North East Scotland Pension Fund

North East Scotland

Pension Fund

Unaudited Annual Report & Accounts

For the period 1 April 2023 to 31 March 2024

Contents

Management Commentary ......................................................................................... 3

1. Foreword ................................................................................................................ 3

2. About the North East Scotland Pension Fund ........................................................ 5

3. Administration 2023/24 ........................................................................................... 6

4. Pensions Committee & Pension Board .................................................................. 7

5. Administration and Performance .......................................................................... 14

6. Financial Performance ......................................................................................... 20

7. Economic and Market Background....................................................................... 25

8. NESPF Investment Strategy ................................................................................ 31

9. Risk ...................................................................................................................... 34

10. Funding Strategy Statement ............................................................................... 35

11. Statement of Investment Principles .................................................................... 36

12. Environmental, Social and Governance Issues .................................................. 37

13. Acknowledgement .............................................................................................. 43

Statement of Responsibilities ................................................................................... 44

Annual Governance Statement ................................................................................ 46

Governance Compliance Statement......................................................................... 51

North East Scotland Pension Fund Accounts ........................................................... 53

Notes to the North East Scotland Pension Fund Accounts ...................................... 55

Appendix 1 – Statement by the Consulting Actuary ................................................. 97

Appendix 2 – Schedule of Employers..................................................................... 102

Appendix 3 – Declared Interests ............................................................................ 104

Management Commentary

1. Foreword

As Convener of the Pensions Committee, I am pleased to introduce the 2023/24

Annual Report and Accounts which reflects a significant year of both challenges and

achievements.

The continued war in Ukraine, the attacks between Hamas and Israel and the

continued Cost of Living Crisis all dominated the headlines this year and contributed

towards the Fund operating within a fast changing environment.

Despite these challenges, the Fund’s Net Asset Value increased from £5,804m to

£6,237m.This increase is not as a result of any of my own decisions, but rather the

result of good decisions made by our fund managers and by staff at the NESPF.

The Fund’s investment strategy has not only positively impacted the asset value but

funding levels too. The 2023 actuarial valuation saw funding levels increase to 126%,

which further demonstrated the strength and long term security of the Fund.

While financial performance and efficiency is a primary focus, the Fund remains

committed to being a socially responsible investor. In 2023/24, the Fund engaged with

the fund managers to expand their reporting on Environmental, Social and

Governance (ESG) metrics. In the coming year, the NESPF will produce their first Task

Force on Climate Related Financial Disclosures (TCFD) report, which aims to develop

consistent climate related financial risk disclosures.

The NESPF was the first Local Government Pension Scheme (LGPS) in the UK to go

live with the new online member portal, rebranded as My Pension+. With improved

design, usability and enhanced security, the site also brings additional functionality

including personalised Annual Benefit Statement (ABS) videos for active members

produced utilising Artificial Intelligence (AI). The Fund will continue to make best use

of technological advances to improve member experience and services.

From a regulatory and compliance point of view, the long awaited McCloud remedy

came into force in October 2023, which expanded the underpin protection for certain

members. Also, The Pensions Regulator’s (TPR) new General Code of Practice took

effect in March 2024. To ensure we met both these new requirements, the Fund

updated processes, tested system developments and implemented new guidance.

In recognition of all that was achieved, I am delighted that the Fund was shortlisted for

several awards including the LGPS Fund of the Year at the LAPF awards and Defined

Benefit Scheme of the Year at the Pension Age awards. These national awards look

at best practice, performance and innovation and the nominations highlight the Fund’s

accomplishments.

Looking ahead to 2024/25, in addition to the delivery of essential services, the Fund

will proceed with several projects. These include a procurement for a Global

Custodian; further improvements to administrative processes; and the introduction of

the Pensions Dashboard (a government initiative that allows the public to see all their

pension savings online and in one single place).

Finally, my sincere thanks to my colleagues on the Pensions Committee and Pension

Board, our advisors and, above all, our staff for their hard work and efforts during the

year.

Councillor John Cooke

Pensions Committee Convener

2. About the North East Scotland

Pension Fund

The North East Scotland Pension Fund (NESPF) administers the Local Government

Pension Scheme (LGPS) for employers located throughout the North and North East

of Scotland.

The LGPS is a defined benefit public sector Pension Scheme that was established

under the Superannuation Fund Act 1972. It is one of the main public sector Pension

Schemes in Scotland and provides members with a range of valuable benefits

including an annual pension, lump sum payments and a range of pension provisions

for family and loved ones. The LGPS is administered locally by 11 government

authorities, with Aberdeen City Council acting as the Administering Authority for the

North East.

NESPF has an asset value of £6.2 billion and 77,865 members. It is the third largest

LGPS fund in Scotland.

The Fund has one primary objective; to ensure the payment of pension benefits to our

members both now and in the future. It is this single purpose that drives the Fund’s

long term policies and strategies. To achieve this objective, funds are built up from

contributions from both employees and employing bodies, together with interest,

dividends and rent from our investments.

There are strict rules and legislation which set out how the LGPS, and by extension

the Fund, operate. These include the LGPS (Scotland) Regulations which are Scottish

Statutory Instruments (SSIs) as well as separate regulations that set out Scheme

benefits, investment and governance requirements. These provide assurance for all

members, employers, taxpayers and stakeholders that the Fund operates efficiently

and manages itself to ensure our key objective, paying out pensions, is met.

3. Administration 2023/24

Administering Authority Aberdeen City Council

Committees Pensions Committee, Pension Board

Chief Officer – Finance Jonathan Belford

Actuary Mercer

Global Custodian HSBC

Performance Measurement HSBC

Banks Virgin Money* & HSBC

AVC Providers Prudential, Standard Life Assurance

Bulk Annuity Provider Rothesay Life Plc

External Auditor Audit Scotland

Internal Auditor Aberdeenshire Council

Investment Consultant Isio

Legal Adviser Aberdeen City Council

Employers For full details see Appendix 2

*Clydesdale Bank trading as Virgin Money

4. Pensions Committee & Pension

Board

Pensions Committee

While day to day administration of the Pension Fund is the duty of Pension Fund staff,

decision making and overall responsibility has been delegated to the Pensions

Committee by Aberdeen City Council.

The Pensions Committee carries out a role similar to that of trustees of a Pension

Scheme. It is the key decision maker for all matters under LGPS Regulations including

benefit administration and investment management.

As a public sector pension provider, both the Council and the Pensions Committee

recognise that they have fiduciary duties and responsibilities not only towards Pension

Scheme members and participating employers but to local taxpayers.

The Committee meets on a quarterly basis to address a range of matters such as risk

management, administration, funding, investment strategy and performance.

The Committee consists of nine elected members of Aberdeen City Council each with

equal voting rights. Following a full Council meeting in February 2024, the number of

Committee members was reduced from 13 to 9. As at 31 March 2024, the Committee

had two vacancies.

Membership 2023/24

Name

Member as

31 March

2023

Joined

Left

Member

as at

31 March

2024

Cllr John Cooke

Yes

Cllr Neil MacGregor

Yes

Cllr Dell Henrickson

Yes

Cllr Alison Alphonse

Yes

Cllr Sarah Cross

Yes

21/02/2024

Cllr Derek Davidson

Yes

Cllr Duncan Massey

Yes

Cllr Ciaran McRae

Yes

13/02/2024

Cllr Christian Allard

Yes

13/02/2024

Cllr Jennifer Bonsell

Yes

27/04/2023

Cllr Kairin van Sweeden*

07/06/2023

Yes

Cllr Alex McLellan

07/06/2023

13/02/2024

Total

(5)

Notes:

*Councillor van Sweeden resigned from the Pensions Committee on 12 October 2023

and was re elected on 14 December 2023.

Meeting Attendance in 2023/24

Name 23/06/23 15/09/23 15/12/23 22/03/24

Overall

Attendance

Cllr John Cooke



100%

Cllr Neil MacGregor



100%

Cllr Dell Henrickson



100%

Cllr Alison Alphonse



50%

Cllr Sarah Cross



N/A

100%

Cllr Derek Davidson



100%

Cllr Duncan Massey



75%

Cllr Ciaran McRae



N/A

100%

Cllr Christian Allard

N/A*



N/A

100%

Cllr Jennifer Bonsell

N/A

100%

Cllr Kairin van

Sweeden



100%

Cllr Alex McLellan



N/A

100%

Notes:

* Councillor Allard did not attend the meeting on the 23 June as he was missed from

the original invitation in error.

**Councillor McLellan sent Councillor Delaney as a substitute.

Pension Board

In line with Scheme regulations, the Fund established a Pension Board in 2015/16.

The Board’s primary function is to ensure that the Fund complies with regulations and

meets the requirements of The Pensions Regulator. In doing so, the Board ensures

the Fund operates in accordance with the law, securing the effective and efficient

governance and administration of the Scheme.

Board membership comprises of eight members, four trade union representatives and

four employer representatives appointed from Councils and Scheduled or Admitted

Bodies. The Pension Board membership is shown below;

Membership 2023/24

Membership

Name

Member

as at

March

2023

Joined

Left

Member

as at

March

2024

Unison

Morag

Lawrence

(Chair)*

Yes

Aberdeenshire

Council

Cllr Stephen

Smith (Vice

Chair)

Yes

Aberdeen City

Council

Cllr Jessica

Mennie

Yes

The Moray

Council

Cllr Graham

Leadbitter

Yes

15/12/2023

The Moray

Council

Cllr David

Gordon

19/12/2023

Yes

First Bus

Ian Hodgson

Yes

22/09/2023

Robert Gordon

University

Jeremy

Lindley

15/02/2024

Yes

GMB

Neil Stirling

Yes

UCATT

Gordon

Walters

Yes

Unite

Alan Walker**

Yes

Total

(2)

Notes:

* Morag Lawrence was reappointed to the Pension Board on 13 February 2024.

** Alan Walker was reappointed to the Pension Board on 24 January 2024.

Meeting Attendance in 2023/24

Name 23/06/23 15/09/23

25/09/23*

15/12/23 22/03/24

Overall

Attendance

Morag

Lawrence



**

100%

Cllr Stephen

Smith



100%

Cllr Jessica

Mennie



***



100%

Cllr Graham

Leadbitter



N/A

100%

Cllr David

Gordon

N/A

****



100%

Ian

Hodgson



N/A

50%

Jeremy

Lindley

N/A

Neil Stirling



100%

Gordon

Walters



80%

Alan Walker



100%

Notes:

* Pension Board additional meeting.

** Morag Lawrence sent Kenny Luke as a substitute.

*** Councillor Mennie sent Councillor Neil Copland as a substitute.

**** Councillor David Gordon attended the meeting on 15 December 2023 in an

observing role.

Apart from the Pension Board’s Annual Meeting, the Board sits at the same time as

the Pensions Committee. To further enhance transparency and openness, both the

Board and Committee receive the same reports for each meeting. These reports

include information on all areas of the Pension Fund; Investment, Accounting,

Governance, Employer Relationship, Administration and Systems.

In assisting with compliance, the Board can report the Fund to The Pensions Regulator

for non compliance with guidance or regulations. In 2023/24 no issues were reported

by the Board to The Pensions Regulator.

The Annual Report of the Pension Board, which reviews its activity for the year, is

available on our website: www.nespf.org.uk.

Conflicts of Interest

The Fund maintains a ‘Conflicts Register’ to record and monitor all potential or actual

conflicts noted prior to or during Pension Committee and Board meetings.

A 'Declaration of Interest' form is completed every 12 months and individuals confirm

that the information submitted is complete, accurate and is to the best of their

knowledge.

In terms of management, where an actual conflict of interest arises the following

option(s) exist:

• a member can withdraw from the discussion and decision making process;

• the Pension Board can establish a sub board to review the issue (where the

terms of reference give the power to do so); or

• if the conflict is so fundamental that it cannot be managed in any other way,

the member can resign.

Pensions Committee members are governed by the national Councillors’ Code of

Conduct. Training on the Code of Conduct was delivered by Aberdeen City Council in

May 2022. Full list of each member’s interests can be found on the Aberdeen City

Council website: https://committees.aberdeencity.gov.uk/mgMemberIndex.

Committee and Board Training 2023/24

Pensions Committee members are not legally obliged to undertake training. The Fund

feels strongly that Committee members should receive training to ensure that they

have the necessary level of knowledge and understanding to exercise their functions.

Whereas for the Board, the Public Service Pensions Act 2013 requires that members

have an appropriate level of knowledge and understanding in order to carry out their

role. The agreed Training Plan for both Committee and Board members has an

expectation that members maintain their level of knowledge and training throughout

the year. Recording and monitoring of attendance at meetings or training events

ensures the requirements of the Training Plan are met.

At the June 2019 meeting the Pensions Committee and Pension Board agreed to

undertake the online Public Service Toolkit produced by The Pensions Regulator.

The Training Report and Training Policy was approved at the June 2022 Pensions

Committee. It was recommended that Committee and Board members work through

and complete the Hymans LGPS Online Learning Academy (LOLA), and on an

ongoing basis thereafter as new versions were delivered.

Pensions Committee - Mandatory Training Record as at 31 March 2024

Name

Hymans

Robertson

LOLA

Version 1.0*

Hymans

Robertson

LOLA

Version 2.0*

TPR

Toolkit

Attended

Cllr John Cooke



3/3

Cllr Neil MacGregor



2/3

Cllr Dell Henrickson



3/3

Cllr Alison Alphonse

0/3

Cllr Derek Davidson

0/3

Cllr Duncan Massey



2/3

Cllr Jennifer Bonsell



1/3

Cllr Kairin van

Sweeden**

0/2

Cllr Sarah Cross**



1/3

Cllr Alex McLellan**

0/2

Cllr Ciaran McRae**

0/2

Cllr Christian Allard**

0/2

Pension Board - Mandatory Training Record as at 31 March 2024

Name

Hymans

Robertson

LOLA

Version 1.0*

Hymans

Robertson

LOLA

Version 2.0*

TPR

Toolkit

Attended

Morag Lawrence



2/3

Cllr Stephen Smith



1/3

Cllr Jessica Mennie

0/3

Cllr Graham

Leadbitter

0/3

Cllr David Gordon**



1/2

Ian Hodgson

0/3

Jeremy Lindley**

0/2

Neil Stirling



3/3

Gordon Walters



1/3

Alan Walker



3/3

Notes for Committee and Board tables above:

* Hymans Robertson LOLA Version 1.0 24 June 2022 to 23 April 2023

Version 2.0 24 April 2023 to 31 March 2024

** Leavers/joiners during the year

In addition to the mandatory training, the Pensions Committee and Board were offered

25 additional training opportunities including:

• Introduction training delivered by Laura Colliss, Pensions Manager, for all

new Committee and Board members;

• A variety of webinars covering topics from industry experts such as:

- Pension Dashboards;

- Cyber Risk;

- Investment Markets;

• Actuarial training delivered by Mercer;

• The NESPF Finance Forum.

Members had the option to complete further additional training courses outwith those

advertised, if they so wished.

5. Administration and Performance

Digital Developments

A primary focus for the NESPF throughout the course of 2023/24 was the development

of our new member self service portal.

Following an internal administration review in 2022, the NESPF placed focus on

making advancements to its systems and processes. This coincided with the

introduction of software developer, Heywood Pension Technologies’ (HPT) new

member portal and upon seeing the potential opportunities this could bring, NESPF

volunteered to be an early adopter.

Working closely alongside Heywood, the Fund commenced its journey, that included

extensive testing, to implement a new intuitive platform, My Pension+, which went live

in June 2023. The NESPF was the first LGPS in the UK to go live with the platform.

My Pension+ offers an entirely fresh look, with enhanced technologies that vastly

improve functionality across the site. Some of the primary developments include:

• Simpler login, without the requirement of usernames and security questions;

Members can use their email address and password to access;

• Enhanced security with two factor authentication;

• Simplified navigation and design built with users in mind which incorporates

best User Experience (UX) practices;

• Retirement forecasting tools;

• Personalised explanatory videos for complex topics, e.g. Annual Benefits

Statements.

Although the new portal is now live, it remains a hybrid system. Not all features of the

previous member portal have been developed for My Pension+, with the site linking

back to the old portal for specific functionality. As such NESPF and HPT will continue

to work closely as the remaining functionality is built, with feature parity the primary

focus in 2024/25. In addition to the development of outstanding functionality, further

innovative developments on the horizon include:

• Electronic Identification verification which will allow members to verify their

identity when registering, removing the need for Fund intervention and

reducing registration lead time;

• SMS multi factor authentication;

• Fully digital, online retirement and refund processes.

Digital Engagement

The delivery of My Pension+ to the Fund’s membership was coordinated to coincide

with the publication of our Annual Benefit Statements. This resulted in the migration of

thousands of members to the new site and six months after the launch, over 12,500

members had registered, with a staggering 15% increase in site usage compared to

the prior year.

Registration and migration statistics as at 31 March 2024 are displayed below:

Registered

for My

Pension+

Members

Registered

Migrated to

My Pension+

Members

Migrated

Active

15,717

63.0%

7,632

48.6%

Deferred

9,948

59.1%

3,748

37.7%

Pensioners & Dependants

8,675

35.5%

2,540

29.3%

Annual Benefit Statements

Annual Benefit Statements (ABS) in 2023 were delivered online as per previous years,

however the medium of Active and Deferred statements differed. Deferred members

were able to view an ABS document that had been generated onto their record which

they could then download.

However for active members, with the implementation of My Pension+, we were able

to provide ABS via a newly designed, regulatory compliant ABS webpage which

delivers information in a easy to understand and visually engaging way. As part of the

revised ABS area, each active member can access a personalised video, outlining key

figures and information in a conversational and user friendly manner. Deferred

members will have a similar ABS page available to them ahead of their 2024

Statements.

A key advantage of using digital statements is that it allows us greater performance

monitoring. Through website analytics, ABS email testing and establishing key

performance indicators such as open and click through rates of email campaigns, the

Fund can gain a better understanding of its membership and their behaviours and thus

modify its approach to maximise engagement with them.

The overall percentage achieved for providing Annual Benefit Statements to more than

45,000 active and deferred members prior to the 31 August deadline was 99.78%

(98.31% 2022/23).

