Statement of Investment Policy

Transcription

1 Statement of Investment Policy Pearson Group Pension Plan Prepared by: Aon Hewitt Limited (Investment Advisors) Towers Watson Limited (Actuarial Advisors) February 2012

2 Section Page 1 Introduction 1 2 Division of Responsibilities 3 3 Objectives and Long Term Policy Final Pay Sections 10 4 Objectives and Long Term Policy Money Purchase Section 13 5 Asset Allocation Guidelines 16 6 Investment Manager Arrangements 18 7 Investment Restrictions 22 8 Monitoring and Implementation of Investment Policy 23 9 Risk Management Policy on Rights Attaching to Investments 27

3 1 Introduction Pensions Act 1.1 This Statement of Investment Policy is produced to meet the requirements under Section 35 of the Pensions Act 1995 (as amended by Section 244 of the Pensions Act 2004), the Occupational Pension Schemes (Investment) Regulations 2005 and to reflect the Government's Voluntary Code of Conduct for Institutional Investment in the UK. 1.2 The Plan Trustee (Pearson Group Pension Trustee Limited) of The Pearson Group Pension Plan (the Plan) has consulted the Principal Employer on the content of this document and will consult the Principal Employer on changes in investment policy as set out in this document, and inform on the employment or removal of Investment Managers. However, the ultimate power and responsibility for deciding investment policy and the employment or removal of Investment Managers lies solely with the Plan Trustee. 1.3 In drawing up this document, the Plan Trustee has sought advice from the Plan's Investment Consultant, Aon Hewitt Limited, and the Scheme Actuary, and has consulted with the Investment Managers. The Plan Trustee will review this document, in consultation with the Investment Consultant and Scheme Actuary, at least annually or following any significant change in investment policy, and will consult with the Investment Managers in the event of changes in this document which affect their investment management responsibilities. Plan Details Changes to the Investment Managers will include making recommendations on the selection of, and monitoring, direct investments. The Pensions Act 1995 distinguishes between investments where the management is delegated to a fund manager with a written contract and those where a product is purchased directly, e.g. the purchase of an insurance policy or units in a pooled vehicle. The latter are known as direct investments. When deciding whether or not to make any new direct investments the Investment Committee will obtain written advice and consider whether future decisions about those investments should be delegated to the fund manager(s). 1.4 This document describes the investment policy pursued by the Plan Trustee. 1.5 The Plan operates for the exclusive purpose of providing retirement benefits and death benefits to eligible participants and beneficiaries. 1.6 Members of the Plan are contracted-out of the State Second Pension under the Pensions Schemes Act Approval to that effect was originally obtained from the Occupational Pensions Board. 1.7 The Plan is a registered pension scheme under Section 153 of the Finance Act Administration of the Plan is managed by the Plan Trustee, which is responsible for the investment of the Plan's assets. 1

4 Financial Services Act 1.9 In accordance with the Financial Services and Markets Act 2000, the Plan Trustee will set general investment policy, but will delegate all day-to-day decisions about the investments that fall within each mandate and responsibility for selection of specific investments to appointed Investment Managers, which may include an insurance company or companies. The Investment Managers shall provide the skill and expertise necessary to manage the investments of the Plan competently In the event that the Plan Trustee does select a specific investment, they will obtain and consider the written advice of a suitably qualified person that the investment is satisfactory. On an annual basis, the Plan Trustee will also consider the written advice of a suitably qualified person that all the investments of the Plan remain satisfactory. Social, environmental and ethical issues 1.11 The Plan Trustee has delegated responsibility for the selection, retention and realisation of investments to the Investment Managers The Plan Trustee's policy is that the extent to which social, environmental or ethical considerations are taken into account is left to the discretion of the Investment Managers. Currently, the Plan's active Investment Managers have mandates that allow the exercise of such discretion. It is not appropriate for the Plan's passive Investment Manager to take account of social, environmental or ethical considerations in selecting investments for their portfolio but their corporate governance policy reflects the key principles of socially responsible investment However, having considered the Investment Managers' policies on socially responsible investment, the Plan Trustee expects that, to the extent to which social, environmental or ethical issues may have a financial impact on the Plan's assets, they will be taken into account by the active Investment Managers in the exercise of their delegated duties. The Plan Trustee has reviewed and has accepted the Investment Managers policies on this issue and will monitor these policies and their implementation on a regular basis, by means of reports from the Investment Managers It is the Plan Trustee's policy to encourage the Plan's Investment Managers to pursue a policy of engagement, where appropriate, with companies in which they invest. 2

