The Pensions Advisory Panel meeting included a discussion of the 2023-2024 Pension Fund Statement of Accounts, the Asset Allocation and Net Zero Strategy Update for the end of 2024, and the Panel was to receive a verbal update on the progress being made in the pooling of London Local Government Pension Scheme funds.

Pension Fund Statement of Accounts 2023-24

The Panel was to note the 2023-2024 Pension Fund Statement of Accounts. KPMG¹ has granted an unqualified opinion on the council and pension fund statement of accounts for 2023-24.

The key adjustments to the accounts that were identified during the audit related to Level 3 investment valuations. Between the accounts being prepared and the commencement of the audit, more up to date valuation information became available for Level 3 investments held by the Fund. The report explains:

These were deemed to be an adjusting event and were therefore adjusted in the pension fund accounts.

Asset Allocation and Net Zero Strategy Update - 31 December 2024

The report pack contains the Asset Allocation and Net Zero Strategy Update for the end of 2024. The market value of the fund increased from £2,271.9m to £2,329.1m during the quarter, an increase of £57.2m. The report pack shows the breakdown of assets managed by each of the fund managers, and notes that

The majority of the (minor) changes in over and underweight positions are linked to market movements, where there has been ongoing strong absolute performance in equity markets.

Nuveen, the fund manager for the direct property holdings, purchased a property in Sidcup on 23 December 2024. Drawdowns from private market investments exceeded distributions in the quarter by £5m. In addition to this, Nuveen required an additional £7.5m for the purchase of the property in Sidcup. Because drawdowns and property purchases exceeded distributions, several liquid assets were sold to top up cash balances.

Under new government guidelines, Local Government Pension Schemes are now required to declare what proportion of their total portfolio is allocated to UK assets.

This is in line with both the previous and new government’s aim to increase pension fund investment in the UK.

The report provides a breakdown by asset class of what proportion of the fund is estimated to be invested in the UK, and finds that it was 32.4%.

The total fund return for the year to the end of December 2024 was 7.8%, which was below the benchmark return of 12.0%.

Over 3 years, the Fund returned 2.8% p.a. compared to a benchmark return of 5.8% p.a., a difference of -3.0% p.a. An annualised return of 8.3% since inception means that the Fund has exceeded, by some margin, the 2022 actuarial valuation’s assumed investment returns of 4.05% p.a.

Northern Trust, who will replace JP Morgan from 1 April 2025, were awarded the custody contract for the fund during the quarter.

The Panel were to be given a verbal update on the progress being made in the pooling of Local Government Pension Scheme funds.

Update on the Local Pension Board

The report pack includes an update from Mike Ellsmore, Chair of the Local Pension Board, on the meeting held by the Board on 22 January 2025. The Pensions Investment Manager presented a case study of the process of increasing the fund’s investment in Index-Linked Gilts, which the board discussed.

The case study included an overview of the Fund’s responsible investment policies and strategic asset allocation.

The Pensions Administration Manager provided an update on progress made on the Pension Service’s IT systems, and the board discussed

the ongoing work in relation the National Pension Dashboard (NPD) and the issuance of annual benefit statements (ABS)

The Chief Investment Officer updated the board on the breaches log.

One of the key points discussed was failure by some employers to pay their contributions.

Two admitted bodies were reported to the Pensions Regulator for failing to make their contributions. The board also discussed the action tracker document, which was prepared by the Fund officers in response to Barnett Waddingham's review of the fund's readiness to comply with the requirements of the General Code.

The board were given an update on current issues in the Local Government Pension Scheme, including the separation of the pension fund accounts from the accounts of the administering authority, and a guarantee provided by the Department for Education to ensure equal treatment of members of Further Education bodies in relation to actuarial valuations.

The forward plan and training plan for 2025-2026 were presented for the board’s consideration.

Pension Services – admin/ops update

The report pack includes an update on the pensions administration and operational function. A number of vacancies in Pension Services remain unfilled, and

we will be working with Council HR over the coming months to try and recruit these positions.

