Hermes Fund Managers Limited

Transcription

1 Hermes Fund Managers Limited Pillar 3 Disclosures as at 31 December 2013 Issued in April 2014 by Hermes Investment Management Limited. Lloyds Chambers, 1 Portsoken Street, London, E1 8HZ. Registered No England & Wales. Authorised and regulated by the Financial Conduct Authority. Hermes Fund Managers Limited 1

2 Contents 1. Overview Introduction Frequency and Basis of Disclosures Scope of Application Risk Management Overview and governance structure Control and oversight functions Hermes key risks Individual Capital Adequacy Assessment Process (ICAAP) Capital Resources Capital Resources and Capital Requirement Remuneration Policy Statement (RPS) Hermes Fund Managers Limited 2

3 1. Overview 1.1 Introduction The Pillar 3 disclosures in this document are in relation to Hermes Fund Managers Limited (Hermes). The Capital Requirements Directive (CRD) requires firms to implement a framework which relates capital to risks and consists of 3 pillars: Pillar 1 sets out the minimum capital requirements for credit, market and operational risks; Pillar 2 requires firms and supervisors to assess the need for additional capital for risks not adequately covered by Pillar 1 by implementing an Individual Capital Adequacy Assessment Process (ICAAP). The ICAAP involves consideration of a range of risks faced by the group and determines the level of capital needed to cover these risks; and Pillar 3 deals with disclosure requirements and is to complement the minimum capital requirements of Pillar 1 and the risk-based processes of Pillar 2. The disclosures are designed to promote market discipline by providing market participants with information to help them assess a firm s risk exposures and processes. Hermes is classified as a BIPRU firm and will not be captured by CRD IV requirements. Hermes remains subject to CRD III rules and remuneration requirements. 1.2 Frequency and Basis of Disclosures Unless otherwise stated, these disclosures are based upon figures as at 31 December After considering the operations and complexity of Hermes, the directors do not consider it necessary to make disclosures more frequently than annually, with the exception of: where any material changes to the business model have taken place or where significant changes to techniques for calculating capital requirements have been made. 1.3 Scope of Application Hermes is wholly owned by the BT Pension Scheme (BTPS). Hermes has a number of companies falling within the Group, the main operating companies being: Hermes Investment Management Limited (HIML); Hermes Alternative Investment Management Limited (HAIML); Hermes Real Estate Investment Management Limited (HREIM); Hermes BPK Limited; Hermes Sourcecap Limited (HSL); Hermes Fund Managers (North America) LP (HFMNA); and Hermes Fund Managers Limited 3

4 Hermes Equity Ownership Services Limited (HEOS). All of these companies (with the exception of Hermes Real Estate Investment Management Limited, Hermes Equity Ownership Services Limited, and Hermes Fund Managers (North America) LP) are separately authorised and regulated by the Financial Conduct Authority (FCA) and are limited licence BIPRU firms. 2. Risk Management 2.1 Overview and governance structure Hermes FCA regulated companies are all Limited Licence Firms and do not trade on their own account. Therefore they do not have any direct principal market risk (with the exception of nominal seed capital provided to the fund range). The companies primary risk exposure is to operational and business risk. Key risks and uncertainties are managed at the Hermes Group level. Hermes primary risk exposure is related to the possibility of a significant decrease in revenue arising from a decrease in assets under management (AUM) as a result of: a fall in market value, clients leaving or Hermes inability to grow AUM. As Hermes interests are closely aligned to those of clients the business strategy necessitates a conservative approach to risk. The Board has limited appetite for accepting operational risk. However, the Board recognises that no system of internal controls can fully mitigate the risk of error, loss or inappropriate activity occurring. The Hermes Board ensure that Hermes maintains sufficient levels of capital to meet its regulatory requirements and to mitigate the key risks present in both its current business and future strategy. In order to embed risk management throughout the firm, Hermes has a comprehensive risk governance structure, Group-wide policies and procedures, management reporting and system controls in place to: identify, mitigate and control risks. In addition, the Hermes Board has documented and approved the risk appetite which contains both qualitative and quantitative measures. The Hermes Board is ultimately responsible for the oversight of risk management within its subsidiary operating companies and as such is responsible for setting and periodically reviewing Hermes risk strategy, including operational risk, counterparty credit risk and investment risk aspects. The Board has delegated oversight of day-to-day risk matters primarily to: the Executive Committee, the Hermes Risk and Compliance Committee and the Hermes Audit Committee, although a number of other governance committees exist within Hermes to support this process, as detailed on the next page. Hermes Fund Managers Limited 4

