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AFB Investment Principles

A.F. Blakemore and Son Limited Staff Retirement Benefit Scheme 
 
Statement of Investment Principles 
 
Introduction 

Section 35 of the Pensions Act 1995 (“the Act”) requires the Trustees to prepare a statement of the principles governing investment decisions (“the Statement”) for the purposes of the Scheme.  This document fulfils that requirement. 

In preparing this Statement, and to comply with Section 36 of the Act, the Trustees have obtained advice from Hughes Price Walker.  The Trustees will obtain such advice, as they consider appropriate and necessary, whenever they intend to review or revise the Statement. 

In preparing this Statement, the Trustees have consulted A F Blakemore and Son Limited (“the Employer”) and will do so whenever the Trustees intend to revise the Statement.  Responsibility for maintaining the Statement and deciding investment policy rests solely with the Trustees. 

The Trustees will review the Statement at least every three years and after any significant change in investment policy. 

Defined Benefit Section 

Investment Objectives 

The investment objectives of the Scheme are: 

(a) The acquisition of suitable assets of appropriate liquidity which will generate income and capital growth to meet the cost of benefits that the Scheme provides as set out in the Trust Deed and Rules; 

(b) So far as reasonably possible, to avoid the risk of the assets failing to meet the liabilities on an ongoing basis;  

(c) To minimise the long term costs of the Scheme by maximising the return on the assets so far as is both prudent and consistent with the above objectives. 

The Trustees are invested in three property funds as shown below.  The Trustees intend to hold the units in these property funds and not to buy or sell further units for the time being. 

  • Standard Life Pooled Property Fund; 
  • Friends Life Property Fund; and 
  • AXA Wealth Threadneedle Pensions Property S2. 

 
The Trustees have agreed to appoint a number of investment managers, utilising a variety of asset classes, in the following proportions: 

Fund  Initial Allocation (%) 
Equity (Baillie Gifford Global Alpha Growth Fund)  21.0
Alternative funds in the following proportions:  45.0
Partners Fund
Baillie Gifford Diversified Growth Fund
1/3 rounded to £0.5m
Remainder
LDI (BMO Funds)  23.5
Property (funds as listed above)  10.5 

The Trustees believe that the assets are invested in a manner appropriate to the nature and duration of the expected future retirement benefits payable under the Scheme. 

The Trustees consider that this policy represents investment in suitable asset classes, is appropriately diversified, and provides a reasonable expectation of meeting the above objectives.

The Trustees may, after consultation with the Employer, temporarily switch an amount out of any fund and into any other fund managed by Baillie Gifford.  The reasons for such a switch could be with a view to making potential relative gains from future market movements or a change in the Trustees’ view of the investment risk they wish to take.  After doing so, the position will be kept under review at regular Trustee meetings.  The aim would then be to switch back to the intended long term asset allocation when the anticipated market movements occur or when the appetite for risk changes in the appropriate direction. 

Transition Plan 

The Trustees understand that all aspects of the strategy can not be implemented simultaneously due to fund restrictions.  The Trustees have therefore determined to approach the final strategy via a series of approximate steps as shown in the table below.  Note that the figures are rounded and the actual allocation at the point of each step might be slightly different due to market movements.

  Start Step 1 Step 2 Step 3 
BG Global Alpha Growth Fund 43.0 21.0 21.0 21.0
BG Diversified Growth Fund  22.0 32.0 32.0 30.0
BG Multi Asset Growth Fund  13.0 13.0 13.0 -
Partners Fund - - - 15.0
BG Investment Grade Long Bond Fund 11.5 23.5 - -
BMO Nominal Dynamic LDI Fund - - 20.0 20.0
BMO Short Profile Real Dynamic LDI Fund - - 3.5 3.5
Property Funds  10.5  10.5  10.5  10.5 
Total 100.0 100.0 100.0 100.0

Step 1 has already been completed. 

Step 2 is expected to complete in June/July 2019. 

Step 3 is expected to complete by Q1 2020.  The Trustees will commit to a certain level of investment in advance, it is therefore likely that the actual proportion invested will be different from the target proportion. 