Pension Administration Strategy (PAS)

In December 2022 a revised PAS was approved by the Pension Committee following

a full consultation. The aim of the PAS is to aid the delivery of high quality pension

administration for the members of the Fund on behalf of its participating employers.

The underlying objectives are:

• To provide high quality pension service delivery;

• Paying pensions and calculating benefits due accurately and on time;

• Good working relationships between the NESPF and its participating

employers;

• Delivery of the LGPS requirements in line with the Scheme regulations;

• Compliance around the Codes of Practice put in place around service delivery

and service standards.

Processing Performance

Key performance

measurement

Target

Work

Volume

Target

Achieved

2023/24

2022/23

Letter notifying death in

service to dependant

5 days

87%

82%

Letter notifying retirement

estimate

10 days

496

478

96%

95%

Letter notifying actual

retirement benefit

10 days

1,738

1,596

92%

90%

Letter notifying deferred

benefit

10 days

1,980

1,875

95%

96%

Letter notifying amount of

refund

10 days

1,178

1,157

98%

Letter detailing transfer in

quotes

10 days

176

122

69%

68%

Letter detailing transfer out

quotes

10 days

544

303

56%

63%

Total

6,157

5,570

91%

This year saw similar performance to 2022/23 with the overall percentage achieved

above 90% for the second consecutive year.

Actual retirement benefit percentage continues to increase and the number of

retirement estimate requests continues to fall as members choose to self serve online

through My Pension+. Bulk automated processing of deferred benefits for members

with Care only service increased to almost 1,000 and continues to deliver efficiency

savings.

Transfer processing proved difficult with cases having to be stockpiled from

announcement of SCAPE rate change on 29 March 2023 until new factors delivered

in July 2023 and for cases impacted by McCloud from the date regulations came into

force on 1 October 2023 until new guidance was received in March 2024.

McCloud Remedy

In December 2018, the Court of Appeal ruled in McCloud v Ministry of Justice that

transitional protection offered to some members as part of pension reform amounted

to unlawful discrimination. In July 2019 following employment tribunal Government

stated difference in treatment would be remedied across all public sector Schemes.

This became known as the McCloud remedy with the LGPS (Remediable Service)

(Scotland) Regulations 2023 coming into force on 1 October 2023.

Communications were issued in December 2023 to eligible members advising that

there was no requirement to do anything whilst the Fund recalculates their benefits. In

February 2024 recalculations for 15,227 members identified a total cost of £6,900 for

pension and death benefits paid out during the remedy period from 1 April 2015 to 31

March 2022, work is underway to rectify the underpayments.

Delivering the remedy has been challenging, initially the Fund worked closely with

employers to identify any missing or incorrect data during the remedy period and this

resulted in 3,781 updates to the pensions administration system. The 18 month delay

between draft and final regulations caused issues with software already delivered

which had to be amended and re delivered in additional releases. Despite all this the

majority of work required to comply with the regulations has been completed.

Employer Data Provision

Throughout the year, good quality, timely data for all active members was provided by

the participating employers of the NESPF through the secure online portal, i-Connect.

The information uploaded monthly directly updates our member database with

starters, leavers, contributions and pay information and ensures that each members

personal details are kept up to date.

More than 1 million data events have been uploaded to the pension administration

system in 2023/24.

The use of i-Connect for data collection has provided substantial benefits to the fund

over the last few years ensuring that the Fund is in the best position to meet the

administrative and regulatory requirements of the Scheme.

The benefits include:

• Reduced administrative burden for day to day processing, contribution

reconciliation and preparations needed in advance of issuing annual benefit

statements;

• Improved data quality allowing the Fund and the participating employers to

have confidence in the triennial valuation results;

• Members have access to up to date information on their individual records

through My Pension+;

• Significant advantages in respect of the future challenges faced by the Fund

around being dashboard ready, applying the McCloud remedy and other

regulatory requirements.

The Fund continues to engage with participating employers, the system provider and

other pension funds around the development of i-Connect to ensure it continues to

deliver data requirements of the ever changing LGPS.

Data Quality

The Fund holds a vast amount of data on our pension administration system. This

database holds individual records for each contract of employment for all members

including active, pensioner and deferred members. The quality of the data held in

relation to these member records directly impacts on all aspects of Fund administration

including the calculation of benefits, payment of members pensions and the triennial

valuation results.

Due to the method of data collection and the level of checking and reconciliation that

is carried out the information held is consistently of a high quality. This provides

comfort for the Fund, the participating employers and the members around the

accuracy of the benefits held and the funding calculations.

The data quality scores that are provided by the Fund as part of the Pension Regulator

annual Scheme return are determined by our data analysis tool, Insights. Dashboards

and reports allows us to assess the data held against a number of parameters allowing

for direct comparison against previous years and other LGPS funds.

The annual Scheme return scores are as follows:

2022

2023

Target

Common Data

97.9%

98.7%

100%

Scheme Specific Data

99.2%

100%

The Fund’s data quality improvement plan is revised annually in an effort to maintain

the high quality of data held and explore options for further improvement. This is

especially relevant with onboarding to the Pension Dashboards ecosystem scheduled

for 2025.

Complaints

NESPF aims to demonstrate the highest level of customer service at all times,

however disputes and issues sometimes arise. The Fund takes all complaints

seriously and will attempt to resolve issues in an effective and timely manner.

Complaints are handled in accordance with Aberdeen City Council’s Complaints

Handling Procedure. All complaints the Fund receives are monitored and recorded by

the Governance team in the Complaints Register.

If no resolution is possible at the informal stage, the complaint proceeds to the Fund’s

Internal Dispute Resolution Procedure (IDRP). The IDRP consists of two formal

stages. Stage 1 is dealt with by an independent appointed person. If the complainant

is not satisfied with the appointed person’s decision, the matter proceeds to Stage 2

of the process which is dealt with by the Scottish Ministers.

The table below is an analysis of those complaints received during 2023/24. There

were 11 complaints made during the year. Of the 7 complaints that were within the

Fund's scope to help remedy, all were resolved at the informal stage.

Complaint Analysis

Number of

Complaints

Waiting Time – Correspondence

Processing Delay

Staff Knowledge

No NESPF Power to Remedy

Total Complaints

Complaints may not always relate to a NESPF decision or process, for example it may

relate to an employer decision, e.g. ill health retirement. In these instances the

complainant may take their complaint directly to the Pensions Ombudsman.

Not included in the above is one prior year complaint, which was submitted to the

Pension Ombudsman Stage during 2023/24. The case is ongoing.

The full complaints procedure and IDRP process is on our website:

https://www.nespf.org.uk/about/complaints.

6. Financial Performance

2023/24 at a Glance

£179m

Additions

£231m

Withdrawals

£26m

Management

Expenses

£533m

Net Return on

Investments

£6,237m

Net Assets of the Fund

at the End of the Year

Key Statistics

Total Number of

Employers

77,865

Total

Membership

1,554

Votes at AGMS

52%

Members

Registered for

My Pension+

42.5

Staff Employed

(FTE)

1,832

Members to Staff

Ratio

North East Scotland Pension Fund Financial Summary

From the year 2022/23, the following tables are the merged figures for the NESPF

and ACCTF.

2019/20

£’000

2020/21

£’000

2021/22

£’000

2022/23

£’000

2023/24

£’000

Contributions

Less Benefits and

Expenses paid

Net Additions/

(Withdrawals)

(30,977)

(51,481)

(33,048)

(34,257)

(78,570)

Net Investment

Income

Change in Market

Value

Net Return on

Investment

(71,648)

1,462,128

181,752

(342,832)

532,616

Transfer In of

ACCTF at

Market Value

290,035

Revaluation of

Insurance Buy

In Contract

(35,062)

(20,924)

Net Increase/

(Decrease) in

Fund

(102,625)

1,410,647

148,704

(122,116)

433,122

Fund Balance as

at 31 March

(Market Value)

4,366,542

5,777,189

5,925,893

5,803,777

6,236,899

The monies belonging to the North East Scotland Pension Fund are managed entirely

by appointed fund managers and are held separately from any of the employing bodies

which participate in the Fund. The only exception to this is a small investment in

Aberdeen City Council’s Loan Fund, which varies year on year and represents surplus

cash from contributions not yet transferred to the fund managers.

After meeting the cost of current benefits, all surplus cash is invested and the value of

investments is then available to meet future liabilities.

Budget

Note

Actual

Spend

2023/24

£’000

Budget or

Forecast

2023/24

£’000

Over or

(Under)

Spend

2023/24

£’000

Administration Expenses

3,113

3,032

Oversight and Governance

Expenses

872

1,119

(247)

Investment Management

Expenses

22,039

19,886

2,153

Management Expenses Total

26,024

24,037

1,987

Where the variance is +/- 5%, an explanation is given below:

1. Over spend – Pay award and one off IT costs.

2. Under spend – Although there were increases in the Actuarial Fees and General

Expenses those increases were less than anticipated.

3. Over spend – Upturn in markets and transaction activity.

Membership Statistics

NESPF

2019/20

2020/21

2021/22

2022/23

2023/24

Active

26,275

26,315

26,961

27,751

27,708

Pensioners

22,156

22,692

23,854

26,146

27,171

Deferred

17,965

17,704

18,150

19,379

19,246

Frozen Leavers

3,021

2,664

3,111

3,602

3,740

Total

69,417

69,375

72,076

76,878

77,865

Active membership appears to have remained stable from 2022/23 to 2023/24 and

may reflect the continuing budgetary pressure faced by the Local Authorities as, in

previous years, there has consistently been an increase to the active membership

totals. The number of deferred members has remained consistent indicating that

members accessing their pensions and transferring their benefits have been in line

with the number of leavers. Pensioner numbers have increased in line with previous

years despite the early retirement exercises currently being undertaken by Local

Authorities. Frozen leavers represent the members who have left the Scheme and

have yet to claim their entitlement to a contributions refund or a transfer of their

entitlement.

Management Expenses

2019/20

£’000

2020/21

£’000

2021/22

£’000

2022/23

£’000

2023/24

£’000

Administration

1,822

2,236

2,388

2,958

3,113

Oversight and

Governance

422

713

615

743

872

Investment

Management

17,953

23,820

23,901

17,767

22,039

Total

Management

Expenses

20,197

26,769

26,904

21,468

26,024

Unit Cost Per Member

2019/20

2020/21

2021/22

2022/23

2023/24

Administrative Unit Cost

per Member

26.25

32.23

33.13

38.48

39.98

Oversight and

Governance Unit Cost

per Member

6.08

10.28

8.53

9.66

11.20

Investment Management

Unit Cost per Member

258.62

343.35

331.61

231.11

283.03

Total Cost

per Member

290.95

385.86

373.27

279.25

334.21

Remuneration Report

There is no need to produce a remuneration report as the Fund does not directly

employ any staff. All staff are employed by Aberdeen City Council and their costs

reimbursed by the Pension Fund. The councillors who are members of the Pensions

Committee and the Pension Board are also remunerated by the Council.

Note 22 to the Accounts details the Key Management Personnel. Councillor and senior

employee remuneration is detailed within the Remuneration Report of Aberdeen City

Council’s Financial Statements.

7. Economic and Market Background

Global Market

The past financial year was marked by volatility driven by high inflation and rapid

interest rate hikes. The stock market oscillated between fears of recession and hopes

of interest rate cuts as inflation moderated. The market overall rallied with the Morgan

Stanley Capital International All Country World Index (MSCI ACWI) GBP returning

+20.6% as technology stocks, especially those related to Artificial Intelligence (AI),

dominated while the rest of the market took time to catch up. Policymakers were

focused on balancing the risk of recession with persistent inflation. While the Federal

Reserve held rates steady, it signalled the intention to cut rates in 2024. The European

Central Bank (ECB) and Bank of England (BoE) also maintained a cautious stance.

Despite the potential delay in rate cuts, the financial markets continued to post positive

returns, driven by the anticipation of returns from AI in the technology sector and the

performance of value stocks towards the latter part of the period.

US Equities

During the year ending 31 March 2024, the US equity markets experienced a strong

and sustained rally. The S&P 500 index gained 29.88% during the 1 year period, with

high growth stocks leading the way. Last March, exuberance around AI helped the

market shake off the turbulence of the regional banking crisis. The market rally was

driven by positive economic conditions, including the Federal Reserve's expected rate

cut timeline, strong earnings, low unemployment, and high consumer spending. In

terms of index performance, the Russell 1000 Growth index outperformed the Russell

1000 Value index over the 1 year period, on the backs of the “Magnificent Seven” tech

giants (Microsoft, Apple, Nvidia, Amazon, Meta, Tesla, and Alphabet), which

accounted for a significant portion of the growth index returns. While sentiment in the

market shifted positive over the last year with many market participants growing

increasingly bullish in their outlooks, questions remain on the continued growth of

productivity, outlook for inflation and long term effects of higher interest rates.

UK Equities

2023 was another year where markets remained focused on interest rate policy and

inflation, as central banks deliberated on how to respond to a mixed picture from the

inflation data. Central bankers had been quick through the year to reaffirm their

commitment to curbing inflation, highlighting the need for rates to remain elevated

against the backdrop of falling goods inflation, but services inflation remained sticky,

driven by tight labour markets. Further volatility was sparked through the year, first as

the collapse of Silicon Valley Bank and Signature Bank led to concerns of a banking

crisis in the US. This was shortly followed by a disruption in the financial sector in

Europe as Credit Suisse was taken over by UBS in a deal brokered by the Swiss

National Bank. Then followed the rise of AI, with divergence driven by the perceived

beneficiaries versus the victims, and finally the outbreak of war in the Middle East. At

the end of 2023 interest rate expectations fell sharply and risk assets rallied. Global

equity markets rallied at the start of 2024 on strong earnings from technology names,

despite mixed macroeconomic data. The Financial Times Stock Exchange (FTSE) All

Share rose 8.4%, however lagged global equity markets on concerns around growth

in China, notably in the commercial real estate market.

European Equities

European equities delivered very strong returns over the last year, despite a backdrop

of cautious sentiment given concerns over a potential recession, weaker China macro

data and geopolitical risks. The asset class remains under owned by investors and we

observe a generally defensive positioning. European markets particularly started to

rally from November 2023 on into the end of the period as market expectations began

to look past the potential for recession which had clouded sentiment for more than 18

months. This move was supported by a dramatic fall in energy prices in the region,

which had risen because of the Russian invasion of Ukraine, feeding through, amongst

other factors, into lower inflation and an increasing likelihood of cuts to interest rates.

During the most recent earnings season, we noted more companies speaking of

stabilisation and/or potential for improvement, with very clear trajectory for increasing

orders in certain end markets.

Emerging Markets Equities

MSCI Emerging Markets ended the period up 8.5%, materially underperforming

Developed Markets, which gained +25.7%. Emerging Markets started 2023 on a

strong note as sentiment surrounding China equities meaningfully reversed amid

growing excitement around China’s much awaited reopening from the Covid-19

pandemic, and the market was hopeful for a peaking US dollar. However, China’s

reopening ultimately disappointed and the US proved remarkably resilient despite

aggressive monetary tightening. Elsewhere the trend of generative AI propelled the

technology sector to substantial gains and Taiwan reached all time highs towards the

tail end of Q1 2024 as the cases for AI grew.

Regionally, Latin America emerged as the top performer over the period with a 23.4%

increase. Peru stood out as one of the strongest performers, largely due to the

sustained high demand for its primary export, copper, in the wake of the AI boom. The

Central and Eastern Europe, Middle East, and Africa (CEEMEA) region saw a 10.6%

rise. Asia, excluding Japan, lagged (+4.3%), primarily due to China’s weakness.

Japanese Equities

Japan equity markets gained during this period, driven by heightened expectations of

corporate reforms by Tokyo Stock Exchange, Semiconductor and other related growth

stocks positioned to benefit from the adoption of AI, and greater inbound demand by

foreign tourists.

In April, the market experienced a rally triggered by statements by American Investor

Warren Buffet accompanied by expectations for structural reforms in domestic

companies, such as improvement in Price to Book Ratio, reopening of the economy

causing greater inbound demand, and continuation of accommodative monetary

policy. Furthermore, the market experienced a rally in growth stocks, fuelled by

heightened expectations for AI related companies. Following such rout, the market

experienced profit taking along with higher US long term interest rates which impacted

US and Japan markets. However, as the market factored in rate cuts, lower treasury

yields helped US and Japan equities to soar. Coming into 2024, data further confirmed

that Japan is finally breaking out of the deflationary cycle and entering a virtuous cycle

of price increases and wage hikes. Although Bank of Japan (BoJ) has ended its

negative interest rate policy, such reversal, confirmed Japan’s return to normal policy

and above mentioned cycle of prices increases and wage hikes.

Bonds

Q2 2023 saw negative bond market sentiment, as economic data points in developed

markets pointed to an environment in which central banks would need to continue

increasing interest rates to slow down the economy. In the US, the March Year on

Year (YoY) Consumer Price Index (CPI) inflation rate accelerated by 5.0% YoY. This

was slightly below the consensus expectation of 5.1%, and a notable decline from the

February CPI number of 6.0%. By the end of the quarter, the Federal Reserve had

paused their interest rate increases. Uncertainty surrounding the ongoing US debt

ceiling negotiations contributed to the negative sentiment. In May, a debt ceiling deal

was agreed which included a suspension of the debt ceiling until January 2025. Euro

area inflation also printed in line with expectations, with March headline and core

inflation rising to 6.9% and 5.7% YoY respectively. Meanwhile, in what was a second

consecutive upside surprise in the UK, prices accelerated by 10.1% having been

expected to accelerate by only 9.8% YoY in March. The ECB and the BoE increased

interest rates over the quarter. UK Inflation once again surprised to the upside with

core at 7.1% YoY vs expected 6.8%. The UK became the only country in the G7 with

rising inflation.

Q3 2023 saw mixed bond market performance, driven by the release of generally soft

economic data, and views on longer term inflation and interest rates. As widely

expected, after pausing its aggressive rate hiking trajectory in June, the Federal

Reserve raised key interest rates during the month. The US CPI inflation rate for the

month of June accelerated by 3.0% YoY. The ECB also raised rates during the month.

