Agenda item

a)    The Committee agreed the proposed default action to de-risk by reducing equity exposure by 10% upon attaining the 110% trigger.

b)    The Committee agreed the updates to the scheme of delegations framework for implementing the 110% trigger if attained.

Mr Middleman of Mercer explained that since the papers were issued for this Committee, the Fund’s 110% funding level trigger had been reached and the current funding level was estimated to be 112%. The funding level was being verified in line with the existing protocol, before any action could be taken but it was expected to still be comfortably over the 110% . 

 Mr Nick Page of Mercer took the Committee through this report. He explained that the review looked at what strategic refinements could be made in the event of reaching the 110% funding level trigger, and how the governance framework around implementing the trigger could be updated. The approach taken for this part of the review was to strike a balance between using surplus funding to reduce employer contributions at the next actuarial valuation, at the same time reducing some investment risk from the strategy in order to further stabilise the future funding position and therefore employer contributions.

 The review also looked at the implementation of the suggested changes and proposed an update to the scheme of delegations to reduce the delay between hitting the trigger and taking action. The proposal was for the committee to define a default course of action to de-risk when the trigger is hit, which will be followed unless the Head of Clwyd Fund, having received formal advice as part of the Funding and Risk Management Group,  decides not to proceed with the default action.  In this scenario, a special Pension Fund Committee meeting would be called where the issues will be considered and the Committee will be asked to decide whether to endorse the Head of Clwyd Pension Fund’s intended way forward.

 Mrs McWilliam noted that the news that the funding level trigger had been hit (subject to verification) should not influence the Committee’s decision on this recommendation.

 Cllr Shallcross asked if there was any sign of a downturn in market performance, and Mr Page said Mercer retained a positive view on equity markets. Cllr Shallcross asked why not maintain the current risk level until the performance changes and how quickly could employer contributions be changed, because given the current financial position of the Councils, this may be a good time to take advantage of surplus. Mr Page said that any changes to the contribution rates would not take effect until after the next formal valuation (effective as at 31 March 2025) with new rates starting from 1 April 2026, and that while the view of equities was currently favourable this can change quickly. Therefore if the decision was to retain the current level of risk, there is a possibility that a downturn before the next actuarial valuation would then impact on any possible reduction to contribution rates due to the higher surplus that the fund currently has. 

 Mr Turner added that the option to maintain the current risk level was considered as part of the review but noted that the intention of the trigger was to consider de-risking. He confirmed that the proposal would not reduce expected returns below the Fund’s needs and there is still room for potential gain in the portfolio going forward. He said the two review phases together improve liquidity, accelerate decarbonisation, and reduce risk to improve stability in the funding and therefore also in the employer contribution position.

 Cllr Shallcross asked whether there is an equivalent action to increase risk again if the funding level falls below a threshold. Mr Turner said that there is not currently a re-risking trigger being proposed, but this is on the agenda for discussion by the Funding and Risk Management Group and any recommendations on this would be brought back to the Committee for agreement. 

 Cllr Wedlake stated that he thought the proposal was a balanced strategy allowing the Fund to reduce risk and have the best prospect of maintaining acceptable return. He said that he recognises stakeholder pressures, but the recommendation supports employers and scheme members in the long term while reducing exposure to unnecessary risk.

RESOLVED: 

a)     The Committee agreed the proposed default action to de-risk by reducing equity exposure by 10% upon attaining the 110% trigger.

b)     The Committee agreed the updates to the scheme of delegations framework for implementing the 110% trigger if attained.