Welcome Break Pension Plan

Notes:
1. Projected pension pot values are shown in today’s terms, and do not need to be reduced further for the effect of future inflation.
2. The starting pot size is assumed to be £10,000.
3. Inflation is assumed to 2.5% p.a.
4. Values are estimates and are not guaranteed.
5. The default fund shown is as at the growth phase (16 years prior to retirement).
6. The net projected growth rates for each fund are as follows:

The Welcome Break Pension Plan (“The Plan”)

Statement of Investment Principles – September 2019

1. Introduction

The Trustees of the Welcome Break Pension Plan (the “Plan”) have drawn up this Statement of Investment Principles (the “Statement”) to comply with the requirements of the Pensions Act 1995 (the “Act”) and subsequent legislation. The Statement is intended to affirm the investment principles that govern decisions about the Plan’s investments. The Trustees’ investment responsibilities are governed by the Plan’s Trust Deed and Rules, of which this Statement takes full regard.

In preparing this Statement the Trustees have consulted a suitably qualified person by obtaining written advice from Mercer Limited (“the Investment Consultant”). In addition, consultation has been undertaken with the Sponsoring Company (the “Sponsor”) to ascertain whether there are any material issues of which the Trustees should be aware when setting their objectives and agreeing the Plan’s investment arrangements.

Defined Benefit Section

2. Process For Choosing Investments

The Trustees have decided to implement a de-risking strategy whereby the level of investment risk reduces as the Plan’s funding level improves. The Trustees have agreed the way in which investment risk should be reduced and have delegated the implementation of the de-risking strategy to Mercer through the use of the Mercer Dynamic De-risking Solution (“DDS”). Mercer constructs portfolios of investments that are expected to maximise the return (net of all costs) given the targeted level of risk

In considering appropriate investments for the Plan, the Trustees have obtained and considered the written advice of Mercer, whom the Trustees believe to be suitably qualified to provide such advice. The advice received and arrangements implemented are, in the Trustees’ opinion, consistent with the requirements of Section 36 of the Act (as amended).

3. Investment Objectives

The Trustees understand that taking some investment risk, with the support of the Sponsor, is necessary to improve the Plan’s ongoing and solvency funding positions. The Trustees recognise that growth asset investment will bring increased volatility of the funding level, but invest in the expectation of improvements in the Plan’s funding level through outperformance of the liabilities over the long term.

The Trustees’ primary objective is to act in the best interest of the members. The main objective of the Trustees is therefore to improve the funding position of the DB Section to firstly achieve 100% funding on the Technical Provisions assumptions and thereafter target being fully funded on actuarial assumptions for the liabilities which allow a relatively low risk investment strategy to be adopted.

The Trustees recognise this ultimately means investing in a portfolio of bonds but believe that at the current time some growth asset investment is justified to target enhanced return expectations and thereby target funding level improvements. The Trustees recognise that this introduces investment risk and these risks are discussed below.

The Trustees will seek to avoid significant volatility in the contribution rate.

The objectives set out above and the risks and other factors referenced in this Statement are those that the Trustees determine to be financially material considerations. Non-financial considerations are discussed in section 16.

4. Risk Management and Measurement

There are various risks to which any pension scheme is exposed. The Trustees’ policy on risk management over the Plan’s anticipated lifetime is as follows:

