The purpose of the Statement of Investment Principles (“the Statement”) is to document the principles and policies governing decisions about the investment of the assets of the Baker Group of Companies Retirement Benefits Scheme (“the Scheme”). This statement has been prepared by the Trustees of the Baker Group of Companies Retirement Benefits Scheme (“the Trustees”). It sets out the Trustees’ policy for complying with the Pensions Act 1995 and associated legislation including the Occupational Pension Schemes (Investment) Regulations 2005 (as amended). is adopted with effect from September 2020
The Trustees have consulted Butchers Pet Care Limited (“the Company”), who are required to give the views of the Sponsoring Company on the Statement, and have received written advice from the Scheme’s Investment Consultant, Mercer Limited (“Mercer”), which is regulated by the Financial Conduct Authority (“FCA”) in relation to investment services.
The Trustees seek to maintain a good working relationship with the Company and will discuss any proposed changes to the Statement with the Company. However, the Trustees’ fiduciary obligations are to the Scheme’s members and will take precedence over the Company’s wishes.
The Scheme’s investment arrangements, based on the principles set out in this Statement, are detailed in the Investment Implementation Policy Document (“IIPD”). Both documents are available to members on request.
The Scheme is governed by its Trust Deed and Rules which sets out all of the benefits in detail and specifies the Trustees’ investment powers. The investment powers do not conflict with this Statement.
Mercer has confirmed in writing to the Trustees that it has the appropriate knowledge and experience to give the advice required by the Pensions Act 1995 and the Occupational Pension Scheme (Investment) Regulations 2005.
The Trustees do not expect to revise this Statement frequently because it covers broad principles rather than their implementation. The Trustees will review it at least once every three years and without delay upon a material change to the Scheme or the Company.
2.1 Overall investment policy falls into two parts:
a) The strategic management of the assets is fundamentally the responsibility of the Trustees acting on expert advice and is driven by the investment objectives as set out below. The Trustees review the investment policy on a regular basis, although it is not expected to change frequently. Details are set out in Section 3.
b) The implementation of the investment policy is the day to day management of the assets which is largely delegated to the Trustees’ selected investment managers. The policy is outlined in Section 4 with full details in the IIPD, which the Trustees update on a regular basis.
2.2 Process For Choosing Investments
The Trustees have appointed Mercer to implement the Trustees investment strategy. In this capacity, and subject to agreed restrictions, the Scheme’s assets are invested in multi-client collective investment schemes (“Mercer Funds”) managed by a management company (Mercer Global Investments Management Limited (“MGIM”)). MGIM has appointed Mercer Global Investments Europe Limited (“MGIE”)) as investment manager of the Mercer Funds. In practice, MGIE delegates the discretionary investment management for the Mercer Funds to third party investment managers based in countries such as Ireland, UK and USA and those sub-investment managers will manage either a sub-fund or certain segments of a sub-fund. Mercer has expertise in identifying, selecting and combining highly rated fund managers who are best placed and resourced to manage the Scheme’s assets on a day to day basis.
In considering appropriate investments for the Scheme, the Trustees have obtained and considered the written advice of Mercer, whom the Trustees believe to be suitably qualified to provide such advice. The advice received and arrangements implemented are, in the Trustees’ opinion, consistent with the requirements of Section 36 of the Pensions Act 1995 (as amended).
3.1 Investment Objectives
The Trustees’ primary objective is to act in the best interest of the members, and ensure that the obligations to beneficiaries of the Scheme can be met. In meeting this objective, the Trustees’ further objective is to reach a position such that in the long term the Scheme assets would be sufficient to buyout the members’ liabilities with an insurance company.
To control risk, the Trustees set the split between the Scheme’s growth and matching assets such that the expected return on the portfolio is expected to be sufficient to meet the Scheme’s long-term objectives. As the funding level improves, investments will be switched from growth assets into matching assets with the aim of reducing overall investment risk.
The Trustees recognise that a portfolio of bonds (or bond like instruments) is the strategy which will best protect against changes in the value of the liabilities and the Scheme’s ongoing and solvency positions. However, the Trustees and the Company have also considered the use of some growth asset investment within the portfolio and feel that some growth asset investment is appropriate to target the higher expected returns over bonds. The Trustees do recognise that holding growth assets (such as equities) investment will bring increased volatility in the ongoing and solvency levels in favour of potentially reduced Company contributions.
As an interim target, prior to buying out the Scheme liabilities, the Trustees will aim to target reaching a suitably strong funding level in order to move to an entirely bond (or bond like instrument) based investment strategy when a suitably strong funding level is achieved. The Trustees will monitor progress against this target. The Trustees will review the investment strategy on a regular basis and aim to de-risk the Scheme investment strategy over time.
The objectives set out above and the risks and other factors referenced in this Statement are those that the Trustees determine to be financially material considerations. Non-financial considerations are discussed in section 5.
