INTRODUCTION STATEMENT OF INVESTMENT PRINCIPLES (SIP) IN RESPECT OF EDS RETIREMENT PLAN and EDS 1994 PENSION SCHEME (Plans) 1.1 EDS Trustee Limited and EDS 1994 Trustee Limited (Trustees) have each prepared this SIP as a record of their investment policy for the Plans. The Trustees refer to this SIP when making investment decisions to ensure that they are consistent with its principles. 1.2 The effective date of this SIP is 1 July 2011. 1.3 The Trustee will review the SIP triennially or more frequently as appropriate. 1.4 In preparing the SIP, the Trustees confirm that they have: Taken advice from a person employed by their investment consultant, Mercer, whom they believe to be qualified and to have the appropriate knowledge and experience of the management of their investments. Consulted with the Principal Employer (the Sponsor, HP Enterprise Services UK Ltd, formerly Electronic Data Systems Limited) and its ultimate parent Company (Hewlett-Packard Company) but also confirm that investment strategy is not restricted by reference to the consent of the Sponsor. The Trustees undertake to follow the same procedure on each occasion that the SIP is revised. 1.5 In considering any aspect of their investment responsibilities, the Trustees will take into account the benefit obligations, which are mainly pensions linked to pay at or near retirement. There are also defined contribution (DC) benefits arising from member and employer payments of Additional Voluntary Contributions (AVCs). 1.6 The Trustees investment powers are set out within the Plans governing documentation and relevant legislation. If necessary, the Trustees will take legal advice regarding their interpretation. Legally the Trustees have ultimate power and responsibility for the Plans investment arrangements. This SIP is consistent with those powers. 1.7 The Trustees have established a Joint Investment Committee (the Committee) to focus on investment matters, consisting of 2 directors of each Trustee, and have appointed a firm of professional investment consultants to provide relevant advice to the Committee and the Trustees, who also take advice as appropriate from the Actuary and other professional advisers. 1.8 The Trustees are accountable for the investment of the Plans assets but they delegate some aspects of the Plans investment arrangements, either to the Committee or to 3rd party service providers, to manage the Plans affairs more effectively. 1.9 The Committee makes recommendations for consideration by the Trustees, who are responsible for setting investment objectives, establishing risk and return targets, and setting the Plans strategic benchmarks and investment manager structure. The Committee implements Trustee decisions under delegated powers by retaining and monitoring investment managers, performance measurers, custodians and other service providers. Page 1 of 10
1.10 The investment managers are responsible for day-to-day management of the Plans assets, with the discretion to buy, sell or retain individual securities in accordance with guidelines agreed by the Trustees. The investment managers report to the Committee regularly regarding their performance. 1.11 The Trustees have appointed a Performance Measurer, who is independent of the investment managers, to calculate return and risk measures for each manager and for the assets of each Plan in aggregate. 1.12 The Trustees have appointed a custodian, who is responsible for arranging the custody and safekeeping of the Plans assets that are managed by the investment managers on a segregated basis. The Trustees have satisfied themselves that the custodian has the financial security, procedures and controls in place to justify this as prudent, efficient and cost-effective. The Trustees are responsible for the safekeeping of underlying assets of unit trusts in which the Plans are invested. Also the Trustees have paid attention to the facilities for the security and efficient management of any cash deposits held. 1.13 The Actuary performs a funding valuation of each Plan triennially and more frequently as appropriate, in accordance with regulatory requirements. The main purpose of the actuarial valuation is to assess the extent to which the assets cover the accrued liabilities and to agree an appropriate funding strategy for each Plan. INVESTMENT OBJECTIVES 2.1 The Trustees seek to ensure that the investment policy is such that there will be sufficient levels of cash flow available in the short term to meet known benefit outgoings. 