• The primary risk upon which the Trustees focus is that arising through a mismatch between the Plan’s assets and its liabilities and the Sponsor’s ability to support this mismatch risk.
• The Trustees recognise that whilst increasing investment risk increases potential returns over a long period, it also increases the risk of a shortfall in returns relative to that required to cover the Plan’s liabilities as well as producing more volatility in the Plan’s funding position.
• The Trustees’ willingness to take on investment risk is dependent on the continuing financial strength of the Sponsor and its ability to contribute to the Plan. The strength of the Sponsor and its perceived commitment to the Plan is monitored by the Trustees and the level of investment risk taken may increase/decrease should either of these change
• The Trustees have delegated the asset allocation to Mercer. To control the risk outlined above, the Trustees set the split between the Plan’s Growth and Matching assets such that the expected return on the portfolio is expected to be sufficient to meet the objectives outlined in Section 3. As the funding level improves, investments will be switched from growth assets into matching assets with the aim of reducing investment risk.
• Whilst moving towards the target funding level, the Trustees recognise that even if the Plan’s assets are invested in matching assets there may still be a mismatch between the interest-rate and inflation sensitivity of the Plan’s assets and the Plan’s liabilities due to the mismatch in duration between matching assets and actuarial liabilities and longevity risk (the risk that the assumptions made about members’ life-expectancy are not borne out).
• The Trustees recognise the risks that may arise from the lack of diversification of investments. To control this risk, the Trustees have delegated the asset allocation decisions within the Growth and Matching portfolios to Mercer (subject to certain restrictions). Subject to managing the risk from a mismatch of assets and liabilities, Mercer aims to ensure the asset allocation policy in place results in an adequately diversified portfolio. Investment exposure is obtained via pooled vehicles. Mercer provides the Trustees with regular monitoring reports regarding the level of diversification within the portfolio.
• To help the Trustees ensure the continuing suitability of the current investments, the Trustees delegate responsibility for the hiring, firing and ongoing monitoring of the Plan’s investment managers to Mercer. Mercer provides the Trustees with regular reports regarding the appointed investment managers to monitor consistency between the expected and experienced levels of risk and return.
• There is a risk that the day-to-day management of the assets will not achieve the rate of investment return expected by the Trustees. The Trustees recognise that the use of active investment managers involves such a risk. However, for specific asset classes they believe that this risk is outweighed by the potential gains from successful active management. Likewise, passive management will be used for one of a number of reasons, namely to diversify and reduce risk and when investing in markets deemed efficient where the scope for added value is limited.
• To help diversify manager specific risk, the Trustees expect Mercer to make multiple manager appointments within each asset class.
• Investment may be made in securities that are not traded on regulated markets. Recognising the risks (in particular liquidity and counterparty exposure) such investments will normally only be made with the purpose of reducing the Plan’s mismatch risk relative to its liabilities or to facilitate efficient portfolio management. In any event the Trustees will ensure that the assets of the Plan are predominantly invested on regulated markets.
• The Trustees recognise the risks inherent in holding illiquid assets. The Trustees have carefully considered the Plan’s liquidity requirements and time horizon when setting the investment strategy and manage liquidity risk by ensuring illiquid asset classes represent an appropriate proportion of the overall investment strategy.
• The Plan is subject to currency risk because some of the investment vehicles in which the Plan invests are denominated or priced in a foreign currency. To limit currency risk, Mercer sets a target non-sterling currency exposure and manages the level of non-sterling exposure using currency hedging derivatives such as forwards and swaps.
• The Trustees recognise that environmental, social and corporate governance concerns, including climate change, have a financially material impact on return. Section 16 sets out how these risks are managed.
• Responsibility for the safe custody of the Plan’s assets is delegated to Mercer who has appointed State Street Custodial Services (Ireland) Limited (“State Street”) as custodian of the assets invested in their vehicles. Mercer is responsible for keeping the suitability of State Street under ongoing review.
• Should there be a material change in the Plan’s circumstances, the Trustees will advise Mercer who, together with the Trustees, will review whether and to what extent the investment arrangements should be altered; in particular, whether the current de-risking strategy remains appropriate.

5. Investment Strategy

The Trustees, with advice from the Plan’s Investment Consultant and the Scheme Actuary, review the Plan’s investment strategy regularly. These reviews consider the Trustees’ investment objectives, their ability and willingness to take risk (the risk budget) and how this risk budget should be allocated and implemented (including de-risking strategies).

The Trustees engage Mercer to implement their de-risking strategy. The approach undertaken relates the asset allocation to the Plan’s funding level (on an actuarial basis using a single discount rate of 0.9% p.a. in excess of the appropriate gilt yields i.e. “gilts + 0.9% basis”). The de-risking rules mandate the following practices:

• To hold sufficient growth assets to target full funding on a “gilts +0.9%” basis when a suitably strong funding level is achieved;
• To reduce the volatility in the funding level by reducing un-hedged liability exposures;
• To monitor the progress in the funding level and to capture improvements in the funding level promptly, if and when they arise.

The de-risking triggers which form the basis of the Plan’s dynamic investment strategy are set out in a separate document – the Statement of Investment Arrangements (“SIA”).