5 2 Division of Responsibilities 2.1 The Plan Trustee has ultimate responsibility for decision making on investment matters. In order to ensure that such decisions are taken effectively, the Plan Trustee uses other bodies either through direct delegation or in an advisory capacity. The roles of each group are shown below. Plan Trustee 2.2 The Plan Trustee is, based on the advice of the Investment Committee and the Money Purchase Committee and, where relevant, the Investment Consultant, responsible for: a. Reviewing the content of this Statement of Investment Policy at least annually and, in any event, immediately after any significant change in policy, and for modifying it if deemed appropriate. b. Reviewing the investment policy in conjunction with each actuarial review, and/or asset liability modelling exercise. c. Setting structures and processes in place, including the use of sub committees, to enable the Plan to make decisions effectively, having regards to the overall objectives set out in section 3 of this document. d. Approving the recommendations of the Investment Committee on the appointment and removal, on behalf of the Plan Trustee, of Investment Managers and Custodians. e. Appointing, reviewing and removing the Investment Consultant. f. Reviewing regular reports from the Investment Committee on carrying out its responsibilities. g. Assessing the quality of the performance and processes of the Investment Managers by means of regular (and at least annual) reviews of the investment results and other information. h. Allocating assets between the investment mandates, in accordance with the agreed policy. i. Reviewing annually the range of investment options and investment funds available to members of the Money Purchase Section. j. Reviewing, at least once every three years, the appointment of the Money Purchase Platform Provider. k. Consulting with the Employer when reviewing investment policy issues. l. Monitoring compliance of the investment arrangements with this Statement on an ongoing basis. 3

6 Investment Committee 2.3 The Plan Trustee will appoint an Investment Committee which may include individuals who are not Directors of the Plan Trustee. The Investment Committee's duties are shown below: a. To review quarterly the reports provided by the Investment Managers and the Investment Consultant, and reporting significant findings to the Trustee. b. To meet with the Investment Managers as required. c. To monitor the compliance of the Investment Managers with the relevant investment guidelines. d. To liaise with the Money Purchase Committee, as required, on any money purchase related investment matter. e. To make recommendations to the Trustee, as and when deemed appropriate or when requested by the Trustee, on changes to the Investment Managers, investment policy or any other matters which are considered appropriate. f. To make recommendations, as and when deemed appropriate to the Plan s Money Purchase Committee regarding the investment options and investment funds available to members with money purchase investments. g. To make recommendations to the Trustee for any modifications which it considers are required to be made to the Statement of Investment Policy. h. To review at least annually, in conjunction with the Investment Consultant, the Plan s Statement of Investment Policy and making any recommendations for change to the Trustee. i. To consider the advice of the Investment Consultant and Plan Actuary in relation to: j. any changes in the Plan s benefits, membership and funding position which may affect the manner in which the assets should be invested, k. the impact on the investment strategy of the results of any asset liability modeling studies requested by the Trustee, and l. reporting findings to the Trustee. m. In the event of a de-risking trigger being met and following confirmation of the trigger from the Plan Actuary and Investment Consultant to confirm agreement, on behalf of the Trustee, to continue with the switch and authorise the change in asset allocation to be implemented by Legal and General. n. To carry out such other duties as shall be notified to the Committee by the Board of the Trustee from time to time. Such duties could require the Committee to work in conjunction with or supply information to other Trustee Committees to ensure both final pay and money purchase investment issues are considered as appropriate. o. To implement such items, identified by the Trustee in its annual action plan, as to be undertaken by the Committee. 4

7 Property Trustee (Pearson Pension Property Fund Limited) 2.4 The property assets of the Plan are held within the Pearson Pension Property Fund, which is the responsibility of the Property Trustee. The Plan Trustee will appoint Directors of the Property Trustee, which may include individuals who are not Directors of the Plan Trustee. The Property Trustee will: Exercise all powers and functions as necessary to fulfill its duties under the Trust Deed. Hold the Property Fund assets in bare trusts for the Plan Trustee. Appoint a Custodian Trustee. Administer the Property Fund. Report to the Plan Trustee, as sole beneficiary of the Property Fund. The Property Trustee s duties include: a. To monitor the performance of the Plan s Infrastructure, pooled investments, in addition to the direct and indirect property assets that it holds in trust. b. To meet with the Property and Infrastructure Managers as required. c. To monitor the compliance of the direct Property Manager with the relevant Property guidelines. d. To review quarterly the reports provided by the Property and Infrastructure Managers, and reporting significant findings to the Plan Trustee. e. To review any reports prepared by the Property & Investment Consultants. f. To review with the Property Consultant the annual Property Strategy papers prepared by the direct property manager. g. To approve the annual Property Fund accounts after review by the Audit & Risk Committee. h. To approve the annual write-off of bad debts. i. To make recommendations to the Plan Trustee, as and when deemed appropriate or when requested by the Plan Trustee, on changes to the Property and Infrastructure Managers, policy or any other matters which are considered appropriate. j. To carry out such other duties as shall be notified to the Board by the Board of the Plan Trustee from time to time. Such duties could require the Board to work in conjunction with or supply information to other Plan Trustee Boards to ensure both final pay and money purchase Property issues are considered as appropriate. k. To implement such items, identified by the Plan Trustee in its annual action plan, as to be undertaken by the Board. 5

