Finance Services. London Borough of Redbridge Pension Fund Investment Panel. Annual Review 2005/06

Transcription

1 Finance Services London Borough of Redbridge Pension Fund Investment Panel Annual Review 2005/06

2 CONTENTS PAGE Executive Summary 1 Introduction 2 Pension Fund Membership 2 Fund Performance 3 Draft Pension Fund Accounts 2005/06 5 Other Issues: Corporate Governance 5 Implementation of the New Investment Mandates and the Appointment of New Investment Managers 6 Business Plan for Pension Fund Issues 2006/07 7 Statement of Investment Principles 7 Governance Policy Statement 7 Conclusion 8 APPENDICES NUMBER The Role of the Pension Fund Investment Panel 1 Market Indices 2 Comparison of Investment Managers & Benchmarks 3 Three Year Rolling Investment Performance 4 Draft Pension Fund Accounts 2005/06 5 Business Plan for Pension Fund Issues 2006/07 6 Statement of Investment Principles 7 Governance Policy Statement 8 Members of the Pension Fund Investment Panel and their Advisers 9 Reports Received by the Pension Fund Investment Panel in 2005/06 10

3 EXECUTIVE SUMMARY The management of the Authority s Pension Fund investments is delegated to the Pension Fund Investment Panel. 2005/06 was a very busy year as the Pension Fund Investment Panel continued to work towards implementing the new longer-term investment strategy and Fund Management arrangements. Following the completion of the tender exercise three new managers, Axa Rosenberg, Standard Life and Newton were appointed to manage specialist mandates. The Investment Panel s 2005/06 work programme included consideration of the following investment management issues: Reviews of Fund and Investment Manager performance; Tender and Selection Arrangements for Fund Management Services; Appointment of three Investment Managers to manage the Core Global Equity Mandate, the Bond Mandate and the Unconstrained/High Alpha Mandate; Arrangements for the Transition of the Fund s Assets; Approving the Business Plan for Pension Fund Issues for 2006/07; Reviewing and Updating the Statement of Investment Principles; Reviewing and updating the Corporate Governance Voting Policy; Monitoring the voting decisions cast at annual and extraordinary general meetings of the Fund s shareholdings. 2005/06 brought the third successive year of positive double-digit returns for UK Pension Funds bringing longer-term performance back closer to historical norms. In the UK, the FTSE All-Share Index returned 28.0% whilst overseas equities, in aggregate, returned 36.0%. The best performing overseas equity regions was Japan and the Emerging Markets. Property had another good year returning 20.5%, and Bonds continued to produce solid returns with an aggregate return of 6.7%. For Redbridge, the total Fund return as at 31 March 2006, was 22.7%. This was 1.5% below the Fund s customised benchmark of 24.2% and was due to below par returns from Capital International and to a lesser extent Schroders. The performance of the Fund s venture capital investment, Henderson Unquoted Growth Equity Fund II - (HUGE II), remains positive. To date investment proceeds have exceeded investment expenditure by 360,713 an absolute return of 40% over the investment period. The draft Pension Fund Accounts are shown at Appendix 5. Income exceeded expenditure by 16.8 million. The Fund continues to generate additional income as part of the phased approach towards achieving a fully funded position. Overall, Fund assets appreciated by 25.6% over the year to 31 March

4 INTRODUCTION The Pension Fund Investment Panel deals with the management of the Pension Fund investments in accordance with regulations laid down in statute. The role of the Investment Panel is explained at Appendix 1. Five Council Members sit on the Investment Panel and are advised by the Director of Finance and Resources. Advice is also provided by the Fund s Actuary Hymans Robertson, Investment Consultants HSBC Actuaries and Consultants Ltd, and other external pension fund management specialists as required. The Investment Panel meet at least five times per year. This annual report sets out the work of the Panel up until its annual meeting in June 2006, and the performance of the Pension Fund for the financial year ended 31 March It highlights the main changes that have occurred in the Pension Fund and its membership. PENSION FUND MEMBERSHIP The Pension Fund is a defined benefit scheme operated under the provisions of the Local Government Pension Scheme regulations (LGPS) to provide pensions and other benefits for employees of the Authority. All of the Authority s employees, except those covered by the Teachers Pension Scheme Regulations can join the Authority s Pension Scheme. Most new employees join the scheme automatically, but this is not mandatory. From May 2004 membership of the Pension Scheme was extended to Councillors under the age of 70. The LGPS regulations also provide for specified bodies (employers) to be admitted into the Fund. As at the 30 June 2006, Admitted and scheduled bodies participating in the Fund were Redbridge Theatre Company, London & Quadrant Housing Trust, Housing 21, Morrison s Facility Services, Redbridge College, Chadwell Heath High School, Ursuline High School, Mayfield High School and Little Heath School. The Fund is financed from contributions from the Authority, employers, participating employees and by investment income and the capital growth of the Fund s assets. The following graph shows the membership of the Pension Fund over the past five financial years Members Deferred Pensioners Employees / / / / /06 2

5 During 2005/06, employee contributors increased by 2.9% (3.0% in 2004/05). The percentage of pensioners increased by 1.6% (2.2% in 2004/05) and the number of deferred members increased by 7.9% (5.5% in 2004/05). The continuing increase in deferred members is attributable to past employees entitled to preserve future pension benefits. Pensioners and deferred members account for 56% of the total Fund membership. This ratio to contributing employees has been fairly stable over the past few years. Additional Voluntary Contributions The provision of an additional voluntary contribution (AVC) facility is a statutory obligation on the Authority. It provides the means for members of the Pension Fund to pay contributions into a policy, which will be used to buy additional pension benefits when the member retires. The Authority, as employer, does not make contributions to the AVC scheme. The Authority has appointed Clerical Medical and Standard Life as joint AVC providers to provide a range of AVC fund options. FUND PERFORMANCE Market Review For the third consecutive year equity markets produced double-digit returns, despite higher energy prices, devastating hurricanes and rising short-term interest rates. UK equities continued to rise setting aside fears of a collapse in house prices and high levels of personal debt leading to uncertainty over the direction of interest rates. As at the 31 March 2006, the FTSE All-Share Index was up by 28%. Overseas equities in aggregate returned 36%. In European markets equities performed well particularly in the second half of the year due to strong corporate earnings. North American stocks had a slow start but began to rise towards the end of 2005, however they lagged in global terms partly due to rising short-term interest rates. Asian markets were amongst the best performers. In Japan domestic regeneration helped push its equity market to exceptional levels with returns of 48%. Property had another good year returning 20.5%, and Bonds continued to produce solid returns with an aggregate return of 6.7%. The graphs at Appendix 2 show the movement in major market indices. Fund Management During 2005/06 Capital International (Capital) and Schroder Investment Management (Schroders) equally managed the majority of the Fund s assets on a multi asset basis. In addition, 2.7% of the Fund was invested in Property Unit Trusts managed by Merrill Lynch, and a small venture capital investment (HUGE II), was managed by Lloyds TSB Venture Managers Limited. Fund Monitoring The WM Company is employed by the Authority to provide analysis of the Investment Managers performance. For each Manager, and the Fund as a whole, the WM Company produces quarterly, annual and three yearly returns for comparison against each Investment Manager s customised benchmark. During 2005/06, performance was assessed in accordance with the performance objectives set out in Appendix 1. Each year a senior representative of the WM Company gives a presentation to the Investment Panel on the overall returns achieved by the Fund and by each Investment Manager. Asset class returns and reasons for over/under performance in relation to market returns are also discussed. 3