The de-risking strategy is formally reviewed on an approximately annual basis to ensure that it remains appropriate.

For the avoidance of doubt, once the funding level has moved through a trigger point and investment risk has been reduced in accordance with the de-risking strategy, the asset allocation will not be automatically “re-risked” should the funding level subsequently deteriorate.

The Trustees have delegated the allocation of assets within the growth and matching portfolios to Mercer, subject to the restrictions set out in the SIA.

Rebalancing ranges have been set within the growth and matching portfolios to ensure the Plan’s assets remain invested in a manner which is consistent with the de-risking strategy. The ranges have been designed to ensure that unnecessary transaction costs are not incurred by frequent rebalancing. Rebalancing ranges around the target allocation are detailed in the SIA.

Responsibility for monitoring the Plan’s asset allocation and undertaking any rebalancing activity when the range restrictions are breached is delegated to Mercer. Mercer reports quarterly to the Trustees on any breaches to the range restrictions.

6. Day–to-Day Management of the Assets

The Trustees have delegated day-to-day management of the assets to Mercer who in turn delegates responsibility for the investment of the assets to a range of underlying specialist investment managers. Mercer is responsible for the selection, appointment, removal and monitoring of the underlying investment managers. The underlying investment managers have full discretion to buy and sell investments on behalf of the Plan subject to agreed constraints.

The Trustees have taken steps to satisfy themselves that Mercer has the appropriate knowledge and experience to choose and combine the underlying investment managers and ensure that they are fit to manage the Plan’s investments.

The Trustees regularly review the continuing suitability of the Plan’s investments, including Mercer’s ability to select, appoint, remove and monitor the appointed managers. Mercer is regulated by the Financial Conduct Authority (“FCA”).

7. Realisation of Investments

Mercer and the underlying investment managers have discretion in the timing of realisation of investments and in considerations relating to the liquidity of those investments within parameters stipulated in the relevant appointment documentation.

8. Cash flow and cash flow management

Cash flows, whether positive or negative, are used to move the Plan’s asset allocation and allocation to the individual underlying investment managers back towards the strategic allocation appropriate at that point in time given the level of de-risking that may have occurred.

9. Rebalancing

Responsibility for monitoring the Plan’s asset allocation and undertaking any rebalancing activity is delegated to Mercer. Mercer will review the actual balance between the Growth and Matching portfolios on an ongoing basis. If at any time the actual balance between the Growth and Matching portfolios is deemed to be outside the appropriate tolerance range Mercer will seek to rebalance these allocations back towards the target allocations. Although Mercer has discretion to vary the tolerance range, it is the intention that the Growth portfolio allocation will not drift by more than 5%, in absolute terms, away from the relevant target allocation.

The ranges have been designed to ensure that unnecessary transaction costs are not incurred by frequent rebalancing.

In the event of a funding level trigger being breached, the assets will be rebalanced to bring them in line with the reduced growth portfolio weight, under the new de-risking band, as defined in the SIA.

10. Sponsor Related Investment

The Trustees note the legislation in relation to limits in sponsor related investment. Given the size of the Sponsor, in the context of the global markets in which the Plan invests, and the diversified investment strategy, the Trustees consider it very unlikely that their investments could be in breach of the legislative constraints.

11. Additional Assets

Assets in respect of the Plan’s Defined Contribution Section are held with Legal & General Investment Management. Members’ additional voluntary contributions (“AVCs”) are held with Legal & General Investment Management and Standard Life.

12. Fee Structures

Mercer levies a fee (plus VAT where applicable) based on a percentage of the value of the assets under management which covers the design and annual review of the de-risking strategy, and investment management of the assets. In addition the underlying managers also levy fees based on a percentage of the value of the assets under management.

Defined Contribution Section and AVCs

13. Investment Objectives

The Trustees recognise that members have different investment goals and that these may change during the course of their working lives. They also recognise that members have different attitudes to risk. The Trustees’ objective is to make available to members a range of investment options which seek to allow members to set an investment strategy that meets their needs and risk tolerances. The Trustees also recognise that members may not believe themselves qualified to take investment decisions. As such the Trustees make available a Default Lifestyle Option (in respect of the DC Section only).

