Meeting documents

Pension Fund Committee
Friday, 29 August 2003

PF290803-13

Report by the Head of Finance

Introduction

At the May 2003 Pension Fund Committee Meeting it was reported that Legal and General had been appointed as the Fund’s Transition Manager. Legal and General’s 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 in the most timely, cost effective and efficient manner.

The Transition Process

The Schroder and Deutsche Investment Management Agreements were terminated on 13 June 2003 and the management of the assets was transferred to Legal and General on this date.

Not all the assets were transferred to the Transition Account. Schroders and Deutsche retained the pooled vehicles, with an instruction to realise these by the most efficient means in order to achieve the best price. In the case of the property units the managers were instructed to transfer these to UBS Global Asset Management, who now manage property within the multi asset brief. All the pooled vehicles were successfully sold or transferred during the first ten days of July.

The transition plan drawn up following a meeting between Legal and General, Oxfordshire County Council and ABN AMRO Mellon, the Fund’s custodian, agreed the transition date as 11 July. It was essential that all four management agreements were signed by all parties and in place before the transition date. This was successfully achieved.

There were a number of issues arising from the investment management agreements where officers had to make decisions, but only did so after consulting the Independent Financial Adviser. All the decisions made were considered to be in the Fund’s best interest. The officers wrote to the Pension Fund Committee’s Chairman, Deputy Chair and Third Group Spokesperson on 5 June and invited them to raise any issues, which they were not entirely happy with. The Chairman contacted the officers to confirm that he had read the letter and had no comments to make. The letter is shown at Annex 1.

One of the issues referred to in the letter was a request by Legal and General to use the iBoxx Sterling Non-Gilt All Stocks Index as the benchmark for corporate bonds. UBS Global Asset Management, who is the new multi assets manager, has also agreed to use this index as its benchmark for corporate bonds.

On 11 July the assets were successfully transferred to the four new managers. At the time this report went to print officers were still waiting to receive a detailed report from Legal and General assessing the success of the transition exercise. The officers will report orally on this exercise.

Cash held in-house

As part of the transition process we took into account the 6% of the Pension Fund, which has been earmarked for private equity and hedge funds following the asset liability study. We also took into account an outstanding transfer of £5 million to the Berkshire Pension Fund, as a result of the transfer of the Probation Service.

As a consequence of taking into account these commitments the cash balance held in-house will be higher than normal. A working balance of £4 million is normally held but following the completion of the transition the balance is £30million.

The cash balance is invested by the Council’s Treasury Management team in the wholesale money markets and is therefore earning a competitive rate of interest for the Pension Fund. The alternative to holding cash in-house would have been to give the cash to the four new managers. However, because this would have been on a temporary basis this may have caused the managers some inconvenience. I discussed this issue with the Independent Financial Adviser and he agreed that it is best to hold the cash in-house on a temporary basis pending investment. He does not consider that holding cash as a temporary measure is a risk in the current markets.

Investment Measurement Performance

During the June 2003 quarter officers held a meeting with ABN AMRO Mellon and Russell Mellon CAPS to agree the future investment performance reporting arrangements for the individual managers and the total fund. Russell Mellon CAPS was provided with details of the Fund’s new customised benchmark and the managers’ specific benchmarks.

It was agreed that the custodian would supply the investment data for performance measurement compared to the previous arrangement whereby the fund managers supplied data. This provides a level of independence.

It was agreed that the new managers’ individual investment performance would not be measured until the commencement of their first complete month of management, which will be 1 August 2003. However, the Fund’s investment performance at total level with be measured from the 1 July, which indeed has been the position throughout the whole of the transition process.

During the discussions with Russell Mellon CAPS it was noted that there is currently no performance benchmark, target or investment range for private equity. I have discussed this issue with the Independent Financial Adviser and we would recommend the following: -

Benchmark – FTSE Smaller Companies Index

Target – To outperform the FTSE Smaller Companies (ex investment trusts) Index by 1% per annum over rolling three-year periods.

Investment Range – 2% to 6%

Summary of the Management and Restructuring Exercise

Annex 2 provides a summary of the management and custody changes that have taken place.

RECOMMENDATIONS

note the issues set out in the letter to the Chairman, Deputy Chair and Third Group Spokesperson as set out in Annex 1; and

agree the benchmark, target and investment range for private equity as set out at paragraph 14 of the report.

CHRIS GRAY
Head of Finance

Background Papers - Nil

Contact Officer -Tony Wheeler, Pension Fund Investments Manager. Tel (01865) 815287