Contact: David Wilson, ext 7407

1 Introduction

1.1 At its meeting in November 2002, the Panel approved the Fund's first business plan, which includes a section setting out the Fund's training policy for Panel members and County Council officers. It included a commitment to "review and revise the business plan annually in November and ... evaluate performance against the action plan".

1.2 This report:

· Sets out an updated business plan.

· Looks briefly at performance against the action plan.

· Reports back on the second training session held in July 2003.

· Gives information on further training courses available to Panel members.

1 The Business Plan

1.1 A draft update of the plan is attached at Appendix 1. Significant changes are shown in italics.

1.2 Much of the previously approved plan remains appropriate and has not been altered. However, a year has passed since the Panel's approval of the original plan, and the action plan (the final section of the document) has been revised and updated accordingly.

1.3 In particular, the extension of the action plan to cover the period until March 2006 has meant that the following are now included:

· Planned annual reviews of this business plan, the Fund's Statement of Investment Principles, the size of and need for the property portfolio, and other matters in 2005/06

· Planned review of the Fund's investment arrangements in 2005 in preparation for the review of the three main investment managers' contracts in December 2005

· Planned review of Savills' performance to be considered by the Panel in November 2005. Savills' contract is due to expire on 31 May 2006, but can be extended to 31 May 2008 if performance is satisfactory.

2 Performance against the action plan

2.1 The original business plan approved in November 2002 listed a number of actions planned for completion in 2002/03 and the first half of 2003/04. These are listed below, with completion dates, or explanations where actions have been deferred:

· Consider the need for an interim actuarial valuation of the Fund in view of poor market performance - completed by the deadline of November 2002 - the Panel agreed that no interim valuation should be commissioned.

· Review ISIS's ethical management contract - initial report considered by the Panel by the deadline of November 2002 - further report in May 2003 leading to the termination of ISIS's contract. The future of the ethical portfolio is the subject of a report to this meeting (item 17)

· Review performance of the three main managers' portfolios - completed by the deadline of May 2003. The Panel agreed that their contracts should continue to run until expiry at 31 December 2005.

· Review the arrangements for the provision of AVC facilities - deadline May 2003 - not yet completed. No changes proposed. Performance will be reviewed in May 2004.

· Review the Statement of Investment Principles - deadline May 2003 - deferred to this meeting (item 7).

· Review business plan and progress against the action plan - completed by virtue of this report by the deadline of November 2003.

· Review management fees, transaction costs and the use of soft commission - completed by the deadline of November 2002 - further review in November 2003 by virtue of report to this meeting (item 8).

3 Deutsche's second training session held in July 2003

3.1 Deutsche's second training session for Panel members was held after the last Panel meeting on 8 July 2003. The programme for the session is shown in Appendix 2.

3.2 The presentations were all good and helpful to the Panel members and officers present. There was a more detailed session on alternative investments, examples being private equity, hedge funds, the use of swaps and bonds issued by emerging market economies.

3.3 Deutsche argued that these were all areas which if used correctly could improve or stabilise returns. The Panel agreed in July 2002 to defer any move into alternative investments until the next full review of the Fund's management arrangements in 2005.

3.4 There was then a useful presentation on Deutsche's policy on corporate governance and its importance in the investment process. They have placed considerable emphasis recently on developing their corporate governance strategy and ethical investment capability. Deutsche argued that poor corporate governance was a major reason for the recent equity market weakness. Deutsche vote on the Fund's behalf at all UK company meetings, and are increasingly active in the US. They have plans to extend this to other major countries.

3.5 Deutsche also explained further their new global equity strategy for managing equities. This was discussed further at the last Panel meeting on 6 November, and a further report has been prepared for this meeting (item 15).

4 Further training

4.1 There are many courses and conferences available to Panel members who feel they need further training. A selection of courses currently available is attached at Appendix 3.

4.2 Any member who wishes to attend any of the courses listed should contact the County Treasurer, who will have copies of the brochures available at the meeting and can make any necessary arrangements.

Recommendations

1 That the Panel approve the revised business plan.

2 That the Panel note progress on the action plan.

3 That the Panel consider the courses listed in Appendix 3 and contact the County Treasurer if they wish to attend any of them.

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.

TITLE FILE

None.

Appendix 1

Business plan

Mission and objectives

The County Council, as administering authority for the Hampshire Pension Fund, has delegated responsibility for the management of the Fund's investments to its Pension Fund Panel, consisting of eight county councillors and non-voting representatives of pensioners and contributors. There is also an independent adviser to the Panel, Harvey Cole.

The Panel's mission is to provide an efficient and effective pension scheme for all employees and pensioners of all eligible employers in Hampshire, in accordance with the requirements of the legislation for the Local Government Pension Scheme.

