Cruden Investments Limited Retirement Cash Benefits Scheme


Statement of Investment Principles
 

1. Introduction

The Trustees of the Cruden Investments Limited Retirement Cash Benefits Scheme ("the Trustees” of “the Scheme") have written this Statement of Investment Principles ("the Statement") to comply with the Pensions Act 1995, as amended by the Pensions Act 2004, the Occupational Pension Schemes (Investment) Regulations 2005, as amended by the Occupational Pension Schemes (Charges and Governance) Regulations 2015 and subsequent legislation. 

The Statement sets out the principles governing decisions about investment arrangements for the Scheme. The Trustees have consulted a suitably qualified person in obtaining written advice from Mercer. In preparing the Statement, the Trustees have also consulted the Sponsoring Company.

Overall, the investment policy falls into two parts. The strategic management of the assets is fundamentally the responsibility of the Trustees acting on expert advice and is driven by their investment objectives as set out in Section 2 below. The remaining elements of policy are part of the day to day management of the assets which is delegated to professional investment managers and described in Section 4.

1.1 Background to the Scheme

The Scheme consists of two sections. Members who joined the Scheme prior to 1 April 2004 had their contributions invested in Aberdeen Standard Life’s With-Profit policies on an insured basis. The Trustees set up a new arrangement with Legal & General Investment Management (“LGIM”) and from 1 April 2004, all future contributions from this date are being made to the LGIM pooled funds.

2. Investment Objectives, Risk and Investment Strategy

2.1 Investment Objectives

The Trustees recognise that members have differing investment needs and that these may change during the course of members’ working lives.

The Trustees also recognise that members have different attitudes to risk. The Trustees regard their duty as making available a range of investment options sufficient to enable members tailor their own investment strategies to their own needs.

The Trustees also recognise that members may not believe themselves qualified to take investment decisions. As such the Trustees make available a default investment option for the LGIM section, which is described in section 3.

The Trustees regularly obtain professional advice, monitor and review the suitability of the funds provided and from time to time may change the managers or investment options. The advice received and arrangements implemented are, in the Trustees opinion consistent with the requirements of Section 36 of the Pensions Act 1995 (as amended).

2.2 Risk Measurement and Management

The Trustees regards “risk” as the likelihood of failing to achieve the objectives set out above and seeks to minimise these risks, so far as is possible.

In arriving at the range of investment options, the Trustees have considered risk from a number of perspectives. The list below is not exhaustive but covers the main risks that the Trustees considers and how they are managed.

Type of Risk

Description

How the risk is monitored and managed

Market risks

Inflation risk

The risk that returns over the members’ working lives does not keep pace with inflation.

The Trustees make available a range of funds, across various asset classes, with the majority expected to provide above inflationary returns over the long term.

The Trustees monitor performance on a regular basis

Members are able to set their own investment allocations, in line with their risk tolerances.

Currency risk

The risk that fluctuations in foreign exchange rates will cause the value of overseas investments to fluctuate.

Credit risk

The risk that the issuer of a financial asset, such as a bond, fails to make the contractual payments due.

Equity and other price risk

The risk that market movements leads to a substantial reduction in the value of a member’s savings.

Liquidity risk

The risk that the Scheme’s assets cannot be realised at short notice in line with member and Trustees demands.

The Scheme invests in daily dealt and daily priced pooled funds.

Investment Manager risk

The risk that the appointed investment manager underperforms the benchmark return, fail to carry out operational tasks, do not ensure safe-keeping of assets or breach agreed guidelines.

The Trustees measure risk in terms of the performance of the funds compared to relevant benchmarks on a regular basis. Majority of the pooled funds are passively managed to avoid risk of underperformance relative to benchmark return.

The Trustees also on regular basis, monitor any significant issues with the investment managers that may impact their ability to meet their performance objectives.

Pension Conversion risk

The risk that the member is invested in a strategy that does not reflect the way in which they intend to take their benefits at retirement.

The Trustees make available a number of funds, which allow members to plan for their specific retirement benefit.

The default strategy is a lifestyle strategy which automatically switches member assets into investments whose value is expected to be less volatile relative to annuity prices

The members, consisting of those with assets in the Standard Life With- Profit’s policy and all new members from 1 April 2004 can select the lifestyle strategy if it meets their personal preferences and retirement objectives.

Environmental, Social and Corporate Governance (“ESG”) risk

The risk that ESG concerns, including climate change, have a financially material impact on the return of the Scheme’s assets.

The management of ESG related risks is delegated to investment managers.

See Section 4.3 of this Statement for the Trustees responsible investment and corporate governance statement.

The risks identified in the table above are considered by the Trustees to be ‘financially material considerations’. The Trustees believes the appropriate time horizon for which to assess these considerations within should be viewed at a member level. This will be dependent on the member’s age and when they expect to retire.

2.3 Investment Strategy

In choosing the Scheme's investment options, it is the policy of the Trustees to consider:

  • The potential risk and rewards of a range of asset classes. The current range includes With- Profits, equities, bond and cash funds. The Trustees mainly offer passive funds as they are cost effective.

  • The suitability of different styles of investment management and the need for investment manager diversification;
  • The suitability of each asset class within a defined contribution scheme; and
  • The need for appropriate diversification both across and within asset classes.

The Trustees believe the range of funds and a default strategy provides appropriate choices for members’ different saving objectives, risk profiles and time horizons.

If members self-select they can combine the investment funds in any proportion in order to determine the balance between different kinds of investments. This will also determine the expected return on a member’s assets and should be related to the member’s own risk appetite and tolerances. Each of the available funds is considered to be diversified across an appropriate number of underlying holdings / issuers.

The Trustees expect the long-term return on equities to exceed price inflation and general salary growth.

The long-term returns on bond and cash funds are expected to be lower than that of equities. However, bond funds are expected to experience lower volatility relative to annuity prices than equities and should help reduce the potential mismatch in relation to the price of annuities (assuming a member opts to access their DC savings via annuity purchase). The Trustees appreciate that bonds cannot provide a complete hedge against all factors that contribute to the movement in annuity prices for example longevity assumptions.

Money market is expected to provide protection against changes in short-term capital values, and may be appropriate for members receiving part of their retirement benefits in the form of tax-free cash.

2.3.1 Lifestyle strategy

The Scheme offers members the option of having their funds invested in a lifestyle strategy which is a pre-determined investment arrangement. The lifestyle strategy invest members’ savings in a global equity fund which is a high risk fund when they are further away from retirement (more than 5 years), before switching into funds designed to broadly match changes in inflation-linked annuity prices (with an allowance for tax free cash). The strategy is summarised in the following table.

Years to Retirement, % of fund invested

 

5+

4

3

2

1

0

Global Equity Fixed Weights (60:40) Fund

100

80

60

40

20

0

Over 5 year Index-linked Gilt Fund

0

15

30

45

60

75

Cash Fund

0

5

10

15

20

25

Total

100

100

100

100

100

100

2.3.2 Self-select fund range

The self-select fund range is made up of stand alone funds and provides flexibility for members who do not wish to be invested in the lifestyle strategy. The range comprises of equities, bonds and cash. Further information is provided in the appendix.

3. Default Investment Option

3.1 Objectives of the Default Investment Option

A proportion of members will actively choose the default option because they feel it is most appropriate for them. However, the vast majority of DC members do not make an active investment decision and are automatically invested in the default option

Having taken written professional advice from a suitably qualified person from Mercer, the Trustees set the default investment option to target purchase of inflation linked annuity as it reflects the option that is considered likely to be the most appropriate, for an average individual, for members who are unable to decide how they wish to take their retirement benefits. 

The Trustees’ objectives in relation to the default investment option, and the ways in which the Trustees seek to achieve these, are detailed below:

  • To generate returns in excess of inflation during the “growth” phase of the option.

The default investment option’s growth phase structure invests 100% of members’ savings in passively managed UK and overseas equities. These investments are expected to provide long-term growth with some protection against inflation erosion, albeit with some volatility.

  • To provide an option that reduces investment risk for members as they approach retirement.

As a member’s pot grows, investment risk will have a greater impact on member outcomes. Therefore, the Trustees believe that a default option that seeks to reduce investment risk (relative to inflation linked annuity price movements, rather than in absolute terms) as the member approaches retirement is appropriate. This is achieved switching a member’s investments from the growth assets to an index linked gilt fund and a cash fund over a 5 year switching period prior to a member’s target retirement date.

  • To offer to members a mix of assets at retirement that are broadly appropriate for an individual who takes 25% of their pot as cash and uses to balance to purchase an inflation-linked annuity.

At the selected retirement date, 75% of the member’s assets will be invested in a passively managed index-linked gilt fund that invests in British Government index-linked securities and 25% in an actively managed cash fund. Whilst returns from these asset classes are expected to be modest over the long-term, they are expected to broadly match inflation linked annuity prices and cash retirement benefits.

Based on the Trustees’ understanding of the Scheme’s membership, a default investment option that targets the purchase of an inflation-linked annuity and a tax-free cash lump sum (up to 25% of a member’s pot) at retirement is expected to be broadly appropriate to meet a typical member’s requirements for income in retirement. This does not mean that members have to take their benefits in this format at retirement. It merely determines the default investment option that will be in place pre-retirement. Members who intend to take their retirement savings by other means are able to choose their own investment options.

Taking into account the demographics of the Scheme’s membership and the Trustees’ views of how the membership might behave at retirement, the Trustees believe that the current default investment option is appropriate and they will continue to review this regularly, and more strategically at least triennially, or after significant changes to the Scheme’s demographic, if sooner.

3.2 Policies in relation to the Default Investment Option

  • The default investment option manages investment and other risks through a strategic asset allocation consisting of equities, bonds and cash. Risk is not considered in isolation but in conjunction with expected investment returns and outcomes for members.

  • In designing the default investment option, the Trustees have explicitly considered the trade-off between risk and expected returns. The default option balances between different kinds of investments to ensure that the expected amount of risk (and commensurately the expected return) is appropriate given the age of the member and their expected retirement date.

  • Assets in the default investment option are invested in regulated markets and in a manner which aims to ensure the security, quality, liquidity and profitability of a member’s portfolio as a whole.

  • The Trustees believe that assets in the default investment option are invested in the best interests of members and beneficiaries, taking into account the profile of members.

  • The investment manager has responsibility for buying and selling the underlying assets. All of the pooled funds used operate daily dealing cycles. 

  • The investment manager also has discretion to incorporate social, environmental and ethical considerations in exercising their delegated responsibilities.

