This Statement of Investment Principles sets out the principles governing investment decisions for the DC Section of the Prudential Staff Pension Scheme (the “Scheme’).
The Scheme is a defined contribution (DC) pension arrangement. It is a qualifying scheme for auto-enrolment purposes.
This Statement has been prepared in accordance with the requirements of sections 35, 36 and 56 of the Pensions Acts 1995 and 2004. The Trustee of the Scheme has considered written advice from the Trustee‘s investment consultant and has consulted with the Principal Employer (The Prudential Assurance Company Limited) in producing this Statement.
The Trustee will review this Statement, in consultation with the investment consultants and the Principal Employer, at least every three years and without delay after any significant change in investment policy or demographic profile of the Scheme’s membership.
This Statement of Investment Principles is dated 8th October 2021.
The Trustee has considered a set of guiding principles to provide an objective and transparent framework for consistent decision making. These principles act as a guide to enable effective delivery of all investment functions.
The principles are that:
In determining which investment options to make available, the Trustee, with advice from its Investment Consultant, has considered the investment risk associated with defined contribution pension investment. This risk can be defined as the uncertainty in the ultimate amount of savings available on retirement. There are a number of factors which contribute to this uncertainty. Some of these factors (such as the amount of contributions paid and the length of time these contributions are invested) cannot be managed by the investment options made available to members.
The Trustee recognises that uncertainty in the following factors can be managed, to some extent, by the choice and allocation of investments. The list below is not exhaustive but covers the main risks that the Trustee faces and how they can be managed:
The principal investment risks which most members face are:
Inflation risk – The risk that the investment returns over members’ working lives will not keep pace with inflation and do not produce adequate retirement benefits.
The Trustee invests in a diversified range of assets in the Lifestyle Options which are likely to produce returns significantly in excess of inflation over the long term. The Trustee also provides access to a range of funds, many of which (those dominated by equities and property in particular) are likely to provide returns significantly in excess of inflation over the long term.
Benefit conversion risk – The risk that market movements in the period just prior to retirement lead to an increase in the cost of turning members’ fund values into retirement benefits.
In the switching phase of the Lifestyle Options, the Trustee increases the proportion of assets which are expected to be broadly suitable for members planning to take their retirement benefits as a combination of cash, income drawdown and annuity purchase during retirement (the Multi-asset Lifestyle Option) or in the case of the alternative Lifestyle Options more closely track annuity prices and/or cash. For non-lifestyle members, the Trustee makes available bond funds that will more closely track annuity prices.
Volatility/Market risk – The risk that adverse movements in investment market values in the period prior to retirement lead to a reduction in the anticipated level of benefits.
For members approaching retirement, the Lifestyle Options increasingly invest in funds which are expected to be subject to lower levels of volatility. These funds are also included in the self-select fund range. The Trustee manages market risk primarily through investing in pooled funds that invest in a diversified range of assets.
Other potentially material investment risks which members may face include:
Counterparty risk – This is a two-fold risk. Firstly, there is a risk that counterparties holding derivative based assets may default leading to a reduction in a fund’s value. Secondly, there is a risk that the Platform provider can be adversely affected by an event that can lead to losses of underlying unitholder funds.
The Trustee, in conjunction with their Platform provider, manages counterparty risk by investing in pooled funds that offer suitable counterparty protection.
Active management risk – The risk that an investment manager will not deliver investment returns in line with investment markets generally or other investment managers.
The Trustee recognises that an actively managed fund may not deliver performance in line with the fund’s objectives/agreed benchmarks. The Trustee regularly monitors fund performance in order to monitor this risk.
Liquidity risk – The risk that funds which invest in more illiquid assets will not be able to accept investments or disinvestments requested by the Trustee and/or members. It is generally noted in a DC context that the greater risk is when redemptions are “gated”.
The Trustee is satisfied that, with the exception of the PSPS Property – active fund, the pooled funds in which they invest usually have sufficient liquidity and may be realised quickly if required. Member communications will warn members where funds, such as those investing in property, may occasionally impose constraints on liquidity.
Environmental, Social and Governance (ESG) risks – the extent to which ESG issues are not reflected in asset prices and/or not considered in investment decision making leading to underperformance relative to expectations.
Climate risk - The extent to which climate change causes a material deterioration in asset values as a consequence of factors including, but not limited to: policy change, physical impacts and the expected transition to a low-carbon economy.
The Trustee believes that taking investment risk is usually rewarded in the long term, while asset allocation (i.e. the choice between asset classes, such as equities and bonds) is the key tool for managing the balance between risk and return.
To help mitigate the principal investment risks, the Trustee offers the Lifestyle Options, which automatically move members from higher risk investments to lower risk investments as they approach retirement.
The Trustee believes that the investment options available are appropriate for managing these risks.
The Trustee has developed and maintains a framework for assessing the impact of all investment risks on long-term investment returns. As part of this, the Trustee monitors the age profile of the Scheme’s membership to arrive at an appropriate timescale.
