Annual report and accounts, E Council, G Britain, LM Bichard, D Kester

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Content: ANNUAL REPORT AND ACCOUNTS ISLE OF WIGHT COUNCIL PENSION FUND 2016-17 Registration number with the Registrar of Occupational and Personal Pensions Schemes 49/22
Contents Foreword .................................................................................................................................................................. 3 Scheme management and advisers ........................................................................................................................4 Financial Performance.............................................................................................................................................6 Investment Policy and Performance Report ............................................................................................................9 Actuarial Statement ...............................................................................................................................................17 Statement of Responsibilities for the Statement of Accounts................................................................................19 Fund Account.........................................................................................................................................................20 Net Asset Statement..............................................................................................................................................21 Knowledge and Skills Framework Compliance Statements ..................................................................................49 Communications Policy Statement ........................................................................................................................51 Governance Policy Statement ...............................................................................................................................53 Terms of Reference of Pension Fund Committee .................................................................................................54 Terms of Reference of the Pension Board ............................................................................................................55 APPENDIX A ­ Glossary of Terms........................................................................................................................59 APPENDIX B ­ Analysis of market value by Industrial Sector ..............................................................................64 APPENDIX C ­ Investment Strategy Statement ...................................................................................................65 APPENDIX D ­ Funding Strategy Statement ........................................................................................................73 APPENDIX E - Governance Compliance Statement...........................................................................................112 Independent auditor's statement .........................................................................................................................136 2
Foreword I am pleased as the Chairman of the Pension Fund Committee to present the annual report and accounts of the Isle of Wight Council Pension Fund for the year ended 31 March 2017, setting out the overall financial activity of the fund. It also includes the latest Funding Strategy Statement and the Investment Strategy Statement, both of which have been reviewed and approved by the committee. The overall net assets value of the fund at 31 March 2017 was Ј559.5 million, an increase of Ј85.5 million in the year. Investment performance in 2016-17 has once again been strong, despite significant market volatility throughout the year. The fund's investment assets (as shown in note 17 to the accounts) generated a positive return (a profit) of 17.9% for the year to 31 March 2017, increasing the overall valuation by Ј86.0 million. 2016-17 has been a busy year for the fund, with the completion of the 2016 triennial valuation; significant progress towards the pooling of the fund's investments through the ACCESS pool, in line with the government agenda; the introduction of new Investment Regulations, to facilitate the pooling agenda and requiring a new Investment Strategy Statement; and continuing developments in the fund's governance regime. The valuation of the fund produced a significant improvement in the funding level for the fund, increasing from 78% in 2013 to 92% in 2016. The employer contribution rates for all employers were agreed before the end of the financial year, and have been implemented from 1 April 2017. During the year ended 31 March 2017, the local Pension Board (as required by the Public Service Pensions Act 2013) met three times. At each meeting the board reviews decisions made by the pension fund committee at its previous meeting, to ensure they have been made in accordance with the fund's internal policies, and wider legislation and regulations. There have been no issues arising from these reviews. 2017-18 will be as busy as last year, if not more so: The fund will need to ensure compliance with two major pieces of EU legislation, being the Markets in Financial Instruments Directive (MiFID II) by January 2018, and the General data protection Regulations (GDPR) by May 2018. Briefings will be provided to committee and board members on both of these exercises; The ACCESS pool inter authority agreement has now been signed by all 11 participating funds, and the procurement exercise for the operator of the new pooled investment vehicle has begun. Officers and elected members will continue to work closely with other funds to get the new vehicle operational by April 2018, including plans to transfer the fund's investment assets into the pool; Procurement exercises will be carried out for two of the fund's significant adviser contracts ­ actuarial services and investment consultancy ­ with a view to new contracts being in place from 1 April 2018; There are a number of significant data exercises to complete on the administration side, including the Guaranteed Minimum Pension reconciliation as a result of the ending of contracting out of state pensions, and the review of the quality data received into the pension fund from employers, including the council; A detailed training programme is being prepared for members of the committee and board, and will be delivered throughout the year to ensure that members have the appropriate knowledge and skills to undertake their roles effectively, in line with the requirements of the Pensions Regulator; The governance framework for the fund, including policies and processes, will be reviewed and developed throughout the year, to improve compliance with the Pensions Regulator's Code of Practice on Governance and Administration of Public Service Pension Schemes. Councillor Adrian Axford Chairman of Pension Fund Committee 3
Scheme management and advisers
Members of the Isle of Wight Council Pension Fund Committee are appointed following the annual meeting of
the Full Council. The members during the period were:
Appointed
Resigned
Councillor I Warlow
Chair
5 May 2017
Councillor A Axford
Chair 17 May 2017
Councillor B Abraham
16 June 2017
Councillor R Barry
5 May 2017
Councillor R Barry (re-appointed)
16 June 2017
11 July 2017
Councillor R Blezzard
27 February 2017
Councillor P Brading
16 June 2017
Councillor V Churchman
16 June 2017
Councillor D Eccles
5 May 2017
Councillor S Hutchinson
5 May 2017
Councillor G Kendall
5 May 2017
Councillor D Pitcher
8 July 2016
Councillor S Smart
16 June 2017
Councillor I Stephens
16 June 2017
Councillor A Garratt
26 July 2017
The Committee is advised by: Mr C Ward, Director of Finance and section 151 officer Ms J Holden, Investment Consultant ­ Mercer Limited Mrs J Thistlewood, Technical Finance Manager In addition a non-voting representative of both the admitted/scheduled bodies and staff union attend the Pension Fund Committee meetings
Investment Managers Baillie Gifford & Co Calton Square 1 Greenside Row Edinburgh EH1 3AN
Majedie Asset Management Ltd 5th Floor 10 Old Bailey London EC4M 7NG
Newton Investment Management Ltd The Bank of New York Mellon Centre 160 Queen Victoria Street London EC4V 4LA
Schroder Investment Management Limited 31 Gresham Street London EC2V 7QA
Actuarial Services Hymans Robertson LLP 20 Waterloo Street Glasgow G2 6DB
Investment Consultants Mercer Limited Belvedere 12 Booth Street Manchester M2 4AW
AVC Provider Prudential AVC customer services Stirling FK9 4UE
Custodian BNP Paribas Securities Services 10 Harewood Avenue London NW1 6AA
Bankers National Westminster 3 Hampshire Corporate Park PO Box 462 Templars Way Chandlers Ford SO53 3RY
Lloyds Bank ­ from 30/06/2017 3 Town Quay Southampton SO14 2AQ
4
Auditors Ernst & Young LLP Apex Plaza Forbury Road Reading RG1 1YE
Scheme Administrator Isle of Wight Council County Hall Newport Isle of Wight PO30 1UD
5
Financial Performance Analytical review Fund account
2016-17 Ј000
Net withdrawals from dealings with members
(1,895)
Management expenses
(2,213)
Net return on investments Net increase in net assets
89,603 85,495
2015-16 Ј000 (2,828) (3,764) 1,109
Notes Increase in basic contributions; reduction in pension strain contributions; inflationary increases in benefits paid; lower payments to leavers Lower performance fees paid to UK and global equity managers, reflecting underperformance compared to benchmarks. Positive performance in UK equities markets. All fund managers generated positive absolute returns.
(5,483)
Net Assets Statement Equities Pooled Investment Vehicles Cash deposits Other net liabilities Total net assets
2016-17 Ј000 111,854 448,164 5,949 (6,478) 559,489
2015-16 Ј000
Notes
93,993 Positive performance in UK Equities market
383,781 Good performance in Global equities market.
2,028
Increase in cash balance held for future investment reflecting low investment returns
(5,808)
Increase in short term borrowing to fund operational activities.
473,994
Membership data Total membership of the fund continues to increase year on year, although active membership has fallen. The profile of membership numbers from 2012 to 2017 is shown below:
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 - Pensioners Deferred members Active members Total
fund membership 2012 - 2017
2012-13 3,558 5,265 3,883 12,706
2013-14 3,687 5,461 4,067 13,215
2014-15 3,873 5,574 3,973 13,420
2015-16 4,036 6,777 3,807 14,620
2016-17 4,192 7,176 3,753 15,121
6
This year two employers ceased to be part of the Pension Fund, but two new employers joined as staff were transferred across. There were also two Town and Parish Councils that re-joined the Fund. The Isle of Wight Council remains the largest employer in the fund, and its share of the active members has adopted an upward trend in real numbers. Despite this there is an overall decline in the proportion from 86.1% in 2012/13 to 83.9% as at 31 March 2017. The composition of active membership numbers is shown below:
Active membership by employer type
4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 - Admitted bodies Scheduled bodies Administering authority Total
2012-13 135 404 3,344 3,883
2013-14 179 550 3,338 4,067
2014-15 162 658 3,153 3,973
2015-16 137 511 3,159 3,807
2016-17 118 485 3,150 3,753
Contributions analysis The table below sets out the employers of the fund, including the number of active members, the basic employees and employers contributions received in the year, and the number of times (and percentage value) of late paid contributions during the year. The LGPS Regulations specify that contributions must be received by the 19th of the following month. No interest was charged on any of the instances of late payment.
Administering Authority
Active members at 31 March 2017
Employee basic conts. Ј000
Employer basic conts. Ј000
instances % value
late
late
Isle of Wight Council
3,150
2,865
10,861
-
-
3,150
2,865
10,861
-
-
Scheduled Bodies
Isle of Wight College
195
209
839
-
-
Sandown Bay Academy Ryde Academy
65
74
284
56
47
186
-
-
-
-
Lanesend Academy
40
23
98
Cowes Enterprise College
48
49
190
-
-
Northwood Primary
25
18
51
-
-
St Blasius Academy
20
11
47
-
-
Island Free School
17
15
62
-
-
Ryde Town Council
6
6
22
5 48.1%
IoW Studio School
4
4
14
1
7.8%
St Catherine's School
2
8
18
5 40.4%
Cowes Town Council
2
1
2
-
-
7
Northwood Parish Council Newport Parish Council Chale Parish Council Wootton Bridge Parish Council Gurnard Parish Council
Active members at 31 March 2017 1 1 1 1 1
Employee basic conts. Ј000 1 1 0 1 1
Employer basic conts. Ј000 2 5 1 4 3
instances late - -
% value late - -
2 14.8%
-
-
485
469
1,828
13
2.1%
Admitted Bodies Sovereign Housing Group Island Roads Southern Vectis Barnardo's Southern Housing Group Cowes Harbour Commissioners Yarmouth Harbour Commissioners Top Mops Ventnor Botanic Gardens Caterlink Trustees of Carisbrooke Castle Museum Visit IOW Ltd Ryde Arena(ceased Oct 16) TOTAL
38 31 16 11 5 4 4 3 2 2 1 1 0 118 3,753
76 60 14 15 10 18 10 2 3 2 2 1 213 3,547
235 215 66 52 39 45 31 7 9 6 2 7 3 717 13,406
-
-
-
-
-
-
-
-
-
-
-
-
-
-
2 19.3%
6 61.1%
-
-
-
-
1
4.2%
1
8.0%
9
2.6%
24
0.2%
8
Investment Policy and Performance Report ISLE OF WIGHT COUNCIL PENSION FUND Report and Accounts for the period ending 31 March 2017 Introduction The Fund's investments have been managed during the year under review by Majedie, Newton, Baillie Gifford and Schroder. The strategic benchmark allocation as at 31 March 2017 was:
Manager
Mandate
Allocation Control ranges Benchmarks
Majedie
UK Equities
Newton
Global Equities
Baillie Gifford Diversified Growth
Schroder
UK Bonds
Schroder
UK Property
Total Source: Statement of Investment Principles
22.5% 32.5% 15.0% 22.0% 8.0% 100.0%
19.5 ­ 25.5% 29.5 ­ 35.5% 11.0 ­ 19.0%
FTSE All-Share index MSCI AC (All Countries) World index (net dividends re-invested) UK Base Rate + 3.5%
18.0% ­ 26.0% 4.0% ­ 12.0% -
Merrill Lynch Sterling Broad Market IPD Pooled Property Fund indices All Balanced Funds Median
Summary of strategic changes
There have been no strategic benchmark changes over the year. The asset allocation at the start and end of the year is shown in the table below.
Asset Allocation
Manager/Asset Class Majedie ­ UK Equity Newton ­ Global Equity Baillie Gifford ­ Diversified Growth Schroder ­ UK Bonds Schroder ­ UK Property Total Source: Investment Managers Figures may not sum to total due to rounding.
Start of Year (Ј'000) 106,119 176,010 70,603 98,856 29,580 481,168
Actual Asset Allocation
End of Year 1 (Ј'000)
Start of Year (%)
129,587
22.1
219,561
36.6
78,020
14.7
108,739 31,332 567,239
20.5 6.1 100.0
End of Year (%) 22.8 38.7 13.8 19.2 5.5 100.0
Benchmark Allocation (%) 22.5 32.5 15.0 22.0 8.0 100.0
1 The assets reported in this table are valued at mid price. This is different to the valuation of investment assets shown in Note 17 to the accounts, which is based on bid price, as required by the CIPFA code of practice. The difference of Ј928,000 relates to the Schroder UK Property portfolio.
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Reasons for variance from Benchmark The Fund's actual asset allocation was maintained within the control ranges set relative to the strategy benchmark over the period. The Fund began the year with an overweight to equities and underweight to bonds, diversified growth and property. The Fund has remained overweight to global equities and underweight property, diversified growth and bonds over the year. Market Background Investment Markets2 Over the 12 month period to 31 March 2017, both risk and defensive asset classes generally posted strongly positive returns as the ultra-accommodative monetary policy measures adopted by the world's major central banks continued to support financial markets. The strong returns posted by most asset classes came despite bouts of volatility following the surprise result of the UK's referendum in June 2016, where the electorate voted to leave the European Union and the unexpected victory for Donald Trump in the US Presidential Election in November 2016. The latter event in particular served to support equities in developed markets, as investors perceived Trump's fiscal policies as being supportive for corporate earnings. Sterling depreciated sharply against its major counterparts following the `Brexit' vote and ended the year 13% weaker against the US Dollar compared to the prior year. This led to material gains for unhedged Sterling investors in foreign assets. Meanwhile, subdued growth expectations in the UK culminated in further loosening of monetary policy by the Bank of England in August 2016, and led to a downward shift in government bond yields. This augmented strong returns for defensive assets, notably index-linked bonds, where returns were further amplified by increased inflation expectations in the UK in light of the depreciation of Sterling. Financial markets continue to be sensitive to the actions of the world's major central banks. In the US, the Federal Reserve Bank (the "Fed") matched investors' expectations by increasing its target rate by 0.25% at its December 2016 meeting and then a further 0.25% at its March 2017 meeting. Elsewhere the European Central Bank ("ECB") announced in December 2016 that its extended Quantitative Easing programme would continue until December 2017 at the earliest, albeit at a slightly reduced pace of asset purchases. The ECB subsequently confirmed in the first quarter of 2017 that further stimulus to this is unlikely to be needed in the near term. The Bank of Japan announced an explicit shift to yield curve targeting in September 2016. While significant political and economic uncertainty remains following the referendum vote, economists now forecast UK Real GDP growth for 2017 to be 1.7% (a reduction from 2.1% from a forecast before the vote but an increase from 0.7% from the forecast just after) whereas inflation, as measured by the change in the Consumer Price Index, is expected to increase to 2.6% (from 1.6% before the vote) reflecting the depreciation of Sterling3. 2 Statistics sourced from THOMSON REUTERS Datastream unless otherwise specified. 3 Sourced from Consensus Economics, 10 April 2017 10
Equities At a global level, developed markets as measured by the FTSE World index, returned 32.9%. Meanwhile, a return of 35.6% was recorded by the FTSE All World Emerging Markets index. At a regional level, European markets returned 27.9% as indicated by the FTSE World Europe ex UK index. At a country level, UK stocks as measured by the FTSE All Share index returned 22.0%. The FTSE USA index returned 35.2% while the FTSE Japan index returned 32.8%. Equity market total return figures are in Sterling terms over the 12 month period to 31 March 2017. Bonds Returns on UK government Bonds as measured by the FTSE Gilts All Stocks Index, returned 6.6%, while long dated issues as measured by the corresponding Over 15 Year Index had a return of 12.3% over the year. The yield for the FTSE Gilts All Stocks index fell over the year from 1.9% to 1.4%. The FTSE All Stocks Index Linked Gilts index returned 19.9% with the corresponding over 15 year index exhibiting a return of 26.1%. Corporate debt as measured by the Bank of America Merrill Lynch Sterling Non-Gilts index returned 9.3%. Bond market total return figures are in Sterling terms over the 12 month period to 31 March 2017. Property UK property investors continued to benefit from the improving property market. Over the 12 month period to 31 March 2017, the IPD UK All Property Index returned 3.8% in Sterling terms. The three main sectors of the UK Property market each recorded positive returns over the period (retail: 2.3%; office: 1.4%; and; industrial 9.4%). Currencies Over the 12 month period to 31 March 2017, Sterling fell by 13.0% against the US Dollar from $1.437 to $1.250. Sterling depreciated 13.75% against the Yen from Ґ161.55 to Ґ139.34. Sterling depreciated against the Euro by 7.3% from 1.26 to 1.17 over the same period. 11
Investment Performance
Manager/Asset Class
Last Year
Fund (%)
Benchmark (%)
Last 3 Years
Fund (% p.a.)
Benchmark (% p.a.)
Majedie ­ UK Equity
26.0
22.0
8.4
7.7
Newton ­ Global Equity
24.2
32.2
15.5
15.6
Baillie Gifford ­ Diversified Growth
10.9
3.8
6.0
4.0
Schroder ­ UK Bonds
10.0
8.0
8.6
7.8
Schroder ­ UK Property
6.7
5.2
12.1
10.8
Total
18.7
18.2
10.4
10.2
Figures shown are based on performance provided by State Street and investment managers. Performance figures are gross of fees.
The Fund has outperformed the benchmark over both the one and three year period by 0.4% and 0.2% respectively. This came largely from the outperformance of Majedie, Baillie Gifford and Schroders.
Linking the Investment Strategy with the Funding Strategy
Although the investment strategy is set from a long-term perspective, it is formally reviewed every 3 years or so after every actuarial valuation. The Committee reviews the investment strategy to ensure that it remains appropriate for the Fund's liability profile.
The Committee believes that the investment strategy in place provides the Fund with the necessary potential for future returns to meet future benefits while also minimising the risk being taken. The majority of the Fund's investments can be considered liquid to ensure that pensions can be paid as they fall due. Custodial Arrangements
Manager
Custodian
Majedie
BNP Paribas
Newton
Bank Of New York Mellon
Baillie Gifford
Bank Of New York Mellon
Schroder
BNP Paribas
Source: Investment Managers Pooled funds have no direct custody arrangements in place, the custodians shown are appointed by the investments managers.
The Committee is responsible for ensuring the Fund's assets continue to be securely held. The Committee reviews the custodian arrangements from time to time and the Fund auditor is authorised to make whatever investigations it deems are necessary as part of the annual audit procedure.
12
Investment Manager Fees Please note that the investment manager fees listed below are the managers' annual management charges. There may be other expenses charged on the Fund's assets, e.g. custodian and administration charges, which would be in addition to these fee scales.
Manager Majedie
Asset Class UK Equities
Newton
Global Equities
Baillie Gifford
Diversified Growth
Schroder
UK Bonds
Schroder
UK Property
*estimated by Schroder
Fees 0.35% p.a. plus 20% of any outperformance above the benchmark return plus 1% on an annualised 3 year rolling basis 0.20% p.a. on the first Ј100m 0.17% p.a. for the next Ј200m 0.12% p.a for the next Ј700m 0.10% p.a. on the remainder plus 20% of any outperformance above benchmark 0.65% p.a. on the first Ј30m 0.50% p.a. on the next Ј90m 0.45% p.a. on the remainder 0.20% p.a. c0.5% p.a.*
Social, Environmental and Ethical Considerations
The Committee recognises that social, environmental and ethical considerations are among the factors which investment managers will take into account, where relevant, when selecting investments for purchase, retention or sale. Each of the managers has produced a statement setting out its policy in this regard. The managers have been delegated by the Committee to act accordingly.
The Myners Review and Code of Best Practice
The Myners principles codify best practice in investment decision making. While they are voluntary, pension fund trustees are expected to consider their applicability to their own fund and report on a 'comply or explain' basis how they have used them. The principles continue to emphasise the essentials of investment governance, notably the importance of effective decision making, clear investment objectives and a focus on the nature of each scheme's liabilities. The principles also require that trustees include a statement of the scheme's policy on responsible ownership in the Statement of Investment Principles and report periodically to members on the discharge of these responsibilities. The Committee monitors their investment policies against Myners to ensure that their implementation is in keeping with the revised principles for the Fund. The following table is taken from the Fund's latest Statement of Investment Principles and provides an update on the Fund's compliance with each of the 6 Myners Principles.
Principle Principle 1 Effective Decision Making: Administering authorities should ensure: That decisions are taken by persons or organisations with the skills, knowledge, advice and resources necessary to make them effectively and monitor their implementation; and
Response on Adherence Compliant Decisions are taken by the Committee which is responsible for the management of the fund. The Committee has support from council officers with sufficient experience to assist them. The Committee also seeks advice from professional actuarial and investment advisers to ensure it can be familiar with the
13
That those persons or organisations have sufficient expertise to be able to evaluate and challenge the advice they receive, and manage conflicts of interest. Principle 2 Clear objectives: An overall investment objective should be set out for the fund that takes account of the scheme's liabilities, the potential impact on local tax payers, the strength of the covenant for non-local authority employers, and the attitude to risk of both the administering authority and scheme employers, and these should be clearly communicated to advisers and investment managers. Principle 3 Risk and liabilities: In setting and reviewing their investment strategy, administering authorities should take account of the form and structure of liabilities. These include the implications for local tax payers, the strength of the covenant for participating employers, the risk of their default and longevity risk. Principle 4 Performance assessment: Arrangements should be in place for the formal measurement of performance of the investments, investment managers and advisers. Administering authorities should also periodically make a formal assessment of their own effectiveness as a decisionmaking body and report on this to scheme members. Principle 5 Responsible Ownership: Administering authorities should Adopt, or ensure their investment managers adopt, the Institutional Shareholders' Committee (ISC) Statement of Principles on the responsibilities of shareholders and agents. Include a statement of their policy on responsible ownership in the Statement of Investment Principles. Report periodically to scheme members on the discharge of such responsibilities. Principle 6 Transparency and Reporting: Administering authorities should
issues concerned when making decisions. The Committee hold a one hour training session before every Committee meeting. The Committee is able to make robust challenges to advice and is aware of where potential conflicts of interest may reside within the Committee and in relation to service providers. Compliant The Committee has established objectives for the fund which takes account of the nature of fund liabilities and the contribution strategy. This involved discussions with the actuary to enable the Committee to set the overall risk budget for the fund. This is reflected in the investment mandates awarded to the asset managers. There is dialogue with admitted bodies within the fund in relation to the contributions they pay, their capacity to pay these contributions and the level of guarantees they can provide. Compliant The investment strategy is considered in the light of the nature of the fund liabilities, the timescale over which benefits will be paid, and financial and demographic factors affecting the liabilities, such as inflation and improving longevity. The Committee and council officers have discussed the contribution strategy with the actuary taking account of the strength of covenant of the council and its long term horizon. Discussions have also taken place with admitted bodies in relation to the affordability of contributions and the strengths of their covenants. Partially Compliant The performance of the fund and its individual managers are monitored on a regular basis. The quality of advisers is assessed on a qualitative basis but is not formally measured. Advisers are subject to periodic re-tender. The Committee is developing formal processes to measure its own effectiveness. Partially Compliant The Committee encourages its investment managers to adopt the ISC Statement of Principles on the responsibilities of shareholders and agents on the fund's behalf This Statement of Investment Principles includes a statement on the fund's policy on responsible ownership. The Committee needs to consider the implications of the UK Stewardship Code (issued in September 2012) to ensure it is fully compliant with the new requirements. Compliant The Committee maintains minutes of meetings which
14
Act in a transparent manner, are available on the council website.
communicating with stakeholders on issues The Committee holds a formal annual meeting for
relating to their management of investment, members and also meets periodically with sponsoring

its governance and risks, including performance against stated objectives. Should provide regular communication to
employer bodies. An Admitted Bodies representative and a Member representative attend Committee
scheme members in the form they consider meetings.
most appropriate.
The Statement of Investment Principles is published on
the council website and is available to members on
request. Other information on the scheme is available
to members on the council website.
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Actuarial Statement Isle of Wight Council Pension Fund ("the Fund") Actuarial Statement for 2016/17 This statement has been prepared in accordance with Regulation 57(1)(d) of the Local Government Pension Scheme Regulations 2013. It has been prepared at the request of the Administering Authority of the Fund for the purpose of complying with the aforementioned regulation. Description of Funding Policy The funding policy is set out in the Administering Authority's Funding Strategy Statement (FSS), dated March 2017. In summary, the key funding principles are as follows: to ensure the long-term solvency of the Fund using a prudent long term view. This will ensure that sufficient funds are available to meet all members'/dependants' benefits as they fall due for payment; to ensure that employer contribution rates are reasonably stable where appropriate; to minimise the long-term cash contributions which employers need to pay to the Fund by recognising the link between assets and liabilities and adopting an investment strategy which balances risk and return (this will also minimise the costs to be borne by Council Tax payers); to reflect the different characteristics of different employers in determining contribution rates. This involves the Fund having a clear and transparent funding strategy to demonstrate how each employer can best meet its own liabilities over future years; and to use reasonable measures to reduce the risk to other employers and ultimately to the Council Tax payer from an employer defaulting on its pension obligations. The FSS sets out how the Administering Authority seeks to balance the conflicting aims of securing the solvency of the Fund and keeping employer contributions stable. For employers whose covenant was considered by the Administering Authority to be sufficiently strong, contributions have been stabilised to return their portion of the Fund to full funding over 20 years if the valuation assumptions are borne out. Asset-liability modelling has been carried out which demonstrate that if these contribution rates are paid and future contribution changes are constrained as set out in the FSS, there is still around a 75% chance that the Fund will return to full funding over 20 years. Funding Position as at the last formal funding valuation The most recent actuarial valuation carried out under Regulation 62 of the Local Government Pension Scheme Regulations 2013 was as at 31 March 2016. This valuation revealed that the Fund's assets, which at 31 March 2016 were valued at Ј474 million, were sufficient to meet 92% of the liabilities (i.e. the present value of promised retirement benefits) accrued up to that date. The resulting deficit at the 2016 valuation was Ј44 million. Each employer had contribution requirements set at the valuation, with the aim of achieving full funding within a time horizon and probability measure as per the FSS. Individual employers' contributions for the period 1 April 2017 to 31 March 2020 were set in accordance with the Fund's funding policy as set out in its FSS. Principal Actuarial Assumptions and Method used to value the liabilities Full details of the methods and assumptions used are described in the 2016 valuation report. Method The liabilities were assessed using an accrued benefits method which takes into account pensionable membership up to the valuation date, and makes an allowance for expected future salary growth to retirement or expected earlier date of leaving pensionable membership. 17
Assumptions A market-related approach was taken to valuing the liabilities, for consistency with the valuation of the Fund assets at their market value. The key financial assumptions adopted for the 2016 valuation were as follows:
Financial assumptions
31 March 2016
Discount rate Salary increase assumption Benefit increase assumption (CPI)
4.0% 2.6% 2.1%
The key demographic assumption was the allowance made for longevity. The life expectancy assumptions are based on the Fund's VitaCurves with improvements in line with the CMI 2013 model, assuming the current rate of improvements has reached a peak and will converge to long term rate of 1.25% p.a. Based on these assumptions, the average future life expectancies at age 65 are as follows:
Males
Females
Current Pensioners Future Pensioners* *Aged 45 at the 2016 Valuation.
22.3 years 23.9 years
24.7 years 26.5 years
Copies of the 2016 valuation report and Funding Strategy Statement are available on request from the Administering Authority to the Fund.
Experience over the period since 31 March 2016 Since the last formal valuation, real bond yields have fallen placing a higher value on the liabilities. The effect of this has been broadly offset by strong asset returns. Both events have roughly cancelled each other out in terms of the impact on the funding position as at 31 March 2017.
The next actuarial valuation will be carried out as at 31 March 2019. The Funding Strategy Statement will also be reviewed at that time.
Peter Summers FFA For and on behalf of Hymans Robertson LLP 26 April 2017 Hymans Robertson LLP 20 Waterloo Street, Glasgow, G2 6DB
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Statement of Responsibilities for the Statement of Accounts Extracted from Isle of Wight Council Statement of Accounts 2016-17 19
Fund Account
2015-16 Ј000 17,714 221 23 17,958
FUND ACCOUNT Dealings with members, employers and others directly involved in the fund Contributions Transfers in from other pension funds Other income
Notes 7 8 9
2016-17 Ј000 18,318 40 17 18,375
(19,262) (1,524) (20,786) (2,828)
Benefits Payments to and on account of leavers
10
(20,102)
11
(168)
(20,270)
(1,895)
(3,764) Management expenses
12
(2,213)
8,605 (413) (7,063) (20) 1,109
Returns on investments Investment income taxes on income Profit and losses on disposal of investments and changes in the market value of investments Interest payable Net returns on investments
13
8,432
14
(36)
17
81,242
16
(35)
89,603
(5,483) 479,477 473,994
Net increase/(decrease) in the net assets available for benefits during the year Opening Net Assets of the Scheme Closing Net Assets of the Scheme
85,495 473,994 559,489
20
Net Asset Statement
2016
NET ASSETS STATEMENT AS AT 31 MARCH
Notes
2017
Ј000
Ј000
478,267 2,028 480,295
Investment assets Cash deposits
17
560,499
17
5,949
566,448
(6,505) 21 811 (628)
Investment liabilities Borrowings Long term assets Current assets Current liabilities
17
(108)
19A
(7,045)
23
157
24
895
25
(858)
473,994 Net assets of the fund available to fund benefits at the period end
559,489
The fund's financial statements do not take account of liabilities to pay pensions and other benefits after the period end. The actuarial present value of promised retirement benefits is disclosed at note 22.