2.2 The Trustees aim to achieve real investment returns over the medium and long term consistent with the relevant assumptions made by the Actuary in the actuarial valuation. The Trustees and Sponsor appreciate that this may lead to some shortterm volatility in the market value of the assets held. 2.3 The Trustees seek to ensure that the investment policy maintains their solvency objectives (linked to the relationship between the present values of assets and accrued liabilities), taking into account the funding objectives agreed between Trustees, Sponsor and Actuary. 2.4 The most recent triennial actuarial valuations, as at 31 March 2010 for EDS Retirement Plan and 31 December 2009 for EDS 1994 Pension Scheme, showed deficits between asset values and accrued liabilities, which were to be closed by recovery plans over 10 years. 2.5 In recognizing that the Sponsor is responsible for the long-term financing of the benefits, the Trustees attempt to follow a policy which, to the extent that it does not conflict with the above objectives, constrains and stabilizes the contribution levels to the greatest extent possible. INVESTMENT STRATEGY 3.1 The Trustees requested the Committee to consider the various factors necessary to determine a long-term investment strategy with a diverse portfolio of assets, to encompass some or all of the following categories: - Equities, both domestic and international. - Bonds, both fixed interest (domestic and international) and index linked. Page 2 of 10
- Alternatives, e.g. hedge funds, private equity. - Property. - Cash. 3.2 In 2004 the Committee proposed and the Trustees agreed to gradually realign the assets to meet the strategy defined at the time. This was achieved by selecting various specialised investment managers to manage portions of the total Plan assets. These appointed managers may be changed from time to time as the Committee considers and recommends as appropriate within the overall strategic target for asset allocation. This was documented as the SIP dated 5 March 2007. Subsequent adjustments to the strategy and to the investment manager appointments, including alternative asset classes for diversification purposes, were proposed, approved and documented as the SIP effective 1 March 2010. Following the most recent actuarial funding valuations, the Committee proposed and the Trustees agreed to make further adjustments to the strategy and manager appointments, the interim result of which is shown at the end of this section. 3.3 In the long term the Trustees anticipate that the real returns expected from equities, both domestic and international, will be greater than those from fixed interest and index linked securities, although it is recognised that the relatively high level of equity real returns achieved over long periods in the past may not be consistently sustainable in the future. Also it is recognised that equity markets demonstrate a greater degree of volatility than bond markets over the shorter term. 3.4 In general, a significant proportion of the assets would be expected to be invested in equities, which by their nature should, over the long-term, produce returns well suited to the anticipated growth in the active member liabilities, through a combination of income and capital growth. The pensioner liabilities, to the extent not bought out through the purchase of annuities, will be expected to have assets invested corresponding to a weighting of the above categories having taken into account the expected future relative rates of return of those assets, the expected future rate of increase of pensions, and the funding situation. 3.5 In selecting and determining the mandate for the chosen investment managers, the Trustees will ensure the distribution of assets is suitable to meet the investment objectives as described in the previous section. 3.6 The Trustees will hold cash to the extent necessary to meet impending anticipated liability outflows. Bank accounts are used to facilitate the holding of cash awaiting investment or payment. 3.7 Recognizing that funds may need to be realised for a number of unanticipated reasons at any time, and the desirability of retaining as much flexibility as possible to cater for unexpected changes in circumstances, the Trustees monitor closely the extent to which any assets not readily realisable are held by the investment managers, and will limit such assets to a level at which they are not expected to prejudice the proper operation of the Plans. 3.8 Analysis of cash flow over the next few years indicates that anticipated contributions from the Sponsor and members, together with expected investment income, will not always exceed benefit payments and, therefore, the necessity for the realisation of investments to meet benefit outgoings over that time needs regular monitoring. 3.9 In determining the above issues, the Trustees have considered the risks attached to holding particular asset categories, and particular securities, both in isolation and as component parts of a diversified portfolio. In their view, the range of assets, together with the mandates given to the investment managers, allows for an acceptable and Page 3 of 10
