Pension Fund
Annual Report and Accounts
2017-18
Contents
Introduction
Page 1
Management and Financial Performance and Policy Statements
Management
Page 4
Investment Strategy Statement
Page 7
Funding Strategy Statement
Page 21
Communication Strategy Statement
Page 35
Governance Policy and Compliance Statement
Page 41
Pension Fund Panel training
Page 48
Assessment of the effectiveness of the Pension Fund Panel decisions made in 2017-18
Page 48
Annual Report of Northumberland County Council’s LGPS Local Pension Board for 2017-18
Page 51
Administration
Page 57
Scheme Members
Page 58
Fund Performance
Page 58
Market Commentary
Page 61
Independent Auditor’s Opinion
Page 63
Pension Fund Accounts
Page 65
Notes Supporting the Pension Fund Accounts
Page 68
Appendix 1 – Fund membership with employer summary
Page 84
Appendix 2 – Statement of the Actuary for the year ended 31 March 2018
Page 85
Appendix 3 – Whole of Pension Fund IAS 26 Disclosure
Page 87
Introduction
Introduction
The purpose of this report is to account for the
and follows the high positive returns experienced
A fully integrated shared pension administration
income, expenditure and net assets of the
during 2016-17.
service with South Tyneside Council commenced
Northumberland County Council Pension Fund
in January 2018.
The overall annual return on the Fund was 3.4%
(“the Fund”) for the financial year to 31 March
for the year (24.2% in 2016-17), which compares
2018. Northumberland County Council is an
favourably with the Fund specific benchmark
administering authority for the Local Government
annual return of 3.3%.
Pension Scheme (LGPS), required by the LGPS
Regulations to maintain a pension fund for the
The long term growth of the Pension Fund is seen
Scheme.
as the most reliable indicator of performance, as
short term fluctuations are evened out. In this
Information about the economic resources
context, the overall annualised return on the Fund
controlled by the Fund is provided by the Net
for the ten years to 31 March 2018 was 7.7% per
Assets Statement, which summarises the net
annum, which compares with the benchmark
assets of the Fund, on the basis of current market
annualised return of 7.8%. Fund returns for the ten
values.
year period were higher than the growth in
Information about the additions to, withdrawals
average earnings and inflation increases.
from, and changes in value of the Fund during the
The significant changes made to Fund
year to 31 March 2018 is shown in the Fund
investments in 2017-18 were:
Account.
the Fund committed £50.00 million to a
In the year to 31 March 2018 the total market
Private Equity investment with Pantheon;
value of the Fund, net of liabilities, has increased
currency hedging against half of the Fund’s
from £1,308.32 million to £1,344.26 million as the
investments in North American publicly
annual return on the Fund (comprising income and
quoted equities was introduced; and,
realised/unrealised gains/losses on investments)
together with receipts to the Fund have exceeded
currency hedging against half of the Fund’s
the payments made from the Fund.
investments in European publicly quoted
equities was introduced.
The Fund Account shows a net withdrawal from
dealings with members of £2.69 million in 2017-18
LGPS regulations were introduced in 2016-17 to
(£5.74 million in 2016-17) as payments to
facilitate pooling of investments, and
pensioners and leavers exceed contributions from
Northumberland County Council made a
members, reflecting the Fund’s maturity. The net
commitment to join Border to Coast Pensions
return on investments experienced during 2017-18
Partnership (BCPP) pooling arrangement. It is
of £45.06 million reflects the positive returns
anticipated that BCPP will commence operation in
experienced by funds generally over that period
July 2018.
2017-18 Pension Fund Annual Report
Page 2
Management
and Financial
Performance
and Policy
Statements
Management and Financial Performance and Policy Statement
Management
At 31 March 2018, the membership of the
Statutory Authority
Pension Fund Panel was as follows:
Under the Local Government Pension Scheme
Voting members
Regulations the statutory administering authority
Representing Northumberland County
responsible for the Fund is:
Council
Northumberland County Council
Councillor J. G. Watson (Chair)
County Hall
Morpeth
Councillor D. Kennedy (Vice-Chair)
Northumberland
Councillor D. L. Bawn
NE61 2EF
Councillor M. Robinson
Pension Fund Panel
The above authority has delegated its
Councillor E. Dunn
responsibility for determining investment policy
Councillor I. C. F. Swithenbank
and monitoring investment performance to the
Non-voting members
Pension Fund Panel which meets at least
quarterly. The Panel sets guidelines for and
Representing employers
assesses the investment decisions of the Fund’s
Mrs Helene Adams (Northumberland National
investment managers.
Park Authority)
Representing employees and pensioners
Ms Sue Dick (Pensioner member of
Northumberland County Council)
Representing employees
Mr Alan Culling (UNISON)
Mr Ian Storey (UNISON)
The Panel is advised by Ms J Holden of Mercer
Limited, who is an independent adviser, rather
than a member of the Panel.
2017-18 Pension Fund Annual Report
Page 4
Management and Financial Performance and Policy Statement
Investment Management
Infrastructure
The day to day management of the Fund’s investments at 31 March 2018 was carried out by the
The Panel selected Global Infrastructure Partners of
following four external managers:
1345 Avenue of the Americas 30th Floor, New York,
New York 10105, USA, as an infrastructure fund
Passive balanced
Legal and General Investment Management Ltd
investment provider to the Fund in July 2011. At 31
One Coleman Street
March 2018 the Fund had a commitment to Global
London
Infrastructure Partners Fund II. The Panel
EC2R 5AA
subsequently selected Antin of 2-8 Avenue Charles
Corporate bonds
Wellington Management International Ltd
de Gaulle, L-1653 Luxembourg, Grand Duchy of
Cardinal Place
Luxembourg, as a second infrastructure fund in
80 Victoria Street
September 2013 and at 31 March 2018 had a
London
commitment to Antin Infrastructure Partners II LP.
SW1E 5JL
Property
Schroder Investment Management Ltd
31 Gresham Street
London
EC2V 7QA
Property
BlackRock Investment Management (UK) Ltd
12 Throgmorton Avenue
London
EC2N 2DL
Private equity
The Panel selected Morgan Stanley of 25 Cabot Square, Canary Wharf, London E14 4QA, as private
equity fund of funds investment provider to the Fund in November 2005. At 31 March 2018, the Fund
had commitments to three of Morgan Stanley’s private equity funds of funds. The Panel selected NB
Alternatives, an affiliate of Neuberger Berman Europe Ltd, Lansdowne House, 57 Berkeley Square,
London W1J 6ER, as a further private equity fund of funds investment provider in January 2007 and at
31 March 2018 had a commitment to two NB Crossroads private equity funds of funds. The Panel
subsequently selected Pantheon Ventures (UK) LLP of 10 Finsbury Square, 4th Floor, London EC2A
1AF, as a third private equity fund of funds investment provider in September 2017 and at 31 March
2018 had a commitment to one of Pantheon’s private equity fund of funds.
2017-18 Pension Fund Annual Report
Page 5
Management and Financial Performance and Policy Statement
Fund assets at 31 March 2018 can be analysed as follows:
Solicitors
UK
Non-UK
Global
Total
Legal services are provided by Northumberland
£m
£m
£m
£m
County Council’s in-house Legal Team. When
Equities
324.28
392.44
109.72
826.44
specialist legal advice is required and the expertise is
Bonds
255.52
-
103.25
358.77
not available in-house legal services are provided by
Alternatives
53.43
-
101.58
155.01
South Tyneside Council’s Pension Fund Team
Cash and cash equivalents
4.04
-
-
4.04
through the shared pension administration service.
Total
637.27
392.44
314.55
1,344.26
Pension Fund Team
Legal Services
Custody
South Tyneside Council
Custody services for the funds managed by the external managers are provided by:
Town Hall and Civic Offices
The Northern Trust Company
Westoe Road, South Shields, Tyne and Wear
NE33 2RL
50 Bank Street
Canary Wharf
London E14 5NT
AVC Fund provider
Scheme members can make additional voluntary
Banking
contributions (AVCs) to the Fund’s nominated AVC
Banking services for the cash managed in-house are provided by:
provider. These contributions are not included in the
Fund’s assets. During 2017-18 members were able
Barclays Bank p.l.c.
to take out AVC plans with:
38 Bridge Street
Morpeth
The Prudential Assurance Company Limited
Northumberland NE61 1NL
5 Laurence Pountney Hill
London EC4R 0HH
Actuary
Actuarial services for the Fund and the participating employers are provided by:
Aon Hewitt Limited
The Aon Centre
The Leadenhall Building
122 Leadenhall Street
London EC3V 4AN
2017-18 Pension Fund Annual Report
Page 6
Management and Financial Performance and Policy Statement
Investment Strategy Statement
ensuring appropriate management of the investments of the Fund,
23 February 2018
including keeping under review the Fund’s investment strategy and
management structure; and,
Introduction and background
This is the Investment Strategy Statement (“ISS”) of the Northumberland
appointing and reviewing the appointments of investment managers,
County Council Pension Fund (“the Fund”), which is administered by
advisers and consultants.
Northumberland County Council (“the administering authority”). The ISS is
External investment managers have been appointed by the Panel to make the
made in accordance with Regulation 7 of the Local Government Pension
day-to-day investment decisions. Details of the investment managers
Scheme (Management and Investment of Funds) Regulations 2016 (“the
employed by the Fund and the nature of their mandates are included in
Investment Regulations”), in accordance with the Secretary of State’s
Appendix B.
Guidance dated September 2016.
The suitability of particular investments and types of investments
The ISS has been approved by the Fund’s Pension Fund Panel (“the Panel”)
The primary objective of the Fund is to provide pension and lump sum
having taken advice from the Fund’s investment adviser, Mercer. The Panel
benefits for members upon their retirement and/or benefits on death for their
acts on the delegated authority of the administering authority.
dependants, on a defined benefits basis. This funding position is reviewed at
The ISS, which was approved by the Panel on 23 February 2018, is subject to each triennial actuarial valuation, or more frequently as required. The Fund is
periodic review at least every three years and without delay after any
currently assessed to have a deficit in terms of the reserves needed and so
significant change in investment policy. The Panel has consulted on the
the investment strategy is focused on achieving returns in excess of inflation,
contents of the Fund’s investment strategy with such persons as it considers
without taking undue risk.
appropriate.
The Panel aims to hold sufficient assets in the Fund such that, in normal
The administering authority seeks to invest in accordance with the ISS any
market conditions, all accrued pension benefits are fully covered by the value
Fund money that is not needed immediately to make payments from the
of the Fund's assets and that appropriate employer contributions are set (by
Fund. The ISS should be read in conjunction with the Fund’s Funding
the Fund’s actuary) to meet the cost of future benefits accruing. For active
Strategy Statement (dated March 2017).
members of the LGPS, benefits will be based on service completed, salary
and inflation.
The Chartered Institute of Public Finance and Accountancy (CIPFA)
recommends that administering authorities attach a Compliance Statement to The
Fund’s investment objective is to achieve a long term return on the
the ISS, setting out compliance, or reasons for non-compliance, with the six
assets which:
principles of investment practice set out in the December 2009 CIPFA
ensures that, together with employer and member contributions, the Fund
publication
Investment Decision-Making in the Local Government Pension
can meet its long term liabilities; and,
Scheme: A Guide to the Application of the Myners Principles The Fund’s
Compliance Statement is attached as Appendix A.
aims to maximise returns within acceptable risk parameters.
The Panel’s remit includes:
The Panel has translated the objectives into a suitable strategic asset
allocation benchmark for the Fund. This benchmark is consistent with the
Panel’s views on the appropriate balance between generating a satisfactory
2017-18 Pension Fund Annual Report
Page 7
Management and Financial Performance and Policy Statement
long term return on investments whilst taking account of market volatility and
a long term approach must be adopted to building up or reducing allocations
risk and the nature of the Fund’s liabilities.
to the illiquid investments held in property, private equity and infrastructure.
The Fund’s investment strategy is reviewed by the Panel at least every three
The performance of the total Fund and the individual managers is measured
years.
independently by Portfolio Evaluation.
The Fund’s most recent full strategy review, taking into account the results of
Investment of money in a wide variety of investments
the 2016 actuarial valuation, took place in October 2016. All Fund strategy
Asset classes
reviews have been undertaken with advice from the Panel’s investment
The Fund invests in UK and overseas markets including equities, fixed
adviser.
interest, index linked bonds and property through pooled funds. The Fund
also invests in private equity and infrastructure as a partner in pooled funds.
The strategy review considers the implications for the future evolution of the
Fund of adopting a range of alternative investment strategies. At the 2016-17
The Panel reviews the nature of the Fund’s investments and considers new
strategy review, the Panel assessed the likelihood of achieving the long term
(to the Fund) asset classes on a regular basis, with particular reference to
funding target, which was defined as “
achieving a fully funded position within
suitability and diversification, taking advice from a suitably qualified person.
the next 21 years”. The Panel also considered the level of downside risk
The Fund’s target investment strategy is set out below. In line with the
associated with different strategies by identifying the low funding levels which
Regulations, the investment strategy does not permit more than 5% of the
might emerge in the event of adverse experience. The approach helps ensure total value of all investments of fund money to be invested in entities which
that the investment strategy takes due account of the maturity profile of the
are connected with that authority within the meaning of section 212 of the
Fund (in terms of the relative proportions of liabilities in respect of pensioners, Local Government and Public Involvement in Health Act 2007.
deferred and active members), together with the level of disclosed surplus or
deficit at the most recent valuation of the Fund.
The Panel has implemented a mechanism that requires Legal and General,
the Fund’s passive manager, to maintain the overall asset allocation of the
A summary of the expected returns and volatility for each asset class
Fund’s public equities and bonds, rebalanced on a weekly basis to the target
assumed in the 2016-17 strategy review is included in Appendix C.
allocations within prescribed control ranges. This ensures that the Fund’s
The formal monitoring of the Fund’s investments is undertaken by the Panel
liquid assets (i.e. equities and bonds) remain close to the asset allocation set
on a quarterly basis, with advice and input from the Panel’s investment
by the Panel, within control ranges which have been set to minimise the
adviser.
number of transactions involved in rebalancing, whilst ensuring that the Fund
benefits from systematic rebalancing from overvalued to undervalued assets.
In addition, the Panel monitors the strategy on an ongoing basis, focusing on
factors including, but not limited to:
The Fund’s investments in private equity, property and infrastructure are not
rebalanced due to the high costs of transacting in these asset classes.
suitability given the funding level and liability profile;
level of expected risk; and,
outlook for asset returns.
The Panel monitors the Fund’s actual allocation on a regular basis to ensure it
does not deviate significantly from the target allocation, but acknowledges that
2017-18 Pension Fund Annual Report
Page 8
Management and Financial Performance and Policy Statement
Fund asset allocation
Restrictions on investment
The Local Government Pension Scheme
(Management and Investment of Funds) Regulations
Asset
2016 have removed the previous restrictions that
class and
applied to the 2009 Regulations. The Panel’s
target
approach to setting its investment strategy and
asset
Role within
assessing the suitability of different types of
allocation
Allocation range
strategy
investment takes account of the various risks
Equities
24% in UK equities
60%
56% to 64%
- return seeking
involved and a regular rebalancing policy is applied
28% in overseas equities
- diversification
to maintain the asset split close to the agreed asset
7.0% in US
- liquidity
allocation target. Therefore it is not felt necessary to
7.0% in Europe
- inflation protection
set additional restrictions on investments.
3.5% in Japan
- participation in
Managers
3.5% in Asia Pacific (Ex Japan)
economic growth
The Panel has appointed a number of investment
7.0% in Emerging Markets
managers all of whom are authorised under the
8% in RAFI 3000
Financial Services and Markets Act 2000 to
undertake investment business. The Panel, after
seeking appropriate investment advice, has agreed
Bonds
15% in index linked securities
25%
21% to 29%
- liability matching
specific benchmarks with each manager so that, in
10% in corporate bond securities
- diversification
aggregate, they are consistent with the overall asset
- liquidity
allocation for the Fund. The Fund’s active investment
- inflation protection
managers hold a mix of investments which reflect
Illiquids
5% in property
5%
3% to 7%
- return seeking
their views relative to their respective benchmarks.
5% in private equity investments
5%
3% to 7%
- diversification
Legal and General, the Fund’s passive manager,
5% in infrastructure investments
5%
3% to 7%
- inflation protection
holds investments within each pooled fund that
- participation in
reflects the benchmark indices tracked.
economic growth
Following consideration of the efficiency, liquidity and
and illiquidity
level of transaction costs likely to prevail within each
market, the Panel has determined that a proportion
premium
of the Fund should be managed on a passive basis.
Total
100%
100%
2017-18 Pension Fund Annual Report
Page 9
Management and Financial Performance and Policy Statement
Risk measurement and management
Type of mandate
Investment manager(s)
The Panel accepts that the Fund must take
One index tracking (passive) manager
Legal and General
75%
investment risk in order to obtain returns to help
One corporate bond (active) manager
Wellington
10%
achieve its funding objectives. There is an active risk
Two property unit trust (active) managers
BlackRock and Schroder
5%
management programme in place that aims to help
Morgan Stanley, NB Crossroads and
the Panel identify the risks being taken and put in
Private equity fund of funds investment vehicles
Pantheon
5%
place processes to manage, measure, monitor and
Infrastructure investment vehicles
Antin and Global Infrastructure Partners
5%
(where possible) mitigate those risks.
Total
100%
The principal risks affecting the Fund are:
75% of the total Fund value is managed by Legal and General and this splits into 15% index linked
financial mismatch, meaning the risk that Fund
gilts; c 24% UK equities; and c 36% overseas equities (the split of UK and overseas equities is not
assets fail to grow in line with the developing
exact because part of the equities track the RAFI 3000 index which is a global equity fund).
cost of meeting the liabilities;
The Fund’s current allocation to passively managed investments is higher than in the past and wil be
changing demographics/regulations, meaning
reviewed in light of the BCPP Ltd sub-funds to be made available under pooling.
the risk that longevity improves and other
The Panel’s expectations in respect of returns from the Fund’s investments are expressed through
demographic factors change, or the Scheme
itself changes, increasing the cost of Fund
achievable and prudent objectives and restrictions that have been set for each mandate.
benefits; and,
When the appointment of investment managers is under consideration, the Fund requests and
considers fees quotations on a range of structures, for example ad valorem, performance based and
systemic risk, meaning the possibility of an
flat fees. The fees that have been accepted are those that the Fund considers will be the most
interlinked and simultaneous failure of several
economically advantageous to it over the life of the mandate.
asset classes and/or investment managers,
possibly compounded by financial ‘contagion’,
Details of the investment managers employed by the Fund and the nature of their mandates are
resulting in an increase in the cost of meeting
included in Appendix B.
the Fund’s liabilities.
2017-18 Pension Fund Annual Report
Page 10
Management and Financial Performance and Policy Statement
The Panel seeks to mitigate financial mismatch and
illiquidity, meaning the risk that the Fund
benefits paid to members represented 0.4% in
systemic risk through a well-diversified portfolio
cannot meet its immediate liabilities because it
2016-17, 0.9% in 2015-16 and 0.6% in 2014-
capable of participating in economic growth. The
has insufficient liquid assets;
15 of the Fund’s net assets, and the Fund
Panel also seeks to understand the assumptions
returned 11.8% per annum over the three
currency, meaning the risk that the currency
used in any strategy review and compares these to
years 2014-17);
of the Fund’s assets underperforms relative to
its own views.
sterling (i.e. the currency of the liabilities);
the Fund invests in a range of overseas
The Panel assesses risk relative to the strategic
markets which provides a diversified approach
benchmark by monitoring the Fund’s asset
environmental, social and governance
to currency markets and the Panel considers
(“ESG”), meaning the risk that ESG related
allocation and investment returns relative to the
the Fund’s currency risk during its risk
factors reduce the Fund’s ability to generate
benchmark. All three of the principal risks are
analysis;
measured as part of the Fund’s triennial actuarial
the long term returns; and,
the Fund hedges the foreign currency
valuation.
manager underperformance, meaning the
exposure on 50% of the North American equity
failure by the investment managers to achieve
The Fund is subject to a range of demographic
holdings and the European (ex UK) equity
the rate of investment return assumed in
risks, but with particular reference to investment
holdings with Legal and General;
setting their mandates.
strategy, the Pension Fund Panel is aware of the
Fund’s increasing matur
the Fund’s allocation to index linked gilts
ity. The more mature a
The Panel measures and manages asset risks as
provides explicit inflation protection and to real
pension fund, the more likely it is that
follows:
assets such as property, infrastructure and
disinvestments will be needed to pay benefits, and
the strategic asset allocation benchmark
equities provides the expectation of achieving
the less investment risk likely to be taken. Maturity
invests in a diversified range of asset classes,
returns in excess of inflation over time;
is considered as part of the investment strategy
and automatic rebalancing arrangements
review.
ensure the Fund’s actual allocation does not
the Panel has considered the risk of
underperformance by any single investment
The Fund is subject to risk of Scheme and
deviate substantially from its target;
manager and has reduced this risk by
guidance changes which may increase the cost of
the Fund invests in a range of investment
appointing more than one manager and having
administering the Scheme or the value of the
Fund’s liabilities.
mandates each of which has a defined
a proportion of the Fund’s assets managed on
objective, performance benchmark and
a passive basis;
Asset risks
manager process which, taken in aggregate,
The principal asset risks affecting the Fund are:
help reduce the Fund’s asset concentration
the Panel assesses the Fund’s managers’
performance on a regular basis, and will take
concentration, meaning the risk that a
risk;
steps, including potentially replacing one or
significant allocation to any single asset
the majority of the Fund’s assets are managed
more manager(s), if it has concerns over future
category and its underperformance relative to
by a passive manager in funds that can be
performance prospects; and,
expectation would result in difficulties in
realised, with minimal transactions costs, on a
achieving funding objectives;
weekly basis at short notice (the Fund’s
the Panel recognises the importance of
obtaining timely and appropriate training and
shortfall of income from contributions over
2017-18 Pension Fund Annual Report
Page 11
Management and Financial Performance and Policy Statement
advice from a suitably qualified adviser, to
agreement and through the ongoing monitoring
Structure and governance of BCPP Ltd
minimise the Fund’s governance risk.
of the custodial arrangements;
In June 2017, the administering authority, together
The Fund’s approach to managing ESG risks is set
with the eleven other LGPS administering
monitoring and management of custody risk in authorities named below, entered into the Inter
out later in this document.
relation to pooled funds has been delegated to Authority Agreement and Shareholders Agreement
the appointed investment managers; and,
Other provider risk
to become the sole shareholders in Border to
transition risk, meaning the risk of incurring
the Fund participates in low risk stock lending
Coast Pensions Partnership Limited (BCPP Ltd)
unexpected costs in relation to the transition of
programmes run by Legal and General, its
and to establish the Joint Committee to oversee its
assets between managers;
passive manager, where the exposure is
investment performance.
through lending programmes in certain of the
custody risk, meaning the risk of losing
BCPP Ltd has been established as an entity to act
pooled investment vehicles, and delegates the
economic rights to Fund assets, when held in
as a FCA regulated alternative investment fund
monitoring and management of stock lending
custody or when being traded;
manager (“AIFM”) to run and operate collective
risk to the manager.
investment vehicles to allow the administering
credit default, meaning the possibility of
A separate schedule of risks that the Fund
authorities to pool their respective investments. It
default of a counterparty in meeting its
monitors is set out in the Fund’s Funding Strategy
will become operational after June 2018.
obligations; and,
Statement.
The twelve administering authorities that have
stock lending, meaning the possibility of
Pooling investments, use of collective
agreed to share legal ownership, control and
default and loss of economic rights to Fund
investment vehicles and shared services
decisive influence over BCPP Ltd are:
assets.
The administering authority is a participant in the
Bedfordshire;
The Panel measures and manages other provider
Border to Coast Pensions Partnership (BCPP)
risks as follows:
Pool.
Cumbria;
when carrying out transitions, the Panel seeks In December 2016, the Department for
Durham;
suitable professional advice;
Communities and Local Government’s Secretary of East Riding;
State confirmed that the BCPP pooling proposal
the Panel monitors and manages risks in these met the investment reform and criteria published in Lincolnshire;
areas through a process of regular scrutiny of
November 2015, which required authorities to
its providers (including obtaining the relevant
North Yorkshire;
submit proposals describing pooling arrangements,
assurance reports on internal controls for
having regard to each of four criteria:
Northumberland;
investment managers and the custodian), and
via advice from the Fund’s investment adviser, A. Asset pool(s) that achieve the benefits of scale; South Yorkshire ;
Mercer, who carries out ongoing
B. Strong governance and decision making;
Surrey;
manager/custodian research and
assessments;
C. Reduced costs and excellent value for money;
Teesside;
and,
custody risk is controlled through the
Tyne and Wear; and,
restrictions set out in the custodian’s
D. An improved capacity to invest in infrastructure.
2017-18 Pension Fund Annual Report
Page 12
Management and Financial Performance and Policy Statement
Warwickshire.
these asset classes will be made through
money. The next such review will take place no
BCPP Ltd once suitable sub-funds have been
later than 2020.
The administering authority is not delegating its key
established; and,
strategic asset allocation or other investment
Other use of collective investment vehicles
decision making powers or investor rights to the
investments in pooled property funds, though
Since 2011, the Fund has only invested via pooled
BCPP Pool. Instead, these will be retained by the
new allocations to property will be made
investment vehicles. The biggest provider of
Panel, subject to consideration of any
through BCPP Ltd once suitable sub-funds
investment management services to the Fund,
recommendations the BCPP Joint Committee may
have been established and existing pooled
Legal and General, is one of Europe’s largest asset
make.
investments will be transferred to BCPP Ltd
managers and a major global investor, and the
once a cost effective way of transferring is
Fund has benefited from economies of scale
Assets to be invested in BCPP Ltd
The Fund’s intention is to invest its assets via
established.
achievable from such a provider.
BCPP Ltd as and when suitable sub-funds become The Fund’s passively managed investments wil
The authority’s approach to shared services
available.
remain outside of BCPP Ltd because the legal
The authority undertakes LGPS administration in a
The key criteria for the Fund’s assessment of
structure in which they are held (i.e. life policies) is
shared service with Tyne and Wear Pension Fund,
the most cost effective structure currently available, from January 2018.
BCPP Ltd sub-funds will be as follows:
and effectively prevents transfer to BCPP Ltd.