In the Euro Area, Gross Domestic Product (GDP) figures increased by 0.3% quarter

on quarter as expected. Once again in the UK, the main story for the month was

inflation, with core inflation remaining high while Services CPI rose, and headline

inflation met expectations. The BoE raised rates to 5.25%. Global bond market

sentiment ended the quarter negative as developed market government bond yields

generally rose over the month, driven mostly by hawkish projections by the Federal

Open Market Committee (FOMC), which left its policy rate unchanged at 5.25% to

5.50%. In Europe, the ECB raised its key interest rates, while the BoE maintained the

Bank Rate at 5.25% following the drop in inflation. However, they cut their forecasts

for economic growth for the second quarter while warning rates may need to remain

at these high levels.

Global bond market sentiment was generally negative at the start of Q4 2023, driven

predominantly by a continued ‘higher for longer’ narrative and solid economic data in

the US. In the US, the CPI inflation data for September showed increases in the Month

over Month (MoM) core and headline rates. Euro area headline inflation fell from 2.9%

YoY in October, below consensus. CPI inflation data was published during the month

in the UK. On a YoY basis prices increased marginally ahead of expectations in

September, with headline inflation printing at 6.7% against the 6.6% expected. By the

middle of the quarter, many believed that developed market central banks had finally

reached the end of their tightening cycles. In the US, headline CPI inflation was flat on

the month, holding the YoY inflation rate. In the Euro Area, headline CPI inflation

surprised to the downside and MoM CPI decelerated, as did UK inflation. Global bond

markets finished the year on a highly positive note, with bond yields falling notably in

developed markets in December. In the US and the Euro area, November CPI inflation

printed in line with expectations. In the UK, YoY November CPI was lower than

expected.

With the start of Q1 2024, global bond markets experienced a slight downturn, with

economic data and central bank communications not swaying expectations for rate

cuts in 2024, despite a challenging start to the year for risk assets. The Federal

Reserve maintained its policy rate, and the ECB noted a declining inflation trend, while

BoJ continued its ultra loose policy. Europe’s GDP growth was stagnant, but jobs

growth showed a slight increase, and the ECB maintained its rates. The BoE held the

bank rate steady with a dovish tone, and the unemployment rate was lower than

expected. The quarter ended on a high in March, where global bond market sentiment

was positive, with tightening spreads and slightly reduced yields. The US ended the

quarter with a slight decrease in core CPI both MoM (0.35%) and YoY (3.8%), while

Europe confirmed its annual inflation rates to be in line with estimates, and the UK

experienced a drop in CPI inflation YoY (3.4%). Japan’s CPI figures were in line with

expectations. Government bond yields in developed markets fell modestly, with US

treasury yields, German bund yields, and UK gilt yields all declining. Most G10

currencies weakened against the US dollar, except for the Canadian and Australian

dollars which appreciated slightly.

UK Property

The past year has been a dynamic period for the UK real estate market, characterised

by a mix of challenges and opportunities. At the end of 2023, we reflected on what

was a very challenging year for the UK real estate markets, as investors grappled with

the implications of higher costs of debt and falling valuations. In the prior 18 months,

we have seen inflation remain persistently high and, as a result, have witnessed

continual rises in the base rate, totalling 500 basis points in that time. The ramifications

of such a large change in the macro environment have been felt throughout all financial

markets. This has affected all assets and led to repricing in line with this fundamental

rebasing as the period of great moderation comes to an end.

In the UK, debt costs continued to remain above yields, even for prime properties,

which caused a widening of the bid ask spread as buyer and seller expectations moved

further apart. The lack of price discovery from subdued transaction activity made it

difficult to monitor pricing and led to a steep decline in liquidity across all sectors.

Capital market activity ended the year on a weak note. In 2023, UK All Property

transaction volumes totalled £32 billion, which is 42% below the five year average. As

yields decompress in 2024, we expect buyer and seller expectations to become more

aligned, supporting a pickup in transaction volumes.

We began to observe a degree of stabilisation by the end of Q4 2023. Valuations

remained steady for several months following a 22% decline in the UK real estate

market from peak pricing in June 2022. This reflected a level of transparency

compared to much of the rest of the world and indicated that the significant correction

appears to be behind us.

It seems that an inflection point is imminent in 2024, with inflation seemingly on a

downward trajectory and interest rates at the peak of the hiking cycle as the BoE held

rates steady at 5.25%, and forward guidance is becoming slightly more dovish. The

renewal in the relative attractiveness of the UK real estate market will be driven by the

first rate cut forecasted to happen later in 2024, coupled with the growing optimism

surrounding the UK’s macroeconomic climate, now in expansionary territory,

translating to a more positive outlook for the real estate market going into 2024.

Market Returns

1 Year

(% p.a.)

3 Year

(% p.a.)

5 Year

(% p.a.)

Equities

FTSE All Share Index

2.9

13.8

5.0

FTSE All World Index

-6.9

15.9

7.4

FTSE All World ex UK Index

-7.2

15.9

7.6

FTSE North American Index

-3.1

18.0

13.1

FTSE European (ex UK) Index

2.1

14.9

4.9

FTSE Japan Index

2.0

7.8

3.9

FTSE Developed Asia (ex Japan) Index

-9.5

14.0

2.5

FTSE Emerging Markets Index

-4.3

29.4

13.9

Bonds

FTSE Actuaries UK Conventional Gilts

All Stocks Index

-16.3

-9.1

-3.1

ICE BofA Sterling Non Gilts Index

-10.3

-3.1

-0.8

FTSE Actuaries UK Index Linked Gilts

All Stocks Index

-26.7

-7.6

-3.2

Source: Bloomberg

8. NESPF Investment Strategy

The Fund’s Investment Strategy is one of diversified investment. This means that

investments are spread across different investment asset types and different

countries, sectors and companies in order to reduce the overall risk.

There are a range of Fund Managers employed to again spread risk, with different

style biases, each with clear and documented agreements in place detailing their

investment mandates. In addition, the Fund employ an independent Global Custodian.

The objective of the Investment Strategy is to deliver long term returns which are

greater than the growth in expenditure to be paid out in pensions. The investment

strategy is monitored on an ongoing basis by the Pensions Committee and Pension

Board, focusing on long term investment with consideration given to short term tactical

considerations if appropriate.

The suitability of particular investments and types of investments are detailed in the

Statement of Investment Principles. The Fund takes proper advice at reasonable

intervals regarding their investments through their appointed advisors.

Asset Structure 2023/24

Asset Class

Distribution as at

31 March 2023

Distribution as at

31 March 2024

Fund

Actual

Fund

Benchmark

Fund

Actual

Fund

Benchmark

Equities (including

alternative assets)

63.3

55.0

63.5

55.0

Bonds/Credit

17.7

22.5

17.9

22.5

Property/Infrastructure

15.9

20.0

16.4

20.0

Cash/Other

3.1

2.5

2.2

2.5

Total

100.0

During the first part of 2023 and given the volatility in markets, NESPF slowed its

rebalancing efforts, making selective and tactical changes in line with its investment

strategy where appropriate. Given the rise in equity markets towards the back end of

2023 and into 2024, this has positively increased the overweight to equities and

therefore allocations have been made to infrastructure and direct lending, with more

rebalancing to follow.

The current Investment Strategy for the North East Scotland Pension Fund is set out

in the Statement of Investment Principles as follows:

Equities 50.0% (range +/- 5%)

Alternative Assets (including private equity) 5.0% (range +/- 5%)

Bonds/Credit 22.5% (range +/- 5%)

Property/Infrastructure 20.0% (range +/- 5%)

Cash/Other 2.5% (range +/- 5%)

North East Scotland Pension Fund Performance

Investment returns over the last year have been strongly positive delivering 9.5%,

given a difficult market backdrop with constant changes regarding sentiment towards

interest rates and inflation affecting different asset classes. In the shorter term some

of the active Equity holdings are behind benchmark, but performance is beginning to

turn around and the NESPF has conviction in these positions as a long term investor.

A number of benchmarks are also arbitrarily higher this year on Sterling Overnight

Index Average (SONIA) targets, which is not necessarily reflective of the asset class

it is measuring against.

It is notable that the NESPF continues to outperform the benchmark returns over

longer periods and similarly comparators such as CPI and Average Earnings over the

longer term. This provides assurance that the Fund’s Investment Strategy works and

will continue to deliver the required returns over the longer term.

The graph below shows the NESPFs performance over the short, medium and long

term against the Fund’s customised benchmark.

Whilst employee contribution rates and benefits payable are set by statute, the long

term liabilities of the NESPF are linked either to wage inflation or to price inflation. It is

the NESPFs performance against these benchmarks that affect the long term

employer contribution rate, which is variable. Over the longer term, the performance

of the NESPF remains ahead of both Average Earnings and CPI.

Year Ending

2021/22

2022/23

2023/24

Since

Inception

Annualised

CPI*

7.0

10.1

3.2

2.9

Average Earning*

7.0

5.8

5.7

3.3

NESPF Return

2.4

-4.1

9.5

8.1

*Source: Office of National Statistics

Investment Management Structure

Details of the Investment Management Structure is in the “Investments Analysed by

Fund Manager” Note to the Accounts.

9.5%

1.9%

6.8%

8.1%

13.2%

6.0%

6.6%

7.8%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1 Year 3 Year 5 Year Since inception

NESPF

Benchmark

9. Risk

A key element to risk management is the structured delegation of powers from the

Council to the Pensions Committee and then to Senior Officers. To complement the

delegation to Senior Managers, there is extensive and detailed accountability back to

Committee on how these delegations have been exercised. Full details of the structure

of delegated powers are contained in the Pension Fund’s Governance Statement.

Investment Risk is recognised as falling into two distinct areas: Manager Skill (alpha)

and Market Risk (beta). The structure of the Investment Strategy reflects this and is

designed with the support of external expert advice. Details are contained in the

Statement of Investment Principles and the Funding Strategy Statement.

The operational management of investment risk forms the basis of quarterly reporting

to the Pensions Committee and Pension Board.

The Fund’s approach to risk is dynamic and can be revised in response to short term

market events.

Benefit Risk is also recognised as falling into two distinct areas: Operational Risk

(regulation compliance and staffing) and Information Technology (IT) risks. The risks

associated with the operational payment of benefits and recording of pensioner

records produces a complex set of risks. These are mitigated with the use of a

dedicated pension administration system that is thoroughly and regularly tested,

combined with the hierarchical checking of output by pension staff. IT risk is mitigated

by using an externally hosted benefit administration system subject to regular update

and review.

It is recognised that all services are very dependent upon third party contracts ranging

from IT through to investment managers. All are subject to regular review and

monitoring.

Risk Management

Risk management is an ongoing process with quarterly reporting provided to the

Pensions Committee and can be found within the Committee packs. These reports

detail the progress achieved in the implementation of the action plan, the ongoing

review of the Risk Register and reporting of new risks that have been identified. It is

also key that the Fund has its own dedicated Risk Management Policy which forms

part of the Risk Management Framework along with the Risk Register.

10. Funding Strategy Statement

The long term objective of the Fund is to achieve and maintain sufficient assets to pay

all pension benefits as they fall due. The Funding Strategy Statement (FSS) addresses

the issue of managing the need to fund those benefits over the long term, whilst at the

same time facilitating scrutiny and accountability through improved transparency and

disclosure.

The purpose of the FSS is therefore:

• To establish a clear and transparent Fund specific strategy which will identify

how employers’ pension liabilities are best met going forward by taking a

prudent longer term view of funding those liabilities.

• To establish contributions at a level to “secure the solvency” of the Pension

Fund and the “long term cost efficiency.”

• To have regards to the desirability of maintaining, as much as possible, a

constant primary contribution rate.

The FSS is required as part of Regulation 56 of the Local Government Pension

Scheme (Scotland) Regulations 2018. As part of the 2023 actuarial valuation, the FSS

for the North East Scotland Pension Fund was reviewed, with employers consulted on

the revised version.

The full statement is available at www.nespf.org.uk.

11. Statement of Investment Principles

This statement sets out the principles governing decisions about investments for the

North East Scotland Pension Fund. All investment decisions are governed by the Local

Government Pension Scheme (Management and Investment of Funds) (Scotland)

Regulations 2016. The Fund objective is to meet benefit liabilities as they fall due at a

reasonable cost to participating employers, given that employee contributions are

fixed. “Reasonable” in this context refers to both the absolute level of contribution –

normally expressed as a percentage of pensionable payroll – and its predictability. The

employer contribution rates are impacted by both the assessed level of funding (ratio

of the value of assets to liabilities) and the assumptions underlying the actuarial

valuation.

The NESPF target is to maintain a 100% funding level. ‘Growth’ assets, such as

equities, are expected to give a higher long term return than ‘liability matching’ assets,

such as bonds. The benefit of higher investment returns is that, over the long term, a

higher level of funding should achieve lower employer contribution rates. However, the

additional investment returns from growth assets come with a price: greater volatility

relative to the liabilities, thus introducing risk. The risk is evidenced by the potential

volatility of both the funding level and the employer contribution rate. There is therefore

a trade off between the additional investment return from greater exposure to growth

assets and its benefits – higher funding level, lower employer contribution level – and

the benefits of greater predictability – of both funding level and employer contribution

rate – from having greater exposure to liability matching assets.

The trade off and its consequences on both funding level and employer contribution

level, were examined by the Pensions Committee and led to the strategic

benchmarks.

The full statement is available at www.nespf.org.uk.

12. Environmental, Social and

Governance Issues

Responsible Investment & Engagement

As a long term investor the Fund has a duty to engage with the companies we invest

in on Environmental, Social and Governance (ESG) issues, and to work with others to

effect change.

What does this look like in practice?

There are several things that we as an investor can do to make changes for the better.

Collaboration

There are limits to what we can achieve as a single investor and believe greater

progress can be made through collaboration with other investors. Our main

collaboration is with the Local Authority Pension Fund Forum (LAPFF). We also

engage with our Fund Managers on a regular basis.

LAPFF brings together a diverse range of Local Authority Pension Funds (87 funds

and 6 pools) with combined assets of over £350 billion. The Forum provides a unique

opportunity for Britain's local authority pension funds to discuss shareholder

engagement and investment issues.

The graph below breaks down the engagements LAPFF has carried out in relation to

the Sustainable Development Goals (SDG). The 17 SDGs are integrated. LAPFF

recognise that action in one area will affect outcomes in others, and that development

must balance social, economic, and environmental sustainability.

LAPFF engagement work examples are noted below:

Mining and Human Rights

Context – LAPFF has been engaging with major mining companies on human rights

for the last five years. This engagement stemmed from tailings dam collapses in Brazil

linked to mining companies BHP, Vale and from Rio Tinto's destruction of cultural

heritage at Juukan Gorge in Australia.

Activities –LAPFF has undertaken an engagement with Grupo Mexico in relation to a

tailings pond leak at one of its operations in Sonora, Mexico. Certain health problems

and environmental damage – in particular, water contamination – are linked to this

leak. LAPFF has met once with the company and once with affected community

members at this stage and will look to progress the engagement in the coming year.

Human rights engagements with Rio Tinto and Anglo American are continuing too.

LAPFF also attended the 2024 African Mining Indaba in Cape Town, South Africa in

first quarter of 2024.

Outcomes – Positive outcomes for LAPFF members after visiting Brazil is that LAPFF

published a report of its findings after thorough engagement with both the affected

communities and the companies involved. Translation of the report into Portuguese

was also completed.

LAPFF is continuing to work with Rio Tinto to ensure that their relationship with

communities affected by their operations globally are improving.

100

200

300

400

500

600

700

Number of Engagements

Engagement Work

SDG Engagements 2023

Engagement with Anglo American is taking place primarily through LAPFF’s

participation in the new Principles for Responsible Investment (PRI) Advance human

rights initiative.

LAPFF submitted a response to the United Nations (UN) Working Groups consultation

on investors and ESG, which included the submission of its reports and work with

affected community members. This focus appears to be of interest at the international

level, and LAPFF will continue to work with the UN Working Group and other

stakeholders to inform best practice on mining and human rights, while linking the work

to financial materiality for investors.

Climate

Context – Drax owns the UK’s largest power generation site in Yorkshire. It consists

of a coal burning plant converted to burning wood pellets, mainly imported from North

America. It meets approximately 7-8% of the UK’s electricity demand. Despite the

switch from coal, Drax is the UK’s largest carbon emitter as stated in research by

climate think tank Ember and is government subsidised.

Drax uses the concept of ‘dynamic carbon sinks’ to justify its claims to carbon

neutrality, i.e., forests are harvested and the wood that is burned regrows.

Activities – LAPFF engaged with Drax in first quarter of 2024 as there are questions

about the time scale over which new growth of trees will compensate for the >10 Million

Tonnes (MT) of CO

Drax emits each year. The Forum sought to understand the

company’s business model, associated risks and sustainability of the supply chain for

wood pellets for combustion at Drax Power Station, which are mainly imported.

LAPFF responded to the consultation from the Department of Energy Security and Net

Zero on prolonging the subsidy to Drax. LAPFF’s response to the consultation covered

the evidence that Drax’s supplies of wood are not carbon neutral, nor sustainable as

a supply source (being dependent on US imports). BBC Panorama had its second

exposé of Drax’s activities that showed that not only has Drax been cutting and using

whole trees, but that the trees cut were from rare forest wood, rather than managed

plantations.

LAPFF attended the 2023 AGM and there was significant unease at Drax’s activities,

with no shareholders speaking positively. There were also representations from

people in the southern US states concerned about cutting down primary forest and

health affecting emissions from pellet plants.

Outcomes – Achievements have been wholly negative as LAPFF has seen no

evidence that the forest stock in the US is growing to offset Drax’s emissions. From

Drax commissions “catchment area” reports it is apparent that rather than a

quantitative test to prove contemporaneous offset, the test in the reports is that forest

stock is not shrinking. There is significant concern that Drax is contributing to net

increases in atmospheric carbon, in addition to wood being an inefficient source of

energy which, per unit of energy obtained, creates more carbon emissions than even

coal.

Drax’s answer is that things will be clearer once the company is able to capture carbon

from its burning by using carbon capture technology. However, that is not proven at

scale and is heavily subsidy dependent, on top of an already exceptionally large

subsidy required for pellet burning. Drax’s activities continue to attract cross party

criticism.

