Carbon Bubble Risk, Pension Fund Fiduciary Duty & Risks To Local Taxpayers Through LGPS Underfunding and Exposure to Investment Losses in Defined Benefit Schemes

Joel M Benjamin made this Freedom of Information request to Northumberland County Council

This request has been closed to new correspondence from the public body. Contact us if you think it ought be re-opened.

The request was successful.

Dear Northumberland County Council,

The Bank of England, HSBC, Citi Bank, Mercers, and the World Bank are clear that climate change is a major and growing financial issue. Bank of England Governor Mark Carney has said that climate change poses physical, liability and transition risks, which are all increasing.

Therefore, carbon bubble risk is now a clear material financial risk, and it is in the best interests of pension fund members to have regard to and actively manage, financial risks posed by climate change.

Additionally, as the individual ensuring compliance with SIP documents and signing off on the pension fund annual accounts, the s151 officer has a fiduciary duty to local taxpayers - who would ultimately be required to bail out the defined benefit LGPS fund, in the event of significant losses suffered in carbon markets, should the LGPS fund not manage carbon risk prudently.

We are therefore requesting the Pension Fund/ Committee/ Board would provide information or set out the appropriate response of the fund to the following questions:

(1) Please provide the two most recent versions of the Statement of Investment Principles (SIP)
(2) Will the fund be reviewing its SIP documents to pursue best practice and review carbon risk management and investment mandates in advance of LGPS pooling? If so when?
(3) Please provide current contract and procurement documents for the Investment Adviser(s) to the Pension Fund Committee.
(4) Please provide current procurement and contract documentation for the external fund manager(s) as set out in investment management agreements.
(5) Please provide a list of compliance breaches identified by the Head of Finance/ s.151 officer and brought to the attention of the Pension Fund Committee, during the last three (3) financial years.
(6) What steps have the Pension Fund Committee and Board taken to address the financial risks posed by climate change?
(7) Since the December 2015 Paris COP agreement, Peabody bankruptcy, and Exxon Mobil downgrade, has the pension fund changed its approach to climate change risk management and investment in carbon stocks?
(8) Please provide Pension Fund Committee and Board meeting minutes where climate change, and carbon bubble investment risk was discussed, and minuted 2014 - 2016.
(9) Have you surveyed or formally consulted with your individual members or employers for their views on your ESG policies or practices in the last 10 years?
(10) How much does the fund spend on ESG engagement services and can you give any examples of engagement activities relating to climate change/carbon risk from the last 10 years?

We are asking these questions to understand how/ if UK local authority pensions funds fiduciary duties are being met in regard to climate change related financial risks - and to appraise financial risks to taxpayers in situations where fiduciary duty to manage carbon investment risk has been breached.

Yours faithfully,

Joel M Benjamin

Northumberland County Council

1 Attachment

Our Ref: 1828  

Dear Enquirer,

INFORMATION REQUEST

Thank you for your request for information which will be dealt with under
the terms of the Freedom of Information Act 2000 / Environmental
Information Regulations 2004.

In some circumstances a fee may be payable and if that is the case, we
will let you know the likely charges before proceeding.

If you have any queries about this matter please contact us. Please
remember to quote the reference number above in any future communications.

Kind regards

Information Governance Office
Northumberland County Council
County Hall
Morpeth
Northumberland
NE61 2EF

Tel: 0345 600 6400
Email: [Northumberland County Council request email]
Web: http://www.northumberland.gov.uk

Northumberland County Council

1 Attachment

Our Ref: 1828   

Dear Enquirer,

FREEDOM OF INFORMATION REQUEST

I refer to your Freedom of Information request (ref: 1828).

This request is being handled under the Freedom of Information Act 2000.

I am writing to ask you to clarify your request. This is because we are
not certain that we have understood your request and we need further
details from you in order to identify and locate the information.

Therefore I should be grateful if you would please clarify exactly what
you mean by the following question, and what you define as a compliance
breach:
 
(5) Please provide a list of compliance breaches identified by the Head of
Finance/ s.151 officer and brought to the attention of the Pension Fund
Committee, during the last three (3) financial years.

If you need assistance with this, please contact me on by email as
follows: [email address].

If we do not receive your clarification within 3 calendar months from
today we will close your request. If after the 3 month period you then
provide clarification, your request will be logged as a new request.