Social, environmental or corporate governance
that the sub-fund enables access to an
However, since April 2016, the Fund has benefited
policy
appropriate investment that meets the
from joint procurement arrangements which Legal
It is recognised that ESG factors can influence long
objectives and benchmark criteria set by the
and General entered into with the administering
term investment performance and the ability to
Fund; and,
authorities collaborating to establish BCPP Ltd.
achieve long term sustainable returns. The Panel
that there is financial benefit to the Fund in
The Fund’s investments in closed end funds (i.e.
considers the Fund’s approach to responsible
investing in the sub-fund offered by BCPP Ltd. private equity and infrastructure) will remain with
investment in two key areas:
At the time of preparing this statement, the detailed the Fund for the remaining fixed life of these
sustainable investment/ESG factors, by
parameters and objectives of the BCPP sub-fund
investment vehicles, until all assets have been
considering the financial impact of
range, and timetable were not finalised.
returned to the Fund. There is no liquid secondary
environmental, social and governance (ESG)
market for these types of investment and there is a
The Fund has determined that the following assets
factors on its investments; and,
risk that sales would only be possible at material
will be held outside of BCPP Ltd:
discounts to net asset value. Therefore, the Panel
stewardship and governance, by acting as
passive investments with Legal and General
is of the view that it is in the best interests of the
responsible and active investors, through
held in life policies, though these investments
Fund to retain these investments.
considered voting of shares, and engaging
would be transferred to BCPP Ltd should
with investee company management as part of
Any assets not invested in BCPP Ltd will be
suitable, value for money passively managed
the investment process.
reviewed at least every three years to determine
sub-funds be established;
whether the rationale remains appropriate, and
The Panel’s view can be summarised as follows:
investments in closed end private equity and
whether it continues to demonstrate value for
the Panel believes that good corporate
infrastructure funds, though new allocations to
governance and the informed use of voting
2017-18 Pension Fund Annual Report
Page 13
Management and Financial Performance and Policy Statement
rights are an integral part of the investment
To date, the Panel has not taken into account non-
considers that the Fund’s and Legal and General’s
process that can improve the performance of
financial factors when selecting, retaining, or
interests are aligned, as both seek to enhance long
the companies in which the Fund invests;
realising its investments. The Panel understands
term shareholder value.
the Fund is not able to exclude investments in
the Fund’s public equity investment manager’s
The Fund encourages Legal and General to vote
order to pursue boycotts, divestment and sanctions
policy on corporate governance and use of
shares in all markets, where practical.
against foreign nations and UK defence industries,
voting rights is reviewed by the Panel
other than where formal legal sanctions,
Stewardship
periodically;
embargoes and restrictions have been put in place In 2018-19, the Panel will consider the Fund
the Fund’s UK equity investment manager
by the Government.
becoming a signatory to the UK Stewardship Code.
must be a signatory to the UK Stewardship
The Panel also requires Legal and General to
The Fund does not hold any assets which it deems
Code issued by the Financial Reporting
comply with the Code.
to be social investments.
Council;
The Fund is a member of the Local Authority
To date, the Panel’s approach to social
the Fund’s public equity investment manager
Pension Fund Forum (LAPFF) through which it
investments has largely been to delegate this to the
should apply the principles of the UK
collectively exercises a voice across a range of
Fund’s investment managers as part of their overall
Stewardship Code to overseas holdings;
corporate governance issues.
ESG duties.
the Fund reviews ESG ratings for each
Scheme members have the option of paying
manager provided quarterly by Mercer;
additional voluntary contributions. When doing so,
the Panel requires its UK equity investment
scheme members must choose between a number
manager to vote the Fund’s effective
of different types of investments, one of which is an
shareholdings in the FTSE 350 in accordance
ethically screened portfolio.
with Pensions & Investment Research
The exercise of rights (including voting rights)
Consultants (PIRC) Limited’s PIRC’s
attaching to investments
Shareowner Voting Guidelines, and reviews
Voting rights
PIRC’s policy periodically;
The Panel has delegated the exercise of voting
it is important that use of voting rights is
rights to Legal and General with a requirement to:
carried out in an informed manner, and the
follow Legal and General’s own share voting
investment manager(s) or a specialist share
policy for all public equities except the FTSE
voting adviser are best placed to undertake it;
350 companies; and,
and,
follow PIRC’s share voting advice for the
the process through which the Fund appoints a
Fund’s effective shareholding in the FTSE 350
manager includes an assessment of each
companies.
candidate’s approach to corporate
governance.
The Panel reviews PIRC’s and Legal and General’s
share voting policies periodically. The Panel
2017-18 Pension Fund Annual Report
Page 14
Management and Financial Performance and Policy Statement
Appendices
Appendix A
Compliance with CIPFA’s
Investment Decision-Making in the Local Government Pension Scheme: A Guide to the Application of the
Myners Principles.
Appendix B
The Fund’s investment manager arrangements and benchmarks.
Appendix C
Long term expected returns.
2017-18 Pension Fund Annual Report
Page 15
Management and Financial Performance and Policy Statement
Appendix A
Statement of Compliance with Myners
a decision on a particular issue is planned. This
Compliance Statement
Principles
provides Panel members with sufficient knowledge
Local Government Pension Scheme (Management Details of the Fund’s
compliance are described
to be able to evaluate and challenge the advice
and Investment of Funds) (Amendment)
below.
they receive.
Regulations 2009 effectively required administering
Principle 1: Effective decision making
The investment adviser (who was selected and
authorities to state the extent to which they
Administering authorities should ensure that:
appointed by the Pension Fund Panel) attends all
complied with the six principles of investment
meetings to provide advice other than those
practice set out in the document published in
decisions are taken by persons or organisations meetings where attendance would result in conflict
December 2009 by CIPFA, the Chartered Institute
with the skills, knowledge, advice and resources of interests.
of Public Finance and Accountancy, and called
necessary to take them effectively and monitor
Investment Decision-Making in the Local
their implementation;
and,
The Panel focuses on setting the strategy for the
Government Pension Scheme: A Guide to the
pension fund and monitoring performance. The
those persons or organisations should have
Application of the Myners Principles and give the
Panel delegates the day-to-day investment
sufficient expertise to be able to evaluate and
reasons for not complying where they do not do so.
decisions to external fund managers.
challenge the advice they receive, and manage
The 2016 Investment Regulations are silent on this
conflicts of interest.
The Panel and the administering authority review
requirement, but CIPFA nevertheless recommends
the Panel’s structure and composition when
that a Compliance Statement be appended to the
Northumberland County Council Pension Fund has necessary.
ISS.
a dedicated pensions committee, known as the
Pension Fund Panel, which is supported by
The Fund maintains a Governance Policy and
suitably experienced and qualified officers, the
Compliance Statement in accordance with
Fund actuary and an independent investment
regulation 55 of the Local Government Pension
adviser. Other specialist advisers are employed to
Scheme Regulations 2013. This contains further
provide advice on specific issues such as
details of the decision making processes.
performance measurement. External advice is
Panel papers are despatched to members to be
obtained as required when appropriate in-house
received at least 5 days in advance of each
expertise is not available.
meeting to allow members sufficient time to read
The Fund’s Training Strategy provides the
the papers.
opportunity for members to attend externally run
Conflicts of interests are managed actively. At each
courses such as the tailored three-day training
Panel meeting, elected members are asked to
course run by the Employers’ Organisation for
highlight conflicts of interests.
Local Government. This is in addition to the
information provided in Pension Fund Panel
papers, and by investment managers and advisers
at the meetings. Tailored training is organised, for
example on infrastructure as an asset class, when
2017-18 Pension Fund Annual Report
Page 16
Management and Financial Performance and Policy Statement
Principle 2: Clear objectives
participating employers when setting the employer
The County Council maintains a risk register which
An overall investment objective(s) should be set
contribution rates and the need to maintain stability includes risks relating to the Pension Fund. The
out for the fund that take account of the scheme’s
in employer contribution rates.
risk register is reported to the Risk Appraisal Panel.
liabilities, the potential impact on local tax payers,
Principle 3: Risk and liabilities
Principle 4: Performance assessment
the strength of the covenant for non-local authority
In setting and reviewing their investment strategy,
Arrangements should be in place for the formal
employers, and the attitude to risk of both the
administering authorities should take account of the measurement of performance of the investments,
administering authority and scheme employers,
form and structure of liabilities.
investment managers and advisers.
and these should be clearly communicated to
advisers and investment managers.
These include the implications for local tax payers,
Administering authorities should also periodically
the strength of the covenant for participating
make a formal assessment of their own
The Investment Strategy Statement and the
employers, the risk of their default and longevity
effectiveness as a decision-making body and report
Funding Strategy Statement define the Fund’s
risk.
on this to scheme members.
primary funding objectives. A long term view is
taken in setting those objectives.
The Fund takes advice from the actuary regarding
The performance of the Fund and of the individual
the nature of its liabilities. Asset-liability modelling
fund managers is monitored quarterly by officers,
Asset-liability modelling is undertaken by the
is undertaken periodically to aid the setting of
the investment adviser and the Pension Fund
investment adviser to aid the setting of investment
investment strategy, and these exercises
Panel. Investment managers are given specific
strategy and to ensure that the Panel understand
specifically take account of covenant strength when performance and risk targets and these are
the risks. The Fund has a scheme-specific
assessing risk tolerance. Asset-liability modelling is assessed as part of the monitoring process.
investment strategy (i.e. a customised benchmark). undertaken by the investment adviser who obtains The Pension Fund Panel monitors performance
The Pension Fund Panel’s attitude to risk is taken
information from the actuary regarding liabilities to
against planned activities shown in the
into account in setting the investment strategy.
use in the model. All risk measurement in this
Northumberland County Council Pension Fund
context is performed with reference to the liabilities.
Reviews of investment strategy focus on the split
annual Action Plan and reviews the appointment of
between broad asset classes, i.e. equities, bonds
The funding strategy for the Fund is expressed in
advisers when appropriate.
and alternative investments.
relation to the solvency of the Fund. Consideration
Training and attendance of Pension Fund Panel
is given to the affordability of employer
Investment management agreements set clear
members are monitored and reported on a regular
contributions at the actuarial valuation.
benchmarks and risk parameters and include the
basis.
requirement to comply with the Fund’s Investment
The Pension Fund operates within the internal
Principle 5: Responsible ownership
Strategy Statement (formerly the Statement of
control arrangements administered by the County
Administering authorities should:
Investment Principles).
Council which are subject to internal and external
audit. The external auditors report annually to the
adopt, or ensure their investment managers
The appointments of advisers are reviewed
Pension Fund Panel and the County Council’s
adopt, the Institutional Shareholders’
regularly. Investment and actuarial advisers are
Audit Committee.
Committee Statement of Principles on the
appointed under separate contracts.
responsibilities of shareholders and agents;
The Funding Strategy requires specific
consideration of the covenants of the Fund’s
2017-18 Pension Fund Annual Report
Page 17
Management and Financial Performance and Policy Statement
include a statement of their policy on
regularly. Stakeholders are consulted on changes.
responsible ownership in the statement of
Documents are available on the Northumberland
investment principles; and,
County Council website.
report periodically to members on the
The Fund produces an annual report and accounts
discharge of such responsibilities.
in which the key documents (listed above) are
reproduced in full. A copy of the annual report is
The Fund instructs its UK equity manager to vote in
sent to all participating employers and it is
line with PIRC’s recommendations on the FTSE
published on the website.
350. For other equity holdings the Fund delegates
its voting to the relevant manager i.e. Legal and
There is a regular (usually annual) meeting held for
General.
employers, and a representative of the (non-
County Council) employers sits on the Pension
The Fund’s policy on responsible ownership is
Fund Panel.
included in the Investment Strategy Statement.
The Fund produces regular newsletters for
The Fund’s annual report and accounts reproduces pensioner members and for active members and
the Investment Strategy Statement in full. The
briefings for employers. The website is updated
annual report and accounts and the Investment
regularly.
Strategy Statement is available on the website, and
is sent to members on request.
Agenda papers for the Pension Fund Panel are
published on the website.
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; and,
provide regular communication to scheme
members in the form they consider most
appropriate.
The Fund’s policy statements, including its
Governance Compliance Statement, Investment
Strategy Statement, Statement of Policy
Concerning Communication, annual Business Plan
and Funding Strategy Statement are maintained
2017-18 Pension Fund Annual Report
Page 18
Management and Financial Performance and Policy Statement
Appendix B
The Fund’s investment manager arrangements and benchmarks
To track the sterling total return of the FTSE All Share Index to within +/- 0.25% per annum
Legal & General Investment Management
UK Equities
for two years in three.
To track the sterling total return of the FTSE World North America Index (less withholding
Legal & General Investment Management
North American Equities
tax if applicable) to within +/-0.5% per annum for two years in three.
To track the sterling total return of the FTSE World North America Index (less withholding
Legal & General Investment Management
North American Equities GPB currency hedged
tax if applicable) hedged to within +/-0.5% per annum for two years in three.
To track the sterling total return of the FTSE Developed Europe (ex UK) Index (less
Legal & General Investment Management
Europe ex UK Equities
withholding tax if applicable) to within +/- 0.5% per annum for two years in three.
To track the sterling total return of the FTSE Developed Europe (ex UK) Index (less
Legal & General Investment Management
Europe ex UK Equities GPB currency hedged
withholding tax if applicable) hedged to within +/- 0.5% per annum for two years in three.
To track the sterling total return of the FTSE Japan Index to within +/- 0.5% per annum for
Legal & General Investment Management
Japanese Equities
two years in three.
To track the sterling total return of the FTSE Developed Asia Pacific (ex Japan) Index (less
Legal & General Investment Management
Asia Pacific ex Japan Equities
withholding tax if applicable) to within +/- 0.75% per annum for two years in three.
To track the sterling total return of the FTSE Emerging Index (less withholding tax if
Legal & General Investment Management
Emerging Market Equities
applicable) to within +/- 1.5% per annum for two years in three.
To track the total return of the FTSE RAFI All World 3000 Index Fund to within +/- 1.0% per
Legal & General Investment Management
Global Equities
annum for two years in three.
To track the sterling total return on the FTSE Actuaries Index-Linked Over Five Year Index
Legal & General Investment Management
Index-Linked Gilts
to within +/-0.25% per annum for two years in three.
To outperform the Bank of America Merrill Lynch 3 Month T-Bill Hedged to GBP by 4.0 to
Wellington Management
Global Total Return Fund
6.0% p.a.
To outperform a composite of the Bank of America Merrill Lynch 3 Month T-Bill Hedged to
Wellington Management
Multi-Asset Credit Fund
GBP by 2.0% p.a.
BlackRock
UK property
To outperform the IPD UK All Balanced Funds Index by 0.5% p.a.
Schroder
UK property
To outperform the IPD UK All Balanced Funds Index by 0.5% p.a.
Rockspring
UK property
To outperform the IPD UK All Balanced Funds Index by 0.5% p.a.
Morgan Stanley
Private Equity Fund of Funds (Private Markets III, IV
and
GDO Fund)
To outperform the FTSE All World Index
Neuberger Berman
Private Equity Fund of Funds (Crossroads Fund XVIII and XX)
To outperform the FTSE All World Index
Pantheon
Private Equity Fund of Funds (Global Select 2017)
To outperform the FTSE All World Index
Global Infrastructure Partners
Infrastructure - GIP Fund II
To achieve and internal rate of return of 8% p.a. net of fees
Antin Infrastructure Partners
Infrastructure - Antin Fund II
To achieve and internal rate of return of 8% p.a. net of fees
2017-18 Pension Fund Annual Report
Page 19
Management and Financial Performance and Policy Statement
Appendix C
Long term expected returns
Asset class
Return
Absolute volatility
(% p.a.)
(% p.a.)
Developed global equities
4.5
19.7
Emerging market equities
4.4
30.2
Long dated index-linked gilts
0.8
9
All stocks corporate bonds
2.2
5.8
Conventional property
3.6
14.5
Private equity
5.5
25.9
Infrastructure unlisted equity
4.7
15.7
The table above shows the absolute expected returns (10 year geometric averages), net of fees, and the absolute volatilities (first year’s standard deviations)
at 30 September 2017.
2017-18 Pension Fund Annual Report
Page 20
Management and Financial Performance and Policy Statement
Funding Strategy Statement
In addition, the administering authority has had
Links to investment policy set out in the
March 2017
regard to the Fund’s Investment Strategy
Statement of Investment Principles
1. Introduction
Statement published under Regulation 7 of the
The Authority has produced this Funding Strategy
Overview
Local Government Pension Scheme (Management Statement having taken an overall view of the level
This Statement, originally prepared in accordance
and Investment of Funds) Regulations 2016 (the
of risk inherent in the investment policy set out in
with Regulation 76A of the Local Government
Investment Regulations).
the Statement of Investment Principles /
Regulations 1997, has been reviewed in
Investment Strategy Statement and the funding
The Fund Actuary, Aon Hewitt Limited, has also
accordance with Regulation 58 of the Local
strategy set out in this Statement.
been consulted on the contents of this Statement.
Government Pension Scheme Regulations 2013.
The assets that most closely match the liabilities of
Purpose of this Statement
The Statement describes Northumberland County
the Fund are fixed interest and index-linked
Council’s strategy, in its capacity as administering
The main purpose of this Funding Strategy
Government bonds of appropriate term relative to
authority (“the administering authority”), for the
Statement is to set out the processes by which the
the liabilities. The Fund’s asset allocation as set out
administering authority:
funding of the Northumberland County Council
in the Investment Strategy Statement invests a
Pension Fund (“the Fund”).
establishes a clear and transparent funding
significant proportion of the Fund in assets such as
strategy, specific to the Fund, which will identify
As required by Regulation 58(4)(a) (as amended)
equities which are expected, but not guaranteed, to
how employers’ pension liabilities are best met
of the Local Government Pension Scheme
produce higher returns than Government bonds in
Regulations 2013 (“the 2013 Regulations”), this
going forward;
the long term. The administering authority has
Statement has been prepared having regard to the supports the desirability of maintaining as
agreed with the Fund Actuary that the Funding
guidance set out in the document published in
nearly constant a primary rate of contributions
Target on the ongoing basis will be set after
September 2016 by CIPFA, the Chartered Institute
as possible, as defined in Regulation 62(5) of
making some allowance for this higher anticipated
of Public Finance and Accountancy and called
the 2013 Regulations;
return. However, the administering authority
“Preparing and Maintaining a Funding Strategy
recognises that outperformance is not guaranteed
Statement in the LGPS” (2016 edition).
ensures that the regulatory requirements to set
and that, in the absence of any other effects, if the
contributions so as to ensure the solvency and
higher expected returns are not achieved the
Consultation
long-term cost efficiency of the Fund are met;
solvency position of the Fund will deteriorate.
In accordance with Regulation 58(3) of the 2013
takes a prudent longer-term view of funding the
Regulations, all appropriate persons (including
The funding strategy recognises the investment
Fund’s liabilities; and,
employers participating within the Northumberland
targets and the inherent volatility arising from the
County Council Pension Fund and the principal
noting that whilst the funding strategy
investment strategy, by being based on financial
trade unions representing the contributors) have
applicable to individual employers or categories assumptions which are consistent with the
been consulted on the contents of this Statement
of employers must be reflected in the Funding
expected return on the investments held by the
and their views have been taken into account in
Strategy Statement, its focus should at all times Fund, and by including measures that can be used
formulating the Statement. However, the Statement
be on those actions which are in the best long
to smooth out the impact of such volatility.
describes a single strategy for the Fund as a
term interests of the Fund.
The administering authority will continue to review
whole.
both documents to ensure that the overall risk
2017-18 Pension Fund Annual Report
Page 21
Management and Financial Performance and Policy Statement
profile remains appropriate including, where
as nearly a constant primary contribution rate
administering authority invests a substantial
necessary, commissioning asset liability modelling
as possible.
proportion of the Fund in such assets. However,
or other analysis techniques.
these assets are more risky in nature, and that risk
b) To maintain as nearly constant an overall
can manifest itself in volatile returns over short
Review of Statement
contribution rate as possible.
term periods, and a failure to deliver the anticipated
The administering authority undertook its latest
The administering authority recognises that the
returns in the long term.
substantive review of this Statement between
requirement to keep employer contribution rates as
February and March 2017.
This short term volatility in investment returns can
nearly constant as possible can run counter to the
produce a consequent volatility in the measured
The administering authority will formally review this following requirements:
funding position of the Fund at successive actuarial
Statement as part of each triennial valuation of the
the regulatory requirement to secure solvency
valuations, with knock on effects to employer
Fund unless circumstances arise which require
and long term cost efficiency which should be
contribution rates. The impact on employer rates
earlier action.
assessed in light of the risk profile of the Fund
can be mitigated by use of smoothing adjustments
The administering authority will monitor the funding
and risk appetite of the administering authority
at each valuation.
position of the Fund on an approximate basis at
and employers;
The administering authority recognises that there is
regular intervals between actuarial valuations and
the requirement that the costs should be
a balance to be struck between the investment
will discuss with the Fund Actuary whether any
reasonable to Scheduled and Admission
policy adopted, the smoothing mechanisms used at
significant changes have arisen that require action.
Bodies, other bodies and to taxpayers (subject
valuations, and the resultant stability of employer
2. Aims and Purpose of the Fund
to not taking undue risks); and,
contribution rates from one valuation period to the
Purpose of the Fund
next.
maximising returns from investments within
The purpose of the Fund is to invest monies in
reasonable risk parameters (see (e) below).
The administering authority also recognises that
respect of contributions, transfer values and
the position is potentially more volatile for
investment income to produce a Fund to pay
Producing low volatility in employer contribution
Admission Bodies with short term contracts, where
Scheme benefits over the long term and to pay out rates requires material investment in assets which
utilisation of smoothing mechanisms is less
monies in respect of the Scheme benefits, transfer
‘match’ the employers’ liabilities. In this context,
appropriate.
values, costs, charges and expenses.
‘match’ means assets which behave in a similar
manner to the liabilities as economic conditions
c) To ensure that sufficient resources are
Aims of the Fund
alter. For the liabilities represented by benefits
available to meet all liabilities as they fall due.
The aims of the Fund are set out under a) to e)
payable by the Local Government Pension
below. Aims a), c), d) and e) reflect requirements of
The administering authority recognises the need to
Scheme, such assets would tend to comprise gilt
the Scheme legislation and associated CIPFA
ensure that the Fund has, at all times, sufficient
edged investments.
guidance. b) is specific to the Fund.
liquid assets to be able to pay pensions, transfer
Other classes of assets, such as stocks and
values, costs, charges and other expenses. It is the
a) To comply with Regulation 62 of the 2013
property, are perceived to offer higher long term
administering authority’s policy that such
Regulations and specifically to adequately fund rates of return, on average, and consistent with the expenditure is met, in the first instance, from
benefits to secure the Fund's solvency while
requirement to maximise the returns from
incoming employer and employee contributions to
taking account of the desirability of maintaining
investments within reasonable risk parameters, the avoid the expense of disinvesting assets. The
2017-18 Pension Fund Annual Report
Page 22
Management and Financial Performance and Policy Statement
administering authority monitors the position to
limiting concentration of risk by developing a
other employers whose participation in the Fund
ensure that all cash requirements can be met.
diversified investment strategy; and,
has ceased) by:
d) To manage employers’ liabilities effectively.
monitoring the mis-matching risk, i.e. the risk
requesting that the Fund Actuary calculates any
deficiency at the date of the exit; and,
The administering authority seeks to ensure that all
that the investments do not move in line with
employers’ liabilities are managed effectively. In a
the Fund's liabilities.
notifying the body that it must meet any
funding context, this is achieved by seeking regular
3. Responsibilities of the key parties
deficiency at exit.
actuarial advice, ensuring that employers are kept
The three parties whose responsibilities to the
c) Pay from the Fund the relevant entitlements as
informed and consulted, and through regular
Fund are of particular relevance are the
set out by Regulations 22 to 52 of the 2013
monitoring of the funding position and the outlook
administering authority, the individual employers
Regulations.
for employers' contributions.
and the Fund Actuary.
d) Invest surplus monies in accordance with the
e) To maximise the returns from investments
Their key responsibilities are as follows:
Regulations.
within reasonable risk parameters.
The administering authority will:
The administering authority will comply with
The administering authority recognises the
a) Administer the Fund.
Regulation 7 of the Investment Regulations, which
desirability of maximising investment income within
states that surplus fund money, not needed
reasonable risk parameters. Investment returns
b) Collect investment income and other amounts immediately, must be invested in a wide variety of
higher than those available on government bonds
due to the Fund as set out in the Regulations
suitable investments, after taking proper advice.
are sought through investment in other asset
including employer and employee contributions
classes, such as stocks and property. The
and, as far as it is able, ensure these
e) Ensure that cash is available to meet liabilities
administering authority ensures that risk
contributions are paid by the due date.
as and when they fall due.
parameters are reasonable by:
Individual employers must pay contributions in
The administering authority recognises this duty
restricting investment to the levels permitted by accordance with Regulations 67 to 70 of the 2013
and discharges it in the manner set out in section
the Investment Regulations;
Regulations. The administering authority will
2(c) above.
ensure that all employers are aware of these
restricting investment to asset classes generally
f) Manage the valuation process in consultation
requirements especially the requirement of the
recognised as appropriate for UK pension
with the Fund Actuary.
Pensions Act 1995 that members’ contributions are
funds;
paid by the 19th of the month following the month
The administering authority ensures it
analysing the volatility and absolute return risks that it is paid by the member. The administering
communicates effectively with the Fund Actuary
represented by those asset classes in
authority may charge interest on late contributions
to;
collaboration with the Fund’s actuary,
in accordance with Regulation 71 of the 2013
agree timescales for the supply of information
investment advisers and fund managers and
Regulations.
and provision of valuation results;
ensuring that they remain consistent with the
The administering authority will ensure that action
risk and return profiles anticipated in the
ensure provision of data of suitable accuracy;
is taken to recover assets from Admission Bodies
funding strategy;
whose admission agreement has ceased (and from
2017-18 Pension Fund Annual Report
Page 23
Management and Financial Performance and Policy Statement
ensure that the Fund Actuary is clear about the The Investment Strategy Statement will be formally notify the administering authority promptly of all
content of the Funding Strategy Statement;
reviewed annually, unless circumstances dictate
changes to membership, or other changes
earlier amendment.
which affect future funding;
ensure that participating employers receive
appropriate communication throughout the
The administering authority will formally review this pay any exit payments required in the event of
process; and,
Statement as part of each triennial valuation
their ceasing participation in the Fund; and,
process, unless circumstances arise which require
ensure that reports are made available as
note and if desired respond to any consultation
earlier action.
required by guidance and regulation.
regarding the Funding Strategy Statement, the
i) Take measures as set out in the 2013
Investment Strategy Statement or other
g) Prepare and maintain an Investment Strategy
Regulations to safeguard the Fund against the
policies.
Statement and a Funding Strategy Statement
consequences of employer default.
after due consultation with interested parties.
The Fund Actuary will:
j) Effectively manage any potential conflicts of
The administering authority will ensure that both
a) Prepare triennial actuarial valuations including
interest arising from its dual role as both
documents are prepared and maintained in the
the setting of employers’ contribution rates at a
administering authority and as a Scheme
required manner.
level to ensure solvency and long term cost
Employer.
efficiency and issuing a Rates and Adjustments
h) Monitor all aspects of the Fund’s performance
k) Enable the Local Pension Board to review the
Certificate, after agreeing assumptions with the
and funding and amend these two documents if
valuation process as set out in their terms of
administering authority and having regard to the
required.
reference.
Funding Strategy Statement.
