The Scheme’s current investment objective is to achieve investment returns that ensure 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 here.
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 £285m (6%) of its current asset base was paid out in the 2018-2019 financial year.
IMPLEMENTATION OF THE Scheme’S 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 percentage point per annum. The Trustee sets a Strategic Target, which is to deliver this return 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 percentage point, 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 of gilts +1.0 percentage point per annum over the long term, and therefore to perform in line with the liabilities measured on a Technical Provisions basis. The chart below shows that the Scheme assets’ performance has tracked to the Strategic Target very closely. The analysis starts from the end of April 2013. This coincides with the contribution into the Scheme on 3 May 2013 of £400m and the creation of a Reservoir Trust of £225m following the sale by Invensys plc of its Rail division. At that time, the investment strategy was revisited and the Trustee took the opportunity to reduce investment risks.
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 5.7% in the year to 31 March 2019. Its value reflects primarily the impact of lower gilt yields. This increases the present value of the pensions that the Scheme is expected to pay. The IMT corresponded to a return of 5.6% and was slightly lower than the Strategic Target, because the IMT had a lower sensitivity to movements 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 agreed with the Company, which means the Trustee needs to target a performance return on the Scheme’s assets equal to the discount rate used for the valuation of the liabilities on a Technical Provisions basis, currently gilt yield +1.0 percentage point 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 55% 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 43% of the assets.
Mandates using primarily investment grade (IG) bonds make up 31% of the assets and were managed by:
The remaining 12% comprises:
a Fixed Income Global Alpha (FIGA) Fund (Hedge Funds: BlackRock)
two Dynamic Asset Allocation mandates (DAA: Barings and BlackRock)
a broad bond portfolio (Amundi)
a listed equity portfolio (LGIM)
a loans mandate (M&G)
a fund investing in bank capital release transactions (AXA PCS)
Around 2% 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.