NORTHAMPTONSHIRE LOCAL
 GOVERNMENT PENSION FUND




Statement of Investment Principles




        NOVEMBER 2007




     ...
Statement of Investment Principles
Contents:                                     Page

   A.   INTRODUCTION               ...
A     INTRODUCTION
1. Regulation 9A of the Local Government Pension Scheme (Management
   and Investment of Funds) (Amendm...
B     GOVERNANCE

1.   Purpose

     The purpose of this section is to set out the governance structure and
     terms of ...
5.4. The Pensions Committee will deal with all matters arising from the
     Council’s function and responsibilities as ad...
(v)      Setting the admissions policy and endorsing decisions delegated
              to the Director for Business Suppor...
6.3. The Investment Advisory Panel meetings will not be held in public, but
     will provide support to the Pensions Comm...
(v)      To review the Funding Strategy Statement, the Statement of
              Investment Principles, the Governance an...
(ii)     Monitor the investment management structure and arrangements
              in order to verify that the investment...
(vii)     Devise and implement training, consultation and communication
              strategies for the employers.

    (...
benchmarks, including the production of reports on their
                performance.

             (g) Attendance at meet...
(vi)     Individual member calculations.

     (vii)    Advice on AVC arrangements.

     (viii)   Providing FRS 17 inform...
11.2 The arrangement is governed by a formal agreement, supported and
     measured by a Service Level Agreement which mon...
C      FUNDING STRATEGY STATEMENT


1.   The Pension Fund has published a Funding Strategy Statement (FSS),
     the purpo...
D    SCHEME’S LIABILITIES

1.   The Pension Fund is a defined benefit scheme which provides benefits
     related to final...
E     INVESTMENT POLICY

1.    The investment policy of the Pension Fund is intended to ensure that all
      statutory pa...
TRACKING                FEES
                                                      %AGE        PERFORMAN         ERROR
   ...
(ii)       Asset Liability Studies are undertaken by the Fund’s Actuary.

(iii)      Historically the Fund’s investment st...
19
The current benchmark investment strategy is:

Asset Class                 Bench Mark       Benchmark Index
UK Equities   ...
11   Risk

     (i)     The overall risk for any Pension Fund is that its assets will be
             insufficient to meet...
(iii)   provide a statement of the effectiveness of the investment
        operations and demonstrate that the Fund’s asse...
F    ELIGIBLE ASSETS

1.   The Fund’s legal advisor has confirmed that the Fund’s investments
     comply with The Local G...
G    SOCIALLY RESPONSIBLE INVESTMENT (SRI)
1.   With regard to socially responsible investment, the authority is mindful o...
(iv)   Community involvement

6.   As a minimum, this approach should be applied to UK companies.
     Managers will be en...
H    CORPORATE GOVERNANCE

1.   Corporate Governance is defined as "the system by which companies
     are controlled and ...
(ii)    There should be a requirement for directors to seek re-election at
             least once every three years.

   ...
I    COMPLIANCE
1.   Investment managers may provide a statement, at agreed intervals, for
     the Investment Panel, conf...
J     LEVEL OF COMPLIANCE WITH THE 10 PRINCIPLES OF GOOD INVESTMENT

                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
NORTHAMPTONSHIRE PENSION
    DESCRIPTION OF PRINCIPLE                                                                     ...
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Statement of Investment Principles 2007 (Word format 382KB)

