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ITEM PF15
PENSION
FUND COMMITTEE – 21 MAY 2004
STRATEGIC
ASSET ALLOCATION AND THE TRANSFER OF £10 MILLION OF SURPLUS CASH TO UBS
GLOBAL ASSET MANAGEMENT
Report by
Head of Finance
Introduction
- At the beginning
of 2002 the Pension Fund Committee appointed its then Actuaries, Watson
Wyatt, to carry out an asset liability study for the Oxfordshire Pension
Fund. The purpose of this exercise was to align the Fund’s investments
more closely with its liabilities. Various risk reward investment scenarios
were considered and their possible impact on future funding levels and
employer contributions was explored.
- The asset allocation
set out in Annex 1 (download as .xls
file) was agreed by the Pension Fund Committee and was phased
in by the Fund’s previous multi asset managers, Schroders and Deutsche
Asset Management, over a nine-month period to 31 March 2003. The move
to a 2% exposure in hedge funds was not implemented until January 2004,
following a comprehensive review carried out by the Independent Financial
Adviser.
- Annex 1 compares
the Fund’s asset allocation before and after the asset liability study.
This shows that the asset allocation benchmark adopted by the Committee
recommended an 8% reduction in equities (from 75% to 67%), an 8% increase
in bonds (from 14% to 22%) and a 6% increase in alternative investments
(from 5% to 11%). Bonds are recognised as being the best match for pension
liabilities.
- Annex 1 also compares
the Fund’s current asset distribution with the strategic benchmark.
This shows that the Fund is broadly matching its strategic benchmark
though it is a currently underweight in bonds. This is mainly due to
the superior returns generated by equities compared with the flatter
bond markets during the year ended 31 March 2004 though UBS, the Fund’s
multi asset manager, has also been tactically overweight in equities
and underweight in bonds since being appointed in July 2003.
The need
to monitor asset allocation following the changes in the Fund’s management
structure
- Following the
asset liability study the Fund’s management structure was reviewed,
which culminated in the change from two multi assets managers to a more
specialist management structure.
- The introduction
of the new strategic benchmark and a new management structure necessitates
the need to monitor and periodically review the Fund’s asset allocation.
Under the Fund’s previous management arrangements decisions on asset
allocation rested primarily with the two multi-asset managers. Under
the new management arrangements this exercise is the responsibility
of the Pension Fund Committee.
- Market movements
over a period invariably impact upon the Fund’s asset weightings and
cause variations with the strategically agreed weightings. If over and
under weightings becomes material then there will be a need to periodically
rebalance the total portfolio. This might for instance mean transferring
funds from the two specialist equity managers to the specialist bond
manager. However, in the shorter term it may be tactically desirable
to be overweight in a particular asset class but it is essential that
the Committee do not lose sight of its overall longer-term strategic
investment objective.
Transfer
of £10 million cash to UBS Global Asset Management on 1 April 2004.
- A working cash
balance is held in house for the payment of pensions and other liabilities.
However, because the Pension Fund is cash positive it is necessary to
periodically transfer any surplus cash to the external managers. Under
the Fund’s previous management arrangements this was a straightforward
exercise. Schroders and Deutsche Asset Management managed the Fund on
a 50:50 basis and so cash was allocated in accordance with this split.
- Under the Fund’s
new management arrangements the basis for allocating cash is less straightforward.
It could be allocated on the basis of the managers’ initial portfolio
weightings but this is not an ideal solution because any imbalances
that have occurred will not be corrected. Another alternative might
be to allocate cash solely with the objective of reverting back to the
strategic benchmark. Were we to do this at this present time then surplus
cash would mostly be allocated to the Fund’s bond manager, Legal and
General.
- In March 2004
it was decided that £10 million of cash held in house should be transferred
to the fund managers. Officers discussed the best means of doing this
with the Independent Financial Adviser. The Independent Financial Adviser
took the view that it was not tactically the right time to rebalance
the portfolio by investing in the bond market. He expected UK short-term
interest rates to rise over the next twelve months, which would normally
have an adverse affect on the UK bond market and he thought that on
balance there were better investment opportunities in the equity markets.
The Fund’s multi asset manager, UBS Global Asset Management, also shared
this view.
- The Pension Fund
Committee Chairman was briefed on this matter and it was subsequently
decided that the most appropriate course of action was to transfer the
whole of the £10 million to UBS Global Asset Management. It was felt
that UBS, because of its a multi-asset management brief, was best placed
to take shorter-term tactical asset decisions.
- Members are reminded
that there is an item in the 2004/05 Pension Fund Business Plan to review
the Fund’s asset allocation in conjunction to drawing up the Funding
Strategy Statement. Determining a process for allocating surplus cash
will form part of this process.
RECOMMENDATIONS
- The Committee
is RECOMMENDED to note this report and endorse the action taken by officers
in transferring £10 million of surplus cash to UBS Global Asset Management
on 1 April 2004.
CHRIS
GRAY
Head of Finance
Background
Papers: Nil
Contact
Officer: Tony Wheeler, Directorate for Business Support Tel
(01865) 815287
May
2004.
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