RISK MANAGEMENT COMMITTEE GUIDE

Transcription

1 HEALTH WEALTH CAREER RISK MANAGEMENT COMMITTEE GUIDE CHESHIRE PENSION FUND 1 APRIL 2017

2 RISK MANAGEMENT FRAMEWORK COMMITTEE GUIDE Page 1 RISK MANAGEMENT COMMITTEE GUIDE CHESHIRE PENSION FUND This is a summary guide to the Cheshire Pension Fund s Investment Risk Management Strategy ( the Strategy ). The full guidance is provided within the Risk Management Strategy and Implementation Policy ( RMSIP ) which is available on the Fund s website. The core principle of the Strategy is that the allocation to growth assets is reduced by a prescribed amount as and when the funding level improves by more than is expected. A founding principle is that improvements are only banked subject to the Fund s Actuary confirming that it does not have a negative impact on the contribution rates paid by employers as part of their long term funding plan. The Strategy also allows for scenarios where the funding level falls below that assumed in the long term funding plan. In this scenario the Strategy would enable the allocation to growth assets to be increased by a prescribed amount in order improve the level of expected future investment returns. The funding level triggers that flag a de-risking (or re-risking) point are set out overleaf. Funding levels are monitored monthly, and at the point at which Officers identify that a trigger has been reached, a strict governance process will be adhered to, as explained in the RMSIP. Each employer has been allocated to one of four investment strategies; Growth Strategy A, Growth Strategy B, Medium Growth Strategy and Gilts Strategy; determined according to the underlying characteristics of each employer: - funding level; - maturity; - covenant; and - time horizon. Growth Strategy A and Growth Strategy B The lowest risk and highest risk investment strategy for Growth Strategy A and Growth Strategy B are aligned. The current lowest risk investment strategy is 50% Growth / 50% Diversifying and Matching ( 50/50 or target investment strategy ). The current highest risk investment strategy is 70% Growth / 30% Diversifying and Matching ( 70/30 ). As Growth Strategy A and Growth Strategy B employers had different starting funding levels (B being higher), they are at different stages of the journey towards the target investment strategy. The proposed funding level triggers and associated asset allocations are presented in the table overleaf. At March 2017, Growth Strategy A sits at Funding Level Trigger 1. At March 2017, Growth Strategy B sits at Funding Level Trigger 4.

3 RISK MANAGEMENT FRAMEWORK COMMITTEE GUIDE Page 2 The proposed asset allocations at each funding level trigger are shown in the table below. 1 80% TRIGGER NUMBER AND FUNDING LEVEL GROWTH ASSETS Equity Legal & General Baillie Gifford Absolute Return Illiquid Alternatives DIVERSIFYING & MATCHING ASSETS Diversified Fixed Income Liability Aware Portfolio Index-linked gilts Employer Group Current Position A B 2 85% 3 89% 4 93% 5 97% Medium Growth Strategy Employers in Medium Growth Strategy are generally closed to new entrants and are targeting a managed exit from the Fund. A number of these employers are making fixed deficit recovery payments and have shorter deficit recovery periods; this means that investment risk is less desirable than for other employers. This is a static investment strategy and is not subject to monthly funding level monitoring. The situation is monitored on a regular basis (at least annually) to ensure that it remains the appropriate strategy for these employers. For example a number of these employers may move to the Gilts Strategy as they get closer to their exit point. The asset allocation for Medium Growth Strategy is 50% growth / 50% diversifying & matching and is shown in the table above under Funding Level Trigger 5. Gilts Strategy For some employers that have exited the Fund on a gilts funding basis, it is appropriate to have an allocation of 100% diversifying and matching assets. This is a static investment strategy and is not subject to monthly funding level trigger monitoring. The situation is monitored on a regular basis (at least annually) to ensure that it remains the appropriate strategy for these employers.

4 RISK MANAGEMENT FRAMEWORK COMMITTEE GUIDE Page 3 Monitoring Process for Growth Strategy A and Growth Strategy B Funding level triggers and associated asset allocations are determined by the Fund in advance and are set out in this policy document. The implementation of resultant changes to the investment strategy are not however automatic. In the event that a funding level trigger is breached, the Fund will follow a robust governance process as set out below. This ensures that the reason for a change in funding level is understood, that market conditions are considered and that the impact on scheme employers is properly evaluated. Funding level is monitored on a monthly basis against pre agreed funding level triggers (by Officers) Funding level trigger has been breached Assessment of reason for change to funding level (Mercer). No funding level trigger has been breached. Evaluation of impact of changing asset allocation on employer funding plans (Actuary). No further action. Recommended action with supporting advice presented to Committee for approval. Outcome reported to Pension Fund Committee Implementation of approved portfolio changes (Officers). Cover Image by C Davis Mercer Limited is authorised and regulated by the Financial Conduct Authority Registered in England No Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU

5 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary September 2014 Executive Summary Date: 25 September 2014 Decision Required? Yes Investment Strategy Current G/D Allocation Value of Assets Value of Liabilities Funding Level Next Funding Level Trigger Action Required ( m) ( m) % Growth A 80/ , % 80% None Growth B 64/36 2,603 2, % 89% Yes- Trigger Breach Medium Growth 50/ % N/A None Static Allocation Gilts 0/ % N/A None Static Allocation Total 3,573 4,243 Recommended Action During the month the funding level for growth strategy B breached the second funding level trigger (89%) and this has instigated a review of the strategic asset allocation. The Committee is asked to approve de-risking in line with the governance handbook (page 35) and the advice of the Fund s advisors, subject to the funding level remaining above, or not materially below, the trigger point during the decision period. De-risking amount 160m Disinvest from GMO Global Equities Invest in Legal and General Over 5 Year Index Linked Gilts Date Tuesday 30 September Rationale Breaching the funding level trigger on 16 September instigated a review of the strategic asset allocation for Growth Strategy B. This review involves the Fund s actuary and investment advisor modelling the proposed, derisked investment strategy with the current contribution strategies, and officers monitoring the funding level over the intervening period. The outcome of this review is shown below: Hymans Robertson confirmation that proposed investment strategy does not negatively impact on the long term funding plan: Mercer confirmation that proposed investment strategy provides sufficient estimated returns so as not to negatively impact on the long term funding plan: Officers (and advisors) confirmation that funding level remains above or not materially below the trigger over decision period: The Fund requires that the above 3 criteria are all satisfied before prior to any de-risking. Officers will monitor the funding level on a daily basis and implementation will only take place as long as the above parameters continue to be satisfied. Funding Level Monitoring September Page 1 of 5

6 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary September 2014 Other Relevant Information Both Hymans and Mercer confirmed that based on the funding level on 16 September the de-risking could be implemented without impacting on the long term funding plan. The increase in funding level from 1 September to 16 September is wholly attributable to an increase in the Gilt yield (+0.2%) reducing the value of the Fund s liabilities. Yields have since fallen slightly; reducing the funding level and this will be monitored closely over the decision period. Hymans Robertson Conclusion Based on a funding level of 90% at 16 September 2014, our modelling suggests that reducing the strategy s allocation to growth assets by 6% (with a corresponding increase in matching assets) does not change the likelihood of full funding on a gilts plus 1.55% funding target in 20 years as it remains at 82% (assuming the same fixed level of employer contributions). The average of the worst 5% of outcomes for funding levels improves from 62% to 65%. The modelling therefore supports the conclusion that in current market conditions a reduction of 6% in the strategy s allocation to growth assets (with a corresponding increase in the allocation to matching assets): - does not materially reduce the likelihood of achieving full funding in 20 years on a gilts plus 1.55% funding target (whilst employers continue to pay the same expected level of employer contribution rates as those agreed at the last formal valuation); and - improves funding level outcomes in adverse market conditions (a reduction in risk). Mercer Conclusion We are supportive of the de-risking actions to be taken following the recent improvements in the Fund s financial position. We recommend the following steps are taken: - Reduce the Fund s growth assets by 6% - by reducing the allocation to the GMO equity portfolio. - Increase the Fund s allocation to index linked gilts by 6% by investing in the Over 5 Year Index Linked Gilt Fund with L&G. - Complete the transition over a single dealing date to reduce the likelihood of missing the opportunity (to target the end of the month if possible). - Propose that Officers discuss with Mercer the transition process. - Having a backstop which prevents the de-risking action being taken if the funding position falls materially below the trigger point at the latest available date reported on prior to agreement to implement the trigger. Electronic Decision Notice Decision Reference: CPF (Strat B De Risking) Decision Maker: Pension Fund Committee Decision Taken On: 25 September 2014 Decision in the Matter Of: Implementation of de-risking for Growth Strategy B in line with the Fund s approved governance procedure. DECISION: Approve that 160m is disinvested from the GMO Global Equity mandate and invested in Over 5 Year Index Linked Gilts with Legal & General. <Committee Member> This decision is subject to the funding level remaining above or not materially below the trigger over the decision period. <Date> Funding Level Monitoring September Page 2 of 5

7 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary September 2014 Investment Strategy: Growth Strategy A Example and number of Employers in 34 Employers including Cheshire East Council, 3C Waste, Warrington and Runcorn Development Association and Warrington Voluntary Action. Strategy: Funding Level 17 September 2014 Monitoring Date: Funding Level: 78.8% Next Funding Level 80% Trigger: Total Value of Assets: 950m Total Value of Liabilities: 1,207m Trigger Breached During Month? No Is further liability hedging proposed during the current month? No A liability hedging proposal is currently being developed in conjunction with the strategic investment advisor. A further update will be provided to the Committee during the second half of the year. Funding Level Tracking The chart below illustrates the progression of the funding level for Growth Strategy A, against the agreed funding level triggers since the 2013 valuation. Funding Level Monitoring September Page 3 of 5

8 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary September 2014 Investment Strategy: Growth Strategy B Example and number of Employers in 84 Employers including Cheshire West and Chester Council, Halton Borough Council and Warrington Borough Council. Strategy: Funding Level 17 September 2014 Monitoring Date: Funding Level: 90.0% Next Funding Level 89.0% Trigger: Total Value of Assets: 2,603m Total Value of Liabilities: 2,894m Trigger Breached During Month? Yes Is further liability hedging proposed during the current month? No A liability hedging proposal is currently being developed in conjunction with the strategic investment advisor. A further update will be provided to the Committee during the second half of the year. Funding Level Tracking The chart below illustrates the progression of the funding level for Growth Strategy B, against the agreed funding level triggers since the 2013 valuation. Funding Level Monitoring September Page 4 of 5