3.3 Risk and Risk Management of the Default Investment Option

The Trustees regard “risk” as the likelihood of failing to achieve the objectives set out above and seeks to minimise these risks, so far as is possible.

In arriving at their investment strategy for the default investment option and the production of the SIP, the Trustees have considered the following risks:

Type of Risk

Description

How the risk is monitored and managed

Market risks

Inflation risk

The risk that returns over the members’ working lives does not keep pace with inflation and will not therefore, secure an adequate income in retirement.

The default investment option is set with the intention of diversifying these risks to reach a level of risk deemed appropriate. This is set with advice from the investment adviser.

The Trustees monitor performance on a regular basis.

Currency risk

The risk that fluctuations in foreign exchange rates will cause the value of overseas investments to fluctuate.

Credit risk

The risk that the issuer of a financial asset, such as a bond, fails to make the contractual payments due.

Equity and other price risk

The risk that market movements leads to a substantial reduction in the value of a member’s savings.

Liquidity risk

The risk that the Scheme’s assets cannot be realised at short notice in line with member and Trustees demands.

The default investment option invests in daily dealt and daily priced pooled funds.

Investment Manager risk

The risk that the appointed investment managers underperform the benchmark return, fail to carry out operational tasks, do not ensure safe-keeping of assets or breach agreed guidelines.

The Trustees measure risk in terms of the performance of the underlying funds compared to relevant benchmarks on a regular basis.

The underlying funds within the default investment option are passively managed to reduce risk of underperformance.

Pension Conversion risk

The risks that the member is invested in a strategy that does not reflect the way in which they intend to take their benefits at retirement.

The default investment option is a lifestyle strategy that automatically switches member assets into investment whose value is expected to be less volatile relative inflation linked annuity prices.

As part of their investment strategy review, the Trustees consider if the default destination remains appropriate.

Environmental, Social and Corporate Governance (“ESG”) risk

The risk that ESG concerns, including climate change, have a financially material impact on the return of the Scheme’s assets.

The management of ESG related risks is delegated to investment managers.

See section 4.3 of this Statement for the Trustees responsible investment and corporate governance statement.

The above items listed in Section 3.2 and 3.3 of this Statement are in relation to what the Trustees consider ‘financially material considerations’. The Trustees believe the appropriate time horizon for which to assess these considerations within should be viewed at a member level. This will be dependent on the member’s age and when they expect to retire.

The Trustees will continue to review the default investment option over time, at least triennially, or after significant changes to the Scheme’s demographic, if sooner. Members will be supported by clear communications regarding the aims of the default investment option and the access to alternative approaches. 

4. Day to Day Management of the Assets

4.1 Main Assets

The Trustees delegate the day to day management of the assets within the Standard Life With- Profit policies and the LGIM pooled funds to the respective managers. The investment managers are authorised or regulated and the Trustees expect them to manage the assets delegated to them under the terms of their contracts.

The investment managers have full discretion to buy and sell investments on behalf of the Scheme, subject to agreed constraints and applicable legislation. They have been selected for their expertise in different specialisations.

The Trustees assess the continuing suitability of the Scheme’s investment manager on a periodic basis. The Trustees’ investment adviser is available to provide help in monitoring the investment manager, both in the form of written reports or attendance at meetings as required by the Trustees.

The Trustees will review the appointment of any investment manager for any reason they consider appropriate.

4.2 Realisation of Investments

In general, the Scheme’s investment managers have discretion in the timing of realisations of investments and in considerations relating to the liquidity of those investments. The investment managers have responsibility for generating cash required for benefit outflow.

All funds, including those in the default strategy, are daily-dealt pooled investment arrangements. These pooled investment arrangements are themselves regulated and underlying investments are invested in regulated markets.

4.3 Socially Responsible Investment and Corporate Governance

The Trustees apply the following beliefs to the whole Scheme including the default investment option.

The Trustees believe that environmental, social and governance (“ESG”) factors do have a material impact on investment risk and return outcomes, and that good stewardship helps creates and preserve value for companies and markets as a whole.

The Trustees also recognise that long-term sustainability issues, particularly climate change present risks and opportunities that increasingly may require explicit considerations.

The Trustees have given the Investment Managers full discretion when evaluating ESG factors and in exercising rights and stewardship obligations attached to the Scheme’s investments. 

Where investments are made on a passive basis, whilst the manager has no discretion over the selection of individual shares or bond issues (as the manager seeks to match the composition of the benchmark index as closely as possible), the Trustees expect the manager to vote in line with its own corporate governance policy.

However, the Trustees consider how ESG, climate change and stewardship is integrated within investment process when appointing new investment managers. In particular, where appropriate, the Trustees will review:

  • The ESG ratings assigned by Mercer to each of the funds used within the Scheme. Mercer’s ratings represent their view on the extent to which ESG and active ownership practices (voting and engagement) are integrated into the manager’s investment process ad decision making across asset classes.
  • Mercer’s assessment of the underlying equity managers against the seven principles of the UK Stewardship Code, including the extent to which they are engaging with the underlying companies in which they invest.
  • Carbon foot printing or climate scenario analysis on a more ad-hoc basis, if and when the Trustees consider this may be beneficial in appointing or reviewing any of the Scheme’s investments.

4.4 Member Views

Member views have not explicitly been taken into account with regards to non-financial matters in the selection, retention and realisation of investments, although feedback received from members is welcomed and considered by the Trustees.

4.5 Additional assets

Additional Voluntary Contributions (AVCs) are invested in the same way as the main assets.

4.6 Monitoring the Investment Managers

The Trustees monitor the bonus rates associated with the Aberdeen Standard Life With-Profit policies. In addition, the Trustees receive reports from Aberdeen Standard Life.

The Trustees receive quarterly reports from Legal & General and if appropriate meet the investment manager.

5. Arrangements with Asset Managers

The Trustees appoint investment managers based on their capabilities and, therefore the perceived likelihood of achieving the expected return and risk characteristics required for the asset class being selected. The Trustees look to their investment adviser, Mercer, for their forward looking assessment of a manager’s ability to outperform over a full market cycle. Mercer’s manager research ratings assist with due diligence and questioning managers during presentations to the Trustees and are used in decisions around selection, retention and realisation of manager appointments.   

As the Trustees invest in pooled investment vehicles they accept that they have limited ability to influence investment managers to align their decisions with the Trustees’ policies set out in this statement. However, appropriate mandates can be selected to align with the Trustees’ overall investment strategy.

The Trustees expect investment managers to incorporate the consideration of longer term factors, such as ESG factors, into their decision making process where appropriate. Voting and engagement activity should be used by investment managers to discuss the performance of an issuer of debt or equity. The Trustees also consider Mercer’s assessment of how each investment manager embeds ESG into its investment process and how the manager’s responsible investment philosophy aligns with the Trustees’ responsible investment policy. The Trustees will use this assessment in decisions around selection, retention and realisation of manager appointments. 

The Trustees’ focus is on longer-term performance but shorter-term performance is monitored to ensure any concerns can be identified in a timely manner. The Trustees receive quarterly reports from Legal & General and review both absolute and relative performance against a portfolio or underlying investment manager’s benchmark on a regular basis, including assessments of both shorter and longer time horizons. The Trustees also rely upon Mercer’s manager research capabilities. The remuneration for investment managers used by the Scheme is based on assets under management; the levels of these fees are reviewed annually as part of the annual value for members assessment to ensure they continue to represent value for members. If performance is not satisfactory, the Trustees may request further action be taken, including a review of fees.

Portfolio turnover costs for each of the funds are reviewed on an annual basis as part of the annual value for members assessment. The ability to assess the appropriateness of these costs is currently limited by the availability of data and the lack of industry-wide benchmarks. The Trustees will monitor industry developments in how to assess these costs and incorporate this in future value for members assessments. Importantly, performance is reviewed net of portfolio turnover costs.

The Trustees are long term investors. All funds are open-ended and therefore there is no set duration for manager appointments. The Trustees are responsible for the selection, appointment, monitoring and removal of the investment managers. The available fund range and Default Option are reviewed on at least a triennial basis. A manager’s appointment may be terminated if it is no longer considered to be optimal nor have a place in the default strategy or general fund range.  

6. Compliance with this Statement

The Trustees will review this Statement regularly on the advice of Mercer.  The Trustees monitor compliance with this Statement on a regular basis and obtain written confirmation from the investment managers that it has given effect to the investment principles in this Statement so far as reasonably practicable and that in exercising any discretion the investment manager has done so in accordance with regulation 4 of the Occupational Pension Schemes (Investment) Regulations 2005.

7. Review of this Statement

The Trustees will review this Statement at least once every three years and in response to any material changes to any aspects of the Scheme, its liabilities, finances and the attitude to risk of the Trustees and the Sponsoring Employer, which they judge to have a bearing on the Statement.  Any such review will again be based on written, expert investment advice and will be in consultation with the Sponsoring Employer.

………………………………………………………………………………………………

For and on behalf of the Trustees of the Cruden Investments Limited Retirement Cash Benefits Scheme

September 2020
 

History of Alterations to SIP

Initial statement: July 2004

Revised statement: September 2019

Revised statement: September 2020
 

Appendix – Underlying funds and fund objectives
 

Global Equity Fixed Weight Index Fund: This fund aims to provide long-term growth by investing only in equities (both UK and overseas). Performance is compared against a benchmark set out in the table below:

Asset Class

Weighting (%)

Index

UK Equities

60

FTSE All Share Index

North American Equities

14

FTSE AW North America Index

European Equities (ex UK)

14

FTSE AW Europe ex UK Index

Japanese Equities

7

FTSE AW Japan Index

Pacific Equities

5

FTSE AW Asia Pacific ex Japan Index

Total

100

 

The Fund’s performance objective is to match the return on its benchmark, measured over rolling 3 year periods. The underlying funds also aim to match their benchmark return, within the following risk tolerances (tracking errors):

  • UK Equity Index Fund - to achieve a tracking deviation within ±0.25% in two years out of every three;
  • North America Equity Index Fund - to achieve a tracking deviation within ±0.5% in two years out of every three;
  • Europe (ex UK) Equity Index Fund - to achieve a tracking deviation within ±1.0% in two years out of every three;
  • Japan Equity Index Fund - to achieve a tracking deviation within ±1.0% in two years out of every three;
  • Asia Pacific (ex Japan) Equity Index Fund - to achieve a tracking deviation within ±1.0% in two years out of every three.