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ISLE OF WIGHT COUNCIL PENSION FUND
NOTES TO THE ACCOUNTS
1.
DESCRIPTION OF THE FUND
The Isle of Wight Council Pension Fund ("the fund") is part of the Local Government Pension Scheme (LGPS)
and is administered by Isle of Wight Council ("the council"). The council is the reporting entity for this pension
fund.
The following description of the fund is a summary. For more detail, reference should be made to the Isle of Wight Council Pension Fund Annual Report 2016-17 and the underlying statutory powers underpinning the scheme, namely the Public Service Pensions Act 2013 and the Local Government Pension Scheme Regulations.
a) General The fund is governed by the Public Service Pensions Act 2013. The fund is administered in accordance with the following secondary legislation: the Local Government Pension Scheme Regulations 2013 (as amended) the Local Government Pension Scheme (Transitional Provisions, Savings and Amendment) Regulations 2014 (as amended) the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016.
It is a contributory defined benefit pension scheme administered by Isle of Wight Council to provide pensions and other benefits for the majority of local government employees throughout the Isle of Wight, and a range of other scheduled and admitted bodies on the Isle of Wight. Teachers, police officers and fire-fighters are not included as they come within other national pension schemes.
The fund is overseen by the Isle of Wight Pension Fund Committee ("the committee"), which is a committee of Isle of Wight Council.
b) Membership Membership of the LGPS is voluntary and employees are free to choose whether to join the scheme, remain in the scheme or make their own personal arrangements outside the scheme.
Organisations participating in the Isle of Wight Council Pension Fund include: - Scheduled bodies, which are local authorities and similar bodies whose staff are automatically entitled to be members of the fund. - Admitted bodies, which are other organisations that participate in the fund under an admission agreement between the fund and the relevant organisation. Admitted bodies include voluntary, charitable and similar bodies or private contractors undertaking a local authority function following outsourcing to the private sector.
The scheduled bodies of the fund with active members at 31 March 2017 are:
Chale Parish Council
Newport Parish Council
Cowes Town Council
Northwood Parish Council
Cowes Enterprise College, an Ormiston Academy Gurnard Parish Council
Northwood Primary Academy Ryde Academy
Isle of Wight College
Ryde Town Council
Isle of Wight Free School
Sandown Bay Academy
Isle of Wight Studio School
St Blasius Primary Academy
Lanesend Primary Academy
Wootton Bridge Parish Council
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The admitted bodies of the fund with active members at 31 March 2017 are:
Barnados
St Catherine's School Ltd
Caterlink (NEW)
Top Mops Ltd (NEW)
Cowes Harbour Commissioners
Trustees of Carisbrooke Castle Museum
Island Roads Limited
Ventnor Botanic Gardens
Southern Housing Limited
Visit IOW Limited
Southern Vectis
Yarmouth (IW) Harbour Commissioners
Sovereign Housing Limited
The membership of the scheme is shown below:
Year ended 31 March 2017 Number of employers with active members
Administering Authority 1
Scheduled Bodies 16
Admitted Bodies 13
Total 30
Number of contributors (Active members)
3,150
485
118
Number of frozen refunds 1
596
11
4
Number of deferred pensioners 2
5,820
616
129
Number of pensioners/ widows/dependant pensioners
3,831
199
162
13,397
1,311
413
Year ended 31 March 2016 Number of employers with active members
Administering Authority 1
Scheduled Bodies 14
Admitted Bodies 13
3,753 611 6,565 4,192 15,121 Total 28
Number of contributors (Active members) Number of frozen refunds 1 Number of deferred pensioners 2 Number of pensioners/ widows/dependant pensioners
3,159 601 5,520 3,706 12,986
511 10 520 182 1,223
137
3,807
4
615
122
6,162
148
4,036
411
14,620
1 Frozen refunds are former employees who do not have any pension entitlement apart from a return of the contributions paid into the Scheme during their employment but have not yet claimed the refund 2 A deferred pensioner is a former employee who has accrued pension rights within the Scheme but has not yet reached retirement age to enable them to access their benefits or transferred their accrued rights to another Scheme/provider
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c) Funding Benefits are funded by contributions and investment earnings. Contributions are made by active members of the fund in accordance with the LGPS Regulations 2013.
The pay bands and rates applicable for the year ended 31 March 2017 are detailed below.
Range (Actual pensionable pay) Up to Ј13,600 More than Ј13,601 and up to Ј21,200 More than Ј21,201 and up to Ј34,400 More than Ј34,401 and up to Ј43,500 More than Ј43,501 and up to Ј60,700 More than Ј60,701 and up to Ј86,000 More than Ј86,001 and up to Ј101,200 More than Ј101,201 and up to Ј151,800 More than Ј151,800
Contribution rate 5.5% 5.8% 6.5% 6.8% 8.5% 9.9% 10.5% 11.4% 12.5%
Employee contributions are matched by employers' contributions which are set based on triennial actuarial valuations. The last such valuation was at 31 March 2016. The current and future employer contribution rates as determined by that valuation are detailed in note 21.
d) Benefits Prior to 1 April 2014, pension benefits under the LGPS were based on final pensionable pay and length of pensionable service, summarised below.
Pension Lump Sum
Service pre 1 April 2008 Each year worked is worth 1/80 x final pensionable salary Automatic lump sum of 3 x salary. In addition, part of the annual pension can be exchanged for a one-off tax-free cash payment. A lump sum of Ј12 is paid for each Ј1 of pension given up.
Service post 31 March 2008 Each year worked is worth 1/60 x final pensionable salary No automatic lump sum. Part of the annual pension can be exchanged for a one-off tax-free cash payment. A lump sum of Ј12 is paid for each Ј1 of pension given up.
From 1 April 2014, the scheme became a career average scheme, whereby members accrue benefits based on their pensionable pay in that year at an accrual rate of 1/49th. Accrued pension is uprated annually in line with the Consumer Prices Index.
There are a range of other benefits provided under the scheme including early retirement, disability pensions and death benefits. For more details, please refer to the Pensions Office website: http://www.iwight.com/council/OtherServices/Pensions-IWC
2.
BASIS OF PREPARATION
The Statement of Accounts summarises the fund's transactions for the 2016-17 financial year and its position at
year-end as at 31 March 2017. The accounts have been prepared in accordance with the Code of Practice on
Local Authority Accounting in the United Kingdom 2016/17 which is based upon International Financial
Reporting Standards (IFRS), as amended for the UK public sector.
The accounts summarise the transactions of the fund and report on the net assets available to pay pension benefits. The accounts do not take account of obligations to pay pensions and benefits which fall due after the end of the financial year. The actuarial present value of promised retirement benefits, valued on an International Accounting Standard (IAS) 19 basis, is disclosed at note 22 of these accounts.
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3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fund account ­ revenue recognition a) Contribution income Normal contributions, both from the members and from the employer, are accounted for on an accruals basis at the percentage rate recommended by the actuary in the payroll period to which they relate.
Employer deficit funding contributions are accounted for on the due dates on which they are payable under the schedule for contributions set by the scheme actuary or on receipt if earlier than the due date.
Employers' augmentation contributions and pension strain contributions are accounted for in the period in which the liability arises. Any amount due in year but unpaid will be classed as a current financial asset. Amounts not due until future years are classed as long-term financial assets.
b) Transfers to and from other schemes Transfer values represent the amounts received and paid during the year for members who have either joined or left the fund during the financial year and are calculated in accordance with the Local Government Pension Scheme Regulations 2013 (see notes 8 and 11).
Individual transfers in/out are accounted for when paid/received, which is normally when the member liability is accepted or discharged.
Transfers in from members wishing to use the proceeds of their additional voluntary contributions (see below) to purchase scheme benefits are accounted for on a receipts basis and are included in Transfers In (see note 8).
Bulk (group) transfers are accounted for on an accruals basis in accordance with the terms of the transfer agreement.
c) Investment income
i) Interest income Interest income is recognised in the fund accounts as it accrues, using the effective interest rate of the financial instrument as at the date of acquisition or origination. Income includes the amortisation of any discount or premium, transaction costs (where material) or other differences between the initial carrying amount of the instrument and its amount at maturity calculated on an effective interest rate basis.
ii) Dividend income Dividend income is recognised on the date the shares are quoted ex-dividend. Any amount not received by the end of the reporting period is disclosed in the net assets statement as a current financial asset.
iii) Distributions from pooled funds Distributions from pooled funds are recognised at the date of issue. Any amount not received by the end of the reporting period is disclosed in the net assets statement as a current financial asset.
iv) Movement in the net market value of investments Changes in the net market value of investments (including investment properties) are recognised as income and comprise all realised and unrealised profits/losses during the year. Fund account ­ expense items d) Benefits payable Pensions and lump-sum benefits payable include all amounts known to be due as at the end of the financial year. Any amounts due but unpaid are disclosed in the net assets statement as current liabilities.
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e) Taxation The fund is a registered public service scheme under section 1(1) of Schedule 36 of the Finance Act 2004 and as such is exempt from UK income tax on interest received and from capital gains tax on the proceeds of investments sold. Income from overseas investments suffers from withholding tax in the country of origin, unless exemption is permitted. Irrecoverable tax is accounted for as a fund expense as it arises. f) Management expenses The code does not require any breakdown of pension fund administrative expenses. However, in the interests of greater transparency, the council discloses its pension fund management expenses in accordance with the CIPFA guidance Accounting for Local Government Pension Scheme Management Costs (2016) Administrative expenses All administrative expenses are accounted for on an accruals basis. All staff costs of the pensions administration team are charged direct to the fund. Associated management, accommodation and other overheads are apportioned to the fund in accordance with council policy. Oversight and governance costs All oversight and governance expenses are accounted for on an accruals basis. All staff costs associated with governance and oversight are charged direct to the fund. Associated management, accommodation and other overheads are apportioned to this activity and charged as expenses to the fund. Investment management expenses All investment management expenses are accounted for on an accruals basis. Fees of the external investment managers and custodian are agreed in the respective mandates governing their appointments. Broadly these are based on the market values of the investments under their management and therefore increase or reduce as the value of these investments change. In addition the fund has negotiated with the following managers that an element of their fee be performance related: Majedie Asset Management Limited ­ UK Equities Newton Investment Management Limited ­ Global Equities Where an investment manager's fee note has not been received by the balance sheet date, an estimate based on the market value of their mandate as at the end of the year is used for inclusion in the fund account. In 2016-17 no fees are based on such estimates (2015-16: nil) The cost of obtaining investment advice from external consultants is included in investment management charges. A proportion of the council's costs representing management time spent by officers on investment management is also charged to the fund. g) VAT VAT payable is included as an expense only to the extent that it is not recoverable from Her Majesty's Revenue and Customs (HMRC). VAT receivable is excluded from income. Net assets statement h) Financial assets Financial assets are included in the net assets statement on a fair value basis at the reporting date. A financial asset is recognised in the net assets statement on the date the fund becomes party to the contractual acquisition of the asset. From this date any gains or losses arising from changes in the fair value of the asset are recognised by the fund. The values of investments as shown in the net assets statement have been determined at fair value in accordance with the requirements of the Code and IFRS13 (see Note 18). For the purposes of disclosing levels of fair value hierarchy, the fund has adopted the classification guidelines recommended in Practical Guidance on Investment Disclosures (PRAG/Investment Association, 2016) 26
i) Foreign currency transactions Dividends, interest and purchases and sales of investments in foreign currencies have been accounted for at the spot market rates at the date of transaction. End-of-year spot market exchange rates are used to value cash balances held in foreign currency bank accounts, market values of overseas investments and purchases and sales outstanding at the end of the reporting period.
j) Cash and cash equivalents Cash comprises cash in hand and demand deposits and includes amounts held by the fund's external managers.
Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to minimal risk of changes in value.
k) Financial liabilities The fund recognises financial liabilities at fair values at the reporting date. A financial liability is recognised in the net assets statement on the date the fund becomes party to the liability. From this date any gains or losses arising from changes in the fair value of the liability are recognised by the fund.
l) Actuarial present value of promised retirement benefits The actuarial present value of promised retirement benefits is assessed on a triennial basis by the scheme actuary in accordance with the requirements of IAS 19 and relevant actuarial standards.
As permitted under the Code, the fund has opted to disclose the actuarial present value of promised retirement benefits by way of a note to the net assets statement (note 22).
m) Additional Voluntary Contributions Isle of Wight Council Pension Fund provides an additional voluntary contributions (AVC) scheme for its members, the assets of which are invested separately from those of the pension fund. The fund has appointed Prudential Life and Pensions as its AVC provider. AVCs are paid to the AVC provider by employers and are specifically for providing additional benefits for individual contributors. Each AVC contributor receives an annual statement showing the amount held in their accounts and the movements in the year.
AVCs are not included in the accounts in accordance with section 4(1)(b) of the Local Government Pension Scheme (Management and Investment Funds) Regulations 2016 but are disclosed as a note only (note 26).
n) Accruals of expenditure and income Activity is accounted for in the year that it takes place, not simply when cash payments are made or received. In particular:

Revenue from the sale of goods is recognised when the council transfers the significant risks
and rewards of ownership to the purchaser and it is probable that economic benefits or service
potential associated with the transaction will flow to the council.

Revenue from the provision of services is recognised when the council can measure reliably the
percentage of completion of the transaction and it is probable that economic benefits or service
potential associated with the transaction will flow to the council.

Supplies are recorded as expenditure when they are consumed ­ where there is a gap between
the date supplies are received and their consumption, they are carried as inventories on the
balance sheet.

Expenses in relation to services received (including services provided by employees) are
recorded as expenditure when the services are received rather that when payments are made.

Interest receivable on investments and payable on borrowings is accounted for respectively as
income and expenditure on the basis of the effective interest rate for the relevant financial
instrument rather than the cash flows fixed or determined by the contract.
Where revenue and expenditure have been recognised but cash has not been received or paid, a debtor or creditor for the relevant amount is recorded in the balance sheet. Where debts may not be settled, the balance of debtors is written down and a charge made to revenue for the income that might not be collected.
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o) Provisions, Contingent Liabilities and Contingent Assets A contingent liability arises where an event has taken place prior to the year-end giving rise to a possible financial obligation whose existence will only be confirmed or otherwise by the occurrence future events. Contingent liabilities can also arise in circumstances where a provision would be made, except that it is not possible at the balance sheet date to measure the value of the financial obligation reliably.
A contingent asset arises where an event has taken place that gives the authority a possible asset, whose existence will only be confirmed by the occurrence or otherwise of uncertain future events.
Contingent liabilities are not recognised in the net assets statement but disclosed in note 28 to the accounts.
4.
CRITICAL JUDGEMENTS IN APPLYING ACCOUNTING POLICIES
Pension fund liability
The pension fund liability is calculated every three years by the appointed actuary, with annual updates in the
intervening years. The methodology used is in line with accepted guidelines.
This estimate is subject to significant variances based on changes to the underlying assumptions which are
agreed with the actuary and have been summarised in Note 22.
These actuarial revaluations are used to set future contribution rates and underpin the fund's most significant investment management policies, for example in terms of the balance struck between longer term investment growth and short-term yield/growth.
5.
ASSUMPTIONS MADE ABOUT THE FUTURE AND OTHER MAJOR SOURCES OF ESTIMATION
UNCERTAINTY
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for the revenues and expenses during the year. Estimates and assumptions are made taking into account historical experience, current trends and other relevant factors. However, the nature of estimation means that actual outcomes could differ from the assumption and estimates.
The items in the net assets statement at 31 March 2017 for which there is a significant risk of material adjustment within the forthcoming financial year are as follows:
Item Actuarial present value of promised retirement benefits
Uncertainties Estimation of the net liability to pay pensions depends on a number of complex judgements relating to the discount rate used, the rate at which salaries are projected to increase, changes in retirement ages, mortality rates and expected returns on pension fund assets. A firm of consulting actuaries is engaged to provide the fund with expert advice about the assumptions to be provided.
Effect if actual results differ from assumptions The effects on the net pension liability of changes in individual assumptions can be measured. For instance: A 0.5% increase in the discount rate assumption would result in a decrease in the pension fund deficit of Ј69m. A 0.5% increase in assumed earnings inflation would increase the deficit by approximately Ј13m. A 0.5% increase in assumed price inflation/pension increases would increase the deficit by approximately Ј56m. A one-year increase in assumed life expectancy would increase the deficit by approximately Ј27m
Pooled Funds
Property
Valuation techniques are used to determine the carrying amount of pooled property funds. Where possible these valuation techniques are based on observable data, but where this is not possible management uses the best available data. Changes in the valuation assumptions used, together with significant changes in rental growth, vacancy levels or
The effect of variations in the factors supporting the valuation would be an increase or decrease in the value of pooled property funds.
28
the discount rate could affect the fair value of the property.
6.
EVENTS AFTER THE BALANCE SHEET DATE
These are events, both favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. Two types of events can be identified: those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period) and those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period)
Events taking place after the date of authorisation for issue are not reflected in the financial statements.
There are no post balance sheet events recorded prior to the authorised for issue date and any events that occurred after this date have not been recognised in the statement of accounts.
7.
CONTRIBUTIONS RECEIVABLE
By category: 2015-16 Ј000 14,191 3,523 17,714
Employers Members
2016-17 Ј000 14,764 3,554 18,318
By authority: 2015-16 Ј000 13,535 2,302 1,877 17,714
Administering authority Scheduled bodies Admitted bodies
2016-17 Ј000 14,166 2,416 1,736 18,318
By type: 2015-16 Ј000 3,497 26 13,065 826 300 17,714
Employees' normal contributions Employees' additional contributions Employers' normal contributions Employers' deficit recovery contributions Employers' augmentation contributions
2016-17 Ј000 3,531 23 13,436 824 504 18,318
8. TRANSFERS IN FROM OTHER PENSION FUNDS
2015-16 Ј000 - 221 221
Group transfers Individual transfers
2016-17 Ј000 - 40 40
29
9. OTHER INCOME
2015-16 Ј000 19 4 23
Miscellaneous income Contribution Equivalent Premiums
2016-17 Ј000 12 5 17
Contribution Equivalent Premiums (CEPs) are sums relating to National Insurance Contributions payable when an employee leaves the pension fund without entitlement to benefits. Sums are held as a contingent asset and/or liability and these amounts remain so until the relevant employee requests a refund of contributions payable, a transfer is made to another pension fund or the employee returns to the employ of the Isle of Wight Council (see note 26).
10. BENEFITS PAYABLE
By category: 2015-16 Ј000 16,556 2,577 129 19,262
Pensions Commutation and lump sum retirement benefits Lump sum death benefits
2016-17 Ј000 17,061 2,837 204 20,102
By authority: 2015-16 Ј000 17,474 1,187 601 19,262
Administering authority Scheduled bodies Admitted bodies
2016-17 Ј000 18,160 1,269 673 20,102
11. PAYMENTS TO AND ON ACCOUNT OF LEAVERS
2015-16 Ј000 28 - 1,496 1,524
Refund to members leaving service Group transfers Individual transfers
12. MANAGEMENT EXPENSES
2015-16 Ј000 326 3,179 258 3,764
Administrative costs Investment management expenses Oversight and governance costs
2016-17 Ј000 55 31 82 168 2016-17 Ј000 389 1,474 350 2,213
30
12A. INVESTMENT MANAGEMENT EXPENSES
2015-16 Ј000 881 2,262 36 3,179
Management Fees Performance Related Fees Custody Fees Transaction Costs
2016-17 Ј000 1,161 274 39 1,474
The analysis of the costs of managing the Isle of Wight Council Pension Fund during the period has been prepared in accordance with CIPFA guidance.
In addition to these costs, indirect costs are incurred through the bid-offer spread on investments sales and purchases. These are reflected in the cost of investment acquisitions and in the proceeds from the sales of investments (see note 17a).
13. INVESTMENT INCOME
2015-16 Ј000 4,210 968 3,416 11 8,605
Income from equities Income from pooled investment vehicles: - Property - Bonds - Unit Trusts Interest on cash deposits Other
2016-17 Ј000 4,985 982 2,891 3 (429) 8,432
14. TAXATION
2015-16 Ј000 413 413
Withholding tax - equities
2016-17 Ј000 36 36
15. EXTERNAL AUDIT COSTS
2015-16 Ј000 21 21
Payable in respect of external audit
2016-17 Ј000 21 21
16. INTEREST PAYABLE
2015-16 Ј000 20 20
Interest on short term borrowing
2016-17 Ј000 35 35
31
17. INVESTMENTS
Market value 31 March 2016 Ј000 93,993 383,781 2,028 474 19 480,295 480,295
Investment assets Equities Pooled Investment Vehicles Cash deposits Investment income due Amounts receivable for sales Recoverable withholding tax Total investment assets Investment liabilities Amounts payable for purchases Total investment liabilities Net investment assets
Market value 31 March 2017 Ј000 111,854 448,164 5,949 389 78 14 566,448 (108) (108) 566,340
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17A.
RECONCILIATION OF MOVEMENTS IN INVESTMENTS
Market value Purchases
Sales
1 April 2016 during the during the
year
year
Equities
Ј000 93,993
Ј000 40,243
Ј000 (44,036)
Change in market value during the year Ј000 21,654
Pooled Investment Vehicles
Global Equities
176,010
-
-
43,551
Property
28,587
982
(155)
890
Bonds
98,856
2,891
-
6,992
Diversified Growth Fund
70,603
1,497
-
5,920
Unit Trusts
9,725
-
(157)
1,972
477,774
45,613
(44,348)
80,979
Cash deposits
2,028
254
Amounts receivable for sales of investments
-
Investment income due
474
8
Recoverable withholding tax Amounts payable for purchases of investments Net investment assets
19 _ 480,295
1 81,242
Market value 31 March 2017 Ј000 111,854 219,561 30,304 108,739 78,020 11,540 560,018 5,949 78 389 14 (108) 566,340
Market value 1 April 2015
Equities Pooled Investment Vehicles Global Equities Property Bonds Diversified Growth Fund Unit Trusts Cash deposits Amounts receivable for sales of investments Investment income due Recoverable withholding tax Amounts payable for purchases of investments Net investment assets
Ј000 105,258 171,942 25,772 96,647 72,004 9,393 481,016 1,279 34 317 36 (13) 482,669
Purchases during the year Ј000 37,571 716 3,416 70,610 112,313
Sales during the year Ј000 (37,911)
Change in market value during the year Ј000 (10,925)
170 (70,548) (215) (108,504)
4,068 1,929 (1,207) (1,463) 547 (7,051) (9)
(3)
(6,880)
Market value 31 March 2016 Ј000 93,993 176,010 28,587 98,856 70,603 9,725 477,774 2,028 474 19 _ 480,295
33
17B. ANALYSIS OF INVESTMENTS 31 March 2016 Ј000 Equities UK 78,269 Quoted Overseas 15,724 Quoted 93,993 Pooled funds ­ additional analysis UK 98,856 Fixed income unit trusts 256,338 Unit Trusts 355,194 28,587 Pooled property investments 28,587 2,028 Cash Deposits 474 Investment income due - Amounts receivable from sales 19 Withholding Tax 2,521 480,295 Total investment assets Investment Liabilities - Amounts payable for purchases - Total Investment Liabilities 480,295 Net investment assets
17C. INVESTMENTS ANALYSED BY FUND MANAGER
Market value
31 March 2016
Ј000
%
98,856 28,687 176,010 106,120 70,603 480,276 19 480,295
20.6% 6.0% 36.6% 22.1% 14.7% 0.0%
Schroder Investment Management ­ Bonds Schroder Investment Management ­ Property Newton Investment Management ­ Overseas Equities Majedie Asset Management ­ UK Equities Baillie Gifford ­ Diversified Growth Fund Recoverable withholding tax
All the above companies are registered in the United Kingdom.
31 March 2017 Ј000
96,945 14,909 111,854
108,739 309,121 417,860 30,304 30,304 5,949 389 78 14 6,430 566,448 (108) (108) 566,340
Market value
31 March 2017
Ј000
%
108,739 30,404 219,561 129,602 78,020 566,326 14 566,340
19.2% 5.4% 38.8% 22.9% 13.8% 0.0%
34
The following investments represent more than 5% of the total net assets of the fund
Market value
Market value
31 March 2016
31 March 2017
Ј000 % of total
Ј000 % of total
fund
fund
176,010
37.13% Newton International Growth X Account
219,561
39.29%
98,856
20.86% Schroder Institutional Sterling Broad Market X Account 108,739
19.46%
70,603
14.9% Baillie Gifford Diversified Growth Pension Fund
78,020
13.96%
28,687
6.03% Schroder UK Property Fund
30,304
5.42%
The following investments represent more than 5% of their asset class
Market value
Market value
31 March 2016
31 March 2017
Ј000 % of
Ј000
% of
asset
asset
class
class
Equities
6,113 6.50% Royal Dutch Shell
9,121 8.15%
6,245 6.64% BP plc
7,687 6.87%
6,422 6.83% HSBC
6,570 5.87%
5,317 5.66% Vodafone Group
4,265 3.81%
Market value 31 March 2016 Ј000 % of asset class
Pooled Investment Vehicles
Global Equities
176,010 100% Newton International Growth X Account
Bonds
98,856 100% Schroder Institutional Sterling Broad Market X Account
Property
28,687 100% Schroder UK Property Fund
Diversified Growth Funds
70,603 100% Baillie Gifford Diversified Growth Pension Fund
9,725
100%
Unit Trusts Majedie Asset Management Special Situations Investment Fund
Market value
31 March 2017
Ј000
% of
asset
class
219,561 100% 108,739 100% 30,404 100% 78,020 100% 11,540 100%
18. FAIR VALUE ­ BASIS OF VALUATION The basis of the valuation of each class of investment asset is set out below. There has been no change in the valuation techniques used during the year. All assets have been valued using fair value techniques which represent the highest and best value available at the reporting date. 35
Description of Asset Market quoted investments Exchange traded pooled investments Pooled investments ­ overseas unit trusts and property funds
Valuation Hierarchy Level 1 Level 1 Level 2
Basis of Valuation Published bid market price ruling on the final day of the accounting period Closing bid value on published exchanges Closing bid price where bid and offer prices are published Closing single price where single price published
Observable and unobservable inputs Not required Not required NAV- based pricing set on a forward pricing basis
18A. FAIR VALUE HEIRARCHY
Asset and liability valuations have been classified into three levels, according to the quality and reliability of information used to determine fair values. Transfers between levels are recognised in the year in which they occur.
Level 1 Assets and liabilities at Level 1 are those where the fair values are derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1 comprise quoted equities, quoted fixed securities, quoted index linked securities and unit trusts.
Level 2 Assets and liabilities at Level 2 are those where quoted market prices are not available; for example, where an instrument is traded in a market that is not considered to be active, or where valuation techniques are used to determine fair value.
Level 3 Assets and liabilities at Level 3 are those where at least one input that could have a significant impact on the instrument's valuation is not based on observable market data.
At 31 March 2017, the fund does not have any investments which should be classified as Level 3.
The following table provides an analysis of the financial assets and liabilities of the pension fund grouped into Levels 1 to 3, based on the level at which the fair value is observable :
31 March 2016
Quoted
Using
Market Observable
Price
Inputs
Level 1
Level 2
Ј000
Ј000
451,708
28,587
451,708
28,587
Total Ј000 480,295 480,295
Financial assets at fair value through profit and loss Financial liabilities at fair value through profit and loss Net investment assets
31 March 2017
Quoted
Using
Market Observable
Price
Inputs
Level 1
Level 2 Total
Ј000
Ј000
Ј000
536,144
30,304 566,448
536,144
(108) (108) 30,196 566,340
36
19. FINANCIAL INSTRUMENTS
19A. CLASSIFICATION OF FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE
The following table analyses the carrying amounts of financial instruments by category and the net assets statement heading. No financial instruments were reclassified during the accounting period.
