1.1  This is the Statement of Investment Principles adopted by Leicestershire County Council (the Council) in relation to the investment of assets of the Council's Pension Fund. It builds on the statutory obligation to publish a Statement of Investment Principles and incorporates additional items included in the Voluntary Code of Best Practice suggested by the Myners Review of Institutional Investment in the UK.

1.2  Investments are monitored on a regular basis by the Pension Fund Management Board (the Board) of the Council acting on the delegated authority of the County Council.   Advice is received as required from professional advisers.  In addition, the Board formally reviews the performance of investments and the overall strategy on an annual basis.

1.3  In preparing this statement the Board has taken professional advice from the investment practice of Hymans Robertson Actuaries and Consultants. Due account has been taken of the maturity profile of the Fund (in terms of the relative proportions of liabilities in respect of the pensioners and active members), together with the level of disclosed surplus or deficit.

1.4  The Board has agreed an asset allocation benchmark, a performance target and various controls on the Fund's investments.  These reflect the Board's views on the appropriate balance between maximising the long-term return on investments and minimising short-term volatility and risk.  The benchmark reflects the position following the actuarial valuation of the Fund as at 31^st March 2004. It is intended that strategy will be revised at least every three years following the actuarial valuation of the Fund.

1.5  The Pension Fund Management Board is constituted as follows:

5 voting members representing Leicestershire County Council
2 voting members representing Leicester City Council
1 voting member representing the District Councils within the County
1 voting member representing De Montfort/Loughborough Universities
5 non-voting staff representatives

2.1  Primary Objective

The primary objective of the Fund is as follows:-

To provide for members' pension and lump sum benefits on their retirement or for their dependants' benefits on death before or after retirement, on a defined benefits basis.

In order that this primary objective can be achieved, the following funding and investment objectives have been agreed.

2.2  Funding Objective - Ongoing Plan

The ongoing plan is to ensure that the Fund has sufficient assets, in normal market conditions, in order that all accrued benefits are fully covered by the actuarial value of the assets.  An appropriate level of employers' contributions is agreed by the administering authority in order to meet the cost of future benefits that accrue.

The assumptions used in the latest Actuarial Valuation are shown in Appendix A.  These assumptions will be reviewed at least at each triennial Actuarial Valuation.  The Board will be advised of any material changes to the Fund during the inter-valuation period.

3.1  To achieve a return on Fund assets which is sufficient, over the long-term, to meet the funding objective set out above on an ongoing basis.

3.2  To achieve this objective the following have been agreed:

3.3  Choosing Investments

The Board will ensure that one or more investment managers are appointed who are authorised under the Local Government Pension Scheme (Management and Investment of Funds) Regulations 1998 to manage the assets of the Fund.

The Board, after seeking appropriate investment advice, will give specific directions as to the strategic asset allocation and will ensure the suitability of assets in relation to the needs of the Fund.  The investment managers will be given full discretion over the choice of individual stocks and are expected to maintain a diversified portfolio.

The managers appointed to manage the Fund's assets are summarised in Appendix B.  Each manager has a different benchmark and target to reflect their specific mandate.  These are also summarised in Appendix B.  In January 2002 the Fund commenced a phased investment in private equity but as the amount currently invested is small, the asset class and the managers involved are not shown in Appendix B.

3.4  Kinds of Investments to be held and Balance Between Different Types of Investments

A management agreement is in place for each Investment Manager which sets out the relevant benchmark, performance target, asset allocation ranges and any restrictions, as determined by the Board.

The overall strategy adopted within the Fund was formally reviewed by way of an asset/liability study based on the results of the 2004 actuarial valuation.

The study took account of the following:-

The Board has agreed a benchmark which provides an efficient balance between risk and return, in the light of the above considerations.  Appendix B summarises the breakdown of the benchmark between individual asset classes although the managers all have discretion to move away from their individual benchmark, within levels laid out in the management agreements.

3.5  Risk

The adoption of an asset allocation benchmark (as described above), and the explicit monitoring of performance relative to a performance target, constrains the investment managers from deviating significantly from the intended approach, while permitting flexibility to manage the Fund in such a way as to enhance returns.

The appointment of a number of different managers introduces a meaningful level of diversification of manager risk.

Each manager is expected to maintain a diversified portfolio of investments.

3.6  Expected Return on Investments

The strategic benchmark is expected to produce a return over the long term in excess of the investment return assumed in the actuarial valuation.  The Fund's assets that are managed on an active basis are expected to outperform their respective benchmarks over the long term.  In this way, the investment performance achieved by the Fund is expected to exceed the rate of return assumed by the Actuary.

3.7  Realisation of Investments

The majority of the investments held by the Fund's Investment Managers are very liquid and may be realised quickly if required.  Direct property investments, which are relatively illiquid, currently make up a modest proportion of the Fund's assets.  Investment in Private Equity is highly illiquid and is expected to remain at a low level of the Fund's total assets.

