This Statement of Investment Principles is produced to meet the requirements of the Pensions Acts 1995 & 2004, the Occupational Pension Schemes (Investment) Regulations 2005 and to reflect the Government's Voluntary Code of Conduct for Institutional Investment in the UK. The Trustees also comply with the requirements to maintain and take advice on the Statement and with the disclosure requirements.
The Trustees aim to invest the assets of the Scheme prudently to ensure that the benefits promised to members are provided. In setting the investment strategy, the Trustees first considered the lowest risk asset allocation that it could adopt in relation to the Scheme's liabilities. The strategy they have selected is designed to achieve a higher return than the lowest risk strategy while maintaining a prudent approach to meeting the Scheme’s liabilities. The overall objective has been agreed with the Employer and is as follows:
To set an investment strategy which targets an expected return over the liabilities (as valued by gilt yields) of 4.5% per annum.
The current asset allocation strategy chosen to meet the objective above is set out in the table below. The Trustees will monitor the actual asset allocation versus the target weight.
| Asset Class | Target Weighting % |
|---|---|
| Liability Driven Investment and Cash | 30 |
| Equities | 39 |
| Diversified Growth Fund | 14 |
| Absolute Return Bonds | 8.5 |
| Hedge Funds | 8.5 |
The asset values may deviate from the above weightings due to returns on investments. There is no set range on the amount that the assets will be allowed to deviate from these weightings. The Trustees will review the position annually and if in their view, and with consultation from their investment advisors, it is necessary, they will rebalance back to the target weighting.
The asset allocation strategy was determined with regard to the actuarial characteristics of the Scheme, in particular the strength of the funding position and the liability profile at the time of the last review date. The Trustees’ policy is to make the assumption that equities will outperform gilts over the long term and that active fund management can be expected to add value. However, the Trustees recognise the potential volatility in equity returns, particularly relative to the Scheme’s liabilities, and the risk that the fund managers do not achieve the targets set.
When choosing the Scheme’s planned asset allocation strategy the Trustees considered written advice from its investment advisers and, in doing so, addressed the following:
In addition, the Trustees also consulted with the sponsoring employer when setting this strategy. The asset allocation strategy is due to be reviewed in 2023 in conjunction with the triennial actuarial valuation.
The Trustees recognise that the key risk to the Scheme is that it has insufficient assets to make provisions for 100% of its liabilities (“funding risk”). The Trustees have identified a number of risks which have the potential to cause a deterioration in the Scheme’s funding level and therefore contribute to funding risk. These are as follows:
Due to the complex and interrelated nature of these risks, the Trustees consider the majority of these risks in a qualitative rather than quantitative manner as part of each formal investment strategy review (normally triennially). Some of these risks may also be modelled explicitly during the course of such reviews. In particular, the mismatching risk was modelled explicitly as part of the most recent investment strategy review when discussing the level of hedge.
Having set an investment objective which relates directly to the Scheme’s liabilities and implemented it using a range of fund managers, the Trustees’ policy is to monitor, where possible, these risks regularly where possible. The Trustees receive annual reports showing:
Aon has been selected as investment adviser to the Trustees. They operate under an agreement to provide a service which ensures the Trustees are fully briefed to take decisions themselves and to monitor those they delegate. Aon are paid an agreed annual fee which captures services needed on a regular basis. Work that falls outside of the annual fee is charged on a Time and Materials basis or for an agreed project fee. This structure has been chosen to ensure that cost-effective, independent advice is received.
The fund manager structure and investment objectives for each fund manager (“mandates”) are as follows:
Legal and General
The passive equity funds aim to track the following indices:
FTSE World Index
FTSE World Index GBP Hedged
The LDI mandate aims to match a proportion of the approximate movement in the
Scheme's liabilities as a result of changes in yields and expected inflation.
Standard Life GARS Fund
To outperform SONIA by 5% per annum over rolling 3 year periods with a volatility target range of between 4% and 8%.
M&G
The fund is currently under the final stages of liquidation and not managed against a benchmark.
Insight
To outperform SONIA by 2% per annum.
Aon Investments Limited
To outperform LIBOR by 4% per annum.
