This document constitutes the Statement of Investment Principles (âthe SIPâ) required under Section 35 of the Pensions Act 1995 for the Meggitt Pension Plan (âthe Planâ). It describes the investment policy being pursued by the Trustee of the Plan and is in compliance with the Governmentâs voluntary code of conduct for Institutional Investment in the UK (âthe Myners Principlesâ). This SIP also reflects the requirements of Occupational Pension Schemes (Investment) Regulations 2005.
Detail on how the Schemeâs investment strategy is implemented is set out in a separate Statement of Investment Implementation (âSIIâ) document (which is maintained by the Trustee).
With effect from 6 April 2009 the Meggitt Executive Pension Plan was merged with the Meggitt Pension Plan. Following the merger the Meggitt Executive Pension Plan is recorded as a separate section in the Planâs accounts. This SIP governs both sections.
The Trustee confirms that, before preparing this SIP, it has consulted with Meggitt PLC (‘the Sponsoring Employer’) and the Scheme Actuary and has obtained and considered written advice from the Investment Adviser. The Trustee believes the Advisers to be qualified by their ability and practical experience of financial matters and to have appropriate knowledge of the investment arrangements that the Plan requires.
The Trustee is responsible for the investment of the Planâs assets and arranges administration of the Plan. Where it is required to make an investment decision, the Trustee always receive advice from the relevant Advisers first and they believe this ensures they are appropriately familiar with the issues concerned.
In accordance with the Financial Services & Markets Act 2000 (âFSMAâ), the Trustee sets general investment policy, but has delegated the day-to-day investment of the Planâs assets to professional Investment Managers (for non-discretionary assets) and a Fiduciary Manager (River and Mercantile Investments Limited). The Investment Managers are authorised under the FSMA and provide the expertise necessary to manage the investments of the Plan. All references to Investment Managers include the Fiduciary Manager.
The Trustee confirms this SIP reflects the Investment Strategy it has implemented for the Plan. The Trustee acknowledges it is their responsibility, with the guidance from the Investment Advisor, to ensure the assets of the Plan are invested in accordance with these Principles.
The Trustee is responsible for the governance and investment of the Planâs assets. The Trustee considers the governance structure set out in this SIP is appropriate for the Plan as it allows the Trustee to make the important decisions on investment policy, while delegating the day-to-day aspects to the Investment Managers or the Investment Adviser as appropriate.
TheTrusteehasappointedanInvestmentSub-Committee(theâISCâ)todealwithinvestmentmattersontheirbehalf. TheISC deals with day to day investment matters and acts as a coordinator between the Investment Adviser, Investment Managers (including the Fiduciary Manager) and the Trustee.
The ISC will report back to the Trustee at each of their meetings on the activities of the ISC since the last meeting. All investment decisions relating to material changes in investment strategy remain the sole responsibility of the Trustee. The responsibilitiesoftheISCarecoveredintheISCtermsofreference. TheTrusteemayfolloworreflectanyoralladviceoffered by the ISC. The ISC maintains a Statement of Investment Implementation (âSIIâ) which sets out the specifics of investment implementation. This document is referred to later in this SIP.
Details of the responsibilities delegated to the ISC and those retained by the Trustee are detailed later in this SIP as well as the ISCâs Terms of Reference.
The overall objective of the Plan is to meet the benefit payments promised as they fall due. The Trustee has set the following qualitative objectives:
The Trusteeâs approach to investment strategy is to allocate the assets into three pools â âOff-riskâ (defined as the ââLiability Hedging Assetsâ), âCashflow Matching Assetsâ and âOn-riskâ (defined as the âGrowth Assetsâ) assets. The investment objective is then translated into the strategy and assets are allocated to these three components:
The Trusteeâs investment objective influences the split of assets between these three components. The allocation agreed by the Trustees is detailed in the SII.The Fiduciary Manager shall not be deemed to have breached the restrictions set out in the SII if the price or value of any part of the portfolio changes solely as a result of market movements but in such circumstances the Fiduciary Manager shall take reasonable steps to bring the portfolio back within the restrictions set out in the SII, unless otherwise agreed with the Trustee.