Over 5 Years Index-Linked Gilts Index Fund: The Fund invests in British Government index linked securities (index linked gilts) that have a maturity period of 5 years and over. The Fund’s performance objective is to track the performance of the FTSE-A Over 5 Years Index Linked Gilt Index and to achieve a tracking deviation within ±0.25% in two years out of three.

Cash Fund: The Fund aims to achieve investment returns in line with wholesale money market short-term interest rates. The Fund’s performance objective is to outperform the LIBID (London Interbank bid rate) 7 Day Index.

UK Equity Index Fund: The Fund’s performance objective is to track the performance of the FTSE All Share Index return and to achieve a tracking deviation within 0.25% in two years out of every three.

World (ex UK) Equity Fund: This Fund aims to provide long-term growth by investing only in equities. The performance objective of the Fund is to match the return on the FTSE World (ex UK) Index.

Over 15 Year Gilts Index Fund: The Fund invests in British Government Gilts that have a maturity of 15 years and over. The Fund’s performance objective is to track the performance of the FTSE A Over 15 Year Gilt Index.

Charges

Global Equity Fixed Weights (60:40) Index Fund

0.16% per annum

Over 5 Years Index-Linked Gilts Index Fund

0.10% per annum

Cash Fund

0.125% per annum

UK Equity Index Fund

0.10% per annum

World (ex UK) Equity Index Fund

0.22% per annum

Over 15 Year Gilts Index Fund

0.10% per annum

An additional fixed management charge of £1,500 per annum paid by the Scheme.

8. Chairman's Annual Governance Statement for the year ending 31 March 2019

Under legislation set out in regulation 23 of The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (as amended) (the ‘Administration Regulations’), the Trustees of the Cruden Investments Limited Retirement Cash Benefits Scheme (the ‘Scheme’) are required to prepare a statement (the ‘Statement’) on governance in its annual report.

This statement describes how the Trustees seek to ensure that the Scheme is well-managed and delivers good services to members and covers five key areas:

1. The investment strategy relating to the Scheme’s default arrangement;

2. The processing of core financial transactions;

3. Charges and transaction costs within the Scheme;

4. Value for members’ assessment; and

5. The Trustees compliance with the statutory knowledge and understanding requirements.

As Chair of the Trustees, it is my pleasure to report to you on how the Trustees have embedded high standards of governance, including those required by legislation, over the period 1st April 2018 to 31st March 2019.

The default investment arrangement

The Trustees are responsible for setting the Scheme’s investment strategy and for appointing investment managers to implement that strategy. The Trustees, having obtained professional advice, have also designed a default investment arrangement for members who do not select their own investment options from the fund range that is available.

The current default investment arrangement is a pre-determined investment strategy that transitions member assets from a global equity fund to an index linked gilts fund and cash fund over a five-year period prior to retirement age. The default investment arrangement is suitable for a member who intends to withdraw 25% of their pension savings on retirement as tax free cash lump sum and use the balance to purchase an inflation linked annuity.

In accordance with the Administration Regulations, the Trustees have appended the latest copy of the Statement of Investment Principles (‘SIP’) prepared for the Scheme under Section 35 of the Pensions Act 1995 (the ‘1995 Act’) and Regulation 2 and Regulation 2A of the Occupational Pension Schemes (Investment) Regulations 2005 (the ‘Investment Regulations’).

The Trustees regularly monitor and review the performance of the funds underlying the default investment arrangement against their respective benchmarks. The Scheme’s investment manager reports quarterly on the performance of the funds against the benchmarks.

The Trustees commenced a formal review of the default investment arrangement in August 2019 and concluded that review in September 2019. As part of that review, the Trustees analysed data relating to the Scheme’s membership profile, including age, fund size, current

asset allocation and how members have been accessing their pension savings since the introduction of pension freedoms i.e. April 2015. The Trustees also asked their investment adviser, Mercer Limited (“Mercer”), to report on market practices and emerging trends in the design of a default investment arrangement. During the fourth quarter of 2019, the Trustees will discuss the outcome of the review and the future strategy of the Scheme with the Company.

Requirements for processing financial transactions bulk transfers in and out

The Pensions Regulator defines core financial transactions as including:

  • member fund switches and redirections
  • receipt of contributions
  • investment of contributions
  • individual transfers in and out quotes and payments
  • benefits payable on death
  • purchase of annuities and payments of lump sums

The Trustees have a specific obligation to ensure that such transactions are processed accurately and promptly. To that end, Mercer has been appointed Scheme administrator and is responsible for processing all of the above transactions on behalf of the Trustees. The Trustees are satisfied that this contractual arrangement is operating satisfactorily; specifically, as follows:

  • The Trustees monitor performance of Mercer against the agreed Service Level Agreement. No significant recurring issues occurred during the Scheme year.
  • The Scheme's Risk Register outlines the risks to members in relation to financial transactions that are monitored and reviewed on a regular basis.
  • The Schedule of Contributions/Payment Schedule sets out timescales for the Company to remit monthly contributions to the Scheme.
  • The Scheme Auditor, Whitelaw Wells, spot checks that contributions are paid in accordance with the Scheme rules.

Charges and transaction costs

The Trustees are required to report on the charges and transaction costs for the investments used in default investment arrangement and self-select funds of the Scheme.

Charges

The Company currently meets administration, member communication and advisory costs associated with operating the Scheme.

The Scheme’s investment manager charges members an annual percentage known as Total Expense Ratio (“TER”). The TER includes management fees and additional fund expenses such as custody and auditor fees.

As demonstrated by the following chart, the Scheme complies with the regulations on capped charges introduced from April 2015. Specifically, the overall fee each year for the default investment arrangement is well below the charge cap of 0.75% which is measured by TER.

Transaction costs

In addition to the investment managers’ expenses included in the TER, investment funds are subject to other implicit costs, such as those associated with trading a fund’s underlying securities, commissions and stamp duty. These expenses are not explicitly deducted from the fund but are captured by a reduction in investment returns.

In reporting these transaction costs, the Trustees confirm that the guidance provided by the Financial Conduct Authority regarding calculations and disclosures of transaction costs was followed. The Trustees received transaction costs information from Legal & General, from 1st April 2018 to 31st March 2019 which is available to members on request.

Transaction costs are calculated using the slippage cost methodology under which it is possible for transaction costs to be negative. This method captures change in price between the decision to execute a transaction and the actual execution and therefore transaction costs can be positive or negative depending on how the market moves between decision point and execution point. A negative cost would occur if prices fall.

The table below summarises the charges and transaction costs of the funds used in the default investment arrangement.

Default Investment arrangement funds

Fund Name

TER

(% p.a.)

Total Transaction costs (%)

LGIM Global Equity Fixed Weights (60:40) Index Fund

0.160 -0.010
LGIM Over 5 Years Index-Linked Gilts Index Fund 0.100 0.030
LGIM Cash Fund 0.125 0.000

Source: LGM

The following chart shows how fees for the default investment arrangement change over a member's lifetime in the Scheme.

Investment chart

The above chart shows the following:

 

  • The default investment arrangement fee remains significantly below the charge cap fee of 0.75% throughout a members’ lifetime in the Scheme.
  • The fee is highest when members are over 5 years away from retirement and invested 100% in the LGIM Global Equity Fixed Weights (60:40) Index Fund.
  • As members near retirement, assets de-risk towards LGIM Over 5 Years Index-Linked Gilts Index Fund and LGIM Cash Fund, and the fee reduces as assets are automatically moved.

The range of charges and transaction costs applicable to the investment options for self-select members being used in the Scheme during the year are tabled below. 

Self-select funds

Fund Name

TER
(% p.a.)

 Total Transaction costs (%)
LGIM Global Equity Fixed Weights (60:40) Index Fund  0.160 -0.010
LGIM World (ex UK) Equity Index Fund 0.220 -0.010
LGIM UK Equity Index Fund 0.100  -0.020
LGIM Over 15 Year Gilts Index Fund 0.100 -0.010
LGIM Over 5 Year Index-Linked Gilts Index Fund 0.100 0.030
LGIM Cash Fund  0.125 0.000

Source LGIM

Value for Members’ Assessment 

The Trustees have also reviewed the charges and transaction costs incurred by members in order to ascertain whether or not they represent good value for members, relative to peers and alternative arrangements that are available. 

The assessment benchmarked the investment charges for the default investment arrangement and self-select funds against comparable funds, reviewed performance of the funds against their objectives and considered ratings from Mercer. A fund was then considered to offer good value if was offered at a competitive fee, performed in line with its objective over the longer term and was highly rated by Mercer. 

The assessment concluded that the Scheme’s overall benefits represent good value to members in comparison to the costs payable by members. The reasons supporting this conclusion include: 

  • Members bear the investment fees whilst the Company meets other general running costs such as communication, trusteeship costs and administration costs. 
  • Charges for the default investment arrangement are significantly below the charge cap of 0.75% per year – see earlier section ‘Charges and transaction costs’ 
  • The funds TER have been assessed by Mercer as comparing favourably with those of peer funds. 
  • The default fund (LGIM Global Equity Fixed Weights (60:40) index) matched its benchmark return of 8.2% p.a. over a five-year period to 31st March 2019. 
  • Similarly, the other funds available to members matched their respective benchmark return to acceptable tolerance range over a five-year period to 31st March 2019.
  • All of the Scheme funds, with the exception of the LGIM Cash Fund are rated ‘A ‘by Mercer. This is an indication that Mercer is confident that the passively managed funds and the Cash Fund will match their respective benchmarks within a reasonable tolerance. 

Trustee knowledge and understanding 

In accordance with sections 247 and 248 of the Pensions Act 2004, the Trustees are required to maintain an appropriate level of knowledge and understanding that, together with professional advice available to them, enables them to properly exercise their functions and duties in relation to the Scheme. This requirement has been met during the course of the Scheme year as follows: 

  • The Trustees have undertaken continuous professional development, within and out with their regular meetings to keep abreast of relevant developments. The Trustees regularly reviewed their training needs. 
  • The Trustees also receive significant levels of advice from professional advisers and the relevant skills and experience of these advisers is a key criterion when evaluating adviser performance or selecting new advisers. Representatives from these advisers attend Trustees’ meetings when required. The Trustees’ also have regular access to designated individuals within the Company who have responsibility for pensions. 

Chair's declaration 

I confirm that the above statement has been produced by the Trustees of the Cruden Investments Limited Retirement Cash Benefits Scheme. 