prudent degree of risk in the context in which the assets are invested, i.e. to meet the long-term liabilities without unduly constraining the flexibility given to the investment managers. The Trustees have taken account of risk as regards both market volatility and expected future returns compared with expected future liability growth. 3.10 Presently there is no directly-held Sponsor-related investment and the Trustees do not envisage any change in this respect in the foreseeable future. 3.11 Strategic Asset Allocation 2010 2011 UK Equities 22.5% 15.00% Global / EAFE Equities (a) 48.5% 51.00% Emerging Markets Equities 8.0% 9.00% Fixed Interest 12.0% 15.00% UK Fixed Interest Gilts 3.0% 3.75% Overseas and Corporate Bonds 9.0% 11.25% UK Index-Linked Gilts 0% 0% Property 0% 0% Hedge Funds 7.0% 7.0% GTAA 2.0% 3.0% Cash (b) 0% 0% Total 100.0% 100.0% (a) Including UK and emerging markets within global and EAFE equities. (b) Cash may be retained for working capital purposes or pending appropriate investment. 3.12 Further diversification into Property and Private Equity has been deferred. INVESTMENT MANAGER MANDATE AND MONITORING 4.1 Investment managers have full discretion to buy and sell investments on behalf of the Plans, subject to agreed constraints and applicable legislation. There are formal investment management agreements (IMAs) in place with all investment managers, who are authorised under UK legislation or the relevant authority of the country in which they are domiciled. The investment managers were selected having regard to an extensive range of factors, which the Trustees considered appropriate for the stewardship of the assets, and having taken written advice from the investment consultant. Similar procedures will apply to any future investment manager review or appointment. 4.2 Present asset categories and investment managers (including performance objectives and benchmarks) are shown in the Appendix to this SIP. 4.3 The Trustees review the investment performance of its managers on a regular basis, currently quarterly, to monitor progress against the mandates. Performance is be assessed according to each investment manager's ability to add value through both asset allocation decisions and stock selection relative to the relevant sector peer group pension fund and market index returns. 4.4 At least annually the Trustees review the investment consultant s written advice in Quarterly Investment Reviews to determine whether the investments held continue to be satisfactory to achieve the necessary diversification and suitability in relation to all other matters covered by this SIP, a copy of which has been provided to each investment manager. Page 4 of 10
4.5 Each investment manager must be selected and retained having regard to the need for diversification and suitability of assets, with a view to giving effect to the principles contained in this SIP, as far as reasonably practicable. Each investment manager is required to exercise the powers of investment that are specified in the IMA. At least annually the Trustees request written confirmation from each investment manager that they continue to manage the assets in a manner consistent with the IMA. The Trustees will promptly supply each investment manager with a copy of this SIP in case of any amendment or replacement. 4.6 Similarly, before investing in any new type of investment vehicle, the Trustees will obtain, as appropriate, the investment consultant s (and, to the extent that it is aware from the mandate given to them by the Trustees, each investment manager s) written advice as to whether the investment is satisfactory for achieving the necessary diversification and suitability in relation to all other matters covered by this SIP. 4.7 The Trustees may enter into performance-related fee arrangements, rather than fees set solely by reference to a predetermined scale of percentages of the assets, to incentivise the investment managers and connect their remuneration with the successful or unsuccessful management of the assets. AVCs 5.1 The Trustees consider that AVC facilities for members should provide the following: - The opportunity for real returns that should offset the adverse effects of inflation. - A suitably diversified asset mix to protect members from poor investment returns from any one particular asset category. - A cash fund that enables members to protect their AVCs from downside volatility, for example in the years immediately prior to expected retirement. - A fund whose value is expected to vary with the price of annuities, for members who wish to protect the annuity purchasing power of their AVCs prior to retirement. 