6 The annual and triennial returns of the Fund are ranked according to its performance. Funds in the 1st percentile are the best performing funds; those in the 50 th percentile are average and those in the 100th percentile are the worst. 2005/06 Annual Returns The customised benchmark return for the period was 24.2%. The Redbridge Pension Fund return for this period was 22.7% and this ranked the performance of the Fund in the 71 st percentile. Schroder s annual return at 23.1% was 1.2% below their customised benchmark of 24.3% ranking in the 68 th percentile. Poor stock and sector selection decisions, particularly in telecomms in the quarter to Sept 05 and an underweight position in European equities mid way through the year contributed to the underperformance. Capital International s annual return of 22.3%, was 1.7% below their customised benchmark ranking in the 74 th percentile. Stock selection decisions were the main contributor to this poor return. Annual Fund returns compared to the benchmark are shown at Appendix 3. Three Year Returns The three-year customised benchmark return for this period was 19.3%. The Redbridge Pension Fund outperformed the benchmark returning 19.4%, ranking in the 54 th percentile. The Fund returns for the last 3 years are detailed at Appendix 4. The figures in brackets indicate the percentile ranking of the performance of the Fund or Investment Manager. The Investment Managers are given individual performance targets, which are assessed on a rolling three-year basis. Schroder s return over the three-year period was 19.8%, 0.4% above their customised benchmark return ranking in the 45 th percentile. Schroders did not meet its performance target of 1% above the benchmark return. Capital International s return over the three-year period at 19.0% was 0.4% below their customised benchmark of 19.4%. This ranked the Fund in the 63 rd percentile. Capital International did not meet its performance target of 1.5% above the benchmark return. Merrill Lynch Property Unit Trusts In order to maintain weighting in property the Fund investments in Property Unit Trusts managed by Merrill Lynch. The annual return on this investment was 24%, 3.5% above the benchmark ranking in the 10 th percentile. Three-year returns at 19.1% were 2% above the benchmark also ranking the Fund in the 10 th percentile. HUGE II - Venture Capital Fund In October 1994 the Panel endorsed an investment by Henderson Pension Fund Management Ltd to invest up to 1m in the long-term venture capital development fund, HUGE II. Henderson later sold their venture capital arm to Lloyds TSB Venture Managers Ltd. This investment is administered in-house. During 2005/06, disposals and partial redemptions raised 43,012. Annual investment income amounted to 11,528. As at the end of 2005/06, the Pension Fund had received cash and assets totalling 1,345,310 realising a net gain of 389,013. Whilst trading conditions have been difficult for some of HUGE II s investee companies, overall the performance of the Fund has been good and has produced an absolute return of 40% over the investment period. 4

7 The HUGE II investment had a primary life span of ten years, which expired on the 8 December By the terms of the management agreement, the investment could then be extended for a period of up to three years. In November 2004, the Investment Manager agreed to extend the life of the HUGE II investment for three years to facilitate further exit opportunities for some of the investee companies remaining in the Fund. The Investment Panel agreed to remain invested in HUGE II, which will now close on the 8 December Changes to Fund Management Arrangement in 2006/07 Following an extensive review, the Investment Panel agreed a new longer-term investment strategy that moved away from the multi-asset fund management style to a more specialist approach. In 2005/06 a tender and selection exercise was conducted and three new investment managers, Axa Rosenberg, Standard Life and Newton were appointed. These managers commenced management of the Funds assets in May THE PENSION FUND ACCOUNTS The draft final accounts for 2005/06 are attached at Appendix 5 and show that the overall value of the Fund stands at 317.9m as at the 31 March 2006 ( 253.1m at 31/3/05). Pension Fund income during the year comprised 5.1m of employee contributions ( 4.6m in 2004/05), a total of 19.3m of employer contributions ( 14.2m in 2004/05) and investment income of 8.5m ( 7.1m in 2004/05). 4.6m was transferred to the scheme from other funds ( 2.4m in 2004/05). Included within the employer s contribution are the Authority s lump sum payments of 0.4m to the Pension Fund in respect of non ill health early retirement ( 0.3m in 2004/05). Expenditure during the year comprised 15.6m of Pension Benefits paid ( 14.8m in 2004/05), 3.7m of transfers to other funds and refunds to contributors leaving the Redbridge Fund ( 3.8m in 2004/05), and 1.3m of investment and administration expenses ( 1.4m in 2004/05). Income exceeded expenditure by 16.8m ( 8.5m in 2004/05). The majority of the additional income was attributable to the receipt of funds from other schemes and employer contributions. The Pension Fund s Actuary has determined a phased increase in employer contributions, so that the Authority meets its statutory requirement to build up the Fund to meet 100% of the Pension Fund s accrued liabilities. Overall, the value of the Fund increased by 64.7m (increased by 24.7m in 2004/05), a rise of 25.6% to the year ended 31 March 2006 and was mainly attributable to continuing good returns from equity markets. OTHER ISSUES During the year the Panel has also considered the following issues: - Corporate Governance The Pension Fund s direct holdings in UK and overseas equities have associated with them, the right to vote on resolutions at company general meetings. The Investment Panel believes in encouraging good corporate governance in the companies in which it invests and has adopted a series of voting principles in respect of its UK holdings in the UK s top 350 FTSE companies. Instructions are given to Investment Managers to vote in accordance with the Pension Fund s corporate governance voting policy. Reports were received at Panel meetings setting out the details of votes cast during each quarter. Votes were cast at 135 company meetings during 2005/06, (108 annual general meetings and 27 extraordinary general meetings). The voting 5

