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Page 1: Events for 2006-2007

London Borough of Newham

Annual Pension Fund Report

2005-2006

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Contents

Introduction

The London Borough of Newham Pension Scheme is part of the Local Government Pension Scheme (LGPS), which is statutory pension scheme. It is governed by the LGPS regulations, which means that the benefits are set out and guaranteed by law. The LGPS is a defined benefit ‘final salary’ scheme and the annual pension and the retirement lump sum are both based upon the length of the employee’s service.

The Council is the administering authority and manages the fund for all employees in Newham and other eligible organisations (Scheduled and Admitted bodies). The fund is financed by contributions from employees, employers and earnings from investments. Funds not immediately required to meet pensions and other benefits are invested in a selection of securities, equities and property.

The management and administration of the scheme is delegated to the Pension Fund Investment Committee, with the chief financial officer taking responsibility at the officer level. Elected members are appointed to the committee and decisions relating to the scheme are delegated to the committee. The elected members are not trustees of the pension fund, however many of the requirements of trust law are considered relevant to the LGPS.

The investment objective of the fund is to achieve a rate of return sufficient to meet its liabilities, with the strategy adopted taking this into account. The pension fund must be sufficient to sustain the future pension entitlements of both past and present employees and is achieved by adjusting the level of employer’s contributions every three years. The funding position is the relationship between estimated future pension payments and the funds held to pay for these pensions and the fund has published a funding strategy statement, which outlines the plan for achieving a funding level of 100%.

The following annual report provides a summary of the performance of the London Borough of Newham’s Pension Fund as at 31st March 2006.

Introduction

Highlights of 2005-06

Events for 2006-2007

Changes in LGPS Regulations

Members, Managers and Advisors

Fund Membership

Investment of Funds

Market Values Asset

Allocation

Largest Equity Holdings

Investment Performance

Individual Fund Manager Performance

Corporate Governance

Socially Responsible Investment

Pension Fund Accounts

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Highlights of 2005-2006

Active Membership to the Fund increased by 3.9% from 6,631 to 6,889.

As part of Best Practice a review of the contracts for Actuarial Services and Investment Advisory Services was undertaken which resulted in the appointment of Mercer Human Resources Ltd for the Actuarial Services and Hewitt Bacon & Woodrow for the Investment Advisory Services.

In line with the Myners report the Fund published its first Business Plan which can be reviewed on the Council’s web-site – www.newham.gov.uk

In accordance with the requirements of the Office of the Deputy Prime Minister (ODPM) the Fund published its first Communications Strategy and Governance Statements. These documents together with a full set of the Annual Accounts can also be found on the Council’s web-site – www.newham.gov.uk

The Fund welcomed two new admitted bodies – FM Conway and Community Links (Arc in the Park)

The Fund welcomed one new scheduled body - Newham Homes.

A review of the contract with our custodian, Northern Trust, resulted in a re-negotiation of terms and fees that will benefit the Pension Fund.

Events for 2006-2007

Introduction of the Pension Simplification – A Day

Appointment of the Global Equity Fund Manager

Appointment of the Currency Manager

Seminar for the Admitted and Scheduled bodies.

Seminar for the members of the scheme

Preparation of the Triennial Valuation

Re-tendering of the Custodian Contract

Forthcoming Changes In LGPS Regulations

The newly formed Department for Local Government and Communities (DCLG), which replaced the ODPM, is embarking upon a number of consultation exercises regarding the future of the Local Government Pension Scheme. Details of these can be found on their website (www.communities.gov.uk).

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Members, Managers and Advisors

The Role of The Pension Fund Investment Committee

The investment committee and its professional advisers oversee the general framework within which the fund is managed. The committee also monitors the performance of the fund managers and the investments for which they are responsible. The main requirement is managing the fund and reducing risk, by diversifying investments over different asset classes, geographically and between fund managers, in order to achieve the right balance the desire for improved returns and the possible risk of those returns dropping due to investment conditions. The committee also considers pension issues as they arise.

