Agenda and minutes

To receive any declarations of interest.

The minutes of the meeting of the Teesside Pension Fund Committee held on 15 December 2021 were taken as read and approved as a correct record.

A report of the Director of Finance was presented to inform Members of the Teesside Pension Fund Committee how the Investment Advisors' recommendations were being implemented.  A detailed report on the transactions undertaken to demonstrate the implementation of the Investment Advice recommendations and the Fund's valuation was included, as well as a report on the treasury management of the Fund's cash balances and the latest Forward Investment Programme.

The Fund continued to favour growth assets over protection assets and currently had no investments in Bonds. Whilst it was considered that Bond yields would rise in the long run, at present yields did not meet the actuarial requirements for the Fund and should continue to be avoided at these levels unless held as a short term alternative to cash.

At the June 2018 Committee it was agreed that a maximum level of 20% of the Fund would be held in cash. Cash levels at the end of December 2021 were 11.23%. The Fund would continue to use cash to move away from its overweight position in equities and invest further in Alternatives.

Investment in direct property would continue on an opportunistic basis where the property had good covenant, yield and lease terms.  There were no sales or purchases during the quarter.

The Fund was considerably underweight its customised benchmark and, providing suitable investment opportunities were available, would look to increase its allocation to this asset class up to the customised benchmark level.  £87.2 million was invested in the quarter. 

Appendix A to the submitted report detailed transactions for the period 1 October 2021 to 31 December 2021. There were net sales of £60.3 million in the period, this compared to net sales of £100.8 million in the previous reporting period. 

As at 30 December 2021, the Fund had £565.2 million invested with approved counterparties. This was an increase of £30.5million over the last quarter. Appendix B to the submitted report showed the maturity profile of cash invested as well as the average rate of interest obtained on the investments for each time period.

The total value of all investments as at 31 December 2021, including cash, was £5,040 million, compared with the last reported valuation as at 30 September 2021, of £4,871 million.

A summary analysis of the valuation, attached at Appendix C to the submitted report, showed the Fund's percentage weightings in the various asset classes as at 31 December 2021 compared with the Fund's customised benchmark.

The Forward Investment Programme provided commentary on activity in the current quarter as well as looking ahead to the next three to five years. Details of the long term target Strategic Asset Allocation and the targets for 31 March 2022 were shown at paragraph 8.2 of the submitted report.

At the end of December 2021 the Fund’s equity weighting was 67.1% compared to 70.9% at the end of September 2021. A schedule was in place to reduce investment in equities over the period 1 April 2021– 31 March 2022 by £725 million, and  ...  view the full minutes text for item 21/47

A report of the Director of Finance was presented to provide Members with quarterly investment reports in respect of funds invested externally with Border to Coast Pensions Partnership Limited (Border to Coast) and with State Street Global Advisers (State Street).

As at 31 December 2021, the Fund had investments in the Border to Coast UK Listed Equity Fund, the Border to Coast Overseas Developed Markets Equity Fund and the Border to Coast Emerging Markets Equity Funds. For all three sub funds the return target was an annual amount, expected to be delivered over rolling three year periods, before calculation of the management fee.

The Fund also had investments in the Border to Coast Private Equity sub-fund and the Border to Coast Infrastructure sub-fund. Total commitments of £50 million were made to each of these sub-funds for 2020/2021, in addition to £100 million commitments to each sub-fund in 2019/2020. These investments were not reflected within the Border to Coast report attached at Appendix A to the submitted report.

The Border to Coast report showed the market value of the portfolio as at 31 December 2021 and the investment performance over the preceding quarter, year, and since the Fund’s investments began. Border to Coast had also provided additional information within an appendix to that report in relation to the Overseas Developed Markets Equity Fund, giving a breakdown of key drivers of and detractors from performance in relation to each of its four regional elements. Market background information and an update of some news items related to Border to Coast were also included.  Border to Coast’s UK Listed Equity Fund was slightly below target and their Overseas Developed Markets Equity Fund was slightly above target since inception. The performance of the Emerging Markets Equity Fund was above benchmark (but below target) in the last quarter, however the Fund’s investments only began earlier this year and it was too early to draw any meaningful conclusions from such a short investment period.

