Teesside Pension Fund

Review of Investment ManagementArrangements 2015

REVIEW OF INVESTMENT MANAGEMENT ARRANGEMENTS 2015

  1. Project Plan
  2. Terms of Reference
  3. Baseline Position
  4. Challenge
  5. Costs
  6. Alternatives
  7. Performance
  8. Findings and Recommendations

Review conducted by:

Independent Investment Advisors

Peter Moon

Fred Green

Chief Finance Officer

Paul Slocombe

Head of Investments & Treasury Management

Paul Campbell

  1. PROJECT PLAN
  1. The Investment Panel appoints the Head of Investments & Treasury Management, in collaboration with the Fund’s Investment Advisors, to carry out the review. Terms of reference are drawn up.
  1. Draw up a Baseline Position Statement.
  1. Challenge what the Fund is trying to achieve.
  1. Consider the costs of current service provision.
  1. Consider alternative methods of service provision.
  1. Evaluate the relative performance of the current management arrangements.
  1. Draft Action Plan.
  1. Agree final Action Plan.
  1. Report Action Plan to Investment Panel and seek approval for recommendations.
  1. TERMS OF REFERENCE
  1. To review all the existing investment management arrangements and to report back to the Investment Panel with recommendations.
  1. To consider, in each case, whether the existing arrangements:
  • Contribute beneficially to the overall performance of the Fund
  • Are cost-effective
  • Can be supported by existing resources of the Section.
  1. To consider whether alternative arrangements could be introduced which would be beneficial to the Fund and to make recommendations where appropriate.
  1. BASELINE POSITION STATEMENT

The Teesside Pension Fund and Investment Panel (the Investment Panel) has responsibility for the investment of surplus monies not required to meet immediate payments to Fund beneficiaries. Over the years a fund has been created, the income and future capital growth from which is available to meet the liabilities of the Fund.

The Investment Panel is a Committee of the Council with plenary powers. Members of the Investment Panel, although not Trustees, act as quasi-Trustees. The investment of pension funds is a statutory function and must be undertaken in accordance with the Local Government Superannuation Regulations 1986, as amended with the Local Government Pension Scheme (Management & Investment of Funds) Regulations 2009. In discharging the investment function the Regulations require that administering authorities have regard to:

  • The need for diversification of investment fund monies
  • The suitability of any investments proposed
  • Appropriate advice obtained at reasonable intervals.

The Teesside Fund operates under a Management Agreement, which sets out the extent of powers delegated to Officers and the responsibilities of those Officers. The Agreement also includes a Statement of Investment Principles (SIP) which sets out the investment responsibilities of the Investment Panel, the Chief Finance Officer, the Head of Investments, the Fund’s Custodian and the Investment Advisors. The SIP is attached (Appendix A1).

  1. The Investment Panel

The Investment Panel is structured in such a way that Members take advice from advisors and officers. Responsibility for day-to-day management of the Fund, including the implementation of Advisor’s recommendations, is delegated to the Head of Investments & Treasury Management. The Investment Panel meets four times a year.

The Investment Panel has two external investment advisors:

  • Peter Moon
  • Fred Green

The Investment Panel will also take advice from other specialist advisors at appropriate times:

  • Aon Hewitt, Fund Actuary
  • The Fund Solicitor, the Head of Legal Services
  1. The Investment Management Arrangements

The Investment Panel is responsible for determining the investment management arrangements. The current position has evolved over the years as changes have been agreed on the advice of the Investment Advisors and Officers. The management arrangements can then be described, in outline, as follows:

The Head of Investments & Treasury Management is responsible for:

  • The investment of Fund assets in compliance with prevailing legislation and the requirements of the Management Agreement.
  • Implementing the Investment Advisor’s recommendations on asset allocation within the parameters laid down
  • Security selection within asset classes
  • Preparation of quarterly reports to the Investment Panel and an annual report on investment performance
  • Reviewing investment management, custodial and other external relationships and advising the Investment Panel as to future policy with a view to delivering continuing improvements within a Best Value regime
  • Implementing the Investment Panel’s policies on corporate governance and ethical, social and environmental investment
  • Assisting the Chief Finance Officer and the Investment Panel in the preparation of the SIP and other Statements and ensuring compliance with their terms.

