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Statement of Investment Principles for the Fenwick Limited Superannuation Fund (the “Fund”)

1. Introduction

This Statement of Investment Principles (“SIP”) sets out the policy of the Trustee of the Fenwick Limited Superannuation Fund (“the Trustee”) on various matters governing decisions about the investments of the Fenwick Limited Superannuation Fund (“the Fund”), a Defined Benefit (“DB”) scheme. This SIP replaces the previous SIP dated September 2019.

The SIP is designed to meet the requirements of Section 35 (as amended) of the Pensions Act 1995 (“the Act”), the Occupational Pension Schemes (Investment) Regulations 2005 (as amended) and the Pension Regulator’s guidance for defined benefit pension schemes (March 2017).

This SIP has been prepared after obtaining and considering written professional advice from

LCP, the Fund’s investment adviser, whom the Trustee believes to be suitably qualified and experienced to provide such advice. Consistent with the requirements of the Competition and Markets Authority, the Trustee monitors the appropriateness of their investment adviser against defined objectives. The advice considers the suitability of investments including the need for diversification given the circumstances of the Fund and the principles contained in this SIP. The Trustee has consulted with the relevant employer in producing this SIP.

The Trustee will review this SIP from time to time and, with the help of its advisers, will amend it as appropriate. These reviews will take place as soon as practicable after any significant change in investment policy and at least once every three years.

  • Appendix 1 sets out details of the Fund’s investment governance structure, including the key responsibilities of the Trustee, investment advisers and investment managers. It also contains a description of the basis of remuneration of the investment adviser and the investment managers.
  • Appendix 2 sets out the Trustee’s policy towards risk appetite, capacity, measurement and management.
2. Investment objectives

The primary objective is to ensure that the Fund should be able to meet benefit payments as they fall due. In addition to this primary objective, the Trustee has additional objectives. These are as follows:

  • that the expected return on the Fund’s assets is maximised whilst managing and maintaining investment risk at an appropriate level. What the Trustee determines to be an appropriate level of risk is set out in Appendix 2.
  • that the Fund should be fully funded on a technical provisions basis (i.e. the asset value should be at least that of its liabilities on this basis). The Trustee is aware that there are various measures of funding, and has given due weight to those considered most relevant to the Fund.
3. Investment strategy

The Trustee, with the help of its advisers and in consultation with the employer, reviewed the investment strategy in June 2020, considering the objectives described in Section 2 above and subsequently implemented an updated investment strategy.

The Trustee has also entered into buy-in contracts with a number of insurers, which provide annuities for a portion of the Fund’s existing pensioners. Although the annuity policies do not have a direct market value, an estimated value of the policies is provided on an annual basis for accounting purposes and the size of these assets are monitored on an ongoing basis.

There is no formal rebalancing policy. The Trustee monitors the asset allocation from time to time. If material deviations from the strategic allocation occur the Trustee will consider with its advisers whether it is appropriate to rebalance the assets, considering factors such as market conditions and anticipated future cash flows.

As the Fund matures over time, the Trustee will seek to de-risk the investment strategy in line with the change in the liability profile of the Fund. This means that the investment strategy will gradually target a higher allocation to lower risk assets and will reduce the level of leverage employed by the portfolio as the Fund matures.

4. Considerations in setting the investment arrangements

When deciding how to invest the Fund’s assets, the Trustee considers several risks, including, but not limited to, those set out in Appendix 2. Some of these risks are more quantifiable than others, but the Trustee has tried to allow for the relative importance and magnitude of each risk.

The Trustee considered a wide range of asset classes for investment taking account of the expected returns and key individual risks associated with those asset classes as well as how these risks can be mitigated where appropriate. The key financial assumption made by the Trustee in determining the investment arrangements is that equity-type investments will, over the long term, outperform gilts by 5.0% pa.

In setting the strategy the Trustee considered:

  • the Fund’s investment objectives, including the target return required to meet the Trustee’s investment objectives;
  • the Fund’s cash flow requirements in order to meet benefit payments in the near to medium term;
  • the best interests of all members and beneficiaries;
  • the circumstances of the Fund, including the profile of the benefit cash flows (and the ability to meet these in the near to medium term), the funding level, and the strength of the employer covenant;
  • the risks, rewards and suitability of a number of possible asset classes and investment strategies and whether the return expected for taking any given investment risk is considered sufficient given the risk being taken;
  • the need for appropriate diversification between different asset classes to ensure that both the Fund’s overall level of investment risk and the balance of individual asset risks are appropriate;
  • any other considerations which the Trustee considers financially material over the time horizon that the Trustee considers is needed for the funding of future benefits by the investments of the Fund; and
  • the Trustee’s investment beliefs about how investment markets work, and which factors are most likely to impact investment outcomes.

