Appendix 1 – Key Risks and Mitigating Factors

Financial Risks	Management / Control
Investment Risk - Assets do not deliver the return required to meet the cost of benefits payable by APF; potential drivers: Investment market performance/volatility Manager underperformance The actual return generated fails to meet APF's discount rate, due to inflation increasing more than expected or assets failing to deliver as expected	Diversification - A diverse range of asset classes and approaches to investing designed to achieve returns in a variety of market environments. By holding a range of assets that are not overly concentrated in any one area, APF expects to reduce the level of risk it is exposed to, whilst increasing the potential to generate attractive risk-adjusted returns. Regular monitoring of manager performance - Each manager is monitored against medium- and long-term performance targets designed to highlight any inappropriate risk-taking behaviour and address factors that may impact the ability of that manager to achieve their performance target. A number of risk metrics are monitored at the portfolio level including tracking error and active risk positions (where relevant). Inflation risk is mitigated by implementing a diversified investment strategy, through the alignment of the investment strategy with funding requirements through regular reviews and monitoring. Value-at-Risk and correlation between asset returns are monitored. Management of strategic risks such as inflation and equity market volatility are addressed through a dedicated risk management framework.
Asset Risk - Liquidity risk: The inherent risk of holding illiquid/less liquid assets that cannot be easily converted into cash. Exchange Rate risk: Foreign currency exposure is expected to be an unrewarded risk over the longer term. Collateral management risk: Collateral is required to support the risk management strategy and protects all parties to a transaction from the risk of default.	Investing across a range of liquid assets recognises the need for access to liquidity in the short term. A tactical liquidity strategy that seeks to replicate APF's strategic benchmark offers immediate access to cash to negate the risk of selling assets when it might be inopportune to do so. Liquidity budgeting informs how much APF can reasonably afford to invest in illiquid holdings in order to benefit from the 'illiquidity premium', without compromising future outgo requirements. Foreign exchange hedging protects the sterling value of overseas investments and serves to reduce the volatility that arises from movements in exchange rates. In periods of sterling weakness, the investment return will be lower than if the assets were unhedged. A robust and proactive collateral monitoring process with prescribed minimum thresholds protect APF from becoming a forced seller of assets in the event a large adverse move in market prices triggers a collateral call.
Responsible Investment: Environmental, Social & Governance (ESG) issues may have a material financial impact if not given due consideration. Climate change risk	Actively addresses ESG risks throughout its investment strategy. Considers ESG risks as part of Strategic Investment Reviews. Quantifies the risk climate change presents to Fund assets and seeks to reduce this risk by allocating capital accordingly.
Longevity Risk - the risk Members of APF live longer than assumed in the actuarial valuation model.	Captured within the funding strategy which is monitored by the Committee on at least a three-yearly cycle. Any improvement or deterioration in longevity will only be realised over the long term.
Employer Covenant Risk - Employers within APF lack the financial capacity to make good their outstanding liabilities.	Addressed through a covenant assessment monitoring process, which annually assess the financial standing of all Employers in APF and the analysis is considered when setting the Funding Strategy. A lower risk investment strategy is adopted for certain admission bodies and orphan liabilities where there is no guarantee underpinning the liabilities.

Financial Risks

Management / Control

Investment Risk - Assets do not deliver the return required to meet the cost of benefits payable by APF; potential drivers:

Investment market performance/volatility
Manager underperformance
The actual return generated fails to meet APF's discount rate, due to inflation increasing more than expected or assets failing to deliver as expected

Diversification - A diverse range of asset classes and approaches to investing designed to achieve returns in a variety of market environments. By holding a range of assets that are not overly concentrated in any one area, APF expects to reduce the level of risk it is exposed to, whilst increasing the potential to generate attractive risk-adjusted returns.

Regular monitoring of manager performance - Each manager is monitored against medium- and long-term performance targets designed to highlight any inappropriate risk-taking behaviour and address factors that may impact the ability of that manager to achieve their performance target. A number of risk metrics are monitored at the portfolio level including tracking error and active risk positions (where relevant).