Fair value through profit and loss Ј000 93,993 383,781 493 478,267 478,267
31 March 2016
Loans and Financial
receivables liabilities at
amortised
cost
Ј000
Ј000
2,042
133
2,175
-
2,175
(432) (6,505) (6,937) (6,937)
Financial assets Equities Pooled investment vehicles Cash Other investment balances Debtors Financial liabilities Other investment balances Creditors Bank Balance Borrowings
31 March 2017 Fair value Loans and through profit receivables and loss
Ј000
Ј000
111,854
448,164
481 560,499
5,949 98 6,047
(108) (108) 560,391
(20) (20) 6,027
Financial liabilities at amortised cost Ј000 - (907) (7,045) (7,952) (7,952)
19B. NET GAINS AND LOSSES ON FINANCIAL INSTRUMENTS
31 March 2016 Ј000 (14,585) (9) (14,594)
Financial assets Designated at fair value through profit and loss Loans and receivables Financial liabilities Fair value through profit and loss Financial liabilities at amortised cost Total
31 March 2017 Ј000 80,987 254 1 81,242
The pension fund has not entered into any financial guarantees that are required to be accounted for as financial instruments
20. NATURE AND EXTENT OF RISKS ARISING FROM FINANCIAL INSTRUMENTS Risk and risk management The fund's primary long-term risk is that its assets will fall short of its liabilities (i.e. promised benefits payables to members). Therefore the aim of investment risk management is to minimise the risk of an overall reduction in the value of the fund and to maximise the opportunity for gains across the whole fund portfolio. The fund achieves this through asset diversification to reduce exposure to market risk (price risk, currency risk, and interest rate risk) and credit risk to an acceptable level. In addition, the fund manages its liquidity risk to ensure there is sufficient liquidity to meet the fund's forecast cash f lows. The council
37
manages these investment risks as part of its overall pension fund risk management programme. Responsibility for the fund's risk management strategy rests with the pension fund committee. Risk management policies are established to identify and analyse the risks faced by the council's pensions operations. Policies are reviewed regularly to reflect changes in activity and market conditions. Because the fund adopts a long term investment strategy, the high level risks described below will not alter significantly during the year unless there are significant strategic or tactical changes in the portfolio. a) 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 it equity holdings. The level of risk exposure depends on market conditions, expectations of future price and yield movements and the asset mix. The objective of the fund's risk management strategy is to identify, manage and control market risk exposure within acceptable parameters, while optimising the return from the investment portfolio. In general, excessive volatility in market risk is managed through the diversification of the portfolio in terms of geographical and industry sectors and individual securities. To mitigate market risk, the council and its investment advisors undertake appropriate monitoring of market conditions and benchmark analysis. The fund's investments are managed on behalf of the fund by the appointed investment managers. Each investment manager is required to invest the assets managed by them in accordance with the terms of their investment guidelines or pooled fund prospectus. The committee has determined that the investment management structure is appropriate and is in accordance with its investment strategy. The committee regularly monitors each investment manager and considers and takes advice on the nature of the investments made and associated risks. Other price risk Other price risk represents the risk that the value of a financial instrument will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or foreign exchange risk), whether those changes are caused by factors specific to the individual instrument or its issuer or factors affecting all such instruments in the market. Other price risk arises from uncertainty about the future value of the financial instruments that the fund holds. All investments present a risk of loss of capital, the maximum risk being determined by the fair value of the financial instruments. The investment managers mitigate this risk through diversification and the selection of securities and other financial instruments is monitored by the council to ensure it is within limits specified in the fund investment strategy. Other price risk - sensitivity analysis Following analysis of historical data during the financial year, the council has determined that the following movements in market price risk are reasonably possible for the 2016/17 reporting period. The volatility data is broadly consistent with a one-standard deviation movement in the value of the assets. The analysis assumes that all other variables remain constant. Had the market price of the fund investments increase/decreased in line with the percentages below, the change in the net assets available to pay benefits in the market price would have been as follows (the prior year comparator is shown below). 38
Cash & cash equivalents Investment portfolio assets Equities ­ UK Equities ­ overseas Pooled investment vehicles: Global equities Property Bonds Diversified Growth Fund Unit Trusts Amounts receivable for sales Investment income due Recoverable withholding tax Amounts payable for purchases Total
Value as at 31 March 2017 Ј000 5,949 96,945 14,909 219,561 30,304 108,739 78,020 11,540 78 389 14 (108) 566,340
Volatility of return % 0.0% 7.3% 9.3% 6.8% 1.8% 3.4% 2.9% 6.3% 0.0% 0.0% 0.0% 0.0%
Value on increase Ј000 5,949 104,022 16,296 234,491 30,849 112,436 80,283 12,267 78 389 14 (108) 596,966
Value on decrease Ј000 5,949 89,868 13,523 204,631 29,758 105,042 75,758 10,813 78 389 14 (108) 535,715
Cash & cash equivalents Investment portfolio assets Equities ­ UK Equities ­ overseas Pooled investment vehicles: Global equities Property Bonds Diversified Growth Fund Unit Trusts Amounts receivable for sales Investment income due Recoverable withholding tax Amounts payable for purchases Total
Value as at 31 March 2016 Ј000 2,028 78,269 15,724 176,010 28,587 98,856 70,603 9,725 474 19 480,295
Volatility of return % 0.0% 5.3% 9.1% 3.1% 3.3% 1.5% 1.5% 2.4% 0.0% 0.0% 0.0% 0.0%
Value on increase Ј000 2,028 82,417 17,156 181,467 29,530 100,339 71,662 9,959 474 19 495,051
Value on decrease Ј000 2,028 74,121 14,294 170,554 27,644 97,373 69,544 9,492 474 19 465,543
b) Interest rate risk The fund invests in financial assets for the primary purpose of obtaining a return on investments. These investments are subject to interest rate risks, which represent the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
The fund's direct exposure to interest rate movements as at 31 March 2017 and 31 March 3016 is set out below. These disclosures present interest rate risk based on the underlying financial assets at fair value. Interest rate risk - sensitivity analysis The council recognises that interest rates can vary and can affect both income to the fund and the carrying value of fund assets, both of which affect the value of the net assets available to pay benefits.
The fund does not directly hold any fixed interest securities; hence a change in interest rates will not impact on the fair value of assets.
39
Changes in interest rates do not impact on the fair value of cash balances, but they will impact on the interest income earned.
c) Currency risk Currency risk represents the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The fund is exposed to currency risk on investments that are denominated in any currency other than sterling. For a sterling based investor, when sterling weakens, the sterling value of foreign currency denominated investments rises. As sterling strengthens, the sterling value of foreign currency denominated investment falls.
The following table summarises the fund's currency exposure as at 31 March 2017, and as at the previous period
end:
Asset value Asset value
as at 31
as at 31
March 2017 March 2016
Ј'000
Ј'000
Overseas Quoted Securities
13,890
15,412
Investment income due
246
202
14,136
15,614
Currency risk ­ sensitivity analysis Following analysis of historical data, the council considers the likely volatility associated with foreign exchange movements to be 8.06% (2015-16: 6.49%) (as measured by one standard deviation), based on historical movements on the month-end exchange rates over a rolling 36-month period.
This analysis assumes that all other variables, in particular interest rates, remain constant.
Movements in the relative strength of the pound against the various currencies in which the fund holds
investments would increase/decrease the net assets available to pay benefits as follows:
Value as at
Value on
Value on
31 March
increase
decrease
2017
+8.06%
-8.06 %
Ј'000
Ј'000
Ј'000
Overseas Quoted Securities
13,890
15,003
12,776
Investment income due
246
272
220
14,136
15,275
12,996
Overseas Quoted Securities Investment income due
Value as at 31 March 2016 Ј'000 15,412 202 15,614
Value on increase +6.49% Ј'000 16,416 212 16,628
Value on decrease -6.49% Ј'000 14,408 192 14,600
d) Credit Risk Credit risk represents the risk that the counterparty to a transaction or financial instrument will fail to discharge an obligation and cause the fund to incur a financial loss. This is often referred to as counterparty risk. The market values of investments generally reflect an assessment of credit in their pricing and consequently the risk of loss is implicitly provided for in the carrying value of the find's financial assets and liabilities.
The fund is exposed to credit risk through its underlying investments (including cash balances) and the transactions it undertakes to manage its investments. The careful selection and monitoring of counterparties including brokers, custodian and investment managers minimises credit risk that may occur though the failure to settle transactions in a timely manner.
40
Contractual credit risk is represented by the net payment, or receipt that remains outstanding, and the cost of replacing the position in the event of a counterparty default. The residual risk is minimal due to the various insurance policies held by the exchanges to cover defaulting counterparties. Bankruptcy or insolvency of the custodian may affect the fund's access to its assets. However, all assets held by the custodian are ring-fenced as "client assets" and therefore cannot be claimed by creditors of the custodian. The fund manages its risk by monitoring the credit quality and financial position of the custodian. The fund does not hold any fixed interest securities directly, hence has limited credit risk through its underlying investments in bonds. Another source of credit risk is the cash balances held to meet operational requirements or by the managers at their discretion. Internally held cash is managed on the fund's behalf by the council's treasury management team in line with the council's Treasury Management Strategy which sets out the permitted counterparties and limits. The fund invests surplus cash held with the custodian in diversified money market funds. The fund does not engage in securities lending activities, hence is not exposed to the counterparty risk of the collateral provided by borrowers against the securities lent. The fund does not have any foreign exchange contracts, hence is not subject to credit risk in relation to the counterparties of the contracts. The council believes it has managed its exposure to credit risk, and has had no experience of default or uncollectable deposits over the past five financial years. e) Liquidity Risk Liquidity risk represents the risk that the fund will not be able to meet its financial obligations as they fall due. The council therefore takes steps to ensure that the pension fund has adequate cash resources to meet its commitments. This will particularly be the case for cash from the cash flow matching mandates from the main investment strategy to meet the pensioner payroll costs. A substantial portion of the fund's investments consist of readily realisable securities, in particular equities and fixed income investments, even though a significant proportion is held in pooled funds. However, the main liability of the fund is the benefits payable, which fall due over a long period and the investment strategy reflects the long term nature of these liabilities. Therefore the fund is able to manage the liquidity risk that arises from its investments in less liquid asset classes such as property which are subject to longer redemption periods and cannot be considered as liquid as the other investments. The fund maintains a cash balance to meet working requirements, which is supported by an available credit line from the Isle of Wight Council. Note 27 includes details of borrowing from the council for this purpose. Management prepares periodic cash flow forecasts to understand and manage the timing of the fund's cash flows. The appropriate strategic level of cash balances to be held forms part of the fund investment strategy. All financial liabilities at 31 March 2017 are due within one year Refinancing risk The key risk is that the council will be bound to replenish a significant proportion of its pension fund financial instruments at a time of unfavourable interest rates. The council does not have any financial instruments that have a refinancing risk as part of its treasury management and investment strategies. 21. FUNDING ARRANGEMENTS In accordance with the Local Government Pension Scheme Regulations 2013, the fund's actuary undertakes a funding valuation every three years for the purpose of setting employer contribution rates for the forthcoming triennial period. The last such valuation took place as at 31 March 2016 and the next valuation will take place as at 31 March 2019. Description of Funding Policy The funding policy is set out in the Administering Authority's Funding Strategy Statement (FSS), dated March 2017. In summary, the key funding principles are as follows: to ensure the long-term solvency of the Fund using a prudent long term view. This will ensure that sufficient funds are available to meet all members'/dependants' benefits as they fall due for payment; 41
to ensure that employer contribution rates are reasonably stable where appropriate; to minimise the long-term cash contributions which employers need to pay to the Fund by recognising the link between assets and liabilities and adopting an investment strategy that balances risk and return. to reflect the different characteristics of different employers in determining contribution rates. This involves the Fund having a clear and transparent funding strategy to determine how each employer can best meet its own liabilities over future years; and to use reasonable measures to reduce the risk to other employers and ultimately to the council tax payer from an employer defaulting on its pension obligations. The aim is to have 100% solvency over a period of 20 years and to provide stability in employer contribution rates by spreading any increases in rates over a period of time. Normally this is three years but in some cases a maximum period of 15 years can be granted. Solvency is achieved when the funds held, plus future expected investment returns and future contributions are sufficient to meet expected future pension benefits payable. When an employer's funding level is less than 10% of the 100% funding target, then a deficit recovery plan will be put in place requiring additional employer contributions.
Funding Position as at the last formal funding valuation At the 2016 actuarial valuation, the fund was assessed as 92% funded (78% at the March 2013 valuation). This corresponded to a deficit of Ј44m (2013 valuation Ј111m) at that time. Contribution increases will be in effect from 1 April 2017 for both scheme employers and admitted bodies.
The FSS sets out how the Administering Authority seeks to balance the conflicting aims of securing the solvency of the Fund and keeping employer contributions stable.
For employers whose covenant was considered by the Administering Authority to be sufficiently strong, contributions have been stabilised below the theoretical rate required to return their portion of the Fund to full funding over 20 years if the valuation assumptions are borne out. Asset-liability modelling has been carried out which demonstrate that if these contribution rates are paid and future contribution changes are constrained as set out in the FSS, there is still a better than 75% chance that the Fund will return to full funding over 20 years. Individual employers' contributions for the period 1 April 2017 to 31 March 2020 were set in accordance with the Fund's funding policy as set out in its FSS.
Minimum Total Contribution Rates expressed as a percentage of pensionable pay are as set out below:-
Employer Name
Minimum Contributions for the Year Ending 31 March
2017
2018
2019
2020
% of pay
% of pay % of pay
% of pay
Isle of Wight Council
23.5
23.5
23.5
23.5
Barnardos
22.0
23.5
23.5
23.5
Caterlink
23.5
23.5
23.5
23.5
Cowes Enterprise College, an Ormiston Academy
*
23.5
23.5
23.5
23.5
Cowes Harbour Commissioners
21.0
21.5
21.5
21.5
The Island Free School
*
20.7
23.5
23.5
23.5
Island Roads
23.5
21.1
21.1
21.1
Isle of Wight College (from 1 August)
25.5
23.8
23.8
23.8
Isle of Wight Studio School
20.7
19.1
19.1
19.1
Lanesend Academy
*
23.5
23.5
23.5
23.5
Northwood Academy
*
23.5
23.5
23.5
23.5
Ryde Academy
*
23.5
23.5
23.5
23.5
Sandown Bay Academy
*
23.5
23.5
23.5
23.5
Southern Vectis (Wightbus)
27.7
23.8
23.8
23.8
Southern Housing Group
25.7
28.3
28.3
28.3
Sovereign Housing Group
20.5
26.9
26.9
26.9
St Blasius Academy
*
23.5
23.5
23.5
23.5
St Catherine's School Ltd
20.3
22.6
22.6
22.6
Top Mops
21.5
21.5
21.5
21.5
Trustees of Carisbrooke Castle Museum
22.3
26.8
26.8
26.8
Ventnor Botanical Gardens
18.9
18.9
18.9
18.9
Visit Isle of Wight
23.5
20.6
20.6
20.6
Yarmouth Harbour Commissioners
21.6
24.8
24.8
24.8
42
In addition, certain employers make a lump sum contribution:
Employer Name
Minimum Contributions for the Year Ending 31 March
2017
2018
2019
2020
Lump sum Lump sum Lump sum Lump sum
Ј000
Ј000
Ј000
Ј000
St Catherine's School Ltd
44
51
51
51
IOW Society for the Blind
41
41
41
41
Yarmouth Harbour Commissioners
59
57
57
57
Cowes Harbour Commissioners
20
19
19
19
Southern Housing Group
122
170
170
170
Sovereign Housing Group
109
139
139
139
* During 2016-17, academies within the fund were asked whether they wished to pool with the administering authority for contribution rate purposes only. Seven of the academies in operation at the time of the 2016 valuation opted to pool, and the pooled rates are shown above.
Principal Actuarial Assumptions and Method used to value the liabilities Full details of the methods and assumptions used are described in the valuation report dated 28 March 2017.
Method The liabilities were assessed using an accrued benefits method which takes into account pensionable membership up to the valuation date, and makes an allowance for expected future salary growth to retirement or expected earlier date of leaving pensionable membership.
Assumptions A market-related approach was taken to valuing the liabilities, for consistency with the valuation of the Fund assets at their market value.
The key financial assumptions adopted for the 2016 valuation were as follows:
Financial Assumptions Discount rate Salary Increases Price inflation/Pension Increases
31 March 2016 % p.a. Nominal 4.00% 2.60% 2.10%
(Explanatory note: The pay increases shown above are for the purposes of the actuarial valuation only and not a reflection of what actual pay rises will be in the short-term. The assumptions are consistent with other assumptions used in the actuarial valuation and reflect longer term trends.)
The key demographic assumption was the allowance made for longevity. The life expectancy assumptions are based on the Fund's bespoke set of VitaCurves in line with the CMI 2013 model, assuming the current rate of improvements has reached a peak and will converge to a long term rate of 1.25% p.a.
Based on these assumptions, the average future life expectancies are as follows:
Males
Females
Current Pensioners
22.3 years
24.7 years
Future Pensioners *
23.9 years
26.5 years
* based on members aged 45 at the valuation date.
Copies of the 2016 valuation report and the Funding Strategy Statement are available on request from the Finance Department of the Isle of Wight Council, administering authority to the fund.
43
22. ACTUARIAL PRESENT VALUE OF PROMISED RETIREMENT BENEFITS In addition to the triennial funding valuation, the fund's actuary also undertakes a valuation of the pension fund liabilities, on an IAS 19 basis, using the same base data as the funding valuation rolled forward to the current financial year, taking account of changes in membership numbers and updating assumptions to the current year. This valuation is not carried out on the same basis as that used for setting fund contribution rates and the fund accounts do not take account of the liabilities to pay pensions and other benefits in the future. In order to assess the value of the benefits on this basis, the actuary has updated the actuarial assumptions (set out below) from those used for funding purposes (see Note 21). The actuary has also used valued ill health and death benefits in line with IAS 19.
Balance sheet Year ended Present value of Promised Retirement Benefits Fair value of scheme assets (bid value) Net Liability
31 March 2017 Јm (720) 559 (161)
31 March 2016 Јm (643) 474 (169)
Liabilities have been projected using a roll forward approximation from the latest formal funding valuation as at 31 March 2016. The actuary estimates this liability at 31 March 2017 comprises Ј253 million in respect of employee members (2016: Ј290 million), Ј169 million in respect of deferred pensioners (2016: Ј111 million) and Ј298 million in respect of pensioners (2015: Ј243 million). The approximation involved in the roll forward model means that the split of scheme liabilities between the three classes of member may not be reliable. However, the actuary is satisfied the aggregate liability is a reasonable estimate of the actuarial present value of benefit promises. The actuary has not made any allowance for unfunded benefits.
The above figures include both vested and non-vested benefits, although the latter is assumed to have a negligible value.
It should be noted the above figures are appropriate for the Administering Authority only for preparation of the accounts of the Pension Fund. They should not be used for any other purpose (i.e. comparing against liability measures on a funding basis or a cessation basis).
Assumptions The assumptions used are those adopted for the Administering Authority's IAS19 report as required by the Code of Practice. These are given below. The actuary estimates that the impact of the change in financial assumptions to 31 March 2017 is to increase the actuarial present value by Ј97m. They estimate the impact of the change in demographic and longevity assumptions is to decrease the actuarial present value by Ј19m.
Financial assumptions Year ended Inflation/Pension Increase Rate Salary Increase Rate Discount Rate
31 March 2017 % p.a. 2.4% 2.8% 2.6%
31 March 2016 % p.a. 2.20% 4.20% 3.50%
(Explanatory note: The pay increases shown above are for the purposes of the actuarial valuation only and not a reflection of what actual pay rises will be in the short-term. The assumptions are consistent with other assumptions used in the actuarial valuation and reflect longer term trends.)
Longevity assumption The life expectancy assumption is based on the Fund's bespoke VitaCurves in line with the CMI 2013 model, assuming the current rate of improvements has reached a peak and will converge to long term rate of 1.25% p.a. Based on these assumptions, the average future life expectancies at age 65 are summarised below:
Current Pensioners Future Pensioners *
Males 22.3 years 23.9 years
Females 24.7 years 26.5 years
44
* Future pensioners are assumed to be currently aged 45 at the most recent formal valuation as at 31 March 2016 Please note that the longevity assumptions have changed since the previous IAS26 disclosure for the Fund.
Commutation assumption An allowance is included for future retirements to elect to take 25% of the maximum additional tax-free cash up to HMRC limits for pre-April 2008 service and 63% of the maximum tax-free cash for post-April 2008 service. Please note the commutation assumptions have changed since the previous IAS26 disclosure for the Fund.
23. LONG TERM ASSETS 31 March 2016 Ј000 Debtors 21 Contributions due - employers 21
31 March 2017 Ј000 157 157
Analysis of debtors 31 March 2016 Ј000 21 Local authorities - Other entities and individuals 21
31 March 2017 Ј000 140 17 157
24. CURRENT ASSETS 31 March 2016 Ј000 Debtors 118 Contributions due - employees 484 Contributions due - employers 62 Taxation 8 Sundry debtors 125 Payments in advance 14 Cash balances 811
31 March 2017 Ј000 116 609 72 2 96 895
Analysis of debtors 31 March 2016 Ј000 62 central government bodies 13 Local authorities 722 Other entities and individuals 797
31 March 2017 Ј000 72 77 746 895
25. CURRENT LIABILITIES 31 March 2016 Ј000 Creditors 195 Taxation 286 Accruals 147 Sundry creditors - Cash Balances 628
31 March 2017 Ј000 216 375 247 20 858
45
Analysis of creditors 31 March 2016 Ј000 196 Central government bodies 116 Local authorities 316 Other entities and individuals 628
31 March 2017 Ј000 216 157 465 838
26. ADDITIONAL VOLUNTARY CONTRIBUTIONS (AVCS) Market value 31 March 2016 Ј000 807 Prudential Life and Pensions
Market value 31 March 2017 Ј000 782
AVC contributions of Ј45.5 thousand were paid directly to Prudential Life and Pensions during the year (201516: Ј46.8 thousand).
AVC amounts are not included in the pension fund accounts in accordance with Regulation 4(2)(c) of the Pension Scheme (Management and Investment of Funds) Regulations 2009 (as amended).
27. RELATED PARTY TRANSACTIONS
Isle of Wight Council The Isle of Wight Council Pension Fund is administered by Isle of Wight Council. Consequently there is a strong relationship between the council and the pension fund.
During the reporting period, the council incurred costs of Ј367 thousand (2015-16: Ј305 thousand) in relation to the administration of the fund and was subsequently reimbursed by the fund for these expenses. The council is also the single largest employer of members of the pension fund and contributed Ј11.0 million in 2016-17 (2015-16: Ј10.7 million) to the fund. All monies owing to the fund, with the exception of deferred balances in respect of pension strain costs totalling Ј274.5 thousand (2016: Ј29.7 thousand), were paid during the year.
During the year, the pension fund borrowed funds from the council to support its working cash flow requirements; interest was charged on these borrowings at the broker local authority interest rate relevant to the amount and duration of the borrowing at the time it was made. The maximum amount borrowed during 2016-17 was Ј7.0 million (2015-16: Ј6.5 million). The balance due to the council at 31 March 2017 is Ј7.0 million (2016: Ј6.5 million),
Interest of Ј 34.4 thousand (2015-16: Ј20.0 thousand) was paid on the borrowings in the year.
Year ended 31 March 2016 Ј000 330 485 2,540 750 2,400 6,505
Repayment profile of borrowings from Isle of Wight Council less than 1 month 2 - 3 months 3 - 6 months 6 - 9 months 9 ­ 12 months Total value of borrowings
Year ended 31 March 2017 Ј000 95 2,450 1,350 3,150 7,045
Governance There are three members of the pension fund committee who are in receipt of pension benefits from the Isle of Wight Council Pension Fund (Cllrs Barry, Kendall and Warlow). In addition committee members Cllrs Barry, Kendall and Warlow are active members of the pension fund.
Each member of the pension fund committee is required to declare their interests at each meeting.
Council members named in note 30 form the Pension Fund Committee as trustees.
46
27A. KEY MANAGEMENT PERSONNEL The key management personnel of the fund are the Finance Director and S151 Officer and the Technical Finance Manager. Total remuneration payable to key management personnel is set out below:
Year ended 31 March 2016 Ј'000 32 6 - 38
Short-term benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments
Year ended 31 March 2017 Ј'000 33 6 - 39
28. CONTINGENT ASSETS AND LIABILITIES
At 31 March 2017 there were contingencies relating to Contribution Equivalent Premiums (CEPs) amounting to a net sum of Ј131 thousand (2016: Ј137 thousand) due to the Pension Fund. Assets amounted to Ј186 thousand and liabilities totalled Ј55 thousand (2016: Ј186 thousand and Ј49 thousand respectively). The sums do not form part of the net assets of the fund. Refunds and payments will only be made on application by the employee.
In 2006 a decision was taken by the Investment Panel to join in a Class Action against the HMRC to recover tax credits on overseas dividends. A sum of Ј880 thousand has been estimated as the possible benefit to the pension fund. This case is on-going. The sums do not form part of the net assets of the fund.
29. CAPITAL COMMITMENTS There were no capital commitments as at 31 March 2017 (2016: nil) 30. TRUSTEES REPORT 2016-17 The trustees of the pension fund are the members for the time being of the Pension Fund Committee, who at 31 March 2017 were Councillors Barry, Eccles, Hutchinson, Kendall, and Warlow (chair). Throughout the year the committee has been advised by the Director of Finance and Section 151 Officer, the Technical Finance Manager, Mercer Limited (the fund's investment consultants), and Hymans Robertson LLP (the fund's actuaries). In addition, non-voting representatives from the admitted bodies and the staff union attend the committee. Investment Performance The net assets of the fund at 31 March 2017 were Ј559.5 million, an increase of 18.0% on the 31 March 2016 valuation of Ј474.0 million. The fund's total investments over-performed compared to the agreed benchmarks by 0.4% during the year. The overall performance of the fund in the year to 31 March 2016 is reflective of the performance of UK and global investment markets. Over the longer term, the fund has continued to outperform annualised benchmark returns for three years (0.2% outperformance).
47
Funding Level The Fund's last triennial actuarial valuation was undertaken at 31 March 2016, showing a funding level of 91.5%, compared to 77.7% at the previous valuation at 31 March 2013. The results of this latest valuation, in terms of revised contribution rates, were implemented with effect from April 2017. The actuary's interim funding projection report at 31 March 2017 showed that the notional funding level had remained at 91.5%, the same as the last triennial valuation at 31 March 2016. However the deficit of Ј44 million at 31 March 2016 has increased to a deficit of Ј52 million at 31 March 2017. Governance The committee continues to keep its governance arrangements under review. Following the formation of the Local Pension Board, as required under the Public Service Pensions Act 2013, the arrangements are developing with a view to continuous improvement. In accordance with the training plan developed in the previous year, training sessions were held before each committee meeting, including presentations from the fund's actuaries on improving the governance framework, and from officers on the pooling of pension investments. The committee received reports on, and agreed, the valuation results, the funding strategy statement, the investment strategy statement, and the governance compliance statement; and received regular updates on investment changes, new and ceasing employers, membership numbers and contribution payments. In addition, the committee continues to receive presentations from its fund managers on the fund's investment performance as well as performance benchmarking and advice from its independent consultants, Mercer Limited 48
Knowledge and Skills Framework Compliance Statements Dated: 11 July 2017 Policy statements 1. This organisation adopts the key recommendations of the Code of Practice on Public Sector Pensions Finance Knowledge and Skills. 2. This organisation recognises that effective financial administration and decision-making can only be achieved where those involved have the requisite knowledge and skills. 3. Accordingly this organisation will ensure that it has formal and comprehensive objectives, policies and practices, strategies and reporting arrangements for the effective acquisition and retention of the relevant public sector pension scheme finance knowledge and skills for those in the organisation responsible for financial administration and decision-making. 4. These policies and practices will be guided by reference to a comprehensive framework of knowledge and skills requirements such as that set down in the CIPFA Pensions Finance Knowledge and Skills Frameworks. 5. This organisation will report on an annual basis how these policies have been put into practice throughout the financial year. 6. This organisation has delegated the responsibility for the implementation of the requirements of the CIPFA Code of Practice to the Managing Director and Head of Paid Service, who will act in accordance with the organisation's policy statement, and, where he is a CIPFA member, with CIPFA Standards of Professional Practice (where relevant). Member and officer training report The training plan formulated following a training needs analysis undertaken in January 2012, and updated following the appointment of new committee members in May 2013, was kept under review during the year. Members undertake training before the start of each of the scheduled committee meetings in future. Members of the Isle of Wight Pension Board are also invited to attend these sessions. These training sessions are delivered by a combination of officers, external advisers and fund managers. Separate agendas are issued for these sessions and a record of member and officer attendance is maintained. No training session was held before the annual meeting in July 2016, or the final meeting of the year in March 2017 During 2016-17, the committee received presentations from each of the fund managers in respect of the performance of their particular portfolios. In May 2016, officers delivered a training session on the fund's approach to pooling of investments, including the development of the ACCESS pool. In September 2016, a further development session on the structure of the ACCESS pool's investment vehicle was delivered. In November 2016, the fund's actuaries delivered a briefing on the governance framework of the fund, and action to improve it. Throughout the year, Councillors Warlow and Blezzard and the Technical Finance Manager attended regular meetings of the ACCESS group, in respect of pooling of investments. The committee members' attendance at the scheduled training sessions and committee meetings during 201617 is set out in the tables below. Overall attendance at committee meetings has remained at a high level during the year, consistent with the previous year. Overall attendance at training has increased from 70% to 85%. 49
Training Councillor: R Barry R Blezzard D Eccles S Hutchinson G Kendall D Pitcher ­ Resigned 7 Jul 16 I Warlow (Chair) Non-voting members: Employer representative Union representative Meetings Councillor: R Barry R Blezzard ­ resigned 27 Feb 17 D Eccles S Hutchinson G Kendall D Pitcher ­ Resigned 7 Jul 16 I Warlow (Chair) Non-voting members: Employer representative Union representative
20 May 2016 18 Nov 2016
Apols 86%
Apols n/a 83%
Apols
Apols
% 100% 50% 100% 100% 100% 0% 100% 85% 50% 50%
20 May 2016 Apols 86% Apols
08 July 2016 (special) n/a 100% Apols
22 Jul 2016 (AGM) n/a 100%
07 Sept 2016 (special) Apols n/a 83%
18 Nov 2016 Apols n/a 83%
03 March 2017 n/a n/a 100%




% 100% 80% 100% 100% 83% 0% 100% 92% 83% 83%
50
Communications Policy Statement Last updated 15 May 2013 Effective communication between the Isle of Wight Council (the council), the scheme members, and the employers within the fund is essential to the proper management of the Isle of Wight Council Pension Fund (the fund) on a transparent and accountable basis. This document sets out a policy framework within which the council, as administering authority for the fund, will communicate with:- Members of the scheme (current, deferred and pensioner) Representatives of members Employing bodies and Prospective members It identifies the format, frequency and method of distributing information and publicity. It also outlines the processes for promoting the scheme to prospective members and employing bodies. Members of the scheme: The key point of contact for members is the pension administration team. They can be contacted by telephone, email or in writing. Although the pensions team operate an open door policy for visitors, pre booked appointments are preferable. A pensions page is maintained on the council's website, http://www.iwight.com/council/OtherServices/PensionsIWC, which provides: Guides to the Local Government Pension Scheme (LGPS) including pension sharing on divorce, increasing pension benefits and the appeals process Policy Statements, including the Statement of Investment Principles, the Funding Strategy Statement, and Governance Compliance Statement. Annual Reports Pensions Bulletins Contact list for Pensions Team Links to other useful sites including the Local Government Pensions Committee (LGPC), the Department for Communities and Local Government (DCLG) and the LGPS Regulations. The information held on the pensions page will be reviewed and updated on a regular basis. Frequency of Communication: Monthly: Payslips (if required) to Pensioner Members Annually: Benefits Statements to contributing members Notification of pensions pay award every April. Publication of the Annual Report of the fund Annual General Meeting for all employing bodies Ad hoc: Statutory notices Amendments to membership (changes in hours, etc.) Notice of proposed changes to the scheme Workshops/employee briefings General policy is to issue statutory notifications and statements within the prescribed limits and to respond to written enquiries within 10 working days. Representatives of members A representative sits on the Pension Fund Committee in a non-voting capacity Employee representatives are invited to the Annual General Meeting Employing bodies A representative sits on the Pension Fund Committee in a non-voting capacity Invitation to the Annual General Meeting 51
Consultation on changes to the Funding Strategy Statement Notification of changes or proposed changes to scheme conditions Consultation on actuarial valuation prospects and options Advice on statutory framework. Prospective members All new starters receive information about the scheme and how to join. This policy statement will be reviewed annually. 52
Governance Policy Statement Last updated 13 May 2013 Isle of Wight Council ("the council"), as the administering authority to the fund, has delegated its functions with regard to the fund to its Pension Fund Committee ("the committee"). The committee oversees the proper administration and management of the fund. It is responsible for: appointing external fund managers and advisers making suitable custody arrangements for the fund's investments considering and approving actuarial valuations every three years and determining the level of employers' contributions considering changes in Local Government Pension Scheme ("LGPS") regulations and determining actions required considering and approving strategic advice on investment policy considering and approving the external managers' asset allocation and investment strategies monitoring the investment performance of the managers against the scheme specific benchmarks the periodic review of this statement, the Statement of Investment Principles, the Funding Strategy Statement and the Communications Policy The committee normally meets with its fund managers and investment advisor four times each year, in February, May, July and November. Each meeting considers the strategy and performance of the managers, together with any business matters that require attention. These include, at least once per annum, consideration of fund management and investment advice arrangements, and the investment strategy of the fund. The July meeting also forms the annual meeting to which all employers and employee representatives are invited to discuss fund performance and developments in the statutory framework. As well as these formal meetings, ad hoc sessions are arranged as required, principally in order to explore available investment strategy options in some depth. The committee is constituted to reflect the views of the council as administering authority and the largest member employer with 83.96% of the contributing membership. The committee consists of seven councillors with voting rights plus the Leader of the Council in an ex-officio capacity one representatives of the admission bodies/scheduled bodies in an observer capacity one representative of the trade unions in an observer capacity 53
Terms of Reference of Pension Fund Committee Extracted from the council's Constitution May 2017 version 8
1. Terms of Reference
1.1. Annually, to elect a chairman (when Full Council has decided not to so appoint)
1.2. To hold an annual meeting of employer representatives
1.3. To periodically review the funding strategy statement and statement of investment principles of the
fund
1.4. To determine strategic investment policy
1.5. To appoint, and regularly monitor performance of fund managers, investment advisors and actuaries
1.6. To periodically review the structure of investment management for the fund and implement new
arrangements as appropriate
1.7. To periodically review and set limits for the overall asset allocation of the fund
1.8. To periodically review issues which have an impact on the fund's long term solvency including those
issues over which the administering body has discretion
1.9. To tender and/or re-tender contracts for the provision of all actuarial and investment management
services required by the fund in accordance with the council's standing order.