9 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary September 2014 Recommendation Members of the Committee are asked to: note the Funding Level positions of each investment strategy. approve de-risking in line with the governance handbook (page 35) and the advice of the Fund s advisors, subject to the funding level remaining above, or not materially below, the trigger point during the decision period. Funding Level Monitoring September Page 5 of 5

10 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary February 2017 Executive Summary Date: 15 February 2017 Decision Required: No Investment Strategy Current G/D Allocation Value of Assets Value of Liabilities Funding Level Next Funding Action Required ( m) ( m) % Growth A 80/20 1,227 1, % 81% None Growth B 58/42 3,523 4, % 92%/82% None Medium Growth 50/ % N/A None Static Allocation Gilts 0/ % N/A None Static Allocation Total 4,938 6,139 Recommended Action No action required. Rationale Not applicable. Other Relevant Information N/a Electronic Decision Notice Decision Reference: Decision Maker: Decision Taken On: Decision in the Matter Of: DECISION: <Committee Member> N/a N/a N/a N/a N/a <Date> Funding Level Monitoring February Page 1 of 4

11 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary February 2017 Investment Strategy: Growth Strategy A Example of Employers in Employers including Cheshire East Council, ANSA, Orbitas, ESAR and all Cheshire East Academies. Strategy: Funding Level 15 February 2017 Monitoring Date: Funding Level: 72.7% Next Funding Level 81% Trigger: Total Value of Assets: 1,227m Total Value of Liabilities: 1,688m Trigger Breached During Month? No Is further liability hedging proposed during the current month? No Funding Level Tracking The chart below illustrates the progression of the funding level for Growth Strategy A, against the agreed funding level triggers since the 2013 valuation. Funding Level Monitoring February Page 2 of 4

12 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary February 2017 Investment Strategy: Growth Strategy B Example of Employers in Employers including Cheshire West and Chester Council, Halton Borough Council and Warrington Borough Council. Strategy: Funding Level 15 February 2017 Monitoring Date: Funding Level: 82.9% Next Funding Level 92%/82% Trigger: Total Value of Assets: 3,523m Total Value of Liabilities: 4,247m Trigger Breached During Month? No Is further liability hedging proposed during the current month? No Funding Level Tracking The chart below illustrates the progression of the funding level for Growth Strategy B, against the agreed funding level triggers since the 2013 valuation. Funding Level Monitoring February Page 3 of 4

13 Cheshire Pension Fund - Funding Level Monitoring Monthly Summary February 2017 Recommendation Members of the Committee are asked to: Note the Funding Level positions of each investment strategy. Funding Level Monitoring February Page 4 of 4

14 Pension Fund Committee 17 March 2017 Item 4b INVESTMENT STRATEGY STATEMENT 1. This paper presents the Committee with the final draft version of the Investment Strategy Statement. It also provides an update on the outcome of the consultation exercise undertaken on the draft version which ran from 17 February 2017 to 17 March Background 2. The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 ( the regulations ) require administering authorities to formulate and to publish a statement of its investment strategy by 1 April The need for an Investment Strategy Statement ( ISS ) replaces the current requirement to publish and maintain a Statement of Investment Principles. 3. The ISS contains the Fund s policy on Responsible Investment ( RI ) which was developed in collaboration with the Committee over several training sessions and Committee meetings. The Responsible Investment Policy was subject to the same consultation exercise as the ISS. 4. On 13 February the Committee approved the release of the draft ISS and RI Policy for consultation. 5. The consultation process has now closed and the outcome of this is provided for the Committee in this report. Consultation Process 6. The regulations state that the Fund must consult such persons as it considers appropriate as to the proposed contents of its investment strategy, however the regulations do not provide any details on who, how or when the Fund must consult. The Fund has therefore taken the view that it will consider feedback from all interested parties including; scheme employers, scheme members (active, deferred and pensioner members), advisors and the Pension Fund Committee. 7. The consultation process has been undertaken as follows: i. Pension Fund Committee, Fund Actuary and Strategic Investment Advisor have been key to the production of the ISS and RI Policy. ii. iii. iv. Scheme employers have been informed about the forthcoming consultation at employer meetings hosted in January and through the Consultative Forum. All scheme employers received an when the consultation was launched. All scheme members who have requested information on investment related matters received an when the consultation was launched. Item 4b - Page 1 of 9

15 Pension Fund Committee 17 March 2017 Item 4b v. The consultation period was open for a period of 4 weeks from 17 February to 17 March The timing of and period of consultation reflects the need to publish the ISS by 1 April 2017 however the Fund will continue to consider any feedback received after this date and indeed the regulations require the Fund to review and if necessary revise its investment strategy from time to time, and at least every 3 years. This means that any appropriate feedback received after the deadline can be reflected in future versions of the ISS. 9. The Committee is asked to note the consultation process undertaken and provide its view on whether there is any merit in further canvassing the opinion of employers and scheme members. Consultation Responses 10. At the time of writing (Friday 10 th March) there is one week remaining of a four week period of consultation. At this point in time the Fund has received 1 (one) formal response. The response was received from a pensioner member of the Fund and it is presented in full at appendix A. Any additional responses received after the publication of this report will be provided to the Committee at the meeting. 11. The member who has provided the response has been in regular communication with the Fund over several years on a wide range of investment related issues. The Fund in no way wishes to undermine the validity of the points raised by the member and officers have therefore attempted to separate what is a very broad response into two categories; i. Comments that directly relate to the documents that are subject to consultation and therefore require a considered response (responses in blue) ii. iii. Comments of a more general nature or that have been addressed by the Fund in previous correspondence (responses in red) Additionally any responses that have resulted to a change to the documents have been underlined 12. The Fund s proposed response is provided in appendix A in red/blue text for the Committee to consider. The Committee is asked to consider and provide their views on the appropriateness of the proposed response. Final Draft Versions 13. The final draft versions of the ISS and RI Policy are provided at appendices B and C respectively and these final draft versions incorporate the changes following the consultation exercise outlined in Appendix A. 14. The Committee is asked to review these final draft versions and provide any final feedback. Subject to any final amendments following this meeting, Committee is asked to recommend the approval of the ISS and RI Policy which will result in the publication of the final versions ahead of the deadline on 1 April Item 4b - Page 2 of 9

16 Pension Fund Committee 17 March 2017 Item 4b Recommendations The Committee is asked to: Consider and provide their views on the proposed communication to consultees as presented in Appendix A Consider and provide their views on the final draft versions of the Investment Strategy Statement and Responsible Investment Policy as presented at appendices B and C respectively. Recommend the approval of the final versions of the Investment Strategy Statement and Responsible Investment Policy for publication ahead of the statutory deadline of 1 April Note the consultation process undertaken and provide its view on whether there is any merit in further canvassing the opinion of employers and scheme members. Item 4b - Page 3 of 9

17 Pension Fund Committee 17 March 2017 Item 4b APPENDIX 1 CONSULTATION RESPONSE 1 of 1 PENSIONER MEMBER 1. The Investment Strategy Statement was described in December 2016 in Section 4 of the draft Funding Strategy Statement FSS on pages 24 and 25. This is a general comment and the Fund makes no formal response. 2. This draft Investment Strategy Statement is now published with a deadline for comments for 13 March 2017 and implementation by 1 April This will allow very little opportunity for any comments to be considered by Trustees or the Board. All consultation responses have been considered in full by the Pension Fund Committee on 17 March Any responses received after this date will also be considered by the Fund. The Fund can update the ISS or RI Policy after the 1 April 2017 if relevant responses are received. 3. This Investment Strategy Statement contains several errors, and in my opinion also some important omissions from current evidence-based publications and research in 2016 and 2017, including the EU Directive on IORP, and the Centre for Policy Studies report LGPS The Lost Decade. The ISS is a requirement under the Local Government Pension Scheme (Management and Investment of Funds) Regulations The general requirements set out in the regulations, align closely with those included in the new EU Directive IORP 2. IORP 2 requires Institutions for Occupational Retirement Provision (IORPs) to put in place a governance framework which includes: a consideration of the environmental, social and governance factors related to investment assets and investment decisions, and an effective risk management function to address relevant risks including, environmental, social and governance risks relating to the investment portfolio and management thereof The Fund s ISS fulfils this requirement through its Responsible Investment Policy which states that We will use an evidence-based long term investment appraisal to inform decision-making in the implementation of RI principles and consider the costs of RI decisions consistent with our fiduciary duties. The Fund will consider the potential financial impact of ESG related issues on an ongoing basis (e.g. climate change or executive remuneration). The Fund is aware of the Centre for Policy Studies report but does not deem it a relevant consideration in the production of the ISS. 4. In my opinion, this Investment Strategy Statement contains little that can be measured, and will not define performance, reduce costs or change investing patterns in the next three years. This is a general comment relating to the implementation of investment policy rather than to the policy itself. 5. This document will do little to open up all Cheshire Pension Fund investments for scrutiny on the website. o Currently only Passive Investments are listed o Active Investments by investments managers are not available on the website. o The Centre for Policy Studies report LGPS The Lost Decade has highlighted how Active investment has resulted in a loss to funds, taxpayers and pensioners. o Yet fees paid to consultants and investment advisers have risen. Item 4b - Page 4 of 9

