audit  2002/2003

Pension Fund - Review of Management Arrangements
Oxfordshire County Council
INSIDE THIS REPORT
PAGES 2-4
Summary Report
•	Introduction
•	Background
•	Conclusions
•	Recommendations
PAGE 5-6

•	Management Arrangements
•	Performance
•	Status of our reports to the Council

PAGE 7

Appendix 1

•	Investment Managers’ Performance Record

ANNEX 1

Introduction
The Oxfordshire County Council Pension Fund is managed under Regulations relating to the Local Government Pension Scheme (LGPS). Among other things, these designate Oxfordshire County Council (the Council) as the administering authority for the scheme. Membership of the scheme is open to all local authority employees in the county either as scheduled bodies or admitted bodies. 
•	scheduled bodies, whose employees have to be allowed into the scheme, include the five district councils, Thames Valley Police Authority, Thames Valley Probation
•	admitted bodies, whom the administering authority may admit to membership. 
The LGPS is contracted out of the state earnings related pension scheme, and is not subject to the minimum funding requirement. Because the LGPS is a statutory scheme, there are no ‘trustees’ as such. However, members of bodies such as the Pension Fund Committee (PFC) are encouraged – and indeed expected – to act in effect as ‘quasi trustees’, adopting the standards of a ‘prudent person’ and applying the informed questioning and challenging approach one would normally expect from lay trustees.
The scheme regulations fix the employees’ contribution at 6 per cent of pay. To ensure that the Fund is always solvent, it is subject to triennial actuarial valuations, with any shortfall between estimated liabilities and assets having to be made good solely by the employers over an agreed period. The change in the valuation of the Fund from 1998 to 2001 is set out in Table 1.
Table 1: Change in funding level 1998 – 2001 
The net effect of the overall changes in the liabilities and value of the fund is a drop in the funding level of £50m (5%)
	1998	2001	% change	
Total Fund liabilities	£504m	£727m	19	
Total Fund value	£485m	£658m	36	
Total Fund deficiency	£19m	£69m		
Funding level 	96 per cent	91 per cent	-5 per cent	

Over the last few years the stock market in general has experienced a downward trend and it is important to consider Oxfordshire’s position in this context and to compare it with the performance of all County Councils. A survey carried out by the Society of County Treasurers shows that between the 1998 and 2001 valuations overall funding levels have fallen from 93.1 per cent to 91.3 per cent (Exhibit 1).  The Fund was valued at £646m at 31 March 2002.  

EXHIBIT 1 county council funding levels 1998, 2001
 
In 1998 Oxfordshire ranked 12th out of the 35 county funds, by 2001 they had dropped to16th