The Panel's objectives are:

· To achieve a long-term 100% funding level, which means that all current and future fund liabilities can be met (subject to review with next valuation results)

· To maintain a stable employers' contribution rate at around 200% of employees' contributions (subject to review after the outcome of the next actuarial valuation at 31 March 2004)

· To respond promptly to legislative changes affecting the Local Government Pension Scheme and pension provision generally

· To comment fully on consultation papers dealing with pension matters in the interests of the Fund's participating employers and members within the deadlines set

· To make sure that the Fund follows best practice as recommended by the Government, the Local Government Pensions Committee (LGPC), the National Association of Pension Funds (NAPF) and other organisations specialising in pensions matters

· To keep abreast of all developments affecting the Local Government Pension Scheme by undertaking training and/or taking advice from external fund managers, external consultants and County Council officers as appropriate

· To make arrangements for keeping the Fund's participating employers and members fully informed about matters which affect them.

The funding level and employers' contribution rate

The Panel seeks to achieve a 100% funding level and stable contribution rate by:

· Commissioning a full actuarial valuation of the Fund every three years as required by law to determine employers' contribution levels - the next statutory valuation will take place as at 31 March 2004 and will determine contributions payable in the three years commencing 1 April 2005

· Arranging interim actuarial valuations if developments are such that the funding level can be expected to have changed significantly

· Commissioning an asset/liability study following valuations or as necessary to help determine the optimum asset allocation needed to meet the Fund's liabilities

· Seeking tenders for the provision of actuarial and consultancy services every six years - the current actuary is Hewitt Bacon & Woodrow whose contract terminates on 31 March 2005 and tenders will be considered by the Panel in the autumn of 2004, and at six-yearly intervals thereafter

· Where an actuarial valuation reveals a past service deficit, employers' contributions will be agreed with the actuary to recover the deficit.

Investment of the Fund

The Panel seeks a return on the investment of the Fund which will enable 100% funding to be achieved and its liabilities to be met with a stable employers' contribution rate. It aims to achieve this by:

· Using the results of asset/liability studies and other analyses to set benchmark asset allocations and performance targets for external active investment managers

· Reviewing managers' performance against those targets over three-year rolling periods at Panel meetings held in the spring and autumn of each year - performance will also be monitored over one-year periods at those meetings

· Reviewing annually the size of and need for each manager's portfolio in the light of their performance in each financial year at Panel meetings to be held in the spring of each year

· Appointing investment managers for standard periods of seven years, although all such appointments will be terminable at any time with one month's notice. Contracts will not normally be terminated within the first three years for below-target performance alone - the current contracts for the three main fund managers (Deutsche, Schroders and SG Asset Management) are due to run until 31 December 2005

· Seeking tenders if necessary for the provision of investment management services every seven years over the nine-month period before the review of the existing contracts - tenders would be considered by the Panel in September 2005

· Reviewing the need and future options for its ethically screened portfolio as necessary

· Considering the need for and size of the Fund's UK direct property portfolio (currently managed by Savills Fund Management) at a Panel meeting in the spring of each year

· Reviewing Savills' performance at the Panel's meeting in the autumn of 2005 - their contract runs until 31 May 2006 but can be extended by two years to 31 May 2008 if performance is satisfactory

· Monitoring the level of management fees paid in the previous 12 months to all the external fund managers at a Panel meeting in the autumn of each year

· Reviewing the level of transaction costs (brokerage and stamp duty) incurred in the previous 12 months by the external managers on the Fund's behalf in the autumn of each year

· Monitoring the external managers' use of soft commission arrangements (if any) in each calendar year at a Panel meeting in the autumn of each year

· Delegating to the County Treasurer responsibility for monitoring the managers' performance between Panel meetings - the County Treasurer meets the managers in the summer and winter of each year.

Arrangements for the investment of additional voluntary contributions (AVCs)

The Panel aims to make sure that there is a wide and varied selection of high-performing investment options for fund contributors who wish to make additional voluntary contributions (AVCs).

The current AVC providers for contributors to the Fund are Eagle Star and Halifax Equitable Life. The performance and options offered by these providers will be subject to annual review by the Panel in May of each year.

Legislative changes

The Panel aims to respond promptly to legislative changes with implications for the management and administration of the Fund. It seeks to achieve this by:

· Closely monitoring new legislation affecting the Local Government Pension Scheme or pension provision generally - this role is delegated to the County Treasurer

· Considering reports on the implications for the Fund of relevant draft legislation

· Agreeing any actions necessary to ensure full compliance when the final legislation is enacted including meeting any deadlines.

Consultation papers

The Panel aims to play an active role in responding to and commenting on consultation papers on pensions matters on behalf of fund employers and members, seeking to ensure high standards of corporate governance and best practice, and the best interests of contributors and pensioners.

Best practice

The Panel will ensure that the Fund follows best practice as recommended by the Government, the Local Government Pensions Committee (LGPC), the National Association of Pension Funds (NAPF) and other organisations specialising in pensions matters. It has delegated responsibility for achieving this to the County Treasurer.

Decision-making

The Panel will take advice as necessary to ensure that all decisions are made in the best interests of the Fund and its members. Advice is provided as necessary by:

· The County Treasurer and his staff

· The actuary, Hewitt Bacon & Woodrow

· The Fund's external investment managers

· The Fund's independent external consultant and sounding board, Harvey Cole.

