TYNE AND WEAR PENSION FUND PENSIONS SERVICE PLAN

Service Plan 2017 20 TYNE AND WEAR PENSION FUND PENSIONS SERVICE PLAN 2017-20 I:\Support\Comms\twpf.info New Website 2011\Fund's Plans and Policies\Service and Training plan\word Versions\Service Plan 2017 -

Service Plan 2017 20 Contents List Para Page No. About the Service Plan Introduction 1 1 Purpose 5 1 Contact for Further Information 6 1 Service Profile Background 7 2 Structure 8 2 Budget 19 5 Vision Statement 30 7 Strategic Context PEST Analysis 33 8 SWOT Analysis 38 11 Aims, Objectives and Actions Introduction 43 14 Aim 1 47 14 Aim 2 53 15 Review of the Funding Level 54 15 The Valuation Process and the Setting of Employers Contributions 70 17 Investment Strategy and the Investment Management Structure 77 18 Aim 3 106 21 Joint Working with other Administering Authorities 107 22 Systems 114 23 Processing 123 24 Staffing Issues 143 26 Performance Management 159 28 Financial Management 164 29 Risk Management 169 30 Equality and Diversity 176 31 Aim 4 178 31 Governance Structure 182 32 Communications Team 197 33 Communicating with Employers 199 33 Communicating with the Scheme Members 202 34 Summary of Aims, Objectives and Actions 36 I:\Support\Comms\twpf.info New Website 2011\Fund's Plans and Policies\Service and Training plan\word Versions\Service Plan 2017 -

Service Plan 2017 20 About the Service Plan Introduction 1. This plan sets out the aims, objectives and actions that we need to achieve in the three year period from 2017/18 to 2019/20 to meet our vision. 2. The plan is reviewed annually and builds on the plans prepared for earlier years. 3. The vision and aims have been reviewed and remain unchanged. The objectives and actions have been developed from year to year. 4. This plan is supplemented by operational plans that describe in greater detail how we intend to achieve our objectives and actions. Purpose 5. We have prepared the plan to ensure compliance with statutory requirements, codes of practice and best practice to monitor and improve performance against the aims, objectives and actions to inform stakeholders about the Fund and to support our accountability to them. Contact for Further Information 6. Please contact the Head of if you require further information. Page 1

Service Plan 2017 20 Service Profile Background 7. South Tyneside Council is the administering authority and scheme manager for the Local Government Pension Scheme in Tyne and Wear. The Fund is open to the five district councils and a wide range of other bodies that provide a service in the county area. Structure 8. The Council has set up a Committee to govern the Fund and a Local Pension Board to assist the Committee in this role. 9. The Council is organised into three groups. The Fund is administered by the Service, which is part of the Business and Resources Group. 10. The Service has a long term establishment of 61 posts as at March 2017. 11. In addition a 0.4 x full time equivalent post has been established to December 2018 to lead on the Guaranteed Minimum Pension reconciliation five temporary posts have been established to assist with the additional pensions processing workload that has arisen from the introduction of the 2014 Scheme. 12. The staff have a wide range of experience and professional and management skills, including financial, investment, money market, pensions, communications and ICT. 13. The Head of oversees the governance structure. 14. The Service is organised into the Investments Office and the Office. 15. The Investments Office is responsible for devising, implementing and keeping under review the investment policy and investment management structure. The assets were valued at 7.9 billion as at March 2017. Eleven investment managers are employed to invest the Fund into the global quoted equity and bond markets and into UK property. The Fund also has investments in private equity, global property and infrastructure Page 2

Service Plan 2017 20 monitoring the performance of managers and custodians and, when necessary, reviewing and replacing those organisations implementing the governments initiative on pooling investments as part of the Borders to Coast Partnership the financial management of the Service, including the preparation of the budget, the budget monitoring, the final accounts and the production of the Annual Report and Accounts the financial administration for the investment of the Fund, including settling transactions, reconciling portfolios and ensuring that all investment income and recoverable tax is received. In 2015/16, the turnover of investments was 6.7 billion and the investment income was 89 million the financial administration of pensions for over 200 employers, including the collection and reconciliation of employer and employee contributions from around 150 employers in relation to 47,000 active members. In 2015/16, contributions and transfers in totalled 297 million the training and communication strategy for the Committee and the Local Pension Board. 16. The Investments Office is also responsible for the money market and borrowing related aspects of the Council s Treasury Management function. 17. The responsibilities of the Office include the payment of pension benefits to 44,000 pensioners. In 2015/16, pension benefits and payments to leavers totalled 272million. the maintenance of records in relation to the entire membership which totals 129,000 devising and delivering training, consultation and communication strategies for the employers and members managing the admission and withdrawal of employers, and the employer database managing the funding strategy and the actuarial valuations to ensure that employers pay an appropriate contribution devising, implementing and keeping under review the Additional Voluntary Contributions arrangements. Page 3

