Agenda, decisions and minutes

To receive any apologies.

Councillor Huw Llewellyn Jones

Councillor Huw Llewellyn Jones

To receive any Declarations and advise Members accordingly.

There were no other declarations of interest.

There were no other declarations of interest.

To confirm as a correct record the minutes of the last meeting held on the 28 November 2019.

RESOLVED:

The minutes of 28 November 2019 were received, approved and signed by the Chairman.

On page 10, Mr Hibbert queried whether the issue of Scheme Member Representation had been considered at the WPP JGC meeting in January. Mrs Fielder said that there was a JGC meeting in December but no one from the Fund was represented and there was no meeting in January. The next JGC meeting is in March where it is expected that JGC Scheme Member Representation will be on the agenda.

Mrs McWilliam noted the reference to the GMP rectification exercise on page 11 and stated that this exercise will now continue through to at least June 2020.

The minutes of the meeting of the Committee held on 28 November 2019 were then agreed.

RESOLVED:

The minutes of 28 November 2019 were received, approved and signed by the Chairman.

RESOLVED:

The Committee noted, commented on and approved the revised Investment Strategy

Statement subject to the agreed changes being made.

            Mr Buckland and Mr Latham took the Committee through the latest Investment Strategy Statement (ISS) and noted the following key points;

-       The regulations requiring funds to produce an ISS were made in 2016.

-       The first ISS was required to be published by 31 March 2017.

-       These regulations are still in place; however new regulations are due later in 2020. As a result, the ISS may need to be further amended.

-       Statutory guidance states that Fund policies on investment cannot go against Government policy.

-       There are a number of key requirements for inclusion in an ISS and Mr Buckland highlighted these, including diversification of investments and consideration of risk.

                      Mr Latham highlighted the changes that had been made to the ISS.

            The first change was to include a new Funding and investment's objective at bottom of page 4 of the ISS in relation to the pooling of assets through WPP. The Committee agreed the proposed wording.

                      Cllr Williams asked whether the Supreme Court case involving the Palestine Solidarity Campaign and Government policy would inhibit the Fund’s Responsible Investment policy. Mr Buckland responded that the way in which the Responsible Investment policy has been written, his view is there is no conflict. He said that the bigger issue is that some Funds have disinvested due to certain ethical beliefs. Mr Buckland said that we await the results of the court case and will return to this issue, which should be known over the next few months.

            Mr Everett asked why the two asset classes, agriculture and timber, were included within the ISS, and not categories such as renewable energy. Mr Harkin explained that infrastructure as an asset class covers a range of investments including renewable energy.  He agreed to revisit the categories.

            The Chairman queried how the Fund's benchmark is determined. Mr Buckland said that the benchmark is a composite of all of the benchmarks of the Fund's underlying asset classes. For example, equities and private markets will both have a benchmark, adding these all together determines the Fund's overall benchmark.

            Mr Latham added that there are strategic ranges set out on page 12 of the ISS. He noted that a conditional range is used when there are major risks to the Fund, in which case the officers, taking account of advice from the Fund's Investment Consultants, can make decisions that move the asset allocations beyond the strategic range, into the conditional range. Mrs McWilliam asked whether the conditional range had been used before. Mr Latham confirmed that he couldn't recall an extreme situation, but it has been used when the Fund was going through a transition. 

            Mrs McWilliam suggested to soften the wording on page 21 of the ISS. The wording stated;

In the longer term, subject to the above mentioned objectives being met, the Clwyd Fund is committed to investing all of its assets through the WPP.

            Mrs McWilliam proposed that the wording should be closer aligned to the pooling objective on page 4 of  ...  view the full minutes text for item 100.

RESOLVED:

(a)  The Committee noted the report and activity since the September 2019 meeting and consultation.

(b)  The Committee approved the final Funding Strategy Statement.

            Mr Middleman noted that at the September meeting the draft Funding Strategy Statement (FSS) had been discussed and the consultation with employers went ahead in November (including the AJCM and meetings with individual employers) with comments being invited. There had been no material changes to that draft but there had been some minor changes as a result of the discussions with employers and also due to lack of progress on certain national issues and structural changes.

