BDO I N I V N EST S M T ENT N T MAN A A N G A E G MENT N CO C NS N U S LT L A T N A C N Y C Y SE S RV R IC I E C S

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1 BDO INVESTMENT MANAG CONSULTANCY SERVICES GEMENT

2 WHY BDO INVESTMENT MANAGEMENT? WE SET OUT BELOW WHY BDOIM ARE AN IDEAL CHOICE AS INVESTMENT CONSULTANTS: 1. Comprehensive expertise in investment BDOIM have a team of 25 full time investment professionals comprising actuaries, economists, analysts, fund managers and consultants. This is organised as follows: Relationship management - you would have a dedicated investment consultant as a single consistent point of contact to utilise BDO s service offering Actuarial and corporate pensions - we have a nationwide team of around 60 pensions and benefits specialists, delivering a full range of actuarial and consultancy services Asset allocation and manager selection - our Asset Management Group has 15 investment professionals, covering all major asset classes and underpins the investment consulting and management services we provide to pension fund clients with assets over> 1.2bn. This combined expertise enables us to advise on strategic issues, tactical asset allocation and fund selection. Our approach enables clients to reduce risks and maximise returns. 2. Clear and robust process Our advice all stems from an analysis of the liabilities and our investment model that we use to manage client monies. The investment model is kept up to date to ensure that it reflects our views of the asset classes. The asset/liability model then allows us to identify optimum asset allocations for the Trustees to choose. We can then help Trustees decide which asset allocation and also advise on timing based on our consultant s views of the markets. This clear and robust process helps clients make complex decisions quickly. This in turn enables them to make investment decisions in a timely manner, increasing investment returns rather than after markets have moved. Actuarial and corporate pensions Relationship management INVESTMENT CONSULTING Asset allocation and Manager selection 2

3 WHY YOU SHOULD SELECT BDO INVESTMENT MANAGEMENT 3. Innovation and linking to client objectives We are highly innovative and deliver clear, straight-forward advice to our clients. For example, our investment consultancy business was one of the leaders in setting up a discretionary investment service for a defined benefit pension scheme, which is now known as "implemented consulting". Beyond day-to-day client work, we take an active role in shaping public pensions policy and governance - we regularly comment in the press on regulatory developments and some of our staff have been seconded to regulatory bodies, which enables our clients to have insight into regulatory matters. 4. Technology Our actuarial system, act-it, is a leading system on the market. Act-IT is fully integrated within Microsoft Excel as is our asset/liability model, enabling valuations, cash flow/liability projections and asset allocation strategies to be run quickly and efficiently. 5. Commitment to clients BDO has frequently been included within the Sunday Times 100 Best Companies to Work For, as well as featured in Financial Times Best Workplace UK and The Times Top 50 Where Women Want to Work. Our commitment to clients and staff means long term working relationships develop. We are proud of the satisfaction ratings and feedback we receive from our clients and ensure that our teams are consistently focused on delivering the highest levels of client service. The vast majority of our defined benefit pensions business comes from client referrals and introductions from other professional advisers with whom we have worked and know our ability to deliver. Furthermore, our membership of professional bodies enables us to be close to the latest developments in the industry, enabling us to advise clients in the full knowledge of industry practice and forthcoming developments. 3

4 OUR INVESTMENT CONSULTA ANCY SERVICES 4

5 BDO INVESTMENT MANAGEMENT S APPROACH TO INVESTMENT CONSULTANCY BDOIM S APPROACH TO INVESTMENT CONSULTANCY IS BROKEN DOWN INTO EIGHT KEY STAGES. STAGES 1-4 SET OUT THE HIGH LEVEL ASPECTS AND WOULD BE DOCUMENTED IN THE STATEMENT OF INVESTMENT PRINCIPLES, THE FORMAL DOCUMENT REQUIRED UNDER LEGISLATION. Stage 1: Strategic objectives The Trustees need to set their overall objectives for the Scheme from a holistic perspective. For example, their objective may be to achieve a particular future funding level, or there may be a plan to wind up the Scheme. Stage: 2 Governance controls Once the strategic objectives are agreed, the Trustees need to decide what parameters they wish to set. These parameters may include: Whether any specific asset classes are to be excluded, such as hedge funds or commodities How often the investment strategy will be reviewed Whether there are trigger points at which a change in the risk/return balance will change. For example, if the Scheme becomes fully funded, the Trustees may wish to adopt a more conservative strategy or buy out benefits with an insurance company. Stage 3: Asset/Liability modelling Any decisions on the investments made by the Scheme must have regard to both the returns being sought and the risks that the Trustees and sponsoring employer are prepared to take. The investment returns have a direct impact on the funding level of the Scheme and the contributions that the employer needs to pay. The direct relationship between funding and investments means that the starting point for any investment decision should be the liability profile. Therefore, BDOIM start off by analysing the projected cashflows of the pension scheme which are normally available following the actuarial valuation of the scheme. We then examine the interaction between assets and liabilities to advise on the balance between risk and return. STAGES: 1. Overall strategy 2. Governance controls 3. Asset/Liability modelling 4. Agree optimum asset allocation 5. Tactical timing of investment changes 6. Manager selection 7. Implementation 8. Monitoring 5