Service Plan 2017 20 18. The long term establishment is shown below: Head of Principal Investment Principal Investment Operations s (x 3) Technical Support Communications Treasury Management Officer and Senior Investment Officer Senior Officers (x6) Senior Officers (x4) Senior Officers (x5) Finance Officer Investment Officers (x2) Officers (x21) Officers (x2) Officers (x8) Finance Assistant Page 4

Service Plan 2017 20 Budget 19. The Scheme Regulations allow the cost of the Service to be charged against the Fund. 20. We have prepared a three year financial plan that provides for the delivery of the aims identified in this plan. 21. A breakdown of the budget is shown below. The total cost shown is very much a provisional figure because the largest single component is the investment management fees which are dependent on the performance and market value of the Fund. Year 2017/18 m 2018/19 m 2019/20 m Investment Fees 92.578 87.086 82.216 Investments Office 1.420 0.842 0.881 Office 2.904 2.747 2.811 Governance 0.121 0.123 0.124 Total 97.023 90.798 86.032 22. For 2017/18, the cost of running the Fund has been estimated at 97.023 million. 23. The budget has been prepared in accordance with the Chartered Institute of Public Finance and Accountancy s (CIPFA) best practice guidance for local government pension scheme accounting. 24. This guidance provides for a fully transparent estimate of the budget for investment management and custody fees that identifies transactions costs and all fees that are charged within pooled investment products, including all layers of base fees and performance fees and running expenses. The Fund is considered to be at the forefront of best practice in this area. The majority of other funds do not break down their costs into this level of detail at present. This may make the Fund look expensive to administer when compared to other funds. 25. A separate budget heading is used for Oversight and Governance Costs. This includes the running costs of the Committee and Local Pension Board. 26. Excluding investment management fees, the budget for 2017/18 has decreased by 0.094 million relative to the 2016/17 budget. Whilst the Fund will incur additional costs in implementing the governments initiative on pooling of investments, this is more than offset by some significant items of one off expenditure dropping out of the budget, including the purchase of IT hardware and software. Page 5

Service Plan 2017 20 27. The 2018/19 and 2019/20 budgets decrease over the previous year s budgets by 6.225 million and 4.767 million respectively. This is largely attributable to decreases in investment management fees and savings relating to the completion of projects. 28. As noted above the costs of setting up the Fund s pooling arangements are included in the 2017/18 budget. However, the budgets for the following two years do not take account of the additional costs and potential savings from pooling. This is because it is extremely difficult to establish the exact timing of when these costs and savings will be incurred. The cost/benefit analaysis undertaken suggests that the Fund should see net savings six years after the implementation date. The impact of pooling on the future years budgets will be considered in further depth as part of the Service Plan and Budget for 2018/19. 29. The draft budgets are provisional figures against outturn. This is because the largest single component is the investment management expenses, which are highly dependent on the market value of the Fund and the performance of individual managers. Page 6

Service Plan 2017 20 Vision Statement 30. Our goal is to provide an efficient, affordable and attractive pension arrangement that is regarded by employers and members as being an important and valued part of the employment package. 31. We will promote membership of the Fund keep contributions as low and as stable as possible through effective management of the Fund work with our partners to provide high quality services to employers and members make pensions issues understandable to all. 32. We will know we are succeeding when we are consistently achieving our investment objective there are sufficient assets to meet the liabilities we are consistently achieving our standards of service to employers and members we are recognised as being amongst the leading UK pension funds. Page 7

Service Plan 2017 20 Strategic Context PEST Analysis 33. The PEST analysis sets out the main external influences impacting on the Fund. 34. The Political factors are set out below: Following a review of public sector pension schemes, the Local Government Scheme became a Career Average Revalued Earnings (CARE) scheme from April 2014. Whilst most system changes are now in place updated amendment regulations continue to be made. The Fund will respond to these updates. The Government has undertaken a review of the investment of the Scheme s assets and has introduced a requirement for the assets to be pooled. Whilst the initial intention was to create up to six funds, each with assets of at least 25 billion, the Government is considering giving the go ahead to eight pools ranging in size from 12 billion to 36 billion, based on values as at 31st March 2015. The Fund has decided to join the Border to Coast Pension Partnership, consisting of 13 funds with a total value of 36 billion. The Fund is taking this initiative forward. Reorganisation of public sector services is continuing to impact on the membership of the Fund and the Scheme. Where the regulatory background permits employers to seek new or continuing membership of the Fund, we want to demonstrate that this is an appropriate option for employers and members in order to prevent the active membership from declining. A declining active membership leads to the Fund maturing more quickly, which could require an increase in employers contributions and a change in the investment strategy. It also affects the cost base for pensions administration and for investment management. The Government s Freedom and Choice initiative is leading to an increase in transfers from defined benefit arrangements such as the Local Government Pension Scheme into defined contribution arrangements. We have introduced a process to evaluate applications for transfers and to ensure that only legal transfers take place. The Government is introducing exit payment caps on employees leaving the public sector. This may make redundancy payments less attractive which may impact on the nature of future restructuring by employers. Page 8