The State Street report (attached at Appendix B to the submitted report) showed the market value of the State Street passive equity portfolio and the proportions invested in each region as at 31 December 2021. Performance figures were also shown in the report over a number of time periods and from inception – the date the Fund started investing passively with State Street in that region: for Japan and Asia Pacific ex Japan the inception date was 1 June 2001, as the Fund had been investing a small proportion of its assets in these regions passively since then. For North America and Europe ex UK the inception date was in September 2018, therefore performance figures only covered just over three years as this represented a comparatively new investment for the Fund. The nature of passive investment – where an index was closely tracked in an automated or semi-automated way – meant deviation from the index should always be low.

State Street continued to include additional information with their report this quarter, giving details  ...  view the full minutes text for item 21/48

A representative from Hymans Robertson, the Fund’s Actuary, gave a presentation covering the following items:

• Background to the Actuarial Valuation.
• Key Valuation Decisions and Outcomes.
• Outlook for the 2022 Valuation.

·         Valuation Timetable.

Work had started on the valuation and assumptions would be presented to the Teesside Pension Fund Committee in the next quarter.  Some modelling on Council contributions would also be presented.  The Whole Fund results would be presented in the autumn and new contributions would be implemented from April 2023.

ORDERED that the information provided was received and noted.

The Head of Pensions Governance and Investments presented the annual Pension Fund Business Plan 2022/2025, including the 2022/2023 Pension Fund budget, for approval.

The 2022/23 forecast income and expenditure was set out in the Business Plan, and summarised at paragraph 3.1 of the submitted report.  It was highlighted that income was expected to be about £62 million less than expenditure and there were additional administration and management expenses of £7.5 million.  Estimated investment income was £56 million, leaving a shortfall of around £12 million in the year.  This was not of great concern currently as the Fund continued to hold large amounts of cash - anticipated to be over £700 million by the end of March 2022. 

A copy of the Business Plan for 2022/25 was attached at Appendix 1 to the submitted report.  The Business Plan included:

• The purpose of the Fund, including the Teesside Pension Fund Service Promise (Appendix A).
• The current governance arrangements for the Fund.
• The performance targets for the Fund for 2022/23, and a summary of the performance for 2021/22 (Appendix B).

• The arrangements in place for managing risk and the most up to date risk register for the Fund (see Appendix C).
• Membership, investment and funding details for the Fund.
• An estimated outturn for 2021/22 and an estimate for income and expenditure for 2022/23 (see Appendix D and page 21 of Appendix 1).

• An annual plan for key decisions and a forward work programme for 2022/23 and an outline work plan for 2022 – 2025.

The Committee was informed that Stockton On Tees Borough Council had recently undertaken a scrutiny investigation regarding Pension Fund Membership and how to encourage uptake.  It was agreed that a copy of the Final Report would be forwarded to the Head of Pensions Governance and Investment for information.

ORDERED that the Pension Fund Business Plan 2022/2025 was approved.

A report of the Director of Finance was submitted to provide Members of the Pension Fund Committee (the Committee) with an update on current issues affecting the Pension Fund locally or the Local Government Pension Scheme (LGPS) in general.

The issues covered in the report included:

• LGPS and Levelling Up.
• Government Actuary’s Department Section 13 Report – Main Findings.
• Government Actuary’s Department Section 13 Report – Fund Comparisons.
• Triennial Actuarial Valuation as at 31 March 2022.
• Department for Work and Pensions (DWP) Consultation on the Draft Pensions Dashboard Regulations 2022.
• Public Service Pensions and Judicial Offices Bill – Amendment.