            Mr Middleman updated the Committee on the state of play on the consultations on the 4-year valuation cycle and Fair Deal which were due to introduce protected status for members and a Deemed Employer route. There has not been any response to the 4-year valuation consultation and the Fair Deal consultation has not been progressed. It is not envisaged that either of these will be progressed before the FSS needs to be signed off so the related wording has been removed from the FSS. These will be reinserted as required and brought back to Committee once there is an update from those consultations.

             Mr Middleman made the following key points;

-       When Mercer set assumptions, in particular around inflation, Mercer look at the best estimate of RPI from market yields on Government Bonds.  Mercer then estimate CPI inflation (the increases applied to liabilities) by deducting 1% p.a. from RPI (i.e. an RPI-CPI gap of 1% p.a.).

-       Following the proposed change in RPI to be more like CPIH, in the September 2019 announcement, the market implied RPI inflation had shifted. Whilst this does not affect the assumptions at the valuation date (31 March 2019) it is important that the Fund recognise this update in the FSS. If this wasn’t recognised it would result in using an assumption for CPI (based on the current RPI / CPI gap) which is too low and hence undervaluing liabilities in future calculations.  It was noted this will be discussed in more detail in the next item but the proposal is to reduce the RPI to CPI gap to 0.7% p.a. to compensate for this.  The consultation on the change is expected as part of the Budget on 11 March 2020 and the position will be kept under review.

-       The overall funding level was 91% at the valuation date, with a deficit of £175m.

-       The ongoing cost of benefits as a result of the valuation was 17.3% of pensionable pay.

-       Contribution rates for employers will be implemented on this basis from 1 April 2020.

            On page 25, the Chairman asked why the average deficit recovery period increased from 12 years in the draft FSS to 13 years. Mr Middleman noted this was an average and that different employers (including the Councils) had different periods appropriate to their circumstances and most had reduced by 3 years but 2 Unitary Councils had reduced by 2 years. It was also noted that it is the overall set of parameters that matter i.e. other assumptions like the discount rate are  ...  view the full minutes text for item 101.

RESOLVED:

(a)  The Committee noted this report on the various elements of the Risk Management Framework, equity protection and currency hedging strategy.

(b)  The Committee were made aware of the risk from potential RPI reform and the balanced action taken to reduce this risk as well as the costs.

            Mr Page introduced himself to the Board and presented the flightpath introductory training session.  Further detailed sessions will be scheduled to deliver more detail on the various elements. The presentation covered the main objectives of the flightpath and the following key points were made;

-       The aim of the investment strategy is to deliver a return above inflation, CPI inflation in particular, given that the Fund’s liabilities rise with inflation.

-       Higher returns above inflation means that lower employer contributions are required to make good on the benefits for members. Conversely lower returns above inflation would mean higher contribution requirements for employers.

-       In order to generate return, risk must be taken. However, there is a need to find a balance between taking enough risk to ensure contributions are affordable, but not too much risk that may result in losses on the investments leading to higher contributions in the future.    The overarching objective is to be fair to current and future taxpayers by getting this reasonable balance.

-       The aim of the flightpath strategy is to manage investment risks to improve the affordability and stability of employer contributions.

-       The flightpath is a risk management approach rather than a de-risking mechanism, and works in tandem with the Fund’s well diversified investment strategy.

-       The flightpath seeks to manage (i.e. hedge) risks associated with both the assets and the liabilities. However, it does not manage all investment or liability risks; rather there is an assessment of whether the benefit of managing a particular risk outweighs the cost of doing so. Cost considerations relate to manager and consulting fees, transaction costs, initial and ongoing governance requirements and the overall impact and likelihood of a risk manifesting negatively so the overall objective is not met.