Service Plan 2017 20 35. The Economic factors are summarised below: The global financial crisis has led to historically low interest rates that have increased the value placed on pension liabilities. It has also contributed to volatility in asset prices. The Brexit vote in June 2016 has also resulted in economic uncertainty and a forecast slowdown in growth as the government considers how to implement the outcome of the referendum. The recent fall in sterling has resulted in inflation forecasts rising. The funding strategy is reviewed on an ongoing basis to address the issues that impact on employers and the Fund. A valuation of the Fund has been carried out as at 31st March 2016. This assumed a lower return expectation going forward than the 2013 valuation. The next valuation will be as at 31st March 2019. The employers that contribute to the Fund operate within tight financial constraints. An increasing number of employers in the private sector have concluded that they will not meet the cost of a defined benefit scheme and have made alternative arrangements. This is an option that may be adopted by our current and potential future admitted bodies if employer contributions rise to levels that are felt to be unaffordable. As stated above, declining active membership is a negative factor for the Fund. The reduction in public sector expenditure is contributing to a maturing of the Fund as employers reduce their workforce. This is affecting the Fund s cashflow and maturity and the type and volume of pension processing that is undertaken. The impact is considered in the funding strategy, the investment strategy and the structure and workload of the Office. The Government has ended Contracting Out from April 2016. This has placed an additional financial burden on employers. There has also been an additional cost to members that may affect future membership of the Scheme. The active membership of the Fund may also fall due to members opting out for personal financial reasons, including the continuing decrease in pensions tax allowances. Auto enrolment into the Fund commenced in 2013. This is introducing more active members, although the extent of the increase will be unclear until all employers have passed their staging date by 2018. Page 9

Service Plan 2017 20 As noted above, the global financial position continues to impact on the asset and liability values and, thereby, the funding level of pension schemes. Concerns remain over the health of the global economy. The investment strategy is based upon asset liability modelling. This has been updated in 2016/17 using the liability data prepared for the 2016 valuation. Consideration will be given to implementing the recommendations from this exercise and from subsequent desktop reviews in later years. We will ensure that the strategy remains appropriate in the light of the Fund s liabilities. It will be important to ensure that any strategy decisions taken by the Fund will be implementable through the investment pooling arrangements that are being created. The investment arrangements for the Fund are largely contracted out to external investment managers. administration is undertaken in house because the Fund has sufficient critical mass and expertise to provide a cost effective, quality service. We benchmark the pensions administration against the peer group to demonstrate the quality of the service offered. Administering authorities work to deliver the Scheme as efficiently as possible. The Fund will continue to explore options for joint working with other administering authorities in order to deliver such efficiencies. 36. The Social factors are set out below: We believe that a defined benefit arrangement is the preferred type of pension provision. We want the Local Government Pension Scheme, as provided by the Tyne and Wear Fund, to be regarded by employers and employees as an attractive and affordable part of the employment package. Improving longevity is increasing the cost of pension provision. We comply with the Equality Act 2010. The Fund is required in its Investment Strategy Statement to set out the extent to which social, environmental or corporate governance considerations are taken into account in the selection, retention and realisation of investments. 37. The Technical factors are set out below: The late release of the regulations for the 2014 CARE scheme and the increased complexity has resulted in backlogs of work. Page 10

Service Plan 2017 20 By December 2018, the Fund needs to reconcile each individual members Guaranteed Minimum Pension (GMP) entitlement record with those held by HMRC. Initiatives from the National Scheme Advisory Board, including but not limited to key performance indicators, cost transparency, and the academy review. Initiatives from the Local Board to assist the Committee with the running of the Fund. From 2015/16, the Regulator has been involved with pensions administration and governance. Oversight on the funding strategy and inter fund comparisons, including the Government Actuaries Department Section 13 review. The outcome of the Treasury and the National Scheme Advisory Board cost management processes. Financial reporting and control has become more complex and the volume of work is increasing. There is a continuing increase in the number and complexity of employer admissions. The 2016 Investment Regulations including the introduction of an Investment Strategy Statement, which replaces the Statement of Investment Principles. The new Regulations also introduce new powers for the Secretary of State to make a direction if he or she is satisfied that an administering authority is failing to act in accordance with guidance. The investment of the Fund continues to become more complex due to the increased use of alternative investments. The Fund is compliant with all six Investment Principles that cover the areas of effective decision making, investment objectives, risk and liabilities, performance assessment, responsible ownership, and transparency and reporting. SWOT Analysis 38. A SWOT analysis has been prepared to assist with preparing the aims, objectives and actions and achieving the vision. 39. The Strengths are summarised below: Page 11

