Annex 1

Statement of investment principles

Introduction

· Hampshire County Council is the administering authority for the Hampshire Pension Fund which includes the County Council, two city (unitary) councils, 11 district councils, around 120 other scheduled bodies, and 80 admission bodies. The total number of contributors is around 44,000 and there are approximately 23,000 pensioners.

· The Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 1999 require administering authorities of pension funds to prepare and review, from time to time, a written statement setting out the investment policy for their Fund.

· The Government has endorsed the recommendation in the Myners Report on Institutional Investment that Statements of Investment Principles should be strengthened to include details of the Fund's decision-making structure, investment objective, asset allocation strategy, and advisers' and managers' mandates.

· This SIP has been drafted in compliance with these regulations.

Responsible committee

· The Pension Fund Panel oversees the proper administration and management of the Pension Fund. It reports to the County Council's Governance Panel and is responsible for:

- appointing external fund managers and advisers

- considering and approving actuarial valuations every three years and determining the level of employers' contributions

- considering changes in pension fund regulations and determining actions required

- considering and approving strategic advice on investment policy

- considering and approving the external managers' asset allocation and investment strategies

- monitoring the investment performance of each manager against the scheme-specific benchmark, based on statistics prepared by Russell Mellon

- the periodic review of this Statement of Investment Principles.

Training

· Opportunities are made available for members of the Pension Fund Panel and officers in the County Treasurer's Department to attend training courses and seminars on pension fund matters, when necessary and appropriate. The cost of attending such events is charged to the Pension Fund.

· A training plan for members of the Pension Fund Panel is being implemented.

Use of advisers

· The Panel is advised by the County Treasurer on all Pension Fund investment and administrative matters.

· The Panel is also advised on investment matters by the Fund's independent adviser and sounding board, Harvey Cole.

· The Panel uses the Fund's actuary, Hewitt Bacon & Woodrow, for advice on matters when in-house expertise is not available. Advice is taken when necessary on asset allocation, manager selection, and investment performance targets from the actuary, the fund managers or specialist consultants or advisers as required or necessary.

Types of investments to be held

· Most of the investments of the Fund are managed by three fund managers (Deutsche Asset Management Limited, Schroder Investment Management Limited, and SG Asset Management) who have discretion to invest in shares, bonds and other investments to limits defined in Schedule 1 of the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 as amended by the Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 1999 and the Local Government Pensions Scheme (Management and Investment of Funds) (Amendment) Regulations 2000.

The main limits are:

- no more than 10% of each portfolio can be invested in any individual holding

- no more than 25% of each portfolio can be invested in each manager's in-house unit trusts.

Other restrictions placed on the managers are:

- they cannot invest in direct property, which is separately managed

- investment in unlisted securities is limited in value to 0.1% of each manager's portfolio.

· About 5% of the Fund is allocated to a UK direct-property portfolio managed by Cordea Savills LLP (formerly Savills Fund Management), a specialist property manager. No property investments are permitted in Hampshire, to avoid perceived conflicts of interest.

· On 1 January 2004, £10m was invested in a new UK share-based portfolio to be managed by Deutsche Asset Management Limited on an ethical basis. This replaced the portfolio managed by ISIS, whose contract was terminated on 30 June 2003.

The expected return on investments

· The overall objectives when investing the Fund are

- to achieve a 100% funding level, which means that all current and future fund liabilities (pensions and other benefits) can be met in full for the foreseeable future

- to maintain a stable employers' contribution level, with a long-term target around 200% of employees' contributions set for the actuaries.

· Around 40% of the Fund is managed by Schroder Investment Management Limited. Their target, with effect from 1 July 2002, is to achieve, over each three-year period (rolled quarterly), performance 1% a year above the Fund's scheme-specific benchmark. They should not underperform the benchmark by more than 3% over each year (rolled quarterly).

· Around 35% of the Fund is managed by Deutsche Asset Management Limited. Their target, with effect from 1 January 2002, is to achieve, over each three-year period (rolled quarterly), performance 1% a year above the Fund's scheme-specific benchmark. They should not underperform the benchmark by more than 3% over each year (rolled quarterly).