3.2 Investment Risk
The Trustees regard “risk” as the likelihood of failing to achieve the objectives set out above and have, on the advice of Mercer, taken several measures which are set out in this Statement to minimise this risk, over the Scheme’s anticipated lifetime, so far as is possible.
The Trustees pay close regard to the risks which may arise through a mismatch between the Scheme’s assets and its liabilities, and the risks which may arise from the lack of diversification of investments. Subject to satisfying the risk from a mismatch of assets and liabilities, the Trustees believe that the asset allocation policy in place provides an adequately diversified distribution of assets.
The Trustees’ willingness to take on investment risk is dependent on the continuing financial strength of the Company and its willingness to contribute to the Scheme. The strength of the Company and its perceived commitment to the Scheme is monitored by the Trustees and risk will be reviewed if either of these deteriorates.
The degree of investment risk taken will also depend on the Scheme’s funding status and liability profile. The Trustees will monitor these with a view to altering the Scheme objectives and risk tolerances if there is a change in either.
There are various risks to which any pension scheme is exposed. The Trustees’ policy is to minimise these risks as far as possible, consistent with earning a satisfactory investment return to enable the Scheme to pay the benefits due to members.
The Trustees have considered the following risks:
3.3 Investment Strategy
The Trustees have chosen a selection of MGIE funds in which to invest the Scheme’s assets. Full details of the Scheme’s investment strategy being implemented can be found in the IIPD.
The investment strategy is reviewed regularly by the Trustees to ensure that it remains appropriate for meeting the objectives set out in 3.1 and for controlling the risks identified in 3.2.
3.4 Consultation with the Company
As required by the Pensions Act 1995, and as a matter of good practice, the Trustees have consulted with the Company concerning the investment arrangements set out above.
The Trustees regard the choice of asset allocation policy as the decision which has most influence on the likelihood that they will achieve their investment objectives. In deciding the Scheme asset allocation, the Trustees have taken advice from Mercer and make their decisions in consultation with the Company.
The strategic weights are targets and deviations from them may occur from time to time. Whilst there is no strategic allocation to cash, it is accepted that the Scheme’s investment managers will need to hold part of the investments in cash or short-term deposits, in order to manage the assets in an efficient manner.
The Trustees monitor the continued appropriateness of the strategy on an ongoing basis with the help of their advisers. However, the strategy will be reviewed in depth after each triennial actuarial valuation, though if there is a significant change (in the opinion of the Trustees) in the capital markets, the circumstances of the Scheme and/or the Company, or governing legislation between valuations, then an earlier review will be conducted.
It is the Trustees’ policy that the majority of the Scheme’s investments are in securities which can be realised at short notice, or in cash.
In addition, the Trustees’ policy is to endeavour to secure the safety of the Scheme’s assets. Custodial arrangements are outsourced to Mercer as detailed in Section 3.2.
The Trustees believe that environmental, social, and corporate governance (ESG) factors may have a material impact on investment risk and return outcomes, and that good stewardship can create and preserve value for companies and markets as a whole. The Trustees also recognise that long-term sustainability issues, particularly climate change, present risks and opportunities that increasingly may require explicit consideration.
As noted above, the Trustees have appointed Mercer to act as discretionary investment manager in respect of the Scheme’s assets and such assets are invested in a range of Mercer Funds managed by MGIE. Asset managers appointed to manage the Mercer Funds are expected to evaluate ESG factors, including climate change considerations, and exercise voting rights and stewardship obligations attached to the investments, in accordance with their own corporate governance policies and current best practice, including the UK Corporate Governance Code and UK Stewardship Code.
The Trustees consider how ESG, climate change and stewardship is integrated within Mercer’s, and MGIE’s, investment processes and those of the underlying asset managers in the monitoring process. Mercer, and MGIE’s, is expected to provide reporting to the Trustees on a regular basis, on ESG integration progress, stewardship monitoring results, and climate-related metrics such as carbon foot printing for equities and/or climate scenario analysis for diversified portfolios.
Member views are not taken into account in the selection, retention and realisation of investments.
The Trustees have not set any investment restrictions in relation to particular Mercer Funds.
When engaging Mercer to implement the Trustees’ investment strategy outlined in section 3, the Trustees are concerned that, as appropriate and to the extent applicable, Mercer is incentivised to align its strategy and decisions with the profile and duration of the liabilities of the Scheme, in particular, long-term liabilities.
As Mercer manages the Scheme’s assets by way of investment in Mercer Funds, which are multi-client collective investment schemes, the Trustees accept that they do not have the ability to determine the risk profile and return targets of specific Mercer Funds. However the Trustees expect Mercer to manage the assets in a manner that is consistent with the Trustees’ overall investment strategy as outlined in section 3. The Trustees have taken steps to satisfy themselves that Mercer has the appropriate knowledge and experience to do so and keeps Mercer’s performance under ongoing review.