The Trustee’s key investment beliefs, which influenced the setting of the investment arrangements, are as follows:

  • allocation is the primary driver of long-term returns;
  • risk-taking is necessary to achieve return, but not all risks are rewarded;
  • equity, credit and illiquidity are the primary rewarded risks;
  • risks that do not have an expected reward should generally be avoided, hedged or diversified;
  • certain investment markets are not always efficient and there may be opportunities for good active managers to add value;
  • consideration of ESG factors in investment decision making leads to better risk-adjusted returns;
  • costs have a significant impact on long-term performance and therefore obtaining value for money from the investments is important.
5. Implementation of the investment arrangements

Before investing in any manner, the Trustee obtains and considers proper written advice from its investment adviser on the question of whether the investment is satisfactory, having regard to the need for suitable and appropriately diversified investments.

Details of the investment managers are set out in the separate Investment Policy Implementation Document (“IPID”).

The Trustee has entered into a series of annuity policies which provide payments to match the pensions payable to some of the Fund’s pensioners.

The Trustee has entered into a contract with a platform provider, who makes available the range of investment funds in which the Fund can invest. There is no direct relationship between the Fund and the underlying investment managers whose funds are accessible on the platform.

For funds held outside the platform the Trustee has signed agreements with the relevant investment managers setting out in detail the terms on which the portfolios are to be managed.

The investment managers’ primary role is the day-to-day investment management of the Fund’s investments.

The Trustee, platform provider and investment managers to whom discretion has been delegated exercise their powers to give effect to the principles in this Statement of Investment Principles, so far as is reasonably practicable.

The Trustee has limited influence over managers’ investment practices because all the Fund’s assets are held in pooled funds, but it encourage its managers to improve their practices where appropriate.

The Trustee‘s view is that the fees paid to the investment managers, and the possibility of their mandate being terminated, ensure they are incentivised to provide a high quality service that meets the stated objectives, guidelines and restrictions of the fund. However, in practice managers cannot fully align their strategy and decisions to the (potentially conflicting) policies of all their pooled fund investors in relation to strategy, long-term performance of debt/equity issuers, engagement and portfolio turnover.

It is the Trustee’s responsibility to ensure that the managers’ investment approaches are consistent with its policies before any new appointment, and to monitor and to consider terminating any existing arrangements that appear to be investing contrary to those policies.

The Trustee expects investment managers, where appropriate, to make decisions based on assessments of the longer term financial performance of debt/equity issuers, and to engage with issuers to improve their performance. It assesses this when selecting and monitoring managers.

The Trustee evaluates investment manager performance by considering performance over both shorter and longer-term periods as available. Except in closed-ended funds where the duration of the investment is determined by the fund’s terms, the duration of a manager’s appointment will depend on strategic considerations and the outlook for future performance. Generally, the Trustee would be unlikely to terminate a mandate on short-term performance grounds alone.

The Trustee’s policy is to evaluate each of its investment managers by reference to the manager’s individual performance as well as the role it plays in helping the Fund meet its overall long-term objectives, taking account of risk, the need for diversification and liquidity.

Each manager’s remuneration, and the value for money it provides, is assessed in light of these considerations.

The Trustee recognises that portfolio turnover and associated transaction costs are a necessary part of investment management and that the impact of portfolio turnover costs is reflected in performance figures provided by the investment managers. The Trustee expects its investment consultant to incorporate portfolio turnover and resulting transaction costs as appropriate in its advice on the Fund’s investment mandates.

6. Realisation of investments

The investment managers have discretion over the timing of realisation of investments of the Fund within the portfolios that they manage, and in considerations relating to the liquidity of investments.

When appropriate, the Trustee, on the administrators’ recommendation, decides on the amount of cash required for benefit payments and other outgoings and informs the investment managers of any liquidity requirements. The Trustee’s preference is for investments that are readily realisable but recognise that achieving a well-diversified portfolio may mean holding some investments that are less liquid (e.g. private credit). In general, the Trustee’s policy is to use cash flows to rebalance the Fund’s assets towards the strategic asset allocation, except where this may impact the level of hedging provided by the LDI portfolio.

7. Financially material considerations and non-financial matters

The Trustee has considered how environmental, social, governance (“ESG”) and ethical factors should be taken into account in the selection, retention and realisation of investments, given the time horizon of the Fund and its members.