Name: A M Hathorn 
Date: 31 October 2019
Chair of the Cruden Investments Limited Retirement Cash Benefits Scheme

Appendix 1 - Charges and costs illustrations

Purpose of this example illustration 

This is not a personal illustration but is an illustration to show how fund related costs and charges can affect the overall value of the funds you invest in over time. It is based on the assumptions of charges and transaction costs shown below. 

Fund charges and transaction costs

   Default Investment Arrangement LGIM World (ex-UK) Equity Index Fund LGIM Over 5 year Index-Linked Gilts Index Fund
Growth -0.180% to 3.000% 3.000%      -0.970% 
TER 0.110% to 0.160% 0.220% 0.100%
TC 0.000% to 0.020% 0.000% 0.030% 

Growth is the assumed growth rate for the fund after taking into account an assumed price inflation of 2.5% per year. The Growth rate for the default investment arrangement is dependent on how far away a member is from retirement such that the further away from retirement, the higher the expected growth rate.

TER is the total expense ratio which is the total charge deducted from the fund 

TC is the Transaction Costs, which is an estimate of explicit and implicit costs incurred as a result of buying, selling, lending or borrowing of investments in the fund, based on actual transaction costs provided for the period 1st April 2018 to 31st March 2019. 

The impact of charges and transaction costs on fund values (£) 

The ‘Before charges’ column shows each fund value without any transaction costs, charges or expenses being deducted to the fund holdings. 

The ‘After charges’ column shows the fund value after deduction of transaction costs, charges and expenses.

Table 1: Active members

 

Majority of members invested in

Highest TER/ Highest Expected growth Lowest TER/ Lowest Expected growth
Name Default Investment Arrangement  LGIM World (ex-UK) Equity Index Fund   LGIM Over 5 year Index-Linked Gilts Index Fund
Year End  Before charges   After charges Before charges  After charges  Before charges  After charges
1 20,920  20,890  20,920  20,880  20,230   20,200
3 46,450 46,170  46,450 46,070 40,650  40,450
5 82,910 82,020 82,910 81,680 65,080 64,540
10 125,180 123,240 125,180   122,520     88,340   87,330
15 174,180 170,650 174,180 169,350  110,500  108,900
20 230,980  225,170  230,980   223,040  131,610 129,310
30 296,830 287,870 296,830 284,600   151,710 148,620
35 373,170   359,980 373,170   355,180 170,850  166,890 
40 461,670 442,910 461,670     436,110 189,090 184,180 
45 538,780 514,180 564,260 528,900 206,450  200,540
47 543,260 517,580 609,730 569,720 213,170 206,840

Table 2: Deferred members

 

Majority of members invested in

Highest TER/ Highest Expected growth Lowest TER/ Lowest Expected growth
Name Default Investment Arrangement  LGIM World (ex-UK) Equity Index Fund   LGIM Over 5 year Index-Linked Gilts Index Fund
Year End  Before charges   After charges Before charges  After charges  Before charges  After charges
1 13,390  13,370 13,390 13,360  12,870   12,860
3 15,070 14,950 15,070 14,910 12,380 12,300
5 17,470 17,190 17,470 17,090 11,790 11,640
10 20,250 19,770  20,250 19,600  11,230 11,010
15 23,480 22,740 23,480 22,470 10,700 10,420
20 27,220 26,150 27,220 25,760 10,190 9,860
30 31,550 30,070 31,550 29,540 9,700 9,330
35 36,580 34,590 36,580 33,870 9,240 8,830
40 42,410 39,780 42,410 38,830 8,800 8,360
45 46,910 43,670 49,160 44,520 8,380 7,910
47 46,370 43,050 52,150 47,030 8,220  7,730

About the illustrations

The illustrations are based on the following assumptions:

  • Projections are from age 18 (youngest age) to 65 (retirement age).
  • The starting pot size is assumed to be £15,000 for active members and £13,000 for deferred members. These are based on the median pot size of the membership.
  • Inflation is assumed to be 2.5% each year.
  • For active members, the assumed contributions each year are 12% of the median salary, £45,000 and increase in line with inflation each year.

Annual Statement of Investment Principles Implementation Statement

Introduction

This statement sets out how, and the extent to which, the Statement of Investment Principles (‘SIP’) produced by the Trustees of the Cruden Investments Limited Retirement Cash Benefits Scheme (“the Trustees” of “the Scheme”), has been followed during the year to 31 March 2020. This statement has been produced in accordance with the Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 (as amended) and the guidance published by the Pensions Regulator.

Investment Objectives of the Scheme 

The Trustees believe it is important to consider the policies in place in the context of the investment objectives they have set. The objectives of the Scheme included in the SIP are as follows:

  • The Trustees recognise that members have differing investment needs and that these may change during the course of members’ working lives. The Trustees also recognise that members have different attitudes to risk. The Trustees regard their duty as making available a range of investment options sufficient to enable members to tailor their own investment strategies to their own needs. 
  • The Trustees also recognise that members may not believe themselves qualified to take investment decisions. As such the Trustees make available a default investment option with Legal & General Investment Management (“LGIM”). The Tustees’ objectives in relation to the default investment option are as follows:

−    To generate returns in excess of inflation during the “growth” phase of the option
−    To provide an option that reduces investment risk for members as they approach retirement
−    To offer to members a mix of assets at retirement that are broadly appropriate for an individual who takes 25% of their pot as cash and uses the balance to purchase an inflation-linked annuity

These objectives were unchanged over the 12 months to 31 March 2020.

The Trustees regularly obtain professional advice, monitor and review the suitability of the funds provided and from time to time may change the managers or investment options.

The policies set out in the SIP are intended to help meet the overall investment objectives of the Scheme.

Review of the SIP

The Trustees reviewed and amended the Scheme’s SIP once during the Scheme year, in September 2019. The changes made related to the requirements under the Occupational Pension Scheme (Investment and Disclosure) (Amendment and Modification) Regulations 2018 requiring the Trustees to state:

  • How the Trustees takes account of financially material considerations including environmental, social and governance (ESG) considerations and explicitly climate change; 
  • The extent to which non-financial matters are taken into account, as well as the approach to the stewardship of investments.

The Trustee consulted with the sponsoring company in finalising the SIP. The SIP was made publicly available before 1 October 2019 and can be accessed on this link:


https://www.cruden-ltd.co.uk/group/cil-retirement-cash-benefits-scheme

Investment Strategy Review

The default investment option is reviewed at least triennially, or after significant changes to the Scheme’s demographic, if sooner.

The default investment option was subject to its formal triennial investment review in September 2019.  The investments (fund type, management style and asset allocations) used in the default investment option were reviewed as part of this exercise. The review also analysed the Scheme’s membership profile, including age, fund size, current asset allocation and how members have been accessing their pension savings since the introduction of pension freedoms. The Trustees also asked their investment adviser to report on market practices and emerging trends in the design of a default investment arrangement. 

No changes were made to the default or fund range following this review. However, the Trustees are considering the recommendations from the investment strategy review in the context of the long-term goals for the Scheme.

Assessment of how the policies in the SIP have been followed for the year to 31 March 2020

The information provided in the following table highlights the work undertaken by the Trustees during the year, and longer term where relevant, and sets out how this work followed the Trustees’ policies in the SIP. The SIP is attached as an Appendix and sets out the policies referenced below.  

The Trustees believe that they have followed the policies in the SIP during the year to 31 March 2020.
 

 

Requirement

Policy/section of the SIP where policy can be found

In the year to 31 March 2020

1

Securing compliance with the legal requirements about choosing investments

As required by legislation, the Trustees have consulted a suitably qualified person by obtaining written advice from Mercer Limited

(Section 1 of the SIP). 

No new investments were implemented over the period.

The Scheme’s investment advisers completed a formal review of the Scheme’s investment arrangements in September 2019 and presented their findings to the Trustees.

2

Kinds of investments to be held

In choosing the Scheme's investment options, it is the policy of the Trustees to consider:

          • The potential risk and rewards of a range of asset classes. The current range includes With- Profits, equities, bond and cash funds. The Trustees mainly offer passive funds as they are cost effective.
          • The suitability of different styles of investment management and the need for investment manager diversification;
          • The suitability of each asset class within a defined contribution scheme; and
          • The need for appropriate diversification both across and within asset classes.

 

 

The Trustees believe the range of funds and a default strategy provides appropriate choices for members’ different saving objectives, risk profiles and time horizons.

(Section 2.3 of the SIP)

The default investment option was subject to its formal triennial investment review in September 2019. The investments (fund type, management style and asset allocations) used in the default investment option were reviewed as part of this exercise. As part of the review, the Trustees also undertook a review of the self-select fund range.

The review also analysed the Scheme’s membership profile, including age, fund size, current asset allocation and how members have been accessing their pension savings since the introduction of pension freedoms.

The Trustees also asked their investment adviser to report on market practices and emerging trends in the design of a default investment arrangement.

No changes were made to the default or self-select fund range following this review. The kinds of investment held in the Scheme remain consistent with the SIP.

The Trustees are considering the recommendations from the investment strategy review in the context of the long-term goals for the Scheme.

3

The balance between different kinds of investments

If members self-select they can combine the investment funds in any proportion in order to determine the balance between different kinds of investments. This will also determine the expected return on a member’s assets and should be related to the member’s own risk appetite and tolerances. Each of the available funds is considered to be diversified across an appropriate number of underlying holdings / issuers.

In designing the default investment option, the Trustees have explicitly considered the trade-off between risk and expected returns. The default option balances between different kinds of investments to ensure that the expected amount of risk (and commensurately the expected return) is appropriate given the age of the member and their expected retirement date.

(Sections 2.3 and 3.2 of the SIP)

The Trustees aim to review the strategic asset allocation of the default investment option on a triennial basis. The date of the last review was September 2019. The review recommended changes to the strategic asset allocation of the default investment option and the self-select fund range. No changes were made to the default or self-select fund range following this review.

The Trustees believe that the range of funds and default strategy provides appropriate choices for members’ different saving objectives. However the Trustees are considering the recommendations from the investment strategy review in the context of the long-term goals for the Scheme.

4

Risks, including the ways in which risks are to be measured and managed

The Trustees recognise risk (both investment and operational) from a number of perspectives in relation to the self-select funds and the default investment option.

(Sections 2.2 and 3.3 of the SIP)

As detailed in the risk table in the SIP, the Trustees consider both quantitative and qualitative measures for these risks when deciding investment policies, strategic asset allocation, the choice of fund managers / funds / asset classes. The table of risks and how they are measured and managed was updated in September 2019 as part of a SIP review. 