18 o Pension Fund Committee 17 March 2017 Item 4b The word PASSIVE does not appear in the Investment Strategy Statement. o In those 10% of total investments published on the website under Passive Investments, there are many examples of how Cheshire Pension Fund invests in companies that conflict with our public health, public services, education, and housing roles. o Yet we are a public services pension fund worth over 4billion. This is a general comment relating to transparency rather than to the ISS. The Fund does however comment that a full list of all investments is provided on the website and that the level of transparency provided has been challenged by the member previously. The Information Commissioners Office ruled in favour of the Pension Fund and the Fund is not required to provide any further information. 6. Consultation: page 2, section 1, paragraph 4 states In preparing this Statement, the Fund has consulted with such persons as it considers appropriate o Cheshire Pension Fund have decided who it will consult with. o No consultation has been arranged via the Cheshire Pension Fund website with members or pensioners. o Page 10 lists those who all have major interests in the status quo as consultants, advisers and auditors. o The Centre for Policy Studies report LGPS The Lost Decade highlights the importance of looking beyond this group of self interested parties. The Fund has consulted as widely as possible in the time available and this is in line with the regulations. Any responses received after this date will also be considered by the Fund. The Fund can update the ISS or RI Policy after the 1 April 2017 if relevant responses are received. 7. Investment Objectives and Beliefs: page 2, section 2, paragraph 3 states the objective is therefore to maximise returns subject to an acceptable level of risk whilst increasing certainty of cost for employers, and minimising the long term cost of the scheme o A further objective should be included to cover socially useful and local investing to generate prosperity in Cheshire, Warrington and Halton. o As it stands, these beliefs do nothing to recognise the important contribution a local government pension fund can make to the communities it serves. o The Investment Strategy Statement needs to become an ethical, long-term, civic and Cheshire community approach to investing. We can invest in the future of the country and Cheshire communities through: 1. infrastructure projects 2. IT networks, communications and infrastructure, 3. clean energy supplies 4. social housing 5. local commerce and industry 6. medical and health research 7. fitness and genuine family leisure (not gambling) o The present focus on returns without exercising any ethical judgement, has produced investments totally incompatible with the present well-being and interests of communities served by the 220 councils, housing associations, and public bodies that pay into the fund. Item 4b - Page 5 of 9

19 o Pension Fund Committee 17 March 2017 Item 4b Many current investments conflict with the work of these 220 employers. o Some current investments actually will damage our futures: Tobacco, Wonga, FOBT companies, Gambling, Gaming, Tax Avoiders (such as Google, Ebay and Amazon), Banks also not paying tax, Commercial Property outside Cheshire, Nuclear, Fracking, Fossil Fuel and CO2 producers, Arms companies, Zero-hours employers, Outsourcing companies, and many other 'unethical' companies The ISS and RI Policy provides a framework for the Fund to make positive decisions based on ESG factors including some of those listed in this response. The RI Policy states: We will use an evidence-based long term investment appraisal to inform decision-making in the implementation of RI principles and consider the costs of RI decisions consistent with our fiduciary duties. The Fund will consider the potential financial impact of investment opportunities that arise from ESG related factors (e.g. investment in renewable energies or housing infrastructure). The Fund will consider investment opportunities that have positive impacts and recognises that the changing external environment presents new opportunities i.e. Renewable energy and social impact investments. A number of the factors listed in this response have been considered specifically by the Pension Fund Committee previously. The Committee has previously resolved that its fiduciary duty remains its primary concern when making investment decisions. 8. Investment Objectives and Beliefs: page 3, section 2, paragraph 4, bullet point 6, states that ESG are important factors for the sustainability of investment returns over the long term o In my opinion, this should read critical factors not just important factors. o The EU IORP legislation highlights the importance of looking ahead to avoid stranded assets that have no future value. o This is a sensible approach not just idealism, and increasingly it is how other pension funds are moving. o Choosing to recognise Climate Change and invest in Green Energy, or divesting from Tobacco, or divesting from all gaming companies, are clear examples. o This is not the same as boycotts, divestment and sanctions against foreign nations and UK defence industries in Regulation 7(2)(e) The ISS and RI Policy provides a framework for the Fund to make positive decisions based on ESG factors including some of those listed in this response. The RI Policy states: We will use an evidence-based long term investment appraisal to inform decision-making in the implementation of RI principles and consider the costs of RI decisions consistent with our fiduciary duties. The Fund will consider the potential financial impact of ESG related issues on an ongoing basis (e.g. climate change or executive remuneration). 9. Investment Risk: page 8, paragraph 4, states The Fund undertakes extensive due diligence on its appointed investment managers and formally monitors performance on a quarterly basis. This process is overseen by the Investment Sub Committee and is advised by Officers and the Fund s advisors. o The clearest way to show that this is happening will be to list quite clearly in Annual Reports and on the Cheshire Pension Fund website, 1. all advisers, Item 4b - Page 6 of 9

20 2. their contracts and fees, 3. their market performance, 4. the dates of these reviews 5. the outcome of the reviews. Pension Fund Committee 17 March 2017 Item 4b o The Centre for Policy Studies report LGPS The Lost Decade is adamant that investment managers fees have been unjustified, and not subject to sufficient scrutiny. o This is public money and should be declared openly. o The Centre for Policy Studies report says that pension trustees are in awe of the highly paid advisers, consultants, and so-called experts. Their unjustified fees become additional costs, because they are not performance related. o The Centre for Policy Studies says council pension funds show a dangerous cocktail of incompetent amateurism, indifference, inertia, and an abject lack of curiosity. This is a general comment about fees paid to investment managers and advisors and does not relate directly to the ISS or RI Policy. The Fund would comment that it was a founder member involved in the creation of the CIPFA guidance Accounting for LGPS Management Costs and is one of the few Funds that has complied fully with the guidance since 2014/15. Thereafter the Fund has been involved in the creation of the Transparency Code and accompanying templates and has sought assurance from Investment Managers that they will sign up to the Code once it is issued. 10. Governance Risk: page 9, paragraph 5, states The Fund ensures that its decision making process is robust and transparent and this is documented in the Governance Compliance Statement which is published on the Fund s website. o I cannot find the Governance Compliance Statement anywhere on the website using the Cheshire Pension Fund search option. o A previous version is in the 2015 / 2016 Annual Report on page 47. The Governance Compliance Statement is included within the Fund s Annual Report and the Fund will ensure that a direct link is provided on the website. 11. Governance Risk: page 9, paragraph 5, also states: information on the Fund s approach to managing this risk is provided within the Responsible Investment Policy which is published on the Fund s website and as an appendix to this document. o The Responsible Investment Policy is not an Appendix to this consultation document. The Responsible Investment Policy is an Appendix to the ISS and a link will be added to the ISS to make is easier for readers to locate. 12. In the Responsible Investment Policy page 3, Cheshire Pension Fund defines engagement which can positively and effectively influence behaviours. o It is not clear if, whether or how Cheshire Pension Fund carries out direct engagement with companies. o If this is done through investment advisers, they will surely have a different set of values to Cheshire Pension Fund, since that is how we have come to invest in these companies. o Some engagement is undertaken not directly by Cheshire Pension Fund but at a distance through LAPFF. Item 4b - Page 7 of 9

21 Pension Fund Committee 17 March 2017 Item 4b o In my opinion that is a mechanism to distance Cheshire Pension Fund from any direct responsibility. o Many critics view engagement as ineffective. The Fund believes that engagement with companies can enhance shareholder value over the long term, particularly where engagement is undertaken on a collective basis. The ISS and RI Policy sets out how Cheshire Pension Fund implements its policy on engagement: Responsibility for day-to-day interaction with companies is delegated to the Fund s investment managers, including the escalation of engagement when necessary. The Fund is committed to collective engagement through its membership of the Local Authority Pension Fund Forum (LAPFF), the LGPS Central pool and other opportunities that arise from time to time. The Fund will do everything practicable in order to bring its influence to bear including working collaboratively with Public and Private Sector pension schemes in order to exert influence as shareholders on relevant issues. The Fund will undertake an annual review of corporate governance, voting and engagement activity undertaken by the Fund and its underlying managers. The Fund will publish an annual summary of voting and engagement activity 13. The Responsible Investment Policy page 4 states The Fund believes that its influence as a shareholder is better deployed by engaging with companies, in order to influence behaviour and enhance shareholder value. The Fund believes that this influence would be lost through a divestment or screening approach. The Fund actively engages with companies through its investment managers and membership of the Local Authority Pension Fund Forum ( LAPFF ). o On the LAPFF page on the Cheshire Pension Fund there are no reports since o Have LAPFF stopped o Earlier LAPFF reports listed show far more interest in senior executive remuneration and bonuses, rather than any ethical consideration about what the companies actually do. This section of the website has not been updated recently and this will be reviewed. The fund believes that Corporate Governance is a key priority that benefits shareholders over the long term. 14. Advice taken: page 10, states In creating this statement, the Fund has taken advice from its Officers and its Investment Consultant. Also, in relation to each of the constituent parts, such as the asset allocation and risk mitigation, the Fund has taken advice from its Investment Consultant, Mercer, and the Scheme Actuary, Hymans Robertson. o The Centre for Policy Studies report LGPS The Lost Decade, is clear that these consultants have a massive interest in maintaining the current situation for their fees. o In many cases fees are not performance related o In 2014 / 2015 costs per member for Cheshire Pension Fund were the worst of all 89 funds in England. Up by 80% on the previous year. o In 2015 / 2016 these went down by 45%, still among the worst in the country. Item 4b - Page 8 of 9

22 Pension Fund Committee 17 March 2017 Item 4b o Cheshire Pension Fund was highlighted in the previous CPS report LGPS Unsustainable. Referring to costs it said Cheshire s are nearly 19 times those of West Yorkshire s (Table 2). One would like to think that Cheshire s s101 Pensions Committee, and its Pension Board charged with assisting the Administering Authority, are asking themselves the question: how did West Yorkshire do that? This is a general comment about fees and does not specifically relate to the ISS. The Fund would comment that it has corresponded previously with the member on this issue. 15. Appendix A Principle 6 Transparency and Reporting, page 12: Minutes are available on the Fund website. o The Committee pages are password protected. o It would be a major step forward if all agendas and minutes were available, and kept up to date. The Fund has committed to publishing the minutes of Committee meeting on its website in line with other Council committees and decision making bodies. The minutes are currently available on the Council s website and the Fund will look to make them more accessible through its own website. 16. Appendix A Principle 6 Transparency and Reporting, page 12:... should provide regular communication to scheme members in the form they find most appropriate... o Communication is normally defined as a two-way process. o Cheshire Pension Fund should set up discussion pages on the website with password protected (registration based on payroll numbers) to allow all members some feedback, to raise topics and stimulate ideas. o This website can be signposted through Cheshire Chat and payslip notes. o Threads can be started by Cheshire Pension Fund to encourage detailed opinions. o Topics, petitions, and other contributions should then become an agenda item for the Pension Board. This is a general comment about communications and does not specifically relate to the ISS. The Fund will consider these comments on its communication strategy at the appropriate time. As part of this process the Fund will need to consider to what extent these suggestions can be incorporated within the resources available to it. 17. In my opinion, this Investment Strategy Statement contains little that can be measured to show any future changes. This is a general comment and the Fund makes no formal response. 18. This document misses many opportunities for a local government pension fund to contribute to the people served in this community. This is a general comment and the Fund makes no formal response. Item 4b - Page 9 of 9