  1. 1. NORTHAMPTONSHIRE LOCAL GOVERNMENT PENSION FUND Statement of Investment Principles NOVEMBER 2007 1
  2. 2. Statement of Investment Principles Contents: Page A. INTRODUCTION 3 B. GOVERNANCE 4 C. FUNDING STRATEGY STATEMENT 14 D. SCHEME’S LIABILITIES 15 E. INVESTMENT POLICY 16 F. ELIGIBLE ASSETS 23 G. SOCIALLY RESPONSIBLE INVESTMENT (SRI) 24 H. CORPORATE GOVERNANCE 26 I. COMPLIANCE 28 J. MYNERS PRINCIPLES 29 Strategic Finance Manager Exchequer Services PO Box 202 John Dryden House 8-10 The Lakes Northampton NN4 7DB sdainty@northamptonshire.gov.uk 01604 236636 2
  3. 3. A INTRODUCTION 1. Regulation 9A of the Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 1999 requires Administering Authorities to publish a written statement recording the investment policy of the pension fund. The purpose of this document is to satisfy the requirements of these regulations. 2. In addition Local Government Pension Scheme (England and Wales) (Amendment) Regulations 2004 came into effect 1 April 2004, requiring Administering Authorities to publish a Funding Strategy Statement [FSS]. The FSS must have regard to the Statement of Investment Principles [SIP] 3. The Northamptonshire Local Government Pension Scheme (“the scheme”) was established in accordance with statute to provide death and retirement benefits for all eligible employees. 4. This document outlines the broad investment principles governing the investment policy of the Scheme. The investment policy and management falls into two parts. The strategic management of the assets is fundamentally the responsibility of the Pension Committee established by Northamptonshire County Council (the administering authority) which has representation from the County Council, district councils and local trade unions. The Committee determines the strategic management of the assets based upon the professional advice it receives and the investment objectives as set out in Section E on pages 16 to 22. The Investment Advisory Panel has oversight of the implementation of the management arrangements and has the same representation as the Pension Committee. The Committee/Panel meets at least five times a year. 5. The principles outlined in this document are effective from February 2008. 3
  4. 4. B GOVERNANCE 1. Purpose The purpose of this section is to set out the governance structure and terms of reference of the Northamptonshire Pension Fund (“the Fund”), 2. The Administering Authority and the Regulatory Framework 2.1. These are set out in the Pensions Committee Governance structure [November 2004] as submitted to Council on 9th December 2004. 2.2. The Investment Advisory Panel supports the Pensions Committee, which reports directly to the Northamptonshire County Council. 3. The Scheme of Delegation These are referred to in the Pensions Committee Governance structure [November 2004] as submitted to Council on 9th December 2004. 4. Contract Procedure Rules These are referred to in the Pensions Committee Governance structure [November 2004] as submitted to Council on 9th December 2004. 5. Pensions Committee 5.1 The Pensions Committee is a formal body of the Council, formed in February 2005, to manage and administer all aspects of the Fund. 5.2 The Council Constitution governs the actions of the Committee and its Officers. 5.3 The Constitution (Article 8) contains the following sections in relation to the functions of the Pensions Committee: “Ensures the Fund complies with all relevant legislation governing the administration of the fund, ensuring appropriate arrangements for the administration of benefits are in place and reviewing investment strategies for the Fund”. 4
  5. 5. 5.4. The Pensions Committee will deal with all matters arising from the Council’s function and responsibilities as administering authority for the Northamptonshire Pension Fund. (i) The role of the Pensions Committee will be to control and resolve all matters relating to the administration of the Northamptonshire Pension Fund and the management and investment of the assets of the Fund. (ii) The Pensions Committee will have five councillors from Northamptonshire County Council and one councillor representative appointed by the Northamptonshire Councils Association [NCA] to represent other local authorities within the county of Northamptonshire. These representatives are referred to as the “Elected Members”. (iii) There will be up to two employee representatives appointed by the Trade Union Unison, to sit on the Pensions Committee in an advisory capacity. These representatives are able to offer opinion and advice but are not eligible to vote on decisions. (iv). The Director for Business Support or nominated substitute will attend together with other officers as required. (v) The Pension Fund may set up sub- committees or working groups to carry out more detailed work in relation to its responsibilities. 5.5 The responsibilities to be discharged by the Committee are: (i). Ensuring that the Fund complies with best practice. (ii). Ensuring that the Fund complies with the Local Government Pension Scheme Regulations 1997, the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 and all other legislation governing the administration of the Fund. (iii). Ensuring the Fund is valued as required and receiving and considering reports on each actuarial valuation, which will be undertaken triennially. (iv). Ensuring appropriate arrangements for the administration of benefits are in place. 5
  6. 6. (v) Setting the admissions policy and endorsing decisions delegated to the Director for Business Support. (vi) Setting the strategy for communicating with Scheme Employers and employees in the scheme. (vii). Ensuring appropriate Additional Voluntary Contribution (AVC) arrangements are in place and reviewing investment performance on such contributions. (viii). To set investment objectives, policy and strategic asset allocation. (ix). To appoint, dismiss and assess the performance of advisers, investment managers, custodians and actuaries. (x) To review and approve the Funding Strategy Statement, the Statement of Investment Principles and the Governance and Communications Policy. (xi) Review the Governance Structure of the Pension Fund to set out the responsibilities of elected members, officers, investment managers, advisors, custodians and the actuary to the Fund, including delegated powers and make recommendations to the Council for changes where necessary. (xii). To develop and maintain a trustee training policy. (xiii). To develop and maintain a risk management strategy. (xiv). To receive and agree the Annual report and Accounts. 5.6. The Pensions Committee will meet at least five times per year and thereafter as required dependant upon business. 5.7. Officers of the Fund are delegated to meet with the trades unions and the employers to discuss any matters relating to the Fund such as the funding position, investment strategy and changes to benefits. 5.8 The minutes of Committee meetings will be reported to Council. 6. The Investment Advisory Panel 6.1. The Investment Advisory Panel (“the Investment Advisory Panel”) is an officially constituted body of the Northamptonshire County Council, set up by the Pensions Committee. 6.2. The Pensions Committee governs the actions of the Investment Advisory Panel and its Officers. 6
