Introduction
This statement sets out the principles governing decisions about the investment of the assets of the AJ Power Ltd No. l R&DBS (“the Scheme”). The Trustees of the scheme issue this statement to comply with section 35 of the Pensions Act 1995 as amended by the Pensions Act 2004 and the Occupational Pension Schemes (Investment) Regulations 2005 and subsequent amendments.
The Statement of Investment Principles (SIP) provides members with details of the Trustees’ investment strategy, the default approach, investment risks and how the Trustees consider the sustainability of the Scheme’s investments over the probable time horizon. The scheme is a “defined contribution” pension scheme - also known as “money purchase”. Broadly, the value of members’ retirement benefits in this type of scheme is based on the amount of money that the member has in the scheme at the point of taking their benefits. The amount of money saved will depend primarily on:
- how much they and their employer have contributed to the scheme;
- the performance of the funds in which the member’s savings are invested; how long the member has contributed to the scheme; and fees deducted from a member’s investments.
As of the year ending 31/12/22 the scheme has now 138 members (77 active and 61 deferred members) and is a wholly insured arrangement, administered by Aegon. This means that all the relevant administration, other services and investment funds are provided by Aegon. The scheme is looked after by Trustees whose duty is first and foremost to arrange for the assets to be invested in the best interests of its members (and beneficiaries). The scheme trustees have produced this SIP, which formally sets out how they will select and monitor the fund choices offered to the scheme’s members. This is a legal requirement.
As required, the Trustees will, when reviewing the SIP, obtain and considered proper advice of a person who, where required, is appropriately authorised to advise the Trustees under the Financial Services and Markets Act 2000 or who the Trustees believe to be suitably- qualified to advise them. The SIP will be reviewed at least every three years or when a significant change to the scheme’s investment strategy or fund range design has been made.
1. Investment Objective
The Trustees have designed their investment strategy to offer a suitable range of funds of members so they can save for their retirement. The fund range includes choices suitable for members of different ages and with different retirement benefit plans. This is to enable members to gain access to a range of asset classes and markets taking account of a number of different risks. In particular the trustees consider the sustainability of the investment fund choices they make available to members over the period for which they expect those funds will be used by members.
2. Investment risk
The Trustees recognize that risks are inherent in retirement savings. Trustees have to strike a balance between taking the sufficient risk to achieve good investment returns while ensuring that default funds (in particular) are not exposed to excessive risk when members are about to retire.
The Trustees do not invest members’ contributions directly in assets such as equities and bonds but instead use a range of investment funds provided by Aegon. The Trustees must carefully consider the period over which the scheme has to provide for members in accumulation and decumulation and financially material risks. A financially material risk is one which could have a significant effect (positive or negative) on members’ retirement savings over the period a particular fund is used by them and can include environmental, social and governance (ESG) including but not limited to climate change factors.
As the scheme invests via pooled funds, the Trustees have delegated responsibility for the selection, retention and realization of investments to Aegon, within certain guidelines and restrictions, and the Trustees’ approach to managing financially material considerations is correspondingly limited by the nature of those pooled funds.
The key investment risks taken into account by Aegon are:
Inflation - the value ‘of the same basket of goods will increase in the future because of the effect of inflation and therefore the performance of Member funds must generally keep pace with this change to protect what is known as the real value of Member savings.
Performance ups and downs - the performance of the funds will at different points go up and will also go down; we call this volatility. Those funds which have a chance of earning more money for Members are likely to see greater volatility over short periods. The Trustees have provided a default fund which balances the need to increase value without exposing Members to too much of this risk.
Pension conversion - for Members nearing their retirement, the potential impact of poor performance is significantly increased as they have less time to make up any lost money. The Trustees have created their choice of fund to cater for Members looking to limit this potential risk. Further, the Cautious Lifestyle fund automatically manages Members’ savings to limit this potential risk as they near retirement.
