Agenda item

(This item will include a presentation by the Director of Corporate Resources. Those in attendance will have the opportunity to ask questions concerning the Annual Report and Accounts. Those unable to attend are asked to forward any questions they have to democracy@leics.gov.uk by 12 noon on Friday 6 December)

A presentation by the Director of Corporate Resources was given on the Annual Report and Accounts of the Pension Fund 2023/24. A copy of the report marked ‘Agenda Item 6’ and presentation is filed with these minutes.

 

During delivery of the presentation, the following points made:

 

i.          As of 31 March 2024, there were exactly 107,000 scheme members, and the scheme size continued to grow.

 

ii.          There were over 3,000 retirements in the year, with 9,552 new starters.

 

iii.          The Pension Fund as at 31 March 2024 was circa £6.5billion, which was 50% bigger than March 2020.

 

iv.          Whilst some Key Performance Indicators (KPIs) were slightly lower than target, when looking at the number of scheme Members and the complexity of the scheme regulations that changed during the 2023/24 financial year due to the McLoud Sargeant Judgement, the figures were quite impressive and showed a strong year of performance in total.

 

v.          Almost 60% of the Fund was classed as pooled, with the remaining investments being funds with external managers moving on to uncalled commitment (credited amounts to managers to be called down over time whenever they need that money to invest).

 

vi.          The Government recently launched its Fit for the Future consultation on three main proposals, which were the reforming of LGPS asset pools, boosting LGPS investment in the localities and UK, and strengthening governance of administering authorities. Feedback on the consultation would be provided by the Authority by the deadline of 16 January 2025.

 

vii.          Progress against the Net Zero Climate Strategy was positive, in that progress towards net zero had already exceeded initial expectations against two primary targets:

 

·       A reduction in weighted average carbon intensity by 50% - this had already reduced by 52.8% versus the 2019 baseline so was way ahead of the 2030 target.

·       A target reduction in financed emissions of 40% with an actual reduction of the total of carbon emissions by 40.4% from the 2019 baseline.

 

viii.          All progress towards Net Zero was against a backdrop of increasing assets under management that were continuing to outperform market benchmarks, which showed the Fund was continuing positive climate actions in a way that was supportive of its fiduciary duty.

 

ix.          The Fund continued to engage on a whole host of environmental, social and governance issues. One method was through voting with over 125,000 resolutions made over the past year and those were votes that the Fund expected Managers to support the long-term economic interests of its stakeholders, and to ensure that boards and directors were accountable to shareholders.

 

In response to questions raised, the following points were made:

 

x.          A member observed that the Committee and Board members came from varying different backgrounds with varying different skills, and noted that the extensive training programme in person and online, that members undertook had not been included in the presentation, and gave reassurance to scheme members that the pension regulations were observed by all Committee and Board members.

 

xi.          A member congratulated officers on the speed in which they had managed the implementation of the McCloud judgement, and how they had managed the extensive, complicated exercise with no additional resources.

 

xii.          A member questioned if, at the age of 55, a person chose to take a portion of their own pension pot, therefore reducing the final balance of their pension fund, if inheritance would also be reduced. It was explained that there would be scenarios where people would need to consider their overall estate, and inheritance was just one element of that. It was further noted that pensions officers were not financial advisors, therefore had to be careful they were not drawn into discussions on financial matters such as tax where independent financial advice should be sought in terms of how they access the benefits to try and reduce the risk around tax.

 

xiii.          A member raised the subject of pension payments around probate. It was explained that currently it was quite an easy process where a member completed a death grant nomination form, which when notified a valuation was provided to the person managing the estate to take account of, with a deduction of tax over the threshold (£325,000 is the norm for the majority but not for all). Following a recent government announcement around inheritance tax, it was likely to be more administratively more complex and could delay payment.

 

The Chairman welcomed Mr. Tom Hoare and Mr. Steven Tart from Hymans Robertson to the meeting. During their presentation, the following points were made:

 

xiv.          One funding valuation element was to see how the level of prudence was placed between the balance of contributions and reliance on future investment returns within the funding strategy, to ensure the Fund was able to meet all scheme member benefits now and in the future.

 

xv.          A funding progression chart since the valuation in 2022 since the funding position as at 30 September 2024 was 150%, which was a healthy funding position. The key driver in the improved funding position was largely down to the reduction in liabilities coupled with good asset performance over the past twelve months.

 

xvi.          A factor of uncertainty when managing the pension fund was life expectancy, and analytics around longevity such as place, income, pension, affluence and gender provided a level of uncertainty and it was difficult to predict how long people were expected to live for.

 

xvii.          With regards to climate risk and pension risk, a lot of pension funds had not paid enough attention to with regards to pension risk. As actuaries, Hymans when setting funding plans were alive to and had improved reporting around risks to the pension fund, with improved sophistication in some of the modelling which looked at extreme events, for example, global food shock which could cascade very quickly through supply chains.

 

xviii.          It was pointed out that, though the Fund was 150% funded, that was for benefits that had been earned, and the majority of benefits had yet to be earned with future contributions. It was acknowledged that employers were under pressure, with councils having budget deficits forecast, and other sectors were experiencing pressure which Hymans were aware, and there was a balance to be made between protecting member benefits and also looking after affordability for employers.

 

In response to questions raised, the following points were made:

 

xix.          A Member questioned, when looking at long-term projections, to what extent had changes in demographics been into account when the world’s population was expected to fall over the century. It was explained the scheme members were of primary concern, and though future earners were not yet in the pension fund, it was something to be aware of. The pension fund would be referred to as ‘immature’ should there be more active members compared to deferred members, and cash flows would become very relevant because more money would be paid out than was coming in, which meant assets would be used to pay pensions rather than the cash coming in.

 

xx.          A member asked if the models used when processing data were as good as they could be, and with regards to climate change, how much had the models changed over the past year. It was noted that the model used was an in-house model called the economic scenario service. There was regular training with the modelling team to understand the governance process around the model, which received minor calibration every month to reset to market conditions.

 

RESOLVED:

 

That the contents of the Pension Fund Annual Report and Accounts 2023-24 be noted.