PENSION SCHEME Statement of Investment Principles
1. Introduction This statement details the principles governing the investment policy of the BBC Pension Scheme (the Scheme). It has been prepared by the directors of BBC Pension Trust Limited (the Trustees), having been advised by their investment consultant and in discussion with the British Broadcasting Corporation (the BBC) as the Scheme s sponsor. It complies with the requirements of the Pensions Act 1995, as amended, and the Occupational Pension Schemes (Investment) Regulations 2005 (the Investment Regulations). It also has regard to the Myners Principles for defined benefit pension schemes. It is reviewed each year or whenever the Trustees are alerted to a material change in the Scheme s funding position which is outside the boundaries the Trustees have determined for automatic changes to the strategic asset allocation and risk tolerance. 2. Objectives The Trustees are responsible for stewardship of the Scheme s assets. Their main objectives are to ensure that: all beneficiaries receive the benefits to which they are entitled under the Rules of the Scheme; and there are sufficient assets to meet the Scheme s liabilities as they fall due. To this end the Trustees have a long-term objective of being fully funded, on a basis which would allow them subsequently to run a low risk investment policy with limited likelihood of requiring recourse to the BBC for additional contributions. Based on the current agreed Schedule of Contributions and investment policy, the Trustees are targeting the achievement of this objective by 2028.
3. Investment policy The Trustees set investment policy. They consult the BBC and take advice from the Scheme Actuary and their investment consultants. They engage independent members of the Investment Committee with relevant investment experience and are supported by an in-house investment team. The investment policy is reviewed at least annually and following each actuarial valuation or asset liability study. The Trustee has established BBC Pension Investment Limited, regulated by the FCA, to exercise investment discretion and provide advice in relation to specific aspects of the Scheme s portfolio. The Trustees delegate responsibility for implementing investment policy to the Investment Committee. It appoints, monitors the performance of and removes investment managers. It oversees asset allocation and directs the cash flow of the Scheme amongst investment mandates, adjusting portfolios as necessary. It monitors, reviews and recommends changes to the Trustees policies in respect of investment, corporate governance, socially responsible investment and engagement. Matters of substance at any Investment Committee meeting are decided by vote. If there is not unanimity the matter is referred to the Trustees for consideration. 4. Investment beliefs In setting policy, the Trustees have regard to a set of investment beliefs developed in discussions with their investment consultant, the in-house team, the independent members of the Investment Committee and other parties. These beliefs can be found in Appendix 1. The investment beliefs provide a starting point for strategic asset allocation reviews and other investment discussions. Fundamentally the Trustees believe and take account of the fact that the BBC is willing to underwrite the liabilities of the Scheme to the extent it can afford to do so. The Trustees monitor the covenant of the BBC on a continuous basis to assess its ability to support the Scheme. The beliefs are reviewed annually.
5. Investment management The Trustees delegate day to day investment decisions to suitably qualified independent investment managers, who are required to comply with the Investment Regulations and this statement. Their activities are defined and constrained by detailed agreements. Investment managers have discretion to buy and sell investments within the terms of their agreements. To aid diversification the Trustees employ a number of managers with specialisms in different asset classes and regions and varying investment styles, both passive and active. A performance monitoring agency measures their performance, and that of the Scheme. Fees are charged either as a proportion of the assets under management or are related to performance targets. They are negotiated individually when a manager is appointed and are reviewed periodically. The Trustees take advice to ensure that fees are commensurate with the services provided. Managers are listed in the Scheme s annual report and accounts, which also contains information about investment performance, asset allocation and major investment decisions taken during the year. 6. Types of investments held The Trustees invest in a mix of real and monetary assets deemed suitable for pension schemes, balancing expected returns against volatility. Derivative instruments, potentially on an unfunded basis, are used to manage the Scheme s risk and for efficient portfolio management purposes. The Trustees carry out due diligence and take advice from their investment consultants to ensure new areas of investment are appropriate. 7. The balance between different types of investments Asset allocation is driven by the specific characteristics of the Scheme, in particular its demography, the pattern
of liabilities, the funding of the Scheme and the risk tolerance of the Trustees and BBC. The Trustees have adopted a dynamic approach to asset allocation which is reviewed following periodic asset liability modelling (ALM) studies that consider the full range of investment opportunities available to the Scheme, expected returns on investments and changes to the funding position. The Scheme limits the size of the strategic allocation to assets deemed as return-seeking. This limit will fall over time and may reduce sooner than planned if the Scheme s funding level rises to pre-agreed trigger levels. The Scheme s strategic asset allocation at the end of March each year is shown in the Scheme s annual report and accounts. The Investment Committee can deviate from the strategic allocation provided it remains within agreed ranges. The methodology for changing the strategic asset allocation is periodically revisited to ensure that changes to the strategic asset allocation are appropriate. 8. Sale of investments The Scheme is now closed to new members and is maturing. A large proportion of the Scheme s assets are readily marketable. Some investments, such as property and private equity, are less easy to sell. Such illiquidity normally allows the Trustees to capture an improved return and is not expected to constrain their investment decisions. 9. Risk The Trustees recognise that the Scheme s assets are exposed to a number of investment and operational risks. They give qualitative and quantitative consideration to these risks when deciding investment policy, strategic asset allocation, the investment manager structure, choice of managers, the terms of their agreements and other aspects of the ongoing management of the Scheme. The quality of the sponsor s covenant is an integral consideration in determining the amount and nature of risk that it is appropriate for the Scheme to take. Further details on the types of risks identified and how they are mitigated are shown in Appendix 2.
