Default Investment Strategy

The Trustee has made available a range of investment funds for members.  Each member is responsible for specifying one or more funds for the investment of their account, having regard to their attitude to the risks involved.  If a member does not choose an investment option, their account will be invested into the default option applicable to them, which is managed as a “lifecycle” strategy (ie it automatically combines investments in proportions that vary according to the time to retirement age).  The lifecycles are 100% invested in equities until twenty years from a member’s target retirement age from which point they transition gradually into lower risk assets appropriate to the outcome targeted.

The Scheme has different default strategies for members, depending on the type of benefits they have. The default options have been designed to be in what the Trustee believes to be the best interests of the majority of the members based on the demographics of the Scheme’s membership.    

Your default arrangements

Review and monitoring of the default arrangements

The Trustee is responsible for the Scheme’s investment governance, which includes setting and monitoring the investment strategy for the Scheme’s default arrangements. 

Details of the objectives and the Trustee’s policies regarding the default arrangements can be found in a document called the ‘Statement of Investment Principles’ (“SIP”).  The Scheme’s most recent DC SIP covering the default arrangements is attached to this annual statement regarding governance. 

As stated in the SIP, the Trustee aims to provide a default investment option that the Trustee believes to be reasonable for those members that do not wish to make their own investment decisions. The Scheme’s current default options’ objectives are to generate returns significantly above inflation whilst members are some distance from retirement, but then to switch automatically and gradually into less risky assets as the member nears retirement with the asset allocation at retirement being designed to be appropriate for members who wish to flexibly take their benefits through an income drawdown arrangement or remain invested in the Scheme or in the case of the Lump Sum strategy, take their retirement pot as cash.

The Trustee formally reviews the strategy and performance of the default arrangements (and other investments) in detail at least every three years or immediately following any significant change in investment policy or the Scheme’s member profile. The last formal investment strategy and performance review took place in June 2020. The first stage of analysis for review took place on 4 June 2020, and focused on what the main default investment strategies should target at retirement. The second stage of analysis took place on 22 June 2020, where the Trustee reviewed the composition of all the DC investment strategies (including the default strategies) and the underlying funds and self-select Freechoice fund range (which included the Cash – active (default) Fund). 

The conclusion of the first stage was that the targets of the default strategies remain appropriate. The Trustee carried out analysis of the Scheme's membership, including looking at members' expected pension pot sizes at retirement to assess likely outcomes and choices at retirement.  This showed that since the previous review in 2017 the membership demographic and pension pot projections remain largely unchanged. The Trustee also looked at a summary of what the Scheme's members have been doing at retirement with their pension pots, based on data provided by the Scheme's administrator, Willis Towers Watson Technology and Administration Solutions (“WTW TAS”).  The key conclusions from this data were that the majority of DC only members are transferring to an alternative provider (indicating income drawdown) whilst nearly all Hybrid members have taken their DC pension as a cash lump sum. On this basis, the Trustee concluded that the retirement outcomes targeted by the current default lifecycle strategies (the Flexible Income Strategy and the Lump Sum Strategy) remain appropriate and that it also remains beneficial to continue to offer an annuity-targeting lifecycle (the Annuity Purchase Strategy) for those members who wish to access their benefits in this way.

The conclusions from the second stage were as follows:

• Based on the analysis explained above, the Trustee believes that the high-level strategy of the main lifecycles (the Flexible Income Strategy, the Lump Sum Strategy and the Annuity Purchase Strategy) remains appropriate.  Whilst it would be possible for the average member to de-risk earlier and still achieve the target replacement rate (i.e. target proportion of members’ projected salaries at retirement), the modelling showed in nearly all scenarios this would result in a worse retirement outcome relative to the current strategy, even in the event of early retirement. 

Adding an allocation to illiquid assets could improve risk-adjusted returns within the growth phase as a result of the additional diversification benefits that could be achieved through an allocation to illiquid assets. As a result of this finding, the Trustee agreed to investigate the potential for further diversifying the equity allocation within both the growth and consolidation phases. The review will be carried out during the 2021 Scheme year.

The Trustee had agreed some changes to the Diversified Assets – active Fund prior to the triennial review as part of its ongoing monitoring of funds, including investigating the possibility of creating a bespoke allocation to alternative asset classes.  These changes remain appropriate in the context of the wider strategy review and will progress over the 2021 Scheme year. 

The Trustee remains comfortable with the Scheme’s allocation to absolute return bonds (i.e. bonds which aim to produce attractive returns in all market conditions) in the approach to retirement. 

 With regards to the Freechoice fund range, the Trustee is comfortable that the current overall fund range covers an appropriate range of asset classes within a reasonable number of options.   

The Trustee is comfortable for the legacy Cash Lifecycle, Capital Lifecycle, LifeCycle 2 and FlexiCycle to remain open to members currently invested.  The Trustee also communicated with members in LifeCycle 2 (and those in FlexiCycle who invest in property as one of their selections) regarding fund gating issues given the property allocation within the strategy. 

The Trustee also reviews the performance of the default arrangements against their aims, objectives and policies on a quarterly basis, through a performance report provided by their investment advisors, LCP.  This review includes an analysis of fund performance and member activity to check that the risk and return levels meet expectations.  The Trustee reviews that took place during the Scheme Year concluded that the default arrangements were performing broadly as expected and that the performance of the default arrangements remains consistent with their stated aims and objectives and the only changes to be made or explored further are intended to provide further benefits to members (e.g. increased growth / cost savings). The Cash – active (default) Fund was incorporated in this review given the underlying fund is the same as the Cash – active Fund which is a self-select option. It will be incorporated into future default strategy reviews where this is required given the Fund will not always hold assets

View the DC Statement of Investment Principles

If you would like to view the full DC Statement of Investment Principles here

More Information

Member Charges 

The Trustee is required to set out the charges incurred by members over the period covered by this statement. As the sponsoring employer pays the Annual Management Charge (AMC), platform expenses and administration expenses, member charges are limited to the additional fund expenses incurred by the underlying managers in the day-to-day running of the funds.

Value for money for members 

The Trustee carried out a value for members’ assessment, looking back over the Scheme year to 31 December 2019. The Trustee is required to assess the extent to which member borne charges and transaction costs for the Scheme Year represent good value for members.

Illustration of charges and disclosures costs 

The Sponsoring employer currently pays the AMC platform expenses and administration costs. Additional expenses (“AE”) are covered by members and are those costs incurred in the management of the underlying funds which are, by nature, flexible and therefore fall outside of the AMC. The Trustee has provided an illustration of the impact of the charges and costs on members pension pots for the default options as and four funds from the Freechoice range.