5.2 The Trustees consider that the type and range of facilities described above are suitable to provide for the requirements of the members in any of the circumstances likely to arise. 5.3 In 2008 the Trustees established a DC investment platform that enables the Trustees to offer a range of investment options and to appoint underlying investment managers, having taken account of factors such as expected investment performance, charges and administrative efficiency, and this has been made available to the members. RISK MANAGEMENT 6.1 The Trustees have conducted a Risk Review and implemented a Risk Register, which helped to identify the following factors as potentially affecting the investment policy: 6.1.1 Sponsor covenant is considered by the Committee when proposing investment strategy. 6.1.2 Solvency and mismatching risks are addressed by the asset allocation strategy and at each triennial actuarial valuation, with the following asset class considerations: UK Government bonds although the lowest risk assets relative to liabilities, they are not risk free. Interest rate risk exists if the cash flow profile of the UK Government bonds held differs from that of the projected Page 5 of 10
liabilities. Inflation risk exists if the assets and projected liabilities have different linkages to inflation. Credit risk reflects the possibility that the payments due under the bond might not be made by the borrower. Other bonds in addition to interest rate, inflation and credit risks, they may introduce currency risk, which will arise through investment in non- Sterling bonds, given that the Funds liabilities are denominated in Sterling, because changes in exchange rates will have an impact on the relative value of the assets and liabilities. Equities whether public or private, they represent an ownership stake in a company, the value of which is determined by the buyer and seller of the stake, with no certainty of future value (unlike payments from a bond, subject to credit and currency risk). A periodic payment, in the form of a dividend, might be made to an equity holder, although timing and amounts are uncertain. The uncertainty of equity return relative to liabilities is captured in the form of the equity mismatch risk, which may be broken down into the credit risk of the underlying company, the volatility risk associated with the price of the equity and the currency risk for equities denominated in currencies other than Sterling. Property provides income and capital return. The income component is subject to interest rate and inflation risks relative to the liabilities; also there is uncertainty of the long-term level of income. The capital value of property is determined by the buyer and seller, with no certainty of future value. These risks and uncertainty, including currency risk for of property outside the UK, are captured in the form of the property mismatch risk. Property is a relatively heterogeneous asset category, with sub-categories potentially exhibiting very different behavioural characteristics and attaching risk exposures. 6.1.3 To reduce risks arising from being overweight or underweight compared with the strategic benchmark allocation, the Committee has set out its Pension Funds Rebalancing Policy. 6.1.4 The Trustees have chosen to employ active management of the different asset classes. Although the appointed investment managers are judged to be capable of adding value net of fees, the use of active management exposes the Plan to underperformance by investment managers, which is mitigated by spreading the funds across several managers with different and complementary styles. Also the guidelines for each manager set out a target ex-ante tracking error range against the manager s benchmark, with any breach of tracking error range to be reported to the Trustees by the managers. 