This meeting was about overseeing the management of the Hackney Council Pension Fund. The topics scheduled to be discussed included a review of the performance of investments made by the Fund, an update on how well the Fund's administrators had been performing, a review of the financial risks facing the Fund, and a report on the Fund's activities relating to ethical investment.

Funding Risk Update & 2025 Valuation Planning

The most significant item scheduled to be discussed during the meeting was a report on the financial risks facing the Pension Fund.

The report explained the risks and opportunities for the Fund arising from recent changes to the financial environment, the most significant of which was a recent sharp rise in global interest rates.

It went on to describe how a recent rise in interest rates, from 0.75% in March 2022 to 5.25% in June 2024, had led to expectations that investments would perform better in the future.

If investors can get a higher return on cash and other lower-risk assets, it follows that the return on riskier assets, such as equities, should also increase. ¹

This increase in expected returns had led to a reduction in the amount of money the Fund needs to have available to pay out pensions in the future. The amount of money the Fund needs now to pay out all of the pensions it is committed to paying out in the future is known as the Fund's 'liabilities', and a reduction in those liabilities is described as an 'improvement' in the Fund's financial position.

The report explained that the Fund had seen an improvement in its funding level from 106% in March 2022 to 139% in June 2024. A funding level of 100% means that the Fund has exactly as much money as it needs to pay out pensions in the future. A funding level of 139% means that the Fund has 39% more money than it needs, and this is seen as a very significant improvement in the Fund's financial position.

However, the report pointed out that this improvement was not because the Fund's investments had actually performed better than expected. Instead it was because the increase in interest rates meant that the Fund was expected to make greater returns on its investments in the future.

The report went on to explain that the Fund could decide to manage the risks arising from this increase in future returns by increasing the amount of money it sets aside to pay out pensions in the future. This would be described as an increase in the 'prudence levels' of the Fund's funding strategy.

The report also explained that recent years have seen a sharp rise in inflation, which has the effect of reducing the purchasing power of money over time. The report explained that this has increased the cost of paying pensions in the future because pensions are index-linked, meaning that they are adjusted upwards in line with inflation to maintain their purchasing power.

It went on to explain that although inflation had recently fallen, it was still expected to remain above the Bank of England's target of 2% for some time to come. It also explained that recent years had seen an increase in uncertainty about the future of inflation, meaning that the Fund may need to set aside more money than usual to manage the risk of future inflation being higher than expected.

With increased uncertainty on the lasting impact of the pandemic and future longevity, the Fund may choose to maintain a funding cushion to help manage uncertain outcomes. ²

The report also explained that recent years had seen an increase in the life expectancy of people living in England and Wales, meaning that the Fund needs to set aside more money than usual to pay out pensions to people who are now expected to live longer than usual.

The question facing pension funds now is: to what extent should we allow for this pandemic era data? Is this recent experience representative of the future or will it be short lived? ³

The report went on to explain that although the Fund's investments are expected to perform better in the future, the Fund may need to set aside more money than usual to manage the risk of future changes to the financial environment. This could include:

• an increase in the amount of money it sets aside to pay out pensions in the future, known as the 'prudence levels' of the Fund's funding strategy.
• a change in the way it invests its assets, known as the 'investment strategy'.
• an increase in the amount of money it retains from its surplus, rather than distributing it to employers in the form of reduced contributions.

The report suggested that the Fund should start planning for its next formal valuation, which is due to be carried out as at 31 March 2025, as soon as possible. It suggested that the Fund should:

• monitor its funding position and identify the key factors causing changes to its position.
• seek to engage with all employers in advance of the valuation to ensure that they understand the challenges facing the Fund.
• carry out modelling of its funding position to inform decisions about future contributions and investment strategy.
• develop a policy on surplus management to determine how any surplus in the Fund is to be used.

Quarterly Update Report

The next most significant item scheduled to be discussed during the meeting was a report on the performance of investments made by the Pension Fund. This report explained that between April and June 2024:

• the Fund’s assets had increased from £2.04 billion to £2.07 billion.
• the Fund's liabilities had decreased from £1.53 billion to £1.49 billion.
• the funding level of the Fund had increased from 133% to 139%.

The report also explained that the Fund was scheduled to decide on whether to invest in a new property fund managed by Resonance Limited ⁴, which describes itself as a social impact investment company.

