Contact: David Wilson, ext 7407

1 Introduction

1.1 In October 2001 and July 2002, the Panel considered reports on the Government's ten recommended principles for the management of defined benefit schemes (ie schemes like the Local Government Pension Scheme where benefits are defined and are not dependent on investment performance) following the publication of the Myners report on institutional investment. Administering authorities of local authority pension schemes are required to state their compliance or otherwise with the ten principles in their Statement of Investment Principles (SIP). The Hampshire Fund's SIP is included at the Appendix to item 6 on this Agenda. The final section of the SIP meets this requirement, setting out clearly the extent of the Hampshire Fund's compliance.

1.2 When introducing the ten principles, the Government promised to review the extent to which the principles had been effective in bringing about the necessary improvements in practice after two years.

1.3 This review was published by the Government in December 2004. This report reminds the Panel of the ten principles, summarises the results of the Government's review, and considers any implications for the management and administration of the Hampshire Fund.

1 The ten principles for the management of defined benefit schemes

Principle 1 - Effective decision-making

1.1 Trustees should take decisions `with the skill and care of someone familiar with the issues concerned'. They should be adequately trained in investment matters, have sufficient in-house and external support and expertise. They should draw up a business plan, incorporating a training plan, which is subject to regular formal review.

Principle 2 - Clear objectives

1.2 The Fund's investment objective should reflect the trustees' best judgement of what is necessary to meet the Fund's liabilities. It should address the level of acceptable risk and include targets which are not related to peer group performance or market indices.

Principle 3 - Asset allocation

1.3 Strategic asset allocation decisions should receive proper attention, and be appropriate for meeting the Fund's investment objective. Trustees should consider the full range of investment options available, including alternative investments like hedge funds and private equity.

Principle 4 - Expert advice

1.4 Contracts for actuarial services and investment advice should be opened to separate competition. Funds should be prepared to incur sufficient fees for each service to attract a wider range of potential providers.

Principle 5 - Clear mandates for managers

1.5 Agreements with investment managers should state clear objectives, timescales for assessment and risk parameters. Contracts should never be terminated prior to the expiry of the evaluation timescale for underperformance alone. Brokerage and other transaction costs should be regularly scrutinised by trustees.

Principle 6 - Voting rights and engagement

1.6 Trustees should ensure that their fund managers have a clear voting strategy, and a strategy for engagement (direct discussions) with investee companies.

Principle 7 - Benchmarks

1.7 Trustees should consider the appropriateness of benchmarks in consultation with fund managers, and consider the style of management separately for each asset class (eg active or passive, multi-asset or specialist).

Principle 8 - Performance assessment

1.8 Trustees should formally review the performance of all managers and advisers, and assess their own performance as trustees

Principle 9 - Transparency

1.9 Statements of Investment Principles (SIPs) should set out clear responsibilities for making decisions, the investment objective, the asset allocation strategy, the mandates for the Fund's managers and advisers, and the fee structures in place.

Principle 10 - Reporting

1.10 Trustees should publish their SIP and the results of performance monitoring exercises. Key information should be supplied regularly to scheme members.

2 The Treasury review

2.1 The Treasury published its review, entitled `Myners principles for institutional decision-making: review of progress', in December 2004.

2.2 Its main conclusion was that considerable progress had been made in complying with the ten principles by defined benefit schemes. However, when announcing publication, Stephen Timms, Financial Secretary, commented `further action is needed to accelerate progress in key areas, in particular in relation to trustee expertise and decision-making processes'.

2.3 The Treasury set out proposals in the review to strengthen and amplify the Myners principles in areas where progress has lagged. The proposals are:

· The `chair of the board' should be responsible for making sure that trustees taking decisions are familiar with investment issues (re principle 1).

· In the case of larger funds with more than 5,000 members (which includes the Hampshire Fund), the `chair of the board' and at least one third of trustees should be familiar with investment issues (re principle 1).

· Larger funds should also have access to in-house expertise equivalent to at least one full-time member of staff familiar with investment issues (re principle 1).

· Funds should contract separately for actuarial advice, investment advice, strategic asset allocation advice, and fund manager selection advice (re principle 4).

· Trustees should publish the results of the monitoring of their own performance to members, and ensure that key information provided to members is also available on a dedicated website (re principles 8 and 10).

3 Implications for the Hampshire Fund

3.1 The difficulty with the Government's first two proposals is the precise meaning of `familiar with investment issues'. The Panel consists of 13 members, six of whom have served on the Panel for a number of years (including the employee and pensioner representatives). These members clearly meet this criterion. At its meeting on 26 May, the Panel considered a report (item 6 on that Agenda) on the need for the new members of the Panel to consider their training requirements. That report recommended that new Panel members should attend the Local Government Pension Committee `Fundamentals' course, which is specially tailored for those responsible for local authority funds.

3.2 With regard to the availability of in-house expertise, the County Treasurer has several members of staff who work to a greater or lesser extent on pension fund investment issues. It is suggested that the Hampshire Fund is already fully compliant here.

3.3 The Hampshire Fund currently seeks tenders for actuarial services and other consultancy advice (see item 14 on this Agenda). Independent advice is provided to the Panel by Mr Harvey Cole, who is unpaid. The Fund's asset allocation and scheme-specific benchmark was developed in 2001 with assistance from both Deutsche and the actuary. Until now, virtually all advice on manager selection has been provided in-house by the County Treasurer, complemented by the expertise of the Panel members. This is under review and discussed further in the report at item 13 on this Agenda.

3.4 It is not clear what is meant by the monitoring of trustees' performance. The Fund's annual report sets out details of the areas covered by reports to the Panel, for example the Fund's performance, and changes to the Local Government Pension Scheme. However, this can never be a reliable measure of the quality of the Panel members' own performance. The Treasury's review indicates that guidance may be issued on a framework for an independent review of the management and administration of pension funds, which could include an assessment of trustees' own performance. A further report will be made when guidance is available, but it is worth noting that the Fund is scrutinised by its external auditors, the Audit Commission. The Commission already monitors the agendas, minutes and reports made to the Panel to ensure that all relevant issues are considered, that decisions are taken on reasonable grounds and that reports are of an acceptable standard. No adverse comments have been made to date.

4 Conclusions

4.1 Although generally compliant with the Myners principles, more needs to be done to ensure that:

· Training of Panel members is sufficient.

· Adequate advice is taken when conducting the next review of the Fund's investment management arrangements.

4.2 The Audit Commission already reviews the Panel's work, and has made no adverse comment.

4.3 A further review of compliance with the Myners principles will be undertaken as part of the reviews of the Fund's Statement of Investment Principles and Business Plan to be considered at the Panel's meeting on 25 November 2005.

Recommendation

1 That the Panel note this report.

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.