-       The Fund’s biggest risk is rising inflation, given that members’ benefits i.e. the Fund liabilities, are linked to inflation. This is managed through a Liability Driven Investment (LDI) strategy which aims to maximise the certainty of returns above inflation when market opportunities arise thought a yield-based trigger mechanism. The hedge level was previously at 20% for interest rates and 40% for inflation. The Fund has decided to reduce inflation exposure by 20% temporarily in light of RPI reform risk which was discussed in more detail after the training.

-       The flightpath also manages equity downside risk through an equity protection strategy, and the risk that sterling appreciates, reducing the value of overseas assets in GBP terms, through a currency hedging strategy.

-       The flightpath seeks to implement the risk management strategies in an efficient manner. This is evidenced by the collateral “waterfall” approach, which ensures the strategies are supported by enough collateral (essentially a cash like pool of assets backing the hedging framework) but not too much that it acts as a drag on Fund returns. Excess collateral is invested in higher yielding but daily dealing funds in order to generate higher returns but is available for collateral to maintain the hedging position if required at short  ...  view the full minutes text for item 102.

RESOLVED:

(a)  The Committee noted the report.

(b)  The Committee discussed the creation of an impact fund and priority investments.

            Mr Latham gave an overview of the report which demonstrated the progress of the WPP. Paragraph 1.08 illustrates the provision of an emerging market equity sub fund through the WPP and the asset allocation for the Clwyd Pension Fund increasing from 6% to 10% (or £200m). Mr Latham and Mrs Fielder are due to represent the Committee and this matter at the next OWG.

            Mr Latham asked for the views of the Committee as to whether the proposed private markets sub-group should have a separate portfolio for impact investing given there is a specific allocation with the Clwyd Pension Fund's investment strategy. Mr Latham explained that the two proposed priority areas for the WPP private markets impact sub-fund are affordable housing and climate change. One of the areas the Fund could ask to be included are the economic areas, looking at SME’s to invest in to hopefully create jobs in the local area.

            Mr Hibbert stated that he was not content with the phrase “affordable housing”. He strongly believed that there needed to be a specific reference to the need for a social element within that. Cllr Williams agreed strongly that a different and clearer definition is required.

            Cllr Mullin asked whether the areas for inclusion could be extended if these materialise as time goes on. Mr Latham confirmed that they can be added to and extended.

            The Committee concluded that they were supportive of climate change elements, supportive of affordable housing subject to the definition being expanded to ensure this included a social requirement, and that they would ideally like the portfolio to include a local element focussed on the Welsh economic generation.  Mr Latham agreed that he would feed the Committee's wishes back to the WPP.

RESOLVED:

(a)  The Committee noted the report.

(b)  The Committee discussed the creation of an impact fund and priority investments.

RESOLVED:

(a)  The Committee considered the update and provided comments. The Committee agreed to return their self-assessment training needs analysis forms by 19 February as referred to in paragraph in 1.07 of the report.

(b)  The Committee approved the Governance Policy and Compliance Statement, including the new objective relating to cybercrime, referred to in paragraph 1.06 of the report and attached in Appendix 2.

Mr Latham said that there was a Scheme Advisory Board meeting on 3 February but there are no formal meeting notes published yet. 

            Mr Latham highlighted the key change to the Governance Policy which is the inclusion of an objective focussed on data security and cybercrime; this was shown on page 141 - Ensuring confidentiality, integrity and accessibility of the Fund's data, systems and services is protected and preserved.

            Mr Latham reminded the Committee about completing their self-assessment forms, and added that Mrs Fielder had hard copies available to complete if that was the preferred option.

            Cllr Hughes attended the two day LGA Governance Conference on 23 and 24 January. He highlighted it was a very useful event with lots of discussion about McCloud but there had been no explanation of the background which would have been helpful.  

            Mrs Williams gave a brief overview explaining that McCloud is an age discrimination case and there was a ruling relating to the firefighters and judicial pension schemes which said younger people put in the new schemes, would now be worse off. People complained that this was ageist and it was upheld so the case needed to be remedied. The Government agreed this needed to be considered for all public sector schemes including the LGPS.