6.1.5 Some investment managers use derivatives to achieve efficient portfolio management, subject to agreed restrictions. The risks of using derivatives are largely the same as those of investing in the underlying asset categories but, additionally, leverage may be introduced if the economic exposure arising from investing in a derivative is greater than the capital committed to the investment. Also administrative risk may also be present depending on the terms of the contract governing the derivative. The investment strategy constrains the use of derivatives, gearing and other specialised instruments. 6.1.6 Across all Plan investments there is potential for regulatory and political risks. Regulatory risk arises from investing in a market environment where the regulatory regime may change. This may be compounded by political risk in those environments subject to unstable regimes. The spreading of investments across the global regions mitigates the impact of these risks. Page 6 of 10
6.1.7 Liquidity risk arises from holding assets that are not readily marketable and realisable. Given the Trustees long-term investment horizon, some liquidity risk is acceptable because of the expected reward for assuming it. Thus a proportion of the Funds assets are invested in illiquid investments but the investment strategy limits this proportion. 6.1.8 Monthly cash flow teleconferences assess disbursement and investment requirements. 6.1.9 The passive hedging of 50% of non-sterling assets mitigates currency risk. 6.2 To mitigate the impact of custodian risk, the Trustees lawyer has carefully reviewed the custodian and sub-custodian arrangements, and there are signature constraints on cash transfers. 6.3 Counterparty credit risk is addressed in the custodian arrangements and the IMAs. 6.4 Concentration of risk (e.g. arising when a high proportion of the Funds assets are invested in securities, whether debt or equity, of the same or related issuers) is addressed by a diversified spread of assets by type and by individual securities within each asset class. 6.5 The Trustees acknowledge that it is not possible to monitor all risks listed above at all times. However, the principle is to accept risks which are expected to be rewarded over time, in the form of excess returns, in a diversified manner. The resulting combination of assets and investment management approaches has been selected to be consistent with the investment objectives stated above. SOCIALLY RESPONSIBLE INVESTMENT AND CORPORATE GOVERNANCE 7.1 The Trustees have asked the investment managers to take account of social, environmental or ethical factors in exercising their investment decisions and corporate governance policy, to the extent that they consider them to be appropriate. Investment managers are encouraged to vote on all member issues in accordance with the guidelines set by the NAPF. TACTICAL TRUSTEE DECISION TAKING 8.1 The Trustees consider it inappropriate to take short-term tactical decisions, and that the agreed strategy should be followed in most market conditions. 8.2 However, in extreme and exceptional circumstances, it may be appropriate to suspend implementation of the stated long-term investment strategy. The Trustees primary objective in taking this step would be to reconsider the investment strategy in the light of these circumstances. Page 7 of 10
APPENDIX I The Plans benchmarks for the total assets are as follows: Asset Class Benchmark Index Weight (%) UK Equities FTSE All Share 15.00 Global Equities MSCI World All Country 18.00 Global Equities MSCI World 22.00 Global Equities excluding North America MSCI Developed EAFE 11.00 Emerging Market Equities MSCI Emerging Markets 9.00 Fixed Interest ML Sterling Non-Gilts 11.25 Fixed Interest FTSE-Actuaries Gilts All Stocks 3.75 Hedge Funds 3 month US Dollar (USD) LIBOR + 5% p.a. 7.00 GTAA 3 month LIBOR 3.00 Total 100.00 The Plans target allocations to the appointed investment managers are as follows: Manager Asset Class Target Allocation (%) Allowable Range (%) Majedie UK Equities 7.5 +/- 2.5 River and Mercantile UK Equities 7.5 +/- 2.5 HP Invest Global Equities 18.0 +/- 4.5 LSV Global Equities 11.0 +/- 3.0 MFS Global Equities 11.0 +/- 3.0 Baillie Gifford Global Equities excluding North +/- 3.0 11.0 America (EAFE) Genesis Emerging Market Equities 9.0 +/- 3.0 Insight Investment Fixed Interest 5.0 +/- 2.0 Western Asset Fixed Interest 10.0 +/- 3.0 Fauchier Hedge Funds 3.5 +/- 1.5 PAAMCO Hedge Funds 3.5 +/- 1.5 Aspect Capital GTAA 3.0 +/- 1.0 State Street Global FX hedge of 50% of developed n/a n/a Advisors (SSgA) markets non-sterling assets Total 100.0 The above manager allocation is designed to achieve the overall strategic asset allocation target set out in section 3.2 of this document. A rebalancing policy is in place to ensure that these targets are maintained within reasonable limits. With