8 Money Purchase Committee 2.5 The Plan Trustee will appoint a Money Purchase Committee. The duties of this Committee are as follows: a. To review at least annually the range of money purchase investment options and investment funds available to Plan members and reporting findings to the Investment Committee and Trustee. b. To liaise with the Investment Committee, as required, on any money purchase related investment matter. c. To review relevant regulatory & legal requirements to ensure that the Plan's money purchase arrangements comply. d. To review at least annually the service delivered by the Trustee s retirement annuity service provider, making recommendations to the Trustee. e. To review at least once every three years the appointment of the money purchase platform provider, making recommendations to the Trustee. f. To monitor the quarterly performance and activity levels of the money purchase platform provider, providing summary data to the Trustee. g. To monitor quarterly the governance of the Plan s money purchase arrangements, in particular to review: Membership statistics Value of assets under management Contribution reconciliation Member behaviour Website usage Member feedback h. To monitor the Plan s money purchase communications to ensure it is in accordance with the Trustee s communication strategy. i. To implement such items, identified by the Trustee in its annual action plan, to be undertaken by the Committee. j. To carry out such other duties as shall be notified to the Committee by the Board of the Trustee from time to time. Such duties could require the Committee to work in conjunction with or supply information to other Trustee Committees to ensure both final pay and money purchase issues are considered as appropriate. 6

9 Investment Managers 2.6 The Investment Managers responsibilities include: a. At their discretion, subject to the mandate given to them by the Plan Trustee, implementing changes in the asset mix and selecting securities within each asset class, with the objective of achieving their target performance within the risk parameters included, as appropriate, in their mandates. b. Providing the Plan Trustee via the Investment Committee, the Investment Consultant and, where applicable, the Property Trustee with quarterly statements of their performance along with a quarterly report on actions and intentions, and any changes to the processes applied to their portfolios. Any changes in the personnel involved in the management process will be communicated separately as soon as is reasonably practicable. c. Providing the Pension Department with valuations of their portfolios when required, which is usually monthly. The investment options of the Money Purchase Section are accessed via an insurance policy issued by the Money Purchase Platform Provider. As such, there is no direct relationship between the Plan Trustee and the Money Purchase Investment Managers. Additionally, the funds accessed are pooled funds and this further limits the degree to which the Plan Trustee or Platform Provider might be able to influence policy. Other statements in this SIP with regards to objectives and policy setting should be read in this context. 7

10 Custodian 2.7 The Custodian s responsibilities include: a. The safekeeping of the directly held assets of the Plan, and the oversight of the activities of sub-custodians appointed by them. b. Providing all appropriate administration including regular reports normally undertaken by custodians relating to the Plan's assets. c. Processing all dividends in a timely manner. d. Processing all corporate actions in a timely manner. e. Processing all tax reclaims, to the extent they exist, in a timely manner. f. Operation of a stock lending programme on behalf of the Plan, when deemed appropriate by the Trustee and subject to restrictions set out within the custody agreement. Investment Consultant 2.8 The Investment Consultant's responsibilities include: a. Participating with the Investment Committee and the Plan Trustee in annual reviews of this Statement of Investment Policy. b. Reporting on the investment performance of all sections of the Plan, including AVC investments. c. Advising the Investment Committee and the Plan Trustee, as requested; in conjunction with the Scheme Actuary of the Plan, how any changes within the Plan's benefits, membership, and funding position may affect the manner in which the assets should be invested. of any changes in the Investment Managers organisations that could affect the interests of the Plan. of changes in the investment environment that could present opportunities or problems for the Plan such as to require a revision to this Statement. On the results of asset liability modelling studies. d. Advising on the selection of new Investment Managers and the de-selection of current Investment Managers. e. Providing the required training to the Plan Trustee or any of the other bodies. f. Undertaking additional project work as required. g. Advising the Property Trustee, as requested. h. Reporting to the Plan Trustee on recommendations of the Investment Committee and the Property Trustee requiring Plan Trustee approval. 8

11 i. Reviewing the Plan s asset allocation as at the end of each calendar quarter and making recommendations to the Plan Trustee regarding changes to the asset allocation so that it reflects the corresponding asset allocation benchmark (see 3.3). j. In the event of a derisking trigger being met (as described in Section 3.3), to confirm that the calculated weekly asset value represents an appropriate estimate and to confirm the assets to be bought and sold within L&G s mandate. Scheme Actuary 2.9 The Scheme Actuary's responsibilities in relation to Plan investments include: a. Liaising with the Investment Consultant on the suitability of the Plan's investment policy given the financial characteristics of the Plan. b. Liaising with the Investment Consultant when formulating funding strategy at triennial valuations (or more frequently as requested). c. Undertaking additional project work as required. d. In the event of a derisking trigger being met (as described in Section 3.3), to review the Liability Watch estimated position and consider the funding implications. Money Purchase Platform Provider 2.10 The Money Purchase Platform Provider s responsibilities include: a. The management and administration of the Money Purchase Section. b. Reporting to the Plan Trustee via the Investment Committee, Money Purchase Committee and the Investment Consultant, quarterly on the Money Purchase Section. Pensions Finance Team 2.11 The Pensions Finance Team s responsibilities include: a. To monitor the Plan s self-sufficiency funding position on a daily basis and provide notification to the relevant parties within two business days in the event that a derisking trigger (as set out in Section 3.3) is met. b. To continue to monitor the Plan s position once a trigger has been met in order to ensure that it remains valid. c. In the event that the derisking is to be undertaken, to prepare the necessary documentation and notify L&G to implement the agreed switch. d. To monitor the assets allocation between return-seeking and liability-matching assets and notify the Investment Committee and the Principal Employer with the proposed action if rebalancing tolerances have been breached. 9

