Archived decisions

Agenda item: 6

HAMPSHIRE COUNTY COUNCIL

Decision Report

1. Executive Summary

1.1. The purpose of this paper is agree arrangements for Pension Fund Panel members to obtain training on pension fund matters.

1.2. This includes training for the newly appointed members and to provide ongoing updates for previous members of the Panel.

1.3. The report also includes a briefing on the Local Government Pension Scheme and the Pension Fund's investment arrangements with the new members of the Panel primarily in mind, as background to the reports to this meeting of the Panel.

2. Contextual information

2.1. It is important that members of the Pension Fund Panel have the knowledge about the Local Government Pension Scheme and investment matters to fulfil their role as Panel members effectively.

3. Training opportunities

LGPS Fundamentals course

3.1. A number of the Panel's members have previously attended the Local Government Pension Scheme Fundamentals training course provided by the Local Government Employers organisation (LGE). The full course is held over three days but individual days can be booked separately. The London-based course for 2009 is planned for 27 October, 30 November and 16 December 2009. There are similar courses in Cardiff and Leeds. The full details of the course content will be published shortly and will be circulated to all members of the Panel. In 2008, the course covered:

· the duties and responsibilities of Pension Fund Panel members

· the scheme's benefits

· the investment statutory framework

· actuarial valuations

· funding strategies and asset allocation strategies

· investment managers and their selection

· mainstream investment asset classes

· alternative investments

· corporate governance and investment

· communication strategies

· the future of the Local Government Pension Scheme.

3.2. Members who have attended the Fundamentals course in the past have generally found it to be very useful and all new members of the Panel are encouraged to consider attending in 2009.

3.3. The LGE is intending to run a one-day refresher course to update members who have previously attended the main Fundamentals course. Again, information will be circulated to the Panel when it is available.

3.4. Booking for all courses and seminars can be arranged through the County Treasurer's Department.

LGPS Trustees annual conference

3.5. The Local Government Pensions Committee organises an annual conference addressing issues specifically from a `trustee' perspective. The 2009 conference will be held in Cardiff on 22 and 23 October. Panel members have attended this conference in previous years and full details of the 2009 conference will be circulated in due course.

Other seminars and conferences

3.6. Details of annual seminars provided by other organisations such as the Local Government Chronicle (LGC) will be circulated when they become available. An example is the LCG's investment summit to be held at the Celtic Manor Resort in South Wales on 10 and 11 September 2009, for which details are attached in Appendix 1. The second day of the summit will be chaired by the County Treasurer.

Training available from investment managers

3.7. Many investment management firms provide training courses on a variety of investment topics, including the managers employed by the Pension Fund. Examples of seminars, training sessions and client conferences are also attached in Appendix 1.

3.8. Most of the Fund's investment managers would be able to provide bespoke training sessions on areas of their expertise for the Panel here in Winchester. In previous years, Deutsche Asset Management (now Aberdeen) have run sessions for the Panel. In addition to the equity managers, Western (bonds), CB Richard Ellis (property) and Bramdean (alternative investments) - or an alternative investments firm such as Clontarf Capital - would be able to provide training sessions on their specialist areas.

3.9. The Fund's actuary, Hewitt, can also provide training courses on the actuarial aspects of the Fund and on asset allocation techniques.

3.10. In addition, Capital International who are not one of the Fund's managers have provided bespoke training sessions for the Panel in the past. They could be invited to provide an update session if the Panel wished to hear the `independent' views of a manager that is not employed by the Fund.

3.11. Overall, the Panel may prefer to take stock of the position following this meeting of the Panel and that on 21 July 2009, after they have reviewed the reports and heard the presentations from the investment managers who will be attending the meetings. The Panel may then be better placed to identify areas on which they would like further bespoke training.

4. Training plans and training logs

4.1. The Panel's training activities have not previously been collated into a formal training plan, although training is considered when the Fund's Business Plan is reviewed each year. A formal training plan would identify the training needs for the Panel as a whole and for individual members. It would identify how those needs would be met and would then evaluate each year the extent to which the training provided has met those needs. Similarly, formal training logs of the training undertaken by each Panel member have not been maintained.

4.2. The Governance Compliance Statement required by the Government specifies that the Pension Fund Panel should consider adopting a training plan and maintaining training logs. This is not mandatory and it is acceptable to set out in the Compliance Statement why that suggestion has not been actioned. Up to now, the Panel has taken the view that this would be unnecessarily bureaucratic. This is a sensible and acceptable response but, as this is the beginning of a new period in the life of the Panel, the Panel may wish to consider whether it should confirm that approach.

5. Briefing for the new Panel

5.1. The following sections provide some background to the Pension Fund, focussing mainly on the investment arrangements.

