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 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. |
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|
Credit risk |
The risk that the issuer of a financial asset, such as a bond, fails to make the contractual payments due. |
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|
Equity and other price risk |
The risk that market movements leads to a substantial reduction in the value of a member’s savings. |
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|
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
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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.
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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.
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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.
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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.
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The investment manager has responsibility for buying and selling the underlying assets. All of the pooled funds used operate daily dealing cycles.
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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. 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.
6. 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 2019
History of Alterations to SIP
Initial statement: July 2004
Revised statement: March 2016
Revised statement: September 2019
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 ±25% in two years out of every three;
- North America Equity Index Fund - to achieve a tracking deviation within ±5% in two years out of every three;
- Europe (ex UK) Equity Index Fund - to achieve a tracking deviation within ±0% in two years out of every three;
- Japan Equity Index Fund - to achieve a tracking deviation within ±0% in two years out of every three;
- Asia Pacific (ex Japan) Equity Index Fund - to achieve a tracking deviation within ±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 |