5 Governance Committees Hermes Fund Managers Limited Executive Committee Audit Committee Risk and Compliance Committee Remuneration Committee Nominations Committee Portfolio Review Committee Management Committee Risk & Control Executive Business Development Forum New Product & Instrument Committee Valuations Committee Liquidity Capacity and Pricing Committee Counterparty Credit Risk Group Outsourcing Review Group Business Change Board The Executive Committee The Executive Committee consists of the Chief Executive Officer, Chief Operating Office and the Head of Business Development and is responsible for all significant matters relating to the overall management of the HFML business. This includes significant client issues, business development, human resources, finance, risk, compliance, legal, IT and operations. The Hermes Audit Committee The Audit Committee is responsible for: reviewing and challenging, where appropriate, the actions and judgements of management in relation to the company s financial statements. reviewing and assessing the effectiveness of the risk management framework, systems, processes, procedures and controls in relation to the investment management activities for all portfolios, funds, and Hermes Fund Managers Limited 5

6 investment vehicles managed on behalf of clients. This also includes any administration services that HFML has contracted to provide. Reviewing and approving the HFML internal audit purpose, plan and programme and ensuring that the internal audit function is adequately resourced and has appropriate standing within the company. Approving the terms of engagement and the remuneration to be paid to the external auditor(s) in respect of audit services provided and monitoring / reviewing the work and output they provide. In order to ensure complete transparency and independence, the Audit Committee is made up entirely of Non-Executive Directors, all of whom are also Board members. The Head of Internal Audit and Head of Finance are in attendance. Risk and Compliance Committee The Risk and Compliance Committee is responsible for: Overseeing the Risk Management framework of HFML and specifically the effectiveness of risk management, governance and compliance activity within HFML. Reviewing the methodology and assumptions used in HFML s models for determining its economic and regulatory capital and satisfy itself the models are fit for purpose. Reviewing relationships with and developments of the regulatory authorities in the UK and where appropriate other geographies where HFMLhas a presence. To review material or prospective legal actions involving HFML. In order to ensure complete transparency and independence, the Risk and Compliance Committee is made up entirely of Non-Executive Directors, all of whom are also Board members. The Head of Risk and Head of Compliance are in attendance. Remuneration Committee The Remuneration Committee meets approximately three times a year, with meeting frequency increasing in the run-up to the end-of-year bonus compensation period. In order to ensure complete transparency and independence, the Remuneration Committee is made up entirely of Non-Executive Directors, all of whom are also Board members. The Chief Executive Officer is in attendance and the Head of Human Resources is an optional attendee. Nominations Committee The Nominations Committee meets on an ad hoc basis in order to approve any forthcoming Board appointments, as well as appointments of Executive Directors. Hermes Fund Managers Limited 6

7 In order to ensure complete transparency and independence, the majority of the Nominations Committee is made up of Non-Executive Directors, with the Chief Executive Officer in attendance. The Portfolio Review Committee The Portfolio Review Committee (PRC) supports the Executive Committee in the assessment and management of the investment teams, their corresponding processes and related activities. The committee has representatives from the Investment Office, Risk, Compliance and Client Relations. The PRC is responsible for: Independently reviewing all of HFML s mandates in terms of performance against objectives, investment risk targets and ex-ante contributions, styles, exposures and stress testing. Undertaking prescribed reviews of all mandates at periodic intervals and reserves the right to review any mandate at any time. This is especially pertinent during periods of exceptional market conditions. Defining and communicating performance and investment risk flags that trigger more detailed PRC scrutiny. Management Committee The Management Committee acts as a forum to assist and advise the Hermes Executive Committee on significant matters relating to the overall management of the Hermes business. This includes significant client issues, business development, human resources (including reward), finance, risk, compliance and legal, and IT and operations. The Management Committee ensures the delivery and coordination of support to the business areas. The Committee has decision making authority but significant decisions affecting the business are deferred to the Executive Committee. Risk and Control Executive The Risk and Control Executive supports the Executive Committee and the Risk and Compliance Committee in the identification, measurement and monitoring of risks and controls throughout HFML. This, in the main, consists of identifying key operational and business risks to the business, monitoring key risk indicators across the business to ensure the effective operation of the controls framework within Hermes, ensuring compliance with FCA and other Regulatory requirements and making recommendations to the HFML Board and HFML Risk & Compliance Committee for the mitigation of key risks to the business. Business Development Forum The Business Development Forum (BDF) is responsible on behalf of the Executive Committee for approving or rejecting a new product (including funds, segregated mandates and special purpose vehicles) as being desirable Hermes Fund Managers Limited 7