· Around 20% of the Fund is managed by SG Asset Management. Their target, with effect from 1 January 2002, is to achieve, over each three-year period (rolled quarterly), performance 1% a year above the scheme-specific benchmark. They should not underperform the benchmark by more than 3% over each year (rolled quarterly).

· About 5% of the Fund is in direct property investment and is managed by Cordea Savills LLP, who aim to outperform the Investment Property Databank (IPD) £50m to £250m benchmark by 1% a year over rolling three-year periods, with effect from 1 January 2002.

· Deutsche Asset Management Limited were asked to manage a small UK share-based ethical portfolio on 1 January 2004. They aim to match a specially constructed index based upon the stocks available to them for investment over a two-year period ending 31 December 2005. Performance of the portfolio will also be compared with the FTSE All-Share index over the same period.

Spread of investments

· The three main fund managers work to a central strategic asset allocation within the Fund's scheme-specific benchmark, and are allowed to invest their portfolios within the ranges set out below:

· Asset/liability studies are commissioned periodically to make sure, as far as possible, that the investment spread is appropriate to minimise the risk of fluctuations in employers' contribution rates, to match liabilities and achieve a 100% funding level, with the overall aim of setting an investment benchmark to match the maturity of the Fund. The next study will be commissioned in 2005 when the actuarial valuation due at 31 March 2004 is complete.

· Projected annual investment returns on asset classes in excess of the return on cash assumed in the last asset/liability study were:

· Managers are expected to maintain a relatively wide-ranging portfolio of investments within each sector to limit risk.

Realisation of investments

· Managers are asked to avoid unnecessary sales and purchases of stocks which incur transaction costs. All sales and purchases of stocks must be regarded by the managers as being in the financial interests of the Fund, ie they will either improve the return or limit excessive risk.

· Transaction costs are monitored closely and reported to the Pension Fund Panel on an annual basis.

· Managers are asked not to invest in stocks which are not readily realisable (turned into cash).

Social, environmental and ethical considerations

· The prime objective of the investment of the Fund is to achieve the best financial return consistent with an acceptable degree of risk.

· However, the Fund recognises that the adoption by companies of positive social, environmental and ethical principles in planning their activities can enhance their long-term performance and increase their financial returns.

· The Fund has delegated to the fund managers responsibility for taking social, environmental and ethical considerations into account when assessing the financial potential and suitability of investments. Each manager must work positively with companies to promote forward-looking social, environmental and ethical standards, rather than adopting a policy of negative screening of stocks.

· Managers are asked not to invest in stocks that could reasonably be expected to cause embarrassment to the Fund.

· Deutsche's ethical portfolio has been invested in UK companies that promote environmental improvements, conservation of natural resources, safe products and services, and good staff and customer relations.

Exercise of rights attaching to investments

· Managers have been instructed to exercise the Fund's responsibility to vote on company resolutions wherever possible.

· They have also been instructed to intervene in companies, either by voting or by direct contact with company management, if companies are failing and the Fund's financial interests are jeopardised.

· The Fund believes that if companies comply with the principles of the combined code published by the Stock Exchange, following the Hampel Report on corporate governance, this can be an important factor in helping them succeed; but the Fund also accepts the need for a flexible approach that is in the common long-term interests of shareholders, company employees and consumers. The Fund's managers should exercise their votes with this in mind.

· In particular fund managers should cast the Fund's votes to ensure that:

- executive directors are subject to re-election at least every three years

- executive directors' salaries are set by a remuneration committee consisting of a majority of independent non-executive directors, who should make independent reports to shareholders

- arrangements for external audit are under the control of an audit committee consisting of a majority of independent non-executive directors, with clear terms of reference - these should include a duty to ensure that the level of non-audit work given to auditors is closely controlled and does not significantly exceed their audit-related fee unless there are, in any manager's opinion, special circumstances to justify it

- in the managers' opinion, no embarrassment is caused to the Fund in relation to the Fund's beneficiaries, Hampshire residents or the general principles of the combined code.

· The managers are required to report to the Panel with a full explanation in any case where they do not follow these guidelines.

Custody

· Arrangements for the custody of the Fund's assets have been considered by the Panel, which has decided to delegate these arrangements to the investment managers. This policy is reviewed periodically.