Service Plan 2017 20 We have a nucleus of experienced staff. There is a willingness to change, develop and innovate. We work under delegated powers and with short reporting lines that assist management control and our ability to respond to changing circumstances. Staff deliver training in house to ensure the Service has the required skills, knowledge and experience. The Fund is compliant with the Investment Principles. The investment management structure is subject to an ongoing review to ensure that the Fund is invested appropriately in the light of its liabilities and opportunities in investment markets. In house investment administration allows us to maintain close control over the investment of the Fund and retain valuable expertise within the Service. In-house pensions administration allows us to tailor the service to the requirements of the employers and members. There is a well-developed communication and training strategy for the employers. Our members benefit from a communications strategy that includes a telephone helpline, a website and annual reporting. 40. The Weaknesses are summarised below: The Committee is addressing a longstanding deficit in the Fund. The funding strategy and the contributions were reviewed at the 2016 valuation, leading to a funding level of 85%. The PEST analysis referred to the changing cashflow and the maturing of the Fund. This is taken into account in the funding and investment strategies. With regard to pensions processing, poor data flows lead to increased costs and to problems in achieving processing deadlines. To address this, we must continue to work with employers to improve the quality and timeliness of information. We have a Administration Strategy in place and have introduced systems to take more data electronically. We have systems in place to measure the timeliness of the data provided by employers and of our processing. The 2014/15 and 2015/16 years were particularly demanding for the Office because of the need to introduce the new CARE scheme, for which the Regulations and associated guidance were not received in a timely manner. Page 12

Service Plan 2017 20 Whilst this improved in 2016/17, backlogs have built up and there have been delays in other areas of work, for example in the continued roll out of the systems that take data electronically from employers, as referred to above. This is slowing up our plans to improve the efficiency of pensions processing. Plans are in place to improve our systems and to remove the processing backlogs. 41. The opportunities are summarised below: The Fund continues to explore options for working with other administering authorities through joint working arrangements and framework agreements. The Government s policy to pool Scheme assets will provide an opportunity to reduce investment costs and improve value for money. It is important that the Fund seeks to ensure that investment returns net of fees are not impaired, that the governance structure of the pooling arrangement is efficient and that set up and transition costs are managed and minimised. The ongoing review of the approach to investing the Fund ensures that the strategic benchmark and the investment management structure remain appropriate at a Fund level. The Fund will provide an employer, on request, with an investment strategy that is modelled against their own liabilities. We are working with our software supplier on the continued development of the pensions administration system, the increased use of electronic data transfers and electronic communications. The Administration Strategy provides a framework to provide timely and accurate information flows between the Fund and the employers. 42. The Threats to the Service are summarised below: The CARE Scheme took effect from April 2014. The Regulations and associated guidance were not received in a timely manner. This, coupled with the increased complexity of the new Scheme, has led to delays in the implementation of some systems and backlogs in other areas of work. Plans are in place to improve the current position. There is a risk of censure by The Advisory Service, the Internal Disputes Resolution Procedure, the Regulator and the Ombudsman if we fail to provide a satisfactory service. The Fund is required to reconcile each individual members Guaranteed Minimum Pension (GMP) entitlement record with those held by HMRC. This could have Page 13

Service Plan 2017 20 significant workload implications and is dependent on enhancement to the pensions administration software. After a long period of stability in the senior management team, there have been a number of changes. A failure to train staff, retain experienced staff and plan for succession would threaten service provision. Page 14

Service Plan 2017 20 Aims, Objectives and Actions Introduction 43. We have considered the four aims in the Vision Statement the key issues that face the Service, as identified by the PEST and SWOT analysis. 44. Objectives and actions have been identified to address the aims and key issues. 45. This part of the plan sets out the objectives and actions that the Service will undertake over the three year period. 46. The aims, objectives and actions are summarised at the end of the plan. Aim 1 - Promote membership of the Fund 47. All of our actions seek to enhance the value of the Fund to employers and members and thereby contribute towards the first aim. However, Objective 1 will make a particular contribution towards meeting this aim. This is set out below. Objective 1 - Promote membership of the Fund to new and employers 48. The PEST refers to the reorganisation of public sector services and the impact that declining membership could have on the Fund and on the Scheme. We must counteract this by promoting new or continuing membership of the Fund as an attractive option to employers and members. 49. The Fund s communications strategy is set out in its Communications Policy Statement, which refers to the promotion of the Scheme to prospective members and their employer. 50. The introduction of Auto Enrolment is of importance to this area, as is the cooperation and support of employers. 51. HM Treasury has completed its review of the Fair Deal for Staff guidance, which was part of the Government s broader review of public sector pensions. It has been confirmed that the broadly comparable approach has been largely withdrawn and that staff will be able to remain members of the appropriate public service pension scheme post-transfer. However, the regulations to bring this into the LGPS are still awaited. Page 15