The Trustee has decided to appoint a Fiduciary Manager, which manages a portion of the assets on a Discretionary basis and holds other assets on a non-Discretionary basis. The Fiduciary Manager has discretion to invest the Plan assets in underlying securities and funds, either directly or through the use of other investment managers (hereafter referred to as the âUnderlying Managersâ) (within guidelines as set out in the SII) to run the portfolio on a day-to-day basis. The Trustee appoints specialist Investment Managers for the asset classes where it believes that value can be added above the benchmark over the medium and long term
The Trustee has acknowledged and considered with sufficient diligence the potential conflict that may arise from the Fiduciary Manager and the Investment Adviser being the same organisation. The Trustee has retained discretion over the remaining assets
The Trustee has received advice on the appropriateness of each Investment Managerâs target, benchmark and risk tolerance from the Investment Adviser and believes them to be suitable to meet the Planâs investment objectives. Each Investment Manager has been mandated by the Trustee to manage the investments in a particular way, and details of these mandates are described in the SII. With respect to the Discretionary Portfolio managed by River & Mercantile Investments Limited (âRAMILâ), the appropriateness of each underlying Investment Managerâs target, benchmark and risk tolerance has been delegated to RAMIL.
The choice of asset classes is designed to ensure the Planâs investments are adequately diversified given the Planâs circumstances. The Trustee will monitor the strategy regularly to ensure they are comfortable with the level of diversification.
The assets are invested in a diversified range of suitable investments of different types each with different Investment Managers in order to reduce investment risk given the circumstances of the Plan.
The range of, and any limitation to the proportion of, the Planâs assets held in any asset class will be agreed between each Investment Manager and the Trustee. This range and set of limitations will be specified in the formal Manager Agreements and may be revised from time to time according to appropriate investment strategy advice provided to the Trustee and having regard to the investment powers of the Trustee as defined in the Trust Deed.
The Trustee may enter into contracts with counterparties, including investment banks, in order to execute derivative transactions. The Trustee has taken advice on the suitability of the contracts and set restrictions on the use of derivatives where they think this is appropriate.
From time to time the Trustee may mandate a Manager, including a transition Manager, to affect short term derivative mandates to reduce risk in the portfolio, as part of efficient portfolio management or to aid a transition process. The Trustee will take suitable advice as part of the decision and implementation process, but owing to the potentially market sensitive nature of such transactions may not detail these, or the specifics of the short term Manager mandates within the SIP and SII.
The Trustee has an informal rebalancing policy whereby the strategy will be rebalanced on advice from the relevant Advisors using cashflows in and out of the Plan.
The Trustee has taken advice from the Investment Adviser to ensure that the Investment Managers are suitable for the Plan, given its objectives.
The Trustee has taken advice from the Advisers to ensure that the asset allocation strategy is suitable for the Plan, given its liability profile, any legal requirements, regulatory guidance and specifications in the Trust Deed.
The Trustee, together with the Planâs administrators, will ensure that they hold sufficient cash to meet the likely benefit outgoings.
The Trustee will monitor the performance of the Investment Managers against agreed performance objectives.
The Trustee, or the Investment Adviser on behalf of the Trustee, will regularly review the activities of the Investment Managers to satisfy themselves that each Investment Manager continues to carry out their work competently and has the appropriate knowledge and experience to manage the assets of the Plan.
As part of this review, the Trustee or the Investment Adviser will consider whether or not each Investment Manager:
If the Trustee is not satisfied with an Investment Manager they will ask the Investment Manager to take steps to rectify the situation. If the Investment Manager still does not meet the Trusteeâs requirements, they will remove the Investment Manager and appoint another.
The Trustee recognises a number of risks involved in the investment of assets for the Plan. These risks, and how they are measured and managed, include:
i. Funding and asset/liability mismatch risk â the risk that the funding level is adversely affected due to a mismatch between the assets and liabilities. This risk is managed in the following ways:
ii. Underperformance risk â the risk of underperforming the benchmarks and objectives set by the Trustee. This risk is minimised using the following techniques:
iii. Country risk â the risk of an adverse influence on investment values from political intervention is reduced by diversification of the assets across many countries.
iv. Concentration risk â the risk of an adverse influence on investment values from the concentration of holdings is reduced by the diversification of the assets.
v. Mismanagement risk â the risk of unsuitable investment activity by the Investment Managers. This is addressed in the agreements with the Investment Managers which contain a series of restrictions. The activity of the Investment Managers and their processes are monitored regularly by the Investment Adviser on behalf of the Trustee.
vi. Default risk â the risk of income from assets not being paid when promised. This is addressed through restrictions for the Investment Managers e.g. a minimum credit rating of the bonds they are allowed to buy and also a high proportion of the bonds held are government bonds which have little default risk.