The Trustees have delegated all day-to-day decisions about the investments that fall within each mandate, including the realisation of investments, to the relevant fund manager through a written contract. When choosing investments, the Trustees and the fund managers (to the extent delegated) are required to have regard to the criteria for investment set out in the Occupational Pension Schemes (Investment) Regulations 2005 (regulation 4).
In setting the Scheme’s investment strategy, the Trustees' primary concern is to act in the best financial interests of the Scheme and its beneficiaries, seeking the best return that is consistent with a prudent and appropriate level of risk. These include the risk that environmental, social and governance factors including climate change negatively impact the value of investments held if not understood and evaluated properly. The Trustees consider this risk by taking advice from their investment adviser when setting the Scheme’s asset allocation, when selecting managers and when monitoring their performance.
The Trustees will be undertaking a formal review of the Scheme's investment strategy in Q4 2020, and it is envisaged that this document, and the Trustees' approach to Responsible Investment as it pertains to the investment decisions made in relation to the Scheme, will be reviewed following the conclusions and implementation of any relevant changes to the Scheme's strategy.
The Trustees recognise that the sponsoring employer has made a number of commitments regarding sustainability, carbon reduction and environmental impact, and that this is an area of importance to both the sponsoring employer and the Trustees.
Arrangements with asset managers
The Trustees regularly monitor the Scheme’s investments to consider the extent to which the investment strategy and decisions of the asset managers are aligned with the Trustees’ policies. This includes monitoring the extent to which asset managers:
The Trustees are supported in this monitoring activity by their investment adviser.
The Trustees receive at least quarterly reports and verbal updates from the investment adviser on various items including the investment strategy, performance, and longer-term positioning of the portfolio. The Trustees focus on longer-term performance when considering the ongoing suitability of the investment strategy in relation to the Scheme objectives, and assess the asset managers over 3-year periods.
The Trustees also receive annual stewardship reports on the monitoring and engagement activities carried out by their asset managers, which supports the Trustees in determining the extent to which the Scheme's engagement policy has been followed throughout the year.
Before appointment of a new asset manager, the Trustees review the governing documentation associated with the investment and will consider the extent to which it aligns with the Trustees’ policies.
The Trustees believe that having appropriate governing documentation, setting clear expectations to the asset managers by other means (where necessary), and regular monitoring of asset managers’ performance and investment strategy, is in most cases sufficient to incentivise the asset managers to make decisions that align with the Trustees’ policies and are based on assessments of medium- and long-term financial and non-financial performance.
Where asset managers are considered to make decisions that are not in line with the Trustees’ policies, expectations, or the other considerations set out above, the Trustees will typically first engage with the manager but could ultimately replace the asset manager where this is deemed necessary.
There is typically no set duration for arrangements with asset managers, although the continued appointment all for asset managers will be reviewed periodically, and at least every three years when a strategy review is carried out. For certain closed ended vehicles, the duration may be defined by the nature of the underlying investments.
The Trustees do not regularly monitor asset managers against non-financial criteria of the investments made on their behalf.
Stewardship – Voting and Engagement
The Trustees recognise the importance of their role as a steward of capital and the need to ensure the highest standards of governance and promotion of corporate responsibility in the underlying companies and assets in which the scheme invests, as this ultimately this creates long-term financial value for the scheme and its beneficiaries.
As part of their delegated responsibilities, the Trustees expect the Scheme’s investment managers to:
The Trustees regularly review the continuing suitability of the appointed managers and takes advice from the investment adviser with regard to any changes. This advice includes consideration of broader stewardship matters and the exercise of voting rights by the appointed managers. If an incumbent manager is found to be falling short of the standards the Trustees have set out in their policy, the Trustees undertake to engage with the manager and seek a more sustainable position but may look to replace the manager.
The Trustees review the stewardship activities of their fund managers on an annual basis, covering both engagement and voting actions. The Trustees will review the alignment of the Trustees’ policies to those of the Scheme’s fund managers and ensure their managers, or other third parties, use their influence as major institutional investors to carry out the Trustees’ rights and duties as a responsible shareholder and asset owner. This will include voting, along with – where relevant and appropriate – engaging with underlying investee companies and assets to promote good corporate governance, accountability, and positive change.
The Trustees will engage with their investment managers as necessary for more information, to ensure that robust active ownership behaviours, reflective of their active ownership policies, are being actioned.