8 policy is, in general, based upon the guidelines issued by the Pensions Investment Research Consultant Ltd (PIRC), who have been retained to provide advice on corporate governance issues. Authority to vote is delegated to the Director of Finance and Resources. All votes are cast on an active basis, if a resolution cannot be supported it is opposed. The Fund s corporate governance voting policy was reviewed in June 2006, and extended to cover all shareholdings in the FTSE All Share Index. Voting was also extended to overseas shareholdings. This is carried out by the Fund s Investment Managers who have been requested to vote according to their policies on behalf of the Fund. The Fund s policy on social, environmental and ethical investment considerations are set out in the Fund s Statement of Investment Principles (Appendix 7). Implementation of New Investment Mandates and Appointment of New Investment Managers Following the review of the Pension Fund s management arrangements it was agreed that the Fund be managed on the following basis: - Assets % of Fund Core Global Equities Mandate 40% Bond Mandate 30% Unconstrained/High Alpha Mandate 20% Property Mandate 5% Private Equity Mandate 5% Total 100% A tender and selection exercise was conducted in accordance with European Procurement requirements to find suitable investment managers to manage the Core Global Equity Mandate, the Bond Mandate and Unconstrained/High Alpha Mandate. Following a rigorous process, Axa Rosenberg were appointed to manage the Core Global Equity Mandate, Standard Life the Bond Mandate and Newton were appointed to manage the Unconstrained/High Alpha Mandate. Investment in Property remains with the current managers and will be reviewed in 2006/07. Private equity investment will also be considered in 2006/07. The 5% Fund allocation is currently included within the Core Global Equity Mandate managed by Axa. Transitional arrangements were undertaken by State Street. The Fund s advisers HSBC Actuaries and Consultants provided advice throughout the tender and selection process. Fund management arrangements from May 2006 are as follows: - Investment Manager Assets % of Fund Axa Rosenberg Core Global Equity Mandate 45% Standard Life Bond Mandate 30% Newton Unconstrained/High Alpha Mandate 20% Merrill Lynch Schroder Property Mandate 5% Total 100% 6

9 Business Plan for Pension Fund Issues 2006/07 Within Principle 1 - Effective Decision Making from the Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom published by CIPFA, there is a requirement for the Director of Finance and Resources to prepare and submit an annual Business Plan for the Pension Fund, for consideration by the Pension Fund Investment Panel. The annual Business Plan has been formulated from the decisions and discussions of the Pension Fund Investment Panel on how Members move forward with the Pension Fund review, respond to new regulations, the increasing liabilities on the Fund and market volatility. The Business Plan outlines the operation of the Pension Fund, sets out key tasks in respect of Pension Fund Issues and how these will be met and includes details on the provision of training and development. The Business Plan includes a draft agenda timetable for the forthcoming cycle of Investment Panel meetings up until its annual meeting in June A copy of the annual Business Plan is attached at Appendix 6. Statement of Investment Principles The Local Government Pension Scheme Regulations require the Authority to prepare and publish a Statement of Investment Principles, which set out the Authority s policies on a wide range of investment matters. The Authority is also required, within the Statement of Investment Principles, to include compliance with CIPFA s Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom, and to give justification where they do not comply. The Investment Panel has made good progress in meeting the requirements of the ten investment principles fully complying with six and partially complying with the remaining four. Areas that required further consideration are Strengthening the criteria for performance management, reporting and transparency of fee charges; More comprehensive terms of reference for the Investment Panel and a defined delegation of investment decisions; These areas will be addressed as part of the Investment Panel s on-going work programme. The current Statement of Investment Principles is shown at Appendix 7 Governance Policy Statement Changes to the Local Government Pension Scheme Regulations required each administering authority to prepare, maintain and publish a written statement setting out the following. (a) Whether the Authority delegates functions in relation to maintaining a pension fund to a committee, sub committee or officer of the Authority; (b) Who these are delegated to; (c) The frequency of meetings; (d) The terms of reference, structure and operational procedures of the delegations; and (e) Whether any delegated body includes representatives of employing authorities (including non-scheme employers) or members and if so, whether those representatives have voting rights. The Governance Policy Statement is attached at Appendix 8 7

10 Conclusion The Pension Fund Investment Panel had a busy year as they worked toward implementing the new Fund management arrangements. This is now substantially complete for 90% of the Fund s assets. Management arrangements for Property and Private equity will be considered in 2006/07. At quarterly meetings, the Investment Panel met with the Investment Managers to monitor investment returns and challenge decisions where appropriate. The Investment Panel also strives towards meeting good standards of corporate governance; the Fund s voting policy has been reviewed and updated to comply with best practice. Votes will be cast, where appropriate at all company meetings of the Pension Fund s holdings. In addition, the Investment Managers are required to report on the application of the Pension Fund s socially responsible investment policy as set out in its Statement of Investment Principles. Publication This report will be made available on the Authority s internet, and to all employers participating in the Pension Fund, Staff Union Representatives and Council Members as appropriate. 8

11 APPENDIX 1 THE ROLE OF THE PENSION FUND INVESTMENT PANEL The role of the Pension Fund Investment Panel is to deal with the management of the Pension Fund investments in accordance with regulations laid down in statute and the Fund s Statement of Investment Principles. Certain duties, which the Authority must have regard to in respect of investments, are discharged through the formal appointment of Investment Managers, namely: i. The diversification of investments; ii. iii. The suitability of investments and types of investment; Proper advice. The Investment Managers are given individual performance objectives, which are used to assess their performance and determine their continued employment. These are: For Capital International (during 2005/06) i. A return of 1.5% per annum above their customised benchmark assessed on a three year rolling average; ii. iii. Performance to be no worse than 4.75% below the benchmark in any twelve-month period; To achieve consistent good performance from stock selection within each market that the Fund invests. For Schroder Investment Managers (during 2005/06) i. A return of 1% per annum above their customised benchmark assessed on a three year rolling average; ii. iii. Performance to be no worse than 3% below the benchmark in any twelve-month period; To achieve consistent good performance from stock selection within each market that the Fund invests. The main role of the Panel therefore is to carry out the following functions to ensure that the duties delegated to the Managers are properly discharged: i. To review, at least quarterly the activities of the Manager; ii. To periodically consider whether to continue the Managers employment. The Managers produce quarterly reports, which are reviewed by the Director of Finance and Resources. Each Manager meets the Panel twice a year and is also formally visited by the Director of Finance and Resources twice a year when performance and transactions are discussed with them. The continued employment of managers is considered at the Annual Meeting of the Panel, when a representative of the WM Company presents a detailed analysis of each Fund Manager s performance. ' The WM2000 median benchmark was used prior to being replaced by a customised benchmark with effect from the 1 st September 2004.