In order to monitor developments, the
Individual employers will:
Valuations will be prepared in accordance with
administering authority may from time to time
generally accepted actuarial methods and
request informal valuations or other calculations.
deduct contributions from employees’ pay
reported on in accordance with current actuarial
Generally, these are undertaken quarterly and the
correctly;
reporting Standards issued by the Financial
calculations will be based on an approximate roll
pay all ongoing contributions, including their
Reporting Council, to the extent that the
forward of asset and liability values, with liabilities
employer contribution as determined by the
Standards are relevant to the Fund.
calculated by reference to assumptions consistent
Fund Actuary, promptly by the due date;
with the most recent preceding valuation.
b) Prepare advice and calculations in connection
Specifically, it is unlikely that the liabilities would be develop a policy on certain discretions and
with;
calculated using individual membership data, and
exercise those discretions within the regulatory
bulk transfers and individual benefit-related
nor would the assumptions be subject to review, as
framework, ensuring that the administering
matters;
occurs at formal triennial valuations.
authority has copies of current policies covering
those discretions;
valuations on the termination of admission
The administering authority monitors investment
agreements or when an employer ceases to
performance of the Fund on a quarterly basis.
pay for additional benefits awarded to
employ any active members; and,
members, early release of benefits or other one
off strain costs in accordance with agreed
arrangements;
2017-18 Pension Fund Annual Report
Page 24
Management and Financial Performance and Policy Statement
bonds and other forms of security against
the Probability of Funding Success (the current For employers:
the financial effect on the Fund of
likelihood as required by the administering
regarded by the administering authority as
employer's default.
authority that the Fund will actually achieve the
being of sound covenant with an indefinite
Solvency Target by the end of the Trajectory
period to expected exit; or,
c) Assist the administering authority in assessing
Period).
whether employer contributions need to be
with guarantors of sound covenant agreeing to
revised between actuarial valuations as
These three choices, supported by risk modelling
subsume the employer's assets and liabilities
required or permitted by the 2013 Regulations.
carried out by the Fund Actuary, define the
following exit;
discount rate and, by extension, the appropriate
d) Ensure that the administering authority is aware
appropriate actuarial methods and assumptions are
levels of contribution payable. Together they
of any professional guidance requirements
taken to be measurement by use of the Projected
measure the riskiness of the funding strategy.
which may be of relevance to the Fund
Unit method of valuation, and using assumptions
Actuary's role in advising the administering
These three terms are considered in more detail
such that, if:
authority.
below.
the Fund had reached the Solvency Target;
Such advice will, where appropriate, take account
Solvency Target
and;
of the funding position and funding and investment
The administering authority's primary aim is long-
its financial position continued to be assessed
strategy of the Fund, along with other relevant
term solvency. Accordingly, employers’
by use of such methods and assumptions; and,
matters.
contributions will be set to ensure that 100% of the
liabilities can be met over the long term using
contributions were paid in accordance with
4. Funding Strategy
appropriate actuarial assumptions. The Solvency
those methods and assumptions;
Risk based approach
Target is the value of assets which the
The Fund utilises a risk based approach to funding
then there would be a chance of at least 80% that
administering authority wishes the Fund to hold at
strategy.
the Fund would continue to be 100% funded after a
the end of the Trajectory Period (see later) to meet reasonable timeframe. The level of funding implied
A risk based approach entails carrying out the
this aim.
by this is the Solvency Target. For the purpose of
actuarial valuation on the basis of the assessed
The Fund is deemed to be solvent when the assets this Statement, the required level of chance is
likelihood of meeting the funding objectives. In
held are equal to or greater than 100% of the
defined as the Probability of Maintaining Solvency.
practice, three key decisions are required for the
Solvency Target, where the Solvency Target is the
risk based approach:
For all other employers, including bodies with
value of the Fund's liabilities evaluated using
limited duration in the Fund or whose liabilities are
the Solvency Target (the value of assets the
appropriate actuarial methods and assumptions.
expected to be orphaned following exit, the
administering authority requires the Fund to
The administering authority believes that its funding required Probability of Maintaining Solvency will be
hold to meet the Fund's liabilities);
strategy will ensure the solvency of the Fund
set at a more prudent level dependent on
the Trajectory Period (how quickly the
because employers collectively have the financial
circumstances. For most such bodies, the chance
administering authority requires the Fund to get capacity to increase employer contributions should of achieving solvency will be set commensurate
there); and,
future circumstances require, in order to continue
with assumed investment in an appropriate
to target a funding level of 100%.
2017-18 Pension Fund Annual Report
Page 25
Management and Financial Performance and Policy Statement
portfolio of Government index linked and fixed
and is not necessarily the same as the Solvency
members over the period until they die, leave
interest bonds after exit.
Target. It is instead the product of the data, chosen
the Fund or retire.
assumptions, and valuation method. The valuation
Probability of Funding Success
Application to different types of body
method, including the components of Funding
The administering authority deems funding success
Some comments on the principles used to derive
Target, future service contributions and any
to have been achieved if the Fund, at the end of
the Funding Target for different bodies in the Fund
adjustment for surplus or deficiency to set the level
the Trajectory Period, has achieved the Solvency
are set out below.
of contributions payable, in turn dictates the chance
Target. The Probability of Funding Success is the
of achieving the Solvency Target at the end of the
For employers:
assessed chance of this happening based on the
Trajectory Period (defined below). The Funding
level of contributions payable by members and
regarded by the administering authority as
Target will be the same as the Solvency Target
employers.
being of sound covenant with an indefinite
only when the methods and assumptions used to
period to expected exit; or
Consistent with the aim of enabling employers'
set the Funding Target are the same as the
contribution rates to be kept as nearly constant as
appropriate funding methods and assumptions
with guarantors of sound covenant agreeing to
possible, the required chance of achieving the
used to set the Solvency Target (see above).
subsume the employer's assets and liabilities
Solvency Target at the end of the relevant
following exit;
Consistent with the aim of enabling employers'
Trajectory Period for each employer or employer
primary contribution rates to be kept as nearly
the administering authority will adopt a general
group can be altered at successive valuations
constant as possible:
approach in this regard of assuming indefinite
within an overall envelope of acceptable risk.
investment in a broad range of assets of higher risk
Contribution rates are set by use of the
Following a valuation, the administering authority
than risk free assets. With regard to guarantors,
Projected Unit valuation method for most
will not permit contributions to be set that have an
they must have been judged to be of suitable
employers. The Projected Unit method is used
unacceptably low chance of achieving the Solvency
covenant by the administering authority (see
in the actuarial valuation to determine the cost
Target at the end of the relevant Trajectory Period.
section on Guarantors in section 5).
of benefits accruing to the Fund as a whole and
Funding Target
for employers who continue to admit new
For all other employers, including bodies with
In order to satisfy the legislative requirement to
members. This means that the future service
limited duration in the Fund or whose liabilities are
secure long term cost efficiency, the administering
(primary) contribution rate is derived as the cost expected to be orphaned following exit, the
authority’s aim is for employer contributions to be
of benefits accruing to employee members over administering authority will have regard to the
set so as to make provision for the cost of benefit
the year following the valuation date expressed potential for participation to cease (or to have no
accrual, with an appropriate adjustment for any
as a percentage of members’ pensionable pay
contributing members), the potential timing of such
surplus or deficiency. This is achieved through the
over that period; and,
exit, and any likely change in notional or actual
setting of a Funding Target.
investment strategy as regards the assets held in
For employers who no longer admit new
respect of the body's liabilities at the date of exit
The Funding Target is the value of assets which
members, the Attained Age valuation method is (i.e. whether the liabilities will become 'orphaned' or
the Fund needs to hold at the valuation date to pay
normally used. This means that the future
a guarantor exists to subsume the notional assets
the liabilities at that date, as indicated by the
service (primary) contribution rate is derived as and liabilities).
chosen valuation method and assumptions. It is a
the average cost of benefits accruing to
product of the triennial actuarial valuation exercise
2017-18 Pension Fund Annual Report
Page 26
Management and Financial Performance and Policy Statement
Full funding
any adjustment to the level of contributions in
see below). In general, for employers that are
The Fund is deemed to be fully funded when the
respect of a surplus or deficiency relative to the
closed to new entrants and the participation is of
assets held are equal to 100% of the Funding
Funding Target used in the valuation is payable.
sufficient term, the Recovery Period is set to be the
Target where the funding target is assessed based
estimated future working lifetime of the active
The Recovery Period applicable for each
on the sum of the appropriate funding targets
membership.
participating employer is set by the administering
across all the employers / groups of employers.
authority in consultation with the Fund Actuary and The exception to this limit is Northumberland
When assets held are greater than this amount the the employer, with a view to balancing the various College, for whom the administering authority has
Fund is deemed to be in surplus, and when assets
funding requirements against the risks involved due agreed to use a Recovery Period of 30 years to
held are less than this amount the Fund is deemed to such issues as the financial strength of the
assist in smoothing contribution rates as the
to be in deficiency.
employer and the nature of its participation in the
employer transitions to an alternative Funding
Smoothing adjustments
Fund.
Target.
Consistent with the aim of enabling employer
The administering authority recognises that a large For employers whose participation in the Fund is
contribution rates to be kept as nearly constant as
proportion of the Fund’s liabilities are expected to
for a fixed period, it is unlikely that the
possible, and having regard to the risks inherent in
arise as benefit payments over long periods of
administering authority and Fund Actuary would
such an approach, the administering authority may time. For employers of sound covenant, the
agree to a recovery period longer than the
also agree with the Fund Actuary the use of explicit administering authority is prepared to agree to
remaining term of participation.
smoothing adjustments in the calculation of the
Recovery Periods which are longer than the
Funding Target. It is unlikely that use of these
The administering authority obtains the opinion of
average future working lifetime of the membership
smoothing adjustments will be extended to
Northumberland County Council‘s Service Director
of that employer (i.e. the estimated period of time
employers whose participation in the Fund is for a
Education and Skills to categorise each academy
until the last active member leaves or retires). The
fixed period (for example, an employer admitted by
in Northumberland into one of three groups: A
administering authority recognises that such an
virtue of having been awarded a best value
meaning robustly viable; B meaning viability less
approach is consistent with the aim of keeping
outsourcing contract).
certain; or C meaning concerns over viability. Each
employer contribution rates as nearly constant as
academy is categorised at inception and at each
Trajectory and Recovery Periods
possible. However, the administering authority also valuation date. For category A academies, a 21
The Trajectory Period in relation to an employer is
recognises the risk in relying on long Recovery
year Recovery Period is applied; for category B a
the period between the valuation date and the date Periods and has agreed with the Fund Actuary a
14 year Recovery Period is applied; and, for
on which solvency is targeted to be achieved.
limit of 21 years, for employers which are assessed category C a Recovery Period of up to 7 years is
by the administering authority as being long term
Where an actuarial valuation reveals that the Fund
applied unless the administering authority receives
secure employers at the triennial valuation at 31
is in surplus or deficiency against the Funding
an instruction from the Department for Education to
March 2016.
Target, employers' contribution rates will be
lengthen the Recovery Period of a specified
adjusted to target restoration of the Funding Target The administering authority’s policy is generally to
academy, in which case, a Recovery Period of up
over a period of years (the Recovery Period). The
set Recovery Periods for each employer which are
to 21 years may be applied for category B and C
Recovery Period in relation to an employer or
as short as possible within this framework
academies.
group of employers is therefore a period over which (although a different policy applies for academies –
2017-18 Pension Fund Annual Report
Page 27
Management and Financial Performance and Policy Statement
A period of 21 years has been used for
employers may step up to the new rates in annual
contribution rate set as a percentage of pay
Northumberland County Council, the largest
steps. This is in line with the aim of having
(although some adjustment has been made for
employer in the Fund. Recovery Periods for other
contribution rates as nearly constant as possible.
those employers who have selected a shorter
employers or employer groups may be shorter, and The administering authority usually allows a
recovery period in the past).
may not necessarily be the same as each other, in
maximum of three steps, however in exceptional
All employers in the Fund are grouped together in
order to suitably balance risk to the Fund and cost
circumstances up to six steps may be used.
respect of the risks associated with payment of
to the employer.
Grouping
benefits on death in service and ill-health
Long term cost efficiency
In some circumstances it is desirable to group
retirement. In other words, the cost of such benefits
In order to ensure that measures taken to maintain employers within the Fund together for funding
is shared across all the employers in the Fund.
stability of employer contributions are not
purposes to calculate employer contribution rates.
Such benefits at no fault of the employer can cause
inconsistent with the statutory objective for
Reasons might include reduction of volatility of
funding strains which could be significant for some
employer contributions to be set so as to ensure
contribution rates for small employers, facilitating
of the smaller employers without insurance or
the long-term cost efficiency of the Fund, the
situations where employers have a common source sharing of risks. The Fund, in view of its size, does
administering authority has assessed the actual
of funding or accommodating employers who wish
not see it as cost effective or necessary to insure
contributions payable by considering:
to share the risks related to their participation in the these benefits externally and this is seen as a
Fund.
pragmatic and low cost approach to spreading the
the implied average deficit recovery period,
risk.
allowing for the stepping of employer
The administering authority recognises that
contribution changes;
grouping can give rise to cross subsidies from one
Asset shares notionally allocated to employers
employer to another over time. Employers may be
In order to establish contribution rates for individual
the investment return required to achieve full
grouped entirely, such that all of the risks of
employers or groups of employers, it is convenient
funding over the recovery period; and,
participation are shared, or only partially grouped
to notionally subdivide the Fund as a whole
how the investment return compares to the
such that only specified risks are shared. The
between the employers, as if each employer had its
administering authority's view of the expected
administering authority’s policy is to consider the
own notional asset share within the Fund.
future return being targeted by the Fund’s
position carefully at each valuation and to notify
This subdivision is for funding purposes only. It is
investment strategy.
each employer that is grouped that this is the case, purely notional in nature and does not imply any
which other employers it is grouped with, and
Stepping
formal subdivision of assets, nor ownership of any
details of the grouping method used. If the
The administering authority will also consider at
particular assets or groups of assets by any
employer objects to this grouping, it will be offered
each valuation whether new contribution rates
individual employer or group.
its own contribution rate.
should be payable immediately or reached by
Roll forward of notional asset shares
being stepped over a number of years. Stepping is
Following commencement in the Fund, non-
The notional asset share allocated to each
a generally accepted method of smoothing the
academy Scheduled Bodies with less than 20
employer will be rolled forward, allowing for all cash
impact of rate changes for local authority pension
contributing members will be included within the
flows associated with that employer's membership,
funds. In consultation with the Actuary, the
'Small Scheduled Bodies' group by default. All risks including contribution income, benefit outgo,
administering authority accepts that long term
are shared and these employers have a common
transfers in and out and investment income. In
2017-18 Pension Fund Annual Report
Page 28
Management and Financial Performance and Policy Statement
general, no allowance is made for the timing of
where, in the opinion of the Fund Actuary, the
employer's payroll will increase at an assumed
contributions and cash flows for each year are
cash flow data which is unavailable is of low
rate. If payroll fails to grow at this rate, or declines,
assumed to be made half way through the year,
materiality, estimated cash flows will be used;
insufficient corrective action will have been taken.
with investment returns assumed to be uniformly
and,
To protect the Fund against this risk, the
earned over that year. However, where significant
administering authority will monitor payrolls and
where, in the opinion of the Fund Actuary, the
one-off employer contributions have been paid,
where evidence is revealed of payrolls not
cash flow data which is unavailable is material,
allowance is made for the timing of such
increasing at the anticipated rate, the administering
or the results of the cash flow approach
contributions.
authority will consider requiring defined streams of
appears to give unreliable results perhaps
capital contributions rather than percentages of
Further adjustments are made for:
because of unknown internal transfers, the
payroll.
Fund Actuary will instead use an analysis of
a notional deduction to meet the expenses paid
gains and losses to roll forward the notional sub
5. Special circumstances related to certain
from the Fund in line with the assumption used
fund. Analysis of gains and losses methods are
employers
at the previous valuation;
less precise than use of cash flows and involve
Interim reviews for Admission Bodies
allowance for any known material internal
calculation of gains and losses to the surplus or Regulation 64 of the 2013 Regulations provides the
transfers in the Fund (cash flows will not exist
deficiency exhibited at the previous valuation.
administering authority with a power to carry out
for these transfers). The Fund actuary will
Having established an expected surplus or
valuations in respect of employers which are
assume an estimated cash flow equal to the
deficiency at the current valuation, comparison
expected to cease at some point in the future, and
value of the liabilities transferred from one
of this with the liabilities evaluated at the
for the Fund Actuary to certify revised contribution
employer to the other, unless some other
current valuation leads to an implied notional
rates between triennial valuation dates.
approach has been agreed between the two
asset holding.
The administering authority's overriding objective at
employers;
Fund maturity
all times is that, where possible, there is clarity over
allowance for death in service and other
To protect the Fund and individual employers from
the Funding Target for that body, and that
benefits shared across all employers in the
the risk of increasing maturity producing
contribution rates payable are appropriate for that
Fund (see earlier); and,
unacceptably volatile contribution adjustments as a Funding Target. However, this is not always
possible, as any date of exit of participation may be
an overall adjustment to ensure the notional
percentage of pay, the administering authority will
unknown (for example, participation may be
assets attributed to each employer is equal to
normally require defined capital streams from
assumed at present to be indefinite), and also
the total assets of the Fund which will take into
employers in respect of any disclosed funding
because market conditions change daily.
account any gains or losses related to the
deficiency.
orphan liabilities.
In certain circumstances, for example for secure
The administering authority's general approach in
this area is as follows:
In some cases information available will not allow
employers considered by the administering
for such cash flow calculations. In such a
authority as being long term in nature, contribution
where the date of exit is known, and is more
circumstance:
adjustments to correct for any disclosed deficiency
than three years after the most recent
may be set as a percentage of payroll. Such an
preceding triennial actuarial valuation, or is
approach carries an implicit assumption that the
unknown and assumed to be indefinite, interim
2017-18 Pension Fund Annual Report
Page 29
Management and Financial Performance and Policy Statement
valuations will generally not be carried out at
employers and their associated Guarantors. The
of the level of risk on premature termination by
the behest of the administering authority;
administering authority, unless notified otherwise,
reason of insolvency, winding up or liquidation.
sees the duty of a Guarantor to include the
for Admission Bodies admitted under paragraph
Where the level of risk identified by the assessment
following:
1(d) of Part 3, Schedule 2 of the Regulations
is such as to require it, the Admission Body shall
(1(d) Admission Bodies) (formerly known as
if an employer ceases and defaults on any of its enter into an indemnity or bond with an appropriate
Transferee Admission Bodies) falling into the
financial obligations to the Fund, the Guarantor party. Where it is not desirable for an Admission
above category, the administering authority
is expected to provide finance to the Fund such Body to enter into an indemnity or bond, the body
sees it as the responsibility of the relevant
that the Fund receives the amount certified by
is required to secure a guarantee in a form
Scheme Employer to instruct it if an interim
the Fund Actuary as due, including any interest satisfactory to the administering authority from an
valuation is required. Such an exercise would
payable thereon; and,
organisation that either funds, owns or controls the
be at the expense of the Relevant Scheme
functions of the Admission Body.
if the Guarantor is an employer in the Fund and
Employer unless otherwise agreed;
is judged to be of suitable covenant by the
The administering authority's approach in this area
a material change in circumstances, such as
administering authority, the Guarantor may
is as follows:
the date of exit becoming known, material
defray some of the financial liability by
In the case of 1(d) Admission Bodies and other
membership movements or material financial
subsuming the residual liabilities into its own
Admission Bodies with a Guarantor, and so
information coming to light, may cause the
pool of Fund liabilities. In other words, it agrees
long as the administering authority judges the
administering authority to informally review the
to be a source of future funding in respect of
relevant Scheme Employer or Guarantor to be
situation and subsequently formally request an
those liabilities should future deficiencies
of sufficiently sound covenant, any bond exists
interim valuation; and,
emerge.
purely to protect the relevant Scheme Employer
for an employer whose participation is due to
During the period of participation of an employer, a
or Guarantor on default of the Admission Body.
cease within three years of the most recent
Guarantor can at any time agree to the future
As such, it is entirely the responsibility of the
preceding triennial valuation, the administering
subsumption of any residual liabilities of the
relevant Scheme Employer or Guarantor to
authority will monitor developments and may
employer. The effect of that action may be to
arrange any risk assessments and decide the
see fit to request an interim valuation at any
reduce the Funding and Solvency Targets for this
level of required bond. The administering
time.
employer, which would probably lead to reduced
authority will be pleased to supply some
contribution requirements.
standard calculations provided by the Fund
Notwithstanding the above guidelines, the
Actuary to aid the relevant Scheme Employer
administering authority reserves the right to request
Bonds and other securitisation
or Guarantor, but this should not be construed
an interim valuation of any employer at any time if
Part 3 of Schedule 2 of the 2013 Regulations
as advice to the relevant Scheme Employer or
Regulation 64(4) of the 2013 Regulations applies.
creates a requirement for a new Admission Body to
Guarantor on this matter.
carry out, to the satisfaction of the administering
Guarantors
authority (and the Scheme Employer in the case of In the case of:
Some employers may participate in the Fund by
an Admission Body falling under paragraph 1(d) (i)
virtue of the existence of a Guarantor. The
Admission bodies admitted under paragraph
of Part 3 of Schedule 2 of the 2013 Regulations),
administering authority maintains a list of
1(e);
an assessment taking account of actuarial advice
2017-18 Pension Fund Annual Report
Page 30
Management and Financial Performance and Policy Statement
Admission bodies admitted under paragraph
In such circumstances, the liabilities are known as
therefore the risk related to these liabilities is small)
1(d) where the administering authority does not subsumed liabilities (in that responsibility for them
then the administering authority may decide to use
judge the Scheme Employer to be of sufficiently is taken on by the accepting employer). For such
the Funding Target used for Scheduled Bodies for
strong covenant; and,
liabilities the administering authority will assume
practical reasons.
that the investments held in respect of those
other Admission bodies with no Guarantor or
Any excess or deficient returns on the notional or
liabilities will be the same as those held for the rest
where the administering authority does not
actual assets attributable to these liabilities relative
of the liabilities of the accepting employer.
judge the Guarantor to be of sufficiently strong
to the Funding Target, will be added to or deducted
Generally, this will mean assuming continued
covenant;
from the investment return to be attributed to the
investment in more risky investments than
notional assets of all employers in the Fund.
the administering authority must be involved in the
Government bonds.
assessment of the required level of bond to protect
Exit valuations
Orphan liabilities
the Fund. The admission will only be able to
Where an employer exits the Fund, an exit
Where an employer is exiting the Fund such that it
proceed once the administering authority has
valuation will be carried out (in accordance with
will no longer have any contributing members,
agreed the level of bond cover. The administering
Regulation 64 of the 2013 Regulations). That
unless any residual liabilities are to become
authority will supply some standard calculations
valuation will take account of any activity as a
subsumed liabilities, the administering authority
provided by the Fund Actuary to aid the relevant
consequence of exit regarding any existing
may act on the basis that it will have no further
Scheme Employer form a view on what level of
contributing members (for example any bulk
access for funding from that employer once any
bond would be satisfactory. The administering
transfer payments due) and the status of any
exit valuation, carried out in accordance with
authority will also on request supply this to the
liabilities that will remain in the Fund.
Regulation 64 of the 2013 Regulations, has been
Admission Body or Guarantor. This should not be
completed and any sums due have been paid.
In particular, the exit valuation may distinguish
construed as advice to the Scheme Employer,
Residual liabilities of employers from whom no
between residual liabilities which will become
Guarantor or Admission Body.
further funding can be obtained are known as
orphan liabilities, and liabilities which will be
The administering authority notes that levels of orphan liabilities.
subsumed (see above) by other employers.
required bond cover can fluctuate and it will
The administering authority will seek to minimise
For subsumed liabilities, the exit valuation will
review, or it recommends that the relevant
the risk to other employers in the Fund that any
anticipate continued investment in assets similar to
Scheme Employer reviews, the required cover
deficiency arising on the orphan liabilities creates a those held in respect of the subsuming employer's
at least once a year.
cost for those other employers to make good such
liabilities.
Subsumed liabilities
deficiency. To give effect to this, the administering
For orphan liabilities the Funding Target in the exit
Where an employer is exiting the Fund such that it
authority may seek funding from the outgoing
valuation will anticipate investment in low risk
will no longer have any contributing members, it is
employer sufficient to enable it to match the
investments, such as Government bonds, or be
possible that another employer in the Fund (the
liabilities with low risk investments, generally
calculated in the same way as subsumed liabilities
'accepting employer') has agreed to provide a
Government fixed interest and index linked bonds.
as considered appropriate.
source of future funding in respect of any emerging However, if these liabilities are deemed to be small
deficiencies in respect of those liabilities.
For the avoidance of doubt, if an academy were to
compared to the liabilities of the whole Fund (and
cease participation in the Fund, in the absence of
2017-18 Pension Fund Annual Report
Page 31
Management and Financial Performance and Policy Statement
another employer of sound covenant taking
Local Pension Board within this framework. The
Liquidity and maturity
responsibility for future funding of residual
main risks to the Fund are:
The LGPS is going through a series of changes,
liabilities, the resulting exit valuation would be
each of which will impact upon the maturity profile
Liability
carried out on a Funding Target consistent with
of the LGPS and have potential cash flow
The main risks include interest rates, pay and price
orphan liabilities as detailed above.
implications. The increased emphasis on
inflation, changing retirement patterns and other
outsourcing and other alternative models for
Regardless of whether the residual liabilities are
demographic risks. The administering authority will service delivery may result in the following:
orphan liabilities or subsumed liabilities, the
ensure that the Fund Actuary investigates these
departing employer will be expected to make good
matters at each valuation or, if appropriate, more
active members leaving the LGPS;
the funding position revealed in the exit valuation.
frequently, and reports on developments. The
transfers of responsibilities between different
In other words, the fact that liabilities may become
administering authority will agree with the Fund
public sector bodies;
subsumed liabilities does not remove the possibility Actuary any changes which are necessary to the
of an exit payment being required.
assumptions underlying the measure of solvency,
scheme changes which might lead to increased
to allow for observed or anticipated changes.
opt-outs; and/or,
The administering authority's policy is that in the
normal course of events, any deficiency that exists
If significant liability changes become apparent
spending cuts and their implications.
at the exit of an employer from the Fund, will be
between valuations, the administering authority will All of these may result in workforce reductions that
payable immediately as a single payment. In
notify all participating employers of the anticipated
would reduce membership, reduce contributions
extreme cases, the administering authority may be
impact on costs that will emerge at the next
and prematurely increase retirements in ways that
prepared to agree payment over a period of years.
valuation, and consider whether to require the
may not have been taken into account in previous
However, this period is very unlikely to exceed five
review of bonds that are in place for Admission
forecasts.
years and any decision will be at the administering
Bodies.
authority's discretion.
The administering authority’s policy is to require
Regulatory and compliance
regular communication between itself and
6. Identification of risks and counter measures
These risks relate to changes to general and LGPS employers and to ensure reviews of maturity at
The administering authority’s overall policy on risk
regulations, national pension requirements or HM
overall Fund and employer level where material
is to identify all risks to the Fund and to consider
Revenue and Customs rules. The administering
issues are identified.
the position both in aggregate and at an individual
authority will keep abreast of proposed changes to
risk level. The administering authority will monitor
the LGPS and, where possible, express its opinion
Governance
the risks to the Fund, and will take appropriate
during consultation periods after careful
This covers the risk of unexpected structural
action to limit the impact of these, both before and
consideration. The administering authority’s policy
changes in the Fund membership (for example the
after they emerge, wherever possible. The
will be to ask the Fund Actuary to assess the
closure of an employer to new entrants or the large
administering authority will ensure that funding
impact on costs of any changes and, where these
scale withdrawal or retirement of groups of staff),
risks are included within the overarching risk
are likely to be significant, the administering
and the related risk of the administering authority
management framework and strategy, linking to
authority will notify employers of this likely impact
not being made aware of such changes in a timely
their risk register and risk management policy as
and the timing of any change.
manner.
appropriate and including a defined role for the
2017-18 Pension Fund Annual Report
Page 32
Management and Financial Performance and Policy Statement
The administering authority’s policy is to require
Employers with a small and declining number
insufficient funds to meet liabilities as they fall
regular communication between itself and
of contributing members
due;
employers, and to ensure regular reviews of such
A recent legal judgement indicates that under the
inadequate, inappropriate or incomplete
items as bond arrangements, financial standing of
current LGPS regulations, employers with no
investment and actuarial advice is taken and
non-tax raising employers and funding levels.
contributing members cannot be charged
acted upon; and,
contributions under Regulation 62 of the 2013
Particular examples are set out below:
Regulations. This ruling, however, does not affect
counterparty failure.