vii. Organisational risk â the risk of inadequate internal processes leading to problems for the Plan. This is addressed through regular monitoring of the Investment Managers and Advisers.
viii. Counterparty risk â the risk of the counterparty to an agreement not carrying out his side of the deal. Where derivatives are used, the risk of counterparty default is reduced through the requirement in the relevant documentation that regular collateral or margin payments be made.
ix. Cash flow risk â addressed through the monitoring of the cash flow requirement of the Plan to control the timing of any investment/disinvestment of assets.
x. Sponsor risk â the risk of the Employer ceasing to exist, which for reasons of prudence, has been taken into account when setting the asset allocation strategy. The Trustee regularly reviews the covenant of the Employer.
xi. Transition risk â the risk of paying unnecessary costs or being at increased risk of adverse market movements, when transitioning assets from one Manager or asset class to another. This risk is mitigated by organising transitions in a structured fashion with the advice of the Investment Adviser or by using a specialist transition Manager, if appropriate.
xii. ESG risk â the risk of adverse performance due to Environmental, Social and Governance (ESG) related factors including climate change. This is addressed by the Investment Managerâs ESG assessment at the point of investment with Underlying Managers. A summary of the overall ESG characteristics in the portfolio is included in the quarterly governance report.
xiii. Longevity risk â the risk of members living longer than assumed in the actuarial valuation. The Trustee does not hedge longevity risk today.
The Trustee will keep these risks and how they are measured and managed under regular review.
The Trustee will obtain and consider proper advice on the question of whether the investments are satisfactory having regard to both the investment objectives and the requirement to meet statutory funding requirements, including the Planâs Specific Funding Requirement.
The funding position is reviewed periodically by the Scheme Actuary, with a full actuarial valuation every three years.
The Trustee will consider with the Advisers, whether the results of these actuarial valuations suggest that any change to investment strategy is necessary to ensure continued compliance with the Statutory Funding Objective.
The Trustee and Investment Managers have agreed, and will maintain, formal agreements setting out the scope of the Investment Managersâ activities, charging basis and other relevant matters. The Investment Managers with whom the Plan engages on a segregated basis have been provided with a copy of this SIP and are required to exercise their powers with a view to giving effect to the principles contained herein and in accordance with subsection (2) of Section 36 of the Pensions Act 1995. Further information can be found in the SII.
The Trustee has appointed the Investment Managers to implement the Planâs investment strategy. The Investment Managers manage assets directly on behalf of the Trustee as well as having delegated authority to appoint, monitor and change the Underlying Managers.
The Investment Managers are appointed to carry out their role on an ongoing basis. The Trustee periodically reviews the overall value-for-money of using R&M Solutions, and information in relation to costs associated with investing is included in the quarterly monitoring report. Ongoing management fees of the Discretionary and non-Discretionary Investment Managers are detailed in the SII. The Trustee is satisfied that these arrangements incentivise the Investment Managers:
The Planâs investments are generally made via pooled investment funds, in which the Planâs investments are pooled with those of other investors. As such, direct control of the process of engaging with the companies that issue these securities, whether for corporate governance purposes (such as capital structure) or other financially material considerations, is delegated to the Underlying Managers.
The Trustee has delegated responsibility for monitoring and voting on decisions relating to their Underlying Manager holdings to the Fiduciary Manager, and to the non-Discretionary Investment Managers. The Fiduciary Manager has in place a voting policy which sets out how it will aim to vote at a general meeting of a pooled fund. For any special resolutions or extraordinary general meetings, the proposed votes of the Fiduciary Manager are subject to additional sign-off by the appropriate representative from the Fiduciary Manager.
The Fiduciary Manager undertakes regular reviews of all Underlying Managers. These reviews incorporate benchmarking of performance and fees, with some managers on performance-related fees as well as performance reviews (including understanding key drivers of performance), investment due diligence meetings and operational due diligence reviews. The Fiduciary Manager reviews the governance structures of Underlying Managers, as well as assessing whether their fees, expenses (and any other charges) are in line with industry peers at inception and from time to time whilst invested.
Where it can be determined, the Fiduciary Manager assesses whether Underlying Manager remuneration arrangements are aligned with the Trusteeâs objectives. The method and time horizon for evaluating and remunerating Underlying Managers is determined by criteria set by the Fiduciary Manager, as detailed above.
