Agenda item

7.1      The Tri-Borough Director of Treasury and Pensions addressed the Committee and outlined the top 5 risks for the fund:

7.1.1   Liability Risk: The Committee were informed that inflation in the UK and globally was exceeding actuarial assumptions, with the Consumer Price Index (CPI) at 6.7% in August 2023, albeit lower than the peak of 11.1% in October 2022. The Tri-Borough Director of Treasury and Pensions said that the persistently high inflation was attributed to various factors such as labour shortages, supply chain challenges, and the ongoing Russia-Ukraine conflict.

7.1.2   Asset and Investment Risk: The Committee were informed that despite efforts, investment managers had failed to meet the benchmark or outperformance targets over an extended period. A mere 0.1% shortfall in the investment target translated to an annual impact of £1.8m. The Fund's performance until August 31, 2023, yielded a net return of 3.21%, falling short of the benchmark by -2.50% net of fees.

7.1.3   Asset and Investment Risk: The Committee were informed that global economic stability faced heightened risks, evident from the collapse of multiple banks since March 2023. Advanced economies were experiencing a deteriorating outlook, marked by elevated uncertainty, setbacks in growth and confidence, increased volatility in oil and commodity prices, and the depreciation of the pound. These conditions have resulted in tightened financial situations, reduced risk appetite, and heightened credit risks.

7.1.4   Regulatory and Compliance Risk: The Committee were informed that the Department for Levelling Up, Housing and Communities (DLUHC) had introduced proposed regulations for Local Government Pension Scheme (LGPS) administering authorities in England and Wales. These regulations aimed to assess, manage, and report climate-related risks as recommended by the Taskforce on Climate-Related Financial Disclosures (TCFD). The implementation of these regulations has been delayed, with the first reporting year now expected to be 2024/25 and the initial reports due by December 2025.

7.1.5   Liability Risk: The Committee were informed that there is a concern about the potential financial strain that may be imposed on the Fund due to the failure of certain bodies, which might result in unpaid liabilities that need to be covered by others. The Tri-Borough Director of Treasury and Pensions said that this risk is exacerbated by the current economic conditions, particularly impacting smaller employers.

7.2      The Committee were updated by the Tri-Borough Director of Treasury and Pensions on the Monitoring and Forecasted Cashflows as of 30 September 2023 which in the Pension Fund's Lloyds bank account balance amount to £2.1m, serving as the primary account for day-to-day transactions, including member contributions and pension payments. Despite stable payment and receipt patterns over the past year, Members were informed that the Fund is experiencing a persistent imbalance, with withdrawals likely from the cash at custody to maintain a positive cash balance. An amount of £6.0m was withdrawn from the cash at custody during the quarter.

7.3      The Committee were informed that the Fund's total cash balance, inclusive of the Lloyds bank account and the cash at custody, was £42.7m as of 30 September 2023. Additionally, a significant cash holding of £40.6m was reported with Northern Trust. The Committee were informed that the Fund conducts various financial activities, including manager distributions and asset transactions, within the Northern Trust custody account.

7.4      On 29 June 2023, the Committee decided to transition 5% of the Fund's equities into renewable infrastructure, a move that was executed in July 2023. The Committee were informed that officers remain vigilant in their monitoring of the cash balance and take necessary measures to ensure adequate liquidity is maintained.