Grand Metropolitan Irish Pension Fund Report to Members 2017

Transcription

1 Grand Metropolitan Irish Pension Fund Report to Members 2017 Your Diageo pension is working to create a successful future for you. Read this update on what s been happening in the Fund this year.

2 Chairman s Report Welcome to the 2017 annual review. Since our last report, the adverse economic environment, and in particular the impact of low interest rates and of Brexit, is making it hard for all pension schemes to close out their deficits. The Trustee is committed to the long-term goal of eliminating the deficit and appreciates the continuing support of the Company. As usual, this report provides you with an update on all important matters: a summary of the Fund s accounts for the year ended 30 September 2016, a review of the Fund s investments over the year, a funding update and other information which we hope you will find interesting. It is important to the Trustee that its communications help you to understand the Fund and your benefits, and keeps you up to date with relevant news and information. The key points are summarised below, with further detail and explanation in the subsequent pages. Summary of the Fund s accounts As you will see on page 3, the value of the Fund s net assets increased over the year to million. The Fund received cash contributions from the Company of 7.4 million, 0.6 million from members and paid benefits to members and expenses totalling 6.7 million. The Fund s investments delivered income of 0.6 million and their market value increased by just under 27 million. Investment review Information on the investments held by the Fund, together with a summary of the investment strategy and details of past performance, is set out on pages 4 and 5. The overall investment return for the year to 30 September 2016 was 12.3% which is 0.9% below the benchmark return of 13.2%. The Investment and Funding Sub Committee, together with the investment adviser, reviews the investment performance, including the returns of individual managers, regularly during the year. Funding update As you will see from pages 6 and 7, the funding position of the Fund has deteriorated since the actuarial valuation as at 30 September This is due to the continuing fall in bond yields which has resulted in an increase in the Fund s liabilities. As mentioned above the Fund s assets also increased, but not to the same extent as the liabilities. The Trustee, with the help of the Fund s actuary, will continue to monitor the funding level in the Fund and its progress in relation to the long-term goal of eliminating the Fund s deficit. Other news On pages 8 and 9 you will find news about your Fund benefits and news affecting pension arrangements in general. I hope that you find this report interesting and easy to understand. The Trustee welcomes any feedback you may have; please address any comments or questions to the Diageo Pensions Team, whose contact details are shown on page 11. You may also like to visit the Fund website at it provides useful information and guidance about the Fund and your pension benefits. As ever, on your behalf, I would like to thank my fellow Trustee Directors, the Diageo Pensions Team and all our advisers for their dedication and work for the Fund and you, its members, throughout the year. David Parkinson, Chairman Chairman s Report 2 Summary of the Fund s Accounts 3 Investment Review 4 Other News 8 The Trustee 10 Who to contact 11 Funding Update 6

3 Summary of the Fund s Annual Accounts to 30 September 2016 Fund Membership Membership at 31 September Actives 334 Deferreds 238 Pensioners Membership at 30 September Actives 352 Deferreds 238 Pensioners Membership analysis at 30 September % Actives 48.6% Deferreds 32.8% Pensioners Active members current employees who participate in the Fund. Deferred members those members who have either opted out of the Fund or left the Company and still retain a benefit. Pensioners those members who are currently in receipt of a pension, including spouses and dependants. Financial summary For the year ended 30 September 2016 The summary of the accounts shown has been extracted from the Trustee s Annual Report and Fund Financial Statements, which have been given a clean audit report by KPMG LLP. m m Value of the Fund s Net Assets at 30 September Received by the Fund Company contributions 7.4 Contributions from members (including AVCs) 0.6 Investment income 0.6 Income Paid from the Fund Benefits and payment in respect of leavers (4.8) Administration costs and investment expenses (1.9) Expenditure (6.7) Increase in value of investments Value of Fund s Net Assets at 30 September 2016 =