  7. 7. 6.3. The Investment Advisory Panel meetings will not be held in public, but will provide support to the Pensions Committee as required. The majority of the matters dealt with by the Investment Advisory Panel are of a confidential nature due to their commercial sensitivity. 6.4. The Investment Advisory Panel has no decision making powers. 6.5 The terms of reference of the Investment Advisory Panel are set out in the “Investment Advisory Panel Structure and Terms of Reference” [January 2005] paper as presented to the Pensions Committee on 2 February 2005. (i) The role of the Investment Advisory Panel will be to consider matters relating to the administration of the Northamptonshire Local Government Pension Scheme and the management and investment of the assets of the Fund and advise the Pensions Committee on resolving such matters. (ii) The Investment Advisory Panel will have the same elected representation as the Pensions Committee. (iii) The employee representative will sit on the Investment Advisory Panel in an advisory capacity. The representative is able to offer opinion and advice but is not eligible to vote on decisions. (iv) The Director for Business Support or nominated substitute will attend together with other officers as required. 6.6. The responsibilities to be discharged by the Investment Advisory Panel are: (i) Ensuring that the Investment Advisory Panel complies with best practice. (ii) To recommend strategic investment objectives, policy and strategic asset allocation to the Pensions Committee. (iii) To assess the performance of investment managers, investment advisors, custodians and actuaries. (iv) To recommend to Pensions Committee appointment and dismissal as required, of service providers to the Fund, such as investment managers, investment advisors, custodians and actuaries. 7
  8. 8. (v) To review the Funding Strategy Statement, the Statement of Investment Principles, the Governance and Communications Policies and submit these to the Pensions Committee for approval. (vi) Advising on the appropriate arrangements for the administration of benefits. (vii) To undertake any task delegated to it by the Pensions Committee. 6.6. The Investment Advisory Panel will meet at least quarterly. 7.0 The Director for Business Support 7.1 The Director for Business Support will: (i). Advise the Committee on all matters which it needs to be aware of in order to discharge its responsibilities in relation to the administration and investment of the Fund. (ii). Prepare the Budget. (iii) Maintain the system of internal financial control. (iv) Develop and maintain a risk management register. (v). Prepare the Annual Report and Accounts. (vi) Manage the triennial and interim actuarial valuations. (vii). Manage the preparation of the Funding Strategy Statement and the review of the Statement of Investment Principles, the Governance and Communications Policies. (viii) Ensure that the operation of the pension fund adheres to best practice. (ix) Ensure contributions received are in accordance with the Schedule of Rates and Adjustments. 7.2 In relation to the investment of the Fund, the Director for Business Support will: (i) Monitor developments that may affect the approach to the investment of the Fund. 8
  9. 9. (ii) Monitor the investment management structure and arrangements in order to verify that the investment policy of the Committee is being implemented. (iii) Monitor the investment managers in order to (a) maintain an awareness of their investment views and strategies (b) verify that the strategies being implemented are in accordance with investment mandates. (iv) Maintain records that monitor the investment performance of investment managers and the Fund. (v). Maintain a record of the Fund’s assets. (vi) Monitor the security and efficiency of the custodian in order to verify that (a). the assets are secure (b). the custodian’s records of the Fund’s assets are reconcilable against managers’ records (c) the custodian’s actions are in accordance with the agreements. (vii) Take investment decisions relating to the portion of the Fund that is invested in house. (viii) Manage cash flow, allocate money between investment managers in order to ensure that the Fund does not become over or under invested and invest the residual cash balances. 7.3 In relation to the administration of benefits, the Director for Business Support will: (i). Monitor developments that may affect the administration of benefits. (ii) Promote Membership of the Fund. (iii) Manage the admissions policy. (iv). Collect and reconcile the employer and employee contributions. (v) Pay pension benefits. (vi). Maintain records in relation to the entire Membership. 9
  10. 10. (vii) Devise and implement training, consultation and communication strategies for the employers. (viii) Devise and implement consultation and communication strategies for the Members. (ix) Manage the AVC arrangements. 8 The Investment Advisor 8.1. The Fund will employ investment advisors as agreed by the Pensions Committee. 8.2 These arrangements are governed by formal agreements, which are reviewed annually. 8.3 Other advisors may be appointed as required. 8.4 The Pensions Committee appointed investment advisor(s) will assist the Investment Advisory Panel in its duties and responsibilities. 8.5 Investment Advisor services to the Fund may include: (i) Strategic Investment Consultancy Services This includes general advice or assistance relating to the investment strategy and structure, and analysis of the performance of any investment. It comprises the following: (a) Advice on the development of an appropriate investment strategy, including the split between different types of generic investments and the indices and industry types that may be invested in. (b) Advice on appropriate benchmarks by which to measure the performance of a particular investment strategy. (c) Advice on the types of arrangements, including alternative methods of investment management available to implement a particular investment strategy. (d) Advice and assistance with the selection of investment managers to implement and carry out a particular investment strategy or structure. (e) Advice and assistance with the selection of a custodian. (f) Assisting the Committee in the monitoring of the performance of any investment or investment managers against agreed 10
  11. 11. benchmarks, including the production of reports on their performance. (g) Attendance at meetings of the Committee, the Investment Panel and other meetings as required. (h) Advice on the Fund’s Governance Structure and advice on, and provision of, “Trustee Training”. (i) Other ad hoc advice as may be required, including:  Assistance in the preparation or revision of the Statement of Investment Principles;  Assistance in the preparation or revision of the Funding Strategy Statement;  Assistance in the preparation or revision of the Governance Policy;  Assistance in the preparation or revision of the Communications Policy;  Assistance in the preparation or revision of documents relating to the Myners Principles;  Advice on derivatives, futures, options or contracts for differences, hedge funds and other such alternative investment options. (ii) Restructuring of Portfolios. (a) Advice on the restructuring of portfolios. (iii) Specific Investment Advice (a) Advice relating to specific investment products. 9. The Actuary 9.1 The Fund will employ an Actuary as agreed by the Pensions Committee, 9.2 The services provided may include: (i) Carrying out the triennial actuarial valuation and interim actuarial valuations. (ii) Assistance with the preparation and updating of the Funding Strategy Statement. (iii) Calculating employer contribution rates for new employers. (iv) Calculating bulk transfer values. (v) Calculations for individual employers, for example on wind ups. 11
