Agenda Item: 8

HAMPSHIRE COUNTY COUNCIL

Decision Report :

Decision Maker:			Pension Fund Panel
Date of Decision:			21 November 2008
Decision Title:			Review of the Fund's Statement of Investment Principles
Decision Reference:			443
Report From:			County Treasurer
Contact name:		Anthony Dodridge
Tel:	01962 847407			Email:	[email protected]

EXECUTIVE SUMMARY

1) Summary of Decision Area:

1.1. Review of the Hampshire Pension Fund's Statement of Investment Principles.

2) Issues Covered in Report:

2.1. The Statement of Investment Principles should be reviewed and updated by the Pension Fund Panel each year.

2.2. A few changes are necessary this year, and these are highlighted in Appendix 1.

3) Recommendations:

3.1. That, subject to any amendments the Panel may wish to make, the updated Statement of Investment Principles be approved.

MAIN REPORT

1) Purpose of the Report:

1.1. Review of the Hampshire Pension Fund's Statement of Investment Principles.

2) The Statement of Investment Principles

2.1. A revised draft of the Statement of Investment Principles (SIP) is attached as Appendix 1 for approval. A few changes are necessary this year, and these are highlighted in Appendix 1.

2.2. In particular, a separate report on this Agenda covers the frequency of meetings of the Pension Fund Panel. Depending on the Panel's views on this, the relevant section of the SIP will be amended as necessary.

2.3. The Fund's Governance Policy Statement is included in this SIP on page 8. The new Governance Compliance Statement is separately covered in item 9 on this Agenda.

3) Recommendations:

3.1. Please see recommendations outlined on the Executive Summary.

Integral Appendix A

CORPORATE OR LEGAL INFORMATION:

LINKS TO THE CORPORATE STRATEGY
			Yes	No
Hampshire safer and more secure for all
Corporate Business plan link no (if appropriate)
Maximising well-being
Corporate Business plan link no (if appropriate)
Enhancing our quality of place
Corporate Business plan link no (if appropriate)
OR
This proposal does not link to the Corporate Strategy but, nevertheless, requires a decision because:

OTHER SIGNIFICANT LINKS:
Links to Previous member decisions:
Title	Ref	Date
Direct Links to Specific Legislation or Government Directives
Title		Date

Section 100 D - Local Government Act 1972 - background documents
The following documents discuss facts or matters on which this report, or an important part of it, is based and have been relied upon to a material extent in the preparation of this report. (NB: the list excludes published works and any documents which disclose exempt or confidential information as defined in the Act.)
Document	Location
None	n/a

Integral Appendix B

COMPREHENSIVE RISK & IMPACT ASSESSMENT:

Race and Equality Impact assessment

Race and equality impact assessment has been considered in the development of this report and no adverse impact has been identified.

Crime prevention issues

The County Council has a legal obligation under Section 17 of the Crime and Disorder Act 1998 to consider the impact of all the decisions it makes on the prevention of crime. The proposals in this report have no impact on the prevention of crime.

Appendix 1

STATEMENT OF INVESTMENT PRINCIPLES

The Fund's Pension Fund Panel undertook its latest substantive review of the Statement of Investment Principles (SIP) in November 2007.

Introduction

Hampshire County Council is the administering authority for the Hampshire Pension Fund, which covers employees of the County Council, two city (unitary) councils, 11 district councils, 115 other scheduled bodies, and 76 admitted bodies. The total number of contributors is around 46,200 and there are approximately 27,400 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 SIPs should be strengthened to include details of the Fund's decision-making structure, investment objective, asset allocation strategy, and advisers' and managers' mandates.

The Local Government Pension Scheme (Amendment) (No 3) Regulations 2007 require the Fund to maintain a Governance Policy Statement. This is included in this SIP.

This SIP has been drafted to comply with these regulations.

Types of investments to be held

The Fund can be invested 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 subsequent regulations 1999, 2000, 2003, 2005 and 2008.

The main limits are:

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

holding

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

A comprehensive review of the Fund's investment management arrangements was completed in October 2006, and a new specialist management structure was put in place. This took effect on 1 January 2007.