The user interface of both the Universal Pensions Manager (UPM) Employer Hub and Member Portal are being improved, and new online calculators are being introduced. The “connect by” date for the National Pension Dashboard (NPD) remains 31 October 2025.

Planning meetings for the 2025 round of Annual Benefit Statements (ABSs) have taken place, and a number of employer planning sessions were scheduled to be held. The re-branded Southwark Pension Fund website has gone live.

Following a “review of market conditions”, Strictly Education contacted Southwark schools confirming their EduPeople payroll and pensions service would be discontinued from 1 April 2025.

Whilst Strictly Education are committed to providing year-end returns for 2024/25, and a transition support team to assist schools with any new payroll providers, this poses a considerable risk to the Southwark Pension Fund (i.e. the LGPS) and the Teachers’ Pensions Scheme.

The report summarises the complaint management activity during the quarter, finding that there were two ongoing complaints to the Pensions Ombudsman against an employer, and three open complaints against the Pension Fund itself.

The report concludes by noting that

Recruitment and retention of key staff with the necessary skills is critical to the achievement of all future plans, as is succession planning.

Compliance with the General Code & Action Plan following Barnett Waddingham review

The Panel was to consider a report on Southwark Pension Fund’s compliance with the revised General Code of Practice (“the Code”). The code came into force on 28 March 2024, and following its release, the fund officers engaged Barnett Waddingham to carry out a review of their compliance with the new requirements. The review found that

Overall, the review found that the Fund is in a very good position in terms of already complying with requirements of the Code. The Fund has strong internal controls, processes, policies and procedures in place for majority of the requirements of the Code.

Key areas where additional work is required to align with specific requirements of the Code and industry best practice were listed. These included the process for identifying and managing key risks, the process for engaging with advisers and service providers, checks and controls relating to the investment of contributions received, and the development of formal documentation and processes relating to transfers out of the fund. An action plan has been prepared to address the gaps identified.

Carbon Footprint Update – 31 Dec 2024

The report pack includes the Carbon Footprint Update for the end of 2024. The results show a decrease in the carbon footprint of the fund for the quarter. Compared to the previous quarter (30 September 2024), the Weighted Carbon Intensity (WCI) has decreased by 9%, and since September 2017, the Fund has reduced its WCI by 84%.

The change is attributed to a variety of factors, including:

• A decrease in WCI for the BlackRock and LGIM developed market low-carbon equities driven by market movements
• A 20% decrease in WCI of the Robeco fund and a 4% decrease in the WCI of the LCVI-CQS fund
• An improvement in the WCI for the Nuveen fund, driven by decarbonisation-focused initiatives that have been implemented across the portfolio over the past years
• An increase in WCI for the index-linked gilts, primarily on account of a drop in UK's reported GHG emissions² and simultaneous increase in its nominal GDP figures

During the quarter, the holdings in the Zero Carbon, Low Carbon and Reduced Carbon investments were ~92% of the total investment.

Update on Engagement and Voting activity – 31 Dec 2024

The report pack includes the Update on Engagement and Voting activity for the end of 2024. It outlines the key engagement and voting themes across the Fund’s listed assets for both segregated and pooled mandates, and summarises the engagement and voting activity undertaken by each of the fund managers.

The Local Authority Pension Fund Forum (LAPFF)³ sent a letter to 94 FTSE 100 companies requesting details about their approach to or operations in conflict-affected and high-risk areas.

Comgest, Newton, LGIM and Blackrock all provided updates on their voting and engagement activities.

The Fund officers have now agreed a way forward with BlackRock and LGIM on ‘pass-through’ voting for the pooled equity assets.

The fund officers agreed to implement Blackrock's Decarbonisation voting policy to all equity holdings in the ACS World Low Carbon Equity Tracker Fund, and the Glass Lewis Climate Policy to FTSE350 and S&P500 companies held in the LGIM GPEW fund.