  12. 12. (vi) Individual member calculations. (vii) Advice on AVC arrangements. (viii) Providing FRS 17 information to individual employers. (ix). Generally, providing advice on matters relevant to the administration of the Fund. 9.3 The arrangement is governed by a formal agreement reviewed annually. 10 The Investment Managers 10.1 Responsibility for the implementation of tactical asset allocation and for the selection, retention and realisation of individual investments has been delegated to external investment managers. 10.2 Where appropriate, managers are required to implement the Committee’s Policy on Socially Responsible Investment, the Exercise of Rights and Corporate Governance. 10.3 The Fund has a balanced mandate and eight specialist mandates. The mandate values fluctuate reflecting the investment performance over time. The Committee has delegated to the Investment Advisory Panel responsibility for monitoring investment performance at quarterly meetings with each manager. 10.4.The arrangement with each manager is governed by an investment management agreement, which is reviewed in line with changes in investment demands. 10.5 In order to assist with monitoring arrangements, the managers are required to provide the Committee and Panel: (i) with quarterly accounting statements and investment performance reports in addition to a quarterly presentation on performance. (ii) the information necessary to calculate performance statistics. (iii) monthly accounting records and other statements to the Funds Global custodian and to finance officers of the fund. 11 The Custodian 11.1 The Fund will employ a custodian as agreed by the Pensions Committee. 12
  13. 13. 11.2 The arrangement is governed by a formal agreement, supported and measured by a Service Level Agreement which monitors key performance measures, which are subject to scrutiny and challenge annually at the July Investment Advisory Panel. 11.3 The custodian is responsible for: (i). Safekeeping of the assets within the portfolio. (ii). Providing regular statements of the assets, transactions, cashflow and corporate actions. (iii) Processing all dividends, tax reclamations and corporate actions in a timely manner. (iv). Providing a securities lending service to the fund. (v) Undertaking any other appropriate administration relating to the portfolio’s assets. (vi) Providing comprehensive monthly and quarterly Fund Manager performance reports. 12 Performance and Risk Monitoring 12.1.The Fund will employ performance measuring services to measure and report on the performance and risk of individual portfolios and the Total Fund, as agreed by the Pensions Committee. 12.2 The arrangement is governed by a formal agreement. 12.3 The Committee, the Investment Panel and the Officers consider formally the performance and risk issues in relation to managers and the Total Fund. Quarterly reports provided by Russell Mellon and Northern Trust are distributed to Elected Members and officers of the Investment Advisory Panel on a quarterly basis. 12.4 An annual review of performance is undertaken, in line with the production of the Annual Report and Statement of Accounts. 13
  14. 14. C FUNDING STRATEGY STATEMENT 1. The Pension Fund has published a Funding Strategy Statement (FSS), the purpose of which is: (i) To establish a clear and transparent fund-specific strategy, which will identify how employers’ pension liabilities are best met going forward; (ii) To support the regulatory requirement to maintain as nearly constant employer contribution rates as possible; and (iii). To take a prudent longer-term view of funding those liabilities. 2. The FSS sets out how the Administering Authority has balanced the conflicting aims of affordability of contributions, transparency of process, stability of employers’ contributions, and prudence in the funding basis. These are set out under the following headings: (i) The Aims and Purpose of the Pension Fund (ii) The responsibilities of the key parties (iii) Solvency issues and target funding levels (iv) The link to investment policy set out in the Statement of Investment Principles. (v) The identification of risks and counter-measures (vi) Monitoring and review (vii) Key risks and controls. (viii) Actuarial Valuation as at 31 March 2007 – Methods and Assumptions. 3. Copies of the FSS can be obtained by writing to the Fund at the address on page 2 of this document 14
  15. 15. D SCHEME’S LIABILITIES 1. The Pension Fund is a defined benefit scheme which provides benefits related to final salary for members. Each member’s pension is specified in terms of a formula based on salary and service and is unaffected by the investment return achieved on the Scheme’s assets. Full details of Scheme benefits are set out in the LGPS regulations. 2. All active members of the Scheme are required to make pension contributions which are based upon a relevant percentage of their pensionable pay as defined in the LGPS regulations. 3. The Administering Authority is responsible for meeting the balance of costs necessary to finance the benefits payable from the Scheme. Employers’ contribution rates are determined from time to time based on the advice of the Scheme’s actuary. The Administering Authority therefore has a direct financial interest in the investment return achieved on the Scheme’s assets. 4. At the last actuarial valuation at 31 March 2007, the membership of the Fund consisted of: Total Average Membership Age Active Members 19,611 43.6 Deferred Pensioners 9,861 43.9 Pensioners 9,874 70.0 Widows/widowers 5. The results of the valuation in 2007 were as follows: Liabilities £m Pensioners 579.5 Deferred Pensioners 221.2 Active Members 650.9 1,451.6 Value placed on assets 1,107.6 Past service shortfall 344.0 (Funding level 76%) 6. The Fund has a positive cash flow, currently £20m p.a. 15
  16. 16. E INVESTMENT POLICY 1. The investment policy of the Pension Fund is intended to ensure that all statutory payments made from the Fund are at minimal cost to local tax payers. 2. The investment objectives are to maximise investment returns over the long term within specified risk tolerances. Investment returns are defined as the overall rates of return (capital growth and income combined). 3. The investment style is to appoint expert Fund Managers with a clear performance benchmark and place maximum accountability for performance against that benchmark on the Fund Manager. 4 The Authority currently has a mix of an active balanced approach and specialist fund managers. Current investment climate has seen many funds move to specialist briefs. The fund believes the current mix between balanced and specialist styles provides a reasonable diversification, specialisation and spread of risk for the investments of the Fund’s assets. 5 The current benchmark reflects the Asset Liability Study undertaken by the Actuary completed in February 2006 and applies measurement against a specific performance benchmark. 6 The Managers appointed to the fund and their individual performance targets over the benchmark index performance [over a rolling three-year programme - Gross of Fees unless otherwise stated] are; 16