10. Additional Voluntary Contributions (AVCs) Members of the Scheme can pay AVCs to the Scheme, in accordance with separate provisions published by the Trustees. The funds in which members can choose to invest their AVCs are reviewed regularly, to ensure that they are well managed and represent good value. The Trustees have the right to vary the arrangements. In this they are advised by their investment consultants. 11. Responsible Investment The Trustees recognise that with ownership comes responsibility and they are committed to exercising their influence and control to promote the long term sustainability of the Scheme s investments. The Trustees employ Hermes Equity Ownership Services (EOS) to vote at company meetings on behalf of Trustees. EOS also engages with companies on governance, ethical and environmental considerations. In addition to engagement at the company level, EOS works on the Scheme s behalf to engage with public, industry and regulatory bodies in the various markets in which the Scheme invests to promote better practices. The Trustees have signed up to the UK Stewardship code and the UNEP Finance Initiative Principles for Responsible Investment (UNPRI). The Scheme s full responsible investment policy can be viewed on the Scheme s website, together with the Scheme s voting record.
Appendix 1 Investment Beliefs 1. Belief: A high level of governance is required to manage a large Scheme with a diverse set of assets. Consequences: The Investment Committee benefits from the knowledge and experience of independent experts who sit as full members of the Investment Committee. An in-house investment team is utilised with sufficient expertise and capacity to support the Investment Committee on all aspects of investment and to oversee management of the assets. The Investment Committee reviews the resources available to ensure there is the right set of skills and sufficient in-house capacity to oversee the management of the Scheme s assets. Trustees seek advice from external investment consultants and lawyers when making decisions. 2. Belief: The Trustees accept that it is necessary to take risk to achieve returns above the risk-free rate. The Trustees have a long term approach to risk and return which they believe is consistent with the Scheme s long time horizon. However, their risk-taking capacity is limited by prudential considerations including the capacity of the Scheme and the BBC as sponsor to tolerate an adverse outcome. Consequences: The Scheme endeavours to set clear and realistic long term investment objectives with a focus on delivering sufficient returns to pay benefits at a level of risk that is acceptable to the Scheme and the Sponsor. The Trustees monitor the Scheme s risks carefully and undertake stress testing and scenario analysis as part of their decision making process. The Trustees have adopted a dynamic asset allocation framework in order for the Scheme not to take more risk than is required to meet its objectives. The Trustees seek to minimise what they perceive to be unrewarded risks where it is cost effective to do so.
3. Belief: The Trustees believe that it is appropriate to hedge a material amount of the Scheme s interest rate and inflation exposure, even in times of historically low interest rates, to mitigate what would otherwise be among the Scheme s biggest risks. Consequences: The Scheme has established a liability hedging programme with the aim of protecting the Scheme against adverse changes in interest rates and inflation. The liability hedging programme involves investment in matching assets such as inflation linked government bonds and derivatives which can be expected to deliver future real cash flows to the Scheme with a high degree of certainty. As the Scheme matures, it is expected the liability matching portfolios will come to represent a larger proportion of the Scheme s overall assets. The Trustees pay close attention to managing liquidity, to the exposure to unfunded derivatives and to counterparty risks that can be associated with liability hedging activity. 4. Belief: The Trustees believe that growth assets such as listed equities are likely to deliver a higher return, over the long term, than government bonds or cash but with a higher level of risk, especially in the short term and when compared to the Scheme s liabilities. Consequences: The Scheme maintains a significant portfolio of these growth assets but the Trustees have sought to mitigate their risk by diversifying the Scheme s exposure across different investments and risk factors, such as equity, property, credit, illiquidity, insurance and other areas. Within this growth allocation, the Trustees have also sought to reduce risk by including secure assets with long term cash flows that can be expected to match, albeit with some degree of uncertainty, the benefits that the Scheme will be required to meet many years into the future. The majority of the Scheme is invested in highly liquid assets. 5. Belief: The timing of moves into and out of asset classes can make a large difference to the long term returns that are actually achieved. For instance, if equities had been purchased at a peak in the market, then it would have been an extremely long time before the equity risk premium was achieved. In contrast, if equities were purchased at a trough in the market, then a significant equity risk premium would have been achieved over most time scales. However, the Trustees are of the opinion that it is extremely difficult to predict short term market movements and that the Scheme does not have a comparative advantage in this area.