Developments and training plan

The Panel aims to keep abreast of all developments affecting the Local Government Pension Scheme by undertaking training and/or taking advice when necessary from external fund managers, external consultants and County Council officers.

The Panel also expects the County Treasurer and relevant members of his department (who are the Panel's main advisers) to keep up-to-date with developments in pensions and investment matters and to undertake training as required. The County Treasurer's Department has been given the "Investors in People" award, which shows its commitment to identifying and providing for learning and development opportunities for its staff.

Communications with participating employers and fund members

The Panel will make arrangements to keep the Fund's participating employers and members fully informed about matters that affect them by publishing:

· an Annual Report on the Fund for each financial year to be available for an Annual General Meeting of fund employers held in September of each following financial year

· an annual leaflet for the Fund's pensioners and contributors which will contain key information about the management and investment of the Fund, changes and developments in the Local Government Pension Scheme, service standards and contact points

· an updated employees' guide to the Scheme annually

· an annual newsletter to pensioners.

Review and evaluation of business plan

The Panel will review and revise the business plan annually in November and will evaluate performance against the action plan.

Actions for 2004/05 and 2005/06

Make arrangements for the full actuarial valuation of the Fund as at 31 March 2004

Review investment arrangements - May 2005, and as appropriate seek any tenders for the provision of investment management services - deadline September 2005, decide on appropriate new investment arrangements - November 2005

Review benchmarks and alternative investment strategies - deadline November 2005

Implement new investment arrangements - deadline January 2006

Review the arrangements for the provision of AVC investment facilities - deadline May 2004 - further review in May 2005

Keep Panel members' training needs under review - ongoing

Seek tenders for the provision of actuarial services from April 2005 - deadline November 2004

Review the Fund's Statement of Investment Principles - deadline November 2004 - further review November 2005

Review this business plan and review progress against the action plan - deadline November 2004 - further review November 2005

Review the size of and need for the property portfolio - deadline May 2004 - further review in May 2005

Review management fees and transaction costs - deadline November 2004 - further review in November 2005

Appendix 2

Programme for training session by Deutsche's staff held on 8 July 2003

Introduction and summary of conclusions from 8 May (Craig Brown)

Alternative asset classes (Rob Barr)

Property - alternative or traditional asset class (Nigel Bennett)

Corporate governance: why it matters to Deutsche (Andrew Tusa)

Global equities (Roger Morris)

The way forward (Craig Brown)

Open forum

Deutsche's presentation slides for these talks are available from the County Treasurer.

Appendix 3

List of courses and seminars currently available

LGPS Fundamentals (notified to Panel members in July 2003)

Supplier: Local Government Pensions Committee

Officially approved by the Office of the Deputy Prime Minister

Full course takes 3 days

Annually

Only third day now available in 2003, but will be re-run in 2004 (dates to be announced)

Edinburgh 4 December 2003

Leeds 16 December 2003

Birmingham 11 December 2003

Cardiff 9 December 2003

London 18 December 2003

Subject matter: duties and responsibilities of Panel members, effective communication with contributors and pensioners, cash and money market investing, risk measures, hedge funds, futures and options. Specifically designed for councillors responsible for local government pension funds.

Trustee courses on pensions

Supplier: Hewitt Bacon & Woodrow

One-day courses

Courses in pensions essentials and trustees' essentials

Dates and venues notified on application

Subject matter: covers trustees' dutues and responsibilities, scheme design, inland revenue rules, Myners Report, pensions legislation. More geared to the private sector.

Fund management overview

Supplier: Investment Education plc

Three-day course

London

1-3 December 2003

2-4 February 2004

Subject matter: fund management, including the opportunity to manage a simulated portfolio.

Performance measurement workshop

Supplier: Investment Education plc

Three-day course

London

8-9 March 2004

Subject matter: how performance is measured, benchmark choices, risk measures, interpretation.

How pension funds and their trustees think

Supplier: Investment Education plc

One-day course

London

2 March 2004

Subject matter: kinds of pension schemes, current pensions issues, investment issues, manager selection, performance measurement, actuarial valuations.

Investment update

Supplier: National Association of Pension Funds

One-day course

Usually London

2004 dates to be announced

Subject matter: investment powers, Myners report, setting benchmarks, defined benefit/defined contribution schemes, investment in falling markets.

Local Government Chronicle - members' role in pensions seminar

Supplier: Local Government Chronicle

One-day seminar

Usually London

May 2004 - date to be announced

Subject matter: market outlook, performance measurement, discussion forum, the actuary's role, the Treasurer's role.

Courses run by Deutsche Asset Management

Half-day seminars

Several levels - introductory, advanced and "Chairman of Trustees" courses

Specialist investment courses

London

Fixed income investment 5 December 2003

Introduction and advanced 23 January 2004

Local authority specialist 5 March 2004

Chairman of Trustees 2 April 2004

Fixed income investment 11 June 2004