12 3 Objectives and Long Term Policy - Final Pay Sections Objectives 3.1 a. The acquisition of suitable assets of appropriate liquidity which should generate a total return to meet, together with new contributions from the members and, if required, the Company, the cost of current and future benefits which the Final Pay Sections of the Plan provide, as set out in the Trust Deed and Rules. b. To limit the risk of the assets failing to meet the liabilities over the long term, in particular in relation to the funding objectives of the Plan as set out in the Statement of Funding Principles. c. To minimise the long term costs of the Plan subject to (b) above, while noting the Trustee s desire to provide discretionary increases to pensions in payment in excess of the guarantees in the Plan Rules that broadly aim to protect fully against the cost of living increases. The Trustee notes that the agreement of the Principal Employer is required before any discretionary increases can be provided. Policy 3.2 The Plan Trustee's Policy is to seek to achieve the objectives through investing in a suitable mixture of real and monetary assets and the consideration of solutions that improve the security and/or liability-matching of the assets. They recognise that the returns on real assets, while expected to be greater over the long term than those on monetary assets, are likely to be more volatile. A mixture across asset classes should nevertheless provide the level of returns required by the Final Pay Sections of the Plan to meet their liabilities at an acceptable level of risk for the Plan Trustee and an acceptable level of cost to the Company. 3.3 Asset allocation is considered regularly by the Trustee and reviewed in detail following each actuarial valuation. The Plan Trustee considers that the following asset allocation is likely to achieve these objectives but will continue to consider whether any changes are required post an actuarial valuation. 10

13 The current strategic asset allocation and the 10 year expected risk and return numbers are shown in the table below. Strategic Asset Allocation Benchmark % 10 year annualised nominal return % p.a. Volatility % Return Seeking Assets 50.0 Total Equities Property Private Equity Hedge Funds Emerging Market Currency* 2.0 n/a n/a Infrastructure** 3.0** Liability Matching Assets 50.0 UK Gilts UK non-government Bonds UK Index Linked Gilts Infrastructure** 2.0** Notes: * The Plan does not currently invest in this asset class and as such return and volatility assumptions for this asset class are not shown. **The Plan Trustee has agreed to increase this allocation to 10% over the long term. All expected return and volatility assumptions are provided as at 30 September All nominal returns are in GBP terms. All volatilities are in local currency terms, For Private Equity and Hedge funds this is USD. The returns and volatility shown for the UK Gilts and Index Linked Gilts are calculated for 15 year duration bond portfolios. For UK non-government Bonds the duration is taken to be 10 years. The Total Equities return and volatility is modelled using the estimates for the performance of the underlying regions combined with the current FTSE All Worlds regional breakdown. The Trustee has agreed a derisking process, whereby the allocation to return seeking assets will be reduced and the allocation to liability matching assets will be increased by an equivalent amount, in accordance with the following schedule: Time*/Funding Level 45% return seeking allocation trigger 40% return seeking allocation trigger 11 35% return seeking allocation trigger 31 March % 77% 79% 31 March % 79% 81% 31 March % 82% 84% * Trigger levels increased linearly on a monthly basis between dates stated

14 The funding level of the Plan (measured on a self-sufficiency basis) will be monitored on a daily basis. In the event that a derisking switch of assets is implemented, this SIP will be updated to reflect the revised asset allocation of the Plan. In the event of a 5% reduction in the funding level from the previous trigger (e.g % falls to 70.5%), the Investment Committee will consider the action that should be taken in the light of the market environment, the views of the Principal Employer and confirmation of the strength of the employer covenant at that time. The Plan will also revise its asset allocation if additional re-risking is thought appropriate having taken the views of the Principal Employer, the Scheme Actuary and the Investment Consultant. Rates of Return 3.4 In forming the return and volatility expectations, as shown, for the various classes of asset available, the Plan Trustee has had regard to the historic returns achieved for these asset classes. The Plan Trustee is mindful that returns over relatively short periods can differ substantially from the long term average but considers that the returns shown are reasonable expectations over the next 10 years. AVCs (Additional Voluntary Contributions) 3.5 The Plan provides a facility for members to pay AVCs to enhance their benefits at retirement. Members are offered a range of external funds in which to invest their AVC payments. The Plan Trustee's objective is to provide a range of funds which will provide a suitable return for members, consistent with members' reasonable expectations and risk preferences. 12