8 and suitable from a commercial, customer and portfolio management perspective; responding to issues and concerns raised by the New Product and Instrument Approval Committee in its assessment of the suitability and appropriateness of the new product; setting fees and pricing and; reviewing ongoing product and range suitability and profitability The BDF is chaired by the Hermes CEO and has representatives from Business Development, Investment Office and Investment Solution and Product Strategy. New Product and Instrument Approval Committee The New Product and Instrument Approval Committee (NPI) supports the Executive Committee and is responsible for supporting the business areas with the implementation of new investment vehicles and derivative instruments, and the ongoing assessment thereof, in accordance with the new product development policy and new instrument policy. Valuations Committee The Valuations Committee supports the Executive Committee and is responsible for drafting and monitoring on-going compliance with the Hermes Valuations Policy for all financial instruments and funds. Liquidity, Capacity and Pricing Committee The Liquidity, Capacity and Pricing Committee (LCP) is a sub-committee of the Valuations Committee and has been established in order to regularly review the liquidity and capacity across HFML s product range, to ensure as far as possible that HFML is able to maintain its products liquidity commitments to its clients. The LCP will also be responsible for determining the swing factor applied to transactions in the UCITS range in exceptional circumstances as outlined in the Hermes Investment Funds Plc ( HIF ) Swing Pricing Procedure. Counterparty Credit Review Group The Counterparty Credit Risk Group supports the Executive Committee and is responsible for approving additions to or deletions from Hermes approved broker and counterparties list as well as monitoring limit utilisations and compliance with these limits. The Counterparty Credit Risk Group is responsible among other areas for establishing Hermes Group policy in relation to the selection of counterparties and brokers and setting appropriate counterparty credit criteria within regulatory or client parameters. Outsourcing Review Group The Outsourcing Review Group supports the Executive Committee and is responsible for reviewing all newly proposed outsourcing arrangements and Hermes Fund Managers Limited 8

9 for reviewing all of Hermes outsourcing arrangements to ensure compliance with Hermes outsourcing policy and regulatory requirements. Business Change Board The Business Change Board supports the Executive Committee and is responsible for reviewing and approving projects and related costs in order to deliver the Hermes strategy. 2.2 Control and oversight functions Hermes has a number of independent control and oversight functions. On a day-to-day basis, business and firm risk is managed within Hermes via the Risk and Compliance teams, while investment risk is managed both at the boutique level and by a dedicated Investment Office. Internal Audit provides independent, objective assurance on the control framework as well as consulting activities to management. All members of staff within the control and oversight functions are suitably qualified and have extensive industry knowledge. The key responsibilities of each function are detailed below. Risk The Director of Risk has a reporting line to the Hermes Chief Operating Officer with direct access to the HFML Chairman and the Chairman of the Risk and Compliance Committee. The Risk team, together with Hermes senior management, continue to augment and embed Hermes risk management framework, which includes: An ongoing assessment of the Governance Committee structure and their risk management responsibilities. Development of risk management metrics and improved risk management information to the Board and the Risk and Compliance Committee. The management of an operational risk system throughout Hermes in order to embed risk and control identification and assessment, together with self-certification of key controls performed by the business. Control testing and reviews to validate or challenge self-certification by the business. The development of new policies and improvement of existing ones where required. Ensuring Hermes risk appetite is documented and cascaded to the organisation. Ensuring that the risks associated with new products, instruments and markets/locations are adequately considered. Hermes Fund Managers Limited 9

