Statement of Investment Principles

Transcription

1 Statement of Investment Principles Cheshire Pension Fund June 2009 Page 1 of 30

2 Contents Section Page 1 Introduction 3 2 Effective Decision Making 4 3 Investment Objectives 8 4 Funding Strategy Statement 11 5 Asset Allocation 12 6 Expert Advice 14 7 Explicit Mandates 15 8 Performance Measurement 23 9 Corporate Governance Myners Compliance Review 27 Annex Myners Best Practice Principles 28 Page 2 of 30

3 1. Introduction 1.1 This is the Statement of Investment Principles (including the Myners compliance summary) for the Cheshire Pension Fund ( the Fund ). 1.2 It is maintained by the Director of Resources of Cheshire West and Chester Council (The Council) advised by the Pensions Committee and the Fund s Investment Consultant, Hymans Robertson. 1.3 The Statement describes the Council s arrangements for managing the Fund s investments and the basis for investment decision making by the Council. 1.4 The Statement provides information on the Fund s investment managers, custodian, and advisers along with details of the services they provide and how their performance in these roles is assessed. 1.5 For further information, please contact Stephan van Arendsen, Senior Manager, Corporate Finance or Nick Jones, Senior Accountant, at Cheshire West and Chester Council, HQ, Nicholas Street, Chester CH1 2NP. Page 3 of 30

4 2. Effective Decision Making 2. Effective Decision Making 2.1 Cheshire West and Chester Council (The Council) is the statutory administering authority for the Local Government Pension Scheme (LGPS) in Cheshire through the Cheshire Pension Fund (the Fund). 2.2 The Council is required to: - comply with the LGPS Regulations 2007/08 as amended and LGPS (Management and Investment of Funds) Regulations 1998 as amended; comply with all relevant Codes of Practice published by CIPFA; arrange the proper administration of the Fund s affairs and ensure that one of its officers has the responsibility for the administration of those affairs. That officer is the Director of Resources with day to day responsibility delegated to the Head of Finance; manage the affairs of the Fund to secure economic, efficient and effective use of resources and to safeguard the Fund s assets and approve the Fund s Statement of Accounts. Director of Resources Responsibilities 2.3 The Director of Resources specific responsibilities in managing the Fund s investments, after consulting with appointed external and internal advisers, are: investment of Fund moneys, including acquisition and management of land and property; disposal of Fund investments including the disposal of land and property; appointment of proxies to represent the Council at meetings at which the Council has a right to be represented as a result of Fund investments; the admission of employees of appropriate bodies to the Fund 2.4 The Director of Resources has delegated day to day responsibility for the Fund to the Head of Finance, advised by the Pensions Committee. 2.5 The Head of Finance is responsible for developing, monitoring and reviewing the strategic financial management of the Fund to ensure prudent management in accordance with national standards and optimisation of returns. In specific terms, the Head of Finance will:- review the Fund s strategic asset allocation at least annually, taking account of any changes in the Fund s liabilities and any guidance regarding tolerance of risk. This review will include consideration of any changes between broad investment classes (bonds, equities, property, cash, etc.); consider and monitor the reports produced by the Fund s investment managers and monitor the managers and the Fund s investment performance; Page 4 of 30

5 receive and review information from the managers on risk analysis, transaction costs, and details of corporate governance (including SRI, voting activity and engagement with management); consider, at least annually, the reports and performance achieved by any specialist property, private equity or other specialist investment managers; allocate new money between managers and in the event that assets need to be realised in order to meet the Fund s liabilities, the Head of Finance will determine the sources of this funding; review managers mandates, and their adherence to investment process, agreed risk ranges, and style. The explicit written mandate of the Fund s managers must be consistent with the Fund s overall objective and be appropriately defined in terms of performance target, risk parameters and timescale; consider the need for any changes to the Fund s investment manager arrangements (e.g. replacement, addition, termination) at least annually and be responsible for any changes to the terms of the mandates of existing managers; in the event of a proposed change of managers, evaluate the suitability of potential managers and be responsible for the appointment and termination of managers so as to achieve best value for the Fund; consider the Fund s approach to social, ethical, and environmental issues of investment, corporate governance, and shareholder activism. The Head of Finance is empowered to delegate responsibility for socially responsible investment, corporate governance and shareholder activism to the Fund s managers, in line with the Fund s policies; review the Fund s nominated AVC arrangements annually and be responsible for the appointment and termination of AVC providers; monitor the investment advice from the Fund s investment consultant and investment services obtained from other providers (e.g. custodian) at least annually and be responsible for the appointment and termination of provider; maintain the Fund s Statement of Investment Principles (SIP); conduct and conclude the negotiation of formal agreements with managers, custodians and other investment service providers. 2.6 The Head of Finance is required to take such professional advice as he considers necessary. Other Delegated Investment Decisions 2.7 Day to day management of the Fund s investments has been delegated to the respective investment managers. Page 5 of 30