6. Annual Report

6.1. A copy of the Pension Fund's latest Annual Report, for 2007/08, is enclosed with this Agenda. The Annual Report for 2008/09 will be published in September 2009, prior to the Pension Fund's annual general meeting on 30 September at Sparsholt College, Winchester (c.10:30 am to 1:00 pm). Full details of the AGM will be circulated to Panel members later in the summer, but members may wish to note the date in their diaries.

6.2. The Annual Report provides background information on the Pension Fund. It includes a number of statements that the Pension Fund is required to publish by statute, including:

- the Business Plan, which includes a summary of the Panel's mission and objectives (page 27)

- the Action Plan to March 2010, agreed as part of the Pension Fund's Business Plan (page 10)

- the Funding Strategy Statement, which sets out how the Pension Fund intends to meet its liabilities over the longer term whilst maintaining stable employer rates as far as possible. The County Council is required to consult the other employers in the Pension Fund on the Funding Strategy Statement (page 31)

- the Statement of Investment Principles (page 37), which incorporates the Governance Policy Statement (page 40)

- the Governance Compliance Statement (page 44)

- the Communications Policy Statement (page 46).

6.3. Other useful information in the Annual Report includes:

- membership of the Fund, in terms of employers, employees and pensioners (page 11)

- the benefits and employee contribution rates (page 13)

- the accounts for 2007/08 (page 17 onwards)

- a glossary of terms (page 52).

7. The statutory background

7.1. The Hampshire Pension Fund is a statutory local government pension scheme fund established under the Superannuation Act 1972. The main governing regulations were issued in 2007 prior to the introduction of a `new look' scheme on 1 April 2007. This followed a lengthy stocktaking review of the scheme by the Government. It continues to be a final salary defined benefits scheme.

7.2. Employees contribute a fixed percentage according to their salaries and are entitled to benefits set out in statute (ie, defined benefits) which are calculated according to their salary at the end of their employment (final salary).

7.3. The scheme is `funded' as investments are held to pay for future benefits unlike the `pay-as-you-go' arrangements for schemes for teachers, police and civil servants. Employers contribute to the cost of the scheme and are responsible for any shortfalls in the funding of the scheme. A statutory cost sharing arrangement between employers and employees is being developed for implementation from April 2012.

7.4. The investment arrangements are governed by further regulations which include broad percentage limits on the Fund's investments, such as the percentage of the Fund that may be held in any single holding.

8. The Pension Fund Panel

8.1. The statutory documents published in the Annual Report include various sections on the role of the Pension Fund Panel. These have been extracted in the following paragraphs.

8.2. 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 (LGPS).

8.3. The Panel's objectives are to:

· achieve a long-term 100% funding level over the long term, which means that all current and future fund liabilities can be met

· maintain a stable employers' contribution rate in the long term

· respond promptly to legislative changes affecting the LGPS and pension provision generally

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

· 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

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

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

8.4. The Panel 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 the Pension Fund's custodian Northern Trust

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

9. Actuarial valuation

9.1. The Pension Fund's assets and liabilities are assessed every three years by the actuary, Hewitt Associates, in an `actuarial valuation'. This establishes the funding ratio which is the proportion of the Pension Fund's liabilities that are covered by its assets. It also sets the employer contribution rates for the following three years that are necessary to fund the scheme, after the employees' contributions, and to recover any shortfall of assets.

9.2. The most recent actuarial valuation was at 31 March 2007. Details are included in the Annual Report at page 15. Some of the key facts from the valuation are:

9.3. The next actuarial valuation will be at 31 March 2010. As conditions currently stand following the global financial crisis, the Pension Fund's position has worsened and it is possible that employer contribution rates will have to rise over the three years from 2011/12. However, there is still time for conditions to change before the base date for the next valuation at 31 March 2010. In addition, the Government has issued an informal consultation paper on possible amendments to the arrangements for the next valuation which will be reported to the Panel's next meeting on 21 July 2009.

9.4. The current value of the Pension Fund's assets of £2.5bn is reported in detail in item 9 on this Agenda.

10. Investment management arrangements

10.1. With the help of the actuary Hewitt and other advisers, the Pension Fund Panel reviewed all the investment management arrangements during 2006 leading up to the expiry of the fund managers' contracts on 31 December 2006. As part of the preparations, Northern Trust were appointed in May 2006 as the single custodian for all the Pension Fund's assets, taking over from the separate custody arrangements previously organised by the individual fund managers.

10.2. Hewitt analysed the optimum allocation of the Pension Fund's investments across the different asset classes (equities, bonds, property, alternative investments, etc), with the aim of achieving the long-term investment return that the Pension Fund will require to meet its liabilities.

