Middlesbroughdemocracy.middlesbrough.gov.uk/aksmiddlesbrough/... · TEESSIDE PENSION FUND &...

TEESSIDE PENSION FUND & INVESTMENT PANEL

Date: Wednesday 28 June 2017 Time: 11:00 a.m. Venue: Mandela Room, Town Hall,

Middlesbrough

AGENDA

1. Apologies for Absence

2. Declarations of Interest

3. Minutes - Teesside Pension Fund and Investment Panel - 8 March 2017

Copy of Minutes []

4. Fund Manager's Report (including Transaction Report)

Report [Page 11]Appendix Ai [Page 15]Appendix Aii [Page 17]

5. Investment Advisors' Reports

Report [Page 27]

6. CBRE Property Report

Report [Page 35]

7. Pooling Update

Report [Page 57]

8. Governance Review - Update

Report [Page 85]Appendix A [Page 89]Appendix B [Page 93]Appendix C [Page 95]Appendix D [Page 127]Appendix E [Page 135]Appendix F [Page 149]Appendix G [Page 165]

Appendix H [Page 177]Appendix I [Page 185]

9. Local Investments Update

Report [Page 191]

10. External Audit Plan

Report [01]

11. Member Training Opportunities

Report [Page 217]

12. Investment Performance Report

Report [Page 223]

13. Property Solicitor Tender Outcome

Report [Page 229]

14. Treasury Management Report

Report [Page 231]

15. Custodian Contract Extension

Report [Page 235]

16. MiFID II Update

Report [Page 237]

17. Personal Share Dealing

Report [Page 243]

18. Tender for Property Investment and Managing Agent Service

Report [Page 245]

19. Any other urgent items which in the opinion of the Chair, may be considered.

Bryn RobertsMonitoring Officer

Town HallMiddlesbrough20 June 2017

MEMBERSHIP

Councillors S E Bloundele (Chair), J Rostron (Vice-Chair), C Akers-Belcher, J Beall, J

Blyth, R Brady, D P Coupe, C Massey, L McGloin, J McTigue, G Purvis, J Sharrocks and M Walters

Assistance in accessing information

Should you have any queries on accessing the Agenda and associated information please contact Susan Lightwing, (01642) 729712, [email protected]

Teesside Pension Fund & Investment Panel 8 March 2017

TEESSIDE PENSION FUND & INVESTMENT PANEL

A meeting of the Teesside Pension Fund & Investment Panel was held on 8 March 2017.

PRESENT: Councillors Bloundele, Blyth, Brady, Coupe, G Purvis and Rostron

Other Local Authority Members:Beall, Stockton Borough CouncilHall, Hartlepool Borough Council

OFFICERS: J Bromiley, P Campbell, A Hill, S Lightwing, P Mudd

APOLOGIES FOR ABSENCE were submitted on behalf of Councillors Massey and Walters, P Fleck,A Martin and A Peacock.

DECLARATIONS OF INTERESTS

Name of Member Type of Interest Item/Nature of InterestCouncillor Beall Non Pecuniary Member of Teesside Pension

FundCouncillor Brady Non Pecuniary Member of Teesside Pension

FundCouncillor Rostron Non Pecuniary Member of Teesside Pension

FundF Green Pecuniary Advisor to Teesside Pension

FundP Moon Pecuniary Advisor to Teesside Pension

Fund

1 MINUTES - TEESSIDE PENSION FUND AND INVESTMENT PANEL - 7 DECEMBER 2017

The minutes of the meeting of the Teesside Pension Fund and Investment Panel held on 7 December 2016 were taken as read and approved as a correct record.

2 FUND MANAGER'S REPORT

A report was presented to inform Members how the Investment Advisors' recommendations were being implemented. Information was provided with regard to stock selection strategies, including a detailed report on transactions undertaken. An independently produced valuation of the Fund's assets was also presented.

It was highlighted that the Investment Advisors continued to favour growth assets over protection assets. The total value of all investments, including cash, was £3,682 million, compared with the last reported valuation as at 30 September 2016 of £3,601 million. At the beginning of the financial year the asset valuation was just over £3 billion and there had been an increase of approximately 20% to date which was credit to the Investment Advisors who had stuck with the allocation plan through periods of relatively low growth. With regard to the asset allocation it was highlighted that the Fund was considerably underweight its customised benchmark and should look to increase its allocation to this assetclass if suitable investment opportunities were available.

1 Page 1 of 246


It was highlighted that the Transaction and Monthly Valuation reports were currently provided online and in hard copy to all Panel Members. The Chair suggested that in future only the Transaction Report for the period would be produced in hard copy.

ORDERED as follows: 1. that the report was noted.2. in future, the Monthly Valuation would only be available to Fund Members online and not inhard copy.

3 INVESTMENT ADVISORS' REPORTS

A report was presented to update Members with the current capital market conditions, and set an appropriate short term asset allocation to best take advantage of the conditions.

The Panel's Independent Investment Advisors provided an update to Members on current global economic, political and market conditions. The Advisors' recommendations were set out in reports attached as Appendices A and B to the submitted report.

Both Advisors continued to favour growth assets over protection assets. Bonds did not meet the actuarial requirements for the Fund at the current yield levels and should continue to be avoided at around these levels unless they were held as a short term alternative to cash. Cash should continue to be built up as divestments from other markets and invested when opportunities allowed.

There was consensus that equity markets had been volatile, with additional volatility in currency markets, which had been beneficial to the Fund with its current weighting in this asset class. It was proposed that the short term asset allocation was amended by increasingthe UK range from 30 to 36 and the Overseas range from 44 to 50.The Advisors expressed caution over Europe into this year's elections in key European countries.

Both Advisors continued to favour further investment into direct property on an opportunistic basis where the property had a good covenant, yield and lease terms.

ORDERED as follows that:

1. The report was noted.2. The proposed short term asset allocation was approved.

4 CBRE PROPERTY REPORT

The Fund's Property Advisors submitted a report that provided an overview of the current property market and informed Members of the individual property transactions relating to the Fund.

CBRE predicted total UK Real Estate investment for 2016 was £49 billion, which was down 30% on 2015. It was anticipated that 2017 would be lower, albeit the UK's economic fundamentals remained strong. Transaction levels had remained subdued in the light of the uncertain political outlook. Sellers were deciding to wait out the currency uncertainty rather

2 Page 2 of 246


than accept a lower price. Foreign investors holding UK assets had also lost out to the currency weakness, rather than being beneficiaries. The outlook in retail for 2017 looked set to be challenging due to an increase in costs and a likely decrease in consumer spending. The Rates revaluation would affect retailers, particularly in London, where some rates were set to increase by over 100%. The National Living Wage would also add to retailers' costs and it was expected that a proportion of all these increased costs would be passed on to consumers. The CBI forecast that consumer spending growth would fall from 2.7% in 2016 to 1.2% in 2017. Inflation was predicted to be as high at 4% by the end of this year. With regard to retail investment, the year ended with competitive bidding and good interest for prime and best secondary stock - high street, retail parks and shopping centres. Interest in secondary and tertiary stock was lower and it was anticipated that this trend would continue for the foreseeable future. The lower exchange rate encouraged continued interest in prime assets from foreign investors and sovereign wealth funds. In the industrial sector the continued shift from the high street towards E-commerce had created a growing demand for distribution space. There was now a severe shortage of prime vacant stock, particularly units of over 200,000 square feet in London and the Golden Triangle. It was predicted that low interest rates and the depth of investor and occupier demand would ensure that prime yields remained low, with the potential for further compression given the increasingly positive rental growth statistics. Within the regional office sector, where there was a balanced occupier demand/supply equation, the investment markets were stable and fairly priced stock would sell, albeit the investor demand was nowhere near as strong as it was for retail and industrial assets. There might be opportunities offering good value, particular whilst there was a lack of prime stock inindustrial and retail. In conclusion, the availability of primary quality stock in the three principal use sectors was limited. It was anticipated that there would be competitive bidding for such assets which would buoy pricing and then valuation yields. CBRE would continue to seek well located assets, in good physical condition, well-let to good covenants and focus on those areas where underlying fundamentals would lead to rental and capital growth in the short and medium terms. CBRE would also continue to seek stock which had strong capital protection qualities. With regard to portfolio activity, the Fund sold its asset in Loughton, Essex for £12.3 million, representing a Net Initial Yield of 3.46% and a premium asset to value of 29%. The Fund alsocompleted on the acquisition of a single let distribution warehouse for £15 million. It was confirmed that the arrears on the three accounts highlighted on page 7 of CBRE's report had now been collected.

In relation to the Asset Management Commentary at page 20 of the report, it was noted that terms had now been agreed in relation to Old Brompton Road, the ongoing rent review negotiations listed had been concluded and the lease re-gear in Colchester had also been completed.

ORDERED that the report was noted.

3 Page 3 of 246


5 LOCAL INVESTMENTS - UPDATE

A report was presented to update Members of the Investment Panel on progress made with local investments.

Discussions had taken place with CBRE regarding their assistance in local investments in other parts of the country, using LGPS Funds. The process they had adopted in the past fitted in the protocol of using their expertise after the initial assessment was completed by theFund and CBRE making a recommendation back to the Fund once more detailed terms of the investment and due diligence was completed.

Additional meetings had taken place with other potential investment/asset management firmswho might or might not be able to assist both the Fund and local public bodies to facilitate local investments in the Tees Valley area. These were at an early stage and needed further development.

The Fund had carried out some early stage discussions with the Tees Valley Combined Authority (TVCA), with further discussion scheduled. The TVCA was working on its own protocol to enable it to present potential investment opportunities to the Fund. Further progress was anticipated in the near future.

ORDERED that the report was noted.

6 LGPS INVESTMENT REFORM (POOLING ASSETS) UPDATE

A follow up report on LGPS Investment Reform was presented to inform Members of the Teesside Pension Fund and Investment Panel (the Panel) of the latest developments in setting up the new Pool, BCPP (Border to Coast Pension Partnership). The sub group looking at the Operating Model had tendered for tax advisors (Deloitte), been in dialogue with Funds and the Independent Advisors/Consultants to set the asset allocation template and was in the process of tendering for advice for procurement of the new Depository and Asset Servicer. The people sub group had tendered for and contracted a recruitment consultant (Odgers andBerndtson) to assist with creating the remuneration package for, and recruiting, the senior executives and non-executives of BCPP. Preparations had started to search for suitable premises in Leeds and the TUPE of existing staff. At the Member sub group held on 31 January 2017, the outline remuneration package for theexecutives and non-executives for BCPP were discussed. The outline, draft packages, which required the agreement of each Fund, were as follows: Executive posts:

● Chief Executive up to £250,000 (flexible package).● Chief Operating Officer/Chief Finance Officer up to £210,000 (flexible package).● Chief Investment Officer up to £210,000 (flexible package).

There was no bonus/PRP and no LGPS membership for the above posts. It was clarified that

4 Page 4 of 246


the postholders would be independent of BCPP. If it was not possible to recruit an appropriate candidate to these posts the matter would be returned to the Member sub group. The post of Risk Officer/Compliance Officer still required consideration. Non-Executive posts:

● Chair up to £40,000.● 2 x Non-Executive Directors up to £20,000.

The sub-group for Governance had procured legal advice from Eversheds LLP for BCPP andSquire Patton Boggs (SPB) LLP for each Fund. Eversheds LLP had prepared the key documents required for the Pool to function with SPB LLP reviewing on behalf of the Funds. These documents were almost at a state of agreement for all Funds. A standard report had been prepared for each administering authority to obtain authority fromeach partner Council to set up the Joint Committee to oversee the investment activities of theBCPP and for each Council to acquire the required shareholdings. The Fund's report was presented to full Council on 15 February 2017 and the recommendations were agreed. All reports would be presented to the administering authorities of each BCPP partner before the end of March and full Joint Committee and shareholder meetings to be held in April 2017. Member representatives from other local authorities requested that a report summarising the current position on the pooling arrangements was provided for local authority employers. At one meeting of the BCPP Partners it was suggested that the Joint Committee should allowthe Trade Unions to participate as non-voting Members and represent Scheme Employees. Their decision to put in place the governance arrangements to create the Joint Committee was postponed to a meeting late in March 2017, after gauging opinion from the other BCPP Partners. The Chair reported that lengthy discussion had taken place in respect of this issue and a unanimous decision had not been reached. A transition plan was in development to identify and mitigate the risks to the Fund of pooling the investment of its assets with BCPP. The key risks identified to date were to staffing, assets and governance and accounting. The staff currently managing the Pension Fund worked mainly in the Loans and Investment section, with pension administration services outsourced to Kier Business Services and some of the accounting function carried out by the Council's Finance section. All the staff in the Loans and Investment section were listed for TUPE (Transfer of Undertakings (Protection of Employment). If those staff moved to BCPP under TUPE, the Fund would not have sufficient staffing resources to manage the activities ofBCPP and the legacy assets not transferred (eg cash, property etc), service the Pension Board and Investment Panel, monitor the activities of pension administration, and, key parts of the Fund's Report and Accounts would not be completed. In addition, as the Service in Middlesbrough could effectively close and move to Leeds, staff were looking at protecting their own futures and this had detrimentally affected moral, with some key staff having already left the service leaving gaps in skills and knowledge to run the section. The transition plan would look at creating an effective strategy to identify the immediate and future (post-pooling) requirements of the Fund and mitigate the above risks. The key risks to assets was the continued management of existing investment assets, the

5 Page 5 of 246


identification of assets to transfer to BCPP and the actual transfer itself, monitoring the investment management of the BCPP in the future, and management of any legacy assets not transferred. The key to mitigating the asset risks was identifying the assets to transfer to BCPP for management. However there were three issues with this as follows: BCPP did not have a timetable for receiving assets to start managing them; BCPP would need to create a team from the existing staff of three internally managed Funds in the BCPP, plus additional new staff in order to continue with low cost, active management by an in-house team; and the Minister had not yet set out the criteria for the strong Value for Money case required to delay placing assets in the pool. Currently the Fund was managed at officer level through the Loans and Investments Section.The transition plan needed to address this and retain key skills and knowledge required to continue to manage the Fund, post pooling, otherwise the Fund could be vulnerable to breaching LGPS regulations and unable to produce accurate and adequate Annual Report and Accounts. ORDERED as follows that the: 1. information provided was noted.2. outline, draft remuneration packages for the Executives and Non Executives of the BCPPwere approved.3. Panel was in favour of Trade Union non-voting membership of the BCPP Joint Committee, and delegated authority to the Chair of the Panel to represent this view with the BCPP Joint Committee.4. the Head of Investments and Treasury Management would draft a report summarising thecurrent position on the pooling arrangements for local authority employers.

7 PENSION GOVERNANCE REVIEW - UPDATE

A follow up report was presented to inform Members of the Teesside Pension Fund and Investment Panel (the Panel) of progress to date with the governance review following as an action from the 2015/2016 External Auditor report.

A working group comprising members of the Panel and the Board had been established and a meeting had been arranged for 7 April 2017. AON Hewitt had been engaged to carry out an independent review of governance arrangements in accordance with terms of reference, a copy of which was attached at Appendix A to the submitted report. To date, AON Hewitt had asked for key documents for review and had held discussions with Fund officers to ascertain current arrangements. AON Hewitt were due to publish a report later this week which would form the basis of discussion at the meeting of the working party. The report would be circulated in advance of the meeting. The working party would identify a way forward with regard to the External Auditor's recommendations. ORDERED that the information provided was received and noted.

8 INVESTMENT ADVISORS TENDER - UPDATE

F Green and P Moon left the room at this point in the meeting.

6 Page 6 of 246


A report was presented to update Members of the Panel with progress made with the tender for Investment Advisors to the Panel. At the last meeting, the Panel agreed to tender for the services of two Independent Investment Advisors for a period of ten years, with reviews/breaks available after four and seven years. Tendering at a fixed price of £12,500 per annum plus expenses for a maximumperiod of ten years was under the European Union procurement threshold. The issue of off-payroll working and income tax (IR35) had been investigated, and a method of tendering with a specification based on outcomes had been devised. This allowed recruitment through the tender process of a consultant and not a disguised employee. A proposed tender specification was attached at Appendix A to the submitted report.

Some further benchmarking had taken place to assist Members to identify the outcomes expected of Investment Advisors from other Funds. Details were attached at Appendix B to the submitted report. Prior to developing a full tender, an investigation into whether or not the Investment Advisors should have professional indemnity insurance and the size of that insurance was required. ORDERED as follows that the information provided and the progress made to date was noted.

9 ANNUAL BUSINESS PLAN 2017/2020

F Green and P Moon re-joined the meeting.

The annual Business Plan 2017/2020 was presented for approval. The proposed management expenses budget for 2017-2018 was £1,643,000. In order to comply with the recommendations of the Myners Review of Institutional Investment it was agreed that an annual Business Plan should be presented for approval. The Business Plan contained financial estimates for the investment and management of the Fund. The Teesside Pension Fund Business Plan was designed to set out how the Investment Panel operated, what powers were delegated and to provide information on key issues. The Business Plan sat alongside the Management Agreement, which set out the delegated powers and responsibilities of officers charged with the investment management function. The Business Plan for 2017/2020 was attached at Appendix A to the submitted report. The Plan had been updated to include an Annual Report to Council, a revised Annual Plan for Key Decisions and the estimated outturn for 2016/2017 for the management expenses budget and proposed budget for 2017/2018. It was highlighted that that the proposed budget for 2017/2018 represented an 11% increase from the previous year. The majority of this small increase reflected the growth in the valuation of properties in the Fund's portfolio since the management expense for property management was calculated as a percentage of the property valuation. Additional increases were also proposed for the cost of information systems to take account of the adverse foreignexchange movement between the US Dollar and the GB Pound. There were also Staffing costs increases to take account of the cost of living rise and slight rise in the employer

7 Page 7 of 246


contribution rates for Pensions. ORDERED as follows that the Teesside Pension Fund Business Plan 2017/2020 and Annual Report for Middlesbrough Council were approved.

10 FUND ACTUARIAL VALUATION AND FUNDING STRATEGY STATEMENT

A report was presented to inform Members of the results of the triennial valuation of the Teesside Pension Fund and the updated Funding Strategy Statement. The Administering Authority was required by Regulation 62 of the Local Government PensionScheme Regulations 2013 to appoint an Actuary to carry out a full valuation of the Fund as at31 March 2016 and as at 31 March every third year afterwards. The main purpose of the valuation was to review the financial position of the Fund and determine the rate at which employing bodies in the Fund should contribute in future to ensure that the existing assets, when combined with future contributions from both employers and scheme members would be sufficient to meet future benefit payments from the Fund. The position of the Fund was very good and, on a whole of fund basis, the funding level was 101%. The value of assets (£3.1bn) exceeded the liabilities by £24.6m. This was a small decrease of £12.4m compared to the last valuation where the Fund was also 101% solvent. The employers' average cost of future service benefits was 15.7% of pensionable pay with effect from 1 April 2017: this was an increase from the 14.4% set at the 2013 valuation. The main reasons for the increase were that the Actuary had a more pessimistic view of future returns achievable from the investment assets owned by the Fund; Membership changes, in particular a fall in active Members contributing to the Fund; and an increase in pensioner Members receiving payments from the Fund. Whilst the Fund was fully funded overall, the funding level of individual employers varied. Some employers still had deficit which needed to be recovered and the payments required were spread over a number of years (the deficit recovering period). At this valuation the deficit recovery period had been set at 20 years, an increase from 11 years at the last valuation. The reason for the increase was to assist and stabilise employer contribution ratesand the affordability of the Fund for employers whilst ensuring the Fund remained solvent. Following the actuarial valuation it was standard practice to undertake an Asset/Liability Study. The Study looked at the long-term liabilities of the Fund and constructed a benchmarksetting out what mix of investments would be best suited to match those liabilities over the medium and long-term. The Study would be carried out by the Fund's Advisors and the Headof Investments in conjunction with the Fund Actuary. Subsequent to 2004 the Funding Strategy Statement (FSS) had been revised for each triennial valuation. A copy of the updated FSS was attached at Appendix A to the submitted report. Since the previous valuation, there were changes to the assumptions used in the Actuarial calculation of the funding targets and a change in the treatment of different employers in the Fund. A number of key assumptions were included in the FSS. The main unfavourable movement from the 2013 valuation was the discount rate. In order to mitigate this, the trajectory period had been increased to 25 years and the deficit recovery period had increased to 20 years, in line with recommended market levels. In past valuations, the same funding target assumptions were used across all employers.

8 Page 8 of 246


The employer covenant risk was not taken into account in the calculations, and, with some employers, the risk of calculating the employer contribution rate on an on-going basis only forthese employers to face a cessation valuation on exit from the scheme at a lower discount rate, based on the gilt rate. After this valuation a full assessment of employer covenant risk would be undertaken and reflected in future versions of the FSS. ORDERED as follows that:1. The outcome of the triennial valuation for 2016 and the updated Funding Strategy Statement were noted and agreed.2. An Asset/Liability Study would be carried out and presented to the Investment Panel.3. A review of Employer Covenant Risk would be carried out and presented to the Investment Panel.

11 INVESTMENT STRATEGY STATEMENT

A report was presented to inform Members in relation to the Fund's Investment Strategy Statement (ISS). The ISS set out the investment strategy for the Fund. The new LGPS (Management and Investment of Funds) 2016 regulations came into force from 1 November 2016 and four key changes were made to the previous 2009 regulations asfollows:

● The introduction of an Investment Strategy Statement, replacing the Statement of Investment Principles.

● The removal of Table of Limits on Investments (Schedule 1), placing the responsibility of setting appropriate limits on each Fund.

● The introduction of allowing funds to invest without restriction as to quantity in Treasury approved collective investment schemes (ie pooling).

● The introduction of power for the Secretary of Statement for DCLG to intervene where an Investment Strategy was deemed not acceptable or a fund did not make suitable arrangements to make investments determined by the Secretary of State.

The new regulations removed the existing schedule of limitations on investments and authorities would be expected to take a prudential approach, demonstrating that they had given consideration to the suitability of different types of investment, had ensured an appropriately diverse portfolio of assets and an appropriate approach to managing risk. This was set out in the ISS which authorities were required to prepare, having taking proper advice and appropriate consultation with interested parties, and publish by 1 April 2017. ORDERED as follows that the Investment Strategy Statement was approved.

12 TREASURY MANAGEMENT REPORT

A report was presented on the treasury management of the Fund's cash balances, including the methodology used. As at 31 December 2016 the Fund had £387.2 million invested with approved counterparties at an average rate of 0.3.03%. Appendix A to the submitted report detailed the maturity profileof cash invested and the average rate of interest obtained on the investments for each time period.

9 Page 9 of 246


ORDERED that the information provided was received and noted.

13 PERSONAL SHARE DEALING

A report was presented on personal share dealing activity to comply with the requirements of the Management Agreement. The following share transaction was undertaken and reported to the Head of Investments: On 23 November 206 a purchase of 100 Vodafone ordinary shares was undertaken. ORDERED that the information was received and noted.

10 Page 10 of 246

28 JUNE 2017

STRATEGIC DIRECTOR: FINANCE, GOVERNANCE AND SUPPORT, JAMES BROMILEY

FUND MANAGER’S REPORT

1. PURPOSE OF THE REPORT

1.1 To inform Members how the Investment Advisors’ recommendations are being implemented.

1.2 To provide information with regard to stock selection strategies, including a detailed report on transactions undertaken.

2. RECOMMENDATION

2.1 That Members note the report.

3. FINANCIAL IMPLICATIONS

3.1 Decisions taken by Members, in light of information contained within this report, will have an impact on the performance of the Fund.

4. IMPLEMENTATION OF INVESTMENT ADVISOR’S ADVICE

4.1 Both Advisors continue to favour growth assets over protection assets. Bonds do not meet the actuarial requirements for the Fund at the current yield levels and should continue to be avoided at around these levels unless they are held as a short term alternative to cash. Cash should continue to be built up as divestments from other markets occurs, and invested whenopportunities allow.

There is consensus that Equity markets will continue to be volatile into the near future, with additional volatility in currency markets. The Advisors would be happy to see a continuation of the previous activities of equity sales at higher market levels where opportunities allow and cash built up pending re-investment when market conditions allow. Both Advisors agreeto a continuation of “stock-picking” equities wherever opportunities allow for investments, but they do favour the developed markets of the UK and US and express caution over Europe into next year’s elections in key European countries.

Both Advisors continue to favour further investment in direct property on an opportunistic basis and the property has a good covenant.

Investment in Alternatives, such as infrastructure and private equity, offer the Fund

1Page 11 of 246

diversification from equities and bonds. They come with additional risks of being illiquid andtraditionally have costly management fees. However, the Fund is considerably underweight its customised benchmark and, providing suitable investment opportunities are available, the Fund should look to increase its allocation to this asset class. Investment opportunities should only occur where the investment makes an appropriate rate of return for the Fund’s, and does not fulfil an alternative purpose.

4.2 Summary of Returns in this Period

Asset Class Percentage ReturnUK Equity (FTSE All Share) +3.9%US Equity (S&P 500) +5.3%Japanese Equity (Topix 500) +2.4%Pacific Equity (MSCI Asia X Japan) +11.0%European Equity (Stoxx 600) +6.7%Australian Equity (ASX) +8.0%

Source Bloomberg LP Sterling Return

5. TRANSACTION REPORT

5.1 It is a requirement that all transactions undertaken are reported to the Investment Panel. Appendix A details transactions from the period 1st January 2017 to 31st March 2017.

5.2 There were net sales of approximately £35m in the period, this compares to net sales of £38m in the previous reporting period. Cash balances increased from £402m to £444m.

Our observations by performance driver are as follows:

(i) Government Fixed Income Markets

As UK inflation broke out of the Bank of England’s 2% target, markets reacted in a sanguine manner. Performance of Index Linked stocks seemed to be underpinned by benign conventional gilt prices. Global bond markets saw short term rates push up, on the back of the Federal Reserve interest rate hike. However long term rates static nature implied a sense that this was not seen as the start of a concerted effort to tighten.

Our portfolio continues to complete an exit strategy from all bonds, with only nominal exposure.

(ii) Currency effects

The US dollar’s recent strength retraced somewhat as the attraction of German growth figures prompted flows into the Euro. The Japanese Yen was strong on the back of an investment focus on export led markets.

2Page 12 of 246

Sterling’s weakness on Brexit process uncertainty began a gradual unwind for valuation extremes, on a purchasing parity basis.

The factors broadly offset themselves in terms of impact to the Fund.

(iii) Equity Markets

Equity markets continued to test new highs in the period, in particular for our portfolio US and UK markets. Stocks with ‘bond proxy’ characteristics such as Utilitiesand Consumer staples held up well. However energy related investments such as mining and oil suffered on weakness in underlying commodity prices.

The stand out markets were emerging markets, that recovered strongly after initial concerns over a Trump presidency. We are heavily weighted here and benefitted accordingly.

The Fund continued to gradually take profits on this strength, given our extreme exposures to equity risk assets.

6. FUND VALUATION

6.1 The Fund Valuation details all the investments of the Fund as at 31st March 2017, and is prepared by the Fund's custodian, BNP. The total value of all investments, including cash, is £3,859 million. The detailed valuation is available on the Fund’s website Teespen.org. This compares with the last reported valuation, as at 31st December 2016 of £3,682 million.

6.2 An analysis of the summary valuation shows the Fund’s percentage weightings in the variousasset classes, compared with the Fund’s customised benchmark and the advisors short term asset allocation range.

3Page 13 of 246

Asset Allocation Summary

ASSET CLASS FUND INVESTMENTADVISORS’

SHORT TERMASSET

ALLOCATIONRANGE

CUSTOMISEDBENCHMARK

AVERAGE*

PROTECTION ASSETS

BONDS (residual)

0 0 – 3 12 16

CASH 12 3 – 10 3 3

GROWTH ASSETS

UK EQUITY 32 30 – 36 30 20

OVERSEAS EQUITY

47 44 – 50 40 43

PROPERTY 7 6 – 9 10 9

ALTERNATIVES 2 2 – 4 5 9

TOTAL 100 100 100

*Average Local Authority Fund as at the last available date data is available (31 March 2016)

CONTACT OFFICER: Paul Campbell – Head of Investments & Treasury Management TEL NO.: 01642 729024

4Page 14 of 246

SECTOR INITIAL % PURCHASES SALES NET FINAL %

£ '000 £ '000 £ '000 OF FUND

UK INDEX LINKED 0.00 0 0 0 0.00

UK FIXED INTEREST 0.20 0 -4,362 -4,362 0.08

OVERSEAS FIXED INTEREST 0.19 0 -2,835 -2,835 0.11

UK EQUITIES 32.38 14,179 -23,353 -9,174 31.65

NORTH AMERICAN EQUITIES 14.35 11,189 -10,110 1,079 14.38

EUROPEAN EQUITIES 11.38 9,458 -19,111 -9,653 11.30

JAPANESE EQUITIES 5.94 3,763 -5,488 -1,725 5.75

PACIFIC EQUITIES 15.11 5,485 -6,573 -1,088 15.93

OTHER EQUITIES 0.80 0 0 0 0.84

PROPERTY UT/ DIRECT PROPERTY 6.90 93 -12,300 -12,207 6.40

OTHER INVESTMENT CO. 1.59 5,787 -1,706 4,081 1.64

CASH 11.16 0 0 0 11.92

100.00 49,954 -85,838 -35,884 100.00

TRANSACTIONS AND CHANGES IN SECTOR WEIGHTINGSFOR THE PERIOD

1st January 2017 to 31st March 2017

Page 15 of 246

of 246

Bargain

Date

Buy /

SellStock Name Country/Category Sector/Country

Nominal

Amount of

Shares

Price CCYPurchase Cost /

Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)

16.02.17 S Coventry Bldg. Society FRN 2020 UK Fixed Interest UK Fixed Interest 2,360,000 100.10 GBP -2,362,360.00 -2,365,428.00 (3,068.00)

08.03.17 S Royal Bank of Canada FRN 2019 UK Fixed Interest UK Fixed Interest 2,000,000 100.04 GBP -2,000,200.00 -1,995,720.00 4,480.00

-4,362,560.00

15.02.17 S Australian Gov. 6% 2017 (Maturity) Overseas Fixed Interest Overseas Fixed Interest4,600,000 100.00 AUD -2,834,781.54 -2,937,320.34 (102,538.80)

-2,834,781.54

03.01.17 S Alliance Trust UK Equities United Kingdom 300,000 638.00 GBP -1,910,171.00 -1,145,264.66 764,906.34

27.01.17 S Alliance Trust UK Equities United Kingdom 100,000 651.50 GBP -650,196.00 -381,754.89 268,441.11

10.02.17 S Alliance Trust UK Equities United Kingdom 188,000 661.50 GBP -1,241,131.76 -717,699.18 523,432.58

24.01.17 S Anglo American plc UK Equities United Kingdom 50,000 1,380.00 GBP -688,619.00 -376,875.51 311,743.49

25.01.17 S Anglo American plc UK Equities United Kingdom 12,601 1,405.00 GBP -176,866.01 -94,980.17 81,885.84

25.01.17 S Antofagasta plc UK Equities United Kingdom 100,000 870.97 GBP -870,098.03 -581,965.56 288,132.47

02.03.17 S Asos plc UK Equities United Kingdom 5,000 5,551.44 GBP -277,293.43 -173,218.79 104,074.64

30.03.17 S Asos plc UK Equities United Kingdom 5,000 6,111.07 GBP -305,246.95 -173,218.79 132,028.16

06.01.17 S Barclays UK Equities United Kingdom 100,000 234.43 GBP -233,964.83 -241,840.19 (7,875.36)

03.03.17 S Barclays UK Equities United Kingdom 100,000 230.05 GBP -229,818.95 -241,840.19 (12,021.24)

03.03.17 S BHP Billiton plc UK Equities United Kingdom 10,000 1,356.00 GBP -135,327.80 -73,612.24 61,715.56

26.01.17 S Blackrock World Mining Trust UK Equities United Kingdom 30,000 375.30 GBP -112,363.82 -117,251.01 (4,887.19)

03.02.17 S Blackrock World Mining Trust UK Equities United Kingdom 50,000 388.25 GBP -193,735.75 -195,418.35 (1,682.60)

08.02.17 P BP plc UK Equities United Kingdom 100,000 453.65 GBP 456,831.09 456,831.09 -






07.02.17 S British American Tobacco plc UK Equities United Kingdom 10,000 5,000.50 GBP -499,048.94 -122,544.54 376,504.40

01.03.17 S British American Tobacco plc UK Equities United Kingdom 10,000 5,125.55 GBP -511,528.52 -122,544.54 388,983.98

03.02.17 S Cineworld Group plc UK Equities United Kingdom 16,000 628.50 GBP -100,357.88 -80,444.07 19,913.81

06.01.17 P Civitas Social Housing UK Equities United Kingdom 1,000,000 103.98 GBP 1,047,039.65 1,047,039.65 -

17.02.17 P Cobham plc UK Equities United Kingdom 100,000 111.26 GBP 112,043.15 112,043.15 -

20.02.17 P Cobham plc UK Equities United Kingdom 100,000 111.50 GBP 112,170.00 112,170.00 -

03.03.17 S Cobham plc UK Equities United Kingdom 100,000 135.06 GBP -134,788.28 -122,777.62 12,010.66

30.03.17 S Cobham plc UK Equities United Kingdom 100,000 135.00 GBP -134,729.00 -122,777.62 11,951.38

03.03.17 S Compass Group plc UK Equities United Kingdom 50,000 1,503.66 GBP -751,077.17 -112,787.89 638,289.28

20.02.17 P CYBG plc UK Equities United Kingdom 100,000 268.46 GBP 270,071.76 270,071.76 -



1Page 17 of 246

Bargain

Date

Buy /


Nominal

Amount of

Shares


Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)



08.03.17 P Dignity plc UK Equities United Kingdom 36,856 2,400.14 GBP 890,787.43 890,787.43 -

03.02.17 P Direct Line Insurance Group UK Equities United Kingdom 50,000 356.80 GBP 179,471.40 179,471.40 -

27.02.17 P Direct Line Insurance Group UK Equities United Kingdom 100,000 337.86 GBP 339,888.16 339,888.16 -

24.01.17 P Dixons Carphone plc UK Equities United Kingdom 100,000 319.46 GBP 321,379.36 321,379.36 -

03.02.17 P Esure Group plc UK Equities United Kingdom 50,000 204.86 GBP 103,045.58 103,045.58 -

08.03.17 S G4S plc UK Equities United Kingdom 20,000.00 286.80 GBP -57,301.64 -48,661.61 8,640.03

10.02.17 P GCP Asset Backed Income Fund Limited - C SharesUK Equities United Kingdom 1,000,000 100.00 GBP 1,000,000.00 1,000,000.00 -

17.01.17 S GCP Asset Backed Income Fund Ltd UK Equities United Kingdom 1,000,000 106.00 GBP -1,057,879.00 -1,015,919.68 41,959.32

13.02.17 S Gocompare.com Group plc UK Equities United Kingdom 120,000 90.78 GBP -108,826.06 -82,951.79 25,874.27

15.03.17 S Hikma Pharmaceuticals UK Equities United Kingdom 15,000 2,272.42 GBP -340,180.27 -254,351.32 85,828.95

16.03.17 P Horizon Discovery Group plc UK Equities United Kingdom 500,000 167.00 GBP 836,671.00 836,671.00 -

07.02.17 S HSBC Holdings plc UK Equities United Kingdom 50,000 688.75 GBP -343,685.40 -292,540.86 51,144.54





24.02.17 P HSBC Holdings plc UK Equities United Kingdom 100,000 649.90 GBP 654,449.50 654,449.50 -

14.03.17 S Imperial Brands UK Equities United Kingdom 12,000 3,875.03 GBP -464,537.60 -169,313.09 295,224.51

01.03.17 S Inchcape plc UK Equities United Kingdom 50,000 770.05 GBP -384,638.97 -180,568.87 204,070.10

17.02.17 S Indivior plc UK Equities United Kingdom 50,000 375.74 GBP -187,494.31 -84,827.32 102,666.99

22.02.17 P Indivior plc UK Equities United Kingdom 105,036 323.61 GBP 342,282.69 342,282.69 -




21.02.17 P Inmarsat plc UK Equities United Kingdom 32,708 624.87 GBP 205,609.77 205,609.77 -

16.02.17 S Intercontinental Hotels Group UK Equities United Kingdom 10,000 3,858.71 GBP -385,484.13 -49,338.38 336,145.75

30.03.17 P Jupiter Green Investment Trust (Rights Issue) UK Equities United Kingdom 44,000 150.79 GBP 66,347.60 66,347.60 -

23.03.17 P Kingfisher plc UK Equities United Kingdom 50,000 319.78 GBP 161,008.57 161,008.57 -

03.02.17 S Lloyds Banking Group plc UK Equities United Kingdom 500,000 65.85 GBP -328,590.50 -326,541.88 2,048.62




06.03.17 P Lonmin plc UK Equities United Kingdom 100,000 106.09 GBP 106,829.60 106,829.60 -

14.02.17 P Middlefield Canadian Income PCC UK Equities United Kingdom 425,000 102.50 GBP 436,496.25 436,496.25 -

26.01.17 P National Grid plc UK Equities United Kingdom 50,000 913.75 GBP 459,619.54 459,619.54 -

25.01.17 S Randgold Resources Ltd UK Equities United Kingdom 7,900 6,803.19 GBP -536,913.56 -359,106.24 177,807.32

14.02.17 S Randgold Resources Ltd UK Equities United Kingdom 2,100 7,505.00 GBP -157,446.39 -95,458.62 61,987.77

08.02.17 S Reckitt Benckiser Group plc UK Equities United Kingdom 7,500 7,268.08 GBP -544,014.48 -138,664.87 405,349.61

23.01.17 S Rio Tinto plc UK Equities United Kingdom 25,000 3,473.52 GBP -866,642.07 -553,930.16 312,711.91

2Page 18 of 246

Bargain

Date

Buy /


Nominal

Amount of

Shares


Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)




06.01.17 S Rolls Royce Holdings 'C' Shares (Redemption) UK Equities United Kingdom 58,420,000 0.10 GBP -58,420.00 -58,420.00 -

26.01.17 S Royal Bank of Scotland Group UK Equities United Kingdom 100,000 237.50 GBP -237,024.00 -258,022.56 (20,998.56)




08.02.17 S RSA Insurance Group plc UK Equities United Kingdom 25,000 598.66 GBP -149,363.95 -126,025.19 23,338.76

31.01.17 P Sage Group plc UK Equities United Kingdom 50,000 612.68 GBP 308,179.04 308,179.04 -



26.01.17 S Sky plc UK Equities United Kingdom 4,950 1,007.00 GBP -49,745.81 -38,298.78 11,447.03

07.02.17 S Sky plc UK Equities United Kingdom 35,050 1,007.00 GBP -352,246.59 -271,186.32 81,060.27

25.01.17 S Standard Chartered UK Equities United Kingdom 50,000 791.44 GBP -395,323.28 -419,108.08 (23,784.80)

01.02.17 S TalkTalk Telecom Group UK Equities United Kingdom 100,000 166.74 GBP -166,572.26 -287,322.76 (120,750.50)

17.02.17 S Unilever plc UK Equities United Kingdom 10,000 3,813.49 GBP -380,585.09 -73,600.15 306,984.94



30.03.17 P Vectura Group plc UK Equities United Kingdom 250,000 156.05 GBP 392,866.95 392,866.95 -

10.01.17 S WM Morrison Supermarkets UK Equities United Kingdom 100,000 246.35 GBP -246,102.65 -212,850.12 33,252.53

21.02.17 P Wood Group (John) plc UK Equities United Kingdom 50,000 731.39 GBP 368,253.60 368,253.60 -

31.01.17 P Worldpay Group plc UK Equities United Kingdom 40,000 286.48 GBP 115,280.52 115,280.52 -





13.02.17 S WPP plc UK Equities United Kingdom 15,000 1,905.00 GBP -285,177.50 -115,014.84 170,162.66

03.03.17 P WPP plc UK Equities United Kingdom 35,000 1,765.40 GBP 619,126.78 619,126.78 -

-9,173,732.08

09.01.17 S Abbot Laboratories (Cash Fraction) North American Equities United States 0 0.00 USD -19.43 0.00 19.43

09.01.17 S Abbot Laboratories (Merger) North American Equities United States 27,000 467.75 USD -1,038,376.11 -1,038,376.11 -

23.03.17 P Accenture plc - Class A North American Equities United States 7,500 122.01 USD 734,826.43 734,826.43 -

19.01.17 P Activision Blizzard Inc North American Equities United States 10,000 38.92 USD 316,819.72 316,819.72 -

02.02.17 P Adient plc North American Equities United States 4,367 64.96 USD 227,483.19 227,483.19 -

22.02.17 P Adient plc North American Equities United States 5,000 67.12 USD 268,238.21 268,238.21 -

24.01.17 S Alphabet Inc - Class A North American Equities United States 250 847.33 USD -167,436.49 -82,010.43 85,426.06

18.01.17 S Alphabet Inc - Class C North American Equities United States 250 803.96 USD -162,864.07 -84,210.37 78,653.70


3Page 19 of 246

Bargain

Date

Buy /


Nominal

Amount of

Shares


Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)


30.03.17 S Amazon.com Inc North American Equities United States 250 875.53 USD -174,513.76 -67,366.80 107,146.96

17.03.17 P Amgen Inc North American Equities United States 5,000 168.47 USD 683,310.95 683,310.95 -

06.02.17 S Apollo Education Group (Acquired) North American Equities United States 275,000 10.00 USD -2,207,416.92 -2,303,080.30 (95,663.38)