6 Pensions Committee 2.8 To advise the Head of Finance in fulfilling these delegated responsibilities the Council has established the Pensions Committee (The Committee). The Pension Committee is made up of 11 members:- Cheshire West and Chester Council Members Cheshire East Council Members Warrington Borough Council Member Halton Borough Council Member Employee representative Councillor Brian Crowe Councillor Hilarie McNae Councillor Don Beckett Councillor Kate Birtwistle Councillor Peter Mason (Chairman) Councillor Frank Keegan Councillor Wesley Fitzgerald Councillor John Narraway Councillor Fiona Bruce Councillor Mike Wharton Mrs Olga Kokkinis 2.9 The Pension Committee s terms of reference are specified in the Council s published Standing Orders and are as follows: to determine the framework within which external organisations appointed to manage a proportion of the Pension Fund should operate. to review investment performance, making recommendations for any action that should be taken. in exceptional cases, to convene to discuss any investment matters needing special attention between meetings Any changes to the Pension Committee s constitution and membership require the agreement of the Council The Pension Committee meets quarterly and a minimum of three Committee members must be present for the meeting to be quorate. Pension Committee meetings are also attended by the Head of Finance, a representative of the Council s Legal Services and from the Investment Consultancy of Hymans Robertson In addition the Pension Committee s convenes at least twice yearly to receive training and updates on developments relating to the Fund, the LGPS and the wider pensions environment. All Pension Committee s members (and any designated substitutes) are expected to have or, for new members, to develop, sufficient expertise in investment matters to be able to conduct their Pension Committee s responsibilities and to interpret the advice which they receive. Pension Committee s members also attend external training courses as appropriate. Page 6 of 30

7 2.13 The Pension Committee s keeps Minutes and appropriate records of proceedings, and circulates Minutes in accordance with Council Standing Orders to the full Council. Copies of Pension Committee s minutes are published to stakeholders Page 7 of 30

8 3. Investment Objectives 3. Investment Objectives 3.1 The primary objective of the Fund is to provide pension and lump sum benefits for members on their retirement and/or benefits on death before or after retirement for their dependants, in accordance with LGPS Regulations. 3.2 The Council aims to manage the Fund so that, in normal market conditions, the assets of the Fund (at their realisable value) are sufficient to cover 100% of its liabilities. For this purpose, the liabilities are assessed on the basis prescribed in the LGPS Regulations. 3.3 The Fund is a defined benefit final salary pension scheme governed by the LGPS Administration Regulations Benefits for members in employment increase in line with scheme membership and with salaries. Benefits for preserved members and pensioners are increased in line with the annual retail price index. 3.4 LGPS Regulations require that an actuarial valuation of the Fund be conducted at least every three years. The last valuation of the Fund was as at 31 March The main purpose of the valuation is to review the financial position of the Fund and to determine the rate at which participating employers should contribute to ensure that the existing assets and future contributions will be sufficient to meet future benefit payments from the Fund. 3.5 In assessing the Fund s position the Actuary has adopted an approach which considers separately the benefits in respect of service completed before the valuation date ( past service ) and benefits in respect of service expected to be accrued by employed members after the valuation date ( future service ). This approach enables results to be analysed between; The past service funding level The extent to which the Fund s assets at the valuation date match the Fund s liabilities at the same date in respect of pensions in payment, deferred pensions, and liabilities for the completed service of employee members. The future service funding rate The level of employers contributions required (net of employee contributions) to meet the cost of benefits arising from membership earned after the valuation date. Page 8 of 30