These objectives translate to the following principles:

• Offering members of the DC Section a ‘Lifestyle’ approach for the default investment strategy and ensuring that the other investment strategy options allow members to plan for their specific retirement objectives;
• Making available a range of pooled investment funds which serve to meet the varying investment needs and risk tolerances of Plan members. This includes offering both passively and actively managed investment funds;
• Providing general guidance as to the purpose of each investment option;
• Encouraging members to seek independent financial advice from an appropriate party in determining the most suitable option for their individual circumstances;
• In determining an appropriate balance between providing flexibility and choice, as well as simplicity and cost control, the Trustees aim to make available a range of options which satisfy the needs of the majority of members.
• The Trustees periodically review the suitability of the options provided and from time to time will change or introduce additional investment funds as appropriate.

14. Default Lifestyle Strategy

With regards to the default lifestyle investment strategy:

• The growth phase structure invests in equities and other growth-seeking assets, and is intended to provide growth with some downside protection and some protection against inflation erosion.
• As a member’s pot grows, investment risk will have a greater impact on member outcomes. Therefore, the default lifestyle investment strategy seeks to reduce investment risk as the member approaches retirement.
• Based on their understanding of the Plan’s membership and the requirements of legislation and the Plan’s Rules about how members of the DC Section can take their benefits, the Trustees have implemented a default lifestyle investment strategy that targets an investment portfolio suitable for a member wishing to take 75% of their DC fund as an inflation linked pension and 25% of their fund as a tax free cash lump sum.
• The Trustees will review the default lifestyle strategy over time, at least triennially, or after significant changes to the Plan’s demographics, if sooner

The Trustees have produced a statement of investment principles in respect of the default lifestyle strategy.

15. Risk

The Trustees have considered risks from a number of perspectives. The list below is not exhaustive but covers the main risks that the Trustees consider and how they are managed.

In selecting assets, the Trustees consider the liquidity of the investments in the context of the likely needs of members. All assets are daily dealing and therefore should be realisable based on member demand.

The items listed above are in relation to what the Trustees consider ‘financially material considerations’. The Trustees believe the appropriate time horizon over which to assess these considerations should be viewed at a member level. This will be dependent on the member’s age and their Selected Retirement Age. Non-financial considerations are discussed in section 16.

Assets in respect of members’ AVCs are invested in a range of investment funds. The AVC arrangements are reviewed periodically to ensure that the investment profile of the funds available remains consistent with the objectives of the Trustees and the needs of the members. More information on the AVC providers is detailed in the SIA.

Arrangements are in place to monitor the DC and AVC investments to help the Trustees check that nothing has occurred that would bring into question the continuing suitability of the current investments.

The Trustees look to ensure members of all risk profiles are catered for within the DC and AVC investment arrangements. The Trustees also offer members a lifestyle investment strategy for DC benefits in order to reduce the volatility of investment returns relative to the benefits expected to be taken for members that are approaching retirement.

16. DB and DC Sections and AVCs

Environmental, Social and Corporate Governance (ESG), Stewardship, and Climate Change

The Trustees believe that ESG factors may have a material impact on investment risk and return outcomes, and that good stewardship can create 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 consideration. The Sponsor’s views on ESG matters will be accounted for, noting that they may not necessarily result in a change in the Trustees’ investment decisions.

DB Section

The Trustees have delegated day to day management of the assets to Mercer who in turn delegates responsibility for the investment of the assets to a range of underlying investment managers. These investment managers are expected to evaluate ESG factors, including climate change considerations, and exercise voting rights and stewardship obligations attached to the investments, in accordance with their own corporate governance policies and current best practice, including the UK Corporate Governance Code and UK Stewardship Code.

The Trustees consider how ESG, climate change and stewardship is integrated within Mercer’s investment processes and those of the underlying managers in the monitoring process. Mercer is expected to provide reporting on a regular basis, at least annually, on ESG integration progress, stewardship monitoring results, and climate-related metrics such as carbon foot printing for equities and/or climate scenario analysis for diversified portfolios.

Member views are not taken into account in the selection, retention and realisation of investments.

The Trustees have not set any investment restrictions on the appointed investment managers in relation to particular products or activities, but may consider this in future.