The Trustee has not designed the default investment strategy to explicitly involve a specialist ESG investment strategy. However, the Trustee has included a specialist equity fund within the Scheme’s self-select fund range and a 5% allocation to this fund within the growth phase of the Scheme’s default lifestyle arrangement. The Trustee does discuss the potential impact of climate risks with its investment adviser and managers on a periodic basis and will monitor developments in this area.
The Trustee recognises that the consideration of financially material considerations over the appropriate time horizon of the investments, including ESG factors and climate risk, are relevant to the development, selection and monitoring of the Scheme’s investment options. The Trustee further recognises that the financial materiality of any factor, including ESG factors, is context specific and that whilst some factors may be relevant to certain stocks/assets, they may not be relevant to others. The Trustee will consider such factors in the development and implementation of their investment arrangements, for the purposes of determining the selection, retention and realisation of investments, where there is sufficient data or evidence to allow them to systematically do so. Where there is not sufficient data or evidence, they will engage with their investment managers to ensure they take such considerations into account within their decision making.
2.3 Expected returns on investments:
The expected returns on the principal asset classes and fund types within the Scheme are:
The Scheme invests through pooled investment vehicles considered appropriate for tax-exempt approved occupational pension schemes.
The Trustee has appointed The Prudential Assurance Company Limited (Platform Provider) to provide secured administration and investment services through an insurance policy. Prudential provide an appropriate range of pooled funds in which to invest the Scheme’s assets. Each fund has a defined benchmark or objective. The underlying managers of the funds (which are set out in Appendix 3) within the pooled funds are responsible for the choice of individual stocks and are expected to maintain a diversified portfolio within each fund.
These funds may invest in: quoted and unquoted securities of UK and overseas markets including equities, fixed interest and index-linked bonds, cash, commercial and residential property; infrastructure and commodities through collective investment vehicles; and derivatives to facilitate changes in the fund’s portfolio of assets or help mitigate investment risks or to enhance investment returns.
The funds used are provided through an insurance company-based investment platform and so must comply with the FCA’s “Permitted Links” rules, which place limits on the degree of leverage which a fund can use.
The Lifestyle Options use funds across asset classes and across the risk/reward spectrum. The self-select fund range offers members a choice of funds across asset classes and across the risk/reward spectrum.
The Trustee believes that both active and passive management have a place in defined contribution arrangements. Some asset classes or investment approaches (such as property, cash, “absolute” or “total” return bonds and diversified growth strategies) are only available as actively managed funds.
For funds managed on a passive (index-tracking) basis, the investment manager seeks to match, rather than exceed, the performance of each fund’s benchmark index. For each passive fund, the investment manager invests in individual stocks in such a way as to replicate, as closely as possible, the composition of that fund’s benchmark index.
For funds managed on an active basis, the investment manager has discretion (within limits) to build a portfolio, consistent with objectives of the fund and its benchmark. The Trustee expects an active portfolio to be broadly diversified across investments.
The Trustee considers that all of the stated asset classes are suitable investments for the Scheme, while the use of pooled funds enables a balance of investments to be held at a security level within each asset class or fund.
The basis of remuneration of the investment managers by the Platform Provider may be subject to commercial confidentiality, however, the Trustee will seek transparency of all costs and charges borne by members. Nevertheless, the Trustee expects that it will be in the interests of both the Platform Provider and the investment managers on the Provider’s platform to produce growth in asset values in line with the funds’ investment objectives. For passively managed funds this should be within an acceptable margin of the index the fund tracks. For actively managed funds the investment return should be commensurate with the level of investment risk implied by the fund’s objectives.
When selecting funds, the Trustee will ask their investment advisor to consider the investment managers’ remuneration strategies and appropriateness of each fund’s investment guidelines to ensure that there is no inducement or scope to take an undue level of risk and that the investment managers will act in line with the interests of the Scheme’s members.
In accordance with the 2015 Regulations, the Trustee conducts an annual Value for Members assessment and will take action should the providers be found to be giving poor value. In addition, in accordance with guidance from the Pensions Regulator, the Trustee will periodically review the Scheme’s choice of providers to ensure their charges and services remain competitive. The Trustee believes that these steps are the most effective way of incentivising the providers to deliver Value for Members, of which investment management charges and investment performance are key considerations.
The Trustee also undertakes a review at least every three years in which the appropriateness of the investment options and the suitability of the Scheme’s investment management arrangements are considered.
The Trustee monitors the investment managers against a series of metrics on a quarterly basis over a long-term time horizon including:
Performance of their funds’ respective benchmarks or performance targets;
Relative tracking error where appropriate;
The exercise of stewardship responsibilities (including engagement with issuers) through their Platform Provider; and
The management of risks.
The Platform Provider or investment managers are expected to provide explanations for any significant divergence from a fund’s objectives. A material deviation from performance and risk targets or approach to portfolio management is likely to result in the fund being formally reviewed.
