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ITEM PF12
PENSIONS
FUND COMMITTEE – 23 MAY 2003
PROGRESS
OF CUSTODIAL SERVICES AND ASSET ALLOCATION
Report by
Head of Finance
Asset Liability
Study
- At the beginning
of 2002 the Pension Fund Committee appointed its Actuary, Watson Wyatt,
to carry out an asset liability study for the Pension Fund. The main
purpose of the study was to agree an investment asset allocation which
best matched the liability profile of the Pension Fund.
- The main conclusion
of the asset liability study was the need to reduce the amount held
in UK equities and to increase the amounts held in Fixed Interest Bonds
and Index linked gilts. Bonds are seen as a better match than equities
for pension payments whilst index linked gilts accommodate the fact
that pension benefits are increased annually in line with changes in
the retail price index.
- Following the
study and at a special meeting in April 2002, the Committee agreed the
new investment asset structure as set out in Annex 1 (download
as .xls file). The question as to whether the Pension Fund should
have a 2% weighting in hedge funds has still to be resolved but the
Independent Financial Adviser will advise the Committee on this issue
later year.
- At the May 2002
Pension Fund Committee meeting it was agreed that Schroders and Deutsche
Asset Management should phase in the new asset structure over the nine-month
period ended 31 March 2003.
- Annex 1 (download
as .xls file) also compares the Pension Fund’s actual asset
weightings as at 31 March 2002 and 31 March 2003 with the newly agreed
customised benchmark. This shows that the asset restructuring has broadly
been achieved.
Appointment
of ABN AMRO Mellon
- At the February
2003 Pension Fund Committee meeting it was reported that officers had
appointed PSolve to assist them in the tendering arrangements and appointment
of a global custodian. At the same meeting it was resolved that the
Director for Business Support and County Treasurer, with the advice
of the Independent Financial Adviser, should agree the appointment of
a global custodian, for a period of three years, commencing from 1 April
2003.
- PSolve advised
us that only a handful of custodians were adequately resourced to manage
a large institutional pension fund and consequently only seven custodians
were invited to tender. Two of these declined to tender on the grounds
that the account was too small. Of the remaining five custodians three
were short-listed.
- Mr Bushell, Mr
Wheeler and a representative from PSolve interviewed the short listed
candidates in London, on 28 February, 2003. Following the interviews
ABN AMRO Mellon was appointed.
- ABN AMRO Mellon
quoted the lowest fee of the five custodians that tendered but this
was not the sole reason why they were appointed. Their organisational
strength, total assets under custody and real-time online web-based
services were considered to be strong points. They had also recently
picked up other local authority mandates, including Worcestershire County
Council and we felt that they demonstrated a strong commitment to the
local authority pension fund sector.
Transfer
of Assets
- The custody management
agreement has been agreed and signed by both parties. ABN AMRO Mellon
was officially appointed, on an initial three-year contract, from 1
April 2003.
- During April 2003
the Pension Fund’s assets were successfully transferred from the two
incumbent custodians to ABN AMRO Mellon.
RECOMMENDATIONS
- The Committee
is RECOMMENDED to note the report.
CHRIS
GRAY
Head of Finance
Background
Papers: Nil
Contact
Officer: Tony Wheeler, Pension Fund Investments Manager Tel (01865)
815287
May
2003.
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