01.02.17 S Apple Inc North American Equities United States 5,000 129.00 USD -513,167.97 -198,547.93 314,620.04

01.03.17 P AT&T Inc North American Equities United States 10,000 42.00 USD 342,944.32 342,944.32 -

02.03.17 P Avon Products Inc North American Equities United States 75,000 4.43 USD 271,592.80 271,592.80 -

01.02.17 S Broadcom Limited North American Equities United States 2,500 202.59 USD -402,944.83 -274,850.37 128,094.46

09.01.17 S Celgene Corp North American Equities United States 2,500 120.26 USD -246,560.24 -111,954.58 134,605.66

15.03.17 S Celgene Corp North American Equities United States 2,500 125.44 USD -252,758.81 -111,954.58 140,804.23

19.01.17 P Charter Communications Inc North American Equities United States 2,500 304.43 USD 619,545.78 619,545.78 -

02.02.17 S CME Group Inc North American Equities United States 1,466 122.36 USD -143,265.95 -54,629.67 88,636.28

16.02.17 S CME Group Inc North American Equities United States 1,034 122.10 USD -101,251.93 -38,531.43 62,720.50

15.02.17 S Comcast Corp - Class A North American Equities United States 5,000 76.38 USD -305,146.81 -165,474.80 139,672.01

30.03.17 S Costco Wholesale Corporation North American Equities United States 2,500 167.76 USD -334,392.27 -73,902.46 260,489.81

23.01.17 S CSX Corporation North American Equities United States 5,000 45.43 USD -180,994.09 -80,705.63 100,288.46

06.03.17 P CVS Health Corp North American Equities United States 5,000 80.87 USD 332,599.11 332,599.11 -

01.02.17 P Dell Technologies Inc - Class V North American Equities United States 5,542 62.98 USD 278,791.91 278,791.91 -

06.03.17 P Ecolab Inc North American Equities United States 2,500 125.21 USD 257,461.24 257,461.24 -

02.02.17 P Edwards Lifesciences Corporation North American Equities United States 5,000 88.93 USD 356,566.45 356,566.45 -

16.03.17 P Electronic Arts Inc North American Equities United States 10,000 90.16 USD 730,916.84 730,916.84 -

31.03.17 P Electronic Arts Inc North American Equities United States 7,500 89.57 USD 539,894.91 539,894.91 -

09.02.17 P Facebook Inc - Class A North American Equities United States 10,000 134.02 USD 1,077,054.36 1,077,054.36 -

07.02.17 S Hasbro Inc North American Equities United States 2,500 95.46 USD -189,814.30 -77,363.15 112,451.15

20.01.17 S International Business Machines Corporation North American Equities United States 3,500 169.71 USD -474,117.95 -150,050.66 324,067.29

04.01.17 P Intuitive Surgical Inc North American Equities United States 500 630.57 USD 254,626.88 254,626.88 -

07.02.17 S Intuitive Surgical Inc North American Equities United States 250 703.99 USD -139,975.67 -74,473.84 65,501.83

29.03.17 S Intuitive Surgical Inc North American Equities United States 250 763.45 USD -152,319.65 -74,473.84 77,845.81

09.01.17 S Netflix Inc North American Equities United States 2,500 131.15 USD -268,897.26 -174,687.14 94,210.12

03.01.17 S NVIDIA Corp North American Equities United States 2,500 102.38 USD -207,491.91 -61,774.83 145,717.08

15.02.17 P Paypal Holdings Inc North American Equities United States 10,000 41.75 USD 334,968.84 334,968.84 -

02.03.17 P Philip Morris International Inc North American Equities United States 5,000 109.90 USD 449,491.77 449,491.77 -

09.02.17 S PNC Financial Services Group North American Equities United States 5,000 122.55 USD -490,470.11 -232,917.71 257,552.40

28.02.17 S Priceline Group Inc/The North American Equities United States 250 1,728.42 USD -349,798.00 -204,188.07 145,609.93

09.01.17 P Procter & Gamble Co/The North American Equities United States 10,000 84.30 USD 694,163.10 694,163.10 -

10.01.17 P PVH Corp North American Equities United States 5,000 93.99 USD 390,642.01 390,642.01 -

02.02.17 P Ralph Lauren Corp - Class A North American Equities United States 5,000 77.39 USD 310,285.60 310,285.60 -

08.02.17 P Salesforce.com Inc North American Equities United States 5,599 80.57 USD 361,241.07 361,241.07 -

14.02.17 S Southwest Airlines Co. North American Equities United States 5,000 55.28 USD -221,293.36 -130,850.12 90,443.24

01.03.17 P The Southern Co North American Equities United States 10,000 50.25 USD 410,323.54 410,323.54 -

06.03.17 P US Bancorp North American Equities United States 5,000 55.26 USD 227,278.89 227,278.89 -

4Page 20 of 246

Bargain

Date

Buy /


Nominal

Amount of

Shares


Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)

08.02.17 S Vantiv Inc - Class A North American Equities United States 5,000 64.15 USD -255,827.12 -138,697.71 117,129.41

28.02.17 P Varex Imaging Corp North American Equities United States 12,080 34.92 USD 342,825.19 342,825.19 -

10.01.17 P Versum Materials North American Equities United States 8,125 28.44 USD 192,060.97 192,060.97 -

22.02.17 P Versum Materials North American Equities United States 7,500 30.63 USD 183,611.29 183,611.29 -

01.02.17 S Viacom Inc - Class B North American Equities United States 12,500 41.69 USD -414,619.60 -373,251.88 41,367.72

07.02.17 S Visa Inc Class A Shares North American Equities United States 2,500 85.90 USD -170,790.04 -60,459.60 110,330.44

03.01.17 S Walt Disney Co/The North American Equities United States 2,500 106.00 USD -214,846.63 -75,132.40 139,714.23

1,079,404.82

19.01.17 P Buwog AG European Equities Austria 20,000 21.97 EUR 381,678.18 381,678.18 -

07.02.17 P Immofinanz AG European Equities Austria 150,000 1.71 EUR 219,963.29 219,963.29 -

31.01.17 P Anheuser-Busch Inbev European Equities Belgium 7,000 97.53 EUR 582,941.68 582,941.68 -

26.01.17 S AP Moller-Maersk A/S - B European Equities Denmark 700 11,958.71 DKK -957,009.22 -800,435.73 156,573.49

16.03.17 S FLSmidth & Co A/S European Equities Denmark 15,000 371.09 DKK -647,824.16 -423,085.55 224,738.61

03.02.17 P Novo Nordisk A/S - B European Equities Denmark 20,000 231.58 DKK 538,999.49 538,999.49 -

29.03.17 S BNP Paribas European Equities France 20,000 62.10 EUR -1,063,506.85 -687,836.19 375,670.66

26.01.17 P Eiffage European Equities France 10,000 67.80 EUR 581,405.55 581,405.55 -

18.01.17 P Engie European Equities France 50,000 11.75 EUR 509,833.35 509,833.35 -

29.03.17 S Engie European Equities France 50,000 13.05 EUR -558,774.24 -552,622.17 6,152.07

11.01.17 P Essilor International European Equities France 5,000 104.59 EUR 457,958.70 457,958.70 -

17.02.17 S Peugeot European Equities France 30,000 18.14 EUR -461,707.90 -356,934.75 104,773.15

11.01.17 S Sanofi European Equities France 5,000 78.22 EUR -339,768.76 -248,525.78 91,242.98

04.01.17 S Societe Generale European Equities France 20,000 48.03 EUR -816,912.41 -679,017.91 137,894.50

10.01.17 S Vallourec SA European Equities France 70,000 7.27 EUR -439,789.19 -241,766.13 198,023.06


24.03.17 P Vallourec SA European Equities France 50,000 5.54 EUR 241,168.45 241,168.45 -


26.01.17 P Veoila Environnement European Equities France 23,000 15.95 EUR 314,670.62 314,670.62 -

21.02.17 S Bayer AG-Reg European Equities Germany 10,000 107.97 EUR -910,493.06 -270,714.31 639,778.75

26.01.17 S Daimler AG Registered Shares European Equities Germany 6,080 71.85 EUR -372,202.93 -277,869.07 94,333.86

29.03.17 P Deutsche Bank AG-Reg (Rights Issue) European Equities Germany 75,000 11.65 EUR 757,541.25 757,541.25 -

01.02.17 S Qiagen NV (Cash Fraction) European Equities Germany 0.000 26.32 EUR -3.31 0.00 3.31

11.01.17 S Volkswagen AG-Pref European Equities Germany 7,500 150.66 EUR -981,596.98 -618,840.16 362,756.82

01.03.17 P CRH plc European Equities Ireland 15,000 33.31 EUR 433,064.63 433,064.63 -

5Page 21 of 246

Bargain

Date

Buy /


Nominal

Amount of

Shares


Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)

16.03.17 P Telecom Italia SPA European Equities Italy 1,000,000 0.80 EUR 697,270.41 697,270.41 -

22.03.17 P Gemalto European Equities Netherlands 2,001 50.18 EUR 86,791.47 86,791.47 -

23.03.17 P Gemalto European Equities Netherlands 5,000 50.18 EUR 217,323.04 217,323.04 -

07.03.17 P Ing Groep NV European Equities Netherlands 30,000 13.77 EUR 359,690.34 359,690.34 -

16.01.17 P Koninklijke Ahold Delhaizen European Equities Netherlands 34,843 19.65 EUR 593,159.82 593,159.82 -

05.01.17 Koninklijke Philips (amendment to 15/16 entry) European Equities Netherlands 0 0.00 EUR 0.00 -6.75 (6.75)

23.03.17 S Unilever NV European Equities Netherlands 25,000 46.36 EUR -998,988.17 -506,646.74 492,341.43

26.01.17 P Unilever NV European Equities Netherlands 25,000 37.69 EUR 806,828.33 806,828.33 -

01.02.17 P Wereldhave NV European Equities Netherlands 5,000 40.46 EUR 174,807.71 174,807.71 -

25.01.17 S Aker Asa - A shares European Equities Norway 25,000 350.19 NOK -829,012.81 -529,372.42 299,640.39

31.01.17 S Aker Asa - A shares European Equities Norway 25,000 350.92 NOK -837,121.80 -529,372.42 307,749.38

21.02.17 S Aker Asa - A shares European Equities Norway 30,000 358.28 NOK -1,026,957.20 -635,246.90 391,710.30

28.02.17 S Fred Olsen Energy ASA European Equities Norway 50,000 22.58 NOK -108,368.07 -211,546.95 (103,178.88)



17.03.17 S Odfjell Drilling Ltd European Equities Norway 266,453 18.07 NOK -458,222.61 -403,740.95 54,481.66

11.01.17 S Odfjell Drilling Ltd. European Equities Norway 34,286 15.09 NOK -49,682.28 -51,951.61 (2,269.33)

19.01.17 S Odfjell Drilling Ltd. European Equities Norway 135,780 16.76 NOK -218,815.87 -205,739.64 13,076.23

23.02.17 P Petroleum Geo Services European Equities Norway 49,815 23.99 NOK 114,899.96 114,899.96 -

03.01.17 P Petroleum Geo Services (Rights Issue) European Equities Norway 20,185 22.50 NOK 42,874.24 42,874.24 -

26.01.17 P Polarcus Ltd European Equities Norway 847,829 0.47 NOK 38,318.29 38,318.29 -

16.01.17 S Sevan Drilling Ltd European Equities Norway 103,143 6.26 NOK -61,433.06 -59,933.56 1,499.50




24.03.17 P Sevan Drilling Ltd European Equities Norway 60,355 4.43 NOK 25,144.49 25,144.49 -

31.03.17 P Sevan Drilling Ltd European Equities Norway 59,512 4.34 NOK 24,065.10 24,065.10 -

03.03.17 S Subsea 7 SA European Equities Norway 25,000 127.00 NOK -304,369.67 -168,225.60 136,144.07

22.02.17 S Banco Santander SA European Equities Spain 51,727 5.20 EUR -226,353.99 -199,719.15 26,634.84

01.03.17 S Banco Santander SA European Equities Spain 118,273 5.26 EUR -531,533.21 -456,654.81 74,878.40

27.01.17 P Merlin Properties Socimi SA European Equities Spain 50,000 10.33 EUR 442,144.28 442,144.28 -

02.02.17 S Repsol SA European Equities Spain 48,068 13.76 EUR -569,396.78 -547,598.67 21,798.11

19.01.17 P Assa Abloy AB - B European Equities Sweden 20,000 166.46 SEK 304,489.27 304,489.27 -

02.02.17 S Assa Abloy AB - B European Equities Sweden 10,000 163.55 SEK -149,494.16 -43,875.98 105,618.18

24.03.17 S Assa Abloy AB - B European Equities Sweden 20,000 180.64 SEK -326,398.23 -87,751.97 238,646.26

24.03.17 S Electrolux AB B Shares European Equities Sweden 7,176 240.69 SEK -156,355.35 -103,686.11 52,669.24

25.01.17 P Hemfosa Fastigheter AB European Equities Sweden 50,000 80.10 SEK 360,624.00 360,624.00 -

6Page 22 of 246

Bargain

Date

Buy /


Nominal

Amount of

Shares


Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)

01.02.17 P Hemfosa Fastigheter AB European Equities Sweden 20,000 82.19 SEK 150,768.49 150,768.49 -

28.02.17 S Skandinaviska Enskilda Banken European Equities Sweden 45,000 103.05 SEK -412,174.49 -324,454.01 87,720.48

22.03.17 S Skandinaviska Enskilda Banken European Equities Sweden 35,000 105.29 SEK -332,486.63 -252,353.12 80,133.51

29.03.17 S SKF AB B Shares European Equities Sweden 20,000 180.02 SEK -322,264.33 -244,704.11 77,560.22

31.03.17 S Svenska Cellulosa AB B European Equities Sweden 40,000 288.66 SEK -1,027,776.77 -680,748.72 347,028.05

14.03.17 S Svenska Handelsbanken A Shs European Equities Sweden 50,000 125.70 SEK -571,859.00 -193,049.32 378,809.68

18.01.17 S Volvo AB - B SHS European Equities Sweden 50,000 108.69 SEK -488,500.28 -334,773.41 153,726.87

03.02.17 S Credit Suisse Group AS Reg European Equities Switzerland 30,000 14.97 CHF -361,385.33 -427,776.46 (66,391.13)

03.03.17 S Credit Suisse Group AS Reg European Equities Switzerland 20,770 15.85 CHF -264,685.41 -296,163.90 (31,478.49)

-9,653,491.43

22.02.17 P East Japan Railway Co Japanese Equities Japan 5,000 10,283.50 JPY 365,341.58 365,341.58 -

24.02.17 P East Japan Railway Co Japanese Equities Japan 10,000 10,223.52 JPY 730,980.37 730,980.37 -

16.02.17 P Eisai Co Ltd Japanese Equities Japan 10,000 6,187.24 JPY 438,354.23 438,354.23 -

20.02.17 P Eisai Co Ltd Japanese Equities Japan 10,000 6,108.89 JPY 433,569.19 433,569.19 -

17.02.17 P Fast Retailing Co Ltd Japanese Equities Japan 1,000 35,260.00 JPY 252,288.56 252,288.56 -



20.02.17 S Horiba Ltd Japanese Equities Japan 10,000 6,225.35 JPY -439,630.92 -260,969.71 178,661.21

22.02.17 P Japan Tobacco Inc Japanese Equities Japan 10,000 3,796.00 JPY 269,720.51 269,720.51 -

22.02.17 S NGK Spark Plug Co Ltd Japanese Equities Japan 20,000 2,596.80 JPY -367,185.22 -237,006.34 130,178.88

22.02.17 S Nomura Research Institute Ltd Japanese Equities Japan 5,000 3,900.95 JPY -137,897.72 -66,329.82 71,567.90

01.02.17 P Ono Pharmaceutical Co Ltd Japanese Equities Japan 25,000 2,330.34 JPY 414,949.53 414,949.53 -

14.02.17 P Ono Pharmaceutical Co Ltd Japanese Equities Japan 20,000 2,518.60 JPY 354,496.43 354,496.43 -

31.01.17 S Softbank Group Corporation Japanese Equities Japan 20,000 8,741.34 JPY -1,230,089.69 -332,967.83 897,121.86

31.01.17 S Sony Corporation Japanese Equities Japan 20,000 3,420.97 JPY -481,402.57 -408,699.82 72,702.75

06.01.17 S Toyota Motor Corp Japanese Equities Japan 25,000 6,914.04 JPY -1,200,353.65 -636,301.17 564,052.48

18.01.17 S Toyota Motor Corp Japanese Equities Japan 25,000 6,705.88 JPY -1,177,660.44 -636,301.17 541,359.27

20.02.17 S Toyota Motor Corp Japanese Equities Japan 10,000 6,422.88 JPY -453,580.09 -254,520.47 199,059.62

-1,724,834.09

11.01.17 S Ardent Leisure Group Pacific Equities Australia 200,000 2.29 AUD -278,919.07 -215,666.06 63,253.01

03.02.17 S BHP Billiton Limited Pacific Equities Australia 20,000 26.45 AUD -323,763.02 -312,930.13 10,832.89



03.03.17 S BHP Billiton Limited Pacific Equities Australia 20,000 25.35 AUD -311,509.65 -312,930.13 (1,420.48)

06.01.17 S Commonwealth Bank of Australia Pacific Equities Australia 50,000 84.04 AUD -2,486,741.82 -1,803,703.57 683,038.25

17.02.17 P Domino's Pizza Enterprises Limited Pacific Equities Australia 10,000 56.31 AUD 348,646.37 348,646.37 -

7Page 23 of 246

Bargain

Date

Buy /


Nominal

Amount of

Shares


Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)

03.02.17 S Rio Tinto Ltd Pacific Equities Australia 10,000 65.30 AUD -399,675.93 -298,157.46 101,518.47



27.02.17 P AIA Group Ltd Pacific Equities Hong Kong 50,000 50.14 HKD 260,944.44 260,944.44 -

22.02.17 S China Resources Land Ltd Pacific Equities Hong Kong 100,000 21.89 HKD -224,761.14 -145,360.58 79,400.56

23.02.17 S China Resources Land Ltd Pacific Equities Hong Kong 100,000 21.75 HKD -221,777.99 -145,360.57 76,417.42

24.03.17 S China State Construction International Hldgs. Ltd Pacific Equities Hong Kong 100,000 14.17 HKD -144,988.46 -106,381.37 38,607.09

03.03.17 P CK Hutchinson Holdings Ltd Pacific Equities Hong Kong 25,000 95.36 HKD 252,281.19 252,281.19 -

17.02.17 P Hong Kong Exchanges and Clearing Ltd Pacific Equities Hong Kong 20,000 200.84 HKD 419,371.56 419,371.56 -

10.02.17 S HSBC Holdings plc Pacific Equities Hong Kong 100,000 67.03 HKD -687,047.54 -512,142.39 174,905.15

27.02.17 P HSBC Holdings plc Pacific Equities Hong Kong 25,000 62.95 HKD 163,817.65 163,817.65 -

11.01.17 P Techtronic Industries Co Ltd Pacific Equities Hong Kong 100,000 27.97 HKD 301,099.83 301,099.83 -



10.02.17 P SK Innovation Co Ltd Pacific Equities Republic of Korea 10,000 155,593.10 KRW 1,088,025.78 1,088,025.78 -

14.02.17 P SK Innovation Co Ltd Pacific Equities Republic of Korea 5,000 156,842.60 KRW 556,159.81 556,159.81 -

09.03.17 P Advanced Semiconductor Eng. Inc. (Rights Iss) Pacific Equities Taiwan 62,466 34.30 TWD 56,998.75 56,998.75 -

21.03.17 P Advanced Semiconductor Eng. Inc. (Rights Iss) Pacific Equities Taiwan 1 1.00 TWD 0.03 0.03 -

24.02.17 P Sinbon Electronics Co Ltd Pacific Equities Taiwan 100,000 72.65 TWD 192,182.55 192,182.55 -

03.01.17 P Sitronix Technology Corp Pacific Equities Taiwan 100,000 101.36 TWD 258,939.50 258,939.50

05.01.17 P Sitronix Technology Corp Pacific Equities Taiwan 100,000 99.71 TWD 254,182.80 254,182.80 -




-1,087,178.10

16.01.17 P Loughton - Langston Road, (Rent Adjustment) Property Unit Trusts/Direct PropertyDirect Property ~ ~ GBP 92,868.33 0.00 -

16.01.17 S Loughton - Langston Road, (Sale of Property) Property Unit Trusts/Direct PropertyDirect Property ~ ~ GBP -12,300,000.00 -7,658,640.68 4,641,359.32

-12,207,131.67

16.01.17 P Amedeo Air Four Plus Ltd. (Placing) Other Investment Co. Other Investment Co. 5,000,000 104.00 GBP 5,200,000.00 5,200,000.00 -

12.01.17 S ETFS Physical Gold Other Investment Co. Other Investment Co. 5,000 116.00 USD -475,324.04 -457,913.54 17,410.50



11.01.17 P ETFS Physical Silver Other Investment Co. Other Investment Co. 10,000 16.00 USD 131,196.85 131,196.85 -

02.02.17 S ETFS Physical Silver Other Investment Co. Other Investment Co. 10,000 16.80 USD -134,055.90 -198,641.95 (64,586.05)

8Page 24 of 246

Bargain

Date

Buy /


Nominal

Amount of

Shares


Sale Proceeds

Book Cost of

Stock Sold

Profit/ Loss on

Sale

(p) (£) (£) (£)



31.03.17 S ETFS Physical Silver Other Investment Co. Other Investment Co. 10,000 17.35 USD -138,761.11 -191,311.79 (52,550.68)

09.01.17 P Innisfree PFI Secondary Fund 2 (Drawdown) Other Investment Co. Other Investment Co. ~ ~ GBP 24,184.00 24,184.00 -

06.01.17 P Markham Rae Trade Cap. Partners I (Drawdown) Other Investment Co. Other Investment Co. ~ ~ USD 31,673.59 31,673.59 -

09.03.17 P United States Oil Fund LP Other Investment Co. Other Investment Co. 8,000 10.44 USD 68,921.22 68,921.22 -

13.03.17 P United States Oil Fund LP Other Investment Co. Other Investment Co. 7,000 10.24 USD 59,080.66 59,080.66 -

-

P 4,081,357.13 4,081,357.13 -

Investment Panel - Periods January, February, & March '17 (Cumulative) Total -35,882,946.96

Total Profit - NB: Losses are shown with a ( ) 26,071,816.10

9Page 25 of 246

of 246

INVESTMENT PANEL REPORT

TEESSIDE PENSION FUNDAdministered by Middlesbrough Council

AGENDA ITEM 5

28 JUNE 2017

STRATEGIC DIRECTOR FINANCE, GOVERNANCE & SUPPORT – JAMES BROMILEY

INVESTMENT ADVISORS REPORT


1.1 To update Members with the current capital market conditions, and set an appropriate short term asset allocation to best take advantage of these conditions.

2. RECOMMENDATIONS

2.1 That Members note the report and approve with the short term asset allocation.


3.1 Decisions taken by Members, in light of information contained within this report, will have an impact on the performance of the Fund.

4. BACKGROUND

4.1 At each Investment Panel meeting, the Panel’s Independent Investment Advisors (the Advisors) provide an update to Members on current global economic, political and marketconditions, and recommend an appropriate short term asset allocation for the Fund giventhese conditions.

4.2 As Members are aware, a review of Advisors was carried out and as part of the tender exercise the previous Advisors’ last Panel meeting was March 2017. Progress has not enabled new Advisors to be present for this meeting to provide advice to Members.

4.2 Attached as Appendix A is a report from the Head of Investments and Treasury Management. The report sets out the political, economic and market background since the previous meeting.

5. SHORT TERM ASSET ALLOCATION ADVICE

5.1 In light of no Advisors to provide advice, it is considered appropriate to continue with the previous short term asset allocation. The current political, economic and market conditions are similar to previous advice provided at meetings and do not suggest any need to make any major strategy changes. Currently, the key component when setting

Page 27 of 246



AGENDA ITEM 5the short term asset allocation is the Bond yield level. Most other asset classes are basingtheir levels from this yield as with yields currently low, investors are seeking returns wherever they can find them. Also, the only issue of note on the medium horizon is the US Federal Reserve statement on cutting its bond holdings. It is envisaged that this will be carried out very carefully so as not to spook the US economy and markets and so is worthy of watching but not requiring immediate attention or changes to the short term strategy at this time.

5.2 Therefore, it is proposed that the Fund continues to favour growth assets over protection assets. It is considered that in the long run, Bond yields will rise, but at present and while central bank intervene in the Bond markets, through quantitative easing, yields do not meet the actuarial requirements for the Fund and should continue to be avoided at around these levels unless they are held as a short term alternative to cash.

5.3 Cash has built up as divestments from other asset classes have occurred, and is primed to be invested when opportunities allow. It is always preferential for cash to be invested in higher returning assets, but at this time high cash levels can assist in protecting the Fund, as a diversifier, from Equity market downturns. However, at the current level of 12%, cash should not rise too much further in the short term to above the maximum short term level set at the customised benchmark for protection assets (15%). It is accepted that if the value of other asset classes fall, particularly Equities, there is a possibility that the short term cash level will rose over the maximum set below.

5.4 Equity markets have been volatile, with additional volatility in currency markets, which have recently been beneficial to the Fund with its high weighting in this asset class. The short term allocation strategy and range provide flexibility to continue and either increaseor decrease investments when market opportunities arise.

5.5 Investment in direct property to continue on the same basis as previously presented to the Panel; on an opportunistic basis where the property has a good covenant, yield and lease terms.

5.6 Investment in Alternatives, such as general and local infrastructure and private equity, offer the Fund diversification from equities and bonds. They come with additional risks ofbeing illiquid, traditionally they have costly management fees and investment in the type of investment can be a slow process. However, the Fund is considerably underweight its customised benchmark and, providing suitable investment opportunities are available, the Fund should look to increase its allocation to this asset class up to the customised benchmark level.

5.7 The Fund’s long and short term asset allocation strategies are summarised below, together with the short term asset allocation ranges for each asset class:

Page 28 of 246



AGENDA ITEM 5Asset Class Customised

Benchmark%

MarchWeighting

%

LT AssetAllocationStrategy

ST AssetAllocationStrategy

ST Range %

GROWTH:

UK Equities 30 32 Reduce Market dependent

29 – 35

Overseas Equities

40 47 Reduce Market dependent

45 – 51

Property 10 7 Increase Opportunistic increase

7 – 9

Alternatives 5 2 Increase Opportunistic increase

1.5 – 5

PROTECTION:

Bonds 12 0 Increase Hold 0 – 2

Cash 3 12 Reduce Hold/Reduce 5 – 15

CONTACT OFFICER: Paul Campbell (Head of Investments & Treasury Management)

TEL. NO.: (01642) 729024

Page 29 of 246

Page left intentionally blank

Page 30 of 246

APPENDIX AInvestment Report June 2017

Geopolitical Background

The period since the last Panel meeting has been eventful to say the least.

In the UK, we have now seen the results of two elections. In the local elections in May, the Conservatives gained hundreds of seats with a 7% swing in their favour. A snap election was called for June with the Conservative Party’s intention of providing a stronger margin in the House of Commons from which to negotiate Brexit. The outcome was somewhat different, with the result a hung Parliament. The government are now due to start Brexit negotiations from a weaker than before. In addition, terrorist attacks in Manchester and London halted election campaigning and have heightened security across the UK.

In Europe, the new French President, Emmanuel Macron, was elected from a new (centrist) political party in the run off against Marine Le Pen. This electoral win is seen by markets and economists as removing the risk of a near term market shocks in France and Europe in general. All eyes on Germany next with federal elections due in September. Good results in the latest tworegional elections (Schleswig-Holstien and North Rhine Westphalia) for current Chancellor, Angela Merkel’s CDU party and not so good for her main rival (SPD) also assisted in stabilising European markets.

In the US, questions are still asked of President Trump’s conduct and connection to Russia. Questions deepened with the dismissal of FBI Director, James Comey, raising concerns over the independence of the bureau’s investigation into links between the Trump campaign and Russia inthe run-up to last year’s US presidential election. On a wider front, the US President made his first overseas trip since taking office, visiting the Middle-East and Europe. During his visit to Europe, the US President announced the withdrawal of the US from the Paris agreement on climate change, saying he wants to "renegotiate" a fairer deal that would not disadvantage US businesses and workers.

In non-Trump US news, the US Senate passed the $1.15 trillion spending bill to fund the federal government through the end September. This bill includes an additional $15 billion for the Pentagon and $1.5 billion in emergency border security funds, but does not provide for starting construction of the southern border wall with Mexico.

In the Middle-East, tensions rose between Arab states with Qatar who are accused of allowing terror financiers to operate within its borders. These allegations were denied by Qatar, who claim they have taken more robust counter-terrorism measures than some of its neighbours. In the Far East, North Korea continued with its programme of missile tests in the South Japan Sea, heightening tension between them and the US further since the last Panel meeting.

Economic Background

Page 31 of 246

The headline economic news since the previous Panel meeting is the increase in interest rates in the US. The US raised its interest rates by 0.25% for the second time this year, with many marketcommentators suggesting a third rise by the year’s end. The central bank voted to raise its key rate target to a range of 1% to 1.25%, the highest level since 2008, when policymakers cut rates to encourage borrowing and spending after the financial crisis. The central bank also said it would begin cutting its bond holdings and other securities this year. It cited continued US economic growth and job market strength as reasons for raising its benchmark interest rate.

Across the other major world markets, central banks left monetary policy on hold, with no other major interest rate rises and a continuation of quantitative easing programmes by central banks. Overall, most Gross Domestic Product rates held steady or rose slightly on previous periods. The exception to this was the UK where quarter on quarter GDP dropped by 0.5%.

OPEC struck a deal to extend it production cuts, agreed in November 2016, for another nine months in order to step up efforts to shore up prices following a three year glut of supply. Together with the US decision to withdraw from the climate change accord, it was hoped this action would ensure the oil price moved back over the pivotal $50 a barrel level, however, this was not the case. Currently, the cost of Brent is under $46 a barrel, from a position of over $52 abarrel at the beginning of 2017 and over $50 a barrel at the beginning of April 2017.

Market Background

Equity markets, in general, has performed positively since both the start of this quarter (to 16 June 2017) and the beginning of 2017 (to 16 June 2017), as shown in the table below:

YTD % QTD %

FTSE All-Share (UK) 8.03% 3.85%

S & P 500 (US) 5.96% 1.49%

Euro Stoxx 600 Ex UK (Europe) 15.57% 8.09%

Topix 500 (Japan) 7.78% 4.315%

Bloomberg Asia Pacific Ex Japan -5.16% -4.11%

The above returns are all rebased back to GB Pounds, and take into effect both the currency and index moves. The only area where returns are negative is the Far East (ex-Japan). The strength of the Euro, particularly in the period since the last Panel meeting has assisted the European market’s total returns, which contracts with the weakness of the US Dollar over these periods and acted as a drag on performance of US markets.

In the past it has been reported to the Panel that Bond yields are not sufficient to meet the actuarial rate of return, as calculated by the Fund’s Actuary. The table below sets outthe yields of the major market’s 10 year bond yields for the 31 December 2016, 31 March2017 and 16 June 2017:

Page 32 of 246

10 Year Bond Yields 31/12/2016 31/03/17 16/06/2017

UK 1.235 1.138 1.017

US 2.445 2.421 2.152

Germany 0.204 0.325 0.275

France 0.681 0.966 0.630

Switzerland -0.224 -0.120 -0.176

Japan 0.041 0.065 0.051

Australia 2.765 2.701 2.407

As seen from the levels shown, yields widened after in the first quarter, but have subsequently tightened, and for all markets are not close to the required rate of return of 4.7%.

Short Term Asset Allocation Advice

In light of no Advisors to provide advice, it is considered appropriate to continue with the previous short term asset allocation. The current political, economic and market conditions are similar to previous advice provided at meetings and do not suggest any need to make any major strategy changes. Currently, the key component when setting the short term asset allocation is the Bond yield level. Most other asset classes are basing their levels from this yield as with yieldscurrently low, investors are seeking returns wherever they can find them. Also, the only issue of note on the medium horizon is the US Federal Reserve statement on cutting its bond holdings. Itis envisaged that this will be carried out very carefully so as not to spook the US economy and markets and so is worthy of watching but not requiring immediate attention or changes to the short term strategy at this time.

Therefore, it is proposed that the Fund continues to favour growth assets over protection assets. It is considered that in the long run, Bond yields will rise, but at present and while central bank intervene in the Bond markets, through quantitative easing, yields do not meet the actuarial requirements for the Fund and should continue to be avoided at around these levels unless they are held as a short term alternative to cash.

Cash has built up as divestments from other asset classes have occurred, and is primed to be invested when opportunities allow. It is always preferential for cash to be invested in higher returning assets, but at this time high cash levels can assist in protecting the Fund, as a diversifier, from Equity market downturns. However, at the current level of 12%, cash should notrise too much further in the short term to above the maximum short term level set at the customised benchmark for protection assets (15%). It is accepted that if the value of other asset classes fall, particularly Equities, there is a possibility that the short term cash level will rose over the maximum set below.

Page 33 of 246

Equity markets have been volatile, with additional volatility in currency markets, which have recently been beneficial to the Fund with its high weighting in this asset class. The short term allocation strategy and range provide flexibility to continue and either increase or decrease investments when market opportunities arise.

Investment in direct property to continue on the same basis as previously presented to the Panel; on an opportunistic basis where the property has a good covenant, yield and lease terms.

Investment in Alternatives, such as general and local infrastructure and private equity, offer the Fund diversification from equities and bonds. They come with additional risks of being illiquid, traditionally they have costly management fees and investment in the type of investment can be a slow process. However, the Fund is considerably underweight its customised benchmark and, providing suitable investment opportunities are available, the Fund should look to increase its allocation to this asset class up to the customised benchmark level.

Paul Campbell – Head of Investments & Treasury Management

19 June 2017

Page 34 of 246

of 246


AGENDA ITEM 7

28 JUNE 2017


LGPS INVESTMENT REFORM (POOLING ASSETS) – UPDATE


1.1 To follow up the reports on LGPS Investment Reform presented at previous meetings and inform Members of the Teesside Pension Fund & Investment Panel (the Panel) of the latest developments in setting up the new Pool (BCPP – Border to Coast Pension Partnership).

2. RECOMMENDATION

2.1 It is recommended that Members note the report, and the transformation plan proposed in Sections 8, 9 and 10; in particular:

Delegate to the Strategic Director Finance, Governance & Support and Head of Investments & Treasury Management the authority to change the investment management strategy from internal management to a mix of internal management and pooled funds to manage the whole equity and bond portfolios in the run up to pooling.

Authority is also delegated to the Strategic Director Finance, Governance & Support to decide the extent of the change and which investment markets will be managed through pooled funds, and flexibility is allowed should circumstances change prior to pooling to allow the mix of internal management and pooled funds change to match the staffing resources in place.

Delegate to the Strategic Director Finance, Governance & Support and the Head of Investments & Treasury Management the authority to procure a Transition Manager and any other additional consultancy support needed as part of the transformation plan, and which exceeds current budget.

Authority is delegated to the Strategic Director Finance, Governance & Support to refine the proposed new structure and implement the staffing transformation plan as outlined in Section 9 of the report.

2.2 Middlesbrough Council’s project management framework is currently being used to assist with project management of the transformation from internal management of the Fund to the pooled solution provided by BCPP (see Project Brief – Appendix B). It is


Page 57 of 246


AGENDA ITEM 7recommended that this approach is continued and, after approval of the above recommendation, this project is split into two workstreams – Assets and Staffing.


3.1 The exact financial implications are not known at this time since only high level proposals have been produced. It is known there will be costs:

To set up BCPP, particularly as it is required to be regulated by the Financial Conduct Authority (FCA);

To transfer the Fund’s assets to the chosen Pool, although if this transfer is in specie this will be minimal; and

Once up and running, there will be management expenses for managing the new Poolshared by the Pool’s partners.

3.2 A detailed estimate of the implementation costs was set out in the BCPP proposal which has previously been presented to the Panel. Within this estimate, a worst case scenario cost to set up BCPP of approx. £4.2 million was calculated. This estimate was provided by Deloitte as part of their cost benefit analysis for BCPP’s final submission. This cost is shared equally among the 12 shareholders/partners of BCPP, which equates to approx. £350,000 each.

3.3 It is anticipated that there will also be potential savings and other benefits:

If an Authorised Contractual Scheme (ACS) structure is used, there are further savingsto withholding tax on dividends received from French and Swedish equity investments;

The scale of BCPP will potentially reduce the management costs of externally managed funds, including infrastructure related investments, to a lower cost making these funds more attractive investments than they are currently; and

Access to a larger pool of investment professionals than is currently available to the Fund should improve resilience and provide a greater range of investment asset classes available to the Fund.

4. BACKGROUND

4.1 In his speech on the Comprehensive Spending Review on 25th November 2015, the Chancellor announced the release of the awaited consultation on pooling. Paragraph 1.138 states:

“The government will today publish guidance for pooling Local Government Pension Scheme Fund assets into up to 6 British Wealth Funds, containing at least £25 billion of Scheme assets each. The government is now inviting administering


Page 58 of 246


AGENDA ITEM 7authorities to come forward with their proposals for new pooled structures in line with the guidance to significantly reduce costs while maintaining overall investment performance, with the wider ambition of matching the infrastructure investment levels of the top global pension funds”.

4.2 In summary, the DCLG’s criteria are:

Asset pools achieve the benefits of scale – Pools should be £25 billion as a minimum.

Strong governance and decision making – Pools need to be capable of managing investments and risk on behalf of Funds.

Reduced cost and excellent value for money, with savings made across the LGPS.

Improved capacity to invest in infrastructure – This is implied with the pools having greater scale than single Funds.

4.3 A report was presented to the Panel meeting held on 9 February 2016 where Members agreed to partner with the Borders to Coast Pension Partnership (BCPP) pool. It was also agreed at that meeting that the Fund would submit the BCPP initial proposal to the DCLG, which was done on 19 February 2016. The initial proposal was well received, and provided the foundation to continue with the more detailed final submission.

4.4 The detailed proposal was presented to the Panel at the meeting held on 29 June 2016. The Panel agreed this version of the proposal and delegated authority to the Chair to review the final version and sign it on behalf of the Fund. The final BCPP proposal was submitted to DCLG on 15 July 2016 for further consideration. Representatives from the DCLG, HM Treasury and independent advisors met on 8 September 2016 to consider BCPPs submission. The Minister for DCLG required a further meeting on 24 November 2016 before issuing his letter approving the BCPP proposal in December 2016.

4.5 At a subsequent BCPP Member Steering Group meeting on 30 September 2016 it was agreed to set up a detailed project plan, creating three Member sub groups who will report back to the main Member Steering Group, and begin preparation work in these areas:

• Operating Model – Asset servicing, ICT systems sourcing and implementation, FCA compliance, asset structuring, etc.

• People – Setting remuneration packages for senior executives, TUPE transfer of existing staff, recruitment of senior executives & staff, and securing suitable premises.

• Governance and Monitoring – Co-ordinating final approvals to approve the creation of the Joint Committee and final commitment by each Partner Fund to the acquisition of an equal voting shareholding in BCPP.


Page 59 of 246


AGENDA ITEM 74.6 The latest meeting of the Member Steering Group/Joint Committee, was held on 6 June

2017. Members were updated on progress by BCPP on (further details below):

Update on BCPP project delivery and implementation budget. Update on the governance documentation and incorporation of BCPP Ltd. Refinement of BCPP corporate entity and cost sharing principles. Development of the Target Operating Model (TOM) and asset template progress. Update on the property search. Options for terms & conditions of Employees of BCPP Ltd. Company committee structures and the roles of Non-Executive Directors. Governance requirements for BCPP Ltd. as a Financial Conduct Authority (FCA)

regulated entity. Update on the Executive search, remuneration and recruitment process.

4.7 Attached as Appendix A is a high level project plan showing progress made since receiving ministerial approval. The key change to note is the change of proposed “go live” date to 1 June 2018, a slippage of two months.

5. BCPP – OPERATING MODEL

5.1 The key areas of scope within this workstream are summarised in the table below:

Core Activity Description StatusTax and Financial Services tender

Tender for external consultancy services covering the tax and financial considerations relating to the Operating Model and asset structuring

Completed

Operating and Regulatory Model tender

Tender for external consultancy services covering the selection of the depository, FCA compliance and ICT design and implementation

Completed

Operating Model FCA approved process, selection of depository and associated service providers, and design, testing and implementation of ICT (in conjunction with external advisor(s))

Ongoing & to plan

Asset allocation template

Design of the asset allocation template detailing the sub-funds to be offered – to be approved by the Joint Committee

Ongoing & to plan

Sub-fund prospectuses

Drafting of the prospectus for each sub-fund – to be approved by the Joint Committee andreviewed/approved by the FCA

To commence in summer 2017

Transition planning

Timetable for transition of assets and selection of appropriate external transition managers

To commence in summer 2017

Resource planning Determine the appropriate level of resources To commence in


Page 60 of 246


AGENDA ITEM 7to manage the proposed sub-funds – linking with the people workstream

summer 2017

5.2 All external advisors for the workstream are now in place:

Legal (Eversheds Sutherland); Tax and Financial Services (Deloitte); and Operating and Regulatory Model (Alpha FMC)

5.3 The aim of this workstream is to build an approved FCA Operator. The Target Operating Model works from the order management system for each sub-fund transaction through settlement to custody and update of the asset/accounting records at BCPP. It will also feed internal control systems at BCPP’s Depository which will carry out the reconciliations needed to ensure the assets are safe and correct.

5.4 The current direction is for BCPP to build its own Operating Model, as this gives it greatestflexibility, particularly with investment options and external manager choice. Most rentedoptions are prohibitive and can restrict choices over investments and external managers/other suppliers, and this option was dismissed by the Member Steering Group.

5.5 At this stage the Model is looking at acquiring ICT systems and procuring from suppliers that are already FCA approved. By piecing these together into an overall Target Operating Model, time is saved obtaining approval from the FCA for these parts of the overall jigsaw with only the interfaces and links needing to be tested rigorously to pass FCA inspection.

5.6 A consequence of this approach is that until the full picture is pieced together, the administration and accounting staffing requirement at BCPP cannot be determined as the exact tasks required are not yet fully known.

5.7 Where the Fund currently procures services from a Custodian to keep safe custody of our equities, bonds, etc., BCPP will procure services from a Depository (e.g. HSBC Bank, Northern Trust or State Street). A Depository will procure services including sub-contracting custodian services from a Custodian. It is common that the Custodian is part of the same company group as the Depository.