15 4 Objectives and Long Term Policy Money Purchase Section Objectives 4.1 The Plan Trustee s objective is to make available to members of the Money Purchase Section an appropriate range of investment options to which members and the Company will contribute in order to provide each member with a fund which will be used to secure their benefit at retirement. 4.2 In determining which investment options to make available, the Plan Trustee has considered the investment risk associated with money purchase pension investment. This risk can be expressed as the uncertainty of the ultimate amount of savings available on retirement, the majority of which will be used to purchase an annuity to provide retirement benefits. There are a number of factors which contribute to this uncertainty. Some of them (such as the amount of contributions paid and the length of time these contributions are invested) cannot be managed by the investment options made available to members. 4.3 The Plan Trustee recognises, however, that the uncertainty inherent in three specific investment risks (inflation, capital and pension conversion) can be managed to a limited extent by the choice of investments. 4.4 A list of funds that are currently provided are shown below, along with their investment objectives: Fund Aquila (30/70) Currency Hedged Global Equity Index Fund Aquila UK Equity Index Fund Schroder Life Intermediated Diversified Growth Fund Threadneedle Pensions Pooled Property Fund Investment Objective A passively managed fund invested primarily in equities, both in the UK and overseas market. The fund has approximately 30% invested in the shares of UK companies. The remaining 70% is invested in overseas companies (according to market capitalisation) in the US, Europe (ex-uk), emerging markets and the Far East. A passively managed fund primarily invested in UK equities and aims to achieve a return that is consistent with the return of the FTSE All Share Index. An actively managed fund invested in a diversified range of growth assets classes with a performance objective of achieving a return of Retail Price Inflation (RPI) +5% per annum over a market cycle (typically about 5 years). An actively managed fund invested in property with a performance objective of achieving a return above the CAPS Median. 13

16 Aquila World ex-uk Index Fund Aquila Over 5 Year Index Linked Gilts Index Fund Aquila Over 15 Year Corporate Bond Fund Aquila Over 15 Year Gilt Index Fund Winterthur Money Market Fund Jupiter Ecology Fund A passively managed fund primarily invested in shares of overseas companies, with a performance objective of achieving a return in line with the FTSE All-World Developed ex-uk Index. A passively managed fund primarily invested in UK government index-linked securities that have a maturity period of 5 years or longer. The fund aims to achieve a return in line with the FTSE UK Gilts Index-Linked (over 5 year) Index. A passively managed fund primarily invested in investment grade corporate bonds denominated in Sterling that have a maturity period of 15 years or longer. The fund aims to achieve a return in line with the iboxx Sterling Non-Gilts Over 15 Years Index. A passively managed fund primarily invested in UK government fixed interest securities that have a maturity period of 15 years or longer. The fund aims to achieve a return in line with the FTSE UK Gilts Over 15 Years Index. A fund invested in cash deposits or Sterling denominated money market assets with a performance objective of achieving a competitive return against the 7-Day LIBID. An actively managed fund invested worldwide in companies that demonstrate a positive commitment to the long-term protection of the environment. The fund aims to provide long term capital growth. 4.5 The funds offered in the Money Purchase Section were selected by the Plan Trustee in consideration of the funds objectives and investment process, expected returns, risks and other characteristics, and the Plan Trustee s view of the needs and circumstances of the membership, including the term to retirement and the attitudes to risk. The Plan Trustee realises that while no single option will be sufficient to manage the various risks associated with money purchase investment as described previously, the range is designed to be wide enough to enable individuals to manage the risks identified as they become relevant, according to each member's individual requirements. In addition, the Plan Trustee will take into consideration the Responsible Ownership policy adopted by managers, including their attitude to exercising voting rights (as explained in section 10 of this document), when determining the fund range available to members of this Section. 14

17 4.6 In addition, the Money Purchase Sections offer a Lifestyle Option. The aim of the Lifestyle Option is to try to ensure that members' funds are invested in appropriate funds at the appropriate time, based on their age and the number of years until their selected retirement date. 4.7 The Lifestyle Option involves a phased switching of assets from a long term equity fund (the Aquila (30/70) Currency Hedged Global Equity Index Fund) to the gilt, index-linked gilt, corporate bond and cash funds. The characteristics of these funds are outlined in 4.4 above. The switching commences ten years prior to a member's selected retirement age. 4.8 The funds outlined in 4.4 are provided by means of an assurance contract issued by Winterthur Life UK Limited (the Money Purchase Platform Provider). As required by the Pensions Act, the Plan Trustee s policy is to obtain advice on whether these funds or any other investments chosen by the Plan Trustee itself are satisfactory. AVCs Winterthur Life is remunerated by an ad-valorem fee incorporated in the fund s annual management charge. The fee arrangements have been determined by reference to common practice in relation to the nature of the mandates involved and are kept under regular review with a view to optimising members value for money. 4.9 The Plan provides a facility for members to pay AVCs to enhance their benefits at retirement. The members are offered a range of funds in which to invest their AVC payments. This includes the option to pay AVCs to the funds outlined in 4.4 above, or the AVC Lifestyle Option. The AVC Lifestyle Option involves a phased switching of assets from a long-term equity fund (the Aquila (30/70) Currency Hedged Global Equity Index Fund) to cash. The switching commences five years prior to a member s selected retirement age. 15