The Trustees consider these risks and how they are measured and managed either as part of their regular Trustee meetings where fund performance is discussed or as part of formal investment reviews (the last formal review was undertaken in September 2019).

The Scheme maintains a risk register of the key risks, including operational and investment risks. This rates the impact and likelihood of the risks and summarises existing mitigations and additional actions.

5

Expected return on investments

The Trustees make available a range of funds, across various asset classes, with the majority expected to provide above inflationary returns over the long term.

The Trustees monitor performance on a regular basis.
 

If members self-select they can combine the investment funds in any proportion in order to determine the balance between different kinds of investments. This will also determine the expected return on a member’s assets and should be related to the member’s own risk appetite and tolerances. Each of the available funds is considered to be diversified across an appropriate number of underlying holdings / issuers.

In designing the default investment option, the Trustees have explicitly considered the trade-off between risk and expected returns. The default option balances between different kinds of investments to ensure that the expected amount of risk (and commensurately the expected return) is appropriate given the age of the member and their expected retirement date.

(Sections 2.2, 2.3 and 3.2 of the SIP)

Investment performance is reviewed by the Trustees on a regular basis – this includes performance information on the default and additional investment fund choices. LGIM produce quarterly investment performance reports which include how each investment manager is delivering against their specific targets or benchmarks.

The Trustees also assess the performance and future prospects of the investment managers in their annual Value for Members assessment. 

The investment strategy review undertaken in September 2019 considered the portfolio components of the default against their respective aims and objectives. The performance of the growth phase of the default was reviewed and the de-risking phase of the default review focused on diversification levels.

 

6

Realisation of investments

In general, the Scheme’s investment managers have discretion in the timing of realisations of investments and in considerations relating to the liquidity of those investments. The investment managers have responsibility for generating cash required for benefit outflow.

All funds, including those in the default strategy, are daily-dealt pooled investment arrangements. These pooled investment arrangements are themselves regulated and underlying investments are invested in regulated markets.

The Trustees’ administrators will realise assets following member requests on retirement or earlier where required.

(Section 4.2 of the SIP). 

No changes were made during the year to the liquidity of the funds used by the Scheme.

7

Financially material considerations over the appropriate time horizon of the investments, including how those considerations are taken into account in the selection, retention and realisation of investments

 

The risks identified in the table in Section 2.2 of the SIP are considered by the Trustees to be ‘financially material considerations’.  The Trustees believes the appropriate time horizon for which to assess these considerations within should be viewed at a member level. This will be dependent on the member’s age and when they expect to retire.

The Trustee’s policy on ESG, Stewardship and Climate Change is set out in Section 4.3 of the SIP

(Sections 2.2 and 4.3 of the SIP)

The Scheme’s SIP includes the Trustees’ policy on Environmental, Social and Governance (‘ESG’) factors, stewardship and climate change. This policy sets out the Trustees’ beliefs on ESG and climate change and the processes followed by the Trustees in relation to voting rights and stewardship. The Trustees reviewed and updated this policy when reviewing the SIP in September 2019.

The Trustees keep their policies under regular review with the SIP subject to review at least triennially.

The Trustees have given the Investment Managers full discretion when evaluating ESG factors and in exercising rights and stewardship obligations attached to the Scheme’s investments. 

The risks identified in the SIP are assessed (i.e. measured and managed) as part of reviewing investment performance at Trustee meetings with more strategically focused assessments as part of formal investment strategy reviews. The last review was undertaken in September 2019.

8

The extent (if at all) to which non-financial matters are taken into account in the selection, retention and realisation of investments

Member views have not explicitly been taken into account with regards to non-financial matters in the selection, retention and realisation of investments, although feedback received from members is welcomed and considered by the Trustees.

(Section 4.4 of the SIP)

The Trustees do not explicitly consult members when making investment decisions but would reflect upon any member views communicated to them.

The Trustees have not received any feedback from members during the year.

9

The exercise of the rights (including voting rights) attaching to the investments

Investment managers are expected to evaluate these factors, including climate change considerations, and exercise voting rights and stewardship obligations attached to the investments in line with their own corporate governance policies and current best practice.

(Section 4.3 of the SIP)

The Trustees have delegated their voting rights to the investment managers.

The Trustees reviewed and updated their policy on ESG factors, stewardship and climate change in September 2019. This policy is included in the SIP and sets out the Trustees’ beliefs on ESG and climate change and the processes followed by the Trustees in relation to voting rights and stewardship.

The Trustees are looking to enhance their reporting on manager engagement and have reviewed voting behaviour undertaken on their behalf by the investment managers. This is detailed later in this statement. 

10

Undertaking engagement activities in respect of the investments (including the methods by which, and the circumstances under which, trustee would monitor and engage with relevant persons about relevant matters)

Investment managers are expected to evaluate these factors, including climate change considerations, and exercise voting rights and stewardship obligations attached to the investments in line with their own corporate governance policies and current best practice.

Outside of those exercised by investment managers on behalf of the Trustee, no other engagement activities are undertaken.

(Section 4.3 of the SIP)

As the Scheme invests solely in pooled funds, the Trustees require their investment managers to engage with the investee companies on their behalf. 

The Trustees reviewed and updated their policy on ESG factors, stewardship and climate change in September 2019. This policy is included in the SIP and sets out the Trustees’ beliefs on ESG and climate change and the processes followed by the Trustees in relation to voting rights and stewardship.

The Trustees are looking to enhance their reporting on manager engagement and have reviewed voting behaviour undertaken on their behalf by the investment managers. This is detailed later in this statement.

 

 

 

Voting Activity 

The Trustees have delegated their voting rights to the investment managers. 

As stated in section 4.3 of the SIP, “Where investments are made on a passive basis, whilst the manager has no discretion over the selection of individual shares or bond issues (as the manager seeks to match the composition of the benchmark index as closely as possible), the Trustees expect the manager to vote in line with its own corporate governance policy.”

Going forward investment managers are expected to provide voting summary reporting on a regular basis, at least annually. The reports will be reviewed by the Trustees to ensure that they align with the Trustees’ policy.

The Trustees are looking to enhance their reporting on voting activity by reviewing an annual voting and engagement report which will be produced by the Trustees’ investment consultant.

Over the prior 12 months, the Trustees have not actively challenged the manager on its voting activity. Going forward, the Trustees will be more active in reviewing and challenging voting activity where applicable.

The majority of voting activity will arise in public equity funds. However, voting opportunities may arise in other asset classes such as certain bonds, property, private equity and multi-asset funds.

The Scheme invests in the following daily dealt and daily priced pooled funds with LGIM:

LGIM Global Equity Fixed Weights (60:40) Index Fund
LGIM UK Equity Index Fund
LGIM World (ex UK) Equity Index Fund

LGIM Over 5 Years Index-Linked Gilts Index Fund
LGIM Over 15 Year Gilts Index Fund
LGIM Cash Fund

The funds highlighted in bold hold equities.

The Scheme also has legacy arrangements with Standard Life in the Pension With Profits Fund and the Pension Millenium With Profits Fund and with Royal London in the Crest Secure Fund. All of these funds hold equities. 

The Trustees requested details of the investment managers’ voting activity over the year to 31 March 2020. LGIM provided this information in respect of their equity funds, but Standard Life and Royal London have yet to provide this information.

LGIM’s policy on consulting with clients before voting

LGIM’s voting and engagement activities are driven by ESG professionals and their assessment of the requirements in these areas seeks to achieve the best outcome for all their clients. Their voting policies are reviewed annually and take into account feedback from their clients.

Every year, LGIM holds a stakeholder roundtable event where clients and other stakeholders (civil society, academia, the private sector and fellow investors) are invited to express their views directly to the members of the Investment Stewardship team. The views expressed by attendees during this event form a key consideration as they continue to develop their voting and engagement policies and define strategic priorities in the years ahead. They also take into account client feedback received at regular meetings and/or ad-hoc comments or enquiries.

LGIM’s process for deciding how to vote

All decisions are made by LGIM’s Investment Stewardship team and in accordance with their relevant Corporate Governance & Responsible Investment and Conflicts of Interest policy documents which are reviewed annually. Each member of the team is allocated a specific sector globally so that the voting is undertaken by the same individuals who engage with the relevant company. This ensures their stewardship approach flows smoothly throughout the engagement and voting process and that engagement is fully integrated into the vote decision process, therefore sending consistent messaging to companies.

Proxy voting services

LGIM’s Investment Stewardship team uses Institutional Shareholder Services’ (“ISS”) ‘ProxyExchange’ electronic voting platform to electronically vote clients’ shares. All voting decisions are made by LGIM and they do not outsource any part of the strategic decisions. Their use of ISS recommendations is purely to augment their own research and proprietary ESG assessment tools. The Investment Stewardship team also uses the research reports of Institutional Voting Information Services (IVIS) to supplement the research reports that they receive from ISS for UK companies when making specific voting decisions

To ensure their proxy provider votes in accordance with their position on ESG, they have put in place a custom voting policy with specific voting instructions. These instructions apply to all markets globally and seek to uphold what they consider are minimum best practice standards which they believe all companies globally should observe, irrespective of local regulation or practice.

LGIM retain the ability in all markets to override any vote decisions, which are based on their custom voting policy. This may happen where engagement with a specific company has provided additional information (for example from direct engagement, or explanation in the annual report) that allows them to apply a qualitative overlay to their voting judgement. They have strict monitoring controls to ensure their votes are fully and effectively executed in accordance with their voting policies by their service provider. This includes a regular manual check of the votes input into the platform, and an electronic alert service to inform them of rejected votes which require further action.

LGIM regularly monitor the proxy voting service through quarterly due diligence meetings with ISS. Representatives from a range of LGIM departments attend these meetings, including the client relationship manager, research manager and custom voting manager. The meetings have a standing agenda, which includes setting out their expectations, an analysis of any issues they have experienced when voting during the previous quarter, the quality of the ISS research delivered, general service level, personnel changes, the management of any potential conflicts of interest and a review of the effectiveness of the monitoring process and voting statistics. The meetings will also review any action points arising from the previous quarterly meeting. 