            For the LGPS it is likely that the Fund will need to implement a remedy which involving checking which is the better of the old and new schemes for certain members, given that this was the approach provided to all members who were active on 1 April 2012 and within 10 years of retirement.  This may be extended to all members who were active at 1 April 2012 irrespective of age. Whilst this has a potential to increase funding costs (as discussed in an earlier item) it is likely to have a much more material impact on the administration, due to the need to recalculate benefits for many members who have left or retired since 2012.

            It also affects employers as the Fund will need to gather part time hour changes from employers from April 2014, which will then have to be updated on the Fund's administration system. Mrs Williams explained that, even though the remedy is not likely to be implemented until 2022 at the earliest, the administration team will go ahead with updating the systems so that it will be up to date and the team are prepared. They are expected to them have to and recalculate historical benefits and make payments accordingly (to existing pensioners).

            Cllr Rutherford suggested that the two-day conference could have been completed in one day and he also agreed with Cllr Hughes regarding the clarity on McCloud.  Mrs McWilliam suggested that further training on McCloud could be provided on the 18 March training day that has been scheduled for the Committee and Board. The Committee welcomed that opportunity for further training.

            Mrs McWilliam highlighted to the Committee that there is a Local Authority Responsible Investment Seminar on 8 July in Hertfordshire.  ...  view the full minutes text for item 104.

RESOLVED:

The Committee considered the update and provided comments.

                      Mrs William presented the report.  She highlighted that each month the team report on legal requirements for the Key Performance Indicators (KPIs) and each KPI will have a timescale which the team have to legally adhere to. Currently, the Fund provide KPI requirements for 7 processes in the Fund including retirements and death etc. The team monitor how long it takes to report from reciting member information to implementing it, however, sometimes it is the member who is in control of this i.e. it takes them weeks to respond. Mrs Williams highlighted the importance of gathering the Committee’s ideas and views for other KPIs to assess and this is something that will be developed over time. 

                      The Chairman asked about resourcing and whether extra staffing is required. Mrs Williams said that if things remained the same then the staff would be fine but because there have been recent updates in regulations and court case announcements that has led to the team being required to complete additional work to support this.  This means the resourcing and workflow management will need to be closely monitored.

RESOLVED:

The Committee considered the update and provided comments.

RESOLVED:

The Committee considered and noted this report for delegated responsibilities.

            Mrs Fielder gave a brief investment and funding update and made the following key points;

-       She understood that the business plan priorities for 2019/20 were near completion with most of the tasks on target to be completed before the end of the year.

-       Following the results of the valuation, many of the funding and investment risks on the risk register had been reduced in overall relative value and in some cases at target levels.

                      The report was noted and no further questions were asked.

RESOLVED:

The Committee considered and noted this report for delegated responsibilities.

RESOLVED:

(a)  The Committee discussed and commented on the Market and Economic update for the quarter ended 31 December 2019, which effectively sets the scene for the Investment Strategy and Manager Performance summary.

(b)  The Committee discussed and commented on the Investment Strategy and Manager Performance summary for the quarter ended 31 December 2019.

                      Mr Harkin gave an update on the recent outbreak in the coronavirus and what it means in context of a pension fund. He said that markets had seen significant falls in China and emerging markets initially, however markets had since recovered. The impact in immediate terms on the bond and equity markets were subject to sentiment. He stated that if there are real severe falls in markets, the Fund has protection through the cash and risk management framework. Mr Harkin then emphasised that the biggest question is whether there is a big economic lag effect i.e. how many countries rely on China to build and buy things for them around manufacturing, for example Apple, and therefore there could be a wider impact such as on the US stock market.

                      He added that the Fund value tipped over £2 billion at the end of December. The Fund is going through some changes in the investment strategy and implementing them and are in a healthy position despite market volatility.

                      The report was noted and no further questions were asked.

RESOLVED:

(a)  The Committee discussed and commented on the Market and Economic update for the quarter ended 31 December 2019, which effectively sets the scene for the Investment Strategy and Manager Performance summary.

(b)  The Committee discussed and commented on the Investment Strategy and Manager Performance summary for the quarter ended 31 December 2019.