Should Mercer fail to align its investment strategies and decisions with the Trustees’ policies, it is open to the Trustees to disinvest some or all of the assets invested managed by Mercer, to seek to renegotiate commercial terms or to terminate Mercer’s appointment.
To evaluate performance, the Trustees receive, and consider, investment performance reports produced on a quarterly basis, which presents performance information and commentary in respect of the Scheme’s asset performance and the Mercer Funds in which the Trustees are invested. Such reports have information covering fund performance for the previous three months, one-year, three years and since inception. The Trustees review the absolute performance and relative performance against a portfolio’s and underlying investment manager’s benchmark (over the relevant time period) on a net of fees basis. The Trustees’ focus is on the medium to long-term financial and non-financial performance of Mercer and the Mercer Funds.
Neither Mercer or MGIE make investment decisions based on their assessment about the performance of an issuer of debt or equity. Instead, assessments of the medium to long-term financial and non-financial performance of an issuer are made by the underlying third party asset managers appointed by MGIE to manage assets within the Mercer Funds. Those managers are in a position to engage directly with such issuers in order to improve their performance in the medium to long term. The Trustees are, however, able to consider Mercer’s and MGIE’s assessment of how each underlying third party asset manager embeds ESG into their investment process and how the manager’s responsible investment philosophy aligns with the Trustees’ own responsible investment policy. This includes the asset managers’ policies on voting and engagement.
The asset managers are incentivised as they will be aware that their continued appointment by MGIE will be based on their success in meeting MGIE’s expectations. If MGIE is dissatisfied then it will, where appropriate, seek to replace the manager.
The Trustees are long-term investors and are not looking to change their investment arrangements on an unduly frequent basis. However, the Trustees do keep those arrangements under review, including the continued engagement of Mercer using, among other things, the reporting described above.
The Trustees monitor, and evaluate, the fees it pays for asset management services on an ongoing basis taking into account the progress made in achieving its investment strategy objectives as outlined in section 3. Mercer’s, and MGIE’s, fees are based on a percentage of the value of the Scheme’s assets under management which covers the design and annual review of the de-risking strategy, and investment management of the assets. In addition, the underlying third party asset managers of the Mercer Funds also charge fees based on a percentage of the value of the assets under management. In some instances, some of the underlying managers may also be entitled to charge fees based on their performance.
MGIE reviews the fees payable to third party asset managers managing assets invested in the Mercer Funds on a regular basis with any negotiated fee savings passed directly to the Scheme. Mercer’s, MGIE’s, and the third party asset managers’, fees are outlined in a quarterly investment strategy report prepared for the Trustees, excluding performance-related fees and other expenses involved in the Mercer Funds not directly related with the management fee.
Details of all costs and expenses are included in the Mercer Funds’ Supplements, the Report & Accounts and within the Scheme’s annualized, MiFID II compliant Personalised Cost & Charges statement. The Scheme’s Personalised Cost & Charges statement also include details of the transaction costs associated with investment in the Mercer Funds.
The Trustees do not have an explicit targeted portfolio turnover range, given the de-risking mandate, but rebalancing ranges have been designed to avoid unnecessary transaction costs being incurred by unduly frequent rebalancing. Performance is reviewed net of portfolio turnover costs, with the review of portfolio turnover of the underlying investment managers undertaken by MGIE.
The Trustees on behalf of the Scheme hold shares in the Mercer Funds. In its capacity as investment manager to the Mercer Funds, MGIE, and the underlying third party asset managers appointed by MGIE, within parameters stipulated in the relevant appointment documentation, have discretion in the timing of the realisation of investments and in considerations relating to the liquidity of those investments.
Cash flows, whether positive or negative, are taken into account by Mercer when it rebalances the Scheme’s assets in line with the Scheme’s strategic allocation. Mercer is responsible for raising cash flows to meet the Scheme’s requirements.
Rebalancing ranges have been set between the Growth and Matching Portfolios. Rebalancing ranges have been set within the Growth Portfolio.
Assets in respect of members’ AVCs are invested in a range of investment options. The AVC arrangements will be reviewed periodically to ensure that the investment profile of the funds available remains consistent with the objectives of the Trustees and the needs of the members. More information on the AVC providers is detailed in the IIPD.
In line with the Occupational Pension (Investment) Regulations (2005), the Trustees are required to review the Statement at least every three years and without delay after any significant changes in investment policy.
The Trustees will review this Statement in response to any material changes to any aspects of the Scheme, its liabilities, finances and the attitude to risk of the Trustees and the Company which they judge to have a bearing on the stated Investment Policy.
This review will occur no less frequently than every three years to coincide with the Actuarial Valuation or other actuarial advice. Any such review will again be based on written expert investment advice, and the Company will be consulted.