Pension Fund Annual Report & Accounts · These commentaries (for all or part of 2009/10) appear...

Pension Fund AnnualReport & Accounts

2009/2010

1

P E N S I O N F U N D A N N U A L R E P O R T & A C C O U N T S

Contents

Report of the Director of Finance 2

External Investment Managers’ Reviews 5

Financial Statements:

Statement of Responsibilities for the Statement of Accounts 14

Approval of the Statement of Account 15

Summary of Scheme and its Management 16

Financial Statements 19

Employing Bodies 31

Statement of the Fund Actuary 32

Audit Report 34

Additional Information:

Investment Powers 36

Statutory Statements 37

The Fund’s Largest Equity Shareholding 38

Scheme and Benefit Information 39

Devon Pension Services 41

Glossary 44

Report of the Director of FinanceGlobally the economic situation started to pick up last year after thesignificant downturn experienced through 2007/08 & 2008/09. Financialmarkets recovered lost ground and returned a strong positive performance in2009/10. However, the debt and banking crisis encompassing worldeconomies has receded but is not yet over. Many countries have comethrough the worst of the crises but are now dealing with the impact offunding the measures that were needed to support the world bankingsystem. This has and will put great strain on weaker economies and may leadto further volatility in financial markets.

Locally, during 2009/10 a major structural review of the Fund’s externalmanagers was completed. All of the new managers were in place and fundstransferred to them by August 2009. In a change to previous reports I haveinvited all of the Fund’s external managers to provide a short commentarygiving their views on the markets in which they invest on the Fund’s behalf.These commentaries (for all or part of 2009/10) appear later in this report.

Investment PerformanceI am pleased to report that the Fund is now ranked in the first decile (top10%) of the 87 UK local authority pension funds over 10 years from 2000 to2010. This is a pleasing result especially when the recent volatility of marketsis considered.

The asset value of the Fund at the financial year end was £2.403billion, havingrecovered strongly last year in line with world investment markets. Themarkets ended March 2010 at an 18 month high, helping the Fund to deliveran extremely good return of +33.9% (even though the Fund was goingthrough a period of change). The Fund’s principal aim, to maintain consistentoutperformance over the longer term, is best demonstrated by focussing onthe longer term ten year performance as shown in the chart below. Thispresents the investment returns achieved by the Devon Fund compared to ourpeer group (other local authorities).

2

40

30

20

10

0

-10

-20

Local Authority Benchmark

Devon

2005/06 2006/07 2007/08 2008/09 2009/105 yearsto 2009

10 yearsto 2009

24.4 24.9

7.8 7.0

-3.5 -2.8

Ret

urn

% p

.a.

-19.1-19.9

33.935.2

7.0 7.14.8 3.8

3

Asset AllocationThe County Council’s Investment & Pension Fund Committee, is charged withthe responsibility for the governance and stewardship of the Fund. Against adifficult background, the Committee continued to take a cautious view onworld economic developments but was equally prepared to take decisiveaction when needed. For example, between April 2009 and August 2009 itwas decided to allocate £65m to the passive equity tracker funds and £100mto the multi asset manager in order to maximise the benefit of the sharprecovery in market sentiment during this period, after equity markets hadbottomed in late February 2009. This action kept the asset allocation inbalance and also added short term value through correctly timing theallocation to equities from cash reserves.

No change was made during the year to the Committee’s notional assetallocation target of 70% equities and 30% fixed interest.

Fund SolvencyFor the past nine years Hewitt Associates have acted as the Fund’s Actuary. InFebruary 2010 , following a procurement exercise, they were replaced by oneof the leading firms of consulting actuaries, Barnett Waddingham whoprovide actuarial services to over 40 other local authority pension funds.

The last triennial actuarial valuation of the Fund was as at 31 March 2007.Work on the next scheduled valuation as at 31 March 2010 is now underway.I will report on the final results in next year’s report.

Early indications from the new actuary are that fund solvency (80% at March2007) is likely to be very similar at March 2010. It is anticipated that theoverall impact on employer rates will be minimal, after taking into accountrevised assumptions, longevity projections and a change in the pensionsindexation factor, moving from RPI to CPI (as dictated by Government).

7% Cash

3%UK

Bonds

8%Overseas

Bonds36%Overseas Equities

5%Corporate

Bonds

32%UK Equities

9%Pooled Funds

4

ConclusionDelivering strong performance in a year when the Fund was completing amajor manager transition is a very satisfactory achievement, and one whichthe Investment & Pension Committee believe will strengthen the Fund. It alsoendorses the policy decisions taken by the previous Committee members toappoint a range of new external managers. The revised managementstructure will I believe serve the Fund and all of its stakeholders well and Ilook forward to reporting further on this work next year. Finally I offer mythanks to the Members, Advisers and officers for the advice and guidancegiven during the year.

Mary DavisDirector of Finance

External Investment Managers’ReviewsIn 2009-10 the major fund restructure was completed and this increased thenumber of external managers working for the Devon fund. Each Manager hasprovided an investment commentary for the period of last year during whichthey were managing assets of the fund.

Global Emerging Markets

Aberdeen Asset Management Ltd Page 6

Global Equities

Aberdeen Asset Management Ltd Page 7

Sarasin & Partners LLP Page 8

Global Fixed Interest

Lazard Asset Management Ltd Page 9

Wellington Management International Ltd Page 10

Multi Asset

UBS Asset Management (UK) Ltd Page 12

Passive Global Equity & Emerging Markets

State Street Global Advisors Ltd Page 13

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6

Aberdeen Asset Management Ltd

Mandate – Global Emerging Markets Investment returns for the period to March 2010 for Emerging markets wereexceptional, outstripping a broader recovery in global equity markets.Aberdeen’s performance for Devon captured much of this recovery;performance from funding in July 2009 was strong, up 35.6%, ahead of theMSCI Emerging Markets index.

Positive corporate earnings results and economic news as well as firmercommodity prices boosted emerging markets during the period, although itwas not without some volatility, as markets contended with debt problems inDubai, fears over tighter capital controls and sovereign debt contagion inEurope. Steadily improving GDP numbers in emerging economies andcontinued low interest rates in the US helped the overall positive momentum.The only cloud to check the rebound in economic activity was a higherinflationary outlook, which prompted some central banks to raise interestrates towards the period-end.

The strong relative performance came principally from good stock selection.Massmart from South Africa was the biggest positive as the general retailerrebounded on indications that the domestic trading was strengthening atlast, after a prolonged period of weakness. Truworths International wasanother South African retailer that performed well in the fund. Mexicanlender Banorte reflected the recovery in consumer demand, outperformingits local market, and local beer and bottling giant Femsa was also a strongMexican story. Indonesian conglomerate Astra International performed wellas investors appreciated the top line sales growth. Stock selection in Brazilwas also positive, with a feature being retailer Lojas Renner as representativeof improving economic outlook.

For the year ahead, a key influence will be central bank and governmentpolicy, both in the developing and developed economies. The trade offbetween fear of inflation and a double dip will be a key determinant of howlong a loose monetary policy can be maintained; stimulus seems to bewithdrawn for now, as developed economies are turning their attention tofiscal discipline.

However, this comes at a time when final private demand is still anaemic andrisks derailing the increasingly vulnerable global recovery. Concerns of risinginflation and overheating worries in many emerging economies will seepolicymakers taking policy actions. Emerging markets will not escape arenewed weakness in global trade, with volatility likely to remain high, whileissues such as growing pressure on China to revalue the renminbi.

Market uncertainty is therefore likely to continue. However, we remainfocused on the long-term attributes of the asset class, namely, its robustfinances, sound businesses and fast-growing middle class, rather than theshort-term pressures, and will look to buy when opportunities presentthemselves.

7

Aberdeen Asset Management Ltd

Mandate – Global EquitiesThe investment returns for the year to March 2010 were exceptional in anabsolute sense, led by a powerful recovery in global equity markets. Therecovery reflected the relief from investors that the global financial marketswould not, after all, go into meltdown and leave the world floundering in adepression rivalling the 1930’s experience. Aberdeen’s performance forDevon captured much of this recovery; performance from funding in July2009 was strong, up 27%, slightly behind the FTSE World index.

Notwithstanding the strong performance across equity markets and apparentconfidence of investors, our investment strategy within portfolios wasincreasingly cautious. At the start of the period the monumental efforts bygovernments and central banks to shore up the banking system and provideeconomic stimulus was seen as evidence that crisis had been averted.However, the more effort that central authorities made to avert economicdisaster, the more cautious we have become for developed economies,principally because the burgeoning cost of this policy.

Whilst we could see the effects of these policies on domestic developedeconomies, the stocks we favoured were more orientated towards Asian anddeveloping countries, who have much lower government, corporate andpersonal indebtedness and retain good growth characteristics, rather than indeveloped economies.

Over the part year stock selection within the portfolio was mixed, althoughthe effective country allocation and currency exposure were negatives.Successful stock selection included miner Rio Tinto, Philips Electronics andTenaris, an Italian listed seamless pipe manufacturer that supplies the oilindustry. Other companies also featuring included industrials UnitedTechnologies from the US and Schneider Electric from France; CanadianNational Railways; and Samsung from Korea. Negative stocks includedinsurers QBE from Australia and Mapfre from Spain, both hurt by the fearsthat their balance sheets would need additional financing; German utilityE.On; and Italian oil company ENI.

