Statement of investment principles
- First principles
- Investment structure and the council's attitude to risk
- Policy on socially responsible investment
- Policy in relation to the exercise of rights (including voting rights) attaching to investments
- Policy on Compliance with the Investment Principles set out in the CIPFA Pensions Panel Guidance Note 5
- London Borough of Barnet pension fund objectives
- Specific investment restrictions, parameters and guidelines
- Policy on giving instructions
- Fund managers
First principles
The Investment Policy of the Council's Pension Fund has been decided after consideration of first principles. These principles determine the investment objectives and the level of risk that we believe is appropriate for the Fund.
At the core of the investment policy of the Pension Fund lies the objective of securing and maintaining an investment rate of return which will count towards meeting the Council's current and future obligations and liabilities to make pensions payments and which will contribute towards keeping the burden on the Council Tax Payer as low as possible.
The Council's Pension Scheme is a funded, defined benefit, final salary scheme. Every three years, the Fund's Actuary determines the funding level of the scheme and advises the Council of the rate of employer contributions necessary to meet the cost of pensions in payment and future liabilities.
Employer contributions are met, mainly, by the Council's General Fund and therefore it is the Council Tax-payer who meets this cost. Most of the factors that the Actuary uses to determine what the rate should be are external factors, such as the rate of inflation, life expectancy rates and future dividend earnings. These are all factors over which the Council has no control or influence. The only two areas in which the Council has influence or control is with regard to pensions remuneration policies (in particular early retirement policies other than ill-health) and in the investment performance of the Fund.
With regard to early retirement, the Council is making additional contributions towards meeting the immediate financial strains arising from early retirements other than ill-health retirements.
With regard to investment performance, the Pension Fund Management Advisory Panel recognises that a superior and stable investment return adds towards keeping the employer contribution rates as low as possible. This is because an investment fund, which has a growing capital base, is able to re-invest capital and this in turn, will increase the fund's dividend and interest earning capacity.
The Panel also recognises that the tax-exempt status of the fund must be maintained to safeguard the taxation advantages of freedom from capital and income taxes.
Local authority funds in general have become more mature. Some funds have experienced this maturing more than others depending on their experiences of outsourcing or downsizing. Barnet's Pension Fund has shared this maturing trend in that the growth of full time active contributing members is less strong than the growth in deferred and pensioner membership. However, this maturing has occurred at a slower pace than some other local authority funds. Plans for changes to admission criteria for external contractors in respect of TUPE transferred employees may help to halt or even reverse this trend in the future.
Strong investment returns have always been important to Barnet. We recognise that for local authority funds, especially in the context of maturing pension schemes, there is a great responsibility to set standards and investment performance targets that reflect the objective of keeping the burden on Council Tax as low as possible.
As a statutory public service scheme, the Fund is not subject to the Minimum Funding Requirement of the Pensions Act 1995. However, the Pension Fund Management Advisory Panel does have a responsibility to regularly examine the asset allocation of the Fund to ensure that an appropriate investment strategy has been set to help secure the Fund's continued solvency.
Investment structure and the council's attitude to risk
We pay close attention to the risks, which may arise through a mismatch between the Fund's assets and its liabilities and the risks, which may arise from a lack of diversification of investments. The results of the 1998 Actuarial Valuation showed that the Scheme's funding level had remained at the same level of 95 %, as it was valued in 1995.
The Council seeks to achieve its investment objectives through investing in a suitable mixture of real (e.g. equities) and monetary assets (e.g. bonds and cash), it recognises that the returns on real assets, while expected to be greater over the long term than those on monetary assets are likely to be volatile. Nevertheless, the Council has decided that, in view of the financial health of the Fund, no major change to the Fund's long-term asset allocation was required and an equity-biased approach would be maintained for the foreseeable future. A higher weighting in equities, relative to the average large occupational fund, is held in the expectation that superior returns will be achieved in the long term. This reflects the need to keep the cost of the Fund at reasonable levels, even at the risk of possible adverse and volatile returns in the shorter term.