2.6 Portfolio Turnover
The Trustee does not expect investment managers to take excessive short-term risk and will monitor the investment manager’s performance against the benchmarks and objectives on a short, medium and long terms basis.
For passively managed funds the turnover of holdings is driven by changes in the index a fund seeks to track and hence is outside the control of the investment manager except where a fund’s total assets under management are relatively small where the investment manager does not fully replicate the index or where a fund invests in less liquid stocks.
When selecting actively managed funds, the Trustee will consider, with the help of their investment advisers, the expected level of turnover commensurate with a fund’s investment objectives, the investment manager’s investment processes and the nature of the fund’s assets.
Whilst the Trustee expects performance to be delivered net of costs, including the costs of trading within the portfolio, the Trustee will ask the investment Platform Provider or investment managers on the Platform to report on at least an annual basis on the underlying assets held within fund with details of any transactions and turnover costs incurred over the Scheme’s reporting year. The Trustee will seek to compare portfolio turnover and the resultant costs against peer groups or portfolio turnover and costs for an appropriate index.
Where a fund has significantly under or outperformed its benchmark, the Trustee will seek to ascertain where necessary whether higher or lower than normal turnover has been a contributory factor. The Trustee will challenge the Platform Provider and/or investment managers if there is a sudden change in portfolio turnover or if the level of turnover seems excessive.
The Trustee recognises the long-term nature of defined contribution pension investments and chooses funds which are expected to deliver sustainable returns over the Scheme members’ investment horizon. The Trustee will carry out necessary due diligence on the underlying investment decision making process, to ensure the manager makes investment decisions over an appropriate time horizon aligned with the objectives for the related investment option.
The Trustee expects that each fund will be used for at least three years, this being the period over which performance of the fund can be appropriately evaluated and the costs of change amortised, although all funds are subject to ongoing review against various financial and non-financial metrics in addition to their continued appropriateness within the investment strategy.
Funds need to be sold to make payments of benefits and to undertake fund switches either in accordance with the lifestyle investment strategies or as requested by individual members. The Trustee normally expects the Platform Provider to be able to realise the Scheme’s funds within a reasonable timescale. The Trustee recognises that the investment managers may at times need to impose restrictions on the timing of purchases and sales of funds (most notably investing in property) in some market conditions to protect the interests of all investors in a fund.
Given the size and nature of the Scheme, the Trustee invests on a pooled fund basis undertaken through a Platform Provider. The investment managers are expected to maintain diversified portfolios. Subject to the Funds’ benchmarks and guidelines, the investment managers are given full discretion over the choice of securities and, for multi-asset funds, of asset classes.
The Trustee is satisfied that the range of funds used by the Scheme provide adequate diversification within and across asset classes.
The Trustee recognises that:
As a result, the Trustee believes that a range of investment options should be offered to members. Members are offered a range of self-select fund choices from which they can build and alter their own investment strategy over time. Three Lifestyle Options are also available offering members an investment strategy that systematically changes over time through to the member’s selected retirement date. The Trustee has a “Default Option” for auto enrolment purposes which manages the principal investment risks members face during their membership of the Scheme, known as the PSPS Multi-asset Lifestyle. This fund is a lifestyle strategy which the Trustee believes is broadly appropriate to the needs of a majority of the membership.
Members potentially now have a choice at retirement of:
Taking cash at retirement;
Taking Uncrystallised Funds Pension Lump Sums (“UFPLS”) for several years into retirement;
Using Flexible Access Income Drawdown (“FAD”) during their retirement; or
Buying an annuity at retirement or several years into their retirement.
The Trustee has considered which of these flexibilities will be offered to members. Currently cash and annuity purchase at retirement together with a single UFPLS prior to retirement will be provided within the Scheme. Members wanting to use FAD and perhaps buy an annuity at a later date need to transfer the value of their Personal Account to an arrangement outside the Scheme.
The Trustee believes that members’ choices of benefits at retirement will be strongly influenced by:
The size of their Personal Account in the Scheme.
The size of their deferred benefits from previous occupational pension schemes (especially defined benefits) and workplace group personal pension plans.
Other sources of income including non-pension savings and partner’s pension provision.
In practice, the Trustee can only reliably take the likely value of members’ Personal Account in the Scheme into account. The Trustee believes that a typical member, without significant sources of income outside the Scheme, could be expected to act mostly as follows:
The main investment objective of the Trustee is to provide a range of suitable investment options into which members can choose to invest their contributions to provide benefits for themselves (and their dependants) at retirement.
The Trustee believes that understanding the demographics and likely attitudes to risk/reward of the members are essential to developing and maintaining an appropriate investment strategy. It is also believed that members typically seek to optimise the value of their retirement benefits from a given level of contributions, while aiming to protect the value of those benefits in the years approaching retirement against market falls and fluctuations in the costs of turning fund values into retirement benefits/retirement income streams.
The Trustee recognises that it is impractical to take account of each member’s individual objectives and therefore attempts to provide investment options that fit the general characteristics of the membership and offer a wide enough range of investment options to cater for most members’ needs.