  17. 17. TRACKING FEES %AGE PERFORMAN ERROR MANDAT ASSET Perf MANAGER OF CE RANGE/ Ne E TYPE orm Gross FUND TARGET VOLATILIT t Y ance UK Equities Overseas UBS Balanced Equities 45% 1.0% UP TO 3.5% Property Bonds Aberdeen Asset Specialist Bonds 11% 0.75% 0% to 2% Management RREEF Specialist Property 2% 1.0% 0% to 3% Majedie Specialist UK Equities 8.5% 2.0% 2% to 6% Martin Currie Specialist UK Equities 8.5% 2.0% 3% to 7% Overseas Alliance Berstein Specialist 17% 2% 3% to 7% Equities CBRE Property Specialist Property 3% 1% 0% to 3% Fauchier Specialist Hedge Funds 2.5% Libor + 5 5% to 10% Partners Specialist Hedge Funds 2.5% Libor + 5 5% to 10% 7 The individual manager’s current activity, transactions and performance is reviewed on a quarterly basis by the Investment Panel. 8 An alternative annual review of performance is undertaken annually upon receipt of annual data from WM, which provides a local government perspective. 9 The investment strategy will be reviewed annually with a major review likely to take place immediately following the actuarial review. 10 Asset Liability Study. February 2006. (i) Following the appointment of specialist Fund Managers, an Asset Liability Study was undertaken to review the existing objectives, policy and strategic allocation of the Fund’s assets between different classes of investment to inform decision making regarding the future allocation of assets. The overriding principle is that investment strategy should reflect the liabilities of the Fund. 17
  18. 18. (ii) Asset Liability Studies are undertaken by the Fund’s Actuary. (iii) Historically the Fund’s investment strategy has reflected the view that in the long term equities will produce higher returns than bonds. The Asset Liability Study sought to quantify the risk being taken by the Fund in terms of how the investment strategy could affect the funding level by the March 2010 actuarial valuation. (iv) The Fund commissioned its latest Asset Liability Study in February 2006. (v) The most important findings of the study found that the Fund’s current investment strategy risk level of 11.5%; the median expected funding level at March 2010 of 87% and the current strategic allocation of the funds assets between the different asset classes (equities, bonds, property, and cash) is efficient at the current level of risk. Therefore no fundamental change to current strategic asset allocation was required. (vi) Additionally it was found that the overall actual asset allocation of the Fund was not dissimilar to other local authority funds. (vii) A number of changes were however approved by the Pensions Committee in February 2006, reflected in the latest Benchmark as shown below. (viii) The most significant changes were: (a) Equal allocation within equities between UK Equities and overseas equities. (b) An incremental move towards allocating equities on a market capitalisation basis. (c) Change of emphasis in respect of overseas bonds to remove this asset type from the asset allocation, but allow fund managers to use overseas bonds if they feel it provides a tactical advantage. (d) An increase in the strategic asset allocation to property from 6% to 8% which provides enhanced diversity. It was also noted the Fund’s three property managers are well rated by Mercers. (e) In respect of specialist managers the increased property allocation has been awarded to CBRE. (f) In respect of alternative investments it was agreed that there was no pressure to adopt such investment vehicles but they should be available to the Fund should suitable options arise. (ix) The latest benchmark effective 1st July 2007 is shown below. 18
  19. 19. 19
  20. 20. The current benchmark investment strategy is: Asset Class Bench Mark Benchmark Index UK Equities 34.5 FTSE All-Share Overseas Equities 34.5 US Equities (North FTSE-AW North America 6.067 America) European Equities 6.067 FTSE-AWDev Europe ex UK Japan Pacific 6.066 FTSE-AWDev Asia Pacific Emerging Markets 2.5 FTSE-AW Emerging Overseas Equities 7.0 FTSE-AWDev All World ex UK Overseas Equities 6.8 HSBC-AREF All Balanced Fund Fixed Interest 18.0 UK Gilts 3.2 3.2 FTSE A All Stocks Gilts UK Gilts 1.2 1.2 FTSE A Over 15 Years Gilts UK Non-Gilt Bonds 5.8 5.8 iBoxx £ Non-Gilts International Bonds 1.0 1.0 Lehman 240 Month Sterling Swap International Bonds 1.0 1.0 Lehman 600 Month Sterling Swap UK Index Linked 2.3 2.3 FTSE A ILG (Over 5 Years) UK Index Linked 3.5 3.5 20 Year Sterling Inflation Swap Index Alternatives 13.0 Property 8.0 HSBC-AREF All Balanced Fund Private Equity Hedge Funds 5.0 UK LIBID 7 Day Notice Cash 0.0 TOTAL 100.0 20
  21. 21. 11 Risk (i) The overall risk for any Pension Fund is that its assets will be insufficient to meet its liabilities. The risk is negligible for Local Authority funds as these are assessed on an actuarial basis every 3 years and contribution rates are adjusted to ensure solvency. (ii) Furthermore, the Northamptonshire Local Government Pension Scheme is managed in a way that is designed to control normal investment risk. (iii) Further Asset Liability Studies will be undertaken to help the Investment Panel determine, from time to time, appropriate asset allocation ranges. The aim of these is to ensure that the Fund’s assets are prudently spread across different asset types and markets. As the Fund’s liabilities are based in sterling, the majority of the Fund’s assets are likely to be sterling denominated. (iv) The Fund will normally hold a large proportion of its assets in equities, which are considered to be the most appropriate match with the Fund’s liabilities. Over the long term, they should provide a hedge against inflation and grow in line with the underlying economy. To minimise the risks associated with this policy, a broadly based portfolio of stocks is held, spread across different countries and different industrial sectors. (v) The Fund’s investment performance is reviewed quarterly by the Investment Advisory Panel and should remedial action be required the panel will determine the action to be taken and recommend to the Pensions Committee for approval. 12 The Fund is subject to actuarial review every three years. The Fund’s actuary calculates the contributions required from employing authorities to ensure the solvency of the Fund. The Fund’s position is based on the Market values of the assets at the time of the Review. 13 The Fund has a positive cash flow and therefore has no present requirement to realise assets in order to meet its liabilities. It does, however, sell investments from time to time as part of normal investment management activities. 14 The Fund’s Custodian will be reviewed annually. The aim of this is to; (i) gain feedback on the quality of services from the existing provider and comparisons with alternative providers. (ii) provide transparency and openness with regard to the investment operations of the Fund. 21
  22. 22. (iii) provide a statement of the effectiveness of the investment operations and demonstrate that the Fund’s assets are adequately safeguarded. 22