12 APPENDIX 2 27-Mar Mar Feb Feb Jan Dec Dec Nov Mar Mar Feb Jan Jan Dec Nov-05 EUROPE EX UK Nov Oct Sep Sep Aug Aug Jul Jun Jun May May Apr Apr-05 Date NIKKEI Nov Oct Sep Sep Aug Jul-05 FTSE ALL SHARE Mar Mar Feb Feb Jan Dec Dec Nov Nov Oct Sep Sep Aug Aug Jul Jun Jun May May Apr Apr-05 Date Points Points DOW JONES INDUSTRIAL Mar Mar Feb Jan Jan Dec Nov Nov Oct Sep Sep Aug Jul Jul Jun May May Apr Apr Jul Jun May May Apr Apr-05 Date Date Points Points

13 APPENDIX 3 Capital returns for the year to 31st March UK Equities North America Europe ex UK Japan Pacific Other Intl UK Bonds O/S Bonds UK I/L Fund Benchmark Cash / other Schroder Returns for the Year to 31st March UK Equities North America Europe ex UK Japan Pacific Other Intl UK Bonds UK I/L Cash / other Property Fund Benchmark

14 APPENDIX 4 PENSION FUND INVESTMENT PERFORMANCE 2003/4 2004/5 2005/6 3 Year Annualised Return % Ranking Return % Ranking Return % Ranking Return % Ranking COMBINED FUND 25.8 (33) 10.4 (67) 22.7 (63) 19.4 (50) BENCHMARK SCHRODER 25.4 (37) 11.5 (30) 23.1 (61) 19.8 (43) BENCHMARK CAPITAL INTERNATIONAL 27.1 (27) 8.5 (93) 22.3 (71) 19.0 (60) BENCHMARK Notes: - The Benchmark used to measure performance is a bespoke benchmark from 1 st September Prior to this the fund was measured against the WM2000 Universe, which represents the majority of UK segregated funds. - The figures in brackets indicate the percentile ranking achieved by the Fund and Fund Managers. 1 = best, 100 = worst.

15 APPENDIX 5 DRAFT PENSION FUND ACCOUNT FOR THE YEAR ENDED 31 MARCH / /06 '000 '000 Contributions and Benefits 19,017 Contributions receivable 24,422 2,369 Transfers in 4, Other Income 0 21,410 29,023 (14,824) Benefits payable 15,593 (3,789) Leavers 3,812 (393) Administrative expenses 398 (19,006) 19,803 2,404 Net additions from dealings with members 9,220 Returns on Investments 7,591 Investment income 9,301 (501) Irrecoverable withholding tax (820) Change in market value of investments 5,111 - Realised profit/(loss) 11,711 11,033 - Unrealised profit/(loss) 36,301 (967) Investment management expenses (918) 22,267 Net returns on investments 55,575 24,671 Net increase in the fund during the year 64, ,410 Net assets of the scheme as at 1 April , ,081 Net assets of the scheme as at 31 March ,876 NET ASSET STATEMENT AS AT 31 MARCH / /06 '000 '000 Investments 22,503 Fixed interest securities 29, ,132 Equities 187,253 4,420 Index-linked securities 4,504 49,679 Pooled Investment Vehicles 52,670 13,275 Property unit trusts 15,678 7,783 Cash Deposits/Instruments 26, Other , ,235 1,189 Current assets and liabilities 1, ,081 Net assets of the scheme as at 31 March ,876

16 APPENDIX 6 Finance Services Pension Fund Investment Panel Business Plan for Pension Fund Issues 2006/2007

17 Pension Fund Investment Panel Business Plan 2006/07 1. Introduction The publication of the Myners Report and the subsequent statutory requirement to comply with CIPFA s Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom (CIPFA s Investment Code of Practice) requires the Director of Finance and Resources to prepare and submit to the Pension Fund Investment Panel an annual Business Plan for the Pension Fund. This is the Pension Fund s fourth Business Plan. It continues to build on the foundations set out in the previous Business Plan approved by the Pension Fund Investment Panel in May 2005, and sets out the key tasks for the Pension Fund Investment Panel in respect of Pension Fund issues for 2006/07. These reflect the Pension Fund Investment Panel s commitment to develop a suitable investment strategy and monitoring procedures, for the future that meets the Fund s objectives and complies with best practice. The Business Plan outlines the operation of the Pension Fund, reviews progress in 2005/06 and includes provision for training and development, which will equip the Pension Fund Investment Panel s Members with the necessary skills to make decisions on the Pension Fund s Investments. 2. Background Legal Framework The 1972 Superannuation Act empowers the Secretary of State for the Environment (now the Office of the Deputy Prime Minister) to make regulations to provide for the pension arrangements of Local Government employees. The scheme is open to all employees with the exception of teachers who have separate arrangements. Redbridge Council as an administering Authority is required by the Local Government Pension Scheme Regulations 1995 to maintain a Pension Fund. The Fund provides benefits for employees including retirement pensions, spouse and dependent pensions, death grants and other lump sum payments. The scheme is funded by contributions from employees at 6% of pensionable pay 1 (set by statute), contributions from employers (set by the Actuary), dividends, interest, and profits from the Pension Fund s investments. The Local Government Pension Scheme is known as a defined benefit scheme, which means that employees pension entitlements are based on their final salary and are guaranteed, whatever the financial position of the Pension Fund. Any deficit on the Pension Fund is made up through employer contributions. Contributions to the Pension Fund are invested until required to pay pension benefits. Regulations in respect of Pension Fund investment management are contained in the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 and any amendments thereto. 3. Redbridge Framework The Pension Fund Investment Panel, which meets at least five times a year, oversees the management of the Pension Fund s investments. The Pension Fund Investment Panel consists of five Members who are appointed annually by the Council. Under the Council s Constitution, the term of reference for the Pension Fund Investment Panel is as follows: To deal with the management of Superannuation Fund Investments in accordance with Regulations issued by the Secretary of State under Section 7 of the Superannuation Act Manual workers who were in the employ of the Council prior to 1st April 1999 pay a contribution rate of 5% 1

18 Pension Fund Investment Panel Business Plan 2006/07 The Director of Finance and Resources has overall responsibility for the financial management of the Pension Fund and the administration of the pension scheme. 4. Size of the Pension Fund As at the 31 March 2006, the value of the Pension Fund was approximately 317.9m. Final Accounts for the year 2005/06 will go to the Statement of Accounts Committee for approval in June Membership of the pension scheme as at the 31 March 2006 was as follows: Contributors 4797 Pensioners and dependents 3556 Deferred pensioners 2453 (former contributors entitled to pension benefits in the future) In addition the following bodies have been admitted into the Fund: Redbridge College, London & Quadrant Housing Trust, Housing 21, Morison Facility Services and Redbridge Theatre Company. 5. Management of the Pension Fund Investments The current key objectives, as set out in the Pension Fund s Statement of Investment Principles, are to: maximise investment returns over the long term within an appropriate level of risk and volatility; in order to secure and maintain an investment rate of return, which will count towards meeting the Council s current and future obligations and liabilities to make pension payments; which will contribute towards keeping the burden on the Council s General Fund and therefore, the council taxpayer, as low as possible. In order to achieve these objectives, the Pension Fund Investment Panel has appointed external investment management firms, AXA Rosenberg Investment Management Limited, Newton Investment Management Limited and Standard Life Pension Funds Limited to manage 45%, 20% and 30% of the Pension Fund s assets respectively. In addition, the Pension Fund Investment Panel has retained Schroder Investment Management and Merrill Lynch to manage property unit trust investments. Each Investment Manager has been set investment objectives and targets as follows: AXA Rosenberg Investment Management Limited To outperform their customised benchmark by 1.5% per annum net of fees on a rolling three-year basis To achieve consistent good performance on stock selection within each market that the Fund invests. Newton Investment Management Limited An absolute return of Sterling 1 month London Inter-Bank Offer Rate ( LIBOR ) plus 4.0% per on a five year rolling basis. 2