During 2005/06, the composition of the Investment Committee was as follows:

Elected Members

Councillor Winston Vaughn (Chairman)Councillor Oliver Inverary (Vice-Chair)Councillor Jo CorbettCouncillor Lester Hudson Councillor Alec KellawayCouncillor Sukhdev Singh MarwayCouncillor John SaundersCouncillor Harvinder Singh Virdee

Bob Heaton (Executive Director of Resources)John Turnbull (Head of Finance)Roy Nolan (Corporate Finance Manager)Maria Uhlmann (Legal)

Tim Linehan, GMBBrain Ward, UNISONHarry Cubberley, Craft Unions

Trade Union Representatives

Council Officers

The London Borough of Newham

Administering Authority

Administrator

London Pension Fund Authority

Scheduled & Admitted Bodies

Newham College Newvic CollegeFM Conway Ltd Newham HomesStratford School Carpenters TMODavid Webster Ltd Arc in the Park Greenwich Leisure Ltd

Fund managers

Custodian

Northern Trust Company

Independent Advisor

Hymans

Actuary

Hymans

AVC Providers

Clerical Medical Investment Group LtdEquitable Life Assurance Society

Auditors

PricewaterhouseCoopers

Performance Measurement

WM Company

Capital InternationalAberdeen Asset ManagementLegal & General Investment ManagementRreef HarbourVest Partners (UK) Ltd

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All of the Council’s employees, except those covered by the Teachers Pension Scheme regulations, can join the Council’s pension scheme and the LGPS regulations also provide for specified bodies (employers) to be admitted.

As at 31 March 2006, the value of the pension fund was approximately £552m. Membership of the pension scheme for the year 2005-2006, along with a comparison to previous years, is as follows:

The investment of pension funds is a statutory function and is undertaken by the fund, in accordance with the Local Government Superannuation Regulations. The regulations require the administering authorities to have regard to the need for diversification of investment fund monies, the suitability of any investment

In adhering to these regulations, the London Borough of Newham Pension Fund employs professional fund management companies to manage the fund’s investments on a day-to-day basis and pursues a policy of managing risk by diversifying both investments and investment managers. Following the 2004 actuarial valuation, a review of the investment management arrangements was carried out. This concluded that some changes should be made so as to move forward from multi asset to specialist manager structure strategic asset allocation.

Assets are held by the fund in order to achieve returns consistent with the cost of future pension liabilities as assessed by the actuary at the 2004 valuation. The Fund has chosen a specific benchmark in order to determine the appropriate balance between where the fund’s assets are invested between geographical regions and the type of asset. The Fund invests through a range of pooled Funds as well as directly in shares and has a mix of passive and active management. Stock selection is delegated to Investment Managers who may vary their allocation within set bands and must re-balance to the benchmark quarterly. The funds strategic asset allocation as at 31 March 2006 is shown in the table above.

Fund Membership

Investment of Funds

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The market value of the funds investments on 31 March 2006 was £552m, compared with a value of £426m on 31 March 2005.

The chart on the right shows the movement in the market value of the fund’s assets over recent years.

The value of the fund increased by £126m in the year to 31 March 2006.

Market Values from 31 March 2000 to 31 March 2006

Asset Allocation

2005 2006

Asset allocation determines the proportion of the fund to be invested in each asset class. The following charts show the allocation of the fund’s assets between the different classes of investments, with a comparison to the position as at 31 March 2005. They demonstrate the move from holding cash to investment within property, in accordance with the revised investment strategy.

Largest Equity Holdings

Market Values

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Measurement of the performance of the fund’s investment returns is provided to the pension fund investment committee, on a quarterly basis by each of the fund managers and the WM Company. The WM Company is employed by the Fund to provide analysis of the fund managers’ performance, detailing the returns in each asset class and the reasons for over/under performance in relation to market returns. For each manager, and the fund as a whole, they provide details on quarterly, annual and three-year returns for comparison against each Fund Manager’s customised benchmark.