Processes for determining the most significant votes

In determining significant votes, LGIM’s Investment Stewardship team takes into account the criteria provided by the Pensions & Lifetime Savings Association consultation  (PLSA). This includes but is not limited to:

  • High profile vote which has such a degree of controversy that there is high client and/ or public scrutiny;
  • Significant client interest for a vote: directly communicated by clients to the Investment Stewardship team at LGIM’s annual stakeholder roundtable event, or where they note a significant increase in requests from clients on a particular vote;
  • Sanction vote as a result of a direct or collaborative engagement;
  • Vote linked to an LGIM engagement campaign, in line with LGIM Investment Stewardship’s 5-year ESG priority engagement themes.


LGIM will provide information on significant votes in the format of detailed case studies in their quarterly ESG impact report and annual active ownership publications. 

LGIM publicly disclose their votes for the major markets on their website. The reports are published in a timely manner, at the end of each month and can be used by clients for their external reporting requirements.

Risk Management

LGIM has its own internal Risk Management System (“RMS”) to provide effective oversight of key processes. This includes LGIM's voting activities and related client reporting. If an item is not confirmed as completed on RMS, the issue is escalated to line managers and senior directors within the organisation. On a weekly basis, senior members of the Investment Stewardship team confirm on LGIM’s internal RMS that votes have been cast correctly on the voting platform and record any issues experienced. This is then reviewed by the Director of Investment Stewardship who confirms the votes have been cast correctly on a monthly basis. Annually, as part of their formal RMS processes the Director of Investment Stewardship confirms that a formal review of LGIM’s proxy provider has been conducted and that they have the capacity and competency to analyse proxy issues and make impartial recommendations.

Over the last 12 months, the key voting activity on behalf of the Trustees for the three LGIM equity funds was as follows:

  • LGIM – Global Equity Fixed Weights (60:40) Index Fund – Passive
Number of meetings eligible to vote at over year to 31 March 2020 3,059
Number of resolutions eligible to vote on over year to 31 March 2020 38,265
Percentage of resolutions voted on where eligible 98.39%
Of the resolutions voted on, percentage voted with management 85.34%
Of the resolutions voted on, percentage voted against management 14.56%
Of the resolutions voted on, percentage abstained from  0.10%

─    Key votes undertaken over the prior year are summarised below:
−    BP PLC
Resoultion 22 – Approve the Climate Action 100+ Shareholder Resolution on Climate Change Disclosures.

Date: 21 May 2019

Criteria for assessing as significant: 
This is the first shareholder resolution put forward by LGIM.

Voted: For

Rationale:
LGIM and other major shareholders put forward a proposal calling on BP to explain how its strategy is consistent with the Paris Agreement on climate change. LGIM worked with the board of BP to secure its support for the motion. At the company’s annual general meeting, the proposal was passed with overwhelming approval from shareholders. LGIM have since met BP repeatedly – including its chair and incoming CEO – to advise on implementing the resolution. The company has announced industry-leading targets: net zero emissions from its operations, net zero carbon emissions from the oil and gas it digs out of the ground, and a 50% reduction in the carbon intensity of all the products it sells. 

Outcome: 99.1% support
−    BAYER AG
Res 2 - Approve Discharge of Management Board for Fiscal 2018

Date: 26 April 2019

Criteria for assessing as significant: 
Vote of no confidence, a rare escalation step.

Voted: Against

Rationale:
Following its acquisition of agribusiness Monsanto, Bayer was asked to pay millions in damages in several court cases where plaintiffs claimed that Monsanto’s glyphosate-based weedkiller RoundUp was linked to causing cancer. The damages were reduced upon appeal, and Bayer was adamant that RoundUp was not carcinogenic. LGIM are concerned that the Bayer supervisory and management boards had not fully considered the significant risks related to glyphosate litigation in the US. Although at the time of the merger agreement in 2016 there were only about a hundred such lawsuits, by the end of 2019, the number grew to over 40,000. From the finalisation of the acquisition in May 2018 until July 2019 Bayer’s share price fell by approximately 45%. Unrelated to the litigation, LGIM have previously discussed the importance of a lead independent director, particularly in times of crisis. LGIM spoke to the company ahead of its 2019 AGM to gain a better understanding of the decision-making process in relation to the Monsanto acquisition and the legal advice it received for litigation risk. LGIM recommended establishing advisory and M&A committees, staffed by members appointed with specific expertise; appointing non-executive directors with specific expertise; and appointing new executives. In addition, LGIM suggested that these incidents should have a bearing on remuneration awarded for the year.

Outcome: 44.5% for; 55.5.% against
−    ESSSILORLUXOTTICA
Res A, B and C: Elect Wendy Evrard Lane as Director; Elect Jesper Brandgaard as Director; Elect Peter James Montagnon as Director

Date: 16 May 2019

Criteria for assessing as significant: 
Escalation of engagement. LGIM publicly announced their support for the board nominees ahead of the AGM to ensure the current board knew their intentions and to raise awareness to the other shareholders.

Voted: For

Rationale:
In 2018, French lenses producer Essilor merged with Italian frame manufacturer Luxottica. Upon conclusion of the merger, the executive chair of Luxottica´s holding company (Delfin) owned 32.7% of the merged company’s share capital. Under the terms of the merger agreement, the aforementioned executive chairman and Essilor’s executive vice-chairman were both given equal powers.  A board was also established, with membership split equally between Essilor and Delfin. In March 2019 an internal disagreement between the two heads of the merged entity occurred. Two of the company’s shareholders – Comgest and Valoptec – put forward three board nominees in a bid to break the impasse. LGIM contacted EssilorLuxottica to discuss the issue, but received no reply. LGIM engaged extensively with Comgest, Valoptec and the board nominees. LGIM publicly announced their support for the board nominees ahead of the AGM to ensure the current board knew their intentions and to raise awareness to the other shareholders.

Outcome: Res A: 43.7% support ; Res B: 34.1% support
−    FIRSTGROUP
Resolution a - Remove Wolfhart Hauser as Director

Date: 25 June 2019

Criteria for assessing as significant: 
The activist's proposals were potentially disruptive for the company.

Voted: For

Rationale:
The performance of the company had been weak for a number of years. Following a profit warning in February 2018, the chief executive stepped down. 

On 25 June 2019, shareholder activist Coast Capital convened a shareholder meeting to appoint seven directors to the board of the company and remove six company directors including the board chair and the chief executive. 

Coast Capital made strategy proposals such as: the company exits its rail business; separate the company’s US and UK assets; the immediate payment of a dividend. 

David Martin, one of the nominees of the activist, failed to confirm his intention to stand for election before the deadline. The resolution on his appointment to the board could not therefore be validly voted on by shareholders. 

LGIM engaged directly with both sides: the company’s Senior Independent Director (SID) and the activist. They also consulted other top shareholders on their views. 

LGIM decided to cast a vote against the board chair to signal their concerns around the pace of execution of the strategy and poor performance. They supported the rest of the board and opposed the activist’s nominees..

Outcome: 29.3% for

  •  LGIM – UK Equity Index Fund – Passive
Number of meetings eligible to vote at over year to 31 March 2020 846
Number of resolutions eligible to vote on over year to 31 March 2020  11,859
Percentage of resolutions voted on where eligible 99.64%
Of the resolutions voted on, percentage voted with management  93.64%
Of the resolutions voted on, percentage voted against management 6.36%
Of the resolutions voted on, percentage abstained from 0.00%

─    Key votes undertaken over the prior year are summarised below:
−    BP PLC
Resoultion 22 – Approve the Climate Action 100+ Shareholder Resolution on Climate Change Disclosures.

Date: 21 May 2019

Details of vote as per LGIM - Global Equity Fixed Weights (60:40) Index Fund above. 
−    FIRSTGROUP
Resolution a - Remove Wolfhart Hauser as Director

Date: 25 June 2019

Details of vote as per LGIM - Global Equity Fixed Weights (60:40) Index Fund above.

  • LGIM – World (ex UK) Index Fund – Passive
Number of meetings eligible to vote at over year to 31 March 2020  2,286
Number of resolutions eligible to vote on over year to 31 March 2020 27,184
Percentage of resolutions voted on where eligible  97.88%
Of the resolutions voted on, percentage voted with management 81.46%
Of the resolutions voted on, percentage voted against management 18.40%
Of the resolutions voted on, percentage abstained from 0.14%

─    Key votes undertaken over the prior year are summarised below:
−    BAYER AG
Res 2 - Approve Discharge of Management Board for Fiscal 2018

Date: 26 April 2019

Details of vote as per LGIM - Global Equity Fixed Weights (60:40) Index Fund above.
−    ESSSILORLUXOTTICA
Res A, B and C: Elect Wendy Evrard Lane as Director; Elect Jesper Brandgaard as Director; Elect Peter James Montagnon as Director

Date: 16 May 2019

Details of vote as per LGIM - Global Equity Fixed Weights (60:40) Index Fund above.

 

Appendix: Statement of Investment Principles

1.    Introduction
 
The Trustees of the Cruden Investments Limited Retirement Cash Benefits Scheme ("the Trustees” of “the Scheme") have written this Statement of Investment Principles ("the Statement") to comply with the Pensions Act 1995, as amended by the Pensions Act 2004, the Occupational Pension Schemes (Investment) Regulations 2005, as amended by the Occupational Pension Schemes (Charges and Governance) Regulations 2015 and subsequent legislation.  

The Statement sets out the principles governing decisions about investment arrangements for the Scheme.  The Trustees have consulted a suitably qualified person in obtaining written advice from Mercer. In preparing the Statement, the Trustees have also consulted the Sponsoring Company.

Overall, the investment policy falls into two parts.  The strategic management of the assets is fundamentally the responsibility of the Trustees acting on expert advice and is driven by their investment objectives as set out in Section 2 below. The remaining elements of policy are part of the day to day management of the assets which is delegated to professional investment managers and described in Section 4.

1.1.    Background to the Scheme

The Scheme consists of two sections. Members who joined the Scheme prior to 1 April 2004 had their contributions invested in Aberdeen Standard Life’s With-Profit policies on an insured basis. The Trustees set up a new arrangement with Legal & General Investment Management (“LGIM”) and from 1 April 2004, all future contributions from this date are being made to the LGIM pooled funds.

The Scheme also has a legacy money purchase arrangement separately invested from the Scheme’s main assets in individual policies of assurance with Royal London.


2.    Investment Objectives, Risk and Investment Strategy

2.1.    Investment Objectives

The Trustees recognise that members have differing investment needs and that these may change during the course of members’ working lives. 

The Trustees also recognise that members have different attitudes to risk.  The Trustees regard their duty as making available a range of investment options sufficient to enable members to tailor their own investment strategies to their own needs. 