19 Pension Fund Investment Panel Business Plan 2006/07 Standard Life Pension Funds Limited To outperform their customised benchmark by 0.75% pa net of fees on a three year rolling basis. Schroder Investment Management To outperform their customised benchmark by 1% on a rolling three year basis Merrill Lynch Investment Managers To outperform their customised benchmark by 1% on a rolling three year basis In order to monitor whether the Investment Managers are meeting these objectives, the WM Company, an independent performance measurement firm, measures the performance of the Pension Fund s assets. The Pension Fund Investment Panel meet quarterly with the investment managers on a rotational basis to discuss performance and related investment issues. 6. Business Plan 2005/2006 The Pension Fund Investment Panel approved the Pension Fund s Business Plan in May2005. It set out the key tasks that the Pension Fund Investment Panel would seek to undertake during the year. These included pension fund management, performance monitoring, corporate governance activities and other standard investment issues. -Progress The Pension Fund Investment Panel met eight times during 2005/06 where the following issues were considered: The tender process to appoint investment managers to manage three new investment mandates. The appointment of AXA Rosenberg to manage the Core Global Equity Mandate The appointment of Newton Investments to manage the High Alpha Global Equity Mandate The appointment of Standard Life to manage the Bonds Mandate Reviewed and updated the Statement of Investment Principals Reviewed and updated the Corporate Governance Voting Policy Monitored and reviewed the performance of the Investment Managers Reviewed votes cast at annual general and extraordinary company meetings Member development on a number of topical investment issues. 3

20 Pension Fund Investment Panel Business Plan 2006/07 7. Key Tasks for 2006/2007 The following key tasks have been set for 2006/2007. They will continue to build on the good foundations laid down in 2005/2006. Pension Fund Management Review property and private equity mandates and, if necessary, set in motion a tender exercise to appoint new investment managers. Performance Management Monitoring arrangements for measuring the performance of the Pension Fund Investments and the new Investment Managers. Corporate Governance Review the corporate governance voting policy and monitor votes cast. Other Investment Issues Develop a more comprehensive terms of reference for the Pension Fund Investment Panel and a defined delegation of investment decisions; Review the Statement of Investment Principles to ensure that it remains up to date and meets best practice; Training and Development To ensure each Member of the Pension Fund Investment Panel has access to development on Pension Fund Investment issues. 8. Undertaking the Key Tasks Pension Fund Management In 2004/05, the Pension Fund Investment Panel agreed a new investment strategy, the investment mandates required to meet this strategy and the Fund s overall investment objectives. The new investment mandate structure is shown below. Share Asset Class of Fund 40% Global Equities 20% Specialist Global Equities 30% Bonds 5% Property 5% Private Equity The tender exercise undertaken in 2005/2006 resulted in investment managers being appointed to the first three mandates in the above table. 4

21 Pension Fund Investment Panel Business Plan 2006/07 During 20006/07 a review of the current arrangements for property and private equity mandates will be undertaken and tendering arrangements put in place if necessary. The Director of Finance and Resources in partnership with HSBC Actuaries and Consultants will provide continued professional advice on achieving these tasks. Full implementation of the new strategy is likely to take some eighteen months to complete. Performance Monitoring The monitoring of the returns on the Pension Fund Investments will continue to be undertaken by The WM Company who will provide quarterly, annual, and three-yearly investment returns. Each quarter, the Director of Finance and Resources will submit to the Pension Fund Investment Panel a report on the investment performance of the Investment Managers which will compare the actual returns achieved against their agreed investment benchmarks and targets. The Pension Fund Investment Panel and the Director of Finance and Resources have the opportunity to discuss performance with the Investment Managers and any other related investment issues that may arise. In times where performance is poor the Pension Fund Investment Panel will request that the Investment Manager sets out their strategy for improving performance and meeting agreed targets. These arrangements will be reviewed to incorporate the additional performance monitoring requirements of the new investment strategy. Corporate Governance Each quarter, the Director of Finance and Resources presents to the Pension Fund Investment Panel, a report on all votes cast at annual and extraordinary General Meetings in the previous quarter. The Pension Investment Research Consultancy (PIRC) provides advice on corporate governance matters. The Pension Fund votes on all holdings held within the FTSE All Share index in accordance with the Pension Funds agreed voting policy. During the year, the policy will be reviewed and updated to incorporate any new requirements. Other Investment Issues CIPFA s Principles for Investment Decision Making require the Pension Fund Investment Panel to be governed by specific terms of reference, standing orders, and operational procedures, which define those responsible for taking investment decisions. Consideration will therefore be given to developing more robust terms of reference that meet these requirements. The Regulations require that the Pension Fund s Statement of Investment Principles reflect the agreed policies and procedures, which govern the operation of the Pension Fund. The appointment of any new Investment Managers and any other changes that the Pension Fund Investment Panel makes to current procedures will need to be incorporated in the Statement. In any event, the Pension Fund Investment Panel will review the Statement annually, to ensure compliance with best practice Suggested Timetable Appendix 1 provides indicative agenda items that are likely to be debated during this year. In addition other items on topical issues may be debated as appropriate. 5

22 Pension Fund Investment Panel Business Plan 2006/07 9. Training and Development One of the requirements of CIPFA s Principles for Investment Decision Making is that all Members of the Pension Fund Investment Panel have sufficient knowledge to make investment decisions and challenge the advice that they are given. This requires the Pension Fund Investment Panel to have gained a familiarity with pension issues through a programme of training and development. The Pension Fund Investment Panel has received training and development in conjunction with each of the key decisions made in 2005/06 and this will continue throughout 2006/07. This will have the advantage of co-ordinating training and development with the key tasks contained within this business plan. Training will be commissioned as and when required and is available from a variety of sources such as: External courses; Training sponsored by the Investment Managers; Training delivered by Investment Consultants; Training included as part of the service received from our Performance Measurement provider and Actuary; Partnership arrangements with other Local Authorities to deliver training on common themes; National conferences. In addition, the Pension Fund Investment Panel will be kept abreast of current investment issues and topical events by receiving articles and other relevant literature provided by external Pension Professionals, Government and Regulatory bodies, and inhouse Officers. Information will be provided in both paper and electronic format. The combination of the training and development methods detailed above will provide Members with the necessary skills to make decisions on Pension Fund investment issues. Training and development is a legitimate expense, chargeable to the Pension Fund. 6