The Scheme’s assets, representing the total value of all the investments held in respect of the Scheme’s members are invested in the best interests of the Scheme’s members and dependants. In the event of a potential conflict of interest (e.g. between the Trustee and the members), priority is given to the interests of members and dependants.
The Trustee’s policy for ensuring that the assets of the Scheme are invested in members’ and dependant’s best interests is 1) to provide a Lifestyle Option designed to provide appropriate outcomes targeted at the member’s selected retirement date, for members who do not wish to self-select their investment funds, and 2) to provide members who do not wish to invest in the Lifestyle Option with a suitable choice of other investment options.
On joining the Scheme, members are automatically invested into the Multi-asset Lifestyle strategy until they make a decision to make employee contributions at which point they must make an active decision to remain in the multi-asset lifestyle strategy, switch into an alternative lifestyle strategy or self-select their investments from the individual funds available.
The Scheme has this Lifestyle Option because:
The current Multi-asset Lifestyle Option reflects the expectation that the majority of new members and members who joined recently will be expected to take their retirement benefits as a combination of cash, income drawdown and annuity purchase during retirement. The Multi-asset Lifestyle (the Default Option) has therefore been designed to reflect this.
Full details of the Multi-asset Lifestyle Option are provided in appendix 3.
In addition to the Multi-asset Lifestyle Option, the Trustee believes that the following investment options are appropriate to achieve the overall objectives of the Scheme:
Alternative Lifestyle Options are offered for those members who believe that the risk profile/target retirement benefits of the Lifecycle Option are not appropriate to their needs, but otherwise do not want to take an active part in selecting where contributions are invested. The alternative Lifestyle Options have been designed specifically for members who wish the asset allocation of their investment strategy to be managed for them and who intend to purchase an annuity on retirement.
The alternative Lifestyle Options manage the principal risks faced by members during their membership, but offer a choice of different levels of investment risk.
The Multi-asset Lifestyle Option and the alternative Lifestyle Options are designed to cater for investment needs of members who do not wish to self-select their investment funds and are designed to deliver a significant (after inflation) investment return throughout most of the working life of the member and reduce the risk to the member of the investment strategy towards their selected retirement date.
The self-select fund range is provided for members who want to take an active part in choosing where their Personal Account is invested and complements the Multi-asset Lifestyle Option and the alternative Lifestyle Options. The self-select fund range covers a spectrum of investment risk levels and investment approaches, so that members can tailor the investment of their Personal Account more closely to their personal needs and attitude to risk – although it cannot be expected to cover all the investment needs of all members.
Full details of the investment options are provided in Appendix 3.
From time to time the Platform Provider or fund manager may suspend trading in a fund due to market conditions or decide to close a fund commercial or regulatory reasons. This would be outside the Trustee’s control.
Should these circumstances occur, it may be necessary for the Trustee to redirect contributions to an investment option which differs from some members’ original choice. The Trustee will ensure that any alternative investment option adopted in this manner is consistent with the charge cap for default arrangements.
For example, in the event that buying or selling units in a fund chosen by members is suspended for any reason, the Trustee may decide that it is in the members’ best interests to temporarily redirect contributions to another investment option. Once such as suspension has been resolved, the Trustee will arrange for the re-investment of contributions into the investment option originally chosen by members.
In all such circumstances, the Trustee and/or Platform Provider will notify members of the issue and steps being taken to resolve it. Where necessary, these will be described in Appendix 3
Certain other arrangements and funds used by the Scheme can be classified as default arrangements for the purposes of The Occupational Pension Scheme (Charges and Governance) Regulations 2015. These arrangements are set out in Appendix 3.
All members Contributions are classed as additional voluntary contributions (AVCs) and can be paid to enhance their benefits at retirement. At retirement, or on earlier death, the accumulated value of a member's AVCs is used to provide additional benefits in accordance with Scheme rules and HM Revenue and Customs requirements.
The AVC investment options consist of the same investment options available for Employer Credits contributions. The options are reviewed on a regular basis by the Trustee, having taken written advice on their continued suitability as required by Section 36 of the Pensions Act 1995.
The Trustee will always act in the best interests of the members and will assess the suitability of different types of investments to meet the needs of members.
The parties principally responsible for the governance and operation of the Scheme are:
The Trustee does not give advice to individual members on their fund selections. Members are encouraged to take independent financial advice when making their individual investment choices.
In preparing this Statement, the Trustee has taken into account current guidance from the Pensions Regulator.
Having taken advice from the Scheme’s investment consultant, the Trustee is satisfied that the selected investment managers have sufficient experience and expertise to carry out their role. The Trustee has delegated all day-to-day investment management decisions to the Platform Provider /Fund Managers authorised under the Financial Services & Markets Act 2000.
The responsibilities are described in greater detail in Appendix 1.
