The Scheme’s current investment objectives are to achieve investment returns that, together with the contributions paid by the Company and by members in the future, ensures the assets of the Scheme are sufficient to meet the benefits due to each member as they fall due over time.
Statement of Investment Principles
The Scheme’s strategy and objectives, together with full details of the investment process are set out in the Statement of Investment Principles. This document is updated regularly and a copy is available to members from Invensys Pensions.
The Trustee aims to secure members’ future benefits by reducing risk and delivering consistent, reliable investment performance.
The Invensys Pension Scheme is a mature scheme. On 31 March 2015, the Scheme closed to future accrual. All active members became deferred members, and the Scheme stopped receiving ongoing contributions from the active membership. The Scheme is a substantial net payer of benefits. This therefore erodes its asset base naturally every year. We can measure the extent of its maturity in the net payments made each year: approximately Ł280m (5%) of its current asset base was paid out in the 2016-2017 financial year.
Scheme investment strategy
The Scheme’s investment objective is to achieve investment returns that ensure the assets of the Scheme are sufficient to meet each member’s benefits and the Scheme’s expenses as they fall due over time.
The Scheme’s Technical Provisions imply a required return on investments equivalent to UK Government gilt yields +1.0% per annum. The Trustee sets a Strategic Target, which is to deliver the return implied by the Technical Provisions over the long term. The Trustee’s investment policy for the Scheme’s Defined Benefit section is designed to achieve the Strategic Target. In order to deliver gilts +1.0%, the Trustee has to invest in assets that have an element of risk associated with them. The risks, and the framework for managing them, are described in detail in the notes to the financial statements.
This Strategic Target is primarily driven by:
- the Scheme’s profile:
- the nature of the liabilities
- the structure of the membership base
- the Trustee’s overall risk tolerance
- the Trustee’s evaluation and perception of the covenant provided to the Scheme.
From the Strategic Target, the Trustee derives a Strategic Asset Allocation. This is designed to deliver asset returns gilts +1.0% per annum over the long term, and therefore to perform in line with the liabilities measured on a Technical Provisions basis.
The chart excludes contributions received, changes to the Technical Provisions’ assumptions, and membership updates.
At the investment level, the Trustee sets specific performance targets for each underlying investment manager. These specific targets naturally have shorter time horizons than the Strategic Target. The aggregation of these targets determines the Scheme’s Investment Manager Target (IMT).
Year on year, the IMT might be above or below the Strategic Target. The Trustee is responsible for:
- long-term monitoring of the performance of the assets against the Strategic Target, equivalent to the Technical Provisions (as above).
- ongoing monitoring of the performance of the assets against the IMT (see investment managers’ performance section).
The Strategic Target corresponded to a return of 12.8% in the year to 31 March 2017. Its value reflects the dual impact of higher inflation expectations and lower gilt yields. The former increases the projected amount of pensions that the Scheme is expected to pay, while the latter increases their present values. The IMT corresponded to a return of 12.2%. It was lower than the Strategic Target for the year because the IMT had a lower sensitivity to movement in gilt yields, and therefore increased less than the Strategic Target when gilt yields fell.
The Trustee determines the investment strategy after taking advice from a professional investment adviser. The investment strategy and objectives, together with full details of the investment process, are set out in the Statement of Investment Principles. This document is updated regularly. A copy is available to members of IPS.
Strategic asset allocation
To a large extent, the Trustee has invested in assets with a profile that closely matches the liabilities by using bonds or ‘bond-like’ assets. This helps the assets to match the valuation movements in the liabilities, thereby reducing the volatility of the Scheme’s funding position.
The Trustee is not able to match fully the liabilities of the Scheme with its assets. This is mainly because of the requirements imposed by the Company. This requires the assets of the Scheme to target a performance return equal to the discount rate used for the valuation of the liabilities on a Technical Provisions basis, currently gilt yield +1.0% per annum.
The Scheme’s investments are classified in two categories:
1. A Liability Matching Fund (LMF). This is used to mitigate the Scheme’s interest rate and inflation risks. The LMF is composed exclusively of assets perceived to have a relatively low risk:
- UK Government gilts
- Network Rail bonds
- cash equivalent instruments.
BlackRock, the asset manager managing this portfolio, is also permitted to use derivative instruments, such as interest and inflation swaps, and gilt repurchase agreements. The LMF currently represents 62% of the assets, which are held directly via the Scheme’s custodian platform with BNY Mellon.
2. An Investment Portfolio. This aims to access the risk premium of a diversified portfolio of return-seeking assets. It also seeks to benefit from the additional performance available from active management, where considered appropriate. The total Investment Portfolio currently represents 35% of the assets.
Mandates using primarily investment grade bonds make up 23% of the assets and were managed by:
The remaining 12% comprise:
- a Fixed Income Global Alpha (FIGA) Fund (Hedge Funds: BlackRock)
- two Dynamic Asset Allocation mandates (DAA: Barings and BlackRock)
- two broad bond portfolios (AllianceBernstein, Pioneer)
- a listed equity portfolio (LGIM)
- a loans mandate (M&G).
Around 3% of the Scheme’s assets were allocated to DC and AVC plans, or were held in cash to satisfy the Scheme’s short-term payment obligations or pending investment.