An actuarial review of the fund in 2004, showed that the pension fund had liabilities totalling £620m but assets of only £378m, thus producing a shortfall of £243m, i.e. the fund was only 61% funded. In order to reduce this deficit, the Council carried out a review of the Investment Strategy, which resulted in a change in the fund managers’ mandates. As a result of the changes in the strategy, together with improved stock market returns, the value of the fund increased and latest estimates indicate a funding level of around 67%.

The Investment Managers are given individual performance benchmarks related to the indices of the assets in which they invest, which are used to assess their performance and are as follows;

Individual Fund Manager Performance 2005/06

Their performance relating to their benchmark for the year is shown on the chart below.

Investment Performance

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Corporate Governance

Corporate Governance is a general term describing how companies are directed and controlled. Boards of Directors are responsible to shareholders for how they run their companies and shareholders can play an active part in corporate governance by using their voting rights at annual general meetings.

Ensuring the highest standards of governance and accountability within the companies we invest in will lead to increased profitability and will benefit the shareholders with enhanced investment returns.

Following the recommendations of the Cadbury Committee, the members of the Pension Fund Investment Committee believe in encouraging good corporate governance in the companies in which the fund invests and have adopted voting principles in respect of the funds voting rights, to influence the way in which these companies are managed in the future. The voting policy is based upon the guidelines issued by the Pensions Investment Research Consultants Ltd (PIRC), who are hired to provide advice on corporate governance issues.

Authority to vote is delegated to the individual fund managers, who cast the fund’s votes within the policy guidelines. The fund managers discuss any matters of concern with the company management boards and report voting issues to the investment committee.

In addition to encouraging best practice through voting, the London Borough of Newham remains a committed and active member of the

Local Authority Pension Fund Forum (LAPFF). The LAPFF promotes the investment interests of Local Authority Pension Funds and maximise their interests as shareholders to promote corporate social responsibility and high standards of corporate governance amongst the companies in which they invest.

Socially Responsible Investment

The Pension Fund Investment Committee recognises that investment managers must consider social, environmental and ethical issues when selecting investments.

In considering these issues, the London Borough of Newham’s fund managers are instructed to invest in the best interest of the fund, whilst also having regard for non-financial factors in selecting investments.

Pension Fund Accounts

The Pension Fund Accounts summarise the transactions of the fund during the year, both for benefits and investments, and show the position of the fund on 31st March 2006. The financial statements provide information about the financial position, performance and financial adaptability of the fund.

Income received from contributions and transfers in were greater than expenditure on benefits payable and administration, which along with an increase in investment income resulted in a net increase in the pension fund of £126m.

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2004/05 Pension Fund 2005/06£000s £000s £000s

FUND ACCOUNTContributions Receivable:

8,091 Contributions from Employees (note 1) 8,43428,601 Contributions from Employers (note 1) 31,515 39,949

4,838 Transfer Values in 5,136

Benefits Payable:(19,993) Pensions Payable (20,629) (2,830) Lump Sum Benefits Payable (2,958) (23,587)

Payments to and on account of leavers:(92) Refunds of Contributions (45)

(7,667) Transfer Values Out (6,879)Net Additions From Dealing With Members (6,924)

(692) Administration and other expenses borne by the scheme (606)10,256 13,968

Return on Investments:8,108 Investment Income 9,932 9,932

Changes in Market Value of Investments:18,524 Realised Gains and Losses on Investments Sold 30,42513,739 Unrealised/Other Changes in Market Value 74,158 104,583

(1,140) Investment Management Expenses (1,610)(580) Other Expenses (tax borne by Fund) (541) (2,151)

38,651 Net Returns On Investments 112,364

48,907 Net increase /(decrease) in the fund during the year 126,332

376,794 Opening Net Assets of the scheme 425,701

425,701 Closing Net Assets of the scheme 552,033

NET ASSETS STATEMENTInvestment AssetsRepresented by:Investments at Market Value:

35,137 Fixed Interest Securities 43,403311,870 Equities - Quoted 410,806

1,946 Equities - Unquoted 4,03315,166 Index Linked Securities 16,69040,118 Freehold and Leasehold Property 71,7473,174 Cash and Other Investments 4,3571,223 1,003 552,039

Current Assets:331 Debtors and Prepayments 148

17,128 Cash and Bank Balances 246 1,397

Current Liabilities:(392) Creditors (400)

425,701 Fund Balance at 31st March 552,033

Pension Fund Accounts 2005-06

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NOTES TO THE PENSION FUND

Note 1. Fund Operation and Membership

The Pension Fund provides pensions and other benefits for former, non-teaching employees of the Council (teachers are covered by a separate pension fund). It is a statutory defined benefit scheme operated under the Local Government Pension Scheme Regulations 1997 (as amended ). Subject to certain criteria, all non-teaching employees may choose to join the scheme. Membership of the Fund at the year end was as follows:

At 31st March 2006 At 31st March 2005Contributing Members 6,889 6,631Current Pensioners 5,612 5,480Deferred Pensioners 3,808 3,401

Benefits are financed by contributions from employees, Scheme employers, and by income from investments. The employees basic contribution is 6% of pensionable pay for Officers and Manual Workers. The Employers contribution for 2005/06, paid by the Council, was 22% of pensionable pay.

In addition to the Council, there are three scheduled bodies participating in the scheme: Newham Sixth Form College (NewVIc), Newham Community College and Stratford School, and five admitted bodies Greenwich Leisure, Carpenters TMO, FM Conway, Community Links & Newham Homes.

Contribution Rate

Employee’s Contributions Employer’s Contributions

Scheme Employers 2004/05 2005/06 2004/05 2005/06£000s £000s £000s £000s

LB Newham 22.0% 7,666 7,986 27,169 30,073Stratford School 22.0% 18 20 63 73NewVIc 12.5% 70 79 245 165Newham College of Further Education

22.0% 290 293 1,009 1,071

Carpenters TMO 13.0% 12 11 43 29Greenwich Leisure 13.0% 35 34 72 74FM Conway 17.6% 0 7 0 20Newham Homes 22.8% 0 0 0 0Community Links 13.8% 0 4 0 10TOTAL 8,091 8,434 28,601 31,515

The Council administers the Fund’s investments. Specialist Fund Managers. – Capital International, Legal & General (L&G), Aberdeen Asset Management (AAM), Rreef Ltd – have been appointed to invest the majority of the Fund. In addition, a small proportion of the Fund is held in property and venture capital. The Fund does not form part of the Council’s consolidated accounts.

Note 2. Fund Managers’ Holdings

The majority of the Fund is represented by investments. The statement below shows the market value of each type of investment held by the individual Fund Managers in £000s as at 31st March 2006.

Investment Capital L&G. AAM Rreef Int. Manag

Total

Fixed Interest (UK) 2,114 8,990 25,492 0 0 36,596Fixed Interest (Overseas) 0 2,121 4,686 0 0 6,807Index Linked - UK 5,354 11,336 0 0 0 16,690UK Equities - Quoted 73,692 136,010 0 0 2,257 211.959Overseas Equities - Quoted 83,938 114,909 0 0 0 198,847Equities - Unquoted 0 0 0 0 4,033 4,033Freehold Property 0 0 0 0 820 820Unit Trusts - Property 0 0 0 70,927 0 70,927Cash & Liquid Assets (UK) 3,850 31 328 148 0 4,357Debtors 836 164 0 3 0 1,003TOTAL HOLDING 169,784 273,561 30,506 71,078 7,110 552,039As a percentage of total 30.76 49.55 5.53 12.87 1.29 100

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The 31st March 2005 investment market values were as follows (in £000s):

Investment Capital Legal & Gen.

DeAM* Int. Manag

Total

Fixed Interest (UK) 1,872 7,373 21,751 0 30,996Fixed Interest (Overseas) 53 1,703 2,385 0 4,141Index Linked - UK 5,757 9,409 0 0 15,166UK Equities - Quoted 55,216 49,036 55,423 1,945 161,620Overseas Equities - Quoted 63,930 28,788 57,532 0 150,250Equities - Unquoted 0 0 0 1,946 1,946Freehold Property 0 0 0 820 820Unit Trusts - Property 0 0 39,298 0 39,298Cash & Liquid Assets (UK) 1,908 54 1,212 0 3,174Debtors 649 143 431 0 1,223TOTAL HOLDING 129,385 96,506 178,032 4,711 408,634As a percentage of total 31.66 23.62 43.57 1.15 100

* Aberdeen Asset Management Ltd (AAM) bought DeAM during 2005.

Note 3. Actuarial Position

The level of contribution payable by the Council to the Fund during 2005/06 was based on the actuarial valuation as at 31st March 2004. This valuation sets the contribution rates for the three years commencing 1st April 2005.

The market value of the Fund’s assets at March 2004 was £377 million, compared to liabilities of £620 million, representing 61% of the Fund’s accrued liabilities, allowing for future pay increases.

The contribution rates have been calculated using the projected unit actuarial method and the main actuarial assumptions used in 2004 are shown in the following table:

Assumption 2001 Valuation 2004 ValuationRate of Return on Investments 6.75% Equities / 5.75% Bonds 6.7% Equities / 4.9% BondsRate of general pay increases 4.3% per annum 4.4% per annumRate of increase to pensions inPayment (in excess of GMPs) 2.8% per annum 2.9% per annumvaluation of Assets Market value based on average Market value based on average values of

values of assets in the 12 months assets in the 12 months prior to 31st Marchprior to 31st March 2001 2004

The 2004 valuation set the required rate of contributions by the Council for 2005-06 at 22% pensionable pay. This rate of contribution is that which, when added to the contributions paid by the members, is sufficient to meet the following:

100% of the liabilities arising in respect of service after the valuation date; plus an adjustment over a period of 20 years to reflect the shortfall of the value of each participating

employer’s notional share of the Fund’s assets from 100% of its accrued liabilities, allowing, in the case of members in service, for future pay increases.

The employers’ contribution rate will increase in stages to 24.2% by 2007/08 following the 2004 valuation.

Note 4. Accounting Policies

SORP accounts summarise the transactions and net assets of the Fund. They do not take account of liabilities to pay pensions and other benefits in the future.

Accounting Standards - The Pension Fund Accounts have been prepared in accordance with the accounting recommendations of the Financial Reports of Pension Schemes – a Statement of Recommended Practice. However disclosures have been limited to those required by the Code of Practice on Local Authority Accounting in the United Kingdom: a Statement of Recommend Practice.

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Basis of Preparation - The accounts have been prepared on the accruals principle, with the exception of transfer values which are included on a cash basis.

Valuation Principles - Investments are shown in the accounts at their market value that has been determined as follows:

Equities traded through the Stock Exchange Electronic Trading Service (SETS), are valued on the basis of the latest mid market price. Other quoted investments are valued on the basis of the mid-market value quoted on the relevant stock market.

Foreign currency is translated to sterling at the closing mid-market rate on the 31st March 2006

Unit Trusts and managed funds are valued at the average of the bid and offer prices provided by the relevant fund managers, which reflect the market value of the underlying investments.

Unquoted securities are valued by the fund managers at the end of the year in accordance with generally accepted guidelines - in accordance with the managers’ own valuation of the underlying securities or, where appropriate, at cost.

The value of fixed interest investments in the Scheme’s investment portfolio excludes interest earned but not paid over at the Scheme year end, which is included separately within accrued investment income

Property under the direct ownership of the Pension Fund is shown at its open market value as determined periodically by a professional valuer. The last valuation of the Fund’s property was conducted in March 2002.

Costs of trading are included as appropriate within purchase costs or sales revenues.

Investment Income – The following accounting policies are used:

Income from equities is accounted for on the date stocks are quoted ex-dividend. Income from overseas investments is recorded net of any withholding tax where this cannot be recovered.

Income from fixed interest and index-linked securities, cash and short-term deposits is accounted for on an accruals basis

Income from other investments is accounted for on an accruals basis The change in market value of investments during the year comprises all increases and decreases in the

market value of investments held at any time during the year, including profits and losses realised on sales of investments and unrealised changes in market value.

Foreign currencies – Assets and liabilities in foreign currencies are expressed in sterling at the rates of exchange ruling at the year-end. Income from overseas investments is translated into sterling at an average rate for the period. Surpluses and deficits arising on conversion or translation are dealt with as part of the change in market value of investments.

Contributions – Normal contributions, both from the members and from employers, are accounted for in the payroll month to which they relate at rates as specified in the rates and adjustments certificate. Additional contributions from the employer are accounted for in accordance with the agreement under which they are paid, or in the absence of such an agreement, when received.

Benefits Payable – Under the rules of the Scheme, members receive a lump sum retirement grant in addition to their annual pension. Lump sum retirement grants are accounted for from the date of retirement. Where a member can choose whether to take a greater retirement grant in return for a reduced pension, these lump sums are accounted for on an accruals basis from the date the option is exercised. Other benefits are accounted for on the date the members leaves the Plan or on death.

Transfers to and from other schemes – Transfer values represent the capital sums either receivable in respect of members from other pension schemes or previous employers or payable to the pension schemes of new employers for members who have left the Plan. They take account of transfers where the trustees of the receiving scheme have agreed to accept the liabilities in respect of the transferring members before the year end and where the account of the transfer can be determined with reasonable certainty.

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Investment, Management and Administration - A proportion of relevant Council officers’ time, including related on-costs, have been charged to the Fund on the basis of actual time spent on scheme administration and investment related matters.

Other Expenses – Administration and investment management expenses are accounted for on an accruals basis. Expenses are recognised net of any recoverable VAT.

Statement of Investment Principles - Details of the Council’s Statement of Investment Principles is available for inspection on the Council website (www.newham.gov.uk).

Note 5. Related Party Transactions

There were no related party transactions in 2005/06.

Note 6. Additional Information

Further analysis, supporting the information in the accounts is detailed below.

Administration and Investment Management Costs 2004/05 2005/06Scheme Administration. £000s £000sOfficers’ salaries and related costs. 619 606Direct running costs 73 36Administration & other expenses borne by fund 692 642Fund Management Expenses 1,140 1,574

1,832 2,216Investment IncomeInterest 919 1,499Dividends 6,677 7,827Rents 57 104Sub total 7,653 9,430Bank Interest 455 502Total 8,108 9,932

Analysis of Purchases and Sales of Investments during 2005/06

Investment At 1st April 05£000s

Purchases£000s

Sales£000s

At 31st March 06£000s

Fixed Interest - UK 29,943 32,938 (27,370) 35,510Fixed Interest - Overseas 4,107 750 (3,050) 1,807Index Linked - UK 13,340 8,671 (3,334) 18,677UK Equities - Quoted 155,149 106,642 (80,823) 178,890Overseas Equities - Quoted 150,987 91,499 (82,871) 159,615Equities - Unquoted 2,102 2,648 (538) 6,290Property Trust 37,223 23,123 0 60,346Freehold Property 60 0 0 60UK Cash 3,174 2,085 (901) 4,358

Total 396,085 268,355 (198,887) 465,553

Analysis of Gains and Losses on Investments during 2005/06

Investment Profits£000s

Losses£000s

Net Profit£000s

Fixed Interest - UK 2,150 (6) 2,144Fixed Interest - OS 0 (2) (2)Index Linked - UK 218 (205) 13UK Equities - Quoted 19,349 (5,442) 13,907Overseas Equities - Quoted 14,802 (1,090) 13,712Equities - Unquoted 501 (92) 409Property 12 0 12Currency 356 (126) 230Total 37,388 (6,963) 30,425

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Schedule of Debtors and Creditors

Debtors 2005/06 £’000

2004/05 £000s

Contributions from outside bodies 148 118Dividends outstanding - Rreef 1 0Dividends outstanding - L&G 164 143Dividends outstanding - CAP 770 582Interest 68 67Dividends outstanding - DeAM 0 431Sale of holdings 0 213

1,151 1,554

Creditors 2005/06 £’000

2004/05 £’000

Tax payable on outstanding dividends

(81) (106)

Fees due to Fund Managers (305) (286)Investment Advisor Fees (14) 0

(400) (392)