Terms of Reference Investment Committee

Terms of Reference Investment Committee Last updated 17 October 2016

1.0 Overall purpose and responsibility of the Investment Committee 1.1 The Investment Committee s (the Committee ) objective is to provide assistance in the discharge of the Managing Board s investment responsibilities as detailed in this document for the Life Fund, Stakeholder Pension Fund and Child Trust Funds. In doing so it should take due account of solvency requirements including the regulatory, tax and accounting implications, the investment strategy principles set out in the Society s Principles and Practices of Financial Management, the Prudent Person Principle, the Police Mutual brand and reputation. 2.0 Matters reserved for the Managing Board and Permitted Activities 2.1 Matters that are specifically reserved for the Managing Board are shown in appendix 1. These may be amended from time to time by the Managing Board and notified to the Committee. 2.2 The Committee will be permitted to act within the scope of the Investment Strategy documents. Any potential action or activity that will fall outside of these permissions must be approved by the Managing Board in advance. 3.0 Membership 3.1 The Committee will be appointed by the Managing Board and will normally comprise an equal number of non-executive and executive directors. The Chairman and Deputy Chairman must be non-executive directors. In the absence of the Committee Chairman, the Deputy Chair will chair the meeting. Additionally, the Chief Executive Officer and the Finance Director will be appointed to the Committee. 3.2 Ordinarily the Chief Actuary and the Investment Accounting Manager will attend meetings. Members of the Managing Board and the Chief Risk Officer will have the right to attend meetings and other attendees may be invited by the Committee as required. Attendance at the Committee meeting will not constitute membership and consequently additional attendees will have no right to vote. 3.3 The Chief Actuary will be present to consult on any decisions that could have a significant effect on solvency and/or capital requirements. 3.4 It is noted that although there are minimum targeted skill levels, with regards to the Investment Capabilities Matrix shown in appendix 3, it will be expected that the skill levels will differ between Investment Committee Members and not all members will always attain this minimum. Other Investment Committee attendees will not normally be expected to achieve all minimum capability levels. 3.5 In respect of new members of the Investment Committee it is acknowledged that their skill levels may be below the minimum targeted skill levels during a probationary period when inductions and training will be undertaken. 3.6 It is also noted that there may be a conflict of interest for the Chief Actuary in providing guidance to the Committee on solvency issues. 4.0 Frequency of regular meetings and quorum 4.1 The Committee will meet at least four times per year with additional meetings scheduled as required. Ordinarily notice of meetings, agendas and papers will be provided seven days before the meeting. Meetings will be scheduled to ensure that external information can be appropriately considered and such that minutes of meetings are available for review by the Managing Board at their subsequent meeting. 4.2 The Committee shall have a quorum of at least two members, consisting of at least one executive member and one non-executive member. A duly convened meeting of the Committee at which a quorum is present shall be competent to exercise all or any of the authorities, powers and discretions vested in or exercisable by the Committee. A quorum may be present in person or in communication with each other by telephone. To count in the 1

quorum a person who is in communication with the others by telephone must be able to hear fully, and participate in, the proceedings. 5.0 Ad-hoc meetings 5.1 Ad-hoc meetings held in addition to the regular meetings may be held via telephone or using email. 5.2 Ad-hoc meetings should normally be limited to operational and short term tactical issues (e.g. Tactical Asset Allocation) where it is necessary for decisions to be made outside of the regular meetings. 5.3 Meetings to be held by telephone will be notified by email and will require a minimum of two members of the Committee including at least one non-executive director to form a quorum. Decisions will be made in accordance with the Conduct of the Committee section of this Investment Committee Terms of Reference. 5.4 Any decision made by email will be deemed to have been made when a majority is reached and will not need responses from all Investment Committee members. 6.0 Use of external advisors 6.1 From time to time the Committee may require support from external advisors to enable it to effectively discharge its responsibilities under these Terms of Reference. To support this, planned expenditure that the Committee will be authorised to approve will be included within the PMAS Group budget. In addition, the Chief Executive Officer may also authorise unbudgeted management expenditure up to 100k in accordance with the Powers and Authorities Manual. 7.0 Conduct of the Committee 7.1 For all Investment Committee decisions, all members of the Committee will be notified of proposals before they are agreed. Any resolution or decision of the Committee will be passed by receiving positive responses from three of the four members at a duly convened meeting. The Chairman will provide a carrying vote in the event that votes are equal, on the condition that responses have been received from all members of the Committee. 8.0 Responsibilities 8.1 The role and responsibilities of the Committee are set out in appendix 2 to this document including the respective roles and responsibilities of others in Committee related activities. Appendix 2 is split into three tables reflecting Group, Investment Related and Operational responsibilities. Each table includes commentary which gives the scope of responsibility that the Committee has in each area. 8.2 The Investment Committee will recommend new asset classes in line with the Prudent Person Principle, and in doing so, provide the Managing Board with appropriate and sufficient detail to enable them to understand the risks and rewards, and to ensure that there are systems and processes that properly identify, measure, monitor, manage, control and report the investments. 8.3 In the event that a new asset class is recommended the Investment Committee will be required to confirm that they have the relevant level of asset class capabilities and skills, or that they are undertaking to achieve them. 9.0 Review of performance and terms of reference 9.1 The Managing Board and the Committee will formally review these terms of reference at least annually. 2