We believe that the asset allocation policy in place provides an adequately diversified distribution of assets and by employing two fund managers with contrasting investment styles, we are further diversifying in terms of exposure to individual stocks and to different stages of economic and market cycles. We can also see that there is a risk in holding assets that are not readily realisable. The Fund invests in certain unit trusts, which may take longer than equity or fixed interest stocks to realise, e.g. property unit trusts.
Investments in property unit trusts are managed in-house. No investment in direct property is held. Other unit trusts held by the investment managers are within the ranges specified in the investment regulations. The majority of these holdings are in regulated collective investment schemes, however the fund is invested in emerging markets unit trusts, which are Off-Shore, based unregulated collective investment schemes. The cash flow of the Fund remains strongly positive and the likelihood of the Fund having to realise any investments in order to pay benefits is very low.
In view of this, the Pension Fund Management Advisory Panel considers that the benefits of diversification and risk spreading obtained by investing in these vehicles more than offsets any potential longer realisation periods.
The investment management arrangements of the Fund were reviewed in 1999 in order to ensure that these remained appropriate. The Pension Fund Management Advisory Panel has ensured that the professionals engaged to manage the assets of the Fund have the capacity, skills and resources to achieve its objectives. The Council employs two investment managers.
Both managers are regulated by the Investment Management Regulatory Organsiation Limited (IMRO). Schroder Investment Management and Henderson Investors each manage approximately one-half of the Fund. The investment managers have day to day responsibility for the investment of Fund's assets and adequate diversification is achieved through direct and pooled investment in a wide range of investment markets and asset classes. As required by the Financial Services Act the Council has entered into a signed Agreement with each manager, the terms of which are consistent with the principles in this Statement.
These Agreements provide important protections for the Fund. They set out the detailed terms on which the assets are managed, the investment briefs, guidelines and restrictions under which the manager works. Copies of the Agreements are available for inspection on request.
Policy on socially responsible investment
We have considered the options open to us for Socially Responsible Investment. We strongly believe that, in accordance with those objectives, non-financial factors should not drive the investment process at the cost of financial return on the Council's Pension Fund. We also believe that encouragement and persuasive pressure from the fund management community is a more robust way to influence companies. It is likely to have more effect than isolated pockets of direct action by shareholders and this has a better prospect of achieving Governments' original objectives.
We would encourage the Fund Managers to consider the financial impact of good and poor socially responsible activities of companies. If their assessment of companies for investment indicates that a corporate governance, social, environmental or ethical factor could have an impact on a company's financial performance (positively or negatively) we believe that the Fund managers must take account of it. In addition we will ask our Fund Managers to confirm if they have discussed any such issues with company management at our quarterly investment meetings
Policy in relation to the exercise of rights (including voting rights) attaching to investments
The exercise of a proxy vote is a somewhat blunt tool with which to improve standards of corporate governance, but it is not the only way in which we can influence corporate behaviour. Our Fund Managers meet with the senior management of many UK Companies each year. Although the primary purpose of such meetings is to give management the opportunity to discuss matters of strategic importance, the highly interactive nature of these meetings means that this is a natural forum in which to raise matters such as corporate governance.
We believe that the use of these meetings in conjunction with a disciplined and consistent voting policy detailed above contributes to higher standards of corporate governance in the UK. Linking the remuneration of directors to the fortunes of their company whilst reducing the rolling elements of contracts is a clear way of aligning the interest of directors with those of shareholders. The establishment of challenging performance criteria, which must be met for incentive plans to vest, reinforces this objective. Importantly, these performance targets can often give an insight into companies' aims and ambitions which can otherwise remain obscure, and it is in this way that the right to vote on resolutions becomes supplementary to the investment process; not just a duty but a benefit.
