Return
to Agenda
ITEM PF14
PENSION
FUND COMMITTEE – 27 AUGUST 2004
PENSION
FUND INVESTMENT AND ADMINISTRATION EXPENSES OUT-TURN FIGURES FOR THE YEAR
ENDED 31 MARCH 2004
Report by
the Head of Finance
Introduction
- In February 2003
the Pension Fund Committee approved the budget in respect of the Pension
Fund’s investment and administration expenses for the 2003/04 financial
year. The production of this budget was in accordance with a recommendation
of best practice set out in the Myners Report.
- Annex 1
(download as .xls file) compares
the Investment Management and Scheme Administration out-turn figures
against that budget and shows the variations against each budget head.
The reasons for the larger variations are explained below.
Investment
Management Expenses
- The largest component
of the Investment Management expenses is the external fund management
fees. The fees for this service were estimated as £1.8 million but the
actual fee reported in the accounts was £869,000. However, this large
‘underspending’ is misleading because there is a large element of management
fees, which is a hidden cost and is not transparent in the accounts.
- This situation
arises as a consequence of the managers holding pooled vehicles. To
avoid double counting, the management fees for these vehicles are rebated
back to the Pension Fund, and are netted off against the main management
fee. The amount rebated back to the Fund in 2003/04 was £555,000.
- If the rebated
sum is aggregated with the disclosed sum of £869,000 then the true level
of management expenses is £1,424,000 and the true underspend is £376,000.
The main reason for this underspend was that the average fee for the
new managers was lower than the estimated fee. Hymans Robertson, the
consultants who advised the Pension Fund on the new management structure,
estimated that the average fee would be 0.38% per annum, but the actual
fee in 2003/04 was 0.32%.
- The actual cost
for the transition management exercise was lower than estimated. It
was difficult to estimate what the cost of this exercise would be at
the time of drawing up the budget. Legal and General very successfully
carried out the transition for a fixed fee contract of £130,000.
- On 1 April 2003
the Pension fund appointed an independent custodian, ABN AMRO Mellon.
The actual custodial fee for 2003/04 was £116,000, which was lower than
the estimated sum of £150,000. This was due to a much lower volume of
trading than anticipated.
- The fee of £73,000
paid to the Independent Financial Adviser included a £50,000 ex gratia
payment. This payment was in recognition of the extra work he carried
out during 2002 and 2003, in relation to the major management restructuring
of the Pension Fund. The budget report explained that an ex gratia payment
would be made but because the restructuring exercise was still being
carried out at the time of this report, it was not possible to determine
the size of the payment.
- The Psolve consultancy
fee, for work carried out in relation to the appointment of the global
custodian, was paid earlier than expected, and included as an overspend
in the 2002/03 accounts. The actual cost was the budgeted sum. This
year’s underspend therefore reflects a timing difference, rather than
a real variation in planned expenditure.
- The overspending
of £25,000 for the manager selection consultancy fee was mainly due
to the attendance of Hymans Robertson at the five days of manager interviews.
This additional work was not originally budgeted for, but the Head of
Finance was keen that Hymans Robertson should be present throughout
the whole of the interview and appointment process.
- The members training
budget was underspent by £10,000. However, the budget in respect of
2004/05 has still been maintained as £12,000 in line with the Myners
report recommendation that trustee training should be given a higher
priority.
- There was no stock
lending income in 2003/04. The stock lending programme was not put in
place until the beginning of the 2004/05 financial year, following detailed
reviews carried out by officers and the Independent Financial Adviser.
Scheme
Administration Expenses
- The Financial
Services Recharges was under spent by £21,000. This can be split
between direct costs and indirect overheads. The direct costs were overspent
by £13,500 as a result of increased pay due to job evaluation, partly
offset by leaving the posts vacant and delaying recruitment, increased
training costs of £3,000 with the move to encourage professional training
alongside in-house training, and £7,700 in respect of advertising for
vacancies.
- The indirect costs
recharged from the Financial Services budget were underspent by £34,500.
The underspend was across a number of component parts, and reflects
an overestimate of some of the overhead costs of bringing the service
back in-house, and changes within the cost structures of Financial Services
itself.
- Printing and Stationery
show an under spend of £18,000. This is partly as a result of the decision
to stop sending monthly payslips to pensioners, and partly due to delays
in updating the scheme handbook to allow the impact of proposed regulation
changes to be incorporated.
- The under spend
of £12,000 in postage is mostly attributable to not sending out monthly
payslips to pensioners.
- An over spend
of £46,000 for Software and Licensing costs was mainly due to the document
imaging of the pension records and the subsequent storage costs which
amounted to £36,000. Relocation of the server was £2,000. The remainder
was simply the increased costs of licences and maintenance agreements.
- The Actuary Fees
over spend of £2,000 reflects additional advice required to the team.
- A change in accounting
practice has resulted in a one-off double charge for Audit Fees in 2003/04.
The charge includes the actual bill paid for the 2002/03 audit, plus
an accrual for 2003/04 fees.
- Other charges
were to cover membership and subscription fees. This year we participated
in the CIPFA benchmarking club at the cost of £1,000. The remaining
over spend of £3,000 was due to NAPF voting not being included in the
budget figure.
- The reduction
of £1,000 in income is because the SIB reviews (in respect of the mis-selling
of pensions) are coming to an end.
RECOMMENDATIONS
- The Committee
is RECOMMENDED to receive the report and note the outturn position.
CHRIS GRAY
Head of Finance
Background Papers: Nil
Contact Officers:
Tony Wheeler, Pensions Investment Manager – (01865) 815287
Sally Fox, Pensions
Administration Manager – (01865) 816080
August 2004
Return to TOP
|