WEST YORKSHIRE PENSION FUND

STATEMENT OF INVESTMENT PRINCIPLES

The Statement of Investment Principles has been prepared in accordance with the Local Government Pension Scheme (Management and Investment of Funds) (Amendment) Regulations 1999.

City of Bradford Metropolitan District Council became the administering authority of the West Yorkshire Pension Fund in 1986. The Fund covers the five District Councils of West Yorkshire together with numerous other employers.

Investment Decision Making Process

The Council has delegated all its functions as administering authority of the Pension Fund to the Finance Director. The Head of Pensions and Investments, who reports to the Finance Director, has day to day control of the management of all aspects of the Fund’s activities. The Finance Director utilises the Investment Advisory Panel as the vehicle for overseeing the Fund’s investment functions.

The Panel determines the investment policy of the Fund and has ultimate responsibility for investment strategy. The Panel undertakes its responsibilities through taking appropriate advice from external advisers, supported by the in-house investment management team.

Once investment strategy has been set at the quarterly meetings of the Panel, the in-house investment management team undertakes sector and stock selection on a discretionary basis to implement the strategy.

Types of Investments To Be Held

The West Yorkshire Pension Fund will hold investments in Fixed Interest Securities, Equities, Index Linked Securities, Managed and Unitised Funds (including Property Unit Trusts), and Cash Deposits, covering all the world stock markets.

A relatively small proportion of the Fund’s investments will be held in Emerging Markets, both through direct investments and pooled vehicles. No direct property holdings are to be held, with the Fund’s investment in properties being through the purchase of units in Property Unit Trusts. The Fund will invest in Hedge Funds.

The Fund will not invest directly in unquoted companies, as the Fund’s private equity investment will be undertaken via a number and mixture of venture and development capital funds.

Stock lending will be actively pursued up to the 35% limit as permitted under the Local Government Pension Scheme and Management and Investment of Funds (Amendment) Regulations 2005. The Investment Advisory Panel agreed this on 20 October 2005.

The Fund undertakes currency hedging up to a maximum of $100 million at any one point in time.

Balance Between Different types of Investment

The biggest proportion of the Fund’s investment will be in Equities. This type of investment bias is intended to maximise growth in the value of assets over the long term.

Fixed Interest Securities, Index Linked Securities, Property Unit Trusts, Alternative Investments and Cash Deposits will make up the balance of investment. The distribution of investments between the asset classes will vary based on perceived economic and market conditions.

The Fund’s planned asset allocation strategy will be linked to a fund-specific benchmark, and the Fund will invest within the following control ranges for each asset class. Depending on market conditions, the Fund may stray outside the control ranges on occasions before adjustments are made to rectify the situation.

Range %

Bonds - Total 14 – 20

UK Fixed Interest Gilts 2 – 8

UK Index Linked Gilts 2 – 8

Corporate Bonds 1 – 7

Global Bonds 1 – 5

Equities – Total 67 - 73

UK Equities 37 – 47

Overseas Equities 23 – 33

UK Property Unit Trusts 3 – 7

Private Equity 0.5 – 2.5

Fund of Hedge Funds 0.5 – 2.5

Cash 2 - 8

Investment into Private Equity and Fund of Hedge Funds are being undertaken progressively, and the control ranges for these asset classes will be reviewed annually with potential increases over the next three years. As a result of the progressive increase in Private Equity and Fund of Hedge Funds, there will be a corresponding reduction in the control range for Cash.

Risk

To minimise risk, the investment portfolio of the Fund will be continually monitored and reviewed, and the portfolio will be well diversified as evidenced by the fact that the Fund’s equity holdings are spread across more than 300 UK companies, 600 foreign companies, and a range of unit trusts and managed funds.

Risk will also be controlled by reviewing on an on-going basis the risk attached to the Fund’s asset allocation relative to the fund-specific benchmark, so that any major divergence from the benchmark is acceptable. Mercer Investment Consulting has completed a recent ‘Investment Strategy Review’ for WYPF, and this has provided details of the risks associated with adopting the fund-specific benchmark and variations to it.

Custodian risk is controlled through an ongoing monitoring and periodic review of the custodial arrangements.

Risk is also monitored in relation to the ongoing funding position of WYPF and the investment requirements that flow from it, in conjunction with the Fund’s Actuary.

Counter-party and cash management risk are controlled by the in-house investment management team through the setting of appropriate limits for exposure with any individual organisation.

Expected Return on Investments

The Fund’s investment portfolio will be actively managed by internal managers, supported by the external investment advisers, and the Fund’s annual investment return will be measured against the fund-specific benchmark. The expected return on investments will be such as to achieve +0.5% per annum above the fund-specific benchmark annualised over 3-year rolling periods, and linked to an under-performance limit of 1.5% against the benchmark in any one year, as measured independently by the WM Company.

Realisation of Investments

The majority of investments to be held will be in fixed interest securities and equities that are quoted on recognised stock markets, and may be easily realised if required. The liquidity in other classes varies enormously (for example in property and private equity).

Transaction Costs

The in-house team of investment managers utilise a core list of brokers to provide a dealing service for share transactions undertaken. Commission paid to all brokers on UK and Overseas share transactions are at competitive rates negotiated by the in-house investment managers. No soft commissions or commission recapture programmes are included.