  23. 23. F ELIGIBLE ASSETS 1. The Fund’s legal advisor has confirmed that the Fund’s investments comply with The Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 and the restrictions contained therein. 23
  24. 24. G SOCIALLY RESPONSIBLE INVESTMENT (SRI) 1. With regard to socially responsible investment, the authority is mindful of the following legal principles which are based on recent decisions in the courts and which apply to all pension schemes, as follows: (i) Administering authorities are free to adopt a policy of socially responsible investment, provided that they treat the financial interests of all classes of scheme members as paramount and their investment policies are consistent with the standards of care and prudence required by law. (ii) Administering authorities are free to avoid certain kinds of prudent investment which they consider scheme members would regard as objectionable so long as they make equally financially advantageous and prudent investments elsewhere. They may also make “ethical” investments provided these are otherwise justifiable on investment grounds. (iii) Administering authorities are not entitled to subordinate the interests of members to ethical or social demands. The financial performance of the Fund consistent with proper diversification and prudence is paramount. 2. The Council expects that the boards of companies in which the Pension Fund invests should pay due regard to environmental matters and thereby further the long term financial interests of the shareholders. Ethical and environmental issues arise not only in board policy decisions but in daily operations. The Investment Panel (on behalf of the Council) cannot become involved in those decisions and therefore looks to the directors of a company to manage that company’s affairs taking proper account of the shareholders’ long term interests. 3. The Fund will expect its appointed investment managers to have discussions with companies in an effort to improve their SRI performance. The manager should seek access to independent research to assist with these discussions. 4. The Panel will also seek its own independent advice to assist furthering its SRI aims. 5. The issues which should be addressed as part of these SRI discussions would normally include: (i) Environmental issues (ii) Employment standards (iii) Human Rights 24
  25. 25. (iv) Community involvement 6. As a minimum, this approach should be applied to UK companies. Managers will be encouraged to apply the same principles for non-UK companies. 7. Managers should report their discussions and their impact to the Panel on a regular basis to be determined by the Panel. 25
  26. 26. H CORPORATE GOVERNANCE 1. Corporate Governance is defined as "the system by which companies are controlled and directed". Effective corporate governance systems provide checks and balances on company management, together with the necessary incentives. Pension Funds, as major shareholders want to promote good corporate governance and hence good performance. 2. The UK Steering Committee on Local Government Pensions (UKSC), CIPFA, the National Association of Pension Funds (NAPF), the Local Authority Pension Fund Forum (LAPFF) and the Combined Code all advise pension funds to use their votes as shareholders to promote good corporate governance. 3. The following general principles drawn up by the Pensions and Investment Research Consultants Ltd (PIRC) are used as the basis for the Northamptonshire corporate governance policy: (i) Shareholders should assume the responsibilities of ownership. This does not entail intervening in daily management matters, but should involve setting standards and guidelines for corporate activity. (ii) Shareholders' voting rights are an asset which needs managing with the same duty of care as any other asset. (iii) Shareholders' voting rights should be exercised in an informed and independent manner. (iv) Shareholders' voting policies should reflect three main concerns: (a) To protect their rights as shareholders (b) To ensure that corporate governance standards are consistent with protecting assets (c) To promote corporate governance standards in order to enhance long term value. 4. Managers have delegated authority to exercise voting rights in accordance with the authority’s previously determined voting policy, which is set out below. Managers are required to report their voting actions as part of their quarterly reporting. 5. The Pension Fund would wish to vote against company resolutions where the following requirements are not met. (i) Chairman and Chief Executive posts should be separate (or there should be alternative arrangements consistent with this split). 26
  27. 27. (ii) There should be a requirement for directors to seek re-election at least once every three years. (iii) Rolling contracts for directors should not exceed one year. 6. Fixed contracts should not exceed two years. 7. There should be an approved remuneration policy in place which (i) Satisfies the Remuneration Committee that the returns justify the expenditure. (ii) Should not be based upon performance reward criteria which disbenefit the long term interests of the company. (iii) Rewards recipients for meeting challenging performance criteria. (iv) Aligns the interests of Directors with those of other shareholders. 8. There should be full disclosure of all emoluments received by Directors. 9. Clear disclosure of performance related payments. 10. The Remuneration Committee should be composed solely of independent non-executive Directors. 11. There should be an Audit Committee which has a majority of independent non-executive Directors. 12. Issue of shares should be consistent with pre-emption guidelines. 13. The Annual Report and Accounts should be free from material inadequacies. 14. There should be no resolutions to make party political donations. 15. There should be sufficient biographical information on Directors. 16. One third of the Board should be independent non-executives. 27
  28. 28. I COMPLIANCE 1. Investment managers may provide a statement, at agreed intervals, for the Investment Panel, confirming their compliance with this document. 2. Custodians should certify on an annual basis that they have complied with this document. 3. The Investment Panel will be responsible for assessing the risks assumed by the Scheme at global level, i.e. assuming that the portfolios of the individual managers were amalgamated. 4. The Investment Panel are responsible for monitoring the Scheme’s performance, both at global level and manager by manager. 5. The Investment Panel are responsible for monitoring the qualitative performance of the managers and custodians employed to ensure that they remain suitable investment managers/custodians for the scheme. These qualitative aspects include, inter alia, changes in ownership, changes in personnel, poor administration etc. 6. At regular meetings of the Investment Panel, the Members will consider the Scheme’s compliance with this Statement of Investment Principles. Every 12 months the Statement will be reviewed in full (in conjunction with the other parties to the Statement) and a revised Statement prepared and circulated. 7. Compliance with the Myners Principles (i) In 2000, the UK Government commissioned a Review of Institutional Investment in the United Kingdom. The review, published in March 2001, was undertaken by Paul Myners. The review was to investigate possible distortions in institutional investment decision-making. Mr Myners published his report on 6 March 2001. In response to the Myners’ proposals, the government issued a revised set of ten investment principles in October 2001 and confirmed that it would be taking forward the recommendations of the Myners report. (ii) There is now an expectation that authorities will be required to publish details of their compliance with the ten principles and to give justification where they have chosen not to comply. (iii) Section J Myners Principles shows how the Fund complies with each of the ten principles, along with the proposed action and timescales. 28
