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Risk Management

The Fund’s primary long-term risk is that its assets fall short of its liabilities such that there are insufficient assets to pay promised benefits to members. The investment objectives have been set with the aim of maximising investment returns over the long term within specified risk tolerances. This aims to optimise the likelihood that the promises made regarding members’ pensions and other benefits will be fulfilled.

Responsibility for the Fund’s risk management strategy rests with the Pension Fund Committee.

A key tool in managing risk is the Fund’s risk register which is reviewed by the Pensions Board. The risk register identifies the risks that the Fund is exposed to and assesses the likelihood and impact of each risk along with the control mechanisms in place to manage them. The risks in the register are then scored and rated red, amber or green to highlight those risks with a high likelihood of occurrence and/or a potentially big impact and therefore require closer monitoring.

In order to manage risks a Pension Fund Risk Register is maintained and reviewed quarterly. Risks identified have been reduced through planned actions. The risk objective areas of risk have been updated to reflect the CIPFA risk classifications. The Risk Register is managed by the Tri-Borough Director of Pensions and Treasury.

The key risks identified within the Pension Fund risk register, as updated on 24 June 2024, are:

Key risks identified
Objective area at riskRiskRisk ratingMitigating actions
Asset and Investment RiskSignificant volatility and negative sentiment in global investment markets following disruptive geopolitical and economic uncertainty, including with Russia and Ukraine and further geopolitical instability in the Middle East.Red
  1. Continued dialogue with investment managers re management of political risk in global developed markets.
  2. Investment strategy involving portfolio diversification and risk control.
  3. The Fund alongside its investment consultant continually reviews its investment strategy in different asset classes.
  4. The London Borough of Bexley Pension Fund can report that as at 31 March 2024, the value of direct investments to Russia or Ukraine within the Pension Fund’s asset classes is 0.
Asset and Investment RiskIncreased scrutiny on environmental, social and governance (ESG) issues, leading to reputational damage.
TCFD regulations impact on LGPS schemes currently unknown but expected to come into force during 2024/25.		Red
  1. Review ISS in relation to published best practice (e.g., Responsible Investment Statement).
  2. The Fund currently invested in renewable infrastructure and recently invested in a sustainable equity fund.
  3. The Fund has produced and continues to review its Responsible Investment Policy.
  4. The Fund is a member of the Local Authority Pension Fund Forum (LAPFF), which raises awareness of ESG issues and facilitates engagement with fund managers and corporate company directors.
  5. Officers attend training sessions on ESG and TCFD requirements.
Administrative and Communicative RiskLegislative and Regulatory Changes such as McCloud, Pooling guidance, Fair Deal, Changes to exit credits, Deferred employer status, 4 year valuations, HE/FE status change, TCFD requirements for LGPS, Levelling Up Agenda.Red
  1. Officers to horizon scan and to attend Pension Officers Forums, CIPFA events etc to ensure that they are up to date with any legislative or regulatory changes.
  2. Bexley to respond where appropriate to Government consultations. Changes in Legislation and Regulation and the impact on the Fund are reported to Pensions Committee.
  3. Officers have the relevant experience, skills and knowledge to ensure legislation and regulations are complied with.
Inflation RiskDue to high CPI inflation levels, increases in future pension payments, which could affect future employer contributions aligned with triennial actuarial valuations.
However, this risk is now trending downwards, following the decreased CPI levels since the height in October 2022.		Red
  1. Fund employers continue to monitor own experience.
  2. Assumptions made on pay and price inflation (for the purposes of IAS19/FRS102 and actuarial valuations) should be long term assumptions. Any employer specific assumptions above the actuary’s long-term assumption would lead to further review.
  3. Employers to made aware of generic impact that salary increases can have upon the final salary linked elements of LGPS benefits (accrued benefits before 1 April 2014). They may have some control over the award of salary increases through pay award negotiations.
  4. Pay rises generally remain below inflation.
  5. The fund holds investments in GILTs, index-linked property (Inflation Plus fund) and other real assets to mitigate CPI risk. Moreover, equities will also provide a degree of inflation protection.
  6. Officers continue to monitor the increases in CPI inflation on an ongoing basis.
Asset and Investment RiskThe fund managers or pooling operators fail to achieve the rate of investment return set out in their mandates.Red
  1. Investment manager performance is reviewed on a quarterly basis.
  2. The Pension Fund Committee is positioned to move quickly if it is felt that targets will not be achieved.
  3. Fund's investment advisors report any performance concerns and provide advice on actions the fund should take.
  4. The Fund's investment management structure is highly diversified, which lessens the impact of manager risk compared with less diversified structures.
  5. Officers and the fund’s advisors meet with fund managers on a regular basis to challenge performance issues.
Liability RiskScheme members live longer than expected leading to higher-than-expected liabilities.
This risk is trending down as life expectancy does not increase at rates expected.		Amber
  1. The scheme's liability is reviewed at each triennial valuation and the actuary's assumptions are challenged as required. The actuary's most recent longevity analysis has shown that the rate of increase in life expectancy is slowing down.

Risks arising from financial instruments are outlined in the notes to the Pension Fund Accounts (Note 15).

The Funding Strategy Statement sets out the key risks, including demographic, regulatory, governance, to not achieving full funding in line with the strategy. The actuary reports on these risks at each triennial valuation or more frequently if required.

Third Party Risks

The Council has outsourced the following functions of the Fund:

  • investment management
  • custodianship of assets
  • pensions administration

As these functions are outsourced, the Council is exposed to third party risk. A range of investment managers are used to diversify manager risk.

To mitigate the risks regarding investment management and custodianship of assets, Officers carry out reconciliations to ensure that information provided by third parties is accurate. Investment managers produce internal control reports annually which the Fund reviews to give assurance that the managers are adequately managing risks within their organisation. The Fund’s investment advisor continually reviews the market, activity of the fund managers and will raise concerns such as changes to key members of staff and make recommendations to the Committee.