The Trustee maintains a register of interests of each of the Trustee Directors and their advisers. This register is reviewed if Trustee Directors declare a change. At each Trustee meeting Trustee Directors are asked to declare any new potential conflicts. Any identified potential conflicts between stakeholders are identified in a timely manner and dealt with appropriately.
In the event of a conflict of interests, the Trustee will need to ensure that contributions for the Multi-asset Lifestyle Option are invested in the sole interests of members and beneficiaries.
When appointing Platform Providers and choosing investment managers’ funds on the Provider’s platform, the Trustee will seek to establish that the Platform Provider and each investment manager has an appropriate conflicts of interest policy in place. This includes any provisions to disclose any potential or actual conflict of interest to the Trustee.
When given notice, the Trustee will consider the impact of any conflicts of interest arising in the management of the funds used by the Scheme.
Responsibility for investment decisions has been delegated to the investment managers which includes consideration of the capital structure of investments and the appropriateness of any investment made. Where managers are investing in new issuance, the Trustee expects the investment manager to engage with the issuer about the terms on which capital is issued and the potential impact on the rights of new and existing investors.
The Trustee will consider any conflicts of interest arising in the management of the funds used by the Scheme and will ensure that the Platform Provider and each investment manager has an appropriate conflicts of interest policy in place. Platform providers and investment managers are required to disclose any potential or actual conflict of interest to the Trustee.
The Trustee communicates regularly with all stakeholders. This includes the following:
Consulting the Principal Employer on the content of this Statement;
Providing communications to Scheme members;
Producing the Annual Report and Accounts which includes the Chairman’s statement;
Completing an annual return to the Pensions Regulator;
Meeting regularly with the investment platform provider, investment consultants, and the administrator;
Providing a range of literature/media to assist members in making their investment decisions. In addition, members have access to factsheets for each fund.
Details of the current service providers and investment managers to the Scheme are set out in Appendix 2 to this Statement.
Details of the current fees for the Scheme’s service providers and funds are set out in Appendix 4 to this Statement.
The Trustee regularly reviews the performance of each fund in which the Scheme invests against its stated performance objective. The Trustee recognises that past performance is not a good indicator of future performance and therefore takes advice from their investment adviser as to the suitability of the investment manager.
The Trustee receives an independent investment performance monitoring report on a quarterly basis.
The Trustee monitors the suitability of the objectives for the Multi-asset Lifestyle Option and the performance (after the deduction of charges) of the Multi-asset Lifestyle Option against these objectives at least every three years and without delay after any significant change in: (i) investment policy; or (ii) the demographic profile of the membership. The Trustee also monitors any other default options under The Occupational Pension Scheme (Charges and Governance) Regulations 2015 on a similar basis.
The Trustee monitors the suitability of the objectives for the alternative Lifestyle Options and the performance (after the deduction of charges) of the alternative Lifestyle Options against these objectives at least every three years and without delay after any significant change in: (i) investment policy; or (ii) the demographic profile of the membership.
The charges for the investment options borne by members (expressed in terms of each fund’s “Total Expense Ratio”) are monitored by the Trustee annually to ensure that they represent “value for money” relative to the needs of the membership.
The Scheme is a qualifying scheme for auto-enrolment purposes. The Trustee monitors the compliance of the Multi-asset Lifestyle Option with the charge cap introduced by the Pensions Act 2014, which applies from April 2015.
Details of the current charges are set out in Appendix 4 to this Statement.
The Trustee reviews the performance of the funds and to the extent that the funds’ performance is impacted by the transaction costs, the Trustee considers the impact of transaction costs. The Trustee is awaiting guidance from the Pensions Regulator before undertaking further work to assess and disclose transaction costs. The Trustee is in dialogue with the Platform Provider to obtain details of transactions costs.
The Trustee monitors the processes whereby contributions in respect of members are invested in and money is disinvested from the investment options to pay benefits.
The Chairman’s statement included in the Annual Report and Accounts confirms the results of the monitoring during the preceding year.
The Trustee recognises that stewardship encompasses the exercise of voting rights, engagement by and with investment platform and fund managers and the monitoring of compliance with agreed policies.
The Trustee has requested that the platform provider and investment managers have the financial interests of the members as their first priority when choosing investments.
The Scheme invests via an investment platform provider, who in turn invest in funds which are pooled with other investors to keep costs down and ensure adequate diversification. As a result, the Trustee has adopted a policy of delegating voting decisions on stocks to the underlying fund managers on the basis that voting power will be exercised by them with the objective of preserving and enhancing long term shareholder value. The fund managers are expected to exercise the voting rights attached to individual investments in accordance with their own house policy.
Where relevant, the Trustee has reviewed the voting and engagement policies of the fund managers as well as the approach to governance of the investment platform provider and determined that these policies are appropriate. On an annual basis, the Trustee will request that the investment Platform Provider and fund managers provide details of any change in their house policy.
Where appropriate, the Trustee will engage with and may seek further information from the investment platform provider and fund managers on how portfolios may be affected by a particular issue.