10.3. The results of this analysis did not indicate that a radical change from the existing asset allocation was necessary, in terms of the split between equities (65%), bonds (25%) and property (10%). One significant change was made, however. The Panel agreed to move from multi-asset investment management (where a fund manager is responsible for investing a portfolio across a range of different asset classes, such as UK equities, overseas equities, fixed interest bonds and index linked bonds) to specialist managers who focus on one class of assets only. It was thought that returns would be better from specialists than from `jacks-of-all-trades'.

10.4. Ten investment managers were appointed to manage eleven portfolios, as summarised below, with effect from 1 January 2007. They replaced three multi-asset managers and one property manager. The appointments followed a full tendered procurement exercise which attracted interest from 120 firms.

	Percentage	Targeted returns
	of Fund
	%
Global equities
Aberdeen	12	High performance
AllianceBernstein	12	High performance
Newton	12	High performance
UK equities
SGAM	9	High performance
Aberdeen	8	Low risk
Schroders	12	Low risk
Global bonds
Western	5	High performance
UK index linked bonds
Legal & General	10	Index tracking
State Street	10	Index tracking
UK property
CB Richard Ellis	8	RPI + 4.5% pa
European property
Aberdeen (formerly Goodman)	2	HICP + 5% pa
	------
Total	100
	------

10.5. The whole of the Pension Fund is managed by external investment management firms, apart from the cash balance which is managed and held on deposit by the County Treasurer.

10.6. The latest valuations of the portfolios are reported in item 9 on this Agenda.

10.7. The asset allocation was designed to optimise the Pension Fund's `risk budget'. The use of index-tracking UK index linked bond portfolios and lower risk UK equity portfolios allowed allocations to higher risk global equity and bond managers with more aggressive performance targets in the expectation that, overall, returns would be higher. The managers' performance targets are summarised on page 4 of the Annual Report. Most of the managers are assessed over rolling three and five year periods. Their recent performance is analysed in item 9.

10.8. The Panel also agreed to allocate up to 10% of the Pension Fund to alternative investments, such as private equity, speciality funds and hedge funds. This allocation would be funded over three or four years from the Pension Fund's annual surplus of income over expenditure which is expected to continue over the next decade at least. The surplus arises because contributions from employees and employers exceed expenditure on pensions and other benefits. It reflects the need to increase employer contributions now to recover the Pension Fund's forecast shortfall over the longer term.

10.9. The Panel appointed Bramdean Asset Management in May 2007 to advise on the alternative investments portfolio. A full report will be made to the Panel on the alternative investments portfolio later in July 2009. With the reduction in the total value of the Pension Fund as a result of the global financial crisis, the commitments to the alternative investments portfolio have now reached the target of 10%. Further investment in the portfolio was suspended by the Panel in November 2008 pending a review of the portfolio at the July 2009 meetings.

10.10. The investment managers attend meetings of the Panel on a regular basis to report on their investment policies and performance. The frequency of these presentations reflect the degree of risk associated with their portfolios. The current timetable for the Panel's meetings in 2009 is as follows

10.11. The Panel does not routinely meet with Legal & General and State Street because of the very low risk nature of their UK index linked bonds portfolios, or with Aberdeen Property Investors on the relatively small European property portfolio (c.£50m).

10.12. SGAM completed the sale of their UK investment management business to GLG Partners in April 2009. Further information on GLG Partners and the implications of this sale are included in item 9 on this Agenda. That report also includes details of all the equities and bonds investment managers' policies and performance. Similar reports will be made to the Panel's meetings later in July 2009 on the property and alternative investments portfolios.

11. Recommendations

11.1. That Panel members contact the County Treasurer if they wish to attend any of the training courses, seminars or conferences described in the report.

11.2. That the Panel consider whether any further bespoke training sessions should be arranged for the Panel later in 2009.

11.3. That the Panel consider whether to confirm the current practice of not preparing a detailed training plan for Panel members or maintaining individual training logs.

i:\ . . . . \ian\docs\penpanel 080709report training1.doc 01 July 2009

CORPORATE OR LEGAL INFORMATION:

Links to the Corporate Strategy

Other Significant Links

IMPACT ASSESSMENTS:

1. Equalities Impact Assessment:

1.1. Equality objectives are not considered to be adversely affected by the proposals in this report.

2. Impact on Crime and Disorder:

2.1. The proposals in this report are not considered to have any direct impact on the prevention of crime.

3. Climate Change:

a) How does what is being proposed impact on our carbon footprint / energy consumption?

No specific impact.

b) How does what is being proposed consider the need to adapt to climate change, and be resilient to its longer term impacts?

No specific impact.