Yours sincerely

FOI Co-ordinator - Corporate Resources
Information Governance Office
Northumberland County Council
County Hall
Morpeth
Northumberland
NE61 2EF

Tel: 0345 600 6400
Email: [Northumberland County Council request email]
Web: http://www.northumberland.gov.uk

Dear Northumberland County Council,

By "Compliance Breach" I mean that Under Section 70 of the Pensions Act 2004 (see below), certain people (ie s151 or monitoring officer) are required to report breaches of the law to the Pensions Regulator where they consider that they have a reasonable cause to believe that a legal duty which is relevant to the administration of the scheme has not been, or is not being, complied with and that failure to comply is likely to be of material significance to the Pensions Regulator in the exercise of its functions.

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Yours faithfully,

Joel M Benjamin

Northumberland County Council

6 Attachments

Our Ref: 1828

Dear Enquirer,

FREEDOM OF INFORMATION ACT REQUEST 

I refer to your Freedom of Information request in relation to Statement of
Investment Principles.
Right of Access 

Section 1(1) of the Act provides any person making a request for
information to a public authority is entitled. 

(a) to be informed in writing by the public authority whether it holds
information of the description specified in the request (which Section
1(6) of the Act designates as the "duty to confirm or deny"), and 

(b) if that is the case, to have that information communicated to him. 

The right is to obtain access to the information itself and not to the
document or record which contains it. 

The Act creates a general right of access to information held by public
authorities subject to various exemptions. 

Northumberland County Council confirms that it holds the information you
have requested, please see the (attached/following) information in
response. 

(1) Please provide the two most recent versions of the Statement of
Investment Principles (SIP)
See attached
(2) Will the fund be reviewing its SIP documents to pursue best practice
and review carbon risk management and investment mandates in advance of
LGPS pooling? If so when?
The Fund will not be reviewing its SIP as this is being replaced by
the Investment Strategy Statement (ISS) from April 2017.

Environmental or corporate governance considerations are taken
into account in the selection,non-selection, retention and realisation of
investments, and this will be reflected in the ISS, as it was in the SIP

(3) Please provide current contract and procurement documents for the
Investment Adviser(s) to the Pension Fund Committee.

An exemption is claimed in respect of your request for a copy of
the contract, under section 43(2) of the Freedom of Information Act.
This section provides that information is exempt information if its
disclosure would, or would be likely to, prejudice the commercial
interests of any person (including the public authority holding it).
Investment advisers are not obliged to publicly disclose the content of
their commercial agreements. Disclosing such information in the public
domain would place our Investment Adviser at a competitive disadvantage to
its competitors who had not been placed under a similar obligation. In
addition we consider that it is likely that disclosure of the contract
into the public domain would prejudice the Council's own commercial
interests because of the affect it would have on the Council's ability to
negotiate favorable contractual provisions with Investment Advisers in the
future.

We have considered whether the public interest favors maintaining
the exemption or disclosing the information. In this case we are
satisfied that the public interest in ensuring that the Council is able to
achieve best value for money through the best possible contractual terms
and through the engagement of Investment Advisers who may be discouraged
from providing their expertise to the authority in the event that
their commercial strategy were to be visible to their competitors,
outweighs the public interest in increasing transparency and
accountability in public spending.

(4) Please provide current procurement and contract documentation for the
external fund manager(s) as set out in investment management agreements.
An exemption from disclosure is also claimed in respect of
this information under section 43(2) of the Freedom of Information Act for
the reasons set out in response to Q3.
(5) Please provide a list of compliance breaches identified by the Head of
Finance/ s.151 officer and brought to the attention of the Pension Fund
Committee, during the last three (3) financial years.
Thank you for providing clarification on question (5), as follows:
By "Compliance Breach" I mean that Under Section 70 of the Pensions Act
2004 (see below), certain people (ie s151 or monitoring officer) are
required to report breaches of the law to the Pensions Regulator where
they consider that they have a reasonable cause to believe that a legal
duty which is relevant to the administration of the scheme has not been,
or is not being, complied with and that failure to comply is likely to be
of material significance to the Pensions Regulator in the exercise of its
functions.