0

20

40

60

80

100

120

Total funding levels 

2001

Oxfordshire 

0

20

40

60

80

100

120

Oxfordshire 

Total Funding levels 

1998

Source Society of County Treasurers Survey 2001

As a result of the drop in the funding level and the impact of other changes (eg increased longevity) there have been significant increases in the employers’ contribution rates – generally up by over 30 per cent from 11.46 per cent to 14.94 per cent. The impact on the pay bill across all participating authorities has not been calculated.
This review focuses upon the Council’s overall management arrangements of its pension fund.
Background
Since September 1994, the investments of the Fund have been managed by two external managers – Schroders and Deutsche.  Schroders were originally appointed in 1991, and re-appointed in 1994 (at which time the Council sacked two managers – Scottish Widows and Baillee Gifford) when they held 60% of the Fund, with Deutsche holding the remaining 40%.  Following a further review in 1999, the fund was re-allocated to give each manager a 50% share, to be managed on a ‘balanced’ mandate of multi-asset types of investments (UK and overseas equities, bonds, property, cash).  One of the reasons that Deutsche and Schroders were selected was because of what was seen as their complementary management styles and philosophies.  Both managers are working to the same performance target: to outperform the CAPS median by 1% over rolling 3 year periods, with a lower limit of no more than –2% underperformance in any 12 month period.  In addition, the Fund has a small Venture Capital Fund, on which they are advised by UBS Warburg.
Conclusions
Overall we have concluded that whilst the Council could have taken earlier and more decisive action in respect of Schroders, they regularly reviewed their management arrangements, and in 1999 consciously decided to stay with the present Managers.  At that time, the Fund’s overall performance had put them regularly in the top quartile of all local authority funds, and it was hoped that the Managers’ complementary styles would maintain that position.  At that time the Council recognised that if Deutsche’s performance worsened, then Schroders would need to improve theirs to compensate.  That has not happened.  Against that background the Council have acted with commendable speed to revise their whole management arrangements.
In summary despite the recent, and current, poor performance record, the Oxfordshire Pension Fund is well managed.  There is a formal Committee with clear responsibilities and reporting lines.  The Council officers monitor the position regularly, have reviewed their management arrangements regularly, and have revised these arrangements as appropriate.  Whilst Committee minutes do not record all concerns about performance and management arrangements, there is correspondence on file that does very clearly set out such concerns.  Responses from Managers are followed up.  The Committee should, though, consider whether minutes of its meetings could better reflect their discussions with Managers.
Information provided to Members is both comprehensive and clearly set out.  External advisers report regularly, and they too set out their information in a very informative and clear manner.  Members are, therefore, provided with all information to enable them to take a view on the management and performance of the Fund.  They also take their Corporate Governance responsibilities seriously, and receive regular reports on these and Social responsibility issues.
The Committee has now concluded that a change of management arrangements is appropriate, and has advertised for new managers.  Responses are required by early February 2003, following which the selection and appointment process will take place.
Recommendations
We make one recommendation:
•	that the Pension Fund Committee reviews the format and content of its minutes to better reflect its discussions with external managers.
We have discussed and agreed this recommendation with the Council’s Assistant Treasurer.

Our detailed findings are set out overleaf. We will follow up this report including the changes made to fund managers later this year.

Management Arrangements
Responsibility for the internal management of the Fund falls to the Assistant County Treasurer (Barry Phillips) who exercises the County Treasurer’s delegated responsibility on his behalf.  There is Member involvement through a Pension Fund Committee, which reports to the Strategy & Resource Committee.  The Committee comprises 6 members of the County Council, 2 District Council representatives, and 1 (non-voting) Beneficiaries’ representative.
The Committee meets quarterly, and holds an Annual Forum.  It is advised by the Treasurer, and by an Independent Adviser – Mr A (Tony) F Bushell - who provides an independent report and commentary on fund managers’ performance and other matters.  Representatives of both managers attend all meetings.
The Committee receives regular reports on Corporate Governance and SRI issues relating to the Fund’s holdings.  The Statement of Investment Principles has been revised to reflect, amongst other things, the extent to which the Fund meets the CIPFA guidance relating to Myners’ 10 Principles.  A report to the Committee in May 2002 shows that the Fund largely complies – either wholly or partly – with the CIPFA guidance; only 8 (of 38) specific points are not met.
Performance
The performance of the Fund’s managers against the benchmark for the period since quarter-ending 31 December 1998 is attached (appendix 1).  It shows that, in that period:
•	Deutsche breached the lower performance limit (not more than –2% in any 12 months) over 4 consecutive quarters in 2000/1
•	Deutsche have failed to achieve the +1% performance target since the beginning of 2001
•	Schroders have never achieved the performance target of CAPS Median +1, but have never breached the lower limit
•	Over the longer term Deutsche performed well until mid-2000, then had a couple of poor years, giving a poor 3-year return to 2002.  
Managers’ performance is highlighted in reports from both the Treasurer and the Independent adviser – including a very clear graphical presentation.  Performance is also reported on annually by CAPS, and by the Actuary, with the latter making a formal presentation to the Committee (not minuted).  Both these reports also highlight managers’ performance against their target.  A particular feature of the regular reporting is that the performance records of Oxfordshire’s named managers are compared with the ‘house’ average of both external managers.  In this way, the Council can monitor how their own performance compares with that of other funds being managed by their managers.  This showed that in 2001/2, the Council’s performance was 2% below Schroders’ house average.
There have been concerns about Schroders for some time, both about performance and the rapid turnover of manager – the Council have had 3 different managers in a short time, one of whom left before they’d even met him.
Whilst none of these concerns are minuted, there is correspondence between the Council and both Managers recording concerns, and seeking explanations.  The position – and action taken – is therefore well documented.
In response to their deteriorating performance record, the Council considered whether the risk profile and performance targets were appropriate.  A review by their external consultants concluded that the +1% out performance target was incompatible with an under-performance limit of –2% - the ‘active risk’ inherent in the investments held by the Managers indicated that they were playing safe to avoid breaching the lower limit, but to the detriment of significant out-performance.  The consultants’ view was that +0.3% was a more realistic performance target. 
This has led the Council to recently revise its benchmark – performance is now measured against individual Stock Market Indices rather than the CAPS median.  However, the study concluded that even this change was unlikely to achieve the Council’s required performance target with the current management structure.  Consequently, they have now put the whole fund out to tender – the advert inviting expressions of interest appeared in the European Journal in mid-December 2002.