From time to time, the Trustees will consider the methods by which, and the circumstances under which, they would monitor and engage with an issuer of debt or equity, an asset manager or another holder of debt or equity, and other stakeholders. The Trustees may engage on matters concerning an issuer of debt or equity, including their performance,strategy, risks, social and environmental impact and corporate governance, the capital structure, and management of actual or potential conflicts of interest.
Members' Views and Non-Financial Factors
In setting and implementing the Scheme’s investment strategy the Trustees do not explicitly take into account the views of Scheme members and beneficiaries in relation to ethical considerations, social and environmental impact, or present and future quality of life matters (defined as "non-financial factors*").
*The Pension Protection Fund (Pensionable Service) and Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018.
Cost Monitoring
The Trustees are aware of the importance of monitoring their fund managers' total costs and the impact these costs can have on the overall value of the Scheme's assets. The Trustees recognise that in addition to annual management charges, there are a number of other costs incurred by their fund managers that can increase the overall cost incurred by their investments.
The Trustees collect annual cost transparency reports covering all of their investments and ask that the fund managers provide this data in line with the appropriate Cost Transparency Initiative (“CTI”) template for each asset class. This allows the Trustees to understand exactly what they are paying their investment managers. The Trustees work with their investment adviser and fund managers to understand these costs in more detail where required.
Portfolio Turnover
The Trustees are aware of the portfolio turnover costs (portfolio turnover costs are defined as the costs incurred as a result of the buying, selling, lending or borrowing of investments) associated to their underlying investments through the information provided by their fund managers. The monitoring of the target portfolio turnover and turnover range is monitored annually with the assistance of the Scheme’s investment adviser.
The Trustees accept that transaction costs will be incurred to facilitate investment returns and that the level of these costs varies across asset classes and by manager investment style within an asset class. In both cases, a high level of transaction costs is acceptable as long as it is consistent with the asset class characteristics and manager’s style and historic trends. Where the Trustees’ monitoring identifies a lack of consistency the mandate will be reviewed. The Trustees are supported in their cost transparency monitoring activity by their investment adviser.
Evaluation of Performance and Remuneration
The Trustees assess the performance of their fund managers on a quarterly basis and the remuneration of their fund managers on an annual basis via collecting cost data in line with industry standard templates.
The Trustees delegate certain responsibilities. When deciding which decisions to take themselves and which to delegate, the Trustees have taken into account whether they have the appropriate training and expert advice in order to take an informed decision. The Trustees have established the following responsibility structure:
Trustees:
Investment Advisers:
Fund Managers:
The Pensions Act 1995 distinguishes between investments where the management is delegated to a fund manager with a written contract and those where a product is purchased directly, eg the purchase of an insurance policy or units in a pooled vehicle. The latter are known as direct investments.
The Trustees' policy is to review their direct investments and to obtain written advice about them at regular intervals. These include the pooled funds through which the Scheme invests with its fund managers and the vehicles available for members' AVCs. When deciding whether or not to make any new direct investments the Trustees will obtain written advice and consider whether future decisions about those investments should be delegated to the fund managers.
The written advice will consider the issues set out in the Occupational Pension Schemes (Investment) Regulations 2005 and the principles contained in this statement. The regulations require all investments to be considered by the Trustees (or, to the extent delegated, by the fund managers) against the following criteria:
The Trustees' investment adviser has the knowledge and experience required under the Pensions Act 1995.
The Trustees expect the fund managers to manage the assets delegated to them under the terms of their respective contracts and to give effect to the principles in this statement so far as is reasonably practicable.
Fund managers are remunerated on an ad valorem fee basis, with the Hedge Fund and Absolute Return Bond mandates incorporating a performance fee element. This structure has been chosen to align the fund managers’ interests with those of the Scheme.
In addition, fund managers pay commissions to third parties on many trades they undertake in the management of the assets and also incur other ad hoc costs.
The Trustees have invested their assets through pooled funds. The managers of these funds have appointed their own custodians. The custodians provide safekeeping for all the fund's assets and perform the administrative duties attached, such as the collection of interest and dividends and dealing with corporate actions.
The Trustees will review this SIP at least every three years and immediately following any significant change in investment policy. The Trustees will take investment advice and consult with the Sponsoring Employer over any changes to the SIP.