We remain cautious for the current year. We do not believe that there willbe sufficient follow through from an economic perspective to maintain themomentum, once the stimulus plans have run their course. Equity marketshave retrenched since end March, reflecting a growing level of uncertaintyover sovereign debt and worries that there will be a broader economicslowdown. Despite this correction, we continue to remain cautious in generalabout equity markets. Stock selection is more important then ever, and ourprimary approach, identifying good investments through fundamentalanalysis, remains unchanged, with a particular focus on good qualitybusinesses and managements, strong balance sheets and cash generation.We will continue to look for opportunities that any ensuing market volatilitymay present to selectively add to existing holdings or add new names.

8

Sarasin & Partners LLP

Mandate – Global EquitiesFunds were transferred to Sarasin & Partners in July 2009 to manage a globalequity mandate employing their thematic investment process. Sarasin aim toidentify the most promising positive ‘themes’ which capture the drivers ofsales growth for multi-national companies and the sources of competitiveadvantage that generate corporate profits growth over the longer-term.

Financial markets recovered strongly throughout the year as investors’ riskappetite returned. At first the strongest performance came from those stocksthat had been most depressed by the credit crunch. However, graduallyconfidence was also restored in a widening range of longer-term investmentthemes and, after lagging a little in the first two months, the thematicportfolio moved up strongly with the market over the rest of the period.

The themes employed in the portfolio include major demographic andeconomic trends such as rising consumption from emerging marketconsumers as well as smaller scale but equally powerful trends. For instance,there are certain strategic necessities that governments, companies orconsumers can’t do without. Some are obvious: such as energy security,homeland defence, basic food and medical supplies, etc. Others are lessobvious, but no less necessary, like the dredgers that keep open the world’smajor sea ports. The best investments in the ‘Security of Supply’ theme willhave characteristics of inevitability and are likely to have strong upsidepotential due to probable competition for control.

The credit crisis brought about a reversal in capital flows. A period ofabundant supply of cross-border bank finance was replaced with capitalconstraint. This is an environment in which ‘The Strong Get Stronger’, atheme in which companies with strong cash flows and balance sheet can actas their own bank and can gain competitive advantage. While weakercompanies are aggressively cutting costs and managing working capital,Strong Get Stronger companies can take advantage of recovering demand,acquire assets cheaply and take market share.

Towards the end of the period there was evidence that the recovery in globalequity markets was waning in the face of concerns about the strength of theeconomic recovery in the US and action to cool the economy in China.Weightings were reduced in the Corporate Restructuring and Pricing Powerthemes which had been among the strongest themes in the recoveringmarket as risk and cyclicality were embraced. Weightings were increased inthe more growth oriented and defensive themes of Intellectual Property andExcellence and Strong get Stronger.

Since the year end concerns have grown of a ‘double dip’ in economic activityand Sarasin & Partners believe this will lead the major western central banksto redouble their efforts to reflate economic growth. Another globalrecession seems unlikely but investors are likely to focus more closely onreliable growth themes.

9

Lazard Asset Management Ltd

Mandate – Global Fixed Interest

Market Review Global interest rates were reasonably stable and range-bound during thisperiod. Despite the one-year anniversary of Lehman’s collapse, somewhatmixed and tentative signs of economic growth in larger developed markets,and the European debt crisis, investors showed an appetite for riskier assetsas cash on the sidelines was put to work. Many corporations haveaccumulated large cash balances and continue to tap bond markets at veryattractive pricing levels. As a result, credit spreads have generally beentighter, reflecting these improving fundamentals and strong flows into cashbonds.

Performance Review (For the period 1 August 2009 to 31 March 2010)Absolute and relative performance were both positive during the period,with diversified contributions from interest rate moves, credit spreadtightening, and currency exposure. Country allocations contributed toperformance, including an overweight position in bonds from core Europe(including Scandinavia), Australia and Canada, as well as an underweightposition in bonds from Greece, Spain, Italy and Japan. Security selection andspread product helped returns, as our diversified exposure to investment-grade corporates, select emerging markets, and sovereign external debtperformed well. Our slight underweight position in the financials sector andlong-maturity corporates detracted from performance. Tactical currencyexposure to developed and emerging markets (especially our commodityexposure) added value. Our modest underweight to the Japanese yen hurtreturns, but we will maintain this underweight in Japanese yen (and bonds)due to the very poor fundamentals in Japan.

Outlook In contrast to the somewhat binary risk-off / risk-on financial markets in 2008and 2009 respectively, we believe 2010 will be more balanced. We believechoppy and volatile price action within a range will prevail for interest ratesand currencies, allowing active managers to potentially add value by rotatingbetween different domestic fundamental conditions (and opportunities)around the world. In fact, we are especially optimistic about faster recoveriesin select Asian and Latin American countries, which have exhibited impressiveeconomic and financial resilience during the crisis. We also believe thatcorporate bonds will outperform government bonds in the United States andEurope. As such, we will opportunistically add shorter-maturity corporates tothe strategy. Strong fundamentals and higher yields, coupled with flushglobal liquidity, is also likely to continue to attract investors into emergingmarkets, so we plan to maintain our overweight position in this sector.

As always, we seek diversified investments in global bond, credit, andcurrency markets, with good underlying fundamentals and asymmetricalupside risk/reward profiles. We are optimistic about the prospect ofgenerating strong returns from the flexible opportunity set that a globalmandate provides.

10

Wellington Management International Ltd

Mandate – Global Fixed Interest

Market Review• The global economy continued to rebound during the second half of

2009, as risk aversion moderated further, inflationary pressures remainedin check and global yields declined, showing clear signs of responsivenessto the massive stimulus injected following a severe contraction in late2008. Sentiment and risk appetite both improved by the end of the firstquarter 2010 as economic releases grew stronger, bolsteringexpectations regarding the sustainability of the economic recovery.

• Comfortable to let the recovery gather momentum, policymakersmaintained exceptionally accommodative monetary policies and anumber of fiscal programs aimed at stimulating the economy aideddemand, with markets settling into a cyclical ‘sweet spot’ during the finalperiod of 2009.

• Non-Treasury sectors benefited most from this particularly favourablebackdrop, with lower quality credit segments setting the pace.

• Yield curves were mixed, although generally steeper as long rates rose.

• The US dollar produced mixed results during the period, benefiting fromexpanding government rate differentials, better economic data andexpectations for the removal of Fed stimuli. An improved riskenvironment and sharp improvements in manufacturing aidedcommodities and the currencies of commodity-exporting countries.

Performance Review and Attribution (for period 1 August 2009 to 31

March 2010)

• The Portfolio performed strongly in absolute terms, returning 11.75%since inception.

• The Portfolio, however, underperformed its benchmark by 57 basispoints over the period.

• Although currency strategies provided a positive contribution to results,with underweight positions in the Japanese yen and overweightpositions in the Indian rupee, macro, credit, and quantitative strategiesdetracted from performance over the period.

• Sector allocation in credit provided negative results while securityselection was positive.

• Quantitative strategies represented the primary source ofunderperformance, negatively impacted by country positioning in Q42009 that favoured the US versus Germany.

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Outlook and Strategy as of August 2010

We Think… Therefore…• Global growth set to slow • Underweight commodity

in 2H10, raising deflation risk currencies (AUD,NZD,CAD)

• More risk of quantitative • Long US 5 yr and 10 yr treasurieseasing in US

• Sovereign default risk remains • Short peripheral Europe versuscore Europe

• US risk premium too high • Long US10 and 30 yr vs. German relative to Germany and France 10s and 30s

• Implied default rates too high • Overweight global credit

12

UBS Asset Management (UK) Ltd

Mandate – Multi AssetIn the year to 31 March 2010, equity markets recovered to 18-month highsand the period ended with signs of the economic recovery being clearer inthe first quarter of 2010. This new market sentiment resulted in global equitymarkets, as measured by the MSCI World Total Return Index in localcurrencies, rising 69% from the lows of March 2009. Credit spreads alsonarrowed significantly from the extremely distressed levels seen in the firstquarter of 2009, despite a small hiccough in January, and Government bondyields ended the period to 31 March 2010 at similar levels to 12 months ago.There is, however, still much lost ground to recover and it was clear thatmarkets had become more volatile towards the end of the period, reflectingthe inflation v deflation debate closely linked to concerns over a ‘double-dip’recession.

In relation to your Pension Fund, for the year to 31 March 2010, your activeportfolio returned +42.6% compared with the benchmark return of +37.0%,with outperformance in all quarters over the period. Your passive portfoliotracked the index return across all quarters during the year to 31 March 2010,with rounding leading to a small outperformance on the one year numbers;+52.8% versus +52.3% respectively.

In your active portfolio, our asset allocation views were taken through ourpooled tactical asset allocation funds, the Market Absolute Return Strategy(MARS) and the Currency Absolute Return Strategy (CARS). In the first half ofthe year, although large positive exposures to risk assets such as equities andcorporate bonds were maintained, we began to reduce equity positions inMARS, specifically in the US and UK, which was matched by an increase ininvestment grade credit. These positions were maintained through toNovember when equity positions were reduced further, in addition to highyield investments, to reduce the funds risk profile. We continued to reducethe overall equity exposure in early 2010 on concerns that an element ofcomplacency had crept into markets. In CARS, we had relatively modestpositions at the start of the period under review. Key positions included along exposure to Swedish krona and Asia (ex-Japan) currencies, and a shortexposure to US dollar and euro. The short position in the euro throughout theyear and the well timed unwinding of our short US dollar position proved tobe particularly strong contributors to performance in the second half of theyear to 31 March 2010.

