Speaking to FT Mandate from a frosty Edinburgh, Colin Hay, principal investment officer at Lothian Pension Fund, explains the structure of the scheme. It handles the pension investments for workers in voluntary organisations, colleges, universities, non-profit organisations and other publicly-funded bodies in East Lothian, Edinburgh, Midlothian and West Lothian. It also runs the pension fund of Lothian Buses in a separate portfolio, which accounts for about £130m of the £2bn pool of assets.
Following government efforts to privatise local bus services, a “separate fund was established in case the bus company was to be sold off”, says Mr Hay, although this has yet to happen.
In the year to end March 2004, the Lothian Pension Fund paid out more than £106m in benefits and received £139m in contributions and transfers from other pension schemes.
Democratic control
The fund is accountable to a committee of locally elected members of Edinburgh City Council. The pensions and trusts committee meets at least twice a year; it has overall responsibility for the pension scheme and takes all policy decisions.
The council’s director of finance, Donald McGougan, is responsible for the day-to-day administration and investment of the scheme.
The two funds are run under a broadly uniform investment strategy – very high equity weightings of about 80 per cent. Roughly half of the equities are UK companies of all sizes.
The main pension fund offsets this high-risk approach with only the slightest nod to conservative investing, with an allocation to fixed income of just 3.7 per cent and an index-lined portfolio of 3 per cent.
“Asset-liability modelling drives the investment approach”, says Mr Hay. So The Lothian Fund’s large size and immaturity is what allows it to take this much risk. A lack of allocation to anything more unconventional than private equity (0.5 per cent) tempers the strategy.
The liability profile of the smaller Lothian bus fund calls for a slightly more conservative approach, including an index-linked portfolio worth 12.2 per cent of the fund and around 9 per cent in bonds and cash. It avoids all alternative investments, including even property.
Lothian’s entire investment strategy is informed by a socially responsible investment (SRI) policy. The aim is to enter into a dialogue with the companies in which it invests – rather than exclude them from the portfolio – with the aim of improving their social, environmental and ethical practices. “We believe that all companies should be run with due consideration for socially responsible issues,” says Mr Hay.
“Our policy is to encourage best practice within industries by engaging with companies and driving change, preferably by co-operation rather than coercion, however with the voting against option retained. The companies that use this approach will be seen as market leaders and, hopefully, will realise increased shareholder value as a sign of a well-run organisation with forward-thinking management.” He is currently looking at ways of testing the impact of the fund’s engagement with companies, he says.
Isis has been appointed to run a specific SRI mandate, while external corporate governance provider PIRC conducts the scheme’s engagement activities across its entire portfolio.
Strategy shows promise
Lothian does appear to have got its investment strategy right, according the most recent data available. Although the scheme suffered three years of poor returns during the stock market downturn (see tables), it has made strong gains in recent months. The main fund was up 29.5 per cent for the year to March 2004. The long-term return for the main fund and bus fund remains positive and ahead of inflation at 2 per cent, with average earnings of 4 per cent.
The fund recently reviewed its actuarial and investment consultancy services after the fixed term contract for existing advisers Hymans Robertson came to its end. Lothian decided to stick with Hymans, which has advised it since the 1970s, on the basis of its “expertise, innovation and high quality service”, says Mr McGougan. “Their robust advice has proved invaluable by controlling risk through the diversification of the fund’s assets.”
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