1.10.
To undertake member training on investment issues
1.11.
To consider applications for admitted body status
1.12.
To exercise all discretionary functions of a pension scheme manager including those relating to
the fire pension scheme.
1.13.
Annual Report
1.13.1. The panel will produce an annual report on the performance of the investment fund and this will
be circulated to all members and will be formally reported to the audit committee.
2. Membership 7 elected members, appointed on a political proportionality basis. 1 non-voting employee representative nominated by Unison. 1 non-voting representative nominated by admitted bodies (external companies who have staff who are members of the pension scheme as a result of staff transfers to them).
2.1. In Attendance Chief executive (or his nominated representative) Leader of the council can attend as necessary 2 representatives as required from pension fund investment managers 1 representative from investment advisors 1 administrative support 1 representative from actuaries will be invited to attend as required eg to consider annual report and after triennial fund valuations
3. Proceedings 3.1. The procedure rules for the regulation of proceedings shall apply to meetings of the Isle of Wight Pension Fund Committee.
4. Quorum 4.1. The quorum for the Committee is 3 elected members.
5. Meeting Frequency and Length 5.1. The committee will meet bi-annually but additional meetings will be arranged with the approval of the chairman of the committee, if required.
6. Access to information 6.1. All meetings of the committee shall be held in public unless there are grounds for excluding the press and public, as set out in the access to information procedure rules or in accordance with legislation.
7. Agenda 7.1. The agenda for the committee will be determined by the Proper Officer in consultation with the chair of the committee.
8. Voting 8.1. Any vote shall be by show of hands. A simple majority prevails and in the event of a tied vote the chairman has a casting vote.
54
Terms of Reference of the Pension Board Extracted from the council's Constitution May 2017 version 8 1. Terms of Reference and Delegated Authorities 1.1. Introduction i) The purpose of this document is to set out the terms of reference for the local Pension Board of the Isle of Wight Council Pension Fund. 1.2. Role of the Local Pension Board i) The role of the Local Pension Board as defined by sections 5 (1) and (2) of the Public Service Pensions Act 2013, is to ­ Assist Isle of Wight Council Administering Authority as Scheme Manager; ­ to secure compliance with the Local Government Pension Scheme (LGPS) regulations and any other legislation relating to the governance and administration of the LGPS to secure compliance with requirements imposed in relation to the LGPS by the Pensions Regulator in such other matters as the LGPS regulations may specify Secure the effective and efficient governance and administration of the LGPS for the Isle of Wight Council Pension Fund Provide the Scheme Manager with such information as it requires to ensure that any member of the pension board or person to be appointed to the board does not have a conflict of interest. ii) The Pension Board will ensure it effectively and efficiently complies with the code of practice on the governance and administration of public service pension schemes issued by the Pension Regulator. iii) The Pension Board will also help ensure that the LGPS is managed and administered effectively and efficiently and complies with the code of practice on the governance and administration of public service pension schemes issued by the Pension Regulator. iv) The Pension Board shall meet sufficiently regularly to discharge its duties and responsibilities effectively. 1.3. Appointment of members of the Pension Board i) The process for selecting members of the Pension Board is set out below. ii) The Board shall consist of 4 members and be constituted as follows: 2 employer representatives; 2 scheme member representatives; iii) One of the employer representatives shall be an elected member of the Isle of Wight Council. The other will be selected by the other employers of the fund, following nominations. iv) The scheme member representatives shall be appointed by UNISON, who will be responsible for arranging their own election of suitable candidates and advise the Isle of Wight Council of this so that it can be assured that it is open and transparent. v) Pension Board representatives must not also participate in or act as members of the Isle of Wight Council Pension Fund Committee. vi) The Chair of the local Pension Board will be determined by the Board on an annual basis. vii) It will be the role of the Chair to ensure that all members of the Board show due respect for process, that all views are fully heard and considered and to determine when consensus has been met. viii) Each employer representative and scheme member representative so appointed shall serve for a fixed 2 year period which can be extended for further period(s) subject to re-nomination. ix) Each Board member is expected to attend all Board meetings during the year. In the event of consistent non-attendance by any Board member, then the tenure of that membership should be reviewed by the other Board members in liaison with the Scheme Manager. x) Other than by ceasing to be eligible as set out above, a Board member may only be removed from office during a term of appointment by the unanimous agreement of all of the other members. xi) The Board may, with the approval of the Scheme Manager, co-opt persons who are not members of the Board to serve on sub committees, particularly where this would add skills and experience. xii) Notwithstanding the appointment of co-opted members, the majority of the Board shall be comprised of employer and scheme member representatives, represented in equal number. xiii) There will be no provision to allow for substitute members to be appointed. 1.4. Quorum i) The Board shall have a formal quorum of 3. 55
1.5. Conflicts of Interest i) The policy for identifying conflicts of interest will be based upon the Council's Code of Conduct and relevant guidance issued by the Pensions Regulator. ii) No one may be appointed to the Board who has a conflict of interest. It is the responsibility of the board member to provide any information required by the Scheme Manager in order to determine whether a conflict exists. 1.6. Board Review Process i) The Board will undertake each year a formal review process to assess how well it and its subcommittees, if any, and the members are performing with a view to seeking continuous improvement in the Board's performance. 1.7. Advisers to the Board i) The Board may be supported in its role and responsibilities through the appointment of advisers and shall, subject to any applicable regulation and legislation from time to time in force, consult with such advisers to the Board and on such terms as it shall see fit to help better perform its duties. Any cost associated with the use of advisers to the Board must first be agreed with the Administering Authority. ii) The Board shall ensure that the performances of the advisers so appointed are reviewed on a regular basis. 1.8. Knowledge and Skills i) A member of the Pension Board must be conversant with ­ The legislation and associated guidance of the Local Government Pension Scheme (LGPS). Any document recording policy about the administration of the LGPS which is for the time being adopted by the Isle of Wight Council Pension Fund. ii) A member of the Pension Board must have knowledge and understanding of ­ The law relating to pensions The Pension Regulator's code of practice, and Any other matters which are prescribed in regulations. iii) It is for individual Pension Board members to be satisfied that they have the appropriate degree of knowledge and understanding to enable them to properly exercise their functions as a member of the Pension Board. iv) In line with this requirement Pension Board members are required to be able to demonstrate their knowledge and understanding and to refresh and keep their knowledge up to date. Pension Board members are therefore required to maintain a written record of relevant training and development. v) Pension Board members will undertake a personal training needs analysis and regularly review their skills, competencies and knowledge to identify gaps or weaknesses. vi) Pension Board members will comply with the Scheme Manager's training policy. Members of the Pension Board will be expected to attend training sessions held before each Pension Fund Committee meeting, to support the development of their knowledge and skills, as well as any other training sessions held specifically for Board members. 1.9. Board Meetings ­ Notice and Minutes i) The Scheme Manager shall give notice to all Pension Board members of every meeting of the Pension Board. The Scheme Manager shall ensure that a formal record of Pension Board proceedings is maintained. Following the approval of the minutes by the Chair of the Board or Board committee, they shall be circulated to all members and posted on the Isle of Wight Council website. ii) There will be at least 1 Pension Board meeting a year, to be held between the May and July meetings of the Isle of Wight Pension Fund Committee. Other meetings may be convened with due notice as the Board determines. 1.10. Remit of the Board i) The Pension Board must assist the Scheme Manager with such other matters as the scheme regulations may specify. It is for scheme regulations and the Scheme Manager to determine precisely what the Pension Board's role entails. 1.11. Standards of Conduct i) The role of Pension Board members requires the highest standards of conduct and therefore the "seven principles of public life" will be applied to all Pension Board members together with the code of conduct as contained within the constitution of the Isle of Wight Council. 56
1.12. Decision making i) Each member of the Pension Board will have an individual voting right but it is expected the Pension Board will as far as possible reach a consensus. If there are equal numbers of votes for and against the Chair of the Pension Board will have a second or casting vote which will be reported to the Scheme Manager.
1.13. Publication of Pension Board information i) Scheme members and other interested parties will want to know that the Isle of Wight Council Pension Fund is being efficiently and effectively managed. They will also want to be confident that the Pension Board is properly constituted, trained and competent in order to comply with scheme regulations, the governance and administration of the scheme and requirements of the Pension Regulator. ii) Up to date information will be posted on the section relating to the Isle of Wight Council Pension Fund on the Isle of Wight Council website showing: The names and information of the Pension Board members How the scheme members are represented on the Pension Board The responsibilities of the Pension Board as a whole The full terms of reference and policies of the Pension Board and how they operate The Pension Board appointment process Who each individual Pension Board member represents Any specific roles and responsibilities of individual Pension Board members. iii) Pension Board papers, agendas and minutes of meetings will be published on the Isle of Wight Council Pension Fund website. These may at the discretion of the Scheme Manager be edited to exclude items on the grounds that they would either involve the likely disclosure of exempt information as specified in Part 1 of Schedule 12A of the Local Government Act 1972 or it being confidential for the purposes of Section 100A(2) of that Act and/or they represent data covered by the Data Protection Act 1998. iv) The Scheme Manager will also consider requests for additional information to be published or made available to individual scheme members to encourage scheme member engagement and promote a culture of openness and transparency.
1.14. Accountability i) The Pension Board will be collectively and individually accountable to the Scheme Manager.
1.15. Expense Reimbursement i) Only expenses incurred by a Board member in attending an activity approved by the Board will be paid by the Council.
1.16. Reporting Breaches i) Any breach brought to the attention of the Pension Board, whether potential or actual, shall be dealt with in accordance with the procedure set out in a separate policy document.
1.17. Definitions
i) The undernoted terms shall have the following meaning when used in this document:
"Chair"
Reference to duties to be performed, or authorities
exercised, by the Chair
"Elected member"
A councillor of the Isle of Wight Council, elected by due
democratic process.
"Employer"
Organisations external to the Council whose employees
are eligible to be members of the Isle of Wight Council
Pension Fund, either under Schedule 2, part 1 of Local
Government Pension Scheme (Administration)
Regulations 2008, or by virtue of an admission
agreement with the administering authority.
"LGPS"
The Local Government Pension Scheme as constituted
by the Local Government Pension Scheme Regulations
2013, the Local Government Pension Scheme
Transitional Provisions, Savings and Amendment)
Regulations 2014 and the Local Government Pension
Scheme (Management and Investment of Funds)
Regulations 2009
57
"Pension Board" or "Board" "Scheme" "Scheme Manager" "Scheme member"
Means the local Pension Board for the Isle of Wight Council administering authority for the Isle of Wight Council Pension Fund as required under the Public Service Pensions Act 2013 Means the Local Government Pension Scheme as defined under "LGPS" Means Isle of Wight Council as administering authority of the Isle of Wight Council Pension Fund. A person who has been admitted to membership of a pension scheme and is entitled to benefit under the scheme. Such a person may be "Active" (paying contributions), "Deferred" (no longer paying contributions, but entitled to future benefit), or "Retired" (in receipt of benefit)
1.18. Interpretation i) Any uncertainty or ambiguity or interpretation required relating to any matters contained in this document shall be resolved by reference to the Scheme Manager.
58
APPENDIX A ­ Glossary of Terms Accrual rate The proportion of earnings that a defined benefit pension scheme pays as pension for each year of membership. Accrued liabilities A measure of the value in today's money of all pension entitlements to be paid in the future that have been earned to date. Accrued income The amount of dividend income declared on a shareholding but not paid at the accounting date. Active members Current employees who are contributing to an organisations pension scheme. Actuarial assumptions The assumptions that an actuary must make in order to arrive at a valuation for a pension fund. These include life expectancy, rates of inflation, expected earnings and the income that will be received from pension scheme investments. Actuarial liability The value placed on the accrued benefits of the fund using actuarial methods and assumptions for outgoings, including expenses, expected to fall on the fund after the valuation date based on benefits accrued for service up to the valuation date. Actuarial valuation A review of the pension fund, which takes place every three years, to ensure that employers' contributions are sufficient to maintain the solvency of the fund. Actuary An independent consultant who carries out the actuarial valuation and may also advise on changes in benefit structure and on investment strategies. The actuary will perform calculations based on information about prevailing circumstances and analysis of statistics. Additional voluntary contributions (AVCs) An extra pension contribution which can be made by a member of an occupational pension scheme. AVCs can be made into the occupational scheme or to a standalone product called a freestanding AVC plan. Administering authority A local authority required to maintain a pension fund under the local government pension scheme regulations. Admitted bodies/transferee admission bodies Bodies, including those from the voluntary and charitable sectors and contractors, whose staff can become members of an LGPS fund by virtue of an admission agreement between the administering authority and the relevant body. All Share Index Properly the FTSE All Share Index which summarises the state of the UK equity market. It covers around 900 of the major UK industrial, commercial and financial companies. Asset allocation The apportionment of a fund's assets between asset classes and/or markets (also see Bet). Asset allocation may be strategic, i.e. long-term, or tactical, i.e. short-term, aiming to take advantage of relative market movements. 59
Asset classes A specific category of assets or investments, such as stocks, bonds, cash, international securities and real estate. Assets within the same class generally exhibit similar characteristics, behave similarly in the marketplace and are subject to the same laws and regulations. Asset/liability modelling A statistical tool designed to help establish the most appropriate asset mix for a pension fund, in the context of its liabilities. Automatic enrolment A pension scheme where an individual is made a member by default and has actively to decide to leave the scheme. Authorised Unit trusts A unit trust which is approved by the Financial Services Authority (FSA) to be sold to members of the public. Benchmark A "notional" fund or model portfolio which is developed to provide a standard against which a manager's performance is measured. A target return is generally expressed as some margin over the benchmark. Bond A security issued by a corporate or government body borrowing in the capital markets. Bonds promise to pay interest (coupons) during the life of the bond plus the main amount borrowed. Bonds may be secured over assets of the firm or they can be unsecured. Bonus issue Bonus, scrip or free issue mean the same thing. Free shares are issued to existing shareholders out of company reserves. Career average revaluation of earnings scheme (CARE) A defined benefit scheme that gives individuals a pension based on a percentage of the salary earned in each year of their working life. Cash Cash is defined as cash instruments (e.g. money market deposits) and cash in bank and in hand. Corporate governance Governance for local authorities is defined as how they ensure that they do the right things, in the right way, for the right people in a timely, inclusive, open, honest and accountable manner. It comprises the systems processes, culture and values, by which local government bodies are directed and controlled, and through which they account to, engage with and where appropriate lead their communities. Coupon The interest payments on bonds. Currency hedging An approach aimed at eliminating or reducing foreign exchange risks. Custody/custodian Safe-keeping of securities by a financial institution. The custodian keeps a register of holdings and will collect income and distribute monies according to client instructions. 60
Deferred members Scheme members who have left employment or ceased to be an active member of the scheme while remaining in employment, but retain an entitlement to a pension from the scheme. Defined benefit scheme A scheme where the benefits are defined and paid, irrespective of contributions or investment performance. Defined contribution scheme A scheme where the benefits paid are dependent on contributions paid and investment performance. These are also called money purchase schemes. Discount rate Future benefit payments due need to be discounted to give the present value of the liabilities. A discount rate is chosen to reflect the investment return that is expected on the pension fund. Diversification The spreading of a fund's investments among different asset classes, markets and geographical areas in order to reduce risk. Diversification is a basic principle of multi-asset management. Dividend A payment distributed by a company to equity shareholders Equities The general term for ordinary shares issued in UK and overseas companies. Ethical investment Where investment is restricted to companies undertaking business in accord with an ethical definition. This could cover companies not engaging in arms manufacture. Ex Without. If a share is sold ex-dividend, the buyer does not get the last dividend that was declared. Financial Services Authority (FSA) The lead regulator. An agency which is not a government department. Fund managers Firms of investment professionals appointed by an investments or pensions committee to make day-to-day investment decisions for the fund within the terms of an investment management agreement (IMA). Funding Strategy Statement (FSS) The funding strategy statement provides a clear and transparent fund specific strategy for meeting an employer's pension liabilities in the future. It also defines a prudent longer term view of funding these liabilities while keeping within the regulatory framework to maintain a constant stable employer's contribution rate. FTSE A company that specialises in index calculation. Although not part of a stock exchange, co-owners include the London Stock Exchange and the Financial Times. They are best known for the FTSE 100, an index of the top 100 UK companies (ranked by size). Futures The right to buy a fixed quantity of a commodity on a date in the future at a price fixed earlier Gilts Fixed or index linked securities issues by the UK government (bonds). 61
Hedging A strategy which aims to eliminate the possibility of loss in an investment transaction or to minimise a risk by offsetting the exposure to a risk by entering into an investment with the exact opposite pay off pattern. Often used in the context of overseas investments to eliminate any potential currency loss (or profit). IAS 19 An international accounting standard that sets out the accounting treatment for employee benefits, including post-employment benefits such as pensions. Index-linked securities UK government issued stocks on which the interest and eventual repayment of the loan are based on movements in the retail price index. Investment adviser A professionally qualified individual or company whose main livelihood is derived from providing objective, impartial investment advice to companies, pension funds or individuals, for a stated fee. Listed security A security (a share) that is quoted on a major stock exchange. Mandate Instructions given to the manager by the client on the performance target, restrictions on stocks etc. Market value The price at which an investment can be bought or sold at a given date. Maturity The maturity of a pension scheme indicates the number of active members relative to the number receiving pensions. Member A person who has been admitted to membership of a pension scheme and is entitled to benefit under the scheme. Mid price Halfway between the bid price and the offer price Mortality assumptions One of the greatest unknowns for a pension fund is how long benefits will be paid for. People are currently living longer than they did in the past. Actuaries assess future mortality, using tables based on research and additionally can access databases which enable mortality to be analysed and modelled at a detailed level within employer's geographical areas. Club Vita is an example of such a database. Pooled fund A fund managed by a fund manager in which investors hold units. Stocks, bonds, properties etc. are not held directly by each client, but as part of a "pool". This contrasts with a segregated fund. Realised This is when the value of loss or profit is received when an investment is sold Return This is the percentage change of the total value invested over a set period. Rights issue An issue of new shares by a company, offered to existing shareholders in proportion to their holdings. The new shares are usually offered at a discount to encourage shareholders to buy. However, this can cause the existing 62
price to fall. Risk Generally taken to mean the variability of returns. Investments with a greater perceived risk must usually promise a higher return than a more stable investment before rational investors will consider buying them. Generally the higher the potential return the higher the associated risk. Scheduled bodies These are the organisations listed in the Local Government Pension Scheme (Administration) Regulations 2008 (Schedule 2, Part 1) and include county councils and district councils. Scrip dividend A dividend paid in the form of additional shares rather than cash. Securities Investments in company shares, fixed interest or index-linked stocks. Socially responsible investment (SRI) Investment where social, environmental or ethical considerations are taken into account in the selection, retention and realisation of the investment, and the responsible use of rights (such as voting rights) attached to investments. Stock Commonly used as a name for ordinary shares (common stock in the US) More correctly it is the name for UK gilts. Strategic asset allocation Long-term allocation between the main asset classes with the aim of meeting the investors risk and return objectives. Transfer value The amount of the transfer payment which is made to another pension arrangement. Unit trust An open ended trust investing in a wide spread of stocks, shares and cash (depending on FSA limits) Investors buy units directly from the fund manager. Unquoted security A security which is not quoted on stock exchange Unrealised Gains/(Losses) The increase/(decrease) at year end in the market value of investments held by the fund since the date of their purchase Withholding tax A tax deducted from overseas investment income. Yield A measure of the return earned on an investment. 63
APPENDIX B ­ Analysis of market value by Industrial Sector
Banking Basic Resources Construction Financial Services Healthcare Ind Goods & Services Insurance Media Oil & Gas Personal & Household Goods Real Estate Retail Technology Telecoms Travel & Leisure Utilities Pooled Funds Bonds Managed Fund Managed Funds Overseas Equities Managed Fund Property Managed Fund Diversified Growth Fund Pooled Funds subtotal Grand total
Baillie
Majedie
Majedie
Newton
Gifford
UK
Overseas Global
Schroder Schroder Diversified
Equities
Equities
Equities
Property Bonds
Growth
TOTAL
Ј000
Ј000
Ј000
Ј000
Ј000
Ј000
Ј000
15,193
1,642
-
-
-
-
16,835
8,335
3,608
-
-
-
-
11,943
424
-
-
-
-
-
424
344
-
-
-
-
-
344
5,427
-
-
-
-
-
5,427
11,801
883
-
-
-
-
12,684
2,533
-
-
-
-
-
2,533
1,483
-
-
-
-
-
1,483
17,906
-
-
-
-
-
17,906
1,088
184
-
-
-
-
1,272
176
-
-
-
-
-
176
16,783
239
-
-
-
-
17,022
1,749
603
-
-
-
-
2,352
7,237
6,053
-
-
-
-
13,290
3,014
1,697
-
-
-
-
4,711
3,453
-
-
-
-
-
3,453
96,946
14,909
-
-
-
-
111,855
11,540 11,540
-
-
-
-
-
219,561
-
-
-
-
-
219,561
30,304 30,304
108,739 - 108,739
78,020 78,020
108,739 11,540 219,561 30,304 78,020 448,164
108,486
14,909
219,561
30,304
108,739
78,020
560,019
64
APPENDIX C ­ Investment Strategy Statement Dated: March 2017 INVESTMENT STRATEGY STATEMENT (`ISS') ISLE OF WIGHT COUNCIL PENSION FUND ­ MARCH 2017 1. Introduction The Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 require administering authorities to formulate and to publish a statement of its investment strategy, in accordance with guidance issued from time to time by the Secretary of State. This ISS has been designed to be a living document and is an important governance tool for the Fund. This document sets out the investment strategy of the Fund, provides transparency in relation to how the Fund investments are managed, acts as a risk register, and has been designed to be informative but reader focused. This document replaces the Fund's Statement of Investment Principles. This statement will be reviewed by the Committee at least triennially or more frequently should any significant change occur. 2. Investment Beliefs and Objectives The Fund has the following investment beliefs which help to inform the investment strategy derived from the decision making process: Funding, investment strategy and contribution rates are linked The strategic asset allocation is the key factor in determining the risk and return profile of the Fund's investments Investing over the long term provides opportunities to improve returns Diversification across asset classes can help to mitigate against adverse market conditions and assist the Fund to produce a smoother return profile due to returns coming from a range of different sources Managing risk is a multi-dimensional and complex task Risk mitigation will be prioritised according to size of potential impact and risks will only be taken where they are expected to be rewarded Environmental, Social and Governance considerations are important factors for the sustainability of investment returns over the long term Value for money from investments is important, not just absolute costs. Asset pooling will help reduce costs whilst providing more choice of investments and will therefore be additive to Fund returns. High conviction active management can add value to returns The primary objective of the Fund is to provide pension and lump sum benefits for members on their retirement and/or benefits on death, before or after retirement, for their dependents, in accordance with the Local Government Pension Scheme ("LGPS") regulations and statutory provisions. The Committee aims to fund the Fund in such a manner that, in normal market conditions, all accrued benefits are fully covered by the value of the Fund's assets and that an appropriate level of 65
contributions is agreed by the employer to meet the cost of future benefits accruing.
3. Investment strategy and the process for ensuring suitability of investments.
As noted above, the Fund's objective is to pay benefits as they fall due and this requires the build-up of sufficient reserves in advance. The Fund is currently assessed to have a deficit in terms of the reserves needed and so the asset strategy is focused on achieving returns in excess of gilts, without taking undue risk. Having a thorough understanding of the risks facing the Fund is crucial and these are covered later in this statement.
The asset strategy, along with an overview of the role each asset plays in achieving the Fund's objectives is set out in the table below:
Asset class
Allocation Allowable
%
ranges %
Role (s) within the strategy
Equity
55.0
+/-6%
Long term growth in excess of inflation expected
Diversified Growth Fund
15.0
+/-4%
Diversification and Tactical Asset Allocation
Fixed Income
Diversified source of return from a range
22.0
+/-4%
of sources.
Not specifically income generating
Property
Diversification.
Generates investment income; Returns
8.0
+/-4%
expected to be inflation-sensitive
Exposure to Illiquidity premium
The Pensions Committee is responsible for the Fund's asset allocation which is determined via a triennial strategy review as part of the valuation process, but is kept under constant review; noting that strategic changes are an evolutionary process. The triennial review looks at both qualitative and quantitative analysis, covering: The required level of return that will mean the Fund can meet its future benefit obligations as they fall due The level of risk that the Fund can tolerate in absolute terms, and in relation to its funding level and deficit An analysis of the order of magnitude of the various risks facing the Fund is established in order that a priority order for mitigation can be determined The desire for diversification across asset class, region, sector, and type of security 4. Risk measurement and management The Committee assesses risks both qualitatively and quantitatively, with the starting point being the triennial strategy review. Risks are considered, understood and then prioritised accordingly.
66
A Investment Risks The Committee uses Risk Attribution Analysis to determine the order of magnitude of the main investment risks the Fund is facing. The chart below shows the VaR (Value at Risk, essentially the losses that would occur in a 1-in-20 event) facing the Fund, split into major risk categories.
As an additional illustration of risk, the table below shows how a range of events could impact the Fund:
Event Fall in equity markets Rise in Inflation Fall in interest rates Active Manager underperformance
Event movement 20% fall in equities 1% increase in inflation 1% fall in interest rates 3% underperformance from all active managers
Impact on Deficit Ј56m Ј75m Ј75m Ј14m
As shown in both the Value-at-Risk attribution chart and the table above, the most significant risk that the Fund is running is in relation to equities. Whilst not immaterial the risks being run by the use of active management is far smaller.
Equities ­ One of the largest risks that the Fund is running is in relation to its equity holdings. Should equity market conditions deteriorate significantly this will have a negative impact on the funding level. The Fund holds equities in order to provide the necessary returns to ensure that the Fund remains affordable. The Committee believes that the extra returns that are expected to be generated by equities compensates the level of risk equities bring to the Fund, but does believe in diversification, and looks to mitigate equity risk by investing significantly in bonds and alternatives. The Fund is a long term investor but does require income over and above contributions received in order to pay pensions. A strategy is therefore being developed that would seek income from alternative assets and bonds, rather than from equities, in order to avoid being a forced seller at a low point in the market.
