Draft Annual Report and Accounts of the Orkney Islands Council Pension Fund 2025/2026

www.orkney.gov.uk

IMAGE: The cover shows the Orkney Islands Council crest above a coastal scene with a road and causeway beside shallow water, rocky shoreline and a rusted shipwreck. The cover text reads “Draft Annual Report and Accounts of the Orkney Islands Council Pension Fund 2025/2026” and “www.orkney.gov.uk”.

Contents

• Annual Report and Accounts of the Orkney Islands Council Pension Fund — 1
• 2025/2026 — 1
• Management Commentary — 1
• Statement of Responsibilities for the Annual Accounts — 15
• Remuneration Report — 17
• Annual Governance Statement — 18
• Governance Compliance Statement — 26
• Annual Accounts 2025/2026 — 31
• Pension Fund Account — 31
• Net Assets Statement as at 31 March 2026 — 32
• Notes to the Annual Accounts — 33
• Independent Auditor’s Report to the Members of Orkney Islands Council as administering authority for the Orkney Islands Council Pension Fund and the Accounts Commission — 58
• Annex 1 – Pension Fund Sub-committee, Pension Board, Scheduled and Admitted Bodies — 59
• Annex 2 – Actuarial Statement for 2025/2026 — 60
• Annex 3 - Glossary of Terms — 62
• Additional Information — 64

Management Commentary

Introduction

Welcome to the Annual Report and Accounts for the Orkney Islands Council Pension Fund for the year ended 31 March 2026.

The Local Government Pension Scheme (Scotland) Regulations 2018 require the Council, as administering authority for the Fund, to produce a separate statement of accounts for the Pension Fund and incorporate it into an Annual Report.

This Annual Report has been produced to provide Elected Members, employers, scheme members, and other interested parties with information concerning the administration and performance of the fund for financial year 2025/2026 and we hope you find its content useful.

To assist in the understanding of the Annual Report and Accounts we would encourage you to make reference to the Management Commentary in the first instance.

We realise that pensions are a highly complicated subject. It is, however, important that fund members take the time to try and understand the scale of benefits that they will receive when they retire - whether this is from the Local Government Pension Scheme itself or through other pension arrangements, such as the State Pension.

Overview of Fund Business

Under the statutory provisions of the Local Government Pension Scheme, Orkney Islands Council is designated as an “Administering Authority” and is required to operate and maintain a pension fund – the Orkney Islands Council Pension Fund (“the Fund”).

The Fund is used to pay pensions, lump sum benefits and other entitlements to scheme members and their dependants. Contributions to the Fund are made by employee members and by participating employers. The Fund also receives income from its investments, which include equities and pooled investment vehicles.

The Fund operates under the terms of the Local Government Pension Scheme, which is a public sector pension arrangement. Scheme membership is made up of active, deferred and pensioner members. To be able to join the scheme, a person must be employed by a relevant employer and not eligible to join another public sector pension scheme. Teachers are not included as they have a separate national pension scheme.

Review of the Year

Key Facts and Figures

The increase in fund value over the year was largely the result of an increase in the market value of investments of £33.7m. Outflows, including benefits payable (£14.3m) and management expenses (£3.2m) were offset by investment income of £9.2m and contributions receivable of £13.7m. Overall, this represents a year-on-year increase of -7.2% in the value of the fund.

Over the 2025/2026 financial year, the Pension Fund returned 7.2% driven by strong equity returns over Q2 and Q3 2025, which were partially offset as markets saw increased volatility towards the end of the year due to uncertainties surrounding the Middle East conflict.

The Fund’s managers delivered mixed performance over the past 12 months. All of the Pension Fund’s holdings (the Baillie Gifford Global Alpha and UK Equity Funds, Barings Global Private Loan Fund (“GPLF”) 3 and 4 mandates and the IFM Global Infrastructure Fund, L&G gilts funds and L&G Future World Net Zero Buy and Maintain Fund) had positive returns this year in absolute terms, except for the IFM Core Energy Transition Fund (previously known as the Net Zero Infrastructure Fund) which produced negative returns.

Amongst the growth assets, the Baillie Gifford Global Alpha Fund was the best performing mandate over the year, returning 10.4%, in absolute terms. Nevertheless, the manager underperformed its benchmark by 6.4% over the past 12 months. Similarly, the Baillie Gifford UK Equity Fund returned 7.5% in absolute terms over the 12-month period and underperformed its benchmark by 12.6% net of fees.

At the start of the 12 months, global equities outperformed on the back of strong performance by a limited number of US-listed Technology and Technology-adjacent megacap names, the “Magnificent 7”. These are Apple, Nvidia, Microsoft, Amazon, Tesla, Meta/Facebook, and Alphabet/Google. However, global equities weighed on performance in the latter part of the year, amid rising investor uncertainty surrounding geopolitical tensions.

The Pension Fund’s protection assets with L&G, gilts and index-linked gilts funds and Future World Net Zero Buy and Maintain Fund, returned 2.5%, 3.8% and 3.8% respectively.

Fixed income assets delivered positive absolute returns throughout the year as inflation and rising interest rate expectations eased, resulting in the fall of yields and the rise in prices. Bond prices rise as their yields fall. UK bonds in particular performed well as credit spreads tightened to historic lows through 2025 before widening again in early 2026, ending Q1 2026 above prior lows but still below long-term averages.

Within the Pension Fund’s income assets, the GPLF 3 and 4 posted positive returns over the 12-month period, where the GPLF 3 marginally outperformed its benchmark by 0.3% while the GPLF 4 slightly underperformed by 0.6%.

Similarly, IFM Global Infrastructure Fund had a positive return over a 12-month period in absolute terms, returning 8.7%, albeit falling behind its benchmark by 1.2%. However, the IFM Core Energy Transition Fund delivered a negative absolute return of -0.5%, underperforming its benchmark of 2.9%. We note it is too early to meaningfully evaluate the manager’s performance, given this is a relatively newly appointed manager.

The overall benchmark return of 11.4% generally reflects variable market conditions for investors over the 12 months to 31 March 2026.

The value of the fund increased by £38.4m or 7.2% in the financial year and totalled £570.6m at 31 March 2026.

The change in value of the fund over any given period is a combination of the net money flows into or out of the Fund and any gain or loss on the capital value of its investments.

During the year, a loss on member contributions receivable and transfers in over pension payments and management expenses of £4.2m (2025: £3.4m loss) was offset by income from dividends and interest of £9.2m (2025: £9.7m). The Fund was also increased by a net capital gain of £33.7m (2025: £10.0m loss).

The Accounts are based on the market value of investments at 31 March 2026. This means that they include the profit or loss that has been made, due to the change in the value of investments, over the period from the date of their purchase to 31 March 2026 even though no actual sale has taken place. This notional value is defined as “unrealised” profit or loss. By contrast “realised” profits and losses are those that have arisen from actual sales throughout the year.

Of the net capital gain of £33.7m in the year, £4.4m was an unrealised gain (2025: £50.0m loss) and £29.3m realised gain (2025: £40.0m realised gain).

After allowing for projected liabilities on the fund, the funding level has decreased to 175% at 31 March 2026 from its value of 188% last financial year end, calculated on an ongoing funding basis.

We are pleased to report that the Fund maintains a position well above its 100% funding target, being in surplus by £244m at the financial year end (2024/2025: £246m) according to the actuary’s most recent funding update.

Economic and Market Background

Despite a softer second half, 2025 proved to be a resilient year for the global economy, expanding 3.4%, amid higher US tariffs and policy uncertainty. AI-related investment, fiscal support and monetary easing reinforce a reasonable global growth backdrop in 2026. However, supply-side risks from the US-Iran conflict have added uncertainty.

US and UK headline inflation peaked in summer 2025. Tariff impacts on US inflation were milder; in the UK, wage and services inflation eased. However, higher energy costs have derailed disinflation progress, with US inflation at 3.3%, UK inflation at 3.3% and eurozone inflation at 2.6% in March 2026.