Consequences: The Trustees pay close attention to the valuations of asset classes and markets and their long term expected returns. They receive advice from their investment consultant and an economic research firm to support their strategic investment decisions. The Trustees do not attempt to add value through short term market timing. 6. Belief: The Trustees believe that financial markets are not always efficient and that there may from time to time be opportunities for active managers to add value. However, they also believe that active managers will, on average, underperform their representative benchmarks net of fees. The Trustees are principally concerned with net of fee performance and are only willing to pay high fees if they have strong grounds to trust a manager s ability to achieve a higher net return than a lower cost solution. Consequences: The Scheme uses a mixture of active and passive strategies with an emphasis on passive management in efficient, more liquid, markets where information flows are good and it can be difficult for active managers to add value on a consistent basis. The Investment Committee monitors closely the performance of its managers to ensure that active management is adding value taking account of fees. 7. Belief: The Trustees believe that well governed companies that manage their businesses in a responsible way will produce higher returns over the long term. The Scheme s responsible investment policy has an important role to play in safeguarding and enhancing the long term value of the Scheme s assets. Specifically, the Trustees recognise climate change could be a long term risk for the fund and has the potential to impact the Scheme s investments. Consequences: Through employing a voting and engagement overlay service the Scheme looks to engage with companies in which it invests to encourage them to maintain high standards of governance and to operate in a socially and environmentally responsible way. The Scheme monitors its exposure to climate change and requires fund managers to take climate change related factors into account and reviews their policies.
Appendix 2 Risk Risks Interest rate Inflation Return seeking risk Impacts, Controls and Mitigation The Trustees are particularly concerned about a fall in interest rates which would cause the present value of liabilities to rise. The Trustees monitor the Scheme s interest rate risk closely, supported by the Scheme s investment consultants. To mitigate this risk, the Trustees invest in bonds, derivatives and other investments with predictable long term cash flows that will tend to rise in price if interest rates fall. The real value of investments could be eroded and fail to keep pace with the Scheme s requirement to pay inflation linked benefits. An increase in expected inflation will cause the present value of liabilities to rise if it is not accompanied by a rise in interest rates. The Trustees monitor the Scheme s inflation risk closely, supported by the Scheme s investment consultants. To mitigate this risk, the Trustees invest in index-linked bonds, derivatives and other assets which have inflation-linked cash flows. Actual returns may differ from expected returns. In practice, a fall in the value of return seeking assets would have the effect of increasing the Scheme s deficit. The risk and performance of the return seeking portfolio is monitored and the Scheme s asset allocation is frequently reassessed to ensure that the Scheme is not taking significantly more risk than needed to reach its objectives. Investments are diversified across and within asset classes, to avoid over-exposure to any one asset class or market. Assets are monitored relative to the Scheme s strategic benchmark.
Risks Longevity Active management Counterparty risk Liquidity Currency Impacts, Controls and Mitigation Longer life expectancy would increase the Scheme s liabilities. Mortality rates are monitored and actuarial advice is taken on the assumptions used in arriving at the liabilities, and the assumptions include an element of prudence. The Trustees regularly assess the possibility and value of hedging the Scheme s longevity risk. Mismanagement or failure to comply with investment management agreements (IMAs) could lead to poor performance. Each investment manager is monitored to ensure compliance with its IMA. Returns achieved are monitored together with the continued suitability for appointment. The risk that a counterparty defaults while owing money to the Scheme. Collateral is posted by the counterparty for long term transactions when the valuation of the transaction is favourable to the Scheme. The risk of the Scheme not having sufficient liquid assets to allow it to meet its liabilities and other obligations as they fall due. The liquidity profile of the investments is regularly reviewed and the amount of cash held to pay benefits is assessed well in advance to minimise unforeseen sales and transaction costs. The large majority of the Scheme s assets are invested in highly liquid assets. Movements in exchange rates can impact the sterling value of overseas assets held. Currency exposure is monitored. The Scheme partially hedges the major currency exposures, and ensures that overseas investments are diversified across currencies.
Risks Climate change Sponsor Operational Impacts, Controls and Mitigation Disruption or instability caused by climate change could have a negative impact on investment returns. The Scheme s approach to responsible investing is set out in the Responsible Investment Policy. The risk that the sponsor of the Scheme is unable to provide future support to the Scheme. The willingness and ability of the BBC to continue contributions at a level necessary to fund the Scheme s benefits is monitored. The risk is that there is a breakdown in the Scheme s investment back office or custody functions, and/or the operation of financial markets. This could be from cyber attack or other reasons. The broad custody function at HSBC is monitored as is its ability to hold the Scheme s assets securely. Asset positions, trades and valuations are reconciled with managers and custodian and the Scheme s own records. The Scheme conducts operational due diligence on new and existing mandates. Produced by: Pension and Benefits Centre Telephone: 029 2032 2811 Email: mypension@bbc.co.uk Web: bbc.co.uk/mypension October 2017