Service Plan 2017 20 52. The new policy states that local government and other best value authorities continue to be outside Fair Deal. The impact of the new policy on transfers from local authorities and other best value authorities is being considered in a separate exercise by the Department for Communities and Local Government. Aim 2 - Keep contributions as low and as stable as possible through effective management of the Fund 53. Our approach to meeting this aim is set out below under the headings of: Review of the Funding Level The Valuation Process and the setting of Employers Contributions Investment Strategy and the Investment Management Structure. Review of the Funding Level 54. The PEST and the SWOT identify the cost of the Scheme as an issue for employers. 55. A pension fund is a long term entity. The decisions that are taken at any point in time can have a long term impact on a fund and on the participating employers and members. 56. It is important to review and understand the causes of the past movements in the funding level. 57. The employers contributions are set by triennial valuations. 58. The 1989 valuation revealed a funding level of 118%, with this surplus being due to actual investment returns having greatly exceeded expected returns. This overfunded position led to the scheduled employers taking a contributions holiday. 59. A significant change was made to the cost of the scheme in April 1990 when pension funds took over, from employers, the liability to pay pensions increases. This, combined with the contributions holiday, led to the surplus being eroded. 60. The funding level revealed by the 1992 valuation was 98%. The contributions holiday was ended and an employers contribution for the scheduled employers was phased in. 61. The 1995 and 1998 valuations both revealed funding levels of 87%. The 1998 result was adversely affected by the removal of the tax credit that was attached to UK equity dividends, which took effect from the July 1997 budget. Page 16

Service Plan 2017 20 62. The 2001 valuation revealed a deterioration in the funding level from 87% to 82 %. This fall was attributable to improving longevity employer specific factors such as pay awards, restructurings, ill health retirements and early retirements the investment returns in the inter valuation period being below the levels assumed in the 1998 valuation, although this was alleviated in part by the Fund s performance being stronger than the peer group return. 63. The bear market in equities between 2000 and 2003 led to a further and significant fall in the funding level. The 2004 valuation revealed a funding level of 64%, based on our core assumptions. This was largely attributable to investment returns being below the level assumed in the 2001 valuation although, again, it was alleviated in part by the Fund s performance being stronger than the peer group return. 64. Administering authorities and employers across the Scheme recognised that the falls in funding levels had to lead to employers contributions rising from April 2005. 65. The 2007 valuation revealed an improvement in the funding level to 79%, based on our core assumptions. This was attributable to investment returns in the three year period covered by the 2004 valuation being materially above the expected long term returns. However, factors such as improving longevity put upward pressure on employers contributions, which were increased for most employers from April 2008. 66. The global financial crisis damaged the asset base and funding level of pension schemes. Again, this was alleviated slightly by the Fund s performance being above the peer group return. The funding strategy was reviewed at the 2010 valuation to address the lower funding level. This involved adopting less stringent core assumptions for the employers with a stronger covenant and a greater reliance on guarantees for some employers with a weaker covenant. It was stated that the assumptions would be strengthened at later valuations. Following these changes to the funding strategy, the funding level at the 2010 valuation was 79%, based on the new core assumptions. 67. The funding strategy was reviewed at the 2013 valuation and the assumptions were strengthened. The funding level was 81%. 68. The most recent valuation as at 31 st March 2016 has shown that the funding level has improved further to 85%. The core asumptions used were broadly comparable to those used in the 2013 valuation. 69. Whilst 2017/18 is not a valuation year it is important to continue to develop the funding strategy. The plan will now identify appropriate objectives and actions. Page 17

Service Plan 2017 20 The Valuation Process and the Setting of Employers Contributions 70. The Fund has to prepare, maintain and publish a Funding Strategy Statement that sets out the funding strategy, having consulted with appropriate persons when preparing the strategy. 71. The Fund s strategy includes ensuring that all employers pay an appropriate contribution for most employers, breaking down the total contribution into a future service rate calculated as a percentage of pay and a past service payment calculated as a lump sum where appropriate, stepping in changes to contribution rates setting the discount rates and deficit recovery periods with reference to the strength of each employer s covenant, which may take the availability of bonds and guarantees into account a reliance on such bonds and guarantees for employers with a weaker covenant the use of grouped rates for certain employers a robust policy for the recovery of Strain on the Fund backing cessation valuations with UK Government Index-Linked Gilts an underpin to ensure no employer in deficit at the time of the valuation pays less than they would have paid under the previous valuation. Objective 2 - Actuarial and funding strategy related issues 72. In 2017/18 and 2018/19, the Fund will keep the funding strategy under review to ensure that it continues to target solvency, whilst managing the cost of the Scheme to employers. 73. The next triennial valuation will be carried out in 2019/20. Preparations for this will need to take place over the next couple of years. 74. The reduction in public sector expenditure is leading to an increase in deferred and pensioner membership. The Fund s cashflow is being monitored to ensure that it is managed efficiently in relation to the payment of benefits and the investment strategy. The cashflow is also being selectively monitored at employer level so that the funding position of the employer is kept under review. Page 18