4 Investment Review Investment and Funding Sub Committee The Investment and Funding Sub Committee (IFSC) is appointed by the Trustee and operates under its own terms of reference. Assisted by the Fund s professional investment adviser, Mercer (who replaced Aon Hewitt in February 2016), the IFSC is responsible for advising the Trustee on investment strategy and for appointing and monitoring external investment managers who are independent of the Trustee and Diageo plc. It reports regularly to the Trustee Board, making recommendations as appropriate. The Investment and Funding Sub Committee meets on a regular basis throughout the year. It reviews the overall performance of the Fund, as well as the investment returns of the individual managers, and deals with most other investment related issues. Investment strategy and recent developments The Trustee has established a dynamic de-risking programme, which seeks to reduce the level of investment risk as the funding level of the Fund improves. This is done by switching out of return-seeking growth assets (such as equities), which are higher risk, into matching assets (such as bonds) with a risk and return profile more closely matched with the liabilities of the Fund. The funding position is monitored on a monthly basis but as none of the de-risking triggers were reached there was no change to the overall asset allocation during the year. Throughout the year under review the benchmark asset allocation remained at 55% in growth assets and 45% in matching assets. The value of the Fund s liabilities, the amount needed to meet the benefits payable to members in future years, is significantly influenced by interest rates and inflation. The Trustee has in place a liability-hedging programme designed to mitigate the impacts on the Fund of changes in the rates of interest and inflation. Over the year there has been little change in the proportion of liabilities covered by inflation and interest rate hedging, which were at approximately 48% and 17% respectively. Following a review of the equity portfolio, the Trustee decided that equity returns can be efficiently captured using passive rather than active management. As a result, the two active equity managers, Schroders and Harding Loevner, were replaced with a single passive equity manager, Irish Life, which tracks appropriate global equity indices. In order to limit fluctuations in the value of the equity portfolios due to currency effects a 50% currency hedge has been put in place. At 31 January 2017 the Fund hit its next de-risking trigger i.e. 80% funded on a Self-Sufficiency basis. As a result, under the de-risking framework, the Trustees agreed to transfer 26.3m out of the Irish Life passive equity portfolios (growth assets) and invest the proceeds equally in the Insight and Blackrock absolute return bond funds (matching assets). This took place in March 2017 and resulted in a 9% reduction in assets invested in riskier growth assets from 55% to 46% with matching assets similarly increasing by 9% to 54%. In February 2017, following a review, the Trustee agreed to appoint Grosvenor Capital Management to manage a 12m infrastructure mandate as part of the growth assets. This will provide greater diversification within the growth assets thereby reducing overall risk without materially impacting expected returns. In addition, the Trustee has updated the range of AVC investment options available to members in order to provide a more modern selection. The Trustee continues to review the investment strategy on an ongoing basis in line with the Fund s liabilities. 4

5 Investment Review Investment structure The table below shows the analysis of the Fund s net investment assets at 30 September 2016 and the principal investment managers appointed to manage these assets. Asset class Principle investment managers As at 30 September 2016 m % Equities Irish Life Alternatives BlackRock Alternative Advisors BNY Mellon Global Funds PLC Growth-asset portfolio Liability hedging programme, bonds and cash Insight Investment Funds Management Limited BlackRock Investment Management Limited Assets subject to benchmark AVCs Irish Life Assurance plc Total net investments Employer-related investment At 30 September 2016, none of the Fund s investment managers directly held any shares in Diageo plc. Overall investment performance The investment return achieved by the Fund, and its constituent portfolios, is measured by the custodian, Northern Trust Global Services Limited. The total annualised returns achieved by the Fund, including the liability hedging programme, were: 1 year to 30 September 2016 % 3 years to 30 September 2016 % (p.a.) 5 years to 30 September 2016 (% p.a.) Benchmark Fund return