10 Compliance The Compliance team is responsible for ensuring that the Hermes regulated entities comply with the regulatory requirements. The Director of Compliance has a reporting line to the Hermes Chief Operating Officer with direct access to the HFML Chairman and the Chairman of the Risk and Compliance Committee. The Compliance team, together with Hermes senior management, continue to augment and embed Hermes compliance framework, which includes: Act as the primary point of contact between Hermes and the regulators. Managing any potential conflicts of interest. Improving the monitoring of regulatory and client specific guidelines through the implementation of new systems. Ensuring that the risks associated with new products, instruments and markets/locations are adequately considered. Money Laundering and KYC responsibilities. Staff inductions and regulatory training. Internal Audit The Internal Audit team is independent of the day to day operations and management of the company. Internal Audit is an integral part of the Hermes internal control framework, and is fully committed to working closely with management and the Audit Committee. The Internal Audit function reports functionally to the Audit Committee and administratively to the Chief Executive Officer. Internal Audit is responsible for providing independent, objective assurance and consulting activities to management through a systematic and disciplined risk based approach and assessment of the control framework at Hermes. This assessment is delivered through scheduled Internal Audits determined by an annual audit risk assessment process and plan, as presented to and approved by the Hermes Audit Committee. Special projects and investigations as requested by management, and approved by the Audit Committee, are also completed on key business activities. Investment Office The Investment Office works as an independent portfolio oversight body across all investment boutiques. Combining traditional fiduciary values with modern analytical techniques, it monitors fund positioning, risk and performance across the investment products. The portfolio oversight function is performed by a combination of risk and performance analysts and exmoney managers. The Investment Office helps to ensure the delivery of sustainable risk-adjusted alpha, while providing timely warnings to the investment teams, Head of Investment and Portfolio Review Committee (PRC) when it identifies potential problem areas. Hermes Fund Managers Limited 10

11 The Investment Office aims to identify the principal risks in the portfolio and the drivers of performance (both positive and negative) and relay this to the fund managers. In addition, the group monitor adherence to stated investment process and changes in decision making methodology and efficacy. It uses a combination of proprietary systems, off-the-shelf software and direct questioning to perform its duties. Where necessary, fund managers will be challenged to justify a position or view. Should an issue be identified (such as excess concentration or factor exposure) the Investment Office will promptly discuss with the manager to manage or reduce the risk exposure, and prevent re-occurrence. If the issue cannot be resolved after discussion with the fund manager, it is escalated to the PRC. Alternatively if the issue is serious enough it will be escalated to the PRC immediately. 2.3 Hermes key risks The key risks that relate to Hermes are set out below. The majority of the risks affecting Hermes can be classified as operational risks, where a significant part of capital is assigned. Hermes ensures that appropriate controls are in place to manage these risks and these are monitored on a regular basis. Operational / Business Risk - including: Strategy execution risk; Poor investment performance; Loss of key clients in particular Hermes has key client dependency on BTPS, which is the owner of Hermes and by far Hermes largest client; Loss of key staff; Business disruption, e.g. failure of systems; Regulatory breaches / regulatory change; Significant business change; and Mandate breaches. Credit Risk - Hermes acts as agent on behalf of its clients in dealing with market counterparties, and as such does not incur any credit risk to its own balance sheet or capital in relation to market trading activities. Whilst this risk rests with the clients themselves, Hermes must exercise due care, skill and diligence in its selection of counterparties as a failure to do so increases the operational risk for Hermes. Hermes will have credit risk in relation to its own funds, specifically: exposures to market counterparties (e.g. banks) where Hermes deposits are held; and fees receivable from clients. Hermes seeks to mitigate counterparty credit risk through a number of measures, these include, settling trades on a delivery versus payment basis (equities and bonds), the use of a central clearer (futures), credit support annexes (CSA) to ISDAs (OTCs) and in relation to FX utilising Continuous Link Settlement (CLS). Hermes Fund Managers Limited 11

12 Market Risk - Hermes, as investment manager, acts as agent on behalf of its clients and must manage the inherent market risk in accordance with clients risk appetite and investment parameters. Failure to have appropriate systems in place to manage client portfolios in accordance with client risk appetite and investment parameters represents an operational risk to Hermes. Hermes does not take any principal positions itself (with the exception of nominal seed capital provided to the fund range) and therefore does not incur any market risk in relation to its balance sheet and capital. However, Hermes fee revenue is based on the underlying value of the portfolios that it manages for its clients. If there is a decrease in the market value of these portfolios as a result of a fall in market values then revenue may be impacted as a result of a market downturn. Exposure to foreign currency movements will increase as more revenues are earned abroad. These will require monitoring and appropriate hedging strategies to be introduced to minimise risk. Management ensure that appropriate controls are in place to mitigate the above risks and these are monitored on a regular basis. 2.4 Individual Capital Adequacy Assessment Process (ICAAP) Risk management and capital management is an ongoing process within Hermes. The process involves various activities, for example: Risk assessments which are carried out across the organisation, both top down and bottom up, and are assessed by the relevant business heads and senior management at least quarterly; Regular reporting to senior management and the various governance committees on the risk management process and also escalation process agreed for significant risks and issues; Regular review of risk appetite and tolerances; Stress and scenario analysis, and reverse stress testing; Risk and capital is considered as part of all strategic decisions; The Executive Committee and Board regularly review the risk assessment during their meetings and Board level agenda items are assessed against the risk assessment and capital needs of Hermes; and Capital requirements / financial forecasts are assessed quarterly by the Executive Committee. The ICAAP is seen as a business as usual process within Hermes, with the Executive Committee and the Board involved in numerous ongoing discussions for review and approval. The ongoing risk management process and capital requirements are under constant review and the Hermes Executive Committee and Board actively participate in the risk workshops and review meetings. Given the structure of Hermes, the BTPS Trustees are also regularly on site so BTPS is also fully aware of the processes and requirements. Regular risk reporting is in place, including the quarterly risk management information pack which contains an update on the capital position. The pack is Hermes Fund Managers Limited 12

