Northern Ireland is being transformed by peace. The city of Belfast goes about its business with a new lightness of step. The army presence has all but vanished and rebuilding and renewal are the order of the day.
For the province’s institutions there is a different sense of priorities affecting all walks of life, not least the operations of local government. On the outskirts of Belfast, the largest local pension fund could see its role alter, as the structure of government changes and powers transferred from local authorities as a result of the decades of strife, are devolved back eventually.
The Northern Ireland Local Government Officers’ Superannuation Committee (NILGOSC) follows the UK local government scheme, though it reports now to the Northern Ireland Assembly. “Our objective is to maintain parity with this scheme,” explains Deane Morrice, secretary of NILGOSC.
“All in all, we have over 200 different bodies in the scheme, which gives us a similar structure to the London Pensions Fund Authority. These include the 26 local councils, five education boards and the housing executive, which would be equivalent to local government in England – then we have a lot of individual schools, and other bodies.” But local councils in Northern Ireland now have fewer powers currently than their counterparts across the water, as they are limited to running recreation centres, burial grounds and environmental health.
“We were set up as a body in 1950, just to administer the local government scheme.” In fact, the biggest constituent is the five education boards which accounts for 15,735 members, next is Translink, comprising the province’s railways and bus companies with some 3,376 employees, followed by the NI Housing Executive with 2,843 and Belfast City Council with 1,831. All in all, the scheme has around 68,000 members, of whom 38,000 are actives, deferreds 10,000 and 20,000 pensioners. The benefit structure follows the classic public sector model of a defined benefit final salary basis, providing 50% of final pay after a 40-year career, plus a lump sum cash benefit.
Morrice is answerable to a 11-member management committee appointed to run the scheme by the NI Department of the Environment for a four-year term of office. Half of the committee come from the employers and half from the employee side, with a neutral chairman. They have a quasi-trustee role, requiring them to make sure the funds are appropriately invested, as well as having oversight of all the administration side, he explains. “The committee meets at our offices once a month, when I report to it.” But NILGOS itself is reviewed every five years to see if it is performing adequately and to check if any other arrangements would be optimal. “We came through with flying colours three years ago, and will be due another review in two years’ time.”
But the most onerous responsibility for committee members is undoubtedly the investment of the fund’s £2.2bn (E3.6bn) of assets and the monitoring of performance, he says. The structure on this side was changed in the last year or so, including a new benchmark.
The fund has recently completed an asset liability study with its actuaries Bacon & Woodrow, which confirmed that as the fund was still relatively young, the allocation to equities could be high, so the asset allocation benchmark is 80% equities and 20% bonds and cash. Half of the equities proportion is to be UK and half overseas.
This new regime was introduced last June on a phased basis. “We had then 55% of the total portfolio in UK equities and by the end of March this year, this will be down to 40%.” The committee reviews the allocation on an annual basis, and at the end of March 2001, it was fixed income securities 14%, index-linked securities 0.7%, equities 66%; real estate 6%, unitised funds 6% and deposits 3%.
He adds that “we have discovered that whatever the benchmark is the managers tend to hug this very closely – they do not seem to take big bets on allocation, just one or two per cent seem to be a big bet for them.” This new fixed benchmark will be monitored closely to see that it continues to be appropriate, says Morrice.
“We now have a core fund of 10% run on a passive balanced basis, managed by Legal & General, with the rest of the fund, excluding the property element, split equally between Schroders and Merrill Lynch, on an actively managed balanced basis.” The indexed element was introduced last year as a foil to the two existing active managers, who had been working to a performance target and benchmark asset allocation on a peer group basis, the CAPS median.
For Schroders this was to out-perform this benchmark over three year rolling periods, while Merrills had to outperform by 1% pa over the rolling three years. Both are required to outperform the retail price index increase by at least 5% over rolling five years. They have been able to depart from the CAPS median allocation within controlled ranges.
“The idea is that Merrill’s proportion adds the extra performance, while the Schroders gives us returns in line with the benchmark, without taking too much risk. The indexed portfolio was introduced because of its low cost and would act as a good benchmark to measure our other two managers against – as if we can get index performance at little cost, why should we be paying high fees to the active managers?” This L&G £250m portfolio has exactly the same allocation of 40% UK, 40% overseas equities and 20% bonds. “All three are being measured against the same benchmark,” he says.