The Fund's Pension Fund Panel has agreed to increase the limit on contributions to private equity and indirect property partnerships from 5% to 10% of the total Fund with effect from 1 March 2008, so that investment in the alternative investments of up to 10%, agreed as part of the new investment management structure, may proceed. The decision to increase the limit to 10% complies with the Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 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 of around 200% of employees' contributions set for the actuary.

Following an asset/liability study in 2005 by the Fund's actuary, Hewitt Associates Limited, the Fund's target is to achieve a long-term return 2.5% a year above a low-risk portfolio, which is defined as a portfolio invested 85% in index-linked gilts and 15% in fixed-interest gilts.

Spread of investments

The Fund's Pension Fund Panel has agreed the following specialist investment management structure, which took effect on 1 January 2007. The structure is designed to achieve the overall long-term target return without exposing the Fund to excessive risk.

Investment sector	Management style		% of Fund
UK equities	Low-risk active		20
UK equities	High-performance active		9
Global equities	High-performance active		36
Global bonds	Active		5
UK index-linked bonds	Passive		20
UK property	Direct and indirect		8
European property	Indirect		2
Total			100

Nine managers have been appointed from 1 January 2007 for 11 separate mandates. Contracts are for an initial five-year period, but can be extended for periods of up to five years subject to satisfactory performance.

The Panel also intends to invest up to 10% of the Fund in alternative investments, such as private equity and hedge funds. These investments are being funded from new cash flow, as the Fund's income will exceed its expenditure over the foreseeable future. Bramdean Asset Management have been appointed from 1 August 2007 to act as an adviser on appropriate alternative investments for the Fund for an initial five-year period with the option of an extension for a further five years.

Projected annual investment returns on asset classes assumed by Hewitt Associates Limited in the 2005 asset/liability study are:

Asset class	Projected annual return %
UK fixed-interest stocks	5.5
UK index-linked stocks	5.25
UK equities	8.5
Global equities	8.5
Property	7.0

Realisation of investments

Managers are asked to avoid unnecessary sales and purchases of stocks which incur transaction costs. They must regard all sales and purchases of stocks as being in the Fund's financial interests; that is, they will either improve the return or limit excessive risk.

Transaction costs are monitored closely and reported to the Pension Fund Panel once a year.

Managers of equity and bond portfolios are asked not to invest in stocks that are not readily realisable (capable of being 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 where companies adopt positive social, environmental and ethical principles in planning their activities, this 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.

The County Council asks managers not to invest in stocks that could reasonably be expected to embarrass the Fund.

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, by voting or direct contact with company management, in companies that are failing and thus jeopardising the Fund's interests.

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, 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 cast their votes with this in mind.

In particular, the Fund's managers should cast their 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 managers closely control the level of non-audit work given to auditors, and should 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 its beneficiaries, Hampshire residents, or the general principles of the combined code.

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

Custody

Northern Trust has been appointed as the Fund's independent global custodian with effect from 1 August 2006 for a seven-year period ending on 31 July 2013, subject to satisfactory performance.

Governance policy statement

Hampshire County Council, as the administering authority to the Fund, has delegated its functions with regard to the Fund to its Governance Committee, which in turn has delegated those functions to the Pension Fund Panel.

The Pension Fund Panel oversees the proper administration and management of the Pension Fund. It is responsible for:

- appointing external fund managers and advisers

- making suitable custody arrangements for the Fund's investments

- 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' investment

strategies

- monitoring the investment performance of each manager against their target and benchmark, based on statistics prepared by Northern Trust

- the periodic review of this Statement of Investment Principles, the Fund's Business Plan, its Funding Strategy Statement, its Governance Compliance Statement, this Governance Policy Statement and the Fund's Communication Policy Statement.

The Pension Fund Panel currently meets four times each year, twice in May and twice in November. These meetings are used mainly for discussions with the Fund's investment managers, using a report on their strategies and performance prepared by the County Treasurer, any views of the independent adviser, and presentations prepared by the managers themselves. The meetings also deal with `business' items, such as reports from the County Treasurer, the independent adviser and other consultants as necessary on a range of issues, for example reviews of this SIP, the Fund's Business Plan, training matters, and proposals for scheme change for consideration by the Pension Fund Panel.