In your passive portfolio, your UK equities are managed on a passive basis andinvestment activity within the fund therefore reflects any changes in therespective index.

The near future holds a great deal of uncertainty. Economies take longer torecover and sustain lower growth rates coming out of financial crises thanthey do after typical cyclical recessions. The timing of exit strategies remainskey to asset class performance in the year ahead as will the evolution of theeconomic and inflationary environment.

13

State Street Global Advisors Ltd

Mandate – Passive Global Equity & Emerging Markets

Market ReviewWhat a difference a year makes. In the previous 18 months the largest bearmarket since the late 1930s had destroyed US$18 trillion of equity marketcapitalisation around the world, an amount well in excess of the entirenominal GDP of the United States. Twelve months later, every asset class hasshown positive returns. Emerging markets, small-cap stocks and high yieldbonds have soared 70%-90% in US dollar terms. Indeed, after a harrowingstart to calendar year 2009, the twelve months just passed saw remarkablypersistent recovery in both economic prospects and risk appetites. Whilehistoric 2007 highs remained distant memories, investor sentiment stillbenefited immensely as many market averages regained levels that hadbroken down badly after the September 2008 collapse of Lehman Brothers.

Boosting investor spirits throughout the period were improving profitexpectations. Although the pace of estimate gains seemed to ebb as the yeardrew to a close, relative value considerations kept equities buoyantworldwide. Short-term investments remained singularly unappealing, as G7central bankers affirmed their commitment to supportive policies and Liborrates eroded further. Corporate bond spreads, both investment-grade andhigh-yield, contracted throughout the period, easing financial constraints onborrowers with access to the capital markets.

Devon County Council Fund ReturnsDevon County Council Pension Fund invests passively in developed markets,with a 75% currency hedge, and emerging markets, equally weighted bycountry.

Devon’s passive currency hedge is designed to reduce currency volatiltiy onnon-sterling developed market assets over time. The funds performedbroadly in line with their benchmark over the 12 months to 31 March 2010.

Devon’s investment in emerging markets, equally weighted by country, onceagain outperformed its market cap-weighted equivalent, with Devon reapingthe benefit of the outperformance of smaller emerging markets over the 12months to 31 March 2010. SSgA manages the assets passively, re-weightingthe country exposure on a quarterly basis. Each country performed broadlyin line with the relevant index over the 12-month period, though with agreater degree of tracking error than their devleoped market peers.

Financial Statements

2009/2010

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Statement of Responsibilities for theStatement of Accounts

The Authority's ResponsibilitiesThe Authority is required to:

• make arrangements for the proper administration of its financial affairsand to secure that one of its Officers has the responsibility for theadministration of those affairs. In this Authority, that Officer is theDirector of Finance;

• manage its affairs to secure economic, efficient and effective use ofresources and safeguard its assets;

• approve the Statement of Accounts.

Responsibilities of the Director of FinanceThe Director of Finance is responsible for the preparation of the Authority'sStatement of Accounts in accordance with proper practices as set out in theCIPFA / LASAAC Code of Practice on Local Authority Accounting in the UnitedKingdom ('the Code of Practice').

In preparing this Statement of Accounts, the Director of Finance has:

• selected suitable accounting policies and then applied them consistently;

• made judgements and estimates that were reasonable and prudent;

• complied with the Code of Practice;

• paid due regard to the Pension SORP 2007.

The Director of Finance has also:

• kept proper accounting records which were up to date;

• taken reasonable steps for the prevention and detection of fraud andother irregularities.

Certificate of the Director of FinanceI hereby certify that this Statement of Accounts for the year ended 31 March2010 has been prepared in accordance with the Accounts and AuditRegulations 2003 (as amended) and that it presents a true and fair view of thefinancial position of the Authority as at 31 March 2010 and its income andexpenditure for the year ended 31 March 2010.

Mary DavisDirector of Finance18 June 2010

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Approval of the Statement ofAccounts

I confirm that these accounts were approved by the Audit Committee at itsmeeting held on 24th June 2010.

Signed on behalf of Devon Pension Fund

Cllr Barry ParsonsVice Chairman of the Investment and Pension Fund Committee24th June 2010

AuthorisationThese financial statements replace the un-audited financial statementsauthorised at the meeting of the Investment and Pension Fund Committee on24th June 2010.

Mary DavisDirector of Finance17th September 2010

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Summary of Scheme and itsManagementThe Local Government Pension Scheme (LGPS) is one of the oldest publicsector schemes in operation, having been established as a national scheme in1922. There are about 1.6 million employees currently contributing to theLGPS in England and Wales; roughly 75% of the local government workforce.They contribute to the LGPS via any one of the 88 regional pension fundsspread across England and Wales.

The LGPS is managed by administering authorities in accordance withregulations approved by Parliament. In Devon’s case this is Devon CountyCouncil. Each administering authority is responsible for its own Fund, intowhich all contributions are paid. Rules by which the administering authoritiesmust operate - the LGPS Regulations - are determined by the Governmentafter consultation with representatives for both employees (trade unions)and employers (Local Government Association, Local Government PensionsCommittee).

Each LGPS administering authority pays its benefits from a dedicated pensionfund. Both the scheme member and their employer pay into this fund in orderto provide retirement benefits for the member once they reach retirementage (or earlier if the situation demands). Before this time arrives however, thecontributions paid into the scheme are invested in a variety of bonds andshares; all under the watchful eye of the funds investment managementteam. By investing the contributions in this way, rather than leaving themdormant for years on end, the fund can build up enough assets to cover anypayments it may be expected to make regarding its scheme membersretirement benefits.

Please visit the website www.devon.gov.uk/pensions for further information.

As of 31st March 2010, the net assets of the Devon County Council PensionFund were valued at £2.403 million. The fund itself currently has 38,665actively contributing members, employed by 96 employers of variousdescriptions (Unitary, District, Town & Parish Councils, EducationEstablishments and Admitted Bodies). Pensions are paid to 23,392 pensioners(and/or dependants) every month. There are currently 21,997 members withrights to deferred benefits.

The LGPS is contracted-out of the State Second Pension (S2P) and must, ingeneral, provide benefits at least as good as most members would havereceived had they been members of S2P.

17

18

Management StructureAdministering Authority Devon County Council

County HallExeterEX2 4QJ

Your Pension Fund Representatives

Investment & Pension Fund Committee (at 31 March 2010)

Representing Devon Councillor Sara Randall Johnson (Chairman)County Council Councillor Barry Parsons (Vice Chairman)

Councillor Paula BlackCouncillor Jerry BrookCouncillor Richard EdgellCouncillor Anne FryCouncillor Brian GreensladeCouncillor Des HannonCouncillor Andrew MouldingCouncillor Ray RadfordCouncillor Philip SandersCouncillor Richard Westlake MBE

Representing Devon Councillor Peter Edwards (Devon District Councils)Unitary & District Councillor Peter Smith (Plymouth)Councils Councillor David Stark (Plymouth)

Councillor John Thomas (Torbay)

ObserversRepresenting the Roberto Franceschini Contributors Mrs Lorraine Parker

Representing the Colin LomaxBeneficiaries

Advisers Norman FergusonJohn Harrison

Investment Managers Devon County Council Investment TeamAberdeen Asset ManagersLazard Asset ManagementSarasin & PartnersState Street Global Advisors (UK) LtdUBS Global Asset Management (UK) LtdWellington Management International

County Council Officers Phil Norrey Chief ExecutiveMary Davis Director of Finance Barry White Principal Finance

Manager (Investments)Charlotte Thompson Pensions Manager

Fund Actuary Barnett Waddingham LLP

Copies of the full Annual Report, Statutory Published Statements and abridgedMembers Leaflet can be found on-line at the Devon County Council web site at:www.devon.gov.uk/pensions/investments.htm

Requests for information about the accounts or investments should be made inwriting to Barry White, Investment Manager, Devon County Council, CountyHall, Exeter EX2 4QJ

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Financial Statements

BackgroundEmployees of the Council are members of two separate pension schemes:

• The Local Government Pension Scheme, administered by Devon County Council.

• The Teachers’ Pension Scheme, administered by Capita Teachers‘ pensions on behalf of theDepartment for Children, Schools and Families (DCSF)

Both schemes provide defined benefits to members earned as employees. The arrangements for theteachers’ scheme mean that liabilities for these benefits fall on the DCSF and do not form part ofthe Devon Pension Fund. The fund also extends to cover employees of unitary and district councils,civilian employees of the Devon and Cornwall Police Authority and Devon and Somerset Fire &Rescue Authority and employees of a number of other admitted member bodies.

The accounts of the fund are set out in line with Chapter 2 “Recommended Accounting Practice”of the Pension Statement of Recommended Practice 2007 (SORP 2007).

The accounts reflect the assets that are available to the Fund, and the current liabilities. Longer-term liabilities for future pension benefits are not reflected in the accounts. Future contributionsare matched to future liabilities through an actuarial valuation.

