2010 Pension Investment Approach Review

When the Pension Investment Approaches were launched in 2006, we put an ongoing governance process in place with input from independent specialists. Part of this commitment was to review the Pension Investment Approaches and, if necessary, make any changes to ensure they continue to meet our customers’ needs.

We've completed a recent review with analysis by us and investment specialists Barrie & Hibbert. The purpose was to

• assess the current equity asset allocations to find out if we can improve the optimisation of the UK to overseas equity split
• analyse the impact of reducing the lifestyle stage (currently 15 years) in conjunction with a reduction in the proportion of equities held under the Pension Investment Approaches with a view to improving the risk and return profile
• review the asset classes currently included in the Pension Investment Approaches to determine whether any other types of assets should be added, for example global emerging markets, commodities, gilts, property and overseas bonds
• analyse the impact of introducing a foreign currency hedge on overseas equities
• assess whether the underlying finds continue to meet their aims and objectives
• determine whether the change of the bond component from active to passive (tracker), delayed from 2008, should still go ahead

The results of our recent review were

• The current UK to overseas equity split is still one of the most efficient in terms of risk and expected return
• No variation in lifestyle duration and proportion of equities held was providing a more efficient profile in terms of risk and expected return
• The inclusion of additional asset classes provided no significant benefit to the overall risk and expected return profile of the Pension Investment Approaches
• The inclusion of a foreign currency hedge was providing no risk reduction benefits
• The underlying funds continue to meet their aims and objectives, with an acceptable level of tracking difference
• The change in the bond component should still go ahead as soon as appropriate.

It has been our intention since 2008 to make changes to three of the Pension Portfolio funds which are used for our Pension Investment Approaches by moving the bond component from active to passive (tracker) management. This is to be achieved via our links to State Street Global Advisors.

We have delayed making these changes due to the extreme market volatility experienced over the past few years (which led to a significant increase in the cost of buying and selling corporate bonds) and the detrimental effect making these changes could have had on the fund values of individual pension policies. While markets stabilised somewhat in 2010, the market conditions were still not right. However, we believe current market conditions make it an appropriate time to make the switch and have started the transition process. Assuming no deterioration in market conditions we expect to complete the switch later in 2011.

We believe this change is appropriate for members as the majority of the investment mix in our Pension Investment Approaches (i.e. the equity element, which is the main asset class in our Pension Investment Approaches) is already managed on a passive basis, meaning we’ll be taking a more consistent investment approach.

Passively managed funds cover many popular indices so can be a way for investors to gain access to the world’s equity and bond markets. More information on both the general and relevant risks associated with the underlying funds can be found in the Pension Funds Investor’s Guide.

No. The planned changes to the management of the bond component will happen automatically and we’ll write to every employee invested in a Pension Investment Approach at that time.

We take our governance responsibilities very seriously - the table below sets out how we fulfil our governance obligations.

Other than the change in the bond component from active to passive management outlined above, there are currently no other plans to change our core investment proposition. The research concluded that the Pension Investment Approaches still meet members’ needs, although we will continue to review these during 2011 and beyond.

For more information please speak with your Account Manager or financial adviser. More information about our Pension Investment Approaches can be found in our Pension Investment Approach Guide.