18 5 Asset Allocation Guidelines Asset Ranges 5.1 The Final Pay Section of the Plan may hold funds in the following asset classes and will normally fall within the currently specified limits:- Minimum % Maximum % Total Equities Property 2 10 Private Equity 0 10 Hedge Funds 0 5 Emerging Market Currency 0 6 Infrastructure 0 10 Return-Seeking Assets in aggregate (excluding matching infrastructure component) Bonds "Matching Type" Assets 0 20 Infrastructure 0 10 Cash 0 10 Liability-Matching Assets in aggregate (including matching infrastructure component) Comments In the above table, the total allocation to equities has been grouped together so that it includes traditional long only equities as well as the long/short equity mandate. The allocation to hedge funds encompasses all types of hedge fund strategies which may be considered. Within the "Liability- Matching" portfolio a new asset class labelled "Matching type" assets has been included. This will include asset classes such as index-linked property leases. The overall strategic allocation to "Return Seeking" and "Liability Matching" Assets will be reviewed and updated following the upcoming actuarial valuation. Two-way rebalancing of the portfolio is performed with reference to the rebalancing protocol agreed between the Trustee and the Principal Employer. The current benchmark is 50% return-seeking and 50% liability-matching assets. Should a derisking trigger be met (as described in Section 3.3), the above table may be updated to reflect the revised asset allocation of the Plan. 16

19 5.2 Asset categories not included here may only be used following a revision of these restrictions which specifically permits their inclusion. Any changes will be agreed with the Principal Employer. Diversification 5.3 The choice of benchmark and the ranges specified in 5.1 above are designed to ensure that the Plan's investments are adequately diversified between asset classes. In addition, the use of several Managers with different investment styles and the investment restrictions covered in Section 7 ensure that, at a stock selection level, the Final Pay Sections of the Plan avoid undue concentration and, in practice, the aggregate portfolio is well diversified. Suitability 5.4 The Plan Trustee has taken advice from both the Scheme Actuary and the Investment Consultant to ensure that the benchmark and the ranges specified above are suitable for the Plan given its liability profile and funding objectives. Liquidity 5.5 The Pension Department will ensure that the Final Pay Sections of the Plan hold sufficient cash to meet the likely benefit payments from time to time. This will be by means of drawdowns of specific amounts from any of the Investment Managers (excluding the Private Equity, Long Term Long Only equity and Infrastructure portfolios). The Plan holds sufficient investments in liquid assets to meet unexpected cashflow requirements in all reasonably foreseeable circumstances. 17

20 6 Investment Manager Arrangements Manager Structure 6.1 Investment Managers are employed, as at the date of publication, in the following roles in relation to the Final Pay Sections. The actual amount held with each manager may vary between the minimum and maximum shown as a guidance in section 5 of this document. Legal & General Investment Management Marathon Asset Management Limited Bridgewater Associates LP - to manage a portfolio of UK and overseas equities, UK fixed interest government securities, UK index-linked government securities and sterling corporate bonds. - to manage a portfolio of global equities. - to invest in the Pure Alpha fund, which takes positions in currency, bond, equity and commodity markets. LaSalle Investment Management - to manage a portfolio of property investments (including DV3 and DV4, and the CBRE Alpha Fund). Pantheon Ventures Rogge (UK bonds) Carnegie Asset Management Meridiam CB Richard Ellis EQT Alinda Uberior - to manage a portfolio of unquoted equity investments. - to manage a portfolio of fixed interest and index-linked securities. - to manage a portfolio of global equities. - to manage an infrastructure portfolio - to manage a portfolio of European property investments through the Alpha fund. - to manage an infrastructure portfolio - to manage an infrastructure portfolio - to manage an infrastructure portfolio The asset allocation benchmarks for each Investment Manager together with the amounts allocated to each Investment Manager for management are consistent with the Plan's long term asset allocation for the Final Pay Section. Performance Objectives 6.2 A set of measurable objectives have been developed for the Investment Managers consistent with the achievement of the Plan's longer term objectives. In each case, risk parameters, consistent with the performance objective, have been agreed. The nature of the risk parameters vary from Manager to Manager and include restrictions on the exposure to an individual security and /or expected tracking errors. 18

21 Legal & General To produce returns in line with the relevant index within each asset class. Marathon Asset Management Limited To outperform the MSCI All Country World Index net, by 2.0% pa over rolling three year periods. Carnegie Asset Management To outperform the MSCI World Index (unhedged) by at least 3.0% pa over rolling five year periods. Carnegie s performance will also be monitored against the annual UK RPI plus 6%. Bridgewater Associates LP To achieve substantial capital appreciation via a wide range of asset classes while targeting an alpha tracking error of approximately 18%. Rogge Global Partners (UK bonds) To outperform a composite index, as shown below, by 1.5% pa (before fees) over rolling three year periods. Asset Class % Index Sterling Non Gilts 75.0 Merrill Lynch Sterling Non-Gilts All Stocks Index Sterling Index-Linked 25.0 FTSE A Index Linked Gilts Over 5 Years Index LaSalle Investment Management To outperform the IPD UK Quarterly Property Index by 1.0% pa. Pantheon Unquoted Equity - to provide a return in excess of 15% pa over rolling five year periods. CB Richard Ellis To provide a total return (net of all fees and expenses) of between 8% to 10% per annum through a diversified exposure to pan-european real estate (excl. UK) through investment in Investment Funds and/or Property Related Assets. Meridiam To produce IRRs in the region of 9.5% to 14% (gross) through long term investments in social assets, economic assets and selective purchase of secondary assets. EQT To make investments that provides opportunities for value creation through growth or operational improvements. The EQT Fund will make primarily controlling and co-controlling 19

