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.

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. 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

7. 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

The Pensions Regulator defines core financial transactions as including:

 bulk transfers in and out

 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.