5.8 In this arrangement, the Depository will put in place internal controls needed to pass FCA approval and will carry out many of the checks the Fund currently carries out as part of our validation controls to prove the accuracy and integrity of our asset data. Whereas ourchecks are usually completed on a monthly basis, because BCPP is managing client investments, these checks will be carried out on more of a rolling basis, ultimately to provide BCPP’s clients with sub-fund unit prices as frequently as required.

5.9 In addition to safe custody, a Depository has a legal requirement to act as a policeman for the FCA, and ensure that each sub-fund of BCPP is in compliance with the FCA approved prospectus. In this respect, it is acting in a similar manner as a Trustee for BCPP and the


Page 61 of 246


AGENDA ITEM 7clients/customers of BCPP. To carry out this function effectively, a Depository has greater checks and controls in place than the usual customer/supplier Custodian relationship.

5.10 The asset servicing provider will value the underlying assets and provide a unit price for the sub-fund unit trust. Again, it is usual for this to be part of the same company group asthe Depository since, in order to achieve FCA approval, the Depository is required to ensure accuracy and timeliness of pricing, and have in place adequate FCA approved auditand validation checks.

5.11 The asset allocation template currently being developed is sufficiently flexible to allow theTeesside Fund to continue to invest with a very similar asset allocation as now. This has been developed over time with input from the Fund’s Officers and Investment Advisors, and presented to the Chair of the Panel at a Member Steering Group meeting. It is also flexible enough to allow the Fund to make some changes to its investment strategy ahead of the pooling date, should these be needed.

6. BCPP – PEOPLE/PROPERTY

6.1 The People sub-group has tendered for and contracted with a recruitment consultant (Odgers & Berndtson) to assist with creating the remuneration packages for the senior Executives and Non-Executives of BCPP and recruiting to these positions.

6.2 At the Member Sub Group meeting on 31 January 2017, the outline remuneration package for the Executives and Non-Executives for BCPP were discussed. The draft outlinepackages agreed were taken back to each Fund and agreed for the following posts:

Executive posts: Chief Executive Officer Chief Operating Officer/Chief Finance Officer Chief Investment Officer

Non-Executive Posts: Chair 2 x Non-Executive Directors

6.3 Adverts for the Chair and Chief Executive Officer posts have closed and interviews are dueto take place in June for the Chair and July for the Chief Executive Officer. The remaining two Non-Executive Director positions were advertised in April with interviews due to take place in July. The remaining Executives are planned to be advertised in late June/early July, with interviews planned for September.

6.4 The remuneration package and job description/person specification for the final senior position of Chief Risk Officer is being developed. This position is not a Board Member, therefore the package does not require shareholder approval, only Board approval.


Page 62 of 246


AGENDA ITEM 76.5 At the last Member Steering Group/Joint Committee meeting on 6 June 2017, Members

agreed outline terms and conditions for the remaining staff of BCPP Ltd. This included an outline BCPP package proposal which allows staff to either take part in the LGPS, but receive a lower pay rate, or take a defined contribution (DC) pension and receive a higher pay rate, with the total cost to BCPP of both options equal when employer contributions for the LGPS or DC scheme are included.

6.6 The premises search has begun with the appointment of WSB Property Consultants LLP, a Leeds based property agent, to assist with the search, narrow down the choices to a few and assist with negotiating the terms of a lease. The current position is to look for premises on a ten year lease, with a break option after five years. Properties in the centreand outskirts of Leeds are being investigated, with central Leeds currently favoured as the cost differential is not as great as first envisaged and communication links in central Leeds are much better.

7. BCPP – GOVERNANCE & MONITORING

7.1 The sub-group for Governance and Monitoring have procured legal advice from EvershedsSutherland LLP for BCPP Ltd. and Squire Patton Boggs (SPB) LLP for each Fund. Eversheds Sutherland LLP have prepared the key documents needed for the Pool to function (Articlesof Association & Shareholder Agreement for BCPP Ltd., and an Inter-Authority Agreement for the Joint Committee) with SPB LLP reviewing on behalf of the Funds.

7.2 A standard report was prepared for each Administering Authority to obtain authority fromeach partner Council to set up the Joint Committee to oversee the investment activities ofBCPP and for each Council to acquire the required shareholdings. The Fund’s report was presented to full Council on 15 February 2017 and the recommendations agreed (including the Minister’s approval letter). All reports were presented to the administering authorities of each BCPP partner before the end of March 2017.

7.3 All the required documents are now at a state of agreement for all Funds. BCPP Ltd. was incorporated on 31 May 2017, and the Shareholder Agreement and Inter-authority Agreement are now signed and sealed by all shareholders/partners, and executed on 6 June 2017.

8. TEESSIDE PENSION FUND – TRANSFORMATION PLAN (ASSETS)

8.1 The key risks to assets is the continued management of existing investment assets, the identification of assets to transfer to BCPP and the actual transfer itself, monitoring the investment management of BCPP in the future, and management of any legacy assets not initially transferred, e.g. direct property.

8.2 To start mitigating the asset risks, which assets will transfer to BCPP for management and which assets will remain for the Fund to manage will be identified. There are three issues with this:


Page 63 of 246


AGENDA ITEM 7i. BCPP does not have a definitive timetable ready yet for receiving assets and start

managing them. This dependency is causing uncertainty over the on-going management of assets and how long the current arrangements are required;

ii. For BCPP to create a relatively low cost, active management in-house team, they need to create this from the existing staff of three internally managed Funds in BCPP(Teesside , East Riding and South Yorkshire Funds), plus additional new staff where needed. At this stage, this is an unknown entity without a track record of working asa collective; and

iii. The Minister’s approval letter states “I expect every administering authority to participate in a pool. I also expect authorities to place all assets in their chosen pool,unless there is a strong value for money case for delay, taking into account the potential benefits across the pool, and to delegate investment management selection to the pool.” To our knowledge, the Minister has not set what he considersthe criteria for a “strong VFM case”, but for the Teesside Fund it is recognised that the current arrangements for management of quoted equities and bonds is cost effective and has a strong long term performance track record.

8.3 A workshop was held on 28 April 2017 to clarify the position of the Investment Panel over the future of the Fund’s investment management arrangements, i.e. managing the Fund’s assets in the long term and in the period up to BCPP taking over investment management responsibilities.

8.4 The workshop attendees were presented with the potential benefits and risks of different investment strategies available to the Fund (see Appendix C). Agreement was reached to comply with the spirit of the new legislation and pool our investments with BCPP. The preference is to invest in the appropriate internally managed sub-funds for Equities and Bonds once they are available, and these sub-funds have passed due diligence checks around safe custody, asset servicing and valuation and adequate investment managementarrangements can be clearly demonstrated (e.g. staffing quality and resilience).

8.5 As an interim measure, and given the current staffing risks discussed at previous Investment Panel meetings, it was agreed at the workshop that the Strategic Director Finance, Governance & Support and Head of Investments & Treasury Management are authorised to deviate from internal management, where considered necessary, to greater use of pooled funds. In order to facilitate this, additional resources will be needed to appoint a Transition Manager and, potentially, additional consultancy support to assist theFund with this transformation.

8.6 Pooled funds will reduce the number of holdings of the Fund by effectively outsourcing management of certain parts of the Fund, and replacing a large number of holdings with units in a single unit trust equivalent to the value of the transferred holdings. For example, the existing (approx.) £1.2 billion UK Equity portfolio (with shares owned in over 200 individual UK companies) could be replaced with units in a single unit trust to the same value. This reduction in investment asset lines will reduce the administration and


Page 64 of 246


AGENDA ITEM 7accounting required, alleviating some of the pressure on the Investment Administration and Accounting team.

8.7 A set of criteria will be devised to assist the Strategic Director Finance, Governance & Support and the Head of Investments & Treasury Management identify the most appropriate investment markets to change. This criteria will centre on:

Current investment management arrangements; Resilience of investment management arrangements; Impact on the portfolio from both an investment management and administration

and accounting support perspective; Complexities of markets and current difficulties with administration and accounting

arrangements for these markets; and The estimated timing that sub-funds will be made available from BCPP.

8.8 The extent of the change needed will also be determined by the Strategic Director Finance, Governance and Support and Head of Investments & Treasury Management. Thenumber of holdings and overall size of assets under internal management will be reduced to a manageable level with current staffing resources available. This should alleviate future disruptions in managing the Fund’s assets, however at current resource levels therewill still be occasions where spikes in some tasks or reduced resource levels for holiday/sickness cause disruption, e.g. trading may need to be suspended if there is a back-log of trades to book on assets records and the accounting system.

8.9 It is proposed to use passive pooled funds where needed (i.e. unit trusts that exactly track an underlying index, e.g. the FTSE All-share index) and until a suitable investment sub-fund is available from BCPP. The benefits and risks of using passive funds are stated in Appendix C.

8.10 Additional resource will be required to meet the on-going investment management fee (between approx. 0.01% and 0.02% of assets under managed, depending on which investment market is managed using the passive fund, e.g. an Asia Pacific ex-Japan Index Fund would cost 0.0255% of approx. £600 million assets, or approx. £153,000 p.a.).

8.11 There will also be additional costs incurred to adjust the Fund’s existing portfolio of holdings to a revised portfolio which is an acceptable match to the underlying index before an in specie transfer of this portfolio of assets to the (passive) external investment manager is carried out. There will be some future savings from reduced transaction costs once the Fund owns units in the passive unit trust (amount unknown as future transactionactivity are dependent on unpredictable market and company specific conditions).

8.12 The choice of external investment manager will be identified on an investment market by market basis, and on the basis of the most suitable pooled fund which passes the Fund’s due diligence tests and best fits the Fund’s customised benchmark.


Page 65 of 246


AGENDA ITEM 78.13 The criteria and initial extent of transformation to pooled funds will be carried out in July

2017, with preparations made to transform the Fund over the following months, as soon as suitable pooled funds are identified, and a Transition Manager and any additional consultancy support required have been procured.

8.14 The other benefit from this approach is that the transition from passive pooled funds to BCPP sub-funds will be simple as the difficult parts of the Fund’s long term transformationfrom internal management to BCPP-managed funds will be completed sooner while there is more certainty over staffing resources. Also, it is unclear at this time how some investment markets could be managed once staff have transferred to BCPP. There is currently an inception of a plan to second staff back to internally managed Funds (Teesside, East Riding and South Yorkshire Funds), but this requires FCA approval for thesestaff to be employed by one organisation and manage funds for another.

9. TEESSIDE PENSION FUND – TRANSFORMATION PLAN (STAFFING)

9.1 The current staff managing the Pension Fund are mainly in the Loans & Investment Section, with pension administration services outsourced to Kier Business Services and some of the accounting function carried out by the Council’s Financial Governance and Revenues Section. Almost all current staff in Loans & Investments have a significant proportion of their work in the function that will be carried out by BCPP in future and therefore transfer under TUPE (Transfer of Undertakings (Protection of Employment)).

9.2 Should staff move to BCPP under TUPE, the Fund will not have staffing resources to manage the activities of BCPP and the legacy assets not transferred (cash, property, etc.), service the Teesside Pension Board and the Investment Panel, monitor the activities of pension administration, and key parts of the Fund’s Report and Accounts would not be completed.

9.3 In addition, as the service currently provided in Middlesbrough could effectively move to Leeds, some staff are looking at protecting their future as this change of location or other factors do not appeal to them. This has detrimentally effected morale in the Section and key staff have already left, leaving gaps in the skills, knowledge and experience needed to run the Section. This problem is further increased as now there is inevitably key man risk with a smaller number of staff.

9.4 The staffing transformation plan creates a strategy to identify the future (post-pooling) staffing requirements of the Fund, and implementing this plan should help mitigate the above risks. The staffing structure (see Appendix D (ii) for the first draft, proposed staffingstructure post pooling) will enable the Fund to manage the activities of the pool after the transfer of assets, manage the assets not transferred to the pool and carry out the other governance and accounting work required.

9.5 In addition, all HR options will be explored to retain existing staff for as long as is needed, and supplement them with additional resources, either staff resources or additional financial resources to transform the investment assets into units in pooled funds which


Page 66 of 246


AGENDA ITEM 7are simpler to manage. This is to ensure the investment assets continue to be managed effectively in the interim. The next step is to agree a suitable staffing review that:

Allows the Fund to continue to be effectively managed up to BCPP taking over this responsibility;

Provides sufficient resources to continue to manage the Fund after the initial transfer of equities and bonds to BCPP; and

Has sufficient flexibility in the future staff review and consultation to reduce redundancies, and:

Allow those staff who wish to continue with an investment related career in Middlesbrough to do so, and

Allow those staff who wish to continue with a career in investment management or administrative and accounting support for equities and bonds to transfer to BCPP.

9.6 The current option being explored will:

i. Delete existing vacant positions from the existing structure (see Appendix D (i)) but retain sufficient budget to cover temporary appointments in place to assist with the current workload.

ii. Introduce the Investment Team (Legacy Assets) and Governance & Investment Administration Team (see Appendix D (ii)) alongside the existing structure, as discrete and separate parts of the Section.

iii. Ring-fence initial recruitment to the existing staff.iv. Should staff wish to remain at the Fund, allow them to express an interest in their

preferred position, demonstrating how they meet that position’s essential criteria.v. Where there are more expressions of interest for positions, use a full application

and interview process to fill these posts.vi. Review the Section after this process and delete newly created vacant positions.

vii. If there are still unfilled positions after this process, a normal recruitment process will begin to fill these.

9.7 If existing staff decide not to take part in the above, it is assumed they are favouring a move to work at BCPP. Also, if there is a situation where there are more staff applying than posts, then any unsuccessful staff will still be eligible to work at BCPP.

9.8 So far, a number of meetings have been held with staff to discuss the implications of pooling, including a meeting with HR to discuss TUPE and a presentation from those currently building BCPP. In addition, engagement with Trade Unions has begun, providing them with information on the pooling project and discussing with them the staffing implications of pooling. These meetings will continue throughout the transformation process.

9.7 BCPP are proposing to start the staff consultation in 2018, ahead of the TUPE process (see Appendix A). It would be beneficial to the Fund and current staff to carry out our staffing transformation plan ahead of this TUPE process, preferably completing the staffing reviewby the end of 2017/start of 2018.


Page 67 of 246


AGENDA ITEM 7

10. TEESSIDE PENSION FUND – TRANSFORMATION PLAN (FURTHER COMMUNICATIONS)

10.1 Some communication has been held with the Fund’s employers, via email. It is planned topresent the transition plan to the four Local Authority employers in the Fund, and present details of pooling and the transformation plan at an Employers Forum the Fund is looking to arrange.

10.2 Pooling of the Fund’s investment assets does not have an impact on employee contribution rates or pension benefits, however, communication it is planned to the Teesside Pension Fund scheme members for information as part of the bi-annual newsletters to active members and pensioner members.

11. TEESSIDE PENSION FUND – TRANSFORMATION PLAN (SUMMARY)

11.1 The following table summarises the actions to be taken as part of the transformation plan:

Core Activity Description Target DateAsset Management Assess the current portfolio to decide the new

ratio mix of internally management to pooled funds

July 2017

Asset Management Procurement of Transition Manager to assist with the transformation plan for assets as part of transferring asset to BCPP or the chosen pooled fund provider

TBC

Asset Management Procure services of a consultant to support and assist the transformation plan for assets

August 2017

Staffing Refine the staffing transformation plan to determine a structure that is sufficient and capable of managing legacy assets and undertaking the Fund’s governance and investment administration functions

August 2017

Staffing Implement the new staffing structure, after taking advice as to whether consultation is required

Sep - Dec 2017

Communications Set up arrangement with the 4 Local Authority scheme employers to meet their Executives / Cabinets

Sep/Oct 2017

Communications Article in the next editions of the Fund’s newsletters

Autumn 2017

Communications Presentation to the Employer Forum TBC


Page 68 of 246


AGENDA ITEM 7CONTACT OFFICER: Paul Campbell (Head of Investments & Treasury Management)

TEL. NO.: 01642 729024


Page 69 of 246

Appendix A

Page 70 of 246

of 246

Appendix B

Project BriefProject Ref / Title: Transition Plan - Pooling of

Pension AssetsVersion: Outcome:

Project Sponsor: James Bromiley Project Manager: Paul Campbell

Programme: Not applicable Proposed Start Date: Mar-17

Project descriptionTo transfer the arrangements for management of the Teesside Pension Fund's investment assets (currently £3.9 billion) to the new pooling company set up by 12 partners (incl. Teesside) - Border to Coast Pension Partnership (BCPP). BCPP is in the process of setting itself up and will not be ready to receive assets to manage for some time (approx. June 2018 at the earliest). In addition, Teesside needs to start the process of transforming itself to manage the Fund with BCPP, and decide whether it is in its best interests to transfer assets in their current form toBCPP for management, transform the existing assets to another form (e.g. unit trusts) as part of a de-risking exercise ahead of BCPP taking over management of investment assets or delay the transfer of assets (if this is possible & acceptable to DCLG). In addition to this, Teesside will need staff in the future to management the relationship with BCPP & manage pension fund cash and any other legacy assets.

Scope of the projectThe Loans & Investments Section currently manages the investments of the Teesside Pension Fund. It includes 17 FTEs (cost centre 10137), of which the predominant function of 16 FTEs is to manage investments, and as such it isprobable/likely that all 16 can transfer to BCPP under TUPE. A staffing review is required to set out the staff resources required in the lead up to asset transfer, over the transfer period and post transfer (i.e. managing BCPP, cash & other legacy assets).

Outline business caseCompliance with SI 2016 No. 946 LGPS (Management & Investment of Funds) Regulations 2016. As part of these new regulations, the Secretary of State for CLG can take over the running of the Fund, if its investment strategy, including its approach to pooling, is considered inadequate.

Business change neededMBC delegates responsibility for management of the Teesside Pension Fund to the TPF & Investment Panel (Panel). The Panel currently has authority to decide on investment management arrangements, and has supported an internal management model, using employees of MBC to manage the majority of investments of theFund. The new LGPS regulations require each Fund to select and name a pool and commit to pooling investments of assets; the Panel has chosen BCPP. In addition, and as a consequence of transferring the function of managing the Fund's investment assets to BCPP, it is probable/likely that the existing staff managing these assets will transfer under TUPE to BCPP.

CostsCosts (Revenue)

Up to £350,000 paid by the Teesside Pension Fund, representing 1/12th of the maximum estimates cost (£4.5 million) of setting up BCPP.

Funding (Revenue)

Nil

Page 72 of 246

Costs (Capital)

Class A shares at a cost of £1 to acquire the Fund's share of ownership of BCPP Ltd., and Class B shares at a cost of €833,333.34 as 1/12th share of the €10 million required to be set up as the required regulatory capital for an investment management company of the structure proposed by BCPP. Both paid by Teesside Pension Fund.

Funding (Capital)

Nil

Estimated Cost BenefitProjected Funding

(£)Project Cost (£) Additional

Income (£)Cost

Reduction(£)

Cost / Benefit (£)

Payback Period(Mth)

Nil Nil Nil Nil Nil Nil

Benefits - Non-financial or Non-cashable (e.g. staff time)Measure Description Current Target

Regulations Compliance with LGPS Regulations There is a dependency on BCPP to be readyto receive investment assets. TPF proposals regarding use of BCPP when sub-Funds are available and pass the Fund's due diligence test.

Full compliance

Resilience Based on the plans for staffing at TPF (if internal management continued) and BCPP (if assets transferred to BCPPto manage), greater resilience to management of the Fund's investmentassets.

Risk with current staffing situation in the run up to pooling. Staff numbers may reduce to a pointwhere the Fund cannot be managed effectively. Mitigating by exploring a plan of transforming the investment assets to units in unit trusts (passive funds) which require much less intensive management and

Resilience across all investment asset groups.

Page 73 of 246

administration / accounting.

Additional withholding tax savings.

The ACS structure will deliver additional tax savings on withholding tax with French & Swedish equity dividends.

Currently taking advantage of LG Pension Fund exemptions. For France and Sweden, these rates are not as favourable as for an ACS Manager.

Small increased return on French / Swedish equity assets.

Reduced investment management fees for externally managed funds.

Access to greater bulk purchasing power with the larger BCPP.

There is some movement by the Fund Management industry to respond to the call for reduced fees for LGPS Funds. The Fund will seek to take advantage of these reduced rates whenever itinvests in external funds between now until a pooed solution is available. These new investments must be in line with the investment strategy set by the Panel and meet the Fund's due diligence checks.

Access to new funds, which so far are deemed too expensive.

Page 74 of 246

Broader range of investmentassets available.

With BCPP, it is planned that (in time) there will be access to greater specialist resources which should allow access to a broader range of investment assets, e.g. co-investment opportunities.

Such investmentsare not currently viable for the Fund to invest in.

Access to new investment assets which are currently not considered viable.

Initial Project Categorisation Rating

Benefit % Complexity % FullFwork or

POAP

Comments

22% 67% Look to split the project into2 (Assets and Staffing) after key decision is made by the Panel on which assets will transfer to BCPP.

RisksRisk Description Owner Likelihood

(1-5)Impact

(1,2,3,5,7)Risk

ScoreMitigating Actions

Staffing - Period up to Asset transfer and/or TUPE of staff

PC 5 7 35 Plans being developed to transform the existing asset structure to units in unit trusts (passive funds), if needed.

Staffing - Key Man Risks within the L&I team

PC 5 7 35 New staffing structure will look to address this in the longer term. Additional resource required to assist with pooling project - approved by S151. Plans being developed to transform existing asset structure to units in unit trusts (passive funds), if needed.

Assets (continued management up to pooling)

PC 5 7 35 Investment Panel workshop provides guidance and agreement in principle over the future investment management strategy, including an interim solution through greater use of unit trusts (passive funds).

Transfer of Assets to BCPP PC 5 7 35 Investment Panel workshop and June Panel meeting will set the strategy for use of the pool as an investment management solution & transition management arrangements with BCPP anda (potentially) procured transition manager and/or TPF Custodian.

Page 75 of 246

Asset management post pooling

PC 5 7 35 New staffing structure will look to address this in the longer term.

Pension Fund Governance &Accounting

PC 5 7 35 New staffing structure will look to address this in the longer term.

Progress before Official Sign-off (June Panel)

PC 5 7 35 Investment Panel workshop provides guidance and agreement in principle over the future investment management strategy, including a pooling solution.

Conflict of interest risk PC 5 7 35 Investment Panel workshop to provide guidance and agreement in principle on the future investment management strategy.

Key MilestonesActivity / Milestone Start Date End Date Resp

Preparation for Panel Workshop Mar-17 Apr-17 PCWorkshop with Panel Members Apr-17 Jun-17 PCFinalised Decision on Asset Transfer Jun-17 Jun-17 PCDevelopment of PID/split into two projects (Assets & Staffing)?

May-17 Jul-17 PC

ApprovalsProject Sponsor:

Date: PMO: Date:

Page 76 of 246

Appendix C

Asset Strategy Existing Resource FutureDelivery

Benefits Risks

Equities£2,945m80%

Active managementUK & OverseasIn-house teamLong term reduce allocation (to 70%)

Mgmt.: >4 WTEs (est. 5 WTEs)Admin.: Under-resourced & needs investment to meet potential future demand

Fund Experience & track recordAlready set-upProvides VFM (lower cost)Control retainedShareholder governance ownershipEngagement through LAPFF

Non-compliance with LGPS regulationsMiFID II Broker/ResearchResilience & key man risk (Mgmt. & Admin.) when matched against BCPPRequires investment (staffing & systems)New Custodian (very complex) to implement & projectmanage (how can we backfill posts?/consultant costs to provide near turn-key solution?/effect on trading activity?)Staff retention problems (new competitor in Leeds) – are they to be replaced?Resources restrainedMBC Recruitment – can we get the right staff & how long to train them?No staff base to draw from for Legacy Assets / Governance (Mgmt. & Admin.)

Pool Compliance with LGPS regulationsBCPP proposal shows resilienceBuilt on LGPS experience & track recordProvides greater investment options?Direct engagementExisting staff to potentially draw from for Legacy Assets / Governance (Mgmt. & Admin.)New Custodian less complicated to implement & project manage

No track record (at Pool)No guarantee LGPS teams will gelCosts estimated (£5.8 to £10.1 m p.a. shared by 12 Funds)Start date unknown for sub FundsACS – transparency goneShareholder governance may be compromised

Ext. Manager (IMA)

Experience & track recordReduced internal staffing required (Mgmt. only)Management resilience?

ExpensiveTransition risks and costsChurning?Shareholder governance may be compromised

Page 77 of 246


Benefits Risks

Ext. Funds (Active)

Experience & track recordReduced internal staffing requiredManagement resilience?

Very expensiveIn-specie transfer?Shareholder governance compromised

Ext. Funds (Passive)

Certain of performanceComparable cost to internal, active mgmt.Reduced internal staffing required

Performance from asset allocation decisions onlyTransition risks and costs (much less than Ext. Man. (IMA))Shareholder governance compromised

Bonds£14m0.5%

Active managementUK Fixed, Index-linked & Overseas BondsIn-house teamLong term increase allocation (to 12%)

Mgmt.: <1 WTE (est. <1 WTE)Admin.: Under-resourced & needs investment to meet potential future demand

Fund Experience & track recordAlready set-upProvides VFM (lower cost)Control retained

Non-compliance with LGPS regulationsMiFID II Broker/ResearchResilience & key man risk (Mgmt. & Admin.) when matched against BCPPRequires investment (staffing & systems)New Custodian (very complex) to implement & projectmanage (how can we backfill posts?/consultant costs to provide near turn-key solution?/effect on trading activity?)Staff retention problems (new competitor in Leeds) – are they to be replaced?Resources restrained (particularly relevant when bond yield’s pick-up)MBC Recruitment – can we get the right staff & how long to train them?No staff base to draw from for Legacy Assets / Governance (Mgmt. & Admin.)

Page 78 of 246


Benefits Risks

Pool Compliance with LGPS regulationsBCPP proposal shows resilienceBuilt on LGPS experience & track recordProvides greater investment options?Existing staff to potentially draw from for Legacy Assets / Governance (Mgmt. & Admin.)New Custodian less complicated to implement & project manage

No track record (at Pool)No guarantee LGPS teams will gelCosts estimated (£5.8 to £10.1 m p.a. shared by 12 Funds)Start date unknown for sub FundsACS – transparency gone

Ext. Manager (IMA)

Experience & track recordReduced internal staffing required (Mgmt. only)Management resilience?

ExpensiveTransition risks and costsChurning?

Ext. Funds (Active)

Experience & track recordReduced internal staffing requiredManagement resilience?

Very expensiveIn-specie transfer?Investment Income?

Ext. Funds (Passive)

Certain of performanceComparable cost to internal, active mgmt.Reduced internal staffing required

Performance from asset allocation decisions onlyTransition risks and costs (much less than Ext. Man. (IMA))Investment Income?

Property£254m7%

Mix of direct property & indirect collective investment vehiclesNon-discretionary external management agreementLong term increase allocation (to 10%)

Mgmt.: <1 WTE (est. <1 WTE)Admin.: Under-resourced (key man risk exists) & needs investment to meet potential future demand

Non-discretionary (Fund makes the decisions)

Currently, experience at the Fund of this arrangementNo ownership transfer needed in near futureExisting staff to potentially draw from for Legacy Assets / Governance (Mgmt. & Admin.)

Resilience (existing staffing arrangement too small)Key man riskStaff retention until pooling

Page 79 of 246


Benefits Risks

Pool Access to other markets (long term)Potentially reduced fees (in-house solicitors?)

Pool not ready for direct property for 3-5 yearsOwnership transfer – tax?Unknown future investment strategy/staffing

Discretionary Experience & track record of mgmt.No ownership transfer needed in near futureReduced internal staffing required (Mgmt. only)Management resilience?

No experience at the Fund of this arrangementAdmin resource still requiredLoss of controlTransparency

Ext. Funds Experience & track recordReduced internal staffing requiredManagement resilience?

Sale of existing portfolio?ExpensiveLack of transparencyIncome?Management resource needed for PUTs/LLPsAdmin resource for draw-downs & receipts (LLPs)Redemption timetable

Alternatives£59m1.5%

Mix of direct ETFs (commodities) and funds/partnerships (absolute return funds & infrastructure)Long term increase allocation (to 5%)

Mgmt.: <1 WTE (est. <1 WTE)Admin.: Meets small current requirement & needs investment to meet potential future demand

Existing Mix Control over investments(Limited) experienceActively drive investment over next 3-5 yearsCo investment potential with greater experienceExisting staff to potentially draw from for Legacy Assets / Governance (Mgmt. & Admin.)

Resilience (existing staffing arrangement too small)Key man risk needs correctingStaff retention until final LLP investment run-offHigh LLP fees (but reducing all the time)

Pool Experience from other LGPS FundsFee reductions through scaleCo-investment (long term)

Pool not ready for 3-5 years?No clarity yet as to how the mechanics of investing willwork

Page 80 of 246


Benefits Risks

Ext. Manager (IMA)

Quicker investment of cash?Experience & track recordReduced internal staffing requiredManagement resilience?

ExpensiveLack of transparencyIncome?Admin resource for draw-downs & receipts (LLPs)

Cash£401m11%

Short term investmentsLong term reduce allocation (to 3%)

Mgmt.: <1 WTE (est. <1 WTE)Admin.: MBC provide

Fund The Fund must still provide resources for cash flow and treasury managementMBC provide?

Page 81 of 246

Appendix D (i)

Page 82 of 246

APPENDIX D (ii)

Page 83 of 246

of 246


AGENDA ITEM 8


28 JUNE 2017


GOVERNANCE REVIEW – UPDATE


1.1 To inform Members of the Teesside Pension Fund and Investment Panel (the Panel) of progress to date with the governance review resulting from an action in the 2015/16 External Auditor report (observations and recommendation).

2. RECOMMENDATION

2.1 That Members note the progress made to date, and pass any comment, and agree the following:

Terms of Reference – Teesside Pension Fund Committee (Appendix D) Terms of Reference – Teesside Pension Board (Appendix E) Conflicts of Interest Policy (Appendix F) Procedure for Reporting Breaches of the Law (Appendix G) Risk Management Policy (Appendix H) Training Policy (Appendix I)


3.1 There are no financial implications from this report.

4. BACKGROUND

4.1 A review of the Annual Report and Financial Statements (2015/16) was undertaken by EY. During the course of the audit EY were asked to comment on how the Governance of the Fund compares to other large pension schemes and they set out some high level observations. The observations and recommendations are set out below in Appendix A, together with the proposed actions resulting from the recommendations.

Page 85 of 246

4.2 One of the actions agreed was to form a small working group made up from officers of the Fund and Members of both the Teesside Pension Fund and Investment Panel and Teesside Pension Board; terms of reference attached as Appendix B.

5. SUMMARY OF KEY CHANGES

5.1 As a result of the review and the work completed by the working group, the following key changes will be made:

The Panel will change its name to the Teesside Pension Fund Committee (the Committee).

Membership of the Committee and Board will be for four years, fitting in with the electoral cycle.

The Panel currently has membership availability for scheme members/trade unions, but these are non-voting positions. The Committee will have two voting positions for scheme members/trade unions.

The Teesside Pension Board Members will serve for a period of four years, fittingin with the electoral cycle.

Pension Board Members are able to attend Pension Fund Committee meetings as observers, including any exempt items.

The current business plan is focussed more on investments. This plan will be extended to include more Pension Administration and Governance, including key performance indicators and budgets for pension administration and governance.

An annual Employer Forum will be introduced for scheme employers to attend and receive update on the Fund.

6. PROGRESS MADE SINCE THE LAST PANEL MEETING

6.1 The small working group created from Members of the Teesside Pension Board (the Board) and the Panel met in April 2017. AON Hewitt, who were asked to carry out anindependent review of governance arrangements, produced a report following their review (see Appendix C) and presented their findings and recommendations at the April 2017 meeting. In addition to their report, AON Hewitt also produced draft, revised terms of reference for the Panel and Board.

6.2 Following the working group meeting and further discussions with Fund Officers, AON Hewitt amended the revised terms of reference for the Panel and Board to reflect the outcomes reached at the working group meeting. These were discussed further with Middlesbrough Council’s Monitoring Officer, where further changes to the Council’s constitution to reflect the changes to both the Panel and Board and their terms of reference were also discussed. Following approval from the Panel andBoard these changes will be presented at the September 2017 Full Council meeting for final approval and incorporation within the Council’s Constitution.

Page 86 of 246

6.3 As part of the review, a number of policies were identified as required by the LGPS Regulations or related guidance but either missing or out of date. AON Hewitt were instructed to produce the following draft policies for review and adoption by the Fund:

Conflicts of Interest Policy

Governance Policy and Compliance Statement (including a delegation of functions to officers)

Procedure for Reporting Breaches of the Law

Risk Management Policy

Training Policy

6.4 In addition, Kier Business Services were asked to produce:

Administration Strategy

Communications Strategy

7. NEXT STEPS

7.1 The terms of reference for the Teesside Pension Fund Committee and Teesside Pension Board, and the policies presented to the Panel will also be presented to the Teesside Pension Board for their input.

7.2 The terms of reference for the Teesside Pension Fund Committee and Teesside Pension Board will be presented to Full Council for Middlesbrough Council in September 2017, together with other required changes for inclusion in the Council’s constitution.

7.3 The Governance Policy and Compliance Statement, Administration Strategy and Communications Strategy are still in draft form and will be completed for presentation at the September 2017 Pension Fund Committee meeting.

7.4 An exercise will be carried out to update the Fund’s risk register. The risk register will be updated to reflect the recommended format by CIPFA, and adopted as part ofthe Risk Management Policy.

7.5 Following the adoption of the recommended changes and new policies, a process will be introduced to check adherence to the Pension Regulator’s Code of Practice.

7.6 Following adoption of the new training, individual training plans will be created for all Committee/Board Members, and key Fund Officers.

Page 87 of 246


TEL. NO.: 01642 729024

Page 88 of 246

TEESSIDE PENSION FUND & INVESTMENT PANELGOVERNANCE REVIEW (APPENDIX A)

Observation Recommendation Proposed Action

1. Following the introduction of the Local Government Act 2013, the Council has introduced a local Pensions Board (‘the Board’) with responsibility for assisting the Council to comply with the regulations and legislation relating to the governance and administration of the Fund and any requirements by the Pensions Regulator.

The Pensions and Investment Panel (‘the Panel’) continues to exist as before ensuring that the Fund’s objectives are delivered and the investments managed.

Given these changes it is important that the Board and Panel have clear roles and responsibilities to enable the Fund to be governed and operated effectively.

The purpose of the Board is to challenge and scrutinise how the Fund is being managed and operated including the appropriateness of the investment strategy.

Being able to do this effectively requires having a sufficient level of knowledge of the Fund in relationto investment strategy and performance as well as compliance with all relevant laws and regulations (including Code 14).

We recommend that the Board determines and fully documents its role.

A key part of this is ensuring that it has the appropriate level of knowledge and expertise to challenge and scrutinise effectively in line with the new rules and expectations.

We would strongly recommend that consideration is given as a matter of priority to the appointment of an external consultant to advise on governance, administration and compliance to ensure that best practice is adopted and improvements made where necessary; and an external investment adviser to help support both the Board in its ability to challenge and scrutinise effectively and also the Panel with its operational responsibilities.

Independent external expertise would help to ensure that the Board and Panel are able to demonstrate that they are managing risk effectively for the Fund and ultimately the Council.

A small working party is created to review the current governance arrangements.

Attached is Appendix B which sets out the proposed terms of reference for the working party.

Once the working party has concluded its work, the Board will review its terms of reference and decide on appropriate consultancy support to assist it with its role.

Page 89 of 246



The area of pensions and investment is immensely complex and expertise is critical to have in today’s regulatory environment. For a Fund of this size it is very usual not to have independent external consultants and external investment advisers appointed to help.

2. The Fund is now under the oversight of the Pensions Regulator (‘TPR’) and therefore needs to comply with Code 14.

The Board and Panel and need to understand their reporting duties.

Additionally the Code emphasises the importance of scheme trustees to have appropriate knowledge and understanding to make effective decisions about scheme operations.

We recommend that the Panel organise for a detailed compliance checklist to be produced which is maintained and reviewed at each meeting to monitor compliance of laws and regulations which the Board can also review.

Additionally we recommend a training log is introduced covering all relevant Board and Panel members and which is personalised for each member to address knowledge gaps.

It should log the learning activities of all relevant members and the Board and Panel as a whole with actions to address gaps.

A compliance checklist will be created and reported to the Panel. The checklist will continue to be updated and maintained, and reported regularly to the Panel and Board.

A report will be brought to the Panel and Board to agree a training policy for each whichsets out the procedure for identify and delivering training and setting up an appropriate recording system.

3. The last detailed asset/liability review was in 2013.

Undertaking regular reviews helps to mitigate the risk of inappropriate investment strategies to enable pension liabilities to be effectively

We recommend that the Panel introduces a formal process to have regular monitoring of funding and investment performance using triggers to highlight when actions for change need to be considered.

Once the actuarial valuation for 2016 is almostcomplete a detailed asset liability review will be undertaken.

In addition, the tender for actuarial services

Page 90 of 246



managed.This is in common with how large schemes mitigatefunding deficits.

The Fund’s funding level at the last valuation was 101% which is very satisfactory, however the Fund’s investment performance for the 2015/16 year has now fallen behind its peer group as a result of the higher concentration of equities held relative to others.

As part of this process more regular and greater input and involvement by the actuary is likely to be required to help develop and monitor this.

The Board should consider its role in terms of scrutiny and review of this and also the advice and support andinformation it needs to supplement its knowledge and understanding to challenge effectively.

Given the current investment risk profile of the Fund (relative to similar LGSs) the Board should review and have evidence to demonstrate its challenge of the appropriateness of the current investment strategy as early as possible particularly in the run up to the pooling arrangements.

includes the option to obtain an interim valuation every year. Interim valuations will provide a guide to the Fund as to changes in actuarial assumptions and their impact on the funding level.

The Board’s role will be considered as part of the terms of reference of the working party as proposed in observation and recommendation1 above.

4. We understand that compliance with the Myners Principles has not been reviewed since 2009.

The areas covered include:-

Effective decision making Clear Objectives Risks and Liabilities Performance Assessment Responsible Ownership Transparency and Reporting

Given the developments in best practice and expectations of The Pensions Regulator (‘TPR’), we recommend that the Panel updates the status of current levels of compliance with Myners.

The Board should then review taking advice as necessary and identify any gaps and actions to address.

The Fund’s compliance with the Myners Principles is reported in the Fund’s Annual Report and Accounts.

An annual assessment can be reported to the Panel for consideration ahead of publication ofthe Fund’s Annual Report and Accounts.

The Board can review the annual assessment and recommend actions considered necessary.

Page 91 of 246



5. We understand that the Fund has a risk register butthat it is not reviewed regularly in line with best practice and the expectations of The Pensions Regulator.

Risk registers should be treated like living documents and reviewed regularly and at times of significant change.

We recommend that there is a process for more regular formal review and update.

The Panel should also consider how it obtains appropriate evidence and assurance that the risks are being managed as expected. For example, introducing a testing strategy which could involve internal audit.

The risk register will be reviewed and reportedto the Panel with a recommendation of how regular it should be reported to the Panel for further review.

6. We observed that the latest Governance Statementis dated 2011.

There is a requirement to have this updated annually and include in the Annual Report.

We recommend that this is updated as soon as possible to address any changes required in relation toroles, responsibilities, structures and process.

A new, proposed Governance Statement is included as an outcome aim of the working party proposed in observation and recommendation 1 above.

Page 92 of 246

TEESSIDE PENSION FUND & INVESTMENT PANELGOVERNANCE REVIEW (APPENDIX B)

TEESSIDE PENSION FUND

REVIEW OF GOVERNANCE ARRANGEMENTS – WORKING PARTY

TERMS OF REFERENCE

Aims of the Review:

To ensure the current governance arrangements for the Teesside Pension Fund are in line with current regulations and laws, and are effective and clearly understood by all relevant parties.

Outcomes of the Review:

The review of governance arrangements should produce the following outcomes:

1. Define the roles of the Teesside pension Fund and Investment Panel and the Teesside Pension Board, and produce recommended update terms of reference for both committees.

2. Review the membership mix of the Teesside Pension Fund and Investment Panel and recommend an appropriate mix which best represents the membership and responsibilities of the Fund’s employers.

3. Following the above reviews, produce a new recommended governance compliance statement in line with the LGPS 2013 Regulations (para. 55) and review and recommend any additional changes needed for the administering authority’s constitution.

4. In anticipation of the Teesside Pension Fund pooling its investments into a collective investment vehicle in full, in part or not at all, recommend any future potential governance changes.

5. Build a regular governance review (e.g. every three years or sooner if needed) to confirm theFund’s arrangements remain adequate and up to date.

Working Party Membership:

The following are proposed for membership of the working party carrying out the review:

1. Independent Lead/Chair – An external consultant with suitable knowledge and experience in LGPS governance.

2. Investment Panel Members – Three Members from the existing Panel

3. Pension Board Members – Three Members from the existing Board.

4. Officers – The Strategic Director Finance, Governance & Support (in his capacity as the lead responsible officer for the Fund), the Head of Investments and Treasury Management and a suitable officer from MBCs Legal & Democratic Services.

Page 93 of 246

Required Resources:

The resources needed to complete the review are the procurement costs for the external consultant and the officer/Member time needed.

Proposed Timetable:

1. Procure the external consultant either through quotes or a procurement framework agreement before the end to December 2016.

2. Agree the membership of the Working Party – December 2016.3. Carry out the review during January 2017.4. Report back to the Teesside Pension Board (27 February 2017) and Teesside Pension Fund

and Investment Panel (8 March 2017).

Page 94 of 246

Aon Hewitt

Risk. Reinsurance. Human Resources.

Copyright © 2017 Aon Hewitt Limited. All rights reserved. aon.com Aon Hewitt Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 4396810 Registered office: The Aon Centre | The Leadenhall Building | 122 Leadenhall Street | London | EC3V 4AN This report and any enclosures or attachments are prepared on the understanding that it is solely for the benefit of the addressee(s). Unless we provide express prior written consent no part of this report should be reproduced, distributed or communicated to anyone else and, in providing this report, we do not accept or assume any responsibility for any other purpose or to anyone other than the addressee(s) of this report.