Brent crude oil rose 58.3% to $118 per barrel over the period. Oversupply concerns weighed on oil prices in 2025; however, geopolitical tensions and the Strait of Hormuz, a vital route for 20% of global energy trade, closure drove oil prices up 63.1% in March and 94.5% in the first quarter of 2026.

After cutting borrowing costs, markets were pricing in UK and US rate reductions in 2026, prior to the conflict. However, energy-driven inflation fears reversed expectations. Expectations of US rate cuts were erased. In the UK, expectations of two rate cuts by end-February became expectations of two rate hikes by March-end. Markets priced in a possible rate hike in the eurozone. In Japan, rates rose to 0.75% p.a., the highest since 1995.

Sovereign bond yields rose across major advanced markets in Q1 2026. Concerns over greater bond issuance amid waning institutional demand have pressured long-end yields. Real yields rose on global competition for capital from the AI-investment boom. However, short-term yields rose the most, as markets priced in rate hikes. US and UK 10-year bond yields increased to 4.3% p.a. and 4.9% p.a., respectively. Equivalent Japanese and German yields rose to 2.4% p.a. and 3.0% p.a., respectively, on increased issuance expectations.

Despite widening in Q1 2026, credit spreads remain down over 12 months and near historic lows. Over the period, sterling investment-grade spreads fell 0.1% p.a. to 0.9% p.a. Over the same period, US speculative-grade spreads fell 0.1% p.a., while European high yield spreads were flat; both were at 3.3% p.a. by March-end.

The US dollar has outperformed peers since the conflict began. However, the Nominal Broad U.S. Dollar Index remains 5.6% lower over the period as investors increased hedging after April’s tariffs. Yen and sterling trade-weighted measures fell 9.7% and 1.1%, respectively, while the euro rose 3.1%.

Global equities are up 19.8% over the period. Tech led growth at 20.6%, outperforming value at 16.7%. Developed Asia Pacific ex Japan led, with the region’s involvement in the semiconductor supply chain and increased AI-related capital expenditure. Japan outperformed on higher fiscal spending, corporate reforms and a weaker yen. Strong energy sector performance and positive selection contributed to the UK’s outperformance. Robust earnings, advances in Chinese AI and dollar weakness supported emerging markets.

US equities lagged due to weakness in mega-cap tech, the primary AI-capex spenders, and lack of market breadth. Europe ex UK underperformed on an unfavourable sector mix and stock selection.

The growth outlook has been supported by AI-related investment and expectations of monetary and fiscal easing, but higher energy prices add uncertainty. While geopolitical shocks often fade, prolonged energy-supply disruptions – such as in the mid-1970s or 2022 – have led to more persistent macroeconomic and market effects.

Although forecasts are still evolving, global inflation is likely to be revised up and growth revised down, with uneven impacts. Europe and Asia are more exposed to higher oil and gas prices than North America, with outcomes dependent on the scale and duration of any disruption to energy supplies through the Strait of Hormuz.

Central banks typically look through one-off supply shocks, but post-2022 they are likely to be more cautious about second-round inflation effects. The UK and eurozone appear most vulnerable, suggesting the Bank of England and the ECB may remain on hold in the near term. By contrast, the US Federal Reserve may prioritise growth risks, given the US economy’s relative insulation from energy shocks and weakening labour market data.

Sovereign bond yields appear attractive relative to long-term growth and inflation expectations, particularly in scenarios where growth slows and near-term inflation pressures ease. For absolute-return investors focused on managing near-term inflation risks, leaning into exposure to the front end of the sovereign yield curve may be sensible, given lower duration risk and reduced sensitivity to further inflation surprises.

Credit spreads have compressed and are well below long-term averages. While they still offer a premium over long-term expected loss, it is historically a thin one. Given attractive sovereign yields, investment-grade bonds offer reasonable medium-term return potential, although slight widening could lead credit to underperform gilts. We are more cautious on speculative-grade bonds; spreads are more volatile and, being shorter maturity, speculative-grade bonds derive less benefit from attractive long-term sovereign bond yields.

Equities have recovered from their March 2026 decline. Strong tech-driven earnings growth has provided near-term fundamental support to equities. However, elevated valuations mean expected medium-term returns remain moderately weaker relative to neutral expectations and historic norms.

The US dollar has steadied against major peers in 2026, having weakened notably since the start of 2025. While sterling has weakened versus the dollar, it remains broadly in line with fair value based on its real effective exchange rate relative to its long-term trend. This supports a neutral medium-term view on the dollar.

Investment Strategy

The investment strategy of the Fund is to invest monies in a prudent and diversified manner, in accordance with the Scheme regulations and in recognition of the inherent risks that accompany any investment in the respective asset classes. The strategy is set out in the Statement of Investment Principles which can be viewed on request.

The most recent review of the investment strategy was approved by the Sub-committee in February 2024. The agreed interim and long-term target allocations are shown in the Asset Allocation table below together with the actual asset allocation at 31 March 2026.

In time the strategy will transition towards the relevant target allocations. The Fund has acted to reduce its holdings in growth-seeking assets in favour of funding a new allocation to income-generating assets as part of a strategy to further diversify the Fund’s investments. Nevertheless, holdings in equities still account for 54.6% of the Fund’s portfolio as at 31 March 2026. The remaining 45.4% is held in Infrastructure Credit, Private Debt, Bonds and Cash at 8.4%, 7.9%, 28.4% and 0.7% respectively.

The most recent review in 2024 agreed a full disinvestment from the multi-asset mandates and subsequent investment of those proceeds into protection assets. These changes have been progressed during 2024/25 and are intended to reduce the risk profile of the fund and have been matched by a proportionate reduction in growth assets.

During 2025/26, the Pension Fund Sub-committee agreed to increase the Fund’s commitment to private debt, to reach its target allocation of 10%. Following fund manager interviews, the onboarding to Barings Global Private Loan Fund Perpetual was completed in March 2026.

As a result of its exposure to equities, the relative performance of the Fund against its benchmark can be volatile over the short term. However, the Fund continues to have a strong funding position which allows it to take a long-term view across successive investment cycles.

A Responsible Investment Policy was approved in February 2024 which sets out the underlying objectives and beliefs of the Sub-committee on behalf of the Fund and what the Sub-committee expects to achieve from having this policy in place. It details the actions that the Sub-committee will take to achieve those actions and the means by which the actions will be assessed in order to judge whether the expected outcomes have or have not been achieved.

Top 10 Direct Equity Holdings

The top 10 direct equity holdings within the Fund at 31 March 2026 were:

Investment Performance

The performance of the Pension Fund managed investments has been measured against a bespoke or fund-specific benchmark since 1 April 2018, following the closure of the previous peer group benchmark, and reflects the weighting or concentration of individual asset classes within the approved investment strategy. The benchmark is maintained by Hymans Robertson.

The Fund’s performance target for this accounting period is to outperform the fund-specific benchmark measured over a rolling five-year period. The average performance over the last five years of 1.6% is behind the benchmark of 7.0%.

The following graph summarises investment performance on an annualised basis over 1, 3 and 5-year periods.

IMAGE: A bar chart titled “Annualised Performance 2021-2022 to 2025-2026” compares Actual and Benchmark returns. For 1 year, Actual is 7.70 and Benchmark is 11.40. For 3 years, Actual is 5.70 and Benchmark is 9.20. For 5 years, Actual is 1.60 and Benchmark is 7.00.

Structure of Administration

Staffing

Administration of the Fund is carried out in-house and undertaken by the Payroll and Pensions section within Orkney Islands Council’s Enterprise & Resources Service.

The Pensions team within the Payroll and Pensions section has 3.7 full-time equivalents, consisting of a Service Manager, one full-time Team Manager, two part-time Senior Assistants and an Administrative Assistant. In addition to maintaining Fund members’ records using data supplied by all Fund employers, the Pensions team also provides frontline services to scheme members. As well as answering telephone calls and responding to electronic and written correspondence, meetings are provided where requested.

The staff resources detailed above are supplemented by shared staff resources within the Enterprise & Resources Service, providing additional governance, payments, investment, and accounting expertise. In addition, the Human Resources and Organisational Development section, within Orkney Islands Council’s Infrastructure & Organisational Development Service, also supports the work of the Pension section by arranging pre-retirement workshops for scheme members who are within two years of retirement.