67
Liabilities ­ The other major risk the Fund is running is in relation to its unhedged liabilities which are impacted by changes in real gilt yields. The Fund's liabilities are sensitive to inflation as future pensions are linked to inflation and the cashflow out of the Fund will increase as inflation increases. The liabilities are sensitive to changes in gilt yields as these are used to place a current value on the future payments, as this yield falls the present value of the liabilities increases. Alternatives ­ The Fund has a significant amount of assets allocated to a range of alternatives, with allocations to property and diversified growth. The risks that these investments bring at an individual level is not insignificant however the Committee believe that over the long term alternatives will provide returns that compensate for the risks being run. Additionally the level of diversification the assets provide helps to reduce the Funds reliance on returns from equities. Illiquid assets such as property are also a valuable source of income. Active Manager Risk ­ Investment Managers are appointed to manage the Fund's investments on its behalf. This risk is small relative to other risks; however the Fund still addresses this risk. Extensive due diligence is used before managers are selected, with a number of different managers chosen to prevent concentration risk The investment managers are also monitored regularly by the Committee, Officers and by the Fund's Advisors. The Fund's portfolio is well diversified across asset classes, geography and asset managers. As different asset classes have varying correlations with other asset classes, the Fund by investing in a range of different investments can minimise the level of risk run to a degree. B Demographic Risks The Fund is subject to a range of demographic risks, but with particular reference to investment strategy, the Committee is aware of the potential for the Fund to mature over time as the pensioner liability increases. A mature pension fund is likely to take less investment risk over time and this is considered at each strategy review. The more mature a pension fund, the more likely it is that disinvestments would need to be made to pay benefits. The Fund is not in that situation at present as income from contributions and investments are greater than benefit payments. However, this situation is monitored regularly and formally as part of the actuarial valuation and strategy review. C Cashflow Management Risks As noted above, the Fund is marginally cash flow positive after taking investment income into account. However, this position will be reviewed regularly and is a factor that is incorporated into the Fund's investment strategy reviews in order that a portfolio of income generating assets is built up over time. D Governance Risks The Fund believes that there is a benefit to the Fund to be gained from good governance in the form of either or both of an increased return and/or decreased risk. Poor governance can lead to opportunities and risks being missed, and have a detrimental effect on the funding level and deficit. Details of the Fund's governance structure can be found in the Governance Compliance Statement in the Fund's annual report and accounts. E Environmental, Social & Governance (`ESG') Risks The committee recognises that social, environmental and ethical considerations are among the 68
factors which investment managers will take into account, where relevant, when selecting investments for purchase, retention or sale. Each of the Fund Managers has produced a statement setting out its policy in this regard. The managers have been delegated by the committee to act accordingly. 4. Approach to asset pooling Isle of Wight is a member of the ACCESS pool along with the following 10 other pension funds: East Sussex Essex Hampshire Hertfordshire Cambridgeshire Kent Norfolk Northamptonshire Suffolk West Sussex All eleven funds are committed to collaboratively working together to meet the criteria for pooling and have signed a Memorandum of Understanding to underpin their partnership (this will be updated for the proposed Inter Authority Agreement, once concluded). ACCESS is working to a project plan in order to create the appropriate means to pool investments. The first investments to be pooled in 2017 will be passively managed investments. The ACCESS Funds have set out how they meet the pooling criteria, the pool's structure, governance arrangements and services to be shared is set out in the submission made to the Government in July 2016, which is available on ACCESS's website http://www.accesspool.org/ All 11 ACCESS funds are working in the expectation that all investments will be pooled apart from a minority of investments where there is a no value for money benefit to pooling a specific investment as identified and agreed by an individual fund. 5. Voting Rights The Committee has delegated the exercise of voting rights to the investment managers on the basis that voting power will be exercised by them with the objective of preserving and enhancing long term shareholder value. Accordingly, the managers have produced written guidelines of their process and practice in this regard. Copies of the Fund Managers' latest corporate governance reports are available from the Technical Finance Manager. The managers are encouraged to vote in line with their guidelines in respect of all resolutions at annual and extraordinary general meetings of companies. 6. Environmental, Social and Corporate Governance policy and policy of the exercise of rights (including voting rights) attaching to investments The Pension Fund Committee must act with the best financial interests of the beneficiaries, present and future, in mind. The Pension Fund Committee believes that companies should be aware of the potential risks associated with adopting practices that are socially, environmentally or ethically unacceptable. As part of the investment decision-making process, Investment Managers are required to consider such practices and assess the extent to which this will detract from company performance and returns to shareholders. Investment Managers are required to exercise voting rights on behalf of the Pension Fund when it is in the best interests of the Pension Fund. The quarterly report from investment managers should include details of voting activity. 69
The Fund has never sought to implement a policy that explicitly excludes certain types of investments, companies or sectors except where they are barred by UK law. The Fund believes that its influence as a shareholder is better deployed by engaging with companies, in order to influence behaviour and enhance shareholder value. The Fund believes that this influence would be lost through a divestment or screening approach. The Fund actively engages with companies through its investment managers. Ultimately the Fund will always retain the right to disinvest from certain companies or sectors in the event that all other approaches are unsuccessful and it is determined that the investment is no longer aligned with the interests of the Fund or that the issue poses a material financial risk. The Fund is committed to the UK Stewardship Code and is developing a statement of compliance for assessment by the Financial Reporting Council. Myners Principles Although not specifically referenced in the Regulations, the Committee feels that assessment of compliance with the Myners Principles is a valuable governance tool. A copy of the Fund's Myners Compliance Statement can be found in the appendix. Advice Taken In creating this statement, the Fund has taken advice from its Investment Consultant. Also, in relation to each of the constituent parts, such as the asset allocation and risk mitigation, the Fund has taken advice from its Investment Consultant, Mercer, and the Scheme Actuary, Hymans Robertson. In providing investment advice, Mercer is regulated by the Financial Conduct Authority. 70
Appendix A ­ Myners Principles Principle 1 Effective Decision Making: Administering authorities should ensure: That decisions are taken by persons or organisations with the skills, knowledge, advice and resources necessary to make them effectively and monitor their implementation; and That those persons or organisations have sufficient expertise to be able to evaluate and challenge the advice they receive, and manage conflicts of interest.
Response on Adherence Compliant Decisions are taken by the Committee which is responsible for the management of the Fund. The Committee has support from council officers with sufficient experience to assist them. The Committee also seeks advice from professional actuarial and investment advisers to ensure it can be familiar with the issues concerned when making decisions. A training needs analysis was undertaken by the Committee in January 2012, resulting in a training plan being developed and delivered for the financial year 2012-2013. The training needs analysis was refreshed to inform a new training delivery plan for 2013-14 and beyond. The Committee hold a one hour training session before every Committee meeting. The Committee is able to make robust challenges to advice and is aware of where potential conflicts of interest may reside within the Committee and in relation to service providers.
Principle 2 Clear objectives: An overall investment objective should be set out for the fund that takes account of the scheme's liabilities, the potential impact on local tax payers, the strength of the covenant for non-local authority employers, and the attitude to risk of both the administering authority and scheme employers, and these should be clearly communicated to advisers and investment managers.
Compliant The Committee has established objectives for the Fund which takes account of the nature of fund liabilities and the contribution strategy. This involved discussions with the actuary to enable the Committee to set the overall risk budget for the Fund. This is reflected in the investment mandates awarded to the asset managers. There is dialogue with admitted bodies within the fund in relation to the contributions they pay, their capacity to pay these contributions and the level of guarantees they can provide.
Principle 3 Risk and liabilities: In setting and reviewing their investment strategy, administering authorities should take account of the form and structure of liabilities. These include the implications for local tax payers, the strength of the covenant for participating employers, the risk of their default and longevity risk.
Compliant The investment strategy is considered in the light of the nature of the fund liabilities, the timescale over which benefits will be paid, and financial and demographic factors affecting the liabilities, such as inflation and improving longevity. The Committee and council officers have discussed the contribution strategy with the actuary taking account of the strength of covenant of the council and its long term horizon. Discussions have also taken place with admitted bodies in relation to the affordability of contributions and the strengths of their covenants.
71
Principle Principle 4 Performance assessment: Arrangements should be in place for the formal measurement of performance of the investments, investment managers and advisers. Administering authorities should also periodically make a formal assessment of their own effectiveness as a decision-making body and report on this to scheme members.
Response on Adherence Partially Compliant The performance of the Fund and its individual managers are monitored on a regular basis. The quality of advisers is assessed on a qualitative basis but is not formally measured. Advisers are subject to periodic re-tender. The Committee is developing formal processes to measure its own effectiveness.
Principle 5 Responsible Ownership: Administering authorities should Adopt, or ensure their investment managers adopt, the Institutional Shareholders' Committee (ISC) Statement of Principles on the responsibilities of shareholders and agents. Include a statement of their policy on responsible ownership in the Statement of Investment Principles. Report periodically to scheme members on the discharge of such responsibilities. 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. Should provide regular communication to scheme members in the form they consider most appropriate.
Partially Compliant The Committee encourages its Investment Managers to adopt the ISC Statement of Principles on the responsibilities of shareholders and agents on the Fund's behalf This Statement of Investment Principles includes a statement on the fund's policy on responsible ownership. The Committee needs to consider the implications of the UK Stewardship Code (issued in September 2012) to ensure it is fully compliant with the new requirements. Compliant The Committee maintains minutes of meetings which are available on the council website. The Committee holds a formal annual meeting for members and also meets periodically with sponsoring employer bodies. An Admitted Bodies representative and a Member representative attend Committee meetings. The Statement of Investment Principles is published on the council website and is available to members on request. Other information on the scheme is available to members on the council website.
72
APPENDIX D ­ Funding Strategy Statement 1 Introduction 1.1 What is this document? This is the Funding Strategy Statement (FSS) of the Isle of Wight Council Pension Fund ("the Fund"), which is administered by Isle of Wight Council ("the Administering Authority"). It has been prepared by the Administering Authority in collaboration with the Fund's actuary, Hymans Robertson LLP, and after consultation with the Fund's employers and investment adviser. It is effective from 1 April 2017 1.2 What is the Isle of Wight Council Pension Fund? The Fund is part of the national Local Government Pension Scheme (LGPS). The LGPS was set up by the UK Government to provide retirement and death benefits for local government employees, and those employed in similar or related bodies, across the whole of the UK. The Administering Authority runs the Isle of Wight Council Pension Fund, in effect the LGPS for the Isle of Wight area, to make sure it: receives the proper amount of contributions from employees and employers, and any transfer payments; invests the contributions appropriately, with the aim that the Fund's assets grow over time with investment income and capital growth; and uses the assets to pay Fund benefits to the members (as and when they retire, for the rest of their lives), and to their dependants (as and when members die), as defined in the LGPS Regulations. Assets are also used to pay transfer values and administration costs. The roles and responsibilities of the key parties involved in the management of the Fund are summarised in Appendix B. 1.3 Why does the Fund need a Funding Strategy Statement? Employees' benefits are guaranteed by the LGPS Regulations, and do not change with market values or employer contributions. Investment returns will help pay for some of the benefits, but probably not all, and certainly with no guarantee. Employees' contributions are fixed in those Regulations also, at a level which covers only part of the cost of the benefits. Therefore, employers need to pay the balance of the cost of delivering the benefits to members and their dependants. The FSS focuses on how employer liabilities are measured, the pace at which these liabilities are funded, and how employers or pools of employers pay for their own liabilities. This statement sets out how the Administering Authority has balanced the conflicting aims of: affordability of employer contributions, transparency of processes, stability of employers' contributions, and prudence in the funding basis. There are also regulatory requirements for an FSS, as given in Appendix A. 73
The FSS is a summary of the Fund's approach to funding its liabilities, and this includes reference to the Fund's other policies; it is not an exhaustive statement of policy on all issues. The FSS forms part of a framework which includes: the LGPS Regulations; the Rates and Adjustments Certificate (confirming employer contribution rates for the next three years) which can be found in an appendix to the formal valuation report; the Fund's practices regarding admissions, cessations and bulk transfers (were the Fund's practices to change during the period of the FSS, the appropriate stakeholders would be communicated with accordingly); actuarial factors for valuing individual transfers, early retirement costs and the costs of buying added service; and the Fund's Investment Strategy Statement (see Section 4) 1.4 How does the Fund and this FSS affect me? This depends who you are: a member of the Fund, i.e. a current or former employee, or a dependant: the Fund needs to be sure it is collecting and holding enough money so that your benefits are always paid in full; an employer in the Fund (or which is considering joining the Fund): you will want to know how your contributions are calculated from time to time, that these are fair by comparison to other employers in the Fund, and in what circumstances you might need to pay more. Note that the FSS applies to all employers participating in the Fund; an Elected Member whose council participates in the Fund: you will want to be sure that the council balances the need to hold prudent reserves for members' retirement and death benefits, with the other competing demands for council money; a Council Tax payer: your council seeks to strike the balance above, and also to minimise cross-subsidies between different generations of taxpayers. 1.5 What does the FSS aim to do? The FSS sets out the objectives of the Fund's funding strategy, such as: to ensure the long-term solvency of the Fund, using a prudent long term view. This will ensure that sufficient funds are available to meet all members'/dependants' benefits as they fall due for payment; to ensure that employer contribution rates are reasonably stable where appropriate; not to restrain unnecessarily the Investment Strategy of the Pension Fund so that the Administering Authority can seek to maximise investment returns (and hence meet the costs of benefits) for an appropriate level of risk; to minimise the long-term cash contributions which employers need to pay to the Fund, by recognising the link between assets and liabilities and adopting an investment strategy which balances risk and return (NB this will also minimise the costs to be borne by Council Tax payers); to reflect the different characteristics of different employers in determining contribution rates. This involves the Fund having a clear and transparent funding strategy to demonstrate how each employer can best meet its own liabilities over future years; and 74
to use reasonable measures to reduce the risk to other employers and ultimately to the Council Tax payer from an employer defaulting on its pension obligations. 75
1.6 How do I find my way around this document? In Section 2 there is a brief introduction to some of the main principles behind funding, i.e. deciding how much an employer should contribute to the Fund from time to time. In Section 3 we outline how the Fund calculates the contributions payable by different employers in different situations. In Section 4 we show how the funding strategy is linked with the Fund's investment strategy. In the Appendices we cover various issues in more detail if you are interested: A. the regulatory background, including how and when the FSS is reviewed, B. who is responsible for what, C. what issues the Fund needs to monitor, and how it manages its risks, D. some more details about the actuarial calculations required, E. the assumptions which the Fund actuary currently makes about the future, F. a glossary explaining the technical terms occasionally used here. If you have any other queries please contact Jo Thistlewood, Technical Finance Manager, in the first instance at e-mail address [email protected] or on telephone number 01983 821000 extension 6371. 76
2 Basic Funding issues (More detailed and extensive descriptions are given in Appendix D). 2.1 How does the actuary measure the required contribution rate? In essence this is a three-step process: Calculate the ultimate funding target for that employer, i.e. the ideal amount of assets it should hold in order to be able to pay all its members' benefits. See Appendix E for more details of what assumptions we make to determine that funding target; Determine the time horizon over which the employer should aim to achieve that funding target. See the table in 3.3 and Note (c) for more details; Calculate the employer contribution rate such that it has at least a given probability of achieving that funding target over that time horizon, allowing for different likelihoods of various possible economic outcomes over that time horizon. See 2.3 below, and the table in 3.3 Note (e) for more details. 2.2 What is each employer's contribution rate? This is described in more detail in Appendix D. Employer contributions are normally made up of two elements: a) the estimated cost of benefits being built up each year, after deducting the members' own contributions and including administration expenses. This is referred to as the "Primary rate", and is expressed as a percentage of members' pensionable pay; plus b) an adjustment for the difference between the Primary rate above, and the actual contribution the employer needs to pay, referred to as the "Secondary rate". In broad terms, payment of the Secondary rate will aim to return the employer to full funding over an appropriate period (the "time horizon"). The Secondary rate may be expressed as a percentage of pay and/or a monetary amount in each year. The rates for all employers are shown in the Fund's Rates and Adjustments Certificate, which forms part of the formal Actuarial Valuation Report. Employers' contributions are expressed as minima, with employers able to pay contributions at a higher rate. Account of any higher rate will be taken by the Fund actuary at subsequent valuations, i.e. will be reflected as a credit when next calculating the employer's contributions. 2.3 What different types of employer participate in the Fund? Historically the LGPS was intended for local authority employees only. However over the years, with the diversification and changes to delivery of local services, many more types and numbers of employers now participate. There are currently more employers in the Fund than ever before, a significant part of this being due to new academies. In essence, participation in the LGPS is open to public sector employers providing some form of service to the local community. Whilst the majority of members will be local authority employees (and ex-employees), the majority of participating employers are those providing services in place of (or alongside) local authority services: academy schools, contractors, housing associations, charities, etc. The LGPS Regulations define various types of employer as follows: Scheduled bodies - councils, and other specified employers such as academies and further education establishments. These must provide access to the LGPS in respect of their employees who are not eligible to join another public sector scheme (such as the Teachers Scheme). These employers are so-called because they are specified in a schedule to the LGPS Regulations. 77
It is now possible for Local Education Authority schools to convert to academy status, and for other forms of school (such as Free Schools) to be established under the academies legislation. All such academies (or Multi Academy Trusts), as employers of non-teaching staff, become separate new employers in the Fund. As academies are defined in the LGPS Regulations as "Scheduled Bodies", the Administering Authority has no discretion over whether to admit them to the Fund, and the academy has no discretion whether to continue to allow its non-teaching staff to join the Fund. There has also been guidance issued by the DCLG regarding the terms of academies' membership in LGPS Funds. Designating employers - employers such as town and parish councils are able to participate in the LGPS via resolution (and the Fund cannot refuse them entry where the resolution is passed). These employers can designate which of their employees are eligible to join the scheme. Other employers are able to participate in the Fund via an admission agreement, and are referred to as `admission bodies'. These employers are generally those with a "community of interest" with another scheme employer ­ community admission bodies ("CAB") or those providing a service on behalf of a scheme employer ­ transferee admission bodies ("TAB"). CABs will include housing associations and charities, TABs will generally be contractors. The Fund is able to set its criteria for participation by these employers and can refuse entry if the requirements of the Fund's admission practices are not met. (NB The terminology CAB and TAB has been dropped from recent LGPS Regulations, which instead combine both under the single term `admission bodies'; however, we have retained the old terminology here as we consider it to be helpful in setting funding strategies for these different employers. 2.4 How does the measured contribution rate vary for different employers? All three steps above are considered when setting contributions (more details are given in Section 3 and Appendix D). 1. The funding target is based on a set of assumptions about the future, (e.g. investment returns, inflation, pensioners' life expectancies). However, if an employer is approaching the end of its participation in the Fund then its funding target may be set on a more prudent basis, so that its liabilities are less likely to be spread among other employers after its cessation; 2. The time horizon required is, in broad terms, the period over which any deficit is to be recovered. A shorter period will lead to higher contributions, and vice versa (all other things being equal). Employers may be given a lower time horizon if they have a less permanent anticipated membership, or do not have tax-raising powers to increase contributions if investment returns under-perform; and 3. The probability of achieving the funding target over that time horizon will be dependent on the Fund's view of the strength of employer covenant and its funding profile. Where an employer is considered to be weaker, or potentially ceasing from the Fund, then the required probability will be set higher, which in turn will increase the required contributions (and vice versa). For some employers it may be agreed to pool contributions, see 3.4. Any costs of non ill-health early retirements must be paid by the employer, see 3.6. Costs of ill-health early retirements are covered in 3.7 and 3.8. . 78
2.5 How is a deficit (or surplus) calculated? An employer's "funding level" is defined as the ratio of: the market value of the employer's share of assets (see Appendix D, section D5, for further details of how this is calculated), to the value placed by the actuary on the benefits built up to date for the employer's employees and exemployees (the "liabilities"). The Fund actuary agrees with the Administering Authority the assumptions to be used in calculating this value. If this is less than 100% then it means the employer has a shortfall, which is the employer's deficit; if it is more than 100% then the employer is said to be in surplus. The amount of deficit or shortfall is the difference between the asset value and the liabilities value. It is important to note that the deficit/surplus and funding level are only measurements at a particular point in time, on a particular set of assumptions about the future. Whilst we recognise that various parties will take an interest in these measures, for most employers the key issue is how likely it is that their contributions will be sufficient to pay for their members' benefits (when added to their existing asset share and anticipated investment returns). In short, deficits and funding levels are short term measures, whereas contribution-setting is a longer term issue. 2.6 How does the Fund recognise that contribution levels can affect council and employer service provision, and council tax? The Administering Authority and the Fund actuary are acutely aware that, all other things being equal, a higher contribution required to be paid to the Fund will mean less cash available for the employer to spend on the provision of services. For instance: Higher Pension Fund contributions may result in reduced council spending, which in turn could affect the resources available for council services, and/or greater pressure on council tax levels; Contributions which Academies pay to the Fund will therefore not be available to pay for providing education; and Other employers will provide various services to the local community, perhaps through housing associations, charitable work, or contracting council services. If they are required to pay more in pension contributions to the LGPS then this may affect their ability to provide the local services at a reasonable cost. Whilst all this is true, it should also be borne in mind that: The Fund provides invaluable financial security to local families, whether to those who formerly worked in the service of the local community who have now retired, or to their families after their death; The Fund must have the assets available to meet these retirement and death benefits, which in turn means that the various employers must each pay their own way. Lower contributions today will mean higher contributions tomorrow: deferring payments does not alter the employer's ultimate obligation to the Fund in respect of its current and former employees; Each employer will generally only pay for its own employees and ex-employees (and their dependants), not for those of other employers in the Fund; 79
The Fund strives to maintain reasonably stable employer contribution rates where appropriate and possible. However, a recent shift in regulatory focus means that solvency within each generation is considered by the Government to be a higher priority than stability of contribution rates; The Fund wishes to avoid the situation where an employer falls so far behind in managing its funding shortfall that its deficit becomes unmanageable in practice: such a situation may lead to employer insolvency and the resulting deficit falling on the other Fund employers. In that situation, those employers' services would in turn suffer as a result; Council contributions to the Fund should be at a suitable level, to protect the interests of different generations of council tax payers. For instance, underpayment of contributions for some years will need to be balanced by overpayment in other years; the council will wish to minimise the extent to which council tax payers in one period are in effect benefitting at the expense of those paying in a different period. Overall, therefore, there is clearly a balance to be struck between the Fund's need for maintaining prudent funding levels, and the employers' need to allocate their resources appropriately. The Fund achieves this through various techniques which affect contribution increases to various degrees (see 3.1). In deciding which of these techniques to apply to any given employer, the Fund will consider a risk assessment of that employer using a knowledge base which is regularly monitored and kept up-to-date. This database will include such information as the type of employer, its membership profile and funding position, any guarantors or security provision, material changes anticipated, etc. This helps the Fund establish a picture of the financial standing of the employer, i.e. its ability to meet its long term Fund commitments. For instance, where an employer is considered relatively low risk then the Fund will permit options such as stabilisation (see 3.3 Note (b)), a longer time horizon relative to other employers, and/or a lower probability of achieving their funding target. Such options will temporarily produce lower contribution levels than would otherwise have applied. This is permitted in the expectation that the employer will still be able to meet its obligations for many years to come. On the other hand, an employer whose risk assessment indicates a less strong covenant will generally be required to pay higher contributions (for instance, with a higher funding target, and/or a shorter deficit recovery period relative to other employers, and/or a higher probability of achieving the target). This is because of the higher probability that at some point it will fail or be unable to meet its pension contributions, with its deficit in the Fund then falling to other Fund employers. The Fund actively seeks employer input, including to its funding arrangements, through various means: see Appendix A. 80
3 Calculating contributions for individual Employers 3.1 General comments A key challenge for the Administering Authority is to balance the need for stable, affordable employer contributions with the requirement to take a prudent, longer-term view of funding and ensure the solvency of the Fund. With this in mind, the Fund's three-step process identifies the key issues: 1. What is a suitably (but not overly) prudent funding target? 2. How long should the employer be permitted to reach that target? This should be realistic but not so long that the funding target is in danger of never actually being achieved. 3. What probability is required to reach that funding target? This will always be less than 100% as we cannot be certain of future market movements. Higher probability "bars" can be used for employers where the Fund wishes to reduce the risk that the employer ceases leaving a deficit to be picked up by other employers. These and associated issues are covered in this Section. The Administering Authority recognises that there may occasionally be particular circumstances affecting individual employers that are not easily managed within the rules and policies set out in the Funding Strategy Statement. Therefore the Administering Authority may, at its sole discretion, direct the actuary to adopt alternative funding approaches on a case by case basis for specific employers. 3.2 The effect of paying lower contributions There are a number of methods which the Administering Authority may permit, in order to improve the stability of employer contributions. These include, where circumstances permit:- capping of employer contribution rate changes within a pre-determined range ("stabilisation"); the use of extended time horizons; adjusting the required probability of meeting the funding target; the phasing in of contribution rises or reductions; the pooling of contributions amongst employers with similar characteristics; and/or the use of some form of security or guarantee to justify a lower contribution rate than would otherwise be the case. Employers which are permitted to use one or more of the above methods will often be paying, for a time, contributions less than the measured contribution rate. Such employers should appreciate that: their true long term liability (i.e. the actual eventual cost of benefits payable to their employees and exemployees) is not affected by the pace of paying contributions; lower contributions in the short term will be assumed to incur a greater loss of investment returns on the deficit. Thus, deferring a certain amount of contribution may lead to higher contributions in the long-term; and it may take longer to reach their funding target, all other things being equal. 81
Overleaf (3.3) is a summary of how the main funding policies differ for different types of employer, followed by more detailed notes where necessary. Section 3.4 onwards deals with various other funding issues which apply to all employers. 82
3.3 The different approaches used for different employers
Type of employer
Scheduled Bodies
Community Admission Bodies and Designating Employers
Sub-type
Local Authority
College
Academies
Open to new entrants
Closed to new entrants
Funding Target Basis used
Ongoing, assumes long-term Fund participation (see Appendix E)
Ongoing, but may move to "gilts basis" see Note (a)
Primary rate approach
(see Appendix D ­ D.2)
Stabilised
Yes - see
No
No
No
No
contribution rate?
Note (b)
Maximum time horizon ­ Note (c)
20 years
15 years
15 years
15 years
15 years
Secondary rate ­ Note (d) Treatment of surplus Probability of achieving target ­ Note (e)
% of payroll or monetary amount Covered by stabilisation arrangement 67%
% of payroll or monetary amount Contributions at least at primary rate 75%
% of payroll or monetary amount Contributions at least at primary rate 75%
% of payroll or monetary
Monetary amount
amount
Preferred approach: contributions kept at Primary rate. However, reductions may
be permitted by the Admin. Authority
75%
75%
Phasing of
Covered by
contribution changes stabilisation
arrangement
At the discretion of the Administering Authority. May be 3 years.
Review of rates ­ Note (f) New employer Cessation of participation: cessation debt payable
Administering Authority reserves the right to review contribution rates and amounts, and the level
of security provided, at regular intervals between valuations
n/a
n/a
Note (g)
Note (h)
Cessation is assumed not to be generally possible, as Scheduled Bodies are legally obliged to participate in the LGPS. In the rare event of cessation occurring (machinery of Government changes for example), the cessation debt principles applied would be as per Note (j).
Can be ceased subject to terms of admission agreement. Cessation debt will be calculated on a basis appropriate to the circumstances of cessation ­ see Note (j).
Transferee Admission Bodies (all) Ongoing, assumes fixed contract term in the Fund (see Appendix E) No Outstanding contract term Monetary amount Reduce contributions by spreading the surplus over the remaining contract term 75% None Particularly reviewed in last 3 years of contract Notes (h) & (i) Participation is assumed to expire at the end of the contract. Cessation debt (if any) calculated on ongoing basis. Awarding Authority will be liable for future deficits and contributions arising.
83
Note (a) (Basis for CABs and Designating Employers closed to new entrants)
In the circumstances where: the employer is a Designating Employer, or an Admission Body but not a Transferee Admission Body, and the employer has no guarantor, and the admission agreement is likely to terminate, or the employer is likely to lose its last active member, within a timeframe considered appropriate by the Administering Authority to prompt a change in funding, the Administering Authority may set a higher funding target (e.g. using a discount rate set equal to gilt yields) by the time the agreement terminates or the last active member leaves, in order to protect other employers in the Fund. This policy will increase regular contributions and reduce, but not entirely eliminate, the possibility of a final deficit payment being required from the employer when a cessation valuation is carried out.
The Administering Authority also reserves the right to adopt the above approach in respect of those Designating Employers and Admission Bodies with no guarantor, where the strength of covenant is considered to be weak but there is no immediate expectation that the admission agreement will cease or the Designating Employer alters its designation.
Note (b) (Stabilisation)
Stabilisation is a mechanism where employer contribution rate variations from year to year are kept within a pre-determined range, thus allowing those employers' rates to be relatively stable. In the interests of stability and affordability of employer contributions, the Administering Authority, on the advice of the Fund Actuary, believes that stabilising contributions can still be viewed as a prudent longer-term approach. However, employers whose contribution rates have been "stabilised" (and may therefore be paying less than their theoretical contribution rate) should be aware of the risks of this approach and should consider making additional payments to the Fund if possible.
This stabilisation mechanism allows short term investment market volatility to be managed so as not to cause volatility in employer contribution rates, on the basis that a long term view can be taken on net cash inflow, investment returns and strength of employer covenant.