Governance Review Teesside Pension Fund

Prepared for Teesside Governance Working Party Copy to Paul Campbell, Head of Investments & Treasury

Management Prepared by Michael Ferguson, Senior Public Sector Benefits &

Governance Consultant Karen McWilliam, Head of Public Sector Benefits and Governance Consultancy

Date 23 March 2017

Page 95 of 246

Aon Hewitt

Governance Review

Executive Summary We have been asked by the Middlesbrough Council ("MC"), the administering authority for Teesside Pension Fund, to carry out a governance review in relation to the Teesside Pension Fund ("the Fund") for consideration by a Governance Working Group. The Fund is one of the 89 Funds who are part of the national Local Government Pension Scheme in England and Wales.

The purpose of this review is to ensure that the Middlesbrough Council, the Administering Authority for the Teesside Pension Fund, is meeting its legal requirements in relation to the running of the Fund. In addition, the review highlights areas of good practice in relation to the governance of the Fund and also recommends any potential areas for improvement. The approach taken has been to compare the Administering Authority's current practices (at a high level) against the Aon Hewitt governance framework. The framework considers the following key areas:

Direction – What is the Fund trying to achieve? Legislation

Strategies and Policies

Delivery – How does the Fund meet its aims? Business Planning

Performance Monitoring

Risk Management

Decisions – Does the Fund have effective decision making? Governance Structure

Behaviour

Pensions Skills and Knowledge

Our overall conclusion is that the governance of the Fund is of a good level in many areas and meets legal requirements on the whole, and in some areas the Administering Authority is demonstrating best practice. These include:

having good quality investment monitoring information, and

making good use of officers and advisers' expertise to assist with decision making

We also identified some areas which we believe could be improved, and we therefore made some recommendations, including the following:

improving a few areas of the Fund business plan

formalising Fund strategies / policies including in the areas of Conflicts of Interest, Training and Risk Management to provide a clearer framework

undertaking a detailed review of the Fund's practices against The Pension Regulator's Code of Practice Number 14 - Governance and administration of public service pension schemes

ensuring all policies and strategies are subject to regular review.

Next steps We understand this report will be considered by the Governance Working Party on 7th April 2017. We look forward to answering any questions and discussing the conclusions with the Working Party at that meeting. We recommend that an action plan is developed in relation to implementing these recommendations, in order that progress can be monitored on an ongoing basis.

Page 96 of 246

Aon Hewitt

Governance Review

Governance Review

Teesside Pension Fund

Table of Contents 1 - Introduction 3

2 - Governance Framework 4

3 - Direction – What are you trying to achieve? 7

4 - Delivery – How do you meet your aims? 19

Appendix A – Reference Material 29

Page 97 of 246

Aon Hewitt

Governance Review 3

1 - Introduction Purpose and scope This paper sets out the findings of Aon Hewitt's governance review of the Teesside Pension Fund, which was commissioned by Middlesbrough Council. Middlesbrough Council (the "Administering Authority") is responsible for managing and administering the Teesside Pension Fund (the "Fund"), which is part of the Local Government Pension Scheme ("LGPS").

The purpose of this review is to ensure that the legal requirements in relation to the governance of the Fund are being adhered to, as well as to highlight areas of good practice in relation to the governance of the Fund, and also any recommended areas for improvement. We have compared the Administering Authority's practices against the Aon Hewitt governance framework which considers areas such as the role and effectiveness of the Teesside Pension Fund and Investment Panel ("the Panel") in running the fund, and the key documents and policies that govern the Fund. The Aon Hewitt governance framework is explained further in the next section of this report.

The review has been carried out a high level and did not involve any detailed investigation into services such as administration, communications, funding or investments. Accordingly it does not provide any technical comment in relation to any of these areas, including regarding the technical content of the related key governance documents. The review does include consideration, at a high level, of the legal requirements relating to governance, for example, the requirement to publish certain policies and strategies under Local Government Pension Scheme legislation. Though it includes some legal elements, these are presented by us in our capacity as pension consultants and not as legal experts, and as such nothing in this report should be considered as legal advice.

Further, the review does not specifically consider the establishment or operation of the Local Pension Board ("LPB"). However, we are separately considering the terms of reference for the LPB for the Administering Authority and would be happy to provide further guidance on how the LPB operates.

Research The information upon which this review has been based has been gathered by:

Desk-top review of key reports, statements and policies governing the scheme and web information. The documents considered are listed in Appendix A.

We would like to thank Paul Campbell, the Head of Investments & Treasury Management, for his assistance throughout this review.

We hope the information contained within this report is useful to the Teesside Governance Working Party and officers (and, if shared wider, the Teesside Pension Fund and Investment Panel and Local Pension Board) in considering how best to govern the Fund in the future.

We look forward to answering any questions in relation to the report, and particularly any areas where we have highlighted that improvements could be made.

We recommend that an action plan is developed in relation to implementing these recommendations in order that progress can be monitored on an ongoing basis.

Page 98 of 246

Aon Hewitt

Governance Review 4

2 - Governance Framework This section describes the best practice framework against which this review was conducted.

There are some key benefits from having effective governance in place, including:

Robust risk management that can assist in preventing issues from arising, or at least reducing their impact should they arise

Ensuring resources and time are appropriately focussed

Timely decision making and implementation of change

A clear view of how the Fund is being operated and making use of the Pension Advisory Panel.

At Aon Hewitt, we have a number of beliefs when it comes to achieving good governance including:

Direction – having clear strategies and policies that also meet legislative requirements are fundamental

Delivery – having a clear plan for implementing the Fund's strategies and policies, together with appropriate monitoring as to whether they are being achieved, and good risk management ensure effective and efficient delivery

Decisions – having an appropriate governance structure, involving the right people, with the right attitude and the appropriate skills and knowledge is key.

These beliefs are shown in the following diagram and described in more detail below.

Page 99 of 246

Aon Hewitt

Governance Review 5

Table 1 – Aon Hewitt governance framework

Direction – What are you trying to achieve?

Legislation and guidance

The Fund's strategies and policies should be in line with legislative requirements and any related professional guidance.

Strategies and policies

The Fund's strategies and policies should clearly set out the aims, principles, protocols and environment for how the Fund is managed. The strategies and policies: should be wide ranging covering all key areas including funding,

investments, administration, communications and governance itself should be clearly articulated, to provide a framework within which those

managing the Fund are able to operate should provide the focus for all future decisions and plans should be agreed by those responsible for governing the Fund.

Delivery – How do you meet your aims?

Business Planning

Each Fund should have a business plan, setting out required activities in the forthcoming period. Those activities: should be driven by the Fund's strategies and policies will include activities driven by changes in overriding legislation.

Performance Measurement

Those responsible for governing the Fund should be provided with appropriate performance information. Measurements should: illustrate whether the Fund's aims are being achieved cover the full range of key areas (e.g. investments, funding, governance,

communications and administration)

illustrate whether the Fund's business plan is being achieved be updated in accordance with appropriate timescales be presented in a manner that is easy to follow and understandable to

those governing the Fund assist in identifying changes to the Fund's business plan, strategies,

polices and aims.

Risk Management

Effective risk management is critical to minimise the impact and/or probability of unfortunate events and to maximise the realisation of opportunities. It should be: aligned with the Fund's aims a key consideration in decision making systematic or structured an integral part of the Administering Authority's processes and procedures

on a daily basis.

Decisions – Do you have effective decision making?

Page 100 of 246

Aon Hewitt

Governance Review 6

Governance structure

There is no one 'correct' governance structure. The Administering Authority's structure should: have clear terms of reference have a clearly documented scheme of delegation allow decision making at the appropriate level allow quick decision making where appropriate include appropriate representation from stakeholders involve well-presented information/reports Proper range of subject matters being considered allow sufficient time for discussion where necessary have good quality (committee) administration (e.g. issuing papers in good

time) involve a process for managing conflicts provide transparency to stakeholders where appropriate.

Behaviour

A good governance structure will not be effective unless it involves the right people with the right attitude. Individuals should: have a high level of attendance at meetings demonstrate integrity in relation to their Fund role be engaged and provide appropriate challenge be accountable for the decisions made highlight any potential conflicts they may have for a Chairperson, manage the meetings fairly without any bias to

individuals or self prepare adequately for meetings.

Skills and knowledge

A critical element is the need for those managing the Fund to have the appropriate level of knowledge and skills. Administering Authorities should:

clearly articulate the knowledge and skills requirements in a Fund policy provide ongoing training in an effective and suitable manner to meet those

requirements regularly review whether knowledge aspirations are being met ensure they rely appropriately on officers and advisers to provide expert

knowledge.

Throughout this report we have included comments and facts which we hope are useful to the Administering Authority, in highlighting areas of good practice but also identifying areas for potential improvement. To provide some greater clarity on the intention of our comments, we have included graphics to illustrate whether they are:

positive – meets legal requirements, national guidance and good practice.

negative – requires improvement as it does not meet legal requirements or practices we consider key to good governance.

neutral – meets legal practice, in the main, but could be improved to meet good practice or national guidance.

Page 101 of 246

Aon Hewitt

Governance Review 7

3 - Direction – What are you trying to achieve? In this section, we consider whether the Fund has clear strategies and policies which meet the following requirements: The Fund's strategies and policies should be in line with legislative

requirements and any related professional guidance. The Fund's strategies and policies should clearly set out the aims,

principles, protocols and environment for how the Fund is managed. The strategies and policies:

• should be wide ranging covering all key areas including funding, investments, administration, communications and governance itself

• should be clearly articulated, to provide a framework within which those managing the Fund are able to operate

• should provide the focus for all future decisions and plans • should be agreed by those responsible for governing the Fund.

In the table that follows, we summarise the key policies and strategies which we would expect to be in place for a well governed LGPS Fund, considering both legal requirements and best practice. Note that we have not considered the principles or methodology within these documents, given that this review is focussed on governance matters and not, for example, on the quality of actuarial or investment matters.

We have indicated in the table whether the documents are;

legally required under the LGPS, or

expected in accordance with CIPFA, LGPS Scheme Advisory Board ("SAB") or The Pensions Regulator's ("TPR") Guidance or Codes (many of which have some element of statutory backing),

and we then consider whether they are currently in place for the Fund and whether they meet these legal requirements or any requirements laid out in Guidance or Codes.

We also consider the quality and structure of these policies and strategies. For example, it is important that the Panel is fully engaged in the development of all strategies and policies, whilst receiving appropriate advice and expertise from the officers and advisers of the Fund. It must therefore be clear that strategies and policies are part of the Panel business and are subject to ongoing review. We consider some other best practice elements later.

Page 102 of 246

Aon Hewitt

Governance Review 8

Table 2 – Strategies and policies – meeting key requirements

Strategy / Policy Fund Version? / Version Date

Legal or National Guidance Requirement

Adherence to Legislation and Guidance

Process, decision making or more general observations

Funding Strategy Statement (FSS), including actuarial assessments

Yes – March 2017

LGPS Regulations

CIPFA FSS Guidance

The Administering Authority has reviewed its strategy in line with the 2016 valuation and has taken the revised strategy to the panel for approval.

Meets requirements and also appears to follow the CIPFA 2016 guidance.

The FSS and actuarial valuation were considered by the Panel at their meeting on 8th March 2017.

It is also clear that they took appropriate advice from the actuary.

The FSS states "The FSS is reviewed by the administering authority at least every three years as part of the triennial valuation."

Investment Strategy Statement (ISS)

Yes - March 2017 LGPS Regulations

DCLG Guidance on Preparing and Maintaining an Investment Strategy Statement

Compliance Statement against CIPFA guidance on the Myners Principles in the LGPS

Meets requirements in the Regulations and DCLG guidance as well as a well set out statement of compliance against the Myners Principles

The ISS includes information relating to ESG and corporate governance matters.

The ISS is very clear in setting out the Fund's aims and objectives and the responsibilities of the key officers.

The ISS sets out how the fund will manage its investments through its chosen Investment Pool

There is no mention of how or when this will be reviewed and this should be added to the final version.

Page 103 of 246

Aon Hewitt

Governance Review 9





Governance Policy and Compliance Statement

Yes – but not been updated since 2011

LGPS Regulations

Compliance Statement against Secretary of State guidance

The Governance Compliance Statement provides does not provide all of the information that is required by the Local Government Pension Scheme Regulations 2013. Specifically it is missing information on terms, structure and operational procedures relating to the Local Pension Board as well as being out of date (and therefore) inaccurate in places.

The statement has not been updated since 2011, although it says it will be updated annually and following local elections, resulting in the information being out of date (e.g. Panel members).

The statement could be improved in a number of places, for example, it does not mention if/when anyone was consulted and the explanation of scheme member representation is not clear.

The description of the delegation in relation to administration matters is not clear and not what we consider to be good practice. This is covered in more detail later in this report.

Communications Policy

Yes – but not been update since 2010

LGPS Regulations Meets the requirements. The policy has not been updated since 2010 and hence makes no mention of communications with or from the Local Pensions Board.

Page 104 of 246

Aon Hewitt

Governance Review 10





Administering Authority Discretionary Policy

Yes but not been updated since 2009 other than the scheme of delegation (updated in December 2016)

LGPS Regulations – basic element only

There is a policy in place but it does not fully comply with regulations as there is no mention of granting of early payment of benefits/waiving of actuarial reduction in relation to scheme employers that no longer exist. A scheme of delegation agreed by the Panel in December 2016 did determine who was responsible for deciding the specific policies.

There are a range of further discretionary provisions in the LGPS regulations (such as the charging of interest on late contributions or how to determine who should receive a death grant) that do not require to be included within a written policy statement. It is, however, best practice to have a fuller policy statement covering these areas; some of which could be delegated to officers if sufficiently low risk and where a blanket policy is not appropriate. It is our view that this is particularly important where third party administrators are in place to ensure they understand their delegated responsibilities. The scheme of delegation states that a number of these responsibilities sit with the Section 151 Officer but it would not be appropriate for each and every case to be considered by the Section 151 Officer and therefore standard policies can be developed in a number of cases (with appropriate wording y to ensure that it does not fetter future discretion in relation to these powers).

Page 105 of 246

Aon Hewitt






Administration Strategy

Yes but not been updated since 2011

LGPS Regulations, (as an optional strategy)

We recognise the good practice demonstrated by the Fund in having an administration Strategy in place, particularly given it is optional. As this is an optional strategy, the contents are also optional. The Fund's version includes all elements except the publication of annual reports (e.g. highlighting levels of performance).

There is a strategy in place but this has not been reviewed since 2011 and so we would recommend it is reviewed.

Risk Management Policy & Strategy

No CIPFA Guidance No specific Fund policy or strategy is in place, although there is a risk register which has not been reviewed since April 2015.

N/A

Annual report and accounts

Yes – 2015/2016 LGPS Regulations

CIPFA Guidance "Preparing the Annual Report"

CIPFA accounting guidance

Meets all LGPS Regulatory requirements.

However we would suggest that the report relating to the Fund's administration could be expanded. In particular the legislation suggests that it should include whether any levels of performance under the Administration Strategy are being achieved.

Please note that due to the detailed nature of CIPFA's accounting guidance we have not considered adherence to the guidance. We expect this will have been considered by the Fund's auditors.

This was considered at the June 2016 Panel meeting and it was agreed that these be adopted.

We note that there was also an action point that the Terms of Reference for the Pension Fund needed amending to reflect the fact that all Panel members had voting rights and not solely Members of Middlesbrough Council and this was then amended in the final version.

Page 106 of 246

Aon Hewitt






Knowledge and Skills/Training Policy

No

CIPFA & SAB

TPR Code of Practice

The Fund's business plan states that the CIPFA requirements have been adopted but there is no formal training policy in place for Officers, Panel or Board Members. However we recognise that at the Panel meeting in September 2016 a report was submitted making suggestions regarding Member training.

The LPB has legal responsibilities regarding their knowledge and skills requirements; it is unclear whether the Board meet these legal requirements. It is important that a policy is created and it must incorporate these legal requirements as well as the various areas of guidance

We would therefore recommend that a Training Policy:

• Is created for all Fund stakeholders in accordance with the SAB and CIPFA requirements

• Is formally approved and adopted by the Panel and LPB

• clearly states the individual responsible for ensuring that the Policy is implemented (as is recommended). Typically this is the Section 151 Officer or a senior officer at a similar level with Pension Fund responsibility.

Page 107 of 246

Aon Hewitt







No

SAB

Required for LPB only

There is no formal policy.

Although not explicit in any legislation or guidance, it would be good practice to have a wider Fund Conflicts of Interest Policy applying to all stakeholders, and this is mentioned as part of the CIPFA annual report guidance. This should highlight differences between the Council's requirements in relation to declarations for elected members and officers as well as ensuring other parties (observers and advisers) are fully aware of expectations. Creating such a policy would also assist the Administering Authority to ensure that they adhere to the legal requirements relating to having no conflicts of interest for Local Pension Board members.

Breaches of the Law Procedure

No Pensions Act 2004

TPR Code of Practice

We have not seen any evidence of a Breaches Procedure, and it is therefore unclear whether individuals understand their legal requirements in relation to reporting breaches of the law that may be considered significant to the Pensions Regulator.

We recommend that a Breaches Procedure is drawn up in relation to ongoing monitoring of breaches of legislation. This is not only useful in ensuring any breaches which are materially significant to The Pensions Regulator are reported. The recording requirements would be key in understanding any ongoing issues to ensure that improvements are made.

Page 108 of 246

Aon Hewitt






Treasury/Cash Management

Being prepared CIPFA guidance It is good practice for each administering authority to have a Treasury Management Policy outlining cash flow is managed. Whilst there may be a Council wide strategy, the pension fund uses a separate bank account which is why a separate policy is required. The March 2017 Panel meeting includes an update on this clarifying that the Administering Authority is currently developing a Fund specific Treasury Management Policy.

Employer (admission / cessation / bulk transfer) Policy

Yes

None- good practice only

N/A Although not legally required, many administering authorities have now put such policies in place to provide greater detail and expand on some of the areas in the FSS, such as how bulk transfers will normally be calculated and arranged, how new employers are admitted to the Fund etc. The Fund has such a policy as an appendix to the FSS.

On the face of it, all the key elements in relation to joining and leaving employers are included. However, it could be more explicit in relation to how decisions are made where a clear route is not to be followed. There also does not seem to be any mention of the approach to bulk transfers so it could be expanded to include this.

Page 109 of 246

Aon Hewitt


As a general principle we would also recommend that any strategy or policy document should include the following elements in addition to the main contents/purpose of the document:

Introduction including any relevant legislation and guidance

The Fund's aims / objectives in this area

What measurement / monitoring will be carried out in relation to those aims / objectives

The key risks relating to the strategy and how they are being managed / monitored

Who was consulted on the drafting of the strategy / policy

When / how it was approved

The effective date of the strategy / policy

When it will next be reviewed

The roles / responsibilities of key parties responsible for delivering the strategy (e.g. Pension Advisory Panel, officers, fund managers, advisers etc.)

In addition, we recommend that the latest version of all of these key documents is made separately available on the Fund's website (rather than simply as part of the latest Report and Accounts).

We show in the following tables whether or not these elements are contained in the Fund's key documents, where we consider them appropriate.

Table 3 – Strategies and policies – document structure

Strategy / Policy Elements

Introduc-tion including any relevant legislation and guidance

The Fund's aims / objectives

Measure-ment / monitor-ing requirements

Key risks and how they are being managed / monitored

Who was consulted


Effective date


The roles and respons-ibilities of the key parties

On website

FSS Yes Yes Yes Yes Yes No Yes Yes Yes Yes1

ISS Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes1

Page 110 of 246

Aon Hewitt







Who was consulted


Effective date



On website

Gover-nance

Partly No No No No No No No Yes Yes

Commun-ications

Partly Yes No No No No No No Yes Yes

Discretion-ary

Yes N/A N/A N/A No No No No No Yes

Admin-istration

Yes Partly Partly No Partly No No No Yes No

Risk No policy in place.

N/A N/A N/A N/A N/A N/A N/A N/A N/A

Training No policy in place


Conflicts No policy in place.


Breaches No policy in place


Page 111 of 246

Aon Hewitt







Who was consulted


Effective date



On website

Treasury Manage-ment

No policy in place


Employer (appendix to FSS)

As per FSS As per FSS As per FSS As per FSS As per FSS As per FSS As per FSS As per FSS Yes As per FSS

1 – As these have just been approved, the check has been carried out against the previous versions.

As you can see from the tables above, there are many policies that do not follow good practice by incorporating these key elements. This also highlights that a number of policies are out of date and it's not clear if they were ever agreed by the Panel (as is good practice and in line with agreed delegations). We would recommend the Administering Authority incorporates the review of all of these policies within its business plan and (explained later) and the Panel's forward plan. At that point, we would recommend that the next review of each policy includes a review of the structure of the policy to ensure all the key elements identified above are incorporated. Further, we did notice that the following mission and objectives are included within the Fund's business plan and we recommend that these are incorporated into the relevant policies highlighted above to ensure consistency.

The Investment Panel’s mission is to provide an efficient and effective pension scheme for all employees and pensioners of all eligible employers in the area, in accordance with the requirements of the legislation for the LGPS. The objectives are: • To achieve a 100% funding level over the long term so that the current and future liabilities can be met.

• To maintain a stable employers’ contribution rate over the long term.

• To respond promptly to legislative changes affecting the LGPS and pension provision generally.

• To communicate effectively with the Fund’s participating employers and members.

Page 112 of 246

Aon Hewitt


Adherence to The Pensions Regulator's Code of Practice In addition to the LGPS regulations, CIPFA and SAB guidance, there are a number of key requirements relating to the management and operations of public service pensions schemes which are outlined in The Pension Regulator's Code of Practice Number 14 - Governance and administration of public service pension schemes ("TPR's Code of Practice"). Many of the elements in the guidance relate to legislative requirements, mainly under the Public Service Pensions Act 2013 or the Pensions Act 2004. The Code of Practice covers the following areas and it can be seen that there is also overlap with some of the policies and strategies mentioned previously in this section.

Knowledge and understanding of LPB members

Conflicts of interest and representation

Publishing information about schemes

Internal controls

Scheme record-keeping

Maintaining contributions

Providing information to member

Internal dispute resolution

Reporting breaches of the law

As a matter of best practice, we would expect all Administering Authorities to carry out a regular review of their approach against:

the legal requirements underpinning the TPR Code of Practice, with a view to ensuring that these are being adhered to, and

the guidance contained within the code, to consider whether the guidance should be adhered to or an alternative and justifiable approach should be taken.

This will also be an area of particular interest to LPBs as it is part of their statutory responsibility to assist in ensuring compliance with the TPR's Code of Practice.

The Pension Regulator has carried out two surveys of public sector schemes' compliance with the Code since it was introduced and has stated that it expects all schemes to have assessed themselves against the law and its code of practice.

Given the detailed requirements in TPR's Code of Practice, we have not considered whether the Teesside Pension Fund is compliant with the requirements. Instead we have tried to identify whether there is evidence of a check having been carried out against the legal and best practice elements of the Code. Unfortunately this does not appear to be the case, and we recommend this is carried out as soon as possible, in particular to identify whether all legal requirements are being met.

Although this check does not appear to have been carried out, it is worth highlighting that, as part of this review, we have recognised a number of areas that do demonstrate compliance with the TPR's Code of Practice and a number of the recommendations we have made will also assist in move towards greater compliance against the Code.

Page 113 of 246

Aon Hewitt


4 - Delivery – How do you meet your aims? In this section we consider whether the Fund: has a business plan in place has an appropriate governance structure has people with the appropriate level of knowledge and skills has people with appropriate behaviours needed to make the governance

effective.

Business Planning A Fund's business plan should set out all planned activities in the forthcoming period. Those activities:

should be driven by objectives of the Fund's strategies and policies

will include activities driven by changes in overriding legislation.

It is good practice for Funds to have a clear business plan. The LGPS Myners Principles published by CIPFA explicitly refer to this as follows:

"The CFO should ensure that a medium term business plan is created for the pension fund, which should include the major milestones and issues to be considered by the committee. The business plan should contain financial estimates for the investment and administration of the fund, and include appropriate provision for training. Key targets and the method of measurement should be stated, and the plan should be submitted to the committee for consideration.

The business plan should review the level of internal and external resources the committee requires to carry out its functions effectively and contain recommended actions to put right any deficiencies or to anticipate changing requirements in the future."

We have reviewed the 2016/17 and 2017/18 business plans for the Teesside Pension Fund and it is a very comprehensive and good quality document.

The plan includes most of the elements we would recommend incorporating into a business plan. To further improve and strengthen the plan we would recommend expanding it to include the following to provide clearer visibility and agreement:

key tasks and projects being undertaken by officers (including Kier), rather than just focussing on matters which would be part of future Panel agendas or key decisions. In particular, we would expect this to include more elements in relation to:

– legislative changes (e.g. any potential changes as a result of MIFIDII and administration projects such as a result of exit payments and GMP/scheme reconciliation),

– contract reviews (e.g. the retender of the third party administration service which we understand will need to commence in 2018/19)

– policy review, as explained previously (e.g. governance, administration, etc.).

budgets for approval covering all areas of the Fund (not just the investment management expenses)

performance targets relating to all areas of the Fund. We note the administration ones are not included. The performance targets should all be aligned to what is included in the overriding policies.

Page 114 of 246

Aon Hewitt


Performance Measurement Those responsible for governing the Fund should be provided with appropriate performance information. Measurements should:

illustrate whether the Fund's aims are being achieved (as outlined in the Fund's policies and strategies)

cover the full range of key areas (e.g. investments, funding, governance, communications and administration)

illustrate whether the Fund's business plan is being achieved

be updated in accordance with appropriate timescales

be presented in a manner that is easy to follow and understandable to those governing the Fund

assist in identifying potential changes to the Fund's business plan, strategies, polices and aims.

At each Panel meeting, a quarterly update report is presented including the following information:

Fund Manager's report

Investment Adviser's report

CBRE Property report

However, although investments are covered in detail, based on our analysis of the last 3 years meeting minutes, it appears that the Panels spend a disproportionate amount on time on this area and very little information is provided in relation to monitoring of other areas such as funding, governance, administration and communication matters. As a result, we are concerned that the Panel might not be provided with sufficient information to allow them to identify successes or issues in the running of the Fund, such as delays in paying or notifying scheme benefits, resourcing issues or concerns with employer covenant arrangements.

We recommend that the Administering Authority reviews its wider monitoring arrangements to ensure that all of the Fund's aims and objectives, as should be articulated in the key strategies and policies, are subject to ongoing monitoring at appropriate timescales. We would expect this to include areas such as:

regular reporting of turnaround times and more qualitative measures in relation to the administration performance targets, some of which are already set out in an administration strategy (see above)

more regular consideration of funding matters, such as funding levels, employer covenants and cash-flows, specifically focussed on the key objectives of the funding strategy statement

We would also expect ongoing monitoring reports to share information such as:

identified breaches of the law (both those reported to TPR and those simply recorded by the Fund)

monitoring progress against the Fund's budget including expected income and expenditure

monitoring of key tasks included within the annual business plan.

It is possible to contain much of this information within a summary scorecard or another simple method of indicating at a high level any areas that are not meeting the requirements (but equally allowing Panel members to easily identify how well the Fund is also doing). This could perhaps be as simple as an initial summary page within the appropriate report, which would assist in ensuring information is kept succinct where appropriate.

Risk Management Effective risk management is critical in minimising the impact and/or probability of undesirable events and in maximising the realisation of opportunities. Risk Management should be:

aligned with the Fund's aims

Page 115 of 246

Aon Hewitt


a key consideration in decision making

systematic or structured

an integral part of the Administering Authority's processes and procedures on a daily basis.

Although much of the focus of Panel papers is around the key risks to the Fund from an asset management perspective, the Administering Authority does not seem to have a Fund specific risk management policy. Such a policy would highlight how risks are identified and managed, where responsibility lies and reporting and escalation of matters. That being said, the Fund has in the past maintained a risk register which sets out the controls in place to manage the risks identified and that is being developed for submission to the LPB on a biannual basis. The risk register is a key element of the day to day management of the Fund and is expected to be in place according to:

CIPFA's guidance to managing risk in the LGPS (which particularly highlights that there is a great deal more to risk management in the LGPS than simply investment risk)

CIPFA's Myners LGPS guidance

The Pension Regulator's Code of Practice (which is driven by the Pensions Act 2004, which requires appropriate internal controls to be in place).

We recommend that the Administering Authority considers creating a Fund specific risk management policy to tie in with the Fund's risk register and that the register continues to be developed and updated. We further recommend that the risk register (or at least the key risks) are regularly shared with the Panel so as to provide an opportunity to input to how these risks are being mitigated (or accepted as the case may be).

Page 116 of 246

Aon Hewitt


5 - Decisions – Do you have effective decision making? In this section we consider whether the Fund: has an appropriate governance structure has people with the appropriate level of knowledge and skills has people with appropriate behaviours needed to make the governance

effective. In this part of the report we would normally make comment on how the Panel meetings are run, for example whether meetings are well chaired, whether there is appropriate engagement from the Panel, with all or most individuals having an opportunity to participate in the discussion, with appropriate guidance from advisers and officers, and whether there is sufficient time for discussion. As we have not observed any of the meetings and we have not gathered feedback from any Panel members, we are unable to make substantive comments regarding many of these areas and therefore the information below is based on reviewing recent minutes, reports and other background information.

Appropriate governance structure There is no one 'correct' governance structure. The Administering Authority's structure should: have clear terms of reference

have a clearly documented scheme of delegation

allow decision making at the appropriate level

allow quick decision making where appropriate

include appropriate representation from stakeholders

involve well-presented information/reports

proper range of subject matters being considered

allow sufficient time for discussion where necessary

have good quality (Panel) administration (e.g. issuing papers in good time)

involve a process for managing conflicts

provide transparency to stakeholders where appropriate.

These elements are considered in this section.

Terms of reference and scheme of delegation to the Pension Fund and Investment Panel and senior officers

The Fund's business plan refers to the terms of the Panel being agreed at Council in September 1999. This report is no longer available on the Council's website and very limited information is included in the Council's Constitution as reproduced below (extracted from the Scheme of Delegation):

ALLOCATION OF FUNCTIONS - NON – EXECUTIVE FUNCTIONS

FUNCTION: Functions relating to local government pensions, etc.

DELEGATION: The Teesside Pension Fund and Investment Panel

General Delegation to Officers

Superannuation and Pensions: The Chief Finance Officer to deal with pension matters.

Page 117 of 246

Aon Hewitt


In addition, the Constitution highlights that the Chief Financial Officer is responsible for the proper administration of the Authority's financial affairs, including the pension fund.

The Governance Compliance Policy states, "The funding is in the hands of the Teesside Pension Fund and Investments Panel. This Panel acts in a similar manner to the Board of Trustees of a private sector pension fund. The Administering Authority has granted the panel plenary powers to manage the investments of the fund within the requirements of the Local Government Pension Scheme Regulations as amended from time to time, without reference to the full council."

It also states "The Administering Authority has designated Mouchel Business Services as the administrator of the Teesside Pension Fund."

The specific terms of reference for the Panel (as included in the Governance Policy Statement) are included in Appendix B.

We consider there to be opportunities to clarify the role of the Panel and the officers of the Fund. Some points for consideration are as follows:

with most other Administering Authorities, the full terms of reference for the Panel (and the Board) are included within the Council's Constitution. Even if this route is not followed, we believe there should be greater clarity around how the terms of reference, membership of the Panel and officer delegations across all areas (i.e. governance, investments, funding, administration and communications).

we do not consider it good practice for Kier (or any contractor or supplier) to have full delegated responsibility for delivery and decisions relating to administration without appropriate oversight by the Panel. We are not clear whether this is fully the case but this needs clarified and we would recommend much greater oversight of the administration service by the Panel.

We have been asked to separately consider the Panel's and LPB's terms of reference and we will bring separate recommendations to the Governance Working Party.

Appropriate representation

It is good practice for Administering Authorities to allow some representation for scheme members and employers. The Administering Authority provides this in a number of ways:

The Pension Fund and Investment Panel and is made up of:

– Elected members from Middlesbrough Council (the administering authority)

– Elected members from all the other councils in the former Cleveland County Council

– Trade union members (no voting rights)

– A representative from the other scheme employers (chosen by election by the admitted bodies)

The LPB is made up of:

– Three employer representatives

– Three employee representatives

We consider that the involvement of the wide range of stakeholders across these two bodies provides good opportunity for them to feed into the decision making process. In addition, it is good practice to have an employer representative (i.e. a representative of employers other than the Administering Authority and other Councils) as a member of the Pension Fund and Investment Panel and this meets the best practice included within the Secretary of State's Governance guidance.

Appropriate level of decision making and quick decision making where appropriate

It is important that decisions are made at the appropriate level and that the governance structure is flexible enough to ensure that decisions can be made in a timely manner. It would appear from the

Page 118 of 246

Aon Hewitt


agendas and minutes we have reviewed that the Panel does make decisions where required at meetings and there is a good level of discussion taking place. The decisions are recorder in the minutes as a matter of public record. We are unable to comment on how inclusive the discussions are and what level of challenge takes place as we have not observed any of the meetings.

It is, however, important that investment decisions within the constraints of the Fund's strategy can be made in between Panel meetings. Based on the information presented within the Investment Strategy Statement (particularly in appendix one) and at Panels, there appears to be delegated responsibilities permitting officers to vary the short term asset allocation on the basis of advice from the Fund's investment advisers. However, we could not source the formal documentation and approval of those delegations through the Constitution or otherwise. We would therefore recommend that consideration is given to how these might be articulated more clearly and with the appropriate approval.

Well-presented information/reports

Information and reports are provided to the Pension Fund and Investment Panel by officers and various advisers (including the investment consultant). Our view from the reports we have seen is the information and reports are well constructed and presented. We have not had the opportunity to observe any meetings where reports were presented and hence we cannot comment on how engaged the panel were or how they interacted with each other, the officers and advisers. Equally we have not obtained views from the Panel members as to whether they are satisfied with the content and format of the reports and presentations.

Proper range of subject matters being considered

As mentioned previously the majority of the meetings tend to focus on investment matters and we would expect to see more time spent focussing on the areas of Fund management, and particularly administration and communication matters. This is particularly important, in our view, given the administration of the Fund is outsourced to a private contractor (Kier).

Sufficient time for discussion It is very difficult for us to comment as we have not observed any of the meetings. However we have reviewed all of the last three years' agendas and minutes and it would appear that all agenda items have been covered in each meeting. What we can't comment on is whether sufficient time was given to each agenda item or whether some of these were rushed and hence not covered in sufficient detail or not providing opportunity for any Panel members', officers' or advisers' views to be heard and considered.

Managing actual and potential conflicts of interest Each Panel elected member and any co-opted member is required to declare any interests (pecuniary or not) in line with local authority requirements at the beginning of each meeting and this is recorder in the meeting minutes. It is also pleasing to see that the Investment Advisers to the Fund have highlighted a pecuniary interest (albeit the details of this are not clear in the minutes). A pecuniary interest is generally considered as an interest that a person has in a matter because of a reasonable likelihood or expectation of appreciable financial gain or loss to the person. This would cover areas such as land ownership, involvement with businesses and gifts or hospitality.

However, there can be examples whereby a member does not have a clear pecuniary or non-pecuniary interest as defined by the Council's Code of Conduct, but instead has a personal or professional conflict of interest that needs to be managed appropriately. For example, having separate responsibility for an employer who participates in the Fund

In that example, there may be circumstances where it is necessary for Panel members (e.g. administering authority or other Council's elected members) to balance their employing authority responsibilities (e.g. maintaining local service provision) against their administering authority responsibilities (e.g. ensuring appropriate payments by all employers into the Fund). This could potentially extend to political views whereby some councillors may have different views than other councillors from differing political parties, for example, in relation to investment in local infrastructure or environmental, social and governance (ESG) matters. Recent Queen's Counsel opinion and the

Page 119 of 246

Aon Hewitt


Law Commission report conclude that ultimately Panel members, and all those concerned with the management of the Fund, should remain focussed on the underlying fiduciary and public law responsibilities. This means that Fund assets should be invested in the best interests of members and beneficiaries. The potential for interests that could conflict with Fund matters, and this ultimate responsibility, should always be recognised and managed appropriately. We do recognise that the potential for conflicts of interest was recently highlighted within in the March 2017 Panel paper on local infrastructure investment.

The Council's Code of Conduct requirements in relation to disclosable pecuniary and some non-pecuniary interests are a useful starting point for managing conflicts. However, there are circumstances where other interests could have an impact on impartiality in the Fund's decision making. A Fund specific Conflicts of Interest Policy (see below) could ensure this point is clear to all involved. It is, however, worth highlighting that this would not necessarily require individuals to be removed from meetings.

The CIPFA Guidance for LGPS Funds in Preparing the Annual Report refers to the information contained within the Fund's Governance Compliance Statement including their "policy and processes for managing any conflicts of interest". It is also a key area of interest for both the Scheme Advisory Board and in The Pension Regulator's Guidance, albeit more focussed on LPB members.

This is not a legal requirement but, as mentioned earlier in this report, however we recommend that the Administering Authority develops a Fund specific Conflicts of Interest policy outlining how conflicts of interest will be managed and dealt with at a Fund level. This could include reference to;

the Council's Code of Conduct

how it relates to co-optees and observers

examples of Fund specific potential conflicts of interest

how conflicts of interest (and potential conflicts of interest) will be managed

guidance for officers and advisers of the Fund to also adhere to.

This would complement the procedures currently being developed for local infrastructure investments and many of the decisions relating to asset pooling.

Transparency to Stakeholders As with all public services, it is important that stakeholders have appropriate access to Fund information, including regarding the governance of the Fund. In this regard the Administering Authority's activities are appropriately driven by local authority legislation, for example:

the requirement to provide public access to meetings (except for exempt items), and

the requirement that all reports, agendas and minutes are to be published (except for exempt information).

It is pleasing to therefore see Panel meeting agendas and reports, and in due course the minutes, are all published on the Middlesbrough Council website. It is also positive to note that exempt items appear to be extremely rare, demonstrating a culture of openness and transparency in decision making. In addition, the LGPS regulations require each Administering Authority to produce and publish an annual report and accounts providing key financial information, management information and strategies. This requirement is enhanced by the (non-statutory) CIPFA Guidance for LGPS Funds in Preparing the Annual Report.

Our observations are that the Administering Authority demonstrates compliance with this requirement, producing and publishing a thorough set of report and accounts annually.

Further the Administering Authority maintains a website which includes a wide range of information including:

information for scheme members about the benefits of being a scheme member

key governance documents (e.g. Annual Report and Accounts and policies)

Page 120 of 246

Aon Hewitt


information about the Panel and LPB.

We do, however, note that the Administering Authority does not host any employer forum (other than perhaps some training for employers in the day to day responsibilities of providing information for the administration team). It is commonplace for administering authorities to host employer forum (generally annually) or annual stakeholder meetings. We believe these are particularly beneficial given the growing number of employers in LGPS Funds, including the Teesside Pension Fund, providing an opportunity for two way communication between stakeholders. There are a number of options as to how this can be positioned, including:

focussing purely on employers, but perhaps splitting the session between more scheme member specific elements (and so focussed on those involved with day to day administration or HR matters) and more strategic elements such as funding, governance and investments (of more interested to Finance Directors or equivalents).

opening it up to scheme members as well as employer representatives.

These events can often have guest speakers, such as investment advisers, actuaries and AVC providers as well as updates from key officers of the Fund, the Panel and Board.

Skills and knowledge A critical element of good governance is the need for those managing the Fund to have the appropriate level of knowledge and skills. The current requirements relating to training of Pension Fund and Investment Panel members and officers of LGPS Funds are included in the following documents:

CIPFA Code of Practice on public sector pensions finance knowledge and skills

CIPFA Knowledge and Skills Framework – Elected representatives and non-executives

CIPFA Knowledge and Skills Framework - Officers

In addition, Scheme Advisory Board's Guidance and The Pensions Regulator's Code of Practice (albeit focussed on LPB knowledge and skills legal requirements) highlight the need for the Administering Authority to have appropriate policies and procedures in place to ensure a high level of knowledge and skills.

Though adhering to the CIPFA documents is not statutory, they are considered good practice and there is increasing acceptance of the need for high levels of knowledge as well as increasing scrutiny of this by Panel members and officers. The key elements of the CIPFA requirements are that Administering Authorities:

clearly articulate the knowledge and skills requirements in a Fund policy

provide ongoing training in an effective and suitable manner to meet those requirements

regularly review whether knowledge aspirations are being met

ensure that they rely appropriately on officers and advisers to provide expert knowledge.

These elements are considered in this section. Our focus within this section is on the requirements relating to Panel members and senior officers of the Fund.

Clearly articulated knowledge and skills requirements in a Fund policy

The Fund has no formal training policy for officers and Panel members although a proposal was made regarding member training at the Panel meeting on 28 September 2016.

The following measures were suggested: That there be a minimum mandatory training requirement for all Members of the Teesside

Pension Fund and Investment Panel (TPFIP); and

That all Members of the TPFIP complete a self-assessment form to ascertain if further guidance or training is required, following completion of the mandatory training, in order to comply with the

Page 121 of 246

Aon Hewitt


Myners Principles.

The minutes from this meeting show the following was ordered:

1. Introductory training for all Members of the Teesside Pension Fund and Investment Panel was mandatory. 2. All Union Representatives should be offered the Introductory Training. 3. A self-assessment form should be completed by participants following the Introductory Training.

We would further recommend that the Administering Authority considers formalising and implementing a Fund policy to set out its policy and approach to training, which could include the following:

A statement regarding embracing the CIPFA Framework (or an alternative)

How training will be provided

Qualifications the Administering Authority will encourage (if relevant)

Expectations in relation to training attendance (perhaps even to the degree that all Panel members must attend at least 1 key conference per year)

Specific requirements in relation to new members (e.g. the requirement to undertake induction training)

How knowledge requirements will be regularly assessed and monitored

An individual within the Administering Authority who is ultimately responsible for ensuring the policy is adhered to (CIPFA recommend this should be the Section 151 Officer's responsibility).