23 Cheshire Pension Fund Investment Strategy Statement Cheshire Pension Fund Investment Strategy Statement

24 Cheshire Pension Fund Investment Strategy Statement 1. Introduction This is the Investment Strategy Statement (the Statement ) of Cheshire Pension Fund (the Fund ) as required by regulation 7 of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (the Regulations ). The regulations require administering authorities to formulate and to publish a statement of its investment strategy, in accordance with guidance issued from time to time by the Secretary of State. The ISS is an important governance tool for the Fund. The document sets out the current investment strategy of the Fund, provides transparency in relation to how the Fund s investments are managed, acts as a high level risk register, and has been designed to be informative for all stakeholders. This document replaces the Fund s Statement of Investment Principles. In preparing this Statement, the Fund has consulted with such persons as it considers appropriate and the document will be updated based on any factors that the Fund considers material to its liabilities, finances or attitude to risk. This statement will be reviewed at least triennially or more frequently if appropriate. Any feedback or comments on this document should be addressed to the Pension Fund Manager and ed to pensions@cheshirewestandchester.gov.uk. 2. Investment Objectives and Beliefs The primary objective of the Fund is to provide pension and lump sum benefits for members on their retirement and/or benefits on death before or after retirement for their dependants, in accordance with LGPS Regulations. The Funding Strategy and Investment Strategy are intrinsically linked and together aim to deliver stable contribution rates for employers and a reduced reliance on employer contributions over time. The investment objective is therefore to maximise returns subject to an acceptable level of risk whilst increasing certainty of cost for employers, and minimising the long term cost of the scheme. Having a thorough understanding of the risks facing the Fund is crucial and these are covered later in this statement. The Fund s investment beliefs which help to inform the investment strategy are as follows: Funding, investment strategy and contribution rates are linked The strategic asset allocation is the key factor in determining the risk and return profile of the Fund s investments Investing over the long term provides opportunities to improve returns Diversification across asset classes can help to mitigate against adverse market conditions and assist the Fund to produce a smoother return profile due to returns coming from a range of different sources. 2

25 Cheshire Pension Fund Investment Strategy Statement Managing risk is a multi-dimensional and complex task but the overriding principle is to avoid taking more risk than is necessary to achieve the Fund s objectives Environmental, Social and Governance are important factors for the sustainability of investment returns over the long term Value for money from investments is important, not just absolute costs. Asset pooling will help reduce costs whilst providing more choice of investments and will therefore be additive to Fund returns. High conviction active management adds value to returns over the long term. 3. Investment Strategy and the Process for Ensuring Suitability of Investments. Translating the Fund s investment and funding objectives into a single suitable investment strategy is challenging. The key objectives often conflict. For example, minimising the long term cost of the scheme is best achieved by investing in higher returning assets e.g. equities. However, equities are also very volatile (i.e. go up and down fairly frequently in fairly large moves), which conflicts with the objective to have stable contribution rates. Additionally, the number of employers in the Fund has increased significantly in recent years meaning that there are groups of employers with different underlying characteristics and with different long term funding objectives. In order that the Fund delivers on its key objectives; ensuring that each employer takes the appropriate level of investment risk, giving each the best opportunity possible to achieve its long term funding objective whilst increasing certainly of cost, the Fund operates four distinct investment strategies. Each investment strategy has its own strategic asset allocation benchmark. The strategic benchmark is consistent with the Fund s views on the appropriate balance between generating satisfactory long-term returns, whilst taking account of market volatility, risk and the nature of the Fund s liabilities. The Fund is required to monitor its investment strategy relative to the agreed asset allocation benchmark in order to ensure that it remains consistent with the overall objective. The Fund undertakes a fundamental review of the strategic asset allocation every three years following actuarial valuations of the Fund. The Fund also monitors compliance with this statement at least quarterly and monitors progress towards the long term funding objective for relevant groups of employers at least monthly. 3

26 Cheshire Pension Fund Investment Strategy Statement The strategic asset allocation at 1 April 2017 for each of the four investment strategies is shown in table 1. Table 1 Strategic Asset Allocation Investment Strategy (%) Asset Class Investment Objective Growth Growth Medium Gilts A B Growth Growth Equity - Exposure to global equity markets. - Outperform global equity markets Contains high conviction active strategy with meaningful outperformance target. Absolute Return -Provide significant real returns (currently CPI + 5%) -Lower volatility than equities. -Low correlation to equities (beta) Illiquid Alternatives -Preserve capital at times of stress - Long term returns in excess of public equity markets - Access to assets that provide link to inflation Diversifying & Matching Diversifying Fixed Income - Unconstrained exposure to fixed income - Focus on return generation Flexible duration Liability Aware - Access to assets which provide liability matching characteristics such as movements in interest rates and inflation In addition to the fundamental review of the strategic asset allocation undertaken every three years, the Fund monitors progress of employers within Growth Strategies A&B on a monthly basis. This gives the Fund the opportunity to adjust the strategic asset allocation in the event that a group of employers are ahead or behind their funding plan. This is an important mechanism used by the Fund to ensure that each employer continues to take the appropriate level of investment risk, giving each the best opportunity possible to achieve its long term funding objective whilst increasing certainly of cost. The progress of employers in Medium Growth Strategy and Gilts Strategy is monitored every three years as these employers are already invested in their target funding plan. A full explanation of the process undertaken to assess employer funding progress is provided in the Fund s Investment Risk Management document which is published on the website. 4

27 Cheshire Pension Fund Investment Strategy Statement The Fund allows asset allocations to fluctuate around the target allocations subject to the tolerances set out in table 2. Table 2 Tolerance Ranges Asset Class Growth Strategies A and B Medium Growth Equities +/-5% +/- 2.5% Absolute Return Illiquid Alternatives +/-2.5% (rebalancing dependent on magnitude, cost and liquidity) +/-2.5% (rebalancing dependent on magnitude, cost and liquidity) Diversifying Fixed Income +/-2.5% +/-2.5% Liability Aware Assets +/-2.5% +/-2.5% +/-2.5% (rebalancing dependent on magnitude, cost and liquidity) +/-2.5% (rebalancing dependent on magnitude, cost and liquidity) The maximum percentage of assets to be held in each asset class is set out in table 3. Table 3 Maximum Allocations 1 Asset Class Growth Strategies Medium Growth A&B 2 Equities 45.0% 25.0% Absolute Return 20.0% 20.0% Illiquid Alternatives 20.0% 20.0% Diversifying Fixed Income 22.5% 22.5% Liability Aware Assets 32.5% 32.5% Infrastructure The Fund is committed to increasing its exposure to infrastructure assets where this will align with the overarching strategic investment strategy. Infrastructure investing comes in many forms and the Fund s investment strategy enables the potential for infrastructure to be included within both the Illiquid Alternatives and Diversifying Fixed Income portfolios. The Fund s long term aspiration is to target an infrastructure allocation of up to 10% of Fund assets and this will be explored further by the Fund through its work with LGPS Central. 1 The maximum allocations in table 3 are absolute limits whereas the tolerance ranges in table 2 are targets. For example the maximum allocation to illiquid alternatives is greater than the tolerance range due to the illiquid nature of the asset class. 2 Maximum allocations for Growth Strategy A&B reflect the maximum allocation that would apply where the investment strategy is on either the first or last step as part of the risk management framework. 5

28 Cheshire Pension Fund Investment Strategy Statement A fundamental review of the strategic asset allocation is undertaken every three years following the actuarial valuation that provides the assurance that the investment strategy is aligned to the long term funding plan. This review utilises both qualitative and quantitative analysis, and covers; The required level of return that will mean the Fund can meet its future benefit obligations as they fall due The level of risk that the Fund can tolerate in absolute terms, and in relation to its funding level and deficit A reassessment of the pace of de-risking in line with the risk management process described above. An analysis of the order of magnitude of the various risks facing the Fund is established in order that a priority order for mitigation can be determined The desire for diversification across asset class, region, sector, and type of security. 4. Risk measurement and management The Fund assesses risks both qualitatively and quantitatively, with the starting point being the investment strategy review which is undertaken every three years. The Fund s approach to risk is informed by the Pension Fund Committee, its professional advisors and officers of the Fund. The key risks that the Fund is exposed to can be grouped under the following headings; investment, funding, operational and governance. These risks are identified, measured, monitored and managed on an active basis with the responsibility for oversight from the Pension Fund Manager. 6

29 Cheshire Pension Fund Investment Strategy Statement These risks are summarised as follows: A. INVESTMENT RISK The Fund uses Risk Attribution Analysis to better understand the order of magnitude of the main investment risks the Fund is facing and to inform decision making and resource planning. The chart below shows the VaR (Value at Risk, essentially the increase in the deficit that would occur in a 1-in-20 downside event) facing the Fund, split into major risk categories. This is purely an illustration of the potential downside risk at a point in time (in this case 30 September 2016) and helps the Fund to prioritise its resources towards the areas of greatest risk. As an additional illustration of risk, table 4 below shows how a range of events could impact the Fund: Table 4 Sensitivity Analysis Event Event movement Impact on Deficit Fall in equity markets 20% fall in equities c. 430m Rise in Inflation 1% increase in inflation c. 680m Fall in interest rates 1% fall in interest rates c. 820m 3 Active Manager underperformance 3% underperformance from all active managers c. 65m As shown in both the Value-at-Risk attribution chart and the sensitivity analysis, the highest allocation of investment risk currently relates to interest rate and inflation. 3 Based on 2016 valuation report 7