9 3.6 The assumptions adopted by the Actuary at the 2007 valuation are set out below Valuation Assumptions Derived from Nominal Real Price Inflation (RPI) Market expectation of 3.2% long term future inflation as measured by the difference between yields on fixed and index-linked Government bonds as at the valuation date Pay increases Assumed to be 1.5% p.a. 4.7% 1.5% in excess of price inflation Gilt-based discount rate The yield on fixed-interest 4.5% 1.3% (nominal) and index linked (real) Government bonds Funding basis discount rate Assumed to be 1.6% p.a. above the yield on fixed interest Government bonds 6.1% 2.8% 3.7 Based on these assumptions and on the benefits accrued by Fund members the following table summarises the valuation results for the Fund at 31 March m Past Service liabilities Employee members 1,413 Deferred benefit members 294 Pensioners 1,096 Total Liabilities 2,804 Value of the Fund s assets 2,385 Past Service Deficit (419) Funding level % 85% Average employer contribution rate % of pensionable pay Future service 15.0 Past Service 4.5 Total rate The 2007 valuation showed that the past service funding level increased from 75% to 85% between the 2004 and 2007 valuations. This was largely due to the level of investment returns achieved by the Fund being higher than assumed in the 2004 valuation. This was sufficient to offset the increase in the value of liabilities from increases in life expectancy. Page 9 of 30

10 3.9 The Future Service funding rate also increased at the 2007 valuation after allowing for improvements in life expectancy The increase in the funding level allowed for a decrease in the common employers contribution rate from 20.0% to 19.5% The Fund s approach to meeting its liabilities and to setting employer contribution rates is set out in the Funding Strategy Statement (see also next section) Page 10 of 30

11 4. Funding Strategy Statement 4. Funding Strategy Statement 4.1 From April 2005 the Local Government Pension Scheme Regulations required all Funds to publish a Funding Strategy Statement (FSS). 4.2 The FSS is a summary of the Fund s approach to funding its pension liabilities and the resulting impact on employer contribution rates. 4.3 The key requirements relating to the FSS in the regulations are that: After consultation with all relevant interested parties involved with the Fund, the administering authority will prepare and publish their funding strategy. In preparing the FSS, the administering authority must have regard to: o FSS guidance produced by CIPFA o its statement of investment principles published under Regulation 9A of the Local Government Pension Scheme (management and o Investment of Funds) Regulations 1998 (as amended). The FSS must be kept under review, revised and published whenever there is a material change in either the policy on the matters set out in the FSS or the Statement of Investment Principles. The Fund s actuary must have regard to the FSS as part of the fund valuation process. 4.4 The latest version of the FSS for the Cheshire Pension Fund is available on the Cheshire Pension Fund website at: or from the Pension Section (see contact details at the end of this document) Page 11 of 30

12 5. Asset Allocation 5. Asset Allocation 5.1 The Fund has adopted a tailored asset allocation benchmark rather than a peer group benchmark. 5.2 The asset allocation benchmark sets out the mix of assets to be held in the Fund s portfolio of investments. A benchmark was set following the 2004 valuation and through the annual investment strategy meetings is subject to continuous review and amendment. 5.3 As at June 2009, the Fund has adopted the following asset allocation benchmark at total fund level. The more detailed specific benchmarks for the Fund s individual managers are shown later in this Statement. Proportion Benchmark Index % % Equities UK 25.0 FTSE All Share Overseas 37.0 Global (unconstrained) Global (unconstrained) North America Europe ex UK Japan Pacific ex Japan Emerging Markets MSCI World index FTSE World All World FTSE AWD N America FTSE AWD Europe ex UK FTSE AWD Japan FTSE AWD Asia Pac. ex Japan MSCI Emerging Markets Bonds 14.0 Merrill Lynch Sterling Broad Property 9.0 CAPS Property Private Equity 5.0 LIBID 7 Day Secured Loans 5.0 LIBOR 1 month Global Tactical Asset 3.0 LIBID 3 month Allocation Cash 2.0 LIBID 7 Day In setting the Fund benchmark, the Head of Finance and the Pensions Committee take account of the nature of the Fund s liabilities and the investment returns as assessed in the 2007 triennial valuation of the Fund s liabilities (as previously described). The benchmark review also considered any changes in investment market conditions since that valuation report. Page 12 of 30

13 5.5 In determining the mix of assets to be included in the benchmark, all the principal asset classes permitted within LGPS Regulations and listed in CIPFA Guidance were considered. 5.6 The revised benchmark also takes account of the levels of expected real returns from the different assets in which the Fund invests. These returns were based on advice received from the Fund s investment consultant (Hymans Robertson) in consultation with the Fund s investment managers. 5.7 The Council continues to collate information from peer group benchmarks for information purposes only. Risk 5.8 The asset allocation benchmark adopted by the Pension Committee for the Fund is designed to achieve the targeted return over the long term. The Pension Committee recognises that there will be periods when market conditions do not permit those assumptions to be met and that the benchmark needs to be kept under periodic review in order to confirm that it is still suitable for the purpose for which it was designed. 5.9 The mix and number of investment managers, the choice between active and passive management and where risk might best be exploited has been considered and is continuously reviewed by the Pension Committee In choosing the managers, one balanced tracking, three active equity managers, and three specialist fixed income managers, together with specific diversifying investments in property, private equity, GTAA and secured loans, the Pension Committee has considered and is prepared to tolerate, the potential risks associated with each individual manager s pursuit of out performance The Pension Committee has agreed risk tolerances with each manager which reflect their performance targets. Page 13 of 30

