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ITEM CC10

COUNTY COUNCIL – 4 NOVEMBER 2003

REPORT OF THE PENSION FUND COMMITTEE

Review of the Oxfordshire Pension Fund’s Management Structure

  1. The last report to Council from this Committee on 14 January 2003 explained the reasons behind the decision of the Committee to review the management structure of the Pension Fund and to adopt a fund specific benchmark. The Fund had been managed by two multi-asset managers who covered all the main classes of investment. It was seen that other funds employed specialist fund managers for parts of the fund, for example UK equities, and that this could improve performance in those areas, rather than relying on fund managers having equal expertise in all asset classes.

  2. Following a rigorous process, the Committee concluded that the option to have one multi-asset active manager, with a range of specialist managers and no passive management, should be adopted. A named company was appointed to manage the tendering process and to provide the necessary analysis to select a shortlist of fund managers. The Committee also agreed to appoint an independent Global Custodian for safe-keeping of assets, dividend and income collection and settlement of trades in all asset classes and markets. This was a change, as the custody arms of the two existing Fund Managers had carried out this function previously.

    3. Revised Structure

  3. The interviewing process for the new Fund Managers took place during the late spring. An Appointments Sub-Committee was set up to carry this out, comprising three members of the Pension Fund Committee with the addition of one of the district council co-optees. Following an extensive pre-interview process and detailed interview the following organisations were chosen:

    4. Multi Assets -

    UBS Asset Management

    Property

    UBS Asset Management

    (this was combined with Multi Assets to form a single mandate)

    UK Equities

    Baillie Gifford

    Global Equities

    Alliance Bernstein

    UK Fixed Interest

    Legal and General

  4. These changes took effect on 11 July 2003. In the interim, and in order to avoid undue expense, the Committee appointed a transitional Fund Manager (Legal & General) to manage all aspects of the restructuring process. Their role was to take the existing Schroder and Deutsche Asset Management portfolios and complete the restructuring in order to deliver the new portfolios to the four newly appointed managers. This process has been successfully concluded with all four management agreements having been signed and sealed. The Committee has joined in thanking and congratulating the Council’s Pension Fund Investments Manager (Mr Tony Wheeler) and the Committee’s Independent Financial Adviser (Mr Bushell) for such a smooth transfer at such an efficient cost.

    5. Investment Strategy

  5. Another change to the management arrangements of the Pension Fund has been the recent decision that 2% of the Pension Fund’s assets should be invested in Hedge Funds, in line with the customised benchmark. This decision followed an asset liability study that had been carried out by the Actuary in early 2002 and which was seen as a further means of reducing the level of risk within the Pension Fund as a whole. However, before we did so we decided to ask the Independent Financial Adviser to explore that option. Following some research he recommended that the Committee should go ahead and invest in a fund of funds (a fund made up of a number of Hedge Funds). The Committee has since authorised officers to go ahead with the selection.

  6. There is no one single definition of a Hedge Fund. They include a wide variety of investment strategies with a broad range of risk and return objectives, designed to produce positive returns in all market conditions. They can be invested in any stock or commodity in any part of the world. There are two principal benefits of investing in them:

    1. a reduction in risk – because returns can be delivered in absolute terms rather than relative to a benchmark, that is to say, achievement of a stipulated level of gain rather than comparisons;

    2. a reduction in volatility.

    Funding Level

  7. Finally, at the last actuarial valuation, on 31 March 2001, the Pension Fund was 91% funded. The next valuation will take place on 31 March 2004 and we will therefore not know what the level of current funding will be until after that date. The new funding level will certainly be lower than at the last valuation but at this stage it is not possible to forecast with any accuracy what impact this will have on employer contribution rates and council tax bills. Any changes which might be necessary will come into force for the three years commencing 1 April 2005 with the objective of enabling the Pension Fund to meet its liabilities in the future.

    8. RECOMMENDATION

  8. The Council is RECOMMENDED to note the report.

C.H. SHOULER
Chairman of the Committee

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