All employers’ contribution rates are decided by the fund’s actuary every three years after anactuarial valuation of the fund. The next valuation will be completed this year and the results willbe published early in 2011.

The Accounts are set out in the following order:

• Fund Account - which discloses the income to and expenditure from the fund relating toscheme members and to the investment and administration of the fund. The account alsoreconciles the fund’s net assets at the start of the year to the net assets at the year end.

• Net Asset Statement - which discloses the type and value of all net assets at the year end.

• Notes to the Fund Account - provides supporting details and analysis of the figures in theFund Account and Net Asset Statement.

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Statement of Accounts

Fund Account2008/09 2009/10

Notes £’000 £’000

CONTRIBUTIONS AND BENEFITSContributions receivable:

Employers 7 107,084 115,904Employees contributing to the fund 37,171 38,470

Transfers in from other schemesGroup Transfers 0 0Individual Transfers 12,523 20,110

156,778 174,484Benefits payable:

Pensions (84,098) (91,011)Lump Sums (20,802) (26,716)Death Benefits (2,213) (2,101)

Payments to and on account of leaversRefunds (4) (16)Group Transfers 0 (8,724)Individual Transfers (6,847) (14,810)

Administration expenses 13 (1,342) (1,325)

(115,306) (144,703)

Net Additions from dealings with Fund members 41,472 29,781

RETURNS ON INVESTMENTSInvestment IncomeFixed Interest

U.K. Public Sector Bonds 5,645 2,941U.K. Public Sector Index Linked Bonds 2,010 891Overseas Government Bonds 2,920 7,003Overseas Government Index Linked Bonds 679 15UK Corporate Bonds 108 155Overseas Corporate Bonds 1,324 3,422

Equities (Listed)U.K. 4,077 4,335Overseas 3,177 5,755

Pooled Funds 7,458 5,839DerivativesInterest on Cash Deposits 11,324 370Irrecoverable Withholding Tax 437 1,064Underwriting Commission 17 23Investment Management expenses 13 (783) (4,288)Change in Market Value of Investments:

Realised & Unrealised profit/(loss) (453,072) 563,425

Net Returns on Investments (414,679) 590,950Net Increase (Decrease) in the Fund during the year (373,205) 620,731Opening Net Assets of the Fund at 1 April 2,155,787 1,782,582

Net Assets of the Fund at 31 March 1,782,582 2,403,313

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2008/09 2009/10£’000 £’000

MEMORANDUM NOTETotal ContributionsAnalysed by

Administering authority 48,294 51,862Scheduled bodies 92,159 97,099Admitted bodies 3,802 5,413

144,255 154,374Benefits PayableAnalysed by


107,117 119,844

22

Net Asset Statement2008/09 2009/10

Notes £’000 £’000

INVESTMENTS AT MARKET VALUE 2/4Investment AssetsFixed Interest

U.K. Public Sector Bonds 157,609 36,009U.K. Public Sector Index Linked Bonds 87,251 32,129Overseas Government Bonds 128,978 194,986Overseas Government Index Linked Bonds 453 561UK Corporate Bonds 0 6,784Overseas Corporate Bonds 19,285 121,638

Equities (Listed )U.K. 117,342 157,526Overseas 180,985 436,894

Managed Funds 4 544,403 1,018,947Pooled Funds 4 264,741 217,867Derivative Assets 9

Futures - Overseas Fixed Interest 0 51UK Bond Forwards 0 7Overseas Bond Forwards 0 68Forward Currency Contracts 0 2,633

Foreign Currency 1,064 9,970Short Term Deposits 237,950 127,375Cash & Bank Deposits 26,767 34,946

Investment LiabilitiesDerivatives 9

Futures - UK Fixed Interest 0 (8)Futures - Overseas Fixed Interest 0 (100)UK Bond Forwards 0 (25)Overseas Bond Forwards 0 (108)Forward Currency Contracts 0 (3,235)

Total of investments held 1,766,828 2,394,915

Net Current Assets and LiabilitiesCurrent Assets 10 19,489 25,437Current Liabilities 10 (3,735) (17,039)

Net Assets of the Fund at 31 March 1,782,582 2,403,313

Notes to the Net Asset Statement

a) The financial statements above summarise the transactions and net assets of the Fund but theydo not take account of liabilities to pay pensions and other benefits which fall due after the endof the Fund’s accounting year.

b) The actuarial position of the scheme, which does take account of such obligations, issummarised in the Statement of the Actuary for the year ended 31 March 2010 on pages 32and 33.

23

Notes and Accounting Policies1. In GeneralThe Devon Pension Scheme is a defined benefit scheme which provides pensions for County, Unitary and DistrictCouncil staff not in other schemes, together with staff at certain other admitted bodies.

Currently, eligible staff from 96 active employers may join the fund. At 31 March 2010 there were 38,665 contributors,23,392 pensioners/dependents and 21,997 deferred pensioners in the Fund. Devon County Council is the designatedAdministering Authority. The Investment and Pension Fund Committee comprising of County Councillors togetherwith representatives of the Unitary and District Councils (with observers representing the staff and retired members)control the investments with advice from specialists. Employing body details are shown on page 31.

The Fund Accounts are prepared in accordance with the Local Government Pension Scheme (Management andInvestment of Funds) Regulations 2009 and in accordance with the Statement of Recommended Practice for PensionFunds (2007 SORP) issued by the Pensions Research Accountants Group (PRAG). (The Accounting Standards Board hasapproved PRAG for the purposes of issuing recognised SORPs for pension schemes).

• Contributions, benefits and investment income are included on an accruals basis.

• Investments are included in the accounts on a fair value basis.

• All settlements for buying and selling of investments are accrued on the day of trading.

• Debtors and creditors are raised for all amounts outstanding at 31 March 2010.

• Transfer values received and paid out have been accounted for on a cash basis.

• Some additional payments are made to beneficiaries on behalf of certain employers. These payments aresubsequently reimbursed by those employers. The figures contained in the accounts are shown exclusive of bothpayments and reimbursements.

• Interest on deposits is accrued if not received by the end of the financial year.

1.1 Cost of InvestmentsThe costs shown in the Accounts include only the direct costs of purchasing investments.

1.2 Market Value of InvestmentsThe market values of investments referred to in this report are provided by JP Morgan Worldwide Securities Services.Derivatives are now required to be valued on a fair value basis. Investments are also required to be valued at their fairvalue and where there is an active market the bid price is usually the appropriate quoted market price.

1.3 Foreign Currency TransactionsThe Pension Fund has significant investments overseas. The value of these investments in the Balance Sheet isconverted into sterling at the exchange rate prevailing on 31 March 2010 as supplied by JP Morgan WorldwideSecurities Services. Income receipts, and purchases and sales of overseas stocks, are normally converted into sterling ator about the date of each transaction, and are accounted for using the actual exchange rate received.

1.4. DerivativesFutures are disclosed in the accounts at fair value which is the exchange price for closing out of the contract at thebalance sheet date. This represents the unrealised profit or loss on the contract.

Forward foreign exchange contracts are disclosed in the accounts at fair value which is the gain or loss that would arisefrom closing out the contract at the balance sheet date by entering into an equal and opposite contract at that date.

Bond Forwards are disclosed in the accounts at fair value which is the market value of the underlying bond at thebalance sheet date adjusted for the cost of carry and accrued interest.

24

2. Investment Management ArrangementsThe Pension Fund is currently managed by six external managers (eight mandates) and the in-house Investment Teamin the following proportions:-

31 March 2010Manager Mandate £’000 %UBS Global Asset Management (UK) Ld Multi Asset 393,236 16.4Aberdeen Asset Managers Ltd Global Equity 119,007 5.0Sarasin and Partners LLP Global Equity 116,312 4.9Aberdeen Asset Managers Ltd Global Emerging 131,173 5.5State Street Global Advisors Ltd Passive Equities 452,064 18.9UBS Global Asset Management (UK) Ltd Passive Equities 421,917 17.6Lazard Asset Management LLC Global Fixed Interest 170,053 7.1Wellington Management International Ltd Global Fixed Interest 161,336 6.7DCC Investment Team Specialist Funds 429,817 17.9

2,394,915 100.0

3. Investment Movements and TransactionsValue at Purchase at Sale Change in Value at 31

31 March cost & proceeds & Market March2009 Derivative Derivative Value 2010

Payments Payments

£'000 £'000 £'000 £'000 £'000

Investment assetsFixed Interest

U.K. Public Sector Bonds 157,609 101,943 (215,081) (8,462) 36,009 U.K. Public Sector Index Linked Bonds 87,251 51,815 (109,872) 2,935 32,129 Overseas Government Bonds 128,978 465,282 (388,465) (10,809) 194,986 Overseas Government Index Linked Bonds 453 9,366 (9,394) 136 561UK Corporate Bonds 0 8,400 (1,960) 344 6,784 Overseas Corporate Bonds 19,285 151,459 (47,220) (1,886) 121,638

Equities (Listed)U.K. 117,342 88,884 (76,204) 27,504 157,526 Overseas 180,985 397,208 (127,575) (13,724) 436,894

Managed Funds 544,403 167,772 (296,519) 603,291 1,018,947 Pooled Funds 264,741 25,175 (35,810) (36,239) 217,867 Derivatives 0 21,339 (21,108) (948) (717)Foreign Currency 1,064 8,906 0 0 9,970 Short Term Deposits 237,950 0 (110,885) 310 127,375 Cash & Bank Deposits 26,767 8,247 0 (68) 34,946

Net Current assest and Liabilities 1,766,828 1,505,796 (1,440,093) 562,384 2,394,915Current Assets 19,489 4,873 0 1,075 25,437 Current Liabilities (3,735) (45) (13,225) (34) (17,039)

Net Assets of the Fund at 31 March 1,782,582 1,510,624 (1,453,318) 563,425 2,403,313

The change in market value of investments during the year comprises all increases and decreases in the market value ofinvestments held at any time during the year, including profits and losses realised on sales of investments during the year.