Systems

Fund members’ records are maintained on Aquila Heywood’s pensions administration system known as Altair. Every current and former employee of Fund employers, including Orkney Islands Council, who has a pension entitlement in the Fund is included in the Altair system.

The Council’s ResourceLink Payroll system is used to pay pensioner benefits. The Pensions team is restricted to read-only access of the payroll system, with amendments being made to pensioner records via a formal request process to the Payroll team.

Administration Performance

Orkney Islands Council as administering authority is committed to providing a high-quality pension service to both members and employers and ensuring members receive their correct pension benefits entitlement.

Administration performance figures are monitored by the Pension Fund for financial year 2025/2026, against the key service standards set by the Pension Fund Sub-committee, as follows:

Scheme Arrangements

Career Average Revalued Earnings Scheme (CARE) – LGPS 2015

A number of important changes have been made to the LGPS from 1 April 2015. The changes, which have been agreed between the Trade Unions, COSLA and the Scottish Government, ensure that the scheme complies with the terms of the Public Pensions Act 2013.

From 1 April 2015 the pension scheme moved away from a final salary to a career average revalued earnings scheme (CARE).

The main changes of this scheme were:

• A move towards benefits being worked out using career average revalued earnings (CARE) rather than final salary.
• Pensions being built up at a rate of 1/49th of annual pensionable pay.
• Member’s normal retirement age being linked to their own State Pension Age. Members may still be able to retire from age 60 but a reduction for early payment may apply.
• Protection of benefits for members aged 55 and over at 1 April 2012 who will be guaranteed that their benefits will not be less than they would have been if the 2015 scheme had never been introduced, and
• Benefits built up before April 2015 will continue to be calculated using actual final pensionable pay at date of leaving.

Fund Update

Membership details are shown below along with a short description for each membership status:

Employer Bodies

The Fund invested and administered pensions on behalf of 4 current and former employers during financial year 2025/2026. These include scheduled bodies, brought into the Fund by legislation, and admitted bodies, which chose to join the Fund. The detailed listing of employers and their membership numbers is contained in Note 1 of the Annual Report and Accounts for the Fund.

Pension Increases

Pensions which are in payment and deferment are increased each April in accordance with the Pension (Increase) Act 1971. Since April 2011, this increase has been linked to the Consumer Price Index (CPI) rather than the Retail Price Index (RPI).

Actuarial Valuation

Annex 2 contains the formal Actuarial Statement for financial year 2025/2026 which is prepared in line with International Accounting Standard (IAS) 26 and supports the preparation of the Accounts for the Pension Fund.

The last triennial valuation, as at 31 March 2023, calculated that the Fund’s assets were valued at £480m, and were sufficient to meet 164.0% of the liabilities, namely the present value of promised retirement benefits accrued up to that date. This compared with 118% at the previous March 2020 valuation. The resulting surplus at the 2023 valuation was £188m.

For the purpose of reporting a funding level and an associated surplus/deficit for the 2023 valuation, a prudent future investment return of 5.2% p.a. with a 75% likelihood of success has been used, compared to 2.9% p.a. for the 2020 valuation.

The liabilities were assessed using an accrued benefits method which takes into account pensionable membership up to the valuation date and makes an allowance for expected future salary growth and inflation to retirement or expected earlier date of leaving pensionable membership.

Since the previous valuation, various events have taken place which affect the value placed on the liabilities, including:

• Decrease due to future investment returns being anticipated to be higher than at 2020.
• Increase due to the significant increase in short-term future inflation expectations.
• Decrease due to a slight reduction in life expectancy, not allowing for Covid-related excess deaths.
• Decrease due to an updated model of future improvements to the most recent model available, including allowance for some recent mortality experience related to the excess deaths from the Covid-19 pandemic.

This overall decrease in liabilities has been offset by an increase in the Fund’s assets resulting from a positive investment return and a net cash inflow over the period since the last full valuation at 31 March 2023.

As recommended by the Fund’s Actuary, Hymans Robertson, the employers’ contribution rate has been reduced to 15.0% for the period 1 April 2024 to 31 March 2027 with reference to the future costs and also taking account of the current funding position, which is based on past service benefits.

The most recent funding update produced at 31 March 2026 indicates that the funding surplus has decreased from 188% to 175% since 31 March 2025. The reduced surplus can be attributed to increases in past service liabilities and a reduction in the surplus during the year.

The assessed Primary contribution rate for 1 April 2024 – 31 March 2027 at March 2023 was 22.1%. On applying a Secondary contribution rate of -7.1% to give a required minimum contribution, against the background of increased uncertainty over the future impacting on actuarial assumptions, the employer contribution rate was reduced to 15.0% for the three-year period 2024 to 2027.

Main Risks and Uncertainties Facing the Fund

Awareness of risk and risk mitigation is a key facet of the Fund’s strategic and operational activities. Whilst it is not possible to eliminate risk entirely, the Fund has taken steps to evaluate risk and put strategies and controls in place to minimise its adverse effects.

The Fund has its own risk register, which details some 24 risks faced by the Fund and can be viewed at the related downloads section here. The risk register is reviewed annually by the Pension Fund Sub-committee and Pension Board.

Principal risks, and the way in which they are managed, are as follows:

Financial Mismatch, the risk that the Fund’s assets fail to grow in line with the cost of meeting its liabilities. The Pension Fund Sub-committee measures and manages financial mismatch in several ways. It has set a strategic asset allocation benchmark for the Fund and assesses risk relative to that benchmark by monitoring the Fund’s asset allocation and investment returns. It also assesses risk relative to liabilities by monitoring benchmark returns relative to liabilities. The Pension Fund Sub-committee keeps under review demographic assumptions which could impact on the cost of benefits. These assumptions are considered formally in the triennial valuation and reviewed annually within funding update reports produced by the Fund’s Actuary, Hymans Robertson.

Systemic Risk, the risk of an interlinked and simultaneous failure of several asset classes and/or investment managers. The Pension Fund Sub-committee seeks to manage systemic risk by the appointment of investment managers. The Pension Fund Sub-committee regularly reviews total asset values within asset class.

Liquidity Risk, the risk that the Fund cannot meet its immediate liabilities because it has insufficient liquid assets. This is controlled by the regular estimation of cash flow to ensure that sufficient cash balances are available. By holding the majority of its assets in liquid assets such as equities and bonds, unexpected cash flow requirements can be met by the realisation of assets. Liquidity risk is also moderated by the Fund continuing to have a surplus of contributions receivable over pensions payable.

Transition Risk, the risk of incurring unexpected costs or losses when assets are transferred between asset classes. When carrying out significant transitions the Pensions Sub-committee will take professional advice and consider the appointment of specialist transition managers.

Pension Fund Sub-committee and Pensions Board

In line with scheme regulations, and the respective terms of reference for the Pension Fund Sub-committee and Pensions Board, the group met concurrently on four occasions during 2025/2026.

Training activity for the members of the Pension Fund Sub-committee and Pension Board was undertaken during the financial year 2025/2026, in accordance with the agreed training plan, to enable Councillors charged with the governance of the Fund to execute their role as quasi-trustees effectively.

Acknowledgement

We would like to take this opportunity to thank our colleagues in the Enterprise & Resources Service and the members of the Pension Fund Sub-committee and the Pensions Board for their help and co-operation in managing the financial affairs of the Pension Fund.

Gareth Waterson, BAcc, CA
Section 95 Officer

Councillor Heather Woodbridge
Leader

Oliver D Reid
Chief Executive

Statement of Responsibilities for the Annual Accounts

Responsibilities of the Orkney Islands Council as Administering Authority

The Council is required to:

• Make arrangements for the proper administration of the financial affairs of the Orkney Islands Council Pension Fund (the Fund) and to secure that one of its officers has the responsibility for the administration of those affairs under Section 95 of the Local Government (Scotland) Act 1973. In this Council, that officer is the Director of Enterprise & Resources.
• Manage the affairs of the Fund to secure economic, efficient, and effective use of resources and safeguard its assets.
• Ensure the Annual Accounts are prepared in accordance with legislation, namely the Local Authority Accounts (Scotland) Regulations 2014 and the Local Authority (Capital Finance and Accounting) (Scotland) (Coronavirus) Amendment Regulations 2021, and, so far as is compatible with that legislation, in accordance with proper accounting practices under Section 12 of the Local Government in Scotland Act 2003.
• Approve the Annual Accounts for signature.