30 Cheshire Pension Fund Investment Strategy Statement Interest Rate and Inflation The investment strategy recognises risk and looks to increase the allocation to assets that provide protection against falling rates and rising inflation expectations when affordable to do so, which is considered appropriate in the context of the Fund s position as a long term investor. Equities The Fund holds equities in order to provide the necessary returns to ensure that the Fund remains affordable. The Fund believes that the extra returns that are expected to be generated by equities over the long term compensates for the risk involved in equity investing. The investment strategy is diversified which helps to mitigate equity risk by investing significantly in bonds and alternatives. Alternatives The risks associated with investing in alternative asset classes including absolute return, property and private equity are relevant considerations when assessing the overall level of risk within the investment strategy. The Fund believes that over the long term alternative asset classes will provide a level of return that compensates for the inherent risk. The additional level of diversification provided by these assets helps to reduce the Fund s reliance on equity returns. At a whole Fund level, investing in alternative asset classes reduces the overall level of risk. Active Manager Risk The Fund undertakes extensive due diligence on its appointed investment managers and formally monitors performance on a quarterly basis. This process is overseen by the Investment Sub Committee and is advised by Officers and the Fund s advisors. Liquidity risk: The Fund invests in both liquid and illiquid assets meaning that not all assets can be realised in at short notice. Given the long term investment horizon, the Fund accepts some liquidity risk given the potential for higher returns. The Fund monitors its liquidity position carefully to ensure that it is not a seller of long term assets in order to make day to day payments of benefits. Around 80% of fund assets are highly liquid. Exchange rate risk: The Fund as a long term investor can tolerate some short term currency fluctuations, however this is managed carefully by its investment managers who are monitored against Sterling benchmarks and therefore use hedging techniques to contain this risk. B. FUNDING RISK The Fund s investment strategy is a fundamental part of ensuring that the risk of deterioration in funding level is managed effectively. Employer contribution strategies are aligned to the investment strategy, there are however a number of factors that could lead to a disconnect between the investment and contribution strategies. These risks are set out below: Demographic risks - The Fund is subject to a range of demographic risks, but with particular reference to investment strategy, the Fund monitors the maturity of the membership base closely. A more mature membership base would mean that there were a greater number of pensioner members receiving benefits than active members paying contributions. The projected maturity of the membership base is factored into the investment strategy in order to ensure that as the membership base matures, the fund is invested in the appropriate level of income generative investments or investments that are realisable at short notice and at low cost. 8

31 Cheshire Pension Fund Investment Strategy Statement C. OPERATIONAL RISK Operational risks arise through the implementation of the Fund s investment strategy. These risks are set out below: Transition risk The Fund may incur unexpected costs in relation to the transition of assets between managers and/or asset classes. When carrying out significant transitions, the Fund takes professional advice and considers the appointment of specialist transition managers in order to mitigate this risk when it is cost effective to do so. Custody risk The Fund must ensure that it retains the economic rights to all Fund assets, when held in custody or when being traded. It does this through the use of a global custodian for custody of assets, the use of formal contractual arrangements for all investments and maintaining independent investment accounting records. Credit default risk A counterparty related to a Fund investment could fail to meet its contractual obligations. The Fund monitors this through robust internal compliance arrangements where applicable, contractual requirement for investment managers to manage counterparty risk on the Fund s behalf and robust due diligence prior to making any investment. D. GOVERNANCE RISK Good governance is an essential part of the Fund s investment strategy and the Fund therefore identifies poor governance as a potential risk that can have a detrimental effect on the funding level and the deficit. The Fund ensures that its decision making process is robust and transparent and this is documented in the Governance Compliance Statement which is published on the Fund s website. Environmental, Social and Governance risks The Fund s investment strategy contains its own policy on Responsible Investment. Non-compliance with this policy would expose the Fund to financial and reputational risk. The Fund believes that effective management of financially material Responsible Investment risks should support the Fund s requirement to protect returns over the long term. The Fund will seek to further integrate Responsible Investment factors into the investment process across all relevant asset classes. Further information on the Fund s approach to managing this risk is provided within the Responsible Investment Policy which is published on the Fund s website and as an appendix to this document. 5. Approach to asset pooling The Fund is entering the LGPS Central pool with the understanding that the pooled investments will benefit from lower investment costs, greater investment capability and access to more uncorrelated asset classes. The implementation of the Fund s investment strategy by a newly created FCA registered investment manager will lead to improved governance, transparency and reporting giving the Pension Fund assurance that its investment strategy is being implemented effectively. The Fund intends to invest all its assets into the LGPS pool but will maintain some cash balances at the fund. Investment strategy will be owned by the fund with advice from the fund manager/operator and Independent advisors. 9

32 Cheshire Pension Fund Investment Strategy Statement 6. Responsible Investment The Cheshire Pension Fund is a long term investor aiming to deliver a sustainable Pension Fund for all stakeholders. Cheshire West and Chester Council as the administering authority of the Fund has a fiduciary duty to act in the best, long-term, interests of the Fund s employers and scheme members. The Fund believes that in order to fulfil this duty, it must have a clear policy on how it invests in a responsible manner. Responsible Investment is a fundamental part of the Fund s overarching investment strategy as set out in this Investment Strategy Statement. That is, to maximise returns subject to an acceptable level of risk whilst increasing certainty of cost for employers, and minimising the long term cost of the scheme. The Fund believes that consideration of Environmental, Social and Corporate Governance ( ESG ) factors are fundamental to this, particularly where they are likely to impact on the overarching investment objective. The Fund s approach aims to ensure that consideration of ESG factors is embedded in the investment process, utilising the various tools available to manage ESG risks and to harness opportunities presented by ESG factors. The Fund s core principles of responsible investment are: 1. We will apply long-term thinking to deliver long-term sustainable returns. 2. We will seek sustainable returns from well-governed assets. 3. We will use an evidence-based long term investment appraisal to inform decision-making in the implementation of RI principles and consider the costs of RI decisions consistent with our fiduciary duties. The way in which the Fund ensures that these core principles are met, and how it monitors its own performance is provided within the Responsible Investment Policy. 7. Myners Principles Although not specifically referenced in the Regulations, the Fund continues to assess its own compliance with the Myners Principles of Good Investment Governance. A statement that sets out an assessment of compliance is presented at appendix A. 8. Advice taken In creating this statement, the Fund has taken advice from its Officers and its Investment Consultant. Also, in relation to each of the constituent parts, such as the asset allocation and risk mitigation, the Fund has taken advice from its Investment Consultant, Mercer, and the Scheme Actuary, Hymans Robertson. In providing investment advice, Mercer is regulated by the Financial Conduct Authority. 10

33 Cheshire Pension Fund Investment Strategy Statement APPENDIX A COMPLIANCE WITH MYNERS PRINCIPLES OF GOOD INVESTMENT GOVERNANCE Principle Principle 1 Effective Decision Making: Administering authorities should ensure: That decisions are taken by persons or organisations with the skills, knowledge, advice and resources necessary to make them effectively and monitor their implementation; and That those persons or organisations have sufficient expertise to be able to evaluate and challenge the advice they receive, and manage conflicts of interest. Principle 2 Clear objectives: An overall investment objective should be set out for the fund that takes account of the scheme s liabilities, the potential impact on local tax payers, the strength of the covenant for non-local authority employers, and the attitude to risk of both the administering authority and scheme employers, and these should be clearly communicated to advisers and investment managers. Principle 3 Risk and liabilities: In setting and reviewing their investment strategy, administering authorities should take account of the form and structure of liabilities. These include the implications for local tax payers, the strength of the covenant for participating employers, the risk of their default and longevity risk. Evidence of Compliance Compliant Decisions are taken by the Section 151 Officer of the Administering Authority, advised by the Pension Fund Committee. The Section 151 Officer and the Committee has support from Council officers with sufficient experience to assist them. The Fund is also advised by professional actuarial and investment advisers. The Committee makes robust challenges to advice and is aware of where potential conflicts of interest may reside within the Committee and in relation to service providers. Compliant The Fund has established investment objectives which take account of the nature of Fund liabilities and the contribution strategy. The objectives are set based on advice from the Fund Actuary and Strategic Investment Advisor which informs the overall risk budget for the Fund. The overarching objective is reflected in the investment mandates awarded to the asset managers. There is dialogue with admitted bodies within the Fund in relation to the contributions they pay, their capacity to pay these contributions and the level of guarantees they can provide. Compliant The investment strategy is considered in the light of the nature of the Fund liabilities, the timescale over which benefits will be paid, and financial and demographic factors affecting the liabilities, such as inflation and improving longevity. The Pension Fund Committee and Council officers challenged the contribution strategy with the Actuary, in order that it takes into account of risk factors for the Fund including strength of covenant. Discussions have also taken place with admitted bodies in relation to the affordability of contributions and the strengths of their covenants. 11

34 Cheshire Pension Fund Investment Strategy Statement Principle Principle 4 Performance assessment: Arrangements should be in place for the formal measurement of performance of the investments, investment managers and advisers. Administering authorities should also periodically make a formal assessment of their own effectiveness as a decision-making body and report on this to scheme members. Principle 5 Responsible Ownership: Administering authorities should adopt, or ensure their investment managers adopt, the Financial Reporting Council s (FRC) Stewardship Code on the responsibilities of shareholders and agents. include a statement of their policy on responsible ownership in the Statement of Investment Principles. Evidence of Compliance Partially compliant The performance of the Fund and its individual managers are monitored on a regular basis. The quality of advisers is assessed on a qualitative basis and is subject to periodic retender in order to ensure value for money. The Pension Fund Committee does not yet have a formal process in place to measure its own effectiveness. Compliant The Pension Fund Committee encourages its investment managers to adopt the Financial Reporting Council s (FRC) Stewardship Code on the responsibilities of shareholders and agents on the Fund s behalf and all relevant managers comply. This Investment Strategy Statement includes a statement on the Fund s policy on responsible ownership. The Fund will publish an annual summary of voting and engagement activity. report periodically to scheme members on the discharge of such responsibilities. Principle 6 Transparency and Reporting: Administering authorities should act in a transparent manner, communicating with stakeholders on issues relating to their management of investment, its governance and risks, including performance against stated objectives. should provide regular communication to scheme members in the form they consider most appropriate. Compliant The Fund maintains minutes of all Pension Fund Committee meetings and documents all key decisions through the EDN and ODN process. Minutes are available on the Fund website. The Council holds a formal annual meeting for members and also meets periodically with sponsoring employer bodies. A member representative attends Committee meetings. The Investment Strategy Statement is published on the Fund s website and is available to members on request. Other information on the Scheme is available to members on the Fund s website. 12