13 discussed in detail with the Hermes Executive Committee with a summary also going to the Risk and Compliance Committee. The Hermes Board also review the financial position of the company at formal Board meetings on a quarterly basis. In addition, the Hermes Risk Appetite Statement contains key indicators for each of the risks within the Hermes risk assessment. The indicators act as an early warning system in the monitoring of the associated risks. These are also collated within the quarterly risk management information pack to highlight any trends. Going forward the Hermes Board will continue to formally review and approve the ICAAP on an annual basis. The Board will also revisit the ICAAP more frequently should any new material issues arise. 3. Capital Resources 3.1 Capital Resources and Capital Requirement The majority of the operating companies within Hermes are BIPRU limited licence firms. They have adopted the simplified standardised approach to credit risk. The fixed overhead requirement forms the basis for the Pillar 1 capital requirement for Hermes, being significantly in excess of market and credit risk requirements. A summary of Hermes Pillar 1 capital at 31 December 2013 is presented below. Hermes holds all of the its capital in the form of Tier 1 capital. HERMES FUND MANAGERS LIMITED (HFML) GROUP CAPITAL SUMMARY AS AT 31 DECEMBER 2013 (All figures 000's) (Shaded areas represent cells not entered) Pillar 1 Allocation of amounts by HFML group regulated entity Consolidation Minimum capital HIML HAIML BPK Sourcecap NON-REG Credit Risk 3, ,369 Market Risk Operational Risk Fixed Overhead Risk 16,296 5, , ,323 Total Own Funds Requirement 16,296 5, , ,323 Pillar 1 Total 16,296 5, , ,190 Current total capital 26,433 7,717 1,719 3,000 1,175 12,822 Capital Surplus over Pillar 1 Requirement 10,137 2,308 1,583 1, ,632 Total Own Funds Requirement is higher than the Fixed Overhead Requirement for AIFMD entities (HAIML and BPK) In addition, Hermes also undertakes an ICAAP (see previous section) in accordance with the requirements to assess the need for additional capital to support the risks not adequately covered by Pillar 1. This process includes: a detailed analysis of the key risks to Hermes with input and approval from the Hermes Board and Risk and Compliance Committee; and Hermes Fund Managers Limited 13

14 stress and scenario analysis, which includes both single event and multi event scenarios. The risks and scenarios are considered in relation to the financial forecasts, over a five year period to assess the impact. As at 31 December 2013 Hermes capital resources were 26,433,000 which was in excess of both the Pillar 1 and Pillar 2 assessments. Hermes Fund Managers Limited 14

15 4. Remuneration Policy Statement (RPS) The following RPS is produced and published in accordance with the requirements of the FCA Remuneration Code (the Code). A. Firm Specific Information A.i The below list contains tier three entities within Hermes group that are caught by the Code. Firm Name FRN Business Type No. of Code Staff Proportionality Tier Individual Guidance Received? Hermes Fund Managers Limited Not registered with FCA Asset Management 0 N/A N/A Hermes Investment Management Limited Hermes Alternative Investment Management Limited Hermes BPK Limited Hermes Sourcecap Limited Asset Management Asset Management Asset Management Asset Management 17 3 Yes 12 3 Yes 6 3 Yes 8 3 Yes A.ii Contact details of the key individual who should be contacted within Hermes regarding compliance with the Remuneration Code is as follows: Name Job Title Phone No. Martin Jackson Head of HR m.jackson@hermes.co.uk A.iii Our performance year runs from/to: From 01 January to 31 December A.iv This RPS is in respect of: 2013 Hermes Fund Managers Limited 15