Investments and Disinvestments 

The 10.5% initial allocation to Property funds is an estimate.  No money will be invested into, or disinvested from, those funds in order to move closer to that proportion.  

The 15% initial allocation to the Partners Fund is an estimate.  No money will be invested into, or disinvested from, this fund in order to move closer to that proportion. 

From time to time the LDI fund may distribute cash or require a cash injection due to a rebalancing event.  Where such an event occurs, the cash will be distributed to / injected from the Baillie Gifford Global Alpha Growth Fund and/or the Baillie Gifford Diversified Growth Fund to move towards the 21%:45% ratio for the equity:alternative high level allocation. 

In the normal course of business, day to day investments and disinvestments will be made to and from the Baillie Gifford Global Alpha Growth Fund and/or Baillie Gifford Diversified Growth Fund to move towards the 21%:45% ratio for the equity:alternative high level allocation. 

Delegation of Investment Discretion 

The Trustees have delegated day-to-day investment management to the investment managers which are regulated by the FCA. 

The investment managers manage the investments of the Scheme’s assets in accordance with the following objectives:  

Fund Objective
Baillie Gifford Global Alpha Growth Fund  The fund aims to outperform the MSCI AC World Index by at least 2.0% per annum (before management fees), over rolling five year periods. 
Partners Fund  To achieve capital growth over the medium to long term by investing in various alternative asset classes and/or alternative investment strategies. 
Baillie Gifford Diversified Growth Fund To outperform the UK Base Rate by at least 3.5% per annum (net of fees) over rolling five year periods with an annualised volatility of less than 10%. 
BMO Nominal Dynamic LDI Fund  To hedge a generic fixed liability profile. 
BMO Short Profile Real Dynamic LDI Fund To hedge a generic short duration inflation linked liability profile. 
Standard Life Pooled Property Fund  To provide long term growth from a combination of income and capital growth by investing predominantly in prime quality UK properties. 
Friends Life Property Fund  To achieve capital growth and income by investing mainly in UK commercial property. 
AXA Wealth Threadneedle Pensions Property S2  To outperform the CAPS Median for Pooled Property funds by at least 1.0% to 1.5% per annum over rolling 3 year periods. 

The terms of the delegation are set out in agreements between the Trustees and the investment managers. The agreement includes such matters as investment objectives, the procedures for instructions, custody of the assets, voting, fees and charges. 

Realisation of Investments 

The Trustees will hold sufficient cash to meet the likely expenditure on benefits and expenses from time to time.  The Trustees will also hold sufficient assets in liquid investments to meet unexpected cashflow requirements in the majority of circumstances so that, where possible, the realisation of assets will not disrupt the Scheme’s overall investment policy. 

Expected Return on Investments 

The investment strategy was developed by balancing the Trustees’ key requirements.  The investment strategy was chosen to remove a large portion of the risk of adverse movements in interest rates, generate the returns necessary to fund the Scheme and to maintain sufficient liquid assets to meet likely cashflow needs.  In the Trustees’ opinion, the chosen strategy offers an acceptable trade-off between risk and return. 

Risk Management 

The Trustees recognise and monitor a number of risks involved in the investment of the assets of the Scheme: 

  • Solvency risk and mismatching risk – addressed through the underlying asset allocation, mitigated by the use of LDI funds and monitored through ongoing triennial actuarial valuations. 
  • Manager risk – addressed through the performance objectives and the ongoing monitoring of the investment managers and enhanced by the diversification effect of using multiple managers. 
  • Liquidity risk – the Scheme’s administrators monitor the level of cash held in order to limit the impact of cashflow requirements on the investment policy. 

Liability Hedging 

The strategy allocates approximately 23.5% of the assets to BMO LDI funds.  These funds will be expected to hedge around 90% of the fixed liabilities of the Scheme and 35% of the real liabilities of the Scheme.  

Investment Management Monitoring 

The Trustees will receive quarterly reports from Hughes Price Walker Limited and will meet with their representatives as necessary to review their investment performance and processes.  Through this process of regular reporting and review, the Trustees aim to ensure that the investment managers are performing competently and in compliance with this Statement. 