6 BDO INVESTMENT MANAGEMENT S APPROACH TO INVESTMENT CONSULTANCY Stage 4: Optimum asset allocation Using BDOIM s asset/liability model we can identify asset allocations along the efficient frontier that satisfy the Trustees requirements. You can see how your current investment strategy compares to the optimal strategies. This enables you to understand how much additional investment return you can expect for adopting a particular level of risk. Stage 5: Consider tactical aspects The optimum asset allocation is a longer term strategy and current market conditions may make it inappropriate to implement immediately. Our investment consultants overlay the technical aspects with a practical tactical strategy. Options may include looking at switching at specific market levels, phasing switches or agreeing a discretionary mandate. Stage 6: Manager selection The approach used for manager selection may depend upon the size of the proposed investment and the asset classes that the Trustees wish to include. Considerations include: Active v Passive Pooled or segregated mandates Number and style of funds. At this stage we would also discuss and agree benchmarks that the Trustees will use to monitor the performance of the fund manager. As BDOIM run a number of investment funds we have a robust process of analysing and selecting funds. We research both quantitative and qualitative aspects of investment managers and maintain ongoing dialogue to ensure that we can advise clients if they need to take action. STAGES: 1. Overall strategy 2. Governance controls 3. Asset/Liability modelling 4. Agree optimum asset allocation 5. Tactical timing of investment changes 6. Manager selection 7. Implementation 8. Monitoring 6

7 BDO INVESTMENT MANAGEMENT S APPROACH TO INVESTMENT CONSULTANCY Stage 7: Implementation We provide the Trustees with a step by step guide to implementation and will draft appropriate documents where possible. Key considerations when restructuring a portfolio are: Termination issues and costs Setting specific manager mandates Agree service standards Contractual and fee issues. Transition cost analysis Transition management review, including timing Ensure smooth handover. Stage 8: Monitoring We provide customised investment monitoring reports that cover the following information: Scheme information Financial position and cash flow Portfolio changes Performance evaluation Attribution analysis Market review and outlook Underlying criteria for action. In addition, where we are aware of specific issues that require immediate consideration by the Trustees between monitoring reports, we will bring them to the Trustees attention. STAGES: 1. Overall strategy 2. Governance controls 3. Asset/Liability modelling 4. Agree optimum asset allocation 5. Tactical timing of investment changes 6. Manager selection 7. Implementation 8. Monitoring 7

8 INVESTMENT STRATEGY AND ASSET ALLOCATION STAGES 3 AND 4 ARE NOW DISCUSSED IN MORE DETAIL. Stage 3 - Asset/Liability modelling BDOIM will carry out a review of the term and nature of Scheme liabilities. In particular, we project the future cashflows in respect of benefit payments (see opposite) for all future years and understand their dependence on factors such as inflation and, where relevant, salary increases. From the liability profile we can identify the gilt portfolio that produces a similar pattern of cashflows and which therefore represents a low, base level of risk for the Scheme. An example is shown opposite. However, if this is set as the investment strategy, the Trustees would be locking into low returning assets and the consequent cost of the Scheme would escalate dramatically! We therefore look at alternative asset allocations using sophisticated modelling of a range of long-term strategic options that might produce higher returns but with higher degrees of risk. BDOIM consider the main asset classes and also alternative investments. In particular, our research has identified that the diversification obtained by using alternative investment classes can significantly reduce the volatility of investment returns and hence the volatility of future funding levels. Projected cash flows PROJECTED BENEFIT PAYME ENTS ( M) Inflation-linked Fixed PERIOD (YEARS) Matching gilt portfolio This portfolio provides a Scheme-specific starting point against which to investigate alternative investment portfolios that might produce higher returns, but with more risk. FIXED GILTS INDEX LINKED GILTS Medium term (up to 20 years) Long term (over 20 years) 25% 25% 20% 30% 8