We have developed a Corporate Governance and Proxy Voting Policy that directs our proxy voting, deals with the implementation of the policy and outlines the benefits which accrue to the Pension Fund by the policy's application. The Policy is in accordance with the Combined Code on Corporate Governance issued as an appendix to the Listing Requirements of the London Stock Exchange.
We intend our voting policy to be implemented across the FTSE All Share Index. Voting custom and practice and levels of disclosure among overseas companies are not the same as for the UK and it is not possible to vote in accordance with this policy for non-UK equities at the current time.
We would, however, look towards effecting our policy overseas when circumstances permit. Shareholder Resolutions will be considered on their merits and we will ask our Fund managers to contact the company secretary for further information on resolutions deemed to be contentious, if necessary.
The Director of Resources gives instructions to the Fund managers to vote our shares in accordance with this policy. In addition to our own records, we ask our Fund managers to keep a record of all votes cast so that we may, if required, inspect them for compliance purposes.
Policy on Compliance with the Investment Principles set out in the CIPFA Pensions Panel Guidance Note 5
The Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 2002 - SI No. 1852 came into force on 9 August 2002.
This regulation requires the Fund to state the extent to which it complies with the ten principles of investment practice issued by the Government in October 2001 in response to the recommendations of the Review of Institutional Investment undertaken by Paul Myners.
As evidenced by the Policies and Objectives set out elsewhere in this Statement of Investment Principles the administering authority has, in general, complied with the principles as laid out in the CIPFA Pensions Panel Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom. Detailed documentation regarding compliance is in hand.
London Borough of Barnet pension fund objectives
Investment objectives
"To minimise the long term cost of funding commensurate with an appropriate level of risk and volatility".
Fund benchmark
The investment managers are instructed to adhere to specified minimum and maximum ranges in employing their tactical asset allocation strategy. Given the performance target,the asset allocation will broadly follow the WM (World Markets Company) Local Authority Median Fund, but the investment managers have freedom to manage the portfolio in pursuit of the Investment Objectives subject to the specific investment restrictions, parameters and guidelines and the specified minimum and maximum ranges.
Performance target
Both Henderson Investors and Schroder Investment management have been set performance targets to achieve not less than 1% above the returns achieved by the WM LA Median Fund over a three-year period with a maximum underperformance of 3% in any rolling twelve month period.
Specific investment restrictions, parameters and guidelines
In addition to the Council's attitude to risk in respect of the Fund's long term asset allocation, the Council complies with a number of specific statutory restrictions. The Pension Fund Management Advisory Panel has set additional investment guidelines and restrictions that reflect their attitude to the risks inherent in investing and maintaining safe custody of the Fund's assets.
Statutory Restrictions and the Council's Parameters on Investments
The statutory restrictions are set out in detail in part 11 (Schedule 1) of the LGPS (Management and Investment of Funds) Regulations 1998 (SI 1998 No. 1831) and subsequent amendments.
Policy on giving instructions
Our instructions to the managers will be in writing. Instructions given orally or by fax or telex will be confirmed in writing. Where the Agreement would be varied or where instructions involve the transfer of assets to or from the portfolio, instructions will be confirmed in writing and shall bear the signatures of two authorised signatories to the Fund.
Fund managers
The Pension Fund Management Advisory Panel meets quarterly with its fund managers to review performance and consider their activities and the future investment strategy.
The Fund managers are:
Schroder Investment Managers (UK) Ltd
31 Gresham Street
London
EC2V
7QA
Tel: 0171 658 6000
Henderson Investors Ltd
3 Finsbury Avenue
London
EC2M
2PA
Tel: 0171 638 5757
Custody of the Fund's assets is subject to combined Fund management and Custodian Agreement agreements with Schroder Investment Management (The Custodian for Schroder Investment management (UK) Ltd. and Cogent Investment Operations Ltd., (the Custodian for Henderson Investors Ltd).
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