DRAFT Devon Pension Fund Annual Report and Accounts Summary 2023-24

Report of the Director of Finance and Public Value

Introduction

Over the last year, the value of the Devon Pension Fund has increased from £5.3 billion, as at 31 March 2023, to £5.9 billion as at 31 March 2024, representing an investment return of 11.3%. Following a difficult year in 2022, investment markets were more positive during the 2023/24 financial year, particularly from September 2023 onwards. Global inflation began to reduce, and gains in asset markets reflected a more positive outlook on growth and earnings.

The Fund continues to seek to manage its investments in a responsible way to ensure sustainable returns to fund future pensions. This includes managing climate risk and acting as good stewards of the shares in which we invest. During the year, we moved all of our passive equity investment (25% of the Fund) to a Paris Aligned Benchmark fund, which had the effect of both reducing the carbon footprint of our investments and reducing our exposure to companies with fossil fuel reserves. We were again re-accredited as signatories of the UK Stewardship Code which sets high standards for managing investments in a responsible way. We also launched a Local Impact Portfolio, which aims to invest in assets that make a positive impact on Devon and the South West, while still achieving the required investment returns.

The administration of pension benefits is undertaken for the Devon Fund by Peninsula Pensions, a shared pensions administration service between Devon and Somerset. Peninsula Pensions continues to deliver strong performance for both members and employers despite the challenges of a continuing increase in demand, alongside staff recruitment. During 2023/24, the team has introduced further technological solutions relating to the Member self-service portal, providing a more efficient way of individuals claiming a refund of contributions direct, if/when due; as well as a database to track Employer performance, thus ensuring the service provided to members is within statutory timescales. The team is well positioned to manage both current and future challenges, specifically the McCloud remedy, and the introduction of the Pension Dashboard, whilst ensuring compliance with both current and future LGPS amendments alongside any other relevant regulatory changes. The team encourages the more efficient use of electronic communication, with further new developments in progress relating to the online portal.

Summary of Financial Statements

The financial statements and their purpose are summarised as follows:

Fund Account

The Fund Account sets out the Pension Fund’s income and expenditure for the year to 31 March 2024. The first section sets out the income received in contributions from employers and employees, and the expenditure on pension benefit payments. The second section of the Fund Account shows the income received from the Fund’s investments and the cost of managing those investments. Investment income from property, infrastructure and private debt investments is returned as cash and can be used to offset any shortfall between contributions and benefit payments. The Fund’s equity and bond investments are made via pooled funds which retain and reinvest the income from the individual securities. The Fund Account also shows that there has been an increase in the capital values of the Fund’s investment assets of £581 million over the last year.

 Net Asset Statement

The Net Asset Statement sets out the net assets of the Fund, in line with the IFRS based Code of Practice on Local Authority Accounting in the United Kingdom (the Code) and the latest Statement of Recommended Practice (SORP). The investment assets are split out further in a subsequent note.

Investment Performance

As indicated above, the asset value of the Fund at the end of the 2023/24 financial year was £5.914 billion.  This represented an investment return of 11.3% net of fees, compared with the Fund’s internally set strategic benchmark target of +12.7%.

The Fund’s strategic benchmark is set as an average of the benchmarks for each of the investment portfolios, weighted according to the Fund’s strategic asset allocation targets. The active equity portfolios all underperformed their respective benchmarks over the year. In particular the Sustainable Equities and Global High Alpha portfolios underperformed due to underweight allocations to the seven big technology companies (Microsoft, Apple, Alphabet, Meta, Nvidia, Amazon and Tesla) that drove market performance for most of the year.

The other big drag on relative performance was the infrastructure allocation. In particular, three of the longstanding investments made over 10 years ago suffered double digit negative returns over the year, which offset the better performance across the rest of the allocation. The under-performance was more notable given the benchmark targets a return 4% above inflation, and inflation has been at relatively high levels.