6 Funding Update Funding update The Trustee is pleased to present this update on the funding position of the Fund. This information is provided in a question and answer format, which we hope you will find useful. What is the purpose of this update? Its purpose is to explain the latest funding position of the Fund, as at 30 September 2016, and to report on progress in relation to addressing the deficit in the Fund. How is the funding position of the Fund measured? The funding position of the Fund is measured by the Fund s actuary using two different bases: The ongoing basis, which assumes that the Fund will continue until the benefits of all existing members are paid. It measures whether there are sufficient assets in the Fund to meet future benefit payments for members in respect of their benefits which have accrued as at the valuation date. The discontinuance basis, in accordance with the Minimum Funding Standard (MFS). This is a standard set by legislation which measures the value of benefits payable under the Fund as if the Fund were to cease and wind up as at the valuation date. As pension increases on pensions built up after 1 January 2014 are discretionary under the Fund s Trust Deed and Rules, no provision for these pension increases is included in the MFS valuation. The MFS sets out a prescribed calculation basis, which broadly assumes that accrued benefits would be secured by buying insurance policies for pensions in payment and by paying transfer values to an alternative scheme for the benefits accrued by active and deferred members. The Trustee is required to regularly review the funding position on both the ongoing basis and the MFS basis even though there is no expectation that the Fund will be wound up. How is the Fund funded? Both the Company and members who are still working for the Company contribute to the Fund. The level of members contributions is set out in the Fund Rules. The Company s contributions are variable and are intended to meet the balance of the amount of money required to pay the benefits due over the lifetime of the Fund. How much does the Company currently pay into the Fund? As at the 30 September 2015 actuarial valuation the Fund s actuary advised that a Company contribution of 25.8% of pension salaries was required to meet the ongoing cost of accruing benefits (offset by the surplus calculated on the ongoing basis as at 30 September 2015). However, the Trustee and Company had agreed a recovery plan (Funding Proposal) in 2011 under which the Company would pay 5.7 million per year until 2020 along with Company contributions of 20.6% of pensionable salaries with the aim of meeting the Minimum Funding Standard by 30 September Member contributions are payable in addition. As the contributions under the Funding Proposal exceed the contribution requirements from the 2015 valuation the contributions under the Funding Proposal will continue to be paid until the next actuarial valuation due as at 30 September

7 Funding Update What was the latest estimate of the funding position? The estimated funding level of the Fund on the ongoing basis as at 30 September 2016, based on funding assumptions derived from the same methodology as used for the full 2015 actuarial valuation but updated to reflect market conditions at 30 September 2016, was as follows: Value of the Fund s assets* Amount needed to provide benefits* Deficit Funding level 92.6% *excluding AVCs This compares with a funding level of 103% at the actuarial valuation as at 30 September The reason for the reduction in the funding level is the significant increase in the liabilities due to lower bond yields. What does the latest MFS funding estimate say about the security of benefits in the unlikely event of the Fund being wound up? The Fund s actuary indicated that the assets held within the Fund were sufficient to meet 94.3% of the benefits accrued under the Fund at 30 September 2016, as measured by the Minimum Funding Standard. The Trustee observes that the goal within the Funding Proposal is to achieve a funding level of 100% on this statutory basis by 30 September The Fund s actuary has confirmed that the plan is on track as at 30 September 2016 to achieve this goal. What happens next? million million (19.8) million The Trustee, with the help of the Fund s actuary, will continue to monitor the ongoing and the MFS funding levels in the Fund and the progress of the Funding Proposal towards the goal of eliminating the MFS deficit by