Service Plan 2017 20 75. Further work in relation to the funding strategy will include use of the Aon Hewitt Tracker system to monitor estimated Fund level movements in the funding level and reporting the results to the Committee and to employers introducing new employers into the Fund managing employer withdrawals from the Fund and ensuring that their liability to the Fund is met monitoring the position on employer covenant consideration of the position of universities and colleges. 76. The Government s Freedom and Choice initiative may lead to an increase in transfers from defined benefit arrangements such as the Local Government Pension Scheme into defined contribution arrangements. A system has been put into place to evaluate applications for transfers and to ensure that only legal transfers take place. Investment Strategy and the Investment Management Structure 77. A key part of improving the funding position is ensuring that the Fund has an appropriate investment strategy in place. We must ensure that the Fund s assets are invested effectively and appropriately in the light of its financial position, its liabilities and opportunities in investment markets. 78. The investment objectives are summarised in the Investment Strategy Statement. 79. The Fund s investment objectives are: To invest the Fund in assets of appropriate liquidity to produce income and capital growth that, together with employer and employee contributions, will meet the cost of benefits To keep contributions as low and as stable as possible through effective management of the assets. 80. In addition the Fund has agreed a set of Investment beliefs, which are also set out in the Investment Stategy Statement. 81. As stated in the PEST and the SWOT, the Fund is compliant with the six Investment Principles that cover the areas of effective decision making, investment objectives, Page 19

Service Plan 2017 20 risk and liabilities, performance assessment, responsible ownership, and transparency and reporting. 82. Since 2000, the Fund s strategic benchmark has been derived from asset liability studies that examine the financial position, the membership profile, the nature of the liabilities and analyse the expected range of outcomes from differing investment policies. 83. The strategy in place in 2016/17 was based upon an asset liability study carried out in 2013/14 which used the liability data from the 2013 valuation. Desktop reviews have been carried out in the intervening years to ensure that this approach remains appropriate. 84. A further asset liability study has been carried out in 2016/17, using the liability data from the 2016 valuation. The changes required from this review will be implemented in 2017/18. At the time of writing the outcome of this asset liability study is not known. It is important that any changes are implementable under the new investment pooling arrangements. 85. The strategic asset allocation includes 58.5% in quoted UK and overseas equities, 7.5% in private equity, 19.0 % in bonds and cash, 12.5% in UK and global property and 2.5% in infrastructure. 86. The strategy is implemented through a management structure comprised of eleven specialist mandates that cover the global quoted equity and bond markets and the UK property market. The investment in private equity, global property and infrastructure is by way of allocations to funds. 87. The detailed work of the Investments Office and any changes to the investment structure will be set out in operational plans. Objective 3 - Ensure that the Fund has an appropriate strategic benchmark and investment management structure 88. We will continue to ensure that the Fund has an appropriate strategic benchmark and investment management structure. 89. As noted above the latest asset liability study has been undertaken towards the end of 2016/17. The outcome of this will be implemented in 2017/18. 90. The next full asset liability study will be carried out in 2019/20, using data from the 2019 valuation. 91. Until the next study in 2019/20, the benchmark and structure will be test checked, probably annually, to ensure that they remain suitable for the Fund s liabilities. Page 20

Service Plan 2017 20 92. It is anticipated that further amendments will be made to the structure and mandates during the period of this plan. These may include enhancements to individual mandates. Any such amendments would take the impact and timing of pooling into account. 93. We will monitor the performance of all managers and custodians carry out formal reviews of appointments that include market testing, if required ensure that the fees payable on alternative investments are justified by the net returns maintain financial control over all portfolios on a monthly monitoring cycle consider de-risking strategies at Fund and employer level manage the Fund level cashflow. Objective 4 - Consideration of areas related to the investment of the Fund 94. We will continue to examine other areas that are related to the investment of the Fund, taking into account the future impact of pooling, including the application of the tactical asset allocation mechanism the custody arrangements, which may include the use of the Scheme wide framework agreement stock-lending, to include an ongoing assessment of risk, the implications for voting and the recovery of overseas tax performance and risk management services the payment, recovery and filing obligations in relation to UK and overseas tax transaction cost monitoring and commissions paid, including the element that pays for research, through monitoring of Level Two disclosures the class action arrangements. Objective 5 - Examine ways of providing employers, at their request and at their own risk and cost, with an investment strategy that may be more tailored to their individual liabilities Page 21