The internally managed investment team, under the management of the Fund Manager,are responsible for:

  • The day-to-day management of all directly held bond and equity investments, within the limits set out in the Management Agreement
  • The internal fund management arrangements, including country and sectoral management responsibilities assigned to managers.

Equities

The portfolio of equity investments are managed internally on an active basis. The vast majority of investments are directly into company shares across the following global markets:

  • UK Equities
  • US Equities
  • European Equities
  • Far East Equities
  • Japan Equities

A number of managed funds are used to manage a small amount of the overall equity portfolio. These managed funds provide exposure to specialist areas (e.g. smaller companies) or certain geographical areas where direct share holdings are not possible or practicable (e.g. India or Latin America).

Management of the equity portfolio is split on a geographical and, in the case of UK Equities, a sectoral basis. The portfolio is split between the Investment Managers, at the discretion of the Fund Manager.

Property

Property is managed externally by CBRE on a non-discretionary basis. In practice the Head of Investments& Treasury Management makes decisions based on advice from CBRE. The Fund also invests in Property Unit Trusts and Property Partnerships under the management of the Head of Investments & Treasury Management, as a means of obtaining exposure to types of property where direct exposure is not practicable.

Alternatives/Other Investments

The alternative portfolio is designed to contain investments which are uncorrelated to equity and bond markets and have a more regular and steady return profile. The Fund has a small number of investments in specific “project funds” funds (e.g.a caravan park managed fund), private equity and infrastructure funds, under the control of the Head of Investments & Treasury Management.

In addition, the Fund invests in passive exchange tradable funds which track specific commodity prices (e.g. the oil or gold price). These investments are managed by the Treasury Manager, at the discretion of the Fund Manager.

Fixed Interest/Bonds

The fixed interest portfolio is managed internally on an active basis. The portfolio comprises investment in UK and Overseas Bonds and Index Linked stocks. The Fund’s Bond portfolio is managed by the Treasury Manager, at the discretion of the Fund Manager.

Cash

The Fund’s cash balances are deposited with a select few counterparties (Banks & Building Societies) or in “call accounts” with Banks. The only exception is that a small amount is retained by the Fund’s Custodian as working capital.

Related, non-investment management functions

The Head of Investmentsis responsible for implementing the Investment Panel’s policy on corporategovernance and socially responsibleinvestment. Although these may be considered separate from investment management, the philosophy of the Teesside Fund is very much that encouraging companies to follow best practice will improve company performance and, therefore, investment returns to the Fund.

  1. The Loans & Investment Section

The Section provides two main Services:

  • Pension Fund Investment Management
  • Treasury Management for Middlesbrough Council

Some officers work exclusively in the delivery of one of the Services while some divide their time over both. Because of the nature of their work, which is driven by demand, and because of the “Team” ethos it is difficult to determine a precise split. An analysis of timesheets for the Section as a wholeshows the following split of time:

  • Pension Fund
/ 93.5%
  • Treasury Management
/ 6.5%

The long running trend is towards more resources being devoted to the Pension Fund, reflecting the growth of the Fund, the increasing complexity of the Investment Management function & providing the administration and accounting support required for this function, and the demands of the Investment Panel in areas such as Corporate Governance.