DC Section and AVCs

As the DC assets are invested in pooled funds, the Trustees have given the appointed investment managers full discretion in evaluating ESG factors, including climate change considerations, and exercising voting rights and stewardship obligations attached to the investments. The Trustees accept that by using pooled investment vehicles for its investments, the Plan’s voting rights are exercised by its investment managers in accordance with their own corporate governance policies, and taking account of current best practice including the UK Corporate Governance Code and the UK Stewardship Code.

The Trustees will consider ESG and climate change in manager selection and strategy decisions based on the ratings provided by their consultant, however, the prominent weighting on decisions will be expectations of future performance and the impact on member outcomes.

The Trustees will review their consultant’s ESG ratings for the investment managers on an annual basis. A change in ESG rating does not mean that the fund will be removed or replaced automatically.

The Trustees have not set any investment restrictions on the appointed investment managers in relation to particular products or activities, but may consider this in the future. Member views are not explicitly taken into account in the selection, retention and realisation of investment funds but the Trustees will consider how to cater for members who might engage on ESG matters.

17. Review of this Statement

The Trustees will review this Statement at least once every three years and without delay after any significant change in investment policy. Any change to this Statement will only be made after having obtained and considered the written advice of someone who the Trustees reasonably believe to be qualified by their ability in and practical experience of financial matters and to have the appropriate knowledge and experience of the management of pension plan investments.

WELCOME BREAK PENSION PLAN

STATEMENT OF INVESTMENT PRINCIPLES IN RESPECT OF THE DEFAULT INVESTMENT STRATEGY FOR THE DC SECTION – SEPTEMBER 2019

1. Introduction

1.1 The Trustees of the Plan have drawn up this Statement of Investment Principles (“the Statement”) to comply with the requirements of the Occupational Pension Schemes (Investment) Regulations 2005 and subsequent legislation, relating to provision of information specific to default investments, referred to as the “Default Arrangement”. This should be read in conjunction with the main Statement.

1.2 The Default Arrangement covered by this Statement is as follows:

• the Lifestyle Investment Programming Option

2. Principles

2.1 The Trustees recognise that many members do not consider themselves competent to take investment decisions. As such, the Trustees have made available a default arrangement. Unless members make a specific request for their accounts to be invested in a different manner, the Trustees implement the default arrangement.

2.2 The default investment arrangement, which is the Lifestyle Investment Programming option (the “Lifestyle Strategy”), adopts a pre-set investment strategy. This strategy has two phases: the accumulation phase and the consolidation phase. When a member is younger, their account is invested in funds that aim for long-term growth (accumulation phase) in excess of inflation. As the member approaches retirement, their account is switched automatically into lower-risk, lower-growth funds (consolidation phase) that aim to provide greater stability by targeting the purchase of an inflation-linked annuity and the withdrawal of tax free cash.

3. Default Arrangement

Objectives

3.1 The aims of the default arrangement and the ways in which the Trustees seek to achieve these aims are detailed below:

- To generate returns in excess of inflation during the accumulation phase of the strategy whilst managing downside risk.

The default arrangement’s accumulation phase invests 100% of members’ accounts in a fund comprised mainly of global equities, but which also has a small allocation to bonds and cash. This fund is expected to provide long term growth in excess of inflation but with greater downside protection than investing purely in equities.

- To provide a strategy that reduces investment risk for members as they approach retirement.

As a member’s account grows, investment risk will have a greater impact on outcomes at retirement. Therefore, the Trustees believe that a strategy that seeks to reduce investment risk as the member approaches retirement is appropriate. Moreover, as members approach retirement, the Trustees believe the primary aim should be to provide protection against a mismatch between asset values and the expected costs of retirement benefits.

The Lifestyle Strategy therefore aims to reduce volatility near retirement via automated switches over a 16 year period to a member’s selected retirement date. Investments are gradually switched from a growth oriented fund (the Multi-Asset Fund), initially into a lower risk / return fund (the Blended Fund) and finally into a combination of an Index-Linked Gilt Fund (to broadly match short-term changes in the price of Inflation-linked annuities) and to a cash fund for capital preservation purposes.

- To provide exposure at retirement to assets that are broadly appropriate for an individual planning to use their savings in the Plan to buy an inflation-linked annuity and to take a 25% tax-free cash lump sum at retirement.