Early retirement strain payments
the ability to collect contributions following an exit
The specific risks associated with assets and asset
No allowance is made in the triennial valuation and valuation under Regulation 64 of the 2013
classes are:
consequent employer rates for the additional value Regulations. The regulations may alter in the
of the benefits when a member is made redundant
future, but there is a risk of a body ceasing to pay
equities – industry, country, size and stock
or leaves on the grounds of efficiency.
contributions with a deficiency in the Fund.
risks;
To counter the potential increase in Funding Target The administering authority will monitor Scheme
fixed income – yield curve, credit, duration and
emerging at the next valuation, a payment is
Employers with declining membership to ensure
market risks;
calculated (using methods and assumptions
that funding is close to 100% by the time the last
alternative assets – liquidity, property and alpha
agreed with the Fund Actuary) and made by the
member leaves service, and may alter the funding
risks;
Scheme Employer to the Fund to meet this
strategy accordingly. It will also ensure that an exit
additional cost at the date the member is made
valuation is carried out for employers once it is
money market – credit and liquidity risks;
redundant or leaves on the grounds of efficiency.
clear there will be no contributing members relating currency risks; and,
Body ceasing to exist with unpaid deficiency
to that employer in the future.
macroeconomic risks.
Some employers can cease to exist and/or become
Investment
insolvent, leaving the employers in the Fund open
This covers items such as the performance of
The administering authority reviews each
to the risk of an unpaid deficiency. Any such
financial markets and the Fund’s investment
investment manager’s performance quarterly, and
deficiency will be met by the relevant Scheme
managers, asset reallocation in volatile markets,
at least annually considers the asset allocation of
Employer with regard to a 1(d) Admission Body
leading to the risk of investments not performing
the Fund by carrying out a review with its
and there is therefore no risk to other employers in
(income) or increasing in value (growth) as
Investment Adviser. The administering authority
the Fund (provided of course that the relevant
forecast.
also annually reviews the effect of market
Scheme Employer is itself of good covenant). Any
movements on the Fund’s overall funding position.
Examples of specific risks are:
unpaid deficiency in relation to other employers
Employer
falls on all employers in the Fund, and the
assets not delivering the required return (for
These risks arise from the ever-changing mix of
administering authority will ensure that risks are
whatever reason, including manager
employers, from short-term and ceasing
reduced by use of bond arrangements or ensuring
underperformance);
employers, and the potential for a shortfall in
there is a Guarantor to back the liabilities of the
systemic risk with the possibility of interlinked
payments and/or orphaned liabilities.
body.
and simultaneous financial market volatility;
2017-18 Pension Fund Annual Report
Page 33
Management and Financial Performance and Policy Statement
The administering authority will put in place a
is less than 65% the administering authority will not
Funding Strategy Statement which contains
adopt assumptions which lead to a reduction in the
sufficient detail on how funding risks are managed
aggregate employer contribution rate to the Fund.
in respect of the main categories of employer (e.g.
Smoothing
Scheduled and Admission Bodies) and other
The administering authority recognises that
pension fund stakeholders.
utilisation of a smoothing adjustment in the
The administering authority maintains a knowledge solvency measurement introduces an element of
base on its employers, their basis of participation
risk, in that the smoothing adjustment may not
and their legal status (e.g., charities, companies
provide a true measure of the underlying position. If
limited by guarantee, group/subsidiary
such an adjustment is used, the administering
arrangements) and uses this information to inform
authority’s policy is to review the impact of any
the choice of funding strategy for each employer.
adjustment made at each valuation to ensure that it
does not alter the disclosed solvency level by more
Choice of Solvency and Funding Targets
than 5%.
The administering authority recognises that future
experience and investment income cannot be
Recovery Period
predicted with certainty. Instead, there is a range of The administering authority recognises that
possible outcomes, and different assumed
permitting surpluses or deficiencies to be
outcomes will lie within that range.
eliminated over a Recovery Period, rather than
immediately, introduces a risk that action to restore
The more optimistic the assumptions made in
solvency is insufficient between successive
determining the Solvency and Funding Targets, the measurements. The administering authority’s policy
more that outcome will sit towards the 'favourable'
with regard to Recovery Periods is set out in
end of the range of possible outcomes, the lower
section 4 of this Statement.
will be the probability of experience actually
matching or being more favourable than the
assumed experience, and the lower will be the
Solvency and Funding Targets calculated by
reference to those assumptions.
The administering authority will not adopt
assumptions for bodies regarded by the
administering authority as being of sound covenant
which, in its judgement, and on the basis of
actuarial advice received, are such that it is less
than 55% likely that the strategy will deliver funding
success. Where the probability of funding success
2017-18 Pension Fund Annual Report
Page 34
Management and Financial Performance and Policy Statement
Communication Strategy Statement
The Local Government Pension Scheme
In carrying out their roles and responsibilities in
This is the Statement of Policy concerning
Regulations 2013 require all LGPS funds in
relation to the communication of the LGPS, NCC
Communication of the Northumberland County
England and Wales to publish a statement of policy and employers will, as a minimum, comply with
Council LGPS Pension Fund ("
the Fund") and has concerning communication with members and
overriding legislation, including:
been developed following consultation with South
Scheme employers. This Statement sets out with
Local Government Pension Scheme
Tyneside Council (the shared administration
whom NCC and STC will communicate, how this
Regulations;
service provider), employers in the Fund, Scheme
will be done and how the effectiveness of that
Pensions Acts 2004 and 2011 and associated
member representatives and other interested
communication will be monitored.
stakeholders.
disclosure legislation;
Purpose and objectives
Northumberland County Council ("
NCC") is the
The aim of the Communication Strategy is to
Public Service Pensions Act 2013 and
administering authority responsible for the local
ensure that Scheme members understand the
associated record keeping legislation;
administration of the Fund, which is part of the
benefits of the Scheme, and all stakeholders are
Freedom of Information Act 2000;
Local Government Pension Scheme (“
the LGPS”)
kept informed of relevant developments within the
and (“
Equality Act 2010; and,
the Scheme”). The Fund comprises over 40
Fund. NCC also believes that effective
employers with active members, and around
communications will help to maintain the efficient
Data Protection Act 2003 and the General
27,000 Scheme members (including active
running of the Fund.
Data Protection Regulation 2016/679.
members, deferred and pensioner members).
In communication with stakeholders NCC will:
Regulation 61 of the Local Government Pension
South Tyneside Council (“
STC”) provides LGPS
provide user friendly, relevant and informative Scheme Regulations 2013 sets out the
administration services for:
communications in a clear, concise manner
requirements of the communications policy for
LGPS funds as follows:
Tyne and Wear Pension Fund; and,
with well-presented information;
“Statements of policy concerning
Northumberland County Council Pension
provide communications that are valued by
communications with members and Scheme
Fund.
stakeholders;
employers”
Most communications with the Fund’s
provide access to the appropriate means of
61 (1) An administering authority must prepare,
members and Scheme employers are provided
communication for stakeholders with
maintain and publish a written statement
by STC as part of the shared administration
alternative needs; and,
setting out its policy concerning
service, but NCC will continue to provide
look for efficiencies in delivering
communications with —
communications that relate to collection of
communications.
contributions, and actuarial, investment and
(a) members;
governance matters.
Regulatory basis
The LGPS is a statutory scheme, established by an
(b) representatives of members;
NCC retains overall responsibility for
Act of Parliament. The LGPS Regulations 2013
(c) prospective members; and,
communications issued to members of the Fund
provide the conditions and regulatory guidance
and Scheme employers by STC.
(d) Scheme employers.
surrounding the production and implementation of
communications strategies.
2017-18 Pension Fund Annual Report
Page 35
Management and Financial Performance and Policy Statement
(2) In particular the statement must set out its
How NCC communicates
communication. Al of the Fund’s generic Scheme
policy on —
Ensuring that key stakeholders are well informed
member communication material is produced in
about the LGPS is of paramount importance, and
English but may be requested in alternative
(a) the provision of information and publicity NCC recognises that communicating in a clear,
languages. The principles of Plain English have
about the Scheme to members,
informative style is vital in achieving this aim so
been adopted in all communications.
representatives of members and Scheme
that employers and members can understand the
employers;
Online services
value of the Scheme as part of the employment
STC continues to develop and enhance the secure
(b) the format, frequency and method of
package.
online web services for
employers available via
distributing such information or publicity;
Who NCC communicates with
the
www.twpf.info (shared administration) website.
and,
NCC recognises that there are several distinct
STC is currently developing web services for
(c) the promotion of the Scheme to
stakeholder groups, such as:
members and during 2018 expects to offer:
prospective members and their employers.
Scheme members (active, deferred, pensioner membership details and payslips to view;
(3) The statement must be revised and
and dependant members) and prospective
published by the administering authority
Scheme members;
delivery of annual benefit statements;
following a material change in their policy
pension increase updates;
on any of the matters referred to in
Scheme employers and prospective Scheme
paragraph (2).
employers;
amendment of personal details; and,
Delivery of communications
Pension Fund Panel and LGPS Local Pension calculation of “what if” scenarios.
NCC has delegated responsibility for the
Board members;
management of the Pension Fund to the Pension
Fund staff;
Fund Panel, taking into consideration advice from
the LGPS Local Pension Board. The Pension Fund
STC staff; and,
Panel will monitor the implementation of this
other interested organisations including
Strategy on a regular basis as outlined later in this
Government departments, the LGPS Scheme
Statement.
Advisory Board and advisers to the Fund.
Operationally, the delivery of the majority of
The main means of communication with these key
member communications for the Fund is
stakeholders are outlined in Annex A.
undertaken by STC as part of the shared
Diversity of communication
administration service. However, NCC undertakes
The Fund’s information is available in alternative
communications with employers that relate to
formats, for example, Braille, large print, British
collection of contributions, and actuarial,
Sign Language, on request. NCC and STC aim to
investment and governance matters.
use the most appropriate communication medium
for the audience receiving that information. This
may involve using more than one method of
2017-18 Pension Fund Annual Report
Page 36
Management and Financial Performance and Policy Statement
Measuring whether the communication objectives are met
NCC monitors success against its communication objectives in the following
Key risks are:
ways:
lack or reduction of skilled resources due to difficulty retaining and
Communication objectives
Measurement
recruiting staff members and/or absence due to sickness;
Provide user friendly, relevant and
Satisfaction surveys of employers and a sample of Scheme
informative communications in a
members achieving 90% of scores in positive responses in
significant increase in workloads causing strain on day to day service
clear, concise manner with well-
these areas
delivery and therefore less focus on communications;
presented information
Provision of an (at least) annual mailing to all active and
issues in production of annual benefit statements, e.g. incorrect
pensioner members detailing Scheme changes and other
addresses held;
relevant developments
Active members having the opportunity to attend a meeting
inability to deliver a service to members due to system downtime or
when significant Scheme changes occur
failure;
Provide communications that are
Satisfaction surveys of employers and a sample of Scheme
valued by stakeholders
members achieving 90% of scores in positive responses in
issuing incorrect or inaccurate communications; and,
these areas
lack of clear communication to employers or Scheme members.
Provide access to the appropriate
Satisfaction surveys of employers and a sample of Scheme
means of communication for
members achieving 90% of scores in positive responses in
Costs
stakeholders with alternative needs these areas
All costs relating to the operation and implementation of this Strategy will be
Look for efficiencies in delivering
Evidence of utilising communications produced nationally
met by the Fund.
communications
or in partnership with other administering authorities
Approval, review and consultation
An overview of NCC's and STC's performance against these objectives will be This Communication Strategy Statement was approved under a delegation
reported within the Fund's Annual Report and Accounts and reported to the
given by the Pension Fund Panel on 23 February 2018. It is effective from
Pension Fund Panel and LGPS Local Pension Board.
April 2018.
Where performance is substantially below standard, NCC will formulate an
It will be formally reviewed and updated at least every three years, or sooner if
improvement plan. This will be reported to the Pension Fund Panel and LGPS the administration management arrangements or other matters included
Local Pension Board together with an ongoing update on progress against the within it merit reconsideration, including any changes to the LGPS or other
improvement plan.
relevant Regulations or guidance.
Key risks
In preparing this Strategy, NCC has consulted with STC, the employers in the
The key risks to the delivery of this Strategy are outlined below. The Principal
Fund, the Scheme member and employer representatives on the LGPS Local
Accountant (Pensions) and other officers will work with the Pension Fund
Pension Board, and other persons considered appropriate.
Panel and LGPS Local Pension Board in monitoring and responding to these
and other key risks. Where the risk must be managed by South Tyneside
Council, NCC will monitor it through regular shared administration service
reports and meetings.
2017-18 Pension Fund Annual Report
Page 37
Management and Financial Performance and Policy Statement
Annex A
Communication with pensioner members
Communication with deferred pensioner
Communication with all Scheme members, i.e.
STC sends an annual mailing to pensioner
members
pensioner members, deferred pensioner
members in April to show, among other things, the
STC sends annual benefit statements to deferred
members and active members
pension increase applied in the year. A sample of
pensioner members, which keeps Scheme
the annual mailing is also available via
members informed of their future pension benefit
STC publishes a range of Scheme information for
www.twpf.info.
entitlement. STC surveys members to obtain their
employees eligible to join the Local Government
views on the service and information provided.
Pension Scheme. All information is available to
At the time of retirement, specific information is
These are typically sent with the annual benefit
view and download from
www.twpf.info but can
made available to each individual pensioner which
statement.
also be provided in paper format on request.
includes:
STC provides a members’ telephone helpline,
At the time of leaving employment, specific
a statement summarising the calculation of
which is a “one stop shop” for all pension enquiries,
information is made available to each individual
his/her pension and lump sum;
deferred beneficiary which includes:
and available Monday to Friday (8:30 to 5:00 (4:30
a letter explaining the arrangements for paying
on Friday)) on
0191 424 4141.
a statement summarising the calculation of
his/her pension;
his/her pension and lump sum entitlement and
Members are also welcome to visit the team to
a fact sheet directing to leaflet on line
information regarding when the benefits are
discuss queries, at STC’s office, The Pensions
explaining his/her appeal rights; and,
due for payment together with any early
Office, Town Hall and Civic Offices, Westoe Road,
release provisions;
South Shields, Tyne and Wear, NE33 2RL.
a fact sheet summarising the provisions of the
Pension Increase legislation.
Presentations can be provided for employers.
a leaflet explaining his/her appeal rights; and,
Presentations and promotional material can be
A sample of pensioner members is surveyed
a fact sheet setting out his/her options with
provided for active Scheme members at the
annually to ask their views on the quality and range
regard to LGPS rights, e.g. explaining how to
request of an employer and can be tailored to a
of services provided by the STC Pensions Office.
transfer LGPS rights to a new employer’s
specific request.
A combined payslip and P60 is issued in April each
pension scheme.
year to each pensioner member, and a payslip is
issued when there is a change in an individual's
pension of £10 or more in a month. Regular
payslips are provided on request.
2017-18 Pension Fund Annual Report
Page 38
Management and Financial Performance and Policy Statement
Communication with active members
Communication with representatives of
Communication with prospective members
On joining the LGPS, each member is provided
members
Prospective members can obtain an information
with a welcome pack by STC that includes
Two trade union representatives and one
booklet about joining the Scheme from STC. It has
information about Scheme benefits, and a form
employee/pensioner representative have observer
been designed to answer the frequently asked
which enables him/her to request further
status seats on the Pension Fund Panel. The seats questions about joining the Scheme. This is made
information regarding the transfer of earlier pension on the Panel entitle those representatives to all of
available to all employers for them to include in
rights into the LGPS, and to make a death benefit
the reports, policy documents, presentations and
their recruitment and appointment packs. The
nomination. Subsequently, STC provides the
some of the training made available to the voting
booklet may also be downloaded from the shared
Scheme member with a notice confirming his/her
members of the Panel.
administration website at
www.twpf.info.
admission to the Scheme and detailing his/her
Two Scheme member representatives also have
STC has a prospective member area on the shared
rights to count previous service, if appropriate.
seats on the LGPS Local Pension Board (one of
administration website that can be found at
STC sends annual benefit statements to active
whom is also an observer on the Pension Fund
http://www.twpf.info/article/13021/Joining-the-
members, and an annual newsletter to update
Panel). The Board's role is to assist the
Scheme which has further information on how to
members on any relevant changes. The newsletter administering authority (NCC) as Scheme Manager join the Scheme.
is also available via the website. STC surveys
to secure compliance with the LGPS Regulations
At an employer’s request, STC wil work with that
members to obtain their views on the service and
and any other legislation relating to the governance employer to encourage membership of the Fund
information provided. These surveys are typically
and administration of the Scheme, and
and to identify initiatives that could be undertaken
sent with the annual benefit statement.
requirements imposed in relation to the LGPS by
to increase active membership for that employer.
At an employer’s request, STC will provide
the Pensions Regulator; and to ensure the effective
Automatic enrolment has and will continue to play
additional information for active members, to
and efficient governance and administration of the
a part in promoting the Scheme to prospective
explain Scheme benefits and offer an opportunity
LGPS.
members. Most employers who are required to
to deal with members’ questions.
provide access to eligible employees will have met
NCC facilitates regular presentations provided by
their staging date by now. Providing information to
Prudential (the Fund's AVC provider) for active
prospective members about the Scheme is part of
Scheme members to make them aware of their
the employers’ statutory obligation in respect of
AVC options.
automatic enrolment.
2017-18 Pension Fund Annual Report
Page 39
Management and Financial Performance and Policy Statement
Communication with Scheme employers
STC provides a detailed and prescriptive Scheme
Following the amalgamation of the district councils
Guide with relevant updates, which sets out the
in Northumberland with Northumberland County
responsibilities, processes, procedures, forms for
Council on 1 April 2009, one non-voting seat on the completion and other requirements of the
NCC Pension Fund Panel was allocated to an
employers. This Guide is available via the secure
employer representative and one to an
area of
www.twpf.info.
employee/pensioner representative. The purpose
NCC and STC issue employer alerts by bulk email
of the employer representative seat is to give
when it is necessary to give details of Scheme
representation on the Panel to all of the other
changes.
employers (i.e. other than Northumberland County
Council) participating in the Fund.
Employers are emailed the Fund’s Annual Report
and Accounts each year by NCC, which includes
Two employer representatives also have seats on
key policy statements for the Fund.
the LGPS Local Pension Board (one of whom is
also an observer on the Pension Fund Panel). The
Employers were consulted on the initial Investment
Board's role is:
Strategy Statement (ISS) for the Northumberland
County Council Pension Fund, and are consulted
to assist the administering authority (NCC) as
on all changes to the ISS.
Scheme Manager to secure compliance with
the LGPS Regulations and any other
Employers were consulted on the initial Funding
legislation relating to the governance and
Strategy Statement (FSS) for the Northumberland
administration of the Scheme, and
County Council Pension Fund, and are consulted
requirements imposed in relation to the LGPS
on all changes to the FSS.
by the Pensions Regulator; and,
Employers are consulted on other ad hoc policy
to ensure the effective and efficient
statements, such as the Fund’s Governance Policy,
governance and administration of the LGPS.
as the need arises.
STC holds an annual employers’ meeting to assist Each employer is assigned a client manager at
employers in fulfilling their legal obligations to
STC who is a first point of contact for any queries
provide year end information about their
on LGPS pensions administration matters that
membership, and to explain any Scheme changes. arise.
NCC holds an annual employers’ meeting at which Participating employers are asked to complete a
relevant topics such as the move to the shared
questionnaire giving their views on the quality and
administration service, the Fund’s investment
range of services periodically by STC.
strategy and the actuarial position are discussed.
2017-18 Pension Fund Annual Report
Page 40
Management and Financial Performance and Policy Statement
Governance Policy and Compliance
Delegation of administering authority functions The Pension Fund Panel has the power to
Statement
discharge all functions and responsibilities relating
The day-to-day administration of the LGPS
to the Council’s role as administering authority for
Part 1: Governance arrangements
The day to day administration is carried out by
the Northumberland County Council Pension Fund
Northumberland County Council (“NCC”) is the
officers reporting to the Section 151 Officer of
as set out in The Local Government Pension
administering authority for the Local Government
NCC.
Scheme Regulations 2013 (as amended), the Local
Pension Scheme (“LGPS”) fund known as
Government Pension Scheme (Management and
Northumberland County Council Pension Fund
Part 4 of the NCC Constitution (Delegations to
Investment of Funds) Regulations 2009 (as
(“the Fund”). The functions of an administering
Officers) delegates to the Section 151 Officer and
amended), and the Local Government Pension
authority are set out in the LGPS Regulations 2013 the Deputy Section 151 Officer in the Section 151
Officer’s absence the following service
Scheme (Transitional Provisions, Savings and
(as amended).
Amendment) Regulations 2014 (as amended).
responsibilities:
Objectives
“The exercise of corporate Council functions in
The Panel’s functions include:
NCC has put governance arrangements in place to
relation to finance services, revenues and benefits,
administer the LGPS with the objectives of:
Ensuring the proper administration of the Local
including benefits fraud, the Council’s fraud
Government Pension Scheme;
ensuring robust governance arrangements are
strategy and associated arrangements, debt
in place to facilitate informed decision making
recovery, treasury management, insurance and
Ensuring appropriate management of the
supported by appropriate advice, policies and
associated corporate risk management, internal
investments of the Northumberland County
strategies, which do not unreasonably favour
audit and liaison with external audit, administration
Council Pension Fund, including keeping
under review the Fund’s investment strategy
one group of stakeholders over another;
of the Local Government Pension Scheme and
and management structure;
procurement.”
ensuring the Pension Fund is managed and its
services delivered by people who have the
Decision making
Approving and maintaining administering
appropriate knowledge and expertise; and,
The NCC
Pension Fund Panel, a
committee of
authority policy statements as required by the
Local Government Pension Scheme
NCC, makes the decisions in relation to the
complying with all appropriate legislation and
administering authority functions.
Regulations including the Funding Strategy
statutory guidance, and to act in the spirit of
Statement, Statement of Investment Principles,
other relevant guidelines and best practice
Part 3 of the NCC Constitution (Matters Reserved
Governance Compliance Statement and
guidance.
to Elected Members and Committee Terms of
Communications Strategy;
Reference) sets out:
The identification and management of potential and
Making suitable arrangements for the actuarial
actual conflicts of interest is integral to NCC
“The Pension Fund Panel is a committee of NCC
valuations of the Pension Fund taking into
achieving its governance objectives, therefore the
with a membership of six elected members which
account the covenant risk posed by the
NCC Pension Fund Panel approved a Conflicts of
reports to the County Council.
participating employers; and,
Interest Policy on 22 May 2015, which will be
Terms of Reference and Powers of the Pension
formally reviewed and updated at least every three
Appointing and reviewing the appointments of
Fund Panel
years.
investment managers, advisers and
consultants.
2017-18 Pension Fund Annual Report
Page 41
Management and Financial Performance and Policy Statement
The Northumberland County Council Pension
Member substitutions will not normally be permitted
the two local trade unions representatives are
Fund’s Governance Policy and Compliance
unless the substitute member(s) can demonstrate
selected, appointed and reappointed by the
Statement provides further detail of the
the appropriate knowledge and skills for the role.
Secretary of the Joint Trade Union Group at
administering authority’s LGPS governance
NCC who is mindful of the Pension Fund’s
The NCC LGPS Pension Board
Appointments
arrangements.
Panel LGPS consists of:
Training Policy and the potential benefit from
continuity of membership.
NCC LGPS Pension Board provides oversight of
the governance and administration of the LGPS. Its
the Lead Member for Finance;
Frequency and pattern of Panel meetings
Terms of Reference are set out in the Constitution.” the Chairperson of the Pension Fund Panel;
The Panel shall meet a minimum of five times in a
Council year, on dates and times determined by
Membership of the Pension Fund Panel
the Monitoring Officer; and,
the County Council, with four quarterly meetings to
Panel membership is as follows:
the Chief Financial Officer.
(among other things) monitor the performance of
six
elected members of NCC;
the Fund’s investment managers, and a fifth
Duration of appointments to the Panel
four
non-voting observer status/co-opted
meeting to receive presentations from investment
Elected member appointments:
members comprising:
managers. Additional meetings will be held when
in accordance with NCC’s Rules of
considered necessary by the Chair of the Pension
one representative of the Fund’s other
Procedure, NCC councillors will be
Fund Panel to consider agenda items requiring
participating employers appointed by the
appointed annually and may be
more time, such as the asset allocation strategy
NCC LGPS Pension Board Appointments
reappointed for further terms. In
review.
Panel (for membership of the Appointments
considering these appointments, NCC will
Panel see below);
Quorum
be mindful of the Pension Fund’s Training A meeting of the Pension Fund Panel will only be
two scheme member representatives,
Policy and the potential benefit from
quorate when at least three voting Panel members
determined by the local trade unions
continuity of membership.
are present.
chosen by and from amongst the unions
Chair/Vice Chair
concerned; and,
Non-voting observer status appointments:
Only elected members of NCC may be the Chair
one scheme member representative
the two representatives appointed by the
and Vice Chair of the Pension Fund Panel.
appointed by the NCC LGPS Pension
Appointments Panel were appointed in 2015
Duration of meeting
Board Appointments Panel.
and reviewed/appointed every four calendar
years thereafter. Representatives may be
Any limit on the duration of a Panel meeting in the
The three scheme member representatives are
reappointed for further terms, and the
Council’s Rules of Procedure will exclude any
deemed to be representative of all scheme
Appointments Panel will be mindful of the
training provided to the Panel as part of the
members (active members, deferred pensioners,
Pension Fund’s Training Policy and the
meeting. When considered necessary by the Chair,
pensioners and dependents).
potential benefit from continuity of
a meeting of the Pension Fund Panel can last up to
The employer representative is deemed to
membership; and,
seven hours, including breaks.
represent all “non-NCC” participating employers.
2017-18 Pension Fund Annual Report
Page 42
Management and Financial Performance and Policy Statement
Code of Conduct
the two Scheme member representatives are
NCC’s responsibilities as an employer
Part 1 of the NCC Code of Conduct for Elected
(i) one of the three non-voting member
This Governance Policy and Compliance
Members shall apply in relation to the standards of
representatives who already sit as observers
Statement relates
only to the governance
conduct of non-voting observer status members as
on the Pension Fund Panel, and (ii) a
arrangements established by NCC in its capacity
if they were voting co-opted members of the
pensioner, to be sourced by seeking interest
as the
administering authority for the LGPS.