The Trustee does not engage directly but believes it is appropriate for the fund managers to engage with key stakeholders which may include corporate management, regulators and governance bodies, relating to their investments in order to improve corporate behaviours, improve performance and mitigate financial risks. The Trustee aims to review engagement activity undertaken by the fund managers as part of its broader monitoring activity.
The Trustee expects the investment Platform Provider to adopt similar practices with regards to the inclusion and ongoing oversight of fund managers on their platform. The Trustee also expects the Platform Provider to be able to evidence their own governance practices on request.
The Trustee expects the Platform Provider to monitor adherence of their investment managers to stated voting and engagement policies, engage with managers where concerns are identified and to report on these issues. The Trustee will request/receive reports from the investment Platform Provider on the fund managers’ voting activity on a periodic basis.
The Trustee reviews the fund managers’ voting activity annually in conjunction with their investment adviser and use this information as a basis for discussion with the investment Platform Provider and fund managers.
The Trustee recognises that some members will have strong personal views that are not related to financial considerations but that influence where they believe their savings should, or should not, be invested.
To address non-financial factors, the Trustee may include self-select funds in the Scheme that are of a specialist nature with characteristics that take into account non-financial factors. The Scheme currently offers a fund managed on ESG principles for members who are likely to hold stronger personal views in ESG areas relative to the majority of members. The Scheme also includes a 5% allocation to this fund in the growth phase of the default lifestyle arrangement.
The Trustee notes that non-financial factors can affect various investment risks which are borne by members and recognises that the performance of these funds will be different relative to funds that only consider financial factors.
Fund managers are otherwise only expected to take non-financial factors into account when these do not conflict with the financial interests of members and the Scheme’s investment objectives.
This Statement of Investment Principles was completed in October 2021. It will be next reviewed no later than 2022.
|David Green DC Section Committee Chairman||Original document signed by David Green||8 October 2021|
The responsibilities outlined in section 4 are as follows.
Operating the Scheme in accordance with its Trust Deed and Rules.
Reviewing the suitability of the investment funds available to the members.
Having regard to the need for diversification and suitability of investments.
Considering potential new asset classes for use within the Scheme.
Appointing investment consultants and other advisors as necessary for the good stewardship of the Scheme.
Appointing the platform provider and selecting the investment managers who invest the Scheme’s assets.
Assessing the performance, charges and processes of the Platform Provider and investment managers by means of regular, but not less than annual, reviews of investment performance and other information, with the investment consultants.
Consulting with the Principal Employer when reviewing investment policy issues.
Appointing, monitoring and dismissing professional advisers.
Preparation of the Statement of Investment Principles and reviewing the content of the Statement and modifying it if deemed appropriate, in consultation with the Principal Employer and the investment consultants.
Monitoring compliance of the investment arrangements with this Statement on a regular basis.
Preparing an annual Chairman’s statement for inclusion in the Annual Report and Accounts.
Responsible for the day-to-day investment management of the underlying funds’ assets.
Informing the Provider of any material change in the internal objectives and guidelines of any pooled funds used by the Scheme and managed by the relevant Investment Manager.
For Investment Managers providing an “actively” managed portfolio they, at their discretion, may implement changes in the asset mix and select securities in each asset class. Their responsibility is to deliver performance (relative to their benchmark) in line with their target performance objective.
For Investment Managers of “passively” managed funds, they are responsible for tracking the relevant benchmark return within an appropriate tracking error.
Exercising voting rights on share holdings in accordance with their general policy.
The Funds are accessed through an investment Platform Provider. The Platform Provider is responsible for investing contributions with the fund managers selected by the Trustee while ensuring that the funds are priced correctly, maintain sufficient liquidity and meet regulatory requirements. It is also responsible for the creation and ongoing running of white labelled and blended funds.
Providing the Trustee with quarterly statements of the assets and factsheets on the underlying funds.
Ensuring that the underlying funds are priced correctly.
Reviewing the continued structural suitability of the underlying funds.
Informing the Trustee of any material changes in the internal objectives and guidelines of any pooled funds used by the Scheme.
Ensuring that investment of the Scheme’s assets is in compliance with prevailing legislation and within the constraints detailed in this Statement.
Provision of ongoing reporting in relation to stewardship of underlying assets, turnover of investment funds, transaction costs, impact of charges on member accounts and any other reporting required to fulfil the Trustee’s reporting obligations.
|For pooled funds in which the Trustee invests, custodial duties are undertaken by the appointee of the relevant Investment Manager. The Custodians’ principal responsibilities may include:
|The role of the Investment Consultant is to give advice to the Trustee in the following areas:
Select funds consistent with:
Providing clear objectives to the Trustee to enable the Trustee to effectively govern the Scheme.
The Administrator is responsible for passing contributions to the Platform provider and ensuring that members are allocated the correct number of units in the funds. It is also responsible for operating the lifestyle strategies and general administration, including record-keeping, providing members with annual benefit statements and paying benefits when they become due.