Socially Responsible Investment 

As the assets of the Scheme are managed in pooled arrangements, the Trustees accept that the assets are subject to the investment managers’ own policies on social, environmental and ethical investment considerations when selecting, retaining or realising investments. 

AVCs

Prior to the closure to future accrual, the Trustees provided a facility for members to pay AVCs to enhance their benefits at retirement.  Members could invest in a range of funds managed by MGM Advantage and Prudential.

Defined Contribution Section 

Investment Policy 

The Trustees have appointed Baillie Gifford as investment manager.  The Trustees’ investment policy is to offer members of the Money Purchase Section the following range of funds: 

Type of fund Name 
UK equity  Baillie Gifford UK Equity Core Fund
Global equity  Baillie Gifford Global Alpha Growth Fund
Emerging markets equity Baillie Gifford Emerging Markets Leading Companies Fund
Managed Baillie Gifford Managed Fund 
Diversified growth  Baillie Gifford Diversified Growth Fund; and
Baillie Gifford Multi Asset Growth Fund
Corporate bond Baillie Gifford Investment Grade Long Bond Fund 
Annuity protection Baillie Gifford Active Long Gilt Fund 
Annuity protection Baillie Gifford Active Index Linked Gilt Fund 

The funds offered give a range of different risk and return characteristics so that members can construct an overall portfolio suitable to provide for their pensions at retirement.  Members are responsible for choosing their own investment strategy from the range of funds on offer. 

An optional lifestyle facility is available as a default strategy for members who do not wish to choose their own investment strategy.  Under the lifestyle strategy, members’ investments are automatically changed as they approach their chosen retirement date to minimise the different investment risks. 

The lifestyle strategy consists of the following two funds: 

  • Baillie Gifford Global Alpha Growth Fund
  • Bailie Gifford Multi Asset Growth Fund 

Under the lifestyle strategy, members who are more than five years from their chosen retirement date will be invested in the Baillie Gifford Global Alpha Growth Fund.  Over the five years before the chosen retirement date, members’ funds will be gradually moved to the Baillie Gifford Multi Asset Growth Fund.  The aim is to broadly have 100% of the member’s funds in the Baillie Gifford Multi Asset Growth Fund at retirement. 

The Trustees believe it is in the best interests of members to be invested in equities when there is a long period to retirement then, when approaching retirement, to be invested in safer assets.  The strategy looks to maximise the absolute value of the DC pots, subject to reasonable protections against downside volatility as retirement approaches. 

Delegation of Investment Discretion 

The Trustees have delegated day-to-day investment management to Baillie Gifford, which is regulated by the FCA.  The investment manager manages the investments of the Scheme’s assets in accordance with the following objectives: 

Fund  Objective
Baillie Gifford UK Equity Core Fund To outperform the FTSE All-Share Index by at least 1% per annum over rolling three year periods (before the management fee). 
Baillie Gifford Global Alpha Growth Fund The fund aims to outperform the MSCI AC World Index by at least 2.0% per annum (before management fees), over rolling five year periods. 
Baillie Gifford Emerging Markets Leading Companies Fund  To produce attractive returns over the long term through investment primarily in a concentrated portfolio of the larger and more tradable companies, as measured by the value of their freely floating shares and value of shares traded, in emerging markets worldwide and in any economic sectors of such markets. 
Baillie Gifford Managed Fund  The objective is to produce capital growth over the long term. 
Baillie Gifford Diversified Growth Fund  To outperform the UK Base Rate by at least 3.5% per annum (net of fees) over rolling five year periods with an annualised volatility of less than 10%. 
Baillie Gifford Multi Asset Growth Fund  To outperform the UK Base Rate by 3.5% per annum (net of fees) annualised over rolling five-year periods with an annualised volatility of less than 10% over rolling five-year periods. 
Baillie Gifford Investment Grade Long Bond Fund  The objective is to produce attractive returns over the long term, while achieving a higher level of income than would be available from investment only in comparable UK Gilts, by investing primarily in a diversified portfolio of investment grade long bonds denominated in sterling. 
Baillie Gifford Active Long Gilt Fund To outperform the FTSE Actuaries UK Conventional Gilts Over 15 Years Index by 0.5% per annum (before fees) over rolling three-year periods. 
Baillie Gifford Active Index Linked Gilt Fund  To outperform the FTSE Actuaries UK index-Linked Gilts Over 5 Years Index by 0.5% per annum (before fees) over rolling three-year periods. 