35 Cheshire Pension Fund Investment Strategy Statement Glossary of Terms Term Absolute return Alternatives Bonds De-risking Diversifying fixed income Equities Flight path Funding basis Funding level Illiquid alternatives Liquid asset Stochastic modelling Target funding plan Trigger point Definition A fund that aims to achieve a positive return irrespective of movements in the equity and bond markets. Typically seen as an unconventional asset class i.e. an asset class, other than traditional asset classes such as equities, bonds, property and cash. A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Seen as a good matching asset for a pension scheme. Moving from growth to matching assets to reduce risk. A bond like investment that is return seeking and provides a different source of return other than equities. A share in a company. Seen as a risky or growth asset from a pension scheme perspective. The expected change in the Fund s funding position over time, allowing for contributions and investment returns. The assumptions used by the Scheme Actuary to place a value on the Fund s liabilities (the value of the benefits to be paid out of the Fund). The difference in the value of the Fund s assets and liabilities. Assesses the financial health of the Fund. An asset which is not easily traded (i.e. cannot be converted into cash quickly and with minimal impact to the price received) An asset which is easily traded (i.e. can be converted into cash quickly and with minimal impact to the price received) Stochastic modelling is a form of financial modelling that includes one or more random variables. The purpose of such modelling is to estimate how probable outcomes are within a forecast to predict conditions for different situations. The targeted investment strategy assuming a favourable funding position has been reached. It should be noted that whilst a specific asset allocation may be targeted, in practice this may change over time depending upon market opportunities and Fund specific events (e.g. make-up of the liability profile proportion of pensioners / non pensioners etc). Instigates a change in the growth / defensive split of the Fund based on the Fund s funding position at a point in time. 13

36 Cheshire Pension Fund Responsible Investment Policy Cheshire Pension Fund Responsible Investment Policy

37 Cheshire Pension Fund Responsible Investment Policy 1. Introduction The Cheshire Pension Fund ( the Fund ) is a long term investor aiming to deliver a sustainable Pension Fund for all stakeholders. Cheshire West and Chester Council ( the Council ) as the administering authority of the Fund has a fiduciary duty to act in the best, long-term, interests of the Fund s employers and scheme members. The Fund believes that in order to fulfil this duty, it must have a clear policy on how it invests in a responsible manner. Responsible Investment is a fundamental part of the Fund s overarching investment strategy as set out in the Investment Strategy Statement. That is, to maximise returns subject to an acceptable level of risk whilst increasing certainty of cost for employers, and minimising the long term cost of the scheme. The Fund believes that consideration of Environmental, Social and Corporate Governance ( ESG ) factors are fundamental to this, particularly where they are likely to impact on the overarching investment objective. The Fund s approach aims to ensure that consideration of ESG factors is embedded in the investment process, utilising the various tools available to manage ESG risks and to harness opportunities presented by ESG factors. 2. What is our policy on Responsible Investment? The Fund s core principles of responsible investment are: 1. We will apply long-term thinking to deliver long-term sustainable returns. 2. We will seek sustainable returns from well-governed assets. 3. We will use an evidence-based long term investment appraisal to inform decision-making in the implementation of RI principles and consider the costs of RI decisions consistent with our fiduciary duties. 2

38 Cheshire Pension Fund Responsible Investment Policy 3. What will we do to ensure that these core principles are met? Core Principle We will apply long-term thinking to deliver longterm sustainable returns We will seek sustainable returns from wellgoverned assets We will use an evidence-based long term investment appraisal to inform decision-making in the implementation of RI principles and consider the costs of RI decisions consistent with our fiduciary duties. Associated Actions - The Fund s long-term investment objectives will be detailed in the Investment Strategy Statement. - The Fund will set longer-term performance objectives for its investment managers. - The Fund will seek to ensure that its long term interests are aligned with that of its investment managers on all issues including on ESG considerations. - Policies relating to ESG will be considered as part of the Fund s long term investment planning process, following a thorough and robust investment appraisal. - The Fund will apply a robust approach to stewardship, linked to the Fund s belief that engagement can positively and effectively influence behaviours. - The Fund will engage with companies when engagement will add value to the Fund. - The Fund is committed to compliance with the UK Stewardship Code 1 and working within the spirit of the United Nations Principles of Responsible Investment ( UNIPRI ). - We will hold our investment managers to account to ensure compliance with this policy. - The Fund is committed to collective engagement through its membership of the Local Authority Pension Fund Forum (LAPFF), the LGPS Central pool and other opportunities that arise from time to time. - The Fund will exercise its voting rights in all markets where practicable. - The Fund will consider the potential financial impact of ESG related issues on an ongoing basis (e.g. climate change or executive remuneration). - The Fund will consider the potential financial impact of investment opportunities that arise from ESG related factors (e.g. investment in renewable energies or housing infrastructure). - The Fund will consider investment opportunities that have positive impacts and recognises that the changing external environment presents new opportunities i.e. Renewable energy and social impact investments. 1 The Fund is committed to the UK Stewardship Code and is developing a statement of compliance for assessment by the Financial Reporting Council. A draft statement is included in Appendix 1. 3

39 Cheshire Pension Fund Responsible Investment Policy 4. How will we monitor our performance on Responsible Investment? The Fund will ultimately be transparent and accountable in terms of its performance on Responsible Investment. This will be achieved through the following approach: o o o o o o o o o o The Fund will publish its Investment Strategy Statement on its website in line with the scheme regulations. Decisions relating to the setting of investment policy will be explained. The Fund will publish its RI policy on its website. This policy will be reviewed on an ongoing basis and formally consulted on at least every three years. The Fund will monitor closely its appointed investment managers whom the Fund rely on to implement its RI policy. The Fund will undertake an annual review of corporate governance, voting and engagement activity undertaken by the Fund and its underlying managers. The Fund will publish an annual summary of voting and engagement activity The Fund will ensure that its decision makers are properly trained and kept abreast of ESG issues in order to make informed decisions. The Fund will include ESG as standing item on Pensions Investment Sub Committee (or equivalent) agendas (with a view to reporting on manager performance in relation to ESG investing, and noting any hot topics / issues arising). The Fund will undertake a fundamental review of any specific ESG issues that are considered by the Investment Sub Committee to be of potentially material financial impact. The Fund will consider and respond to feedback from stakeholders in relation to issues of concern. 5. Responsible Investment and LGPS Central From 1 April 2018 the implementation of the Fund s investment strategy will be undertaken by LGPS Central, an investment management company set up by 8 Local Authorities (including Cheshire West and Chester Council) in line with the latest scheme regulations. The Fund will seek to ensure that LGPS Central is set up in order to deliver objectives of this policy alongside that of the other Funds involved. It is expected that the Fund s ability invest in a responsible way will be enhanced through LGPS Central due to the inherent benefits of scale, collectivism and innovation that will result from the project. 6. Engagement versus Exclusion Cheshire Pension Fund has never sought to implement a policy that explicitly excludes certain types of investments, companies or sectors except where they are barred by UK law. The Fund believes that its influence as a shareholder is better deployed by engaging with companies, in order to influence behaviour and enhance shareholder value. The Fund believes that this influence would be lost through a divestment or screening approach. The Fund actively engages with companies through its investment managers and membership of the Local Authority Pension Fund Forum ( LAPFF ). Ultimately the Fund will always retain the right to disinvest from certain companies or sectors in the event that all other approaches are unsuccessful and it is determined that the investment is no longer aligned with the interests of the Fund or that the issue poses a material financial risk. 4

40 Cheshire Pension Fund Responsible Investment Policy 7. Exercise of Voting Rights The Fund continues to exercise its ownership rights by adopting a policy of actively voting stock it holds. The Fund delegates responsibility for voting to its appointed investment managers who are required to vote wherever the Fund has a voting interest. Wherever practicable, votes must be cast in accordance with industry best practice as set out in the Combined Code of Corporate Governance with a clear focus on enhancing long term shareholder value. In order to ensure that the governance practices employed by the Fund s investment managers are aligned to that of the fund, investment manager s quarterly performance reports are required to include a specific briefing on corporate governance, detailing all votes cast on the Fund s behalf. This is reported to the Investment Sub Committee on a quarterly basis and any exceptions or examples non-compliance are addressed directly with the Fund s managers. The Fund is committed to the UK Stewardship Code and is developing a statement of compliance for assessment by the Financial Reporting Council. A draft statement is included in Appendix 1. 5

41 Cheshire Pension Fund Responsible Investment Policy APPENDIX 1 - STEWARDSHIP CODE COMPLIANCE DRAFT STATEMENT Principle 1: Institutional investors should publicly disclose their policy on how they will discharge their stewardship responsibilities. The Fund takes its responsibilities as a shareholder seriously and has made a commitment to the informed exercise of its ownership rights as detailed in the Investment Strategy Statement Principle 2: Institutional investors should have a robust policy on managing conflicts of interest in relation to stewardship and this policy should be publicly disclosed. The Fund expects its fund managers to have effective policies addressing potential conflicts of interest. In respect of conflicts of interest within the Fund, Committee members are required to make declarations of interest annually. Principle 3: Institutional investors should monitor their investee companies. Day-to-day responsibility for managing the Fund s equity holdings is delegated to our appointed fund managers and the Fund expects them to monitor companies, intervene where necessary, and report back regularly on activity undertaken. Principle 4: Institutional investors should establish clear guidelines on when and how they will escalate their activities as a method of protecting and enhancing shareholder value. Responsibility for day-to-day interaction with companies is delegated to the Fund s investment managers, including the escalation of engagement when necessary. The Fund intends to consider whether there are any themes that it would like to prioritise in relation to engagement activity and will escalate its activity; On occasion, the Fund may itself choose to escalate activity; this will typically be through our membership of the LAPFF in the first instance but will also involve investment managers and where possible other like-minded investors. Principle 5: Institutional investors should be willing to act collectively with other investors where appropriate. The Fund seeks to work collaboratively with other institutional shareholders in order to maximise the influence that it can have on individual companies. This is achieved through our LAPFF membership, together with initiatives proposed by our investment managers or other advisors. The Fund will do everything practicable in order to bring its influence to bear including working collaboratively with Public and Private Sector pension schemes in order to exert influence as shareholders on relevant issues. The Fund will report the outcomes of this collective engagement to the Pension Fund Committee. Principle 6: Institutional investors should have a clear policy on voting and disclosure of voting activity. The Fund is reliant on the investment managers own policies, although it expects managers to vote in line with the Combined Code. The Fund expects managers to exercise all votes associated with its equity holdings. On a general basis, the Fund will support resolutions which are consistent with the Combined Code and represent best practice. In overseas markets, the Fund expects that managers will take account of local best practice principles. Where resolutions or issues fall short of the expected standards, the Fund expects managers will either abstain or vote against, depending on the individual circumstances of the company and the issues presented. 6