3.8  Additional Voluntary Contributions (AVCs)

Members have the opportunity to invest in an AVC fund, details of which are shown in Appendix C.

4.1  Socially Responsible Investment (SRI)

The Pension Fund Management Board has considered social, environmental and ethical issues in the context of the Fund's investment strategy and their responsibility to safeguard the best financial interests of beneficiaries.  The Board recognises that involvement by individual companies in activities that may be considered unacceptable could lead to a poor share price performance.

The investment managers have produced statements setting out their policies on these issues.  Having reviewed these policies, the Board has decided to delegate investment powers to the managers to act in accordance with their statements, in pursuit of the investment strategy set by the Board.  It is expected that the managers will attempt to influence the behaviour of companies in this area where they can identify a possible impact onto the share price.

4.2  Corporate Governance/Exercise of Voting Rights

The Pension Fund Management Board recognise that votes attaching to the Fund's shareholdings are a valuable asset, and expect to see their shareholdings voted in a considered manner.  Wherever practical and cost effective, all available votes should be cast.

The exercise of voting rights is, however, only part of the way in which shareholders can influence companies to take action that ensures that share price performance can be optimised.  All managers have produced statements in terms of their policies in relation to Corporate Governance.  These policies have been reviewed by the Board and responsibility for Corporate Governance (including the exercise of voting rights) has been delegated to the managers on the basis that voting powers will be exercised with the objective of preserving and enhancing long term shareholder value.

The managers have been specifically instructed to vote against any resolution relating to the payment of political donations by a company.

The Pension Fund Management Board has requested the investment managers to report any significant issues in respect of SRI or Corporate Governance on a regular basis.

5.1  Effective Decision Making

5.1.1  All decisions taken by the Pension Fund Management Board are taken in the context of attempting to achieve an acceptable level of return, within acceptable levels of risk, over the medium and long-term.  The achievement of an acceptable level of return will allow employers’ contribution rates to remain at manageable and relatively stable levels.

5.1.2  It is recognised that if effective decisions are to be made by the Pension Fund Management Board they must, as a group and individually, have sufficient support and training to be able to make decisions with an appropriate level of expertise.  The Board will receive advice from the investment practice of Hymans Robertson, as well as from the Director of Resources and his staff.  Trustee training will be offered to the members of the Board on an on-going basis, with the expectation that this will be at least annually.

5.1.3. No significant decision will be made unless all nine voting members of the Board have been invited to attend a meeting.  Decisions will be on a majority of attendees basis.  Administrative matters to do with the Fund (e.g. appointment of a Custodian of the Fund's assets) will be dealt with by the director of Resources and reported to the Board, if necessary, at one of the regular meetings.

5.1.4. The current structure of the Board is such that it allows representation to all major employer groups whilst being sufficiently small to remain effective.  The structure of the Board will be kept under review.

5.2  Clear Objectives

5.2.1  The overriding objective of the Board is to put into place a portfolio and asset structure which seeks to achieve a return on Fund Assets which is sufficient, over the long-term, to meet the cost of all benefits due for payment by the Fund.

5.2.2.  As employers' contributions into the Fund are variable and are set every three years as part of the actuarial valuation process, it is important that these contribution rates are not overly volatile.  In an attempt to produce an asset mix which is expected to achieve acceptable long term returns, but without significant volatility, the Fund commissions an asset/liability study every three years (to coincide with the timing of the actuarial valuation).  The asset/liability study assesses the likely future outcome in the event of various economic and financial scenarios, and from these outcomes a strategic asset allocation is proposed.

5.2.3  It is accepted that the proposed strategic asset allocation derived from an asset/liability study will not be the one which best 'matches' assets to known liabilities (e.g. the best match for pensioner liabilities is UK index-linked gilts).  The strategic asset allocation has been agreed by taking into account the opportunities and risks of investing in different asset classes, with the intention of allowing employers’ contribution rates to remain relatively low and stable.  The Fund’s strategic asset allocation takes a pragmatic approach to the mismatch of assets and liabilities.

5.3  Focus On Asset Allocation

5.3.1  The strategic asset allocation agreed by the Pension Fund Management Board is by far the most critical aspect of achieving an acceptable level of investment return, within acceptable levels of volatility.  The regular commissioning of an asset/liability study to appraise alternative asset allocation strategies assists the Board to make strategic asset allocation decisions.

5.4  Expert Advice

5.4.1  The Pension Fund Management Board receives expert advice at its quarterly meetings from the investment practice of Hymans Robertson.  The actuarial valuation of the Fund is carried out by the actuarial practice of Hymans Robertson.  The individuals involved are different to those involved in providing investment advice.  The use of the same firm for both services is not deemed to be contrary to the best interests of the Fund.