Service Plan 2017 20 95. The strategic benchmark and investment management structure is based upon an analysis of liabilities at the Total Fund level, resulting in employers being offered a one size fits all strategy. 96. We can examine ways of providing employers, at their request and at their own risk and cost, with an investment strategy that may be more tailored to their individual liabilities. 97. Such an approach could be of interest to employers that wish to adopt a low risk strategy, or that have a finite membership in the Fund such as contractors, or to employers whose liabilities differ markedly from the Total Fund liabilities. 98. This may become a more significant issue if and when more employers become fully funded. Objective 6 Pooling Of Investments 99. As noted in the PEST Analysis, the Government has undertaken a review of the investment of the Scheme s assets and has introduced a requirement for the assets to be pooled in up to six pools, each with assets of at least 25 billion. 100. The Fund is acting to take forward this requirement. It is part of the Border to Coast Parnership (BCPP), which is a group of thirteen funds, valued at 36 billion as at March 2015. 101. The BCPP submitted a pooling proposal to government in July 2016, which was approved in December 2016. 102. A signifianct amount of work has already been undertaken in 2016/17 to develop the proposed new arrangements. This will continue in 2017/18, with the target of getting the new pooling entity up and operational in April 2018. 103. It is anticipated that the transition of most of the quoted assets into the pool will take place in 2018/19. The then alternative investments will go into run off over the natural period of each investment. 104. The Fund will remain responsible for deciding its strategic asset allocation and approach to derisking at a Fund and employer level. 105. Whilst the manager related activities described above in Objectives 3 and 4 will be gradually subsumed into the pool, the Fund will develop a range of further objectives needed for monitoring the activities of the pool. Aim 3 Work with our partners to provide high quality services to employers and members Page 22

Service Plan 2017 20 106. Our third aim is To work with our partners to provide high quality services to employers and members. The objectives and actions are set out under the headings of Joint Working With Other Administering Authorities Systems Processing Staffing Issues Performance Management Financial Management Risk Management Equality and Diversity. Joint Working With Other Administering Authorities 107. The PEST referred to the need for administering authorities to deliver the Scheme as efficiently as possible. 108. Pooling arrangements for investments will be in place from 2018/19 in accordance with the Government s initiative. In the period up to then, there will be selective joint working on appropriate areas of investment. 109. Other opportunities for joint working are expected to arise. The Fund will need to ensure it is appropriately placed to take advantage of any opportunities that arise. 110. We use the Scheme wide framework agreements for procurement. These are currently available for Actuarial and Benefit Consultancy Services Investment Consultancy Services Global Custody Services Administration Systems Legal Services. 111. We work with the Local Government Association on the communication strategy for the new Scheme, the development of material and the use of social media for the communications strategy. 112. We work with other clients of our pension administration system provider to develop the system, and prioritise development. Objective 7 - Explore options for joint working with other administering authorities Page 23

Service Plan 2017 20 113. The Fund will continue to explore and consider options for joint working with other administering authorities and organisations in order to deliver efficiencies. Page 24

Service Plan 2017 20 Systems 114. The development work on systems is undertaken largely within the Technical and Communication Teams. The Operations Teams assist in areas such as testing and in focus groups. Objective 8 - Develop pensions systems 115. The 2014 CARE scheme has been in place from April 2014. 116. The Service has been engaged on the introduction of the new Scheme from 2013/14. Most of the development work has now been completed. The final development is due to be completed in March 2017 in relation to transactional costs data which is needed for the cost management process. There may be some development work on this transaction cost data that overruns into 2017/18, which will need to be finalised as soon as possible. 117. The contract on the pensions administration system, Civica UPM, expired on 31 st March 2016. It was renewed to 31 st March 2022 following a procurement process that was run through a framework agreement. 118. As previously noted the Fund is required to reconcile each individual members Guaranteed Minimum Pension entitlement to records held by HMRC. Civica is developing some reports to assist with this. This will require the download of data from HMRC. The delopment work on the first phase is expected to be completed in 2016/17, but this may overrun and further development work is needed in 2017/18. 119. The ongoing development of processes in UPM is continuing. The Technical and Communications Teams are delivering a number of initiatives, including further development and roll out of bulk data inputs (BDIs) that allow employers to submit certain types of member data electronically. BDIs for Person Changes and Hours Changes were introduced in 2012/13. The BDI for Joiners has been rolled out in 2016/17 and work has also started on reviewing a leaver BDI. the roll out of our web based facility for employer input of data will continue in 2017/18, with the aim of having all forms developed and in use by employers by June 2017. the use of more efficient working practices. improved management information on pensions processing. information on employers is held in a combination of paper and electronic files. These files have now largely been transferred onto UPM. Page 25

