The meeting was scheduled to include updates on the performance of the Fund’s investments and service delivery, and also on the Government’s latest consultations. Also scheduled for consideration were the outcomes of an interim actuarial valuation and a review of risk management strategies.

Government consultation on LGPS Reform in England & Wales

The Government is consulting on how the Local Government Pension Scheme (LGPS) is structured and managed. Bath and North East Somerset Council (B&NES) manages the Avon Pension Fund, which is a member of the Brunel Pension Partnership.

The proposals cover three areas:

• Reforming LGPS asset pools: The proposals suggest the eight current LGPS pools be brought closer to a fiduciary manager model, with a suggestion that administering authorities would set their own high-level investment objectives and asset allocation, but then delegate implementation of that strategy to the pools, rather than appointing their own investment managers.
• Boosting LGPS investment in localities and regions of the UK: This would require funds to work with local government to identify suitable local investment opportunities, and to have regard to local growth plans.
• Strengthening governance of both LGPS Funds and pools: The proposals echo many of the recommendations of the 2021 Good Governance Review by The Scheme Advisory Board. These include the requirement to have a Senior LGPS officer and to produce an Administration Strategy.

The deadline for responses to the consultation was the 16th of January 2025. A draft response to the consultation from the Avon Pension Fund is available in Appendix 1 of the LGPS Consultation: Fit for the Future report.

Interim actuarial valuation results

The last full actuarial valuation of the Fund took place on the 31st of March 2022. The next one is due to be completed on the 31st of March 2025. An interim valuation was carried out to assess whether the funding strategy adopted at the last full valuation remains appropriate.

The main changes since the 2022 valuation are:

• Life expectancy: The life expectancy assumptions have been reduced, based on the latest models from the Continuous Mortality Investigation. This reduces the size of the Fund’s liabilities, which are the amount it needs to pay out in pensions, and therefore reduces the amount it needs to collect in contributions.
• Discount Rate: The discount rate is an assumption about the return the Fund expects to make on its investments. This has increased since the last valuation, reflecting higher expected returns from investments. This has the effect of reducing the size of the liabilities and therefore reducing the contribution rate.
• Inflation: The assumed rate of long-term inflation has reduced from 3.1% to 2.5%. Because pensions in payment are increased each year in line with inflation, a lower assumed rate of inflation reduces the size of the liabilities, because the increases to pensions in payment are assumed to be lower.

The interim valuation shows the funding level, which is the size of the Fund’s assets as a proportion of its liabilities, has increased from 96% in 2022 to 103% at present. The improvement is driven primarily by the increase in the discount rate and the change in demographic assumptions.

Review of Risk Management Strategies

The Committee reviewed the Fund’s Risk Management Framework. This includes its Liability Driven Investment Strategy¹, which aims to reduce the impact of changes in interest rates on the value of the Fund’s liabilities, and its Equity Protection Strategy, which aims to protect the value of the Fund’s investments in the event of a fall in the value of the stock market.

The strategies were found to be performing in line with the Fund’s strategic objectives. However, an issue has arisen with the Fund’s collateral position. Collateral is cash and gilts that are held by the Fund to support its derivative strategies². The Fund is currently holding a large amount of collateral, which is materially above the level at which the manager would require additional collateral.

The Committee considered a number of options for the most efficient use of excess collateral, including reactivating the interest rate trigger framework, switching synthetic Paris-aligned equities into the physical Brunel Paris-aligned fund, and continuing to hold excess collateral as cash. However, they resolved to take no immediate action, pending the outcome of the full Investment Strategy Review, which was scheduled to be completed during the first half of 2025.

Foresight Group Appointment

The Fund has a target allocation of 3% of its assets to local impact investments. These investments aim to deliver both financial returns for the Fund, and social and environmental benefits for the local community. The majority of this allocation was to be split between three core sectors:

• Renewable Infrastructure
• Affordable Housing
• SME Funding

Wessex Gardens, a £330m portfolio of 17 solar assets, has already been selected as the Renewable Infrastructure investment, and a £50m commitment has been made to Octopus Real Estate to fund Affordable Housing.

The Investment Panel considered a proposal to appoint Foresight Group, a private equity investment manager, to manage the Fund’s SME Funding strategy. This strategy would seek to stimulate local economic growth through business innovation and the creation of local jobs, through private equity style investments in local SMEs.

The Panel recommended that the appointment be approved, pending completion of due diligence, suitability, tax and legal advice.

Performance of Investments

The Fund’s assets stood at £6,034m on the 30th of September 2024 and delivered a net investment return of 3.5% over the quarter.

GMP Reconciliation

The Fund was scheduled to consider the results of a reconciliation exercise that was undertaken to compare the Fund’s records on Guaranteed Minimum Pensions (GMPs) with records held by HMRC. A GMP is a minimum pension that is guaranteed to be paid to members of pension schemes that contracted out of the State Earnings-Related Pension Scheme (SERPS)³

The reconciliation identified a number of discrepancies between the Fund’s records and HMRC’s records, a significant number of which related to historic overpayments of GMPs. The Committee was scheduled to resolve not to recover these overpayments.

Pension Fund Administration

The Pensions Operations Manager was scheduled to provide a verbal update on progress against service level agreements and to update the Committee on recruitment of key staff.