Resonance…develops and manages award-winning, highly impactful investment funds…that blend financial return with positive social impact. ⁵

The report explained that the Fund had previously invested in a property fund managed by Columbia Threadneedle which was now being wound down, with the underlying properties being sold.

The Columbia Threadneedle Low Carbon Property Fund is now in wind-down, with the underlying properties being sold. ⁶

The report went on to explain that Redington ⁷, the Fund's investment consultant, believed that:

inflation was uncomfortably high for central banks despite the CPI coming down and the volatile element of inflation related to energy. Redington's view therefore was that interest rates were unlikely to be reduced at this stage. ⁸

The report also explained that work was underway to encourage investment managers to consider environmental, social and governance factors when making investment decisions.

Work has begun on developing a new engagement framework for the Fund to support the Stewardship Code submission in being considered separately on this agenda. A further meeting of the RI Working Group (RIWG) took place to support this work on 11 September. ⁹

Stewardship Code Submission

The next most significant item scheduled to be discussed during the meeting was a draft submission to the UK Stewardship Code ¹⁰ prepared by Redington ¹¹. The UK Stewardship Code is a voluntary code of practice that sets out a framework for institutional investors to demonstrate their commitment to good stewardship. The code requires signatories to report on how they have implemented the code's principles, and to provide evidence of their stewardship activities.

Scheme Member Responsible Investment Survey

The next most significant item scheduled to be discussed during the meeting was a draft of a survey to be sent to scheme members to understand their views on responsible investment. The survey was scheduled to be circulated in October 2024.

Responsible Investment Working Group Update

The next most significant item scheduled to be discussed during the meeting was an update from the Responsible Investment Working Group, which had met on 11 September 2024. The working group had been set up to oversee the development of the Fund's environmental, social and governance (ESG) strategy, and to monitor progress on climate charges and initiatives.

The working group provided an update on the engagement activity undertaken by the Local Authority Pension Fund Forum (LAPFF) ¹² on behalf of the Fund. LAPFF is a collaborative body to which the majority of Local Government Pension Scheme funds are members, meaning that it speaks on behalf of approximately £350 billion of LGPS assets.

The working group also provided an update on the progress of the Fund's application to become a signatory to the UK Stewardship Code, and on the development of the scheme member responsible investment survey.

High Level Monitoring Report

The least significant item scheduled to be discussed during the meeting was a high level update on key strategic Pension Fund matters, including progress against the Business Plan, Strategic Objectives Scorecard, and the risk register.

The report explained that the Business Plan was being refreshed to ensure it met the current requirements of the Fund over the next 3 years. It also explained that a Business Planning Day would be held with all officers within the Pensions Team and the Fund's advisors attending to ensure that all actions and requirements were included in the future work plan.

The report went on to explain that the Strategic Objectives Scorecard currently included Administration and Communications only, and that a high number of communication measures were not being reported on because customer satisfaction surveys for members and employers had not been carried out during the past year.

The report also explained that the Fund's risks were categorised as follows:

• Potential financial/data loss or systems downtime due to cybercrime - this was categorised as high risk due to increased threat. Mitigations being put in place included the development of an incidence response plan and supplier resilience checks.
• The increase in inflation which can erode asset values causing cashflow issues - this was categorised as high risk given the exceptionally high inflation figures over the past year. Mitigations being put in place included the implementation of the investment strategy changes agreed by the Committee in March 2023.
• Poor delivery of administration contracts resulting in poor member experience and potential breaches of legislation/failure to meet SLAs - this was categorised as high risk due to difficulties in implementation of the new contract with Equiniti. Mitigation included regular service review and review of performance against SLAs, and early identification of issues.
• The impact of the McCloud remedy ¹³ on the quality and timeliness of the administration of the Fund - this was categorised as high risk due to resourcing and software issues. Mitigation included dedicated project management from Aon and regular review with Equiniti to monitor progress.
• Service Interruption due to the administration system software upgrade which may impact the ability to effectively administer benefits to members - this risk had arisen due to the Compendia touch migration. Mitigation included robust project management of the transition.

The report also explained that there had been eleven breaches of the law identified since 1 April 2024 relating to late contributions, late remittance advice and leaver breaches of disclosure legislation. These were rated as low risk.

Generally, only breaches rated red might be of material significance to the Pensions Regulator and hence reportable albeit they are considered on their individual merits. ¹⁴