The current stabilisation mechanism applies if: the employer satisfies the eligibility criteria set by the Administering Authority (see below) and; there are no material events which cause the employer to become ineligible, e.g. significant reductions in active membership (due to outsourcing or redundancies), or changes in the nature of the employer (perhaps due to Government restructuring), or changes in the security of the employer. On the basis of extensive modelling carried out for the 2016 valuation exercise (see Section 4), the stabilised details are as follows:
Type of employer
Council
Max cont. increase
+0%
Max cont. decrease
+0%
84
The stabilisation criteria and limits will be reviewed at the 31 March 2019 valuation, to take effect from 1 April 2020. However the Administering Authority reserves the right to review the stabilisation criteria and limits at any time before then, on the basis of membership and/or employer changes as described above. Note (c) (Maximum time horizon) The maximum time horizon starts at the commencement of the revised contribution rate (1 April 2017 for the 2016 valuation). The Administering Authority would normally expect the same period to be used at successive triennial valuations, but would reserve the right to propose alternative time horizons, for example where there were no new entrants. Note (d) (Secondary rate) For employers where stabilisation is not being applied, the Secondary contribution rate for each employer covering the three year period until the next valuation will often be set as a percentage of salaries. However, the Administering Authority reserves the right to amend these rates between valuations and/or to require these payments in monetary terms instead, for instance where: the employer is relatively mature, i.e. has a large Secondary contribution rate (e.g. above 15% of payroll), or there has been a significant reduction in payroll due to outsourcing or redundancy exercises, or the employer has closed the Fund to new entrants. Note (e) (Probability of achieving funding target) Each employer has its funding target calculated, and a relevant time horizon over which to reach that target. Contributions are set such that, combined with the employer's current asset share and anticipated market movements over the time horizon, the funding target is achieved with a given minimum probability. A higher required probability bar will give rise to higher required contributions, and vice versa. The way in which contributions are set using these three steps, and relevant economic projections, is described in further detail in Appendix D. Different probabilities are set for different employers depending on their nature and circumstances: in broad terms, a higher probability will apply due to one or more of the following: the Fund believes the employer poses a greater funding risk than other employers, the employer does not have tax-raising powers; the employer does not have a guarantor or other sufficient security backing its funding position; and/or the employer is likely to cease participation in the Fund in the short or medium term. Note (f) (Regular Reviews) Such reviews may be triggered by significant events including but not limited to: significant reductions in payroll, altered employer circumstances, Government restructuring affecting the employer's business, or failure to pay contributions or arrange appropriate security as required by the Administering Authority. The result of a review may be to require increased contributions (by strengthening the actuarial assumptions adopted and/or moving to monetary levels of deficit recovery contributions), and/or an increased level of security or guarantee. 85
Note (g) (New Academy conversions) At the time of writing, the Fund's policies on academies' funding issues are as follows: i. The new academy will be regarded as a separate employer in its own right and will not be pooled with other employers in the Fund. The only exception is where the academy is part of a Multi Academy Trust (MAT) in which case the academy's figures will be calculated as below but can be combined with those of the other academies in the MAT; ii. The new academy's past service liabilities on conversion will be calculated based on its active Fund members on the day before conversion. For the avoidance of doubt, these liabilities will include all past service of those members, but will exclude the liabilities relating to any exemployees of the school who have deferred or pensioner status; iii. The new academy will be allocated an initial asset share from the ceding council's assets in the Fund. This asset share will be calculated using the estimated funding position of the ceding council at the date of academy conversion. The share will be based on the active members' funding level, having first allocated assets in the council's share to fully fund deferred and pensioner members. The asset allocation will be based on market conditions and the academy's active Fund membership on the day prior to conversion; iv. The new academy's initial contribution rate will be calculated using market conditions, the council funding position and, membership data, all as at the day prior to conversion; v. As an alternative to (iv), the academy will have the option to elect to pay contributions initially in line with the ceding LEA instead. However, this election will not alter its asset or liability allocation as per (ii) and (iii) above. Ultimately, all academies remain responsible for their own allocated deficit. The Fund's policies on academies are subject to change in the light of any amendments to DCLG guidance. Any changes will be notified to academies, and will be reflected in a subsequent version of this FSS. In particular, policies (iv) and (v) above will be reconsidered at each valuation. Note (h) (New Admission Bodies) With effect from 1 October 2012, the LGPS 2012 Miscellaneous Regulations introduced mandatory new requirements for all Admission Bodies brought into the Fund from that date. Under these Regulations, all new Admission Bodies will be required to provide some form of security, such as a guarantee from the letting employer, an indemnity or a bond. The security is required to cover some or all of the following: the strain cost of any redundancy early retirements resulting from the premature termination of the contract; allowance for the risk of asset underperformance; allowance for the risk of a fall in gilt yields; allowance for the possible non-payment of employer and member contributions to the Fund; and/or the current deficit. 86
Transferee Admission Bodies: For all TABs, the security must be to the satisfaction of the Administering Authority as well as the letting employer, and will be reassessed on an annual basis. The details of the required security will be specified in the employer's admission agreement. See also Note (i) below.
Community Admission Bodies: The Administering Authority will only consider requests from CABs (or other similar bodies, such as section 75 NHS partnerships) to join the Fund if it is required by the terms of their contract with the relevant letting authority. Details of security will be specified in the employer's admission agreement
The above approaches reduce the risk, to other employers in the Fund, of potentially having to pick up any shortfall in respect of Admission Bodies ceasing with an unpaid deficit.
Note (i) (New Transferee Admission Bodies)
A new TAB usually joins the Fund as a result of the letting/outsourcing of some services from an existing employer (normally a Scheduled Body such as a council or academy) to another organisation (a "contractor"). This involves the TUPE transfer of some staff from the letting employer to the contractor. Consequently, for the duration of the contract, the contractor is a new participating employer in the Fund so that the transferring employees maintain their eligibility for LGPS membership. At the end of the contract the employees revert to the letting employer or to a replacement contractor.
Ordinarily, the TAB would be set up in the Fund as a new employer with responsibility for all the accrued benefits of the transferring employees; in this case, the contractor would usually be assigned an initial asset allocation equal to the past service liability value of the employees' Fund benefits. The quid pro quo is that the contractor is then expected to ensure that its share of the Fund is also fully funded at the end of the contract: see Note (j).
Employers which "outsource" have flexibility in the way that they can deal with the pension risk potentially taken on by the contractor. In particular there are three different routes that such employers may wish to adopt. Clearly as the risk ultimately resides with the employer letting the contract, it is for them to agree the appropriate route with the contractor:
i)
Pooling
Under this option the contractor is pooled with the letting employer. In this case, the contractor pays the same rate as the letting employer, which may be under a stabilisation approach.
ii)
Letting employer retains pre-contract risks
Under this option the letting employer would retain responsibility for assets and liabilities in respect of service accrued prior to the contract commencement date. The contractor would be responsible for the future liabilities that accrue in respect of transferred staff. The contractor's contribution rate could vary from one valuation to the next. It would be liable for any deficit at the end of the contract term in respect of assets and liabilities attributable to service accrued during the contract term.
iii)
Fixed contribution rate agreed
Under this option the contractor pays a fixed contribution rate and does not pay any cessation deficit.
87
The Administering Authority is willing to administer any of the above options as long as the approach is documented in the Admission Agreement as well as the transfer agreement. The Admission Agreement should ensure that some element of risk transfers to the contractor where it relates to their decisions and it is unfair to burden the letting employer with that risk. For example the contractor should typically be responsible for pension costs that arise from: above average pay increases, including the effect in respect of service prior to contract commencement even if the letting employer takes on responsibility for the latter under (ii) above; and redundancy and early retirement decisions. Note (j) (Admission Bodies Ceasing) Notwithstanding the provisions of the Admission Agreement, the Administering Authority may consider any of the following as triggers for the cessation of an admission agreement with any type of body: Last active member ceasing participation in the Fund (NB recent LGPS Regulation changes mean that the Administering Authority has the discretion to defer taking action for up to three years, so that if the employer acquires one or more active Fund members during that period then cessation is not triggered. The current Fund policy is that this is left as a discretion and may or may not be applied in any given case); The insolvency, winding up or liquidation of the Admission Body; Any breach by the Admission Body of any of its obligations under the Agreement that they have failed to remedy to the satisfaction of the Fund; A failure by the Admission Body to pay any sums due to the Fund within the period required by the Fund; or The failure by the Admission Body to renew or adjust the level of the bond or indemnity, or to confirm an appropriate alternative guarantor, as required by the Fund. On cessation, the Administering Authority will instruct the Fund actuary to carry out a cessation valuation to determine whether there is any deficit or surplus. Where there is a deficit, payment of this amount in full would normally be sought from the Admission Body; where there is a surplus it should be noted that current legislation does not permit a refund payment to the Admission Body. For non-Transferee Admission Bodies whose participation is voluntarily ended either by themselves or the Fund, or where a cessation event has been triggered, the Administering Authority must look to protect the interests of other ongoing employers. The actuary will therefore adopt an approach which, to the extent reasonably practicable, protects the other employers from the likelihood of any material loss emerging in future: (a) Where a guarantor does not exist then, in order to protect other employers in the Fund, the cessation liabilities and final deficit will normally be calculated using a "gilts cessation basis", which is more prudent than the ongoing basis. This has no allowance for potential future investment outperformance above gilt yields, and has added allowance for future improvements in life expectancy. This could give rise to significant cessation debts being required. (b) Where there is a guarantor for future deficits and contributions, the details of the guarantee will be considered prior to the cessation valuation being carried out. In some cases the guarantor is simply guarantor of last resort and therefore the cessation valuation will be carried out consistently with the approach taken had there been no guarantor in place. Alternatively, where the guarantor is not simply guarantor of last resort, the cessation may be calculated using the ongoing basis as described in Appendix E; 88
(c) Again, depending on the nature of the guarantee, it may be possible to simply transfer the former Admission Body's liabilities and assets to the guarantor, without needing to crystallise any deficit. This approach may be adopted where the employer cannot pay the contributions due, and this is within the terms of the guarantee. Under (a) and (b), any shortfall would usually be levied on the departing Admission Body as a single lump sum payment. If this is not possible then the Fund would spread the payment subject to there being some security in place for the employer such as a bond indemnity or guarantee or look to the security itself as a means of full or partial payment. In the event that the Fund is not able to recover the required payment in full, then the unpaid amounts fall to be shared amongst all of the other employers in the Fund. This may require an immediate revision to the Rates and Adjustments Certificate affecting other employers in the Fund, or instead be reflected in the contribution rates set at the next formal valuation following the cessation date. As an alternative, where the ceasing Admission Body is continuing in business, the Fund at its absolute discretion reserves the right to enter into an agreement with the ceasing Admission Body. Under this agreement the Fund would accept an appropriate alternative security to be held against any deficit, and would carry out the cessation valuation on an ongoing basis: deficit recovery payments would be derived from this cessation debt. This approach would be monitored as part of each triennial valuation: the Fund reserves the right to revert to a "gilts cessation basis" and seek immediate payment of any funding shortfall identified. The Administering Authority may need to seek legal advice in such cases, as the Body would have no contributing members. 3.4 Pooled contributions From time to time, with the advice of the Actuary, the Administering Authority may set up pools for employers with similar or complementary characteristics. This will always be in line with its broader funding strategy. At the present time the only pool in operation is the Council pool, which includes various legacy bodies and employers associated with the Council. Academies will be regarded as separate employers in their own right and will not be pooled with other employers in the Fund, the only possible exception being when the Academy is part of a Multi-Academy Trust (MAT). However, Community Admission Bodies that are deemed by the Administering Authority to have closed to new entrants are not usually permitted to participate in a pool. Transferee Admission Bodies are usually also ineligible for pooling. Smaller Transferee Admission Bodies may be pooled with the letting employer, provided all parties (particularly the letting employer) agree. Employers who are permitted to enter (or remain in) a pool at the 2016 valuation will not normally be advised of their individual contribution rate unless agreed by the Administering Authority. Those employers which have been pooled are identified in the Rates and Adjustments Certificate. 3.5 Academy contribution rates The Administering Authority permits an academy to elect to pay a contribution rate in line with that paid by the Isle of Wight Council. An academy electing for this option will be paying contributions that may be more or less than required to meet their funding target, over the appropriate time horizon with the required likelihood of success. An academy electing to pay a lower contribution rate than their individually assessed rate should note the comments made in 3.2 above. 89
3.6 Non ill health early retirement costs It is assumed that members' benefits are payable from the earliest age that the employee could retire without incurring a reduction to their benefit (and without requiring their employer's consent to retire). (NB the relevant age may be different for different periods of service, following the benefit changes from April 2008 and April 2014). Employers are required to pay additional contributions (`strain') wherever an employee retires before attaining this age. These contributions may, at the absolute discretion of Administering Authority, be spread over an appropriate period of time to be advised by the Administering Authority. In any event the spread period cannot exceed the period to the member's normal retirement date. The actuary's funding basis makes no allowance for premature retirement except on grounds of ill-health. 3.7 Ill health early retirement costs In the event of a member's early retirement on the grounds of ill-health, a funding strain will usually arise, which can be very large. Such strains are currently met by each employer, although individual employers may elect to take external insurance (see 3.8 below). Admitted Bodies will usually have an `ill health allowance'; Scheduled Bodies may have this also, depending on their agreement terms with the Administering Authority. The Fund monitors each employer's ill health experience on an ongoing basis. If the cumulative cost of ill health retirement in any financial year exceeds the allowance at the previous valuation, the employer will be charged additional contributions on the same basis as apply for non ill-health cases. Details will be included in each separate Admission Agreement. 3.8 External Ill health insurance If an employer provides satisfactory evidence to the Administering Authority of a current external insurance policy covering ill health early retirement strains, then: - the employer's contribution to the Fund each year is reduced by the amount of that year's insurance premium, so that the total contribution is unchanged, and - there is no need for monitoring of allowances. The employer must keep the Administering Authority notified of any changes in the insurance policy's coverage or premium terms, or if the policy is ceased. 3.9 Employers with no remaining active members In general an employer ceasing in the Fund, due to the departure of the last active member, will pay a cessation debt on an appropriate basis (see 3.3, Note (j)) and consequently have no further obligation to the Fund. Thereafter it is expected that one of three situations will eventually arise: a) The employer's asset share runs out before all its ex-employees' benefits have been paid. In this situation the other Fund employers will be required to contribute to pay all remaining benefits: this will be done by the Fund actuary apportioning the remaining liabilities on a pro-rata basis at successive formal valuations; b) The last ex-employee or dependant dies before the employer's asset share has been fully utilised. In this situation the remaining assets would be apportioned pro-rata by the Fund's actuary to the other Fund. c) In exceptional circumstances the Fund may permit an employer with no remaining active members to continue contributing to the Fund. This would require the provision of a suitable security or guarantee, as well as a written ongoing commitment to fund the remainder of the employer's obligations over an appropriate period. The Fund would reserve the right to invoke the cessation 90
requirements in the future, however. The Administering Authority may need to seek legal advice in such cases, as the employer would have no contributing members. 3.10 Additional flexibility in return for added security The Administering Authority may permit greater flexibility to the employer's contributions if the employer provides added security to the satisfaction of the Administering Authority. Such flexibility includes a reduced rate of contribution, an extended time horizon, or permission to join a pool with another body (e.g. the Local Authority). Such security may include, but is not limited to, a suitable bond, a legally-binding guarantee from an appropriate third party, or security over an employer asset of sufficient value. The degree of flexibility given may take into account factors such as: the extent of the employer's deficit; the amount and quality of the security offered; the employer's financial security and business plan; and whether the admission agreement is likely to be open or closed to new entrants. 3.11 Policies on bulk transfers Each case will be treated on its own merits, but in general: The Fund will not pay bulk transfers greater than the lesser of (a) the asset share of the transferring employer in the Fund, and (b) the value of the past service liabilities of the transferring members; The Fund will not grant added benefits to members bringing in entitlements from another Fund unless the asset transfer is sufficient to meet the added liabilities; and The Fund may permit shortfalls to arise on bulk transfers if the Fund employer has suitable strength of covenant and commits to meeting that shortfall in an appropriate period. This may require the employer's Fund contributions to increase between valuations. 91
4 Funding strategy and links to investment strategy 4.1 What is the Fund's investment strategy? The Fund has built up assets over the years, and continues to receive contribution and other income. All of this must be invested in a suitable manner, which is the investment strategy. Investment strategy is set by the administering authority, after consultation with the employers and after taking investment advice. The precise mix, manager make up and target returns are set out in the Statement of Investment Principles (being replaced by an Investment Strategy Statement under new LGPS Regulations), which is available to members and employers. The investment strategy is set for the long-term, but is reviewed from time to time. Normally a full review is carried out as part of each actuarial valuation, and is kept under review annually between actuarial valuations to ensure that it remains appropriate to the Fund's liability profile. The same investment strategy is currently followed for all employers. 4.2 What is the link between funding strategy and investment strategy? The Fund must be able to meet all benefit payments as and when they fall due. These payments will be met by contributions (resulting from the funding strategy) or asset returns and income (resulting from the investment strategy). To the extent that investment returns or income fall short, then higher cash contributions are required from employers, and vice versa Therefore, the funding and investment strategies are inextricably linked. 4.3 How does the funding strategy reflect the Fund's investment strategy? In the opinion of the Fund actuary, the current funding policy is consistent with the current investment strategy of the Fund. The asset outperformance assumption contained in the discount rate (see Appendix E3) is within a range that would be considered acceptable for funding purposes; it is also considered to be consistent with the requirement to take a "prudent longer-term view" of the funding of liabilities as required by the UK Government (see Appendix A1). However, in the short term ­ such as the three yearly assessments at formal valuations ­ there is the scope for considerable volatility and there is a material chance that in the short-term and even medium term, asset returns will fall short of this target. The stability measures described in Section 3 will damp down, but not remove, the effect on employers' contributions. The Fund does not hold a contingency reserve to protect it against the volatility of equity investments. 4.4 How does this differ for a large stable employer? The Actuary has developed four key measures which capture the essence of the Fund's strategies, both funding and investment: Prudence - the Fund should have a reasonable expectation of being fully funded in the long term; Affordability ­ how much can employers afford; Stewardship ­ the assumptions used should be sustainable in the long term, without having to resort to overly optimistic assumptions about the future to maintain an apparently healthy funding position; and Stability ­ employers should not see significant moves in their contribution rates from one year to the next, to help provide a more stable budgeting environment. The key problem is that the key objectives often conflict. For example, minimising the long term cost of the scheme (i.e. keeping employer rates affordable) is best achieved by investing in higher returning 92
assets e.g. equities. However, equities are also very volatile (i.e. go up and down fairly frequently in fairly large moves), which conflicts with the objective to have stable contribution rates. Therefore, a balance needs to be maintained between risk and reward, which has been considered by the use of Asset Liability Modelling: this is a set of calculation techniques applied by the Fund's actuary to model the range of potential future solvency levels and contribution rates. The Actuary was able to model the impact of these four key areas, for the purpose of setting a stabilisation approach (see 3.3 Note (b)). The modelling demonstrated that retaining the present investment strategy, coupled with constraining employer contribution rate changes as described in 3.3 Note (b), struck an appropriate balance between the above objectives. In particular the stabilisation approach currently adopted meets the need for stability of contributions without jeopardising the Administering Authority's aims of prudent stewardship of the Fund. Whilst the current stabilisation mechanism is to remain in place until 2020, it should be noted that this will need to be reviewed following the 2019 valuation. 4.5 Does the Fund monitor its overall funding position? The Administering Authority monitors the relative funding position, i.e. changes in the relationship between asset values and the liabilities value, quarterly. It reports this to the Pensions Committee quarterly. 93
5 Statutory reporting and comparison to other LGPS Funds 5.1 Purpose Under Section 13(4)(c) of the Public Service Pensions Act 2013 ("Section 13"), the Government Actuary's Department (GAD) must, following each triennial actuarial valuation, report to the Department of Communities & Local Government (DCLG) on each of the LGPS Funds in England & Wales. This report will cover whether, for each Fund, the rate of employer contributions are set at an appropriate level to ensure both the solvency and the long term cost efficiency of the Fund. This additional DCLG oversight may have an impact on the strategy for setting contribution rates at future valuations. 5.2 Solvency For the purposes of Section 13, the rate of employer contributions shall be deemed to have been set at an appropriate level to ensure solvency if: (a) the rate of employer contributions is set to target a funding level for the Fund of 100%, over an appropriate time period and using appropriate actuarial assumptions (where appropriateness is considered in both absolute and relative terms in comparison with other funds); and either (b) employers collectively have the financial capacity to increase employer contributions, and/or the Fund is able to realise contingent assets should future circumstances require, in order to continue to target a funding level of 100%; or (c) there is an appropriate plan in place should there be, or if there is expected in future to be, a material reduction in the capacity of fund employers to increase contributions as might be needed. 5.3 Long Term Cost Efficiency The rate of employer contributions shall be deemed to have been set at an appropriate level to ensure long term cost efficiency if: i. the rate of employer contributions is sufficient to make provision for the cost of current benefit accrual, ii. with an appropriate adjustment to that rate for any surplus or deficit in the Fund. In assessing whether the above condition is met, DCLG may have regard to various absolute and relative considerations. A relative consideration is primarily concerned with comparing LGPS pension funds with other LGPS pension funds. An absolute consideration is primarily concerned with comparing Funds with a given objective benchmark. Relative considerations include: 1. the implied deficit recovery period; and 2. the investment return required to achieve full funding after 20 years. 94
Absolute considerations include: 1. the extent to which the contributions payable are sufficient to cover the cost of current benefit accrual and the interest cost on any deficit; 2. how the required investment return under "relative considerations" above compares to the estimated future return being targeted by the Fund's current investment strategy; 3. the extent to which contributions actually paid have been in line with the expected contributions based on the extant rates and adjustment certificate; and 4. the extent to which any new deficit recovery plan can be directly reconciled with, and can be demonstrated to be a continuation of, any previous deficit recovery plan, after allowing for actual Fund experience. DCLG may assess and compare these metrics on a suitable standardised market-related basis, for example where the local funds' actuarial bases do not make comparisons straightforward. 95
Appendix A ­ Regulatory framework A1 Why does the Fund need an FSS? The Department for Communities and Local Government (DCLG) has stated that the purpose of the FSS is: "to establish a clear and transparent fund-specific strategy which will identify how employers' pension liabilities are best met going forward; to support the regulatory framework to maintain as nearly constant employer contribution rates as possible; and to take a prudent longer-term view of funding those liabilities." These objectives are desirable individually, but may be mutually conflicting. The requirement to maintain and publish a FSS is contained in LGPS Regulations which are updated from time to time. In publishing the FSS the Administering Authority has to have regard to any guidance published by Chartered Institute of Public Finance and Accountancy (CIPFA) (most recently in 2016) and to its Statement of Investment Principles / Investment Strategy Statement. This is the framework within which the Fund's actuary carries out triennial valuations to set employers' contributions and provides recommendations to the Administering Authority when other funding decisions are required, such as when employers join or leave the Fund. The FSS applies to all employers participating in the Fund. A2 Does the Administering Authority consult anyone on the FSS? Yes. This is required by LGPS Regulations. It is covered in more detail by the most recent CIPFA guidance, which states that the FSS must first be subject to "consultation with such persons as the authority considers appropriate", and should include "a meaningful dialogue at officer and elected member level with council tax raising authorities and with corresponding representatives of other participating employers". In practice, for the Fund, the consultation process for this FSS was as follows: a) A draft version of the FSS was issued to all participating employers on 23 December 2016 for comment; b) Comments were requested by 31 January 2017; c) Following the end of the consultation period the FSS was updated where required and then published, on 31 March 2017. A3 How is the FSS published? The FSS is made available through the following routes: Published on the website, at http://www.iwight.com/council/OtherServices/Pensions-IWC A copy sent by e-mail to each participating employer in the Fund; A full copy included in the annual report and accounts of the Fund; Copies sent to investment managers and independent advisers; Copies made available on request. 96
A4 How often is the FSS reviewed? The FSS is reviewed in detail at least every three years as part of the triennial valuation. This version is expected to remain unaltered until it is consulted upon as part of the formal process for the next valuation in 2019. It is possible that (usually slight) amendments may be needed within the three year period. These would be needed to reflect any regulatory changes, or alterations to the way the Fund operates (e.g. to accommodate a new class of employer). Any such amendments would be consulted upon as appropriate: trivial amendments would be simply notified at the next round of employer communications, amendments affecting only one class of employer would be consulted with those employers, other more significant amendments would be subject to full consultation. In any event, changes to the FSS would need agreement by the Isle of Wight Council Pension Fund Committee and would be included in the relevant Committee Meeting minutes. A5 How does the FSS fit into other Fund documents? The FSS is a summary of the Fund's approach to funding liabilities. It is not an exhaustive statement of policy on all issues, for example there are a number of separate statements published by the Fund including the Statement of Investment Principles/Investment Strategy Statement, Governance Strategy and Communications Strategy. In addition, the Fund publishes an Annual Report and Accounts with up to date information on the Fund. These documents can be found on the web at https://www.iwight.com/council/OtherServices/PensionsIWC. 97
Appendix B ­ Responsibilities of key parties The efficient and effective operation of the Fund needs various parties to each play their part. B1 The Administering Authority should: operate the Fund as per the LGPS Regulations; effectively manage any potential conflicts of interest arising from its dual role as Administering Authority and a Fund employer; collect employer and employee contributions, and investment income and other amounts due to the Fund; ensure that cash is available to meet benefit payments as and when they fall due; pay from the Fund the relevant benefits and entitlements that are due; invest surplus monies (i.e. contributions and other income which are not immediately needed to pay benefits) in accordance with the Fund's Statement of Investment Principles/Investment Strategy Statement (SIP/ISS) and LGPS Regulations; communicate appropriately with employers so that they fully understand their obligations to the Fund; take appropriate measures to safeguard the Fund against the consequences of employer default; manage the valuation process in consultation with the Fund's actuary; provide data and information as required by the Government Actuary's Department to carry out their statutory obligations (see Section 5); prepare and maintain a FSS and a SIP/ISS, after consultation; notify the Fund's actuary of material changes which could affect funding (this is covered in a separate agreement with the actuary); and monitor all aspects of the fund's performance and funding and amend the FSS and SIP/ISS as necessary and appropriate. B2 The Individual Employer should: deduct contributions from employees' pay correctly; pay all contributions, including their own as determined by the actuary, promptly by the due date; have a policy and exercise discretions within the regulatory framework; make additional contributions in accordance with agreed arrangements in respect of, for example, augmentation of scheme benefits, early retirement strain; and notify the Administering Authority promptly of all changes to its circumstances, prospects or membership, which could affect future funding. B3 The Fund Actuary should: prepare valuations, including the setting of employers' contribution rates. This will involve agreeing assumptions with the Administering Authority, having regard to the FSS and LGPS Regulations, and targeting each employer's solvency appropriately; provide data and information as required by the Government Actuary's Department to carry out their statutory obligations (see Section 5); provide advice relating to new employers in the Fund, including the level and type of bonds or other forms of security (and the monitoring of these); 98
prepare advice and calculations in connection with bulk transfers and individual benefit-related matters; assist the Administering Authority in considering possible changes to employer contributions between formal valuations, where circumstances suggest this may be necessary; advise on the termination of employers' participation in the Fund; and fully reflect actuarial professional guidance and requirements in the advice given to the Administering Authority. B4 Other parties: investment advisers (either internal or external) should ensure the Fund's SIP/ISS remains appropriate, and consistent with this FSS; investment managers, custodians and bankers should all play their part in the effective investment (and dis-investment) of Fund assets, in line with the SIP/ISS; auditors should comply with their auditing standards, ensure Fund compliance with all requirements, monitor and advise on fraud detection, and sign off annual reports and financial statements as required; governance advisers may be appointed to advise the Administering Authority on efficient processes and working methods in managing the Fund; legal advisers (either internal or external) should ensure the Fund's operation and management remains fully compliant with all regulations and broader local government requirements, including the Administering Authority's own procedures; the Department for Communities and Local Government (assisted by the Government Actuary's Department) and the Scheme Advisory Board, should work with LGPS Funds to meet Section 13 requirements. 99
Appendix C ­ Key risks and controls
C1 Types of risk The Administering Authority has an active risk management programme in place. The measures that it has in place to control key risks are summarised below under the following headings:
financial;
demographic;
regulatory; and
governance.
C2 Financial risks Risk
Summary of Control Mechanisms
Fund assets fail to deliver returns in line with the anticipated returns underpinning the valuation of liabilities over the long-term.
Only anticipate long-term returns on a relatively prudent basis to reduce risk of under-performing. Assets invested on the basis of specialist advice, in a suitably diversified manner across asset classes, geographies, managers, etc.
Analyse progress at three yearly valuations for all employers.
Inter-valuation roll-forward of liabilities between valuations at whole Fund level.
Inappropriate long-term investment strategy.
Overall investment strategy options considered as an integral part of the funding strategy. Used asset liability modelling to measure 4 key outcomes.
Chosen option considered to provide the best balance.
Fall in risk-free returns on Government bonds, leading to rise in value placed on liabilities.
Stabilisation modelling at whole Fund level allows for the probability of this within a longer term context.
Inter-valuation monitoring, as above.
Some investment in bonds helps to mitigate this risk.
Active investment manager under-performance relative to benchmark.
Quarterly investment monitoring analyses market performance and active managers relative to their index benchmark.
Pay and price inflation significantly more than anticipated.
The focus of the actuarial valuation process is on real returns on assets, net of price and pay increases.
Inter-valuation monitoring, as above, gives early warning.
Some investment in bonds also helps to mitigate this risk.
Employers pay for their own salary awards and should
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Risk Effect of possible increase in employer's contribution rate on service delivery and admission/scheduled bodies Orphaned employers give rise to added costs for the Fund
Summary of Control Mechanisms be mindful of the geared effect on pension liabilities of any bias in pensionable pay rises towards longerserving employees. An explicit stabilisation mechanism has been agreed as part of the funding strategy. Other measures are also in place to limit sudden increases in contributions. The Fund seeks a cessation debt (or security/guarantor) to minimise the risk of this happening in the future. If it occurs, the Actuary calculates the added cost spread pro-rata among all employers ­ (see 3.9).
C3 Demographic risks Risk
Summary of Control Mechanisms
Pensioners living longer, thus increasing cost to Set mortality assumptions with some allowance for
Fund.
future increases in life expectancy.
The Fund Actuary has direct access to the experience of over 50 LGPS funds which allows early identification of changes in life expectancy that might in turn affect the assumptions underpinning the valuation.
If deemed to be worthwhile, the possibilities of mortality hedging may be investigated.
Maturing Fund ­ i.e. proportion of actively contributing employees declines relative to retired employees.
Continue to monitor at each valuation, consider seeking monetary amounts rather than % of pay and consider alternative investment strategies.
Deteriorating patterns of early retirements
Employers are charged the extra cost of non ill-health retirements following each individual decision.
Employer ill health retirement experience is monitored, and insurance is an option.
Reductions in payroll causing insufficient deficit recovery payments
In many cases this may not be sufficient cause for concern, and will in effect be caught at the next formal valuation. However, there are protections where there is concern, as follows:
Employers in the stabilisation mechanism may be brought out of that mechanism to permit appropriate contribution increases (see Note (b) to 3.3).