the exception of SSgA, all of the above managers employ active management. The investment managers benchmarks and performance objectives are as follows: Majedie UK Equities Benchmark: 100% FTSE All Share Index. Objective: Out-performance by at least 3.0% per annum over a rolling 3-year period. Ex-ante tracking error will typically be in the range 2% to 6%. Permitted Distribution: UK Equity Service 80 100% In-House Funds 0 20% River and Mercantile UK Equities Benchmark: 100% FTSE All Share Index. Objective: Out-performance by at least 3.0% per annum over a rolling 3-year period. Ex-ante tracking error will typically be in the range 2% to 6%. HP Invest CCF Global Equity Fund Page 8 of 10
Benchmark: 100% MSCI World All Country Index. Objective: Out-performance by at least 2.0% per annum, net of fees, over a rolling five-year period. Ex-ante tracking error will typically be in the range 2% to 8%. LSV Global Equities Benchmark: 100% MSCI World Index. Objective: Out-performance by at least 3.0% per annum over a rolling five-year period. Ex-ante tracking error will typically be in the range 4% to 8%. MFS Global Equities Benchmark: 100% MSCI World Index. Objective: Out-performance by at least 2.5% per annum over a rolling three-year period. Ex-ante tracking error will typically be in the range 3% to 8%. Baillie Gifford EAFE Equities Benchmark: 100% MSCI EAFE Developed Index. Objective: Out-performance by at least 2.5% per annum over a rolling three-year period. Ex-ante tracking error will typically be in the range 3% to 7%. Genesis Emerging Markets Equities Benchmark: 100% MSCI Emerging Markets Index. Objective: Out-performance by at least 2.5% per annum over a rolling three-year period. Ex-ante tracking error is not specified. Permitted Distribution: Primarily equity securities established in, or quoted on, Emerging Markets, defined by reference to World Bank Emerging Countries classification. Insight Investment - Bonds Benchmark: 75% iboxx Sterling Non-Gilts + 25% FTSE-Actuaries Gilts All Stocks. Objective: Out-performance by 0.75% per annum net of fees over rolling three-year periods. Ex-ante tracking error will typically be in the range 0.5% to 3.0%. Western Asset - Bonds Benchmark: 75% Merrill Lynch Non-Gilts + 25% FTSE-Actuaries Gilts All Stocks. Objective: Out-performance by 1.0% per annum over rolling three-year periods. Ex-ante tracking error will typically be in the range 0.5% to 3.0%. Fauchier Fund of hedge Funds Benchmark: 3 month US Dollar (USD) LIBOR + 5% per annum. Objective: Out-performance cover a rolling five-year periods. Ex-ante tracking error: N/A. PAAMCO Fund of hedge Funds Benchmark: 3 month US Dollar (USD) LIBOR + 5% per annum. Objective: Out-performance cover a rolling five-year periods. Ex-ante tracking error: N/A. Aspect Capital - GTAA Benchmark: 3 month LIBOR. Objective: Out-performance cover a rolling three-year period. Ex-ante tracking error: N/A. Page 9 of 10
SSgA FX hedge of 50% of developed markets non-sterling assets Benchmark: Sum of returns from one-month forward foreign exchange contracts with respect to the 50% hedge of the relevant foreign currency components of the Hedged Portfolio. Objective: Match the benchmark. Ex-ante tracking error: APPENDIX II The manager will aim to maintain an average level of residual risk relative to the benchmark measured as the standard deviation of excess returns over rolling three year periods of less than 0.20% per annum. \----/ Applicable only for EDS 1994 Pension Scheme - E.ON Section The Section s benchmarks for the total assets are as follows: Asset Class Benchmark Index Weight (%) Cash + LDI funds FTSE-Actuaries Gilts Index Linked 20 years 20 Cash + LDI funds FTSE-Actuaries Gilts Index Linked 30 years 50 Cash + LDI funds FTSE-Actuaries Gilts 15 years 30 Total 100 The Section s target allocations to the appointed investment managers are as follows: Manager Asset Class Target Allocation (%) Allowable Range (%) Insight Investment Cash + LDI funds 100.0 - Total 100.0 The above manager employs passive management with LDI overlay. The investment manager s benchmarks and performance objectives are as follows: Insight Investment - Bonds Benchmark: FTSE-Actuaries Gilts 20% Index Linked 20 years + 50% Index Linked 30 years + 30% 15 years. Objective: Match the benchmark. Ex-ante tracking error: The manager will aim to maintain an average level of residual risk relative to the benchmark measured as the standard deviation of excess returns over rolling three year periods of less than 0.25% per annum. Ex-ante tracking error will typically be in the range 0% to 0.5%. \----/ Page 10 of 10