23 Pension Fund Investment Panel Business Plan 20006/07 APPENDIX 1 KEY TASKS - DRAFT TIMETABLE 2006/07 DATE AGENDA ITEMS TRAINING and DEVELOPMENT September 2006 Quarterly Meeting Pension Fund Management Property investment Corporate Governance Quarterly report on votes cast Performance Monitoring Quarterly performance report of the Pension Fund and Investment Managers Report from the Fund Manager Property different types of property investment and those suitable for the Redbridge Pension Fund November 2006 Quarterly Meeting Other Issues Annual Report for /06 Pension Fund Management Review of the Fund s Property investments Corporate Governance Quarterly report on votes cast Performance Monitoring Quarterly performance report of the Pension Fund and Investment Managers Report from the Fund Manager February 2007 Quarterly Meeting Pension Fund Management Private Equity Corporate Governance Quarterly report on votes cast Private Equity - different types of private equity investment, and those suitable for the Redbridge Pension Fund 7

24 Pension Fund Investment Panel Business Plan 20006/07 Performance Monitoring Quarterly performance report of the Pension Fund and Investment Managers Report from the Fund Manager Other Issues Review of Terms of Reference for the Pension Fund Investment Pane May 2007 Quarterly Meeting Pension Fund Management Private equity tendering arrangements Corporate Governance Quarterly report on votes cast Review of Corporate Governance Voting Policy Performance Monitoring Quarterly performance report of the Pension Fund and Investment Managers Report from the Fund Manager Other Issues Annual Business Plan for 2007/08 Tendering review and update on procuring requirements Jun/Jul 2007 Annual Meeting Performance Monitoring Report on HUGE II Report on the annual and longer term performance of the Pension Fund and Investment Managers from The WM Company Topical Issues update on current issues affecting the pension investment industry Jun/Jul 2007cont d Corporate Governance Review of Statement of Investment Principles Other Issues Report from the Actuary on topical issues 8

25 9 Pension Fund Investment Panel Business Plan 20006/07

26 APPENDIX 7 Finance Services London Borough of Redbridge Pension Fund Statement of Investment Principles Revised 2006

27 The Document Provides information on the: Page Background to the Operations of the Investment Arrangements 2 Investment Responsibilities 3 Fund Liabilities 5 Investment Approach 6 Investments and their Management 7 Social, Environmental and Ethical Considerations 10 Corporate Governance 11 CIPFA Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom 12 Annex 1 Investment Mandates Asset Allocation Bands 2 Statutory Restrictions on Investments 3 Compliance with Myners Ten Principles of Investment Practice 1

28 Section 1 Legislation Background Statement of Investment Principles Revised June 2006 The Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 1999 require administering authorities to prepare, maintain and publish a written statement of the principles governing their decisions about investments, including a statement of compliance with Myner s ten principles of investment management. The purpose of this document is to meet these requirements. The Chartered Institute of Public Finance and Accountancy (CIPFA) publication Principles for Investment Decision Making in the Local Government Pension Scheme in the UK was published in April 2002 to provide guidance. The Investment Panel will review the Scheme s compliance with the Statement of Investment Principals at least annually, or more frequently should any significant change occur. Local Government Pension Scheme The Local Government Pension Scheme (LGPS) was established in accordance with statute to provide death and retirement benefits for all eligible employees and their dependents. Eligible employees are mainly local government staff, except teachers who have separate pension arrangements, and a number of other bodies as permitted by Local Government Pension Scheme Regulations 1997 (and amendments thereto). The LGPS is a funded final salary scheme, with employee contributions set at 6% (except for those workers in employment before 1 st April 1998 who have a protected 5% rate) and employer contribution rates vary depending the funding level assessed every three years by the Fund actuary. Benefits are defined in law and inflation-proofed in line with the annual increase in the Retail Price Index (RPI) for September. The scheme is operated by designated administering authorities - each maintains a pension fund and invests monies not immediately needed to pay benefits. The London Borough of Redbridge is a designated administering authority. Pension Fund Investment Panel The Pension Fund Investment Panel (Investment Panel) consists of five local Councillors who are appointed by Council annually. The Investment Panel decides on the investment policies most suitable to meet the liabilities of the Pension Fund and has the ultimate responsibility for investment strategy. The Investment Panel meets at least five times a year. Advice The Investment Panel obtains and considers advice from the Council s Director of Finance and Resources, and as necessary from the Fund s actuary, investment managers and independent investment consultants as required. Management The Investment Panel has delegated the management of the Fund s investments to professional investment managers, appointed in accordance with the LGPS regulations, who activities are specified in detailed investment management agreements and regularly monitored. 2

29 Section 2 Investment Responsibilities Statement of Investment Principles Revised June 2006 The Investment Panel is responsible for: Determining overall investment strategy with regard to the suitability and diversification of investments in order to meet the fund s long term funding requirements. Monitoring compliance with the Statement of Investment Principals and reviewing its contents Appointing investment managers, an independent custodian, and external advisers as necessary Reviewing investment manager performance against appropriate benchmarks and targets on a regular basis and being satisfied as to manager expertise and the quality of their internal systems and controls. Reviewing policy on social, environmental and ethical considerations, and on the exercise of voting rights. The Investment Panel are advised by The Director of Finance and Resources who is also responsible for: Ensuring compliance with statutory requirements and the investment principles set out in this document, and reporting any breaches to the Investment Panel Ensuring proper resources are available to meet the London Borough of Redbridge Pension Fund responsibilities. The Investment Managers are responsible for: The investment of pension fund assets in compliance with legislation and the detailed Investment Management Agreements Appropriate asset allocation around the individual mandate objectives set by the Investment Panel and stock selection with asset classes Preparation of monthly and quarterly reporting including a review of investment performance Attending meetings of the Investment Panel as required The Investment Advisers are responsible for: Providing advice to the Investment Panel and officers on a suitable investment policy and investment management arrangements Providing reports and commentaries on external manager activities, performance data and investment transactions at regular intervals Contribution to investment meetings and specific reviews 3

30 Statement of Investment Principles Revised June 2006 The Independent Custodian is responsible for: Providing the monthly accounting data summarising details for all investment transactions during the period Settlement of all investment transitions, collection of income, tax reclaims and the administration of corporate actions The Actuary is responsible for: Undertaking a triennial valuation of the Fund s assets and liabilities Providing advice as required so that the Investment Panel can consider both the funding and investment objectives. 4

31 Statement of Investment Principles Revised June 2006 Section 3 Fund Liabilities Scheme Benefits The Pension Fund is a defined benefit scheme with provides benefits related to final salary for members. Each member s pension is specified in terms of a formula based on salary and service and is unaffected by the investment return achieved on the Fund s assets. Full details of the benefits are set out in the LGPS regulations. Financing benefits All active members are required to make pension contributions based on 6% of their pensionable pay (except those workers in employment before 1 st April 1998 who have a protected 5% rate) as defined in the LGPS regulations. The Pension Fund is responsible for meeting the balance of costs necessary to finance the benefits payable from the Fund by applying employer contribution rates, and additional lump sum contributions as determined from time to time by the Fund s actuary. The London Borough of Redbridge has published a Funding Strategy Statement as required by the Scheme regulations. Actuarial Valuation The Fund is valued by the actuary every three years in accordance with the LGPS regulations and monitored each year. 5