Transaction costs are included in the costs of purchases and sale proceeds. Transaction costs include costs chargeddirectly to the scheme such as fees, commissions, stamp duty and other fees. Transaction costs in the year amountedto £1.019m.

25

4. Analysis of Managed and Pooled Funds

(a) Managed FundsUBS SSGA Other Total 31

Managers March 2010

£'000 £'000 £'000 £'000UK 421,917 102,715 97,653 622,285North America 179,128 179,128Europe 138,717 138,717Japan 31,504 31,504Global 47,313 47,313

421,917 452,064 144,966 1,018,947

31 March 2009 269,347 275,056 544,403

(b) Pooled FundsOther Total 31

Managers March 2010

£'000 £'000 £'000 £'000UK Quoted Property 71,810 71,810UK Unquoted 48,043 48,043Overseas Unquoted 98,014 98,014

0 0 217,867 217,867

31 March 2009 264,741 264,741

5. Stock LendingThe Local Government Pension Scheme (Management & Investment of Funds) Regulations 2009 allow the Fund tolend stock provided that the total value of the securities to be transferred does not exceed 25% of the total fundvalue. In 2009/10 the In-House managed funds and the external manager lent both UK and Overseas stocks. JPMorgan Worldwide Securities Services act as custodian for the Fund, and have been authorised to lend stocks fromthese portfolios. At 31 March 2010 the total stock on loan amounted to £61.476m – 2.56% of total Fund value (31March 2009 £91.794m - 5.15%). Collateral is required against all loans in the form of cash or another approved formof security. At 31 March 2010 the fund held £64.404m collateral (48% cash and 52% securities).

6. TaxationValue Added Tax The Fund is reimbursed by H.M.Revenue & Customs, and the accounts are shown exclusive

of this tax.

Income Tax The Pension Fund is an exempt fund, and where permitted U.K tax on interest anddividends is recovered from H.M.Revenue & Customs. The Pension Fund cannot reclaim the10% tax credit attached to U.K. company dividends which are included net of the taxcredit.

Withholding Tax This is payable on income from overseas investments. This tax is recovered wherever localtax law permits.

Other Taxation Issues Consequent upon rulings given in the European Court of Justice, along with a number ofother local authority pension funds, the Devon Fund is pursuing the recovery of tax paidon certain dividends. If successful this will be of material benefit to the Fund.

26

7. Contributions

Contributions received 2008/09 2009/10£'000 £'000

EmployersNormal 84,946 86,633Deficit funding 22,127 29,246Augmentation 11 25

107,084 115,904Employees

Normal 37,171 38,470

144,255 154,374Contributions analysed by


144,255 154,374Benefits analysed by


107,117 119,844

8. Additional Voluntary Contributions (AVC) InvestmentsThe Fund has two AVC providers; Equitable Life and Prudential. The value of employees’ AVC investments is shownbelow.

31/03/2009 Contributions Investment Return Paid Out 31/03/2010£’000 £’000 £’000 £’000 £’0005,054 401 196 (479) 5,172

These amounts are not included in the Pension Fund Accounts in accordance with regulation 5(2)(c) of the PensionScheme (Management and Investment of Funds) Regulations 2009.

27

9. Derivative ContractsDerivative receipts and payments represent the realised gains and losses on futures contracts. The scheme’s objectiveis to decrease the risk in the portfolio by entering into future positions to match current assets that are already heldin the portfolio without disturbing the underlying assets.

Derivative Contract Analysis

Investment Assets

Value at Economic Expiration Period Value at 31 March Note exposure 31 March

2009 2010£'000 £'000 £'000

Futures a0 UK Fixed Interest 0 Less than 1 Year 00 Overseas Fixed Interest 30,236 Less than 1 Year 510 30,236 51

Bond Forwards b0 UK Bond Forwards 3,050 Less than 1 Year 70 Overseas Bond Forwards 18,674 Less than 1 Year 680 21,724 75

0

0 Forward foreign exchange contracts c 174,351 2,633

0 Total Derivative Assets 226,311 2,759

Investment LiabilitiesValue at Economic Expiration Period Value at 31 March Note exposure 31 March

2009 2010 £'000 £'000 £'000

Futures a0 UK Fixed Interest 8,606 Less than 1 Year 80 Overseas Fixed Interest 30,739 Less than 1 Year 1000 39,345 108

Bond Forwards b0 UK Bond Forwards 21,035 Less than 1 Year 250 Overseas Bond Forwards 20,766 Less than 1 Year 1080 41,801 133

0 Forward foreign exchange contracts c 174,351 3,235

0 Total Derivative Liabilities 255,497 3,476

The economic exposure values futures on a 'gross basis' showing the total exposure to the underlying asset class thatthe future affects as if the change in asset allocation in the underlying asset class has taken place.

Notes:a.Futures. A futures contract is a standardized contract between two parties to buy or sell a specified asset of

standardized quantity and quality at a specified future date at a price agreed today (the futures price). Thecontracts are traded on a futures exchange.

b.Bond Forwards. A bond forward is an agreement whereby a counterparty agrees to trade a specified amountof a bond at a specified price on a future date.

c. Forward Currency Contract. A forward contract or simply a forward is a non-standardized contract betweentwo parties to buy or sell an asset at a specified future time at a price agreed today.

28

10. Debtors/CreditorsDebtors and Creditors include purchases and sales of investments not yet due for settlement. These large amountsdue to or from the Pension Fund are paid within a few days of the year-end and have been included on a gross basis.

31 March 2009 31 March 2010£'000 £'000

Current Assets

Debtors and Prepayments

Contributions Receivable- Employers 8,798 8,345- Employees 3,166 2,977

Interest on Cash & Bank Deposits 4,278 425Dividends receivable 1,467 7,941Settlements receivable 873 4,636Other debtors 907 1,113

19,489 25,437

Current Liabilities

Creditors and Receipts in AdvanceDevon County Council 1,444 1,406Settlements payable 196 9,117Other creditors 2,095 6,516

3,735 17,039

11. Contingent LiabilitiesOn 1 December 2005 staff employed by Torbay Council to provide social care services were transferred to the TorbayPrimary Trust. From that date pension contributions for those employees went to the National Health Service PensionScheme (NHSPS). All affected staff subsequently have 12 months to elect whether to leave their accrued pensionentitlement with the Devon Fund (as a deferred benefit) or transfer that 'pension pot' to the NHSPS. The detailedresults of these elections have not yet been finalised and agreed but the Devon Fund Actuary estimates that the bulktransfer value should not exceed £13.5m. The cash transfer should be concluded in 2010/11.

12. Contingent AssetAt 31 March 2005 all staff employed by the Devon & Cornwall Magistrates Courts Service who were members of theDevon (LGPS) Fund transferred to the Principal Civil Service Pension Scheme (PCSPS). No further contributions werereceived from that employer. All affected staff subsequently had 12 months to elect whether to leave their accruedpension entitlement with the Devon Fund (as a deferred benefit) or transfer that 'pension pot' to the PCSPS. Thedetailed results of these elections have still to be finalised and agreed between the Devon Fund Actuary and theGovernment Actuary's Department (Actuary to the PCSPS). The latest estimate from the Actuary shows that a capitalsum of £1.4m will be payable to the Devon Fund by the PCSPS. Under the transfer protocol issued by the Departmentfor Constitutional Affairs any capital payments due to local authority pension funds would be repaid in ten annualinstalments. It is anticipated that the first capital receipt should be receivable in 2010/11.

13. Administration Expenses and Related Party TransactionsIn accordance with Financial Reporting Standard 8 ‘Related Party Disclosures’ material transactions with relatedparties not disclosed elsewhere are detailed below:-

Under legislation, introduced in 2003/04, Councillors are entitled to join the Scheme. No Members of the Investment& Pension Fund Committee receive pension benefits from the Fund.

No senior officers responsible for the administration of the Fund have entered into any contract, other than theircontract of employment with the Council, for the supply of goods or services to the Fund.

The Devon Fund is a limited partner in the UBS International Infrastructure Fund LLP. The total investmentcommitment made was $50million and at 31 March 2010 $33.5m had been drawn down for investment. At 31 March

29

2010 the value of the Fund’s investment was £21.3m. Barry White, Principal Finance Manager (Investments) is amember of the limited partnership Investor Advisory Committee (IAC). No fee is payable but expenses incurred forattending the annual meeting of the IAC were received.