The Trustee expects its investment managers to take account of financially material considerations (including climate change and other ESG considerations). The Trustee seeks to appoint managers that have appropriate skills and processes to do this, and from time to time reviews how its managers are taking account of these issues in practice.

The Trustee has limited influence over managers’ investment practices where assets are held in pooled funds, but it encourages its managers to improve their practices where appropriate

The Trustee does not take into account any non-financial matters (i.e. matters relating to the ethical and other views of members and beneficiaries, rather than considerations of financial risk and return) in the selection, retention and realisation of investments.

8. Voting and engagement

The Trustee recognises its responsibilities as owners of capital, and believes that good stewardship practices, including monitoring and engaging with investee companies, and exercising voting rights attaching to investments, protect and enhance the long-term value of investments. The Trustee has delegated to its investment managers the exercise of rights attaching to investments, including voting rights, and engagement with relevant persons such as issuers of debt and equity, stakeholders and other investors about relevant matters such as performance, strategy, capital structure, management of actual or potential conflicts of interest, risks and ESG considerations.

The Trustee does not monitor or engage directly with issuers or other holders of debt or equity. It expects the investment managers to exercise ownership rights and undertake monitoring and engagement in line with the managers’ general policies on stewardship, as provided to the Trustee from time to time, considering the long-term financial interests of the beneficiaries.

The Trustee seeks to appoint managers that have strong stewardship policies and processes, reflecting where relevant the recommendations of the UK Stewardship Code issued by the Financial Reporting Council, and from time to time the Trustee reviews how these are implemented in practice.

SIP signed for and on behalf of Ross Trustees Services Limited, as Trustee of the Fenwick Limited Superannuation Fund:
Signed: Nigel Moore

Appendix 1 - Investment governance, responsibilities, decision-making and fees

The Trustee has decided on the following division of responsibilities and decision-making for the Fund. This division is based upon the Trustee’s understanding of the various legal requirements placed upon it, and its view that the division of responsibility allows for efficient operation and governance of the Fund overall. The Trustee’s investment powers are set out within the Fund’s governing documentation.

1. Trustee

In broad terms, the Trustee is responsible in respect of investment matters for:

  • developing a mutual understanding of investment and risk issues with the employer;
  • setting the investment strategy, in consultation with the employer;
  • formulating a policy in relation to financially material considerations, such as those relating to ESG considerations (including but not limited to climate change);
  • formulating a policy on taking account of non-financial matters in the selection, retention and realisation of investments;
  • setting the policy for rebalancing between asset classes;
  • setting a policy on the exercise of rights (including voting rights) and undertaking engagement activities in respect of the investments;
  • putting effective governance arrangements in place and documenting these arrangements in a suitable form;
  • appointing, monitoring, reviewing and dismissing investment managers, investment advisers, actuary and other service providers;
  • monitoring the exercise of the investment powers that they have delegated to the investment managers and monitoring compliance with Section 36 of the Act;
  • communicating with members as appropriate on investment matters, such as the Trustee’s assessment of its effectiveness as a decision-making body, the policies regarding responsible ownership and how such responsibilities have been discharged;
  • reviewing the investment policy as part of any review of the investment strategy;
  • reviewing the content of this SIP from time to time and modifying it if deemed appropriate; and
  • consulting with the employer when reviewing the SIP.
2. Platform provider

The investment platform provider will be responsible for:

  • providing access to a range of funds managed by various investment managers; and
  • providing the Trustee with regular information concerning the management and performance of the assets.
3. Investment managers

In broad terms, the investment managers will be responsible for:

  • managing the portfolios of assets according to their stated objectives, and within the guidelines and restrictions set out in their respective investment manager agreements and/or other relevant governing documentation;
  • taking account of financially material considerations (including climate change and other
  • ESG considerations) as appropriate when managing the portfolios of assets;
  • exercising rights (including voting rights) attaching to investments and undertaking engagement activities in respect of investments;
  • providing the Trustee / investment platform provider with regular information concerning the management and performance of their respective portfolios; and
  • ESG considerations) as appropriate when managing the portfolios of assets;
  • having regard to the provisions of Section 36 of the Act insofar as it is necessary to do so.

The custodians of the portfolios (whether there is a direct relationship between the custodian and the Trustee or not) are responsible for safe keeping of the assets and facilitating all transactions within the portfolios.

4. Investment adviser

In broad terms, the investment adviser will be responsible, in respect of investment matters, as requested by the Trustee, for:

  • advising on how material changes within the Fund’s benefits, membership, and funding position may affect the manner in which the assets should be invested and the asset allocation policy;
  • advising on the selection, and review, of the investment managers, incorporating its assessment of the nature and effectiveness of the managers’ approaches to financially material considerations (including climate change and other ESG considerations); and
  • participating with the Trustee in reviews of this SIP.
5. Fee structures

The Trustee recognises that the provision of investment management and advisory services to the Fund results in a range of charges to be met, directly or indirectly, by deduction from the Fund’s assets.