We recommend that all of the above points are considered separately for officers, Panel members and LPB members, and are brought together into a single document so there is one single Fund policy on training.

Providing ongoing training in an effective and suitable manner to meet those requirements and regularly review whether knowledge aspirations are being met

We believe it is important to provide a wide range of training opportunities to Panel members via a range of different approaches. For example, in addition to ensuring that Panel members are aware of all the key elements of managing the Fund, we believe it is important that they have the opportunity to learn about areas that the Administering Authority may not currently be focussed on. A key skill of a good Panel member is to be able to identify where information is not provided in reports, and therefore to be able to ask questions relating to alternative options that are not under consideration (i.e. turning the unknown unknowns into known unknowns).

Whilst we note that the members are encouraged to attend the fundamentals training we can see no evidence in the agendas and minutes of the Panel meetings of any regular training at these meetings. We recommend that all training attended is clearly documented in a training log, which should provide an overall assessment against the CIPFA knowledge and skills framework (or whichever framework is adopted) to allow one to understand whether Panel/LPB members and officers have had appropriate training in the required competencies. We recommend this is considered in conjunction with the creation and implementation of the Training Policy mentioned above. We also recommend that further information in relation to attendance at training is included in Panel updates and the Fund's Annual Report and Accounts.

Rely appropriately on officers and advisers to provide expert knowledge

Having reviewed the last three years of Panel minutes and agendas, it is clear to see that the members rely on input from their investment advisers, actuarial advisers and officers of the Fund to aid them in their decision making. Every meeting features updates and papers from the investment and property advisors and there is regular input from the officers and other advisers when needed.

Behaviour

Page 122 of 246

Aon Hewitt


A good governance structure will not be effective unless it involves the right people with the right attitude. Individuals should: have a high level of attendance at meetings demonstrate integrity in relation to their Fund role be engaged and provide appropriate challenge be accountable for the decisions made highlight any potential conflicts they may have for a Chairperson, manage the meetings fairly without any bias to individuals or self prepare adequately for meetings. These elements are considered in this section. The information derives from review of the minutes, agendas and the governance report in the 2015/16 report and accounts.

Attendance at Meetings

The 2015/16 attendance record in the annual report and accounts also demonstrates strong ongoing attendance, so we have no concerns in this area.

General Behaviour

This element can be easily aligned with the General Principles of Public Life which are adopted by Middlesbrough Borough Council as part of its members' Code of Conduct. These principles are:

1. Selflessness

2. Integrity

3. Objectivity

4. Accountability

5. Openness

6. Honesty and truthfulness

7. Leadership

They also apply to co-opted members.

It is very difficult for us to make any comments under this heading as we have not had the opportunity to observe behaviours at first hand.

Page 123 of 246

Aon Hewitt


Appendix A – Reference Material This appendix lists the various documents that were considered as part of this Governance Review.

Last three years Pension Fund and Investment Panel Meeting agendas, reports and minutes

The Middlesbrough Borough Council Constitution 2016

The Middlesbrough Borough Council Scheme of Delegation 2016

Annual Report 2015/16

Communications Strategy 2010

Funding Strategy Statement March 2017

Governance Compliance Statement 2011

Investment Strategy Statement 2017

Valuation Report 2013

Administering Authority Discretions Policy Statement 2009

Risk Register 2015

Business Plan 2016/17

Pensions Administration Strategy 2011

Page 124 of 246

Aon Hewitt


Appendix B – Panel Terms of Reference This appendix reproduces the terms of references as included in the Governance Compliance Statement of 2011.

1. For Members of the Council to act as Trustees of the Fund.

2. To have delegated powers to manage the investments of the Fund within the requirements of the Local Government Pension Scheme Regulations as amended from time to time.

3. To manage the Fund in accordance with the Management Agreement.

i. To ensure that the fund complies with the Local Government Pension Scheme (Benefits, Membership and Contributions) Regulations 2007, the Local Government Pension Scheme (Administration) Regulations 2008 and the Local Government Pension Scheme (Transitional Provisions) regulations 2008 (as amended), Her Majesty’s Revenue and Customs (HMRC) requirements for Pension Funds and any other relevant statutory provision.

ii. The selection, appointment and dismissal of investment managers, scheme administrators, independent advisors and ad hoc advisors.

iii. The formulation of investment strategy and risks strategy for the Fund under its stewardship, after receiving advice from its independent advisors and the Loans and Investment Manager.

iv. Setting investments targets and monitoring the investment performance and financial control of the Funds’ assets and commissioning the preparation of actuarial valuations and accounts.

v. Ensuring that value for money is achieved from all the specialists supplying services to the Fund through a comprehensive and qualitative selection process and through budgetary control.

vi. Commissioning any actuarial valuation and taking appropriate action in the light thereof.

vii. Receiving and agreeing the annual report and accounts.

viii. Ensuring effective communication with scheme members and pensioners.

ix. Receiving and dealing with general complaints from scheme members and pensioners.

x. To determine the exercise of the discretions allowed to the administering authority, as laid down in by relevant legislation.

xi. Any other responsibilities delegated to it by the Authority.

Page 125 of 246

Aon Hewitt


Contact Information Michael Ferguson Senior Public Sector Consultant Public Sector Team +44 (0)7798 841776 [email protected] Karen McWilliam Head of Public Sector Benefits and Governance Consultancy Public Sector Team +44 (0)7711 016707 [email protected]

About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world’s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited to learn about Aon’s global partnership with Manchester United.

Page 126 of 246

mailto:[email protected]


http://www.aon.com/

http://www.aon.com/risk-services/default.jsp

http://www.aon.com/reinsurance/default.jsp

http://www.aon.com/human-capital-consulting/default.jsp

http://www.aon.com/human-capital-consulting/hrbpo/default.jsp

http://aon.mediaroom.com/

http://www.insurancejournal.com/news/international/2012/12/12/273624.htm

http://www.aon-esolutions.com/

http://www.aon.com/human-capital-consulting/default.jsp

http://aon.mediaroom.com/2013-02-21-Risk-Insurance-magazine-honors-47-Aon-brokers-and-consultants-with-Power-Broker-designation

http://www.aon.com/human-capital-consulting/consulting/health_benefits_consultants.jsp

http://aon.com/

http://www.aon.com/manchesterunited

http://www.manutd.com/Splash-Page.aspx

1

Teesside Pension Fund Committee (to replace Teesside Pension Fund and Investment Panel)

Role and Delegated Functions The Pension Fund Committee's principal aim is to carry out the functions of Middlesbrough Council as the Scheme Manager and Administering Authority for the Teesside Pension Fund in accordance with Local Government Pension Scheme and any other relevant legislation. In its role as the administering authority, Middlesbrough Council owes fiduciary duties to the employers and members of the Teesside Pension Fund and must not compromise this with its own particular interests. Consequently this fiduciary duty is a responsibility of the Pension Fund Committee and its members must not compromise this with their own individual interests.

The Pension Fund Committee will have the following specific roles and functions, taking account of advice from the Chief Finance Officer and the Fund's professional advisers:

a) Ensuring the Teesside Pension Fund is managed and pension payments are made in compliance with the extant Local Government Pension Scheme Regulations, Her Majesty’s Revenue & Customs requirements for UK registered pension schemes and all other relevant statutory provisions.

b) Ensuring robust risk management arrangements are in place.

c) Ensuring the Council operates with due regard and in the spirit of all relevant statutory and non-statutory best practice guidance in relation to its management of the Teesside Pension Fund.

d) Determining the Pension Fund’s aims and objectives, strategies, statutory

compliance statements, policies and procedures for the overall management of the Fund, including in relation to the following areas:

i) Governance – approving the Fund's Governance Policy and

Compliance Statement for the Fund within the framework as determined by Middlesbrough Council and making recommendations to Middlesbrough Council about any changes to that framework.

ii) Funding Strategy – approving the Fund's Funding Strategy Statement including ongoing monitoring and management of the liabilities, ensuring appropriate funding plans are in place for all employers in the Fund, overseeing the triennial valuation and interim valuations, and working with the actuary in determining the appropriate level of employer contributions for each employer.

iii) Investment strategy - approving the Fund's Investment Strategy

Page 127 of 246

2

Statement and Compliance Statement including setting investment targets and ensuring these are aligned with the Fund's specific liability profile and risk appetite.

iv) Administration Strategy – approving the Fund's Administration Strategy determining how the Council will the administer the Fund including collecting payments due, calculating and paying benefits, gathering information from and providing information to scheme members and employers.

v) Communications Strategy – approving the Fund's Communication Strategy, determining the methods of communications with the various stakeholders including scheme members and employers.

vi) Discretions – determining how the various administering authority discretions are operated for the Fund.

e) Monitoring the implementation of these policies and strategies on an ongoing basis.

f) In relation to the Borders to Coast Pension Partnership; the Asset Pooling

Collaboration arrangements:

i) Monitoring of the performance of the Borders to Coast Asset Pooling Collaboration and its Operator and recommending actions to the Joint Committee, The Mayor or his Nominee (in his role as the nominated person to exercise Shareholder rights and responsibilities), Officers Groups or BCPP Ltd, as appropriate.

ii) Undertake the role of Authority in relation to the Inter Authority Agreement, including but not limited to: • Requesting variations to the Inter Authority Agreement • Withdrawing from the Inter Authority Agreement • Appointing Middlesbrough Council officers to the Officer

Operations Group.

g) Considering the Fund's financial statements and the Fund’s annual report.

h) Selection, appointment, dismissal and monitoring of the Fund’s advisers, including actuary, benefits consultants, investment consultants, global custodian, fund managers, lawyers, pension funds administrator, independent professional advisers and AVC provider.

i) Liaison with internal and external audit, including providing recommendations in relation to areas to be covered in audit plans, considering audit reports and ensuring appropriate changes are made following receipt of audit findings

j) Making decisions relating to employers joining and leaving the Fund. This

Page 128 of 246

3

includes which employers are entitled to join the Fund, any requirements relating to their entry, ongoing monitoring and the basis for leaving the Fund.

k) Agreeing the terms and payment of bulk transfers into and out of the Fund.

l) Agreeing Pension Fund business plans and monitoring progress against them.

m) Agreeing the Fund's Knowledge and Skills Policy for all Pension Fund Committee members and for all officers of the Fund, including determining the Fund’s knowledge and skills framework, identifying training requirements, developing training plans and monitoring compliance with the policy.

n) Agreeing the Administering Authority responses to consultations on LGPS matters and other matters where they may impact on the Fund or its stakeholders.

o) Receiving ongoing reports from the Chief Finance Officer, the Head of Investments and Treasury Management and other relevant officers in relation to delegated functions.

No matters relating to Middlesbrough Council’s responsibilities as an employer participating within the Teesside Pension Fund are delegated to the Pension Fund Committee.

Composition

(a) Membership

The Teesside Pension Fund Committee will be composed of 15 members. Its membership will include:

i) Nine Councillors of Middlesbrough Council, determined by the Council.

ii) One Councillor from each of Hartlepool Borough Council, Stockton Borough Council and Redcar & Cleveland Borough Council.

iii) One representative of the other Scheme Employers in the Teesside Pension Fund appointed in accordance with procedures agreed by the Chief Finance Officer and Monitoring Officer.

iv) Two representatives of the scheme members of the Teesside

Pension Fund, appointed in accordance with procedures agreed by the Chief Finance Officer and Monitoring Officer.

Named substitutes are permitted providing they satisfy the knowledge and skills policy of the pension fund.

Page 129 of 246

4

(b) Term of office

i) The representative members (for other scheme employers and scheme members) are appointed for a period of no more than six years and may be reappointed for further terms.

ii) Councilors of the participating Councils will have a term of office to

the next ordinary local government election following their appointment. They may be reappointed for further terms.

(c) Quorum.

A meeting of the Pension Fund Committee shall only be quorate when:

i) At least eight members are present, and

ii) At least five of the members present are Councillors of

Middlesbrough Council.

(d) Voting

Voting Rights are held by all members including the scheme member representatives as long as they are not employees of Middlesbrough Council

(e) Chairing the Committee.

i) Only a Councilor of Middlesbrough Council may be the Chair.

ii) The Chair and Vice Chair will be elected annually by members

of Middlesbrough Council.

iii) .

(f) Procedure Rules The Council’s Rules of Procedure, Codes and Protocols will apply to this Committee in the same way as they apply to other Committees unless different provision is made in this article. Members of the Teesside Pension Board shall be permitted to attend Pension Fund Committee meetings, including exempt items.

(g) Knowledge and Skills Requirements Members of the Committee will be obliged to adhere to the Fund’s

Page 130 of 246

5

Knowledge and Skills Policy, including attendance at training events.

(h) Location

The Pension Fund Committee may occasionally meet outside of Middlesbrough Council area.

Officers

The Committee may delegate a limited range of its functions to one or more officers of the Authority. The Pension Fund Committee will be responsible for outlining expectations in relation to reporting progress of delegated functions back to the Pension Fund Committee.

OFFICERS’ DELEGATIONS

Chief Finance Officer and Head of Investments and Treasury Management

The day to day management and administration of Teesside Pension Fund matters including ensuring arrangements for investments of assets and administration of contributions and benefits, excluding matters delegated to the Teesside Pension Fund Committee.

OTHER DELEGATIONS RELATING TO BORDERS TO COAST ASSET POOLING COLLABORATION

At its meeting on the 15th February 2017, Middlesbrough Council approved its participation, acting as the Administering Authority for the Teesside Pension Fund, in the Border to Coast Pension Partnership Pooling Arrangement as the Council's approach to pooling investments in accordance with the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 and the Guidance on Preparing and Maintaining an Investment Strategy. The following are responsibilities delegated relating to this participation (in addition to those mentioned in part (f) of the Teesside Pension Fund Committee responsibilities above).

The Mayor (or whomever he decides to nominate)

The nominated person to exercise the Council’s rights as a shareholder in BCCP Limited

and be its representative at shareholder meetings, on behalf of the Teesside Pension Fund. The responsibilities are as set out in the Shareholders Agreement, Articles, Inter Authority Agreement and any other agreements entered into and include, but are not limited to the following :

Page 131 of 246

6

a) to serve a written notice on the Board of the Company to cease to be a Shareholder in the Company

b) to vote on matters, including the reserved matters in Schedule 1 of the Shareholder Agreement as replicated below:

Reserved Matters

PART A – Matters for approval by all of the Shareholders (unanimous consent

required) 1. subject to FCA rules, extend the activities of the Company outside the scope of the Business or close down any operation of the Business; 2. subject to FCA rules, give any guarantee or indemnity outside the ordinary course of the Business to secure the liabilities of any person or assume the obligations of any person (other than a wholly owned subsidiary) (e.g. guaranteeing a lease that does not relate to the Business of the Company); 3. subject to FCA rules, enter into or vary any contracts or arrangements with any of the Shareholders or directors (other than service agreements and letters of appointment as directors) or any person with whom any shareholder or director is connected (whether as director, consultant, shareholder or otherwise) (e.g. any contract which could give preferential rights to a specific shareholder); 4. enter into any agreement not in the ordinary course of the Business and/or which is not on an arm's length basis; 5. enter into or vary any agreement for the provision of consultancy, management or other services by any person which will, or is likely to result in, the Company being managed otherwise than by its directors; 6. change the name of the Company; 7. pass a resolution or present a petition to wind up the Company or apply for an administration order or any order having similar effect in a different jurisdiction in relation to the Company unless in any case the Company is at the relevant time unable to pay its debts within the meaning of section 123 Insolvency Act 1986; 8. reduce or cancel any share capital of the Company, purchase its own shares, hold any shares in treasury, allot or agree to allot, whether actually or contingently, any of the share capital of the Company or any security of the Company convertible into share capital, grant any options or other rights to subscribe for or to convert any security into shares of the Company or alter the classification of any part of the share capital of the Company (in each case other than as expressly permitted by this Agreement and/or the Articles where no prior consent shall be required including, without limitation, pursuant to either clause 4 (Finance & Regulatory Capital) and/or clause 15 (Consequences of Breach) and/or Article 26 of the Articles (Issue of Shares and Pre-Emption Rights)); 9. other than as expressly permitted by this Agreement and/or the Articles, redeem or buy any existing Shares or otherwise reorganise the share capital of the Company; 10. admit any person as a member of the Company or an investor in the BCPP pool; 11. enter into any partnership, joint venture or profit sharing arrangement with any person (excluding entering into any investment or investment vehicle); 12. alter any of the provisions of the Articles or any of the rights attaching to the Shares; 13. amalgamate or merge with any other company or business undertaking; 14. sell, lease (as lessor), licence (as licensor), transfer or otherwise dispose of any of its material assets otherwise than in the ordinary course of the Business; 15. the removal and replacement of any Interim Directors, but for the avoidance of doubt not including any subsequent or replacement appointments of any director which shall be

Page 132 of 246

7

made under Part B below; 16. commence, settle or defend any claim, proceedings or other litigation brought by or

against BCPP, except (i) in relation to debt collection (not exceeding £500,000) in the

ordinary course of the Business and (ii) in relation to any investment related claims or proceedings relevant to the ACS or other collective investment vehicles; 17. take out any third party loan(s) in respect of BCPP which (in aggregate) exceed the

sum of £5,000,000;

18. form any subsidiary of BCPP, or acquire any shares in any other company, whether through subscription or transfer, such that the company concerned becomes a subsidiary of BCPP; 19. determine the composition, governance arrangements and limits of authority of any and all subsidiaries of BCPP; 20. approving and adopting a Subsequent Strategic Plan (including the Annual Budget) and/or amending any such Plan; and 21. make any capitalisation, repayment or other distribution of any amount standing to the credit of any reserve of the Company or pay or declare any dividend or other distribution to the Shareholders save that no consent will be required to pay the B Share Dividend.

PART B – Matters for approval by a Shareholder Majority only

1. enter into or materially vary any licence or other similar agreement relating to intellectual property to be licenced to or by the Company which is otherwise than in the ordinary course of the Business; 2. appoint or remove the auditors of the Company; 3. alter the Company's accounting reference date; 4. make any significant change to any of the Company's accounting or reporting practices other than conforming with any changes made to the accounting standards adopted by the Company; 5. approve the annual accounts of the Company; 6. determine the amount of, or any increase in, remuneration payable to any directors from time to time; 7. establish or amend any pension scheme (i.e. for employees of the Company); 8. subject to FCA rules, enter into any agency, distribution or similar agreement which confers or is expressed to confer any element of exclusivity as regards any goods or services the subject of such agreement or as to the area of the agreement or vary such an agreement to include any such exclusivity; 9. incur in any financial year any item or series of items of capital expenditure including

finance leases (but excluding operating leases) of more than £5,000,000 (unless provided

for in the Initial Strategic Plan or any Subsequent Strategic Plan); 10. enter into or vary any operating lease either as lessor or lessee, of any plant, property or equipment of a duration exceeding 5 years or involving aggregate premium and annual

rental payments in excess of £100,000 (unless provided for in the Initial Strategic Plan or

any Subsequent Strategic Plan); 11. adoption of (and any amendment of) any written conflicts policy; 12. approval of any conflict or potential conflict of interest any director may have which would preclude him or her from being included in the quorum of any meeting of the directors; 13. appointment of any subsequent director, any alternate director (who is not at the time a director of the Company) and including, for the avoidance of doubt any subsequent Chair

Page 133 of 246

8

in accordance with the Companies Act 2006 or otherwise; and 14. removal of any director and, for the avoidance of doubt, the Chair in accordance with the Companies Act 2006 or otherwise.

Chairman (or Vice Chairman in their absence) of the Teesside Pension Fund Committee

The nominated representative of the Council on behalf of Teesside Pension Fund on the Border to Coast Pension Partnership Joint Committee, noting that the Joint Committee shall not making binding decisions on the matters in the Terms of Reference of the Joint Committee but may make recommendations to each Authority to individually determine.

Chief Finance Officer (who is the Section 151 Officer)

a) The nominated officer to meet and resolve any Deadlock Situation as per Clause 10 of the Shareholder Agreement

b) The nominated officer to consider and resolve any Dispute as per Clause 13 of the Inter Authority Agreement

Page 134 of 246

TEESSIDE PENSION BOARD OF MIDDLESBROUGH COUNCIL TERMS OF REFERENCE

Introduction 1. This document sets out the terms of reference of the Teesside Pension Board, the Local Pension Board of Middlesbrough Council (the 'Administering Authority') a scheme manager as defined under Section 4 of the Public Service Pensions Act 2013. Middlesbrough Council is the scheme manager for Teesside Pension Fund. The Teesside Pension Board (hereafter referred to as 'the Board') is established in accordance with Section 5 of that Act and under regulation 106 of the Local Government Pension Scheme Regulations 2013 (as amended). 2. The Board is established by the Administering Authority and operates independently of the Committee. Relevant information about its creation and operation are contained in these Terms of Reference. 3. The Board is not a committee constituted under Section 101 of the Local Government Act 1972 and therefore no general duties, responsibilities or powers assigned to such committees or to any sub-committees or officers under the constitution, standing orders or scheme of delegation of the Administering Authority apply to the Board unless expressly included in this document. 4. Except where approval has been granted under regulation 106(2) of the Regulations the Board shall be constituted separately from any committee or sub-committee constituted under Section 101 of the Local Government Act 1972 with delegated authority to execute the function of the Administering Authority. Interpretation 5. The following terms have the meanings as outlined below:

‘the Act’ means The Public Service Pensions Act 2013.

‘Administering Authority’

means Middlesbrough Borough Council as manager and administrator of the Teesside Pension Fund.

‘the Board’ means the Teesside Local Pension Board, the terms of reference for which are set out in this document

‘the Board Secretary’ refers to the Head of Investments & Treasury Management who has been designated as the Secretary to the Board by the Administering Authority.

‘Chief Finance Officer’ means, under Section 151 of the Local Government Act 1972 and as defined in Middlesbrough Council's Constitution, an officer the Administering Authority is

Page 135 of 246

required to have who has a statutory responsibility to ensure the proper arrangement of the authority’s financial affairs including the Fund.

‘the Code’ means the Pension Regulator’s Code of Practice No 14 governance and administration of public service pension schemes.

'the Committee' means the Teesside Pension Committee which has delegated decision making powers for the Fund in accordance with Section 101 of the Local Government Act 1972.

'the Fund' means the Teesside Pension Fund managed and administered by the Administering Authority.

'the Guidance' means the guidance on the creation and operation of local pension boards issued by the Shadow Scheme Advisory Board.

‘Monitoring Officer’ means the officer of the Administering Authority as required under section 5 of the Local Government and Housing Act 1989 as amended by schedule 5 para 24 of the Local Government Act 2000.

'the Regulations' means the Local Government Pension Scheme Regulations 2013 (as amended from time to time), the Local Government Pension Scheme (Transitional Provisions, Savings and Amendment) Regulations 2014 (as amended from time to time) and the Local Government Pension Scheme (Management and Investment of Funds) Regulations 2016 (as amended from time to time) and all including any earlier regulations as defined in these regulations to the extent they remain applicable.

'Relevant legislation' means relevant overriding legislation as well as the Pension Regulator's Codes of Practice, as they apply to the Administering Authority and the Board, notwithstanding that the Codes of Practice are not legislation.

'the Scheme' means the Local Government Pension Scheme in England and Wales.

‘Scheme Manager’ means Middlesbrough Borough Council as Administering Authority of the Teesside Pension Fund.

Page 136 of 246

Statement of purpose 6. The Board is responsible for assisting the Administering Authority: (a) to secure compliance with the Regulations, any other legislation relating to the governance and administration of the Scheme, and requirements imposed by the Pensions Regulator in relation to the Scheme; and (b) to ensure the effective and efficient governance and administration of the Scheme. 7. The Council considers this to mean that the Pension Board is providing oversight of these matters and, accordingly, the Pension Board is not a decision making body in relation to the management of the Pension Fund. The Board makes recommendations and provides assurance to assist in the management of the Fund. Duties of the Board 8. The Board should at all times act in a reasonable manner in the conduct of its purpose. It will ensure that in performing their role it is:

done effectively and efficiently and

complies with relevant legislation and

done by having due regard and in the spirit of the Code of Practice on the governance and administration of public service pension schemes issued by the Pensions Regulator and any other relevant statutory or non-statutory guidance.

9. In support of this duty Board members should be subject to and abide by the Code of Conduct for Board members. The Board will adopt Middlesbrough Borough Council’s Members’ Code of Conduct for this purpose. Establishment 10. The Board is established on 1st April 2015, as approved by Middlesbrough Borough Council on 1st April 2015. These Terms of Reference were updated by Middlesbrough Borough Council on 6th September 2017. Membership 11. The Board shall consist of six voting members, as follows: (a) Three Employer Representatives; and (b) Three Scheme Member Representatives. 12. There shall be an equal number of Scheme Member and Employer Representatives. Employer representatives 13. Employer representatives shall be elected members of the

Page 137 of 246

scheme employers of the Fund as outlined below. No elected member of the Administering Authority who is responsible for the discharge of any function of the Administering Authority under the Regulations may serve as a member of the Board. 14. Employer representatives should be able to demonstrate their capacity to attend and complete the necessary preparation for meetings and participate in training as required. 15. Substitutes shall not be appointed. 16. A total of three employer representatives shall be appointed to the Board from the following sources: i. Two employer representatives shall be appointed from the separate Councils of Hartlepool, Middlesbrough, Redcar and Cleveland, and Stockton-on- Tees. ii. One employer representative shall be chosen from all of the other scheme employers of the Teesside Pension Fund. Scheme member representatives 17. Scheme member representatives shall either be scheme members or have capacity to represent scheme members of the Fund. 18. Scheme member representatives should be able to demonstrate their capacity to attend and complete the necessary preparation for meetings and participate in training as required. 19. Substitutes shall not be appointed. 20. A total of three scheme member representatives shall be appointed from the following sources: (a) Two scheme member representatives shall be appointed from the active membership and may be members of the recognised trade unions representing employees who are scheme members of the Fund. (b) One scheme member representative shall be appointed from the pensioner members of the Fund. 21. The scheme member representatives shall represent all active, deferred, pensioner and dependant members irrespective of the trades unions affiliation, or lack of it.

Page 138 of 246

Appointments 22. A selection panel consisting of the Chief Finance Officer, Monitoring Officer and Board Secretary shall form an appointment panel and will be responsible for all appointments to the Pension Board. 23. Subject to meeting the arrangements in paragraphs 30 to 35 below a Chair and Deputy Chair shall be appointed for the Board as follows:

(a) The role of Chair will be rotated on an annual basis with the Deputy Chair. Each of the posts will be held by one employer representative and one scheme member representative.

(b) The existing Deputy Chair will become the Chair at the point of rotation. (c) A new Deputy Chair will be appointed from the appropriate representatives (i.e. employer or scheme member depending on the rotation) by the new Chair of the Pension Board. The Deputy Chair will then take over as Chair after a period of one year.

Duties of chair 24. The Chair of the Board shall: (a) ensure the Board delivers its purpose as set out in these Terms of Reference, (b) ensure that meetings are productive and effective and that opportunity is provided for the views of all members to be expressed and considered, and (c) seek to reach consensus and ensure that decisions are properly put to a vote when it cannot be reached.

(d) agree the agenda for each Board meeting.

(e) approve minutes for Board meetings having regard to comments from other

Board members and other attendees.

(f) write reports on the work of the Board.

(g) liaise with the Board Secretary on the requirements of the Board, including

advanced notice for officers or advisors to attend and arranging dates and times of Board meetings.

(h) undertake other tasks that may be requested by the members of the Board,

within the remit of these Terms of Reference. .

Page 139 of 246

(i) annually review and report on the performance of the Board.

The decision of the Chair on all points of procedure and order shall be final. Notification of appointments 25. When appointments to the Board have been made the Administering Authority shall publish the name of Board members on Middlesbrough Council’s website and the process followed in the appointment. Terms of Office 26. The term of office as a member of the Board is four years from the date of the first Board meeting after their appointment. 27. Extensions to terms of office up to a maximum of two years may be made by the Appointment Panel with the agreement of the Board. 28. A Board member may be appointed for further terms of office using the methods set out in paragraphs 13 to 22. 29. Board membership may be terminated prior to the end of the term of office due to: (a) A member representative appointed on the basis of their membership of the scheme no longer being a scheme member in the Fund. (b) A member representative no longer being a scheme member or a representative of the body on which their appointment relied. (c) An employer representative no longer holding the office or employment or being a member of the body on which their appointment relied.

(d) A Board member no longer being able to demonstrate to the administering authority their capacity to attend and prepare for meetings or to participate in required training. (e) The representative being withdrawn by the nominating body. (f) A Board member has a potential conflict of interest which cannot be managed in accordance with the Board's conflict policy. (g) A Board member who is an elected member becomes a member of the Committee. (h) A Board member who is an officer of the Administering Authority becomes responsible for the discharge of any function of the Administering Authority under the Regulations.

Page 140 of 246

Conflicts of interest 30. All members of the Board must declare to the Administering Authority on appointment and at any such time as their circumstances change, any potential conflict of interest arising as a result of their position on the Board. 31. A conflict of interest is defined as a financial or other interest which is likely to prejudice a person’s exercise of functions as a member of the Board. It does not include a financial or other interest arising merely by virtue of that person being a member of the Scheme. 32. On appointment to the Board and following any subsequent declaration of potential conflict by a Board member, the Board Secretary, with the assistance of the Monitoring Officer if required, shall ensure that any potential conflict is effectively managed in line with both the requirements of the Board's conflicts policy and the requirements of the Code. Knowledge and understanding (including Training) 33. The Board shall establish and maintain a Knowledge and Understanding Policy and Framework to address the knowledge and understanding requirements that apply to Board members under the Act which are: a) a member of the Board must be conversant with:

i. the legislation and associated guidance of the Local Government Pension Scheme (LGPS), and

ii. any document recording policy about the administration of the LGPS which is adopted by the Teesside Pension Fund.

b) a member of the Board must have knowledge and understanding of –

i. The law relating to pensions, and ii. Any other matters which are prescribed in regulations.

It is for individual Board members to be satisfied that they have the appropriate degree of knowledge and understanding to enable them to properly exercise their functions as a member of the Pension Board. That policy and framework shall set out the degree of knowledge and understanding required as well as how knowledge and understanding is acquired, reviewed and updated. 34. Board members shall attend and participate in training arranged in order to meet and maintain the requirements set out in the Board's Knowledge and Understanding Policy and Framework. 35. Board members shall adhere to the Training and Knowledge Policy document agreed by the Board and amended as necessary. Meetings 36. The Board shall as a minimum meet two times each year.

Page 141 of 246

37. The Chair of the Board with the consent of the Board membership may call additional meetings. Quorum 38. A meeting is only quorate when at least one board member representing each of the scheme member and employer side is present, one of whom must be the Chair or Vice Chair. 39. A meeting that becomes inquorate will be rearranged at a time and date that will ensure sufficient members to allow it to be quorate. Decision making and voting 40. It is expected that the Board will act collectively to reach a consensus. 41. Should it be required that a matter should be put to a vote, each Board Member will have an individual voting right on any matter to be decided. A motion is passed at a meeting of the Board if a majority of voting members are in favour of the motion. 42. A voting member of the Board is not permitted to appoint another voting member as their proxy. 43. The Chair will have a second or casting vote in the case of equality of votes. 44. The results of any voting outcomes will be reported in the Board minutes via reference to the number split of the vote. Board administration and recommendations to the Pension Committee 45. The Chair shall agree with the Board Secretary an agenda prior to each Board meeting. 46. The agenda and supporting papers will be issued at least five working days in advance of the meeting except in the case of matters of urgency. 47. Draft minutes of each meeting including all actions and agreements will be recorded and circulated to all Board Members within fifteen working days after the meeting and subject to formal agreement by the Board via email or at their next meeting. Any decisions made by the Board should be noted in the minutes. 48. The public minutes may with the agreement of the Board, be edited to exclude items on the grounds that they would either involve the likely disclosure of exempt information as specified in Part 1 of Schedule 12A of the Local Government Act 1972 or it being confidential for the purposes of Section 100A(2) of that Act and/or they represent data covered by the Data Protection Act 1998. Separate exempt minutes will be recorded in relation to such items.

Page 142 of 246

49. The Board Secretary shall ensure that Board members meet and maintain the knowledge and understanding as determined in the Board's Knowledge and Understanding Policy and Framework and other guidance or legislation. 50. The Board Secretary shall arrange such advice as is required by the Board subject to such conditions as are listed in these Terms of Reference for the use of the budget set for the Board. 51. The Board Secretary shall ensure an attendance record is maintained along with advising the Administering Authority on allowances and expenses to be paid under these terms. 52. The Board Secretary shall liaise with the Administering Authority on the requirements of the Board, including advanced notice for officers to attend and arranging dates and times of Board meetings. Public access to Board meetings and information 53. The Board meetings can be open to the general public (unless there is an exemption under relevant legislation which would preclude part (or all) of the meeting from being open to the general public). 54. The following will be entitled to attend Board meetings in an observer capacity: (a) Members of the Committee, (b) Any person requested to attend by the Board. 55. Any such attendees will be permitted to speak at the discretion of the Chair. 56. In accordance with the Act the Administering Authority shall publish on the Middlesbrough Borough Council website information about the Board to include: (a) The names of Board members and their contact details. (b) The representation of employers and scheme members on the Board. (c) These Terms of Reference. 57. The Administering Authority shall also publish on the Middlesbrough Borough Council website other information about the Board including: (a) Agendas and minutes (b) Training and attendance logs (c) An annual report on the work of the Board to be included in the Fund's

Page 143 of 246

own annual report. 58. All or some of this information may be published using the following means or other means as considered appropriate from time to time: (a) On the Middlesbrough Borough Council website. (b) On the Teesside Pension Fund website. (c) As part of the Fund’s Annual Report. (d) As part of the Governance Policy. 59. Information may be excluded on the grounds that it would either involve the likely disclosure of exempt information as specified in Part 1 of Schedule 12A of the Local Government Act 1972 or it being confidential for the purposes of Section 100A (2) of that Act and/or they represent data covered by the Data Protection Act 1998. 60. Board members shall be entitled to attend Pension Fund Committee meetings as observers, including any exempt items. Expenses and allowances 61. a) Subject to b) below, an allowance will be made to both Employer and Scheme Member Representatives for attending meetings relating to Pension Board business (including attending training) at the rates of £100 per day or £50 per half day. b) The allowance will not be paid if the representative is already receiving pay or an alternative allowance in relation to the period, unless it is reduced due to them not attending their normal duties. 62. The Chair of the Pension Board will receive an allowance of £200 per day or £100 per half day but will not be entitled to also claim the allowance under paragraph 61 above.

63. All Pension Board members will also be entitled to claim travel and subsistence allowances in accordance with the procedures and allowances that would apply to a Councillor of the Administering Authority.

Budget 64. The Board is to be provided with adequate resources to fulfil its role and a budget will be agreed in advance of each financial year by the Committee. In doing so the budget for the Board will be met from the Fund.

Page 144 of 246

Core functions 65. The first core function of the Board is to assist the Administering Authority in securing compliance with the Regulations, any other legislation relating to the governance and administration of the Scheme, and requirements imposed by the Pensions Regulator in relation to the Scheme. Within this extent of this core function the Board may determine the areas it wishes to consider including but not restricted to: (a) Review management, administrative and governance processes and procedures in order to ensure they remain compliant with the Regulations, relevant legislation and in particular the Code. (b) Review the compliance of scheme employers with their duties under the Regulations and relevant legislation. (c) Monitor complaints and performance on the administration and governance of the scheme. (d) Review the arrangements for the training of Board members. (e) Review the complete and proper exercise of employer and administering authority discretions. (f) Review the compliance of particular cases, projects or process on request of the Committee. 66. The second core function of the Board is to ensure the effective and efficient governance and administration of the Scheme. Within this extent of this core function the Board may determine the areas it wishes to consider including but not restricted to: (a) Assist with the development of improved customer services. (b) Monitor performance of administration, against key performance targets and indicators. (c) Review the risk register as it relates to the Administering Authority function of the authority. (d) Assist in the development and monitoring of process improvements on request of Committee. 67. In support of its core functions the Board may make a request for information to the Administering Authority with regard to any aspect of the Administering Authority’s function. Any such request should be reasonably complied with in both scope and timing.

Page 145 of 246

Administering Authority Consents 68. The Teesside Pension Board shall not: (a) Question what investments decisions have or have not been made by the Administering Authority or its Committee, for the avoidance of doubt these shall include but not be limited to financial investment decisions and property related investment decisions. (b) Amend the statements, strategies and reports prepared in compliance with Sections 57 to 61 of the LGPS Regulations. (c) Consider or become involved in any internal dispute resolution appeals or the process itself. (d) Enter into contracts on behalf of the Administering Authority. (e) Dismiss any members of the Administering Authority. (f) Use the Teesside Pension Board to act on behalf of a particular constituency or Pension Fund scheme member in general or in relation to a specific complaint at any time. (g) Compromise the Administering Authority’s ability to comply with its fiduciary duty to the Pension Fund and its members. 69. The Teesside Pension Board must seek written consent from the Chief Finance Officer before it: (a) instructs any external advisor to provide a report of any kind; (b) requests any external advisor to attend a meeting of the Teesside Pension Board which shall require any remuneration of any level; (c) incurs a cost to the Pension Fund, unless it is explicitly covered within the Board’s budget; (d) can amend these terms of reference. Reporting 70. The Board must provide minutes of each meeting to the following Committee meeting. 71. The Board should in the first instance report its requests, recommendations or concerns to the Committee via an official committee report. In support of this any member of the Board may attend a Committee meeting as an observer. 72. Requests and recommendations should be reported under the provisions of paragraphs 67 above.

Page 146 of 246

73. The Board should report any concerns over a decision made by the Committee or the Administering Authority to the Committee subject to the agreement of the majority of Members present. 74. On receipt of a report under paragraph 71 above the Committee should, within a reasonable period, consider and respond to the Board.

Page 147 of 246

of 246

Teesside

Pension Fund


[Fund logo or formatting as required]

Page 149 of 246

2


Introduction

Conflicts of interest have always existed for those with LGPS administering authority responsibilities as well as for advisers to LGPS funds. This simply reflects the fact that many of those managing or advising LGPS funds will have a variety of other roles and responsibilities, for example as a member of the scheme, as an Elected Member of an employer participating in the LGPS or as an adviser to more than one LGPS administering authority. Further any of those persons may have an individual personal, business or other interest which might conflict, or be perceived to conflict, with their role managing or advising LGPS funds.

It is generally accepted that LGPS administering authorities have both fiduciary and public law duties to act in the best interests of both the scheme beneficiaries and participating employers. This, however, does not preclude those involved in the management of the fund from having other roles or responsibilities which may result in an actual or potential conflict of interest. Accordingly, it is good practice to document within a policy, such as this, how any such conflicts or potential conflicts are to be managed.

This is the Conflicts of Interest Policy of the Teesside Pension Fund (the Fund), which is managed by Middlesbrough Council. The Policy details how actual and potential conflicts of interest are identified and managed by those involved in the management and governance of the Fund, whether directly or in an advisory capacity.

This Conflicts of Interest Policy is established to guide the Pension Fund Committee members, local Pension Board members, officers and advisers. Along with other constitutional documents, including the various Codes of Conduct, it aims to ensure that they do not act improperly or create a perception that they may have acted improperly. It is an aid to good governance, encouraging transparency and minimising the risk of any matter prejudicing decision making or management of the Fund otherwise.

Aims and Objectives

In relation to the governance of the Fund, the Administering Authority's objectives are to

ensure that:

all staff and Pension Fund Committee Members charged with the financial administration and decision-making with regard to the Fund are fully equipped with the knowledge and skills to discharge the duties and responsibilities allocated to them

the Fund is open in all its dealings and readily provides information to interested parties

all relevant legislation is understood and complied with

the Fund is at the forefront of best practice for LGPS funds

all Conflicts of Interest are managed appropriately

The identification and management of potential and actual conflicts of interest is therefore integral to the Administering Authority achieving its governance objectives.

Page 150 of 246

3

To whom this Policy Applies

This Conflicts of Interest Policy applies to all members of the Pension Fund Committee and the Pension Board, including scheme member and employer representatives, whether voting members or not. It applies to all members of the Teesside Fund Management Team and the Strategic Director of Finance, Governance and Support (Section 151 Officer).

This Policy and the issue of conflicts of interest in general must be considered in light of each individual's role, whether this is a management, advisory or assisting role.

The Head of Investments and Treasury Management will monitor potential conflicts for less senior officers involved in the daily management of the Fund and highlight this Policy to them as he or she considers appropriate.

This Policy also applies to all advisers and suppliers to the Fund, whether advising the Pension Board, Pension Fund Committee or Fund officers, in relation to their role in advising or supplying the Fund.

In this Policy, reference to advisers includes all advisers, suppliers and other parties

providing advice and services to the Administering Authority in relation to pension fund

matters. This includes but is not limited to actuaries, investment consultants, independent

advisers, benefits consultants, third party administrators, fund managers, lawyers,

custodians and AVC providers. Where an advisory appointment is with a firm rather than an

individual, reference to "advisers" is to the lead adviser(s) responsible for the delivery of

advice and services to the Administering Authority rather than the firm as a whole.

In accepting any role covered by this Policy, those individuals agree that they must:

acknowledge any potential conflict of interest they may have;

be open with the Administering Authority on any conflicts of interest they may have;

adopt practical solutions to managing those conflicts; and

plan ahead and agree with the Administering Authority how they will manage any conflicts of interest which arise in future.

The procedures outlined later in this Policy provide a framework for each individual to meet

these requirements.

Legislative and related context

There are a number of overriding requirements relating to the management of potential or

actual conflicts of interest for those involved in LGPS funds which are included in legislation

or guidance. These are summarised in Appendix 1.

Other Administering Authority Requirements

Individuals to whom this policy applies may also be required to adhere to other requirements in relation to conflicts of interest. This includes:

Pension Fund Committee Members who are required to adhere to the Middlesbrough Council Members’ Code of Conduct

local Pension Board Members who are required to adhere to the Middlesbrough Council Members’ Code of Conduct

Page 151 of 246

4

employees who are required to adhere to the Middlesbrough Council Employees’ Code of Conduct

advisers who are expected to have their own policies or protocols.

Further information is provided in Appendix 2.