Signed on behalf of Orkney Islands Council:

Councillor Heather Woodbridge
Leader

The Director of Enterprise & Resources Service Responsibilities

The Director of Enterprise & Resources is responsible for the preparation of the Annual Accounts in accordance with proper practices as required by legislation and as set out in the CIPFA/LASAAC Code on Local Authority Accounting in the United Kingdom (the Code).

In preparing these Annual Accounts, the Director of Enterprise & Resources 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 Code, in so far as it is compatible with legislation.

The Director of Enterprise & Resources Service has also:

• Kept adequate accounting records which were up to date.
• Taken reasonable steps for the prevention and detection of fraud and other irregularities.

I certify that the annual accounts give a true and fair view of the financial position of the Orkney Islands Council Pension Fund as at 31 March 2026, and of its transactions for the year ended 31 March 2026.

Gareth Waterson, BAcc, CA
Section 95 Officer

Remuneration Report

The Pension Fund does not directly employ any staff. We have therefore not included a remuneration report within the Annual Report.

All staff are employed by Orkney Islands Council, and their costs reimbursed by the Pension Fund.

The Councillors, who are members of the Pension Fund Sub-committee and Pension Board are also remunerated by Orkney Islands Council.

Details of Councillor and Senior Employee remuneration can be found in the statement of accounts of Orkney Islands Council on the Council’s website:

https://www.orkney.gov.uk/your-council/finances/budgets-and-accounting/statement-of-accounts/

The Statement of Accounts of Orkney Islands Council does not form part of the Pension Fund’s Annual Report and Accounts.

Annual Governance Statement

Scope of Responsibility

The Orkney Islands Council acts as Administering Authority for the Orkney Islands Council Pension Fund. The Council is responsible for ensuring that its business is conducted in accordance with the law and proper standards, and that public money is safeguarded, properly accounted for, and used economically, efficiently, and effectively.

The Council has a statutory duty to make arrangements to secure best value under the Local Government in Scotland Act 2003.

In discharging this overall responsibility, the Council is responsible for putting in place proper arrangements for the governance of its affairs and facilitating the effective exercise of its functions. This includes arrangements for the management of risk.

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)/Society of Local Authority Chief Executives and Senior Managers (SOLACE) framework “Delivering Good Governance in Local Government”. The Code is available on the Council’s website.

Purpose of the Governance Framework

The governance framework comprises the systems and processes, and cultures and values, by which the Council is directed and controlled, and the activities used to engage with and lead the community. It enables the Council to monitor the achievement of its strategic objectives and to consider whether those objectives have led to the delivery of appropriate, cost-effective services.

The system of internal control is a significant part of that framework and is designed to manage risk to an acceptable level, and provide reasonable, but not absolute, assurance that the policies, aims and objectives can be delivered.

The governance framework has been in place for the year ended 31 March 2026 and up to the date of approval of the Annual Accounts.

Governance Framework

1. Behaving with integrity, demonstrating strong commitment to ethical values, and respecting the rule of law.
2. Ensuring openness and comprehensive stakeholder engagement.
3. Defining outcomes in terms of sustainable economic, social, and environmental benefits.
4. Determining the interventions necessary to optimise the achievement of the intended outcomes.
5. Developing the entity’s capacity, including the capability of its leadership and the individuals within it.
6. Managing risks and performance through robust internal control and strong public financial management.

The Pension Fund is governed by the Local Government Pension Scheme (Scotland) Regulations. These include requirements for the preparation and production of a number of key policy documents including a Valuation Report, a Funding Strategy Statement, and a Statement of Investment Principles.

Review of Effectiveness

Orkney Islands Council has put in place appropriate management and reporting arrangements to enable it to satisfy itself that its approach to corporate governance is adequate and effective in practice.

The officers responsible for administering the Pension Fund respond to findings and recommendations of external audit, scrutiny and inspection bodies and the Council’s independent internal audit section. The Pension Fund Sub-committee is integral to overseeing independent and objective assurance and monitoring improvements in internal control and governance.

Administering Authority

Orkney Islands Council is the Administering Authority for the Local Government Pension Scheme set up for the Orkney Islands geographic area.

The Pension Fund Sub-committee has responsibility to discharge all functions and responsibilities relating to the Council’s role as administering authority for the Orkney Islands Council Pension Fund in terms of the Local Government (Scotland) Act 1994, the Superannuation Act 1972 and the Public Service Pensions Act 2013.

The Council has delegated management of the investments of the Pension Fund to the Pension Fund Sub-committee, which fulfils the role of Fund Manager, and has established a Pension Board which is the body responsible for assisting the Fund Manager in relation to compliance with scheme regulations and the requirements of the Pension Regulator.

Regulatory Framework

The Pensions Regulator is the UK regulator of work-based pension schemes. It works with trustees, employers, pension specialists and business advisers, giving guidance on what is expected of them.

The Scottish Public Pensions Agency (SPPA) is responsible for regulating the LGPS in Scotland and the Council administers the pension scheme in accordance with guidance and regulations issued by the SPPA.

The Orkney Islands Council Pension Fund is open to all employees of scheduled bodies except those whose employment entitles them to belong to another statutory pension scheme, for example teachers. Employees of admitted bodies can join the scheme, subject to those bodies meeting the statutory requirements, and on such terms and conditions as the Council, as Administering Authority, may require. A list of scheduled and admitted bodies is attached as Annex 1.

The Pension Fund Sub-committee is a formal sub-committee of Orkney Islands Council’s Policy and Resources Committee.

Financial affairs are conducted in compliance with the Council’s Financial Regulations which are reviewed and updated on a regular basis.

Funds are invested in compliance with the Fund’s Statement of Investment Principles.

Pension Fund Sub-committee and Pension Board

The members of the Pension Fund Sub-committee together with the Pension Board act as quasi-trustees and oversee the management of the Orkney Islands Council Pension Fund.

Their overriding duty is to ensure the best possible outcomes for the Fund, its participating employers and scheme members.

The Pension Fund Sub-committee comprises seven members of the Council:

• Leader, Chair of Policy and Resources Committee.
• Deputy Leader, Vice Chair of Policy and Resources Committee.
• Five other elected members of the Council appointed by the Policy and Resources Committee.

The Fund Actuary, the Independent Investment Consultant, the Director of Enterprise and Resources, the Service Manager (Payroll and Pensions) and the Head of Corporate Governance, or their nominated representatives, also attend meetings of the Pension Fund Sub-committee as advisers.

The Pension Fund Sub-committee meets at least quarterly. Additional meetings are called as appropriate and papers and minutes are publicly available on the Council’s website, unless they have been considered as exempt business.

Membership of the Pension Board consists of equal numbers made up of four trade union representatives and employer representatives, drawn from Orkney Islands Council and scheduled or admitted bodies who are members of the Pension Fund.

The Pension Board meets at least quarterly. A majority of either side, trade union or employer representatives, may requisition a special meeting of the Pension Board in exceptional circumstances.

While the statutory roles and functions of the Pension Fund Sub-committee and the Pension Board are separate, the normal practice is that both bodies meet at the same time to consider the same agenda, with the Chair of the Pension Fund Sub-committee chairing the concurrent meeting.

During the year 2025/26 there was no disagreement. However, if the Pension Fund Sub-committee and the Pension Board cannot reach joint agreement on any matter:

• The Pension Board may refer a decision of the Pension Fund Sub-committee back for further consideration if at least half of its members agree and any defined grounds are met.
• If there is no agreement after the matter has been referred back, the decision of the Pension Fund Sub-committee stands and the difference in view will be published and notified to the Scottish LGPS Advisory Board.
• The Scottish LGPS Scheme Advisory Board may consider and take a view on the matter and, if appropriate, provide advice to the Scheme Manager or the Pension Board.

