Agenda item

Funding, Flight-Path and Risk Management Framework

To update Committee Members on the funding position, and the implementation of the Flight path and risk management framework


The Committee considered and noted the update, which included the performance of the Fund over periods to the end of March 2022.


Mr Middleman explained that this report looked at the financial health of the Fund and how the risks were managed. He added the following key points for the benefit of the new members who were less familiar with the objectives and operation:

-       The Fund has protection against equity falls and a number of other key risks. The flightpath strategy’s intention is to protect the Fund at the right time by hedging certain risks but not at any cost, so there is a balance to be struck on how far you go and how much you are prepared to pay for protection.

-       The framework was also designed to work as efficiently as possible.

-       Mr Middleman emphasised the significant success of the framework with several hundred £m deficit reduction since inception despite many challenges throughout.

-       The other key risks were inflation and interest rates given that the Fund’s liabilities were directly linked to inflation. Therefore, given the increase in inflation rates, it was crucial to derive a strategy to deliver investment returns (which were in part related to interest rates) to offset the increase in liabilities.  Otherwise, the contributions would increase and the employers would have to finance that.

-       The framework also managed the currency risk and liquidity and collateral risks. In terms of operational aspects, Mr Middleman said the Fund needed to ensure any money being held to protect against these risks, were delivering the appropriate investment returns.

-       As part of the governance of the framework, the Funding and Risk Management Group (“FRMG”) consists of officers and advisors who manage the day-to-day delivery of the framework, and bring decisions back to the Committee to ensure the framework was working correctly.

-       Paragraph 1.02 showed the Fund’s progression since the 2019 actuarial valuation. The updated version to allow for the 2022 valuation results would be brought to Committee later this year.

-       At 31 March 2022, the Fund was estimated to be 101% funded and therefore in slight surplus and ahead of what was expected at the last valuation by 8%. However, Mr Middleman believed the Fund would see a deterioration since then given the high inflation rate and therefore higher liabilities. He emphasised that the critical matter at the 2022 valuation and the funding strategy review is the level of inflation and its persistency into the future.

-       As outlined in paragraph 1.03, the inflation rate hedge ratio was 40% and the interest rate hedge ratio was 20%, which means the Fund is partly protected against some of the risks. The Fund was in a strong position in comparison to other Fund’s and had appropriate levels of protection in place.  The hedging was at these levels due to the cost to increase it but it is possible as interest rates rise the protection could be increased.

-       Paragraph 1.05 showed the equity protection strategy and how it was performing. The gains and protections from this prove that the strategy was doing what the Fund need it to do and working efficiently.

-       As noted in paragraph 1.08, setting the inflation assumption for the 31 March 2022 actuarial valuation would be the critical aspect of the valuation. He believed that the pension increase awarded to pensions in payment and members CARE benefits could easily reach 10% or more in 2023. This would be great for members in the current environment, but from a Fund financial perspective it would increase liabilities materially.  Consequently, the Fund’s assets would need provide higher returns (all other things equal) to offset this increase in liabilities.

-       As part of the 2022 valuation the FRMG looked at a range of inflation outlooks and considerations when considering the estimate of future inflation and this would be considered in the committee training on the FSS and valuation in August and then at the November committee when the draft FSS is brought for approval.

-       The executive summary on page 279 reflected the overview of how the framework was operating.




The Committee considered and noted the update, which included the performance of the Fund over periods to the end of March 2022.

Supporting documents: