UK - Lancashire County Council has agreed to defer the appointment of an enhanced index-tracking manager for its £3.3bn (€3.8bn) pension fund, as officials say performance is "not compelling".

Latest figures presented to the council's pension fund committee showed the funding level of the scheme had dropped a further five percentage points in the fourth quarter of 2008 to 60%, which is significantly lower than the 84% funding level reported at the last actuarial valuation in March 2007.

An actuarial review of the funding position of the scheme at 31 December 2008 showed the value of the assets were £3.3bn but the liabilities were estimated at £5.4bn, leaving a deficit of £2.1bn.

In addition, the pension fund committee was told "tolerance testing" in October had revealed the probability of the local authority scheme meeting its funding target by the end of its recovery period was just 35%.

Following the update on the funding position, the committee agreed to continue with the rebalancing the asset allocation of the fund with regards to the two portfolios run by Legal & General, as it already ran an index-tracking multi-asset portfolio but was also given responsibility for the assets formerly run by Schroders in a second index-tracking fund in 2007.

Lancashire terminated the UK equity contract held by Schroders in September 2007 and halved the global equity portfolio of Newton Investment Management amid concerns of underperformance by the managers, and had "temporarily" transferred the assets to L&G while it reviewed its strategy and tendered new mandates.

Lancashire Council then initiated a search for a UK and global equities enhanced index-tracking manager in September 2008 to run around £350m of its assets on a six-year contract, although the mandate could have been split between more than one provider. (See earlier IPE article: Lancashire seeks equity manager to replace Schroders)

At the last meeting of the pension fund appointments sub-committee, however, it was agreed the appointment of a new enhanced index-tracking manager would be deferred for a further year.

Following a report from Mercer reviewing the tenders received in response to the search, and views from the investment panel, the meeting concluded "there was clear evidence from the tender submissions that the performance achieved by these mandates was not compelling".
After a suggestion by the executive director of resources, and treasurer to the pension fund, to consider deferring the mandate, the sub-committee resolved the appointment of an enhanced index tracking manager "should not be taken forward at this stage", and instead a further report should be presented "in the light of experience over the next 12 months or so".  
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