22 investments in infrastructure investments located in Northern and Eastern Europe with the flexibility to invest globally. Alinda To produce IRRs in the region of 20% (gross) through long term investments in the purchase of large economic infrastructure assets, predominantly from the secondary market. The manager is also targeting average cash on cash return of 10% per annum and at least 2.5 times gross return of capital. These assets will predominantly be sourced from the US and Western Europe Uberior To produce IRRs of approximately 8% (net) through a long term investment in a portfolio of relatively low risk infrastructure assets. A majority of these assets will be UK government backed PPP/PFI concessions, with a small exposure to toll-roads that have some demand/patronage risk. Other considerations 6.3 It is expected that each Investment Manager should achieve their respective objective in the majority of rolling three year and five year periods under consideration but will not necessarily achieve their objective in every such period. However, the Investment Managers should demonstrate that the skill that they exercise on the portfolios is consistent with their objective given the levels of risks adopted. 6.4 The Trustee takes a longer term view of currency risks. Therefore, the hedging of foreign currency risks within the Final Pay Sections of the Plan is limited to the bond and hedge fund portfolios. 6.5 The Plan Trustee and the Investment Managers who have delegated discretion will exercise their powers in a manner calculated to ensure the security, quality, liquidity, profitability and diversification of the portfolio as a whole is appropriate. The assets will also be invested in a manner appropriate to the nature and duration of the expected future retirement benefits payable under the Plan. 6.6 Investment Managers are remunerated by an ad-valorem fee based on the value of the portfolio under management or by an ad-valorem fee and a performance related element depending on the nature of their mandate. The Trustee expects the Investment Managers to give effect to the principles in this statement so far as is reasonably practicable. 6.7 The fee arrangements have been determined by reference to common practice in relation to the mandates involved. 6.8 The Investment Consultant is remunerated based on a monthly retainer, with additional fees being charged for work outside the retainer that are based on the 20

23 nature and amount of the work carried out. The fee arrangements have been determined by reference to common practice in relation to the nature of the work carried out. 21

24 7 Investment Restrictions Universal 7.1 The following restrictions are applied as a policy position by the Plan Trustee. No direct investment is permitted in securities issued by Pearson plc (or by companies in which Pearson plc holds 20% or more of the equity share capital). Derivatives may be used to enhance the efficient management of the portfolio and can be used where they provide opportunities to achieve the investment objective of the portfolio more effectively than would be the case through direct dealing in the underlying securities. As a general rule, Investment Managers are only allowed to hold derivatives where the underlying itself is a permissible asset, unless stated otherwise. All relative (percentage) measurements of derivative exposure to be based on notional amounts (a hypothetical underlying value which does not change hands but upon which interest rate or other payment obligations are calculated). Manager Restrictions 7.2 The Plan has Agreements in place with each of its Investment Managers. These Agreements cover the restrictions which will apply in the management of the Plan s assets. Each Investment Manager is liable to have different restrictions, commensurate with its mandate, the performance objective, and the skills which it can bring to bear. 22

25 8 Monitoring and Implementation of Investment Policy 8.1 The appointment of the Investment Managers will be reviewed by the Plan Trustee from time to time, based on advice from the Investment Committee and the results of its monitoring of performance and process. The Investment Managers have been provided with a copy of this Statement and will be provided with a copy of any revised Statement. Selection Criteria 8.2 The Plan Trustee has identified the criteria by which Investment Managers should be selected (or deselected). These include: Business supportive ownership committed to investment management. evidence of clear strategic direction. People high calibre, experienced professionals. relatively low staff turnover. evidence of clear commitment to house culture. strong recruitment/training plans. Process effective approach to accessing/interpreting research. robust, repeatable process. process consistent with the stated philosophy. Performance acceptable variability in relation to Investment Manager s style. De-selection Criteria 8.3 Investment Managers may be replaced if: a. they fail to meet the performance objectives set out in Section 6; and/or b. the Plan Trustee believes that the Investment Manager is not capable of achieving the performance objectives in the future. c. the Plan Trustee believes that another Investment Manager is better placed to achieve the requisite level of investment performance. d. the Plan Trustee has received advice and recommendation from the Investment Consultant, Aon Hewitt Limited, regarding the suitability or otherwise of the Investment Manager(s) in managing the Plan's assets. 23