14 6. Expert Advice 6. Expert Advice 6.1 The Fund s appointed investment consultant is the Investment Practice of Hymans Robertson who was appointed in Hymans Robertson is also the Fund s actuarial adviser. 6.2 At the time Hymans Robertson were appointed, the Fund did not arrange separate tenders for actuarial and investment advice. 6.3 There is however a clear separation of duties within Hymans Robertson, in the provision of investment advice and actuarial services to the Fund in compliance with the Myners requirements (see also section 10) 6.4 Fixed fees have been agreed for regular activities (such as attendance at the Pension Committee and annual performance reviews). Additional work may be commissioned at agreed hourly rates or at negotiated fixed rates. Separate fees are charged and billed for investment and actuarial services. 6.5 In addition to the appointed investment consultant the Head of Finance and the Pensions Committee also seek advice (where relevant) from the Fund s external investment managers and custodian. No additional fees are incurred for this advice. Page 14 of 30

15 7. Explicit Mandates 7. Explicit Mandates 7.1 The proportion of the Fund s investments managed by external managers fluctuates in relationship to the relative returns of each asset class and also the returns achieved by the managers. The proportions managed as at 31 March 2009 are summarised below: Investment Manager Appointed Brief % of Fund Baillie Gifford & Co Nov 1993 Global Equities - active 19.6% Legal & General Nov 1993 Equities - tracking 16.4% GMO Dec 2005 Global equity - active 12.2% Rockspring 1989 Property 8.0% Henderson Global Investors Juy 2008 Fixed Income 7.2% Goldman Sachs Asset July 2008 Fixed Income 7.0% Management Baillie Gifford & Co Jan 2005 Long term global equities 6.1% Standard Life Dec 2005 UK Equity active 5.5% Adams Street Partners May 2003 Private Equity 3.5% M&G Aug 2006 Secured Loans 3.1% Baillie Gifford & Co July 2008 Fixed Income 3.0% Pantheon Partners May 2003 Private Equity 2.9% ECM Aug 2006 Secured Loans 2.8% Mellon Capital Aug 2005 Global Tactical Asset 2.2% Allocation Lexington Partners Mar 2005 Private Equity 0.3% Working capital cash n/a 0.2% Each manager has a specific mandate which sets out the manager s performance target and review periods, agreed fee scales and the reporting, stewardship accounting and other arrangements governing the relationship between the Fund and the manager. 7.3 Any variations to the mandate must be agreed by the Heads of Finance and Legal Services in writing. Contracts may be terminated by the Council at any time subject to contractual notice periods. Mandates may be terminated immediately for breach of contract. LGPS Investment Regulations 7.4 Managers are required to manage their proportion of the Fund in accordance with LGPS (Management and Investment of Funds) Regulations and this is explicit within the managers mandates. Page 15 of 30

16 7.5 The Investment Regulations were changed in August 2005 to introduce base and higher limits on the types of investments which the Fund may hold. The limits are shown below; Page 16 of 30

17 Regulatory Limits on Investments Base Limits Higher Limits 1. Any single sub-underwriting contract. 1% 5% 2. All contributions to any single partnership. 2% 5% 3. All contributions to partnerships. 5% 15% 4. All deposits with - 10% - a. any local authority, or b. any body with power to issue a precept or requisition to a local authority, or to the expenses of which a local authority can be required to contribute, which is an exempt person (within the meaning of the Financial Services and Markets Act 2000) in respect of accepting deposits as a result of an order made under section 38(1) of that Act, and all loans (but see paragraph 12). 5. All investments in unlisted securities of companies. 10% 15% 6. Any single holding (but see paragraphs 13 and 14). 10% - 7. All deposits with any single bank, institution or 10% - person (other than the National Savings Bank). 8. All sub-underwriting contracts. 15% - 9. All investments in units or other shares of the 25% 35% investments subject to the trusts of unit trust schemes managed by any one body (but see paragraph 14). 9A. All investments in open-ended investment 25% 35% companies where the collective investment schemes constituted by the companies are managed by any one body. 9B. All investments in units or other shares of the 25% 35% investments subject to the trusts of unit trust schemes and all investments in open-ended investment companies where the unit trust schemes and the collective investment schemes constituted by those companies are managed by any one body (but see paragraph 14). 10. Any single insurance contract. 25% 35% 11. All securities transferred (or agreed to be transferred) by the authority under stock lending arrangements. 25% 35% Page 17 of 30

