The Pension Board of Tower Hamlets Council met on Monday 13 June 2022 to discuss the actuarial valuation of the pension fund, review the fund's business plan, and address various operational risks and administrative matters. Key decisions included the approval of the actuarial assumptions for the upcoming valuation and the adoption of the fund's business plan for 2022-2025.

Actuarial Valuation Assumptions

The board received a presentation from Douglas Green, an actuary from Hymans Robertson, regarding the actuarial valuation of the Tower Hamlets Pension Fund. The purpose of the actuarial valuation, conducted every three years, is to ensure the fund has sufficient assets to meet its future benefit obligations to over 20,000 members. Mr. Green explained the complex process of making assumptions about future investment returns, inflation (CPI), salary increases, and longevity.

The board was informed that the actuarial assumptions for the valuation, which underpins future contribution calculations, were being reviewed. Key financial assumptions discussed included:

• Investment Return (Discount Rate): The fund's assets are projected to deliver a return above the risk-free rate. The prudence level for this assumption has increased from 65% to 68% since the last valuation, suggesting a slightly higher expected return or a greater likelihood of achieving a specific return.
• CPI Inflation: The assumption for future inflation has been revised upwards slightly, reflecting a short-term spike followed by a return to longer-term levels. This is crucial as pension benefits are linked to CPI.
• Salary Increases: While a high-profile assumption, its financial impact is diminishing due to the shift from final salary to career average revalued earnings (CARE) pension schemes. The assumption for long-term pay growth has been set in line with CPI.

Demographic assumptions, such as longevity, were also discussed. The fund uses data from Club Vita, a large database of longevity statistics, to estimate life expectancy at an individual member level, considering factors like postcode and gender. The impact of COVID-19 on longevity was noted as too early to definitively assess, with the current proposal being to largely ignore the mortality data from the past two years due to potential skewing effects.

The board was assured that the actuarial process is robust and that the assumptions are developed through a collaborative discussion between the actuaries and the fund officers, with the final approval resting with the Pensions Committee. The board's role is to scrutinise the process rather than approve the assumptions themselves.

ESG Voting and Engagement

Miriam Adams, Interim Head of Pensions and Treasury, presented a report on the Environmental, Social, and Governance (ESG) voting and engagement activities undertaken by the Tower Hamlets Pension Fund's investment managers and the Local Authority Pension Fund Forum (LAPFF) for the quarter ending March 2022.

The report highlighted that voting rights are primarily exercised at the pooled or underlying manager level, rather than at the fund level, due to the move to a pooled structure. The fund works with London CIV to ensure its views are represented. Notable engagements by LAPFF included meetings with companies such as Novatis, Roche, AstraZeneca, Sanofi, Nestlé, and Starbucks. The engagement with Starbucks focused on the rights of workers to bargain collectively.

John Gray, a Pension Board member, was noted as the Vice Chair of the Social Economic Diversity Task Force's advisory board. The report also touched upon the conflict in Ukraine and Russia, with LAPFF engaging with companies on human rights and governance issues, and the ongoing engagement with companies on the UN list for business in the Occupied Palestinian Territories.

Specific voting alerts were highlighted for Apple and Rio Tinto. While the fund had minimal direct investment in Rio Tinto, LGIM (Legal & General Investment Management) had investments in Apple's low-carbon portfolio. The report detailed discrepancies between LAPFF's voting recommendations and LGIM's voting decisions, with Miriam Adams awaiting an explanation from the manager.

Business Plan 2022-2025

The board was asked to approve the fund's business plan for 2022-2023 to 2024-2025. Miriam Adams explained that this is a high-level document outlining key tasks and objectives, in line with the Good Governance 3 recommendations from the Scheme Advisory Board.

A significant point of discussion was the projected increase in administration costs and investment management expenses, particularly the growth in costs related to renewable energy investments. Miriam Adams explained that this increase is due to capital calls for private market funds, such as renewable energy and potential affordable housing investments, which carry higher management fees. The committee is also considering reducing its allocation to equities and commercial property to increase investment in these more expensive, but potentially higher-return, asset classes. The board acknowledged the substantial increase in costs but also noted the potential for higher returns from these asset classes.

Risk Register

Miriam Adams provided an update on the fund's risk register. Several risks were moved from 'amber' to 'green', indicating improved management:

• G4: Appropriate objectives are not agreed or monitored: This risk has improved with the adoption of the business plan, which will be used to track objectives.
• G7: Legal requirements and/or guidance are not complied with, leading to financial loss or reputational damage: This has also moved to 'green' with the implementation of the business plan.

However, the AON governance review is still ongoing and expected in September 2022. Risks related to data issues with employers such as Mulberry Academy, Tower Hamlets Homes, and Eastern Homes remain a concern, with the team continuing to upload data manually while awaiting employers to fulfil their data submission obligations.

The Climate Change Impact risk (F12) is expected to improve as the fund progresses towards its net-zero pathway, which was approved by the committee and presented to the board.

A significant portion of the discussion focused on iConnect data issues and the ongoing efforts to resolve historical data mismatches. Nisar Visram, Director of Finance, Procurement and Ordering, explained that while fixes are being implemented for future data flows, the reconciliation of historical data is a complex and time-consuming exercise. The board expressed frustration with the slow progress and the long-standing nature of these issues, emphasizing the need for a clear resolution timeline.

Administrative Report

Miriam Adams presented the administrative report, highlighting membership numbers and the impact of the council's auto-enrolment staging date in April, which led to a significant number of employees being enrolled and subsequently opting out.

The report noted progress on workflows, with draft workflows received from the system provider and currently undergoing testing. This is expected to improve reporting capabilities, including SIGFAR reporting.

An update on pension tax indicated no new admissions to the fund, but several were in the process of finalisation.

A recruitment and retention survey conducted by the LGA revealed that recruitment and retention challenges are widespread across LGPS funds. Discussions are ongoing regarding potential LGPS-owned training programs.

The board discussed the reasons for staff opting out of the scheme, with affordability being a primary concern. The 50-50 option and the Sharia compliance of the LGPS were mentioned as ways to encourage membership. The board also noted the importance of ensuring employees understand the benefits of LGPS membership, including life insurance.

David Thompson raised concerns about the manual data cleaning for some employers, questioning whether the council is undertaking this work for free. He also inquired about the annual allowance breach risk and the fund's role in warning members, noting that the fund is not authorised to provide financial advice. Miriam Adams clarified that the fund provides statements to high earners and offers workshops, but the ultimate responsibility for tax liability lies with the scheme member.

The report also indicated ongoing challenges with transfers in, as the fund is dependent on other LGPS funds to provide estimates and monies, which is being hampered by data and staffing issues at other organisations.

The meeting concluded with the board noting the improving performance in tasks outstanding and the inclusion of SIPFA targets in the workflow areas.