The Pension Fund Panel is constituted to reflect the views of:

- the County Council as administering authority and the largest employer with 45% of the contributing membership

- the two city unitary authorities with 22% of the contributing membership

- the district councils and other employers with 33% of the membership, and

- the Fund's pensioners and contributors themselves.

The Pension Fund Panel consists of:

- nine county councillors with voting rights

- one representative of the unitary city councils of Portsmouth and

Southampton with voting rights

- one representative of the 11 district councils in the Hampshire county area with voting rights

- one representative of the Fund's contributors with voting rights

- one representative of the Fund's pensioners with voting rights

- one independent adviser/sounding board without voting rights.

Training

Members of the Pension Fund Panel and officers in the County Treasurer's Department have opportunities 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 has been implemented.

Use of advisers

The County Treasurer advises the Panel on all Pension Fund investment and administrative matters.

The Fund's independent adviser and sounding board, Mr Harvey Cole, advises the Panel on investment matters.

The Panel uses the Fund's actuary, Hewitt Associates Limited, and other consultants as necessary, for advice on matters when in-house expertise is not available. The Panel takes advice from the actuary, the fund managers or specialist consultants or advisers as required on allocating assets, selecting managers, and investment performance targets.

Communications with Fund employers and members

Each financial year, an annual report on the Fund is prepared for consideration by Fund employers at an Annual General Meeting to be held by 30 September in the next 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 30 November. This summarises the accounts, and the investment management and administrative arrangements.

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

Annual benefit statements are provided to contributors and deferred pensioners, together with 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.

The 10 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 Committee.

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 and other consultants as necessary.

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, Mr Harvey Cole.

There is no power under LGPS regulations to pay Panel members for pension fund work. A business plan, which includes a training plan, has been prepared.

Clear objectives

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

Asset allocation

The Fund's actuary, Hewitt Associates Limited, carried out asset/liability studies in 1999 and 2005.

Bramdean Asset Management also provided advice in 2005 on an appropriate asset allocation for the Fund.

Advice from both these sources was used to determine the final strategic asset allocation to take effect from 1 January 2007, which should enable the Fund to meet its liabilities and maintain stable employers' contribution rates.

Advice from both these sources was also used to draw up benchmarks and constraints, within which the fund managers appointed after the review must work with effect from 1 January 2007.

Expert advice

The Fund's contract for actuarial and other advice is open to competitive tender periodically. The current contract with Hewitt Associates Limited runs until March 2010, with an option to extend to March 2015, subject to satisfactory performance.

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

Investment managers themselves are asked for advice, including Bramdean Asset Management, and new approaches are developed in partnership.

Little use is made of other advisers as sufficient expertise is available in 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 vary according to the nature of each manager's mandate, and are effectively determined by the agreed targets and timescales for performance assessment.

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 overall target return and the managers' individual targets are set out clearly in this Statement of Investment Principles and in the Annex.

Performance assessment

Formal reviews of the managers' performance take place twice a year. Additional meetings take place between the managers and the County Treasurer each year as required.

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 each year 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 Pension Fund Panel approving any significant amendment.

Investment management arrangements from 1 January 2007

			Benchmark	Annual target performance gross/net of fees
Low-risk active UK equities
	Aberdeen Asset Management		FTSE All Share	+1.5% gross
	Schroder Investment Management		FTSE All Share	+1.25% gross
High-performance UK equities
	SG Asset Management		LIBOR	+5% gross
High-performance global equities
	Aberdeen Asset Management		MSCI World	+3% gross
	AllianceBernstein		MSCI World	+3.5% gross
	Newton Investment Management		MSCI World	+3% gross
Active global bonds
	Western Asset Management		Lehman Bros Global Aggregate	+1.5% gross
Passive index-linked bonds
	Legal & General		FT British Government over 5 years index-linked gilts index
	State Street Global Advisors		As above
UK property
	CB Richard Ellis Investors		Retail Price Index (RPI)	+4.5% net
European property
	Aberdeen Property Investors (formerly Goodman Property Investors until May 2008)		Eurozone Harmonised Index of Consumer Prices (HICP)	+5% net