Communications with Fund employers and members

· Each financial year, an annual report on the Fund is prepared for consideration and approval by fund employers at an Annual General Meeting to be held no later than 30 September in the following financial year. This covers the Fund's accounts, investment arrangements and policy, investment performance, Scheme changes and other issues of current interest.

· A leaflet for fund pensioners and contributors is also prepared annually and distributed by 31 October. This summarises the accounts, and the investment management and administrative arrangements.

· This Statement of Investment Principles is published and made available to Scheme employers within three months of any amendment(s).

· Annual benefit statements are provided to contributors and an annual newsletter to pensioners.

Membership of external bodies

· The Hampshire Pension Fund is a member of the following external bodies:

- the National Association of Pension Funds (NAPF)

- the Local Government Pensions Committee (LGPC).

Service standards

· The County Council follows best practice as set out in the LGPC circular `Principles of Good Practice for the Management of Local Government Pension

Schemes'.

Review of the Statement of Investment Principles

· This Statement of Investment Principles is subject to review at any time by the County Treasurer, who will report to the Pension Fund Panel accordingly, seeking approval for any changes.

Principles for the management of defined benefit schemes - compliance

Effective decision-making

· The County Council has delegated responsibility for the management and administration of the Fund to its Pension Fund Panel, which reports to the Council's Governance Panel.

· Workshops and seminars are made available to Panel members and County Council officers on investment and pensions matters.

· Detailed investment decisions are delegated to fund managers.

· Advice on asset allocation is sought from the actuary.

· Full briefings on investment and pensions matters are provided to Panel members by the County Treasurer.

· The Panel also takes advice on investment matters from its independent adviser and sounding board, Harvey Cole.

· Panel members are not paid for pension fund work as there is no power to do so under Local Government Pension Scheme regulations.

· A business plan, which includes a training plan, has been prepared.

Clear objectives

· The Fund's objectives and risk limits are set out clearly in this Statement of Investment Principles.

Asset allocation

· The Fund's actuary, Hewitt Bacon & Woodrow, carried out an asset/liability study in 1999.

· This was used to determine a strategic asset allocation which will enable the Fund to meet its liabilities and maintain stable employers' contribution rates.

· The study was used to draw up a scheme-specific benchmark and ranges by investment sector within which the three main fund managers must work.

· The 5% allocation to direct property is in line with the actuary's recommendation.

· A further asset/liability study may be commissioned from the actuary in 2005 after the next actuarial valuation at 31 March 2004, as appropriate.

Expert advice

· The Fund's contract for actuarial and other advice is open to competitive tender periodically. The current contract with Hewitt Bacon & Woodrow runs until March 2005.

· Harvey Cole acts as an independent adviser to, and sounding board for, the Pension Fund Panel.

· Investment managers themselves are asked for advice and new approaches are developed in partnership.

· Little use is made of other advisers as sufficient expertise is available within the County Treasurer's Department. Hence there is no separate tender process for other advice.

Clear mandates for the managers

· All mandates have clear objectives and timescales for performance assessment.

· Acceptable levels of risk are set by the range allowed around the central asset allocation in the benchmark, and by the limits placed on underperformance in any 12-month period.

· There are no soft commission arrangements.

Voting rights and engagement

· The Fund's policies on voting rights and engagement are set out clearly in this Statement of Investment Principles.

Appropriate benchmarks

· The Fund's benchmark and the managers' targets are set out clearly in this Statement of Investment Principles.

· The Pension Fund Panel takes the view that active management is better than passive management or index-tracking, and that multi-asset rather than specialist managers are preferable.

Performance assessment

· Formal reviews of the managers' performance take place twice a year. In addition, two further meetings take place between the managers and the County Treasurer each year.

· There is no formal system for reviewing the performance of the members of the Pension Fund Panel.

Transparency

· This Statement of Investment Principles covers all areas as proposed by the Myners Committee and subsequently confirmed by the Government.

Reporting

· The results of the Pension Fund Panel's performance monitoring exercises are published in the annual report for the Fund.

· Key information is supplied to scheme members in the annual leaflet.

· An updated Statement of Investment Principles is published and made available to scheme employers within three months of the approval of any amendment by the Pension Fund Panel.