Devon County Council is the administering authority for the purpose of the fund, and included within the investmentmanagement expenses are charges for investment management, accounting and administration expenses. These havebeen incurred for the internal cost of providing the services. The expenses are detailed below:

2008/09 2009/10£’000 £’000

Administration ExpensesPensions Administration (note a) 1,293 1,241Actuarial Services 39 26Audit Fees 10 58

1,342 1,325

Investment Management ExpensesInvestment Management & Accounting (note a) 257 268External Investment Managment (note b) 593 3,940Custodian 46 148Stock Lending Income & Commission Recapture (123) (126)Audit Fees 10 58

783 4,288

Total 2,125 5,613

Notes:a. Included within the Investment Management expenses are charges amounting to £0.268m for Investment

Management and Accounting and in Administration expenses £1.241m for Pensions Administration expenses.These have been incurred for the internal cost of providing these services.

b.The cost of external fund management varies with the value of investments under management and the extentto which performance fees are earned. In 2009/10 fees are higher due to the addition of 4 new Fund Managers.In 2009/10 one Manager earned an additional fee of £1.950m based on its performance and provision for thisis included in these accounts.

14. Minimum Pension GuaranteeOver a number of years pension funds generally have made small but cumulatively sometimes material overpaymentsbecause of miscalculations in the minimum pension guarantee. The information to make these calculations isprovided to the Pension Fund by HM Revenue & Customs (National Insurance Contributions Office). The governmenthas deemed that individual overpayments will not be reclaimed. At present Devon Pensions are still awaitinginformation from HMRC to allow the overpayments to be fully calculated. Based on a comprehensive review ofpensioner records the value of overpayments is £300,000.

15. ContributionsScheme members (employees) paid variable percentages of their total pensionable pay into the fund as set out below.

Whole Time Pay Rate Member contribution rateUp to £12,600 5.5%£12,601 to £14,700 5.8%£14,701 to £18,900 5.9%£18,901 to £31,500 6.5%£31,501 to £42,000 6.8%£42,001 to £78,700 7.2%More than £78,700 7.5%

30

Statistical Summary

Financial Summary

2005/06 2006/07 2007/08 2008/09 2009/10£’000 £’000 £’000 £’000 £’000

Contributions and Benefits

Contributions received 119,571 131,310 136,009 143,845 154,021

Employers Additional Capital contributions 965 540 928 410 353

Transfers from Other Schemes 18,529 18,339 20,037 12,523 20,110

139,065 150,189 156,974 156,778 174,484

Benefits Paid (82,554) (95,502) (99,802) (107,117) (119,844)

Transfers to Other Schemes (13,113) (7,059) (7,061) (6,847) (23,534)

Administration Expenses (1,020) (1,201) (1,346) (1,342) (1,325)

(96,687) (103,762) (108,209) (115,306) (144,703)

Net Additions (Withdrawals) from Dealings with Fund members 42,378 46,427 48,765 41,472 29,781

Returns on Investments

Investment Income 32,662 34,821 39,921 39,176 31,813

Investment Management Expenses (1,494) (1,509) (1,530) (783) (4,288)

Increase / (decrease) in Market Value of Investments during the Year 351,949 121,714 (118,790) (453,072) 563,425

Net Returns on Investments 383,117 155,026 (80,399) (414,679) 590,950

Net Assets of the Fund at 31 March 1,985,968 2,187,421 2,155,787 1,782,582 2,403,313

Membership Summary

2005/06 2006/07 2007/08 2008/09 2009/10£’000 £’000 £’000 £’000 £’000

Contributors 35,058 36,563 36,346 38,304 38,665

Pensioners and Dependents 19,193 20,274 21,206 22,171 23,392

Deferred Pensioners 15,151 16,946 19,293 20,242 21,997

3131

Scheduled Bodies

Dartmoor National Park Authority

Devon & Cornwall Police Authority

Devon & Somerset Fire & RescueAuthority

Devon County Council

Devon Sea Fisheries Committee

East Devon District Council

Exeter City Council

Mid Devon District Council

National Probation Service - Devon& Cornwall

North Devon District Council

Plymouth CityBus

Plymouth City Council

South Hams District Council

Teignbridge District Council

Torbay Council

Torridge District Council

West Devon Borough Council

Foundation Schools

Colyton Grammar School

Coombeshead College

Great Torrington School

Hayes Primary School

Lipson Community College

Newton Abbot College

Plymstock Trust School

South Dartmoor CommunityCollege

St.Boniface R.C. Boys College

Stoke Damerel Community College

Teign School

Torquay Boys Grammar School

Uffculme School

Widewell Primary School

Town & Parish Councils

Ashburton Town Council

Barnstaple Town Council

Bideford Town Council

Bovey Tracey Town Council

Braunton Parish Council

Brixham Town Council

Buckland Monachorum ParishCouncil

Combe Martin Parish Council

Crediton Town Council

Cullompton Town Council

Dartmouth Town Council

Dawlish Town Council

Exmouth Town Council

Ilfracombe Town Council

Ivybridge Town Council

Kingsbridge Town Council

Kingsteignton Parish Council

Lynton & Lynmouth Town Council

Newton Abbot Town Council

Okehampton Town Council

Sidmouth Town Council

South Brent Parish Council

South Molton Town Council

Tavistock Town Council

Totnes Town Council

Ugborough Parish Council

Woodbury Parish Council

Further/Higher EducationCorporations

Bicton College

City College Plymouth

Exeter College

PETROC

Plymouth College of Art & Design

South Devon College of Arts &Technology

University of Plymouth

Admitted Bodies

Amey Services

Call 24 Hour Ltd

Carillion JM Ltd

Dame Hannah Rogers School

Exeter Royal Academy for DeafEducation

Initial Catering Services

Innovate

Interserve Project Services

Keyham Community Partnership

Leisure East Devon Ltd

Making Space

Millfield Economic DevelopmentTrust

North Devon CrematoriumCommittee

North Devon Homes Ltd.

Open College Network - SW region

PLUSS

Plymouth Citizen’s Advice Bureau

Plymouth Shopmobility

Riviera Housing Trust

South West Tourism

Tarka Housing Ltd

Teign Housing

Tone Leisure (South Hams) Ltd

Tor Homes Ltd

Torbay Coast & Countryside Trust

Torquay Museum Trust

Valuation Tribunal Service - Devon

West Devon Homes Ltd

Wolseley Development Trust

Employing BodiesThere are currently 96 employers who have active members in the Fund.

32

Statement of the Actuary for the year ended 31 March 2010

IntroductionThe last full triennial valuation of the Devon County Council Pension Fund was carried as at 31March 2007 in accordance with the Funding Strategy Statement of the Fund and Regulation 77(1)of the Local Government Pension Scheme Regulations 1997. The results were published in thetriennial valuation report dated 28 March 2008.

2007 Valuation ResultsThe results for the Fund were as follows

• The funding level was determined to be 80%, i.e. the assets amounted to 80% of the liabilitypromises made as at that valuation date. This corresponded to a deficit of £553.5m at thattime.

• The common contribution rate was set at 15% of payroll assuming the funding level was tobe restored over a 25 year period.

• In addition, adjustments were made, where appropriate, to individual Employers’contribution rates as set out in the Rates and Adjustments Certificate.

• The funding level of the Fund had increased from 61% at the 2004 triennial valuation.

Valuation methodThe contribution rates were calculated using the Projected Unit Method or the Attained AgeMethod depending on the nature of the employers in the Fund. Employers remaining open to newentrants were valued on the Projected Unit Method, whereas the employers who did not allow newentrants to join their section of the Fund were valued using the Attained Age method.

Contribution RatesThe contributions rates, in addition to those paid by the members of the Fund, are set to besufficient to meet

• The additional annual accrual of benefits allowing for future pay increases and increases topension in payment when these fall due.

• plus an amount to reflect each participating employer’s notional share of value of the Fund’sassets compared with 100% of their liabilities in the Fund in respect of service to thevaluation date.

33

Key Financial AssumptionsThe liabilities were valued allowing for expected future investment returns and increases tobenefits as determined by market levels at the valuation date as follows;

Discount Rate – in service

Scheduled Bodies 6.2 % per annum

Admitted Bodies 6.2% per annum

Discount Rate – left service

Scheduled Bodies 6.2% per annum

Admitted Bodies 5.2% per annum

Rate of increases in pay 4.7% per annum

Rate of increases to pensions in payment 3.2% per annum

Asset valuationAssets were valued at their market values at the date of valuation.

Post Valuation Events – Changes in market conditionsSince March 2007 investment returns have been less than assumed at the 2007 valuation althoughliabilities may have also reduced due to an increase in the real discount rate underlying thevaluation funding model. There has been an improvement in investment returns since 31 March2009 which will be factored into the next valuation result.

The next actuarial valuation is due as at 31 March 2010 and the resulting contribution rates requiredby the employers will take effect from 1 April 2011. We will continue to monitor the financialposition of the Fund.

Alison Hamilton FFAPartnerBarnett Waddingham LLP

17 June 2010

34

Audit Report

Independent auditor’s report to the Members of Devon County CouncilI have audited the pension fund accounting statements for the year ended 31 March 2010. The pension fundaccounting statements comprise the Fund Account, the Net Asset Statement and the related notes. The pension fundaccounting statements have been prepared under the accounting policies set out in the Statement of AccountingPolicies.

This report is made solely to the members of Devon County Council in accordance with Part II of the Audit CommissionAct 1998 and for no other purpose, as set out in paragraph 49 of the Statement of Responsibilities of Auditors and ofAudited Bodies published by the Audit Commission in April 2008.

