Meeting documents

Pension Fund Committee
Friday, 21 May 2004

PF210504-15

Division(s):N/A

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

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