18 7.6 In November 2005, the Fund exercised its discretion under the Regulations to permit up to 35% of the Fund to be invested in insurance contracts. This decision was taken to allow Legal & General, the Fund s passive manager to transfer the Fund s US investments into their pooled index fund as the Fund is now able to recover withholding tax on US equity dividends held in pooled funds. 7.7 The Fund has not exercised its discretion to vary any other limits away from the base limits shown above. 7.8 The short term volatility of manager performance is addressed by the different investment approaches of the core quoted equity and fixed income managers and by spreading the exposure across property, private equity, GTAA and secured loans. In addition, the active equity and bond managers may take tactical asset allocation positions and seek to add value for the Fund as a whole. 7.9 The Pension Committee also monitors transaction costs through reports provided by the managers in line with the transaction cost reporting framework of the Fund Management Association developed in The managers also provide information on their own turnover and commission levels. None of the Fund s appointed managers make use of soft commission arrangements. Baillie Gifford 7.10 The manager was appointed to an active balanced (bonds and equities) brief in November Following a tender process and appointment of dedicated Fixed Income mandates this became an equity only mandate in July Their target is to outperform the Fund s customised benchmark by 1.5% p.a. net of fees assessed over rolling 3 year periods The asset allocation ranges (i.e. the amount the manager is allowed to diverge from the benchmark allocation) for Baillie Gifford are set out below; Benchmark % UK equities 58.0 Overseas equities 41.0 US 21.0 Europe 10.0 Asia, Pacific and Japan 5.0 Emerging Markets 5.0 Cash Page 18 of 30

19 7.12 The Fund invested in the manager s unconstrained global equity portfolio in January The target for this portfolio is to outperform the FTSE World All World Index by 3% p.a net of fees over the medium term (5-7 years). The portfolio is unconstrained so there are no asset allocation ranges around the benchmark for this portfolio The manager was also appointed from July 2008 to actively manage a fixed income portfolio with a target to outperform the Merrill Lynch Sterling Broad Index by +2.0% over rolling 3 year periods Page 19 of 30

20 7.14 Legal & General 7.15 The manager was appointed in November Their target is to passively manage their portfolio by tracking the Fund s composite benchmark (excluding property) over rolling 3 year periods. GMO Benchmark % Ranges +/- UK equities Overseas equities US Europe Japan Emerging Markets Pacific (excl Japan) The manager was appointed in December Their mandate is to actively manage an unconstrained portfolio of global equities. The manager s target is to outperform the MSCI World Index by 2.0% p.a. net of fees assessed over rolling 3 year periods. The portfolio is unconstrained so there are no asset allocation ranges around the benchmark for this portfolio. Standard Life 7.17 The manager was appointed in December Their mandate is to actively manage a portfolio of UK equities currently valued at 11% of the Fund. Their target is to outperform the FTSE All Share Index by 2.0% p.a gross of fees over rolling three year periods. Rockspring Property Management 7.18 The manager was appointed in November Their mandate is to invest up to 9% of the Fund in property holdings (excluding residential). Their target is to outperform the CAPS direct property median over a rolling five & ten year period. Adams Street Partners 7.19 The manager was appointed in May Their mandate is to invest up to 2.5% of the Fund in private equity global fund of funds vehicles. Their target is to achieve a specific return on the amount of cash invested over the life time of each private equity fund of funds. Page 20 of 30