Service Plan 2017 20 120. We will investigate in 2017/18 whether there is a commercial justification to develop UPM Payroll to allow it to make trivial commutation payments. There could be some level of savings from not paying very small pensions to those who have attained State Pension Age (pensions cannot be commuted before State Age except in very limited circumstances) but these may not be sufficient to justify the development costs. 121. We may investigate the development of a single payments module in UPM for non recurring payments. This has the potential to improve security of payments and efficiency. 122. The UPM system provides a capability for member led calculations, providing statements and updating personal information that will be developed. The actions for this area are included under Objective 19, Communicating with Members. Processing 123. The majority of the pensions processing is carried out by the three Operations Teams. The teams are multi disciplinary and provide a client service to specified employers. 124. In addition, the Communications Team handles a significant number of the simpler processes. 125. The detailed work of the Teams is set out in operational plans. 126. UPM is used directly by the employers to review records and carry out estimates on their employees benefits. 127. There are a number of areas that will impact on processing. 128. A data cleansing initiative in relation to common data has been applied. 129. A data cleansing initiative in relation to conditional data will be introduced from 2017/18. 130. The Service has been working with employers on Auto Enrolment and Auto Re-Enrolment. This has included providing information and training seminars. Systems are in place for pensions processing and the financial control of contributions received and returned. 131. The Government s Freedom and Choice initiative is leading to an increase in transfers from the defined benefit arrangements such as the Local Government Pension Scheme into defined contribution arrangements. A system has been put Page 26

Service Plan 2017 20 into place to assess applications for transfers and to ensure that only legal transfers take place. 132. An exercise to reconcile the Guaranteed Minimum records held by pension schemes to those held by the HMRC must be completed by 31 st December 2018. The exercise is expected to be complicated and time consuming. A special project team has been set up. As contingency we are considering the use of a third party provider to assist with this task if our software provider fails to deliver within timescales and or volumes of work are higher than expected. 133. The main areas to be considered within this plan are processing within the Office the quality and timeliness of information flows from employers. 134. The development of electronic communications and passing of data referred to under Objective 8 will assist in these areas. Objective 9 - Introduce improved working practices across pensions processing 135. legislation sets out timescales within which many processes are to be completed. 136. We have derived timescales and targets for processing that are based on this legislation. These are referred to in the Employers Guide and in the Administration Strategy. 137. There is an earlier reference in this plan to the programming and processing problems that have arisen for the Fund and the employers from the introduction of the 2014 CARE Scheme. 138. Progress towards reducing these backlogs has been made in 2016/17. These issues must be fully addressed in 2017/18 and a recovery plan has been developed, which is taking a risk based approach that removes the backlog of processing work and puts us in a position to focus on meeting processing targets. The Operations Team s are taking the lead in this area. 139. Therefore, the timetable for processing in 2017/18 has been prepared with the aims of removing the backlog in processing that arose from 2014/15 as a result of the introduction of the CARE Scheme meeting processing targets Page 27

Service Plan 2017 20 providing the annual update to pensioners by the internal deadline of 16th April completion of the contribution posting exercise by 30th June maximising the number of completed benefits statements achieving the statutory deadline of 31st August for the production of the deferred and annual benefits statements issuing the pensions savings statements by 6th October completing the Guaranteed Minimum Pension reconciliation exercise by 31st December 2018. 140. The quality of data flows from employers is a key factor in controlling costs and achieving processing deadlines. 141. We will continue to work with employers to improve the quality and timeliness of data through the client service role that is delivered by the Operations Teams mailshots employer training the Employers Guide and the Administration Strategy, which set out the timescales and targets for processing performance indicators that measure the timeliness of the submission of data targeting those employers that are experiencing particular difficulties. 142. An annual exercise is undertaken on common data. This will include the conditional data once the report for this has been developed. Staffing Issues 143. The establishment of the Service is monitored to ensure that it is capable of delivering the service required. 144. The factors that impact on the structure include joint working with other administering authorities Page 28

Service Plan 2017 20 the introduction of the CARE Scheme, which is proving to be more complex to administer than the 2008 Scheme an increase in the number of employers, mainly being academies an increase in the number and complexity of employer admissions, and in the ongoing management of employers. This is resulting from a range of factors including the creation of academies, the requirements in relation to bonds and guarantees as set out in the Local Government Pension Scheme Regulations 2013, the restructuring of employers and admission agreements, and withdrawals from the Fund. A robust system has to be in place for this area of work, which is managed with colleagues in Legal Services. changes to the number of members and type of membership as a result of the reduction in public sector expenditure auto Enrolment and Auto Re-Enrolment changes in legislation that have led to an increase in the number of the more complex pensions processing queries and transactions more members are requiring information on their pension options and tax position work arising from the Freedom and Choice initiative improvements to the pensions administration system will lead to more efficient processing the backlog in pension processing that arose from 2014/15 as a result of the introduction of the CARE Scheme financial reporting and control has become more complex and the volume of work is increasing the investment of the Fund has become more complex the implications and implementation of pooling. 145. From about 2010, in order to reduce costs and provide flexibility for a future restructuring, the Service adopted the practices of freezing posts as they fell vacant, of allowing staff to reduce their hours where possible and of reducing overtime working. The possible merger of administering authorities that was under consideration through the Call for Evidence was also a factor in not recruiting. Eight posts out of the establishment of 61 posts were frozen at the start of the 2014/15 year. Page 29