At the member’s selected retirement date, 75% of the member’s assets will be invested in an index-linked gilt fund and 25% in a cash fund.

Policies in relation to the default arrangement

3.2 The Trustees’ policies in relation to the default arrangement are:

- The default arrangement manages investment risks through a diversified strategic asset allocation consisting of traditional assets i.e. equities, bonds and cash. Risk is not considered in isolation, but in conjunction with expected investment returns and outcomes for members. Section 4 provides further information on the Trustees’ risk policies in relation to the default arrangement.

- In designing the default arrangement, the Trustees have explicitly considered the trade-off between expected risk and return.

- The Trustees have also taken into account the needs of members with regards to security, quality, liquidity and profitability of a member’s portfolio as a whole. The Trustees have designed the default arrangement taking account of the assets in the default.

- If members wish to, they can opt to choose their own investment options at any time. Members are supported by clear communications in the form of a members’ booklet regarding the aims of the default arrangement and the access to alternative funds, albeit the Trustees will not provide advice to members on their individual choice of investment options.

- Assets in the default arrangement are invested in daily traded pooled funds which hold highly liquid assets. The pooled funds are commingled investment vehicles, which are managed by Legal & General Investment Management (“LGIM”). The selection, retention and realisation of assets within the pooled funds are delegated to LGIM in line with the mandates of the funds. Likewise, LGIM have full discretion (within the constraints of their mandates) on the extent to which social, environmental or ethical considerations are taken into account in the selection, retention and realisation of investments.

- Within the default arrangement, units across the underlying pooled funds are bought and sold according to the table below:

4. Risk

Taking into account the demographics of the Plan’s membership and the Trustees’ views of how the membership will behave at retirement, the Trustees believe that the balance between asset classes within the default option is appropriate and will continue to review this over time, at least triennially, or after significant changes to the Plan’s demographics, if sooner.

In selecting assets, the Trustees consider the liquidity of the investments in the context of the likely needs of members. All assets are daily dealing and therefore should be realisable based on member demand.

The Trustees have considered risks from a number of perspectives. The list below is not exhaustive but covers the main risks that the Trustees consider and how they are managed.

The items listed above are in relation to what the Trustees consider ‘financially material considerations’. The Trustees believe the appropriate time horizon over which to assess these considerations should be viewed at a member level. This will be dependent on the member’s age and their Selected Retirement Age.

5. Suitability of Default Investment Strategy

5.1 Based on their understanding of the Plan’s membership, the Trustees believe that the above objectives and policies reflect members’ best interests. The rationale underpinning this belief is as follows:

- A defined benefit underpin applies to many members. The underpin requires that the majority of members’ benefits should be taken as a pension which increases in payment in line with inflation.

- In addition, the Trustees believe that most members save into a pension plan to achieve a stable income in retirement that is protected at least partially from inflation. The targeting of an annuity purchase at retirement during the consolidation phase is aligned with that objective. 


- The default arrangement is aimed largely at members who do not feel capable of taking investment decisions. Again, the Trustees believe that an annuity purchase which provides a secure income at retirement is likely to be the preferred course for many such members, as opposed to say income drawdown which requires more intensive investment governance during retirement. 


- Almost all members withdraw tax free cash at retirement. The use of the Sterling Liquidity Fund within the default addresses that requirement. 


- Members seeking an adequate income in retirement will likely need to achieve real investment returns for most of their period as pension savers. The use of a fund with significant weightings in global equities during the accumulation phase addresses that requirement.

5.2 The Trustees are aware that fund sizes for members approaching retirement are often small and this may disincline members towards annuity purchase at retirement. However, members will likely have other savings that can be consolidated with their Plan savings.

5.3 The Trustees intend to monitor members’ decisions and other inputs from time to time to ensure that the default arrangement remains suited to their needs. They will also review the investment choices available to members to ensure that those who regard the default arrangement as unsuited to their needs have suitable alternative investment funds to select from.

6. Review of this Statement

6.1 The Trustees will review this Statement at least once every three years and without delay after any significant change in investment policy. Any change to this Statement will only be made after having obtained and considered the written advice of someone who the Trustees reasonably believe to be qualified by their ability in and practical experience of financial matters and to have the appropriate knowledge and experience of the management of pension scheme investments.