The Administrator’s main investment related responsibilities include:
The Trustee has appointed the following service providers:
The investment consultant is Hymans Robertson LLP.
The investment platform through which the investment options are operated is provided by The Prudential Assurance Company Limited.
The investment managers accessed through the investment platform are M&G, MFS, Baillie Gifford, Kleinwort Benson, Lindsell Train, Schroders, Trilogy, RBC, and Invesco.
The Funds’ custodians are appointed by the investment managers.
The administration of the Scheme is carried out by The Prudential Assurance Company Limited.
In delivering the overall investment objective of the Lifestyle Options, the Trustee adheres to the following supporting objectives:
The PSPS Multi-asset Lifestyle Option invests in a diverse range of investments that are expected to provide significant real returns over long periods (such as equities and diversified growth funds) for much of the member’s working life, then switches gradually into assets that are more consistent with members taking their retirement benefits as a combination of cash, income drawdown and annuity purchase during retirement, as illustrated below.
From 10th January 2020, this strategy initially invests 100% in equities (25% PSPS Global Equity – active, 40% Overseas Equity – passive, 10% UK Equity – active, 10% UK Equity – passive,10% Emerging Market Equity – active and 5% PSPS Responsible Investment Equity Fund) and between 20 years and 10 years from retirement gradually builds up exposure to the PSPS Diversified Growth Fund –active, until at a point 10 years before retirement it is invested 25% in equities and 75% in the PSPS Diversified Growth Fund –active. Then 10 years from retirement the strategy also de-risks into PSPS Total Return Bonds – active and also, in the last 3 years before retirement, the PSPS Cash Fund – active. The final allocation at retirement is 10% equities, 40% diversified, 30% total return bonds and 20% cash.
The PSPS Active Lifestyle option invests in two actively-managed UK and global equity funds for much of the member’s working life, then switches gradually into assets that are more consistent with generating an income in retirement (such as bonds and cash) towards the member’s selected retirement date, as illustrated below.
This strategy invests 100% in equities (70% PSPS Global Equity – active, 30% UK Equity – active) until 10 years before retirement. 10 years from retirement, the strategy gradually de-risks into PSPS Corporate Bonds – active and PSPS Index-Linked Gilts – active. The PSPS Cash Fund – active is introduced 4 years before retirement. The final allocation at retirement is 25% cash, 75% bonds.
The PSPS Passive Lifestyle option invests in two passively-managed UK and global equity funds for much of the member’s working life, then switches gradually into assets that are more consistent with generating an income in retirement (such as bonds and cash) towards the member’s selected retirement date, as illustrated below.
This strategy invests 100% in equities (70% PSPS Overseas Equity – passive, 30% UK Equity – passive) until 10 years before retirement. 10 years from retirement, the strategy gradually de-risks into PSPS Corporate Bonds – active and PSPS Index-Linked Gilts – active. The PSPS Cash Fund – active is introduced 4 years before retirement. The final allocation at retirement is 25% cash, 75% bonds.
Members can select their own target retirement age for the Default Option and alternative Lifestyle Options, failing which the target age of the option defaults to age 65.
Due to the temporary suspension of trading in the PSPS Property – active Fund, member contributions had been redirected to the PSPS Cash - active Fund. The Trustee has decided to close the PSPS Property – active Fund. These contributions have been reinvested in the PSPS Total Return Bond – active Fund.
The charges on the PSPS Cash – active Fund are set out in Appendix 4.
Certain other arrangements and funds used by the Scheme can be classified as default arrangements for the purposes of The Occupational Pension Scheme (Charges and Governance) Regulations 2015. These arrangements are:
PSPS Total Return Bond – active Fund
Some members were automatically switched to this fund on 9th February 2021 due to the closure of the PSPS Property – active Fund. Because some members were switched without their express consent this fund is classified as a “default arrangement”. The Trustee believes this fund is appropriate as a replacement for the PSPS Property – active Fund as it has a similar expected return and lower expected volatility (risk) than the PSPS Property – active Fund. The Trustee also believes this fund is appropriate as it is a defensive bond based fund which can be a useful component of a member’s strategy in planning their investments particularly where a member has built up a substantial amount and may be looking to reduce risk whilst also looking for some investment growth.
The charges on the PSPS Total Return Bond - active Fund are set out in Appendix 4
All the funds used by the Default Option, alternative lifestyle strategies and self-select funds are provided through an investment platform operated by Prudential.
Members cannot invest concurrently in self-select funds and a lifestyle strategy or more than one lifestyle strategy.