The above are just a couple of examples of engagement carried out by LAPFF, more

in depth information can be found at http://www.lapfforum.org.

Fund Managers

Through our fund managers we can engage with companies more directly by raising

concerns and meeting with Senior Management and Executives.

Fund managers report their engagements on a quarterly basis so we can monitor

engagement activity.

The below is one example of such activity being undertaken through one of our Fund

Managers.

Biodiversity on offshore wind farm

Through one of our Infrastructure portfolios the Fund invests in an offshore wind farm

in the Dutch part of the North Sea, on the border with Belgium. The biodiversity of the

construction site was assessed as the project commenced. The action taken was the

release of 2,400 flat oyster tables. The oyster tables were placed on the base of some

of the wind turbines in October 2020.

A team of researchers reviewed the oyster tables in 2023. The outcome being they

discovered in addition to the survival, presence and growth in oyster larvae they also

increase biodiversity. For this they used Environmental DNA traces in the water and

an underwater camera, The underwater water videos showed a lot of life around the

foundations with a total of the 65 species found. The researchers will return with the

hope of seeing the oysters have settled in the shell layer and rock surrounding the

wind turbine.

Other ways the Pension Funds collaborate are by being members/signatories of the

following ESG initiatives:

• 2022 Global Investor Statement;

• 2022 Non Disclosure Campaign (NDC);

• Bangladesh Accord on Fire and Building Safety (the Accord);

• Climate Action 100;

• Carbon Disclosure Project;

• Principles for Responsible Investment.

Further information on these initiatives can be found on our website:

https://www.nespf.org.uk/about/investment/responsible-investment/.

By working together, we and other investors can use our collective size to influence

decision making and promote the highest standards of corporate governance and

corporate responsibility.

Voting

As an institutional shareholder we have a responsibility to make full use of our voting

rights which enables the Fund to promote good governance practices in the

companies in which we invest.

The Fund vote in house on all our active managers holdings and over the last year

have voted at 106 Annual General Meetings/Special meetings on 1,554 resolutions.

The Fund’s voting advice is provided by Pensions & Investments Research

Consultants Ltd (PIRC). Additional advice is also received from the Local Authority

Pension Fund Forum.

Further information on the Fund’s Voting record can be found on our website:

https://www.nespf.org.uk/about/investment/responsible-investment/voting/.

1 1

UK Europe USA/Canada Asia Japan South America

Votes

Region

Voting By Region 23/24

During the year to 31 March 2024, the main reasons for casting a vote against a

resolution are listed below:

Directors

● Insufficient independent representation on the board.

● Global Diversity and Inclusion efforts of the company.

● Executives who are employees should not be additionally rewarded with bonuses or

Long Term Incentive Plans (LTIPs) for duties that are considered part of the job.

● The Chair cannot effectively represent two corporate cultures.

● Company has not disclosed quantified targets for the performance criteria of its

variable remuneration policy.

Share Issues/Repurchase

● No clear case as to how this would benefit long term shareholders.

Annual Reports

● Concerns over sustainability policies and practice.

908

491

140

For Against Abstain Non Voting

Items

Withheld

Items

US Frequency

Vote on Pay

Withdrawn

100

200

300

400

500

600

700

800

900

1000

Resolution

Votes

Voting By Resolutions 23/24

13. Acknowledgement

The production of the Unaudited Annual Report and Accounts is very much a team

effort involving many staff as well as information supplied by our advisors. We would

like to take this opportunity to acknowledge the considerable efforts of staff in the

production of the 2023/24 Unaudited Annual Report and Accounts.

Angela Scott Jonathan Belford, CPFA Councillor John Cooke

Chief Executive Chief Officer – Finance Pensions Committee Convener

On behalf of Aberdeen City Council.

21 June 2024

Statement of Responsibilities

The North East Scotland Pension Fund is governed by an Administering

Authority, Aberdeen City Council, and is required to:

• Make arrangements for the proper administration of their financial affairs and

to secure that the proper officer of the authority has responsibility for the

administration of those affairs (Section 95 of the Local Government (Scotland)

Act 1973). For the North East Scotland Pension Fund, that officer is the Chief

Officer - Finance for Aberdeen City Council.

• Manage their affairs to secure economic, efficient and effective use of

resources and safeguard its assets.

• Ensure the Annual Accounts are prepared in accordance with legislation (The

Local Authority Accounts (Scotland) Regulations 2014) and so far, as is

compatible with the legislation, in accordance with proper accounting practices

(Section 12 of the Local Government in Scotland Act 2003).

• Approve the Annual Accounts for signature.

I confirm that these Unaudited Annual Accounts were approved for signature by the

Pensions Committee at its meeting on 21 June 2024.

Signed on behalf of Aberdeen City Council.

Councillor John Cooke

Pensions Committee Convener

The Chief Officer - Finance responsibilities:

The Chief Officer - Finance is responsible for the preparation of the Pension Fund’s

Annual Accounts in accordance with proper practices as required by legislation and

as set out in the CIPFA/LASAAC Code of Practice on Local Authority Accounting in

the United Kingdom (the Accounting Code).

In preparing the Annual Accounts, the Chief Officer - Finance has:

• selected suitable accounting policies and then applied them consistently;

• made judgements and estimates that were reasonable and prudent;

• complied with legislation;

• complied with the Local Authority Accounting Code (in so far as it is compatible

with legislation).

The Chief Officer - Finance has also:

• kept adequate accounting records which are up to date;

• taken reasonable steps for the prevention and detection of fraud and other

irregularities.

Financial Position:

I certify that the Unaudited Annual Accounts give a true and fair view of the financial

position of the North East Scotland Pension Fund at the reporting date and the

transactions of the Fund for the year ended 31 March 2024.

Jonathan Belford, CPFA

Aberdeen City Council, Chief Officer – Finance

21 June 2024

Annual Governance Statement

Scope of Responsibility

Aberdeen City Council has statutory responsibility for the administration of the Local

Government Pension Scheme (LGPS) in the North East of Scotland.

As the Administering Authority for the Pension Fund, the Council is responsible for

ensuring that its business, including that of the Pension Fund, is conducted in

accordance with the law and proper standards, that public money is safeguarded,

properly accounted for and used economically, efficiently and effectively.

In discharging this overall responsibility, the Aberdeen City Council Pensions

Committee is responsible for putting in place proper arrangements for the governance

of the Fund’s affairs and facilitating the effective exercise of its functions, which

includes arrangements for the management of risk. In addition, the Fund also has its

own dedicated Risk Management Policy which forms part of the Risk Management

Framework along with the Risk Register.

The Council has approved and adopted a Local Code of Corporate Governance which

is consistent with the principles of the Chartered Institute of Public Finance and

Accountancy (CIPFA) and the Society of Local Authority Chief Executives (SOLACE)

Framework: Delivering Good Governance in Local Government.

Purpose of the Governance Framework for North East Scotland Pension Fund

The governance framework comprises the systems, processes, culture and values by

which the Administering Authority (including the Pension Fund) is directed and

controlled. The Pension Fund complies with this framework ensuring that strategic

objectives are monitored and to assess the effectiveness of services.

The North East Scotland Pension Fund is governed by the Local Government Pension

Scheme (Scotland) Regulations. These include requirements for the preparation and

production of several key policy documents including a Funding Strategy Statement

and Statement of Investment Principles. These documents set out the Fund’s

objectives together with the main risks facing the Fund and the key controls in place

to mitigate those risks.

The system of internal control is a significant part of the governance framework and is

designed to manage risk to a reasonable level. It cannot eliminate all risk of failure and

can therefore only provide reasonable and not absolute assurance of effectiveness.

A governance framework has been in place at Aberdeen City Council and North East

Scotland Pension Fund during 2023/24 and up to the date of approval of the Annual

Report and Accounts.

The Governance Framework

The Fund relies upon the Council’s internal financial controls for its financial systems

and that monitoring is in place to ensure the effectiveness of those controls. Within the

overall control arrangements, the system of internal control is intended to ensure that

assets are safeguarded, transactions are authorised and properly recorded, and

material errors or irregularities are either prevented or would be detected within a

timely period.

To help provide a framework of control, the Council’s governance framework includes

standing orders, financial regulations, financial/administrative monitoring and

procedures (including segregation of duties, management supervision and a system

of delegation and accountability). In addition, the terms of reference for the Pensions

Committee sets out its role and delegated functions.

The systems include:

• Managing receipt of contributions from employees and employers and payment

of benefits to retired members of the Fund;

• Review of financial and performance reports against forecasts, benchmarks

and targets set;

• The preparation of regular financial reports which include funding updates and

actual expenditure against forecasts; and

• Consideration of External and Internal Audit reports by the Audit, Risk and

Scrutiny Committee and by the Pensions Committee.

These arrangements also include:

• A training programme to ensure that Pensions Committee and Pension Board

members develop the required level of knowledge and understanding of the

LGPS;

• Identifying the objectives of the Fund in the Funding Strategy Statements,

Statement of Investment Principles and Service Plan. Quarterly updates are

presented to the Pensions Committee;

• Monitoring the achievement of objectives by the Pensions Committee and

senior officers;

• A systematic approach to monitoring service performance by the Pensions

Committee, senior officers and stakeholders including benchmarking of

services;

• A clear statement of risk combined with effective risk management

arrangements. A risk register is updated and regularly reported to the Pensions

Committee;

• The Monitoring Officer reports on any non compliance with laws and regulations

of which the Pensions Committee are made aware;

• Operating within clearly established investment guidelines defined by the Local

Government Pension Scheme Investment Regulations and the Fund’s

Statement of Investment Principles;

• Compliance with the CIPFA Principles for Investment Decision Making in the

Local Government Pension Scheme and the Myners Principles on investment;

• Appropriate investment custody arrangements with a Global Custodian and

access to the custodian’s extensive internal control framework;

• Monitoring of appointed fund managers and third party providers ensuring

compliance within their management agreements and receipt of assurances

from them on the adequacy of the internal financial control systems operated

by them.

The Public Service Pensions Act 2013 introduced new regulatory requirements

including the introduction of a Pension Board. The Board assist the Administering

Authority in delivering a regulatory compliant Scheme and was implemented from 1

April 2015. In addition, the Scheme now reports to The Pensions Regulator under the

new governance arrangements. This provides additional assurances to all

stakeholders that the Scheme has the appropriate internal and external governance

framework in place.

From 1 April 2016, the Pension Fund has also implemented a new structure that

identified six key areas; Investment, Accounting, Administration, Systems, Employer

Relationship and Governance.

Teams are now in place to continue to deliver an efficient and effective service to all

stakeholders while providing succession planning and clear and accountable roles.

Review of Effectiveness

The Pension Fund has responsibility for conducting, at least annually, a review of the

effectiveness of their control environment including the system of internal control.

The Pension Fund approach this with reference to the Council and its approach. This

considers different layers of assurance, namely management assurance both

internally through the Council and the assurance and recommendations provided by

Internal Audit; and External Audit and other external scrutiny reports.

Management Assurance

As the administration of the Pension Fund is directly within the remit of the Chief Officer

- Finance, assurance was sought from him in relation to the effectiveness of internal

financial controls. These assurances provide the opportunity to highlight any

weaknesses or areas of concern that should be taken account of. For 2023/24, no

significant areas of weakness were highlighted.

In reviewing this, it has been assessed that the Council’s financial management

arrangements conform to the governance requirements of the CIPFA statement on the

Role of the Chief Financial Officer in Local Government (2010). Furthermore, in

relation to statutory postholders, the effectiveness of the Council’s arrangements can

be evidenced through the relationship that they have had throughout the year with the

Council and its officers, being full members of the Corporate Management Team. In

addition, the Chief Officer - Finance and the Monitoring Officer are generally in

attendance to advise not only the Council at its meetings, but the Audit, Risk and

Scrutiny Committee and the Pensions Committee.

The Audit, Risk and Scrutiny Committee remains responsible for ensuring the

effectiveness of the Internal Audit function and considering reports prepared by the

External Auditor. Further to this, the Pensions Committee is responsible for the internal

and External Audit functions in respect of the Pension Fund.

Assurance from Internal Audit

The Internal Audit function, for the Council and the Pension Fund, was under contract

to Aberdeenshire Council during the financial year.

Towards the end of the year, Internal Audit conducted a review of the Pension Fund’s

Investment Strategy with the outcome reported to the March 2024 Pensions

Committee. No major issues or risks were reported.

The Chief Internal Auditor’s annual report concluded that in his opinion the NESPF

had an effective framework for Governance, Risk Management and Control. The Full

Internal Audit report is on the Fund’s website: www.nespf.org.uk.

At the Pensions Committee meeting on 22 March 2024, the 2024-27 three year

Internal Audit plan was approved. These audits will focus on:

• 2024/25: Pension Fund Payroll

• 2025/26: Key Administrative Processes

• 2026/27: Complaints Handling

External Audit and Other External Scrutiny

The External Auditor, Audit Scotland, reports to the Pensions Committee on the year

end financial audit and issues national performance audit reports.

Governance Compliance Statement

The LGPS regulations require administering authorities to measure their governance

arrangements against the standards set out in the guidance. Where compliance does

not meet the published standard, there is a requirement for administering authorities

to set out any reasons for non compliance in their Governance Compliance Statement.

We consider our current governance structure to be fully compliant with the

requirements of the CIPFA and SOLACE Principles A ii) and B i) as key stakeholders

are represented on the Pension Board, which was established to underpin the work of

the Pensions Committee. In 2023/24, there were no significant issues to highlight on

the Governance Compliance Statement.

A copy of the Governance Compliance Statement is on our website:

www.nespf.org.uk/about/policies-and-statements/.

Certification

It is our opinion that reasonable assurance can be placed upon the adequacy and

effectiveness of systems of governance operated by Aberdeen City Council and the

North East Scotland Pension Fund. The annual review demonstrates that the

governance and internal control environment operated effectively during the 2023/24

financial year. On a quarterly basis, written updates regarding the Pension Fund’s

adherence to Investment Strategies and Performance are provided to the Pensions

Committee.

Angela Scott Jonathan Belford, CPFA Councillor John Cooke

Chief Executive Chief Officer – Finance Pensions Committee Convener

On behalf of Aberdeen City Council

21 June 2024

Governance Compliance Statement

Principle

Compliance

1. Structure

a) That employer representatives of participating LGPS

employers, Admitted Bodies and Scheme members

(including pensioner and deferred members) are members

of either the main or secondary Committee established to

underpin the work of the main Committee.

Fully compliant

b) The management of the administration of benefits and

strategic management of fund assets clearly rests with the

main Committee established by the appointing Council.

c) That where a secondary Committee or panel has been

established, the structure ensures effective communication

across both levels.

d) That where a secondary Committee or panel has been

established, at least one seat on the main C

ommittee is

allocated for a member from the secondary Committee or

panel.

2. Committee Membership and Representation

a) That all key stakeholders are afforded the opportunity to

be represented within the main or secondary Committee

structure. These include:

i) employing authorities (including non Scheme employers,

e.g. Admitted Bodies);

ii) Scheme members (including deferred and pensioner

Scheme members);

iii) where appropriate, independent professional observers,

and

iv) expert advisors (on an ad hoc basis).

Fully compliant

b) That where lay members sit on a main or secondary

committee, they are treated equally in terms of access to

papers, meetings and training and are given full opportunity

to contribute to the decision making process, with or without

voting rights.

3. Voting

a) The policy of individual administering authorities on

voting rights is clear and transparent, including the

justification for not extending voting rights to each

body or group represented on main LGPS

committees.

Fully compliant

4. Training/Facility Time/Expenses

a) That in relation to the way in which statutory and related

decisions are taken by the Administering Authority, there is

a clear policy on training, facility time and reimbursement of

expenses in respect of members involved in the decision

making process.

Fully compliant

b) That where such a policy exists, it applies equally to all

members of committees, sub committees, advisory panels

or any other form of secondary forum.

c) That the Administering Authority considers the adoption

of annual training plans for C

ommittee members and

maintains a log of all such training undertaken.

5. Meetings (Frequency/Quorum)

a) That an Administering Authority’s main Committee or

committees meet at least quarterly.

Fully compliant

b) That an Administering Authority’s secondary Committee

or panel meet at least twice a year and is synchronised with

the dates when the main Committee sits.

c) That an Administering Authority who does not include lay

members in their formal governance arrangements, must

provide a forum

outside of those arrangements by which

the interests of key stakeholders can be represented.

6. Access

a) That subject to any rules in the Council’s constitution, all

members of main and secondary committees or panels

have equal access to Committee papers, documents and

advice that falls to be considered at meetings of the

Committee.

Fully compliant

7. Scope

a) That Administering Authorities have taken steps to bring

wider Scheme issues within the scope of their governance

arrangements.

Fully compliant

8. Publicity

a) That Administering Authorities have published details of

their governance arrangements in such a way that

stakeholders with an interest in the way in which the

Scheme is governed, can express an interest in wanting to

be part of those arrangements.

Fully compliant

Full details on how the Fund remains compliant can be viewed in our Governance

Compliance Statement available on our website:

www.nespf.org.uk/about/policies-and-statements/.

NORTH EAST SCOTLAND PENSION FUND ACCOUNTS

Fund Account for the year ended 31 March 2024

This statement shows a summary of the income and expenditure that the Pension

Fund has generated and consumed in delivering the LGPS. Included is the income

generated from employers’ and employees’ contributions and investment income, as

well as the cost of providing benefits and administration of the Fund.