The Trustee has agreed Terms of Business with the Fund’s actuarial and investment advisers, under which work undertaken is charged for by an agreed fixed fee or on a “time-cost” basis.

The investment managers and platform provider receive fees calculated by reference to the market value of assets under management and in some cases also a performance related fee. The fee rates are believed to be consistent with the managers’ general terms for institutional clients and are considered by the Trustee to be reasonable when compared with those of other similar providers. See also Section 5 of the SIP.

The fee structure used in each case has been selected with regard to existing custom and practice, and the Trustee’s view as to the most appropriate arrangements for the Fund However, the Trustee will consider revising any given structure if and when it is considered appropriate to do so.

6. Performance assessment

The Trustee is satisfied, taking into account the external expertise available, that there are sufficient resources to support its investment responsibilities. The Trustee believes that it has sufficient expertise and appropriate training to carry out its role effectively.

It is the Trustee’s policy to assess the performance of the Fund’s investments, investment providers and professional advisers from time to time. See Section 5 of the SIP. The Trustee will also periodically assess the effectiveness of its decision-making and investment governance processes and will decide how this may then be reported to members.

7. Working with the Fund’s employer

When reviewing matters regarding the Fund’s investment arrangements, such as the SIP, the Trustee seeks to give due consideration to the employer’s perspective. While the requirement to consult does not mean that the Trustee needs to reach agreement with the employer, the Trustee believes that better outcomes will generally be achieved if the Trustee and employer work together collaboratively.

Appendix 2 - Policy towards risk
1. Risk appetite and risk capacity

Risk appetite is a measure of how much risk the Trustee is willing to bear within the Fund in order to meet its investment objectives. Taking more risk is expected to mean that those objectives can be achieved more quickly, but it also means that there is a greater likelihood that the objectives are missed, in the absence of remedial action. Risk capacity is a measure of the extent to which the Trustee can tolerate deviation from its long term objectives before attainment of those objectives is seriously impaired. The Trustee aims is to strike the right balance between risk appetite and risk capacity.

When assessing the risk appetite and risk capacity, the Trustee considered a range of qualitative and quantitative factors, including:

  • the strength of the employer’s covenant and how this may change in the near/medium future;
  • the agreed journey plan and employer contributions;
  • the Fund’s long-term and shorter-term funding targets;
  • the Fund’s liability profile, its interest rate and inflation sensitivities, and the extent to which these are hedged;
  • the Fund’s cash flow and target return requirements; and
  • the level of expected return and expected level of risk (as measured by Value at Risk (“VaR”), now and as the strategy evolves.
2. Approach to managing and monitoring investment risks

The Trustee considers that there are several different types of investment risk that are important to manage and monitor. These include, but are not limited to:

2.1. Risk of inadequate returns

A key objective of the Trustee is that, over the long-term, the Fund should generate its target return so that it has adequate assets to meet its liabilities as they fall due. The Trustee therefore invests the assets of the Fund to produce a sufficient longterm return in excess of the liabilities. There is also a risk that the performance of the Fund’s assets and liabilities diverges in certain financial and economic conditions in the short term. This risk has been considered in setting the investment strategy and is monitored by the Trustee on a regular basis.

2.2. Credit risk

This is the risk that a borrower will cause a financial loss for the other party by failing to meet required payments for a contractual obligation.

The Fund is subject to credit risk because it invests in bonds and loans via pooled funds. The Trustee manages its exposure to credit risk by only investing in pooled funds that have a diversified exposure to different credit issuers, and invests in a majority of bonds that are classified as “investment grade”.

2.3. Equity risk

Equity represents (part) ownership of a company. Equity risk is the risk that the value of this holding falls in value.

The Trustee believes that equity risk is a rewarded investment risk, over the long term. The Trustee considers exposure to equity risk in the context of the Fund’s overall investment strategy and believes that the level of exposure to this risk is appropriate.

2.4. Currency risk

Whilst the majority of the currency exposure of the Fund’s assets is to Sterling, the Fund is subject to currency risk because some of the Fund’s investments are held in overseas markets. The Trustee considers the overseas currency exposure in the context of the overall investment strategy and believes that the currency exposure that exists diversifies the strategy and is appropriate. Furthermore, the Trustee manages the amount of currency risk by investing in pooled funds that hedge currency exposure.