Manager - selecting a fund from a manager who could make a poor investment decision which then impacts on lots of Members is a considerable risk. Aegon’s Fund Governance Group is responsible for governing Aegon funds. The Governance Group uses a framework to provide assurance to their stakeholders. To achieve this, the team operates a number of processes and controls which identify where funds are not being invested as customers have been led to expect and then highlights funds that are not delivering good customer outcomes. The Fund Governance Group uses a risk-based approach taking account of Aegon’s strategic objectives as well as the requirements of their key stakeholders. Aegon funds are generally designed to be held for five years or more, so their fund governance focuses on long-term expectations. However, if a fund or fund range persistently fails to meet the agreed criteria, and Aegon believes these reasons are systemic, the Fund Governance group will recommend changes. Changes can be made for a variety of reasons, not just performance. However, their guiding principle is to ensure that such changes help meet the Fund Promise commitment to investors.
Diversification - keeping all your eggs in one basket or holding a limited number of different investments increases the risk of losing money if one particular investment underperforms. So funds holding a greater number of different shares, or holding different types of investments, help to increase diversification and therefore reduce risk.
Liquidity - some investments such as property or shares in private companies are not easy to sell, and therefore it can take some time to get money returned or transferred to another fund. The Trustees have limited this risk by offering a fund which is generally more liquid rather than illiquid.
Sustainability - The Trustees believe that integrating in “sustainable” investment solutions for Members over the long term - as these should provide better returns, increase Member engagement and improve the quality of the environment we all live and work in. In addition, and more fundamentally, members want to know where their money is invested. This is very much encapsulated in the development of ‘ESG’ that we are now seeing across the market and is a key element of the work the Trustees do to look after Members’ investments. ESG considerations include:
- Environmental - climate change, water management, waste disposal, pollution and use of natural resources.
- Social impacts - health and safety, supply chain, labour management and product safety.
- Governance-Board diversity, executive pay, ownership and control, accounting integrity and tax transparency.
In particular, climate change is a key focus -potentially impacting Members over both the short and long term. The Trustees believe that an ESG-aligned investment strategy will become hugely important to delivering long term returns and where applicable these factors will be considered in the investment process:
- All managers of funds available in the range apply the UK Stewardship Code and are signed up to the UN Principles for Responsible Investment which works to incorporate ESG factors into investment and ownership decisions.
- The Trustees expect that the managers of the funds made available to Members will integrate climate change and other ESG risk factors into their investment process and will be able to explain how such factors impact their decisions.
This is the minimum level of active ESG stewardship and engagement the Trustees expect from A_egon and the underlying fund managers. Under the Trustee’s delegation, Aegon monitors such activities on a periodic basis in the event any instances are identified where such minimum expected levels of stewardship are not being met.
Aegon and the relevant fund managers are working to deepen the ESG focus of the Scheme’s default fund and ensure the wider range of fund options integrates ESG considerations. In particular, the Trustees will also make available investment strategies which apply a more focused approach by using ESG stock selections and weightings to direct investment choices. They also ensure the fund range includes Ethical and Sharia options.
The Trustees do not own assets directly so cannot exercise voting rights themselves, but Aegon meets regularly with the managers responsible for the default fund to understand their voting records and engagement activities, and how they have taken account of climate change and other financial material risks.
The primary focus is on financial factors and their impact on Members. However, from a non-financial perspective, feedback about the fund range and specific investment concerns are always welcome. The Trustees do not have an explicit policy for non-financial considerations, but they can take account of such considerations and will also consider any views expressed to them by Members.
3. Investment Design
The Trustees believe the fund range made available to the scheme is appropriate and, when doing so, have taken advice from our independent financial adviser Wren Sterling (formerly known as Ralston Bennett Financial Planning) and “the Scheme’s insurer/administrator Aegon.
The Trustees are aware that some members will not want to make decisions about where to save their contributions and therefore go into the default fund arrangement, whilst others will want to exercise differing amounts of control.