Inflation risk is mitigated by implementing a diversified investment strategy, through the alignment of the investment strategy with funding requirements through regular reviews and monitoring. Value-at-Risk and correlation between asset returns are monitored. Management of strategic risks such as inflation and equity market volatility are addressed through a dedicated risk management framework.

Asset Risk -

Liquidity risk: The inherent risk of holding illiquid/less liquid assets that cannot be easily converted into cash.

Exchange Rate risk: Foreign currency exposure is expected to be an unrewarded risk over the longer term.

Collateral management risk: Collateral is required to support the risk management strategy and protects all parties to a transaction from the risk of default.

Investing across a range of liquid assets recognises the need for access to liquidity in the short term. A tactical liquidity strategy that seeks to replicate APF's strategic benchmark offers immediate access to cash to negate the risk of selling assets when it might be inopportune to do so.

Liquidity budgeting informs how much APF can reasonably afford to invest in illiquid holdings in order to benefit from the 'illiquidity premium', without compromising future outgo requirements.

Foreign exchange hedging protects the sterling value of overseas investments and serves to reduce the volatility that arises from movements in exchange rates. In periods of sterling weakness, the investment return will be lower than if the assets were unhedged.

A robust and proactive collateral monitoring process with prescribed minimum thresholds protect APF from becoming a forced seller of assets in the event a large adverse move in market prices triggers a collateral call.

Responsible Investment:

Environmental, Social & Governance (ESG) issues may have a material financial impact if not given due consideration.

Climate change risk

Actively addresses ESG risks throughout its investment strategy.

Considers ESG risks as part of Strategic Investment Reviews.

Quantifies the risk climate change presents to Fund assets and seeks to reduce this risk by allocating capital accordingly.

Longevity Risk - the risk Members of APF live longer than assumed in the actuarial valuation model.

Captured within the funding strategy which is monitored by the Committee on at least a three-yearly cycle. Any improvement or deterioration in longevity will only be realised over the long term.

Employer Covenant Risk - Employers within APF lack the financial capacity to make good their outstanding liabilities.

Addressed through a covenant assessment monitoring process, which annually assess the financial standing of all Employers in APF and the analysis is considered when setting the Funding Strategy.

A lower risk investment strategy is adopted for certain admission bodies and orphan liabilities where there is no guarantee underpinning the liabilities.

Operational / Other Risks	Management / Control
Investment Pooling - Pooling provider does not deliver APF’s investment objectives.	The Service Agreement sets out the duties and responsibilities of the Pool and the rights of APF as a client. A robust governance framework with agreed constitution and terms of reference ensures the objectives of pooling are met. Ongoing monitoring of performance, service delivery, costs and savings arising from pooling. Details of APF’s pooling arrangement are set out in Section 2 of this document.
Regulatory and Political Risk - The potential for adverse regulatory or political change. Regulatory risk arises from investing in a market environment where the regulatory regime may change. This may be compounded by political risk in those markets subject to political uncertainty.	Ongoing horizon scanning and consideration on APF Risk Register. Review and response to consultations on changes to the LGPS regulations and guidance which may impact scheme funding or investment strategy. Ongoing review of the investment strategy and specific investment portfolios.
Governance Risk - Committee Members do not have sufficient expertise to evaluate and challenge the advice they receive. Committee Members are to possess an appropriate level of knowledge, skill and understanding to discharge their fiduciary duty.	Periodic Member self-assessment. Training policy in place based on Chartered Institute of Public Finance and Accounting (CIPFA) Knowledge and Skills Framework for LGPS funds. Expert advice commissioned to support strategic and implementation decisions.
Cash Flow Risk - Payments to pensioner members exceed contributions.	Liquidity requirement specified within the investment objectives to help manage needs. Investment strategy has been structured such that the generation of investment income to achieve this liquidity requirement is feasible. Monitoring cash flow critical to the internal monitoring and rebalancing process and is an important consideration when setting investment strategy.
Custody risk - The risk of losing economic rights to Fund assets, when held in custody or when being traded.	Use of global custodian with negotiated service level agreement and internal reconciliation of accounting records.
Counterparty risk - The possibility of default of a counterparty in meeting its obligations.	Counterparty exposure restrictions as relating to the risk management framework and treasury management policy. Internal controls reporting and compliance monitoring.