Transaction fees and custody fees are paid to HSBC for overseas stock market transactions on terms agreed with HSBC under the contract for banking services.

The Fund subscribes to the ‘Transaction Cost Measurement Service’ offered by its custodian HSBC, which provides transaction execution cost comparisons by country/broker pairing.

Socially Responsible Investment

Investment decisions are taken based on financial and commercial considerations so as to yield the best return by way of income and capital appreciation. If it is shown that particular types of social, environmental and ethical investment can produce at least comparable returns, then the Fund will invest in such companies as part of the normal investment process.

The voting policy of the West Yorkshire Pension Fund is viewed as a fundamental contribution towards socially responsible investment. The Fund is committed to ensuring that the companies in which it has a shareholding adopt sound principles of corporate responsibility, particularly in relation to environmental and employment standards. The Fund will utilise the shareholding wherever possible, through the voting policy and engagement, to exert influence on those companies falling short of acceptable standards.

The WYPF is a member of the Local Authority Pension Fund Forum, which currently comprises 32 local authority pension funds with assets of £50 billion. The Forum exists to promote the investment interests of local authority pension funds, and in particular to maximise their influence as shareholders to promote corporate social responsibility and high standards of corporate governance amongst the companies in which they invest.

The WYPF is also a member of the Institutional Investors Group on Climate Change (IIGCC). The IIGCC seeks to promote a better understanding of the implications of climate change amongst its members and other institutional investors, and to encourage companies and markets in which its members invest to address any material risks and opportunities to their businesses associated with climate change and a shift to a lower carbon economy.

Exercise of Rights Attached to Investments

The West Yorkshire Pension Fund will exercise its voting rights at the Annual/ Extraordinary General Meetings of all UK companies within the FTSE 350, European companies within the Eurotop 300, and US companies in the S&P 500, in which the Fund has a shareholding. The voting policy to be adopted by the Fund at these meetings will be based on the latest ‘Shareholder Guidelines’ issued by the Pensions and Investment Research Consultants Limited (PIRC), an independent adviser to the pensions industry who provide policy research and analysis on shareholder issues. These ‘Shareholder Guidelines’ encompass the Combined Code of Best Practice arising from the Cadbury, Greenbury, Hampel, Higgs and Smith Committees relating to corporate governance and corporate responsibility.

The Fund will normally take up its entitlement attached to rights issues when offered at a discount to the current market price.

Myners’ Report

In 2000, the Government commissioned a ‘Review of Institutional Investment in the United Kingdom’ by Paul Myners of Gartmore Fund Management Group. Paul Myners published the outcome of his review in a report in March 2001. In response to the proposals contained in the review, the Government issued a set of investment principles, and they cover the ten areas of effective decision making; clear objectives; focus on asset allocation; expert advice; explicit mandates; activism; appropriate benchmarks; performance measurement; transparency; and regular reporting.

The extent to which WYPF has adopted these investment principles is as follows:

Effective Decision-Making: the Investment Panel encompasses a range of expertise, supported by external investments advisers and the in-house team of investment managers. Greater emphasis is being placed on training for Panel members, and a number of initiatives on this front have been, and continue to be, developed. An annual business plan for the Panel is now produced.

Clear Objectives: members of the Panel take a long-term view in setting investment objectives. Investment objectives are set for the Fund itself which have due regard to the Fund’s Funding Strategy Statement and for the managers and external investment advisers in order to encourage added value commensurate with a measured and controlled level of volatility.

Focus on Asset Allocation: Panel members focus entirely on asset allocation, with day-to-day stock selection left to the discretion of the in-house investment managers. The Investment Panel has commissioned independent risk budgeting and asset liability studies from time to time to provide comment on the current asset policy being pursued by WYPF.

Expert Advice: the external investment advisers attend all meetings of the Investment Panel so as to provide the necessary expert advice to support the Panel members in coming to their decisions.

Explicit Mandates: constraints on the types of investment are in line with limits expressed in regulations. No explicit mandates are given to the in-house team of investment managers and to the external investment advisers, although they are set investment return targets against the fund-specific benchmark. Specific performance and volatility targets are given to the Fund of Hedge Fund managers in which WYPF invests.

Activism: the WYPF actively votes its shares in all FTSE 350, the top 300 European, and the US S&P 500 companies, and it will look to extend the geographical scope of its voting activity wherever possible. WYPF also engages with companies through its membership of the Local Authority Pension Fund Forum.

Appropriate Benchmarks: active management is adopted with appropriate risk controls as reflected in a well-diversified portfolio of investments. From 1 April 2005 the Fund uses a fund-specific benchmark to compare actual asset allocation and investments returns.

Performance Measurement: the Panel formally monitors the investment performance of the Fund annually at its October meeting, and an assessment is made of the in-house investment managers’ and external investment advisers’ performance against the investment target return. Arrangements have been put in place for the external investment advisers to assess the effectiveness of the Panel itself on an annual basis.

Transparency and Regular Reporting: the statement of investment principles is regularly updated and is included in the Fund's Annual Report and Accounts, and is also available for viewing on the Fund's website.