Overall performance of the fund has been reasonably good, with “some good and some bad years”, comments Morrice. Though the last two years have not been good, he acknowledges, with fund well down from its peak of £2.5bn in 2000. Manager performance is reviewed annually in conjunction with the fund’s investment consultant. “We are not in the position of changing managers lightly. We have had Merrills for 11 years and Schroders for four years.”
However, for the year end 31 March 2001, Merrills returned –10.2% against the CAPS bench mark of –7.7%, due, it says, to an overweight in the TMT sector, adding that “stock selection in the Pacific Basin was also particularly unhelpful”. Schroders missed the benchmark by a whisker returning -7.8%. The fund report notes impassively: “as one manager has underperformed against its benchmark, the committee will keep its performance under review”.
Morrice adds that both the active managers are performing well in this current year.
The overall return for the fund over three years to last March has been 3.7%, against the CAPS median of 4.3% and over five years 7.8%pa, compared with 9.3%.
The fund’s financial position in fact is very strong, with a solvency ratio of over 120%. “We have had this surplus since 1990 and have done particularly well compared with other local authorities.” This has meant that the employers’ contribution rate has been held at 4.6%, compared with an average rate of 11.9% that would be required otherwise to finance the benefits, according to the actuaries. Employees contribute 6% of pay to the scheme.
“One reason,” ventures Morrice, “why we have a lower contribution rate in our scheme than the equivalent in England may be that we have never allowed redundancy pensions to be borne by the fund and so be included in the contribution rate, it is paid for when you let someone go. That has concentrated employers’ minds greatly, in that they will not let employees go unless they can afford to. The entire cost is contributed to the scheme in one capital funding payment – in the rest of the UK that has only been the case since 1998.”
The fund used to have a problem with retirement on ill-health grounds in the 1980s, and NILGOS set up a panel of independent doctors, all occupational health physicians. “Everyone seeking retirement on ill-health has to go through the panel and we determine if they are going to obtain it or not – not the employer. So ill health retirement has not been the problem that it has been elsewhere.”
The property portfolio amounts to 7% of the fund and this is administered in-house, but with the help of a locally-based independent property adviser. “Traditionally, we invested just in Northern Ireland, but in the 1990s we moved to the UK, both to diversify and as a reflection the troubles had on the property market.” In the last two years, property has been the best performing asset class for the fund, which measures itself against the IPD benchmarks, with a return of 10.3%, as against 9.6% for the index, though it is expected to out perform by 1% pa. “Our preferred stance has been to buy properties direct ourselves, rather than get involved in funds and trusts, since we are big enough to do that,” he says. The fund has also exposure to forestry investment to the tune of £8m.
NILGOS is investing £1m in the Veridian Growth Fund, a local venture capital scheme raising £10m, with the European Investment Bank, Industrial Development Board, with other pension funds, including that of Veridian, the NI electricity company. This is for investing in domestic NI businesses. “We are just dipping our toe into private equity and we are hoping to do well.”
Another area the fund says it could look at is having a single custodian, providing the advantage of putting everything “in the one house”, which gives a little more control, though for a cost, he acknowledges. Another topic on his agenda to examine is stocklending as a possible avenue for the fund.
All administration for the fund is handled from the office, with some £4.5m in payments being made each month to the pensioners, all handled by a staff of just over 30. Morrice is very proud of the £19.21annual administration cost per member, which is well below the average of other local authority schemes. “Most of the bodies we serve have less than 20 members involved,” he points out, which puts extra demands on the organisation. “The top 12 bodies account for 75% of the membership.”
The fund has managed to grow its new member numbers, particularly with the recent regulations allowing part-timers with under 15 hours per week join the scheme, which meant that in the last 18 months, numbers grew by 10,000. “New bodies continue to join at the rate of one a month, but they are generally small, such as a scheme for a school staff other than the teachers.”
Longer term, should there be local government reorganisation, the result could be in a transfer back of the services now run by central government back to the local authorities. “Since our local authorities really only have limited services in their remits, there are more services to be returned.” But he adds philosophically: “That’s longer term, when the time is right!”

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