Notes

2022/23

2023/24

£’000

Dealings with members, employers and

others directly involved in the Fund

Employees’ Contributions

37,056

39,651

Employers’ Contributions

124,477

135,877

Transfer Values

2,656

3,415

Other Income

Additions

164,192

178,946

Employers’ Surplus Refunds/Exit Payments

1,186

24,864

Retirement Pensions

140,887

157,148

Retirement Allowances

25,257

33,436

Death Gratuities

5,845

7,741

Contributions Refunded

583

499

Transfer Values

3,223

7,804

Withdrawals

176,981

231,492

Net (Additions)/Withdrawals from dealings

with members

12,789

52,546

Management Expenses

21,468

26,024

Net (Additions)/Withdrawals including Fund

Management Expenses

34,257

78,570

Return on Investment

Investment Income

83,274

87,224

Taxes on Income

(552)

(530)

Profits and (Losses) on Disposal of Investments

and Changes in Market Value of Investments

(425,554)

445,922

Net Return on Investments

(342,832)

532,616

Transfer In of ACCTF at Market Value

290,035

Revaluation of Insurance Buy In Contract

18c

(35,062)

(20,924)

Net Increase/(Decrease) in the Net Assets

available for Benefits during the year

(122,116)

433,122

Opening Net Assets of the Fund

5,925,893

5,803,777

Net Assets of the Fund at the end of the year

5,803,777

6,236,899

NORTH EAST SCOTLAND PENSION FUND ACCOUNTS

Net Assets Statement as at 31 March 2024

This statement provides a breakdown of type and value of all Net Assets at the year

end.

Notes

2022/23

2023/24

£’000

Investment Assets

Bonds

46,218

Equities

2,161,917

2,431,401

Pooled Funds

2,230,604

2,516,109

Direct Property

367,200

381,000

Private Equity

480,612

500,286

Private Debt

155,026

129,789

Funds held by Investment Managers

74,044

137,659

ACC Loans Fund Deposit

145,610

41,150

Investment Income Due

2,024

2,543

Investment Sales Amount Receivable

161

16,520

Total Investment Assets

5,663,416

6,156,457

Investment Liabilities

Investment Purchases Amount Payable

(27,072)

Net Investment Assets

5,663,416

6,129,385

Insurance Buy In Contract

20a

158,000

127,000

Life Time Tax Allowance

20a

189

174

Long Term Assets

158,189

127,174

Current Assets

20b

16,452

16,607

Current Liabilities

20c

(34,280)

(36,267)

Net Current Assets/(Liabilities)

(17,828)

(19,660)

Net Assets of the Fund at the end of the year

5,803,777

6,236,899

Jonathan Belford, CPFA

Aberdeen City Council, Chief Officer – Finance

21 June 2024

NOTES TO THE NORTH EAST SCOTLAND

PENSION FUND ACCOUNTS

Note 1: Accounting Policies

The North East Scotland Pension Fund’s Accounts have been prepared in accordance

with the Code of Practice on Local Authority accounting in the UK (the Code).

The Annual Accounts summarise the Fund’s transactions for the 2023/24 financial year

and its position at year end as at 31 March 2024.

The Annual Accounts do not take account of the obligation to pay pensions and benefits

which fall due after the end of the year.

The Fund’s Annual Accounts are prepared on an accruals basis.

Contribution Income

Normal contributions, from both members and employers, are accounted for on an

accruals basis. Employers’ deficit funding contributions are accounted for on the due

dates on which they are payable under the schedule of contributions set by the Scheme

Actuary or on receipt (if earlier than the due date).

Employers’ pension strain contributions are accounted for in the period in which the

liability arises. Any amounts due in year but unpaid will be classed as a current financial

asset.

Transfers to and from other Schemes

Transfer values represent the amounts received and paid during the year for members

who have either joined or left the Fund during the financial year and are calculated in

accordance with the Local Government Pension Scheme (Scotland) Regulations.

Individual transfers in/out are accounted for when received/paid, which is normally when

the member liability is accepted or discharged.

Investment Income

Interest income is recognised in the Fund account as it accrues, using the effective

interest rate of the financial instrument as at the date of acquisition or origination.

Dividend income is recognised on the date the shares are quoted ex dividend. Any

amount not received by the end of the reporting period is disclosed in the Net Assets

Statement as a current financial asset.

Distributions from pooled funds are recognised at the date of issue. Any amount not

received by the end of the reporting period is disclosed in the Net Assets Statement as a

current financial asset.

Property related income consists primarily of rental income. Rental income is demanded

in accordance with the terms of the lease, generally being quarterly in advance.

The property portfolio accounts are prepared on an accruals basis.

Changes in the net market value of investments (including investment properties) are

recognised as income and comprise all realised and unrealised profits/losses during the

year.

Fund Account - Expenses

Benefits Payable

Pensions and lump sum benefits payable include all amounts known to be due as at the

end of the financial year. Any amounts due but unpaid are disclosed in the Net Assets

Statement as current liabilities.

Taxation

The Fund is a registered public service Scheme under Section 1 (1) of Schedule 36 of

the Finance Act 2004 and as such is exempt from UK income tax on interest received

and from capital gains tax on the proceeds of investments sold. Income from overseas

investments suffers withholding tax in the country of origin unless exemption is permitted.

Irrecoverable tax is accounted for as a Fund expense as it arises.

Management Expenses

The Code does not require any breakdown of Pension Fund management expenses.

However, in the interests of greater transparency, the Pension Fund discloses its

management expenses in accordance with CIPFA guidance on Accounting for Local

Government Pension Scheme Management Costs.

a.) Administrative Expenses and Oversight and Governance Costs

All administrative expenses and oversight and governance costs are accounted

for on an accruals basis. All staff costs are charged direct to the Fund.

Accommodation and other overheads are apportioned to the Fund in accordance

with Aberdeen City Council’s policy.

b.) Investment Management Expenses

All investment management expenses are accounted for on an accruals basis.

Fees of the external investment managers and custodian are agreed in the

respective mandates governing their appointments. Broadly, these are based on

the market value of the investments under their management and therefore

increase or reduce as the value of these investments change.

In addition, the Fund has negotiated performance related fees with several of its

investment managers. Performance related fees were £5,618,140 in 2023/24

(£4,586,458 2022/23).

Where an investment manager’s fee note has not been received by the balance

sheet date, an estimate based upon the market value of their mandate as at the

end of the year is used for inclusion in the Fund Account.

Financial Assets

Financial assets are included in the Net Assets Statement on a fair value basis at the

reporting date. A financial asset is recognised in the Net Assets Statement on the date

the Fund becomes party to the contractual acquisition of the asset. From this date any

gains or losses arising from changes in the fair value of the asset are recognised by the

Fund.

Valuation of Investments

All investments are valued at their market value at 31 March 2024 and are determined

as follows:

All stocks within the FTSE 100 are valued based on the last traded price recorded on

SETS (the Stock Exchange Electronic Trading Service), while all other listed securities

are valued on the basis of the market conventions where primarily traded, which is either

last traded or bid market price.

Investments held in foreign currency have been valued on the above basis and translated

into sterling at the rate ruling at the balance sheet date.

Managed funds including unit trusts are stated at the bid price of the latest prices quoted

or the latest valuation by the Fund’s custodian.

Private equity/debt and infrastructure assets are independently valued by the appointed

Fund Manager and General Partners. Fair value is calculated by applying Private Equity

and Venture Capital Valuation Guidelines.

Unlisted investments are valued using one of the following methodologies:

• Multiple (based on comparable quoted multiples and significant third party

transactions);

• Price of Recent Investment;

• Net Assets;

• Discounted Cash Flows or Earnings from Underlying Business.

When applying an Earning Multiple, the Fund Manager/General Partner will use the best

estimate of maintainable earnings. In accordance with guidelines, discounts have been

applied for size, quality of earnings, gearing and dependency on one customer where

appropriate. A Marketability Discount will also have been applied to reflect liquidity.

Direct property investments are valued by an external valuer (Savills UK Ltd), in

accordance with the Valuation Standards issued by The Royal Institute of Chartered

Surveyors.

The valuer’s opinion of Market Value was primarily derived using:

• Comparable recent market transactions on arm’s length terms.

A full copy of the valuer’s report including all general assumptions and definitions is

available on request from the Executive Director of Corporate Services, Aberdeen City

Council, Level 1 West, Business Hub 7, Marischal College, Broad Street, Aberdeen,

AB10 1AB.

Derivatives

Derivative contract assets are valued at bid price and liabilities are fair valued at offer

price. Changes in the fair value of derivative contracts are included in the change in

market value.

The value of future contracts is determined using exchange prices at the reporting date.

Amounts due from or owed to the broker are the amounts outstanding in respect of the

initial margin and variation margin.

The future value of forward currency contracts is based on market forward exchange

rates at the year end date and determined as the gain or loss that would arise if the

outstanding contract were matched at the year end with an equal and opposite contract.

Cash

Cash comprises of cash in hand and demand deposits.

Cash equivalents are short term, highly liquid investments that are readily convertible to

known amounts of cash and that are subject to minimal risk of changes in value.

Financial Liabilities

The Fund recognises financial liabilities at fair value as at the reporting date. A financial

liability is recognised in the Net Assets Statement on the date the fund becomes party to

the liability. From this date any gains or losses arising from the change in the fair value

of the liability are recognised.

Actuarial Present Value of Promised Retirement Benefits

The actuarial present value of promised retirement benefits of the Fund is assessed on

a quarterly basis by the Scheme Actuary and is in accordance with the requirements of

International Accounting Standard 19 (IAS 19) and relevant actuarial standards.

As permitted under IAS 26, the Fund has opted to disclose the actuarial present value of

promised retirement benefits by way of a note to the Net Assets Statement (Note 2)

together with the full Statement by the Consulting Actuary is on Appendix 1.

Orphan liabilities are liabilities in the North East Scotland Pension Fund for which there

is no sponsoring employer within the Fund. Ultimately, orphan liabilities must be

underwritten by all other employers of the Fund.

Under the termination policy of the Fund, as set out by the Scheme Actuary, a termination

assessment will be made on a least risk funding basis, unless the Admission Body has a

guarantor within the Fund or a successor body exists to take over the liabilities. This is to

protect the other employers in the Fund as, at termination, the Admitted Body’s liabilities

will become “Orphan Liabilities” within the Fund.

Additional Voluntary Contributions

North East Scotland Pension Fund provides an Additional Voluntary Contributions (AVC)

Scheme for its members, the assets of which are invested separately from those of the

Pension Fund. The Fund has appointed Prudential as its AVC provider together with

Standard Life. AVCs are paid to the AVC provider by the employers and are specifically

for providing additional benefits for the individual contributors. Each AVC contributor

receives an annual statement showing the amount held in their account and the

movements in the year, from each service provider. AVCs are not included within the

Annual Accounts however they are detailed in a Note to the Accounts.

Critical Judgements in applying Accounting Policies

Unquoted Private Equity/Debt and Infrastructure Investments

It is important to recognise the highly subjective nature of determining the fair value of

unquoted private equity/debt and infrastructure investments. They are inherently based

on forward looking estimates and judgements involving many factors. These investments

are valued by the investment managers.

The valuations are prepared in accordance with the International Private Equity and

Venture Capital Valuation Guidelines, which follow the valuation principles of

International Financial Reporting Standards (IFRS).

The value of unquoted investments at 31 March 2024 was £1,084,758,078 (31 March

2023 £925,701,847).

Actuarial Present Value of Promised Retirement Benefits

Each fund is required to disclose the estimated actuarial present value of promised

retirement benefits as at the end of the financial year. These estimates are prepared by

the Scheme Actuary. These values are calculated in line with IAS 19 assumptions and

comply with requirements of IAS 26. However, the results are subject to significant

variances based on changes to the underlying assumptions.

The figures are only prepared for the purposes of IAS 26 and have no validity in other

circumstances. It is not relevant for calculations undertaken for funding purposes and

setting contributions payable to the Fund.

Insurance Buy In Contract

In 2020/21, a bulk annuity insurance buy in contract was purchased with Rothesay Life

Plc. The insurer underwrites the risk of meeting the liabilities of a specified group of

pensioners on the former Aberdeen City Council Transport Fund’s pensions payroll as at

the inception date 19 November 2020. The insurer will pay the cost of the monthly

pension payments for this group as long as they or their dependants are entitled to a

pension.

The Insurance Buy In Contract is included in the Net Assets Statement as an Asset and

is valued at year end by the Scheme Actuary.

Events after the Reporting Period

Events after the reporting period are those events, both favourable and unfavourable,

that occur between the end of the reporting period and the date when the Statement of

Accounts is authorised for issue. Two types of events can be identified:

• those that provide evidence of conditions that existed at the end of the reporting

period – the Statement of Accounts is adjusted to reflect such events;

• those that are indicative of conditions that arose after the reporting period – the

Statement of Accounts is not adjusted to reflect such events, but where a category

of events would have a material effect, disclosure is made in the notes of the

nature of the events and their estimated financial effect.

Events taking place after the date of authorisation for issue are not reflected in the

Statement of Accounts.

Changes in Accounting Policies

Changes in accounting policies are only made when required by proper accounting

practices or the changes provide more reliable or relevant information. Where a change

is made, it is applied retrospectively by adjusting opening balances and comparative

amounts for the prior period as if the new policy had always been applied.

Accounting Standards That Have Been Issued but Not Yet Adopted

At the balance sheet date, the following new standards and amendments to existing

standards have been published but not yet adopted by the Code:

• IFRS 16 Leases - This standard replaces IAS 17 and removes the operating

classification for leases, eliminating the ability for organisations to keep operating

leases off balance sheet, by reporting them as a note to the accounts. With the

new standard all leases will be considered finance leases unless they meet the

specific exception criteria. Implementation of this standard is from 1 April 2024.

• Lease Liability in a Sale and Leaseback (Amendments to IFRS 16) - The

amendments to IFRS 16 add subsequent measurement requirements for sale and

leaseback transactions. This amendment is not expected to have a significant

impact on the Financial Statements.

• Classification of Liabilities as Current or Non Current

(Amendments to IAS 1) - The amendments are:

Specify that an entity’s right to defer settlement must exist at the end of the

reporting period;

Clarify that classification is unaffected by management’s intentions or expectations

about whether the entity will exercise its right to defer settlement;

Clarify how lending conditions affect classification; and

Clarify requirements for classifying liabilities an entity will or may settle by issuing

its own equity instruments.

This amendment is not expected to have a significant impact on the Financial

Statements.

• Non-current Liabilities with Covenants (Amendments to IAS 1) - The

amendments improved the information an entity provides when its right to defer

settlement of a liability for at least 12 months is subject to compliance with

covenants.

This amendment is not expected to have a significant impact on the Financial

Statements.

• International Tax Reform: Pillar Two Model Rules (Amendments to IAS 12) -

Pillar Two applies to multinational groups with a minimum level of turnover. The

amendments are:

A temporary exception to the requirements to recognise and disclose information

about deferred tax assets and liabilities related to Pillar Two income taxes; and

Targeted disclosure requirements for affected entities.

These amendments are not likely to affect Pension Fund transactions.

• Supplier Finance Arrangements (Amendments to IAS 7 and IFRS 7) - The

amendments require an entity to provide additional disclosures about its supplier

finance arrangements. The new requirements aim to provide users of financial

statements with information that enables them to:

Assess how supplier finance arrangements affect an entity’s liabilities and cash

flows; and

Understand the effect of supplier finance arrangements on an entity’s exposure to

liquidity risk and how the entity might be affected if the arrangements were no

longer available.

This amendment is not expected to have a material impact on the Financial

Statements.

Note 2: Actuarial Valuation Report

An Actuarial Report for the North East Scotland Pension Fund (NESPF) was provided

as at 31 March 2023.

Information from the 2023 Actuarial Valuation is detailed below:

Market Value of Assets at Valuation £5,804,000,000

Liabilities £4,614,000,000

Surplus £1,190,000,000

Funding Level

The Level of Funding in Terms of 126%

the Percentage of Assets available

to meet Liabilities

Achieving the Solvency Funding Target

The funding objective as set out in the Funding Strategy Statement (FSS) is to achieve

and maintain a solvency funding level of 100% of liabilities (the solvency funding

target). In line with the FSS, the Fund has determined a contribution requirement for

each employer taking into account the offset of any surplus held or the recovery of any

deficit due. The average spread/recovery period adopted by the Fund is 13 years.

The valuation determined that the average employer cost of providing members benefits

across the Fund was 20.2% (the Primary contribution rate.) By spreading the surplus over

13 years the Secondary contribution rate for the whole Fund is -6.2% meaning that the

average employer contribution rate is 14.0% of pensionable pay.

In practice, each employer’s position is assessed separately, details of which can be

found in the 2023 Actuarial Valuation report. This sets out the contributions for each

employer over the 3 year period to 31 March 2027.

Schedule to the Rates and Adjustments Certificate

The Schedule to the Rates and Adjustments Certificate for the Fund sets out the

contributions for the employer over the 3 year period to 31 March 2027. The rates have

been determined in accordance with the FSS. Any adjustments made to the rates

proposed by the Scheme Actuary were made as a result of the consultation carried out

by the Fund and were made in line with the approaches agreed with the Scheme Actuary.

Contribution requirements for the period from 1 April 2027 onwards will be revised as part

of the next actuarial valuation as at 31 March 2026 and will be confirmed in the Rates

and Adjustments Certificate and Schedule accompanying that valuation report.

Assumptions used to Calculate Funding Target

Discount Rate (Past Service) 4.60% p.a.

Discount Rate (Future Service) 4.10% p.a.

Assumed Long Term Price Inflation (CPI) 2.60% p.a.

Salary Increases – Long Term 4.10% p.a.

Pension Increases in Payment 2.60% p.a.

The 2023 Actuarial Report and the NESPF Funding Strategy Statement are available

from the office of the Executive Director Corporate Services, Aberdeen City Council,

Level 1 West, Business Hub 7, Marischal College, Broad Street, Aberdeen, AB10 1AB.

Actuarial Statement

The Scheme Actuary has provided a statement describing the funding arrangements of

the Fund.

The actuarial value of promised retirement benefits at the accounting date, calculated in

line with International Accounting Standards 26 (IAS 26) assumptions, is estimated to be

£4,706m (2023 £4,598m).

The following factors that have had a key impact on the actuarial gains shown for the

year to 31 March 2024:

• A change in financial assumptions including an increase in the discount rate and

a slight increase in corporate bond yields has resulted in a small reduction in

liabilities;

• The demographic assumptions have been changed to reflect the new data

available form the Continuous Mortality Investigation (CMI_2022). This has had

the effect of reducing the liabilities;

• Allowances for the impact of the 6.7% pension increase awarded in April 2024

have been made within the calculation. Additionally, CPI since September 2023

has been included. Since current inflation is higher than the long term inflation

assumptions this has increased the value of the liabilities;

• Following the completion of the 2023 valuation the actual member experience from

the previous valuation in 2020 has fed into the calculation.