Administration and Financial Management of the Fund

The Council’s Director of Enterprise and Resources is the Officer with responsibility to ensure proper administration of the Council’s financial affairs in terms of Section 95 of the Local Government (Scotland) Act 1973.

The Director of Enterprise and Resources is responsible for:

• The financial accounting of the Fund.
• The preparation of the Pension Fund Annual Report and Accounts.
• Being the principal advisor on management of investments to the Council in its capacity as Trustee to the Fund and as the Fund’s Administering Authority.

The day-to-day management of the investment activities of the Fund is administered by the Corporate Finance Team within the Enterprise and Resources Service.

The pension benefits policy oversight and day-to-day administration for the Fund is administered by the Pensions Team within the Enterprise and Resources Service.

The annual accounts of the Fund are subject to external audit. The auditor is appointed by Audit Scotland.

Professional Advisers and External Service Providers

Hymans Robertson is appointed to act as Actuary and Investment Consultants to the Fund. The services provided include advice on investment strategy, funding level, and actuarial valuations. Hymans Robertson also provides independent performance measurement services for the Fund.

The Fund’s appointed investment managers have responsibility for the selection, retention, and disposal of individual investments. Where appropriate, they also implement the Pension Fund Sub-committee’s policy in relation to socially responsible investment and corporate governance. All fund managers are required to be signatories of the United Nations’ Principles for Responsible Investment.

The Bank of New York is the Fund’s appointed global custodian and is responsible for the safekeeping of the assets including the processing of transactions and submission of tax claims.

Internal and External Control and Review

The system of internal financial controls is based on a framework of delegation and accountability for officers and elected members embodied in procedural Standing Orders, Financial Regulations, the Scheme of Administration, and the Scheme of Delegation to Officers.

This includes:

• Comprehensive accounting systems that record income and expenditure for both member and investment activities.
• Regular reviews of investment reports that measure investment returns against agreed benchmarks.
• Regular reviews of investment manager reports that measure performance against agreed targets.
• Independent performance reviews of the Fund by the Fund’s investment consultant and performance monitoring services provider.

The system can provide only reasonable and not absolute assurance that assets are safeguarded, transactions authorised and properly recorded, and that material errors or irregularities are either prevented or would be detected within a timely period.

The Pensions team within the Payroll and Pension section consists of 3.7 full-time equivalents.

The Director of Enterprise and Resources, as Section 95 officer for the Council as Administering Authority, is responsible for ensuring the proper administration of the financial affairs of the Pension Fund.

The Chief Internal Auditor reports to the Monitoring and Audit Committee and functionally to the Head of Corporate Governance, who is also the Council’s Monitoring Officer.

Counter Fraud and Anti-Corruption

Effective counter fraud and anti-corruption arrangements are developed and maintained in accordance with the Code of Practice on Managing the Risk of Fraud and Corruption.

The increased risk of fraud and scams is also being managed on an ongoing basis, focusing on staff support, communication of potential scams and close monitoring of checks prior to any transfers out being completed.

Risk Management

The Fund’s Risk Register was last reviewed and updated at the concurrent meetings of the Pension Fund Sub-committee and the Pension Board on 25 February 2026.

The main changes identified in the last review were as follows:

• The likelihood of the risk regarding financial risks arising from UK and geopolitical uncertainty which could impact the Fund’s Assets and Liabilities has been increased to 5, with the impact maintained at 3.
• The likelihood of the risk regarding the Funding Strategy only being updated following a triennial actuarial valuation has been increased to 4, with the impact remaining at 2.
• The likelihood of the risk regarding Fund members electing to transfer all or part of their pension entitlement much earlier than projected due to new pension access reforms has been decreased to 3, with the impact remaining at 1.
• The risk regarding closure of facilities due to a pandemic has been renamed to Closure of facilities. The likelihood and impact remain unchanged.

The full risk register is available at:

https://www.orkney.gov.uk/your-council/finances-services/pensions/pension-fund-sub-committeepension-board/

Significant Governance Issues

A review of effectiveness of the governance framework has not identified any significant governance issues or control weaknesses in the Pension Fund’s governance arrangements.

The following issue was highlighted in the Audit Report for financial year 2024/25:

• It was noted that there is only one nominal ledger code for the whole Baillie Gifford portfolio. The movement on investments table did not correctly reflect the change in market value attributed to the cash held in foreign currency.

Recommendation – A nominal code is set up for each portfolio, equities, cash, and pooled funds. The cash postings are made between the codes, and the cash balance is reconciled to the investment manager records at end of each quarter.

Management Response – The point was noted but given that Baillie Gifford is reported internally as a separate mandate for the whole portfolio, it is preferred to keep the nominal ledger in its current format. However, records will be maintained on a quarterly basis that make the transactions in the portfolio clearer and identify the change in market value across the different asset classes.

Update – The quarterly records have been updated to comply with this audit point.

Access to Information

Pension Fund Sub-committee papers, minutes and the Fund’s Annual Audit Report and Accounts are available via the Council’s website:

https://www.orkney.gov.uk/

Opinion

It is our opinion that reasonable assurance can be placed upon the adequacy and effectiveness of the Council’s internal financial control systems during the year ended 31 March 2026.

Councillor Heather Woodbridge
Leader

Oliver D Reid
Chief Executive

Governance Compliance Statement

The Regulations that govern the management of LGPS funds in Scotland require that a Governance Compliance Statement be published. The following compliance statement sets out the extent to which the Orkney Islands Council Pension Fund governance arrangements comply with best practice.

Gareth Waterson, BAcc, CA
Section 95 Officer

Councillor Heather Woodbridge
Leader

Oliver D Reid
Chief Executive

Annual Accounts 2025/2026

Pension Fund Account

The Pension Fund Account sets out all income and expenditure of the Pension Fund.

Net Assets Statement as at 31 March 2026

The Net Assets Statement sets out the value, as at the statement date, of all assets and current liabilities of the Fund. The net assets of the Fund, assets less current liabilities, represent the funds available to provide for pension benefits as at 31 March 2026.

The Fund Account and Net Assets Statement do not show any liability to pay pensions or other benefits in the future. The liability to pay pensions is detailed in Note 19, Actuarial Present Value of Promised Retirement Benefits.

The unaudited accounts were issued on 30 June 2026.

Gareth Waterson, BAcc, CA
Section 95 Officer

Notes to the Annual Accounts

1. Description of Fund

a) The Local Government Pension Scheme

The Local Government Pension Scheme is a funded defined benefit scheme, established under the Superannuation Act 1972, with pensioners receiving index-linked pensions. It is administered by Orkney Islands Council in accordance with the Local Government Pension Scheme (Scotland) Regulations 2018, as amended, and was contracted out of the State Second Pension until 6 April 2016 when the new State Pension was introduced.

The Pension Fund is subject to a triennial valuation by an independent, qualified actuary, whose report indicates the required future employer’s contributions.

b) Membership Details

Under the Local Government Pension Scheme, member contributions are paid on a tiered basis, the contribution rate being determined by the amount of salary falling into each earnings tier.

Eligibility to join the scheme

Orkney Islands Council employees with a contract for 3 months duration or more are automatically entered into the LGPS. Employees with a contract of less than 3 months duration will be automatically enrolled into the LGPS if they satisfy the automatic enrolment criteria, however they can opt in if they do not meet the automatic enrolment criteria.

A person employed by a community admission body, or a person employed by a transferee admission body, is eligible to be a member if the person, or class of employees to which the person belongs, is designated in the admission agreement by the body as being eligible for membership of the Scheme.

Employees of community admission bodies and transferee admission bodies are also enrolled into the Local Government Pension Scheme if they satisfy the auto enrolment criteria.

The following table gives details of the various bodies’ membership.

c) Benefits

Prior to 1 April 2015, pension benefits under the LGPS were based on final pensionable pay and length of pensionable service. From 1 April 2015, the scheme became a career average scheme, whereby members accrue benefits based on their pensionable pay in that year at an accrual rate of 1/49th. Accrued pension is uprated annually in line with the Consumer Prices Index.