5.4.2  The advice received from Hymans Robertson will be assessed on an ad-hoc basis.

5.5.  Explicit Mandates

5.5.1  Wherever applicable, all of the investment managers employed by the Fund have mandates which explicitly state the breakdown of the asset allocation of the benchmark, the performance objective (on a rolling three year basis) and maximum asset allocation variances acceptable relative to the benchmark.

5.5.2  None of the investment managers has any institutionally acceptable financial instruments excluded from their benchmarks, where it is reasonable for them to be used in assisting the achievement of the performance objective.  Any request by a manager to extend the permitted use of financial instruments will be considered on a case-by-case basis.

5.5.3  The Board is aware that transaction related costs (including hidden costs such as bid/offer spreads when purchasing or selling investments) can detract significantly from the investment performance achieved.  The investment managers are encouraged  to provide evidence, preferably externally verified, as to the cost-effectiveness of their dealing processes.  None of the investment managers transacts business using 'soft commission' agreements i.e. where the manager receives services which are paid for from the commissions incurred by the Fund.

5.6  Activism

5.6.1  The investment managers employed are expected, as a matter of course, to be pro-active in their dealings with companies.  This includes intervention in the running of a company, where it is deemed to be in shareholders' best interests.

5.6.2  It is accepted by the Board that the judgement of when intervention is in the shareholders' best interest is a subjective matter.  The Board has instructed its managers to report on any significant Corporate Governance issues on a quarterly basis, even if intervention has ultimately been deemed inappropriate, and will monitor the actions of its managers closely.

5.7  Appropriate Benchmarks

5.7.1  As stated previously, an asset/liability study is used to arrive at the overall strategic asset allocation of the Fund.  It would, however, be overly risky and entirely inappropriate not to appoint more than one Investment Manager in order to achieve a diversification of risk.

5.7.2  The Board has appointed a number of managers to invest the assets of the Fund, and the current structure is attached as Appendix B.  The structure has been agreed by considering the risk and returns available from both passive and active management.  Whilst the majority of the Fund's investments are managed actively, passive management is included across almost all asset classes to provide a low-risk core portfolio to the Fund.

5.7.3  All of the active investment managers are allowed sufficiently large variances from their benchmarks to enable genuinely active management to be carried out, and for them to achieve their challenging performance objectives on a medium-term basis.

5.8  Performance Measurement

5.8.1  The investment performance achieved by each of the managers is assessed on an on-going basis, but will be formally reviewed following the end of each financial year.  The rolling-three year and medium term performance will also be reviewed annually.

5.8.2  The effectiveness of the strategic asset allocation agreed by the Board can not be accurately assessed on a short-term basis, and neither can some of the advice given by Hymans Robertson.  The Board will, however, formally assess its actions on a periodic basis as this will act as a checklist on whether its procedures are suitable or could be improved.

5.9  Transparency

5.9.1  As a Local Government Pension Scheme receiving employers' contributions directly from the public purse, all decisions will be taken in public unless the information is considered to be commercially sensitive.  Examples of commercially sensitive information would be;

Details of Fees paid to individual investment managers
Details of the securities held within individual portfolios
Asset allocation changes that have not been completed
Appointment of new investment managers

5.10  Regular Reporting

5.10.1  Individual members will be informed of any meaningful changes to the LGPS Benefit Regulations

5.10.2  The Pension Fund Management Board will produce an annual report in relation to its actions each year, and will issue this report to all employing bodies covered by the Fund.

5.10.3  The Board does not consider it cost-effective to issue annual updates to individual members of the scheme, particularly as their benefits are guaranteed (and effectively underwritten by their employer via a variable employers' contribution rate) and the investment performance of the Fund has absolutely no impact on the level of these benefits.  The lack of an annual update to members is contrary to the recommendations of the Myners Review.  The Fund will continue to produce an Annual Report and Accounts which will be available to all members.

5.10.4  Any interested party will be sent a copy of the Annual Report and Accounts on request.

* Net of Investment Expenses

The Actuarial Valuation as at 31^st March 2004 was carried out using an unsmoothed market related method. The financial assumption used in the valuation were derived by considering the yields on the valuation date.  The assets of the Fund are based on the relevant market valuations on the valuation date.

It should be noted that the absolute returns as given above are not critical to the results of the Valuation - it is the returns relative to one another which are more significant (in particular, the return achieved in excess of inflation).

Members who commence AVC payments will pay into the With Profits Fund run by Prudential.  At retirement, the accumulated value of a member's AVC can be used to purchase an annuity on the open market or to buy additional service within the LGPS.
The With Profits vehicle is designed to provide smoothed medium to long term growth by investing in a range of assets including equities and property.  The investment returns are distributed by way of reversionary and terminal bonuses.  The objective of the With Profits policy is to provide returns on members' contributions which at least keep pace with inflation.
Members may also make their own arrangements to pay AVCs to other providers, any such arrangement is referred to as a Free Standing AVC.