Nevertheless, an 11.3% overall return over the year was a good performance for the Fund, putting the Fund in the top half of LGPS funds based on investment performance.

The following chart presents the investment returns achieved by the Devon Fund compared to the Fund’s benchmark over each of the last five years, plus the total annualised return over the last three years and the last five years. Performance figures are shown net of fees.

Fund solvency

The Fund is required to have an actuarial valuation conducted every three years. The most recent triennial valuation, as at 31 March 2022, was carried out by the Fund Actuary, Barnett Waddingham. The valuation determined that the Devon Pension Fund’s funding level had improved from 91% to 98%, compared with the previous 2019 valuation.

The Fund Actuary has reassessed the position as at 31 March 2024, using the approach of rolling forward the data from the 2022 valuation, and updating it for subsequent investment returns, pension and salary increases. While it is not possible to assess the accuracy of the estimated liability as at 31 March 2024 without completing a full valuation, the results will be indicative of the underlying position. The Actuary has estimated that on a smoothed basis, considering market conditions as at 31 March 2024, the funding level will have deteriorated to around 95.8%. The reduction is due to a small reduction in the discount rate being used to calculate the liabilities and the impact of high inflation over the last two years on pensions in payment.

Asset allocation

The Investment and Pension Fund Committee is charged with the responsibility for governance and stewardship of the Fund and making decisions about strategic asset allocation policy.

The asset allocation strategy continued to target an allocation of 50% to Equities, 20% to Fixed Interest and 30% to Alternatives/Other. While the target allocation to equities remained unchanged during the year, it was agreed to move all of the passive equity allocation to the Global Paris Aligned Benchmark fund to better manage the climate risk of the portfolio.

Within alternatives/other, the plan is to increase the allocation to private markets (Infrastructure, private debt and private equity), but private market investments take some time to build up. A reducing short-term allocation to diversified returns funds has been retained to hold the funds that will be required to meet the private markets commitments that have been made. Typically

commitments to invest in private markets are made up front, but the commitment is only drawn as investment opportunities are identified by the fund managers.

During 2023/24 the Committee agreed to top-slice the private markets allocations to create a Local Impact Portfolio that would look to invest in assets that would benefit the local community across Devon and the South West. This could include investments in sustainable infrastructure, affordable housing or providing local business support.  The investments would be made through fund managers to ensure that any conflicts of interest were managed, and the investments would target an investment return in line with the Fund’s fiduciary duty to act in the best interests of meeting its

pension liabilities. By 31 March, a total of £62.5 million had been invested, with further commitments made and other opportunities being considered.

Actual Asset Allocation as at 31 March 2024

 

A comparison of the actual allocation as at 31 March 2023 with the Fund’s target allocation for 2022/23 is shown in the following table:

Actual Asset Allocation Compared to Target

 

Conclusion

After a difficult year for investments in 2022, it was good to see the Fund achieve a positive double digit investment return in 2023/24 .

It was also pleasing to see a further 35.3% reduction in the Weighted Average Carbon Intensity of the Fund’s equity and corporate bond investments over the year. We have now seen a 64% reduction in our investment portfolio from the March 2019 baseline. Through our stewardship activities and the launch of our Local Impact portfolio we hope to make a difference globally and locally, in addition to making strong investment returns to meet our pension liabilities.

 

Peninsula Pensions, the shared service that administers pension benefits for both the Devon and Somerset Pension Funds, continues to be at the forefront of new innovation in the way that we serve our pension fund members. Improvements to the on-line portal, work on the pensions dashboard and the potential use of Artificial Intelligence to better explain the pension that each individual pension fund member will get on retirement should all make a big difference to the level of service we can provide going forward.

The Fund remains committed to ensuring that it provides an excellent service to pension fund members and value for money for both pension fund members and local taxpayers.

Angie Sinclair
Director of Finance and Public Value

 

Summary Pension Fund Accounts

Fund Account

 

Net Asset Statement

 

Current Investment Managers

Managers and Mandates