scheme-level Section 13 valuation.

     

    Actions/further information to be provided:

     

    None.

     

12/20

LGPS SCHEME ADVISORY BOARD (SAB) - CONSULTATION ON DRAFT RESPONSIBLE INVESTMENT GUIDANCE pdf icon PDF 103 KB

    In accordance with Fund’s investment objectives in the 2020/21 Business Plan.

    Additional documents:

    Minutes:

    Witnesses:

     

    Neil Mason - Strategic Finance Manager (Pensions)

     

    Key points raised in the discussion:

     

    1. The Chairman queried what the next step was after the letter was sent outlining the Council’s response to the Scheme Advisory Board (SAB) consultation on the draft Responsible Investment (RI) guidance. In response the Strategic Finance Manager (Pensions) informed the Committee that Members would be provided with the results of the consultation. Surrey Pension Fund was broadly supportive of the guidance and particularly the definition of the ‘spectrum of capital’ which was an investment core belief of the sub-group.
    2. The Strategic Finance Manager (Pensions) added that funds’ fiduciary duties could be impacted by the Court of Appeal’s ruling regarding the use of pension policies to divest or boycott foreign nations in response to the Palestine Solidarity Campaign. In response to the Chairman’s query, the Strategic Finance Manager (Pensions) also noted that RI, ESG and climate risk were grey areas as to where funds’ fiduciary duties started and ended on political points of view.
    3. The Vice-Chairman asked for clarification on the relationship between the Surrey Pension Fund and SAB. The Strategic Finance Manager (Pensions) noted that SAB was a direct line in to Government for the LGPS and provided advice on regulations and best practice to the Pension Fund Committee, Local Pension Board and Section 151 officer.

     

    RESOLVED:

     

    The Committee noted the report and annexe.

     

    Actions/further information to be provided:

     

    None.

     

13/20

INVESTMENT MANAGER ISSUES AND PERFORMANCE AND ASSET/LIABILITIES UPDATE pdf icon PDF 1 MB

    In accordance with Fund’s investment objectives in the 2020/21 Business Plan.

     

    NB: Annexes 2 and 3 are contained within Item 15 as they contain Part 2 information.

     

     

    Additional documents:

    Minutes:

    Witnesses:

     

    Steve Turner - Investment Consultant (Mercer)

    Anthony Fletcher - Independent Advisor (MJ Hudson)

     

    Key points raised in the discussion:

     

    1. In response to the Chairman, the Investment Consultant noted that the Fund’s transition of assets to Border to Coast (BCPP) continued to be positive.
    2. The Independent Advisor updated the Committee on the Equity Protection Strategy (EPS) of Legal and General Investment Management (IM). He explained that the Fund had given up the potential equity upside of its portfolio of approximately £107m or 2.37% of Total Fund Value (as at 31 December 2019). Investing in that insurance strategy resulted in the Fund’s total return being 10.4%, it would have been 2% higher otherwise. He reminded the Committee that the equity protection strategy was chosen to provide an insurance against a fall in equity values in the period leading up to the actuarial valuation.
    3. The Independent Advisor concluded that it was important to recognise the long-term investment strategy of the Fund which could look through short periods of volatility such as changing equity markets and more recently coronavirus - a memo had been sent to scheme members in light of Covid-19.

     

    RESOLVED:

     

    The Pension Fund Committee:

     

    Noted the main findings of the report: the Fund’s 3 year annualised performance return for the period ending 31 December 2019 was +6.2% against its target return of 6.6%. The funding level as at 31 December 2019 was 101.6%.

     

    Actions/further information to be provided:

     

    None.

     

14/20

EXCLUSION OF THE PUBLIC

    That under Section 100(A) of the Local Government Act 1972, the public be excluded from the meeting for the following items of business on the grounds that they involve the likely disclosure of exempt information under the relevant paragraphs of Part 3 of Schedule 12A of the Act.

    Minutes:

    RESOLVED:

     

    That under Section 100(A) of the Local Government Act 1972, the public be excluded from the meeting for the following items of business on the grounds that they involve the likely disclosure of exempt information under the relevant paragraphs of Part 3 of Schedule 12A of the Act.

     

    The meeting was adjourned at 11:29 am

     

    It was reconvened at 11:36 am

     

15/20

INVESTMENT MANAGER ISSUES AND PERFORMANCE AND ASSET/LIABILITIES UPDATE

    In accordance with Fund’s investment objectives in the 2020/21 Business Plan.

     

    NB: Annexes 2 and 3 are the Part 2 annexes to item 13.

     

    Additional documents:

    Minutes:

    Witnesses:

     

    Anthony Fletcher - Independent Advisor (MJ Hudson)

     

    Key points raised in the discussion:

     

    1. The Independent Advisor outlined the passive equity fund performance of Legal and General Investment Management (LGIM), he also noted the performances of Majedie and Newton Investment Management.
    2. The Independent Advisor summarised the performance of the BCPP’s UK Equity Alpha and Global Equity Alpha funds.

     

    RESOLVED:

     

    The Pension Fund Committee noted the Part 2 Annexes 2 and 3.

     

    Actions/further information to be provided:

     

    None.

     

16/20

CONSULTATION ON INDEX LINK GILTS

    In accordance with Fund’s investment objectives in the 2020/21 Business Plan.

     

    Additional documents:

    Minutes:

    Witnesses:

     

    Steve Turner - Investment Consultant (Mercer)

    Neil Mason - Strategic Finance Manager (Pensions)

    Anthony Fletcher - Independent Advisor (MJ Hudson)

     

    Key points raised in the discussion:

     

    1. TheInvestment Consultant summarised that the Fund held a small allocation of Index Linked Gilts (ILG).
    2. The Strategic Finance Manager (Pensions) noted that the Fund had received correspondence from Mercer regarding the materiality of holding ILGs in response to the potential reform of the RPI inflation measure.
    3. Responding to the Chairman, the Independent Advisor discussed theGovernment’s consultation on the calculation of ILGs and the impact of transferring ILGs into conventional (fixed interest) gilts.

     

    RESOLVED:

     

    The Pension Fund Committee agreed the recommendations outlined in the Part 2 report.

     

    Actions/further information to be provided:

     

    None.

     

17/20

BORDER TO COAST UPDATE

    In accordance with Fund’s investment objectives in the 2020/21 Business Plan.

    Additional documents:

    Minutes:

    Witnesses:

     

    Neil Mason - Strategic Finance Manager (Pensions)

     

    Key points raised in the discussion:

     

    1. The Strategic Finance Manager (Pensions) highlighted the Investment Programme Governance Calendar and Partner Fund Governance Calendar which showed their scheduled work streams until March 2021.
    2. The Strategic Finance Manager (Pensions) noted that the number of partner funds would be reduced from twelve to eleven as a result of the merger between Northumberland County Council and South Tyneside Council pension funds. That merger had been known by all partner funds from the outset of Border to Coast.

     

    RESOLVED:

     

    The Pension Fund Committee agreed the recommendations outlined in the Part 2 report.

     

    Actions/further information to be provided:

     

    None.

     

18/20

PUBLICITY OF PART 2 ITEMS

    To consider whether the item considered under Part 2 of the agenda should be made available to the Press and public.

    Minutes:

    The Committee agreed that no confidential information within items considered under Part 2 of the agenda should be made available to the Press and public.

     

     

19/20

DATE OF NEXT MEETING