A range of other benefits are also provided including early retirement, disability pensions, and death benefits, as explained on the LGPS website:

https://www.scotlgpsmember.org/

2. Basis of Preparation of the Accounts

The Accounts summarise the Pension Fund’s transactions for the 2025/2026 financial year and its position at year-end as at 31 March 2026.

The accounts for the Fund have been prepared in accordance with the Code of Practice on Local Authority Accounting in the United Kingdom 2025/2026, which is based upon International Financial Reporting Standards (IFRS), as amended for the UK public sector.

The accounts have been prepared on an accruals basis and do not take account of liabilities to pay pensions and other benefits after the year end. However, the actuarial position does account for such obligations. This is disclosed on page 12 of the accounts and should be read in conjunction with the Actuarial Statement (Annex 2).

The accounts have been prepared on a going concern basis. The going concern concept assumes that the Pension Fund has adequate resources to realise its assets and meet benefit obligations in the normal course of affairs for at least twelve months from the date of approval of these Accounts.

3. Statement of Accounting Policies

3.1 Contributions Income

Normal contributions, both from the members and employers, are accounted for on an accruals basis as follows:

• Employee contribution rates are set in accordance with LGPS regulations, using common percentage rates for all schemes that rise according to pensionable pay.
• Employer contributions are set at the percentage rate recommended by the Fund Actuary for the period to which they relate.

Employers’ augmentation contributions and pension strain costs are accounted for in the period in which the liability arises. Any amounts due in the year but unpaid will be classed as current financial assets.

3.2 Transfers to and from Other Schemes

Transfer values represent the amounts receivable and payable during the year for members who have either joined or left the Fund during the financial year and are calculated in accordance with the LGPS Regulations.

Individual transfers in/out are accounted for when receivable/payable, which is normally when the member liability is accepted or discharged.

Transfers to the Fund from members wishing to use the proceeds of their additional voluntary contributions to purchase scheme benefits are accounted for on a receivables basis and are included in Transfers in.

Bulk transfers are accounted for on an accruals basis in accordance with the terms of the transfer agreement.

3.3 Investment Income

1. Income from fixed interest, index-linked securities and other interest receivable is taken into account on an accruals basis.
2. Income from all other marketable securities is taken into account on the date when stocks are quoted ex-dividend.
3. Distributions from pooled funds are recognised at the date of issue. Where income generated by the pooled investment vehicles is not distributed but is retained within the funds this is reflected in the change in market value of the units.
4. Changes in the value of investments are recognised as income and comprise all realised and unrealised profit/losses during the year.

3.4 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, providing that payment has been approved.

3.5 Management Expenses

The Fund discloses its management expenses in line with the CIPFA guidance Accounting for Local Government Pension Scheme Management Expenses (2016).

Management expenses include direct management fees from external fund managers appointed to manage segregated portfolios of investments, indirect management charges levied on pool funds, transaction costs and expenses associated with the administration and governance of the Fund.

3.6 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.

3.7 Financial Instruments

Investment assets are included in the accounts on a fair value basis as 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 in the fund account.

3.7.1 Market quoted securities

Market quoted securities are valued at bid market prices on the final day of the accounting period.

3.7.2 Fixed interest securities

Fixed interest securities are valued at a market value based on current yields at 31 March 2026.

3.7.3 Pooled investments

Pooled investments are valued at closing bid prices where bid and offer prices are published or closing single price where single price is published, as provided by the investment manager. Shares in other pooled arrangements have been valued at the latest available net asset value.

3.7.4 Unquoted equity, debt and infrastructure

Unquoted equity, debt and infrastructure asset valuations are provided by fund managers following independent validation.

3.8 Foreign Currency

Income and expenditure arising from transactions denominated in a foreign currency are translated into pound sterling at the exchange rate in operation on the date on which the transaction occurred.

3.9 Cash and Cash Equivalents

Cash is represented by cash in hand and deposits with financial institutions repayable without penalty on notice of not more than 24 hours. Cash equivalents are investments that mature in less than three months from the date of acquisition and that are readily convertible to known amounts of cash with insignificant risk of change in value.

3.10 Recognition of Income and Expenditure

Activity is accounted for in the year in which it takes place, not simply when cash payments are made or received.

• Expenses in relation to services received are recorded as expenditure when the services are received rather than when payments are made.
• Dividend income is recognised when the right to receive payment is established.
• Where income and expenditure have been recognised but cash has not been received or paid, a debtor or creditor for the relevant amount is recorded in the Net Assets Statement.

3.11 Administrative Overheads

The Payroll and Pensions section of Orkney Islands Council is responsible for administering the Pension Fund. The Section receives an allocation of the overheads of the Council which is based on its direct cost and the amount of central services consumed.

3.12 Prior Period Adjustments, Changes in Accounting Policies and Estimates and Errors

Prior period adjustments may arise as a result of a change in accounting policies or to correct a material error. Changes in accounting estimates are accounted for prospectively.

Changes in accounting policies are only made when required by proper accounting practices or where the change provides more reliable or relevant information about the effect of transactions, other events and conditions on the Fund’s financial position or financial performance.

Material errors discovered in prior period figures are corrected retrospectively by amending opening balances and comparative amounts for the prior period.

3.13 Acquisition Cost

Any acquisition costs of investments are included in the book cost of the investment.

3.14 Critical Judgements in Applying Accounting Policies

The Pension Fund liability is calculated every three years by the appointed actuary. The judgements which have the greatest impact on pension fund liabilities are those around the discount rate, the inflation rate, and the life expectancy of members.

3.15 Assumptions Made About the Future and Other Major Sources of Estimation and Uncertainty

The Accounts contain estimated figures that are based on assumptions made by the Pension Fund about the future or that are otherwise uncertain. Estimates are made taking into account historical experience, current trends, and other relevant factors. However, actual results could be materially different from the assumptions and estimates.

The sensitivities regarding the principal assumptions used to measure the scheme liabilities are set out below:

3.16 Accounting Standards that were Issued but Not Yet Adopted

The following new or amended standards have been published but not yet adopted:

• FRS 102 Amendments – The Financial Reporting Standard applicable in the UK and Republic of Ireland, amendments to Heritage assets.
• IFRS 9 and IFRS 7 – Amendments to the Classification and Measurement of Financial Instruments.
• Annual improvements to IFRS accounting standards – Volume 11.
• IFRS 9 and IFRS 7 – Amendments to the Contracts Referencing Nature-dependent Electricity.

These amendments are not expected to have a significant impact on the Pension Fund.

3.17 Events after the Balance Sheet

Events after the net assets statement date 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.

• 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, but where a category of events would have a material effect, disclosure is made in the notes.

The annual accounts were signed by the Director of Enterprise & Resources on 30 June 2026. Events taking place after the date of authorisation for issue have not been reflected in the accounts.

4. Analysis of Contributions Receivable

5. Transfers In

Transfers into the Fund during 2025/2026 were £1.466m, compared with £1.571m in 2024/2025. This represents the total of transfer values in respect of individual members joining the scheme.

6. Analysis of Benefits Payable

7. Payments to and on Account of Leavers

8. Management Expenses

9. Investment Income

10. Change in the Market Value of Investments

11. Analysis of Investments

As at 31 March 2026 the market value of the assets under management is as follows:

The following table provides an analysis of investments by fund manager:

12. Concentration of Investments

Investments increased in value to £568.5m as at 31 March 2026, compared with £528.9m in 2025, a movement of £39.6m.

During 2025/2026, sales of investments totalled £132.3m and purchases totalled £140.2m, including £16.7m and £23.2m respectively relating to the transition to the revised investment strategy.

The following individual investments exceed 5% of the total value of the net assets of the Pension Fund at 31 March 2026:

13. Reconciliation of Movements in Investments

2025/2026

2024/2025

14. Fair Value Hierarchy

Assets and liabilities have been classified into three levels, according to the quality and reliability of information used to determine fair value.