2.5. Interest rate and inflation risk

The Fund’s assets are subject to interest rate and inflation risk because some of the Fund’s assets are held in bonds/interest rate swaps via pooled funds. However, the interest rate and inflation exposure of the Fund’s assets hedge part of the corresponding risks associated with the Fund’s uninsured liabilities.

The Trustee considers interest rate and inflation risks to be generally unrewarded investment risks.

The net effect of the Trustee’s approach to interest and inflation risk will be to reduce the volatility of the funding level, and so the Trustee believes that it is appropriate to manage exposures to these risks in this manner and to review them on a regular basis.

2.6. Environmental, social and governance (ESG) risks

Environmental, social and corporate governance (ESG) factors are sources of risk to the Fund’s investments which could be financially material, over both the short and longer term. These potentially include risks relating to factors such as climate change, unsustainable business practices, and unsound corporate governance. The Trustee seeks to appoint investment managers who will manage these risks appropriately on their behalf and from time to time review how these risks are being managed in practice.

2.7. Illiquidity/marketability risk

This is the risk that the Fund is unable to realise assets to meet benefit cash flows as they fall due, or that the Fund will become a forced seller of assets in order to meet benefit payments. The Trustee is aware of the Fund’s cash flow requirements and believes that this risk is managed by maintaining an appropriate degree of liquidity across the Fund’s investments.

2.8. Risk from lack of diversification

This is the risk that failure of a particular investment, or the general poor performance of a given investment type, could materially adversely affect the Fund’s assets. The Trustee believes that the Fund’s assets are adequately diversified between different asset classes and within each asset class. This was a key consideration when determining the Fund’s investment arrangements and is monitored by the Trustee on a regular basis.

2.9. Investment manager risk

This is the risk that an investment manager fails to meet its investment objectives. Prior to appointing an investment manager, the Trustee receives written advice from a suitably qualified individual and will typically undertake an investment manager selection exercise. The Trustee monitors the investment managers on a regular basis to ensure they remain appropriate for their selected mandates.

2.10. Counterparty risk

This is the risk that one party to a contract (such as a derivative instrument) causes a financial loss to the other party by failing to discharge a contractual obligation. This risk applies in particular for those contracts that are traded directly between parties, rather than traded on a central exchange.

The synthetic equity funds make use of total return swaps and futures to provide efficient equity exposure. The LDI funds make use of derivative and gilt repos contracts and these investments are used by the Trustee to match efficiently a portion of the Fund’s liabilities. Counterparty risk is managed within the funds through careful initial selection and ongoing monitoring of trading counterparties, counterparty diversification and a robust process of daily collateralisation of each contract, to ensure that counterparty risk is limited, as far as possible, to one day’s market movements.

2.11. Collateral adequacy risk

The Fund is invested in leveraged LDI to provide protection against adverse changes in interest rates and inflation expectations. The Fund is invested in leveraged synthetic equity to provide efficient exposure to equities. These funds may from time to time call for additional cash to be paid to these portfolios in order to support a given level of leverage. Collateral adequacy risk is the risk that the Trustee, when requested to do so, will not be able to post additional cash to the LDI or synthetic equity funds within the required timeframe. A potential consequence of this risk is that the Fund’s interest rate and inflation hedging could be reduced and that the Fund’s funding level could suffer subsequently as a result. Similarly, the Fund’s exposure to equities may fall and there is a risk that the Fund is not generating a sufficient return to meet its funding target. In order to manage this risk, the Trustee ensures that the Fund has a sufficient allocation to money-market and other highly liquid assets which can be readily realised, so that cash can be posted to the managers at short notice.

2.12. Other non-investment risks

The Trustee recognises that there are other, non-investment, risks faced by the Fund, and takes these into consideration as far as practical in setting the Fund’s investment arrangements as part of its assessment of the other aspects of the Fund’s Integrated Risk Management framework.

Examples include:

  • longevity risk (the risk that members live, on average, longer than expected); and
  • sponsor covenant risk (the risk that, for whatever reason, the sponsoring employer is unable to support the Fund as anticipated).

Together, the investment and non-investment risks give rise generally to funding risk.

This is the risk that the Fund’s funding position falls below what is considered an appropriate level. The Trustee regularly reviews progress towards the Fund’s funding target, both in the longer-term as well as against short-term milestones, comparing the actual versus the expected funding level. The Trustee has also taken steps over the years to mitigate some of the longevity risk by entering into bulk annuity contracts.

By understanding, considering and monitoring the key risks that contribute to funding risk, the Trustee believes that it has appropriately addressed and are positioned to manage this general risk.

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