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The Pensions Regulator became responsible for oversight of the LGPS with
effect from 1 April 2015, therefore NCC started providing recordable (not
reportable) breaches to its Pension Fund Panel from that date. This
information is publicly available from our website.  No breaches have been
identified by the S151 Officer or Panel or the Local Pension Board as
reportable to the Pensions Regulator. 
(6) What steps have the Pension Fund Committee and Board taken to address
the financial risks posed by climate change?
Day to day investment decision making is delegated to the external
investment managers, who take account of all relevant risks, in the
decision making process.
The Pension Fund Panel  considers all investment related risks as part of
its currently ongoing strategy review, taking advice from its investment
advisers, Mercer.
(7) Since the December 2015 Paris COP agreement, Peabody bankruptcy, and
Exxon Mobil downgrade, has the pension fund changed its approach to
climate change risk management and investment in carbon stocks?
Day to day investment decision making is delegated to the external
investment managers, who take account of all relevant risks, in the
decision making process.
The Pension Fund Panel  considers all investment related risks as part of
its currently ongoing strategy review, taking advice from its investment
advisers, Mercer.
(8) Please provide Pension Fund Committee and Board meeting minutes where
climate change, and carbon bubble investment risk was discussed, and
minuted 2014 - 2016.

There are no minutes containing this discussion.

(9) Have you surveyed or formally consulted with your individual members
or employers for their views on your ESG policies or practices in the last
10 years?
The Fund consults with its employers on its SIP every year, and will
consult on the ISS before 31 March 2017
(10) How much does the fund spend on ESG engagement services and can you
give any examples of engagement activities relating to climate
change/carbon risk from the last 10 years?

The Fund is a member of the Local Authority Pension Fund Forum (LAPFF)
with effect from January 2017.  Details of LAPFF engagement  activities 

LAPFF is a collaborative body of 71 LGPS funds with assets under
management of £175 billion. LAPFF operates to protect the long-term
investment interests of beneficiaries by promoting the highest standards
of corporate governance and corporate responsibility amongst investee
companies.  On behalf of its members, LAPFF runs a diverse work plan
providing comprehensive engagement over a range of different work streams
including LGPS reform, the promotion of good governance, reliable
accounting and various aspects of responsible investment. Publications
released in 2016 include ‘[2]Engaging for a Low Carbon Transition’,
‘The [3]Corporate Tax Transparency Initiative Report’ and a ‘Mergers and
Acquisitions Trustee Guide’
(see [4]www.lapfforum.org/Publications/latest-research).  The total spend
budgeted for the LAPFF work plan in 2016/2017 is in excess of £400,000.  

The annual subscription fee payable by the Fund for the year to 31-3-2018
is £8,460pa

The attached LAPFF briefing provides further information.

The Fund has subscribed to PIRC corporate governance service for the
UKFTSE 350 for many years including the last 10 years.  I cannot disclose
the fees paid for the reasons set out in 3 and 4 above.

PIRC reports monitor company environmental policy and over the last year
we have included CDP (carbon disclosure project) data on company
disclosures.

 

I have attached a copy of the PIRC UK Shareholder Voting Guidelines 2016,
and  refer you to Chapter 8 that covers our approach to sustainability and
corporate responsibility reporting in UK companies.

The Fund's passive manager, Legal and General engages with companies in
the passively managed equity finds.  L&G's Corporate Governance Policy is
attached. 

Complaints 

If you are unhappy with the way your request for information has been
handled, you can request an internal review by writing within 2 months
from the date of this response to the Information Governance Office: 

Information Governance Office
Northumberland County Council
County Hall
Morpeth
NE61 2EF 

Email: [5][Northumberland County Council request email] 

Information Commissioner 

If you remain dissatisfied with the handling of your request, you have a
right by Section 50 of the Act to apply to the Information Commissioner
for a decision as to whether your request has been dealt with in
accordance with the requirements of the Act at: 

The Information Commissioner's Office
Wycliffe House
Water Lane
Wilmslow
Cheshire 
SK9 5AF 

Tel: 01625 545 745
Email: [6][email address

There is no charge for making an appeal. 

Yours sincerely 

FOI Coordinator - Corporate Resources
Information Governance Office
Northumberland County Council
County Hall
Morpeth
Northumberland
NE61 2EF

Tel: 0345 600 6400
Email: [7][Northumberland County Council request email] 
 Web: [8]http://www.northumberland.gov.uk 

References

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