Council.
via the annual Pensioner Newsletter; and,
NCC also has responsibilities as a
Scheme
employer participating in the Fund which are not
NCC LGPS Local Pension Board
there will be a minimum of two meetings per
covered by this Statement, for example, to have
To comply with Regulation 106 of the LGPS
year, with the option for the Chair of the LPB to employer discretion policies in place.
(Amendment) (Governance) Regulations 2015,
call more.
terms of reference to establish the NCC LGPS
Approval, review and consultation
The Fund’s Training Policy and Conflicts of Interest
Local Pension Board were approved at the full
This Governance Policy and Compliance
Policy apply to Pension Fund Panel members, LPB
Council meeting on 25 February 2015.
Statement was approved at the NCC Pension Fund
members and the key officers involved in the
Panel meeting on 3 November 2017. It will be
The NCC LGPS Local Pension Board (“the LPB”) is governance and administration of the LGPS.
formally reviewed and updated following any
responsible for
assisting NCC as administering
Other governance arrangements
material change to the matters covered in the
authority in securing compliance with legislation
NCC is committed to inclusion of the Fund’s
Statement
and regulations, and to ensure the efficient and
stakeholders. Therefore, in addition to consulting
effective governance and administration of the
with the participating employers as required by
LGPS. The LPB will have an oversight role in the
LGPS regulations, employers are invited to attend
governance of the Fund.
employer meetings held (usually) annually to
The key points from the LPB terms of reference
communicate Scheme changes and the actuarial
are:
position of the Fund. Employers also receive a
copy of the Fund’s Annual Report and Accounts
there are four members of the LPB, or five if an
each year, which reproduces certain key
independent chair is deemed necessary;
documents in full, such as the Investment Strategy
only the four members of the LPB (i.e. not the Statement and the Governance Compliance
independent chair, if there is one) have voting
Statement.
rights;
The LGPS administration service for NCC will be
the two employer representatives are (i) a
undertaken from January 2018 by South Tyneside
NCC councillor (who does not already sit as a
Council as part of a shared administration service
voting member of the Pension Fund Panel),
on behalf of Tyne and Wear Pension Fund and
and (ii) the non-voting employer representative NCC Pension Fund. The LGPS shared
who already sits as observer on the Pension
administration service holds regular road shows for
Fund Panel;
employees to provide information about the
.
Scheme.
2017-18 Pension Fund Annual Report
Page 43
Management and Financial Performance and Policy Statement
Part 2: Governance Compliance Statement
Reason for non-
Action Complies with
Compliance
Compliance Standard
Arrangements in Place/Action Taken
Principle? Yes/No/Partial
(if applicable)
Structure
The management of the administration of benefits and strategic
The terms of reference for the Pension Fund Panel, as set out in the
Yes
management of fund assets clearly rests with the main committee
Northumberland County Council Constitution include the term:
established by the appointing council.
“ensuring the proper administration of the LGPS and ensuring proper
management of the investments of the Fund.”
That representatives of participating LGPS employers, admitted
The Pension Fund Panel comprises six Northumberland County
Yes
bodies and scheme members (including pensioner and deferred
Council councillors. Participating employers are also represented on
members) are members of either the main or secondary committee
the Pension Fund Panel by one representative who has observer
established to underpin the work of the main committee.
status. Scheme members (i.e. contributors and pensioners) are
represented by two trade union representatives and one
employee/pensioner representative, all three of whom have observer
status on the Pension Fund Panel.
That where a secondary committee or panel has been established,
There is no secondary committee or panel.
Yes
the structure ensures effective communication across both levels.
That where a secondary committee or panel has been established, at
There is no secondary committee or panel.
Yes
least one seat on the main committee is allocated for a member from
the secondary committee or panel.
Representation
That all key stakeholders are afforded the opportunity to be
represented within the main or secondary committee structure. These
include :-
i) employing authorities (including non-scheme employers, e.g.
Employing authorities are represented by the six Pension Fund Panel
Yes
admitted bodies);
members. The six members are all councillors of Northumberland
County Council, a unitary council which represents the majority of the
contributors to the Northumberland County Council Pension Fund.
Other participating employers are represented by one non-voting
employer representative. Other employers are also represented by
the Pension Fund Panel members, some of whom have
representative links with other participating employers.
ii) scheme members (including deferred and pensioner scheme
Scheme members are represented by two non-voting trade union
Yes
members);
observers. Employees and pensioners are also represented by one
non-voting employee/pensioner representative.
2017-18 Pension Fund Annual Report
Page 44
Management and Financial Performance and Policy Statement
Reason for non-
Action Complies with
Compliance
Compliance Standard
Arrangements in Place/Action Taken
Principle? Yes/No/Partial
(if applicable)
iii) independent professional observers; and,
There are no independent professional observers on the Pension
Partial
An independent
Fund Panel, however the Fund’s investment adviser attends all
professional observer
meetings where investments are discussed. The Fund actuary, the
has not been considered
external auditor and the performance measurement service provider
necessary in the past.
attend meetings as required.
There is a cost
associated with having
an independent
professional observer on
the Panel and it is not
clear that any benefits
would outweigh the cost.
iv) expert advisors (on an ad-hoc basis).
The Pension Fund Panel investment adviser attends all meetings.
Yes
That where lay members sit on a main or secondary committee, they
All Panel members and observers are treated equally in terms of
Yes
are treated equally in terms of access to papers and meetings,
access to papers, training, and participation in the decision making
training and are given full opportunity to contribute to the decision
process.
making process, with or without voting rights.
Selection and Role of Lay Members
That committee or panel members are made fully aware of the status,
New Panel members are offered induction training and copies of key
Yes
role and function they are required to perform on either a main or
documents, such as the Statement of Investment Principles. They are
secondary committee.
required to agree to the Northumberland County Council Code of
Conduct for Elected Members as applied to voting co-opted members
of the Council.
That at the start of any meeting, committee members are invited to
Declaration of interests is a standard procedure at the start of all
Yes
declare any financial or pecuniary interest related to specific matters
Pension Fund Panel meetings. Declarations are noted in the minutes.
on the agenda.
2017-18 Pension Fund Annual Report
Page 45
Management and Financial Performance and Policy Statement
Reason for non-
Action Complies with
Compliance
Compliance Standard
Arrangements in Place/Action Taken
Principle? Yes/No/Partial
(if applicable)
Voting
The policy of individual administering authorities on voting rights is
The six Pension Fund Panel members have voting rights; the two
Yes
clear and transparent, including the justification for not extending
trade union representatives, the one employer representative and the
voting rights to each body or group represented on main LGPS
one employee/pensioner representative have observer status only,
committees.
though they participate in the decision making. Voting rights have not
been extended to the trade union and employee/pensioner
representative observers on the Panel because they represent
Scheme members whose pension rights are guaranteed in law and
are not dependent on Fund performance and therefore bear none of
the investment risk. Voting rights have not been extended to the
employer representative who has observer status on the Panel
because doing so would merely duplicate the representation provided
by the Panel members themselves. Also section 102(3) of the Local
Government Act 1972 effectively precludes conferring voting rights on
Panel members who are not elected members of Northumberland
County Council.
Training/Facility Time/Expenses
That in relation to the way in which statutory and related decisions are All new members of the Pension Fund Panel are offered induction
Yes
taken by the administering authority, there is a clear policy on training, training by an officer. The Fund’s Training Policy applies to all
facility time and reimbursement of expenses in respect of members
Pension Fund Panel members. Facilities time is provided by the
involved in the decision-making process.
member’s employer. Expenses are reimbursed in accordance with
Northumberland County Council’s expenses scheme.
That where such a policy exists, it applies equally to all members of
The policy applies equally to all members of the Pension Fund Panel.
Yes
committees, sub-committees, advisory panels or any other form of
There is no secondary committee or panel.
secondary forum.
Meetings (frequency/quorum)
That an administering authority’s main committee or committees meet The Pension Fund Panel meets at least quarterly.
Yes
at least quarterly.
That an administering authority’s secondary committee or panel meet
There is no secondary committee or panel.
Yes
at least twice a year and is synchronised with the dates when the
main committee sits.
That administering authorities who do not include lay members in their Trade union observers and the employee/pensioner representative on
Yes
formal governance arrangements, provide a forum outside of those
the Pension Fund Panel represent lay members.
arrangements by which the interests of key stakeholders can be
represented.
2017-18 Pension Fund Annual Report
Page 46
Management and Financial Performance and Policy Statement
Reason for non-
Action Complies with
Compliance
Compliance Standard
Arrangements in Place/Action Taken
Principle? Yes/No/Partial
(if applicable)
Access
That subject to any rules in the councils constitution, all members of
All Panel members and observers are treated equally in terms of
Yes
main and secondary committees or panels have equal access to
access to papers and advice.
committee papers, documents and advice that falls to be considered
at meetings of the main committee.
Scope
That administering authorities have taken steps to bring wider scheme The terms of reference for the Pension Fund Panel, includes all
Yes
issues within the scope of their governance arrangements.
administering authority responsibilities, and therefore the Panel
considers wider scheme issues and not just investments. The one
exception to this principle is that the Northumberland County Council
Constitution provides that, prior to January 2018 its Staff Committee
should, where necessary, exercise administering authority discretion
over the payment of death grants. From 29 January 2018, this
discretion was delegated to the Head of Pensions at Tyne and Wear
Pension Fund.
Publicity
That administering authorities have published details of their
Each revision of the Governance Compliance Statement will be
Yes
governance arrangements in such a way that stakeholders with an
consulted upon. The Governance Policy and Compliance Statement is
interest in the way in which the scheme is governed, can express an
published on the Northumberland County Council website. The
interest in wanting to be part of those arrangements.
Governance Compliance Statement is reproduced in full within the
Northumberland County Council Pension Fund Annual Report and
Accounts, a copy of which is distributed to all participating employers
with active Scheme members.
2017-18 Pension Fund Annual Report
Page 47
Management and Financial Performance and Policy Statement
Pension Fund Panel Training
The Pension Fund Panel adopted a Training Policy 2017 having previously served on the Panel, this
The Pension Fund Panel recognises the
in 2015-16.
membership change has been very well managed,
importance of ensuring that the members charged
and the Panel has continued to implement
Assessment of the Effectiveness of
with the financial management and decision-
decisions through the year. All members have
the Pension Fund Panel Decisions
making with regard to the pension scheme are fully
shown commitment to training, and continuity has
equipped with the knowledge and skills to
made in 2017-18
been achieved in all other aspects of the operation
discharge the duties and responsibilities allocated
Overall assessment
of the Panel, such as the advisers to the Fund.
to them.
In response to the Government’s requirement for
The Panel would particularly draw attention to the
LGPS asset pooling, the Pension Fund Panel (“
the
Most members of the Panel have attended at least
following achievements in the year:
Panel”) has continued to take an active part in the
part of the series of three training days organised
it has actively participated in the development
development and establishment of the pool
by the Local Government Association (Local
of BCPP Ltd and worked collaboratively in other
operator, Border to Coast Pensions Partnership
Government Pensions Committee), which are
ways with pooling partners;
(BCPP Ltd). The Chair and Vice Chair of the Panel
specifically targeted at elected members with
have been fully engaged during this process,
responsibility for the investment of local authority
it has overseen the implementation of the
attending all BCPP Joint Committee meetings to
pension funds. All new and existing Panel
shared pensions administration service with
provide a voice for Northumberland County Council
members are actively encouraged to attend.
South Tyneside Council;
Pension Fund (“
the Fund”). The Panel has been
All new members of the Panel receive/are offered
it has continued to work collaboratively with
mindful of
both the
opportunity for the Fund
NCC’s LGPS Local Pension Board;
an induction seminar given by an officer.
afforded by improved collaborative working with
Members are offered the opportunity to attend
other LGPS administering authorities in the period
it has approved NCC Pension Fund’s revised
relevant courses and conferences as they arise,
prior to BCPP Ltd’s “go live” to obtain better
Investment Strategy, Administration Strategy,
particularly those organised by the LGA and PLSA. investment management fee rates, and the
threat
Communications Policy, and Governance
Members are invited to attend meetings for
faced by the Fund of incurring (and sharing others’)
Policy and Compliance Statements, and first
employers which may include a presentation by the transition costs in the near future when moving
Administering Authority Discretions Policy;
Fund’s actuary depending on the stage of the
investments to BCPP Ltd.
it has given approval to enable the Fund to opt
triennial actuarial valuation cycle.
The Panel has overseen the implementation of a
up to professional client status with relevant
Members receive briefings from fund managers
shared administration service with South Tyneside
financial institutions prior to implementation of
each quarter on the managers’ processes and
Council, adopting revised policy statements for the
MiFID II;
topics of interest such as risk and control.
Fund to facilitate the delivery of a cost effective and it has supported the introduction of a formal
efficient service.
Members receive training and advice, both verbal
Training Needs Analysis for all Panel and
and written, from the Pension Fund Panel adviser
The Panel faced a major challenge as a result of
Board members;
and officers at Panel meetings and as part of the
membership changes following the May 2017
it has reviewed quarterly fund manager
Pension Fund Panel papers distributed in advance
Northumberland County Council elections, when
performance and the impact of currency
of the meetings.
four out of the six voting Panel members were
hedging; and,
replaced. With two of the four new members from
2017-18 Pension Fund Annual Report
Page 48
Management and Financial Performance and Policy Statement
it has considered GDPR and the potential
fund investment and the Local Government
in attendance at all meetings and have been
implications for the Fund.
Pension Scheme.
allowed the opportunity to provide advice during
meetings to ensure that decisions made comply
Governance arrangements in 2017-18
The Panel has organised additional meetings
with the regulations and best practice.
Administrative arrangements
where necessary to further consider an issue when
The Panel met seven times in the 2017-18 Council focus on a single issue is required, for example,
Panel members have ensured that the views of the
year:
pooling or shared services.
observer status participants have been fully
considered.
four meetings for the normal quarterly business The Panel has delegated authority to the Director
including the review of investments and
of Corporate Resources, in consultation with the
The Chair has conducted the meetings to ensure
monitoring the appointed fund managers, plus
Chair and Vice Chair, where necessary, to ensure
that all members have been encouraged to express
one further meeting which has been added to
that matters could be progressed on a timely basis
their views. All Panel members have contributed to
the standard quarterly timetable;
without the need to revert to the committee.
effective and efficient meetings. NCC’s LGPS Local
Pension Board members have been invited to
one further extraordinary meeting to discuss
The minutes of meetings and reports presented to
attend all formal meetings of the Panel, as well as
and consider NCC’s policies with a view to
the Panel were of adequate detail for members to
all training and working group meetings of the
aligning with South Tyneside Council’s policies ensure that officers had acted on and implemented Panel to observe the decision making process.
before implementation of the shared pensions
the decisions taken.
administration service from January 2018; and,
The Panel has considered and approved a
The papers for the meetings were circulated well in programme of future meetings for the investment
one further extraordinary meeting to appoint
advance to allow adequate time for Panel members managers who will be requested to attend
NCC Pension Fund’s representative on the
to read and consider the issues. The papers were
meetings, and added an additional regular annual
BCPP Joint Committee.
prepared to an adequate standard and included a
meeting to the programme. The programme takes
short summary of each agenda item to aid the
The number of meetings held has been appropriate
a risk based approach to allocating time for the
reader in understanding the key points. Urgent
to allow sufficient time to consider all agenda items
Panel to interview and question the managers, and
items, to be tabled at meetings, have been kept to
and ensure sufficient training and experience have
allows for flexibility so managers can be requested
a minimum although at certain times this has been
been gained by the members before making the
to attend more frequently should the Panel deem it
unavoidable due to ever changing circumstances
decisions required.
appropriate. The programme of meetings allows
especially regarding pooling.
sufficient time for the Panel to understand the fund
The length of the meetings (i.e. usually a full day)
The papers have been presented at the meetings
managers’ philosophy and processes and time for
has been appropriate to enable members to
by officers and advisers with sufficient technical
effective challenge. The Chair of the Panel has
consider complex subject matter, and time has
knowledge, experience and skill to assist members been pro-active in determining the frequency of the
been allowed in the meetings for effective
in understanding the key areas.
fund managers’ attendances at the meetings.
challenge of the external fund managers and other
advisers.
The meetings have been conducted in a format
The Panel monitors the cost of transitions of assets
which has allowed for decisions to be reached
from one fund manager to another.
The Panel has allocated sufficient time at each
promptly but after appropriate consideration.
meeting to consider each decision fully and to
Suitably qualified officers and advisers have been
understand the inherent risks involved in pension
2017-18 Pension Fund Annual Report
Page 49
Management and Financial Performance and Policy Statement
Meetings have been conducted following the
functions. Internal and external audit provide
example, for interviewing current external
protocols as set out in the Northumberland County
independent checks on the work of the officers and managers, where the Panel was supported by
Council Constitution.
the Pension Team.
Mercer’s advice and research information
throughout the process. Panel members have
Access to advice
Performance measurement adviser
devoted time to attend relevant and tailored training
The Panel recognises the importance of
The Panel has the opportunity to question and
events, and supported the introduction of a formal
understanding its responsibilities to the employers
engage with the independent performance
Training Needs Analysis to be completed annually
participating in the Fund and, in particular, the need measurement adviser, Portfolio Evaluation, to
by all Panel and Board members.
to understand and manage investment (asset
discuss the performance of the external investment
allocation) risk. The Panel has had access to
managers. This provides an independent check on
Communication with stakeholders
appropriate advice and has obtained advice in the
the investment managers, the information provided The Panel has promoted effective communication
year from suitably qualified specialists including:
in the Panel papers, and, to some extent, the
with the stakeholders of the Scheme and Fund,
such as road-shows and newsletters for the
investment advice from Mercer;
advice provided by the investment adviser
(Mercer).
contributors (employees). Panel members have
actuarial advice from Aon Hewitt; and,
attended the annual employers’ meeting which has
Continuity
legal advice on contracts entered into from
provided them with valuable feedback.
Pension Fund investment is long term in nature
Squire Patton Boggs, Eversheds as well as the and expertise takes time to build up. Continuity is
legal specialists at South Tyneside Council.
vitally important for effective decision making, with
The Panel has taken advice from Mercer on all
some decisions, such as the decisions about asset
investment decisions made and obtained Mercer’s allocation, being made over the course of several
research information and ratings each quarter for
meetings. During 2017-18, the Panel has had
all of the Fund’s external investment managers.
continuity in the three most important areas for its
effectiveness as a decision-making body, namely:
Senior officers of the Council, such as the Director
of Corporate Resources have attended Panel
its own membership including observers (with
meetings when necessary.
two members from pre-2013, including the
former Chairman, returning to the Panel as
The Panel has an assessment process to formally
members following the May 2017 elections) ;
measure the performance of the investment
adviser on an annual basis.
its investment adviser; and,
Audit
the officers who support the work of the Panel.
The Panel has the opportunity to question and
Training
engage with the external auditor to discuss the
The Panel recognises that pension fund investment
accounting and administration arrangements for
is a technical area and the importance of spending
the Pension Fund and the Scheme. NCC’s internal time on training. The Panel has received adequate
audit programme covers Pension Fund accounting
training for the decisions taken in the year, for
2017-18 Pension Fund Annual Report
Page 50
Management and Financial Performance and Policy Statement
Annual Report of Northumberland County Council’s LGPS Local Pension
1.3
The
Pension Board for 2017-18
Board operates under Terms of Reference
which were agreed by Northumberland
1
Constitution, Representation and Attendance
County Council on 25 February 2015.
1.1 The Northumberland County Council LGPS Local Pension Board (“
the Board”) was constituted
http://committeedocs.northumberland.gov.u
under the Public Service Pensions Act 2013. It consists of two representatives of the Scheme
k/MeetingDocs/8857_M1029.pdf
employers, and two representatives of the Scheme members. In addition it has a non-voting
independent Chair. The Board met on four occasions during the year, and now meets shortly after
1.4 The Board is not a Committee of the
each quarterly meeting of the Northumberland County Council (NCC) Pension Fund Panel (“
the
Council, but is established under the Public
Panel”
Service Pensions Act 2013. It is supported
by a Board Secretary.
In 2017-18, all meetings of the Board were quorate. Membership and attendance at the Board
meetings held in the year was as follows:
1.5 Under the current Terms of Reference,
Board meetings are not open to the public,
24 April
17 July
6 October
11 December
although agendas and minutes can be
2017
2017
2017
2017
found at the following web link:
Gerard Moore - Independent Chair (Non-
http://committee.northumberland.gov.uk/Co
voting)
mmittee.aspx?BodyID=173
Councillor Bernard Pidcock - Employer
Representative, Northumberland County
Council
Mrs Helene Adams - Employer
Representative, Northumberland National
Park Authority
Ms Sue Dick - Scheme Member
Representative, pensioner member
John Clark - Scheme Member
Representative, pensioner member
This represents an overall attendance record of 90%.
2017-18 Pension Fund Annual Report
Page 51
Management and Financial Performance and Policy Statement
2 Functions and Operation of the Board
with the Chair and Vice Chair of the Panel
records at Board meeting and as observers at
2.1 The two primary functions of a Local Pension
being invited to attend Board meetings, also in
Panel meetings and training events. However,
Board are to assist the Administering Authority
an observer capacity. With both arrangements,
regarding the more important dimension of
to:
there is a strong record of cross-observing,
outputs, the Board believes that the ultimate
resulting in transparency, improved
test of its effectiveness is that the Panel is
ensure effective and efficient governance
understanding and mutual trust and respect.
satisfied with the work of the Board.
and administration of the LGPS; and,
2.5 This healthy relationship between Panel and
2.8 The direct costs of operating the Board in
ensure compliance with relevant laws and
Board has enabled the Panel to better manage
2017-18, covering travel and training expenses
regulation.
its own agenda by requesting that the Board
relating to Board members as well as the fees
2.2 It therefore has a monitor/assist/review
give prior consideration and scrutiny to certain
and expenses of the Independent Chair,
purpose, rather than being a decision making
activities, such as new risks, progress chasing
amounted to £14,425 and were met by the
body. It could be seen as being a critical and
on key implementation dates and reviewing
Fund. These costs do not include any indirect
supportive friend. As such, the general
recorded breaches of the law or of Scheme
costs relating to officer time nor apportioned
approach of the Board is to seek assurances,
regulations. However, all breaches information
costs for the use of the Council’s premises,
with evidence from Northumberland County
is initially reported to the Panel and any breach
systems and services which are recharged to
Council Pension Fund (“
the Fund”), that it is
viewed by the Scheme Manager as potentially
the Fund by the Council. This represents an
meeting its objectives (as set out in the
reportable to the Pensions Regulator would be
increase of £2,050 on the direct costs for the
Statement of the Fund’s Objectives approved
brought to the attention of and considered by
previous year. This reflects both the additional
by the Panel on 26 February 2016 and 7 July
the Panel.
roles as described in paragraphs 2.5 and 2.6,
2017), producing its required statements,
plus the Panel decision to increase the number
2.6 To reflect this evolving role, a sharper
managing its risks, etc. so as to achieve the
of Board meetings to reflect the number of
feedback mechanism has been implemented
overall Board’s objectives as set out in
quarterly meetings of the Panel itself (whereas
during the year, whereby, as Board Chair, I
paragraph 2.1 above.
in 2016-17 there were only two physical
present a written executive summary report to
meetings of the Board, plus one virtual
2.3
In so doing, the Board is helping manage the
the Panel following each meeting of the Board.
meeting). The Board is now expected to meet
reputational risk of the Fund, and of the
This sets out the recommendations from the
four times a year. Nevertheless, the Board is
Administering Authority, which is more critical
Board, the assurances it has gained, and any
mindful of delivering value for money, and has
now that the LGPS in England and Wales has
other information deemed of relevance to the
adopted various means of working in a cost
both the Ministry of Housing, Communities
Panel.
effective manner.
andLocal Government (MHCLG) and the
2.7 With this additional level of transparency now
Pensions Regulator (tPR) as its regulators.
in place, the Board had not formally adopted a
2.4 To facilitate the operations of the Board, its
set of key performance indicators (KPI’s).
members are invited as observers to meetings
Some measurements of inputs are readily
of the Panel. This arrangement is reciprocated,
available and positive, such as attendance
2017-18 Pension Fund Annual Report
Page 52
Management and Financial Performance and Policy Statement
3 Work Programme of the Board
the issue of providing insurance cover for
compliance with relevant legislation, and thus
3.1 In devising its work programme, the Board
Board members was still unresolved, although
does seek assurances that due process has
needs to take into account guidance,
informal discussions with tPR have clarified the
been followed regarding investment strategies,
expectations and requests from a number of
type of exceptional circumstances which could
statements and decisions, and that LGPS
different sources. Mindful of the sheer range of
lead to fines on Board members. In 2017-18,
regulations have been complied with.
issues and papers which it could consider
tPR levied its first fine on an administering
3.7 Board agendas are also determined by any
within its governance budget and its Terms of
authority for the failure to submit its Annual
changes in processes and procedures, and by
Reference, the Board recognises the need to
Scheme Return. Whilst it was a nominal fine
requirements to comply with both existing
prioritise and continues to differentiate in its
on this London authority, it was more, perhaps,
annual statutory deadlines and deadlines
agenda between items for detailed discussion,
to serve as a warning to others. As stated in
resulting from new legislative and regulatory
and those for awareness or noting. The Board
paragraph 2.3, the Board is keen to protect the
requirements. For the Fund, two key local
sets its own agenda and prioritises its time
reputational risk of the Fund.
developments were the continuing progress
accordingly.
3.5 The Regulator has issued Code of Practice 14,
towards the establishment of Border to Coast
3.2 The Board agenda needs to reflect the
and expects administering authorities both to
Pensions Partnership pooling arrangement for
expectations as set out in its Terms of
measure themselves against and comply with
investments, and the move to a shared
Reference, supplemented by specific requests
the detailed elements of the Code. The main
administration service with the Tyne and Wear
from the Panel, as reflected in paragraph 2.5
focus of the Code is administration and
Pension Fund (TWPF) from January 2018. In
above. In addition, Board members may
benefits, rather than investment issues, and
addition, 2018 particularly has brought a raft of
request consideration of specific issues.
this, generally but not exclusively, is reflected
compliance dates for new legislation, which
in the composition of the Board agendas. As
has required inclusion in the Board’s agendas.
3.3 In managing its agenda, the NCC Local
such the Board endeavoured to incorporate
Pensions Board is mindful of the role of the
into its work programme for 2017-18 the
LGPS Scheme Advisory Board for England
Regulator’s priorities of basic compliance,
and Wales (SAB). The SAB has two roles:
focussing on the top three risks of record
giving advice both upwards to MHCLG and
keeping, internal controls and poor and
downwards to individual funds. A two way flow
inefficient communications. In addition, the
of information between the SAB and individual
Board was instrumental in arranging a training
funds is expected, and it is the aim of the NCC
and discussion event for Panel and Board
Board to be seen as an example of good
members and officers, attended by the
practice.
