Contact: David Wilson, ext 7407

1 Introduction

1.1 The first of Myners' ten principles for defined benefit schemes states that pension fund trustees should either have sufficient skills, information and resources to take decisions effectively, or delegate those decisions to those who have. The fourth of Myners' principles suggests that contracts for investment advice should be opened up to competition separately from those for actuarial services.

1.2 A number of other county administering authorities have made arrangements to appoint independent advisers to assist their investment panels. This report looks at a sample of these arrangements and the roles played by such advisers. It then sets out the options for the Panel.

1.3 It concludes by asking the Panel to approve the Chairman's decision that Harvey Cole as an Honorary Alderman should receive a copy of the papers for each of the Panel's meetings and act as an independent "sounding board" for the Panel.

1 Arrangements in place at other administering authorities

1.1 Investment advisers used by other county administering authorities either have an actuarial background, or are investment specialists. Some are still working for other employers as fund managers or actuaries, and take on investment advisory roles on a consultancy basis in a private capacity. Others are retired. Some administering authorities commission investment advisory work from their appointed actuary when required.

1.2 There is no standard method of selecting an investment adviser. Some authorities have used standard selection procedures, placing advertisements and carrying out an interview process. Others have made arrangements without interview with actuaries who previously worked on their funds.

1.3 They are normally paid, either in the form of an annual fee, a fee per meeting attended, or a fee per day worked. Annual fees paid to investment advisers vary between £5,000 and £10,000 a year. One authority pays £2,500 per investment panel meeting attended. Another authority pays £1,000 per day worked.

1.4 There are several options when deciding on an independent adviser's role:

· They can act as a "sounding board" by reviewing Panel papers and/or attending Panel and, sometimes, officers' meetings.

· Some advisers not only attend meetings, but prepare reports independently of both the investment managers and the relevant treasurer or director of finance.

· Others play an even more active role, assisting with, and in one case organising, manager selection processes, and taking the main responsibility in monitoring managers' performance.

1.5 The authorities using investment advisers see the advantages as:

· They are totally independent, having no financial stake in the funds they are advising.

· They are often investment specialists who may have expertise which is in short supply in some local authority finance departments.

· They provide investment panel members with alternative views to those put forward by fund managers and finance staff.

1.6 However, there are drawbacks too:

· They have no clearly separate role - they may duplicate work carried out both by fund managers, the appointed actuaries and local authority finance staff.

· They are normally paid, meaning additional expense to pension funds.

· They are no guarantee of good performance - one administering authority has recently terminated its investment adviser's contract and is currently seeking tenders for a replacement following poor performance from one of its managers.

· There could be confusion of accountability.

· Possible indemnity issue.

2 Conclusions

2.1 The Panel may feel that the current arrangements work well and that no change is needed. Both the current Panel and the County Treasurer have sufficient background and experience in investment matters. The Panel is able to take decisions effectively in accordance with Myners' first principle. There is a danger of confusing accountability with the appointment of another adviser and such persons may not be completely independent or free of conflicts of interest, depending on their background, or have relevant recent experience.

2.2 If further advice is needed, the Hampshire Fund has used the appointed actuary, Hewitt Bacon & Woodrow, and has also called on the experience of senior managers at Deutsche and Schroders. All three firms have extensive resources and expertise, as do the new managers SG Asset Management. Specialist advice can also be commissioned from consultants or elsewhere on specific issues should the Panel consider it necessary.

2.3 Nonetheless, Harvey Cole, until recently a member of the Panel, offered in June 2002 to act as a sounding board for the Panel. His role would be to help safeguard the Fund and its members' interests.

2.4 Mr Cole would receive copies of all Panel reports when they are despatched. He could prepare a selection of questions or points to raise with the managers, which would complement and be incorporated in the normal briefings from the County Treasurer. He would not attend Panel meetings.

2.5 The Chairman has agreed this arrangement and the papers for the Panel meeting on 23 May 2002 were supplied to him, as were those for this meeting.

2.6 The Panel may feel that collectively it has sufficient experience and skills to continue the current arrangements, but if it wished to consider appointing an independent adviser, tender arrangements would be necessary. Other options might exist - for example making use of known individuals such as Barry Sanjana (if not re-appointed elsewhere) or Brian Peters (both initially with Morley), or Hugh Bolland (ex-Schroders). Again their advice would be helpful but might suffer from the points identified in paragraph 3.1 of conflicts of interest in the former case, and lack of current experience in the latter case.

Recommendations

1 That the Panel continues its current arrangements and does not appoint an independent adviser, as it has sufficient skills, information, resources and advice to take decisions effectively, meeting the first of Myners' principles.

2 That the Chairman's action in appointing Harvey Cole as an informal independent sounding board for the Panel be endorsed.

3 That the remainder of this report be approved.

Section 100 D - Local Government Act 1972 - background papers

The following documents disclose facts or matters on which this report, or an important part of it, is based and has been relied upon to a material extent in the preparation of this report.

NB the list excludes:

1. Published works.

2. Documents which disclose exempt or confidential information as defined in the Act.

None.

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