Investment Managers and Performance
Investment manager mandates
Investment manager mandates The mandates agreed with the investment managers set out performance targets over rolling three year periods and are shown in the table below.
The Scheme specific liability benchmark is calculated by the Investment Adviser, using prevailing bond yields, to reflect the change in value of the projected future cash flows of the Scheme provided by the Actuary (this is consistent with the Scheme’s Statement of Funding Principles).
In 2008 the Dynamic Asset Allocation, Equity and Broad Bond portfolios were measured against an absolute return benchmark of London Interbank Offered Rate (LIBOR) plus 3-4%.
Investment managers are able to use financial derivative instruments to meet their targets within controls set out in documentation agreed by the Trustee.
Investment manager commentary and performance
The investments are managed, under the guidance of the Trustee and its Investment Adviser, by independent investment managers. The Scheme’s investment managers are continuously reviewed over a 36-month rolling period. Long periods of review are essential, as it enables managers to be judged throughout the business cycle.
In difficult economic times however, the assets under management can underperform and lead temporarily to an increased deficit. Since August 2007 the substantial market downturn has caused a majority of assets to suffer significant falls in value. UK government bonds however, have actually performed well in these difficult times, compensating for the fall in value of the other assets.
An investment return for the year of (3.9%) did not meet the Scheme’s objective of 4.9%. Over the last three years the assets have generated a return of 0.35% per annum against a Scheme target of 5.36%. Over the past five years, the annual performance has been 4.4% against a target of 6.7%.
Many asset managers in the market place have underperformed their absolute benchmarks. We continuously monitor that our managers’ performance is no worse than others. The Investment Committee has reviewed the managers using appropriate relative composite indices and currently consider no material change needs to be made. This relative performance will be kept under review.
The market values held by each manager as at 31 March 2009 are shown in the table on page 12. New bond managers were introduced from 30 September 2004, with substantially changed mandates and this date is regarded as the start date for reviewing bond manager performance.
Subsequent changes have been made to the bond manager mandates and to the structure of the Higher Performance funds. These changes give managers more flexibility in their use of financial instruments and are intended to help managers contribute to benchmark outperformance
Investment manager commentary
An investment return for the year of 0.4% did not meet the Scheme benchmark of 1.0%, nor the Scheme target of 2.6%; however, over the period since the inception of the new strategy on 30 September 2004, the assets have generated a return of 7.7% per annum against a Scheme liability benchmark of 6.1% per annum (Scheme target 9.1%). This underperformance has been kept under review by the Investment Committee and has resulted in the changes noted above, with further planned changes in 2007/08.
The Scheme’s investment managers are continuously reviewed over a 36 month rolling period. These longer periods of review are essential, as it enables managers to be judged throughout the business cycle.
New Bond managers were introduced from 30 September 2004, with substantially changed mandates and this date is regarded as the start date for reviewing Bond manager performance.
Subsequent changes have been made to the Bond manager mandates and to the structure of the Higher Performance funds. These changes give managers more flexibility in their use of financial instruments and are intended to help managers contribute to benchmark outperformance.
Custody arrangements
Trust Law and the Pensions Act 1995 impose a specific duty on the Trustee to safeguard the assets of the Scheme. Since 2001 the Trustee has appointed a global custodian to hold the Scheme’s assets that make up the various portfolios managed by the investment managers. Its provider from 1 September 2006
has been BNY Mellon Asset Servicing B.V. In the case of the Fund of Hedge Funds, this work is undertaken by a separate custodian based in the United States (PFPC Inc).
The custodians are responsible for the safekeeping of assets and administration and ensuring that assets are only released with appropriate authorisation.
The administrative functions of the custodians include the settlement of transactions, the collection of income arising from the investments, recovery of any tax paid that is not due and the reporting of and accounting for the Scheme’s investments. The Scheme uses some pooled and collective investment arrangements where the custody services are arranged through the fund provider.
The Trustee together with its Investment Adviser reviews the effectiveness of the custodial arrangements on a continual basis. The custodians are required to publish a report on its internal controls that has been audited by a third party auditor in accordance with agreed standards.
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