These calculations are only prepared for the purposes of IAS 26 and have no validity in

other circumstances. It is not relevant for calculations undertaken for funding purposes

and setting contributions payable to the Fund.

The full statement by the Scheme Actuary is in Appendix 1.

Note 3: Contributions Receivable

By Category

2022/23

2023/24

£’000

Employees’ Normal Contributions

37,056

39,651

Employers’ Normal Contributions

121,677

132,815

Employers’ Deficit Recovery Contributions

2,800

3,062

Total Employers’ Contributions

124,477

135,877

Total

161,533

175,528

By Authority

2022/23

2023/24

£’000

Administering Authority

42,834

47,980

Scheduled Bodies

102,012

111,570

Admitted Bodies

16,687

15,978

Total

161,533

175,528

Note 4a: Transfers In from other Pension Funds

2022/23

2023/24

£’000

Individual Transfers

2,656

3,415

Total

2,656

3,415

Note 4b: Analysis of Transfer Value from Aberdeen City Council Transport Fund

2022/23

2023/24

£’000

Net Investment Assets

85,414

Long Term Assets

202,216

Bank Accounts

3,230

Current Assets

Current Liabilities

(912)

Total

290,035

Note 5: Employers’ Surplus Refunds/Exit Payments

2022/23

2023/24

£’000

Employers’ Surplus Refunds/Exit Payments*

1,186

24,864

Total

1,186

24,864

*Two employers terminated their admission agreements with the Fund in each of the

above years. Surplus refunds/exit payments were calculated by the Scheme Actuary.

Note 6: Benefits Payable

By Category

2022/23

2023/24

£’000

Pensions

140,887

157,148

Commutation and Lump Sum Retirement Benefits

25,257

33,436

Lump Sum Death Benefits

5,845

7,741

Total

171,989

198,325

By Authority

2022/23

2023/24

£’000

Administering Authority

45,710

50,137

Scheduled Bodies

102,687

112,004

Admitted Bodies

23,592

36,184

Total

171,989

198,325

Note 7: Payment to and on Account of Leavers

2022/23

2023/24

£’000

Refunds to Members Leaving Service

584

503

Payments for Members Joining State Scheme

(1)

(4)

Individual Transfers

3,223

7,804

Total

3,806

8,303

Note 8a: Management Expenses

2022/23

2023/24

£’000

Pension Fund Staffing Costs – Administration

1,595

1,787

Information Technology

474

556

Supplies & Services

161

192

Accommodation

714

560

Printing and Publications

Administration Expenses Total

2,958

3,113

Pension Fund Staffing Costs – Investment

232

262

Pension Fund Committee

Pension Board

External Audit Fee

Internal Audit Fee

Actuarial Fees

287

330

General Expenses

163

211

Oversight and Governance Expenses Total

743

872

Investment Management*

11,328

14,395

Performance Fees*

4,586

5,618

Direct Operating Property Expenses

793

761

Transaction Costs

921

1,095

Custody Fees

139

170

Investment Management Expenses Total

17,767

22,039

Management Expenses Grand Total

21,468

26,024

*In accordance with CIPFA guidance, the Fund treats those fees deducted from private

equity/debt investments as Investment Management or Performance Fees. See the table

below for a breakdown by asset class.

Quantifying these costs involves requesting the relevant fund managers for information,

not all of which can be independently verified. Sometimes, fee estimates are required

and there is a risk that the amount is incorrectly stated. However, as costs are offset by

a corresponding adjustment to the change in market value of investments, any inaccuracy

in the estimate will not change the Fund’s net movement for the year.

Note 8b: Investment Management Expenses by Asset Class

2023/24

Management

Fees

Performance

Fees

Direct

Property

Expenses

Transaction

Costs

Total

£’000

Bonds

Equities

4,804

1,820

1,095

7,719

Pooled Funds

2,264

950

3,214

Property

1,077

761

1,838

Private Equity

3,525

1,767

5,292

Private Debt

2,644

1,081

3,725

Subtotal

14,395

5,618

761

1,095

21,869

Custody

Fees

170

Grand Total

22,039

2022/23

Management

Fees

Performance

Fees

Direct

Property

Expenses

Transaction

Costs

Total

£’000

Bonds

Equities

4,335

2,034

837

7,206

Pooled Funds

451

1,188

1,723

Property

1,222

793

2,015

Private Equity

3,688

417

4,105

Private Debt

1,557

947

2,504

Subtotal

11,328

4,586

793

921

17,628

Custody

Fees

139

Grand Total

17,767

Note 8c: Analysis of Transaction Costs

Commission

£’000

Fees/

Tax

£’000

2022/23

Total

£’000

Asset

Type

Commission

£’000

Fees/

Tax

£’000

2023/24

Total

£’000

324

513

837

Equities

384

711

1,095

Pooled

Funds

324

597

921

Total

384

711

1,095

Note 9: Investment Income

2022/23

2023/24

£’000

Bonds

257

186

Equity Dividends

19,978

24,544

Property Rental Income

18,862

20,333

Interest on Cash Deposit

4,790

8,911

Pooled Funds

21,894

20,704

Private Equity

3,645

585

Private Debt

10,139

12,206

Other (including P/L from Currency &

Derivatives)

3,709

(245)

Total

83,274

87,224

Tax

Withholding Tax – Equities

(552)

(530)

Total Tax

(552)

(530)

Net Total

82,722

86,694

Note 10: Investment Assets

Reconciliation of Movements in Investments and Derivatives:

Market

Value

31 March

2023

Purchases

Sales

Change

in Market

Value

Market

Value

31 March

2024

£’000

Bonds

46,218

(41,889)

(4,329)

Equities

2,161,917

824,687

(894,245)

339,042

2,431,401

Pooled

Funds

2,230,604

169,479

(30,116)

146,142

2,516,109

Property

367,200

40,297

(12,012)

(14,485)

381,000

Private

Equity

480,612

75,204

(38,532)

(16,998)

500,286

Private

Debt

155,026

(7,581)

(14,206)

(3,450)

129,789

5,441,577

1,102,086

(1,031,000)

445,922

5,958,585

Other

Cash

219,654

178,809

Investment

Income Due

2,024

2,543

Investment

Sales

Amount

Receivable

161

16,520

Investment

Purchases

Amount

Payable

(27,072)

Net

Investment

Assets

5,663,416

6,129,385

Reconciliation of Movements in Investment and Derivatives (continued):

Market

Value

31 March

2022

Purchases

Sales

Change

in Market

Value

Market

Value

31 March

2023

£’000

Bonds

63,010

(0)

(16,792)

46,218

Equities

2,319,608

641,102

(644,885)

(153,908)

2,161,917

Pooled

Funds

2,347,495

197,477

(105,094)

(209,274)

2,230,604

Property

427,375

4,742

(3,211)

(61,706)

367,200

Private

Equity

518,689

55,748

(106,805)

12,980

480,612

Private

Debt

143,106

11,299

(2,525)

3,146

155,026

5,756,273

973,378

(862,520)

(425,554)

5,441,577

Other

Cash

196,372

219,654

Investment

Income Due

2,264

2,024

Investment

Sales

Amount

Receivable

7,155

161

Investment

Purchases

Amount

Payable

(14,395)

Net

Investment

Assets

5,947,669

5,663,416

Note 11: Analysis of Investments

2022/23

2023/24

£’000

Bonds

46,218

Equities - UK

399,957

392,251

Equities - Overseas

1,761,960

2,039,150

Equities

2,161,917

2,431,401

Pooled Funds Breakdown:

Bonds

855,510

840,348

Equities

965,698

1,125,612

Infrastructure - Unit Trust

119,333

95,466

Infrastructure - Limited Partnership

290,063

454,683

Pooled Funds

2,230,604

2,516,109

Direct Property

367,200

381,000

Private Equity

480,612

500,286

Private Debt

155,026

129,789

Other Investments

1,002,838

1,011,075

Funds held by Investment Managers

74,044

137,659

ACC Loans Fund Deposit

145,610

41,150

Investment Income Due

2,024

2,543

Investment Sales Amount Receivable

161

16,520

Other Balances

221,839

197,872

Investment Assets Total

5,663,416

6,156,457

Investment Liabilities

Investment Purchases Amounts Payable

(0)

(27,072)

Investment Liabilities Total

(0)

(27,072)

Net Investment Assets

5,663,416

6,129,385

Note 12: Analysis of Derivatives

Futures

There were no outstanding exchange traded future contracts as at 31 March 2024.

Forward Foreign Currency

There were no outstanding forward foreign currency contracts as at 31 March 2024.

Note 13: Investments Analysed by Fund Manager

31 March

2023

31 March

2024

£’000

Investment Assets

State Street Global

Advisors

1,326,129

22.9

1,468,479

23.5

Baillie Gifford

1,189,218

20.5

1,291,963

20.7

BlackRock Asset

Management

1,009,413

17.4

1,161,225

18.6

BlackRock Renewable

Power III

41,303

0.7

62,552

1.0

Abrdn (Property)

380,057

6.5

391,347

6.3

Abrdn (Property

Residential)

29,525

0.5

28,123

0.5

HarbourVest

326,824

5.6

330,500

5.3

ACC Loans Fund

Deposit

145,610

2.5

41,150

0.7

Global Custodian

26,416

0.5

97,404

1.5

Partners Group

47,314

0.8

35,815

0.6

Maven Capital

407

0.0

Unigestion

56,938

1.0

81,411

1.3

Russell Multi Asset

Credit

105,705

1.8

116,939

1.9

Aviva Infrastructure

119,332

2.1

95,466

1.5

Hermes Infrastructure

96,176

1.7

82,651

1.3

Alcentra

70,757

1.2

62,133

1.0

Hayfin Direct Lending

84,269

1.5

67,656

1.1

Insight Credit

366,558

6.3

380,542

6.1

Allianz Home Equity

19,609

0.3

24,420

0.4

IFM Global

Infrastructure

152,707

2.6

309,587

5.0

Schroders

69,149

1.2

0.0

5,663,416

97.6

6,129,385

98.3

Net Long and Current

Assets

Bank Account

938

0.0

Long Term and Current

Debtors Less Creditors

139,423

2.4

107,504

1.7

Net Assets

5,803,777

100.0

6,236,899

100.0

The following investments represent more than 5% of the Net Investment Assets:

Security

Market

Value

31 March

2023

% of Net

Investment

Assets

Market

Value

31 March

2024

% of Net

Investment

Assets

£’000

MPF International Equity

Index

Pooled Fund*

489,120

8.64

611,736

9.98

MPF UK Equity Pooled

Fund*

476,578

8.42

513,875

8.38

Insight Investment Mgt

Global Funds*

366,558

6.47

380,542

6.21

MPF UK Index Linked

Gilts*

360,431

6.36

342,868

5.59

IFM Global Infrastructure

152,692

2.70

308,067

5.03

HarbourVest Tranche L

297,332

5.25

265,487

4.33

*The investments listed above are Pooled Investments, i.e. where two or more parties

‘pool’ or combine their investments. This type of investment allows the Fund to gain from

economies of scale, i.e. lower transaction costs and diversification that can help reduce

risk.

Note 14: Stock Lending

31 March 2023

Collateral

Percentage

31 March 2024

Collateral

Percentage

£’000

Stock on Loan

Equities

421,438

537,669

Total Exposure

421,438

537,669

Total Collateral

444,759

106%

573,243

107%

Stock Lending is the lending of stock from one investor to another that entitles the lender

to continue to receive income generated by the stock plus an additional payment by the

borrower.

Collateral is held at 107% in respect of each borrower, consisting of Government Debt,

UK and Overseas Equities.

Note 15: Property Holdings

2022/23

2023/24

£’000

Opening Balance

427,375

367,200

Purchases

35,150

Construction

4,557

5,092

Subsequent Expenditure

185

Disposals

(3,211)

(12,012)

Net Increase in Market Value

(61,706)

(14,485)

Closing Balance

367,200

381,000

The property holdings note shows those UK properties directly held by the Fund and as

such the Fund is responsible for all the repairs, maintenance or enhancements. There

are no restrictions on the realisability of the property or the remittance of income or

proceeds on disposal and the Fund is not under any contractual obligations to purchase,

construct or develop any of these properties, as all are addressed within the Fund’s

Property Investment Strategy.

The valuation has been prepared against a backdrop where valuations have stabilised

and there is a more promising outlook as we move into the rest of 2024. Therefore, the

valuation is not reported as being subject to ‘material valuation uncertainty’ as defined in

the RICS Valuation – Global Standards.

The future minimum lease payments receivable by the Fund are as follows:

2022/23

2023/24

£’000

Within One Year

17,846

19,304

Between One Year and Five Years

60,388

60,591

Later than Five Years

80,089

88,631

Total

158,323

168,526

In accordance with IAS 17, the above table has been presented using the ‘break date’ of

the lease agreements.

Based upon the Fund’s own historic experience but also on similar properties received

from the Fund’s property letting agents, the above disclosure for 2023-24 has seen no

adjustment being required for a credit loss allowance.

Note 16: Financial and Non Financial Instruments

Accounting policies describe how different asset classes of financial and non financial

instruments are measured. Also, how income and expenses, including fair value gains

and losses, are recognised. The following table analyses the fair value of financial assets

and liabilities (excluding cash) by category and by Net Assets Statement heading. No

financial assets were reclassified during the accounting period.

Non financial instruments have been added to the table for reconciliation to the Net

Assets of the Fund.

31 March 2023

31 March 2024

Designated

as Fair

Value

through

Profit &

Loss

Assets at

Amortised

Cost

Financial

Liabilities

Amortised

Cost

Designated

as Fair

Value

through

Profit &

Loss

Assets at

Amortised

Cost

Financial

Liabilities

Amortised

Cost

£’000

Financial

Assets

46,218

Bonds

2,161,917

Equities

2,431,401

2,230,604

Pooled Funds

2,516,109

480,612

Private Equity

500,286

155,026

Private Debt

129,789

219,654

Cash

178,809

2,185

Other Investment

Balances

19,063

174,641

Debtors

143,781

5,074,377

396,480

Subtotal

5,577,585

341,653

Financial

Liabilities

(0)

Other Investment

Balances

(27,072)

(34,280)

Creditors

(36,267)

(34,280)

(63,339)

5,074,377

396,480

(34,280)

Financial

Instruments

Total

5,577,585

341,653

(63,339)

Non

Financial

Instruments

367,200

Property

381,000

5,441,577

396,480

(34,280)

5,958,585

341,653

(63,339)

5,803,777

Net Assets

of the Fund

6,236,899

Note 17: Net Gains and Losses on Financial and Non Financial Instruments

31 March 2023

31 March 2024

£’000

Financial Assets

£’000

(363,848)

Fair Value through Profit and Loss

460,407

Financial Liabilities

Fair Value through Profit and Loss

(363,848)

Net Gains and Losses on Financial

Instruments

460,407

Non Financial Instruments

(61,706)

Fair Value through Profit and Loss

(14,485)

(425,554)

Net Gains and Losses of the Fund

445,922

Note 18: Valuation of Financial and Non Financial Instruments carried at Fair Value

The valuation of financial instruments has been classified into three levels, according to

the quality and reliability of information used to determine fair value.

Level 1

Financial instruments at Level 1 are those where the fair values are derived from

unadjusted quoted prices in active markets for identical assets and liabilities. Products

classified as Level 1 comprise quoted equities, quoted fixed securities, quoted index

linked securities and unit trusts.

Listed investments are shown at bid prices. The bid value of the investment is based on

the bid market quotation of the relevant stock exchange.

Level 2

Financial instruments at Level 2 are those where quoted market prices are not available.

For example, where an instrument is traded in a market that is not considered to be active,

or where valuation techniques are used to determine fair value and where these

techniques use input that are based significantly on observable market data.

Level 3

Financial instruments at Level 3 are those where at least one input that could have a

significant effect on the instrument’s valuation is not based on observable market data.

Such instruments would include unquoted private equity/debt and infrastructure

investments and hedge fund of funds, which are valued using various valuation

techniques that require significant judgement in determining appropriate assumptions.

The values of the investments in unquoted private equity/debt and infrastructure are

based on valuations provided by the general partners to the funds in which North East

Scotland Pension Fund has invested.

These valuations are prepared in accordance with the International Private Equity and

Venture Capital Valuation Guidelines, which follow the valuation principles of IFRS and

US GAAP. Valuations are usually undertaken annually at the end of December. Cash

flow adjustments are used to roll forward the valuations to 31 March as appropriate.

The following table provides an analysis of the financial assets and liabilities of the

Pension Fund grouped into Levels 1 to 3, based on the level at which the fair value is

observable.

Non Financial instruments have been added to the table for reconciliation to the Net

Assets of the Fund.

Note 18a: Fair Value – Basis of Valuation

The basis of the valuation of each class of investment asset is set out below. There have

been no changes in the valuation techniques used during the year. All assets have been

valued using fair value techniques which represent the highest and best price available

at the reporting date.

Description

of Asset

Valuation

Hierarchy

Basis of

Valuation

Observable

and

Unobservable

Inputs

Key Sensitivities

Affecting the

Valuations

Provided

Market

Quoted

Investments

Level 1

Published bid

market price

ruling on the final

day of the

accounting

period

Not required

Quoted Bonds

Level 1

Fixed interest

securities are

valued at a

market value

based on current

yields

Not required

Exchange

Traded Pooled

Investments

Level 1

Closing bid value

on published

exchanges

Not required

Forward

Foreign

Exchange

Derivatives

Level 2

Market forward

exchange rates at

the year end

Exchange rate

risk

Not required

Pooled

Investments –

Overseas Unit

Trusts and

Property

Funds

Level 2

Closing bid price

where bid and

offer prices are

published.