The terms of the delegation are set out in agreements between the Trustees and the investment manager. The agreement includes such matters as investment objectives, the procedures for instructions, custody of the assets, voting, fees and charges. 

Realisation of Investments 

When benefits in respect of any member become payable, the Trustees will consider whether it is appropriate to realise the assets attributable to that member.

Expected Return on Investments 

The Trustees expect the return on the UK equity fund, the overseas equity fund, the global equity fund and the managed fund to exceed the return on the bond funds as well as the rate of increase in prices and earnings. 

The Trustees expect the return on the diversified growth fund and multi asset fund to be around 3.5% pa above bank base rates over the longer term. 

Risk Management 

The Trustees recognise and monitor a number of risks involved in the investment of the assets of the Scheme: 

  • Market volatility risk – whilst the risk of poor investment returns (and the cost of securing pensions at retirement) is ultimately borne by the members, the Trustees provide members with an optional lifestyle strategy which, unless they choose otherwise, gradually moves each member’s accumulated fund and future contributions into the gilt and multi asset funds as they approach their chosen retirement date. 
  • Manager risk – addressed through the performance objectives and the ongoing monitoring of the investment manager. 

Investment Management Monitoring 

The Trustees will receive quarterly reports from the investment manager and will meet with its representatives as necessary to review its investment performance and processes.  Through this process of regular reporting and review, the Trustees aim to ensure that the investment manager is performing competently and in compliance with this Statement. 

Socially Responsible Investment 

As the assets of the Scheme are managed in pooled arrangements, the Trustees accept that the assets are subject to the investment manager’s own policies on social, environmental and ethical investment considerations when selecting, retaining or realising investments. 

Defined Benefit and Defined Contribution Sections 

Environmental, Social and Corporate Governance Matters 

The Scheme’s overarching responsibility is to deliver financially sustainable returns for an acceptable level of risk to meet the future pension benefits of the members as they fall due and in a way that employer contributions paid into the Scheme are as stable and affordable as possible. 

The Trustees have a duty to act in the best financial interests of the Scheme’s beneficiaries and the Scheme is a long-term investor.  This includes considering Environmental, Social and Corporate Governance (‘ESG’) risks and opportunities that may be financially material to the Scheme.  The Trustees invest in pooled funds and so the assets are subject to the investment manager’s own policies on ESG considerations, including climate change.  The Trustees undertake due diligence when appointing investment managers and review each of those managers’ policies on ESG considerations.  The Trustees appreciate that those investment managers which integrate ESG considerations can help mitigate risks and have the potential to lead to better, long-term financial outcomes. 

The appointed investment managers have opted to sign the United Nations-supported Principles for Responsible Investment (PRI).  As signatories to the PRI, the investment managers have made the following commitments: 

As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time). 

We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following: 

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes. 

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices. 

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest. 

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry. 

Principle 5: We will work together to enhance our effectiveness in implementing the Principles. 

Principle 6: We will each report on our activities and progress towards implementing the Principles. 
 
The investment managers’ reports related to PRI and their statements on compliance with the Financial Reporting Council (FRC) Stewardship Code, which is seen as the UK standard for good stewardship, are reviewed by the Trustees at least once every three years. 

Exercise of rights 

As the Trustees invest in pooled funds, the investment managers make decisions related to: 

  • the exercise of any rights, including voting rights, attaching to the investments; and 
  • engagement activities in respect of the investments. 

This Statement has been agreed by the Trustees of the A.F. Blakemore and Son Limited Staff Retirement Benefit Scheme. 
 

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