Status of our reports to the Council
Our reports are prepared in the context of the Statement of Responsibilities of Auditors and Audited Bodies issued by the Audit Commission. Reports are prepared by appointed auditors and addressed to non-Executive Directors/Members or officers. They are prepared for the sole use of the audited body, and no responsibility is taken by auditors to any Director/Member or officer in their individual capacity, or to any third party.	

APPENDIX 1
OXFORDSHIRE PENSION FUND										
Investment Managers' Performance record	 	 										
 	 	 	 	 	 	 	 	 	 	 		
Period to	Benchmark	Performance over period:	 	
 	 	 	DEUTSCHE	SCHRODER	 	
 	12 months	3 years	12 months	3 years	against benchmark	12 months	3 years	against benchmark	 	
 	 	 	 	 	12 months	3-year	 	 	12 months	3-year		
 	%	%	%	%	%	%	%	%	%	%		
1998	 	 	 	 	 	 	 	 	 	 		
31-Mar	 	 	 	 	 	 	 	 	 	 		
30-Jun	 	 	 	 	 	 	 	 	 	 		
30-Sep	 	 	 	 	 	 	 	 	 	 		
31-Dec	12.5	13.1	15.4	15.5	2.9	2.4	10.8	12.8	-1.7	-0.3		
1999	 	 	 	 	 	 	 	 	 	 		
31-Mar	6.9	13.3	8.6	15.8	1.7	2.5	5.8	13.4	-1.1	0.1		
30-Jun	10.0	13.8	11.2	15.5	1.2	1.7	9.2	13.8	-0.8	0.0		
30-Sep	18.3	11.7	19.4	12.8	1.1	1.1	17.4	11.2	-0.9	-0.5		
31-Dec	19.1	15.4	24.6	18.5	5.5	3.1	17.6	14.9	-1.5	-0.5		
2000	 	 	 	 	 	 	 	 	 	 		
31-Mar	12.9	14.4	17.2	16.4	4.3	2.0	11.6	13.4	-1.3	-1.0		
30-Jun	10.3	12.5	13.8	14.6	3.5	2.1	8.7	11.3	-1.6	-1.2		
30-Sep	12.9	9.6	17.1	11.3	4.2	1.7	11.4	8.0	-1.5	-1.6		
31-Dec	-0.7	10.2	-3.6	11.5	-2.9	1.3	0.2	9.3	0.9	-0.9		
2001	 	 	 	 	 	 	 	 	 	 		
31-Mar	-7.0	4.3	-9.5	4.8	-2.5	0.5	-6.4	3.2	0.6	-1.1		
30-Jun	-6.0	4.7	-8.6	5.0	-2.6	0.3	-6.2	3.6	-0.2	-1.1		
30-Sep	-16.7	4.0	-18.8	4.3	-2.1	0.3	-16.7	2.9	0.0	-1.1		
31-Dec	-9.8	2.3	-11.7	2.0	-1.9	-0.3	-10.9	1.6	-1.1	-0.7		
2002	 	 	 	 	 	 	 	 	 	 		
31-Mar	-1.7	1.4	-2.5	1.1	-0.8	-0.3	-2.3	0.7	-0.6	-0.7		
30-Jun	-10.9	-2.6	-11.2	-2.6	-0.3	0.0	-10.9	-3.2	0.0	-0.6		
30-Sep	-14.6	-6.9	-14.9	-6.8	-0.3	0.1	-15.3	-7.7	-0.7	-0.8		
31-Dec