Closing single

price where

single price

published

NAV based

pricing set on

a forward

pricing basis

Not required

Freehold and

Leasehold

Properties

Level 2

Valued at fair

value at the year

end using the

investment

method of

valuation by

Valuers under the

supervision of

Tom Priest

MRICS and

Claire Magowan

MRICS of Savills

Existing lease

terms and

rentals

Independent

market

research

Nature of

Tendencies

Covenant

Strength for

existing

in accordance

with the RICS

Valuation

Professional

Standard

tenants

Assumed

vacancy levels

Estimated

rental growth

Discount rate

Unquoted

Equity/Debt

& Infrastructure

Level 3

Comparable

valuation of

similar

companies in

accordance with

International

Private Equity

and Venture

Capital Valuation

Guidelines (2018)

Earnings

Before

Interest,

Taxes,

Depreciation,

and

Amortisation

(EBITDA)

multiple

Revenue

multiple

Discount for

lack of

marketability

Control

Premium

Valuations could

be affected by

material events

occurring

between the date

of the Financial

Statements

provided and the

Pension Fund’s

own reporting

date, by changes

to expected

cashflows and by

any differences

between audited

Accounts

Quoted

Market

Price

Using

Observable

Inputs

With

Significant

Unobservable

Inputs

Values at 31 March

2024

Level 1

Level 2

Level 3

Total

£’000

Financial Assets at Fair

Value through Profit and

Loss

4,492,827

1,084,758

5,577,585

Non Financial Assets at

Fair Value through Profit

and Loss

381,000

Financial Liabilities at

Fair Value through Profit

and Loss

Net Investment Assets

(Fair Value)

4,492,827

381,000

1,084,758

5,958,585

Quoted

Market

Price

Using

Observable

Inputs

With

Significant

Unobservable

Inputs

Values at 31 March

2023

Level 1

Level 2

Level 3

Total

£’000

Financial Assets at Fair

Value through Profit and

Loss

4,148,676

925,701

5,074,377

Non Financial Assets at

Fair Value through Profit

and Loss

367,200

Financial Liabilities at

Fair Value through Profit

and Loss

Net Investment Assets

(Fair Value)

4,148,676

367,200

925,701

5,441,577

Note 18b: Transfers between Levels 1 and 2

There were no transfers between levels 1 and 2.

Note 18c: Reconciliation of Fair Value Measurements within Level 3

Market

Value 31

March 202

Purchases during

the year &

Derivative

Payments

Sales during the

year & Derivative

Receipts

Realised Gains &

Losses

Unrealised Gains &

Losses (a)

Market Value 31

March 202

£’000

Infrastructure

– Limited

Partnership

290,063

168,479

(3,929)

3,929

(3,859)

454,683

Private

Equity

480,612

75,204

(38,532)

22,419

(39,417)

500,286

Private Debt

155,026

(7,581)

(14,206)

3,726

(7,176)

129,789

Total

925,701

236,102

(56,667)

30,074

(50,452)

1,084,758

(a) Unrealised and realised gains and losses are recognised in the profit and losses on

disposal and changes in the market value of investments line with the Fund Account.

Bulk Annuity Insurance Buy In Contract

The transfer of assets from the ACCTF included a Bulk Annuity Insurance Buy In Contract

with Rothesay Life Plc. The insurance cover provides that the insurer underwrites the risk

for meeting the liabilities of a specified group of pensioners on the pensions payroll as at

the inception date 19 November 2020. The insurer will pay the cost of the monthly

pension payments for this group so long as they or their dependants are entitled to a

pension.

The Insurance Buy In Contract is included in the Net Assets Statement as an Asset and

is valued at year end by the Scheme Actuary.

Total

£’000

Transfer from ACCTF of Insurance Buy In on 1 April 2023

158,000

Level Pensions Paid by Insurer

(10,076)

Actuarial Revaluation

(20,924)

Closing Market Value as at 31 March 2024

127,000

Note 18d: Sensitivity of Assets Valued at Level 3

Having analysed historical data, current market trends and consulted with independent

investment advisors, the Fund has determined that the valuation methods described

above are likely to be accurate to within the following ranges and has set out below the

consequent potential impact on the closing value of investments held at 31 March 2024.

Assessed

Valuation

Range (+/-)

Value at 31

March 2024

Value on

Increase

Value on

Decrease

£’000

Infrastructure –

Limited

Partnership

26%

454,683

572,901

336,465

Private Equity

26%

500,286

630,360

370,212

Private Debt

26%

129,789

163,534

96,044

Total

1,084,758

1,366,795

802,721

The key underlying inputs for the Insurance Buy In Contract level 3 Valuation are the

discount rate and life expectancy. The impact of the changes as calculated by the

Scheme’s Actuary is shown below:

Valuation

31 March 2024

Valuation

Increase

Valuation

Decrease

Change in Assumptions

Adjustment

£m

Discount Rate Adjustment

(-/+) 0.5%

127

133

122

Life Expectancy Adjustment

(+/-) 1 Year

127

132

122

It is important to note that the above are sensitivities rather than being ‘upper or lower

bounds’ on the value of the policy.

Furthermore, the value of the Insurance Buy In Contract matches the insured liability,

so in practice any variation in the asset value would have no effect on the Net Fund

position.

Note 19: Risk arising from Financial and Non Financial Instruments

The Fund’s primary long term risk is that the Fund’s assets will fall short of its liabilities

(i.e. promised benefits payable to members). Therefore, the aim of investment risk

management is to minimise the risk of an overall reduction in the value of the Fund and

to maximise the opportunity for gains across the whole Fund portfolio.

The Fund achieves this through asset diversification to reduce exposure to market risk

(price risk, currency risk and interest rate risk) and credit risk to an acceptable level. In

addition, the Fund manages its liquidity risk, ensuring there is liquidity to meet the Fund’s

forecast cash flows.

The Fund manages these investment risks as part of its overall Pension Fund Risk

Management Strategy.

Responsibility for the Fund’s Risk Management Strategy rests with the Pensions

Committee. Risk management policies are established to identify and analyse the risks

faced by the Fund. Policies are reviewed regularly to reflect changes in activity and in

market conditions.

Market Risk

Market risk is the risk of loss from fluctuations in equity prices, interest and foreign

exchange rates and credit spreads. The Fund is exposed to market risk from its

investment activities, particularly through its equity holdings. The level of risk exposure

depends on market conditions, expectations of future price and yield movements and the

asset mix.

The objective of the Fund’s Risk Management Strategy is to identify, manage and control

market risk exposure within acceptable parameters, whilst optimising the return on risk.

In general, excessive volatility in market risk is managed through the diversification of the

portfolio in terms of geographical location, industry sectors and individual securities.

Specific risk exposure is limited by applying risk weighted maximum exposures to

individual investments.

Other Price Risk – Sensitivity Analysis

Following analysis of historical data and expected investment return movement during

the financial year and in consultation with the Fund’s Investment Adviser, the Fund has

determined that the following movements in market price risk are possible for the 2023/24

reporting period.

Asset Type

Potential Market Movements (+/-)

UK Bonds

7.5%

Overseas Bonds

7.5%

UK Equities

16.0%

Overseas Equities

20.5%

Pooled – Diversified Growth Fund

12.5%

Infrastructure - Other

13.0%

Infrastructure -

Limited Partnership

26.0%

Private Equity

26.0%

Private Debt

26.0%

Property

13.0%

Cash

1.5%

The potential price changes disclosed above are broadly consistent with a one standard

deviation movement in the value of the assets. The sensitivities are consistent with the

assumptions contained in the Investment Adviser’s most recent review. This analysis

assumes that all other variables, particularly foreign currency exchange rates and interest

rates, remain the same.

Had the market price of the Fund’s investments increased/decreased in line with the

above, the change in the Net Assets available to pay benefits in the market price would

have been as follows (the prior year comparator is shown overleaf).

Asset Type

Value as at

31 March

2024

Change

Value on

Increase

Value on

Decrease

£’000

UK Bonds

342,867

7.5

368,582

317,152

Overseas Bonds

497,481

7.5

534,792

460,170

UK Equities

883,998

16.0

1,025,438

742,558

Overseas Equities

2,673,015

20.5

3,220,983

2,125,047

Infrastructure - Other

95,466

13.0

107,877

83,055

Infrastructure -

Limited Partnership

454,683

26.0

572,901

336,465

Private Equity

500,286

26.0

630,360

370,212

Private Debt

129,789

26.0

163,534

96,044

Total

5,577,585

6,624,467

4,530,703

Asset Type

Value as at

31 March

2023

Change

Value on

Increase

Value on

Decrease

£’000

UK Bonds

429,465

8.0

463,822

395,108

Overseas Bonds

472,263

8.0

510,044

434,482

UK Equities

876,535

16.3

1,019,410

733,660

Overseas Equities

2,251,080

20.5

2,712,551

1,789,609

Infrastructure - Other

119,333

13.0

134,846

103,820

Infrastructure -

Limited Partnership

290,063

26.0

365,479

214,647

Private Equity

480,612

26.0

605,571

355,653

Private Debt

155,026

26.0

195,333

114,719

Total

5,074,377

6,007,056

4,141,698

Interest Rate Risk

The Fund invests in financial assets for the primary purpose of obtaining a return on

investments. These investments are subject to interest rate risks which represents the

risk that the fair value or future cash flows of a financial instrument will fluctuate because

of changes in market interest rates.

The Fund’s interest rate risk is routinely monitored by the Fund in accordance with the

Fund’s Risk Management Strategy, including monitoring the exposure to interest rates

and assessment of actual interest rates against the relevant benchmarks.

The Fund’s direct exposure to interest rate movements as at 31 March 2023 and 31

March 2024 is set out below. These disclosures present interest rate risk based on the

underlying financial assets at fair value:

Asset Type

As at 31 March 2023

As at 31 March 2024

£’000

Cash and Cash Equivalents

219,654

178,809

Cash Balances

938

Bonds

901,728

840,348

Total

1,122,320

1,019,167

Interest Rate Risk Sensitivity Analysis

The Fund recognises that interest rates can vary and can affect both income to the Fund

and the value of the Net Assets available to pay benefits. A 100 Basis Point (BPS)

movement in interest rates is consistent with the level of sensitivity applied as part of the

Fund’s Risk Management Strategy. The Fund’s long term average rates are expected to

move less than 100 BPS from one year to the next and experience suggests that such

movements are likely.

The analysis that follows assumes that all other variables, particularly exchange rates,

remain constant and shows the effect in the year on the Net Assets available to pay

benefits of a +/- 100 BPS change in interest rates:

Exposure to

Interest Rate Risk

Asset Values as

at 31 March 2024

Impact

+ 1%

- 1%

£’000

Cash and Cash

Equivalents

178,809

180,597

177,021

Cash Balances

Bonds

840,348

848,751

831,945

Total

1,019,167

1,029,358

1,008,976

Exposure to

Interest Rate Risk

Asset Values as

at 31 March 2023

Impact

+ 1%

- 1%

£’000

Cash and Cash

Equivalents

219,654

221,851

217,457

Cash Balances

938

947

929

Bonds

901,728

910,745

892,711

Total

1,122,320

1,133,543

1,111,097

Currency Risk

Currency risk represents the risk that the fair value of future cash flows of a financial

instrument will fluctuate because of changes in foreign exchange rates. The Fund is

exposed to currency risk on financial instruments that are denominated in any currency

other than the functional currency of the Fund (£UK). The Fund holds both monetary and

non monetary assets denominated in currencies other than £UK.

The Fund’s currency rate risk is routinely monitored in accordance with the Fund’s Risk

Management Strategy, including monitoring the range of exposure to currency

fluctuations.

The following table summarises the Fund’s currency exposure as at 31 March 2024 and

as at the previous year end:

Assets Exposed to Currency Risk

Asset Value as at

31 March 2023

Asset Value as at

31 March 2024

£’000

Overseas Quoted Securities

866,225

966,194

Overseas Unquoted Securities

627,402

640,063

Overseas Unit Trusts

961,383

1,131,346

Total Overseas Assets

2,455,010

2,737,603

Currency Risk – Sensitivity Analysis

Following analysis of historical data in consultation with the Fund’s investment advisers,

the Fund considers the likely volatility associated with foreign exchange rate movements

to be 10.4%.

This analysis assumes that all other variables, particularly interest rates, remain constant.

A 10.4% strengthening/weakening of the pound against the various currencies in which

the Fund holds investments would increase/decrease the Net Assets to pay benefits as

shown below:

Assets Exposed to

Currency Risk

Asset Value as at

31 March 2024

Potential Market Movement

+10.4%

-10.4%

£’000

Overseas Quoted

Securities

966,194

1,066,678

865,710

Overseas Unquoted

Securities

640,063

706,630

573,496

Overseas Unit Trust

1,131,346

1,249,006

1,013,686

Total

2,737,603

3,022,314

2,452,892

Assets Exposed to

Currency Risk

Asset Value as at

31 March 2023

Potential Market Movement

+10.1%

-10.1%

£’000

Overseas Quoted

Securities

866,225

953,714

778,736

Overseas Unquoted

Securities

627,402

690,770

564,034

Overseas Unit Trust

961,383

1,058,483

864,283

Total

2,455,010

2,702,967

2,207,053

Credit Risk

Credit risk represents the risk that the counterparty to a transaction or a financial

instrument will fail to discharge an obligation and cause the Fund to incur a financial loss.

The market values of investments generally reflect an assessment of credit in their pricing

and consequently the risk of loss is implicitly provided for in the carrying value of the

Fund’s financial assets and liabilities.

Deposits are not made with banks and financial institutions unless they are rated

independently and meet the Fund’s credit criteria. The Local Government Pension

Scheme Investment Regulations have limits as to the maximum percentage of the

deposits placed with any one class of financial institution. Money market fund deposits

are made through the Fund’s Global Custodian and are evaluated according to their

internal criteria.

Deposits made to the Aberdeen City Council (ACC) loans fund are administered within

the City Council treasury policy.

The Fund believes it has managed its exposure to credit risk and has had no experience

of default or uncollectable deposits. The Fund’s cash holding at 31 March 2024 was

£178,819,000 (31 March 2023 was £220,592,000). This was held with the following

institutions as shown below:

Summary

Rating

Balance as at

31 March 2023

Balance as at

31 March 2024

£’000

Liquidity Funds

HSBC Liquidity Funds

AA-

56,247

115,566

Bank Deposit Accounts

ACC Loans Fund Deposit

N/A

145,610

41,150

HSBC

AA-

17,797

22,093

Subtotal

219,654

178,809

Bank Current Accounts

HSBC Bank

AA-

927

Virgin Money*

A-

938

Total

220,592

178,819

*Clydesdale Bank trading as Virgin Money.

Liquidity Risk

Liquidity risk represents the risk that the Fund will not be able to meet its financial

obligations as they fall due. The Fund ensures that it has adequate cash resources to

meet its commitments. The Fund has immediate access to its cash holdings.

The Fund defines liquid assets as assets that can be converted to cash within three

months. Illiquid assets are those assets which will take longer than three months to

convert into cash. As at 31 March 2024 the value of illiquid assets was £1,465,758,078

which represented 23.5% of the Total Net Assets of the Fund (31 March 2023

£1,292,901,847 which represented 22.3% of the Total Net Assets of the Fund).

Note 20a: Long Term Assets

31 March 2023

31 March 2024

£’000

Insurance Buy In Contract

158,000

127,000

Life Time Tax Allowance

189

174

Total Long Term Assets

158,189

127,174

Note 20b: Current Assets

31 March 2023

31 March 2024

£’000

Employees’ Contributions due

3,023

3,215

Employers’ Contributions due

8,853

9,526

Sundry Debtors

3,638

3,856

Subtotal

15,514

16,597

Bank

938

Total Current Assets

16,452

16,607

Note 20c: Current Liabilities

31 March 2023

31 March 2024

£’000

Sundry Creditors

24,862

28,154

Benefits Payable

9,418

8,113

Total Current Liabilities

34,280

36,267

Note 21: Related Party Transactions

Both the UK and Scottish Governments have a significant influence over the general

operations of the Fund. They are responsible for providing the statutory framework within

which the Fund operates and prescribes the terms of benefit payments to the Fund’s

membership. Members’ benefit payments are shown in Notes 6 and 7.

The Fund’s related party transactions with the Administering Authority, i.e. Aberdeen City

Council, are:

31 March 2023

31 March 2024

£’000

Income:

Contributions Receivable

39,964

43,031

Loans Fund Interest

1,767

5,234

Excess Pensions

2,355

2,522

Strain on Fund

515

2,426

Expenditure:

Central Support Services

2,045

2,267

Accommodation – 2 Marischal Square

393

387

Debtors:

Contributions Due

3,430

3,576

Excess Pensions Due

325

347

Creditors:

Central Support Services Payable

571

635

Cash Balances:

ACC Loans Fund Deposit

145,610

41,150

Audit Scotland are the appointed External Auditors of the Fund and Aberdeen City

Council. They attend the Pensions Committee and Pension Board meetings. Their fee is

disclosed in Note 8a.

Note 22: Key Management Personnel

Certain employees of Aberdeen City Council hold key positions in the financial

management of the North East Scotland Pension Fund. Two employees were identified

and their financial relationship with the Fund (expressed as an accrued pension) is set

out below:

Accrued

Pension

2022/23

Accrued

Pension

2023/24

£’000

Steven Whyte

Director of Resources

Jonathan Belford

Chief Officer - Finance

Governance

As at 31 March 2024, 7 members of the Pensions Committee and 8 members of the

Pension Board were active members or pensioners of the North East Scotland Pension

Fund.

Each member of the Pensions Committee and Pension Board is required to declare any

financial and non financial interest they have in the items of business for consideration at

each meeting, identifying the relevant agenda items and the nature of their interest.

Conflicts of Interest are managed in accordance with the Conflicts of Interest Policy or

Codes of Conduct for Councillors or Employees. A list of Declared Interests are disclosed

in Appendix 3.

The Fund’s related party transactions with those declared interests are:

2023/24

Income

Debtors

Contributions

Receivable

Excess

Pensions

Contributions

Due

£’000

Grampian Valuation Joint Board

686

Robert Gordon University

7,533

619

2022/23

Income

Debtors

Contributions

Receivable

Excess

Pensions

Contributions

Due

£’000

Grampian Valuation Joint Board

647

Robert Gordon University

6,878

640

For the above related parties there were no expenditure transactions and no outstanding

creditor balances for both years.