Regulator, held in Durham in December 2017,
3.4 Members of the Board are also accountable to
which was also attended by three neighbouring
the Pensions Regulator (tPR) for their
LGPS funds.
performance. The Regulator can issue fines to 3.6 Whilst investment activity is, generally, outside
Board members, or, more likely, to
the consideration by the Pensions Regulator,
administering authorities. At 31 March 2018,
nevertheless, the Board is expected to ensure
2017-18 Pension Fund Annual Report
Page 53
Management and Financial Performance and Policy Statement
4 Outcomes from the Board 2017-18
Regulation, the December 2018 deadline for
examined the documents made available to
4.1 As indicated in paragraph 2.6, a summary
the Guaranteed Minimum Pension
Scheme members.
report is made to the Panel covering the
reconciliation exercise, and annual deadlines
4.5 Paragraphs 4.2 and 4.3 indicate the pace of
Board’s recommendations, assurances gained
for issuing the 2018 Annual Benefit Statements
change facing the Fund, which is not likely to
and the provision of other information for the
and submission of the Annual Scheme Return.
reduce. To help mitigate and manage the
awareness of the Panel. The Board is pleased
It is now clear that the Regulator’s Annual
associated increased risks, the Panel accepted
that all its recommendations in 2017-18 were
Scheme Return for 2018 will be more complex
the recommendation from the Board that the
accepted. Some of the recommendations were
and this will need to be factored into the
Board meet at the same frequency as the
implemented routinely by the Board Secretary,
Board’s work programme for 2018-19.
quarterly meetings of the Panel, which implies
whilst others were accepted by the Panel.
4.3 Also mentioned in paragraph 3.7, one of the
four meetings a year. In so doing, the Panel
Indeed, this new process for succinct feedback
key events of the year was the move to
asked the Board to make observations and
to the Panel was itself a recommendation from
sharing administration services with TWPF.
recommendations regarding any new risks
the Board meeting on 6 October 2017.
Effective and timely communications with
which are identified. The Board gained
4.2 As indicated in paragraph 3.7, the Fund had to
Scheme members is an important element of
assurances that each new risk was being
meet a number of deadlines during the year,
the Regulator’s Code of Practice 14
managed by key personnel at a high level.
some of which were critical from a risk
(paragraph 196 et al). Fund officers actively
4.6 The Board was involved in the completion of
perspective, and fell in between scheduled
engaged with Panel and Board members to
the annual survey by the Scheme Advisory
meetings of the Panel. The Board
help ensure that Scheme member anxiety
Board and discussed in detail the annual
recommended that Panel and Board members
regarding the implications of this change would
survey by the Pensions Regulator. Both
were kept informed of progress towards
be minimised and appropriately responded to.
surveys were completed within the requested
successful completion of the following
The immediate post-transfer evidence
deadlines.
deadlines:
indicates that these desired outcomes were
4.7 A standing item on each Board agenda is a
achieved. Likewise, early communications with
31 August 2017 for issuing the 2017 Annual
Scheme employers, as recommended by the
review of recorded breaches, and reporting
Benefit Statements;
Board, helped with the smooth transition. The
back to the Panel on its findings. For the more
31 December 2017 for submission of the
Board also gained assurances that there would
significant breaches, the Board and its
Annual Scheme Return to the Pensions
be no adverse impact on the access to advice
members, together with other individuals
Regulator; and,
for members of the Scheme.
(Panel members, officers, Scheme employers)
all have a responsibility to report a breach of
3 January 2018 for the opting up process
4.4 Other areas of the “communication with
law to the Pensions Regulator should they
with regards to the Markets in Financial
Scheme members” agenda which the Board
believe it to be of material significance to the
Instruments Directive (MiFID II).
considered were the 50:50 option and the
Regulator (Code of Practice 14 paragraphs
opportunity to participate in the additional
A similar approach is being taken in 2018-19
241 to 275). The Board did examine in detail a
voluntary contributions (AVCs) and additional
regarding the 25 May 2018 implementation
breach caused by the Fund reissuing a small
years’ options. In both cases, the Board
date of the General Data Protection
minority of 2017 Annual Benefit Statements to
2017-18 Pension Fund Annual Report
Page 54
Management and Financial Performance and Policy Statement
correct the Statements originally provided to
explanations given, such as an exodus of
the Board was kept updated on the
members (Code of Practice 14 paragraphs 187
Scheme members on 31 March, the volume of
developments of the Border to Coast Pensions
to 193), and concurred that this was not a
queries resulting from the issuing of Annual
Partnership pooling arrangement, and
reportable breach. Internal procedures allow
Benefit Statements, and the impact of planning
endeavoured to monitor progress from the
any differing opinions to be independently
for the commencement of the shared
perspective of process.
considered and a conclusion reached, and this
administration service which is expected to
4.12 Other duties I performed on behalf of the
may involve seeking a specialist external
make services for members of the Fund more
Board included:
perspective. Training has been provided in this
robust. The Board was satisfied with its
area, and recording and reporting procedures
conclusion that cases of retirements and
reviewing the draft Pension Fund Annual
are in place.
During 2017-18, to the best of
deaths were always prioritised.
Report and Accounts for 2016-17 and
the Board’s knowledge, there were no
recommending some minor changes;
4.10The Board considered the process for
breaches reported to the Regulator.
reviewing the strength of employer covenants,
holding my annual review with the Fund’s
4.8 For 2018-19, following the implementation of
and learned that there were currently no
Section 151 Officer and gaining assurances
the shared administration service, the Panel
charges on property in the Fund’s favour.
from her degree of involvement on pension
and Board will receive information about
fund matters;
4.11The Board examined a number of investment
breaches from TWPF. The Board has received
issues in the year. It made recommendations
as 2017 was an election year for NCC,
examples of the breaches reporting TWPF
regarding the implementation of MiFID II. It
contacting NCC’s party leaders to request
provides to South Tyneside Council’s Pensions
also recommended that when asset managers
that, as far as possible, where previously
Committee and Local Pension Board, and
and investment advisers present investment
serving Panel and Board members had
noted Aon Hewitt’s advice that the Fund
performance statistics to the Panel, such
been re-elected to NCC, they continue to
should adopt TWPF's breaches reporting then
statistics are always shown net of investment
serve in those key roles to retain
work with TWPF to develop it further.
management fees, so that valid comparisons
knowledge, understanding and experience
Following discussions with TWPF officers, the
can be made with the underlying assumptions
in the light of the significant turnover of the
Board was satisfied that appropriate
within the investment strategy. The Board
Panel membership;
explanations will be provided when future
noted the receipt of ISAE 3402 reports which
breaches information is reviewed.
attending industry conferences, and peer
review the internal controls used by the Fund’s
group meetings of Local Pension Board
4.9 A further standing item is to review the Key
asset managers and custodian. A fourth
members, and giving verbal and written
Performance Indicators (KPIs) for the Fund.
investment issue considered was the cash flow
feedback for the information of the Panel
During the year, the Board made
arrangements in place. The Board gained the
and Board; and,
recommendations regarding the format of the
necessary assurances from the information
information to ensure that the significance and
and explanations provided that the cash flow
making a presentation to the newly-elected
materiality of underperforming categories were
arrangements, including any necessary
Panel on the role, purpose and
better understood. Whilst some individual
realisation of assets, were sufficiently robust
achievements of the Board.
indicators were below target in particular
and flexible to ensure the payment of pensions
quarters, the Board was satisfied with the
and lump sums every month as due. Finally,
2017-18 Pension Fund Annual Report
Page 55
Management and Financial Performance and Policy Statement
5 Training
allocation to infrastructure remained
21st Century Trusteeship and its “Quicker,
5.1 Each Board member individually has to be
appropriate; and,
Clearer, Tougher” approach will influence the
conversant with the details of the Scheme,
Work plan, including its expanded Annual
All Board members have attended at least
which translates as having a good working
Scheme Return.
one of the joint training and networking peer
knowledge. Specific external training has
events facilitated by CIPFA and Barnett
7 Thanks
previously been provided for Board and Panel
Waddingham which enabled them to meet
As Chair of Northumberland County Council’s
members on the role and purpose of Board,
Local Pension Board members from other
LGPS Local Pension Board I wish to thank my
and on the reporting and recording of
funds and compare practices and
fellow Board members who have volunteered
breaches.
experience.
their time and energies for their roles, and for
5.2 The assessment of training needs, and how
their ongoing support, as reflected in their
6 Work plan
they are met, is a standing item and examined
excellent attendance record. As a non-voting
6.1 The adjusted work plan for 2017-18 took
on an ongoing basis. Both formal (group) and
Chair, it is pleasing that votes are very rarely
account of the following areas:
informal (by discussion, cascade or one to
required, and that, when called, have all been
one) training is provided to reflect individual
Accounts;
unanimous. Sincere thanks are also expressed
training needs.
to the Board Secretary, Chair and Vice Chair of
Administration and record keeping including
the Pension Fund Panel, to the Democratic
The Board was represented at the June
breaches;
Services Officers and to officers of the Tyne and
2017 annual LGA/LGPS Trustees
Audit and risk management including the
Wear Pension Fund who have attended to help
Conference and will be represented at the
risk register;
the Board’s understanding of the implications of
equivalent event in 2018, which provides a
the shared administration service.
good high level perspective to supplement
Communications with Scheme members;
the greater level of detail in training in
Compliance with the regulations;
individual areas;
Governance;
The Board was well represented at a
regional training event in Durham in
Developments in pooling;
Gerard Moore
December 2017 to hear a presentation from
Investments including MiFID II and
the Pensions Regulator;
investment performance monitoring;
Independent Chair
Fund-specific training was provided at every
Shared administration services; and,
Northumberland County Council LGPS Local
Panel meeting held in the year, covering
Pension Board
subjects including the requirements and
Training.
17 April 2018
potential impact on the Fund of MiFID II and 6.2 There will be a degree of flexibility in future
the General Data Protection Regulation,
work plans to allow for any additional reviews
and the characteristics of infrastructure as
by the Scheme Advisory Board or the
an asset class and whether the 5% Fund
Pensions Regulator, or any other
developments. For 2018-19, the Regulator’s
2017-18 Pension Fund Annual Report
Page 56
Management and Financial Performance and Policy Statement
Administration
External Audit
The Northumberland County Council Pension Fund financial statements are
Until 31 May 2017, the Fund’s accounts were the responsibility of:
audited by:
Steven Mason (S151 Officer)
Ernst & Young LLP
Chief Executive
Citygate
St James’ Boulevard
Assisted by:
Newcastle upon Tyne
Alison Elsdon (Deputy S151 Officer)
NE1 4JD
Director of Corporate Resources
From 1 June 2017, the Fund’s accounts are the responsibility of:
Alison Elsdon (Interim S151 Officer)
Service Director - Finance
Staff members within the Pensions’ Administration Team of the Corporate
Resources Directorate were responsible for administering the Scheme,
including the calculation and administration of benefit payments and transfer
values, as well as recording employee and employer contributions and the
maintenance of employees’ pension records, and pensioners’ and deferred
pensioners’ records. From 29 January 2018 Pensions Administration was
undertaken through a shared service with Tyne and Wear Pension Fund from
offices in South Tyneside.
Staff members within the Pension Fund Accounting Team of the Corporate
Resources Directorate maintain the Fund’s accounts and investment records,
prepare quarterly reports to the Pension Fund Panel, produce the Annual
Report and Accounts and act as a point of contact with the Fund’s investment
managers, advisers and auditors.
2017-18 Pension Fund Annual Report
Page 57
Management and Financial Performance and Policy Statement
Scheme Members
Participating Employers
The Fund’s members are current employees (active members), retired
The employers that participate in the Fund are listed in Appendix 1. A
employees and councillors (pensioner members) and deferred pensioner
summary of the number of participating employers is as follows:
members of the County Council and a number of other scheduled and
Active
Ceased
Total
admitted bodies. At 31 March 2018, the Fund had 9,031 active members
Scheme Employers (known as “Scheduled Bodies”)
27
2
29
and 8,596 pensioner members.
Admitted Bodies
14
1
15
Firefighters and teachers have separate pension arrangements and do not
Total
41
3
44
therefore participate in the Fund.
There are also pension payments made from the Fund to former employees
The following graph is an analysis of the Fund members at 31 March 2018
of Northumberland County Council, who retired prior to local government
Fund members at 31 March 2018
reorganisation of Northumberland in 1974, for whom the pension increase
element (or part thereof) is recharged to councils outside the current
geographical boundaries of Northumberland County Council
Fund Performance
Annual returns
Over the year to 31 March 2018 the Northumberland County Council Pension
Fund’s return was 3.4%, outperforming its benchmark of 3.3%.
Year ending 31 March
2014
2015
2016
2017
2018
%
%
%
%
%
Fund performance
4.00
13.40
-0.70
24.20
3.40
Benchmark
3.70
13.40
-1.20
24.10
3.30
Further details of the membership are given in Appendix 1.
2017-18 Pension Fund Annual Report
Page 58
Fund Performance
Annualised returns
Asset allocation
The following shows the Northumberland County Council Pension Fund’s
longer-term returns compared with the Fund specific benchmark.
Actual
allocation
31 March
3.9%
3.7%
2018
4.0%
5%
5%
5%
26.8%
25%
Analysis of returns
60%
Investment category
Fund
Benchmark
Target
61.7%
%
%
Antin (infrastructure)
6.9
8.0
BlackRock (Property)
10.1
10.1
G.I.P (infrastructure)
(2.3)
8.0
Legal and General (Index tracker)
3.1
3.0
Morgan Stanley (private equity)
1.3
2.6
NB Alternatives (private equity)
15.0
2.6
Pantheon (private equity)
-
-
Equity
Bonds
Property
Private Equity
Infrastructure
Schroder (Property)
10.5
10.1
Wellington (Bonds)
3.3
1.5
Combined Fund
3.4
3.3
All returns are shown net of fees
The Fund’s returns are measured by the independent performance
measurement advisor, Portfolio Evaluation.
2017-18 Pension Fund Annual Report
Page 59
Fund Performance
Management costs
Certain investments in pooled vehicles have investment costs met within the
vehicle rather than an explicit charge paid by Northumberland County Council
Pension Fund. Thus costs are not charged directly to the Fund Account but
are shown gross in management expenses and investment income. They are
included in the fair value adjustments applied to assets concerned within the
Fund Account and corresponding notes. The performance is reported on a net
basis.
The table below shows adjustments made for these costs during the current
and previous financial year using information supplied by investment
managers.
2016-17
2017-18
£000
£000
1,482 Investment management costs charged
1,215
Costs deducted from investment income:
1,384 Pooled investment vehicles
1,000
2,251 Ventures and partnerships
2,637
5,117 Total gross investment management costs
4,852
2017-18 Pension Fund Annual Report
Page 60
Fund Performance
Market commentary
The Fund’s returns
2017-18 was a year of low returns for local authority pension funds with the
The Northumberland County Council Pension Fund produced a return of 3.4%
average being approximately 3.0%.
in 2017-18.
Over the year all primary asset classes had a positive performance. The
The Fund return was 0.1% above its benchmark in 2017-18. Asset allocation
highest returns were achieved by property assets (approximately 10%), equity had a positive impact due to being overweight in equities (a high performing
markets were the next highest performer with the UK having a return of
asset class) and underweight in bonds (a low performing asset class).
approximately 2% and global equities a return of almost 5%. Fixed income
Manager performance was a positive generator of Fund excess return due to
and Private Equity assets only achieved small positive returns whilst the
the positive contributions from the Wellington Corporate Bond portfolio and
return on cash was negligible.
Private Equities via NB Alternatives. Infrastructure portfolios underperformed.
Index funds, as expected, have performed in line with their benchmarks.
Some individual holdings of alternative assets such as private equity had a
return of 20% and in many cases absolute return funds and infrastructure
Relative to Portfolio Evaluation’s database of local authority pension funds the
funds exceeded 15%.
Fund has returned a higher than average return for the one year, five year
and ten year periods.
Over the year ended March 2018 equity markets rose with Emerging Markets
being the best performer. From a UK investor’s perspective sterling once
Over five years the Fund returned 8.6% p.a. which was 0.3% p.a. above the
again had an impact on market returns as it appreciated significantly against
benchmark return of 8.3% p.a. The return has been significantly above returns
the dollar (reversing some of the currency depreciation that occurred in 2016
from cash, salary and retail inflation.
because of Brexit) impacting negatively on returns from non UK markets.
Over ten years the Fund achieved a return of 7.7% p.a. The return has been
Global growth remains the primary driver behind equity performance as
significantly above returns from cash, salary and retail inflation.
markets move from a recovery to expansionary phase. Bond yields remained
‘soft’ for much of the year and finally increased in Q1, resulting in low returns
for this asset class. Within the UK and globally the Basic Materials,
Industrials, Consumer Services and Financial sectors have had good returns
whilst the Consumer Goods, Utilities and Healthcare sectors have
underperformed the broad market. Generally small and mid-capitalisation
stocks have outperformed large capitalisation stocks.
2017-18 Pension Fund Annual Report
Page 61
2017-18 Pension Fund Annual Report
Page 62
Independent
Auditor’s
Opinion
2017-18 Pension Fund Annual Report
Page 63
Pension Fund
Accounts
Pension Fund Accounts
Net Assets Statement
31 March 2017
Note
31 March 2018
£000
£000
UK Investments
Pooled Investment Vehicles:
50,031 Property
53,430
330,347 Equity
324,274
228,645 Index Linked
255,522
Overseas Investments
Pooled Investment Vehicles:
491,294 Equity
502,166
99,911 Other Fixed Interest
103,253
105,653 Ventures and Partnerships
101,580
1,305,881
11
1,340,225
993
Other Investment Balances
11
893
1,306,874
11
1,341,118
3,442
Cash Deposits
1,473
708 Current Assets
12
4,596
(2,702) Current Liabilities
13
(2,924)
1,308,322 Net Assets of the Fund at 31 March
14
1,344,263
The Fund Account and Net Assets Statement do not take account of
obligations to pay pensions and benefits which fall due after 31 March 2018.
The actuarial position of the Fund is shown in the “Statement of the Actuary”
and the “Whole of Pension Fund Disclosures under IAS 26” shown in
Appendices 2 and 3 respectively of the Annual Report and these Financial
Statements should be read in conjunction with that.
2017-18 Pension Fund Annual Report
Page 67
Pension Accounts
Notes Supporting the Pension Fund Accounts
1. Basis of preparation
Investments
Investment gains and losses
The accounts have been prepared in accordance
Valuation of investments
Realised and unrealised gains and losses on
Investments are shown at their fair value which
with the CIPFA/LASAAC Code of Practice on
investments arising in the year to 31 March 2018
has been determined as follows:
Local Authority Accounting in the United Kingdom
are credited to the Fund.
2017-18, which is based on International Financial
(1)
Quoted securities are valued at the bid price
Investment transactions
Reporting Standards as amended for the UK
quotations at close of business on 31 March
Investment transactions arising up to 31 March
public sector, and incorporate the provisions of
2018;
2018 but not settled until later are accrued in the
Financial Reports of Pension Schemes: A
accounts.
(2)
Pooled investment vehicles are stated at the
Statement of Recommended Practice (2015).
bid prices quoted by their respective
Cash and cash equivalents
The accounts summarise the Fund’s transactions
managers on 31 March 2018;
Cash comprises cash at bank and amounts held
for the year to 31 March 2018 and the net assets
by the Fund's custodian. Cash equivalents are
(3)
Other unlisted securities, including
available to pay LGPS pension benefits at
short term, highly liquid investments that are
partnerships, are valued with regard to latest
31 March 2018. They do not take account of
readily convertible to cash and subject to minimal
dealings and other appropriate financial
obligations to pay pensions and benefits which fall
risk of changes in value.
information as provided by their respective
due after 31 March 2018. However the actuarial
managers or those controlling the
Contributions
present value of the promised retirement benefits
partnerships; and,
Contributions represent the total amounts
as set out in “Option C” of IAS 26 (calculated on
receivable from the employers participating in the
assumptions set in accordance with IAS 19) is
(4)
Overseas securities and cash are translated
Fund in respect of their own contributions and
disclosed in Appendix 3 to the Annual Report and
into sterling at the rate ruling at the Net
those of their pensionable employees. The
these Financial Statements should be read in
Assets Statement date.
employers’ contributions are made at rates
conjunction with that.
Investment income
determined by the Fund’s actuary which include
2. Accounting Policies
Dividends and interest on stocks are credi
ted to
deficit funding contributions for some employers.
the Fund in the year in which they become ex-
The accounts have been prepared on an accruals
Employers’ contributions for strain on the Fund
dividend. Interest receivable on loans and deposits
basis, except for transfers of benefits to and from
following early retirements are accounted for in the
is accounted for on an accruals basis. Foreign
other schemes which are accounted for on a
period in which the liability arises.
income has been translated into sterling at the
receipts and payments basis, and except that the
date of the transactions, when received during the
Contributions due at 31 March 2018 are accrued
Net Assets Statement does not include liabilities to
year, or at the exchange rates applicable at 31
in the accounts but no provision is made for
pay pensions after the end of the Fund year.
March 2018 where amounts were still outstanding
employees’ and employers’ contributions relating
The principal accounting policies are as follows:
at the year end.
to sums due on pay awards not yet settled.
Amounts due in year but unpaid are classed as a
current financial asset.
2017-18 Pension Fund Annual Report
Page 68
Pension Accounts
Notes Supporting the Pension Fund Accounts
Benefits and refunds
Investment management expenses
3. Critical judgements in applying
Benefits and refunds are accounted for in the year
Investment management expenses are accounted
accounting policies
in which they become due for payment. Amounts
for in the year in which they become due for
The most significant judgements in applying
due in year but unpaid are classed as a current
payment. Amounts due in year but unpaid are
accounting policies are as follows:
financial liability.
classed as a current financial liability.
Transfer values
Events after the reporting period
Unquoted private equity and infrastructure
Transfer values are those sums paid to or
Events that occurred after 31 March 2018 which
investments
received from other pension schemes for
provide evidence of conditions that existed at 31
Private equity and infrastructure investments
individuals and relate to periods of previous
March 2018 are included in the accounts. Events
are valued based on forward looking estimates
pensionable employment.
that are indicative of conditions that arose after 31
and judgements made by the general partners
March 2018 are not included, except for events
Transfer values received and transfer values paid
(i.e. those controlling the partnerships) to the
with material effect which are disclosed in the
are accounted for on a receipts and payments
funds invested in.
notes to the accounts.
basis.
Actuarial present value of promised retirement
Financial instruments
Taxation
benefits
Al of the Fund’s assets and liabilities, as shown in
The Fund is a registered public service scheme
The actuarial present value of promised
the Net Assets Statement, are classified as
under section 1(1) of Schedule 36 of the Finance
retirement benefits, as disclosed in Appendix 3,
financial instruments, and the principal accounting
Act 2004 and as such is exempt from UK income
is prepared by the Fund actuary adopting
policies applied in accounting for them are
tax on interest received and from capital gains tax
“Option C” of IAS 26. Option C requires
described elsewhere in this note.
on the proceeds of investments sold. Income from
actuarial valuation of the liabilities on an IAS 19
overseas investments suffers withholding tax in
Obligations to pay promised retirement
basis to be prepared at formal triennial
the country of origin, unless exemption is
benefits
valuations only, the most recent being at 31
permitted. Irrecoverable tax is accounted for as a
The actuarial present value of promised retirement
March 2016. The liability disclosed in Appendix
Fund expense as it arises.
benefits is shown in a separate actuarial report
3 is subject to significant variances depending
accompanying the accounts, entitled “Whole of
Administrative expenses
on the assumptions adopted.
Pension Fund Disclosures under IAS 26” and
Direct and indirect staff costs for the pension
shown as Appendix 3 to the Annual Report. This
team, together with apportioned costs for the use
treatment follows “Option C”, as set out in IAS 26
of Northumberland County Council’s premises,
Accounting and Reporting by Retirement Benefit
systems and services are charged to the Fund. A
Plans.
share of the cost of the shared administration
service with South Tyneside Council is charged to
the Fund.
2017-18 Pension Fund Annual Report
Page 69
Pension Accounts
Notes Supporting the Pension Fund Accounts
4. Assumptions made about the future and other major sources of estimation uncertainty
The items in the Net Assets Statement at 31 March 2018 and Appendix 3 involving assumptions about the future and major sources of estimation uncertainty
for which there is a significant risk of material adjustment to the value disclosed within the next financial year are as follows:
Uncertainties
Effect if actual results differ from assumptions
Unquoted private equity There are no publicly listed prices for the Fund’s investments in private
Total private equity and infrastructure investments disclosed in the accounts amount to £102 million.
and infrastructure
equity and infrastructure and therefore there is a degree of estimation and
The Fund’s performance measurement service provider, Portfolio Evaluation, estimates potential
investments
judgement involved in the valuations used.
volatility consistent with one standard deviation movement in the change in value of private equity as
an asset class over the latest three years of 8.4%. This equates to a tolerance of +/- £9 million.
Actuarial present value
Estimation of Fund deficit depends on a number of complex judgements
An increase of 0.5% in the discount rate assumption would decrease the pension liability by
of promised retirement
relating to the discount rate used, and factors such as projected salary
approximately £125 million at 31 March 2016. An increase of 0.25% in assumed salary inflation
benefits
growth and inflation, commutation rates and mortality rates. The Fund
would increase the pension liability by approximately £12 million at 31 March 2016. A one year
actuary provides advice about the assumptions used in calculating the
increase in assumed life expectancy would increase the pension liability by approximately £45 million
deficit. The effects of changes in individual assumptions can be
at 31 March 2016.
measured.
At the balance sheet date, the following new standards and amendments to existing standards had been published but not yet adopted by the Code of
Practice on Local Authority Accounting in the United Kingdom:
IFRS 9 Financial Instruments, which introduces extensive changes to the classification and measurement of financial assets, and a new “expected credit
loss” model for impairing financial assets. The impact wil be to reclassify assets currently classified as loans and receivables to amortised cost. There are
not expected to be any changes in the measurement of financial assets and the Fund does not at this stage anticipate any adjustments for impairments;
IFRS 15 Revenue from Contracts with Customers, presents new requirements for the recognition of revenue, based on a control-based revenue
recognition model. The Fund does not have any revenue streams within the scope of the new standard;
IAS 7 Statement of Cash Flows (Disclosure Initiative), will potentially require some additional analysis of Cash Flows from Financing Activities, however
since the Fund is not currently required to prepare a Cash Flow Statement it does not anticipate any additional disclosure; and,
IAS 12 Income Taxes (Recognition of Deferred Tax Assets for Unrealised Losses), applies to deferred tax assets related to debt instruments measured at
fair value. Currently the Fund does not hold such financial instruments.
2017-18 Pension Fund Annual Report
Page 70
Pension Accounts
Notes Supporting the Pension Fund Accounts
5. Contributions
8. Payments to and on account of leavers
2016-17
2017-18
2016-17
2017-18
£000
£000
£000
£000
Employers’ normal contributions
2,455 Individual transfers to other schemes
5,756
16,923 Administering authority
20,411
38 Payments for members joining state scheme
-
3,270 Scheduled bodies
4,555
88 Refunds to members leaving service
77
2,119 Admitted bodies
2,017
2,581
5,833
Employers’ other contributions
12,263 Deficit funding
11,702
1,439 Strain on the Fund following early retirements
788
9. Management expenses
Members
2016-17
2017-18
8,521 Normal
8,891
£000
£000
44,535
48,364
723 Administrative costs
926
5,117 Investment management expenses
4,852
6. Transfers in from other pension funds
421 Oversight and governance costs
520
2016-17
2017-18
- BCPP Ltd expenses
127
£000
£000
6,261
6,425
3,004 Individual transfers in from other schemes
5,100
Investment management expenses can be further analysed as follows:
3,004
5,100
7. Benefits
2016-17
2017-18
£000
£000
2016-17
2017-18
5,082 Management fees
4,816
£000
£000
Pensions
35 Custody fees
36
37,659 Administering authority
38,515
5,117
4,852
2,118 Scheduled bodies
2,337
Indirect management fees charged within pooled investment vehicles and
1,698 Admitted bodies
1,796
Commutation of pensions and lump sum retirement
partnerships have been included in investment management expenses,
7,466 benefits
6,561
and management expenses analysed in accordance with CIPFA guidance
1,755 Lump sum death benefits
1,112
Accounting for Local Government Pension Scheme Management Costs.