21 Pantheon Ventures 7.20 The manager was appointed in May Their mandate is to invest up to 2.5% of the Fund in private equity global fund of funds vehicles. Their target is to achieve a specific return on the amount of cash invested over the life time of each private equity fund of funds. Lexington Capital Partners 7.21 As noted in paragraph 5.3 the Fund s long term objective is to increase the Fund s exposure to private equity to 5%. In addition to the Fund s two long term private equity partners (Pantheon and Adams Street), in March 2006 the Fund made a tactical commitment of US$17.34m to obtain additional exposure to private equity funds in the global secondary market. Mellon Capital 7.22 The manager was appointed in April Their mandate is to manage up to 3% of the Fund through global tactical asset allocation investments. Their target is to add 1.5% p.a. to total Fund returns over the medium term (at least five years). European Credit Management (ECM) 7.23 The manager was appointed in August 2006 with a specific mandate to invest 1.5% of the Fund in its secured loan fund - Leveraged Loans Europe. Their target is to achieve a return 3.5% to 4.5% above the EURIBOR cash return (converted to sterling). The Fund has subsequently made additional investments into this Fund to increase the allocation to as at 30 September 2008 M&G 7.24 This manager was also appointed in August 2006 with a specific mandate to invest up to 1.5% of the Fund in its secured loan fund - M& G European Loan Fund. Their target is to achieve a return +1.75% above the LIBOR cash return. The Fund has subsequently made additional investments into this fund to increase the allocation to 30 September 2008 Henderson Global Investors 7.25 The manager was appointed in July 2008 to run an active fixed income mandate targeting outperformance of +2.0% above the Merrill Lynch Sterling Broad index Goldman Sachs Asset Management 7.26 This manager was also appointed in July 2008 to run an active fixed income mandate targeting outperformance of +2.0% above the Merrill Lynch Sterling Broad index Page 21 of 30

22 Custodian 7.27 The Fund s custodian is Bank of New York Mellon for all quoted equities managed in segregated accounts. For pooled fund investments the pooled fund managers have appointed their own independent custodian The Fund s custodian is responsible for:- settling all investment purchase and sales transactions as instructed by the Fund s investment managers ensuring the Fund s investment holdings are properly and securely held and registered; processing all income and corporate actions arising from the Fund s investment holdings; lodging the investment managers proxy voting instructions for the Fund s direct equity shares in accordance with the Fund s agreed corporate governance policy In addition to these custodian services the Fund also employs the Bank Of New York Mellon to provide the value added services of consolidated total Fund accounting records and also to provide an independent performance measurement service Fees 7.30 The Fund s investment managers all receive fees at an agreed fixed percentage of the value of funds under management. The agreed fee scales are set out in each of the manager s mandates. Mellon receives an additional performance fee for performance above their benchmark Separate fees are paid for custodian services provided for segregated assets. Any other fees earned by the manager in managing the portfolio (such as those charged for in-house pooled investment vehicles) are fully rebated These arrangements were set in place following open best value competition at the time of the managers appointments The managers do not receive or pay soft commissions in managing the portfolio on the Fund s behalf. Page 22 of 30

23 8. Performance Measurement 8. Performance Measurement 8.1 In addition to the manager monitoring activity described below, the Pension Committee reviews, at least annually, the contribution and impact of the Fund s chosen investment strategy, the strategic asset allocation benchmark and the contribution of the investment managers within that benchmark. This review includes consideration of the appropriate balance between active and passive management and performance risk. 8.2 The statutory triennial valuations review the returns achieved from the Fund s investments and compare these to the level of returns assumed by the Actuary and to the growth in the Fund s liabilities. The results of the triennial valuation trigger a detailed review of the Fund s investment strategy. 8.3 The Council has retained the services of Bank of New York Mellon Asset Servicing (BNYMAS) who provide independent performance data on the performance of the Fund as a whole and of the Fund s investment managers. This information is presented to the Pension Committee each quarter and as part of the annual review of Fund performance. 8.4 BNYMAS also report on the individual manager s performance against their specific benchmark and analyse performance between that attributable to stock selection and asset allocation divergence. 8.5 The focus of all performance reporting is to ensure that the agreed investment management framework continues to be appropriate in the light of the Fund s liabilities, investment risk and prevailing market conditions and that the managers are managing the Fund s assets within that framework. Manager Monitoring Activity 8.6 The Head of Finance monitors the performance of the Fund s investment managers on a monthly and quarterly basis. The managers each provide monthly valuations and quarterly investment and valuation reports which give detailed information on investment transactions, overall performance and positive and negative performance influences. 8.7 The Pension Committee receives quarterly reports from the Head of Finance on the performance of the Fund as a whole and the contributions of each investment manager. These reports consider the performance against the Fund s benchmark in the last quarter, and on a rolling 1 and 3 year basis. 8.8 The Pension Committee receives twice yearly presentations from the Fund s active equity and balanced managers and annual presentations from the tracking, specialist property, GTAA, private equity and secured loans managers. Page 23 of 30