What is a Conflict or Potential Conflict and how will they be managed?

The Public Service Pensions Act 2013 defines a conflict of interest as a financial or other

interest which is likely to prejudice a person’s exercise of functions.

Therefore, a conflict of interest may arise when an individual:

has a responsibility or duty in relation to the management of, or provision of advice to, the LGPS fund administered by Middlesbrough Council, and

at the same time, has:

a separate personal interest (financial or otherwise) or

another responsibility in relation to that matter,

giving rise to a possible conflict with their first responsibility. An interest could also arise due

to a family member or close colleague having a specific responsibility or interest in a matter.

Some examples of potential conflicts are included in Appendix 3.

Middlesbrough Council will encourage a culture of openness and transparency and will

encourage individuals to be vigilant; have a clear understanding of their role and the

circumstances in which they may have a conflict of interest, and of how potential conflicts

should be managed.

Middlesbrough Council will evaluate the nature of any dual interests or responsibilities that

are highlighted and assess the impact on pension fund operations and good governance

should an actual conflict of interest materialise.

Ways in which conflicts of interest may be managed include:

the individual concerned abstaining from discussion, decision-making or providing advice relating to the relevant issue

the individual being excluded from the meeting(s) and any related correspondence or material in connection with the relevant issue (for example, a report for a Pension Fund Committee meeting)

a working group or sub-committee being established, excluding the individual concerned, to consider the matter outside of the formal meeting (where the terms of reference permit this to happen)

Provided that the Administering Authority (having taken any professional advice deemed to be required) is satisfied that the method of management is satisfactory, Middlesbrough Council shall endeavour to avoid the need for an individual to resign due to a conflict of interest. However, where the conflict is considered to be so fundamental it cannot be effectively managed, or where a Pension Board member has an actual conflict of interest as defined in the Public Service Pensions Act 2013, the individual will be required to resign from the Committee, Board or appointment.

Page 152 of 246

5

Minor Gifts For the purposes of this Policy, gifts such as t-shirts, pens, trade show bags and other promotional items (subject to a notional maximum value of £50 per item and an overall maximum value of £100 from an individual company per event) obtained at events such as conferences, training events, seminars, and trade shows, that are offered equally to all members of the public attending the event do not need to be declared. Pension Fund Committee members should, however, be aware that they may be subject to lower limits and a separate notification procedure in the Middlesbrough Council Members’ Code of Conduct.

Responsibility

The Administering Authority for the Teesside Pension Fund must be satisfied that conflicts of

interest are appropriately managed. For this purpose, the Head of Investments and

Treasury Management is the designated individual for ensuring the procedure outlined below

is adhered to.

However, it is the responsibility of each individual covered by this Policy to identify any

potential instances where their personal, financial, business or other interests might come

into conflict with their pension fund duties.

Operational procedure for officers, Pension Fund Committee members and

Pension Board members

What is required How this will be done

Step 1 - Initial

identification of

interests which do or

could give rise to a

conflict.

On appointment to their role or on the commencement of this

Policy if later, all individuals will be provided with a copy of

this Policy and be required to complete a Declaration of

Interest the same or similar to that included in Appendix 4.

The information contained in these declarations will be

collated into the Pension Fund's Register of conflicts of

interest in a format the same or similar to that included in

Appendix 5.

Step 2 - Ongoing

notification and

management of

potential or actual

conflicts of interest

At the commencement of any Pension Fund Committee,

Pension Board or other formal meeting where pension fund

matters are to be discussed, the Chairman will ask all those

present who are covered by this Policy to declare any new

potential conflicts. These will be recorded in the Fund's

Register of conflicts of interest. In addition, the latest version

of the register will be made available by the Head of

Investments and Treasury Management to the Chairman of

every meeting prior to that meeting.

Any individual who considers that they or another individual

has a potential or actual conflict of interest which relates to an

Page 153 of 246

6

item of business at a meeting, must advise the Chairman and

the Head of Investments and Treasury Management prior to

the meeting, where possible, or state this clearly at the

meeting at the earliest possible opportunity. The Chairman, in

consultation with the Head of Investments and Treasury

Management, should then decide whether the conflicted or

potentially conflicted individual needs to leave the meeting

during the discussion on the relevant matter or to withdraw

from voting on the matter.

If such a conflict is identified outside of a meeting the

notification must be made to the Head of Investments and

Treasury Management and where it relates to the business of

any meeting, also to the Chairman of that meeting. Head of

Investments and Treasury Management, in consultation with

the Chairman where relevant, will consider any necessary

action to manage the potential or actual conflict.

Where information relating to any potential or actual conflict

has been provided, the Head of Investments and Treasury Management may seek such professional advice as he or she thinks fit (such as legal advice from the Monitoring Officer) on how to address any identified conflicts.

Any such potential or actual conflicts of interest and the

action taken must be recorded on the Fund's Register of

conflicts of interest.

Step 3 - Periodic

review of potential and

actual conflicts

At least once every 12 months, the Head of Investments and

Treasury Management will provide to all individuals to whom

this Policy applies a copy of the Fund's Register of conflicts of

interest. All individuals will complete a new Declaration of

Interest (see Appendix 4) confirming that their information

contained in the Register is correct or highlighting any

changes that need to be made to the declaration. The

updated Register will then be circulated by the Head of

Investments and Treasury Management to all individuals to

whom it relates.

Conduct at Meetings

There may be occasions / circumstances when a representative of employers or members wishes to provide a specific point of view on behalf of an employer (or group of employers) or member (or group of members). The Administering Authority requires that any individual wishing to speak from an employer's or member's viewpoint must state this clearly, e.g. at a Pension Board or Pension Fund Committee meeting, and that this will be recorded in the minutes.

Page 154 of 246

7

Operational procedure for advisers

Although this Policy applies to all of the key advisers, the operational procedures outlined in

steps 1 and 3 above relating to completing ongoing declarations are not expected to apply to

advisers. Instead all advisers must:

be provided with a copy of this Policy on appointment and whenever it is updated

adhere to the principles of this Policy

provide, on request, information to the Head of Investments and Treasury Management in relation to how they will manage and monitor actual or potential conflicts of interests relating to the provision of advice or services to Middlesbrough Council as Administering Authority

notify the Head of Investments and Treasury Management immediately should a potential or actual conflict of interest arise.

All potential or actual conflicts notified by advisers will be recorded in the Fund’s Register of

conflicts of interest.

Monitoring and Reporting

The Fund's Register of conflicts of interest may be viewed by any interested party at any

point in time. It will be made available on request to the Head of Investments and Treasury

Management. In addition it will be published in the Fund's annual report and accounts.

In order to identify whether the objectives of this Policy are being met the administering

authority will review the Register of conflicts of interest on an annual basis and consider

whether there has been any potential or actual conflicts of interest that were not declared at

the earliest opportunity.

Key Risks

The key risks to the delivery of this Policy are outlined below all of which could result in an

actual conflict of interest arising and not being properly managed. The Head of Investments

and Treasury Management will monitor these and other key risks and consider how to

respond to them.

Insufficient training or poor understanding in relation to individuals’ roles on pension fund matters

Insufficient training or failure to communicate the requirements of this Policy

Absence of the individual nominated to manage the operational aspects of this Policy and no one deputising, or failure of that individual to carry out the operational aspects in accordance with this Policy

Failure by a chairperson to take appropriate action when a conflict is highlighted at a meeting.

Costs

All costs related to the operation and implementation of this Policy will be met directly by

Teesside Pension Fund. However, no payments will be made to any individuals in relation

to any time spent or expenses incurred in the disclosure or management of any potential or

actual conflicts of interest under this Policy.

Approval, Review and Consultation

Page 155 of 246

8

This Conflicts of Interest Policy was approved at the Teesside Pension Fund & Investment

Panel (later renamed as the Teesside Pension Fund Committee) meeting on 28th June 2017.

It will be formally reviewed and updated at least every three years or sooner if the conflict

management arrangements or other matters included within it merit reconsideration,

including if there are any changes to the LGPS or other relevant Regulations or Guidance

which need to be taken into account.

Further Information

If you require further information about anything in or related to this Conflicts of Interest

Policy, please contact:

Paul Campbell,

Middlesbrough Council,

Head of Investments & Treasury Management

Middlesbrough Town Hall,

Albert Road,

Middlesbrough,

TS1 2QJ

E-mail - [email protected]

Telephone - 01642 729024

Page 156 of 246

9

Appendix 1

Legislative and Related Context

The overriding requirements in relation to the management of potential or actual conflicts of interest for

those involved in LGPS funds are contained in various elements of legislation and guidance. These are

considered further below.

The Public Service Pensions Act 2013

Section 5 of this Act requires that the scheme manager (in the case of the LGPS, this is the administering

authority) must be satisfied that a local pension board member does not have a conflict of interest at the

point of appointment and from time to time thereafter. It also requires local pension board members (or

nominated members) to provide reasonable information to the scheme manager for this purpose.

The Act defines a conflict of interest as “a financial or other interest which is likely to prejudice the person’s

exercise of functions as a member of the board (but does not include a financial or other interest arising

merely by virtue of membership of the scheme or any connected scheme).”

Further, the Act requires that scheme managers must have regard to any such guidance that the national

scheme advisory board issue (see below).

The Local Government Pension Scheme Regulations 2013

Regulation 108 of these Regulations applies the requirements of the Public Service Pensions Act (as

outlined above) to the LGPS, placing a duty on each administering authority to satisfy itself that local

pension board members do not have conflicts of interest on appointment or whilst they are members of the

board. It also requires those pension board members to provide reasonable information to the

administering authority in this regard.

Regulation 109 states that each administering authority must have regard to guidance issued by the

Secretary of State in relation to local pension boards. Further, regulation 110 provides that the national

scheme advisory board has a function of providing advice to administering authorities and local pension

boards. There is also guidance relating to the creation of local pension boards including a section on

conflicts of interest on the Scheme Advisory Boards website. . This Conflicts of Interest Policy has been

developed having regard to that guidance.

The Pensions Act 2004

The Public Service Pensions Act 2013 also added a number of provisions to the Pensions Act 2004 related

to the governance of public service pension schemes and, in particular, conflicts of interest.

Section 90A requires the Pensions Regulator to issue a code of practice relating to conflicts of interest for

pension board members. The Pensions Regulator has issued such a code and this Conflicts of Interest

Policy has been developed having regard to that code.

Further, under section 13, the Pensions Regulator can issue an improvement notice (i.e. a notice requiring

steps to be taken to rectify a situation) where it is considered that the requirements relating to conflicts of

interest for Pension Board members are not being adhered to.

The Localism Act 2011

Chapter 7 of this Act requires councillors to comply with the code of conduct of their local authority and that

code of conduct must be consistent with the Seven Principles of Public Life (considered further below). In

addition the Act requires that the code of conduct must include provisions requiring the disclosure and

registration of pecuniary interests and interests other than pecuniary interests.

The Seven Principles of Public Life

Page 157 of 246

10

Otherwise known as the ‘Nolan Principles’, the seven principles of public life apply to anyone who works as

a public office-holder. This includes people who are elected or appointed to public office, nationally and

locally, and all people appointed to work in:

the civil service

local government

the police

the courts and probation services

non-departmental public bodies

health, education, social and care services

The principles also apply to all those in other sectors that deliver public services.

Many of the principles are integral to the successful implementation of this Policy. The principles are as

follows:

selflessness

integrity

objectivity

accountability

openness

honesty

leadership.

Advisers’ Professional Standards

Many advisers will be required to meet professional standards relating to the management of conflicts of

interest, for example, the Fund Actuary will be bound by the requirements of the Institute and Faculty of

Actuaries. Any Protocol or other document entered into between an adviser and the Administering

Authority in relation to conflicts of interest, whether as a requirement of a professional body or otherwise,

should be read in conjunction with this Policy.

Page 158 of 246

11

Appendix 2

Other Administering Authority Requirements

Pension Fund Committee Members

In addition to the requirements of this Policy, Pension Fund Committee members and co-opted members

(including non-voting co-opted members) are required to adhere to the Middlesbrough Council Members’

Code of Conduct which includes requirements in relation to the disclosure and management of pecuniary

and other interests.

Local Pension Board Members

In addition to the requirements of this Policy, Local Pension Board members are required to adhere to Parts

30 - 32 of the Terms of Reference of the Local Pension Board. This includes the following requirements:

30. All members of the Board must declare to the Administering Authority on appointment and at any such

time as their circumstances change, any potential conflict of interest arising as a result of their position on

the Board.

31. A conflict of interest is defined as a financial or other interest which is likely to prejudice a person’s

exercise of functions as a member of the Board. It does not include a financial or other interest arising

merely by virtue of that person being a member of the Scheme.

32. On appointment to the Board and following any subsequent declaration of potential conflict by a Board

member, the Board Secretary, with the assistance of the Monitoring Officer if required, shall ensure that

any potential conflict is effectively managed in line with both the requirements of the Board's conflicts policy

and the requirements of the Code.

Employees

In addition to the requirements of this Policy, officers of Middlesbrough Council are required to adhere to

the Middlesbrough Council Code of Conduct for Employees which includes requirements in relation to

aiming to avoid conflicts of interests and declaring them in writing should they occur.

Advisers The Administering Authority appoints its own advisers. There may be circumstances where these advisers are asked to give advice to Middlesbrough Council or other scheme employers, or even to scheme members or member representatives such as the Trades Unions, in relation to pension matters. Similarly, an adviser may also be appointed to another administering authority which is involved in a transaction involving the Teesside Pension Fund and on which advice is required. An adviser can only continue to advise the Administering Authority and another party where there is no conflict of interest in doing so. Where the Pension Board decides to appoint an adviser, this can be the same person as is appointed to

advise the Pension Fund Committee or Fund officers as long as there is no conflict of interest between the

two roles. The key advisers are all expected to have their own policies or protocols on how conflicts of

interest will be managed in their relationships with their clients, and these should have been shared with

Middlesbrough Council.

Page 159 of 246

12

Appendix 3

Examples of Potential Conflicts of Interest

a) An elected member on the Pension Fund Committee is asked to provide views on a funding strategy

which could result in an increase in the employer contributions required from the employer he or she represents.

b) A member of the Pension Fund Committee is on the board of a Fund Manager that the Committee is

considering appointing.

c) An officer of the Fund or member of the Pension Fund Committee accepts a dinner invitation from a Fund Manager who has submitted a bid as part of a tender process.

d) An employer representative on the Local Pension Board is employed by a company to which the administering authority has outsourced its pension administration services and the Local Pension Board is reviewing the standards of service provided by that company.

e) The person appointed to consider internal disputes is asked to review a case relating to a close friend or relative.

f) An officer of the Fund is asked to provide guidance to the Local Pension Board on the background to an item considered at the Pension Fund Committee. This could be a potential conflict as the officer could consciously or sub-consciously avoid providing full details, resulting in the Board not having full information and not being able to provide a complete view on the appropriateness or otherwise of that Pension Fund Committee item.

g) The administering authority is considering buying its own payroll system for paying pensioners, rather than using the payroll system used for all employees of the Council. The Finance Director, who has responsibility for the Council budget, is expected to approve the report to go to the Pension Fund Committee, which, if agreed, would result in a material reduction in the recharges to the Council from the Fund.

h) Officers of the Fund are asked to provide a report to the Local Pension Board or Pension Fund Committee on whether the administration services should be outsourced which, if it were to happen, could result in a change of employer or job insecurity for the officers.

i) An employer representative employed by the administering authority and appointed to the pension board to represent employers generally could be conflicted if he or she only acts in the interests of the administering authority, rather than those of all participating employers. Equally, a member representative, who is also a trade union representative, appointed to the pension board to represent the entire scheme membership could be conflicted if he or she only acts in the interests of their union and union membership, rather than all scheme members.

j) A Fund adviser is party to the development of a strategy which could result in additional work for their firm, for example, delegated consulting of fund monies or providing assistance with monitoring the covenant of employers.

k) An employer representative has access to information by virtue of his or her employment, which could

influence or inform the considerations or decisions of the Pension Fund Committee or Local Pension Board. He or she has to consider whether to share this information in light of their duty of confidentiality to their employer. Their knowledge of this information will put them in a position of conflict if it is likely to prejudice their ability to carry out their functions as a member of the Pension Fund Committee or Local Pension Board.

Page 160 of 246

13

Appendix 4

Declaration of Interests relating to the management of the Teesside

Pension Fund administered by Middlesbrough Council

I, [insert full name], am:

an officer involved in the management

a Pension Fund Committee Member

a Pension Board Member

of the Teesside Pension Fund and I set out below under the appropriate headings my interests, which I am required to declare under the Teesside Pension Fund Conflicts of Interest Policy. I have put “none” where I have no such interests under any heading.

Responsibilities or other interests that could result in a conflict of interest (please list and continue on a separate sheet if necessary):

1. Relating to me

a. Responsibilities relating to an employer in the pension fund

b. Membership of the LGPS

c. Other (see examples)

Page 1 of 2

Tick as appropriate

Page 161 of 246

14

2. Relating to family members or close colleagues

a. Responsibilities relating to an employer in the pension fund

b. Membership of the LGPS

c. Other (see examples)

Undertaking:

I declare that I understand my responsibilities under the Teesside Pension Fund Conflicts of Interest Policy. I undertake to notify the Monitoring Officer of any changes in the information set out above.

Signed _____________________________________________Date _____________________

Name (CAPITAL LETTERS) ______________________________________________________

Page 2 of 2

Page 162 of 246

15

Appendix 5

Teesside Pension Fund - Register of Potential and Actual Conflicts of Interest All reported conflicts of interest will be recorded in the minutes and a register of conflicts will be maintained and reviewed annually by Middlesbrough Council,

the Administering Authority.

Date identified

Name of Person

Role of Person

Details of conflict Actual or potential conflict

How notified(1) Action taken(2) Follow up

required

Date resolved

(1) E.g. verbal declaration at meeting, written conflicts declaration, etc.

(2) E.g. withdrawing from a decision making process, left meeting

Page 163 of 246

of 246

1


Procedure for Reporting Breaches of the Law


Page 165 of 246

2

Reporting Breaches Procedure

Introduction

This document sets out the procedures to be followed by certain persons involved with the Teesside Pension Fund (“the Fund”), the Local Government Pension Scheme managed and administered by Middlesbrough Council, in relation to reporting breaches of the law to the Pensions Regulator.

Middlesbrough Council, as Administering Authority, has delegated responsibility for the implementation of these procedures to the Head of Investments and Treasury Management.

Breaches can occur in relation to a wide variety of the tasks normally associated with the

administrative function of a scheme such as keeping records, internal controls, calculating

benefits and making investment or investment-related decisions.

This Procedure document applies, in the main, to:

all members of the Pension Fund Committee and the Local Pension Board all senior officers involved in the management of the Fund including members of the

Chief Finance Officer, Monitoring Officer, Loans & Investments Section and Pension Administration team.

any professional advisers and third party suppliers including auditors, actuaries, independent advisers, third party administrators, legal advisers and fund managers

officers of employers participating in the Fund who are responsible for pension matters.

The next section clarifies the full extent of the legal requirements and to whom they apply.

Requirements

Pensions Act 2004

Section 70 of the Pensions Act 2004 (the Act) imposes a requirement on the following

persons:

a trustee or manager of an occupational or personal pension scheme a member of the pension board of a public service pension scheme a person who is otherwise involved in the administration of an occupational or personal

pension scheme the employer in relation to an occupational pension scheme a professional adviser in relation to such a scheme a person who is otherwise involved in advising the trustees or managers of an

occupational or personal pension scheme in relation to the scheme, to report a matter to The Pensions Regulator as soon as is reasonably practicable where that person has reasonable cause to believe that:

(a) a legal duty relating to the administration of the scheme has not been or is not being complied with, and

(b) the failure to comply is likely to be of material significance to The Pensions Regulator.

The Act states that a person can be subject to a civil penalty if he or she fails to comply with this requirement without a reasonable excuse.

Page 166 of 246

3

The duty to report breaches under the Act overrides any other duties the individuals listed

above may have. However the duty to report does not override ‘legal privilege’. This means

that, generally, communications between a professional legal adviser and their client, or a

person representing their client, in connection with legal advice being given to the client, do

not have to be disclosed.

The Pension Regulator's Code of Practice

Practical guidance in relation to this legal requirement is provided in The Pension

Regulator’s Code of Practice including in the following areas:

implementing adequate procedures judging whether a breach must be reported submitting a report to The Pensions Regulator whistleblowing protection and confidentiality.

Application to the Teesside Pension Fund

Middlesbrough Council has developed this procedure which reflects the guidance contained

in The Pension Regulator’s Code of Practice in relation to the Fund and this document sets

out how the Council will strive to achieve best practice through use of a formal reporting

breaches procedure.

Training on reporting breaches and related statutory duties, and the use of this procedure is

provided to Pension Fund Committee members, Pension Board members and key officers

involved with the management of the Fund on a regular basis. Further training can be

provided on request to the Head of Investments and Treasury Management.

The Teesside Pension Fund Reporting Breaches Procedure

The following procedure details how individuals responsible for reporting and whistleblowing

can identify, assess and report (or record if not reported) a breach of law relating to the

Fund.

It aims to ensure individuals responsible are able to meet their legal obligations and avoid

placing any reliance on others to report. The procedure will also assist in providing an early

warning of possible malpractice and reduce risk.

1. Clarification of the law

Individuals may need to refer to regulations and guidance when considering whether or not

to report a possible breach. Some of the key provisions are shown below:

Section 70(1) and 70(2) of the Pensions Act 2004: www.legislation.gov.uk/ukpga/2004/35/contents

Employment Rights Act 1996: www.legislation.gov.uk/ukpga/1996/18/contents

Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (Disclosure Regulations): www.legislation.gov.uk/uksi/2013/2734/contents/made

Public Service Pension Schemes Act 2013: www.legislation.gov.uk/ukpga/2013/25/contents

Local Government Pension Scheme Regulations (various): http://www.lgpsregs.org/timelineregs/Default.html (pre 2014 schemes) http://www.lgpsregs.org/index.php/regs-legislation (2014 scheme)

The Pensions Regulator’s Code of Practice:

Page 167 of 246

http://www.legislation.gov.uk/ukpga/2004/35/contents


http://www.legislation.gov.uk/uksi/2013/2734/contents/made


http://www.lgpsregs.org/timelineregs/Default.html

http://www.lgpsregs.org/index.php/regs-legislation

4

http://www.thepensionsregulator.gov.uk/codes/code-governance-administration-public-service-pension-schemes.aspx In particular, individuals should refer to the section on ‘Reporting breaches of the law’, and for information about reporting late payments of employee or employer contributions, the section of the Code on ‘Maintaining contributions’.

Further guidance and assistance can be provided by the Head of Investments and Treasury Management, as long as requesting this assistance will not result in alerting those responsible for any serious offence (where the breach is in relation to such an offence).

2. Clarification when a breach is suspected

Individuals need to have reasonable cause to believe that a breach has occurred, not just a

suspicion. Where a breach is suspected the individual should carry out further checks to

confirm the breach has occurred.

Where the individual does not know the facts or events, it will usually be appropriate to check with the Head of Investments and Treasury Management at Middlesbrough Council, a member of the Pension Fund Committee or Pension Board or others who are able to explain what has happened. However there are some instances where it would not be appropriate to make further checks, for example, if the individual has become aware of theft, suspected fraud or another serious offence and they are also aware that by making further checks there is a risk of either alerting those involved or hampering the actions of the police or a regulatory authority. In these cases The Pensions Regulator should be contacted without delay.

3. Determining whether the breach is likely to be of material significance

To decide whether a breach is likely to be of material significance an individual should

consider the following, both separately and collectively:

cause of the breach (what made it happen)

effect of the breach (the consequence(s) of the breach)

reaction to the breach

wider implications of the breach.

Individuals may also request the most recent breaches report from the Head of Investments

and Treasury Management, as there may be details on other breaches which may provide a

useful precedent on the appropriate action to take.

Further details on the above four considerations are provided in Appendix A to this

procedure.

The individual should use the traffic light framework described in Appendix B to help assess

the material significance of each breach and to formally support and document their

decision.

A decision tree is provided below to show the process for deciding whether or not a breach

has taken place and whether it is materially significant and therefore needs to be reported.

Page 168 of 246

http://www.thepensionsregulator.gov.uk/codes/code-governance-administration-public-service-pension-schemes.aspx

http://www.thepensionsregulator.gov.uk/codes/code-governance-administration-public-service-pension-schemes.aspx

5

4. Referral to a level of seniority for a decision to be made on whether to report

Middlesbrough Council has designated an officer (the Head of Investments and Treasury

Management) to ensure this procedure is appropriately followed. They are considered to

have appropriate experience to help investigate whether there is reasonable cause to

believe a breach has occurred, to check the law and facts of the case, to maintain records of

all breaches and to assist in any reporting to The Pensions Regulator, where appropriate.

If breaches relate to late or incorrect payment of contributions or pension benefits,

information the matter should be highlighted to the Head of Investments and Treasury

Management at the earliest opportunity to ensure the matter is resolved as a matter of

urgency.

Individuals must bear in mind, however, that the involvement of the Head of Investments and Treasury Management is to help clarify the potential reporter's thought process and to ensure this procedure is followed. The potential reporter remains responsible for the final decision as to whether a matter should be reported to The Pensions Regulator.

The matter should not be referred to the Head of Investments and Treasury Management if doing so would alert any person responsible for a possible serious offence to the investigation (as highlighted in section 2). If that is the case, the individual should report the matter to The Pensions Regulator setting out the reasons for reporting, including any uncertainty – a telephone call to the Regulator before the submission may be appropriate, particularly in the case of a more serious breach.

Page 169 of 246

6

5. Dealing with complex cases

The Head of Investments and Treasury Management may be able to provide guidance on

particularly complex cases. Guidance may also be obtained by reference to previous cases,

information on which will be retained by Middlesbrough Council, or via discussions with

those responsible for maintaining the records. Information may also be available from

national resources such as the Scheme Advisory Board or the LGPC Secretariat (part of the

LG Group - http://www.local.gov.uk/our-support/workforce-and-hr-support/local-government-

pensions ).

If timescales allow, legal advice or other professional advice can be sought and the case can

be discussed at the next Committee or Board meeting.

6. Timescales for reporting

The Pensions Act and The Pension Regulator's Code require that, if an individual decides to

report a breach, the report must be made in writing as soon as reasonably practicable.

Individuals should not wait for others to report and nor is it necessary for a reporter to gather

all the evidence which The Pensions Regulator may require before taking action. A delay in

reporting may exacerbate or increase the risk of the breach. The time taken to reach the

judgements on “reasonable cause to believe” and on “material significance” should be

consistent with the speed implied by ‘as soon as reasonably practicable’. In particular, the

time taken should reflect the seriousness of the suspected breach.

7. Early identification of very serious breaches

In cases of immediate risk to the scheme, for instance, where there is any indication of

dishonesty, The Pensions Regulator does not expect reporters to seek an explanation or to

assess the effectiveness of proposed remedies. They should only make such immediate

checks as are necessary.

The more serious the potential breach and its consequences, the more urgently reporters

should make these necessary checks. In cases of potential dishonesty the reporter should

avoid, where possible, checks which might alert those implicated. In serious cases, reporters

should use the quickest means possible to alert The Pensions Regulator to the breach.

8. Recording all breaches even if they are not reported

The record of past breaches may be relevant in deciding whether to report a breach (for

example it may reveal a systemic issue). Middlesbrough Council will maintain a record of all

breaches identified by individuals and reporters should therefore provide copies of reports

submitted to The Pensions Regulator to the Head of Investments and Treasury

Management. Records of unreported breaches should also be provided to the Head of

Investments and Treasury Management as soon as reasonably practicable and certainly no

later than within 20 working days of the decision made not to report. These will be recorded

alongside all reported breaches. The record of all breaches (reported or otherwise) will be

included in the quarterly Monitoring Report at each Pension Fund Committee meeting, and

this will also be shared with the Pension Board.

Reporting a breach

Reports must be submitted in writing via The Pensions Regulator’s online system at

www.tpr.gov.uk/exchange, or by post, email or fax, and should be marked urgent if

appropriate. If necessary a written report can be preceded by a telephone call.

Page 170 of 246

http://www.local.gov.uk/our-support/workforce-and-hr-support/local-government-pensions

http://www.local.gov.uk/our-support/workforce-and-hr-support/local-government-pensions

http://www.tpr.gov.uk/exchange

7

Reporters should ensure they receive an acknowledgement for any report they send to The

Pensions Regulator. The Pensions Regulator will acknowledge receipt of all reports within

five working days and may contact reporters to request further information. Reporters will not

usually be informed of any actions taken by The Pensions Regulator due to restrictions on

the disclosure of information.

As a minimum, individuals reporting should provide:

full scheme name (Teesside Pension Fund)

description of breach(es)

any relevant dates

name, position and contact details

role in connection to the scheme

employer name or name of scheme manager (the latter is Middlesbrough Council).

If possible, reporters should also indicate:

the reason why the breach is thought to be of material significance to The Pensions Regulator

scheme address (provided at the end of this procedures document)

scheme manager contact details (provided at the end of this procedures document)

pension scheme registry number (PSR – 10171072)

whether the breach has been reported before.

The reporter should provide further information or reports of further breaches if this may help

The Pensions Regulator in the exercise of its functions. The Pensions Regulator may make

contact to request further information.

Confidentiality

If requested, The Pensions Regulator will do its best to protect a reporter’s identity and will

not disclose information except where it is lawfully required to do so.

If an individual’s employer decides not to report and the individual employed by them

disagrees with this and decides to report a breach themselves, they may have protection

under the Employment Rights Act 1996 if they make an individual report in good faith.

Reporting to Pension Fund Committee

A report will be presented to the Pension Fund Committee on a quarterly basis setting out:

all breaches, including those reported to The Pensions Regulator and those not reported, with the associated dates.

in relation to each breach, details of what action was taken and the result of any action (where not confidential)

any future actions for the prevention of the breach in question being repeated

new breaches which have arisen in the last year/since the previous meeting.

This information will also be provided upon request by any other individual or organisation

(excluding sensitive/confidential cases or ongoing cases where discussion may influence the

proceedings).

Page 171 of 246

8

An example of the information to be included in the quarterly reports is provided in Appendix

C to this procedure.

Review

This Reporting Breaches was approved at the Teesside Pension Fund & Investment Panel

(later renamed as the Teesside Pension Fund Committee) meeting on 28th June 2017. It will

be kept under review and updated as considered appropriate by the Head of Investments

and Treasury Management. It may be changed as a result of legal or regulatory changes,

evolving best practice and ongoing review of the effectiveness of the procedure.

Further Information

If you require further information about reporting breaches or this procedure, please contact:

Paul Campbell,




Albert Road,

Middlesbrough,

TS1 2QJ


Telephone - 01642 729024

Further information on the Teesside Pension Fund can be found as shown below:

Teesside Pension Fund website: www.teespen.org.uk.

Page 172 of 246

http://www.teespen.org.uk/

9

Appendix A – Determining whether a breach is likely to be of material significance

To decide whether a breach is likely to be of material significance individuals should

consider the following elements, both separately and collectively:

cause of the breach (what made it happen)

effect of the breach (the consequence(s) of the breach)

reaction to the breach

wider implications of the breach

The cause of the breach

Examples of causes which are likely to be of concern to The Pensions Regulator are

provided below:

Acting, or failing to act, in deliberate contravention of the law.

Dishonesty.

Incomplete or inaccurate advice.

Poor administration, i.e. failure to implement adequate administration procedures.

Poor governance.

Slow or inappropriate decision-making practices.

When deciding whether a cause is likely to be of material significance individuals should also

consider:

whether the breach has been caused by an isolated incident such as a power outage, fire, flood or a genuine one-off mistake

whether there have been any other breaches (reported to The Pensions Regulator or not) which when taken together may become materially significant

The effect of the breach

Examples of the possible effects (with possible causes) of breaches which are considered

likely to be of material significance to The Pensions Regulator in the context of the LGPS are

given below:

Committee/Board members not having enough knowledge and understanding, resulting in pension boards not fulfilling their roles, the scheme not being properly governed and administered and/or scheme managers breaching other legal requirements

Conflicts of interest of Committee or Board members, resulting in them being prejudiced in the way in which they carry out their role and/or the ineffective governance and administration of the scheme and/or scheme managers breaching legal requirements

Poor internal controls, leading to schemes not being run in accordance with their scheme regulations and other legal requirements, risks not being properly identified and managed and/or the right money not being paid to or by the scheme at the right time

Page 173 of 246

10

Inaccurate or incomplete information about benefits and scheme information provided to members, resulting in members not being able to effectively plan or make decisions about their retirement

Poor member records held, resulting in member benefits being calculated incorrectly and/or not being paid to the right person at the right time

Misappropriation of assets, resulting in scheme assets not being safeguarded

Other breaches which result in the scheme being poorly governed, managed or administered

The reaction to the breach

A breach is likely to be of concern and material significance to The Pensions Regulator

where a breach has been identified and those involved:

do not take prompt and effective action to remedy the breach and identify and tackle its cause in order to minimise risk of recurrence

are not pursuing corrective action to a proper conclusion, or

fail to notify affected scheme members where it would have been appropriate to do so.

The wider implications of the breach

Reporters should also consider the wider implications when deciding whether a breach must

be reported. The breach is likely to be of material significance to The Pensions Regulator

where the fact that a breach has occurred makes it more likely that further breaches will

occur within the Fund or, if due to maladministration by a third party, further breaches will

occur in other pension schemes.

Page 174 of 246

11

Appendix B - Traffic light framework for deciding whether or not to report

Middlesbrough Council recommends those responsible for reporting to use the traffic light

framework when deciding whether to report to The Pensions Regulator. This is illustrated

below:

All breaches should be recorded even if the decision is not to report.

When using the traffic light framework individuals should consider the content of the red,

amber and green sections for each of the cause, effect, reaction and wider implications of

the breach, before you consider the four together. Some useful examples of this is

framework is provided by The Pensions Regulator at the following link

http:// www.thepensionsregulator.gov.uk/codes/code-related-report-breaches.aspx

Red

Where the cause, effect, reaction and wider implications of a breach,

when considered together, are likely to be of material significance.

These must be reported to The Pensions Regulator.

Example: Several members’ benefits have been calculated incorrectly.

The errors have not been recognised and no action has been taken to

identify and tackle the cause or to correct the errors.

Amber


when considered together, may be of material significance. They might

consist of several failures of administration that, although not significant

in themselves, have a cumulative significance because steps have not

been taken to put things right. You will need to exercise your own

judgement to determine whether the breach is likely to be of material

significance and should be reported.

Example: Several members’ benefits have been calculated incorrectly.

The errors have been corrected, with no financial detriment to the

members. However the breach was caused by a system error which

may have wider implications for other public service schemes using the

same system.

Green


when considered together, are not likely to be of material significance.

These should be recorded but do not need to be reported.

Example: A member’s benefits have been calculated incorrectly. This

was an isolated incident, which has been promptly identified and

corrected, with no financial detriment to the member. Procedures have

been put in place to mitigate against this happening again.

Page 175 of 246

http://www.thepensionsregulator.gov.uk/codes/code-related-report-breaches.aspx

12

Appendix C – Example Record of Breaches

Date Category

(e.g. administration, contributions,

funding, investment,

criminal activity)

Description and cause of breach

Possible effect of breach and

wider implications

Reaction of relevant

parties to breach

Reported / Not reported

(with justification if not reported and dates)

Outcome of report and/or investigations

Outstanding actions

*New breaches since the previous meeting should be highlighted

Page 176 of 246




Page 177 of 246


Introduction

This is the Risk Management Policy of the Teesside Pension Fund ("the Fund"), part of the Local

Government Pension Scheme ("LGPS") managed and administered by Middlesbrough Council ("the

Administering Authority"). The Risk Management Policy details the risk management strategy for the Fund,

including:

the risk philosophy for the management of the Fund, and in particular attitudes to, and appetite for, risk

how risk management is implemented risk management responsibilities the procedures that are adopted in the Fund's risk management process the key internal controls operated by the Administering Authority and other parties responsible for the

management of the Fund.

The Administering Authority recognises that effective risk management is an essential element of good

governance in the LGPS. By identifying and managing risks through an effective policy and risk

management strategy, the Administering Authority can:

demonstrate best practice in governance improve financial management minimise the risk and effect of adverse conditions identify and maximise opportunities that might arise minimise threats.

The Administering Authority adopts best practice risk management, which supports a structured and

focused approach to managing risks, and ensures risk management is an integral part in the governance of

the Fund at a strategic and operational level.


This Risk Management Policy applies to all members of the Pension Fund Committee and the local

Pension Board, including both scheme member and employer representatives. It also applies to senior

officers involved in the management of the Fund.

Less senior officers involved in the daily management of the Fund are also integral to managing risk for the

Fund, and will be required to have appropriate understanding of risk management relating to their roles,

which will be determined and managed by the Head of Investments and Treasury Management.

Advisers and suppliers to the Fund are also expected to be aware of this Policy, and assist officers,

Committee members and Board members as required, in meeting the objectives of this Policy.

Aims and Objectives

In relation to understanding and monitoring risk, the Administering Authority aims to:

integrate risk management into the culture and day-to-day activities of the Fund raise awareness of the need for risk management by all those connected with the management of the

Fund (including advisers, employers and other partners) anticipate and respond positively to change minimise the probability of negative outcomes for the Fund and its stakeholders establish and maintain a robust framework and procedures for identification, analysis, assessment

and management of risk, and the reporting and recording of events, based on best practice

Page 178 of 246

ensure consistent application of the risk management methodology across all Fund activities, including projects and partnerships.

To assist in achieving these objectives in the management of the Fund, the Administering Authority will aim

to comply with:

the CIPFA Managing Risk publication and the Pensions Act 2004 and the Pensions Regulator's Code of Practice for Public Service Pension

Schemes as they relate to managing risk.

Risk Management Philosophy

The Administering Authority recognises that it is not possible or even desirable to eliminate all risks. For

example, the Fund’s investment strategy shows a strong preference for growth assets, which involves

accepting a level of risk. Accepting and actively managing risk is therefore a key part of the risk

management strategy for the Fund. A key determinant in selecting the action to be taken in relation to any

risk will be its potential impact on the Fund’s objectives in light of the Administering Authority's risk appetite,

particularly in relation to investment matters. Equally important is striking a balance between the cost of risk

control actions against the possible effect of the risk occurring.

In managing risk, the Administering Authority will:

ensure that there is a proper balance between risk taking and the opportunities to be gained adopt a system that will enable the Fund to anticipate and respond positively to change minimise loss and damage to the Fund and to other stakeholders who are dependent on the benefits

and services provided make sure that any new areas of activity (new investment strategies, joint-working, framework

agreements etc.), are only undertaken if the risks they present are fully understood and taken into account in making decisions.

The Administering Authority also recognises that risk management is not an end in itself; nor will it remove

risk from the Fund or the Administering Authority. However it is a sound management technique that is an

essential part of the Administering Authority's stewardship of the Fund. The benefits of a sound risk

management approach include better decision-making, improved performance and delivery of services,

more effective use of resources and the protection of reputation.

CIPFA and The Pensions Regulator's Requirements

CIPFA Managing Risk Publication

CIPFA has published technical guidance on managing risk in the LGPS. The publication explores how risk

manifests itself across the broad spectrum of activity that constitutes LGPS financial management and

administration, and how, by using established risk management techniques, those risks can be identified,

analysed and managed effectively.

The publication also considers how to approach risk in the LGPS in the context of the role of the

administering authority as part of a wider local authority and how the approach to risk might be

communicated to other stakeholders.


The Public Service Pensions Act 2013 added the following provision to the Pensions Act 2004 relating to

the requirement to have internal controls in public service pension schemes.

“249B Requirement for internal controls: public service pension schemes

(1) The scheme manager of a public service pension scheme must establish and operate internal

controls which are adequate for the purpose of securing that the scheme is administered and

managed—

(a) in accordance with the scheme rules, and

Page 179 of 246

(b) in accordance with the requirements of the law.

(2) Nothing in this section affects any other obligations of the scheme manager to establish or

operate internal controls, whether imposed by or by virtue of any enactment, the scheme rules or

otherwise.

(3) In this section, “enactment” and “internal controls” have the same meanings as in section 249A.”

Section 90A of the Pensions Act 2004 requires the Pensions Regulator to issue a code of practice relating

to internal controls. The Pensions Regulator has issued such a code in which they encourage scheme

managers (i.e. administering authorities in the LGPS) to employ a risk based approach to assessing the

adequacy of their internal controls and to ensure that sufficient time and attention is spent on identifying,

evaluating and managing risks and developing and monitoring appropriate controls.

The Pensions Regulator’s code of practice guidance on internal controls requires scheme managers to

carry out a risk assessment and produce a risk register which should be reviewed regularly. The risk

assessment should begin by:

setting the objectives of the scheme determining the various functions and activities carried out in the running of the scheme, and identifying the main risks associated with those objectives, functions and activities.

The code of practice goes on to say that schemes should consider the likelihood of risks arising and the

effect if they do arise when determining the order of priority for managing risks, and focus on those areas

where the impact and likelihood of a risk materialising is high. Schemes should then consider what internal

controls are appropriate to mitigate the main risks they have identified and how best to monitor them. The

code of practice includes the following examples as issues which schemes should consider when designing

internal controls to manage risks:

how the control is to be implemented and the skills of the person performing the control the level of reliance that can be placed on information technology solutions where processes are

automated whether a control is capable of preventing future recurrence or merely detecting an event that has

already happened the frequency and timeliness of a control process how the control will ensure that data is managed securely, and the process for flagging errors or control failures, and approval and authorisation controls.

The code states that risk assessment is a continual process and should take account of a changing

environment and new and emerging risks. It further states that an effective risk assessment process will

provide a mechanism to detect weaknesses at an early stage and that schemes should periodically review

the adequacy of internal controls in:

mitigating risks supporting longer-term strategic aims, for example relating to investments identifying success (or otherwise) in achieving agreed objectives, and providing a framework against which compliance with the scheme regulations and legislation can be

monitored.

Under section 13 of the Pensions Act 2004, the Pensions Regulator can issue an improvement notice (i.e.

a notice requiring steps to be taken to rectify a situation) where it is considered that the requirements

relating to internal controls are not being adhered to.