50,696
50,321
External audit fees of £22,516 (£22,516 in 2016-17) are included in
oversight and governance costs.
2017-18 Pension Fund Annual Report
Page 71
Pension Accounts
Notes Supporting the Pension Fund Accounts
10. Investment income
2016-17
2017-18
£000
£000
3,393 Income from pooled investment vehicles
3,040
3,865 Income from ventures and partnerships
5,041
(17) Net interest on cash deposits
1
7,241
8,082
11. Investments
31 March 2017
31 March 2018
£000
£000
Actively managed investments
50,031 Unit trusts (property)
53,430
Other managed funds
99,911 Other fixed interest
103,253
105,653 Ventures and partnerships
101,580
255,595
258,263
Passively managed investments
1,050,286 Unitised insurance policies (equity and index linked)
1,081,962
1,305,881
1,340,225
993
Other investment balances
893
1,306,874
1,341,118
2017-18 Pension Fund Annual Report
Page 72
Pension Accounts
Notes Supporting the Pension Fund Accounts
Fund investments at 31 March 2018 (and at 31 March 2017) were all externally managed in pooled investment vehicles which can be analysed as follows:
Value at
Value at
Column1
1 April
Change in market
31 March
2017
Purchases at cost
Sales proceeds
value
2018
£000
£000
£000
£000
£000
Actively managed investments
255,595
10,474
(13,053)
5,247
258,263
Passively managed investments
1,050,286
885,828
(885,828)
31,676
1,081,962
1,305,881
896,302
(898,881)
36,923
1,340,225
Other investment balances
993
51
893
Total
1,306,874
36,974
1,341,118
Value at
Value at
Column1
1 April
Change in market
31 March
2016
Purchases at cost
Sales proceeds
value
2017
£000
£000
£000
£000
£000
Actively managed investments
347,959
14,773
(157,948)
50,811
255,595
Passively managed investments
709,469
1,239,093
(1,105,110)
206,834
1,050,286
1,057,428
1,253,866
(1,263,058)
257,645
1,305,881
Other investment balances
246
173
993
Total
1,057,674
257,818
1,306,874
The change in market value of investments during the year comprises all increases and decreases in the market value of investments held at any time during
the year, including profits and losses realised on sales of investments during the year.
Transaction costs are included in the cost of purchases and sale proceeds. Transaction costs include costs charged directly to the Fund such as fees,
commissions, stamp duty and indirect costs incurred through the bid-offer spread on investments within pooled investment vehicles. Transaction costs
incurred in the year amounted to £0.03 million (£0.14 million in 2016-17).
2017-18 Pension Fund Annual Report
Page 73
Pension Accounts
Notes Supporting the Pension Fund Accounts
Other investment balances
13. Current Liabilities
31 March 2017
Column1
31 March 2018
31 March 2017
31 March 2018
£000
£000
£000
£000
908 Cash deposits
841
(2,458) Due to Northumberland County Council
(2,516)
85 Outstanding dividends, tax and other investment income
52
(61) Retirement/death grants due
(265)
993
893
(60) Investment management and custodial fees due
(81)
(123) Other
(62)
12. Current assets
(2,702)
(2,924)
31 March 2017
31 March 2018
£000
£000
These can be further analysed as follows:
Contributions due from employers in respect of
31 March 2017
31 March 2018
291 Employers
321
£000
£000
81 Members
75
(40) Central government bodies
(4)
335 Retirement grants prepaid
4,200
(2,458) Other local authorities
(2,516)
1 Other
-
(204) Bodies external to general government
(404)
708
4,596
(2,702)
(2,924)
These can be further analysed as follows:
31 March 2017
31 March 2018
£000
£000
536 Bodies external to general government
168
127 Central government bodies
185
43 NHS bodies
43
2 Other local authorities
4,200
708
4,596
2017-18 Pension Fund Annual Report
Page 74
Pension Accounts
Notes Supporting the Pension Fund Accounts
14. Analysis of Investments
Fund Value and Proportions
The total market value of the Fund at 31 March 2018 was £1,344.26 million
The values and proportions of the Fund’s assets managed externally are
(£1,308.32 million at 31 March 2017), which can be analysed as follows:
as follows:
31 March
31 March
31 March
31 March
2017
2018
2017
2018
£m
%
£m
%
£m
%
£m
%
821.64
62.8 UK and overseas equities
826.44
61.5
1,050.29
80.4 Legal & General Investment Management
1,081.96
80.7
328.56
25.1 Fixed interest and index linked
358.78
26.7
99.91
7.6 Wellington Management International
103.25
7.7
50.03
3.8 Property unit trusts
53.43
4.0
32.74
2.5 Morgan Stanley (private equity)
23.80
1.8
105.65
8.1 Ventures and partnerships
101.58
7.5
21.29
1.6 NB Alternatives (private equity)
20.44
1.5
0.99
0.1 Other investment balances
0.89
0.1
0.0 Pantheon (private equity)
5.94
0.4
Cash deposits and net current
25.64
2.0 Schroder Investment Management
27.41
2.0
1.45
0.1 (liabilities)/assets
3.14
0.2
24.53
1.9 BlackRock Investment Management (UK)
26.14
2.0
1,308.32
100.0
1,344.26
100.0
33.51
2.6 GIP (infrastructure)
32.71
2.4
18.96
1.4 Antin (infrastructure)
19.46
1.5
The majority of the Fund’s value is held in equities. Analysis by
1,306.87
100.0
1,341.11
100.0
geographical area is as follows:
Net current assets of £3.15 million are not externally managed and
31 March
2017
31 March 2018
therefore not shown in the analysis above.
£m
%
£m
%
All fund managers operating the pooled investment vehicles are registered
330.35
40.2 United Kingdom
324.28
39.3
in the United Kingdom.
97.57
11.9 Europe
94.39
11.4
94.47
11.5 North America
99.83
12.1
46.33
5.6 Japan
49.87
6.0
48.73
5.9 Pacific
48.01
5.8
204.19
24.9 Other
210.06
25.4
821.64
100.00
826.44
100.0
2017-18 Pension Fund Annual Report
Page 75
Pension Accounts
Notes Supporting the Pension Fund Accounts
15. Significant holdings
and some members have continued to contribute to existing AVC
At 31 March 2018, the Fund had holdings in certain pooled investment
investments with both Equitable Life and Phoenix Life Limited.
vehicles which individually represented more than 5% of the total value of
Aggregate contributions paid by members during 2017-18 to AVC
Fund net assets. These holdings were:
investments were £265,075 (£242,549 in 2016-17) to Prudential, and
£324.27 million (24.1%) in the UK Equity Index Fund managed by Legal
£1,513 (£1,815 in 2016-17) to Phoenix Life Limited. There were no
and General Investment Management. (Three separate holdings, each
contributions made in 2017-18 (£87 in 2016-17) to Equitable Life.
of £110.12 million (8.4%) totalling £330.35 million or 25.2% at 31 March
At 31 March 2018, the aggregate value of the AVC investments with
2017);
Prudential was £1,952,634 (£1,864,693 at 31 March 2017), with Equitable
Life was £46,806 (£48,852 at 31 March 2017), and with Phoenix Life
£255.52 million (19.0%) in the Over Five Year Index Linked Gilts Fund
Limited was £13,274 (£13,015 at 31 March 2017).
managed by Legal and General Investment Management. (Three
separate holdings, each of £76.21 million (5.8%), which together total
17. Related party transactions
£228.64 million (17.5%) at 31 March 2017);
Northumberland County Council administers the Pension Fund. During
£109.72 million (8.2%) in the RAFI 3000 Overseas Equity Fund
2017-18 the Pension Fund had an average balance of £0.11 million loaned
managed by Legal and General Investment Management;
to the Council for which it received interest of £358 (and an average
balance of £4.93 million borrowed from the Council during 2016-17 for
£100.33 million (7.5%) in the Emerging Markets Overseas Equity Fund
which it paid interest of £17,214). The costs incurred by the Council in
managed by Legal and General Investment Management; and,
administering the Fund, excluding audit fees, are recharged to the Fund on
£68.93 million (5.1%) in the Multi Sector Credit Portfolio managed by
an annual basis. In 2017-18 these costs amounted to £0.70 million (£0.65
Wellington Management International. (£66.27 million or 5.1% at 31
million in 2016-17). £2.52 million was due to the Council at 31 March 2017
March 2017).
(£2.46 million at 31 March 2017).
16. Additional voluntary contributions (AVCs)
Part of the recharge to the Fund relates to the Council’s Section 151
Scheme members may make AVCs that are invested with the Fund’s
Officer, who comprises the key management personnel of the Fund.
nominated AVC provider. A wide range of investment types is offered to
Remuneration recharged is as follows:
members and benefits obtained are on a money purchase basis. These
31 March 2017
31 March 2018
contributions are not included in these accounts in accordance with
£
£
regulation 4(2)(b) of the Local Government Pension Scheme (Management
(9,895) Short term benefits
(9,237)
and Investment of Funds) Regulations 2009 which prohibits administering
(1,563) Post-employment benefits
(1,337)
authorities from crediting AVCs to the Pension Fund.
(11,458)
(10,574)
During 2017-18 members were able to invest in an AVC plan with
Employer contributions for Pension Fund Panel members and senior
Prudential. Prudential was engaged as AVC provider to the Fund in
management who are members of the Scheme are paid in accordance with
February 2001 to replace Equitable Life, and all new AVCs taken out after
the rates set by the actuary in the Rates and Adjustments Certificate, and
that date were with Prudential. Equitable Life replaced Phoenix Life Limited
active member contributions are paid in accordance with rates set in the
2017-18 Pension Fund Annual Report
Page 76
Pension Accounts
Notes Supporting the Pension Fund Accounts
Local Government Pension Scheme Regulations. The terms and conditions
contributions payable are regularly reviewed (every three years) by the
which apply to Panel members and senior managers are the same as
Fund actuary to ensure their adequacy for the Fund’s long term solvency.
those which apply to all other Scheme members. Four voting Panel
The last statutory actuarial valuation of the Fund was carried out at 31
members were members of the Scheme at 31 March 2018 (four at 31
March 2016. Investment, inflation and longevity risks are carried by the
March 2017).
employers and not by the individual Scheme members.
18. Fund’s operations, funding and membership
Northumberland County Council is the administering authority for
Northumberland County Council Pension Fund is part of the Local
Northumberland County Council Pension Fund under the LGPS
Government Pension Scheme (LGPS), which is a statutory, funded
Regulations, and has delegated its responsibility for determining
pension scheme. The benefits of the Scheme are defined and guaranteed
investment policy and monitoring performance to the Pension Fund Panel.
in law.
The Pension Fund Panel comprises six County Council representatives,
The LGPS was contracted out of the State Second Pension until 6 April
one non-voting employer representative, one non-voting Scheme member
2016. Benefits provided include a tax-free lump sum, with the option to
representative and two non-voting Trade Union representatives.
commute pension for lump sum, and a guaranteed annual pension.
External fund managers have been appointed to make the day-to-day
Local authority employees other than those aged over 75, teachers and
investment decisions.
fire-fighters, are automatically admitted to the LGPS, unless they opt out.
At 31 March 2018 there were four external investment managers, namely
Automatic enrolment legislation also applies to all eligible workers. The list
Legal and General Investment Management, Wellington Management
of all participating employers in the Northumberland County Council
International, BlackRock Investment Management (UK), and Schroder
Pension Fund at 31 March 2018 is shown in Appendix 1
Investment Management.
The LGPS changed with effect from 1 April 2014 to a career average
At 31 March 2018 the Fund also had private equity investments with
scheme for service accrued on and after 1 April 2014; service accrued prior
Morgan Stanley, NB Alternatives and Pantheon, and infrastructure
to 31 March 2014 remains linked to final salary.
investment with Global Infrastructure Partners and Antin Infrastructure
Northumberland County Council Pension Fund collects contributions from
Partners.
active members of the LGPS and their employers. It pays pensions and
The Northern Trust Company provides custodial services for the Fund.
related expenses, and reimburses Northumberland County Council for the
costs incurred in administering the LGPS. Surplus funds, not needed for
19. Investment Strategy Statement (ISS)
the day-to-day expenses, are invested with external fund managers for
Northumberland County Council Pension Fund’s ISS is shown on pages 7
long term growth.
to 20
As a funded scheme, contributions received from employers and
employees and transfer values received are invested in the Fund to meet
the benefits when they fall due. Future returns on investments and future
benefits payable are not known in advance, therefore the employer
2017-18 Pension Fund Annual Report
Page 77
Pension Accounts
Notes Supporting the Pension Fund Accounts
20. Outstanding commitments
At 31 March 2018 the Fund had outstanding commitments to six investments.
Outstanding Outstanding
Capital commitment commitment
Year of
Initial
payments
as at 31
as at 31
commitment commitment
made March 2018 March 2018
m
m
m
£m
Antin Infrastructure Partners II
2013
€ 24.00
€ 20.19
€ 3.81
3.34
Global Infrastructure Partners II-C
2011
$43.00
$37.81
$5.19
3.70
Morgan Stanley GDO Fund
2006
$10.00
$9.70
$0.30
0.22
Morgan Stanley Private Markets III
2005
$50.00
$48.48
$1.52
1.09
Morgan Stanley Private Markets IV
2007
$30.00
$29.59
$0.41
0.29
Pantheon Global Select 2017
2017
$65.23
$8.41
$56.82
40.50
Total outstanding commitments
49.14
Outstanding capital commitments totalled £49.14 million at 31 March 2018 (£11.28 million at 31 March 2017). Capital is payable by the Fund to these private
equity and infrastructure investments when called. Amounts called are irregular in value and timing, and are typically spread over a period of ten years.
21. Financial instruments
The value of financial instruments, classified into one of three levels according to the quality and reliability of information used to determine values, is as
follows:
31 March 2017
31 March 2018
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
£000
£000
£000
£000
£000
£000
£000
£000
-
1,200,228
105,653
1,305,881 Financial assets at fair value through profit and loss
-
1,238,646
101,580
1,340,226
5,143
-
-
5,143 Loans and receivables
6,961
-
-
6,961
(2,702)
-
-
(2,702) Financial liabilities at amortised cost
(2,924)
-
-
(2,924)
2,441
1,200,228
105,653
1,308,322 Net financial assets
4,037
1,238,646
101,580
1,344,263
Level 1 means financial instruments valued using unadjusted quoted prices in active markets for identical assets or liabilities; level 2 means financial
instruments valued using mainly observable market data but publicly quoted market prices are not available and level 3 means financial instruments valued
using unobservable inputs. Level 3 instruments include unquoted investments which are valued using various techniques requiring significant judgement in
determining appropriate assumptions. The Fund’s level 3 investments comprise infrastructure and private equity partnerships which are valued in the Net
Assets Statement based on unaudited valuations at either 31 December 2017 or 31 March 2018 provided by the managers controlling the partnerships.
The Fund has no investment assets classified as level 1. No financial instruments have been reclassified during the year.
2017-18 Pension Fund Annual Report
Page 78
Pension Accounts
Notes Supporting the Pension Fund Accounts
The basis of valuations of each class of investment asset is as follows:
Valuation
Asset
Hierarchy
Basis of Valuation
Observable and unobservable inputs
Key sensitivities affecting the valuation
Pooled investment vehicles
Level 2
NAV based prices published at each dealing point
Price of recent transactions for an
N/A
including unitised insurance policies,
identical instrument
unit trusts and other managed funds
(fixed interest)
Ventures and partnerships
Level 3
Valuations prepared by the managers of those controlling the The general partners’ assessments
Material events affecting the valuations
(infrastructure and private equity)
partnerships (i.e. the general partners) in accordance with
of cash flow, growth and profitability
may occur between the date of the
International Private Equity and Venture Capital Guidelines
expectations and other appropriate
financial information provided by the
and the valuation principles of IFRS and US GAAP
financial information
general partners and the Fund’s
reporting date
A reconciliation of fair value measurements within level 3 is as follows:
Change in
Value at
Purchases
Sales
market
Value at
1 April 2017
at Cost
Proceeds
value
31 March 2018
£000
£000
£000
£000
£000
Level 3 Investments
105,653
10,412
(13,093)
(1,392)
101,580
Net gains and losses on financial instruments can be analysed as follows:
2016-17
2017-18
£000
£000
257,645 Financial assets at fair value through profit and loss
36,923
173 Loans and receivables
51
257,818 Total net gains on financial instruments
36,974
2017-18 Pension Fund Annual Report
Page 79
Pension Accounts
Notes Supporting the Pension Fund Accounts
22. Nature and extent of risk arising from financial
the asset liability modelling study which is carried out every three years or
instruments
more frequently if necessary, to consider alternative asset allocations for
the Fund and the long term impact on employer contribution rates; and,
Overall Fund risk
All Fund assets and liabilities, as disclosed in the Net Assets Statement, are
quarterly monitoring by the Pension Fund Panel of the Fund investments
classified as financial instruments. However, as stated at the foot of the Net
and of the updated estimated funding position.
Assets Statement, it excludes the most significant Fund liability, namely the
The remainder of this note only considers risk in relation to the financial
obligations to pay pensions and benefits which fall due after the end of the
instruments disclosed on the Net Assets Statement.
year. The actuarial position of the Fund, which values such pension
obligations, is dealt with in the Statement of the Actuary and the Whole of
Credit risk
Pension Fund Disclosures under IAS 26 shown on Appendix 2 and Appendix
Credit risk is the risk that the counterparty to a transaction or financial
3 respectively to this report.
instrument will fail to discharge an obligation and cause the Fund to incur a
financial loss.
The sole purpose of holding Fund assets is to invest contributions received
from employees and employers, together with transfer values received and
The Fund is exposed to credit risk on its externally managed investment
investment income, so that there are sufficient funds available to pay
portfolio, on cash deposits managed in-house, and on the contributions
pensions when the active and deferred members become pensioner
receivable from the Fund’s participating employers.
members.
The market values of investments usually reflect an assessment of credit risk
The primary risk for the Fund is the risk that Fund assets do not match the
in their pricing and as a result the risk of loss is implicitly provided for in the
liabilities over the long term. It is the gap between the assets and liabilities,
fair value of the Fund’s investments. Credit risk is also managed through the
known as the funding deficit (or surplus), which is most relevant to the Fund’s
selection and monitoring of the Fund’s custodian and investment managers,
participating employers, who are responsible for meeting the funding deficit.
and via their contracts with the Fund. All investment managers and the
Focussing on the risks surrounding the assets alone therefore gives only a
custodian are required to provide the Fund with an up to date AAF06/01
partial picture. For example, should UK gilt yields increase this would reduce
report, or equivalent, annually. The Fund’s active bond manager, Wel ington
the value of the Fund’s holdings in UK gilts, but it may also reduce the
Management International, considers credit risk as part of its portfolio
actuarial value placed on the liabilities to pay pensions and therefore change
construction.
the funding deficit.
Credit risk on cash deposits managed in-house is managed by
Overall Fund risk and the actions taken to manage that risk are described in
Northumberland County Council’s Treasury Management Team, following the
the Fund’s Statement of Investment Principles and in the Funding Strategy
Council’s Treasury Management Policy. This policy is described in detail in
Statement, both maintained as separate documents which can be obtained
Northumberland County Council’s Treasury Management Annual Report.
from the Service Director - Finance.
Credit risk on contributions receivable from employers is minimised by regular
The key controls are:
monitoring of the monthly receipt of payments from employers. There is no
provision for doubtful debts against the amounts due from employers at 31
the actuarial valuation of the Fund which is carried out every three years
March 2017. The LGPS Regulations require that a risk assessment of any
and resets the employer contribution rates;
new employer admitted under paragraph 1(d) of Part 3, Schedule 2 of the
2017-18 Pension Fund Annual Report
Page 80
Pension Accounts
Notes Supporting the Pension Fund Accounts
2013 LGPS Regulations (formerly known as a transferee admitted body) is
Market risk is inherent in the investments that the Fund holds. To mitigate
carried out, and that a bond or guarantee is obtained where necessary. The
market risk, the Fund invests in a diversified portfolio to include a variety of
Pension Fund Panel must approve the admission of any other new admission
asset classes, geographical regions and industrial sectors. The Fund is also
body. Bonds or guarantees have been obtained for the Fund’s admitted
managed by eight separate investment managers, each with different
employers, where possible. The Fund is potentially exposed to credit risk
investment styles and strategies, and different benchmarks and performance
from certain scheduled employers that have neither tax-raising powers nor a
targets. The Fund has a regular rebalancing policy to maintain the asset split
guarantee from central government.
close to the agreed asset allocation target. Full details of asset allocation and
None of the Fund’s financial assets are past due or impaired.
management structure are described in the Fund’s Statement of Investment
Principles maintained as a separate document which can be obtained from
Liquidity risk
the Service Director - Finance.
Liquidity risk is the risk that the Fund will not be able to meet its financial
The purpose of diversifying the portfolio of assets in the Fund is to reduce the
obligations as they fall due.
impact of price movements, because it is unlikely that all asset classes will
The Fund holds in-house cash resources to meet day-to-day needs and to
move in the same direction at the same time.
pay pensions. If there is insufficient cash available to meet immediate needs,
units in the Fund’s holdings with Legal and General Investment Management, To manage market risk, the Pension Fund Panel and its adviser regularly
review the Fund’s asset allocation and management structure, and monitor
which totalled £1,081.96 million at 31 March 2018, can be realised at short
investment managers’ performance on a quarterly basis.
notice and at minimal cost. In eight out of the last ten years the Fund has
experienced net withdrawals from dealings with members, with the maximum
Market risk can be divided into three elements, namely other price risk,
withdrawal in a single year being £10.30 million.
interest rate risk and currency risk. These are considered further below.
With the exception of investments in private equity and infrastructure, there
are no commitments to contribute further capital to any of the existing Fund
investments. When private equity/infrastructure capital calls are received,
payment is made out of in-house cash surpluses, or, if there are insufficient
funds available, units held with Legal and General are realised. Note 20 to
the accounts shows further information about outstanding commitments to
private equity and infrastructure investments.
Market risk
Market risk is the risk of loss from fluctuations in equity and commodity
prices, interest and foreign exchange rates and credit spreads. The Fund is
exposed to market risk from its investment activities, particularly through its
equity holdings. The level of risk exposure depends on market conditions,
expectations of future price and yield movements, and the asset mix.
2017-18 Pension Fund Annual Report
Page 81
Pension Accounts
Notes Supporting the Pension Fund Accounts
Market risk - other price risk
Other price risk is the risk that the value of a financial instrument will fluctuate as a result of changes in market prices. The Fund is exposed to other price risk
on all of its investment assets. This risk is mitigated by asset and manager diversification. Price risk can be quantified as follows:
Percentage
Value on
Value on
Percentage
Value on
Value on
31 March 2017
change
increase
decrease
31 March 2018
change
increase
decrease
£000
%
£000
£000
£000
%
£000
£000
330,347
8.9
359,615
301,078 UK equities
324,274
9.3
324,529
294,020
491,294
11.3
546,976
435,612 Overseas equities
502,166
12.3
561,773
442,558
228,645
11.1
254,096
203,194 Index linked
255,522
10.9
283,298
227,747
99,911
7.0
106,855
92,967 Other fixed interest
103,253
5.7
109,179
97,326
50,031
2.9
51,462
48,600 Property
53,430
2.2
54,590
52,271
105,653
8.6
114,703
96,602 Ventures and partnerships
101,580
8.4
110,059
93,101
993
0.0
993
993 Other investment balances
893
0.0
893
893
1,306,874
6.7
1,394,173
1,219,574 Total investment assets
1,341,118
6.7
1,431,509
1,250,727
The percentage change for total investment assets at 31 March 2018 and at 31 March 2017 includes the impact of correlation across asset classes, so the
value on increase/decrease amounts do not sum to the total investment assets shown above.
Potential price changes are determined based on the observed historical volatility of asset class returns. The potential volatilities are consistent with a one
standard deviation movement in the change in value of the assets over the latest three years. The analysis shown above assumes all other potential variables
remain the same. The price risk shown above includes interest rate risk and currency risk as they cannot be separated out of market price movements.
Market risk - interest rate risk
Interest rate risk is the risk that the value of a financial instrument will fluctuate as a result of interest rate changes. The Fund is exposed to interest rate risk on
its fixed interest investment assets. This risk is mitigated by asset and manager diversification. Interest rate risk can be quantified as follows:
Value following 1%
Value following 1%
Value following 1%
Value following
decrease in interest
increase in interest
decrease in interest
1% increase in
31 March 2017
rates
rates
31 March 2018
rates
interest rates
£000
£000
£000
£000
£000
£000
228,645
254,096
203,194 Index linked
255,522
319,250
191,795
99,911
106,855
92,967 Other fixed interest
101,253
105,435
97,070
328,556
360,951
296,161 Total fixed interest investments
356,775
424,685
288,865
Bond instruments tend to fall in value when interest rates rise and rise in value when interest rates fall. The analysis above shows the likely effect of a 1%
increase or decrease in interest rates on the value of the bond instruments held by the Fund. It assumes all other potential variables remain the same, and
ignores the effect a change in interest rates might have on the value of other investments held.
2017-18 Pension Fund Annual Report
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Pension Accounts
Notes Supporting the Pension Fund Accounts
Market risk - currency risk
Currency risk is the risk of the value of a financial instrument changing as a result of changes in foreign exchange rates. The Fund is exposed to currency risk
on financial instruments that were purchased in any currency other than sterling. This risk is mitigated by asset and manager diversification. Currency risk can
be quantified as follows:
Percentage
Value on
Value on
Percentage
Value on
Value on
31 March 2017
change
increase
decrease
31 March 2018
change
increase
decrease
£000
%
£000
£000
£000
%
£000
£000
Equities
97,571
9.0
106,391
88,750 Europe
94,394
9.1
102,961
85,827
94,473
9.1
103,050
85,896 North America
99,834
9.7
109,520
90,147
46,329
12.9
52,284
40,375 Japan
49,870
15.6
57,663
42,076
48,729
10.7
53,938
43,520 Pacific
48,011
11.0
53,306
42,715
204,192
11.9
228,573
179,812 Other
210,057
12.3
235,811
184,304
99,911
7.6
107,505
92,318 Other fixed interest
103,253
8.1
111,616
94,889
105,653
9.1
115,238
96,067 Ventures and partnerships
100,140
9.6
109,734
90,546
696,858
7.6
749,819
643,897 Total overseas investments
705,558
8.1
762,708
648,408
The percentage change for total overseas investments at 31 March 2018 and at 31 March 2017 includes the impact of correlation across currencies, so the
value on increase/decrease amounts do not sum to the total overseas investments shown above.
Potential value changes are determined based on the observed historical volatility of currency movements relative to sterling. The potential volatilities are
consistent with a one standard deviation movement in currencies relative to sterling over the latest three years. The analysis shown above assumes all other
potential variables remain the same.