Level 1

Assets and liabilities at Level 1 are those where fair values are derived from unadjusted quoted prices in active markets for identical assets or liabilities. The products classified as Level 1 are comprised of quoted equities.

Level 2

Assets and liabilities 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 based on observable data.

Level 3

Assets and liabilities at Level 3 are those where at least one input that could have a significant effect on the instruments’ valuation is not based on observable market data.

There have been no transfers between Levels 1 and 2 during 2025/2026.

Sensitivity of Assets Valued at Level 3

The underlying assets in the private debt fund are a series of privately originated loans. The underlying assets in the infrastructure fund are high quality, essential and long-duration infrastructure. The potential movements of +/- 7.4% and +/- 14.6% reflect the extent to which this value could vary based on changes in short-term interest rates, inflation, profitability and the likelihood of companies repaying loans.

15. Financial Instruments

The following categories of financial instrument are carried in the Net Assets Statement:

16. Income, Expenses, Gains and Losses

All realised gains and losses arise from the sale or disposal of financial assets that have been derecognised in the annual accounts. The Fund has not entered into any financial guarantees that are required to be accounted for as financial instruments.

17. Risk and Risk Management

The Fund’s primary long-term risk is that the Fund’s assets fall short of its liabilities, namely promised benefits payable to members. 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, interest rate risk and credit risk to an acceptable level. In addition, the Fund manages its liquidity risk to ensure there is sufficient liquidity to meet forecast cash flows.

17.1 Market Risk

Market risk is the risk of loss from fluctuations in equity and commodity 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.

Other price risk

Other price risk represents the risk that the value of a financial instrument will fluctuate as a result of changes in market prices.

The Fund is exposed to share and derivative price risk. The Fund’s investment managers mitigate this price risk through diversification.

17.2 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.

The analysis shows the effect on the net assets available to pay benefits of a 1% change in interest rates:

17.3 Currency Exposure 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 Council considers the likely volatility associated with foreign exchange movements to be 8.7%.

17.4 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 Fund has had no experience of default or uncollectable deposits over the past five financial years. The Fund’s cash holding under its treasury management arrangements at 31 March 2026, including current account cash, was £0.571m.

17.5 Liquidity Risk

Liquidity risk represents the risk that the Fund will not be able to meet its financial obligations as they fall due. The Council therefore takes steps to ensure that the Pension Fund has adequate cash resources to meet its commitments.

The Fund defines liquid assets as assets that can be converted to cash within three months. Illiquid assets are those which will take longer than three months to convert into cash. As at 31 March 2026, the Fund had illiquid assets of £92.533m.

17.6 Refinancing Risk

The key risk is that the pension fund will need to replenish a significant proportion of its financial instruments at a time of unfavourable interest rates. The Fund does not have any financial instruments that have a refinancing risk as part of its investment strategy.

18. Funding and Valuation Note

The Fund’s Actuary undertakes a funding valuation every three years. The actuarial valuation assesses the health of the fund and provides a check that the funding strategy and assumptions used are appropriate. It also sets the future rates of contributions payable by employers.

The most recent full actuarial valuation by Hymans Robertson was to 31 March 2023. The next valuation will take place as at 31 March 2026.

The funding strategy objectives are to:

• Take a prudent long-term view to secure the regulatory requirement for long-term solvency.
• Use a balanced investment strategy to minimise long-term cash contributions from employers.
• Where appropriate, ensure stable employer contribution rates.
• Reflect different employers’ characteristics to set their contribution rates.
• Use reasonable measures to reduce the risk of an employer defaulting on its pension obligations.

The aim is to maintain 100% solvency over a period of 20 years and to provide stability in employer contribution rates.

At the 2023 actuarial valuation, the Fund was assessed as 164% funded. This corresponded to a surplus of £188m.

The mortality assumptions used and applied to all members are based on the Self-Administered Pension Schemes year of birth tables with no further improvements in lifespans estimated from 2020.

19. Actuarial Present Value of Promised Retirement Benefits

The Fund’s Actuary undertakes a valuation of the Fund’s liabilities to pay future retirement benefits. This is calculated in line with IAS 19 every year using the same base data as the triennial funding valuation, rolled forward to the current financial year and taking into account changes in membership numbers and updated assumptions.

The actuarial present value of promised retirement benefits at 31 March 2026 was £340m, compared with £326m in 2025.

This figure is used for statutory accounting purposes by Orkney Islands Council Pension Fund and complies with the requirements of IAS 26 Accounting and Reporting by Retirement Benefit Plans.

Financial Assumptions

Longevity Assumptions

Future pensioners are assumed to be aged 45 as at the last formal valuation.

20. Current Assets

21. Current Liabilities

22. Code of Transparency

The Code of Transparency enables a greater understanding of the investment process and better cost management through the fund managers’ disclosure of transaction costs.

2025/2026

2024/2025

The nature of the transaction cost groups are as follows:

• Transaction Taxes – includes stamp duty and any other financial transaction taxes.
• Broker Commissions – payments for execution services, including exchange fees, settlement fees and clearing fees.
• Implicit Costs – indirect costs associated with buying and selling securities, being an estimate of market impact.
• Indirect Transaction Costs – transaction costs incurred within pooled funds when they buy and sell their underlying investments.

23. Audit Fees

In 2025/2026 the agreed audit fee for the year was £28,000 (2024/2025: £26,800).

24. Agency Arrangements

The Orkney Islands Council Pension Fund pays discretionary pensions to former employees of Orkney Islands Council who were awarded compensatory added years in accordance with the Orkney Islands Council’s Early Retirement and Severance Scheme, but subject to limitations set out in the Local Government (Discretionary Payments and Injury Benefits) (Scotland) Regulation 1998.

The amounts paid are not included within the Fund Account but are provided as a service and fully reclaimed from the Council. The total amount of these payments was £0.235m in 2025/2026 (2024/2025: £0.240m).

Members of the Fund who elected before 1 April 2008 to purchase added years of membership can continue to do so unless the member elects to cease the contract.

25. Statement of Investment Principles and Funding Strategy Statement

The Council as Administering Authority approved its current Statement of Investment Principles in November 2022. The Statement defines the Fund’s operational framework insofar as investments are concerned.

The Funding Strategy Statement defines how the Fund intends to meet its financial obligations and was effective from 22 November 2023.

Both documents are available on the Council website and are also available on request from the Council’s Head of Finance.

26. Stock Lending

In accordance with the Statement of Investment Principles 2022, stock lending is not permitted within any of its segregated investment mandates. As at 31 March 2026 no stock had been released to a third party under a stock lending arrangement.

27. Related Party Transactions

Orkney Islands Council Pension Fund is administered by Orkney Islands Council. The Council incurred costs of £0.604m in relation to administration of the Fund and was subsequently reimbursed by the Fund for these expenses. The Fund had a balance due from Orkney Islands Council of £0.772m as at 31 March 2026.

The Treasury Management section of the Council acts on behalf of the Pension Fund to manage the cash position held in the Pension Fund bank account. During the year, the average balance in the Pension Fund bank account was £274,384.47 and interest of £114,927.74 was earned over the year.

The Council is also the single largest employer of members of the Pension Fund and contributed £8.651m to the fund in 2025/2026.

All the members of the Pensions Sub-committee and the members of the Pensions Board are active members or pensioner members of the pension scheme. There were no declarations of interest intimated at the meetings held during 2025/2026.

27A. Key Management Personnel

28. Additional Voluntary Contributions

Under Inland Revenue rules, scheme members are permitted to make contributions towards retirement and death in service benefits in addition to those which they are required to make as members of the Local Government Pension Scheme.

During the year 2025/2026 member contributions amounted to £0.693m. The value of AVC investments increased by £0.332m to £3.040m as at 31 March 2026, excluding the final bonus.

29. Contingent Liabilities and Contractual Commitments

McCloud Judgement

An allowance for the estimated impact of the McCloud judgement is included within the funding valuation position.

Virgin Media Case

No additional allowance has been made for the Virgin Media vs NTL Pension Trustees II Limited ruling as it currently only applies to the named private sector pension scheme.