The Trustee acknowledges the inherent potential for conflicts of interest which exist as part of ongoing Investment management business activities. As an FCA regulated firm, the Fiduciary Manager is required to prevent or manage conflicts of interest. Where Underlying Managers are also regulated, they are likely to be subject to such requirements to manage conflicts of interest as are applicable in their jurisdiction of incorporation or operations. The Fiduciary Manager directly monitors these as part of their regulatory filings (where available), the Fiduciary Manager also monitors this as part of ongoing review. The Fiduciary Managerâs Conflict of Interest policy is available publicly here:https://riverandmercantile.com/Asp/uploadedFiles/file/Corporate_Governance/RMG_Conflicts_of_Interest_Policy.pdf
The Fiduciary Manager oversees the turnover costs incurred by Underlying Managers as part of its ongoing monitoring process and evaluates such costs to determine if they are in line with peer groups and the Fiduciary Managerâs expectations. Where there are material deviations the Fiduciary Manager engages with Underlying Managers to understand the rationale for such deviations and take appropriate action.
The Investment Advisor and Trustees review the governance structures of the non-Discretionary Fund managers, as well as assessing whether their fees, expenses including portfolio turnover costs (where available and any other charges) are in line with industry peers at inception and from time to time whilst invested.
Portfolio turnover costs will be assessed at the discretion of the Investment Advisor and Fiduciary Manager, and the appropriate level of turnover costs will be considered on an individual asset class basis. The Investment Advisor and Fiduciary Manager will report back to the Trustee regarding portfolio turnover costs to assist in the Trusteeâs ongoing monitoring.
The majority of assets are held in underlying pooled funds, most of which can be realised easily if the Trustee so require. The Investment Manager is permitted to hold up to 20% of the Discretionary Fund in illiquid investments (as defined in the Investment Management Agreement), which the Trustee acknowledges can take additional time to realise. The Trustee has considered this risk against the possibility of needing to realise these assets and are comfortable it is a reasonable approach to take. The Trustee has also added an additional limit of 3% of the Discretionary Fund for any individual illiquid investment.
The Trustee has appointed a custodian for the Planâs Discretionary Portfolio, Core Gilt Portfolio and EDOS3, managed by RAMIL as detailed in the SII.
Some of the Investment Managers have their own custodian arrangement, which have not been directly appointed by the Trustee.
The Trustee believes that these considerations which, include the above âRisksâ can affect the long-term financial performance of investments and can (but do not have to) include environmental, social and governance factors (otherwise known as âESGâ) where relevant. All references to ESG also include climate change.
The Trustee policy is to delegate consideration of financially material factors, including ESG to the Fiduciary Manager who considers these when constructing the portfolio, including looking at Underlying Managers. All references to ESG relate to financial factors only. As part of their ongoing monitoring, the Trustee reviews some key metrics on a regular basis that are provided by the Fiduciary Manager covering ESG which enable them to engage with the Fiduciary Manager and understand the impact of ESG on the portfolio.
ESG factors and stewardship are considered, in the context of long-term performance, by the Fiduciary Manager as part of the manager selection criteria. This review occurs before they are approved for investment in the portfolio. Once an Underlying Manager is appointed, the Fiduciary Manager monitors the ESG implementation and ongoing compliance with other factors, such as stewardship, as a part of overall engagement.
The Trustee does not at present take into account non-financial matters (such as membersâ ethical considerations, social and environmental impact matters or future quality of life considerations for members and beneficiaries) when making investment decisions as there is no likely common view on any ethical matters which members are likely to hold.
Under the Planâs Trust Deed and Rules, members are allowed to invest Additional Voluntary Contributions to improve the benefits they receive at retirement. The Trustee has selected a range of investment funds with Utmost Life, Friends Provident and Prudential for the AVCs to be invested in.
The Trustee reviews these arrangements from time to time having regard to their performance, the objectives and the views of the Advisers.
The Trustee of the Plan is responsible for, amongst other things:
The Investment Managers will be responsible for, amongst other things:
i. At their discretion, but within any guidelines given by the Trustee, implementing changes in the asset mix and selecting and undertaking transactions in specific investments within each asset class.
ii. Providing the Trustee with sufficient information each quarter to facilitate the review of its activities, including:
iii. Informing the Trustee immediately of:
The Investment Adviser will be responsible for, amongst other things:
The Scheme Actuary will be responsible for, amongst other things:
The Legal Adviser will be responsible for, amongst other things:
i. Liaising with the Trustee to ensure legal compliance, including those in respect of investment matters.