16 B. Reward Schemes B.i Bonus schemes A high level description is provided below of schemes in place to reward our Code Staff for performance during the current performance year: Bonus Scheme for Investment Boutiques: Purpose: The purpose of the Scheme is to incentivise Investment Professionals to generate growth in third party profit, to preserve capital, to maximise value for our owner, and to generate performance for our clients. Pool Construction: The Investment bonus pool is derived in three parts: - A fixed proportion of performance fees earned in the period by the Boutique. a) - A variable proportion of operating profit excluding performance fees. Typically, the variation is between a floor at benchmark performance, and an upper level achieved at target performance. The performance measures are set annually by agreement with the CEO, and are initially a combination of relative performance against benchmark. - An assessment of the adherence of the Boutique to a defined set of Hermes corporate behaviours. Pool Distribution to Investment Employees: The allocation of the bonus pool to individual employees is based on financial and non-financials measures. Non-financial measures include an element for employee behaviour, which is used to adjust up / down the overall bonus awarded. Bonus Deferral: The level of deferral is dependent on the quantum of the bonus. Deferrals are cash based, and vest on a pro-rata basis over three years. Bonus Scheme for non-investment areas: Pool Construction: The bonus pool construction differs for non-investment employees, in that it is constructed on a bottom up basis. b) Pool Distribution to non-investment Employees: Individual recommendations are subject to Executive Committee scrutiny and Remuneration Committee approval which considers market data, company performance and individual performance. Bonus Deferral: The level of deferral is dependent on the quantum of the bonus. Deferrals are cash based, and vest on a pro-rata basis over three years. Hermes Fund Managers Limited 16

17 B.ii Executive Incentive Schemes (e.g. Long Term Incentive Plans; co-investment schemes or carried interest schemes) A high level description is provided below of Schemes that will incentivise Code Staff for future performance, these include: Co-Investment / Bonus Deferral Scheme For investment areas the purpose of the Scheme is to align Investment Professionals interests with those of clients and shareholders. Scheme participants within the investment area are required to notionally invest at least 50% of their deferred bonus against the funds they manage. Incentive scheme 1 Co-investment/Bonus Deferral Scheme a) Employees eligible to participate in the Scheme with a bonus award of 50,000 or more are required to defer a percentage of their bonus award; the percentage deferred increases in line with the quantum of their bonus. Investment Professionals are required to notionally invest at least 50% of their deferred bonus against the funds they manage. Deferred bonuses vest over three years on a pro-rata basis. Amounts deferred notionally track fund performance. Non-investment professionals notionally defer all of their deferred bonus into a basket of investment boutique funds (Growth or Conservative). The portion of an Investment Professional s deferred bonus which is not notionally deferred into their own funds, must also be invested into the same basket of boutique funds as non-investment professionals. The terms of the scheme were approved by the HFML Board and Remuneration Committee. There are currently 115 employees participating in the scheme (16 are Code Staff) Equity Plan Participation: b) For Investment Areas, the purpose of the Plan is to provide certain employees with an equity stake in the Boutique that delivers a share in the growth of third party profits (but does not offer an equity stake in the value of the Boutique as a whole). This stake will also deliver a share of the growth in third party value but only on a trigger event. The shares vest 50% after four years and 100% after five years and the third party profit stream continues to accrue after an employee leaves the firm provided the bad leaver provisions are not applicable. Certain senior Central Services and Business Development employees may be invited to purchase an equity stake in the growth in third party profits across all investment Boutiques. Terms and vesting schedule are as above. Hermes Fund Managers Limited 17

18 Incentive Scheme 2 Limited Equity Participation Plan The purpose of the Scheme is to align the long term interests of employees to those of the company s clients and shareholders. Key senior employees are invited to purchase Growth Shares which are linked to growth in third party profit attributable to their investment boutique. Growth Shares vest as follows: 50% after 4 years 50% after 5 years Dividends are payable on the growth shares after vesting and shares can be sold if there is a capital event. The terms of the scheme were approved by the HFML Board and Remuneration Committee. There are currently 54 employees participating in the plan. (9 are Code Staff). C. Remuneration Code Staff C.i The criteria used to determine which of our staff are Code Staff is stated below: The FCA Guidance has been followed. All employees registered for a Significant Influence Functions (SIF) role and fund managers registered as CF30 who exert a significant influence over their area, plus non UK staff who exert significant influence have been classified as Code Staff. C.ii C.iii The number of Remuneration Code Staff identified in total for this performance year is: The number of Remuneration Code Staff likely to rely on the guidance set out by the FCA is: 43 0 C.iv The measures we have taken to ensure that all Code Staff understand the implications of this status in relation to the requirements of the Code are as follows: All Code Staff have been written to explaining the implications of being classed as Code Staff and have been given the name of a member of staff to contact with any questions that they may have. 1. Principle 1 Risk management and risk tolerance 1.1 Our remuneration practices promote sound and effective risk management and do not encourage risk-taking that exceeds the firm s levels of tolerated risk, this is achieved through the following: Investment bonus pools are constructed based on one and three year fund performance, thereby reducing the risk of excessive risk taking in any one year to influence the size of the bonus pool. Whilst the pool quantum is generated formulaically, individual awards are made on a discretionary basis. When determining individual awards, employee behaviour is taken into consideration in addition to financial performance. Hermes Fund Managers Limited 18