32 Statement of Investment Principles Revised June 2006 Section 4 Investment Approach Investment Objective The investment objective is to minimise the long-term cost of funding commensurate with an appropriate level of risk and volatility. The investment objective will be achieved through the formulation of an appropriate investment strategy that takes into account the assumptions made within the actuarial valuation, which are linked to the liabilities of the Fund. The investment strategy will aim to achieve a real return of at least 3.5% p.a. subdivided between bond and equity related assets so that: Equity type assets achieve a real return of 4.25% p.a. Bonds achieve a real return of 1.8% p.a. Strategic Benchmark The strategic asset allocation of the fund will be broadly split 70% equity type investments (including property) and 30% bonds. Investment Fees The fees for investment managers are flat fees based on an agreed percentage of the market value of portfolio at month end. The fees for investment advisers are agreed relative to experience and time input required. Investment Style The Investment Panel has appointed expert investment managers to manage the Fund s investments. Each investment manager has clear performance objectives and is held accountable for performance against those objectives. The Fund is actively managed and invests in a wide range of assets in order to give diversification and spread risk. Reporting The investment managers current investment decisions and actions are reported at each meeting of the Investment Panel. Performance Performance targets are set in relation to the benchmark and (where appropriate) weighted indices specified. The investment manager s performance data is provided at quarterly and annual intervals by WM Company and reviewed by the Investment Panel. 6

33 Statement of Investment Principles Revised June 2006 Section 5 Investments and Their Management The power and duties of the Investment Panel to invest Fund monies are set out in the Local Government Pension Scheme (Management and Investment of Funds) Regulations The Fund is required to invest any monies which are not required immediately to pay pensions and any other benefits and, in so doing, take account of the need for a suitable diversified portfolio of investment and the advice of persons properly qualified on investment matters. Types of Investments In broad terms, investments may be made in accordance with the regulations in equities, fixed interest and other bonds, and property, in the UK and overseas markets and the investment manager s agreements. The Regulations also specify certain limitations on investments. Principally, these place a limit of 10% of the total value of the fund in any single holding, or deposits with a single bank or institution, or investments in unlisted securities. At present, no use is made of the headroom provisions, which permit, in appropriate circumstances, and extension of the percentage limits indicated in the Regulations. Investment Management The Investment Panel has appointed investment managers under the terms of the Regulations to manage the Fund s investments as described below. The investment managers are required to select appropriate types of investments to determine a suitable balance between different kinds of investments (within agreed parameters) relative to their individual benchmarks, and where appropriate to maintain a diversified portfolio (as shown at Annex 1). AXA Rosenberg Investment Management Limited Global Equity Mandate AXA Rosenberg manage the global equity mandate and have the discretion to determine asset allocation within specific ranges and individual stock selection. A performance objective of 1.5% per annum above the relevant benchmark over a rolling three-year period has been set. Newton Investment Management Limited High Alpha Unconstrained Global Equity Mandate Newton Investment Management manage the high alpha unconstrained global equity mandate. A performance objective of 4.0% per annum above the sterling 1 month London Inter-Bank Offer Rate (LIBOR) over a rolling five-year period has been set. Standard Life Pension Funds Limited Active Bond Mandate Standard Life Pension Funds manage the active bond mandate. A performance objective of 0.75% per annum above the relevant benchmark over a three-year period has been set. Schroders Investment Management Property Unit Trust Mandate Schroders Investment manage a property unit trust mandate. A performance objective of 1% per annum above the relevant benchmark has been set. Merrill Lynch Investments Property Unit Trust Mandate Merrill Lynch manage a property unit trust mandate. A performance objective of 1% per annum above the relevant benchmark has been set. 7

34 Lloyds TSB Venture Capital Fund Statement of Investment Principles Revised June 2006 Lloyds TSB manage a venture capital fund, which is in the latter stages of its life cycle and is due to close in Investment Risk Allocation and asset risk Individual manager mandates have been determined recognising the pension fund s overall risk tolerance in relation to funding objectives. Performance risk benchmarks and (where appropriate) targets are used and performance monitored relative to these. This is to ensure the investment manager does not deviate significantly from the Panels intended approach, while permitting flexibility to manage the portfolio and enhance returns over the longer term. Controlling risk Risk diversification supports the decision to appoint a number of managers with specifically tailored mandates. The degree of risk to which the individual portfolios are exposed is also monitored. Choosing Investments The Investment Panel pays close attention to the risks that may arise through a mismatch between the Fund s assets and its liabilities, and the risks that may arise from a lack of diversification of investments. For the time being, the Investment Panel has decided that the Fund s long-term asset allocation will follow the benchmark specified above, and that an equity-biased approach will be maintained. A higher weighting in equities is held in the expectation that superior returns will be achieved in the long term. This reflects the need to keep the Council s cost of the Fund at reasonable levels, even at the risk of possible adverse and volatile returns in the shorter term. It is considered that the asset allocation policy in place, determined following an asset liability investigation undertaken by the Fund s independent adviser, provides an adequately diversified distribution of assets. Additional diversification is achieved by employing more than one investment manager. Further diversification is present in the portfolio by investing in certain smaller companies and property pooled funds (unit trusts) operated by the investment managers. With the size of the Fund in mind, investment in these pooled unit trusts leads to lower volatility of returns and a wider spread of investments than would be possible from direct investment in these sectors. Investments are made subject to the statutory limits and restrictions, which are set out in the Regulations. The main provisions are set out in annex 2. The Investment Panel has not set any additional investment guidelines or restrictions. Realisation of Investments The realisation of investments are left to the investment managers discretion, however, the majority of investments held are quoted on major stock markets and could be realised quickly if required. The Fund s investments in certain unit trust and pooled vehicles do take longer than equities or fixed interest stocks to realise, e.g. property and venture capital. These investments are well within the ranges specified in the regulations and are operated or overseen by the Fund s investment managers. Whilst there is a risk in holding assets that are not readily realisable, the results of the asset liability study indicate that the Fund is unlikely to be a forced seller of investments for some time to come, and therefore, it is considered that the benefits of diversification gained by investing part of the Fund in pooled vehicles outweigh the disadvantage of a slower realisation process. 8

35 Custody Arrangements Statement of Investment Principles Revised June 2006 State Street has been appointed as custodian to the Fund. State Street is regulated by the FSA. Stocks are held as designated holdings or in designated nominee accounts, via CREST or as appropriate. The Custodian also provides banking facilities for the settlement of trades and the collection of income. The separation of investment management from custody is a crucial aspect of security of the pension fund assets. The Council holds minimal working cash balances with National Westminster Bank plc. 9