  29. 29. J LEVEL OF COMPLIANCE WITH THE 10 PRINCIPLES OF GOOD INVESTMENT NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND EFFECTIVE DECISION MAKING 1.1 Decisions should be taken only by persons The Pensions Committee has access to a No action is proposed. or organisations with skills, information and “sitting” Independent Advisor and the Director resources necessary to take them for Business Support. In addition the Panel has effectively. Where trustees elect to take appointed Mercer Human Resource Consulting investment decisions, they must have Limited as investment consultants. sufficient expertise and appropriate training to be able to evaluate critically any advice they take. 1.2 Trustees should ensure that they have The Director for Business Support and his staff No action is proposed. sufficient in-house staff to support them in undertake the investment responsibilities. their investment responsibilities. 1 1.3 Trustees should also be paid, unless there are The Pensions Committee members are of the No action is proposed. specific reasons to the contrary. County Council or employees and as such the Recommendation is not applicable. 1.4 It is good practice for trustee boards to have The Investment Advisory Panel is mandated to No action is proposed. an investment subcommittee to provide provide support and advice to the Pensions appropriate focus. Committee. 1.5 Trustees should assess whether they have the We encourage and enable basic, intermediate Formal, ongoing “Training right set of skills, both individually and and advanced training to be offered. Plan” for all Members of the collectively, and the right structures and Investment Panel. Evaluate processes to carry out their role effectively. The Investment Advisory Panel regularly training given on an annual They should draw up a forward-looking plan. updates on training matters, a training log is basis and ensure induction for maintained (Reported as a PI) and training all new members. options are constantly under review. 29
  30. 30. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND CLEAR OBJECTIVES 2.1 Trustees should set out an overall Fund Investment strategy in place supported Next review of Fund investment objective for the fund that: by Investment benchmarks for each manager benchmark – November 2008. and Asset Liability study – most recent • Represents their best judgement of undertaken end of 2005/beginning of 2006. what is necessary to meet the fund’s liabilities, given their understanding of Specific Fund benchmark approved based the contributions likely to be received upon recommendations from Actuary and from employer(s) and employees; and Investment Managers and the outcome of the Asset Liability study. • Takes account of their attitude to risk, specifically their willingness to accept Review of specific Fund benchmark based underperformance due to market upon Asset Liability Study. conditions. 2 2.2 Objectives for the overall fund should not be Fund objectives directly relate to the Specific No action is proposed. expressed in terms which have no Benchmark relationship to the fund’s liabilities, such as performance relative to other pension funds, or to a market index. 30
  31. 31. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND FOCUS ON ASSET ALLOCATION 3.1 Strategic asset allocation decisions should The Investment Advisory Panel has taken No action is proposed. receive a level of attention (and, where advice from the Actuaries and the Independent relevant, advisory or management fees) that Advisor following the January 2006 Asset fully reflect the contribution they can make Liability Study towards achieving the fund’s investment objective 3.2 Decision-makers should consider a full range The Investment Advisory Panel has The Pensions Committee of investment opportunities, not excluding from considered and allowed small investment in undertook a review of consideration any major asset class, including Private Equity. This is via a consortium with alternative investments in private equity. the East Midlands Local Government 2006/07; however at that stage Authority. the Committee took the view not to extend investment in private equity. However it did during 2006/07 authorise 3 investment in Hedge Fund of Funds and also investment in European property, active Tactical Asset Allocation and active Currency Management. Review anticipated November 2008. 3.3 Asset allocation should reflect the fund’s own Allocation is not referenced to other Funds. No action is proposed. characteristics, not the average allocation of other funds. 31
  32. 32. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND 4 EXPERT ADVICE 4.1 Contracts for actuarial services and Mercers Human Resource Consulting, were These services are regularly investment advice should be opened to appointed as Actuaries to the Fund in reviewed. Timetable for separate competition. November 2003. Mercer Investment reviewing current Consulting were also appointed Investment arrangements in place. Advisors on a separate contract at the same time. The Fund has retained its current Independent Advisor to the Fund. In accordance with the original contract Procurement process planned conditions extensions to the Actuarial and for completion by November Investment Consultancy contracts were agreed 2008. by the Pensions Committee (in November 2006) until October 2008. 4.2 The Fund should be prepared to pay Criteria in place for appointing Fund Managers, No action is proposed. sufficient fees for each service to attract a ranking fees lower in order of priority. broad range of kinds of potential providers. 32
  33. 33. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND EXPLICIT MANDATES 5.1 Trustees should agree with both internal and External managers have a specific benchmark No further proposed change to external investment managers an explicit and agreement sets out the manager’s current policy. written mandate covering agreement latitude. This was reinforced at the Asset between trustees and managers on: Liability Study stage. Review November 2008 • An objective, benchmark(s) and risk Managers provide written justification of their parameters that together with all the strategies. other mandates are coherent with the fund’s aggregate objective and risk Performance benchmarked to an annual level, tolerances; and over a rolling term. BUT no end date specified. • The manager’s approach in attempting to achieve the objective. 5 • Clear timescales(s) of measurement and evaluation, such that the mandate will not be terminated before the expiry of the evaluation timescale for underperformance alone. 5.2 The mandate, trust deed and rules should In principle the Fund could invest in any The Fund will continue to not exclude the use of any set of financial financial instrument not specifically excluded review the relevance of instruments, without clear justification in the by the Local Government Pensions different asset classes, in the light of the specific circumstances of the Fund. Regulations. light of the Asset Liability Study. Review November 2008 33