Other Court Cases

The following court cases may also impact LGPS benefits in the future:

• Walker
• O’Brien

These are unlikely to be significant judgements in terms of impact on the pension obligations of a typical employer. As a result, there has been no allowance made for the potential remedies to these judgements.

Capital Commitments

As at 31 March 2026, as part of the transitioning arrangements to the revised investment strategy, the Fund had contractual commitments to invest up to £1.9m and £5.1m across two new mandates to Private Debt.

The onboarding to a new Private Loan Perpetual Fund was completed in March 2026 with a contractual commitment of £80.0m. Drawdowns for this new fund will commence during 2026/27 and will be funded from within the Fund’s portfolio of investments.

Independent Auditor’s Report

Independent Auditor’s Report to the Members of Orkney Islands Council as administering authority for the Orkney Islands Council Pension Fund and the Accounts Commission.

Annex 1 – Pension Fund Sub-committee, Pension Board, Scheduled and Admitted Bodies

Pension Fund Sub-committee Members

• Councillor A Cowie
• Councillor L Hall
• Councillor S Heddle
• Councillor R King
• Councillor K Leask
• Councillor M Thomson
• Councillor H Woodbridge

Pension Board Members

• Councillor G Bevan
• Councillor D Dawson
• Councillor O Tierney

Union Representatives

• K Kent – Unison
• E Millar – Unite, retired on 29/07/2025
• E Swanney – Unison
• M Vincent – GMB

Employer Representative

• K Ritch – Orkney Ferries Ltd

Scheduled Bodies

• Orkney Islands Council

Admitted Bodies — Active

• Orkney Ferries Limited
• Pickaquoy Centre Trust
• Orkney Islands Property Development Limited

Annex 2 – Actuarial Statement for 2025/2026

Orkney Islands Council Pension Fund Actuarial Statement for 2025/2026

This statement has been prepared in accordance with Regulation 55(1)(d) of the Local Government Pension Scheme (Scotland) Regulations 2018.

Description of Funding Policy

The funding policy is set out in the Administering Authority’s Funding Strategy Statement, dated October 2023. The key funding principles are:

• To ensure the long-term solvency of the overall Fund.
• To ensure the solvency of each individual employer’s share of the Fund.
• To maximise investment returns within reasonable and considered risk parameters.
• To minimise short-term changes in employer contribution rates.
• To ensure sufficient cash is available to meet liabilities as they fall due.
• To help employers manage their pension liabilities.
• Where practical and cost effective, to allow for different characteristics of different employers and groups of employers.

The Funding Strategy Statement sets out how the Administering Authority seeks to balance the conflicting aims of securing the solvency of the Fund and keeping employer contributions stable.

Funding Position at the Last Formal Funding Valuation

The most recent actuarial valuation was as at 31 March 2023. This valuation revealed that the Fund’s assets, valued at £480 million, were sufficient to meet 164% of the liabilities. The resulting surplus at the 2023 valuation was £188 million.

Individual employers’ contributions for the period 1 April 2024 to 31 March 2027 were set in accordance with the Fund’s funding policy.

Method

The liabilities were assessed using an accrued benefits method which takes into account pensionable membership up to the valuation date and makes an allowance for expected future salary growth to retirement or expected earlier date of leaving pensionable membership.

Assumptions

A market-related approach was taken to valuing the liabilities, for consistency with the valuation of the Fund assets at their market value.

The key demographic assumption was the allowance made for longevity. The life expectancy assumptions are based on the Fund’s Vita Curves with improvements in line with the CMI 2022 model, with a 25% weighting of 2022 data, a 0% weighting of 2021 and 2020 data, standard smoothing (Sk7), initial adjustment of 0.25% and a long-term rate of 1.50% p.a.

Future pensioners are currently aged 45.

Copies of the 2023 valuation report and Funding Strategy Statement are available on request from the Administering Authority to the Fund.

Experience over the Period Since 31 March 2023

Markets were disrupted by the ongoing war in Ukraine and inflationary pressures in 2023, impacting on investment returns achieved by the Fund’s assets. Asset performance improved in 2024 and early 2025; however increasing uncertainty in the geo-political environment, including US tariffs and the Middle East conflict, has caused significant short-term market volatility. Overall, the Fund’s investment returns since March 2023 have been positive.

Despite ongoing higher levels of inflation in the UK, resulting in cumulative LGPS benefit increases of 12.6% since 2023, and a slight increase in the Fund’s liabilities, the funding position is likely to be stronger than at the previous formal valuation at 31 March 2023.

The next actuarial valuation will be carried out as at 31 March 2026, and will be finalised by 31 March 2027. The Funding Strategy Statement will also be reviewed during the valuation, and a revised version will come into effect from 1 April 2027.

Allan Woodhouse FFA C.Act
For and on behalf of Hymans Robertson LLP
20 May 2026

Annex 3 – Glossary of Terms

Active Management

An investment management style that seeks to outperform by way of self-selected decisions on stock choice, timing of market incursions, or asset allocation. Compare this with Passive Management.

Asset Allocation

The division of the Fund’s assets between different classes of assets, for example, UK Equities, Japanese Equities, UK Bonds.

Balanced Management

An arrangement under which investments are spread over a range of asset classes at the manager’s discretion. Compare this with specialist management.

Growth Manager

An investment manager who fundamentally believes in picking stocks that he believes will achieve an above-average growth in profits. Compare this with value manager.

Mandate

An agreement between an investment manager and his client as to how investments are to be managed, specifying whatever targets and investment limitations are to apply.

Passive Management

A style of investment management that seeks performance equal to market returns or to some appropriate index.

Pooled Fund

A fund in which a number of investors hold units rather than owning the underlying assets. This is a useful way for smaller funds to diversify investments without exposing them to undue risks.

Return

The value of capital enhancement and income received by a fund in a year, expressed as a percentage of the opening value of the fund. If values fall, “Return” would be negative.

Risk

The danger or chance that returns will vary against benchmarks or targets. If risks are high the expected return should be higher still.

Segregated Fund

The management of a particular fund’s assets independently of those of other funds managed by the same investment house.

Specialist Management

The use of a number of managers, each specialising in a particular asset class. Such managers have no say in asset allocation, being only concerned with stock selection.

Value Manager

A manager who selects stocks that he believes to have potential that is not reflected in the price. This is sometimes caricatured as buying stock because it is cheap.

Vested/Non-Vested Obligations

Vested obligations refer to employee benefits that are not conditional on future employment. Non-vested obligations refer to employee benefits that are conditional on future employment.

Pension Fund Strain

The cost to employers of the early release of pension benefits.

Operating Surplus/Deficit

The surplus/deficit arising from dealing with members, employers and others directly involved in the scheme.

Additional Information

Key Documents Online

You can find further information on the website:

Pension Fund Annual Reports (orkney.gov.uk), including the following document:

• Annual Report and Accounts

Auditor: KPMG

Fund Actuary: Hymans Robertson

Banker: Royal Bank of Scotland

Investment Advisor: Hymans Robertson

Investment Custodian: Bank of New York Mellon

Performance Measurement: Hymans Robertson

Additional Voluntary Contributions (AVC) Manager: Prudential

Investment Managers:

• Baillie Gifford & Co
• Barings
• LGIM
• IFM

Contact Details

For further information and advice on administration, benefits and scheme membership please contact:

Robert Adamson
Pensions Manager
Telephone: 01856 873535, Extension 2108
Email: robert.adamson@orkney.gov.uk

Scheme members should have a copy of the “Employees’ Guide to the Local Government Pension Scheme Administered by the Orkney Islands Council” and can obtain their own copy of an Annual Report on request or visit the Orkney Islands Council Pension Fund website:

https://www.orkney.gov.uk/

For further information on the Fund’s Investments, please contact:

Gareth Waterson
Director of Enterprise & Resources
Telephone: 01856 873535, Extension 2521
Email: gareth.waterson@orkney.gov.uk

Erik Knight
Head of Finance
Telephone: 01856 873535, Extension 2127
Email: erik.knight@orkney.gov.uk