9 INVESTMENT STRATEGY AND ASSET ALLOCATION Stage 4 - Optimum Asset Allocation From the Asset/Liability model we can identify the theoretical efficient portfolio for a given level of risk i.e. no other portfolio can be found that is expected to deliver a better return. This in turn can be used to show the range of expected funding levels in, say, 10 years time so that the Trustees and Company can make an informed choice as to the level of risk that they are prepared to take. In our view this approach enables clients to understand the magnitude of the decisions that they are taking and the impact of adverse experience on the Company, who ultimately has to fund any deficit that should arise. This is illustrated in the following charts. Our research has identified that asset allocation accounts for 40 per cent to 90 per cent of investment returns. Taking into account the risk appetite of the Trustees, we can agree the ranges within which the asset allocation can fluctuate. In addition, we can advise on whether active asset allocation should be adopted in order to increase investment returns as the Trustees may wish to be under or over-weight in particular asset classes depending on the short/medium term outlook for that class. The decision will depend upon the stage of the economic cycle, the market environment, relative valuations, liquidity and specific opportunities. Our analysis of the economic environment over the next five years shows increased volatility in asset classes and this means that asset allocation is likely to substantially affect future investment returns. Efficient frontier BDO BDO 3 Current BDO BDO EXPECTED EXCESS RETUR RN (%) STANDARD DEVIATION OF EXCESS RETURN All asset classes No hedge funds No hedge funds and no commodity funds 9

10 INVESTMENT STRATEGY AND ASSET ALLOCATION Alternative portfolios Portfolio/% Current BDO 1 BDO 2 BDO 3 BDO 4 Expected excess return Standard deviation of excess return UK Gilts medium UK Gilts long UK Index Linked Gilts medium UK Index Linked Gilts long UK Equities Developed market (ex UK) equities Emerging market equities UK Corporate Bonds Cash (UK 3m Tbills) UK Property Hedge funds Commodities Projected funding levels in ten years time % Current BDO 1 BDO 2 BDO 3 BDO 4 ASSETS AS A PERCENTAGE OF LIABILITIES ON CURRENT SCHEME FUNDING BASIS Half of the time the funding level will lie within the blue area. The funding level is expected to lie within the whole bar nine times out of ten. 10

11 APPENDIX I About BDO Investment Management 5 1, , $5bn BDO International is the world s fifth largest accountancy network More than 1,000 offices Almost 46,000 employees Present in 115 countries Total Annual worldwide world wide revenues of US $5bn BDO Investment Management Limited (BDOIM) is an FSA regulated subsidiary of BDO LLP, the UK member firm of BDO International. Full range of accounting and business advisory services throughout the UK. BDOIM has three divisions namely Corporate Pensions and Benefit Services, Private Client Services and Asset Management. Corporate clients range from small employers with fewer than 100 employees to blue chip organisations with thousands of employees. 11

12 APPENDIX II Our values at work UNDERPINNING OUR CULTURE IS A SET OF DEFINED VALUES WHICH REFLECT HOW WE MANAGE OUR WORK, OUR RELATIONSHIPS AND OURSELVES. BDO s culture is one of our core strengths. We have developed our Values at Work to help recognise, preserve and build on these strengths. Our Core Values represent the principles we are committed to upholding now and in the future. They define what we stand for as a firm and are there to guide us in our day-to-day work and decisions. Honesty and integrity This is about openness and prudent judgement, about being trustworthy and straightforward in all our working relationships. Taking personal responsibility We treat each other as equals and recognise individual strengths. Strong and personal client relationships Our client relationships are more than just business partnerships: we aim to understand people as well as businesses, and build long-standing relationships based on mutual respect and trust. Mutual support We treat each other with consideration and respect and have a strong ethos of sharing and consultation. Our values are representative of the way we work with each other internally and also the principles that we follow when working with our clients. We believe that our commitment to upholding these values ensures we maintain an excellent working environment for our people, and can provide an open and honest service that is built around personal working relationships and respect for one another. 12

13 This publication has been carefully prepared, but it is in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Investment Management Limited to discuss these matters in the context of your particular circumstances. BDO Investment Management Limited, its directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it. BDO Investment Management Limited is authorised and regulated by the Financial Services Authority to conduct investment business. Registered in England and Wales under No Registered office 55 Baker Street, London W1U 7EU. BDO Investment Management Limited is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within independent member firms. Copyright 2010 BDO LLP. All rights reserved. the international BDO network of Tax Team of the Year 2009 and 2008 Audit Team of the Year 2008 Corporate Finance Deal of the Year 2008