Active / Passive
PSPS Cash - active
7 Day GBP LIBID
- M&G Pooled Pensions Cash fund (100%)
PSPS Index-Linked Gilts - passive
FTSE A British Government Over 5 Years Index-Linked Index
- M&G Pooled Pensions Index-Linked Passive fund (100%)
PSPS Index-Linked Gilts - active
FTSE A British Government Over 5 Years Index-Linked Index
- M&G Pooled Pensions Index-Linked fund (100%)
PSPS Fixed Interest Bonds - active
FTSE A British Government All Stocks Index
- M&G Pooled Pensions Fixed Interest fund (100%)
PSPS Long-Dated Gilts - passive
FTSE A British Government Over 15 Years Gilts Index
- M&G Long-Term Gilt fund (100%)
PSPS Corporate Bonds -active
iBoxx Sterling Non-Gilts Index
- M&G Pooled Pensions All Stocks Corporate Bond fund (100%)
PSPS UK Equity - passive
FTSE All-Share Index
- M&G Pooled Pensions UK Equity Passive fund (100%)
PSPS UK Equity - active
FTSE All-Share Index
- Lindsell Train UK Equity fund (30%)
- Baillie Gifford UK Equity (30%)
- Schroders Life UK Prime Equity Fund (40%)
PSPS Overseas Equity -passive
Composite FTSE and MSCI regional indices
- M&G Pooled Pensions Overseas Equity Passive fund (100%)
PSPS Global Equity - active
FTSE All-World Index
- MFS Meridian Global Equity fund (37.5%)
- Baillie Gifford Long Term Global Growth fund (25%)
- Kleinwort Benson Investors ACWI Equity fund (37.5%)
PSPS Emerging Markets Equity - active
MSCI Emerging Markets Index
- Trilogy Emerging Markets Equity fund (50%)
- RBC Emerging Markets Equity fund (50%)
PSPS Diversified Growth - active
Composite of underlying benchmarks
- Schroders Life Diversified Multi-Asset fund (one-third)
- M&G Episode Allocation Fund (one-third)
- Invesco Global Targeted Returns (one-third)
PSPS Total Return Bond – active
1 month LIBOR
- M&G Total Return Credit Investment Fund (100%)
PSPS Responsible Investment Equity
- LGIM Ethical Global Equity Index Fund (100%)
FTSE All-World Index
 Available to members from 10th January 2020
If a member who is invested in the Multi-asset Lifestyle Option or one of the other Lifestyle Options decides to change their target retirement age, their investment strategy will be amended in line with the new retirement date.
If the relative short-term performance of the funds used in the Multi-asset Lifestyle Option or alternative Lifestyle Options is such that the proportions invested in each fund have drifted from the target asset allocation, reverse switching into the fund is undertaken to avoid the asset allocation at that point moving too far from its target.
The Scheme’s Investment Consultant is paid for on a fixed fee basis. The Trustee believes that this approach ensures that all advice is impartial and independent.
The overall level of the expected fees, as well as alignment of interest with the Scheme, has been considered when selecting the fee structure. Fees are paid by members via an AMC based on fund value each month which is deducted from their Personal Account.
The platform provider applies the following charges for investing in the funds selected by the Trustee:
Total Charge **
PSPS Cash – active
PSPS UK Equity – passive
PSPS UK Equity – active
PSPS Overseas Equity - passive
PSPS Global Equity - active
PSPS Emerging Markets Equity – active
PSPS Responsible Investment Equity
PSPS Total Return Bond - active
PSPS Diversified Growth – active
The Trustee monitors the total charges of the funds used in the default option on an annual basis. The total charges borne by members in the Lifecycle Option over a rolling 12 month period comply with the charge cap.
Total Charge **
PSPS Cash – active
PSPS Index-Linked Gilts – passive
PSPS Index-Linked Gilts - active
PSPS Fixed Interest Bonds – active
PSPS Long-Dated Gilts – passive
PSPS Corporate Bonds – active
PSPS Property – active
PSPS UK Equity – passive
PSPS UK Equity – active
PSPS Overseas Equity - passive
PSPS Global Equity - active
PSPS Emerging Markets Equity – active
PSPS Diversified Growth – active
PSPS Total Return Bond Fund
PSPS Responsible Investment Equity
 The 1% deduction is an implicit charge made before declaration of the bonus rate.
* Additional expenses are all the other operating costs and expenses (OCEs) within the fund, including the known fixed cost of operating the funds (fund administration, custody and professional fees), but excludes transaction costs. These costs can vary from fund to fund and from time to time, but are accurate as at 1 October 2020.
** The Total Charge is also known as a fund’s “Total Expense Ratio* (TER) and is the sum of a fund’s annual management charges and other operating expenses. It excludes transaction costs on the fund’s underlying assets. It includes the platform provider’s charges. It excludes the additional property management costs for the PSPS Property – active fund.
The charges for the investment options are borne by the members.
The charges for the routine administration of the Scheme are borne by the participating employers
The Custodians are paid through a combination of transaction based fees and ad-valorem fees. This is consistent with market practice. Custodial fees are paid by Members via an adjustment to unit prices of the pooled funds in which the assets are invested.
The funds’ total charges and transaction costs are monitored by the Trustee. The results of this monitoring are set out in the annual Chairman’s Statement which is included in the Trustee’s annual report and accounts.
The administration costs are met by the participating employers.