36 Statement of Investment Principles Revised June 2006 Section 6 Social, Environmental and Ethical Considerations The Regulations require the Council to state its policy on the extent (if at all) to which social, environmental or ethical considerations (commonly and below, referred to as socially responsible investment) are taken into account in the selection, retention and realisation of investments. The Investment Panel has considered socially responsible investment in the context of its legal and fiduciary duties, and the obligations that these place upon it. In view of the principle objectives described earlier in this Statement, the view has been taken that non-financial factors should not drive the investment process at the cost of financial return on the Council s Pension Fund. Therefore, the Investment Panel holds a policy of non-interference with the day-to-day decision making of the investment managers. Over the longer term, the Investment Panel considers that encouraging companies to demonstrate an awareness of the wider issues could enhance shareholder value. Therefore, the Investment Panel has asked the investment managers to take into account the following issues as part of the investment process: When evaluating companies for investment, the investment manager must also consider those activities, which may be deemed to be socially responsible or socially irresponsible and could therefore have a financial impact on the company s performance. If the assessment of companies for investment indicates that socially responsible activities could have an impact on a company s financial performance (positively or negatively), the investment managers must assess and take account of the associated risk and, where appropriate, seek to encourage companies to pursue better business practices. Investment managers should provide assurances that these issues are being taken into account on an agreed basis. 10

37 Statement of Investment Principles Revised June 2006 Section 7 Corporate Governance The Pension Fund s direct holdings in UK and overseas equities have associated with them the right to vote on resolutions at company general meetings. The Investment Panel believes in encouraging good corporate governance in the companies in which it invests and has adopted a series of voting principals in respect of its holdings in companies in the UK FTSE All-Share. For UK equities, the voting policy is, in general, based upon the guidelines issues by the Pensions Investment Research Consultant Ltd (PIRC), who has been retained to provide advice on corporate governance issues. Voting on overseas holdings is undertaken by the Investment Managers in accordance with their voting policies. 11

38 Statement of Investment Principles Revised June 2006 Section 8 CIPFA Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom The Fund s compliance with Myners ten principles of investment practise is set out at Annex 3. 12

39 INVESTMENT MANADATES ASSET ALLOCATION BANDS AXA Rosenberg Investment Management Limited - 45% of Fund Asset Class Lower Limit % Benchmark Upper Limit % Statement of Investment Principles ANNEX 1 Index Equities % UK Equities FTSE All Share North American FTSE All World North America Europe ex-uk FTSE All World Developed Europe ex-uk Japan FTSE All World Japan Pacific ex-japan FTSE All World Developed Pacific ex-japan Other International UCITS MSCI Global Emerging Markets Index Cash GBP 7 day LIBID deposit Newton Investment Management Limited - 20% of Fund High Alpha/Unconstrained Global Equity Mandate. Benchmark: an absolute return of 4% above the sterling 1 month London Inter-Bank Offer Rate (LIBOR). Standard Life Pension Funds Limited 30% of Fund Asset Class Lower Benchmark Upper Index Bonds Limit % % Limit % Long Gilts FTSE A Government Over 15 Years Long UK Corporate Bonds IBoxx Non- Gilts 10/15 + Years Index 13

40 Statement of Investment Principles ANNEX 1 Property 5% of the Fund Schroder Investment Management: To outperform the HSBC Balanced Property UT Median by 1% Merrill Lynch Investment Management - To outperform the HSBC Balanced Property UT Median by 1% 14

41 Statement of Investment Principles ANNEX 2 Statutory Restrictions on Investments 1% limit 2% limit 5% limit 10% limit 15% limit 25% limit Other Limits Any single subunderwriting contract. All contributions to any single partnership. All contributions to partnerships. All deposits with: 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 (4) in respect of accepting deposits as a result of an order made under section 38(1) of that Act, and all loans (excluding Government loans). All investments in unlisted securities of companies. Any single holding but not if an external investment manager is appointed and the single holding is in units or other shares of the investments subject to the trusts of any one unit trust scheme (See schedule 1 part II for details). All sub-underwriting contracts. All investments in units or other shares of the investments subject to the trusts of unit trust schemes managed by any body (see schedule 1 part 11 p.14 for exceptions). Open-ended investment companies (OEICS) where any one body manages the collective investment scheme constituted by the companies. Any single insurance contract. All securities transferred (or agreed to be transferred). The Occupational Pensions Schemes (Investment) regulations 1996 (SI 1996/3127), which impose restrictions on the amount of an occupational pension scheme, which may be invested in employerrelated investments, may further restrict or limit investments of fund monies. Those regulations are made under powers conferred by amongst others, section 40 of the Pensions Act (restrictions on employer related investments). All deposits with any single bank, institution or person (other than the National Savings Bank). 15

42 MYNERS TEN PRINCIPLES OF INVESTMENT PRACTICE Statement of Investment Principles ANNEX 3 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. 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. 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 forwardlooking business plan. Full compliance. The Council, as the administering authority, appoints the Pension Fund Investment Panel, specifically for the purpose of managing the Fund s investments. The Investment Panel is supported by the actuary, independent advisers and officers. A business plan for pension fund issues, and a training and development plan are drawn up annually. 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. Full compliance. The investment objective and attitude to risk have been reviewed and strengthened where necessary, following on from an asset liability study. 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. Full compliance. Investment constraints are consistent with the Regulations. The benefits of investment in alternative asset classes are under review. Principle 4. Expert advice Contracts for actuarial services and investment advice 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. Full compliance. A firm of independent investment advisers was appointed in November 2002 to provide the Investment Panel with pension fund management advice. Actuarial services have been subject to a separate tender process. 16

43 Statement of Investment Principles ANNEX 3 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) of measurement and evaluation, such that the mandate will not be terminated before the expiry of the evaluation timescale for underperformance alone. 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. Full compliance. Explicit mandates, subject to the control limits set out in the investment regulations, are in place. 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 Partial compliance. Monitoring of transaction costs established. Soft commissions are not permitted An active strategy remains to be considered. Principle 6. Activism The mandate and trust deed should incorporate the principle of the US Department of Labor Interpretative Bulletin on activism. 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. Partial compliance. Investment managers have clear corporate governance policies. The Investment Panel has an approved voting policy. Incorporating the US Department of Labor Interpretive remains to be considered. 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 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. Full compliance. Bespoke benchmarks with upper and lower control limits where applicable, and appropriate indices have been implemented. 17

44 Statement of Investment Principles ANNEX 3 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. Partial compliance. Separate monitoring of trustee performance and advisers has yet to be established 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. Partial compliance. Investment Panel s terms of reference to be reviewed. Investment strategy has been strengthened as part of the ongoing review. Principle 10. Regular reporting Trustees should publish their Statement of Investment Principles and the results of their monitoring of advisers and managers. They should send key information from these annually to members of these funds, including an explanation of why the fund has chosen to depart from any of these principles. Full compliance. The SIP is monitored and published annually as part of the Pension Fund Investment Panel s Annual Report. Extracts are included in the annual report sent to pensioners and contributors. 18

45 APPENDIX 8 Finance Services Governance Policy Statement Pension Fund March 2006