Agenda item

A report was presented to provide Members of the Teesside Pension Board with an initial assessment of the impact of the coronavirus pandemic on the Pension Fund.

The Fund was primarily invested in Equities. Although the strategic asset allocation to equities was set at 50%, this allocation was set relatively recently and the portfolio was only gradually being moved from its current allocation which was significantly higher - typically around 75% equities. The coronavirus pandemic led to a quick and dramatic fall in global stock markets, and this was reflected in the Fund valuation as at 31 March 2020. The Fund’s equity holding reduced in value by around £600 million in the three months to 31 March 2020.

Stock markets to some extent recovered after hitting lows towards the end of March, with US markets in particular improving, although the UK stock market has not bounced back as quickly. Some of the Fund’s other assets had been affected to a lesser degree due to their illiquid nature. Although the Fund’s private equity and infrastructure could be adversely affected it would take some time for a correction to take effect.

Another point worth noting in the private equity and infrastructure asset classes was that it was already taking a long time to invest. The Fund had committed £200 million to Border to Coast to invest this year and as at the end of the year, less than £20 million had been invested. This could be advantageous to the Fund as it could allow for investments in any other bargain opportunities that were available.

The value of the Fund’s UK Direct Property Portfolio was likely to be affected by lockdowns and by the pace at which normality returned. Retail assets in particular were affected. The Fund’s Property Advisors had been approached to provide rent holidays on some properties. It was acknowledged that it was generally a better to retain a tenant than try to replace them at such a difficult time.

The Fund was not getting good returns on cash, which was linked to the Bank of England base rate which dropped even further at the start of the reaction to the pandemic and was now 0.1%. The income from cash, which was about £4 million last year in interest, would diminish as well, due to the low interest rates. However, the Fund was a long term investor and over time asset values tended to recover and the drop in value would not necessarily be detrimental to the long term funding. The biggest risk was that global economic growth would be flat or even negative going forward. There was also a potential risk of inflation.

The Pension Fund had for a number of years been cash negative. This meant the amount paid out in pension benefits exceeded the amount collected in employer and employee contributions. This was quite normal for a Local Government Pension Scheme fund, particularly one which was relatively well funded and did not require many of its employers to make additional, deficit correction contributions. Provided the additional cash requirement could be met in a planned way, which did not require the Fund to sell risk assets at an in appropriate time, a cash negative position could be well managed.

The Pension Fund had significant cash holdings and, even taking into account the future commitments it had made to invest in infrastructure and private equity, it would have sufficient cash to ensure all pension payments could be made over at least the next couple of years without having to sell any assets. Officers would work with advisors to develop a long-term approach to cash flow management within the Fund.

One potential issue had been the Scheme Employers and concerns that they might not be able to pay their contributions. All Scheme Employers had been contacted and to date, all contributions had been paid on time.

Officers had kept in regular contact with XPS throughout the period of the pandemic and subsequent lockdown. XPS was able to move quickly to a position where the team could operate effectively working from home and continue to administer the Fund. The team continued to carry out all of its administration functions including processing new entrants, leavers and retirements, as well as ensuring pensions continued to be paid. XPS were encouraging scheme members to contact them via email rather than post and some of the changes that they were looking to introduce anyway had been accelerated.

When the lockdown began in March, the Pensions Team already had the capability to work from home and monitoring of investments, governance support and oversight of the outsourced administration contract continued. The Head of Pensions Governance and Investment also confirmed that the team had kept in regular contact with all investment managers throughout the pandemic. Middlesbrough Council had already been moving towards more employees being able to work agile. A recent survey of employees working from home during the pandemic indicated that only 18% of staff wanted to get back to working in the office.

One area where the Fund’s governance was affected was in the cancellation of the Board meeting scheduled for 20 April 2020. Unfortunately, the Council was not in a position to ensure the meeting could be held effectively remotely and the decision was taken to cancel that meeting. However it was noted that under the prevailing legislation, local pension boards were required to meet at least twice a year and this requirement would still be met. The Teesside Pension Committee had met remotely on 17 June and 22 July 2020 and meetings were now more accessible to members of the public as they were streamed live via the Youtube platform.

The submitted report covered the medium and long-term impacts, the economic impact on the Fund and the drop in the asset values. One outcome was that the next valuation was likely to be less favourable than the current valuation. The Fund Actuary had provided some wording to share with Employers to warn them that they could see an increase in contribution rate from the next valuation. Admission Body Employers could see an increase even sooner as this was permissible if felt necessary.

UK unemployment had increased significantly over the last few months, as had Government debt. Ultimately this could mean reduced funding for local government and fewer active members contributing to the Fund. This could serve to further accelerate the rate at which the Fund matured, and increase the shortfall between benefits and contributions. This underlined the importance of planning for cash flow provisions within the Fund going forwards.

AGREED that the report was received and noted.