Agenda item

The Teesside Pension Fund Audit Planning Report for the year ended 31 March 2020 had previously been considered by the Teesside Pension Fund Committee at the March meeting. That Planning Report was prepared prior to the impact of the Covid-19 pandemic, and this Addendum Report had been prepared to provide an update on how Covid-19 had impacted the External Auditors’ risk assessment and the additional response which would be built into the audit as a result.

The External Auditor highlighted updates to two significant risks that had previously been identified: the valuation of unquoted pooled investment vehicles and the valuation of directly held property. The valuation of the Fund’s investments in unquoted pooled investment vehicles had been identified as a significant risk, as even a small movement in the assumptions underpinning investment manager valuations could have a material impact on the financial statements. Unquoted assets were either Level 2 or Level 3 on the Fair Value Hierarchy, which meant that quoted market prices were not available and the valuation relied on the use of inputs derived from observable market data (Level 2) or were not based on observable market data (Level 3). The approach usually taken to value these assets had changed due to the market volatility brought about by Covid-19 in the final quarter of 2019/2020. The Auditor needed to consider the revised valuation approach taken by the Fund and its fund managers in order to gain assurance that the impact of Covid-19 on investment values had been properly accounted for in the financial statements. The Auditor would also look at private equity investments across other LGPS clients and check that movements were broadly in line.

In relation to directly held property -  this was a significant risk because property was inherently judgemental in its valuation technique. The additional complication from Covid-19 was that the professional valuer that the Pension Fund used to prepare the valuation on properties at year end had provided that valuation on the basis of 'material value uncertainty'. This was something seen from all property valuers across the year end and was not specific to the Pension Fund. It did not mean that valuations could not be used in the Accounts or that they were not appropriate - there was just a little bit more uncertainty and more estimation in those values than usual. EY Real Estate had been engaged to look at a sample of the valuations to ensure that the additional uncertainty risks were adequately addressed.

The Auditor also highlighted other potential impacts of Covid-19 including: going concern and post balance sheet event disclosures and changes introduced to EY’s review and consultation procedures.

Materiality levels for the audit were originally set at 1% of net assets. Given the decrease in Fund asset values, the Auditor had considered whether 1% was still an appropriate threshold and was satisfied that it was. Materiality had therefore decreased from £40.8 million stated in the planning report and was now set at £37.4 million. Performance materiality had been set at £28.0 million which represented 75% of materiality and the threshold for audit differences was £1.9 million.

In response to a query regarding the extra cost to the Fund incurred by the additional work on the increased risks, the External Auditor responded that it would be misleading to provide a figure at this stage since it would depend on what extra procedures were necessary.

It was highlighted that pooled investment vehicles were the majority of the Fund’s asset base. Although there were some very high values, there were not many of them, so the Auditor would focus testing on individual funds.

AGREED that the report was received and noted.