The Head of Pensions Governance and Investment highlighted the following points:

LGPS and Levelling Up

The Government published its “Levelling up the United Kingdom” White Paper on 2 February 2022.   The scope of the White Paper was broad: its stated objective was to take radical steps to improve UK prosperity by “tackling the regional and local inequalities that unfairly hold back communities and to encourage private sector investment right across the UK”.  The White Paper included information about the role the Local Government Pension Scheme will be expected to play with a number of references to Local Government Pension Scheme (LGPS) Funds being used to support local investment.

There was huge potential for institutional investment to support levelling up, across infrastructure, housing, regeneration and SME finance.  Institutional investors currently held UK pension assets of over £3.5tn.  Within that, the LGPS had total investments of over £330bn, making it the largest pension scheme in the UK.  Only a tiny fraction of those funds were currently allocated to local projects.  If all LGPS funds were to allocate 5% to local investing, this would unlock £16bn in new investment.

Since 2016 the Teesside Pension Fund had put in place a protocol to enable local investment opportunities to be considered and, where suitable, approved by the Pension Fund Committee. The Fund defined “local” within the context of its own geographical area, so local investments in this context were those within the Teesside area (the areas covered by Hartlepool, Middlesbrough, Redcar & Cleveland and Stockton-on-Tees Councils).  The Fund’s investment approach allowed up to 5% of its assets to be invested in local projects.  One of the important criteria for assessing any potential local investment was to ensure it had the right risk and return characteristics to meet the Fund’s financial objectives.  Any local investment in itself needed to generate an acceptable economic return for the Fund.

A consultation document was expected later in the year which should provide more clarity on the government’s ambition for LGPS Funds to invest 5% of their assets in projects that supported local areas, and on whether this would be implemented through statutory guidance or legislation.

Government Actuary’s Department Section 13 Report – Main Findings

On 16 December 2021 the Government Actuary’s Department (GAD) published its Section 13 Report on the actuarial valuations carried out across the LGPS as at 31 March 2019.  The Report was named after Section 13 of the  ...  view the full minutes text for item 21/51

The Independent Investment Advisors had provided reports on current capital market conditions to inform decision-making on short-term and longer-term asset allocation, which were attached as Appendices A and B to the submitted report.

Further commentary was provided by both Advisors at the meeting in relation to the current conflict in the Ukraine and the potential impact on the economy and markets, inflation and rising energy costs.

The Advisors recommended that the Fund continued with its current asset allocation strategy.

ORDERED that the information provided was received and noted.

A report was submitted that provided an overview of the current property market and informed Members of the individual property transactions relating to the Fund.

The market remained strong for primary assets in all sectors leading to limited stock availability.  Although this was positive in terms of the Fund’s existing assets it made buying new assets very challenging.

There were no sales or acquisitions during the last quarter.

The Fund had agreed terms for a lease renewal at Bromford Central to Harrow Green Ltd.   This leasing transaction maintained a fully let estate and increased the rent on Unit 4 by 23% (+£31,455 p.a).   This was part of the wider estate asset management plan, whereby a number of leasing negotiations would take place in 2022.  It was confirmed that existing arrears would be cleared by the company prior to the lease agreement being signed off.

The Fund had also agreed terms with Pure Gym for a new 15-year lease at Unit H, Congleton.

CBRE continued to seek long-let institutional stock in a range of sectors, primarily industrial, retail warehousing and supermarket sectors to deliver the secure index linked income streams identified within the Fund’s strategy. Whilst many of these have not progressed quickly CBRE was optimistic that they may gain traction over the next few weeks as investors began to consider their post pandemic strategies.  

The report was written prior to the invasion in Ukraine and it was suggested that this might discourage investment in eastern Europe which could have a knock-on effect on property in London, which was in high demand.  This could force investors into the regional markets where the Teesside Pension Fund operated.  

CBRE continued to work on reducing tenants’ rent arrears through continued dialogue.  The protection scheme put in place for tenants during the Covid-19 remained in place until the end of March.  

ORDERED that the information provided was received and noted.

