2010/11 (PDF, 48 Pages, 1013KB) - THE LOCAL GOVERNMENT ...

Financial Statements - Notes to the Accounts17. Investment Risk18. Financial PerformanceIn order to achieve its statutory obligationsto pay pensions, the Fund invests itsassets, including employer and employeecontributions, in a way that allows it to meetits liabilities as they fall due for payment.It does this by matching assets to liabilitiesvia an Asset Allocation exercise. Duringthe year, MPF targeted a 79% exposure to“growth” assets, such as equities, propertyand alternatives, and 21% to “matching”assets, such as UK bonds or gilts whichprovide the best match for liabilities, i.e.payments of benefits to members in futureyears. Risks in growth assets include issuerrisk and market risk (the greatest risks) whichare mitigated by diversification across assetclasses, markets and sectors. Mitigatinginterest rate risk and inflation risk points tosignificant investment in bonds, but doingso at the expense of “growth” assets wouldincrease the costs of funding. “Matchingassets” backed by the UK Government areconsidered low risk. However, corporatebonds carry some additional issuer risk.The Pension Fund is administered undera budget that is approved by PensionsCommittee each January. That budget isreviewed and, if appropriate, revised thefollowing January, based on the knownand anticipated pattern of expenditureand market movements. In January 2010a budget of £13.81m was approvedfor the financial year 2010/11. This wasrevised in January 2011 to £13.85m.The two main elements of the budget weresalaries and related costs of £2.96m andexternal investment management fees of£7.92m. The final accounts for the yearended 31 March 2011 indicate expenditurelevels of £4.78m on administration costsoverall and £10.3m on all investmentmanagement expenses. The primaryreason for the increase in administrationcosts from the 2010 level of £3.96m isthe payment of one-off severance costsplus the associated pension strain costsof reductions in staffing levels. Investmentmanagement expenses include, as itsmain element, external managers’ fees,but also cover custodian fees, advisorsfees and performance measurement fees.Fees of external managers and the Fund’scustodian are on an ad valorem basis,and will therefore vary as the value of eachportfolio changes. The marginal overspendon external manager fees reflects theincrease in the value of the Fund duringthe year. In addition, in the final accounts,the salaries and related expenses ofthe internal investment team are,in accordance with the PensionsStatement of Recommended Practice(the SORP), shown within investmentmanagement expenses.There is no budget as such for theFund itself. The payment of pensionsis in accordance with the Regulations.Receipts of employers’ contributions are inaccordance with the Triennial Valuation.Consequently, basic pensions transactions,eg. income from employers andemployees contributions, benefits payable,transfers in and out are only contained inthe fund account, and do not form part ofthe budget. However, the scale and timingof such transactions are taken into accountfor cash flow management purposes.The Fund does reserve the right tolevy interest charges on late receiptof contributions from employers. In2010/11 no such charges were levied.32 Financial Statements www.merseysidepensionfund.org.uk