Respective responsibilities of the Director of Finance and auditor The Director of Finance is responsible for preparing the pension fund accounting statements, in accordance withrelevant legal and regulatory requirements and the Code of Practice on Local Authority Accounting in the UnitedKingdom 2009: A Statement of Recommended Practice. In preparing this pension fund accounting statements, theDirector of Finance is responsible for:

• selecting suitable accounting policies and then applying them consistently;

• making judgments and estimates that were reasonable and prudent;

• keeping proper accounting records which were up to date;

• taking reasonable steps for the prevention and detection of fraud and other irregularities.

My responsibility is to audit the pension fund accounting statements and related notes in accordance with relevantlegal and regulatory requirements and International Standards on Auditing (UK and Ireland).

I report to you my opinion as to whether the pension fund accounting statements give a true and fair view, inaccordance with relevant legal and regulatory requirements and the Code of Practice on Local Authority Accountingin the United Kingdom 2009: A Statement of Recommended Practice, the financial transactions of the pension fundduring the year and the amount and disposition of the fund’s assets and liabilities, other than liabilities to paypensions and other benefits after the end of the scheme year. I also report to you whether, in my opinion, theinformation which comprises the commentary on the financial performance included within the Pension Fund AnnualReport, is consistent with the pension fund accounting statements.

I review whether the governance compliance statement published in the Pension Fund Annual Report reflectscompliance with the requirements of the Local Government Pension Scheme (Administration) Regulations 2008 andrelated guidance. I report if it does not meet the requirements specified by the Department of Communities and LocalGovernment or if the statement is misleading or inconsistent with other information I am aware of from my audit ofthe accounting statements. I am not required to consider, nor have I considered, whether the governance statementcovers all risks and controls. Neither am I required to form an opinion on the effectiveness of the Authority’s corporategovernance procedures or its risk and control procedures.

I read other information published with the pension fund accounting statements and related notes and considerwhether it is consistent with the audited pension fund accounting statements. This other information comprises theSummary of Scheme and its Management and the Report of the Director of Finance. I consider the implications formy report if I become aware of any apparent misstatements or material inconsistencies with the pension fundaccounting statements and related notes. My responsibilities do not extend to any other information.

35

Basis of audit opinion I conducted my audit in accordance with the Audit Commission Act 1998, the Code of Audit Practice issued by theAudit Commission and International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board.An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the pensionfund accounting statements and related notes. It also includes an assessment of the significant estimates andjudgments made by the Authority in the preparation of the pension fund accounting statements and related notes,and of whether the accounting policies are appropriate to the Authority’s circumstances, consistently applied andadequately disclosed.

I planned and performed my audit so as to obtain all the information and explanations which I considered necessaryin order to provide me with sufficient evidence to give reasonable assurance that the pension fund accountingstatements and related notes are free from material misstatement, whether caused by fraud or other irregularity orerror. In forming my opinion I also evaluated the overall adequacy of the presentation of information in the pensionfund accounting statements and related notes.

Opinion In my opinion:

• the pension fund accounting statements and related notes give a true and fair view, in accordance with the Codeof Practice on Local Authority Accounting in the United Kingdom 2009: A Statement of Recommended Practice,of the financial transactions of the Pension Fund during the year ended 31 March 2010, and the amount anddisposition of the fund’s assets and liabilities as at 31 March 2010, other than liabilities to pay pensions and otherbenefits after the end of the scheme year; and

• the information given in the commentary on financial performance included within the Pension Fund AnnualReport is consistent with the pension fund accounting statements.

Alun WilliamsAlun WilliamsDistrict Auditor

3-4 Blenheim Court, Lustleigh Close, Matford Business Park, Exeter EX2 8PW

26 November 2010

36

Additional Information

37

Investment PowersThe Local Government Pension Scheme (Management and Investment of Funds) Regulations 2009require that any pension fund monies not for the time being needed to meet payments shall beinvested. The Regulations define what is meant by investment, and place certain restrictions onLocal Authorities.

• Not more than 15% of the fund may be invested in unlisted company securities. These aresecurities which are not listed on either a recognised U.K. stock exchange, or a foreign stockexchange of international standing.

• Not more than 35% of the fund can be invested in unit trusts managed by a single body.

• Not more than 5% of the fund can be invested in any single partnership.

• Not more than 15% of the fund can be invested in all partnerships.

• With the exception of Government fixed interest stocks, bank deposits and managedinsurance funds, no more than 10% of the fund may be invested in a single holding.

• No more than 10% of the fund may be deposited with any one bank (other than the NationalSavings Bank).

• Loans from the fund to any one body including the Administering Authority, but notincluding the Government, may not in total exceed 10% of the value of the fund.

• The Fund can enter into stock lending arrangements provided that the total value of thesecurities to be transferred does not exceed 25% of the total fund value.

• Where an external investment manager is appointed the County Council (through theInvestment and Pension Fund Committee) must be satisfied that any monies under hismanagement are not excessive having regard to proper advice, diversification ofmanagement and to the value of the Fund’s assets. The manager’s appointment must beterminable by not more than 1 month’s notice. They must comply with any instructions givento them by the Council and must report their actions at least once every three months. Inmaking investments they must have regard to the need for diversification and to thesuitability of these investments, and they must be prohibited from making investments thatcontravene the Regulations.

• At least once every three months the Council must review the investments made by themanager, and from time to time consider the desirability of continuing or terminating theappointment.

38

Statutory Statements As required by the Local Government Pension Scheme Regulations a number of StatutoryStatements have been prepared and published by Devon County Council (as the AdministeringAuthority). They are as follows:

Statement of Investment PrinciplesA Statement of Investment Principles (S.I.P) was approved by the Investment & Pension FundCommittee and published in February 2000. The S.I.P has subsequently been revised and updatedby the Committee in May 2007. The current S.I.P is available on the County Council’s website atwww.devon.gov.uk/statement_of_inv_principles.pdf

Funding Strategy StatementA Funding Strategy Statement was approved by the Investment & Pension Fund Committeeand published in March 2004. This statement describes the County Council’s strategy for thefunding of the Pension Fund (and was prepared having regard to the guidance publishedby CIPFA in March 2004). Full details are published on the County Council’s website atwww.devon.gov.uk/strategy_statement090305.pdf.

Communications Strategy StatementA Communications Strategy Statement was approved by the Investment & Pension Fund Committeeand published in February 2006. This statement describes the Fund’s strategy for communicatingwith its various stakeholders. Full details are published on the County Council’s website atwww.devon.gov.uk/communications_policy_statement.pdf

Governance Policy StatementA Governance Policy Statement was approved by the Investment & Pension Fund Committee andpublished in February 2006. This statement sets out the Administering Authority’s policy on Fundgovernance including the representation and participation of key stakeholders on the Investment& Pension Fund Committee. Full details are published on the County Council’s website atwww.devon.gov.uk/governance_policy_statement.pdf

Governance Compliance StatementDuring 2007/08 the Committee reviewed its Governance Policy Statement in order tocomply with Regulation 73A of the LGPS Regulations 2009 and has published a compliancestatement which can be viewed on the County Council’s website atwww.devon.gov.uk/governance_compliance_statement_260308.pdf

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The Funds Largest Equity ShareholdingsUnited Kingdom EquitiesCompany Sector 31-Mar-2010 % of Total

£000 Investments

Vodafone Telecommunications 12,222 0.51BP Oil & Gas 10,770 0.45Royal Dutch Shell Oil & Gas 10,621 0.44HSBC Banks 10,553 0.44Rio Tinto Basic Resources 7,818 0.33Standard Chartered Banks 7,597 0.32Glaxosmithkline Healthcare 6,704 0.28Tesco Retail 6,376 0.27Barclays Banks 6,032 0.25British American Tobacco Personal & Household 4,096 0.17

82,789 3.46

Plus other investments including UK Managed Funds 700,483 29.25

783,272 32.71

Overseas EquitiesCompany Sector Country

Samsung Electronics Technology Korea 11,696 0.49Taiwan Semicondutor Technology Taiwan 7,315 0.31Petroleo Brasileiro Oil & Gas Brazil 7,104 0.30Roche Healthcare Switzerland 6,944 0.29Intel Technology United States 6,338 0.26Tenaris Basic Resources Italy 6,278 0.26China Mobile Telecommunications China 6,183 0.26Swire Pacific Industrial Goods & Services Hong Kong 6,031 0.25Vale Basic Resources Brazil 5,452 0.23Banco Bradesco Banks Brazil 5,283 0.22

68,624 2.87

Plus other investments including Overseas Managed Funds 761,472 31.79

830,096 34.66

UK Property Unit TrustsAviva Pooled Property Fund 15,475 0.65Threadneedle Property Unit Trust 14,314 0.60Hermes Property Unit Trust 13,576 0.57ING Lionbrook Property Unit Trust 12,470 0.52UBS Triton Property Fund 12,071 0.50Schroder Exempt Property Unit Trust 11,888 0.50Rockspring Hanover Property Unit Trust 10,971 0.46Blackrock Property Fund 10,117 0.42Falcon Property Unit Trust 10,013 0.42Royal London Exempt Property Unit Trust 8,417 0.35RREEF UK Core Property Fund 6,670 0.28UBS South East Recovery Fund 5,592 0.23Schroder Indirect Real Estate Fund 2,209 0.09

133,783 5.59

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Scheme and Benefit InformationDevon County Council administers the Pension Fund for its own employees and some 120 otherorganisations including Unitary, District, Town and Parish Councils, Education establishments andother admitted bodies. These also include a number of employers who have ceased activelyparticipating in the fund though still have a number of pensioners.