Appendix 1 Matters reserved for the Managing Board The following table provides detail of items that are specifically reserved for the Managing Board and are therefore outside of the scope of the Investment Committee s authorities. However, the Investment Committee may provide information and recommendations for the Managing Board s consideration in these areas. Area of Responsibility Specific Reserved Responsibility Extent of Delegation / Range of Responsibility that Investment Committee can exert Investment Strategy Defining, updating and amending of strategic asset allocation benchmark and degree of freedom that the Investment Committee can exert. Setting of counterparty and concentration risks including any subsequent amendments. Capital Management Defining, setting and amending of capital policy. None Risk Policy Setting, updating and amending of hedging policy and approach. Setting, updating and amending of trigger points strategy and trigger points. PPFM All new items added or amendments made to the PPFM document. Limited to authorities shown in PPFM. 3

Appendix 2 Investment Committee roles and responsibilities Group Responsibilities The Areas of Responsibility section shown in the table below reflect the areas where the responsibility is wider than the Investment Committee s overall remit. For these items the Investment Committee s responsibility in providing recommendations and information will be limited to investment related activities. It is likely that other Committees will also have responsibilities in these areas and that they will provide additional input to the Managing Board as appropriate. Area of Responsibility Who is responsible? Who produces / provides recommendations and / or Who is consulted? Investment Strategy MB IC WPC CA E E Capital Management MB IC CA E WPC E Risk Policy MB IC GRMC E CA E PPFM MB IC WPC E WPA E Investment Strategy Documents MB IC E E Annual Report and Accounts MB IC E E Asset Valuation Methodology MB AC IC CA E CA E Who performs the task / provides the Investment Related Responsibilities In the table below the Area of Responsibility section is largely or entirely related to investment activities. For these items the Investment Committee will take the responsibility for being the lead in executing and implementing policy and processes in accordance with overall Group policies and the agreed risk appetite of Police Mutual. Area of Responsibility Who is responsible? Who produces / provides recommendations and / or Who is consulted? Who performs the task / provides the Investing in line with the Prudent Person Principle IC E ICM IA IM WPC CA E IA Counterparty and Concentration Risks IC E CA E Investment Strategy Monitoring and Development IC E IA IM WPC CA E IA Monitoring Investment Managers IC E E E Tactical Asset Allocation IC E ICM IA IM Reporting to Managing Board IC E E 4

Appendix 2 Investment Manager Selection (including mandate setup) IC E IA E IA E De-risking / Hedging (in-line with Risk IC E IM IA CA E IM Policy) Monitoring Compliance with Mandates IC E E Custody IC E E E Asset Pricing Basis (in line with Asset IC CA E Valuation Methodology) Performance Measurement IC E E Operational Responsibilities The table below is included for completeness to set out the responsibilities in executing investment strategy at an operational level. Area of Responsibility Who is responsible? Who produces / provides recommendations and / or Who is consulted? Monthly operational updates E E IC E Monthly investment performance and E E IC E monitoring against benchmarks Cashflow Management (Planning) E E IC E Instructing Investment Managers (Ops) E E Cash Management (Ops) E E Information for Other Areas E IC E Unit Pricing and Fund Pricing E E Who performs the task / provides the Key The arrows shown in the tables above indicate the flow of recommendations and information between parties when more than one is involved in a process. Acronym Full Name Acronym Full Name MB Managing Board WPA With Profits Actuary IC Investment Committee AC Audit Committee ICM Investment Committee Members E Executive & the business CA Chief Actuary IA Investment Advisors WPC With Profits Committee IM Investment Managers GRMC Group Risk Management Committee 5

Appendix 3 Investments Capabilities Checklist Knowledge Experience Knowledge Experience Basic - Advanced Practical industry experience Basic - Advanced Practical industry experience (0-5) (Y, N or M) (0-5) (Y, N or M) Individual Key Skills Back Office / Support Capability Bond knowledge Assets: Equity (inc. property) knowledge Segregated mandates Commodity knowledge Pooled Vehicles Tactical Asset Allocation factors Listed investment trusts - Economic Unlisted equity - Political Custody & Safekeeping: - Market forces & sentiment Cash management - Correlations Custody transaction processing - Current Issues Breaks and break resolution Detailed strategy knowledge Safekeeping - Strategy construction Nominee names / registers - Balancing risks Fund accounting & Unit pricing: - Risk oversight Asset valuation (bid-mid-offer) - Governance oversight Swinging prices - Performance measurement Fund accounting and production of a fund Net Asset Value Box management / creations / cancellations Unit pricing Committee Key Skills Other: Detailed bond knowledge Regulator limits - admissibility, localisation - Types of bonds Securities lending - Duration Derivatives - margins, clearing, leveraging - Yield - Risk - Portfolio management Key - Currency & hedging Detailed equity knowledge Knowledge - Stock selection 0 - No knowledge of factor - Value & Growth stocks 1 - Limited knowledge of factor - Market cap & size factors 2 - General understanding of skill area - Passive vs. Active 3 - Broad understanding - Market risk 4 - Broad understanding and some in depth knowledge - Portfolio management 5 - Advanced knowledge and understanding of the majority of aspects - Currency & hedging Detailed commodity knowledge Experience - The commodities market - Risk factors - Commodity strategies Capability - Currency & hedging Individual Key Skills Derivatives and protection strategies Expected minimum level of capability of an individual attending a meeting Committee Key Skills Committee Knowledge Expertise skill expected on the Committee and required to make decisions on current strategy and asset classes Expert bond knowledge High degree of coverage from attendees, but not all attendees expected to possess advanced skill - Fixed interest derivatives Expert equity knowledge Committee Knowledge - Alternative equity strategies These will be areas we do not currently invest in but some background knowledge is required from the Committee. Alternative asset classes Broad knowledge, but not advanced, from at least one member of the Committee. Back Office / Support Capabilities Skills required by the support functions (including HSBC) Capability Have you had direct, practical industry experience through being involved in day to day decision making and management of a strategy or portfolio incorporating the area in question; or have you had oversight and resonsibility for others who have? 6