  34. 34. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND EXPLICIT MANDATES (Cont) 5.3 Trustees, or those to whom they have delegated the task, should have a full Existing fee arrangements are inclusive of Monitor existing arrangements understanding of the transaction-related costs external research, information and transaction Reviewed annually they incur, including commissions. They services. should understand all the options open to them in respect of these costs, and should have an The fund has a process of Commission active strategy – whether through direct Recapture in place to recover double charging financial incentives or otherwise – for ensuring research and development fees for third party that these costs are properly controlled without brokers employed by the Fund’s Fund jeopardising the fund’s other objectives. Managers. Fee arrangements have been considered in the appointment of new Fund Managers. For the first time the Fund has agreed Performance Related Fee with two Fund Managers, it is intended to monitor how effective these operate compared to standard arrangements. 5 5.4 Trustees should not without good reason The Fund commissioned two separate permit soft commissions to be paid in respect Transactional Cost Analysis (TCA) exercises, of their fund’s transactions. for the 6 months ended 31st December 2005 Annual review and the 6 months ended 31st March 2007. In addition the Fund has carried out an independent Custodian Review. 34
  35. 35. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND ACTIVISM 6.1 The mandate should incorporate the principle Mandate does not incorporate this principle. Managers’ strategy may need of the US Department of Labor Interpretative However, it does include corporate to be made more explicit. Bulletin on activism. governance requirements that cover similar ground. Review during 2008 Trustees should also ensure that managers Managers do have an intervention policy but have an explicit strategy, elucidating the this is not explicit as suggested by the circumstances in which they will intervene in Recommendation. a company; the approach they will use in doing so; and how they measure the effectiveness of this strategy. 6 35
  36. 36. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND APPROPRIATE BENCHMARKS 7.1 Trustees should explicitly consider, in Benchmarks have been considered and No action is proposed. consultation with their investment manager(s), agreed with the managers following the Asset whether the index benchmarks they have Liability Study, supported by Fund appointed selected are appropriate; in particular, whether advisors. the construction of the index creates incentives to follow sub-optimal investment strategies. 7.2 Trustees should if setting limits on divergence from an index ensure that they Limits on divergence agreed. Any material No action is proposed. reflect the approximations involved in index divergence to be justified accordingly. construction and selection. 7.3 Trustees should consider explicitly for each asset class invested, whether active or passive Active or passive management flexibility No action is proposed. 7 management would be more appropriate given agreed with managers. The fund currently the efficiency, liquidity and level of transaction prefers active management mandates and its costs in the market concerned. objectives have been set against this principle. 7.4 Trustees should where they believe active management has the potential to achieve higher returns, set both targets and risk Managers have been given freedom to pursue No action is proposed. controls that reflect this, giving managers the active strategies. However, strategies must be freedom to pursue genuinely active strategies. justified. Objectives and risk controls are in place and reported on quarterly to the Investment Advisory Panel. Reviewed during regular meetings of the Investment Advisory Panel and Officers Interim Meetings with Fund Managers and Fund Advisors. 36
  37. 37. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND PERFORMANCE MEASUREMENT 8.1 Trustees should arrange for measurement of The Investment Advisory Panel receives No action is proposed. the performance of the fund and make formal performance advice from Northern Trust, assessment of their own procedures and Russell Melon and The WM Company. decisions as trustees. 8.2 Trustees should arrange for a formal Fund Managers report on performance No action is proposed. assessment of performance and decision quarterly to the Investment Advisory Panel, making delegated to advisors and managers. supported by quarterly interim meetings with Fund Managers not attending the Investment Advisory Panel. Additionally independent fund level and individual manager reviews are undertaken in an annual Pensions Committee and Investment Advisory Panel meeting, covering a wide range of topics. 8 37
  38. 38. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND 9 TRANSPARENCY 9.1 A Statement of Investment Principles should The Council Statement of Investment Principle Annual review by Pensions set out: includes all these issues. Committee - July meeting • Who are taking which decisions and Review after each tri-annual why this structure has been selected. valuation • The Fund’s investment objective. • The Fund’s planned asset allocation The Statement of Investment Principles is strategy, including projected reviewed whenever material changes occur investment returns on each asset and or bi- annually. class, and how the strategy has been arrived at. • The mandates given to all advisors and managers. • The nature of the fee structures in place for all advisors and managers, and why this set of structures has been selected. 38
  39. 39. NORTHAMPTONSHIRE PENSION DESCRIPTION OF PRINCIPLE PROPOSED ACTION FUND REGULAR REPORTING 10.1 Trustees should publish their Statement of The Statement of Investment Principles is The latest version will be Investment Principles and the results of published whenever significant or material placed on the Council’s monitoring of advisors and managers. change occurs and is made available to Fund Intranet and the Council’s Members on request. Internet. A publication of the Statement of Investment Principles, as at November 2007, will follow approval of the latest updates to the Statement, by the Pensions Committee. 10.2 Trustees should send key information from Extent of compliance and non-compliance with Monitoring of the Statement of the Statement annually to members of these Myner’s Principles is reported annually. Investment Principles is 10 funds, including an explanation of why the undertaken annually. fund has chosen to depart from any of these A leaflet is sent to all members with their principles. annual benefit Statements summarising the Compliance with this Annual report and Statement of accounts. recommendation will be reviewed during 2007/08. 39

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