The Head of Finance presented the Authority’s Medium Term Financial Strategy 2024/25 to 2026/27 for consideration and approval.

The key points to note were:

·         In 2022/23 investment costs returned to similar levels seen in 2020/21, this is positive and shows the assets are performing well. The Authority utilise a lot of expensive investment assets as part of the Investment Strategy which is why we are at the top end of expenses for investments.

·         CEM Benchmarking work showed that the cost of our asset mix is below the benchmark, therefore despite costs looking high when taking into account the alternatives we are using, the cost is relatively low in comparison to other funds.

·         For the operational budget most of the changes were accounting for the 4% inflation in 2024/25. Moving forward we expect inflation to move to 2%, however this is very volatile and one of the challenges the Authority face when setting the medium-term financial strategy.

·         Investment Management expenses are expected to increase due to cost changes at BCPP and we expect that this year we will see an increase in investment management costs.

Members questioned whether the political issues in the Middle East would affect any of the investments the Authority currently hold.

The Director responded that any forecast has a range of uncertainties and are always based on assumptions, therefore it is important to look at how the risk is managed, the Authority’s investment strategy is designed to expect less volatility than the average and this is how we manage that risk. Political uncertainty will affect the value of our assets, however the aim of the strategy is to ensure that when we are hit by something like this, it has less of an impact than the average.

Members further probed around whether fund managers will conduct modelling around these worst-case scenarios where political uncertainty is involved and additionally are they modelling other scenarios such as a rapid transition in terms of climate.

The Director responded that fund managers do conduct climate scenario modelling as part of reporting under the TCFD Regime. With regards to political events this is less likely and instead fund managers look at how the political event will affect the stocks we hold and reposition the portfolio to take this into account. 

Members raised that the Investment Strategy is very reliant on alternatives and questioned whether this is likely to remain the same in the foreseeable future and if there would be years like 2021/22 in terms of investment costs where we would be considerably away from the median of other LGPS.

The Director responded that the strategy would continue to be reliant on alternatives now and in the future and that it can be difficult to compare costs due to not all funds reporting as they should causing the comparison to be skewed. Work is being done to improve this on a national level and this will allow us to see improvements on the comparison and it has also been suggested that performance fees would be separated from base fees when reporting which would further contribute to this improvement.

Overall, the Authority is paying less than the benchmark to implement our strategy, but we will not become complacent and will continue to evaluate cost.

Members sought assurance on the Pension Fund Forecast Graph which showed an increase year on year, highlighting this was nice to see but do we think this is a realistic forecast.

The Director responded that the forecast is based on the fund growing in line with the actuarial long-term assumptions. This assumes that we will make returns in line with what the actuary tells us we need to make, and in the long term historically we have achieved this however this can swing on a year-by-year basis. At present we are likely to end the year close to £10.7billion which is reasonably close, dependent on how the year finishes over the next six weeks.

The Head of Finance followed up that the Actuary assumes 4.5% and over the last 30 years we have achieved close to 9% so despite this not being year on year, overall we did outperform this significantly so we could be more optimistic with the figures but have gone with the actuarial percentages.

RESOLVED: Members approved the Medium-Term Financial Strategy 2024/25 to 2026/27.