The Local Government Pension Scheme (LGPS) is a statutory, funded final salary pension schemewith its benefits defined and set in law. The LGPS is contracted out of the State Second PensionScheme (S2P) and must, in general, provide benefits at least as good as most members would havereceived had they remained in S2P.

ContributionsEmployer contributions rates are variable and are determined by the fund Actuary. A full valuationis carried out every 3 years in order to establish the value of the assets and liabilities of the fundand determine individual employer contribution rates. The valuation for the 3 years ending 31March 2007 was implemented with effect from 1 April 2008. Work is currently underway for thenext valuation as at 31 March 2010 with revised employer contributions payable from April 2011.

Employee’s contributions ranged from 5.5% to 7.5% depending on the level of their pensionablepay.

BenefitsThe LGPS provides significant retirement and death benefits to its members which include thefollowing:

• A guaranteed pension calculated as 1/60 x final salary x post April 2008 service

• A guaranteed pension calculated as 1/80 x final salary x pre April 2008 service

• A Tax free lump sum upon retirement calculated using the formula 3/80 x final salary x preApril 2008 service. Options are available to increase the lump sum

• Ability to increase benefits by paying additional voluntary contributions

• An Ill health pension payable from any age

• Immediate unreduced pension on redundancy after the age of 55

• Death in Service lump sum of 3 x salary

• Widow’s/widower’s/civil partner’s/cohabiting partner pension payable for life

• Children’s pension

• Benefits rise in line with inflation

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Changes made affecting benefits during 2009/10Following the implementation of the New Look Local Government Scheme in April 2008 there werea small number of minor technical changes to the regulations which, in the main, were correctingdrafting errors. Other changes to scheme benefits included:

• Minimum Retirement age increased from 50 to 55.

• The option for members with pre April 1988 service to purchase additional survivors pensionfor nominated cohabiting partners.

• Survivor’s pensions for civil partners will now be calculated on total service of the member.

• Amendments to the regulations to provide for the transfer of Learning Skills Council staffinto the LGPS.

For more details of the benefits available from the scheme, an online version of the current‘Employee guide to the LGPS’ can be found on our website at www.devon.gov.uk/pensions

All employers, member and interested parties are asked to look at the Pensions website, which willbe kept up to date with current news on this and other aspects of the pension scheme.

Devon Pension ServicesEstuary HousePeninsula ParkRydon LaneExeterEX2 7XB

Email: [email protected]/pensions

42

Devon Pension Service

Administrative Performance Standards

Our aims• To supply a high quality pensions administration service.

• To provide value for money.

• To meet the highest professional standards in our dealings with all our customers.

Our commitment to youWe are dedicated to placing customers at the heart of our organisation and welcome all contactand enquiries. We will always endeavour to be as good as our word. For instance if we agree to getback to you or reply by a certain date, we will do that. If this turns out not to be possible for anyreason, we will contact you and explain why. We will at all times be fair and open, and alwaysexplain the reasons behind any decision.

Our staff will:• Treat you as an individual and with dignity and respect

• Listen to what you say

• Be helpful and considerate

• Keep what you say to us as confidential

• Where appropriate, tell you exactly what you need to do and what information we need

These 'Performance Statistics' are part of our ongoing commitment to make our work andperformance more open to public scrutiny. Our work has been 'tasked' for a number of years now(every piece of paper/process we receive is registered on the members computer record), but it'sonly in recent years that we have begun to really co-ordinate a method of monitoring andanalysing the data that the tasking system can provide. We will publish the monthly results on thiswebsite in order that you can see for yourselves just how well we perform.

The graph below shows two groups of tasks identified by ourselves; priority tasks (retirements,death benefits, complaints etc) and non-priority tasks (tasks which can maybe be delayed for a dayor two; a new starter form or an address change for example). The results shown are the averagesuccessful completion percentage of all tasks within that category.

The following bullet-points should offer some explanation as to the nature of the kind of workwhich makes up our Priority and Non-Priority categories.

43

Priority• Includes all tasks relating to a death in service, death of a pensioner and/or the death of a

deferred member.

• Any task relating to the retirement of a police officer or fire fighter (ill-health, normalretirements etc).

• Actual retirements for LGPS staff (including police/fire civilian workers). Covers all availableforms of retirement; ill-health, redundancy/efficiency, early retirement, age retirement etc.

• Any query not covered by the other categories that requires a response from ourselves. Forexample; a query on an Admitted Body Status, re-employed pensioner calculations, generaltelephone queries etc.

Non-Priority• All tasks relating to the purchase and administration of Added Years or Additional Voluntary

Contributions (AVC's).

• The process of making a scheme member a leaver before they reach retirement age (but onlyto include those members who opt-out of the scheme or leave the Devon Pension Fundemployer for employment elsewhere; not other reasons for leaving covered in the othercategories).

• The production of cash equivalent transfer values (CETV's) for divorce proceeding's, pensionsharing and earmarking orders.

• 'Passive' notifications such as address changes, hour changes, marital status changes etc.Basically anything which doesn't require a direct response.

• Police/Fire Retirement Estimates.

• The process of refunding a scheme members pension contributions (only available tomembers with less than 3 month's total service).

• LGPS Retirement Estimates.

• The processing of all new starter forms for new employees (or 'opting-in' forms for existingstaff) wishing to join the pension scheme.

• The transfer-in of a scheme members pension rights, accrued with a previousemployer/pension provider, to benefits being accrued on their current LGPS employment.

• The transfer-out of pension benefits held in the Devon Pension Fund to an external employeror pension provider (be it a new LGPS administering authority, personal pension plan or aprivate employer with its own pension arrangements).

50

60

70

80

90

100 Non-Priority Procedures

Priority Procedures

Ap

ril

May

Jun

e

July

Au

gu

st

Sep

tem

ber

Oct

ob

er

No

vem

ber

Dec

emb

er

Jan

uar

y

Feb

ruar

y

Mar

ch

Annual Performance Statistics 2009/10

Task

Su

cces

s R

ate

(%)

Task Success Rate (%)

44

ActuaryAn independent consultant who advises on the financialposition of the fund. Every three years the actuary reviewsthe assets and liabilities of the fund and reports to theCounty Council on the financial position and therecommended employers’ contribution rates. This isknown as the Actuarial Valuation.

Deferred PensionThe pension benefit payable from normal retirement ageto a member of the fund who has ceased to contribute asa result of leaving employment or opting out of thepension scheme before state retirement age.

Emerging MarketsStock Markets in developing countries (as defined by theWorld Bank).

EquitiesOrdinary shares in UK and overseas companies traded ona recognised stock exchange. Shareholders have aninterest in the profits of the company and are normallyentitled to vote at shareholders' meetings.

DerivativesFinancial contracts whose value is tied to an underlyingasset. Derivatives include futures, options and swaps.

Fixed Interest SecuritiesInvestments in mainly government stocks, whichguarantee a fixed rate of interest. The securities representloans which are repayable at a stated future date butwhich can be traded on a recognised Stock Exchange inthe meantime.

Index FutureAn obligation to make or take delivery of a specifiedquantity of an underlying Stock/Index at a particular timein the future, at a price agreed when the contract is takenout.

Index (Stock Market)The movements in a Stock Market are monitoredcontinuously by means of an Index made up of thecurrent prices of a representative sample of stocks.

IndexationAlso known as Index Matching or Index Tracking.Indexation is a statistical technique used to construct aportfolio of shares that will consistently move in line witha particular Index.

Managed FundA multi-asset pooled fund under which an insurancecompany offers participation in one or more pooledfunds.

Market ValueThe price at which an investment can be sold at a givendate.

Performance ServicesWM Performance services are an independent companyused to measure the investment performance of the Fund.They also measure 84 Local Authority sector fundscalculating every quarter the average returns for themedian of all the funds and an constituent funds (theweighted average).

Pooled FundsA fund managed by an external Fund Manager in which anumber of investors buy units. The total fund is theninvested in a particular market or region.

PortfolioA collective term for all the investments held in a fund,market or sector.

Property Unit Trust A pooled investment vehicle that enables investors tohold a stake in a diversified portfolio of properties.

ReturnThe total gain from holding an investment over a givenperiod, including income and increase (decrease) inmarket value.

Solvency TestAn actuarial calculation to determine whether the assetsof an occupational pension scheme are sufficient to meetits benefit obligations.

Transfers to/from Other SchemesThese are sums paid to, or received from other pensionschemes and relate to the current value of pastcontributions which transfer with a member whenchanging employment.

Unrealised Increase / (Decrease) in Market ValueThe increase/ (decrease) in market value, since theprevious year, of those investments still held at the yearend.

Unit TrustA Pooled Fund in which investors hold units, and wherethe fund offers new units and is prepared to redeemexisting units from holders on a regular basis.

Glossary

If you would like this in a different format such aslarge print, Braille or tape, or in a different languageplease contact our Customer Service Centre on0845 155 1015 or email: [email protected]

0094

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November 2010

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Published by Devon County CouncilCounty Hall, Topsham Road, Exeter EX2 4QJ

www.devon.gov.uk

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