42 Cheshire Pension Fund Responsible Investment Policy The policy is reviewed at least annually in order to take account of regulatory developments. Controversial issues may be discussed at Committee meetings. Principle 7: Institutional investors should report periodically on their stewardship and voting activities. The Fund will report on its stewardship activity to the Committee annually. In addition, quarterly reports of voting actions are posted on the Fund s website. The Fund will provide an annual report on how the Fund satisfies its UK Stewardship Code obligations requirements. 7

43 Pension Fund Committee 17 March 2017 Item 5 BUSINESS PLAN 2016/17 ACTION PLAN UPDATE Introduction 1. This paper provides the Committee with an update of the Fund s progress against the 2016/17 Action Plan Delivery Targets, which are necessary in order for the Fund to achieve the outcomes in the Business Plan. 2. The report also provides the Committee with an update on progress with the Business Plan, which will cover the four year period along with the 2017/18 Action Plan Delivery Targets. The revised Business Plan will be presented to the Committee in June. Business Plan Action Plan Delivery Targets 3. The Fund s Business Plan now covers the four year period in order to align it to the Council s medium term planning horizon. In order to achieve the outcomes in the Business Plan there are key action milestones which must be achieved in each of the 4 years. The Fund keeps track of these by way of an annual Action Plan. 4. The Action Plan Delivery Targets is attached in Appendix A. The Plan includes details of actions which have already been completed for all four quarters. The actions are colour coded using the traffic light system so that Members can easily identify progress and any actions which are yet to be completed. 5. As Members will see in the Action Plan there are a number of tasks which are categorised as amber for both quarter 3 and 4. Amber status denotes a risk of minor delay or marginal under achievement against the target set. 6. A summary of the actions which have been classed as amber, along with an explanation of the reason for their amber status and details of any remedial action is included within Table 1 below. Table 1 Summary of Amber Actions 2016/17 Quarter s 3 and 4 Ref. Action (due date) Explanation for amber status/remedial action AP3 Employer feedback survey (October) AP4 Review scope of services provided to employers and resources required (December) Test data accuracy and functionality There is minor slippage as a result of the decision to undertake a pilot survey with the Pensions Consultative Forum ahead of the full employer survey. The full survey was issued in early December after the annual Employer meetings and the window to respond was extended to January 2017 to maximise the number of potential respondents. Analysis of survey feedback has commenced during Q4. The project plan was signed off in February. The implementation of ESS was deferred to allow the Fund to upgrade to the latest software release of the administration database. Item 5 - Page 1 of 2

44 Develop training manuals and operational guides for employers Pilot launch with selected employers and scheme members AP5 Develop staff training and development plans to support transition from functional team structure to multi-disciplinary, customer based delivery model (December) Pension Fund Committee 17 March 2017 Item 5 The Fund will receive the ESS software on the 20 th March in order to begin testing. The system will be piloted with one of the Fund s employers during the summer. A comprehensive Knowledge, Skills and Competency framework has been developed to allow for consistent and appropriate assessment of training and development needs across the whole team. The framework will be used to assist with the transition to multi-disciplined teams during 2017/18. AP6 Review and re-design customer contact/helpdesk arrangements March Develop and publish a suite of performance statistics for the performance of employers and the Fund against agreed standards (December) The Fund has undertaken preliminary analysis on the helpdesk function although more data gathering is required in order to reach any conclusions. This will form part of the second phase of the resource review which will be carried out during 2017/18. The Local Pension Board receives detailed information on a quarterly basis via the Performance Management Framework (PMF). The PMF currently contains information relating to the Fund only. As part of the ongoing process reviews on key casework, the Fund is building in key milestones within the administration database which will allow key statistical information regarding the performance of Employers to be captured. This PMF will be developed over the summer in order to capture performance information of both the Fund and Employers Business Plan and 2017/18 Action Plan Delivery Targets 7. As Members are aware the Fund s Business Plan now covers a rolling four year period, currently The Fund is in the process of updating the Business Plan to cover the period and will present the Plan to the Committee in June. The Plan will also include the 2017/18 Budget and an updated Risk Register. 8. In addition to the Business Plan the Committee will also receive the 2017/18 Action Plan Delivery Targets summary, which will outline the specific tasks that the Fund will need to undertake in order to achieve the outcomes within the Business Plan. Recommendation The Committee are requested to: Note the progress on the Action Plan Delivery Targets. Note that the 2017/18 Business Plan and associated documents will be presented to the Committee in June. Item 5 - Page 2 of 2

45 CHESHIRE PENSION FUND DELIVERY TARGETS/MILESTONES Pension Fund Committee 17 March 2017 Item 5 Appendix A GREEN = Completed or on track AMBER = Risk of minor delay/marginal under-achievement of target RED = Significant delay or material under- achievement against target BLACK = Too early/not yet assessed Reference Outcome Quarter 1 (April-Jun) Quarter 2 (July- Sept) Quarter 3 (Oct-Dec) Quarter 4 (Jan- Mar) Delivery Targets/Milestones Delivery Targets/Milestones Delivery Targets/Milestones Delivery Targets/Milestones AP1 Successful launch of the LGPS Central investment pool, in accordance with the government timetable and criteria; including revised governance structure for the Cheshire Pension Fund to support the new operating model. Business case submission July Business case approval September Joint Committee established to oversee asset pool October Operator company launched December Shadow Board, Shareholder Forum and Practitioner Forum set up March AP2 Comprehensive and transparent reporting on all aspects of Fund performance and decision making; demonstrating high levels of compliance with industry best practice standards. Agree performance reporting framework July Launch performance reporting framework October Develop and maintain improvement plan to address key performance/compliance issues December AP3 Empowered and enabled scheme employers, able to fulfil effectively their obligations under the Scheme and support high levels of performance by the administering authority. Re-launch Pensions Consultative Forum June Issue updated Employer Handbook September Employer feedback survey October Review scope of services provided to employers and resources required December AP4 Digitally enabled communications and data transmission, allowing employers and scheme members to interact with the Fund on a self-serve basis. Agree and sign off project plan for delivery of manager and employee self-serve October Test data accuracy and functionality January Develop training manuals and operational guides for employers February Pilot launch with selected employers and scheme members March

46 AP5 AP6 AP7 AP8 Agile, customer focussed, operating model, based on multi-skilled roles with strong supporting specialisms, able to respond to changing workloads and customer demands. High quality data, communicated on a timely, and accessible basis to support member and employer decision making. Investment cost/savings plan for 15 years commencing 1 st April 2018, demonstrating the costs and benefits expected to be achieved by the Cheshire Pension Fund as a result of asset pooling. Robust and transparent framework in place to assess employer covenant strength on an on-going basis, leading to an overall reduction in the number of employers assessed as high risk. PFC approval of outline business case principles June Develop and implement rolling programme to review efficiency and effectiveness of key operational processes July Develop skills and competency framework to support multi-disciplinary working September Review current compliance with record keeping regulations and develop a data improvement plan September Review and sign off base case inputs for inclusion in Central Pool business case July Develop and implement an initial (baseline) measure of employer covenant as an input into the risk based methodology for the employer classification framework (ECF) September Review/re-design team structure and roles to enable more flexible and responsive use of resources December Develop staff training and development plans to support transition from functional team structure to multi-disciplinary, customer based delivery model December Develop and publish a suite of performance statistics to measure the performance of employers and the Fund against agreed standards December Develop detailed implementation plan December Refine assumptions to reflect investment strategy post valuation/investment Strategy Review December Detailed understanding of operator costs to feed into savings model December Pension Fund Committee 17 March 2017 Item 5 Appendix A Review and re-design customer contact/helpdesk arrangements March Review Scheme documentation and correspondence for compliance against current legislation and disclosure requirements and plain English standards. Develop an improvement plan and timetable March

47 AP9 Robust and transparent, risk based framework in place to set employer contributions and monitor employer funding level and contribution rate sensitivity. Committee to sign off risk based methodology for ECF.September Committee approve draft Funding Strategy Statement (FSS) for consultation with employers September Consult with employers on draft FSS and 2016 Valuation results December Pension Fund Committee 17 March 2017 Item 5 Appendix A Publish final FSS January Publish Rates & Adjustment Certificate March PFC to review and sign off revisions to overarching risk management framework including changes to objectives and de-re-risking triggers March

48 LGPS ASSET POOLING UPDATE Pension Fund Committee 17 th March 2017 Item 6 Introduction 1. The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 require all administering authorities in England and Wales to enter into pooled arrangements for the management of pension fund assets with effect from 1 st April This paper provides the Committee with an update on recent progress in implementing LGPS Central, in conjunction with partner funds in Derbyshire, Leicestershire, Nottinghamshire, Shropshire, Staffordshire, West Midlands and Worcestershire; following Ministerial approval to proceed in December Background 3. The Committee will be aware that the Government have invited LGPS Funds to submit proposals for the creation of asset pools, which satisfy the following key criteria:- Criteria 1: Asset pool(s) that achieve the benefits of scale c 25bn Criteria 2: Strong governance and decision making Criteria 3: Reduced costs and excellent value for money Criteria 4: An improved capacity and capability to invest in infrastructure 4. The business case put forward by LGPS Central is based on agreement that the investment pool should be structured as an FCA authorised entity, supervised jointly by the partner funds on a one fund, one vote basis; and that a jointly owned, alternative investment management company, regulated under the Financial Services and Markets Act (FSMA) 2000, should be incorporated to discharge Operator functions on behalf of the pool. 5. In the light of feedback endorsing this approach from the DCLG/HMT Review Panel appointed by the Minister to oversee the national pooling programme; formal implementation of LGPS Central commenced in September Eversheds and PWC were appointed to provide legal and financial advice and implementation support to the pool, and a number of officers from the participating Funds were seconded on either a full or part time basis, to commence work on the detailed design and build phase of the programme, which is now well underway. 6. The LGPS Central Programme Delivery Group (PDG) is responsible for delivering the agreed implementation programme, overseen by the s151 officers of the partner funds, acting as a Programme Board. 7. Member oversight is provided through regular progress reporting to the Pension Committees of the respective partner funds and joint meetings of the Committee Chairs and Vice Chairs. Following formal registration of LGPS Central Ltd (the Operator Company), a Shareholder Forum has also been established consisting of the nominated shareholder representatives from each administering authority Item 6 - Page 1 of 6