The structure of the section is shown below:

The Chief Finance Officer is the lead responsible officer for the Administrating Authority’s management and administration of pension provision. The Head of Investments & Treasury Management has overall responsibility for Service Delivery. The Section is not split strictly along Service lines, but has two distinct functions:

  • Investment Management which comprises those officers with investment management authorisation:

Head of Investments

Fund Manager

Investment Managers (x3 WTEs)

Treasury Manager

Investment Support Officer

  • Treasury Management which comprises those officers with money market dealing authorisation and also deals with leasing:

Head of Investments

Treasury Manager

Administration Manager

Investment Support Officer

Senior Administration Assistant

Administration Assistants

Both these functions are supported by:

  • Administration which deals with all administrative functions for the Section and comprises:

Head of Investments

Administration Manager

Senior Administration Assistant

Administration Assistants (x4 WTEs)

The Management Agreement requires that those officers with investment management authorisation acquire the Investment Management Certificate unless they have achieved equivalent qualifications. The Agreement also requires that those officers carry out relevant professional training per year. Costs relating to investment management training and required qualificationsare a management expense of the Fund.

Officers will also have skills and qualifications outside the investment management arena, but which will be relevant to their ability to perform. These form the “Skills Base” of the Section, which can be set out as follows:

Officer & Fund Management Experience / Investment Management Qualifications / Other Professional Qualifications
Paul Campbell
16 years / IMC / CIMA
AAT
Investment Management Team
Andy Hill (Equities & Bonds)
26 years / IMC / BSc
AAT
Wendy Brown (Equities)
7 years / IMC / AAT
Kelly Rose (Equities)
2 years / IMC / CIPFA
AAT
Sue Smithyman (Equities)
New starter / AAT
Graham Jones (Bonds & Cash)
19 years / IMC / AAT
Administration Team
Rachel Walker
23 years / IAQ / MBA
Diploma in Mgmt. Studies
Clare Gettings
19 years
Amy O’Donnell
7 years / Certificate in Mgmt. Studies
Helen Jefferson
13 years
Jade Hooker
1 year
Amanda Trattles-Johnson
New starter
Gemma Wilson
New starter

The majority of the Fund (over £2 billion) is currently managed by three equity managers with combined experience of 35 years, almost 12 years each, and who manage an average of approximately £700 million of assets each. Whilst the average amount of assets managed looks too large, the new starter will eventually gain the required qualification andexperience, alleviating this issue. However, the Fund is still vulnerable whenever key officers depart. Currently, just less than 95% of the combined experience in equity management rests with 2 officers (Andy Hill & Wendy Brown) and 74% with 1 officer (Andy Hill).

A recentreduction of experience came about after two experienced officers left the team of equity managers in the past three years; one to promotion and the other left the Authority. These departures came at the same time as the equity marketsexperienced high volatility.

There is a similar issue in the Administration team after an officer with over 20 years of experience, who was responsible for a number of key tasks, recently left. This left a big gap in a small team with the remaining staff members completing the duties of the officer who left whilst training the replacement officer.

In both the Investment Management and Administration team, there are no ready-made replacements.

The investment management function is supported by information systems currently supplied by Bloomberg. System costs are identified in the Management Expenses Budget (Appendix A2).

Costs relating to the management of the Fund are charged to the Fund as Management Expenses. These comprise staff costs and other costs. The Management Expenses Budget for 2015/16 is attached (Appendix A2). The Budget covers both the investment management function and the supporting administration required for this function. The Budget will vary depending upon how the Service was delivered (e.g. internally or externally managed).

Over the last ten years the Fund has more than trebled in terms of assets under management, the number of transactions has increased significantly, and the Fund invests in more equity markets than ever before. Overall, the size, scope and nature of the Fund has changed greatly.

Since the previous review of management arrangements (2007), and after agreement from the Investment Panel, the resources increased as follows:

  • 1 Investment Manager
  • 1 Administration Assistant
  • 1 Senior Administration Assistant
  • 1 Investment Support Officer

Each year, a Business Plan is presented to Members of the Investment Panel for consideration and approval. Within this Plan, the Fund’s Performance Targets are set out (Section 11). The Performance Targets are:

  • Annual audit report showing compliance with the terms of the ManagementAgreement and no other significant issues.
  • Performance better than the return for the Customised Benchmark, as set out in the Asset/Liability Study, for:

The latest financial year

The last three financial years (rolling)

The last ten financial years (rolling)

  • Above median performance as measured against the WM All Funds & WM Local Authority universes for the past one, three & ten years (rolling).
  • Investment management costs, as measured on a £ per scheme member basis, 25% lower than the average local authority fund.
  1. Partners

The Fund has a number of “partners”, internal and external, involved in the delivery of the Service:

  • The Investment Advisors are responsible to the Investment Panel for:

Advising the Panel on the most appropriate short term asset allocation for the Fund, given the up-to-date economic and financial market conditions at each meeting

To recommend to the panel the appropriate investment management structure for the Fund

Advising the Panel on the most appropriate long term asset allocation for the Fund as part of the Asset/Liability Study

Advising the Panel in the preparation and review of the Statement of Investment Principles

Advising the Panel in their regular monitoring of the performance of the Investment Managers

Advising the Chief Finance Officer on matters relating to the strategic direction of the Fund

  • The Fund’s Custodian, who is responsible to the Investment Panel for:

Ensuring that the Fund’s assets are secure and that the Fund is able in a timely fashion to meet its contractual obligations

Providing the Investment Panel with quarterly valuations of the Fund’s Assets

Collecting all income due to the Fund

Carrying out instructions received from the Head of Investments & Treasury Management in respect of voting actions.

  • The Fund’s Actuary, who is responsible for:

Advising the Investment Panel on the most appropriate long-term asset allocation for the Fund as part of the Asset/Liability Study

Determining the Employer’s contribution rate as part of the triennial valuation

  • The Local Authority Pension Fund Forum (LAPFF) which is a group of Local Authority Pension Funds who share a common belief that active engagement with companies in which they invest will improve standards of Corporate Responsibility and performance.
  • Mouchel, the Council’s Strategic Partner, and in particular the Pensions Administration Section which works with the Loans and Investments Section on issues of common interest.

The Loans & Investments Section is part of the Finance and Investments Service Area. Because of the specialist nature of the investment management function, interaction and interface on investment matters with the rest of the Finance & Investments Service and, indeed, the rest of the Council is limited.

  • The Section uses the accounting system (currently SAP, but changing to Agresso)
  • The Section uses the services of the VAT Accountant for VAT-related issues, particularly with property purchases and sales
  • The Section uses the services of the Fund Accountant employed within the Central & Pensions Team of Council’s Finance & Investments Service Area
  • There is interface with Mouchel’s Pensions Administration Section on a number of issues which are “corporate” to the Pension Fund:

Dealing with the Fund Actuary on matters pertaining to the Fund Triennial Valuation

Servicing the Investment Panel

Preparation and publication of material informing scheme members.

  1. Customers

There are a number of users, or Customers of the Service:

  • The Investment Panel, the Members of which act as Trustees of the Fund, is a principle customer. The Members are fulfilling a legal obligation in managing the assets of the Fund and chose to do so via existing arrangements. The Management Agreement and the Rules of Conduct, which the Agreement contains, is effectively a contract between the Investment Panel and officers. All business conducted in the name of the Fund and other matters, relating to the Fund are reported to the Investment Panel for decision or information. The Investment Panel includes representatives from the other Employers belonging to the Fund.
  • The Fund’s Employers make contributions at a rate determined as part of the Actuary’s Triennial Valuation. The investment returns are a key part in the Funding Level and determining the contribution rate set
  • Members of the Scheme, such as active members and pensioners, are also customers. Although the levels of contributions and benefits are currently not affected by the actions of the investment managers, members should be made aware of the activities undertaken on the Fund’s behalf. Trade Union representatives are invited to attend the Investment Panel as observers.
  • Local taxpayers are also customers, as the level of Council Tax varies over time as the employer’s contribution rate is adjusted by the Fund’s Actuary.
  1. CHALLENGE

“Challenge what the Fund is trying to achieve and consider the possible routes for Service provision”

Rationale for the Service