19 2. Principle 2 Supporting business strategy, objectives, values and long-term interests 2.1 We ensure remuneration policies are in line with business strategy, objectives, values and long-term interests on the following basis: Basic purpose: To provide competitive total remuneration opportunities, designed to attract, retain, motivate and reward employees to deliver outstanding performance. Alignment with business strategy: Remuneration philosophy is aligned with business strategy, objectives, values and the long term interests of Hermes and its clients. Remuneration and link to performance: Performance management is operated to support achievement of the overall business strategy, and to ensure remuneration is linked to business and personal performance. Risk Management: Our remuneration procedures and practice promote sound and effective risk management. 3. Principle 3 Avoiding conflicts of interest 3.1 The following approach is taken to ensure remuneration policies avoid conflicts of interest: Hermes has developed a Conflicts of Interest Policy in accordance with the Markets in Financial Instruments Directive ( MiFID ), which outlines the steps the Hermes Group has taken to identify and mitigate the types of conflict of interests that exist, or may exist. Hermes has a Remuneration Committee which is made up of Independent Non Executive Directors who have the power to challenge awards that are recommended. They do not have a vested interest in the amounts being paid to any employees and do not participate in any Hermes incentive schemes. 4. Principle 4 Governance 4.1 We have a Remuneration Committee (RemCo) established within the UK. 4.2 We ensure that remuneration decisions take into account the implications for risk and risk management of the firm, on the following basis: Hermes Fund Managers Limited 19

20 The Heads of Risk and Compliance provide the Remuneration Committee with regular updates on any errors/breaches that may have occurred which are taken into account when making remuneration decisions. 4.3 We ensure that the long-term interests of shareholders, investors and other stakeholders are taken into account, as follows: Investment professionals bonus pools are based upon one and three year investment performance for the funds that individuals manage. Awards made to Investment Professionals from the pools generated, are subject to behavioural measures in addition to financial metrics. The Co-investment/Bonus Deferral Scheme requires Investment Professionals to notionally invest at least 50% of their deferred bonus against the funds they manage thereby aligning their interests to those of the shareholders and investors. The Equity Participation Plan also aligns the interests of employees to those of the shareholder and investors by encouraging employees to grow the third party business of the individual s business area. 4.4 The RemCo has the ability to apply discretion to adjust any individual payments including those paid out in individual incentive schemes. The RemCo is made up of Non Executive Directors who are able to challenge bonus recommendations and have the power to approve or not approve recommendations put before them. 4.5 The RemCo has exercised that discretion in the last three years, by reducing bonus recommendations for some employees where performance has not been to the standard expected or significant errors have been made in the year. 5. Principle 5 Control functions 5.1 With regard to employees engaged in control functions, we ensure that these employees are: o o o independent from the business units that they oversee; have appropriate authority; and are remunerated adequately to be independent of the performance of the business areas they control. The basis for this is described below: The Head of Risk, Head of Compliance and Head of Internal Audit have reporting lines into the Chairman of the Audit Committee in the case of internal audit, and into the Risk and Compliance Committee in the case of Risk and Compliance. The Chairmen of each of the Committees is a non-executive director. The Head of Risk, Head of Compliance, and Head of Internal Audit are Director level. These individuals attend various meetings of the Board and the Executive to express their views. Remuneration for the Hermes Head of Risk, Head of Compliance, and Head of Internal Audit is proposed by Executive Management but independently approved by the Hermes Remuneration Committee. It is based on a combination of market package levels and individual performance. Hermes Fund Managers Limited 20

