Report of the City Treasurer.
6.1 Nikki Parsons presented the report which focused on the two risks the Board had requested more information on at the previous meeting. The first strategic risk, pensions legislation and regulation changes, was classified as a medium risk and because strategic risks were generally inherent, they could not always be mitigated against. However, it was important for the Pension Fund Committee and the Board to be aware of these risks, particularly when making strategic decisions. Nikki Parsons stated that the Department of Communities and Local Government was required to consult with scheme managers, which included the Council, on any proposed changes in legislation and this was also reported to the Pension Fund Committee. In addition, the Local Government Association, the Chartered Institute of Public Finance and Accountancy and the Pensions and Lifetime Savings Association provided briefings to officers on proposed changes. Nikki Parsons then referred to recent changes in legislation and regulation on draft investment regulations, pooling criteria, Local Government Pension Scheme (LGPS) Regulations 2013 and LGPS (Amendment) (Governance) Regulations 2015 as set out in the report.
6.2 Turning to the second strategic risk, Regulation – Introduction of European Directive MiFID II, Nikki Parsons advised that although this was also classed as a medium risk, it was likely to be downgraded to a lower, possibly green status risk as recent indications were that MiFID II would be delayed and not proceed in its current form. The risk had been categorised as medium as local authorities would default to retail client status from their current professional client status. Such a status change presented the risk that a manager could eject a fund from holding a product outside their scope and result in a fire sale of assets.
6.3 During discussions, Members asked whether there were any upcoming changes to pensions regulations and legislation that would particularly affect the Westminster LGPS. A Member asked what the likely response of the Westminster LGPS would be if all schools were to become academies and would scheme members’ data be retained. An explanation of the difference between professional client status and retail client status was sought and whether MiFID II would affect financial services in the City.
6.4 In reply to the issued raised in Members’ discussions, Trevor Webster advised that he did not think changes to pensions legislation and regulations would affect the Westminster LGPS in terms of the software used to manage the pension scheme, and the software would be accordingly updated where there were changes. The software was also effective in terms of preventing overpayments. In the event of all schools being turned into academies, Trevor Webster advised that staff would be subject to TUPE arrangements to ensure their pensions were retained and discussions needed to take place to ensure a suitably robust bond or guarantee was put in place.
6.5 George Bruce advised that the Council was a member of a number of professional organisations that provided advice and training in respect of the potential impact of legislative and regulation changes to pensions and there was also considerable dialogue between the London boroughs. Members heard that a professional client was defined by the European Union as a client possessing the experience, knowledge and expertise to make its own investment decisions and to properly assess the risks that it incurs. Under MiFID II, it had been proposed that local authorities no longer met this criteria and so by default would be re-classified as retail clients. However, MiFID II had been delayed whilst further clarification was sought, but there was still the potential for local authorities to be re-classified. George Bruce felt that if MiFID II was implemented, it would not affect the performance of financial services in the City, however financial institutions in the European Union would seek to have a more common understanding and to offer greater protection for pension scheme members.
6.6 Members then considered risks to focus on at the next meeting. The Board requested that Risk 4 – Strategic: Funding – Level of inflation and interest rates assumed in the valuation may be inaccurate leading to higher than expected liabilities, and Risk 6 – Strategic: Funding – Scheme members living longer than expected leading to higher than expected liabilities, be reported at the next meeting. The Board also requested a separate report on annual benefit statements and timelines.