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ITEM PF15

PENSION FUND COMMITTEE – 25 NOVEMBER 2005

CIPFA LOCAL AUTHORITY PENSION FUND INVESTMENT STATISTICS

Report by the Head of Finance & Procurement

1. WM Performance Services, who were appointed as Oxfordshire’s investment measurement service provider on 1 April 2005, are responsible for compiling the CIPFA statistics for Local Authority Pension Funds. In 2004/05 90 local authority pension funds, with an aggregate value of £93 billion, were included within this service.
2. The statistics cover investment returns for the 1-, 3-, 5- and 10-year periods ended 31 March 2005. The statistics also cover asset distribution, showing the percentage weighting of funds in each major asset class e.g. UK equities, Overseas equities.

Summary of Results

3. Annex 1 (download as .doc file) Table 1 compares the Oxfordshire Pension Fund asset distribution at 31 March 2005 with other local authority pension funds, private sector funds and Oxfordshire’s old and new strategic benchmarks.
4. Oxfordshire’s asset allocation was very much in line with the local authority average. The one exception was that Oxfordshire had a higher exposure to "other" investments, which included private equity and hedge funds and this is set to continue following Oxfordshire’s recent asset allocation review, which has committed a further 2% to private equity and 1% to hedge funds.
5. Another feature worth noting in Table 1 is the difference in asset allocation between local authority and private sector funds. This shows that local authorities have a higher exposure to equities but a lower exposure to bonds compared to private sector funds. The need for companies to report their pension fund deficits in their balance sheets means they are obliged to take a three to five year view on their pension fund investments, which tends to drive them to a higher bond weighting. Furthermore, the large closure of final salary pension schemes in the private sector and the associated increase in their maturity profiles also encourages a higher bond weighting, whereas local authority pension schemes are less mature and able to take a longer term view on their investments.
6. Annex 1 (download as .doc file) Table 2 compares the Oxfordshire Pension Fund’s investment performance for 1-, 3-, 5- and 10-year periods with the 90 local authority pension funds measured. The table also compares the investment returns with the retail price index and average earnings.
7. Table 2 also shows that the investment returns over the three and five-year periods were below both the retail price index and average earnings. However, over the longer ten-year period investment returns comfortably exceeded prices and average earnings.
8. Annex 1 (download as .doc file) Table 3 provides the actuarial assumptions made at the 31 March 2004 valuation, which apply to the three-year period ending 31 March 2007. The assumptions provide both three yearly and longer-term investment return assumptions.
9. Oxfordshire’s investment return of 13.5% for the year ended 31 March 2005 falls within the first year of the current three-year valuation period. The return comfortably exceeds the Actuary’s three-year assumptions of 7.4% for equities/property and 5.2% for bonds. However, it is too early in the valuation cycle to assume that the Pension Fund’s funding position, which was 65% at the 2004 valuation, is improving. The good investment returns so far achieved can quickly be reversed if markets have a downturn, and furthermore how the Fund’s liabilities have changed over the same twelve-month period is not known.
10. Annexes 2 to 5 (download as .xls file) compare in more detail the investment performance of the Oxfordshire Pension Fund with other English County Councils for the 1-, 3-, 5- and 10-year periods. Oxfordshire was not only the best performing county council pension fund over the one-year period but also the best performing fund of the ninety local authority funds measured by the WM Company. However, notwithstanding the excellent one year performance the three and five year performance figures remain below average and are still suffering from the impact of the poor performance for the two year period ended 31 March 2003, which prompted the major management changes in July 2003. Oxfordshire’s ten-year investment performance of 7.5% is just marginally below the average of 7.7%.

RECOMMENDATION

11. The Committee is RECOMMENDED to receive the report.

SUE SCANE
Head of Finance & Procurement

Background papers: CIPFA Local Authority Pension Fund Investment Statistics 1995-2005. Actuarial Valuation Report 31 March 2004.

Contract Officer: Tony Wheeler, Pension Fund Investments Manager Tel: (01865) 815287

November 2005

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