2017-18 Pension Fund Annual Report
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Pension Fund
Accounts
Appendix 1
Fund membership at 31 March 2018
Active
Pensioner
Deferred
Active
Pensioner
Deferred
members
members
members
members
members
members
Northumberland County Council
Ponteland Academy Trust
30
-
1
Employees
6,744
7,743
7,822
Ponteland Town Council
3
1
-
Prudhoe Adderlane Primary (part of Wise
Councillors
-
21
22
Academies)
50
-
-
Local Government Pension Scheme Employers
St. Matthew’s Catholic Academy (part of
(known as “Scheduled Bodies”)
St.Thomas More Partnership)
20
1
4
Ashington Town Council
4
-
-
Seaton Valley Council
-
-
1
Berwick Academy
51
9
11
Three Rivers Learning Trust Academy
242
17
80
Blyth Academy (part of Northern Education Trust)
78
13
22
West Bedlington Town Council
1
-
1
Blyth Quays Trust Academy
139
13
49
Admitted Bodies
Choppington Parish Council
2
-
-
Action for Children
9
2
16
Corbridge Parish Council
1
-
1
Active Northumberland
176
67
61
Cramlington Learning Village Academy
104
12
38
Age UK Northumberland
2
14
15
Cramlington Village Primary School (free school)
12
1
5
Barnardo’s Services Ltd
7
1
13
Emmanuel Schools Foundation (formerly Bede
Berwick Borough Housing Ltd (part of Bernicia
Academy)
140
17
53
Group)
6
12
4
Hadrian Learning Trust
147
-
8
Bullough Cleaning Services Ltd
8
2
1
Haltwhistle Community Campus Academy
46
3
15
Compass Chartwells
5
-
-
Hexham Town Council
6
4
-
Feversham School
-
26
13
Meadowdale Academy
34
4
20
Isos Housing Ltd
17
61
21
Northumberland Aged Mineworkers Homes
Morpeth Town Council
5
4
1
Association
7
7
-
North East Learning Trust
87
-
-
Northumbria Healthcare NHS Foundation Trust
43
85
42
Northumberland College
250
167
277
Queens Hall Arts
3
2
2
Northumberland Church of England Academy
276
61
139
The Disabilities Trust
1
3
3
Northumberland Inshore Fisheries and
Conservation Authority
14
5
5
Wansbeck Homes (part of Bernicia Group)
92
62
18
Northumberland National Park Authority
78
38
86
Woodhorn Charitable Trust
17
7
7
Northumbria Magistrates Courts Committee
-
91
49
Other bodies pre 1974
-
10
-
Pax Christi Catholic Academy Trust
74
10
14
9,031
8,596
8,940
2017-18 Pension Fund Annual Report
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Pension Fund Accounts
Appendix 2
Statement of the Actuary for the year ended 31 March 2018
report dated 29 March 2017 (the "actuarial valuation report"). In addition
to the contributions shown above, payments to cover additional liabilities
Introduction
arising from early retirements (other than ill-health retirements) will be
The Scheme Regulations require that a full actuarial valuation is carried out
made to the Fund by the employers.
every three years. The purpose of this is to establish that the Northumberland
4. The funding plan adopted in assessing the contributions for each
County Council Pension Fund (the Fund) is able to meet its liabilities to past
individual employer or Group is in accordance with the Funding Strategy
and present contributors and to review employer contribution rates. The last
Statement. Different approaches adopted in implementing contribution
full actuarial investigation into the financial position of the Fund was
increases and individual employers' recovery periods were agreed with
completed as at 31 March 2016 by Aon, in accordance with Regulation 62 of
the administering authority reflecting the employers' circumstances.
the Local Government Pension Scheme Regulations 2013. The next
valuation will be undertaken as at 31 March 2019.
5. The valuation was carried out using the projected unit actuarial method
for most employers and the main actuarial assumptions used for
Actuarial Position
assessing the funding target and the contribution rates were as follows:
1. The valuation as at 31 March 2016 showed that the funding ratio of the
Fund had increased since the previous valuation with the market value of
Discount rate for periods in service
the Fund’s assets as at 31 March 2016 (of £1,055.26 mil ion) covering
Scheduled Bodies
4.4% per annum
Ongoing Orphan employers
84% of the liabilities allowing, in the case of pre- 1 April 2014
4.4% per annum
Discount rate for periods after leaving service
membership for current contributors to the Fund, for future increases in
Scheduled Bodies
4.4% per annum
pensionable pay.
Ongoing Orphan employers
2.5% per annum
2. The valuation also showed that the aggregate level of contributions
Rate of inflationary pay increases (additional allowance
required to be paid by participating employers with effect from 1 April
made for promotional increases)
3.5% per annum
Rate of increase to pension accounts
2.0% per annum
2017 is:
Rate of increases in pensions in payment (in excess of
19.3% of pensionable pay. This is the rate calculated as being
Guaranteed Minimum Pension):
2.0% per annum
sufficient, together with contributions paid by members, to meet the
The discount rate for scheduled bodies was also used for employers
liabilities arising in respect of service after the valuation date, (the
whose liabilities will be subsumed after exit by a scheduled body
primary rate);
employer.
Plus
In addition the discount rate for orphan liabilities (i.e. where there is no
Monetary amounts to restore the assets to 100% of the liabilities in
scheme employer responsible for funding those liabilities) was 2.1% p.a.
respect of service prior to the valuation date over a recovery period of
The assets were valued at market value.
21 years from 1 April 2017 (the secondary rate), equivalent to 7.9% of
pensionable pay (or £11.2 million in 2017-18 increasing by 10.9%
Further details of the assumptions adopted for the valuation are set out in
every 3 years).
the actuarial valuation report.
3. In practice, each individual employer's or Group of Employers' position is
6. The valuation results summarised above are based on the financial
assessed separately and contributions are set out in Aon Hewitt Limited's
position and market levels at the valuation date, 31 March 2016. As such
2017-18 Pension Fund Annual Report
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Pension Fund Accounts
Appendix 2
the results do not make allowance for changes which have occurred
10. The report on the actuarial valuation as at 31 March 2016 is available
subsequent to the valuation date.
from Northumberland County Council. Requests should be addressed to
xxxxxx.xxxxxx@xxxxxxxxxxxxxx.xxx.xx
7. The formal actuarial valuation report and the Rates and Adjustments
Certificate setting out the employer contribution rates for the period from 1
April 2017 to 31 March 2020 were signed on 29 March 2017. Contribution
Aon Hewitt Limited
rates will be reviewed at the next actuarial valuation of the Fund as at 31
March 2019 in accordance with Regulation 62 of the Local Government
May 2018
Pension Scheme Regulations 2013.
8. Since the date the valuation report was signed, HM Treasury, in its
response to the consultation on indexation and equalisation of GMPs in
public sector schemes, has made an announcement to extend the
indexation of GMPs to those reaching State Pension Age on or before 5
April 2021 (previously 5 December 2018). This extension period was not
allowed for in the valuation results as the actuarial valuation report was
signed off before the announcement, but the increase in liability is not
expected to be material. In addition, amendment Regulations have been
laid which provide for exit credits to be repaid to employers on exit,
effective from 14 May 2018. It is anticipated that the Administering
Authority will consider whether its Funding Strategy Statement should be
revised on account of these changes.
9. This Statement has been prepared by the current Actuary to the Fund,
Aon Hewitt Limited, for inclusion in the accounts of the Fund. It provides a
summary of the results of their actuarial valuation which was carried out
as at 31 March 2016. The valuation provides a snapshot of the funding
position at the valuation date and is used to assess the future level of
contributions required.
This Statement must not be considered without reference to the formal
actuarial valuation report which details fully the context and limitations of
the actuarial valuation.
Aon does not accept any responsibility or liability to any party other than
our client, Northumberland County Council, the Administering Authority of
the Fund, in respect of this Statement.
2017-18 Pension Fund Annual Report
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Pension Fund Accounts
Appendix 3
Whole of Pension Fund IAS 26
Disclosure
Prepared for
Northumberland County Council Pension Fund
Prepared by
Joel Duckham FIA
Date
10 May 2017
Risk. Reinsurance. Human Resources.
Copyright © 2018 Aon Hewitt Limited. All rights reserved.
aon.com
Registered in England & Wales No. 4396810
Registered office:
The Aon Centre | The Leadenhall Building | 122 Leadenhall Street | London | EC3V 4AN
This report and any enclosures or attachments are prepared on the understanding that it is solely for the benefit of the addressee(s). Unless we provide express
prior written consent no part of this report should be reproduced, distributed or communicated to anyone else and, in providing this report, we do not accept or
assume any responsibility for any other purpose or to anyone other than the addressee(s) of this report.
2017-18 Pension Fund Annual Report
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Aon Hewitt Retirement & Investment
Glossary
2016 Valuation Actuarial Valuation of the Fund as at 31 March 2016
Accounting date
This report is suitable for publication in the Fund's accounts for the years ending 31 March 2017, 31 March 2018 and 31 March 2019
Fund Northumberland County Council Pension Fund
Fund Administering Authority Northumberland County Council
1 Introduction
Addressee
This report sets out pension cost information required by the Fund Administering Authority in order to meet their disclosure
requirements in relation to their pension obligations as specified by the accounting standard, IAS 26.
We have carried out this work in relation to benefits payable from the Fund.
Related Documents
The advice provided in this report is supported by advice contained in the following documents:
IAS 26 Terms of Reference dated 26 April 2017 ('Terms of Reference').
Whole of Pension Fund IAS 26 Assumptions Advice dated 10 May 2017 ('Assumptions Advice').
Actuarial Valuation at 31 March 2016 – Northumberland County Council Pension Fund dated 29 March 2017 (the
'2016 Valuation').
Background
CIPFA’s Code of Practice indicates that the Fund accounts for the year ending 31 March 2017 should disclose the "actuarial
present value of the promised retirement benefits" as set out in IAS 26 and that the actuarial present value should be
calculated on assumptions set in accordance with IAS 19 rather than on the funding assumptions.
CIPFA put forward three options for disclosing the actuarial present value of promised retirement benefits and further detail
on these can be found in our Terms of Reference document noted above.
The Fund Administering Authority has chosen "Option C" which was confirmed to us in an e-mail dated 5 April 2017. Option
C requires the actuarial valuation of the liabilities on an IAS 19 basis to be prepared at formal triennial valuations only, the
most recent being as at 31 March 2016. Under Option C this, together with other related information, should be disclosed in
an actuarial report which will accompany the notes to the accounts.
The calculations contained in this document have been carried out on a basis consistent with our understanding of IAS 19.
I confirm that I am a Fellow of the Institute and Faculty of Actuaries.
2017-18 Pension Fund Annual Report
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Aon Hewitt Retirement & Investment
Document structure
This document is structured as follows:
Section 1 summarises the scope of the work we have undertaken.
Section 2 sets out the results of our calculations together with some comments on the calculations.
Appendix A summarises the data used in our calculations.
Appendix B sets out a brief explanation of the method we have used in preparing the figures.
Appendix C sets out compliance and legal considerations.
Methodology
The approach to our calculations under the various options was set out in the Terms of Reference.
Comments on the methodology as it applies to IAS 26 are set out as Appendix B.
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Aon Hewitt Retirement & Investment
2 Information Required for IAS 26
Introduction
IAS 26 requires the "actuarial present value of the promised retirement benefits" (also known as the "defined benefit
obligation") to be disclosed.
The information set out below relates to the actuarial present value of the promised retirement benefits in the Fund which is
part of the Local Government Pension Scheme. The Fund provides defined benefits based on members’ Pensionable Pay.
Pre 1 April 2014 benefits are linked to pay increases while members are active members of the Fund and post 1 April 2014
benefits are linked to statutory (inflationary) revaluation in service.
Actuarial present
Paragraph 6.5.2.7 of CIPFA's Code of Practice on local authority accounting for 2016/17 sets out that the actuarial present
value of promised
value of promised retirement benefits based on projected salaries should be disclosed.
retirement benefits
The results as at 31 March 2016, together with the results as at 31 March 2013 are shown in the table below. The
corresponding fair value of Fund assets is also shown in order to show the level of surplus or deficit within the Fund when the
liabilities are valued using IAS 19 assumptions.
Value as at
Value as at
31 March 2016
31 March 2013
£M
£M
Fair value of net assets
1,055.3
914.4
Actuarial present value of the promised retirement benefits
1,421.4
1,281.2
Surplus / (deficit) in the Fund as measured for IAS 26 purposes
(366.1)
(366.8)
2017-18 Pension Fund Annual Report
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Aon Hewitt Retirement & Investment
Assumptions
The latest full triennial actuarial valuation of the Fund's liabilities was carried out as at 31 March 2016. The principal
assumptions used for the purpose of IAS 26 by the Fund's independent qualified actuaries were:
31 March 2016
31 March 2013
(% p.a.)
(% p.a.)
Discount rate
3.4
4.4
RPI Inflation
2.9
3.4
CPI Inflation (pension increases) *
1.8
2.4
Rate of general increase in salaries **
3.3
3.9
* In excess of Guaranteed Minimum Pension increases in payment where appropriate. We also recommend the assumption for the revaluation rate of
pension accounts is set equal to the assumption for pension increases.
** In addition, we have allowed for the same age related promotional salary scales as used at the actuarial valuation of the Fund as at the appropriate
date.
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Aon Hewitt Retirement & Investment
Principal demographic assumptions
Post retirement mortality (1)
31 March 2016
31 March 2013
Males
Base table
Standard SAPS S2P Tables
Standard SAPS S1N Tables
Rating to above base table (years) (2)
0
0
Scaling to above base table rates
100%
100%
Allowance for future improvements
CMI 2014 with a long term rate of improvement of
CMI 2012 with a long term rate of improvement of
1.5%
1.5%
Future lifetime from age 65 (currently aged 65)
22.7
22.8 (3)
Future lifetime from age 65 (currently aged 45)
24.9
25.0 (3)
Females
Base table
Standard SAPS S2P Tables
Standard SAPS S1N Tables
Rating to above base table (years) (2)
0
0
Scaling to above base table rates
100%
100%
Allowance for future improvements
CMI 2014 with a long term rate of improvement of
CMI 2012 with a long term rate of improvement of
1.5%
1.5%
Future lifetime from age 65 (currently aged 65)
24.8
25.3 (3)
Future lifetime from age 65 (currently aged 45)
27.1
27.6 (3)
(1) The mortality tables shown apply to normal health retirements. Different rates apply to retirements in ill health.
(2) A rating of x years means that members of the Fund are assumed to follow the mortality pattern of the base table for an individual x years older than them. The ratings shown apply to normal health retirements.
(3) Future lifetimes shown at 31 March 2013 are for individuals aged 65 (or 45) at 31 March 2013, so do not show the effect of anticipated mortality improvements between 2013 and 2016.
31 March 2016
31 March 2013
Commutation
Each member was assumed to surrender pension
Each member was assumed to surrender pension
on retirement, such that the total cash received
on retirement, such that the total cash received
(including any accrued lump sum from pre 2008
(including any accrued lump sum from pre 2008
service) is 75% of the permitted maximum.
service) is 75% of the permitted maximum.
Key risks associated with
Volatility of results
reporting under IAS 26
Results under IAS 26 can change significantly depending on market conditions. The defined benefit obligation is linked to yields on AA-rated corporate bonds, while a
significant proportion of the assets of the Fund are invested in equities. Changing markets in conjunction with discount rate volatility will lead to volatility in the funded
status of the Fund.
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Aon Hewitt Retirement & Investment
Choice of accounting assumptions
The calculation of the actuarial present value of the promised retirement benefits involves projecting future cash-flows from the Fund many years into the future. This
means that the assumptions used can have a material impact on the surplus / deficit. As such, the Fund Administering Authority should ensure that it understands the
reasoning behind the assumptions adopted and is comfortable that they are appropriate.
Furthermore, the Fund Administering Authority should bear in mind that, as required by the accounting standard, the assumptions (with the exception of the discount
rate) have been set so that they represent a best estimate of future experience from the Fund. In practice future experience within the Fund may not be in line with the
assumptions adopted. This means that the liabilities shown in this report only represent one view of the future and the true position could be different from those shown.
For example members could live longer than foreseen or inflation could be higher or lower than allowed for in the calculations.
Sensitivity of results to key assumptions
IAS 19 requires entities to disclose information about the sensitivity of the defined benefit obligation to changes in key assumptions.
The following table illustrates the sensitivity of the defined benefit obligation to small changes to some of the key actuarial assumptions:
Change in assumption
Increase in defined benefit
obligation
0.1% p.a. decrease in the discount rate
£25.2M
0.1% p.a. increase in the assumption for inflationary
£4.5M
pay increases
1 year increase in life expectancy
£45.5M
GMP equalisation
The Government intends that GMPs will be equalised in due course. At present it is not appropriate to allow for this in the accounts because the methodology for
implementing the equalisation is uncertain. However, once the methodology is clarified, the defined benefit obligation will increase and it is likely that the associated cost
will need to be recognised through the profit and loss account. As such, a risk exists as to the magnitude of the impact of equalising GMPs.
2017-18 Pension Fund Annual Report
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Aon Hewitt Retirement & Investment
Appendix A Data Summary
Active members at 31 March 2016
Number
Average
Total Pensionable
Average
Average
age
Pay
Pensionable
service
(£000 p.a.)
Pay
(years)
(£ p.a.)
Men
2016
2,286
45.8
51,434
22,500
9.9
2013
2,175
46.8
50,193
23,077
13.5
Women
2016
6,266
45.7
86,972
13,880
5.4
2013
5,565
46.2
77,114
13,857
7.2
Total
2016
8,552
45.7
138,406
16,184
6.6
2013
7,740
46.4
127,307
16,448
8.9
Note:
The average ages shown in these tables are unweighted. Pensionable Pay is over the year to the valuation date, and includes annualised pay for new entrants during the year. Actual part-time pay is included for part-timers. It is based on the 2014 scheme definition of
pensionable pay. Average service at the 2016 valuation is from 31 March 2014.
Deferred pensioners at 31 March 2016
Number
Average age
Total pension
Average pension
(£000 p.a.)
(£ p.a.)
Men
2016
2,139
45.3
4,959
2,318
2013
1,924
44.9
4,374
2,273
Women
2016
6,395
46.9
7,379
1,154
2013
5,658
45.7
6,187
1,093
Total
2016
8,534
46.5
12,338
1,446
2013
7,582
45.5
10,561
1,393
Note:
The average ages shown in these tables are unweighted. The deferred pension amounts shown above include increases up to and i ncluding April 2016 (2013: April 2013). There were also 849 (2013: 522) members who had yet to decide whether to take transfer payments and
suitable allowance has been made in our calculations.
Pensioners at 31 March 2016
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Aon Hewitt Retirement & Investment
Number
Average
Total pension
Average
age
(£000 p.a.)
pension
(£ p.a.)
Men
2016
2,867
70.7
23,786
8,296
2013
2,727
70.0
22,428
8,225
Women
2016
4,066
70.2
13,403
3,296
2013
3,683
69.4
11,892
3,229
Dependants
2016
1,053
73.8
3,571
3,391
2013
967
76.2
2,755
2,849
Total
2016
7,986
70.9
40,760
5,104
2013
7,377
70.5
37,075
5,026
Note:
The average ages shown in these tables are unweighted. The pension amounts shown above include the increase awarded in April 2016 (2013: April 2013).The figures include 51 children in receipt of pensions (2013: 54).
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Aon Hewitt Retirement & Investment
Appendix B Explanation of Actuarial Methods Used
Benefits valued
Our calculations relate to benefits payable from the Fund (as set out in LGPS Regulations at the relevant times) and related
arrangements. These benefits include retirement pensions and benefits on members’ death and leaving service.
A summary of the benefits that have been valued can be found in the report on the actuarial valuation of the Fund as at 31 March 2016.
Unfunded defined benefit obligations e.g. discretionary pensions benefits being paid under the Local Government (Early Termination of
Employment) (Discretionary Compensation) Regulations (generally referred to as Compensatory Added Years), have not been valued as
they do not form part of the Fund. However, they may be required in the IAS 19 figures prepared for individual employers within the Fund.
Data
The valuation of accrued pension benefits for IAS 26 purposes requires detailed information in respect of each member such as date of
birth, gender, date of joining the fund, their accrued pension and so forth.
This information was supplied by the Fund Administering Authority for the 2016 formal actuarial valuation of the Fund in the form of a
standardised data extract from the Fund Administering Authority's administration systems.
The formal valuation process (which is a precursor to the valuation for IAS 26 purposes) involves a series of structured validation tests on
the data items for integrity and reasonableness. These tests, together with any actions taken in respect of specific data issues, are
documented as part of the normal valuation process.
Where tests reveal issues with the data, the Fund Administering Authority is contacted with a view to resolving all data queries. Only
when the data queries have been resolved to the satisfaction of the Fund Actuary, will the valuation proceed.
We can confirm that no data issues were identified at the 2016 valuation that we believe would have a material effect on the calculations
presented in this report. Overall, it is our opinion that the data presented at the valuation is sufficiently accurate, relevant and complete
for the Fund Administering Authority to rely on the resulting IAS 19 (IAS 26) figures.
Assumptions
IAS 19 sets out the following general requirements for the setting of assumptions:
Actuarial assumptions shall be unbiased and mutually compatible; and
Financial assumptions shall be based on market expectations, at the balance sheet date, for the period over which the obligations
are to be settled.
Furthermore IAS 19 requires that the assumed discount rate is determined by reference to market yields at the balance sheet date on
high quality corporate bonds and in countries where there is no deep market in such bonds, the market yield (at the balance sheet date)
on government bonds shall be used.
CIPFA have informed us that under IAS 26 the assumptions are ultimately the responsibility of the Fund Administering Authority. Any
assumptions that are affected by economic conditions (financial assumptions) should reflect market expectations at the balance sheet
date.
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Aon Hewitt Retirement & Investment
The key financial assumptions are set out on the first page of Section 2 and the derivation of the assumptions is set out in our
assumptions letter referred to in the Related Documents section.
Method and
The figures at 31 March 2016 have been based on a full calculation of the liabilities using the assumptions set out in the Assumptions
calculations
Advice.
Assets
IAS 19 requires that assets be valued at Fair Value which is defined as the amount for which an asset could be exchanged or a liability
settled between knowledgeable, willing parties in an arm's length transaction. For the purposes of this exercise we have taken the asset
values directly from the Fund's audited annual accounts as at 31 March 2016.
Treatment of Risk
To value the risk benefits we have valued service related benefits based on service completed to the date of calculation only.
Benefits
Expenses
Fund administration expenses are not reserved for in the Net Present Value of Actuarial Liabilities, consistent with the treatment adopted
for individual employers who require IAS 19 disclosures. If the Fund wishes the administration expenses to be treated in a different way
they should discuss this further with their auditor and ourselves.
IFRIC 14
IFRIC 14 is an interpretation of paragraph 58 of the IAS 19 accounting standard setting out limits to the amount of surplus that can be
recognised by employing organisations in their accounts. We do not believe it has any relevance to IAS 26.
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Aon Hewitt Retirement & Investment
Appendix C Compliance and Disclaimer
Compliance with
This report should be read in conjunction with the supporting documents listed in Section 1.
actuarial standards
This report and the work related to it, is subject to and complies with the Financial Reporting Council Limited's Pensions Technical
Actuarial Standard and the Technical Actuarial Standards on reporting actuarial information, data and modelling.
The results of the calculations provided in this document constitute a valuation exercise.
Disclaimer
The calculations contained in this report have been made on a basis consistent with our understanding of IAS 19 and IAS 26. Figures
required for other purposes should be calculated in accordance with the specific requirements of those purposes. It must not be assumed
that figures produced for the purposes of IAS 26, which we present in this report, have any relevance beyond the scope of the Financial
Reporting Standards requirements.
This report is prepared on the instructions of the Fund Administering Authority as appropriate ("you" or "your") in relation to the
preparation of IAS 26 figures for the Fund Administering Authority's financial reporting as at the accounting date. It has been prepared at
this date, for the purpose and on the basis set out in this report and for the benefit and use of the Fund Administering Authority.
This report should not be used or relied upon by any other person for any other purpose including, without limitation, other professional
advisers, including your auditors and accountants ("third parties" or "third party"), to the Fund Administering Authority. All third parties are
hereby notified that this report shall not be used as a substitute for any enquiries, procedures or advice which ought to be undertaken or
sought by them. We do not accept any responsibility for any consequences arising from any third party seeking to rely on this report.
We neither warrant nor represent (either expressly or by implication) to any third party who receives this report that the information
contained within is fair, accurate or complete, whether at the date of its preparation or at any other time.
Unless we provide express prior written consent, no part of this report should be reproduced, distributed or communicated to any other
person other than to meet any statutory requirements and, in providing this report, we do not accept or assume any responsibility for any
other purpose or to anyone other than the Fund Administering Authority as appropriate.
We recognise that your auditors may request you directly to see a copy of our report, as part of their audit process and under statutory
requirements. We agree that you may release our report to those auditors for such purpose however in making such disclosure, you shall
ensure that this disclaimer remains attached to this report, and you further agree that you shall ensure that your auditors have read this
disclaimer. For the avoidance of doubt, if we are approached directly by any third party for copies of this report or requested to answer
queries about the report, we will require such third party to accept a third party release non reliance letter agreeing that we did not
prepare the report for the third party and we do not accept any legal obligations to them. Please rest assured that this approach does not
affect our contractual obligations to you as our client, with whom we continue to hold a duty of care in accordance with our terms of
engagement.
This report was based on data available to us at the effective date of our calculations and takes no account of developments after that
date except where explicitly stated otherwise.
With respect to data on which we have relied in producing this report, whilst we have taken certain limited steps to satisfy ourselves that
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Aon Hewitt Retirement & Investment
the data provided to us is of a quality sufficient for the purposes of our investigation, including carrying out certain basic tests for the
purpose of detecting manifest inconsistencies, it is not possible for us to confirm the accuracy or completeness of the detailed information
provided. Whilst the Fund Administering Authority may have relied on others for the maintenance of accurate data, it is their responsibility
to ensure the adequacy of these arrangements and ultimately the Fund Administering Authority that bears the primary responsibility for
the accuracy of such information provided. The information used is summarised in various sections of this report and Appendix A.
2017-18 Pension Fund Annual Report
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Pension Scheme Tax Reference Number:
Address for enquiries
(for the LGPS in England and Wales)
Corporate Resources Directorate
Northumberland County Council
PSTR 00329946RE
County Hall
Morpeth
Northumberland
NE61 2EF
Email
: xxxxxx.xxxxxx@xxxxxxxxxxxxxx.xxx.xx
Pension Scheme Tax Reference Number:
If you would like to receive the
(for the LGPS administered by Northumberland County Council)
Northumberland County Council Pension
Fund Report and Accounts document in
PSTR 00328721RH
large print, braille, audio or in another
format or language please contact us.
Telephone 0345 600 6400
Fax 01670 511413
Text phone 01670 542521
Typetalk 018001 0345 600 6400
Email xxx@xxxxxxxxxxxxxx.xxx.xx
2017-18 Pension Fund Annual Report
Page 100
If you need this information in Large Print, Braille, Audio or
in another format or language please contact us :
Telephone 0845 600 6400
Fax 01670 511413
Text phone 01670 542521
Typetalk 018001 0845 600 6400
Email xxx@xxxxxxxxxxxxxx.xxx.xx
Document Outline