Aegon’s Fund Governance Group ratifies the mandate of any new fund to make sure it can be managed in line with expectations and is likely to deliver good customer outcomes. For non-insured funds, it ensures compliance with MiFID 11 and PROD principles regarding the target market, suitability and transparency of reporting.
4. Scheme Default Fund Arrangement
The Trustees current scheme default arrangement is the Aegon Cautious Lifestyle fund. Details of the investment strategy and investment objectives of the default arrangement are as follows:
The Cautious Lifestyle fund has a below-average risk rating which means we’d expect to see some change in its day-to-day value, both positive and negative, more than a cash investment but with greater potential returns and better protection against inflation. It holds a broad range of investment types including equities (shares) but a significant proportion will be invested in types that aim to provide a reliable source of income and with that, greater stability than would typically be available from equities. It tries to provide better long-term growth prospects than a cash deposit, but are lower risk than funds investing largely in equities.
The fund uses a two-stage investment process called lifestyle. It aims to perform better than its benchmark (Mixed investment 20%-60% shares) in the early years (the growth stage), and give you more certainty about the amount of pension you can buy when you retire (the lifestyle stage). During the early years of your investment, the Cautious Lifestyle fund aims to provide long-term capital growth by investing in a mix of UK Equities (shares) that offer a dividend yield higher than the average for companies in the FTSE All-Share Index and Sterling-denominated fixed interest securities (bonds). It may also, on occasion invest in overseas equities, property and derivatives. The later stage starts six years before your target retirement year and progressively switches your investment to lower-risk funds (ie. Long Gilt fund) with the aim of giving you more certainty as you get closer to retirement. It also moves some of the pension pot into the Cash fund two years before the target retirement year to cater for tax-free cash entitlement.
The current asset allocation is as follows:
- 24.6% UK Equity
- 15.79% UK Fixed Interest
- 2.68% Asia Pacific Emerging Equity
- 7.2% European Equity
- 13.58% North American Equity
- 18.43% Global Fixed Interest
- 19.57% Cash/Money Market
- -7.81% Other
- 4.0% Gilts
- 1.81% UK Corporate Fixed Interest
The past fund performance by calendar year has been:
| Year | 2022 | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|---|
| Fund | -8.34%/ | 7.69% | -0.6% | 11.30% | -5.76% |
| Benchmark | -10.84% | 6.68% | 2.40% | 11.54% | -5.29% |
The annualized past fund performance in cumulative years has been:
| Year | 1 | 3 | 5 | 10 |
|---|---|---|---|---|
| Fund | 7.5% | 2.1% | 1.2% | 3.1% |
| Benchmark | 4.64% | 0.7% | 0.8% | 2.8% |
5. Self-Select Fund Range
The Trustees via Aegon have a range of funds that are likely to cater for a range of saving needs. The range intends to provide a menu of both passive and active funds covering multi-asset and single-asset strategies. This aim is to provide members with the flexibility to construct their own investment strategies, and is likely to cater for varying individual needs. The range includes funds for Sharia-compliant investing, ethical investing and funds across the ESG spectrum. The reasons for the scheme being a wholly-insured scheme with Aegon (an insurance company) are:
a) the financial strength of the insurance company
b) the’security given by (1) the insurance company’s regulation by the Financial Conduct Authority and the Prudential Regulation Authority and (2) the Financial Services Compensation Scheme;
c) the professional management of the insurance company’s investment funds;
d) the insurance company’s pension administration and investment expertise; and
e) value for money in investing in a packaged product with the insurance company;
Before preparing this statement, the Trustees have (a) obtained and considered the advice of a person who is reasonably believed by the Trustees to be qualified by their ability and practical experience of financial matters and to have the appropriate knowledge and experience of the management of the investments of occupational pension schemes and (b) consulted the employer in relation to the Scheme.
James Mcllveen - On behalf of the Trustees of the AJ Power Ltd No.1 R&DBS