The Administering Authority adopts the principles contained in CIPFA's Managing Risk in the LGPS

document and the Pension Regulator’s code of practice in relation to the Fund. This Risk Policy highlights

how the Administering Authority strives to achieve those principles through use of risk management

processes and internal controls incorporating regular monitoring and reporting.

Page 180 of 246

Responsibility

The Administering Authority must be satisfied that risks are appropriately managed. For this purpose, the

Head of Investments and Treasury Management is the designated individual for ensuring the process

outlined below is carried out, subject to the oversight of the Pension Fund Committee.

However, it is the responsibility of each individual covered by this Policy to identify any potential risks for

the Fund and ensure that they are fed into the risk management process.

The Teesside Pension Fund Risk Management Process

The Administering Authority's risk management process is in line with that recommended by CIPFA and is

a continuous approach which systematically looks at risks surrounding the Fund’s past, present and future

activities. The main processes involved in risk management are identified in the figure below and detailed

in the following sections:

1. Risk Identification

The risk identification process is both a proactive and reactive one: looking forward i.e. horizon scanning for

potential risks, and looking back, by learning lessons from reviewing how previous decisions and existing

processes have manifested in risks to the organisation.

Risks are identified by a number of means including, but not limited to:

formal risk assessment exercises managed by the Pension Fund Committee performance measurement against agreed objectives findings of internal and external audit and other adviser reports feedback from the local Pension Board, employers and other stakeholders informal meetings of senior officers or other staff involved in the management of the Fund liaison with other organisations, regional and national associations, professional groups, etc.

Once identified, risks will be documented on the Fund's risk register, which is the primary control document

for the subsequent analysis, control and monitoring of those risks.

2. Risk Analysis & Evaluation

Once potential risks have been identified, the next stage of the process is to analyse and profile each risk.

Risks will be assessed by considering the likelihood of the risk occurring and the impact if it does occur,

with the score for likelihood multiplied by the score for impact to determine the current overall risk rating, as

illustrated in Middlesbrough Council's Risk Matrix on the next page.

Page 181 of 246

of 246

When considering the risk rating, the Administering Authority will have regard to the existing controls in

place and these will be summarised on the risk register.

3. Risk Response

The Head of Investments and Treasury Management will review the extent to which the identified risks are

covered by existing internal controls and determine whether any further action is required to control the risk,

including reducing the likelihood of a risk event occurring or reducing the severity of the consequences

should it occur. Before any such action can be taken, Pension Fund Committee approval may be required

where appropriate officer delegations are not in place. The result of any change to the internal controls

could result in any of the following:

Tolerate – the exposure of a risk may be tolerable without any further action being taken; this is partially driven by the Administering Authority's risk 'appetite' in relation to the Pension Fund;

Treat – action is taken to constrain the risk to an acceptable level; Terminate – some risks will only be treatable, or containable to acceptable levels, by terminating

the activity; Transfer - for example, transferring the risk to another party either by insurance or through a

contractual arrangement.

The Fund's risk register details all further action in relation to a risk and the owner for that action.

4. Risk Monitoring & Review

Risk monitoring is the final part of the risk management cycle and will be the responsibility of the Pension

Fund Committee. In monitoring risk management activity, the Committee will consider whether:

the risk controls taken achieved the desired outcomes the procedures adopted and information gathered for undertaking the risk assessment were

appropriate greater knowledge of the risk and potential outcomes would have improved the decision-making

process in relation to that risk there are any lessons to be learned for the future assessment and management of risks.

5. Risk Reporting

Progress in managing risks will be monitored and recorded on the risk register. The risk register, including any changes to the internal controls, will be provided on an annual basis to the Pension Fund Committee.

The Pension Fund Committee will be provided with updates on a quarterly basis in relation to any changes to risks and any newly identified risks.

As a matter of course, the local Pension Board will be provided with the same information as is provided to the Pension Fund Committee and they will be able to provide comment and input to the management of risks.

In order to identify whether the objectives of this policy are being met, the Administering Authority will review the delivery of the requirements of this Policy on an annual basis taking into consideration any feedback from the local Pension Board. The risks identified are of significant importance to the Pension Fund. Where a risk is identified that could be of significance to the Council it would be included in either the Risk Register.

Key risks to the effective delivery of this Policy

The key risks to the delivery of this Policy are outlined below. The Pension Fund Committee will monitor

these and other key risks and consider how to respond to them.

Page 183 of 246

Risk management becomes mechanistic, is not embodied into the day to day management of the Fund and consequently the objectives of the Policy are not delivered

Changes in Pension Fund Committee and/or local Pension Board membership and/or senior officers mean key risks are not identified due to lack of knowledge

Insufficient resources are available to satisfactorily assess or take appropriate action in relation to identified risks

Risks are incorrectly assessed due to a lack of knowledge or understanding, leading to inappropriate levels of risk being taken without proper controls

Lack of engagement or awareness of external factors means key risks are not identified. Conflicts of interest or other factors lead to a failure to identify or assess risks appropriately

Costs

All costs related to this Risk Policy are met directly by the Fund.


This Risk Policy will be approved at the Teesside Pension Fund & Investment Panel (later renamed as the

Teesside Pension Fund Committee) meeting on 28th June 2017. It will be formally reviewed and updated at

least every three years or sooner if the risk management arrangements or other matters included within it

merit reconsideration.

Further Information

If you require further information about anything in or related to this Risk Policy, please contact:

Paul Campbell,




Albert Road,

Middlesbrough,

TS1 2QJ


Telephone - 01642 729024

Further information on the Teesside Pension Fund can be found at:

www.teespen.org.uk.

Page 184 of 246

http://www.teespen.org.uk/

1


Training Policy


Page 185 of 246

2

TRAINING POLICY

Introduction

This is the Training Policy of the Teesside Pension Fund (the Fund), which is managed and

administered by Middlesbrough Council. It details the training strategy for those involved in

the management of the Fund.

The Training Policy is established to aid Pension Fund Committee members, local Pension

Board members and senior officers in performing and developing in their individual roles,

with the ultimate aim of ensuring that the Fund is managed by individuals who have the

appropriate levels of knowledge and skills.

Aims and Objectives

Middlesbrough Council recognises the significance of its role as Administering Authority to

the Teesside Pension Fund.

In relation to knowledge and skills of those managing the Fund, the Administering Authority's

objectives are to ensure that:

the Fund is appropriately managed and that its services are delivered by people who have the requisite knowledge and expertise, and that this knowledge and expertise is maintained within the continually changing Local Government Pension Scheme and wider pensions landscape.

those persons responsible for governing the Fund have sufficient expertise to be able to evaluate and challenge the advice they receive, ensure their decisions are robust and well based, and manage any potential conflicts of interest.

All Pension Fund Committee members, local Pension Board members and senior officers to

whom this Policy applies are expected to continually demonstrate their own personal

commitment to training and to ensuring that these objectives are met.

To assist in achieving these objectives, the Fund will aim to comply with:

the CIPFA Knowledge and Skills Frameworks and the knowledge and skills elements of the Public Service Pensions Act 2013 and the

Pensions Regulator's (tPR) Code of Practice for Public Service Pension Schemes.


This Training Policy applies to all members of the Pension Fund Committee and the local

Pension Board, including scheme member and employer representatives. It also applies to

all managers of the Teesside Pension Fund and the Section 151 Officer.

Less senior officers involved in the daily management of the Fund will also be required to

have appropriate knowledge and skills relating to their roles, which will be determined and

managed by the Head of Investments and Treasury Management.

Advisers to the Fund are also expected to be able to meet the objectives of this Policy.

Officers of employers participating in the Fund who are responsible for pension matters are

also encouraged to maintain a high level of knowledge and understanding in relation to

LGPS matters, and Middlesbrough Council will provide appropriate training for them.

Page 186 of 246

3

CIPFA and tPR Knowledge and Skills Requirements

CIPFA Knowledge and Skills Framework and Code of Practice

In January 2010 CIPFA launched technical guidance for pension committees and non-

executives in the public sector within a knowledge and skills framework. The Framework set

the skill set for those responsible for pension scheme financial management and decision

making.

Subsequently, in July 2015 CIPFA launched technical guidance for local pension board

members by extending the existing knowledge and skills frameworks in place. This

Framework sets the skill set to enable pension board members to properly exercise their

functions under Section 248a of the Pensions Act 2004, as amended by the Public Service

Pensions Act 2013.

The Framework covers eight areas of knowledge and skills identified as the core

requirements (which include all those covered in the original Committee and non-executives

framework):

Pensions legislation Public section pensions governance Pensions administration Pension accounting and auditing standards Financial services procurement and relationship management Investment performance and risk management Financial markets and products knowledge Actuarial methods, standards and practice

CIPFA’s Code of Practice recommends (amongst other things) that administering authorities:

formally adopt the CIPFA Knowledge and Skills Framework (or an alternative training programme)

ensure that the appropriate policies and procedures are put in place to meet the requirements of the Framework (or an alternative training programme);

publicly report how these arrangements have been put into practice each year, including what assessment of training needs has been undertaken and what training has been delivered against the identified needs.


The Public Service Pensions Act 2013 (PSPA13) requires Pension Board members to:

be conversant with the rules of the scheme and any document recording policy about the administration of the scheme, and

have knowledge and understanding of the law relating to pensions and any other matters which are prescribed in regulations.

The degree of knowledge and understanding required is that appropriate for the purposes of

enabling the individual to properly exercise the functions of a member of the Pension Board.

These requirements have been incorporated and expanded on within tPR's Code of Practice

14: Governance and Administration of Public Service Pension Schemes which came into

force in April 2015.

Page 187 of 246

4


Middlesbrough Council fully supports the use of the CIPFA Knowledge and Skills

Framework, and tPR's Code of Practice and adopts the principles they set out. This Training

Policy highlights how the Administering Authority will strive to achieve those principles

through use of a rolling Training Plan together with regular monitoring and reporting.

The Teesside Pension Fund Training Plan

Middlesbrough Council recognises that attaining, and then maintaining, relevant knowledge

and skills is a continual process for Pension Fund Committee members, local Pension Board

members and senior officers, and that training is a key element of this process.

Middlesbrough Council will develop a rolling Training Plan based on the following key

elements:

Each of these training requirements will be focussed on the role of the individual i.e. a

Pension Fund Committee member, a Pension Board member or the specific role of the

officer.

Training will be delivered through a variety of methods including:

In-house training days provided by officers and/or external providers

Individual Training

Needs

A training needs analysis will be developed for the

main roles of Pension Fund Committee members,

Pension Board members and senior officers

customised appropriately to the key areas in which

they should be proficient. Training will be required in

relation to each of these areas as part of any

induction and on an ongoing refresher basis.

Hot Topic Training

The Training Plan will be developed to ensure

appropriately timed training is provided in relation to

hot topic areas, such as a high risk area or an area of

change for the Fund. This training may be targeted at

specific roles.

General Awareness

Pension Fund Committee members, Pension Board

members and senior officers are expected to maintain

a reasonable knowledge of ongoing developments

and current issues, which will allow them to have a

good level of general awareness of pension related

matters appropriate for their roles and which may not

be specific to the Fund.

Page 188 of 246

5

Training as part of meetings (e.g. Pension Fund Committee and Pension Board meetings) provided by officers and/or external advisers

External training events Circulation of reading material Attendance at seminars and conferences offered by industry-wide bodies Attendance at meetings and events with the Fund's investment managers and advisors Links to on-line training Access to the Middlesbrough Council website where useful Fund specific material is

available

In addition, Fund officers and advisers are available to answer any queries on an ongoing

basis including providing access to materials from previous training events.

Initial Information and Induction Process

On joining the Pension Fund Committee, the Pension Board or on appointment as a Senior

Officer of the Teesside Pension Fund, a new member, officer or adviser will be provided with

the following documentation to assist in providing a basic understanding of the Fund:

An Introduction to the Local Government Pension Scheme (Welcome Pack for Committee and Board members prepared by Teesside Pension Fund officers)

The members' guide to the Local Government Pension Scheme (LGPS) The latest Actuarial Valuation report The Annual Report and Accounts, which incorporate:

The Funding Strategy Statement The Governance Policy and Compliance Statement The Statement of Investment Principles including the Fund’s statement of

compliance with the LGPS Myners Principles The Communications Policy The Administration Strategy

The Administering Authority's Discretionary Policies This Training Policy

In addition, an individual training plan will be developed to assist each member, Pension

Board member or officer in achieving their identified individual training requirements within

six months of those requirements being identified.

Monitoring Knowledge and Skills

In order to identify whether the objectives of this policy are being met, the Administering

Authority will compare and report on attendance at training based on the following:

Individual Training Needs – ensuring refresher training on the key elements takes place for each individual at least once every three years.

Hot Topic Training – attendance by at least 75% of the required Pension Fund Committee members, Pension Board members and senior officers at planned hot topic training sessions. This target may be focussed at a particular group of Pension Fund Committee members, Pension Board members or senior officers depending on the subject matter.

General Awareness – each Pension Fund Committee, Pension Board member or officer attending at least one day each year of general awareness training or events.

Induction training – ensuring areas of identified individual training are completed within six months.

Page 189 of 246

6

Key Risks

The key risks to the delivery of this Policy are outlined below. The Pension Fund

Committee, with the assistance of the Pension Board, will monitor these and other key risks

and consider how to respond to them.

Changes in Pension Fund Committee and/or Pension Board membership and/or senior officers potentially diminishing knowledge and understanding.

Poor attendance and/or a lack of engagement at training and/or formal meetings by Committee Members, Pension Board Members and/or other senior officers resulting in a poor standard of decision making and/or monitoring.

Insufficient resources being available to deliver or arrange the required training. The quality of advice or training provided is not an acceptable standard.

Reporting

A report will be presented to the Pension Fund Committee on an annual basis setting out:

The training provided / attended in the previous year at an individual level The results of the measurements identified above.

This information will also be included in the Fund’s Annual Report and Accounts.

At each Pension Fund Committee and Pension Board meeting members will be provided

with details of forthcoming seminars, conferences and other relevant training events. Costs

All training costs related to this Training Policy are met directly by the Teesside Pension

Fund.


This Training Policy was approved at the Teesside Pension Fund & Investment Panel (later

renamed as the Teesside Pension Fund Committee) meeting on 28th June 2017. It will be

formally reviewed and updated at least every three years or sooner if the training

arrangements or other matters included within it merit reconsideration.

Further Information

If you require further information about anything in or related to this Training Policy, please contact:

Paul Campbell,




Albert Road,

Middlesbrough,

TS1 2QJ


Telephone - 01642 729024

Page 190 of 246

28 JUNE 2017


LOCAL INVESTMENTS UPDATE


1.1 Following agreement at the June 2016 Investment Panel meeting of a protocol and policy enabling investment of the Teesside Pension Fund’s assets in the Tees Valley area, to update Member of the Investment Panel of progress made with local investments.

2. RECOMMENDATION

2.1 That Members note the report, agree draft Memorandum of Understanding (Appendix A) between the Fund and the Tees Valley Combined Authority (TVCA) and agree to allocate resources to utilise CBRE’s expertise to develop the investment process between the Fund and TVCA.


3.1 There will be financial implications directly from this report with the appointment of CBRE, under the existing contract between the Fund and CBRE. At this time, however, the Fund and TVCA are only at the stage of scoping this work and unable to provide a cost estimate.

3.2 Future local investments will be part of the Fund’s overall portfolio and as such the investments must provide the appropriate risk/return profile to assist meeting the Fund’s overall funding objective.

4. BACKGROUND

4.1 Teesside Pension Fund has historically generally avoided direct investment in the Tees Valley area. This was primarily to ensure that the Fund did not find itself inhibited by conflicts of interest in the management of those assets.

4.2 The concept of investing pension contributions locally is attractive, to ensure that the economic activity of providing affordable pensions, benefits as wider a range of local stakeholders as possible. However, unlike other aspects of local investment by the public sector, an investment in itself needs to generate an acceptable economic return for the Fund. The Fund cannot factor into its calculations secondary benefits, such as social or any other economic benefit that does not provide direct investment return.

1Page 191 of 246

4.3 The Chancellor of the Exchequer has indicated that Local Government Pension Schemes should do more to invest in infrastructure. Whilst it is yet to be seen what measures may be put in place to enforce such investment, in future it may be the case that the Fund finds itself obligated to increase such allocations. Members may consider it desirable, where all other factors are equal, to see that such investment occurs in the Tees Valley area.

4.4 In order to assist further infrastructure investment, the Treasury and Department of Communities and Local Government has provided the following definition:

“Infrastructure assets are the facilities and structures needed for the functioning of communities and to support economic development. When considered as an investment asset class, infrastructure investments are normally expected to have most of the following characteristics:

Substantially backed by durable physical assets, Long life and low risk of obsolescence, Identifiable and reliable cash flow, preferably either explicitly or

implicitly inflation-linked, Revenues largely isolated from the business cycle and competition, e.g.

through long term contracts, regulated monopolies or high barriers to entry, and/or

Returns to show limited correlation to other asset classes.

Key sectors for infrastructure include transportation networks, power generation, energy distribution and storage, water supply and distributions, communications networks, health and education facilities, and social accommodation.

Conventional commercial property is not normally included, but where it forms part of a broader infrastructure asset, helps urban regeneration or serves societal needs it may be. Infrastructure service companies would not normally be included. The development, construction and commissioning of infrastructure assets is included in the b road definition.

Individual infrastructure investors will have further additional criteria they applybefore making investments, such as current yield, time to income generation, management strength, risk mitigation measures, and amount of leverage.”

5 PROTOCOL AND POLICY

5.1 It was agreed at the Investment Panel meeting held in June 2016 to formalise a protocol for local public bodies to approach the Fund with local investment opportunities.

2Page 192 of 246

5.2 Proposals received must be at the stage of a viable business plan to allow for a detailed investment appraisal to be completed, including costs, benefits, risks and timing implications. These would then be internally assessed with external advice taken where required, to identify portfolio suitability and risk return trade off, with riskier projects potentially requiring a partial guarantee from the leading project authorities.

5.3 If the project is considered a potentially viable fund investment a report from the Strategic Director Finance, Governance & Support would be submitted to the Investment Panel for consideration, to approve the resources required for a second stage of detailed due diligence and the resources required.

5.4 After robust due diligence a detailed report on the investment would be submitted to the Investment Panel for final approval.

6. PROGRESS MADE TO DATE

6.1 Discussions have been held with CBRE regarding their assistance in local investments inother parts of the country, using LGPS Funds. The process they have adopted in the past fits into our protocol of using their expertise after the initial assessment is completed by the Fund and CBRE making a recommendation back to the Fund once more detailed terms of the investment and due diligence is completed.

6.2 Additional meetings have taken place with other potential investment/asset management firms who may be able to assist both the Fund and local public bodies to facilitate local investments in the Tees Valley area. These are at an early stage, and need further development.

6.3 The Fund has carried out some early stage discussions with the TVCA, with further discussions to take place. The Fund and TVCA have developed the attached draft MoU setting out how they will work together in the future. In addition, we are engaging with CBRE to develop a methodology which enables the Fund and TVCA to present potential investment opportunities to the Fund.

7. ASSET ALLOCATION

7.1 Local investments would fit into the asset class Alternatives. This currently has an allocation target, as determined from the last Asset/Liability Study of 5% of the whole Fund.

7.2 The 2016 Regulations (The LGPS Management and Investment of Funds – Reg. 7(4)) does not allow an Administering Authority’s investment strategy to permit more than 5% of the total value of all investment of fund money to be invested in entities which are connected with that Administering Authority within the meaning of section 212 of the Local Government and Public Involvement in Health Act 2007 (d).

3Page 193 of 246

7.3 It is proposed that for the medium term, local investments will remain in the Alternatives asset class, with the overall asset class continuing with an asset allocation limit of 5% until the next Asset/Liability Study if carried out later this year.

7.4 It is also proposed that for the medium term, an asset allocation limit of 5% of total funds is applied, to ensure compliance with the 2016 Regulations.


4Page 194 of 246

APPENDIX A

MEMORANDUM OF UNDERSTANDING – INVESTMENT CO-OPERATION

Draft v.4 – 24.05.17

Between:

1. TEESSIDE PENSION FUND (“the Fund”) of Kier Pensions Unit, PO box 340, Middlesbrough, TS21 2XP; and

2. TEES VALLEY COMBINED AUTHORITY (“the Authority”) of Cavendish House, Teesdale Business Park, Stockton-On-Tees, TS17 6QY,

together “the Parties”.

Summary

This Memorandum sets out a joint commitment and a basis of collaboration to support the economic development of the Tees Valley region. By working together, the Tees Valley Combined Authority and Teesside Pension Fund will together support long-term transformational programmes to bring economic growth, new jobs and prosperity. In doing so they will ensure good returns on the investment of pensioners’ money, securing good returns from a stake in the growth of the local economy. This Memorandum secures an important benefit from devolution, allowing investment decisions to be made closer to the people and businesses affected. By working together, the Authority and the Fund will expand the resources available to the local economy, and develop the long-term partnerships necessary to secure the delivery of the Tees Valley’s Strategic Economic Plan.

Background

1. The Fund is the Local Government Pension Scheme (LGPS) for local authority employees (and other eligible bodies) in the Teesside area. The Fund wishes to invest in additional projects and developments within the Tees Valley that meet its criteria for investment, and to be able to report to its members on such investments. The Fund has agreed to invest upto 5% of its value (currently approximately £200 million) in investments that support the local economy.

2. The Authority is a mayoral combined authority and was created in April 2016 as a partnership of five local authorities: Darlington, Hartlepool, Middlesbrough, Redcar & Cleveland and Stockton-On-Tees. Its purpose is to drive economic growth and job creation in the Tees Valley area (“the Area”). In 2016 the Authority published its Strategic Economic Plan (“SEP”), which sets out the growth ambitions and priorities for the Area to 2026 and incorporates the Area’s industrial strategy.

Co-Operation

3. The Parties wish to explore together the potential for the Fund to invest in suitable projectsand developments in the Area that:-

a. meet the Fund’s criteria for investment; and

5Page 195 of 246

b. assist in the delivery of the SEP.

4. The Fund and the Authority agree to co-operate on opportunities to work together and increase investment in the Area, through:-

a. the development of a “top-down” investment fund set up for the general purpose of investing in projects and opportunities in the Area, with agreed criteria for investment; and

b. the establishment of a collaborative “bottom-up” process for identifying, evaluating and agreeing the opportunities for investment in specific projects as they are brought forward in the Area.

Parties’ Requirements

5. The Fund has certain minimum requirements that must be met from any potential investment, and will assess any investment opportunities on the basis of these requirements:-

a. Each investment requires approval by the Fund’s Pension Committee; b. Each investment must secure a sufficient minimum risk-adjusted return: the

required rate for each individual investment is dependent on the term of the investment and the risks involved (e.g. investment/project specific risks, any securitisation used, etc.);

c. There must be a method of valuing the investment/asset, preferably an industry standard method (e.g. commercial property valued in accordance with RICS Valuation – Professional Standards (the Red Book));

d. There must be sufficient security for the investment/asset (e.g. legal title, contracts, etc.); and

e. The arrangements for managing the investment/asset must be robust and resilient, including adequate reporting arrangements.

6. The Authority has published its Investment Plan, which sets out how it will identify and bring forward projects in the Area to deliver the SEP. As a democratic institution, the Authority is led by the Tees Valley Mayor and Cabinet, and all discussions are subject to their agreement. The Authority has also agreed an Assurance Framework with Government and adheres to this framework in making and reporting transparent and robust investment decisions.

Establishing co-funding opportunities

7. The Fund and the Authority will work together to progress the establishment and operation of a joint approach to funding, taking into account:-

a. The “in principle” commitment from the Fund to up to 5% of its value (currently approximately £200 million) being available for investment in the local economy;

b. The commitment from the Authority to invest at least £450 million (2017-21), as set out in its Investment Plan, with the potential for greater sums to be secured throughnew borrowing powers and further devolution of funding from central government; and

c. Opportunities for joint investment between the Fund and Authority, in support of common objectives and an agreed approach to project development.

6Page 196 of 246

Project Identification and Evaluation

8. The Authority operates a process of calling for Expressions of Interest (“EoIs”) under its Investment Plan, initially on a quarterly basis. The Authority will:-

a. call for and receive EoIs on behalf of itself and also the Fund; andb. build in to its arrangements for evaluating and developing specific projects an

assessment of the potential for any such project to receive investment from the Fund.

9. The Fund and Authority will co-fund appropriate development capacity, hosted by the Authority, to support project evaluation and development. This could be delivered through co-location or secondment of a member of the Fund’s staff, external appointment or otherwise. This additional resource would be appointed for an initial fixed term of one year and would:-

a. Support the Authority in identifying, developing and evaluating good quality business cases for investment;

b. Identify opportunities for co-investment between the Fund, the Authority, the privatesector, and other partners as appropriate;

c. Oversee the programme management of the Fund’s commitment of resources for local investment, ensuring that the financial and project assurance requirements of the Fund are met; and

d. Present business cases for support from the Fund’s Investment Panel, alongside the Authority’s own governance and decision-making arrangements.

Working Together

10. The Parties will set up a joint group to manage the implementation of this MoU (“the Review Group”):-

a. The Review Group will consist of 3 representatives nominated by each Party, until agreed otherwise;

b. The Review Group will meet as often as necessary to carry out its purpose;c. The Review Group will have agreed terms of reference, with agreed mechanisms

for:-i. reporting its recommendations to each Party in accordance with that Party’s

own requirements; ii. managing any conflict of interest; andiii. managing any dispute;

d. The Review Group will review, evaluate and report on propositions for investment from the Fund, as agreed.

11. The Parties will agree the gateway mechanism for reviewing and agreeing any potential project-specific investment through the Review Group. Ideally projects will be commissioned jointly by the Parties where possible, but in any event the evidence gathering and evaluation of project funding opportunities will be managed jointly up to an agreed point in the process, following which the parties will each manage their respective evaluations and approvals as appropriate.

12. Where a specific project may technically be located outside the Area, it may nonetheless be considered for investment under this MoU if:-

7Page 197 of 246

a. it will produce outcomes that contribute significantly to the delivery of the SEP within the Area; and

b. it will support one or more of the key aims of one of the Fund’s [Admitted Bodies/partner organisations] outside the Area.

13. The Parties will specifically review the potential to invest in the delivery of new housing in the Area, on the same basis as other investments under this Memorandum, and in support of the Authority’s proposals for an Investment Partnership with central government, and partnership with Registered Social Providers or other housing delivery partners.

Key Principles

14. In addition to meeting the Parties’ respective requirements set out at paragraph 5 above, the Parties agree that the key principles underpinning this co-operation are:-

a. Any investments under this MoU will be in furtherance of the SEP, and the alignment of a potential projects with the SEP will be one of the factors to be taken into account when assessing whether a specific investment will be made;

b. All processes (including evaluation, reporting and data management) will be robust but will be kept as straightforward and timely as possible;

c. In the interests of efficiency, all operational and transaction costs will be shared as appropriate and minimised as far as possible, and the Parties will seek to join up their project development and appraisal processes, using the same independent advisors where possible, so that these processes will suffice for the purposes of both Parties;

d. Specifically, where possible the Parties’ due diligence arrangements will be integrated and/or aligned, taking into account:-

i. the need to share capacity and maximise development resources for this purpose;

ii. the need to avoid any potential conflict of interest; and iii. any need either Party may have for independent due diligence advice on a

specific investment decision; ande. All project and investment information will be kept confidential between the Parties.

General

15. The parties commit to working together to continue to develop this collaborative funding model.

16. Senior representatives from each of the Parties will meet every six months to review the operation of this MoU.

17. Each Party will meet its own costs of operating the arrangements set out in this MoU.

18. The timing and content of any announcement on:-a. The establishment and/or operation of this MoU and/or the Review Group; andb. all investment recommendations by the Review Group and their implementation,

will be agreed in advance between the Parties.

19. This MoU will not be legally binding.

8Page 198 of 246

Date:

Signed: for the Fund

Signed: for the Authority

9Page 199 of 246

Appendix 1 – Illustrative Flowchart [to follow]

10Page 200 of 246

Ernst & Young LLP

Teesside Pension FundYear ending 31 March 2017

Audit Plan

June 2017

Page 201 of 246

The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC300001 and is a member firm of Ernst & Young Global Limited.A list of members’ names is available for inspection at 1 More London Place, LondonSE1 2AF, the firm’s principal place of business and registered office.

Teesside Pension Fund and Investment PanelTeesside Pension FundMiddlesbrough CouncilCivic CentreMiddlesbroughTS1 9GA

7 June 2017

Dear Panel Members

Audit Plan

We are pleased to attach our Audit Plan which sets out how we intend to carry out our responsibilities asauditor. Its purpose is to provide the Teesside Pension Fund and Investment Panel (the Panel) with abasis to review our proposed audit approach and scope for the 2016/17 audit in accordance with therequirements of the Local Audit and Accountability Act 2014, the National Audit Office’s 2015 Code ofAudit Practice, the Statement of Responsibilities issued by Public Sector Audit Appointments (PSAA)Ltd, auditing standards and other professional requirements. It is also to ensure that our audit is alignedwith the Panel’s service expectations.

This plan summarises our initial assessment of the key risks driving the development of an effectiveaudit for Teesside Pension Fund (the Pension Fund) and outlines our planned audit strategy in responseto those risks.

We welcome the opportunity to discuss this Audit Plan with you on 28 June 2017 and to understandwhether there are other matters which you consider may influence our audit.

Yours faithfully

Careen GrayExecutive DirectorFor and on behalf of Ernst & Young LLP

Ernst & Young LLPCitygateSt James’ BoulevardNewcastle upon TyneNE1 4JD

Tel: 0191 247 2500ey.com

Page 202 of 246

Contents

EY ÷ i

Contents

1. Overview ..................................................................................................................... 12. Financial statement risks ........................................................................................... 23. Our audit process and strategy.................................................................................. 44. Independence.............................................................................................................. 7Appendix A Fees ............................................................................................................ 9Appendix B UK required communications with those charged with governance .... 10

In April 2015 Public Sector Audit Appointments Ltd (PSAA) issued ‘‘Statement of responsibilities of auditors andaudited bodies.” It is available from the Chief Executive of each audited body and via the PSAA website(www.psaa.co.uk).The Statement of responsibilities serves as the formal terms of engagement between appointed auditors and auditedbodies. It summarises where the different responsibilities of auditors and audited bodies begin and end, and what isto be expected of the audited body in certain areas.The ‘Terms of Appointment from 1 April 2015’ issued by PSAA sets out additional requirements that auditors mustcomply with, over and above those set out in the National Audit Office Code of Audit Practice (the Code) and statute,and covers matters of practice and procedure which are of a recurring nature.This Audit Plan is prepared in the context of the Statement of responsibilities. It is addressed to the TeessidePension Fund and Investment Panel, and is prepared for the sole use of the audited body. We, as appointed auditor,take no responsibility to any third party.Our Complaints Procedure – If at any time you would like to discuss with us how our service to you could beimproved, or if you are dissatisfied with the service you are receiving, you may take the issue up with your usualpartner or director contact. If you prefer an alternative route, please contact Steve Varley, our Managing Partner, 1More London Place, London SE1 2AF. We undertake to look into any complaint carefully and promptly and to do allwe can to explain the position to you. Should you remain dissatisfied with any aspect of our service, you may ofcourse take matters up with our professional institute. We can provide further information on how you may contactour professional institute.

Page 203 of 246

Overview

EY ÷ 1

1. Overview

This Audit Plan covers the work that we plan to perform to provide you with:

► Our audit opinion on whether the financial statements of the Pension Fund give a trueand fair view of the financial transactions of the Pension Fund during the year ended 31March 2017 and the amount and disposition of the fund’s assets and liabilities as at 31March 2017; and

► Our opinion on the consistency of the Pension Fund’s financial statements within thePension Fund’s annual report with the published financial statements of MiddlesbroughCouncil.

Our audit will also include the mandatory procedures that we are required to perform inaccordance with applicable laws and auditing standards.

When planning the audit we take into account several key inputs:

► Strategic, operational and financial risks relevant to the financial statements

► Developments in financial reporting and auditing standards

► The quality of systems and processes

► Changes in the business and regulatory environment

► Management’s views on all of the above

By considering these inputs, our audit focuses on the areas that matter and our feedback ismore likely to be relevant to the Pension Fund.

We will provide an update to the Panel on the results of our work in these areas in our reportto those charged with governance scheduled for delivery in September 2017.

We met with the Head of Investments and Treasury Management and the Pension FundAccountant on 6 February 2017 to discuss the latest developments at the Pension Fund.Following these discussions we did not identify any significant changes to the Pension Fundwhich will impact the scope of our work in 2016/17.

Page 204 of 246

Financial statement risks

EY ÷ 2

2. Financial statement risks

We outline below our current assessment of the financial statement risks facing the PensionFund, identified through our knowledge of the Pension Fund’s operations and discussion withthose charged with governance and officers.

We seek to validate this with you at our meeting in June.

Significant risks (including fraud risks) Our audit approach

Risk of management override

As identified in ISA (UK and Ireland) 240, managementis in a unique position to perpetrate fraud because of itsability to manipulate accounting records directly orindirectly and prepare fraudulent financial statements byoverriding controls that otherwise appear to be operatingeffectively. We identify and respond to this fraud risk onevery audit engagement.

Our approach will focus on:► Testing the appropriateness of journal entries

recorded in the general ledger and otheradjustments made in the preparation of the financialstatements

► Reviewing accounting estimates for evidence ofmanagement bias

► Evaluating the business rationale for significantunusual transactions

Valuation of directly held properties

The Fund has a significant portfolio of directly heldproperty investments. The valuation of land andbuildings is subject to a number of assumptions andjudgements. A small movement in these assumptionscould have a material impact on the financial statements.

Our approach will focus on:► Document and walkthrough the process and assess

the design and implementation of controls over thevaluation of directly held properties

► Assess the property valuer as an expert ofmanagement

► Review the output of the property valuer► Where appropriate consider the reasonableness of

the assumptions used by the property valuer byreference to external evidence

► Where appropriate engage our internal real estateteam to help us gain assurance over a sample ofvaluations

Valuation of complex pooled investment vehicles

The Fund’s investments include complex pooledinvestment vehicles, which include pooled propertyfunds and infrastructure funds.Judgements are taken by the Investment Managers tovalue these investments whose prices are not publicallyavailable. The material nature of investments means thatany error in judgement could result in a materialvaluation error.Current market volatility means such judgments canquickly become outdated. Such variations could have amaterial impact on the financial statements.We have identified the Pension Fund’s investments incomplex pooled investment vehicles as a significant risk,as even a small movement in these assumptions couldhave a material impact on the financial statements.

Our approach will focus on:► Document and walkthrough the process and design

and implementation of controls over the valuation ofcomplex pooled investment vehicles

► Obtain third party confirmations of the investments atthe Pension Fund’s year end

► Review relevant controls’ reports for qualifications orexceptions that may affect the audit risk

► Review the basis of valuation for the complex pooledinvestment vehicles to be satisfied that it is in linewith the accounting policy

► Perform purchase and sales testing

Page 205 of 246

Financial statement risks

EY ÷ 3

2.1 Responsibilities in respect of fraud and errorWe would like to take this opportunity to remind you that management has the primaryresponsibility to prevent and detect fraud. It is important that management, with the oversightof those charged with governance, has a culture of ethical behaviour and a strong controlenvironment that both deters and prevents fraud.

Our responsibility is to plan and perform audits to obtain reasonable assurance aboutwhether the financial statements as a whole are free of material misstatements whethercaused by error or fraud. As auditors, we approach each engagement with a questioningmind that accepts the possibility that a material misstatement due to fraud could occur, anddesign the appropriate procedures to consider such risk.

Based on the requirements of auditing standards our approach will focus on:

► Identifying fraud risks during the planning stages;

► Enquiry of management about risks of fraud and the controls to address those risks;

► Understanding the oversight given by those charged with governance of management’sprocesses over fraud;

► Consideration of the effectiveness of management’s controls designed to address the riskof fraud;

► Determining an appropriate strategy to address any identified risks of fraud, and

► Performing mandatory procedures regardless of specifically identified risks.

Page 206 of 246

Our audit process and strategy

EY ÷ 4

3. Our audit process and strategy

3.1 Objective and scope of our auditUnder the Code of Audit Practice (the ‘Code’) our principal objectives are to review, andreport on, the Pension Fund’s financial statements to:

► Form an opinion on the financial statements under International Standards on Auditing(UK and Ireland); and

► Form an opinion on the consistency of the pension fund financial statements within thepension fund annual report with the published financial statements of MiddlesbroughCouncil.

3.2 Audit process overviewWe completed our interim audit visit in April, where we reviewed internal processes andcontrols for the Pension Fund’s financial reporting process. We did not identify any materialcontrol weaknesses as part of this process.

As in 2015/16, we do not intend to rely upon a controls approach, as we consider it moreeffective and efficient to complete a fully substantive audit approach. To reduce the amountof work required at year end, we commenced this work during our interim visit in April. Wewill complete top up testing as part of our year end audit visit in July. We plan to report ourfindings to you at the Panel meeting in September.

AnalyticsWhere we can, we plan to use our computer-based analytics tools to enable us to capturewhole populations of your financial data. In particular we expect to be able to use these forjournal entries.

These tools:

► Help identify specific exceptions and anomalies which can then be subject to moretraditional substantive audit tests; and

► Give greater likelihood of identifying errors than random sampling techniques.

Internal auditAs in the prior year, we will review internal audit plans and the results of their work. Weconsider these when designing our overall audit approach and when developing in ourdetailed testing strategy. We may also reflect relevant findings from their work in ourreporting, where it raises issues that we assess could have a material impact on the year-endfinancial statements.

Use of specialists

When auditing key judgements, we are often required to rely on the input and adviceprovided by specialists who have qualifications and expertise not possessed by the core auditteam. The areas where either EY or third party specialists may provide input for the currentyear audit are:

Area Specialists

Pensions liability Pension Fund actuaryEY actuary

Valuation of property portfolio Fund Property Valuation expertsEY real estate valuation team

Page 207 of 246


EY ÷ 5

In accordance with Auditing Standards, we will evaluate each specialist’s professionalcompetence and objectivity, considering their qualifications, experience and availableresources, together with the independence of the individuals performing the work.

We also consider the work performed by the specialist in light of our knowledge of thePension Fund’s environment and processes and our assessment of audit risk in the particulararea. For example, we would typically perform the following procedures:

► Analyse source data and make inquiries as to the procedures used by the specialist toestablish whether the source date is relevant and reliable;

► Assess the reasonableness of the assumptions and methods used;

► Consider the appropriateness of the timing of when the specialist carried out the work;and

► Assess whether the substance of the specialist’s findings are properly reflected in thefinancial statements.

3.3 Mandatory audit procedures required by auditing standardsand the CodeAs well as the financial statement risks outlined in Section two, we must perform otherprocedures as required by auditing, ethical and independence standards, the Code and otherregulations. We outline below the procedures we will undertake during the course of ouraudit.

Procedures required by standards► Addressing the risk of fraud and error

► Significant disclosures included in the financial statements

► Entity-wide controls

► Reading other information contained in the financial statements and reporting whether itis inconsistent with our understanding and the financial statements

► Auditor independence

Procedures required by the Code► Reviewing, and reporting on as appropriate, other information published with the

financial statements, including the Annual Governance Statement.

We are also required to discharge our statutory duties and responsibilities as established bythe Local Audit and Accountability Act 2014 and Code of Audit Practice.

3.4 MaterialityFor the purposes of determining whether the financial statements are free from material error,we define materiality as the magnitude of an omission or misstatement that, individually or inaggregate, could reasonably be expected to influence the users of the financial statements.Our evaluation requires professional judgement and so takes into account qualitative as wellas quantitative considerations implied in the definition.

We have determined our initial assessment of overall materiality for the financial statementsof the Pension Fund is £31.3 million based on 1% of net assets as at 31 March 2016. Thismateriality amount will be re-assessed and where necessary updated on receipt of the draft2017 financial statements. We are required to communicate uncorrected audit misstatementsgreater than £1.5 million to you.

Page 208 of 246


EY ÷ 6

The amount we consider material at the end of the audit may differ from our initialdetermination. At this stage, however, it is not feasible to anticipate all the circumstances thatmight ultimately influence our judgement. At the end of the audit we will form our final opinionby reference to all matters that could be significant to users of the financial statements,including the total effect of any audit misstatements, and our evaluation of materiality at thatdate.

3.5 FeesThe duty to prescribe fees is a statutory function delegated to Public Sector AuditAppointments Ltd (PSAA) by the Secretary of State for Communities and Local Government.PSAA has published a scale fee for all relevant bodies. This is defined as the fee required byauditors to meet statutory responsibilities under the Local Audit and Accountability Act 2014 inaccordance with the NAO Code.

Our fees for the 2016/17 audit will be £28,535

3.6 Your audit teamThe engagement team continues to be led by Careen Gray, who is an Executive Director inEY’s Pensions Assurance Team.

Careen continues to be supported by Stuart Kenny who is responsible for the day-to-daydirection of audit work and is the key point of contact for your finance and pension teams.

3.7 Timetable of communication, deliverables and insightsWe have set out below a timetable showing the key stages of the audit. The timetableincludes the deliverables we have agreed to provide to the Pension Fund through the Panel’scycle in 2016/17. These dates are determined to ensure our alignment with PSAA’s rollingcalendar of deadlines.

From time to time matters may arise that require immediate communication with the Paneland we will discuss them with the Chair as appropriate.

Following the conclusion of our audit of the Council and Pension Fund, we will prepare anAnnual Audit Letter to communicate the key issues arising from our work to the Pension Fundand external stakeholders, including members of the public.

Audit phase Timetable

TeessidePension Fundand InvestmentPanel timetable Deliverables

Risk assessment andsetting of scopes

February 2017 June 2017 Audit Plan

Completion ofwalkthroughs of keyfinancial systems

April 2017

Year-end audit July – August2017

September 2017 Report to those charged with governance via theAudit Results ReportAudit report , including our opinion on thefinancial statementsAudit report on our opinion on the consistency ofthe financial statements within the pension fundannual report with the published financialstatements.