The pass-through voting mechanism agreed with both BlackRock and LGIM is more climate-aligned compared to the legacy/standalone voting policy. This is aimed to help drive our net-zero ambition and focus across the pooled equity mandates.

Advisers’ Updates – Quarter to December 2024

The Panel was to note the investment reports from David Cullinan and Aon.

David Cullinan’s Investment Report

Mr Cullinan's report provides a summary of global markets and the performance of the Local Government Pension Scheme funds over the quarter. He then gives a breakdown of the performance of Southwark Pension Fund’s individual investments.

The Fund returned 2.5% over the period, but fell short of the benchmark aspiration.

The Fund returned a solid 7.8% over the full year but remained some way behind the benchmark

Whilst the three-year number was subdued both in absolute and relative terms, long-term returns for the Fund remained solid, ahead of both elevated inflation and actuarial assumption, but behind benchmark.

The near-term market outlook is quite uncertain. Central banks are expected to cut rates as inflation eases, but not to the ultra-low levels of the last decade. US growth is expected to be resilient, while Europe and the UK may see more subdued growth. The new US administration’s focus on a domestic agenda, global politics, and potential trade tariffs will add to the uncertainty. It is likely to remain a challenging environment for both our own investment strategy and the managers we employ to manage the assets.

Mr Cullinan's report explains that active equities, property, and the majority of the ESG priority portfolios performed poorly in the quarter.

Over the quarter, the Fund underperformed by 0.5%.

The aggregate over/underweights with respect to the target benchmark (“asset allocation policy” in the table) had a positive impact over the period, with the underweighting to poorly performing index-linked proving helpful. As we’d expect, selection within asset class determined the outcome. In weighted terms, the performance of our active equity and property managers had the biggest negative influence.

Mr Cullinan then discusses the performance of Newton, Comgest, and Nuveen in detail. He explains that Newton, the active global equities fund manager, underperformed by more than 3% over the quarter, due in part to Trump’s election victory. He says:

Newton’s overarching outlook is more measured than in previous quarters. They hint on one hand that the dominance of US technology companies (that have driven recent strong index performance) may be coming under increasing scrutiny and on the other, that geopolitical instability, new policies from the Trump administration, and the potential impact of stimulus measures in China represent uncertainty for investors. Let’s hope this will provide fertile hunting ground for active stock-pickers!

Comgest, the active emerging market equity fund manager, underperformed by 1.5%, making it their seventh consecutive quarter of underperformance.

Since inception returns have been disappointing, with the portfolio outperforming the index in only three of the thirteen quarters measured. In return terms, the portfolio has achieved a return 4%p.a. behind the index. In impact terms, this equates to a 0.2%p.a. reduction in the Fund’s bottom line.

Mr Cullinan notes that the residential and opportunistic property portfolio struggled, with all of the fund managers failing to hit benchmark, apart from Frogmore, which returned -64%. Nuveen, the manager of the Core Property portfolio, performed poorly over the last three years.

The three-year return reported by Nuveen was a -0.8%p.a. reflecting the weakness in the sector over this period. This was ahead of the property-based benchmark over the same period which returned -1.6%p.a.

Mr Cullinan expresses optimism about the performance of Nuveen over the longer term.

There is some optimism in Nuveen’s latest report, and they remain confident that the current strategy and assets will exceed the performance objective over the longer-term. The portfolio has a very clear strategy which includes a focus on the long-term and improving each of the portfolio’s holdings sustainability credentials. As I commented last quarter, this aligns well with the Fund’s overarching investment strategy.

Mr Cullinan then reviews the performance of the ESG priority allocation, and both Robeco and LCIV-CQS’s Global Credit portfolios.

Aon’s Investment Report

Aon's investment report gives a breakdown of the performance of the individual funds and the total fund over the last quarter, 1 year, 3 years, 5 years, 10 years and since the fund's inception.

LGPS Pooling – verbal update

The Panel was scheduled to receive a verbal update on the progress being made in the pooling of London Local Government Pension Scheme funds.