8 Other News Change to the Fund Actuary Frances Kehoe, Aon Hewitt was appointed Fund actuary from 22 July 2016 following the retirement of Philip Shier, Aon Hewitt. The Trustee Board expressed its appreciation to Mr Shier for the benefit of his experience and advice over the years. Pension increases (pensioner members) The Rules provide for increases, to pensions built up to 31 December 2013, in line with the Consumer Prices Index (CPI) rate up to maximum of 5% and subject to a minimum of 3%. The annual change in the CPI published in January 2016 was 0.1%, therefore, these pensions in payment were increased by 3% from 1 April At 1 April 2016, the Company did not make any discretionary increase to pensions built up from 1 January Pension increases (deferred members) Pensions at retirement of deferred members are increased during the period of deferment by the amount as provided in the rules of the Fund. There was no increase at 1 January 2016 because the change in the CPI was -0.2%. Transfer payments and early retirement (active and deferred members) So long as the funding position of the Fund, as measured in accordance with the Minimum Funding Standard, remains below 100% certain operational constraints remain in force: Any transfer payments out of the Fund may be reduced; Early retirements will not normally be permitted unless the early retirement request arises from serious illness or disability in accordance with the Fund s incapacity retirement rule. These measures are considered necessary in order to protect the security of members benefits. Irish Life which is then used to provide additional pension benefits when you retire. You have the option on how to invest your money with Irish Life. AVCs investments (active and deferred members with AVC holdings) During the year, following a review, the Trustee decided to make changes to the investment funds available to members who want to pay additional voluntary contributions (AVCs). The new funds have lower management charges than the funds which they replaced but the range of investment choices remains similar. From July 2016, the investment options available are as follows: 1) Do It For Me which gives members the option of being less involved in their investment approach. It is a ready-made investment approach which automatically changes the asset mix as members approach retirement. Or 2) Fund Do It Name Myself which allows members to take control of their investment choices and select from the following Irish Life Indexed World Equity Fund (Partially Hedged) fund range: Irish Life High Risk/Return Growth Strategy Irish Life Medium Risk/Return Growth Strategy Irish Life Indexed Corporate Bonds Fund Irish Life Pension for Life Fund Irish Life Low Risk/Return Growth Strategy Irish Life Tax Free Cash Fund Irish Life Capital Protection Fund^ ^ this accepts regular contributions only Further information regarding the funds, including details of the management charges and the fund performance factsheets, is available on the Fund s website. Additional Voluntary Contributions (active members) Additional Voluntary Contributions (AVCs) are a simple and effective way to provide benefits in addition to your pension from the Fund. As the name suggests, AVCs are contributions that you choose to pay voluntarily on top of any contributions you are required to pay to the Fund. By paying AVCs you will build up a fund of money with 8

9 Other News How to avoid a pension scam A pension scam is when someone tries to con you out of your pension money and will often start by someone contacting you unexpectedly about: an investment or other business opportunity that you ve not spoken to them about before accessing your pension as a cash lump sum the ways that you can invest your pension money. If someone contacts you unexpectedly and says they can help you it could be a scam. You may be offered a tempting way to invest your pension pot, e.g. investing it in a new hotel being built in an exotic location. Most of these offers are fake but can appear very convincing. Their aim is to get you to cash in your pension pot and transfer the money. Once you ve transferred your money into a scam, it s too late. You could lose all your pension money, so please be vigilant. 9

10 The Trustee The Trustee of the Fund is R&A Bailey Pension Trustee Designated Activity Company (previously called R&A Bailey Pension Trustee Company Limited). The Directors of the Trustee Company have the responsibility for ensuring that the Fund is run in accordance with its Trust Deed and Rules. The current Directors are: David Parkinson (Chair) James Agnew (appointed 1 March 2016) Paul McMahon Pat Normile Colin O Brien Valerie O Riodan Paul Keane resigned on 31 October Secretary Aedin Kenealy Advisers to the Trustee Actuary Administrator Auditor Bank Custodian Investment Adviser Solicitor Frances Kehoe Aon Hewitt Diageo Pensions Team KPMG LLP Royal Bank of Scotland plc Northern Trust Global Services Limited Mercer appointed 26 February 2016 (prior to this Aon Hewitt) Arthur Cox 10

11 Who to contact If you would like further pension information, you can contact the Pensions Team in the following ways: Writing: Pensions Team Telephone: Diageo plc Edinburgh Park Website: 5 Lochside Way Edinburgh EH12 9DT When contacting the Pensions Team, it is helpful if you provide your full name, address and telephone number, date of birth and your PPS number. If you have a complaint, please raise it with Mrs L Kennedy, Pension Administration Manager, at the above address. If you are dissatisfied with the decision of the Pension Administration Manager, please ask for details of the Internal Disputes Resolution Procedure. Please note that any queries related to your employment should be referred to your line manager or local Human Resources Manager. KEEP IN TOUCH It is important that you notify us of any change of address in writing, even after you leave Diageo, so that we can ensure that you receive your benefits when they become due. It is also important that you complete, and keep up to date, your Tell Us Who Matters forms which can be found on the Fund website The Trustee will take into account any wishes you have expressed in the event of any death benefits becoming payable. Use of personal data In providing services, including preparing this review, the Trustee and its advisers require access to personal data about members and their dependants. The Data Protection Act governs how the Trustee and its advisers use and store personal data. Members can find out more information about how their personal information is used from the Data Protection Commissioner s website at If you have further questions regarding the processing of your personal information, please contact the Diageo Pensions Team. 11

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