The Trustees also recognise that members may not believe themselves qualified to take investment decisions.  As such the Trustees make available a default investment option for the LGIM section, which is described in section 3.

The Trustees regularly obtain professional advice, monitor and review the suitability of the funds provided and from time to time may change the managers or investment options. The advice received and arrangements implemented are, in the Trustees opinion consistent with the requirements of Section 36 of the Pensions Act 1995 (as amended).

2.2.    Risk Measurement and Management

The Trustees regards “risk” as the likelihood of failing to achieve the objectives set out above and seeks to minimise these risks, so far as is possible.

In arriving at the range of invetsment options, the Trustees have considered risk from a number of perspectives. The list below is not exhaustive but covers the main risks that the Trustees considers and how they are managed.

Type of Risk

Description

How the risk is monitored and managed

Market risks

Inflation risk

The risk that returns over the members’ working lives does not keep pace with inflation.

The Trustees make available a range of funds, across various asset classes, with the majority expected to provide above inflationary returns over the long term.

The Trustees monitor performance on a regular basis

Members are able to set their own investment allocations, in line with their risk tolerances.

Currency risk

The risk that fluctuations in foreign exchange rates will cause the value of overseas investments to fluctuate.

Credit risk

The risk that the issuer of a financial asset, such as a bond, fails to make the contractual payments due.

Equity and other price risk

The risk that market movements leads to a substantial reduction in the value of a member’s savings.

Liquidity risk

The risk that the Scheme’s assets cannot be realised at short notice in line with member and Trustees demands.

The Scheme invests in daily dealt and daily priced pooled funds.

Investment Manager risk

The risk that the appointed investment manager underperforms the benchmark return, fail to carry out operational tasks, do not ensure safe-keeping of assets or breach agreed guidelines.

The Trustees measure risk in terms of the performance of the funds compared to relevant benchmarks on a regular basis. Majority of the pooled funds are passively managed to avoid risk of underperformance relative to benchmark return.

The Trustees, also on a regular basis, monitor any significant issues with the investment managers that may impact their ability to meet their performance objectives.

Pension Conversion risk

The risk that the member is invested in a strategy that does not reflect the way in which they intend to take their benefits at retirement.

The Trustees make available a number of funds, which allow members to plan for their specific retirement benefit.

The default strategy is a lifestyle strategy which automatically switches member assets into investments whose value is expected to be less volatile relative to annuity prices

The members, consisting of those with assets in the Standard Life With-Profits policy and all new members from 1 April 2004 can select the lifestyle strategy if it meets their personal preferences and retirement objectives.

Environmental, Social and Corporate Governance (“ESG”) risk

The risk that ESG concerns, including climate change, have a financially material impact on the return of the Scheme’s assets.

 

The management of ESG related risks is delegated to investment managers.

See Section 4.3 of this Statement for the Trustees responsible investment and corporate governance statement.

The risks identified in the table above are considered by the Trustees to be ‘financially material considerations’. The Trustees believes the appropriate time horizon for which to assess these considerations within should be viewed at a member level. This will be dependent on the member’s age and when they expect to retire. 


2.3.    Investment Strategy

In choosing the Scheme's investment options, it is the policy of the Trustees to consider:

The potential risk and rewards of a range of asset classes. The current range includes With- Profits, equities, bond and cash funds. The Trustees mainly offer passive funds as they are cost effective.

The suitability of different styles of investment management and the need for investment manager diversification;

The suitability of each asset class within a defined contribution scheme; and

The need for appropriate diversification both across and within asset classes.

The Trustees believe the range of funds and a default strategy provides appropriate choices for members’ different saving objectives, risk profiles and time horizons.

If members self-select they can combine the investment funds in any proportion in order to determine the balance between different kinds of investments. This will also determine the expected return on a member’s assets and should be related to the member’s own risk appetite and tolerances. Each of the available funds is considered to be diversified across an appropriate number of underlying holdings / issuers.

The Trustees expect the long-term return on equities to exceed price inflation and general salary growth. 

The long-term returns on bond and cash funds are expected to be lower than that of equities. However, bond funds are expected to experience lower volatility relative to annuity prices than equities and should help reduce the potential mismatch in relation to the price of annuities (assuming a member opts to access their DC savings via annuity purchase). The Trustees appreciate that bonds cannot provide a complete hedge against all factors that contribute to the movement in annuity prices for example longevity assumptions.

 Money market is expected to provide protection against changes in short-term capital values, and may be appropriate for members receiving part of their retirement benefits in the form of tax-free cash.


2.3.1.    Lifestyle strategy

The Scheme offers members the option of having their funds invested in a lifestyle strategy which is a pre-determined investment arrangement. The lifestyle strategy invests members’ savings in a global equity fund, which is a high risk fund, when they are further away from retirement (more than 5 years), before switching into funds designed to broadly match changes in inflation-linked annuity prices (with an allowance for tax free cash).  The strategy is summarised in the following table.

Years to Retirement, % of fund invested

  5+ 4 3 2 1 0
Global Equity: Fixed Weights (60:40) Fund 100 80 60 40 20 0
Over 5 year Index-linked Gilt Fund 0 15 30 45 60 75
Cash Fund 0 5 10 15 20 25
Total 100 100 100 100 100 10
  1.  
  2. 2.3.2.    Self-select fund range

The self-select fund range is made up of stand alone funds and provides flexibility for members who do not wish to be invested in the lifestyle strategy. The range comprises of equities, bonds and cash. Further information is provided in the appendix.

3.    Default Investment Option

3.1.    Objectives of the Default Investment Option 

A proportion of members will actively choose the default option because they feel it is most appropriate for them.  However, the vast majority of DC members do not make an active investment decision and are automatically invested in the default option.

Having taken written professional advice from a suitably qualified person from Mercer, the Trustees set the default investment option to target purchase of inflation linked annuity as it reflects the option that is considered likely to be the most appropriate for members who are unable to decide how they wish to take their retirement benefits.  

The Trustees’ objectives in relation to the default investment option, and the ways in which the Trustees seek to achieve these, are detailed below:

-    To generate returns in excess of inflation during the “growth” phase of the option.    

The default investment option’s growth phase structure invests 100% of members’ savings in passively managed UK and overseas equities. These investments are expected to provide long-term growth with some protection against inflation erosion, albeit with some volatility.

-    To provide an option that reduces investment risk for members as they approach retirement.

As a member’s pot grows, investment risk will have a greater impact on member outcomes. Therefore, the Trustees believe that a default option that seeks to reduce investment risk (relative to inflation linked annuity price movements, rather than in absolute terms) as the member approaches retirement is appropriate. This is achieved by switching a member’s   investments from the growth assets to an index linked gilt fund and a cash fund over a 5 year switching period prior to a member’s target retirement date.

-    To offer to members a mix of assets at retirement that are broadly appropriate for an individual who takes 25% of their pot as cash and uses the balance to purchase an inflation-linked annuity. 

At the selected retirement date, 75% of the member’s assets will be invested in a passively managed index-linked gilt fund that invests in British Government index-linked securities and 25% in an actively managed cash fund. Whilst returns from these asset classes are expected to be modest over the long-term, they are expected to broadly match inflation linked annuity prices and cash retirement benefits.

Based on the Trustees’ understanding of the Scheme’s membership, a default investment option that targets the purchase of an inflation-linked annuity and a tax-free cash lump sum (up to 25% of a member’s pot) at retirement is expected to be broadly appropriate to meet a typical member’s requirements for income in retirement. This does not mean that members have to take their benefits in this format at retirement. It merely determines the default investment option that will be in place pre-retirement. Members who intend to take their retirement savings by other means are able to choose their own investment options.

Taking into account the demographics of the Scheme’s membership and the Trustees’ views of how the membership might behave at retirement, the Trustees believe that the current default investment option is appropriate. The Trustees will continue to review this regularly, and more strategically at least triennially, or after significant changes to the Scheme’s demographic, if sooner.

3.2.    Policies in relation to the Default Investment Option

-    The default investment option manages investment and other risks through a strategic asset allocation consisting of equities, bonds and cash. Risk is not considered in isolation but in conjunction with expected investment returns and outcomes for members. 

-    In designing the default investment option, the Trustees have explicitly considered the trade-off between risk and expected returns. The default option balances between different kinds of investments to ensure that the expected amount of risk (and commensurately the expected return) is appropriate given the age of the member and their expected retirement date.

-    Assets in the default investment option are invested in regulated markets and in a manner which aims to ensure the security, quality, liquidity and profitability of a member’s portfolio as a whole.

-    The Trustees believe that assets in the default investment option are invested in the best interests of members and beneficiaries, taking into account the profile of members.

-    The investment manager has responsibility for buying and selling the underlying assets.  All of the pooled funds used operate daily dealing cycles.  
-    The investment manager also has discretion to incorporate social, environmental and ethical considerations in exercising their delegated responsibilities. 


3.3.    Risk and Risk Management of the Default Investment Option

The Trustees regard “risk” as the likelihood of failing to achieve the objectives set out above and seeks to minimise these risks, so far as is possible. 

In arriving at their investment strategy for the default investment option and the production of the SIP, the Trustees have considered the following risks:
 

Type of Risk

Description

How the risk is monitored and managed

Market risks

Inflation risk

The risk that returns over the members’ working lives does not keep pace with inflation and will not therefore, secure an adequate income in retirement.

The default investment option is set with the intention of diversifying these risks to reach a level of risk deemed appropriate. This is set with advice from the investment adviser.

The Trustees monitor performance on a regular basis.

Currency risk

The risk that fluctuations in foreign exchange rates will cause the value of overseas investments to fluctuate.

Credit risk

The risk that the issuer of a financial asset, such as a bond, fails to make the contractual payments due.

Equity and other price risk

The risk that market movements leads to a substantial reduction in the value of a member’s savings.

Liquidity risk

The risk that the Scheme’s assets cannot be realised at short notice in line with member and Trustees demands.

The default investment option invests in daily dealt and daily priced pooled funds.

Investment Manager risk

The risk that the appointed investment managers underperform the benchmark return, fail to carry out operational tasks, do not ensure safe-keeping of assets or breach agreed guidelines.

The Trustees measure risk in terms of the performance of the underlying funds compared to relevant benchmarks on a regular basis.

The underlying funds within the default investment option are passively managed to reduce risk of underperformance.

Pension Conversion risk

The risks that the member is invested in a strategy that does not reflect the way in which they intend to take their benefits at retirement.

