Meeting documents

Pension Fund Committee
Friday, 27 August 2004

PF270804-14

Division(s): N/A

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