Review and monitoring of the default arrangements
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 triennial investment strategy and performance review took place on 3 March 2023.
As part of the triennial strategy review, the Trustee has agreed to update the structure of the three targeted strategies: Flexible Income, Lump Sum and Annuity Purchase strategies. The current approach of these targeted strategies is for members to be invested in white-labelled funds, split by asset class. The newly agreed approach is to begin using four new funds; the Early Growth fund, the Late Growth fund, the Approaching Retirement fund and the Through Retirement fund. Over the time to target retirement age, members’ DC pension pots (or AVCs) will automatically switch between the four new funds. Members will be invested in the ‘Early Growth Fund’ before de-risking into the ‘Late Growth Fund’ beginning from 20 years to retirement. Members are further de-risked into the ‘Approaching Retirement Fund’, of which there are three versions dependent on the targeted strategy members are invested in.
When members are close to target retirement age, their investments begin switching into the ‘Through Retirement Fund’, of which there are three versions dependent on the targeted strategy.
As part of an ongoing project to investigate how the Scheme can access private markets, the Trustee agreed in the strategy review to allocate 15% of the Early Growth Fund to private markets. This will be accessed via a bespoke multi-asset private markets fund. This will be implemented over the next Scheme year in conjunction with the changes to the structure of the Flexible Income, Lump Sum and Annuity Purchase strategies with the percentage invested in private markets planned to gradually build up over 2024 and reach 15% in 2025.
The Trustee concluded that taking a flexible income (e.g. income drawdown) remains an appropriate retirement income target. The growth phase of the default arrangement outperformed inflation over the last 5 years to 31 December 2023. As part of this review the Trustee confirmed that the Scheme's targeted strategies were adequately and appropriately diversified between different asset classes and that the self-select options provide a suitably diversified range to choose from. Members also have the choice to invest into any of the 18 DC funds available in the self-select range (known as ’Freechoice’). These options were also included in the latest review.
In the previous Scheme year, the Trustee agreed to restructure the Property – active Fund, which is available as a Freechoice option. This involved replacing the LGIM Managed Property Fund with the Invesco Global Real Estate Fund and adjusting the strategic allocations to the underlying component funds. An allocation to the Invesco Global Real Estate Fund began being built up in April 2022. The LGIM Managed Property Fund was removed from the Property – active Fund in November 2023. The Trustee continues to use cashflows to meet the target strategic allocation for this Fund.
At the Investment Day in April 2023, the Trustee revisited its specific investment belief related to factor investing. As part of this, the Trustee reviewed the underlying funds of the Global Equity – active Fund. The review considered the broad factor exposure of the underlying funds and the resulting exposure of the white-labelled fund in addition to firmwide considerations of the fund managers. The Trustee concluded that the River Global (previously known as ‘River and Mercantile’) Global Alpha Fund should be removed, the allocation of the MFS Global Equity Fund be reduced and both the Royal London Global Equity Diversified Fund and Schroders Global Sustainable Value Equity Fund be introduced to the Fund. This change will be implemented in 2024.
Following significant outflows and staff departures from one of the managers for an underlying fund of the Emerging Market Equity – active Fund, the Trustee conducted a selection exercise for a replacement underlying manager for this Fund. Resulting from this exercise, the Trustee replaced the GW&K Emerging Markets Fund (which formed 50% of the Emerging Market Equities – active Fund and 7.5% of the Global Equity – active Fund) with the Robeco Emerging Stars Equity Fund in Q4 2023, with a significant contributing factor being the better alignment of the Fund with the Trustee’s beliefs on ESG risk management.
On 10 June 2021, the Trustee reviewed all legacy lifecycles and agreed to automatically switch the investments of all members from Lifecyle 2 into either the Flexible Income or Lump-Sum strategies based on whether members held only a DC pension pot or Hybrid benefits, unless they elected to stay where they were. Given market conditions in 2022 and 2023, the Trustee agreed in June 2023 to retain members within 5 years of their target retirement in Lifecycle 2 due to their exposure to Fixed Annuity Tracker - passive Fund. This investment transfer was implemented over two tranches between 15 and 17 November 2023.
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. This review includes an analysis of DC fund performance and member activity to check that the risk and return levels meet expectations. The Trustee monitors both short- and long-term performance on a quarterly basis. The Trustee reviews that took place during the Scheme year concluded that over the long-term the default arrangements were performing broadly as expected given the market backdrop and the assets held and that the performance of the default arrangements remains broadly consistent with their stated aims and objectives.