For other employers, review of contributions is permitted in general between valuations (see Note (f) to 3.3) and may require a move in deficit contributions from a percentage of payroll to fixed monetary 101
Risk
Summary of Control Mechanisms amounts.
C4 Regulatory risks Risk Changes to national pension requirements and/or HMRC rules e.g. changes arising from public sector pensions reform.
Summary of Control Mechanisms The Administering Authority considers all consultation papers issued by the Government and comments where appropriate. The results of the most recent reforms were built into the 2013 valuation. Any changes to member contribution rates or benefit levels will be carefully communicated with members to minimise possible optouts or adverse actions.
Time, cost and/or reputational risks associated with any DCLG intervention triggered by the Section 13 analysis (see Section 5).
Take advice from Fund Actuary on position of Fund as at prior valuation, and consideration of proposed valuation approach relative to anticipated Section 13 analysis.
Changes by Government to particular employer participation in LGPS Funds, leading to impacts on funding and/or investment strategies.
The Administering Authority considers all consultation papers issued by the Government and comments where appropriate.
Take advice from Fund Actuary on impact of changes on the Fund and amend strategy as appropriate.
C5 Governance risks Risk
Summary of Control Mechanisms
Administering Authority unaware of structural changes in an employer's membership (e.g. large fall in employee members, large number of retirements) or not advised of an employer closing to new entrants.
The Administering Authority has a close relationship with employing bodies and communicates required standards e.g. for submission of data. The Actuary may revise the rates and Adjustments certificate to increase an employer's contributions between triennial valuations
Deficit contributions may be expressed as monetary amounts.
Actuarial or investment advice is not sought, or is not heeded, or proves to be insufficient in some way
The Administering Authority maintains close contact with its specialist advisers. Advice is delivered via formal meetings involving Elected Members, and recorded appropriately.
Actuarial advice is subject to professional requirements such as Peer review.
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Risk Administering Authority failing to commission the Fund Actuary to carry out a termination valuation for a departing Admission Body. An employer ceasing to exist with insufficient funding or adequacy of a bond.
Summary of Control Mechanisms The Administering Authority requires employers with Best Value contractors (Transferee Admission Bodies) to inform it of forthcoming changes. Community Admission Bodies' memberships are monitored and, if active membership decreases, steps will be taken. The Administering Authority believes that it would normally be too late to address the position if it was left to the time of departure. The risk is mitigated by: Seeking a funding guarantee from another scheme employer, or external body, where-ever possible (see Notes (h) and (j) to 3.3). Alerting the prospective employer to its obligations and encouraging it to take independent actuarial advice. Vetting prospective employers before admission. Where permitted under the regulations requiring a bond to protect the Fund from various risks. Requiring new Community Admission Bodies to have a guarantor. Reviewing bond or guarantor arrangements at regular intervals (see Note (f) to 3.3). Reviewing contributions well ahead of cessation if thought appropriate (see Note (a) to 3.3).
103
Appendix D ­ The calculation of Employer contributions In Section 2 there was a broad description of the way in which contribution rates are calculated. This Appendix considers these calculations in much more detail. All three steps above are considered when setting contributions (more details are given in Section 3 and Appendix D: 1. The funding target is based on a set of assumptions about the future, e.g. investment returns, inflation, pensioners' life expectancies. However, if an employer is approaching the end of its participation in the Fund then it's funding target may be set on a more prudent basis, so that it's liabilities are less likely to be spread among other employers after it's cessation of participation; 2. The time horizon required is, in broad terms, the period over which any deficit is to be recovered. A shorter period will lead to higher contributions, and vice versa (all other things being equal). Employers may be given a lower time horizon if they have a less permanent anticipated membership, or do not have tax-raising powers to increase contributions if investment returns under-perform; 3. The required probability of achieving the funding target over that time horizon will be dependent on the Fund's view of the strength of employer covenant and its funding profile. Where an employer is considered to be weaker, or potentially ceasing from the Fund, then the required probability will be set higher, which in turn will increase the required contributions (and vice versa). The calculations involve actuarial assumptions about future experience, and these are described in detail in Appendix E. D1 What is the difference between calculations across the whole Fund and calculations for an individual employer? Employer contributions are normally made up of two elements: a) the estimated cost of ongoing benefits being accrued, referred to as the "Primary contribution rate" (see D2 below); plus b) an adjustment for the difference between the Primary rate above, and the actual contribution the employer needs to pay, referred to as the "Secondary contribution rate" (see D3 below). The contribution rate for each employer is measured as above, appropriate for each employer's funding position and membership. The whole Fund position, including that used in reporting to DCLG (see section 5), is calculated in effect as the sum of all the individual employer rates. DCLG currently only regulates at whole Fund level, without monitoring individual employer positions. D2 How is the Primary contribution rate calculated? The Primary element of the employer contribution rate is calculated with the aim that these contributions will meet benefit payments in respect of members' future service in the Fund. This is based upon the cost (in excess of members' contributions) of the benefits which employee members earn from their service each year. The Primary rate is calculated separately for all the employers, although employers within a pool will pay the contribution rate applicable to the pool as a whole. The Primary rate is calculated such that it is projected to: 1. meet the required funding target for all future years' accrual of benefits*, excluding any accrued assets, 104
2. within the determined time horizon (see note 3.3 Note (c) for further details), 3. with a sufficiently high probability, as set by the Fund's strategy for the category of employer (see 3.3 Note (e) for further details). * The projection is for the current active membership where the employer no longer admits new entrants, or additionally allows for new entrants where this is appropriate. The projections are carried out using an economic modeller developed by the Fund's actuary Hymans Robertson: this allows for a wide range of outcomes as regards key factors such as asset returns (based on the Fund's investment strategy), inflation, and bond yields. The measured contributions are calculated such that the proportion of outcomes meeting the employer's funding target (by the end of the time horizon) is equal to the required probability. The approach includes expenses of administration to the extent that they are borne by the Fund, and includes allowances for benefits payable on death in service and on ill health retirement. D3 How is the Secondary contribution rate calculated? The combined Primary and Secondary rates aim to achieve the employer's funding target, within the appropriate time horizon, with the relevant degree of probability. For the funding target, the Fund actuary agrees the assumptions to be used with the Administering Authority ­ see Appendix E. These assumptions are used to calculate the present value of all benefit payments expected in the future, relating to that employer's current and former employees, based on pensionable service to the valuation date only (i.e. ignoring further benefits to be built up in the future). The Fund operates the same target funding level for all employers of 100% of its accrued liabilities valued on the ongoing basis, unless otherwise determined (see Section 3). The Secondary rate is calculated as the balance over and above the Primary rate, such that the total is projected to: meet the required funding target relating to combined past and future service benefit accrual, including accrued asset share (see D5 below) within the determined time horizon (see 3.3 Note (c) for further details) with a sufficiently high probability, as set by the Fund's strategy for the category of employer (see 3.3 Note (e) for further details). The projections are carried out using an economic modeller developed by the Fund Actuary Hymans Robertson: this allows for a wide range of outcomes as regards key factors such as asset returns (based on the Fund's investment strategy), inflation, and bond yields. The measured contributions are calculated such that the proportion of outcomes with at least 100% solvency (by the end of the time horizon) is equal to the required probability. D4 What affects a given employer's valuation results? The results of these calculations for a given individual employer will be affected by: 1. past contributions relative to the cost of accruals of benefits; 2. different liability profiles of employers (e.g. mix of members by age, gender, service vs. salary); 3. the effect of any differences in the funding target, i.e. the valuation basis used to value the employer's liabilities; 4. any different time horizons; 5. the difference between actual and assumed rises in pensionable pay; 105
6. the difference between actual and assumed increases to pensions in payment and deferred pensions; 7. the difference between actual and assumed retirements on grounds of ill-health from active status; 8. the difference between actual and assumed amounts of pension ceasing on death; 9. the additional costs of any non ill-health retirements relative to any extra payments made; and/or 10. differences in the required probability of achieving the funding target. D5 How is each employer's asset share calculated? The Administering Authority does not account for each employer's assets separately. Instead, the Fund's actuary is required to apportion the assets of the whole Fund between the employers, at each triennial valuation. This apportionment uses the income and expenditure figures provided for certain cash flows for each employer. This process adjusts for transfers of liabilities between employers participating in the Fund, but does make a number of simplifying assumptions. The split is calculated using an actuarial technique known as "analysis of surplus". Actual investment returns achieved on the Fund between each valuation are applied proportionately across all employers, to the extent that employers in effect share the same investment strategy. Transfers of liabilities between employers within the Fund occur automatically within this process, with a sum broadly equivalent to the reserve required on the ongoing basis being exchanged between the two employers. The Fund actuary does not allow for certain relatively minor events, including but not limited to: the actual timing of employer contributions within any financial year; the effect of the premature payment of any deferred pensions on grounds of incapacity. These effects are swept up within a miscellaneous item in the analysis of surplus, which is split between employers in proportion to their liabilities. The methodology adopted means that there will inevitably be some difference between the asset shares calculated for individual employers and those that would have resulted had they participated in their own ring-fenced section of the Fund. The asset apportionment is capable of verification but not to audit standard. The Administering Authority recognises the limitations in the process, but it considers that the Fund actuary's approach addresses the risks of employer cross-subsidisation to an acceptable degree. 106
Appendix E ­ Actuarial assumptions E1 What are the actuarial assumptions? These are expectations of future experience used to place a value on future benefit payments ("the liabilities"). Assumptions are made about the amount of benefit payable to members (the financial assumptions) and the likelihood or timing of payments (the demographic assumptions). For example, financial assumptions include investment returns, salary growth and pension increases; demographic assumptions include life expectancy, probabilities of ill-health early retirement, and proportions of member deaths giving rise to dependants' benefits. Changes in assumptions will affect the measured funding target. However, different assumptions will not of course affect the actual benefits payable by the Fund in future. The combination of all assumptions is described as the "basis". A more optimistic basis might involve higher assumed investment returns (discount rate), or lower assumed salary growth, pension increases or life expectancy; a more optimistic basis will give lower funding targets and lower employer costs. A more prudent basis will give higher funding targets and higher employer costs. E2 What basis is used by the Fund? The Fund's standard funding basis is described as the "ongoing basis", which applies to most employers in most circumstances. This is described in more detail below. It anticipates employers remaining in the Fund in the long term. However, in certain circumstances, typically where the employer is not expected to remain in the Fund long term, a more prudent basis applies: see Note (a) to 3.3. E3 What assumptions are made in the ongoing basis? a) Investment return / discount rate The key financial assumption is the anticipated return on the Fund's investments. This "discount rate" assumption makes allowance for an anticipated out-performance of Fund returns relative to long term yields on UK Government bonds ("gilts"). There is, however, no guarantee that Fund returns will outperform gilts. The risk is greater when measured over short periods such as the three years between formal actuarial valuations, when the actual returns and assumed returns can deviate sharply. Given the very long-term nature of the liabilities, a long term view of prospective asset returns is taken. The long term in this context would be 20 to 30 years or more. For the purpose of the triennial funding valuation at 31 March 2016 and setting contribution rates effective from 1 April 2017, the Fund actuary has assumed that future investment returns earned by the Fund over the long term will be 1.8% per annum greater than gilt yields at the time of the valuation (this is a 0.2% increase to the 1.6% per annum used at the 2013 valuation). In the opinion of the Fund actuary, based on the current investment strategy of the Fund, this asset out-performance assumption is within a range that would be considered acceptable for the purposes of the funding valuation. 107
b) Salary growth Pay for public sector employees is currently subject to restriction by the UK Government until 2020. Although this "pay freeze" does not officially apply to local government and associated employers, it has been suggested that they are likely to show similar restraint in respect of pay awards. Based on long term historical analysis of the membership in LGPS funds, and continued austerity measures, the salary increase assumption at the 2016 valuation has been set to be a blended rate combined of: 1. 1% p.a. until 31 March 2020, followed by 2. The retail prices index (RPI) per annum p.a. thereafter. This is a change from the previous valuation, which assumed a flat assumption of RPI plus 1.0% per annum. The change has led to a reduction in the funding target (all other things being equal). c) Pension increases Since 2011 the consumer prices index (CPI), rather than RPI, has been the basis for increases to public sector pensions in deferment and in payment. Note that the basis of such increases is set by the Government, and is not under the control of the Fund or any employers. As at the previous valuation, we derive our assumption for RPI from market data as the difference between the yield on long-dated fixed interest and index-linked government bonds. This is then reduced to arrive at the CPI assumption, to allow for the "formula effect" of the difference between RPI and CPI. At this valuation, we propose a reduction of 1.0% per annum. This is a larger reduction than at 2013, which will serve to reduce the funding target (all other things being equal). (Note that the reduction is applied in a geometric, not arithmetic, basis). d) Life expectancy The demographic assumptions are intended to be best estimates of future experience in the Fund based on past experience of LGPS funds which participate in Club Vita, the longevity analytics service used by the Fund, and endorsed by the actuary. The longevity assumptions that have been adopted at this valuation are a bespoke set of "VitaCurves", produced by the Club Vita's detailed analysis, which are specifically tailored to fit the membership profile of the Fund. These curves are based on the data provided by the Fund for the purposes of this valuation. It is acknowledged that future life expectancy and, in particular, the allowance for future improvements in life expectancy, is uncertain. There is a consensus amongst actuaries, demographers and medical experts that life expectancy is likely to improve in the future. Allowance has been made in the ongoing valuation basis for future improvements in line with the 2013 version of the Continuous Mortality Investigation model published by the Actuarial Profession and a 1.25% per annum minimum underpin to future reductions in mortality rates. This is a similar allowance for future improvements than was made in 2013. e) General The same financial assumptions are adopted for most employers, in deriving the funding target underpinning the Primary and Secondary rates: as described in (3.3), these calculated figures are translated in different ways into employer contributions, depending on the employer's circumstances. The demographic assumptions, in particular the life expectancy assumption, in effect vary by type of member and so reflect the different membership profiles of employers. 108
Appendix F ­ Glossary
Actuarial assumptions/basis
The combined set of assumptions made by the actuary, regarding the future, to calculate the value of the funding target. The main assumptions will relate to the discount rate, salary growth, pension increases and longevity. More prudent assumptions will give a higher target value, whereas more optimistic assumptions will give a lower value.
Administering Authority
The council with statutory responsibility for running the Fund, in effect the Fund's "trustees".
Admission Bodies
Employers where there is an Admission Agreement setting out the employer's obligations. These can be Community Admission Bodies or Transferee Admission Bodies. For more details (see 2.3).
Covenant
The assessed financial strength of the employer. A strong covenant indicates a greater ability (and willingness) to pay for pension obligations in the long run. A weaker covenant means that it appears that the employer may have difficulties meeting its pension obligations in full over the longer term.
Designating Employer
Employers such as town and parish councils that are able to participate in the LGPS via resolution. These employers can designate which of their employees are eligible to join the Fund.
Discount rate
The annual rate at which future assumed cashflows (in and out of the Fund) are discounted to the present day. This is necessary to provide a funding target which is consistent with the present day value of the assets. A lower discount rate gives a higher target value, and vice versa. It is used in the calculation of the Primary and Secondary rates.
Employer
An individual participating body in the Fund, which employs (or used to employ) members of the Fund. Normally the assets and funding target values for each employer are individually tracked, together with its Primary rate at each valuation.
Funding target
The actuarially calculated present value of all pension entitlements of all members of the Fund, built up to date. This is compared with the present market value of Fund assets to derive the deficit. It is calculated on a chosen set of actuarial assumptions.
Gilt
A UK Government bond, i.e. a promise by the Government to pay interest and
capital as per the terms of that particular gilt, in return for an initial payment of
capital by the purchaser. Gilts can be "fixed interest", where the interest payments
are level throughout the gilt's term, or "index-linked" where the interest payments
vary each year in line with a specified index (usually RPI). Gilts can be bought as
assets by the Fund, but their main use in funding is as an objective measure of
solvency.
Guarantee / guarantor
A formal promise by a third party (the guarantor) that it will meet any pension obligations not met by a specified employer. The presence of a guarantor will mean, for instance, that the Fund can consider the employer's covenant to be as strong as its guarantor's.
Letting employer
An employer which outsources or transfers a part of its services and workforce to another employer (usually a contractor). The contractor will pay towards the LGPS 109
benefits accrued by the transferring members, but ultimately the obligation to pay for these benefits will revert to the letting employer. A letting employer will usually be a local authority, but can sometimes be another type of employer such as an Academy.
LGPS
The Local Government Pension Scheme, a public sector pension arrangement put in place via Government Regulations, for workers in local government. These Regulations also dictate eligibility (particularly for Scheduled Bodies), members' contribution rates, benefit calculations and certain governance requirements. The LGPS is divided into 101 Funds which map the UK. Each LGPS Fund is autonomous to the extent not dictated by Regulations, e.g. regarding investment strategy, employer contributions and choice of advisers.
Maturity
A general term to describe a Fund (or an employer's position within a Fund) where the members are closer to retirement (or more of them already retired) and the investment time horizon is shorter. This has implications for investment strategy and, consequently, funding strategy.
Members
The individuals who have built up (and may still be building up) entitlement in the Fund. They are divided into actives (current employee members), deferreds (exemployees who have not yet retired) and pensioners (ex-employees who have now retired, and dependants of deceased ex-employees).
Primary contribution rate
The employer contribution rate required to pay for ongoing accrual of active members' benefits (including an allowance for administrative expenses). See Appendix D for further details.
Profile
The profile of an employer's membership or liability reflects various measurements of that employer's members, i.e. current and former employees. This includes: the proportions which are active, deferred or pensioner; the average ages of each category; the varying salary or pension levels; the lengths of service of active members vs their salary levels, etc. A membership (or liability) profile might be measured for its maturity also.
Rates and Adjustments Certificate
A formal document required by the LGPS Regulations, which must be updated at least every three years at the conclusion of the formal valuation. This is completed by the actuary and confirms the contributions to be paid by each employer (or pool of employers) in the Fund for the three year period until the next valuation is completed.
Scheduled Bodies
Types of employer explicitly defined in the LGPS Regulations, whose employers must be offered membership of their local LGPS Fund. These include Councils, colleges, universities, academies, police and fire authorities etc., other than employees who have entitlement to a different public sector pension scheme (e.g. teachers, police and fire officers, university lecturers).
Secondary contribution rate
The difference between the employer's actual and Primary contribution rates. In broad terms, this relates to the shortfall of its asset share to its funding target. See Appendix D for further details.
Stabilisation
Any method used to smooth out changes in employer contributions from one year to the next. This is very broadly required by the LGPS Regulations, but in practice is particularly employed for large stable employers in the Fund. Different methods may involve: probability-based modelling of future market movements; longer deficit 110
Valuation
recovery periods; higher discount rates; or some combination of these. An actuarial investigation to calculate the liabilities, future service contribution rate and common contribution rate for a Fund, and usually individual employers too. This is normally carried out in full every three years (last done as at 31 March 2016), but can be approximately updated at other times. The assets value is based on market values at the valuation date, and the liabilities value and contribution rates are based on long term bond market yields at that date also.
111
APPENDIX E - Governance Compliance Statement As at 31 March 2017 Dated: 12 September 2017
Establishment of the local pension board
Ref Principle
Detail of best practice principle
Compliance (Full/Partial/ Non)
Statement of Compliance
E1 Local pension board to be established by 1 April 2015
Local Pension Board terms of reference agreed and approved by the Council
Full compliance
E2 All pension board The administering authority
Non
members to have a should have a person
compliance
personalised
designated to take
training plan in
responsibility for ensuring
place that is
training plans are followed and
regularly monitored regularly review the members
and updated
training requirements and keep
appropriate records of their
learning activities and the
board as a whole
E3 Expenses of the
Provision has been made in
Partial
local pension board the accounting procedures to compliance
to be part of the
identify the costs incurred in
expenses of
the establishment and
administration of operational costs of the local
the pension fund
pension board
Enter here the committee and date the terms of reference were agreed and link or reference to where this can be found The LGPS Pension Board was approved and constituted at the meeting of the Isle of Wight Council on 21 January 2015 https://www.iwight.com/Meetings/committees/mod-council/21-1-15/minutes.pdf (minute 41) The terms of reference form Article 12 to the council's Constitution Enter here whether individual training plans have been completed and where it can be found Individual training plans have not been completed for the pension board members. Members have been referred to the Pensions Regulator's online toolkit to assist with developing their knowledge and skills. A training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 1218 months. Enter here how the costs are being identified All costs incurred in respect of the administration of the pension fund are coded to an administration cost centre within the council's financial hierarchy. These costs are recharged to the pension fund accounts on a quarterly basis Costs incurred directly by the pension fund (for example adviser fees, fund manager costs) are presented to the Pension Fund and Treasury Management Accountant, for direct payment from the fund bank account, and coding to the pension fund accounts. There is no specific budget set for the costs incurred by the pension fund (other than the staffing budget within the council's accounts which is subsequently recharged), or for expenses of the pension board, although reasonable costs agreed with the Director of Finance and section 151 officer are borne by the fund. 112
Ref Principle
Detail of best practice principle
Compliance (Full/Partial/ Non)
Statement of Compliance
E4 Local Pension
The terms of reference will
Full
Board to have
provide for an equal number of compliance
equal number of
scheme member
scheme member
representatives and employer
representatives and representatives which is no
employer
less than 4 in total
representatives
which is no fewer
than 4 in total.
E5 Determine the
The manner and terms by
Full
manner and terms which members of the local
compliance
by which members pension board are clearly set
of the local pension out.
board are
appointed.
E6 The administering The administering authority will Partial
authority to be
have a conflict of interest
compliance
satisfied that
policy and procedure in order
persons appointed to identify and manage actual
to the local pension and potential conflicts of
board do not have a interest
conflict of interest.
Enter here the number of scheme member and employer representatives There are two employer representatives and two scheme member representatives on the pension board. Enter here where the manner and terms by which members of the local pension board are clearly set out. The terms of reference for the pension board specify the method of appointment of board members. One of the employer representatives shall be an officer of the Isle of Wight Council. The other will be selected by the other employers of the fund, following nominations. The scheme member representatives shall be appointed by UNISON, who will be responsible for arranging their own election of suitable candidates and advise the Isle of Wight Council of this so that it can be assured that it is open and transparent. Area for improvement: the terms of reference for the board should be updated to include the process for appointment of scheme member representatives should UNISON be unable, or fail, to make suitable nominations. Enter here whether a conflicts of interest policy has been adopted, where it can be found and the review procedure. Is it to be a regular feature on the local pension board agenda? Is there a register of interests? Who is responsible for maintaining it? Are local pension board members aware of what could be considered a conflict of interest? (i.e. included in induction training) Pension Board members are subject to a conflict of interest policy based upon the Council's Code of Conduct contained within the constitution. A specific policy for the pension fund, incorporating guidance for the Pensions Regulator is being prepared for approval. Board members are required to complete a declaration of interests at the start of their term of appointment. This is maintained by the council's democratic
113
Ref Principle
Detail of best practice principle
Compliance (Full/Partial/ Non)
Statement of Compliance
services team. Members are invited to declare any interests they may have on agenda items at the start of each meeting. Board members have been directed towards the Pensions Regulators training toolkit module on conflicts of interest as a starting point for understanding what might constitute a conflict.
E7 The administering The administering authority will Full
authority to have
have knowledge and access of compliance
regard to guidance the LGPS Advisory Board
issued by the
website
Secretary of State (http://www.lgpsboard.org) and
regularly check for updates
and alerts.
Enter here the post title of the officer(s) responsible for regularly checking the LGPS Advisory Board website and any other methods by which the Fund is kept informed of any guidance issued. The task of regularly checking the LGPS Advisory Board website is not specifically allocated to a role, but falls within the remit of the Technical Finance Manager. Other methods of update include CIPFA and LGA bulletins, emails and networking events
The Pensions Regulator's Code of Practice
Ref Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
P1 P1.1
Knowledge and Understanding
A member of the
A training strategy has been
local pension board adopted and a training plan
must be conversant drafted in which there is
with the scheme
provision for informing local
rules and any
pension board members of the
document
LGPS rules, regulations and
recording policy
the Fund's documents and
about the
recording policy.
administration of
the scheme
Non compliance
Enter here whether a training strategy and plan have been adopted, where it can be found and the review process. A formal training strategy has yet to be developed, to be supported by a training plan. Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. Members of the board completed the online toolkit during the year, and have undertaken specific reading relevant to their role. This has not been recorded on a training log. A training programme for both pension committee and board members will be
114
Ref Requirement
Full Compliance
adopted by the administering authority
Compliance (Full/Partial/ Non)
Statement of Compliance
developed during the summer of 2017, with a view to delivery over the next 1218 months. This will include a log of training undertaken, including background reading and attendance at events.
P1.2 P1.3 P1.4
A process should be in place to ensure a member of the local pension board has the knowledge and understanding required of the law relating to pensions and other matters which are prescribed in the Regulations which is sufficient to enable them to perform their duties The administering authority should establish and maintain policies and arrangements for acquiring and retaining knowledge and understanding The administering authority should designate a person to take responsibility for
A training strategy has been adopted and a training plan drafted in which there is provision for informing local pension board members of the law relating to pensions and matters prescribed in regulations. A training strategy has been adopted and a training plan drafted to establish the arrangements for local pension board members to acquire and retain knowledge and understanding. A training strategy has been adopted that contains details of the person designated to take responsibility for ensuring that a framework is developed
Non compliance Non compliance Non compliance
Enter here whether a training strategy and plan have been adopted, where it can be found and the review process. A formal training strategy has yet to be developed, to be supported by a training plan. Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. A training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 1218 months. Enter here whether a training strategy and plan have been adopted, where it can be found and the review process. A formal training strategy has yet to be developed, to be supported by a training plan. Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. A training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 1218 months. Enter here whether a training strategy and plan have been adopted, where it can be found and the review process. Also state the post title or name of the person designated to take responsibility for ensuring that a framework is developed and implemented A formal training strategy has yet to be developed, to be supported by a training 115
Ref P1.5 P1.6
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
ensuring that a training framework is developed and implemented.
and implemented
The members of the pension board should be familiar with the AVC options offered by the Fund, including the choice of investments offered to members and the relative performance of those The administering authority to prepare and keep an updated list of the documents with which they consider pension board members need to be conversant, including the scheme rules and relevant Fund specific documentation.
Information of the AVC options are provided to the local pension board members An updated list of documents is maintained
Non compliance Partial compliance
plan. Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. A training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 1218 months. It has been suggested that one of the board members be nominated to take a lead on monitoring the training plan. This has not yet been taken forward. Enter here how information of the AVC options are provided to the local pension board members (e.g. induction training, contained in the training plan, provided with an information pack) There is currently not any method for providing this information to board members. However a training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 12-18 months. Enter here whether a list is in existence, where it is available and the post title(s) of the person(s) responsible for maintaining it and notifying local pension board members of updates. There is a list of policies and documents with which the administering authority considers pension board members need to be conversant. All policies are being reviewed and updated and will be presented to the board and committee for approval over the next 12 months. A governance compliance checklist has been acquired and is being completed. This will be monitored regularly by the board as part of their work programme.
116
Ref P1.7 P1.8 P1.9
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
The roles and responsibilities of pension board members to be clearly documented
The terms of reference of the pension board should clearly set out the role, responsibility and duties of the pension board members
Partial compliance
Enter here whether a policy has been adopted, where it is available and the post title(s) of the person(s) responsible for maintaining it The role of the board is fully explained in the terms of reference, which form part of the council's constitution, but which need to be revised to reflect the developing work plan of the board.
Local pension board members to be aware of their personal responsibilities in terms of knowledge and understanding
Local pension board members should have personalised training plans in place, making them aware of their personal responsibilities in terms of knowledge and understanding
Partial compliance
The administering authority to assist individual local pension board members to determine the degree of knowledge and understanding to effectively carry out their role as a pension board member (including pre-appointment training and mentoring if appropriate)
A monitoring system / procedure should be contained in the training strategy and in place in order to assist the local pension board member to attain the level of knowledge and understanding that is sufficient for them to effectively carry out their role, responsibilities and duties as a pension board member
Non compliance
Enter here how this awareness is communicated (e.g. at induction training, contained within the training strategy, personal training plans, regular agenda item, monitoring by person designated to take responsibility for ensuring that a framework is developed and implemented) The pension board terms of reference set out the personal responsibilities of board members to obtain the necessary levels of knowledge and understanding. Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. A training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 1218 months. Enter here whether a training strategy and plan have been adopted, where it can be found and the review process. Also state the post title or name of the person designated to take responsibility for ensuring that a framework is developed and implemented and how this is achieved A formal training strategy has yet to be developed, to be supported by a training plan. Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. A training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 1218 months. It has been suggested that one of the board members be nominated to take a lead on monitoring the training plan. This has not yet been taken forward.
117
Ref Requirement
Full Compliance
P1.10
The administering authority to maintain individual training plans for local pension board members
Individual training records are kept and maintained of the learning activities of the local pension board members.
Compliance (Full/Partial/ Non)
Statement of Compliance
Non compliance
Enter here the post title or name of the person designated to take responsibility for maintaining the individual training records of the local pension board members. Are these regularly reported to the board / individual? A formal training strategy has yet to be developed, to be supported by individual training plans. Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. A training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 1218 months. It has been suggested that one of the board members be nominated to take a lead on monitoring the training plan. This has not yet been taken forward.
P1.11
Local pension board members to invest sufficient time in their learning and development alongside their other responsibilities.
There is provision in the individual training plans to monitor and record attendance at training events and whether sufficient time is being invested in learning and development.