The default investment option is a lifestyle strategy that automatically switches member assets into investments whose value is expected to be less volatile relative to inflation linked annuity prices.

As part of their investment strategy review, the Trustees consider if the default destination remains appropriate.

Environmental, Social and Corporate Governance (“ESG”) risk

The risk that ESG concerns, including climate change, have a financially material impact on the return of the Scheme’s assets.

 

The management of ESG related risks is delegated to investment managers.

See section 4.3 of this Statement for the Trustees responsible investment and corporate governance statement.

The above items listed in Section 3.2 and 3.3 of this Statement are in relation to what the Trustees consider ‘financially material considerations’. The Trustees believe the appropriate time horizon for which to assess these considerations within should be viewed at a member level. This will be dependent on the member’s age and when they expect to retire. 

The Trustees will continue to review the default investment option over time, at least triennially, or after significant changes to the Scheme’s demographic, if sooner. Members will be supported by clear communications regarding the aims of the default investment option and the access to alternative approaches.  


4.    Day to Day Management of the Assets

4.1.    Main Assets

The Trustees delegate the day to day management of the assets within the Standard Life With- Profit policies and the LGIM pooled funds to the respective managers. The investment managers are authorised or regulated and the Trustees expect them to manage the assets delegated to them under the terms of their contracts.

The investment managers have full discretion to buy and sell investments on behalf of the Scheme, subject to agreed constraints and applicable legislation. They have been selected for their expertise in different specialisations.

The Trustees assess the continuing suitability of the Scheme’s investment manager on a periodic basis. The Trustees’ investment adviser is available to provide help in monitoring the investment manager, both in the form of written reports or attendance at meetings as required by the Trustees.

The Trustees will review the appointment of any investment manager for any reason they consider appropriate.

4.2.    Realisation of Investments

In general, the Scheme’s investment managers have discretion in the timing of realisations of investments and in considerations relating to the liquidity of those investments. The investment managers have responsibility for generating cash required for benefit outflow. 

All funds, including those in the default strategy, are daily-dealt pooled investment arrangements. These pooled investment arrangements are themselves regulated and underlying investments are invested in regulated markets. 

4.3.     Socially Responsible Investment and Corporate Governance
 
The Trustees apply the following beliefs to the whole Scheme including the default investment option.

The Trustees believe that environmental, social and governance (“ESG”) factors do have a material impact on investment risk and return outcomes, and that good stewardship helps creates and preserve value for companies and markets as a whole.

The Trustees also recognise that long-term sustainability issues, particularly climate change present risks and opportunities that increasingly may require explicit considerations.

The Trustees have given the Investment Managers full discretion when evaluating ESG factors and in exercising rights and stewardship obligations attached to the Scheme’s investments.

Where investments are made on a passive basis, whilst the manager has no discretion over the selection of individual shares or bond issues (as the manager seeks to match the composition of the benchmark index as closely as possible), the Trustees expect the manager to vote in line with its own corporate governance policy.

However, the Trustees consider how ESG, climate change and stewardship is integrated within investment process when appointing new investment managers. In particular, where appropriate, the Trustees will review:

  • The ESG ratings assigned by Mercer to each of the funds used within the Scheme. Mercer’s ratings represent their view on the extent to which ESG and active ownership practices (voting and engagement) are integrated into the manager’s investment process ad decision making across asset classes.
  • Mercer’s assessment of the underlying equity managers against the seven principles of the UK Stewardship Code, including the extent to which they are engaging with the underlying companies in which they invest.
  • Carbon foot printing or climate scenario analysis on a more ad-hoc basis, if and when the Trustees consider this may be beneficial in appointing or reviewing any of the Scheme’s investments.

4.4.    Member Views

Member views have not explicitly been taken into account with regards to non-financial matters in the selection, retention and realisation of investments, although feedback received from members is welcomed and considered by the Trustees. 

4.5.    Additional assets

Additional Voluntary Contributions (AVCs) are invested in the same way as the main assets.

4.6.    Monitoring the Investment Managers

The Trustees monitor the bonus rates associated with the Aberdeen Standard Life With-Profit policies. In addition, the Trustees receive reports from Aberdeen Standard Life.

The Trustees receive quarterly reports from Legal & General and if appropriate meet the investment manager.
 

5.    Arrangements with Asset Managers

The Trustees appoint investment managers based on their capabilities and, therefore the perceived likelihood of achieving the expected return and risk characteristics required for the asset class being selected. The Trustees look to their investment adviser, Mercer, for their forward looking assessment of a manager’s ability to outperform over a full market cycle. Mercer’s manager research ratings assist with due diligence and questioning managers during presentations to the Trustees and are used in decisions around selection, retention and realisation of manager appointments.   

As the Trustees invest in pooled investment vehicles they accept that they have limited ability to influence investment managers to align their decisions with the Trustees’ policies set out in this statement. However, appropriate mandates can be selected to align with the Trustees’ overall investment strategy.

The Trustees expect investment managers to incorporate the consideration of longer term factors, such as ESG factors, into their decision making process where appropriate. Voting and engagement activity should be used by investment managers to discuss the performance of an issuer of debt or equity. The Trustees also consider Mercer’s assessment of how each investment manager embeds ESG into its investment process and how the manager’s responsible investment philosophy aligns with the Trustees’ responsible investment policy. The Trustees will use this assessment in decisions around selection, retention and realisation of manager appointments. 

The Trustees’ focus is on longer-term performance but shorter-term performance is monitored to ensure any concerns can be identified in a timely manner. The Trustees receive quarterly reports from Legal & General and review both absolute and relative performance against a portfolio or underlying investment manager’s benchmark on a regular basis, including assessments of both shorter and longer time horizons. The Trustees also rely upon Mercer’s manager research capabilities. The remuneration for investment managers used by the Scheme is based on assets under management; the levels of these fees are reviewed annually as part of the annual value for members assessment to ensure they continue to represent value for members. If performance is not satisfactory, the Trustees may request further action be taken, including a review of fees.

Portfolio turnover costs for each of the funds are reviewed on an annual basis as part of the annual value for members assessment. The ability to assess the appropriateness of these costs is currently limited by the availability of data and the lack of industry-wide benchmarks. The Trustees will monitor industry developments in how to assess these costs and incorporate this in future value for members assessments. Importantly, performance is reviewed net of portfolio turnover costs.

The Trustees are long term investors. All funds are open-ended and therefore there is no set duration for manager appointments. The Trustees are responsible for the selection, appointment, monitoring and removal of the investment managers. The available fund range and Default Option are reviewed on at least a triennial basis. A manager’s appointment may be terminated if it is no longer considered to be optimal nor have a place in the default strategy or general fund range.  

6.    Compliance with this Statement

The Trustees will review this Statement regularly on the advice of Mercer.  The Trustees monitor compliance with this Statement on a regular basis and obtain written confirmation from the investment managers that it has given effect to the investment principles in this Statement so far as reasonably practicable and that in exercising any discretion the investment manager has done so in accordance with regulation 4 of the Occupational Pension Schemes (Investment) Regulations 2005.

7.    Review of this Statement
 

The Trustees will review this Statement at least once every three years and in response to any material changes to any aspects of the Scheme, its liabilities, finances and the attitude to risk of the Trustees and the Sponsoring Employer, which they judge to have a bearing on the Statement.  Any such review will again be based on written, expert investment advice and will be in consultation with the Sponsoring Employer.
 

………………………………………………………………………………………………

For and on behalf of the Trustees of the Cruden Investments Limited Retirement Cash Benefits Scheme

September 2020

History of Alterations to SIP

Initial statement: July 2004

Revised statement: March 2016

Revised statement: September 2019

Revised statement: September 2020


Appendix – Underlying funds and fund objectives

Global Equity Fixed Weight Index Fund -:  This fund aims to provide long-term growth by investing only in equities (both UK and overseas). Performance is compared against a benchmark set out in the table below:

Asset Class ii.(%) Index
UK Equities 60 FTSE All Share Index
North American Equities 14 FTSE AW North American Index
European Equities (ex UK) 14 FTSE AW Europe ex UK Index
Japanese Equities 7 FTSE AW Japan Index
Pacific Equities 5 FTSE AW Asia Pacific ex Japan Index
Total 100  

The Fund’s performance objective is to match the return on its benchmark, measured over rolling 3 year periods. The underlying funds also aim to match their benchmark return, within the following risk tolerances (tracking errors):

  • UK Equity Index Fund - to achieve a tracking deviation within ±0.25% in two years out of every three;
  • North America Equity Index Fund - to achieve a tracking deviation within ±0.5% in two years out of every three;
  • Europe (ex UK) Equity Index Fund - to achieve a tracking deviation within ±1.0% in two years out of every three;
  • Japan Equity Index Fund - to achieve a tracking deviation within ±1.0% in two years out of every three;
  • Asia Pacific (ex Japan) Equity Index Fund - to achieve a tracking deviation within ±1.0% in two years out of every three.

Over 5 Years Index-Linked Gilts Index Fund:  The Fund invests in British Government index linked securities (index linked gilts) that have a maturity period of 5 years and over.  The Fund’s performance objective is to track the performance of the FTSE-A Over 5 Years Index Linked Gilt Index and to achieve a tracking deviation within 0.25% in two years out of three.

Cash Fund:  The Fund aims to achieve investment returns in line with wholesale money market short-term interest rates.  The Fund’s performance objective is to outperform the LIBID (London Interbank bid rate) 7 Day Index.

UK Equity Index Fund: The Fund’s performance objective is to track the performance of the FTSE All Share Index return and to achieve a tracking deviation within 0.25% in two years out of every three.

World (ex UK) Equity Fund: This Fund aims to provide long-term growth by investing only in equities.  The performance objective of the Fund is to match the return on the FTSE World (ex UK) Index.

Over 15 Year Gilts Index Fund:  The Fund invests in British Government Gilts that have a maturity of 15 years and over.  The Fund’s performance objective is to track the performance of the FTSE A Over 15 Year Gilt Index.

Charges

Global Equity Fixed Weights (60:40) Index Fund 0.16 % per annum
Over 5 Years Index-Linked Gilt Index Fund 0.10% per annum
Cash Fund 0.125% per annum
UK Equity Index Fund 0.10% per annum
World (ex UK) Equity Index Fund 0.22% per annum
Over 15 Year Gilts Index Fund 0.10% per annum

An additional fixed management charge of £1,500 per annum paid by the Scheme.