A report was presented to provide an overview of administration services provided to the Teesside Pension Fund by XPS Administration.

The following items were highlighted:

• Headlines.
• Membership Movement.
• Member Self Service.
• Additional Work.
• Complaints
• Common Data.
• Conditional Data.
• Customer Service.
• Service Development.
• Performance.
• Employer Liaison.
• Annual Benefit Statements.
• Performance Charts.

In relation to performance it had been a really strong quarter with only two instances of failure within the KPIs that did not impact pension payment or experience.  There were no new complaints.

XPS had been working on closing off 2021/2022 and opening 2022/2023 and had sent templates to all Employers to capture the year end data.  This data would inform annual benefit statement production, the actuarial valuation and the pension saving exercise.

All Employers had received a reminder about their contribution rates effective from 1 April 2022.

An error was noted in the Membership Movement figures and the officer undertook to ensure this was amended for the next report.

ORDERED that the information provided was received and noted.

A report of the Director of Finance was reported to provide Members of the Pension Fund Committee (the Committee) with an update on a regulatory breach that had been added to the Breaches Log.

Under the Pensions Act 2004 certain categories of people involved with a pension scheme had a duty to make a report to the Pensions Regulator where they had reasonable cause to believe that:

a) a legal duty relating to the administration of the scheme had not been or was not being complied with; and

b) the failure to comply was likely to be of material significance to the Pensions Regulator.

The Fund had a policy on reporting breaches, which was reviewed and approved by the 15 December 2021 Pension Fund Committee, a copy of which was attached at Appendix A to the submitted report.   The policy included information on how to report a suspected breach of regulations and how a reported breach was evaluated to assess how it should be dealt with, and whether it should be reported to the Pensions Regulator.

The procedure, and the requirement to report breaches has been in place since 2015. The current Breaches Log was attached as Appendix B to the submitted report. This contained one new addition relating to the provision of benefit statements to deferred members.

Deferred members were members of the pension scheme who had left active employment and no longer contributed to the scheme, but had not yet drawn their pension benefits, normally because they were not old enough yet.  Depending on the age of the individual, it could be many years between their leaving the scheme and drawing their pension, and it was not unusual for the individual to move house and not inform the pension scheme during that time. This resulted in mail being returned from that address and that individual being categorised as a ‘gone-away’. This in turn makes it impossible to provide that individual with an annual benefit statement (which, according to the LGPS regulations, needs to be provided to all active and deferred members by 31 August each year).

The entry in the Breaches Log outlined the position, and explained that a decision had been taken to record but not report this breach, as it had a straightforward explanation, did not result in a loss to the individual and steps were being taken to look to improve the situation.  These steps involved XPS working with the Head of Pensions Governance and Investments to consider cost-effective ways to trace the ‘gone-aways’ with a view to substantially reducing their number for the 2022 annual benefit statements.

ORDERED that the information provided was received and noted.

None.

To consider passing a Resolution Pursuant to Section 100A (4) Part 1 of the Local Government Act 1972 excluding the press and public from the meeting during consideration of the following items on the grounds that if present there would be disclosure to them of exempt information falling within paragraph 3 of Part 1 of Schedule 12A of the Act and the public interest in maintaining the exemption outweighs the public interest in disclosing the information.

ORDERED that the press and public be excluded from the meeting for the following items on the grounds that, if present, there would be disclosure to them of exempt information as defined in Paragraph 3 of Part 1 of Schedule 12A of the Local Government Act 1972 and that the public interest in maintaining the exemption outweighed the public interest in disclosing the information.

The Chief Executive Officer from Board to Coast Pensions Partnership provided an update.

ORDERED that the information provided was received and noted.

A report of the Director of Finance was presented to provide Members of the Committee with Border to Coast’s Environmental Social and Governance (ESG) reports for the quarter ending 31 December 2021 in relation to the three listed equity sub-funds the Pension Fund invested in.

ORDERED that the information provided was received and noted.

ORDERED that the report was DEFERRED for consideration at a future meeting.