The Pensions Committee of Tower Hamlets Council met on Thursday 25 November 2021 to discuss the pension fund's risk management, investment strategies, and audit reports. Key decisions included the approval of the risk management policy and noting the detailed risk register. The committee also received updates on ESG engagement, training, and heard presentations on affordable housing as an investment class.

Pension Fund Risk Management and Audit Reports

The committee received an update on the pension fund's risk management policy and the quarterly risk register. Miriam Adams, Head of Pensions and Treasury, presented the risk management policy, which outlines the aims, objectives, and processes for managing risk within the fund, including the identification and analysis of risks, and the inclusion of climate change risk. Councillor Andrew Wood raised concerns about the prominence of staff retention as a risk, which Miriam Adams acknowledged and stated would remain a red risk until recruitment and vacancies were addressed. The committee approved the risk management policy and noted the detailed risk register.

Deloitte, represented by Jonathan Gooding and James Ross, provided an oral update on the audits of the pension fund's 1819 and 1920 financial statements. They confirmed that the audits were progressing well, with 1819 substantially complete and 1920 well underway. A presumed audit risk of management override of controls was identified, consistent with other audits. Councillor Andrew Wood inquired about a reported £7 million lower funding level than estimated by the in-house actuarial team, with £8 million attributed to experience since 2016. Jonathan Gooding clarified that this figure had been revised to £1.8 million after further consideration, reflecting that the experience changes had been incorporated. The committee noted the comments and expressed appreciation for the work of Deloitte and the council's officers.

Investment in Affordable Housing

The committee received educational presentations on affordable housing as an investment class from two firms: PGIM Real Estate, represented by Andrew Davey and Paul Dennis-Jones, and CBRE Investment Management, represented by Alice Wilcox, Andrew Davey, and Ben Fruman. Both firms highlighted the significant supply-demand imbalance in the UK housing market and the growing need for affordable housing.

PGIM Real Estate presented their UK affordable housing fund, which targets a return of 6% per annum, with 4% from income distribution. They discussed various strategies for accessing the market, including development and stabilised assets, and noted the importance of ESG factors. Councillor Rachel Blake raised concerns about the accuracy of terminology used to describe different housing types and the percentage of market rents. PGIM agreed to adjust their slides to reflect the wider variety of terminology and market conditions across the country. Councillor Mufeedah Bustin questioned the returns in relation to maintenance costs, fire safety, and cladding, and the political risks for councils investing in such funds. PGIM explained their due diligence processes and how they mitigate risks, focusing on new builds and partnering with robust registered providers.

CBRE Investment Management also presented their approach, highlighting their fund's investment in areas with low affordability levels and social need, including existing investments in Tower Hamlets. They outlined options for local investment, such as co-investments and sidecar investments, alongside their main fund. The fund targets a 6% return, with 4% from income, and aims to provide a sustainable housing solution with a focus on additionality, building new homes. Councillor Mufeedah Bustin inquired about the fund's investment in specific blocks within mixed-use developments, and CBRE confirmed they invest in single blocks for legal and liquidity purposes. Councillor Rachel Blake raised concerns about the risks of being too area-specific, and CBRE suggested a diversified approach through their main fund alongside any local co-investment. Councillor Mufeedah Bustin further questioned how the fund is protected from risks faced by financially struggling housing associations, and CBRE detailed their due diligence on assets and registered providers, as well as their strategy for replacing underperforming partners.

Steve Turner, Senior Investment Consultant from Mercers, summarised the discussions, noting that affordable housing is a suitable asset class for the pension fund, offering both financial returns and social impact. He highlighted that PGIM and CBRE presented different approaches to accessing the market, with investing in a diversified fund being the most straightforward. He also noted that pursuing a more targeted local investment in Tower Hamlets would be viable but more complex. Councillor Rachel Blake inquired about the rules regarding investing in the council's own housing schemes, and Kevin Bartle, Director of Finance, Procurement and Audit, confirmed there were no specific rules against it, provided the investment was prudent and offered suitable financial returns, acting in the capacity of a pension fund trustee.

ESG, Voting, Engagement, and Stewardship

Miriam Adams provided an update on ESG, voting, engagement, and stewardship activities. She explained that due to pooled funds, the council no longer has direct control over voting, which is managed by underlying managers and the London CIV. The London CIV, in conjunction with the Local Authority Pension Fund Forum (LAPFF), engages with companies on issues such as climate change, human rights, and governance. Councillor David Edgar asked about the acceleration of challenges to companies regarding climate change, particularly in light of COP26. Miriam Adams noted increased awareness and reporting against TCFD, with many companies identifying targets to reduce emissions, but stressed that significant work remains to be done by both companies and governments to meet these targets. Councillor Mufeedah Bustin raised a question about no votes recorded for certain companies and whether this was an issue for the fund. Miriam Adams stated she was awaiting a response from the London CIV regarding an unusual situation with Bailey Gifford not casting votes due to electronic processing errors. The committee noted the content of the report.

Training Events

Miriam Adams also provided a brief update on training events, asking members to report any issues with logging onto the Hyman's portal for training.

Other Business and Exclusion of Press and Public

The committee noted that there was no other urgent business. The committee then resolved to exclude the press and public from the remainder of the meeting to discuss exempt information.