26 8.4 The Investment Committee holds meetings with the Investment Managers to satisfy themselves that they continue to carry out their work competently and have the appropriate knowledge and experience to manage the investments of the Plan. The Investment Consultant advises on the frequency of these meetings, having regard to any issues that need to be addressed with the Investment Managers. 8.5 The Plan Trustee believes that custodian services are a vital part of the management of the assets of the Final Pay Sections of the Plan and recognises the importance of monitoring, via the Investment Committee, the custodial arrangements. In summary, the current custodial or general partner arrangements are: Legal & General Investment Management HSBC Global Investor Services, Citibank NA and Euroclear. Marathon Asset Management Limited BNY Mellon Asset Servicing. Bridgewater BNY Mellon Asset Servicing. Carnegie BNY Mellon Asset Servicing. Rogge (UK bonds) BNY Mellon Asset Servicing. Pantheon Hogan Lovells*/ Northern Trust International Fund Administration Services (Guernsey) /Close Fund Services. LaSalle Investment Management Ashurst /Semple Fraser, Hogan Lovells International LLP. CBRE Brown Brothers Harriman Trustee Services (Ireland) Limited. Meridiam CACEIS Bank Luxembourg. EQT General Partner for EQT Infrastructure Limited. Alinda Wells Fargo Custody Services. Uberior Uberior Infrastructure Finance GP Limited. * Hogan Lovells custodial responsibilities only extend to that shown in 2.7a, namely the safekeeping of assets. The remaining duties will be carried out by Pantheon. 8.6 The Trustee has appointed BNY Mellon Asset Servicing as its global Custodian to be responsible for the safekeeping of the directly held assets of the Plan, providing appropriate administration, processing dividends, and operation of a stock lending programme on behalf of the Plan when deemed appropriate by the Trustee. 8.7 The appointment of the Money Purchase Platform Provider will be reviewed by the Plan Trustee at least once every three years, based on the results of the Trustee s monitoring of administration and investment process and the Platform Provider s ongoing commitment to the DC marketplace. The Money Purchase Platform Provider has been provided with a copy of this Statement and the Plan Trustee will monitor the extent to which the Platform Provider gives effect to the policies set out in it. 24

27 9 Risk Management 9.1 The Plan Trustee recognises a number of risks involved in the investment of the assets of the Plan which it monitors on a regular basis and seeks to mitigate as shown below: Solvency risk and mismatching risk: includes the risk that the Plan s assets are insufficient, or inappropriate, to meet its liabilities and that there is a significant difference in the sensitivity of asset and liability values to changes in financial and demographic factors are considered by the Plan Trustee and its advisers when setting investment strategy are measured through a qualitative and quantitative assessment of the expected development of the liabilities, relative to the current investment policy are managed through assessing the progress of the actual growth of the liabilities relative to the current investment policy. Manager risk: includes the risk that poor performance by one or more individual Investment Managers has a significant negative impact on the Plan s investments is measured by the expected deviation of the prospective risk and return, relative to the investment policy is managed by monitoring the actual deviation of returns relative to the objective and factors supporting the Investment Manager(s) investment process. The Plan Trustee also monitors a variety of factors at the Investment Managers on a regular basis in order to assist with the identification of any material events at those Investment Managers that might lead to underperformance of the Plan s assets. The Investment Consultant will also provide guidance on the appropriateness or otherwise of the Investment Managers. Liquidity risk: includes the risk that the Plan is forced to sell investments in poor markets to fund pension and other payments is measured by the level of cashflow required by the Plan over a specified period is managed by the Pension Department assessing the appropriateness of the level of cash held in the light of the forecast level of payments. Custodian risk: includes the risk that a custodian of the Final Pay Sections of the Plan misplaces Plan investments that it is receiving, delivering or safekeeping and includes the further risk introduced by the Custodian bank s use of sub-custodians within some overseas countries is measured by assessing the quality of the Custodian bank is managed by the Custodians and the Investment Managers whom are expected to ensure that the custodian arrangements comply with their internal control procedures. 25

28 The Plan Trustee also monitors on a regular basis the extent of the use of subcustodians within the Plan s investment management arrangements and considers the risks that the use of such sub-custodians introduces. Sponsor risk: includes the risk that the Sponsor (in this case the Principal Employer) cannot, or will not, make good a current or future deficit of the Plan is measured by the Sponsor s ability, and willingness, to support the continuation of the Plan and to make good any current or future deficit is managed by assessing the financial strength of the Sponsor s business (including the impact on it of the needs of the Plan), as measured by a number of factors. Stock lending risk: includes the risk that borrowers may fail to pay to the Plan the amounts they owe, or to repay the stock that they have borrowed is measured by reference to the collateral received for stocks lent and limits of exposure to borrowers of stock is managed by not permitting the Plan s segregated managers to undertake stock lending activity. This reflects the Trustee s belief that the market and credit risks of stock lending do not at present justify the returns. Counterparty risk: includes the risks that: (i) an obligor (for example, the issuer of a corporate bond) fails to pay the principal or interest; and (ii) (normally a lesser risk) a financial institution with whom the Plan trades, or to whom it lends, assets, fails to deliver its side of the bargain This is measured by reference to the credit quality of (a) the obligors under assets owned by the Plan and (b) the Plan s trading and lending counterparties is managed by monitoring information provided by the Investment Managers and discussions with Investment Managers on their counterparty risk policies and levels of exposure. Fraud/dishonesty risk: is managed by protection offered by a fidelity and crime insurance policy; the Plan Trustee monitors annual renewal of this policy. 9.2 The Plan Trustee continues to monitor these risks. 26