24 Investment Consultants 8.9 The Head of Finance monitors the performance of Hymans Robertson on a quantitative and qualitative basis. This includes reviews of the timeliness and scope of the consultant s advice and reports. The consultant provides guidance on asset allocation, benchmark setting and targets, risk tolerance, manager selection and manager performance reviews The consultant also provides general information on the wider pensions' background and has been retained to provide training at the Pension Committee s training days. Page 24 of 30

25 9. Corporate Governance 9. Corporate Governance 9.1 The revised Myners principles recommend that Funds adopt the key requirements of the Institutional Shareholders Committee s statement of principles on the responsibilities of institutional shareholders. 9.2 This Statement sets out best practice for institutional shareholders and/or their agents in relation to their responsibilities in respect of investee companies, in that they will: Set out their policy on how they will discharge their responsibilities - clarifying the priorities attached to particular issues and when they will take action; Monitor the performance of, and establish, where necessary, a regular dialogue with investee companies; Intervene where necessary; Evaluate the impact of their engagement; and Report back to clients/beneficial owners. 9.3 The Council s corporate governance arrangements do incorporate these principles. 9.4 The Fund s overall policy is to obtain the best possible return using the full range of investments authorised under the Local Government Pension Scheme regulations. 9.5 The Fund recognises that social, environmental and external considerations can affect financial return. The Fund s managers have been requested to give due consideration to these factors, particularly in the areas of business sustainability and reputation risk when selecting, retaining and realising individual investments. 9.6 Managers of the portfolios containing listed UK and Overseas Equities are required to vote at all meetings where the Fund has a voting interest wherever practicable Votes must be cast in accordance with industry best practice as set out in the Combined Code of Corporate Governance. The managers are required to specifically notify any voting exceptions. All abstentions must be specifically reported and justified. The Fund s non-equity Managers are required to take account of the Fund s views as far as possible. 9.7 The lodging of proxies is delegated to the Fund s investment managers who use the services of their custodians. The managers quarterly reports include a specific briefing on corporate governance and all votes cast on the Fund s behalf. Page 25 of 30

26 9.8 In addition, the equity managers (except GMO) positively engage with companies in which they are investing on the Fund s behalf. This takes the form of regular correspondence and meetings, to review company arrangements and ensure compliance with recognised best practice. The measurement of the effectiveness of such contact is difficult and discussions are in hand with the managers as to how this can be developed. 9.9 The Council has retained the services of the Manifest Voting Issues Service to assist its monitoring of company meetings; emerging corporate governance issues and to inform the development of the Fund s corporate governance arrangements. Page 26 of 30

27 10. Myners Compliance Review 10. Myners Compliance Review 10.1 In 2000, the Government commissioned the Myners Review of Institutional Investment in the UK. The Myners Review set out ten principles for best practice in managing pension fund investments which the Government has adopted The Government requested pension funds to disclose, on a voluntary basis, their compliance with the Myners Principles in their Statement of Investment Principles (SIP). Where a given principle has not been fully adopted, the SIP must include an explanation for that decision CIPFA (the Chartered Institute of Public Finance & Accounting) also published guidance on assessing and disclosing compliance with these principles. In reviewing the Fund s compliance with Myners, the Head of Finance has applied the CIPFA guidance In December 2004, the Government issued its review of voluntary progress towards compliance with the Myners principles. The Government found that, while voluntary action is being taken against the principles, progress is lagging in several key areas In response, the Government has revised the Myners principles to strengthen and amplify what they say in a number of areas. A summary of the revised Myners principles is included at Annex The Fund s arrangements are compliant with the revised Myners Principles except as summarised below; Myners Principle Cheshire Pension Fund Compliance 4 Expert Advice Investment and actuarial advice is managed separately but has not been subject to separate tender. This will be done when these services are next tendered A full copy of this Statement will be sent to all participating employers and major stakeholders and a copy will be placed on the Fund s website at Full copies of the Statement will be provided to any scheme member on request. Page 27 of 30