Details of courses and seminars

All locations are in London, unless indicated

# these events coincide with the Pension Fund Panel's meeting on 20 November 2009

The LGC Investment Summit 2009

10 to 11 September 2009

Celtic Manor Resort, Newport, Gwent

Overview

"Business as usual or has the investment world changed?"

LGC Events is very pleased to invite you to the LGC Investment Summit, now in its 21st year.  Much has changed over the years in the investment of local government pension funds, but nothing as dramatic or as threatening as events over the past year. We thought that 2000 to 2003 was a bad time for pension funds but little did we know!
 
Back in September 2008, we talked about the past 12 months having introduced major turmoil into equity and bond markets as the credit and liquidity crises had taken hold.  Much worse was still to come and one year on we are still licking the wounds.
 
LGC has always recognised the long term nature of pension funds and the need to improve the level of knowledge and understanding of those responsible for their investment.  Increasingly, pension fund trustees throughout the industry are under pressure not only to improve skills and good practice, but to take a firmer hold on their investments.
 
In the public sector, pension schemes are under attack from all sides ~ taking too much risk, too much in equities not enough in bonds, too much reliance on the tax payer, benefits unaffordable.  The LGPS is a funded scheme and the investment strategies we follow need to pull us through over the long term.
 
The Investment Summit at Celtic Manor Resort remains the annual investment event for local government pension funds and sets the benchmark for effective learning and knowledge gathering.
 
This year we aim to learn from what went wrong, where conventional strategies failed, and where active management seemed unable to buck the trend.  But more importantly, we will be looking ahead to new strategies, developing better practices, rationalising risk, and preparing to sustain the LGPS for the future.
 
Fund valuations in 2010 are looming fast and we need to be prepared to manage the future funding and investment strategy requirements.  This is an opportunity therefore to look forward and move on with confidence.  Join us at Celtic Manor to find out more about what the future may hold for your pension fund.
 
"Time to take stock and move on."

The LGC Investment Summit 2009 - Programme

Day 1 - Thursday, 10th September 2009

In the chair: Neil Newton, former Chairman, London Pensions Fund Authority

09:00 Registration and refreshments

10:05 The economy under repair

Reflecting on a year of economic turmoil:

What are the key lessons learnt?

· Are remedial measures working?

· Where are the signs of recovery?

· What does the economic future hold for pension funds?

Andrew Milligan, Head of Global Strategy, Standard Life Investments

11:00 Morning refreshments in the sponsors' presentation suites

11:30 Diversification or non-correlation ~ what does it all mean?

With all the main asset classes failing in 2008:

· Is it still right to diversify?

· What are the real alternatives to quoted equity?

· Asset allocation or strategy choices?

· Can fixed income add real value?

Ewen Cameron Watt, Managing Director and Portfolio Manager
BlackRock, and

Quentin Fitzsimmons, Head of Government & FX, Threadneedle

13:00 Lunch and networking

14:15 Risk rears its ugly head

Frauds or fools, we made some mistakes!

· Where are the "dark pools"?

· Can due diligence work in our favour?

· Changing strategy or re-balancing?

· Who takes responsibility?

Nick Vickers, Head of Financial Services, Kent County Council, and

Simon Savage, Asset Manager - Active Risk Control and Allocation,
GLG Partners

15:15 Afternoon refreshments in the sponsors' presentation suites

15:45 Coping with volatile markets

Changing assets across asset classes is challenging

· Is currency the new cash or do we stick with credit?

· Is passive hedging worth the cost?

· What about the added cost of change?

· How do we manage transition in volatile markets?

Blair Read, Executive Director, GSAM Fixed Income and Currency Group

Lachlan French, Head of Transitions, Barclays Global Investors

16:45 "The Great Debate"

Sustaining the LGPS as a funded DB scheme

17:30 Close of sessions

19:30 Reception and networking

20:00 Dinner

Day 2 - Friday, 11th September 2009

In the chair: Jon Pittam, County Treasurer, Hampshire County Council

09:00 Morning refreshments in the sponsors' presentation suites

10:00 Equities have had their day, or are they still in fashion?

Quoted equity markets worldwide are not performing:

· Have we got too fat on equity expectations?

· Is there value in active management?

· How do we spot the next fall?

· Can we get downside protection?

Scott Berg, Portfolio Manager, Large Cap Equity Strategy, T Rowe Price

Ravi Mantha, Senior Portfolio Manager, Select Global Equities, Fidelity

11:00 Morning refreshments in the sponsors' presentation suites

11:30 It's also about funding, actuarially!

With the 2010 valuation on the doorstep, we look at:

· The prospects for funding levels

· Balancing solvency and risk

· The impact of cost sharing

· Directing investment strategy

· Markers and trends for the future

Ronnie Bowie, Senior Partner, Hymans Robertson

12.15 Closing remarks

12.30 Close of Summit and Lunch