49 Developments since the last Committee update Pension Fund Committee 17 th March 2017 Item 6 8. A summary of key developments and progress since the last Committee is set out below under the following key headings:- National Developments and Regulatory issues Pool Governance and Legal Framework Recruitment of the Company Board FCA Registration Investment Structure Stakeholder Engagement Implementation costs and resources National Developments and Regulatory issues 9. The position nationally, is that eight pools have now received Ministerial approval to proceed; Northern, Borders to Coast, Central, Brunel, ACCESS, London CIV, Local Pensions Partnership (LPP), and Wales. Some discretion has been allowed in terms of the application of the original pooling criteria with regard to scale, and some of the pools are still to commit formally to a regulated, separate entity structure. The implementation approach being adopted also varies with some pools choosing to set up their own operator company (in line with the LGPS Central approach), and others preferring to pursue a rental option. 10. DCLG/HMT are continuing to monitor progress on behalf of the Minister, with the next formal report being required at 31 st March As reported previously, the main regulatory changes required to enable pooling are now in place following approval of the LGPS (Management and Investment of Funds) Regulations There is however, considerable debate currently about the potential implications of the Markets in Financial Instruments (MiFID) Directive 2, which is due to take effect next year. As currently drafted, this EU Directive would require the reclassification of the LGPS Pension Funds, as retail, rather than professional clients, thereby restricting the range of investment vehicles (particularly pooled instruments) available to them. It is possible for Funds to be opted up to professional client status, provided certain criteria are met, but the practicalities of every Fund undergoing (and passing) this test before 1 April deadline for pooling have been questioned. Negotiations between the Financial Conduct Authority (FCA), who are responsible for managing compliance with the MiFID requirements, and DCLG are ongoing. Further guidance is expected early in July Item 6 - Page 2 of 6

50 Pool Governance and Legal Framework Pension Fund Committee 17 th March 2017 Item Members were briefed at the December Committee on the details of the agreed governance and legal framework for the LGPS Central pool, and a copy of the report requesting Cheshire West and Chester Council (in their capacity as administering authority) to approve the necessary legal agreements and Constitutional changes to allow the Cheshire Pension Fund to become a formal member of the pool, and co-owner of LGPS Central Ltd was shared. All necessary approvals were secured at the Council s meeting on 15 th December, and the Council s representation on the Shareholder Forum, Joint Committee and Practitioners Forum was agreed. 14. The other partner funds are taking a similar report through their respective decision making processes and are at different stages in securing the necessary approvals, but all are expected to have these in place by 1 st April This will allow the Inter- Authority Agreement and Shareholder Agreement to be signed off, following the local elections in May. 15. The main governance issue that still needs to be resolved is that of Trade Union or member representation on the Joint Committee. This has been the subject of considerable debate nationally and a statement is expected shortly from the Scheme Advisory Board. The legal framework for LGPS Central would allow for the appointment of a non-voting member representative should this be required, but there remain some practical issues in terms of how an appropriate representative might be selected given the number of funds, and scheme members involved. 16. Further work is continuing on other legal agreements that will need to be concluded prior to operational go-live. These will need to cover issues such as regulatory and working capital and TUPE transfer arrangements, although the latter are not directly relevant to the Cheshire Pension Fund. Recruitment of the Company Board 17. Following appointment of recruitment and selection consultants, advertisements have been placed for all of the senior executive and non-executive positons on the Company Board. The timetable for completion of the recruitment process is summarised below. Timetable for the recruitment of Executive and Non-Executive Roles Role Initial interviews by Selection of candidates Panel interviews By Candidate appointed Head Hunters for interview LGPS Central Chief Executive 20 February 14/15 March 30/31 March Early April 2017 Chief Finance Officer/Chief Operating Officer Chief Investment Officer Company Chairman Non-Executive Director (x2) 10 March 2017 w/c 6 20 March 2017 w/c March February 10 March 2017 w/c 13 March 3 April w/c 27 March 2017 w/c 24 April /15 March 2017 w/c 14 April w/c 3 or 10 April 2017 End of April 2017 Early May May/June /24 March Early April Early May 2017 May/June 2017 Item 6 - Page 3 of 6

51 Pension Fund Committee 17 th March 2017 Item Members of the Shareholder Forum will make up the final interview panel advised by the Programme Board and Odgers Bernstein, the recruitment consultant. Financial Conduct Authority (FCA) registration 19. In order for LGPS Central Ltd to be registered as an authorised investment management company, a detailed submission will need to be made to the FCA including:- the company s operating and financial model the company s medium term strategic plan the proposed investment structure the names of the company senior management team (executives and nonexecutives), their relevant experience, qualifications and regulatory status details of contractual arrangements with third party service providers (e.g. asset servicer, custodian, auditors, IT systems provider etc.), and the arrangements for managing contracts and service level agreements. 20. The assessment and registration process is likely to take at least six months, following submission, so the latest date for this is July Initial meetings with the FCA have taken place with a view to early engagement and dialogue. The on-going process will require significant support from external advisers, with a consequent increase in demands on the programme implementation budget. 21. In order to meet the July submission deadline, a number of major procurements are now being progressed, the key appointment being that of the asset servicer, who will provide the majority of the company s back office services. Contracts of this type are generally very heavily negotiated, and this again, will require significant support from expert advisers. Investment Structure 22. The proposed investment structure for the pool is attached at Appendix 1. This is still work in progress and is subject to on-going discussion with all the partner funds and their investment consultants and advisers. The final investment structure will determine the extent to which individual funds will need to modify or adjust their current investment approach, and consequently the scale and distribution of transitional costs. An element of compromise is inevitable in the interests of overall cost efficiency, but this needs to be balanced against the need to accommodate the high level strategic and risk priorities of all eight administering authorities. These are currently being reviewed as Funds develop their Investment Strategy Statements, and consider the outcomes from the 2016 Valuation. 23. Ultimately, the company s Chief Investment Officer (CIO) will have responsibility for the LGPS Central investment offer, but given the constraints of the overall timetable; some preliminary decisions will need to be made ahead of the CIO taking up post. 24. The Committee will be updated on the LGPS Central investment offer as it develops. Item 6 - Page 4 of 6

52 Stakeholder Engagement Pension Fund Committee 17 th March 2017 Item Regular updates for elected members continue to be provided through a series of LGPS Central Briefing Notes issued by the Programme Office, and through progress reports to individual Fund Committees and Local Pension Boards. On 24 th January a Stakeholder Event was held in Wolverhampton, with over 90 Pension Committee and Pension Board members attending. As well as receiving an update on overall progress, presentations were received from Councillor Roger Phillips (Chairman of the Scheme Advisory Board), Teresa Clay (DCLG) and Tom Wright (Baillie Gifford). Feedback on this event was very positive and a follow up event will be arranged in early autumn. 26. An initial meeting of the Shareholder Forum was held in Matlock on the 15 th December, where Eversheds briefed on company governance and the specific role of shareholders. The Forum also discussed the recruitment arrangements for the company board (see above) and their role in the selection process. A further meeting of the Forum has been arranged for 15 th March, when a draft of the Company Strategic Plan will be presented. There will also be an opportunity for the Forum to be consulted on the final arrangements for the CEO and Chairman appointments. Quarterly meetings are being arranged thereafter. 27. As previously reported, a number of the LGPS Central administering authorities are holding elections in early May, with the possibility that this may result in some changes to the membership of their Pension Committees and/or their Chair and Vice-Chair appointments. Provisional dates for briefing of new members during June/July are being explored. 28. As the formal TUPE process gets underway briefings for staff that are likely to be identified for transfer to the new company are being arranged. It is not anticipated that any staff from the Cheshire Pension Team will be affected, at this stage. Implementation costs and resources 29. Members will recall that the LGPS Central business case submitted in July included a provision of 3.3m for initial set up costs ( 400k per fund) for the period to 1 st April This is in addition to Phase 1 & 2 pre-submission costs of 97k. No allowance for these costs or for any costs met directly by Cheshire in terms of officer and member travel etc. has so far been included in the Administration Budget. 30. Actual expenditure to date and the latest forecast position is summarised in Appendix 2. Forecasts have been updated to reflect recent, more detailed work on the target operating model and the previously identified pressure on the budget allocation for advisors fees. The overall forecast for Phase 3 set up costs has increased from 3.3m to 3.8m. All costs are recharged to the participating Funds on an equal basis, with Cheshire s share totalling 66k to date, and forecast to be 482k in total. Item 6 - Page 5 of 6

53 Pension Fund Committee 17 th March 2017 Item Cheshire share of costs to 31 st March 2017 is forecast to be as follows:- 000s Pre-submission costs (Phase 1 and 2) 12 Set up costs (Phase 3) /17 Forecast 112 This leaves an estimated balance of 382k for 2017/18, which will be taken into account in setting the Fund Administration Budget for the forthcoming financial year. 32. As a number of the key financial variables in the business case have changed or are likely to do so in the near future (e.g. asset values, implementation costs, senior remuneration packages), a full review of the projected costs and savings will be undertaken in April 2017 to provide a more accurate basis for on-going monitoring. This will also take into account the latest advice on tax implications, which suggests that the original objective of eliminating any significant liability for Corporation Tax and VAT across the pool may not be achievable within the current regulatory and tax framework. PWC are supporting the on-going work to quantify potential tax liabilities and advise on the optimal arrangements. 33. The Committee will be updated on the outcome from the review which will be based on asset values at 31 March 2017 (subject to audited figures being available). A further review of the business case and financial model will take place in February 2018, immediately prior to go-live. Conclusions 34. The implementation plan for LGPS Central is progressing well, with a number of key milestones achieved, in terms of the governance structure and legal framework. The timescales for establishing the new Operator Company and for meeting the necessary regulatory requirements continue to be very challenging, and implementation resources are extremely stretched, but the overall critical path remains on track. 35. Key activity over the next period will focus on completion of the recruitment process for the Company Board and continued development of the FCA approval submission, which is critical to successful achievement of the target go-live date of 1 st April Resources and timeframe continue to be the main risks to overall programme delivery and these are being closely monitored by the Programme Board. Recommendations 37. The Committee are asked to note :- the latest position on LGPS Pooling and specifically, the progress being made by LGPS Central. Item 6 - Page 6 of 6

54 Pension Fund Committee 17 March 2017 Item 6 - Appendix 1