28 Annex Myners Code Best Practice Principles (as revised Dec 2004) Myners Principle 1 - Effective Decision Making Decisions should be taken only by persons or organisations with the skills, information and resources necessary to take them effectively. Where trustees elect to take investment decisions, they must have sufficient expertise and appropriate training to be able to evaluate critically any advice they take. Trustees should ensure that they have sufficient in-house staff to support them in their investment responsibilities. Funds with more than 5,000 members should have access to in-house investment expertise equivalent at least to one full-time staff member who is familiar with investment issues. Trustees should also be paid, unless there are specific reasons to the contrary. It is good practice for trustee boards to have an investment subcommittee to provide the appropriate focus. The chair of the board should be responsible for ensuring that trustees taking investment decisions are familiar with investment issues and that the board has sufficient trustees for that purpose. For funds with more than 5,000 members, the chair of the board and at least one-third of trustees should be familiar with investment issues (even where investment decisions have been delegated to an investment subcommittee). Trustees should assess whether they have the right set of skills, both individually and collectively, and the right structures and processes to carry out their role effectively. They should draw up a forward- looking business plan. Myners Principle 2 - Clear Objectives Trustees should set out an overall investment objective for the fund that: represents their best judgement of what is necessary to meet the fund s liabilities given their understanding of the contributions likely to be received from employer(s) and employees; and takes account of their attitude to risk, specifically their willingness to accept underperformance due to market conditions. Objectives for the overall fund should not be expressed in terms which have no relationship to the fund s liabilities, such as performance relative to other pension funds, or to a market index. Myners Principle 3 - Focus on Asset Allocation Strategic asset allocation decisions should receive a level of attention (and, where relevant, advisory or management fees) that fully reflect the contribution they can make towards achieving the fund s investment objective. Decision-makers should consider a full range of investment opportunities, not excluding from consideration any major asset class, including private equity. Asset allocation should reflect the fund s own characteristics, not the average allocation of other funds. Page 28 of 30

29 Myners Principle 4 - Expert Advice Funds should contract separately for actuarial, strategic asset allocation and fund manager selection advice and these contracts should be opened to separate competition. The fund should be prepared to pay sufficient fees for each service to attract a broad range of kinds of potential providers. Myners Principle 5 - Explicit Mandates Trustees should agree with both internal and external investment managers an explicit written mandate covering agreement between trustees and managers on: an objective, benchmark(s) and risk parameters that together with all the other mandates are coherent with the fund s aggregate objective and risk tolerances; the manager s approach in attempting to achieve the objective; and clear timescale(s) for performance measurement and evaluation. The mandate and trust deed and rules should not exclude the use of any set of financial instruments, without clear justification in the light of the specific circumstances of the fund. Trustees, or those to whom they have delegated the task, should have a full understanding of the transaction-related costs they incur, including commissions. They should understand all the options open to them in respect of these costs, and should have an active strategy - whether through direct financial incentives or otherwise for ensuring that these costs are properly controlled without jeopardising the fund's other objectives. Trustees should not without good reason permit soft commissions to be paid in respect of their fund s transactions. Principle 6 - Activism Trustees should comply with the Institutional Shareholders Committee statement of principles on the responsibilities of institutional shareholders and agents, and ensure that the principles are incorporated into fund managers mandates. In line with the principles, trustees should also ensure that managers have an explicit strategy, elucidating the circumstances in which they will intervene in a company; the approach they will use in doing so; and how they measure the effectiveness of this strategy. Myners Principle 7 - Appropriate benchmarks Trustees should: explicitly consider, in consultation with their investment manager(s), whether the index benchmarks they have selected are appropriate; in particular, whether the construction of the index creates incentives to follow sub-optimal investment strategies; if setting limits on divergence from an index, ensure that they reflect the approximations involved in index construction and selection; consider explicitly for each asset class invested, whether active or passive management would be more appropriate given the efficiency, liquidity and level of transaction costs in the market concerned; and Page 29 of 30

30 where they believe active management has the potential to achieve higher returns, set both targets and risk controls that reflect this, giving the managers the freedom to pursue genuinely active strategies. Principle 8 - Performance Measurement Trustees should arrange for measurement of the performance of the fund and make formal assessment of their own procedures and decisions as trustees. They should also arrange for a formal assessment of performance and decision-making delegated to advisers and managers. Principle 9 Transparency A strengthened Statement of Investment Principles should set out: who is taking which decisions and why this structure has been selected; the fund s investment objective; the fund s planned asset allocation strategy, including projected investment returns on each asset class, and how the strategy has been arrived at; the mandates given to all advisers and managers; and the nature of the fee structures in place for all advisers and managers, and why this set of structures has been selected. Principle 10 - Regular Reporting Trustees should publish their Statement of Investment Principles and the results of their monitoring of their own performance, and that of advisers and managers. They should send key information from these annually to members of these funds, as well as posting this on a fund website, including an explanation of why the fund has chosen to depart from any of these principles. It is good practice for funds with more than 5,000 members to have a website dedicated to the fund. Page 30 of 30