Completion of audit August –September 2017

Page 209 of 246

Independence

EY ÷ 7

4. Independence

4.1 IntroductionThe APB Ethical Standards and ISA (UK and Ireland) 260 ‘Communication of audit matterswith those charged with governance’, requires us to communicate with you on a timely basison all significant facts and matters that bear on our independence and objectivity. The EthicalStandards, as revised in December 2010, require that we do this formally both at the planningstage and at the conclusion of the audit, as well as during the audit if appropriate. The aim ofthese communications is to ensure full and fair disclosure by us to those charged with yourgovernance on matters in which you have an interest.

Required communications

Planning stage Final stage

► The principal threats, if any, to objectivity andindependence identified by EY includingconsideration of all relationships between you, youraffiliates and directors and us

► The safeguards adopted and the reasons why theyare considered to be effective, including anyEngagement Quality Review

► The overall assessment of threats and safeguards► Information about the general policies and process

within EY to maintain objectivity and independence

► A written disclosure of relationships (including theprovision of non-audit services) that bear on ourobjectivity and independence, the threats to ourindependence that these create, any safeguards thatwe have put in place and why they address suchthreats, together with any other informationnecessary to enable our objectivity andindependence to be assessed

► Details of non-audit services provided and the feescharged in relation thereto

► Written confirmation that we are independent► Details of any inconsistencies between APB Ethical

Standards, the PSAA Terms of Appointment andyour policy for the supply of non-audit services byEY and any apparent breach of that policy

► An opportunity to discuss auditor independenceissues

During the course of the audit we must also communicate with you whenever any significantjudgements are made about threats to objectivity and independence and the appropriatenessof our safeguards, for example when accepting an engagement to provide non-audit services.

We also provide information on any contingent fee arrangements, the amounts of any futurecontracted services, and details of any written proposal to provide non-audit services.

We ensure that the total amount of fees that EY and our network firms have charged to youand your affiliates for the provision of services during the reporting period are disclosed,analysed in appropriate categories.

4.2 Relationships, services and related threats and safeguardsWe highlight the following significant facts and matters that may be reasonably considered tobear upon our objectivity and independence, including any principal threats. However wehave adopted the safeguards below to mitigate these threats along with the reasons why theyare considered to be effective.

Self-interest threats

A self-interest threat arises when EY has financial or other interests in your entity. Examplesinclude where we have an investment in your entity; where we receive significant fees inrespect of non-audit services; where we need to recover long outstanding fees; or where weenter into a business relationship with the Pension Fund.

We are the appointed auditors for Middlesbrough Council. We have no other businessrelationship with the Pension Fund or Council. At the time of writing, there are no longoutstanding fees.

Page 210 of 246

Independence

EY ÷ 8

We believe that it is appropriate for us to undertake permissible non-audit services, and wewill comply with the policies that the Pension Fund has approved and that are in compliancewith the PSAA Terms of Appointment.

At the time of writing, there are no planned non-audit fees.

A self-interest threat may also arise if members of our audit engagement team haveobjectives or are rewarded in relation to sales of non-audit services to the Pension Fund. Weconfirm that no member of our audit engagement team, including those from other servicelines, is in this position, in compliance with Ethical Standard 4.

There are no other self-interest threats at the date of this report.

Self-review threats

Self-review threats arise when the results of a non-audit service performed by EY or otherswithin the EY network are reflected in the amounts included or disclosed in the financialstatements.

There are no other self-review threats at the date of this report.

Management threats

Partners and employees of EY are prohibited from taking decisions on behalf of managementof your entity. Management threats may also arise during the provision of a non-audit servicewhere management is required to make judgements or decisions based on that work.

There are no management threats at the date of this report.

Other threats

Other threats, such as advocacy, familiarity or intimidation, may arise.

There are no other threats at the date of this report.

Overall Assessment

Overall we consider that the adopted safeguards appropriately mitigate the principal threatsidentified, and we therefore confirm that EY is independent and the objectivity andindependence of Careen Gray, the audit engagement Director and the audit engagementteam have not been compromised.

4.3 Other required communicationsEY has policies and procedures that instil professional values as part of firm culture andensure that the highest standards of objectivity, independence and integrity are maintained.

Details of the key policies and processes within EY for maintaining objectivity andindependence can be found in our annual Transparency Report, which the firm is required topublish by law. The most recent version of this report is for the year ended June 2016 andcan be found here:

http://www.ey.com/uk/en/about-us/ey-uk-transparency-report-2016

Page 211 of 246

Fees

EY ÷ 9

Appendix A Fees

A breakdown of our agreed fee is shown below.

Planned Fee2016/17

£

Scale fee2016/17

£

Outturn fee2015/16

£

Total Audit Fee – Code work 28,535 28,535 28,535

Non-audit work 0 0 0

All fees exclude VAT.

We base the agreed fee presented above on the following assumptions:

► Officers meeting the agreed timetable of deliverables;

► Appropriate quality of documentation is provided by the Pension Fund Team; and

► The Pension Fund has an effective control environment.

If any of the above assumptions prove to be unfounded, we will seek a variation to the agreedfee. We will discuss and agree any variation with the Pension Fund officers in advance.

Fees for the auditor’s consideration of correspondence from the public and formal objectionswill be charged in addition to the scale fee.

Page 212 of 246

UK required communications with those charged with governance

EY ÷ 10

Appendix B UK required communications withthose charged with governance

There are certain communications that we must provide to the Teesside Pension Fund andInvestment Panel. These are detailed here:

Required communication Reference

Planning and audit approachCommunication of the planned scope and timing of the audit including any limitations.

► Audit Plan

Significant findings from the audit► Our view about the significant qualitative aspects of accounting practices

including accounting policies, accounting estimates and financial statementdisclosures

► Significant difficulties, if any, encountered during the audit► Significant matters, if any, arising from the audit that were discussed with

management► Written representations that we are seeking► Expected modifications to the audit report► Other matters if any, significant to the oversight of the financial reporting process

► Audit Results Report

Misstatements► Uncorrected misstatements and their effect on our audit opinion► The effect of uncorrected misstatements related to prior periods► A request that any uncorrected misstatement be corrected► In writing, corrected misstatements that are significant


Fraud► Enquiries of the Teesside Pension Fund and Investment Panel to determine

whether they have knowledge of any actual, suspected or alleged fraud affectingthe entity

► Any fraud that we have identified or information we have obtained that indicatesthat a fraud may exist

► A discussion of any other matters related to fraud


Related partiesSignificant matters arising during the audit in connection with the entity’s relatedparties including, when applicable:► Non-disclosure by management► Inappropriate authorisation and approval of transactions► Disagreement over disclosures► Non-compliance with laws and regulations► Difficulty in identifying the party that ultimately controls the entity


External confirmations► Management’s refusal for us to request confirmations► Inability to obtain relevant and reliable audit evidence from other procedures


Consideration of laws and regulations► Audit findings regarding non-compliance where the non-compliance is material

and believed to be intentional. This communication is subject to compliance withlegislation on tipping off

► Enquiry of the Teesside Pension Fund and Investment Panel into possibleinstances of non-compliance with laws and regulations that may have a materialeffect on the financial statements and that the Teesside Pension Fund andInvestment Panel may be aware of


Page 213 of 246

UK required communications with those charged with governance

EY ÷ 11

Required communication Reference

IndependenceCommunication of all significant facts and matters that bear on EY’s objectivity andindependenceCommunication of key elements of the audit engagement director’s consideration ofindependence and objectivity such as:► The principal threats► Safeguards adopted and their effectiveness► An overall assessment of threats and safeguards► Information about the general policies and process within the firm to maintain

objectivity and independence

► Audit Plan► Audit Results Report

Going concernEvents or conditions identified that may cast significant doubt on the entity’s ability tocontinue as a going concern, including:► Whether the events or conditions constitute a material uncertainty► Whether the use of the going concern assumption is appropriate in the

preparation and presentation of the financial statements► The adequacy of related disclosures in the financial statements


Significant deficiencies in internal controls identified during the audit ► Audit Results Report

Fee Information► Breakdown of fee information at the agreement of the initial audit plan► Breakdown of fee information at the completion of the audit

► Audit Plan► Audit Results Report► Annual Audit Letter if

considered necessary

Page 214 of 246

EY | Assurance | Tax | Transactions | Advisory

Ernst & Young LLP

© Ernst & Young LLP. Published in the UK.All Rights Reserved.

The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Waleswith registered number OC300001 and is a member firm of Ernst & Young Global Limited.

Ernst & Young LLP, 1 More London Place, London, SE1 2AF.

ey.com

Page 215 of 246

of 246



AGENDA ITEM 11

28 JUNE 2017


MEMBER TRAINING OPPORTUNITIES


1.1 To inform Members of the Teesside Pension Fund & Investment Panel (the Panel) of upcoming opportunities for training, either with other Border to Coast Pension Partnership (BCPP) partners or through the Local Government Association (LGA).

2. RECOMMENDATIONS

2.1 That Members note the report and contact the Head of Investments and Treasury Management if they wish to attend the Member training courses.


3.1 The only financial implications arising from this report are the cost of the courses and travel.

4. BACKGROUND

4.1 Each year, Members are asked if they wish to attend training organised by the LGA on its LGPS Trustee Fundamentals courses, usually run over three days. These are usually run on three separate days in October, November and December, with training available in Leeds. At the time of writing this report, there are no further details on dates or content, but these can be shared with Members once available.

4.2 In addition, this year BCPP has organised a two day conference in York on 11 & 12 September 2017 – see attached agenda. This conference has been set up to mimic the LGA Fundamentals course. There is an option to stay over, or travel home after the first afternoon to return the following day.

CONTACT OFFICER: Paul CampbellHead of Investments & Treasury Management

TEL. NO.: (01642) 729024

1Page 217 of 246

BCPP Members Training (Day 1)BCPP Members Training

11th September, The Principal Hotel, York, 2017

Day 1: 10am – 4pm

09.30 – 09.50 Registration and coffee Main Room

09.50 – 10.00 Welcome Main Room

10.00 – 11.00 Benefits Framework and the Relationship between the Admin Authority and Scheme Employers

Brief history LGPS Types of Member / Employer 2014 Scheme Admin Authority & Employer Discretions The role of the Local Pension Board The role of the Regulator How to measure an Administrators Performance

Tim Hazlewood

Main Room

11.00 – 12.00 Actuarial Matters The Purpose of a Valuation Assets and Liabilities Cashflow / Maturing nature of the Scheme What and why are there different valuation methodologies Assumptions and Calculations External Reporting / standardised reporting (SAB / GAD - S13)

what does it all mean. Cost Cap

Mercer

Main Room

12.00 – 13.00 Lunch TBC

2Page 218 of 246

13.00 – 13.45 The Investment Framework The Management and Investment of Funds Regs. 2016. Funding Strategy Statement Investment Strategy Statement Pooling Governance Compliance Statements Annual Reports and Auditing

Investec Asset Management

Main Room

13.45 – 14.50 13.45 – 14.15 14.20 – 14.50

Traditional Asset Classes – Equities Equities Risk / Return Profiles

Columbia Threadneedle

Traditional Asset Classes – Bonds Gilts Corporate Bonds

Aviva Investors

Stream A

(MainRoom)

13.45 – 14.15 14.20 – 14.50

Traditional Asset Classes – Bonds Gilts Corporate Bonds

Aviva Investors

Traditional Asset Classes – Equities Equities Risk / Return Profiles

Columbia Threadneedle

Stream B

(BreakoutRoom)

14.50 – 15.00 Break TBC

15.00 – 16.05 15.00 – 15.30 15.35 – 16.05

Property

Aberdeen Asset Management

Alternative Investments

JP Morgan Asset Management

Stream A

(MainRoom)

15.00 – 15.30 15.35 – 16.05

Alternative Investments

JP Morgan Asset Management

Property

Aberdeen Asset Management

Stream B

(BreakoutRoom)

19.00 Dinner followed by Keith Wade, Chief Economist Schroders

BCPP Members Training (Day 2)

BCPP Members Training

12th September, The Principal Hotel, York, 2017

Day 2: 9am – 4pm

3Page 219 of 246

08.30 – 08.50 Registration and Coffee Main Room

08.50 – 09.00 Welcome Main Room

09.00 – 10.00 Asset Strategy Return Drivers Risk / Diversification / Correlation Alpha / Beta Passive / Active Benchmarks / Performance Measurement Role of strategic asset allocation

Hymans Robertson

Main Room

10.00 – 11.00 Responsible Investment

Evolution Corporate Governance and Stewardship Why considering ESG issues matters RI – ISS How to manage RI obligations in a post pooling world. Collective Power – LAPFF / BCPP.

Legal and General Investment Management – Sacha Sadan

Main Room

4Page 220 of 246

11.00 – 11.15 Break TBC

11.15 – 12.00 LGPS Governance Framework

LGPS Governance Framework Functions of the Committee and the Board BCPP Governance Framework Role of the Scheme Advisory Board

Aon Hewitt - Karen McWilliam

Main Room

12.00 – 13.00 Lunch TBC

13.00 – 14.00 Duties and Responsibilities of Committee and Board Members The LGPS in its legal context General Local Authority Legal Issues LGPS Specific Duties and Responsibilities Wider Duties and Responsibilities What Happens when things go wrong.

Eversheds- Gary Delderfield

Main Room

14.00 – 15;00

15:00 – 16:00

Pooling national & BCPP Progress

Chair Joint Committee / CEO BCPP Ltd

What’s on the National Agenda for the LGPS

LGA – Jeff Houston

Main Room

Important Booking details:To book at place at the training, please email [email protected] with the following details:

Full Name

Position Committee member / LPB member / Officer

Fund

Officer Contact details for any Queries

Additional action required by you to book accommodation:-

Discounted rates have been negotiated at the hotel at £139 pp to take advantage of these:-

Please directly contact: The Principal Hotel, Station Rd York on 01904 653 681 and quote either Aviva Investors OR BCPP to obtain group discount rate on your room.

5Page 221 of 246


of 246


AGENDA ITEM 12

28 JUNE 2017

STRATEGIC DIRECTOR FINANCE, GOVERNANCE & SUPPORT – JAMESBROMILEY

INVESTMENT PERFORMANCE REPORT - 2016

1 PURPOSE OF THE REPORT

1.1 To report on the performance of the Fund.

2 RECOMMENDATION


3 FINANCIAL IMPLICATIONS

3.1 The performance of the Fund is one of the factors which the Fund Actuary takes into account when setting the Employer's contribution rate.

4 BACKGROUND

4.1 The Fund's investment performance is now measured by Portfolio Evaluation Limited (PEL), the leading provider of performance services to public and private sector pension schemes. These results are reported to the Investment Panel in accordance with the requirements of the Management Agreement.

4.2 Monitoring performance is one way in which Members can assess how well the Fund is being managed. Performance is measured against a tailor-made mix of investments which should produce returns over the medium and long term to meet the Fund’s liabilities. From this asset mix, a benchmark can be created and the actual performance of the Fund measured against this customised benchmark. The customised benchmark is reassessed every three years as part of the Asset/Liability Study.

4.3 PEL are specialists in performance risk and return measurement, with a range of pension funds, charities, insurance companies and investment consultants located in the United Kingdom and Europe. PEL replace the WM Company who served thismarket for years, but withdrew early last year.

1


Page 223 of 246

5. HEAD OF INVESTMENTS REPORT

5.1 2016 was a very positive year for the Fund and most investors in general. Growth asset classes (Equities, Property and Alternatives) produced positive returns, particularly UK Equities, who saw strong gains after the outcomes of the UK’s EU Referendum and US Election, and Overseas Equities who also benefitted from a weaker Pound. In addition, Bond performance was strong

5.2 Strong gains were also seen in Property and Alternative asset classes. The Fund continues to invest in these asset classes when opportunities arise.

5.3 Against this background of strong, rising markets, the Teesside Pension Fund built up cash as profits were taken out of Equities and Bonds were sold down to near zero. In the year £189.1 million (net) was divested. Cash increased by approx. £250 million to £400 million. The figures below show the activity detail for the year:

Purchases Sales Net--------(£ millions)--------

UK Equities 91.9 184.0 92.1Overseas Equities 153.6 196.2 42.6Alternatives 9.2 13.2 4.0Property 40.6 4.3 36.3UK Bonds 1.5 48.9 47.4Overseas Bonds 0 21.8 21.8UK Index-linked 0 17.6 17.6TOTAL 296.9 486.0 189.1

5.4 Over the past few years, the policy of being overweight in Equities negatively affected the Fund, however, as will be seen in Section 6 below, this assisted the Fund outperforming its customised benchmark and other Local Authority Funds. The Fund has a mix of investments which differs vastly from the average fund. Members are aware of this difference in asset allocation and have accepted that such a mix carries the risk of greater volatility and that the Fund’s performance can differ vastly from other funds.

5.5 One of the reasons performance measurement is important is that it enables the Investment Panel to assess the effectiveness of the fund management arrangements. The Fund has a regime of undertaking regular reviews of Fund Management Arrangements. These are carried out every 5 years by the Investment Advisors, in conjunction with the Head of Investments, with a report for approval to the Investment Panel. The last review was approved in March 2015.

2Page 224 of 246

6. PERFORMANCE

6.1 The total Fund return for calendar year 2016 was 20.8%, against a benchmark return of 18.5%. This is the return for the calendar year, as is standard practice for this report, not the financial year. The financial year’s performance result are published in the Annual Report and Accounts.

6.2 The most important measure of pension fund performance is over the long term. Pension Fund investment is a long-term business. The way the Fund is managed looks to take the long-term view while being open for opportunities to exploit short-term market opportunities.

6.3 The Fund’s performance over 3, 5 and 10 years is positive, 8.6% p.a., 9.7% p.a., and6.9% p.a. respectively. Over 3 years the Fund underperformed its benchmark by 1.2% p.a., over 5 years it underperformed by 1.3% and over the longer period of 10years the Fund has also underperformed its benchmark by 0.2%.

6.4 The table and chart below show the Fund’s returns over the last 10 years comparedto the benchmark returns.

Relative Performance v. Benchmark:

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 3 yr 10 yrFund 10.3 -17.3 21.8 14.7 -4.2 10.2 12.5 3.8 2.2 20.8 8.6 6.9B’mark 6.2 -16.7 16.9 14.0 -.03 9.6 16.4 7.4 4.1 18.5 9.8 7.0Rel Pfmce 3.9 -0.7 4.1 0.6 -3.9 0.6 -3.3 -3.4 -1.8 2.3 -1.2 -0.2

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 3 yr 10 yr

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Relative Performance v. Benchmark

Year

6.5 The table below emphasises the extent of the difference between the Fund’s actualasset allocation and the customised benchmark, as at December 2016:

3Page 225 of 246

Asset AllocationCustomised

Benchmark %Actual TPF % Difference %

Equities 70 80.3 +10.3Alternatives 5 1.6 -3.4Property 10 6.9 -3.1Bonds 13 0.2 -12.8Cash 2 11.0 +9.0

6.6 For 2016, the difference in performance returns between the customised benchmark (18.5%) and the Teesside Fund (20.8%) was 2.3%. Explaining how this difference occurred, the graph below shows performance for each asset class in 2015:

Equity Alternatives Property Bonds Cash0

5

10

15

20

25

Performance Return %

TPF Return % Cust B'mrk Return %

6.7 The above graph also shows the difference in returns between the customised benchmark and Teesside Fund. Both asset allocation and stock selection decisions have impacted performance positively with outperformance in Equities, where the Fund is very overweight, Property and Alternatives. This is better illustrated in the following chart and graphs which shows the impact on relative performance of both asset allocation and stock selection when comparing the Fund to the customised benchmark.

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 3yrs 10yrsFund 10.3 -17.3 21.8 14.7 -4.2 10.2 12.5 3.8 2.2 20.8 8.6 6.9B’mark 6.2 -16.7 16.9 14.0 -0.3 9.6 16.4 7.4 4.1 18.5 9.8 7.0Rel Pfmce 3.9 -0.7 4.1 0.6 -3.9 0.6 -3.3 -3.4 -1.8 +2.3 -1.2 -0.2Asset All. -0.4 1.3 -0.1 0.0 -3.2 -0.1 -1.1 -2.3 -1.0 +1.1 n/a n/aStock Sel. 4.1 -1.9 4.0 0.7 -0.1 0.7 -2.2 -1.1 -0.8 +1.2 n/a n/a

4Page 226 of 246

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

Asset Allocation

Asset Allocation Impact

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Stock Selection

Stock Selection Impact

6.8 With so much of the Fund invested in Equities (80%), it is always this asset class that determines how well the whole Fund performs. There were some regional disparities in performance during 2016. Strong performance was seen from UK and European portfolios, however, negative excess returns were seen from the US, Far East and Japanese portfolios.

6.7 Bonds underperformed their underlying benchmark indices, however given the amount now invested in this asset class the impact was minimal. Property and Alternatives strongly outperformed their benchmark indices, assisting the overall Fund’s outperformance when compared to the customised benchmark.


TEL. NO.: (01642) 729024

5Page 227 of 246

of 246



AGENDA ITEM 13

28 JUNE 2017


TENDER FOR PROPERTY LEGAL SERVICES


1.1 To present to Members the outcome of the competitive tender process for the provisionof property legal services.

2. RECOMMENDATION

2.1 That Members agree the recommendation set out in section 5 and appoint the successfulcompany for a period of three years with a one year extension option, subject to furtherclearance through Middlesbrough Council’s procurement process.


3.1 Legal fees relating to property are either a management expense and charged directly tothe Fund or capitalised and charged to the underlying asset.

4. BACKGROUND

4.1 The contract with the current service provider, Freeths LLP, is for a fixed term and nowexpired. Accordingly, invitations to tender were sought through a suitable frameworkfrom providers that met the required supplier assessment standard.

5 OUTCOME OF THE TENDER PROCESS

5.1 From the framework list, tenders were received from the following five firms:

Beachcroft Bevan Brittan DWF Freeths Ward Hadaway

5.2 Evaluation of tenders received was on the basis of price and quality, with 40% of the available points awarded on price and 60% awarded on the basis of quality criteria. Total points scored by each of the short-listed managers can be shown (in descending order):

Page 229 of 246



AGENDA ITEM 13

Firm A: 745 Firm B: 710 Firm C: 638 Firm D: 580 Firm E: 386

5.3 It is recommended that Firm A be appointed subject to the successful completion of the ten day standstill period.

5.4 It is intended that the start date of the new contract will be 17 July 2017, although a different start date may be mutually agreed.

5.5 All fees payable under the new contract (as with the current contract) are based purely on activity. As part of the tender, the firms were required to state a range of fees for a range of activities; purchases and sales, rent reviews, new leases etc., and estimated levels of activity based predicted future activity over the next four years allowed comparison to be made between the tenders received. Fees relating to Firm A, based on the estimated level of activity are £88,188 per annum.


Page 230 of 246



AGENDA ITEM 14

28 JUNE 2017


TREASURY MANAGEMENT REPORT


1.1 To report on the treasury management of the Fund’s cash balances, including the methodology used.

2. RECOMMENDATION



3.1 There are no particular implications arising from this report.

4. BACKGROUND

4.1 The Fund holds cash balances made up from investment income and contributions from employers and employees that are available for investments and to make pension payments. The balance of cash held varies from time-to-time, primarily as a result of the Investment Advisors’ recommendations. The balances are managed as part of the Council’s treasury management operation. The Treasury Manager is part of the Loans & Investment section.

5. THE CIPFA CODE OF PRACTICE ON TREASURY MANAGEMENT

5.1 The Chartered Institute of Public Finance & Accountancy (CIPFA) Code of Practice (the Code) sets out how cash balances should be managed.

5.2 The Code states that the objective of treasury management is the management of the Authority’s cash flow, its borrowings and investments, in such a way as to control the associated risks and achieve a level of performance or return consistent with those risks. The security of cash balances invested is more important than the interest rate received.

5.3 Middlesbrough Council adopted the Code on its inception and further determined that the cash balances held by the Fund should be managed using the same criteria. The policy establishes a list of counterparties (banks, building societies and others to whom

Page 231 of 246



AGENDA ITEM 14the Council will lend) and sets limits as to how much it will lend to each counterparty. The only difference when dealing with the Fund’s cash balances is that the limits are larger, reflecting the fact that the Fund has in recent years held more cash than the Council. The counterparty list and associated limits are kept under constant review by the Strategic Director Finance, Governance and Support and changes were made on several occasions as the banking crisis unfolded.

5.4 Although it is accepted that there is no such thing as a risk-free counterparty, the policy has been successful in avoiding any capital loss through default.

5.5 In the interests of good governance it is required that a quarterly report on the Fund’s treasury management policy and current position be presented.

5.6 Panel Members are advised that Middlesbrough Council is currently reviewing its arrangements for treasury management, including appointing an independent treasury advisory company. In future, the treasury management policies for the Council and the Fund will differ, and a policy appropriate to the Fund will be brought to a future Investment Panel meeting for approval. Until then, the Fund will continue with the existing policy.

6. TREASURY MANAGEMENT POLICY

6.1 The counterparty list and associated limits, as at 31 March 2017 was:

H.M. Government (Debt Management Office): Unlimited UK Clearing Banks and their wholly owned subs: £25m (per group) Co-operative Bank: £15m Nationwide Building Society: £15m An overseas bank Group: £7.5m Local Authorities, Police & Fire Authorities and Nationalised Industries: £10m per

Authority AAA-rated Cash Funds: £7.5m per Fund Other Building Societies (Coventry, Leeds, Skipton and Yorkshire): £10m per Society The custodian of the Pension Fund’s assets £20 million, this limit can be temporarily

increased by a further £5 million by the Head of Investments and Treasury Management, for a maximum of 1 week at a time. Any such increase must be reported to the Strategic Director Finance, Governance and Support within 1 week, specifying why the increase was needed.

6.2 In order to keep abreast of a volatile market, which is often fuelled by rumours, the policycan be changed at any time by the Strategic Director Finance, Governance and Support, with subsequent reporting to the relevant committee. The Head of Investments or the Treasury Manager can delete names from the list, but cannot add them, and can reduce limits but cannot increase them.

Page 232 of 246



AGENDA ITEM 146.3 As at 31 March 2017, the Fund had £401.6 million invested with approved counterparties

at an average rate of 0.344%.

6.4 The attached graph (Appendix A) shows the maturity profile of cash invested. It also shows the average rate of interest obtained on the investments for each time period. Forexample, 25.68% of the Fund’s cash investments are repayable in the period 2 weeks to 1 month at an average interest rate of 0.352%.

6.5 Ordinarily, the Treasury Manager is under instruction to keep at least 50% of cash investments relatively liquid (one month or less), in order to fund pension payments and investments. However, given the size of the cash assets held, this strict level is relaxed while cash levels are this high to allow cash flows to be managed at more sensible levels.

CONTACT OFFICER: Paul Campbell – Head of Investments and Treasury Management

TEL. NO.: (01642) 729024

Page 233 of 246

APPENDIX AOutstanding maturities, as at the end of March 2017

0.13% 0.28% 0.33% 0.35% 0.34% 0.44% 0.46% 0.74% 0.00% 1.02%

Page 234 of 246

28 JUNE 2017


CONTRACT FOR CUSTODIAN SERVICES – OPTION TO EXTEND CONTRACT


1.1 The Fund’s custodian services contract was appointed to BNP Paribas Securities Services inFebruary 2013 following a tender process. The contract awarded was for a five year period with an option to extend, at the Fund’s discretion, for a further period of one year. This report seeks approval to exercise that option.

2. RECOMMENDATIONS

2.1 That approval is given to exercise the option to extend by a further year, in accordance with the terms of the last tender and current contract.


3.1 The financial implications to the Fund are to continue making payments for custodian services for an additional year. The proposed budget for 2016/17, as set out in the latest Business Plan, is £40,000. Should the Fund tender for this service at this time, it is anticipated that the annual cost would rise significantly, as the last tender provided a cost opportunity with a significantly reduced tender amount by BNP Paribas Securities Services.

3.2 In addition, the Custodian provides safe custody of the vast majority of the Fund’s £3.8 billion assets.

4. BACKGROUND

4.1 A report to the Investment Panel was brought on 19 September 2012 requesting the appointment of BNP Paribas Securities Services for a period of five years and an option to extend by a further year following a tender process. The tender process assessed both the total cost of the contract and the ability to meet the service standards required by the Fund.

4.2 It is also proposed that it will be in the Fund’s interest to extend the contract for a further year to give the Fund more time and provide greater visibility in order to set an appropriate length of the next contract as this could be the last custodian services contract before investment management responsibility for most assets transfers to the Border to Coast Pension Partnership.

1Page 235 of 246


TEL. NO.: (01642) 729024

2Page 236 of 246

28 JUNE 2017


MARKETS IN FINANCIAL INSTRUMENTS DIRECTIVE II – UPDATE


1.1 To follow up on the previous report presented (March 2016) and update Members of the Teesside Pension Fund and Investment Panel (the Panel) of the Markets in Financial Instruments Directive II (MiFID II) and its impact on the Teesside Pension Fund.

2. RECOMMENDATIONS

2.1 That Members note the report and approve the Head of Investments & Treasury Management to complete the opt up process, where needed, from retail client status to elective professional status.


3.1 There are no immediate financial implications but the classification of the Fund will affect transaction costs and a Research Budget may be needed.

4. BACKGROUND

4.1 The Markets in Financial Instruments Directive 2004/39/EC (MiFID) is a European Law thatprovides harmonised regulation for investment services across the 31 member states of the European Economic Area (the 28 EU member states plus Iceland, Norway and Liechtenstein). The directive's main objectives are to increase competition and consumer protection in investment services and help create a single market for financial services and activities in the European Union. MiFID came into force in 2004 with an implementation date of 1 November 2007.

4.2 The key measures implemented through the directive were: best execution and order handling practices, categorisation of clients, investment research, conflicts of interest, outsourcing, transaction reporting, pre- and post-trade transparency and regulation of trade-related market infrastructure. The introduction of the Directive has resulted in lower trading costs per transaction, reduced bid-ask spreads and faster trading times as envisioned by the European Commission.

4.3 However, expected benefits from the new competitive landscape have not flowed equally to all market participants. In particular, and it is the opinion of the European Commission that these benefits have not always been passed onto the end investor. The trading

Page 237 of 246

environment has become more complex and fragmented and the financial crisis has exposed weaknesses in the regulation of instruments (other than shares) traded mostly between professional investors (e.g. derivatives).

4.4 MiFID II, which repeals Directive 2004/39/EC was published in the Official Journal of the European Union on 12 June 2014. The new rules will be applicable starting January 2018.

5. IMPACT ON THE TEESSIDE PENSION FUND

5.1 The new Regulation/Directive affects the Fund in three ways:

Client Classification – stricter provisions for public sector entities, Inducements – restrictions on provision of free of charge research to clients, and Recording of Communications – records retentions increased to 5 years.

Client Classification

5.2 Previously, under MiFID, some discretion was left with broker/regulated financial institution and client to decide on the most appropriate client classification. The Fund was able to elect itself as a professional client, and therefore able to trade fully without any additional restrictions or protections from brokers/regulated financial institutions (e.g. best execution, disclosures, etc.).

5.3 Under MiFID II, clients can be classified as Per Se Professional, Eligible Counterparty or Retail. If a client does not meet either the Per Se Professional or Eligible Counterparty they must, by default, be considered as Retail. Counterparties can Opt Up to a higher classification or Opt Down to a lower classification if they meet specific criteria, and each broker of fund manager must agree to the change.

5.4 There is a perception amongst European policy makers that Municipalities and Local Authorities have in the past invested in complex financial instruments without thorough product appropriateness checks in place. Under MiFID II, Local Authorities will no longer be permitted to be classified as Per Se Professionals or Eligible Counterparties. By default,therefore, pension funds managed and operated as part of a Local Authority will be classified as Retail Clients. A pension fund operated as a separate legal entity, but owned by a Local Authority can be classified as a Per Se Professional or an Eligible Counterparty.

5.5 Local Authorities may still be allowed to Opt Up to Elective Professional, however, this will be at the discretion of individual Member States (including what criteria must be met in order to Opt Up). Elective Professionals cannot Opt Up to Eligible or Per Se Professional Counterparties.

5.6 The final Opt Up criteria will be set by the Financial Conduct Authority (FCA), the UK’s financial regulator. For LGPS Funds to Opt Up, the FCA will require individual investment manager to carry out a qualitative assessment and set a quantitative test.

5.7 The qualitative assessment will require:

Page 238 of 246

“adequate assessment of the expertise, experience and knowledge of the client that gives reasonable assurance, in light of the nature of the transactions or services envisaged, that the client is capable of making his own investment decisions and understanding the risks involved”

5.8 Quantitative test a), below and one of b) or c) must be satisfied:

a) the size of the client’s financial instrument portfolio, defined as including cash deposits and financial instruments, exceeds £15m;

b) the client has carried out transactions, in significant size, on the relevant market at an average frequency of 10 per quarter over the previous four quarters; and

c) the client works or has worked in the financial sector for at least one year in a professional position, which requires knowledge of the transactions or services envisaged

5.8 Since the last Panel report, a LGPS MiFID II working group has formed and been working with the FCA, Local Government Association (LGA) and Investment Association (IA) regarding the criteria for Local Authorities to Opt Up to elective professional status.

5.9 The FCA are considering a new policy statement which is expected to include a fourth criterion in the quantitative test which will be satisfied of the entity is an Administering Authority of an LGPS Fund. Investors need to satisfy two of the four criteria, which practically means Administering Authorities only need to meet the minimum size (£15 million), which all LGPS Funds meet.

5.10 It is also expected that the FCA will clarify that the qualitative test will continue to reference the individual but will make clear that this can include legal entities as well as natural persons and that the collective decision making structure of the client can be taken into account.

The IA is in the process of drafting a template questionnaire which will then be sharedwith the LGPS and the LGA for comments. This is to ensure that administering authorities only have to provide a standard suite of documents to each investment manager rather than having to tailor it for each manager. The initial template is expected to be issued by the end of May 2017 with a final version targeted by the endof June 2017. Once the final questionnaire has been approved the IA are happy for this to be shared with investment managers who are not currently members of the IA.

Discussions with asset managers leading on this work with the IA have indicated that this will require an assessment of the investment capabilities of the “decision makers”even where they are a collective, e.g. a Committee. While this will make opting up easier than initially anticipated there will still be a process and information requirement from the Administering Authorities. Asset managers representing the IA on this indicated that to make an assessment they may still require evidence of the experience and capacity of the individuals of the collective, possibly supported by training policies, professional advice, etc. of those party to the collective decision making process.

Page 239 of 246

It is expected that investment managers will periodically review the information provided by the Administering Authorities to satisfy the opt-up criteria, probably on an annual basis.

5.11 Following the above developments it is anticipated that the opt-up process for the LGPS Funds will be much simpler than originally feared. Longer term, meeting these criteria will enable the Fund to transact with Border to Coast Pension Partnership (BCPP) and continue to manage other fund management relationships outside BCPP, e.g. limited partnerships in Alternatives.

Inducements

5.12 Currently, the Teesside Fund pays a commission to brokers for each trade and in return receives execution of the trade. Some brokers used by the Fund also provide investment research from Analysts and Commentators. The Fund does not make a direct payment forthe research; rather a flat commission rate is charged for each trade.

5.13 The European Securities and Markets Authority (ESMA) and the FCA have been looking at how firms use dealing commission. That is, the charges paid when investment managers execute trades and acquire external research on their behalf.

5.14 ESMA has put forward a number of assertions in its final technical advice on research and inducements to the European Commission in December 2014.

It has confirmed that, in its view, the current market practice where a broker agrees higher execution rates to enable the investment manager to receive higher value research falls within the scope of an inducement under MiFID II and therefore a Level 1 restriction applies (i.e. there is a conflict of interest between investment manager and fund/client).

It perceives a risk that, without the restriction, the investment manager's duty to act in the best interests of its fund/clients will be impaired.

It considers that there is a risk a firm may be influenced to direct order flow or churn portfolios to gain access to more valuable research.

5.15 ESMA's proposed solution is to separate investment managers' payments for research from execution arrangements and outlines a model for how research can still be paid for by investment managers without constituting an inducement. The FCA's feedback follows ESMA's final technical advice and ESMA's proposed two options for change. Theseproposals are strongly supported by the FCA.

5.16 The proposals are that the investment manager can purchase research:

Directly out of its own resources (the manager can choose to reflect this in an increaseto the firm's portfolio management or advice fees); or

Through a "research payment account", funded by specific charge to the client which would be agreed and disclosed up front with the client. This charge would be based

Page 240 of 246

on a research budget set by the manager and would not be linked to execution volumes or value.

5.17 Brokers providing both execution and research services to investment managers must identify a separate fee for the execution service, with research services charged for separately and not influenced by levels of payment received for execution. Any surplus must either be rebated or offset against future research budgets.

5.18 The Fund is actively manages its relationships with its brokers. Since the previous Panel report, brokers have been approached and asked to clarify their treatment of the Fund after MiFID II, and confirm whether they consider they are providing an execution only service or research is included in their service. So far, some have confirmed arrangementsand others are waiting for more clarity after publication of the new FCA Handbook, due later this month or early July 2017.

Recording of Communications

5.19 FCA regulated financial institutions must record all telephone conversations and electroniccommunications. As the Teesside Fund is not regulated there is not a system in place to record telephone conversation or electronic communications, particularly those associated with trading orders.

5.20 MiFID II reinforces the need for effective recording of all communications and lengthens the period records are retained to five years. Currently, when transaction orders are placed, all brokers maintain adequate record for compliance with MiFID II. In addition, the Fund maintains detailed records of all completed transactions.


TEL. NO.: (01642) 729024

Page 241 of 246

of 246



AGENDA ITEM 17

28 JUNE 2017


REPORT ON PERSONAL SHARE DEALING


1.1 To comply with the requirements of the Management Agreement to report on personal share dealing activity.

2. RECOMMENDATIONS



3.1 There are no financial implications arising from this report.

4. BACKGROUND

4.1 The Management Agreement contains requirements regarding personal share dealing:

Any officer with dealing responsibilities is free to manage their own affairs efficiently and is not expected to refrain from personal dealings. However, he or she should avoid action which involves or might appear to involve a conflict of interest.

Such an officer should not normally deal in the securities of a company when he or she is aware that the Fund is currently buying or selling such securities or that consideration is being given to do so.

All personal dealings should be reported to the Head of Investments, who is responsible for maintaining a Register of such deals.

Details of all personal dealings must be reported to the next convenient Investment Panel, although the officer concerned will not be named in that report.

5. NOTIFIABLE SHARE DEALING

5.1 The following share transaction was undertaken and reported to the Head of Investments:

1Page 243 of 246



AGENDA ITEM 17 On 3 April 2017, 1 BP ordinary share was acquired as a script dividend. On 5 May 2017, 45 BP ordinary shares were purchased.


TEL. NO.: (01642) 729024

2Page 244 of 246

28 JUNE 2017


TENDER FOR PROPERTY INVESTMENT & MANAGING AGENT SERVICES


1.1 To inform Members of the Teesside Pension Fund & Investment Panel (the Panel) of the existing contractual arrangements for managing the Fund’s direct property portfolio and obtain approval to tender for this service again.

2. RECOMMENDATIONS

2.1 That approval is given to tender for property investment and managing agent services (non-discretionary management of the portfolio) for a period of four years, with options to extend for a further two years, plus an additional two years (potential total contract length eight years).


3.1 Currently, the Fund is charged a rate of 0.18% of the valuation of the total direct property portfolio. For the financial year 2017/17, the total charge amounted to approx. £360,000.

4. BACKGROUND

4.1 A report was brought on 14 December 2011 to the Panel requesting the appointment of CBRE for a period of five years and an option to extend by a further year following a tender process. The tender process assessed both the total cost of the contract and the ability to meet the service standards required by the Fund (price 40% and quality 60%).

4.2 The Fund has been very active in this asset class during the period since CBRE were appointed, and it is anticipated that this will continue in the near future. The Fund is actively looking to increase the portfolio with acquisitions up to a target valuation of £250million, whilst continuing to take sales opportunities.

4.3 In September 2016, it was proposed that it will be in the Fund’s interest to extend the contract for a further year, in line with the contract’s terms, to give the Fund more time and provide greater visibility in order to set an appropriate length of the next contract as this could be the last property management services contract before investment management responsibility for direct property assets transfers to the Border to Coast Pension Partnership.

1Page 245 of 246

4.4 The direct property portfolio is managed on a non-discretionary basis, i.e. CBRE cannot make investment decisions about the portfolio; there must be an instruction from the Fund’s Officers.

5. TENDER PROPOSAL

5.1 Management of this asset class will eventually move to Border to Coast Pension Partnership (BCPP), however, it is unclear at this time when that transfer will take place. Currently, moving the assets will involve a change of beneficial owner which will trigger stamp duty for BCPP; something that is clearly not cost effective.

5.2 Solutions are being worked on nationally to ensure that a transfer on this basis does not incur stamp duty, and a methodology is in development, but it comes with some restrictions, e.g. if an asset is sold, the cash cannot be transferred back to the underlying owners but must remain with the BCPP “Property sub-Fund”.

5.3 Any solution BCPP can provide will not happen for some time yet, e.g. at least two years from now. If the Fund were to tender for this period it runs the risk that BCPP is not readyin time and a contract of short duration will be expensive as any fixed costs will be recovered in that timescale.

5.4 If a long term contract is entered into, this should reduce the rate charged to the Fund, but too long a contract could impede the Fund from access to BCPP at a much reduced rate. A compromise would be to look at a medium length contract with two extensions, e.g. 4 years plus 2 years extension, plus further 2 years extension.

5.5 It is also proposed to continue with non-discretionary management of the portfolio, as this currently works well for the Fund and in the proposed staffing structure presented earlier, there is provision to carry on managing the portfolio in this way.


TEL. NO.: (01642) 729024

2Page 246 of 246

Middlesbroughdemocracy.middlesbrough.gov.uk/aksmiddlesbrough/... · TEESSIDE PENSION FUND &...

Documents

Transcript of Middlesbroughdemocracy.middlesbrough.gov.uk/aksmiddlesbrough/... · TEESSIDE PENSION FUND &...