21 5.2 The Risk Assessment function has input into the setting of individual remuneration policies and individual remuneration awards on the following basis: Risk and Compliance provide details of breaches of policy to the Executive Committee; to enable these to be considered when recommending bonus awards. This information is further provided to the Remuneration Committee for consideration before final approval of bonus awards. 6. Principle 6 Remuneration and capital 6.1 We ensure the firm s total variable remuneration does not limit its ability to strengthen its capital base as follows: It should be noted that Hermes Fund Managers Limited is a subsidiary of BT Pension Scheme, and the payment of bonuses is part of a financial planning process. The strategy of HFML for includes payment of bonuses for each year within that period. This has been signed off by the company s shareholder (BTPS). The capital required to fund bonuses has been shared with, and agreed by the company s shareholder, and reflects the joint objectives of preserving capital and generating returns to the shareholder. 7. Principle 7 Exceptional government intervention Hermes has not benefited from exceptional government intervention therefore Principle 7 is not applicable. 8. Principle 8 Profit-based measurement and risk adjustment There are no bonus schemes that separately reward Code Staff. 9. Principle 9 Pension policy 9.1 We provide a non-contributory DC pension Scheme to all employees. It is our policy not to provide discretionary pensions benefits. 10. Principle 10 Personal investment strategies 10.1 The arrangements we have in place to ensure that Investment Professionals undertake not to use personal hedging strategies to undermine the risk alignment effects embedded in their remuneration arrangements are as follows: The terms of remuneration awards preclude any personal hedging arrangements. Any breach of these terms places the employee s award at risk of forfeiture. The wording of the terms is shown below: Hermes Fund Managers Limited 21

22 By accepting your bonus award for YEAR you undertake not to use personal hedging strategies or contracts of insurance to hedge or insure against any risk contained in the deferred remuneration arrangements referred to in this letter. It is a condition of your bonus award that if you are found to have acted in breach of this undertaking, then Hermes may at its absolute discretion require you to forfeit all or part of any amounts of deferred remuneration which you hold in the Scheme. You may also be subject to disciplinary proceedings and possible dismissal. If you do not wish to accept your bonus award on this basis or if you have any queries in relation to the use of personal hedging strategies or contracts of insurance, please contact the Head of Human Resources before DATE. By accepting their award they undertake not to use personal hedging strategies to undermine the risk alignment embedded in their remuneration arrangements. 11. Principle 11 Avoidance of the Remuneration Code 11.1 We ensure that variable remuneration is not paid through vehicles or methods that facilitate the avoidance of the Code, as no vehicles are used that would facilitate avoidance of the code; variable remuneration is paid under one or more of the below methods: - Bonuses paid in the form of immediate cash, and subject to applicable tax withholdings. - Deferred bonuses are paid in cash on vesting, subject to applicable tax withholdings. - Equity issued is bought by employees at market value and held by an Employee Benefit Trust. No other vehicles are used to remunerate employees. 12. Principle 12 Remuneration Structures Performance assessment for individuals 12.1 Below sets out a high-level description of our approach to measuring the performance of individuals including both financial and non-financial metrics, and explains how this assessment influences an individual s remuneration. Hermes Performance Management Process requires all managers to review the performance of their employees and to give them a performance rating to reflect their contribution throughout the year. The rating scale is 1-5 where 1 reflects performance below expectation and 5 consistently exceeds expectation. All roles within the business are benchmarked against the market to ensure that their remuneration is comparable. Company performance is also taken into account in the construction of the bonus pool together with the investment performance of each fund which is measured over one and three years. Hermes Fund Managers Limited 22

23 Guaranteed variable remuneration 12.2 The number of new Remuneration Code staff hired in the last performance year is: 12.3 Of the new Remuneration Code staff hired in the last performance year, the number offered a guaranteed bonus was: Of the offers made, all were confined to the first year of service of the Remuneration Code staff member Our policy on buying out deferred bonuses for new joiners is as follows: Deferred bonuses are bought out on the same vesting terms as those set by the previous employer. An appropriate methodology is used to determine the value of the award bought-out 12.6 We have not offered retention awards to any Code Staff employees in the last 12 months Payments related to early termination 12.7 We have ensured that any exceptional or non-standard termination payments to staff in the last performance year have been compliant with the Code. 13. Disclosure 13.1 This disclosure has been made online at the Hermes Fund Managers Ltd website: Other 14.1 The aggregate annual remuneration of senior management who have a material impact of the risk profile of the firm is 5,082,200 in respect of the 2013 performance year. This is made up of fixed pay and variable pay. The aggregate annual remuneration of other staff who have a material impact of the risk profile of the firm is 6,541,000 in respect of the 2013 performance year. This is made up of fixed pay and variable pay. Fixed pay comprises annual basic salary and any cash allowances. Variable pay comprises discretionary annual bonus based on individual and investment performance. Hermes Fund Managers Limited 23