Note 23: Contractual Commitments as at 31 March 2024

As at 31 March 2024 the NESPF had contractual commitment in respect of Private

Equity/Debt and Global Real Estate portfolios. The undrawn commitments are

outstanding call payments £430.249m (£589.846m 31 March 2023):

Contractual Commitments

Undrawn Commitments

£’000

HarbourVest

607,367

276,975

Partners Group

86,348

19,235

Maven (SLF)

6,308

Unigestion

141,065

67,865

AAM Residential

Property

30,000

1,249

Hermes

Infrastructure

100,000

9,448

Alcentra EDL

85,494

15,398

Hayfin DLF

85,494

15,317

Blackrock

Renewable

79,161

24,740

Allianz Home Equity

25,000

IFM Global

Infrastructure

300,000

Total

1,546,237

430,249

Note 24: Additional Voluntary Contributions (AVC)

Additional Voluntary Contributions are not included in the Pension Fund’s Accounts.

Members of the North East Scotland Pension Fund are included in the following tables.

The amount of Additional Voluntary Contributions paid by members during the year is

shown as income in the table below:

2022/23

Income (AVCs Paid by Members)

2023/24

£’000

Standard Life

3,395

Prudential*

4,435

The closing Net Assets values represent the value of the separately invested Additional

Voluntary Contributions. These closing values are subject to revaluation.

Market Value

Additional Voluntary Contributions

Market Value

31 March 2023

31 March 2024

£’000

1,043

Standard Life

983

25,841

Prudential*

27,601

*The Prudential figures for 2023/24 are estimates. The actual figures will be known at the

end of July 2024.

Note 25: Contingent Assets/Liabilities

The North East Scotland Pension Fund currently holds one cash bond in respect of the

participating employers within the fund. The bond guards against the possibility of being

unable to recover pension liabilities from this Admission Body should they terminate their

participation of the Scheme. A high level review of the bond requirements for the

participating employers within the Fund was undertaken by the Scheme Actuary in 2024

following the completion of the triennial valuation to determine if any bonds needed to be

put into place for the protection of the Scheme guarantors and the other participating

employers as a whole. As a result of the bond review and the positive funding position it

was determined that no amendments needed to be made at this time.

The pension liabilities for all Transferee Admission Bodies are guaranteed by the

originating employer as per Regulation 61(5)(a) of the Local Government Pension

Scheme (Scotland) Regulations 2018. In total, the Fund has secured guarantees for 20

Admission Bodies currently participating in the Scheme.

There is an ongoing Class Action regarding potential securities fraud and a court case

has been scheduled for July 2024.

Note 26: Impairment for Bad and Doubtful Debts

The risk of employers being unable to meet their pension obligations is managed through

the NESPF Termination Policy and the NESPF Employer Covenant Assessment Policy

which are embedded within the Funding Strategy Statement. During 2023/24 three

admission bodies exited from the Fund. Two of those were a managed exit and one where

the employer went into administration. Following these termination events, the assets and

liabilities for each employer were assessed by the Scheme Actuary. The Actuary’s

assessment is to determine the funding level and the deficit or surplus held in accordance

with the regulations. The Fund paid exit credits to two of the exiting employers as a

surplus was identified upon exit. The liabilities for the third employer was subsumed by

the guarantor as at the exit date. Termination certificates, signed by the Scheme Actuary,

were issued to the employers to confirm that the liabilities had been discharged.

Note 27: Investment Principles

A summary of the Statement of Investment Principles is available on our website:

www.nespf.org.uk. A full version of the Statement of Investment Principles is available on

request from Executive Director of Corporate Services, Aberdeen City Council, Level 1

West, Business Hub 7, Marischal College, Broad Street, Aberdeen, AB10 1AB.

The Statement of Investment Principles is reviewed on an annual basis by the Pensions

Committee and following any change to the investment strategies of the Pension Fund.

Note 28: Critical Judgements in applying Accounting Policies

Assumptions made about the future and other major sources of estimation uncertainty.

The items in the Net Assets Statement as at 31 March 2024 for which there is a significant

risk of material adjustment in the forthcoming financial year are as follows:

Item

Uncertainties

Effect if Actual Results

Differ from Assumption

Actuarial Present

Value of Promised

Retirement Benefits.

Estimation of the net liability

to pay pensions depends on

several complex judgements

relating to the discount rate

used, the rate at which

salaries are projected to

increase, changes in

retirement ages, mortality

rates and expected returns

on Pension Fund assets.

The methodology used by

the Scheme Actuary is in line

with accepted guidelines.

Further to the Fund’s liability

being calculated every three

years, an update of the

funding position is calculated

by the Scheme Actuary every

3 months. Further information

can be found in Note 2.

Private Equity

Private Debt

& Pooled

Infrastructure

(Unquoted)

Private equity/debt and

unquoted pooled

infrastructure investments are

valued at fair value in

accordance with International

Private Equity and Venture

Capital Valuation guidelines.

These investments are not

publicly listed and as such

there is a degree of

estimation involved in the

valuation.

Private equity £500 million.

Private Debt £130 million.

Pooled Infrastructure

(Unquoted) £455 million.

There is a risk that these

investments may be under or

overstated in the accounts.

Insurance Buy In

Contract

The Insurance Buy In

Contract is included in the

Net Assets Statement as an

Asset and is valued at year

end by the Scheme Actuary.

The insurer underwrites the

risk of meeting the liabilities

of a group of pensioners

within the Fund.

Key assumptions are the

Discount Rate and Life

Expectancy.

Further information can be

found in Note 18d Sensitivity

Analysis.

Note 29: Events after the Balance Sheet Date

The Unaudited Statement of Accounts was authorised for issue by the Chief Officer –

Finance on 21 June 2024. Events taking place after this date are not reflected in the

Annual Accounts or Notes. Where events taking place before this date provided

information about conditions existing at 31 March 2024, the figures in the Annual

Accounts and Notes have been adjusted in all material respects to reflect the impact of

this information. No such adjustments have been required.

Note 30: Agency Arrangement for Administering Compensatory ‘Added’ Years

The North East Scotland Pension Fund administers compensatory ‘added’ years

payments for those awarded up to 2011. The Fund acts as an agent of employing bodies,

in respect of staff that have had their pension augmented under The Local Government

(Discretionary Payments and Injury Benefits) (Scotland) Regulations 1998.

The cash flows in respect of the relevant employing bodies and associated payroll cost

for those compensatory ‘added’ years payments are:

2022/23

2023/24

£’000

Cost incurred/(recovered) on behalf of:

Aberdeen City Council

2,355

2,522

Aberdeenshire Council

1,358

1,442

Moray Council

698

730

Scottish Water

1,297

1,390

Other

280

297

Total

5,988

6,381

2022/23

2023/24

Associated Payroll Cost

Appendix 1 – Statement by the

Consulting Actuary

This statement has been provided to meet the requirements under Regulation 55(1)(d)

of The Local Government Pension Scheme (Scotland) Regulations 2018.

North East Scotland Pension Fund

An actuarial valuation of the North East Scotland Pension Fund was carried out as at 31

March 2023 to determine the contribution rates with effect from 1 April 2024 to 31 March

2027.

On the basis of the assumptions adopted, the Fund’s assets of £5,804 million represented

126% of the Fund’s past service liabilities of £4,614 million (the “Solvency Funding

Target”) at the valuation date. The surplus at the valuation was therefore £1,190 million.

This position allows for the merger of the Aberdeen City Council Transport Fund into the

North East Scotland Pension Fund on 1 April 2022. In particular, the figures include the

bulk annuity insurance buy in contract with Rothesay Life Plc in respect of a specified

group of pensioners. For the purpose of the actuarial valuation the 31 March 2023

liabilities relating to the insured pensioner members have been assessed on the Fund’s

ongoing valuation basis and the assets have been taken from the audited Fund accounts.

The valuation also showed that a Primary contribution rate of 20.2% of pensionable pay

per annum was required from employers. The Primary rate is calculated as being

sufficient, together with contributions paid by members, to meet all liabilities arising in

respect of service after the valuation date.

1,000

2,000

3,000

4,000

5,000

6,000

Assets Liabilities Surplus

£5,804m

£4,614m

£1,190m

(£m)

126%

Funded

The funding objective as set out in the Funding Strategy Statement (FSS) is to achieve

and maintain a solvency funding level of 100% of liabilities (the solvency funding target).

In line with the FSS, where a shortfall exists at the effective date of the valuation a deficit

recovery plan will be put in place which requires additional contributions to correct the

shortfall. Equally, where there is a surplus it is usually appropriate to offset this against

contributions for future service, in which case contribution reductions will be put in place

to allow for this.

The FSS sets out the process for determining the recovery plan in respect of each

employer. At this actuarial valuation the weighted average recovery period adopted is 13

years, and the total initial recovery payment (the “Secondary rate” for 2024/27) is a

surplus offset of approximately 6.2% per annum in % terms (which allows for the

contribution plans which have been set for individual employers under the provisions of

the FSS).

Further details regarding the results of the valuation are contained in the formal report on

the actuarial valuation dated March 2024.

In practice, each individual employer’s position is assessed separately and the

contributions required are set out in the report. In addition to the certified contribution

rates, payments to cover additional liabilities arising from early retirements (other than ill

health retirements) will be made to the Fund by the employers.

The funding plan adopted in assessing the contributions for each individual employer is

in accordance with the FSS. Any different approaches adopted, e.g. with regard to

surplus offset periods, are as determined through the FSS consultation process.

The valuation was carried out using the projected unit actuarial method and the main

actuarial assumptions used for assessing the Solvency Funding Target and the Primary

rate of contribution were as follows:

For past service liabilities

(Solvency Funding Target)

For future service liabilities

(Primary rate of contribution)

Rate of return on investments (discount

rate)

4.6% per annum

4.1% per annum

Rate of pay increases (long term) 4.1% per annum

4.1% per annum

Rate of increases in pensions

in payment (in excess of GMP)

2.6% per annum

The assets were assessed at market value.

The next triennial actuarial valuation of the Fund is due as at 31 March 2026. Based on

the results of this valuation, the contribution rates payable by the individual employers

will be revised with effect from 1 April 2027.

Actuarial Present Value of Promised Retirement Benefits for the Purposes of IAS

IAS 26 requires the present value of the Fund’s promised retirement benefits to be

disclosed, and for this purpose the actuarial assumptions and methodology used should

be based on IAS 19 rather than the assumptions and methodology used for funding

purposes.

To assess the value of the benefits on this basis, we have used the following financial

assumptions as at 31 March 2024 (the 31 March 2023 assumptions are included for

comparison):

31 March 2023 31 March 2024

Rate of return on investments (discount rate)

4.8% per annum

4.9% per annum

Rate of CPI Inflation / CARE benefit revaluation

2.7% per annum

Rate of pay increases 4.2% per annum*

4.2% per annum

Increases on pensions

(in excess of GMP)/Deferred revaluation

2.8% per annum

* the 31 March 2023 assumption includes a corresponding allowance to that made at the 2020 actuarial valuation for

short term public sector pay restraint.

The demographic assumptions are the same as those used for funding purposes:

• the start of period assumptions are based on the 2020 actuarial valuation

assumptions, updated to reflect the initial demographic study carried out as

preparation for the 2023 actuarial valuation, CMI_2021 with a long term rate of life

expectancy improvement of 1.5% p.a.

• the end of period assumptions are based on the final demographic assumptions

adopted for the 2023 actuarial valuation, updated to CMI_2022 with a long term rate

of life expectancy improvement of 1.5% p.a.

Full details of the demographic assumptions are set out in the formal report on the

actuarial valuation dated March 2024.

100

The movement in the value of the Fund’s promised retirement benefits for IAS 26 is as

follows:

Start of period liabilities

£4,598m

Interest on liabilities

£217m

Net benefits accrued/paid over the period* (£44m)

Actuarial (gains)/losses (see below)

(£65m)

End of period liabilities

£4,706m

*This includes any increase in liabilities arising as a result of early retirements

Key factors leading to actuarial gains above are:

• Change in financial assumptions: Corporate bond yields increased slightly over

the year, with a corresponding increase in discount rate from 4.8% p.a. to 4.9% p.a.

The long term assumed CPI is the same at the end of year as it was at the start of

year. In combination, these factors lead to a small reduction in liabilities.

• Change in demographic assumptions: As noted above, the assumptions have

been updated to reflect the new CMI model available. This acts to reduce the liabilities.

• Pension increases / recent high short-term inflation: The figures allow for the

impact of the April 2024 pension increase of 6.7%, to the extent it wasn’t allowed for

in the 2023 statement, along with known CPI since September 2023 (which will feed

into the 2025 pension increase). As current inflation is higher than the long term

assumption, this increases the liabilities.

• 2023 actuarial valuation: The year end liabilities allow for the final 2023 valuation

results, and so will allow for the difference between the assumptions and actual

member experience over 2020/23. This will include factors such as the impact of

actual pay increases awarded, actual rates of ill health retirement, etc.

Paul Middleman Mark Wilson

Fellow of the Institute and Fellow of the Institute and

Faculty of Actuaries Faculty of Actuaries

Mercer Limited

May 2024

101

APPENDIX 1a – ADDITIONAL CONSIDERATIONS

The “McCloud judgment”: The figures above allow for the impact of the judgment

based on the proposed remedy.

GMP indexation: The above figures allow for the provision of full CPI pension increases

on GMP benefits for members who reach State Pension Age after 6 April 2016.

Covid 19/Ukraine/Gaza conflict: The financial assumptions allow for these factors to

the degree that they are reflected in the market values on which the assumptions are

based. The impact of COVID deaths over the period 2020 to 2023 will be included in the

actuarial gains / losses item above. The mortality assumption includes no specific

adjustment for COVID as our view is that it is not possible at this point to draw any

meaningful conclusions on the long term impact.

High inflation over last two years The period end figures above allow for the impact of

actual known CPI at the accounting date as noted above. The period end assumptions

then allow for expected (market implied) CPI from that point.

102

Appendix 2 – Schedule of Employers

North East Scotland Pension Fund

Employers as

at 31 March

2023

New

Admissions

Ceased

Employers as

at 31 March

2024

Scheduled

Bodies

Admission

Bodies

(3)

Total

(3)

Ceased during 2023/24

1. Aberdeen Cyrenians Admitted

2. First Aberdeen Admitted

3. St Machar Parent Project Admitted

Participating Employers as at 31 March 2024

1. Aberdeen City Council Scheduled

2. Aberdeenshire Council Scheduled

3. Grampian Valuation Joint Board Scheduled

4. Moray College Scheduled

5. Moray Council Scheduled

6. NESTRANS Scheduled

7. North East Scotland College Scheduled

8. Scottish Fire and Rescue Service Scheduled

9. Scottish Police Authority Scheduled

10. Scottish Water Scheduled

11. Aberdeen Endowments Trust Admitted

12. Aberdeen Foyer Admitted

13. Aberdeen Heat & Power Ltd Admitted

14. Aberdeen Performing Arts Admitted

15. Aberdeen Sports Village Admitted

16. Alcohol and Drugs Action Admitted

17. Bon Accord Care Ltd Admitted

18. Bon Accord Support Services Ltd Admitted

19. Community Integrated Care (Inspire Legacy Staff) Admitted

20. Fersands and Fountain Community Project Admitted

21. Forth and Oban Ltd Admitted

22. Fraserburgh Harbour Commissioners Admitted

103

23. HomeStart Aberdeen Admitted

24. HomeStart NEA Admitted

25. Idverde UK Admitted

26. Mental Health Aberdeen Admitted

27. North East Sensory Services Admitted

28. Outdoor Access Trust for Scotland Admitted

29. Pathways Admitted

30. Peterhead Port Authority Admitted

31. Printfield Community Project Admitted

32. Robert Gordon’s College Admitted

33. Robert Gordon University Admitted

34. Robertsons Facilities Management (City) Admitted

35. Robertsons Facilities Management (Shire) Admitted

36. Sanctuary Scotland Housing Association Ltd Admitted

37. SCARF Admitted

38. Scottish Lighthouse Museum Admitted

39. Sport Aberdeen Admitted

40. Station House Media Unit Admitted

41. Xerox (UK) Ltd Admitted

104

Appendix 3 – Declared Interests

In 2023/24 Members/Key Management Personnel had disclosed an interest that is

included within the following list:

Aberdeen Bulawayo Trust

Aberdeen City Heritage Trust

Aberdeen Civil Service Curling Club

Aberdeen Community Health Care Village Limited

Aberdeen Endowments Trust

Aberdeen Gomel Trust

Aberdeen International Airport Consultative Committee

Aberdeen Lads Club

Aberdeen Outdoor Access Forum

AGHOCO 2175 Limited

Asco Group Ltd

Association of Public Service Excellence

Bonsell Accounting Services

Carbon Reduction Analysts Ltd

Care and Repair Initiative Scotland

Champions Board

Clydesdale Bank

Convention of Scottish Local Authorities (COSLA) Health and Social Care Board

Cruden Bay Golf Club

Etiom Ltd

Fersands Area Forum

First Group Plc

Friends of the Gordon Highlander Museum

GMB Union

Grampian Houston Association

Grampian Racial Equality Council (GREC)

Grampian Valuation Joint Board

Granite City Speakers Club

Historic Scotland

Hub North Scotland Limited

Hub North Scotland (Alford) Limited

Hub North Scotland (FWT) Limited

Institute of Chartered Accountants Scotland (ICAS)

Integration Joint Board

Kellas Midstream Ltd

Lloyds Banking Group

Longhaven District Hall Association

Longhaven Social Club

105

Mennico Ltd

Modern Money Scotland

North East Agricultural Advisory Committee

North East Scotland Fisheries Development

Printfield Community Project

Punk Anatomist and Scotonomics

Robert Gordon University

Royal National Lifeboat Institution (RNLI)

Rubislaw Field Committee

Saga

Santander

Scotch Malt Whisky Society

Scottish Ambulance Service

Scottish & Southern Electricity (SSE) Plc

Sport Aberdeen

The Gordon Highlanders Advisory Group

The Vestry

UNISON (Public Service Union)

UNITE the Union

University of Aberdeen

University of the Highlands & Islands (UHI) Foundation

Virgin Money

Woodside Neighbourhood Community Planning and Regeneration Network