Partial compliance
P1.12
Pension board members complete tPR's e-learning programme
Local pension board members are required to complete the Pensions Regulator's elearning programme but this is not in isolation and is supplemented by specific LGPS and related Fund
Partial compliance
Enter here the post title or name of the person designated to take responsibility for maintaining the individual training records of the local pension board members. Are these regularly reported to the board / individual? When / how? Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. Members of the board completed the online toolkit during the year, and have undertaken specific reading relevant to their role. This has not been recorded on a training log. It has been suggested that one of the board members be nominated to take a lead on monitoring the training plan. This has not yet been taken forward. Enter here whether the training strategy sets out the requirement or method by which local pension board members complete the Pensions Regulator's elearning programme and how this is recorded and monitored Board members have been sign-posted to the Pension Regulators' online training toolkit in the first instance, to identify basic knowledge and understanding requirements. At each board meeting, members are asked to update on their completion of the
118
Ref P2 P2.1
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
learning activities
toolkit and to identify further areas of learning arising
Conflicts of Interest
The administering authority should have in place an appropriate conflicts of interest policy, clearly identifying individual roles in identifying and reporting potential conflicts of interest and to whom any potential conflict should be reported
Administering authorities should ensure that there is an agreed and documented conflicts policy & procedure, which includes identifying, monitoring & managing potential conflicts of interest.
Partial compliance
Enter here whether a conflicts policy is in existence, where it is available and the post title(s) of the person(s) responsible for maintaining it. Pension Board members are subject to a conflict of interest policy based upon the Council's Code of Conduct contained within the constitution. A specific policy for the pension fund, incorporating guidance for the Pensions Regulator is being prepared for approval.
P2.2 P2.3
The conflicts of interest policy has a regular review date incorporated in to it
Regular review date specified within the policy.
Partial compliance
The administering authority to maintain a register of all conflicts (and potential conflicts) that are raised, reviewing them appropriately
The administering authority should retain and regular review a register of all conflicts (and potential conflicts) that have been raised. Conflicts should be reviewed and any action taken forward.
Full compliance
Enter here if a regular review date has been implemented Pension Board members are subject to a conflict of interest policy based upon the Council's Code of Conduct contained within the constitution. A specific policy for the pension fund, incorporating guidance for the Pensions Regulator is being prepared for approval. Enter here whether a register of conflicts exists, where it can be found and the post title(s) of the person(s) responsible for maintaining it. Details of the review process and action taken should be clearly documented Board members are required to complete a declaration of interests at the start of their term of appointment. This is maintained by the council's democratic services team.
119
Ref P2.4 P3 P3.1 P3.2 P3.3
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
Declaration of conflicts (or potential conflicts) of interest to be disclosed on appointment and at regular intervals (inc. as a standing item at all meetings)
The administering authority should retain a `register of interest'. This is a simple and effective means of recording and monitoring dual interests and responsibilities of the Pension Board members.
Full compliance
Enter here whether a register of conflicts exists, where it can be found and the post title(s) of the person(s) responsible for maintaining it. This should include initially disclosed conflicts of interest and any additional thereafter. Board members are required to complete a declaration of interests at the start of their term of appointment. This is maintained by the council's democratic services team. Members are invited to declare any interests they may have on agenda items at the start of each meeting.
Publishing information about schemes
The administering authority must publish information about the local pension board and keep that information up to date
Provision is made on the Council website or Fund website that is available for all scheme members to view and should include: - Name - Representative role - Employment and job title (where relevant) - The appointment process to the pension board
Partial compliance
The administering authority should publish information about the local pension board's business
All board papers, agendas and minutes of meetings are available on the Council website or Fund website for all scheme members to view
Full compliance
Enter here where the information about the local pension board is published and the post title of the person(s) responsible for its maintenance Add link to webpage The names of the pension board members are published on the council's democratic web pages https://www.iwight.com/Meetings/current/committeeDetail.aspx?cmteId=187 No other information is published about board members. The appointment process is covered in the terms of reference for the board, included within the council's constitution, but is not linked to the above web page. A project has been initiated to develop the fund's website to improve the availability of information. Enter here where the board paper, agendas and minutes of meetings can be viewed. Add link to webpage All board meeting agendas, papers and minutes are published on the council's democratic web pages https://www.iwight.com/Meetings/current/committeeDetail.aspx?cmteId=187
The administering authority should consider any
There will be details on the Council website or Fund website informing scheme
Partial compliance
Enter here where the details can be found. Confirm if there is a procedure in place for determining requests for further information to be published
120
Ref P4 P4.1 P4.2
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
requests for additional information to be published to encourage scheme member engagement and promote a culture of transparency Managing Risks The administering authority is required to have in place internal controls that include adequate systems, arrangements and procedures for the administration and management of the Fund (including external service providers and third parties)
members who to contact if they wish to make any requests for further information to be published. There will be a procedure in place for determining what scheme member requests will be agreed and how the decision is communicated to the scheme member
There are in place systems, arrangements and procedures to ensure that the scheme is being run in accordance with the scheme rules as set out in regulations. This will include a clear separation of duties, processes for escalation and decision making and documented procedures for assessing and managing risk, reviewing breaches of law and managing contributions to the scheme.
Partial compliance
The administering authority should have in place a risk register to record all risks and
An appropriate risk register is produced, recording all identified risks and action taken. This should be a standing item
Full compliance
Pensions information is published on the council's website https://www.iwight.com/Council/Working-for-the-Council/Pensions-IWC/About0 Governance information is published on the democratic web pages for both committee https://www.iwight.com/Meetings/current/committeeDetail.aspx?cmteId=150 and board https://www.iwight.com/Meetings/current/committeeDetail.aspx?cmteId=187 However there is no link between the two pages. A project has been initiated to develop the fund's website to improve communications with members and enhance the availability of information. Enter here details of hierarchy and reporting The existence of a risk register and its review frequency The auditing arrangements of the fund administration. If outsourced or shared service how the service provider is monitored against service levels The administration of the pension fund is undertaken by the Pensions Team, which is under the Shared Services department. Accounting and governance is undertaken by the Technical Finance Team, within the Finance department. Pensions administration forms part of the internal audit universe, and is reviewed every three years ­ the last review was in 2016-17. The council's Key Financial Systems are reviewed annually by internal audit ­ controls in place for the council's accounting processes are replicated for the pension fund. Internal audit reports are presented to the pension fund committee and pension board for review and monitoring of actions. The fund does not have an administration strategy, nor is there any formal monitoring of service standards by the committee or board. Enter where (if) the risk register is available and the person responsible for maintaining it. A risks and issues log is maintained for the pension fund, overseen by an officer working group, led by the Head of Resources. The log is reported to each meeting of both pension fund committee and pension
121
Ref P4.3 P4.4 P5 P5.1
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
actions taken,
at all Pension Board meetings.
which is reviewed
regularly
The administering Scheduled review dates
authority should
should be included within the
regularly review the business remit of the
effectiveness of its Administering Authority.
risk management A review report should be
and internal control produced detailing the
processes
effectiveness and any
adjustments required with the
Schemes risk management
and internal controls
Risk management Risk Management and internal
and internal
controls included as an
controls should be agenda item with the Pension
a standing item on Committee and pension board
the Pension
agendas.
Committee and
pension board
agendas
Scheme record keeping
The administering authority must be able to demonstrate that they keep accurate, up to date and enduring records to be able to govern and administer the LGPS effectively
There is in place a reliable pension administration software system for the purpose of keeping accurate and up to date scheme member data.
Partial compliance Full compliance Partial Compliance
board. Enter here if there are scheduled review dates and their frequency. A risks and issues log is maintained for the pension fund, overseen by an officer working group which meets on a bi-monthly basis, led by the Head of Resources. Risk management and internal control processes for the pension fund mirror those for the administering authority, which are subject to review periodically by the council's internal audit team. Enter here whether risk management and internal controls have been added to the agenda. The pension fund risk and issues log is reported to each pension fund committee and pension board meeting. Internal audit reports are presented to the pension fund committee and pension board as they are received. Enter here the system operated and its industry acceptance If outsourced or shared service how the data is monitored for accuracy or how member information is kept up to date and notified to the service provider The Isle of Wight Council use Aquila Heywood's altair pension administration system which is a well-known database enabling the administration of pensions. The system is externally hosted, which ensures that all system updates are actioned on a timely basis, and system and data issues can be investigated promptly. There is regular attendance at Aquila Heywood user group class meetings to discuss any issues and seek resolutions to any difficulties.
122
Ref P5.2 P5.3 P5.4
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
Pension administration team members attend training sessions to keep them abreast of any system updates to ensure that records are maintained accurately.
The administering authority must ensure that scheme member data across all membership categories specified in the Record Keeping Regulations is complete and accurate and the data is subject to regular data evaluation The administering authority must keep specific data which will enable it to uniquely identify a scheme member and calculate pension benefits correctly
There is in place a procedure for all membership categories to pass on information with regard to changes in their own circumstances There is in place a procedure for scheme employers to advise of changes in circumstances of their scheme members Scheme members have a unique identifier on the pension administration software system.
Partial compliance Full compliance
Enter here whether such procedures exist to notify changes in scheme member data All members are encouraged to notify the pension administration team of any changes in their circumstances. All scheme members (active, deferred and pensioner) have access to the altair member self-service (MSS) portal which is a secure method of making changes to their member records. In addition, copies of change forms are available on the pension web pages. Members can also write or e mail in their changes. Scheme employers are provided with copies of change forms for their members. Any changes to the scheme are published in the council's internal newsletter and information provided to admitted bodies to forward to their staff. Enter here what identifier is used (e.g. NI number, payroll number, scheme reference number) Enter also whether or not scheme members can be identified by searching by surname or alternative if unique number not yet allocated or unavailable All members have their NI number recorded. All active members have a payroll number provided by their provider. This would be unique to their role. If a unique reference has not been provided by a payroll provider or employer a member would be able to be identified by name date of birth and address.
Each employer within the fund is allocated a unique scheme reference number.
A unique pensioner number is assigned when a member becomes a pensioner.
The administering authority should require
Processes are established which facilitates the transmission of complete and
Partial compliance
Enter here whether an established process is in place for the timely and accurate transmission of data Is there a pension administration strategy in place?
123
Ref P5.5
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
participating employers to provide them with timely and accurate data
accurate data. Employers are aware of the importance of accurate and timely submission of data and have access to expertise in order to resolve queries.
Is there information for employers on the website? Are there penalties for late submission or supply of inaccurate data? There is a timetable and guidance provided to each employer and payroll provider each year which sets out the requirements for providing data. A template for this information is also provided. Admission agreements for employers joining the fund in the last three years contain details of the standards expected for data collection; however this is not the case of older admission bodies, or for scheduled bodies, for whom no admission agreement is required. The fund is looking into developing and publishing an administration strategy which will standardise the requirements for all employers, and will facilitate the introduction and implementation of sanctions (including financial penalties where appropriate) for late or inaccurate submission of data. In addition a project has been initiated to develop the fund's website, which will improve information available to employers.
The administering authority should seek to ensure that employers understand the main events which require information about members to be communicated
Processes are in place for employers to inform the administering authority in the event there is an event affecting a scheme member, such as ­ Joins or leaves the scheme Changes their rate of contributions Changes their name, address or salary Changes their membership status Transfers employment between scheme employers Strike days or breaks in service
Partial compliance
Enter here whether an established process is in place for the timely and accurate transmission of data Is there a pension administration strategy in place? Is there information for employers on the website? Are there penalties for late submission or supply of inaccurate data? This information is provided in the annual admitted bodies' administration guidance notes. Templates for leavers and starters are provided on the pension webpages. Admission agreements for employers joining the fund in the last three years contain details of the standards expected for data collection; however this is not the case of older admission bodies, or for scheduled bodies, for whom no admission agreement is required. The fund is looking into developing and publishing an administration strategy which will standardise the requirements for all employers, and will facilitate the introduction and implementation of sanctions (including financial penalties where appropriate) for late or inaccurate submission of data. In addition, a project has been initiated to develop the fund's website, which will improve information available to employers.
124
Ref P5.6 P5.7 P5.8
Requirement
Full Compliance
The administering authority should have policies and procedures in place for the regular monitoring of data
50/50 membership (This list is not exhaustive) Scheme managers must establish and operate adequate internal controls, which should include processes and systems to support record-keeping requirements and ensure that they are effective at all times.
Compliance (Full/Partial/ Non)
Statement of Compliance
Partial compliance
Enter here whether there are policies and procedures in place, where it is available and the post title(s) of the person(s) responsible for maintaining it. A manual process is currently operated to validate data provided and raise any irregularities with payroll providers for resolution. This is time consuming and inefficient. A project has been initiates to enable the automatic upload of information from payroll providers into the altair administration system, which will allow real-time validation of data and resolution of queries. A project plan for delivery, including timeframes and interim solutions, is being developed.
The administering authority should carry out regular (at least annually) data reviews
Administering authorities establish twice yearly dates to review the data quality held for the scheme. Internal process completed to investigate quality.
Partial compliance
Enter here confirmation details of the data reviews A manual process is currently operated to validate data provided on an annual basis and raise any irregularities with payroll providers for resolution. This is time consuming and inefficient. A project has been initiates to enable the automatic upload of information from payroll providers into the altair administration system, which will allow real-time validation of data and resolution of queries. A project plan for delivery, including timeframes and interim solutions, is being developed. The implementation of this system will facilitate more regular and timely data quality reviews.
The administering authority should ensure that appropriate procedures and timescales are in place for scheme employers to provide updated information when member data changes
Processes are established which details the timely transmission of complete and accurate data
Partial compliance
Enter here whether an established process is in place for the timely and accurate transmission of data Is there a pension administration strategy in place? Is there information for employers on the website? Are there penalties for late submission or supply of inaccurate data? Employers are provided with guidance notes on an annual basis. These notes contain details of the timeframe for submission of data and payments. Change forms are provided to be completed when changes in circumstances occur. Admission agreements for employers joining the fund in the last three years contain details of the standards expected for data collection; however this is not the case of older admission bodies, or for scheduled bodies, for whom no
125
Ref Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
admission agreement is required. The fund is looking into developing and publishing an administration strategy which will standardise the requirements for all employers, and will facilitate the introduction and implementation of sanctions (including financial penalties where appropriate) for late or inaccurate submission of data. In addition, a project has been initiated to develop the fund's website, which will improve information available to employers.
P5.9
The administering authority should be able to trace the flow of funds into and out of the scheme, reconcile these and keep records of transactions
There are audited processes in Full place that record transactions compliance into and out of the Fund
P5.10
The administering authority must keep records of pension board meetings and discussions and records of decisions made other than at a local
Records are available that show decisions made and discussions at local pension board meetings and those that take place outside and are later ratified at a local pension board meeting
Full compliance
Enter here confirmation that regular audits take place on the processes in accounting and reconciling monies into and out of the fund The fund uses the Logotech Public Sector Treasury Management System to record and monitor cash flows in and out of the fund, recording the anticipated contributions (timing and estimated values) and the actual amounts received, as well as forecast benefit payments against those actually paid. If funds are not received on the expected date, the treasury team communicates with the administration team, who also monitor the receipt of data, and missing information is chased. This information is used to forecast the levels of operational cash maintained by the fund. The fund uses the SAP accounting system to record all financial transactions for the fund, and to produce regular Accounting Information for the pension fund committee and local pension board as well as the annual report and accounts. The treasury management processes for the fund are covered by the council's internal audit universe and are reviewed annually by the internal audit provider. The financial statements for the fund are audited annually by the funds external auditors, Ernst & Young, Reports from both sets of auditors are presented to the pension fund committee and local pension board. Enter here where the records are available Add link to webpage All board meeting agendas, papers and minutes are published on the council's democratic web pages https://www.iwight.com/Meetings/current/committeeDetail.aspx?cmteId=187
126
Ref Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
P5.11 P5.12 P5.13
pension board meeting that is later ratified. The administering authority should retain records for as long as they are needed and have in place an adequate system and process for record retention Where the administering authority has identified poor quality or missing data there should be a data improvement plan in place The administering authority should reconcile member records with the relevant employers and be able to identify those scheme members who are approaching retirement, those who are active members and those that are deferred
A policy on document retention is in place that includes the retention of local pension board papers and documents A data improvement plan is in place which contains measures for the administering authority to monitor and a timeframe for attaining accurate data Scheme member records are reconciled with the relevant employers at least on an annual basis. Pension Administration software systems can identify scheme members approaching retirement, active members and deferred members.
Partial compliance Partial compliance Partial compliance
Enter here whether there is a policy document in place that includes the retention of local pension board papers and documents Add the retention time limit Add link to webpage Retention policy follows that of the Isle of Wight Council, which is currently under review in line with the new General Data Protection Regulations (GDPR). Specific data retention requirements for the pension fund need to be reviewed in line with current best practice. Enter here whether a data improvement plan is in place with timescales for data improvement or what measures will be taken where inaccurate data is discovered Specific issues are addressed as they arise ­ for example, The Pensions manager has met with School Business Managers and communication with them will continue on a regular basis. Next meeting September 2017.An escalation process has been adopted. There is no data improvement plan in place ­ this needs to be developed Enter here when and how scheme member records are reconciled with their relevant employers. Confirm that the pension administration software system can identify scheme members approaching retirement, active members and deferred members. A monthly report for deferred members is run to enable information on pension options to be provided ahead of retirement. Information from active members wishing to retire is received via the payroll /HR teams. There is currently no process to regularly review the age profile of the fund's active members, particularly those approaching retirement. This is being developed.
127
Ref Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
P5.14
members The administering authority must ensure that processes created to manage scheme member data are compliant with the Data Protection Act 1998 and data protection principles.
Data Protection Act is complied with and all relevant persons are aware of their responsibilities
Partial compliance
P5.15
The administering Evidence that key
authority should be requirements are set out
able to demonstrate where applicable under the
that records are
following legislation ­
kept in accordance Pensions Act 1995 and
with other relevant
2004
legislation
Pensions Act 2008 and the
Employers' Duties
(Registration and
Compliance) Regulations
2010
Occupational Pension
Schemes (Scheme
Administration) Regulations
1996
Registered Pension
Schemes (Provision of
Information) Regulations
2006
Data Protection Act 1998
Freedom of Information Act
Full compliance
Enter here how this awareness is communicated Officers ­ internal Committee/LPB members ­induction / info packs All employees complete data protection awareness training on -line as part of their induction and this training is reviewed from time to time (3 years maximum) The induction plan for elected members includes a session on data protection, delivered by the monitoring officer. There is current no specific training for pension board members on data protection. Members have been referred to the Pensions Regulator's online toolkit to assist with developing their knowledge and skills. A training programme for both pension committee and board members will be developed during the summer of 2017, with a view to delivery over the next 1218 months. Enter here some evidence or statement that the relevant pieces of legislation are complied with in relation to the Fund's record keeping The pension's Aquila Heywood system is complaint in keeping records under the aforementioned rules and regulations and is supported operationally by means of guidance and process notes.
128
Ref P6 P6.1 P6.2
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
2000 Maintaining Contributions
The administering authority should ensure there are effective policies and procedures in place to identify payment failures and assess the materiality of any failures identified
All employers are aware of the payment deadlines Procedures and processes are in place to monitor the payment of contributions, record payments of contributions to the Fund, manage overdue contributions and identified payment failures are reported to a senior officer.
Partial compliance
Enter here how employers are made aware of their responsibilities to meet contribution payment deadlines (Pension Administration Strategy, Admission Agreement) Confirmation that procedures are in place to monitor and record payments of contributions to the The action taken when a payment failure is identified and the reporting responsibilities Admission agreements for employers joining the fund in the last three years contain information regarding payment deadlines and their duties / responsibilities; however this is not the case of older admission bodies, or for scheduled bodies, for whom no admission agreement is required. The fund is looking into developing and publishing an administration strategy which will standardise the requirements for all employers.
Every year a new template and reinforcement of the guidance is issued to all admitted bodies and Payroll providers.
Employers should be provided with the necessary guidance to ensure they provide the required information to enable contributions to be monitored
Employers are provided with the necessary scheme documents and training requirements to fulfil their obligations within the Scheme. - Contribution templates - Fund liaison contact for contributions
Partial compliance
A monthly control check list of returns and contributions received in maintained. Late of missing information is followed up with the relevant employer, and is reported to management. A report of non-compliance is made on a regular basis to pension fund committee and pension board. Enter here where the employer contribution documents are held and the person responsible for maintaining them. Detail the Fund's contact for contribution pay over. Contribution templates provided at the beginning of each financial year. There is an anomalies checking process to ensure the information is consistent Any inconsistencies are raised back to the employer A generic e mail address is provided for any employer queries. A project has been initiated to develop the fund's website, which will improve information available to employers.
129
Ref Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
P6.3 P6.4 P6.5
Where the administering authority identify a payment failure they should follow a process to resolve issues quickly (e.g. monthly monitoring of employer payments to ensure contributions paid on time and in full) and maintain a record of investigations and communications in relation to such failures The administering authority should review processes or develop a new process which is able to detect situations where fraud may be more likely to occur and where additional checks may be appropriate. The administering authority must
Records are maintained of investigations and communications (and outcomes) in relation to payment failures, together with communication with the employer This will be identified on the fund's risk register A regular review of processes to detect fraud is undertaken Responsible officers are aware of the requirement and there is
Partial compliance Full compliance Partial compliance
Enter here confirmation that a procedure and process is in place to resolve issues where there is a payment failure by an employer A monthly control check list of returns and contributions received in maintained. Late of missing information is followed up with the relevant employer, and is reported to management. A report of non-compliance is made on a regular basis to pension fund committee and pension board. Enter here confirmation the process to detect situations where fraud may take place is recorded on the risk register (enter reference) Confirm that regular reviews of the process to detect fraud are undertaken (date of last review / date of next review) Audit requirement dictate that we receive a starter form in respect of any new contributions received for an employee. We also check that the information provided is consistent with their pay and contribution rate and consequently reconciled on a monthly basis. NFI exercise undertaken annually to match data and ensure consistency. Enter here where the procedure is documented (reporting policy) A new policy Reporting breaches of the law to the Pensions Regulator has been
130
Ref Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
report payment failures which are likely to be of material significance to the Regulator.
a procedure in place for reporting payment failures to the regulator in accordance with the code of practice
drafted and will be sent to members of the pension board for review and recommendation to the pension fund committee for adoption.
P7 P7.1
Member communication
Administering authority to provide an annual benefit statement to all active, deferred and pension credit members containing certain legal information and to ensure all AVC members are provided with a similar statement from their AVC provider
Annual benefit statements are issued to each active, deferred pensioner and pension credit member. Statements must be issued no later than 5 months after the end of the Scheme year to which it relates The Administering Authority will have liaised with the Schemes AVC provider and ensured an appropriate timetabled production of the members AVC statement is produced.
Full compliance
Enter here the date annual benefit statements were issued to active, deferred and pension credit members and the relevant Scheme year to which it relates Enter here the Administering Authorities AVC provider and the agreement details for the member's annual benefit statement production. Annual Benefits Statements (ABS) for all active, deferred and pension credit members are issued by 31 August in line with statutory deadlines. For the year ended 31 March 2017, statements were published via the Member Self Service (MSS) portal on 24 August 2017. The fund's AVC provider, Prudential, issue their ABS to the individual directly. The fund is notified when the statements have been sent.
P7.2
The administering authority must provide scheme members with basic scheme information, meeting minimum legal requirements
The fund will have in place a communication policy which contains details of what information is provided to scheme members and the communication media.
Partial compliance
Enter here confirmation that a communication policy is in place (link to webpage) which sets out what information is provided to scheme members and how it is communicated (scheme booklet, dedicated fund website, council webpage) There is an old and out of date communications policy which needs to be revised. This is in hand. New employees are provided with information in their contract of employment and access to Member Self Service which holds individual data. A project has been initiated to develop the fund's website, which will improve 131
Ref P7.3 P7.4 P7.5
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
information available to members.
Disclosure regulations make provision for scheme members and others to receive information that is relevant to their pension rights and scheme entitlements and provided within certain legal timescales Where information is provided electronically it should comply with legal requirements
The fund will have In place a communication policy that sets out how and when it will communicate with any of the following "relevant persons" within the prescribed legal timescales. Active members Deferred members Pensioner members Prospective members Spouses, civil partners of members or prospective members Other beneficiaries Recognised trade unions Administering authority ensuring that all electronically produced information complies with the legal requirement
Partial compliance Full compliance
Enter here confirmation that a communication policy is in place (link to webpage) which sets out what information is provided to scheme members and how it is communicated (scheme booklet, dedicated fund website, council webpage) There is an old and out of date communications policy which needs to be revised. This is in hand. Pension awareness sessions have been run for staff seeking information on retirement, delivered by the council's AVC provider and council staff.. The Pension and Payroll Lead Officer attends the quarterly corporate induction sessions for new employees. Processes for monitoring and reporting the volume and timeliness of the provision of information to members have yet to be fully developed. The majority of information requested by members is provided within the required timescales. Enter here whether or not the administering authority has complied with the legal requirements. ABS for active and deferred members are primarily published on the MSS selfservice portal. The information provided complies with the legal requirements. All active members have been informed of the MSS portal via internal communication at the council, and emails to school Business Partners and nominated payroll contacts at external employers. Deferred members have been notified of the MSS portal by email. Members have been informed that the ABS will only be provided on-line, but have the option to request a paper copy ­ there have been very few requests for hard copy information, and a high take up of no-line access requests.
The administering authority should attempt to make contact with their
A tracing service has been engaged to trace scheme members where contact details are considered
Partial compliance
Enter here whether or not a tracing service is used and the circumstances in which it is used. The pension administration team work closely with the council tax department to maintain contact details.
132
Ref P7.6 P8 P8.1 P8.2
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
scheme members incorrect
and where contact
is not possible
carry out a tracing
exercise to locate
scheme members.
Requests for
A customer service standard is
information should in place that requires a written
be acknowledged if response to be provided within
information
a specified timescale and
requested cannot where that response cannot be
be immediately
provided that a letter of
provided.
acknowledgement is sent with
an indicative response time.
Internal Dispute Resolution Procedure
Partial compliance
The administering authority has in place an Internal Dispute Resolution Procedure The administering
An Internal Dispute Resolution Procedure is in place in accordance with the LGPS regulations and it clearly states the procedure and process to apply for a dispute to be resolved including ­ - Who it applies to - Who the adjudicator is (stage 1) - Who to contact with a dispute - The information that an applicant must include - How the final decision is reached - How the dispute can be escalated if dis-satisfied - The appropriate timescales A `specified person' has been
Partial compliance Non
The council does not currently use a tracing agent Enter here to confirm that a customer service standard is in place and what the response timescales For communication received via the pension team generic e-mail account, and automatic acknowledgement is delivered advising a response will be made within 5 working days. Enter here confirmation that there is an Internal Dispute Resolution Procedure in place in accordance with the LGPS regulations and the required information included in correspondence where required (inc. website, booklets, etc.) Link to webpage There is an old and out of date procedure which is referenced in statements at the end of correspondence to members. A revised procedure has been drafted and is being reviewed by pension board and committee members, with a deadline of November 2017 for approval. Enter here if a list of the `specified person' for each employer is in existence,
133
Ref P8.3 P9 P9.1
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
authority has
nominated by the scheme
ensured all scheme employer.
employers have
The appropriate timescales
appropriate
known by the scheme
arrangements in
employer for their reply.
place for dealing
with stage 1
disputes
The administering The administering authority to
authority should
complete an annual review of
regularly review its its dispute process.
dispute process to Ongoing and completed
ensure its
disputes to be logged
effectiveness and appropriately.
that the necessary Timescales for completion of
timescales are
dispute cases reviewed.
being met (inc. the
employer
processes at stage
1)
Breaches of the Law
compliance Partial compliance
The administering authority should be satisfied that those responsible for reporting breaches of the law are made aware of their legal requirements and the Pensions Regulator's guidance.
Those responsible for reporting breaches are made aware of the legal requirements and the regulator code of practice. Relevant training should be provided to those responsible for reporting breaches. Sign off required on completion of training and understanding. All those that are responsible to report breaches, should establish and operate
Partial compliance
where it is held and who maintains it. Unknown: as part of the approval process for the new Internal Dispute Resolution Procedure, contact will be made with all scheme employers to determine and record their internal processes. Enter here the details of the annual review, where it is held and the post title(s) of the person(s) responsible for maintaining it. Is this accessible on the Fund's website? The new draft procedure includes provision for an annual review. Enter here the details of all training provided and the corresponding training documentation. -Include the procedures used -List of names and roles that should report breaches within the Fund -Training list document -Annual review of post holders involved Members of the pension fund committee and pension board have been referred to the Pensions Regulator's online training toolkit module on reporting breaches of the law. A new policy Reporting breaches of the law to the Pensions Regulator has been drafted and is being reviewed by pension board and committee members, with a deadline of November 2017 for approval. This covers the responsibilities of all parties to report potential breaches.
134
Ref P9.2 P9.3
Requirement
Full Compliance
Compliance (Full/Partial/ Non)
Statement of Compliance
The administering authority should have a breaches of the law policy in place
appropriate and effective procedures to ensure that they are able to meet their legal obligation.
Breaches of the law policy detailed within the Fund's annual governance statement
Partial compliance
Once the policy is formally launched, briefings will be offered to officers, committee and board members to ensure all are aware of their roles and responsibilities. Enter here whether a policy is in existence, where it is available and the post title(s) of the person(s) responsible for maintaining it. A new policy Reporting breaches of the law to the Pensions Regulator has been drafted and is being reviewed by pension board and committee members, with a deadline of November 2017 for approval.
The administering authority should maintain a breaches log and have identified a person responsible for maintaining the breaches of the law policy, logging, reporting and recording processes
Named person detailed within the Funds annual governance statement. Breaches log established, updated and maintained. Confirmation of the reporting of breaches.
Partial compliance
Enter here the post title(s) of the person(s) responsible. The new policy identifies the Technical Finance Manager as having responsibility for maintaining the breaches log, and the Monitoring Officer for receiving notifications of potential breaches. The breaches log will be presented to the pension board and pension fund committee at every meeting. Potential breaches which have been identified prior to the formal adoption of the policy will be recorded and actions taken will be documented to prevent future recurrence.
135
Independent auditor's statement to the Members of Isle of Wight Council on the pension fund financial statements 136

E Council, G Britain, LM Bichard, D Kester

File: annual-report-and-accounts.pdf
Title: CONTENTS
Author: E Council, G Britain, LM Bichard, D Kester
Author: Andrew Carpenter
Published: Thu Oct 5 11:52:13 2017
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