Statement of Investment Principles – September 2020

Freemantle doc 2

The Fremantle Group Pension Plan (‘the Plan’)

Governance Statement for the period from 1 January 2019 to 31 December 2019

Introduction

This Governance Statement sets out how we have embraced statutory governance standards which are central to the running of the Plan. It explains how the Trustee has met its legal obligations in relation to the management of the Plan over the period 1 January 2019 to 31 December 2019 (“the Plan Year”). As Trustee Directors we recognise the importance of robust governance and adopt good practice standards.
Governance of the default arrangement
1. Statement of Investment Principles
  
  Appended to this statement is a copy of the Plan’s latest Statement of Investment Principles which governs the Trustee’s decisions about investments including its aims, objectives and policies for the Plan’s default arrangements (the default arrangement is the investment structure that members were placed into, when they did not make their own choice when they joined the Plan). In particular, it covers the Trustee’s policies on risk, return and ethical investing and how default arrangements are intended to ensure that assets are invested in the best interests of the members.
2. Review of the default arrangements
  
  One of our key responsibilities is to ensure that, based on the aims and objectives of the default arrangement, the default strategy is designed in the best interests of members. This duty and other governance issues relating to the default arrangement are explained in our Statement of Investment Principles.
  
  The Trustee reviews the appropriateness of the default arrangements on an ongoing basis and formally at least every three years (or sooner, if there is any significant change in investment policy or member demographics), to ensure that the return on investments is consistent with the Trustee’s aims, objectives and policies.
  
  We introduced the Default Lifestyle Option following a review of the default strategy in place prior to then, the ’Legacy Lifestyle Option’, with effect from April 2017. The Default Lifestyle Option was designed to take into consideration pension freedoms introduced from April 2015.
  
  To help ensure that the default arrangement, as well as the self-select investments, continue to be appropriate to our membership, we regularly review their suitability. This takes into account the range of investments, their risk profiles and the demographics of our members. We also make sure that all our investment options are clearly labelled.
  
  Based on a formal review of the Plan’s default investment strategy that was initiated in the 2018 Plan Year and presented to the Trustee on 30 October 2018, the LGIM Fremantle Standard Life Global Absolute Return Strategies (GARS) was replaced by the LGIM Fremantle BlackRock Aquila Life Market Advantage (ALMA) Fund within the default in this Plan Year due to the underperformance of GARS. The review was undertaken with the support of the Trustee’s investment advisers and included an assessment of the current trends in the market, member activity at retirement, members’ appetite for risk and likely outcome at retirement.
  
  Our review of the default took into account guidelines published by the Department for Work and Pensions. Our review included consideration of the following:
  - Ongoing suitability, governance arrangements and objectives;
  - Default investment strategy; and
  - Design of the default arrangement including the suitability of underlying investments.
  The next formal review of the default arrangements will take place during 2021.
  
  Each quarter the Trustee reviews the net performance of the funds underlying the default arrangement with input from our investment managers. The reviews that took place during the 2018 Plan Year led the Trustee to conclude that the default arrangement was not performing as expected and initiated the review described above.
3. Aims, objectives and policies relating to the Plan’s main default arrangement
  
  Currently around 43% of Plan members participate in the Default Lifestyle Option. The Default Lifestyle Option has been designed to provide a lower level of exposure to investment risk to members as they proceed towards retirement. This is commonly referred to as a lifestyle approach, where the member’s investments are de-risked as they get closer to retirement.
  
  The Default Lifestyle Option invests 50% in Global Equities and 50% in Diversified Growth until 10 years before the member’s retirement date. As members approach retirement, assets are gradually and automatically switched into lower-risk bond funds. At a member’s retirement age, the funds are invested 40% in Diversified Growth, 30% in corporate bonds and 30% in gilts.
  
  The mix of Diversified Growth and Global Equity is intended to maximise long-term returns, while providing some protection against fluctuations. The switch of assets in the last 10 years before retirement aims to further reduce the level of investment risk members are exposed to and is likely to be suitable for members who are planning to take a single lump sum, or series of lump sums (drawdown) at retirement.
  
  All of the assets held in the Default Lifestyle Option are readily realised. Because all of the assets held are chosen to meet criteria based upon the likely rates of return, levels of risk and charges, they are not selected with a view to optimising social, environmental or ethical impact of the investments.
4. Aims, objectives and policies relating to the Plan’s other default arrangements
  
  The Legacy Lifestyle Option invests wholly in the Consensus Index Fund until 6 years before the member’s retirement date. As members approach retirement, assets are gradually and automatically switched into a mixture of fixed interest bonds and cash. At a member’s retirement age, the funds are invested 75% in fixed interest bonds and 25% in cash.
  
  The Consensus Index Fund is intended to maximise long-term returns, while providing some protection against fluctuations. The switch of assets in the last 6 years before retirement aims to lead to a mix of assets, at retirement, whose value will vary in approximately the same way as the cost of purchasing an annuity with 75% of the fund and using the remaining 25% of the funds to provide a cash sum.
Financial transactions
1. Service Level Agreement
  
  During the Plan Year, the Trustee, as part of ongoing monitoring reviewed the existing service agreement with its third party administrator. The agreement contains service levels setting out the required turnaround times of all core financial transactions.
2. Monitoring
  
  The processing of core financial transactions is regularly monitored (quarterly) by the Trustee via our administrators, who have implemented internal control procedures that help ensure that core financial transactions are processed promptly and accurately. These include controls and procedures to manage the receipt and timely investment of contributions, the accuracy of investment allocations, payments of benefits as well as the individual transfers out and investment switches managed as part of the life-styling arrangements.
  
  To help gain assurances that administration is dealt with promptly and accurately we undertake the following exercises with input from our administrator:
  - Monitoring services against service level agreements;
  - Review administration reports on a quarterly basis; and
  - Quarterly reconciliation of investments.
    
    The Trustee, having considered these reports, has concluded that, until the end of 2019, the Plan’s core financial transactions had overall been processed promptly and accurately during the period covered by this statement.
3. Accuracy of record keeping and data security
  
  The Trustee reviews the accuracy of record keeping on an ongoing basis. A last formal review was undertaken in June 2017. The Trustee put in place plans for any areas of improvement identified, documented any risks identified and agreed processes with the Plan administrator for ongoing data monitoring, reporting and dealing with errors.
  
  From 25 May 2018, legislation was introduced in relation to data protection, ownership of data and data privacy, EU General Data Protection Regulation (“GDPR”). The Trustee, in conjunction with its legal advisers, Plan administrator and Fremantle, initiated a workstream devoted to preparing for its introduction and ongoing compliance. The Trustee actioned the following in order to have all processes and procedures in place by 25 May 2018:
  - Issued data processing questionnaires to the Plan administrator
  - Updated the Trustee privacy statement
  - Reviewed Plan administrator and external advisers, auditors and provider contracts
  - Updated wording in member communications
  - Reviewed and updated processes for member consent, where required
  - Drafted and adopted a Trustee data protection policy
  The Trustee continues to test the policy to ensure ongoing compliance. All of the above is captured in the Trustee’s risk register.

Charges and Transaction costs

Charges borne by the members

The Trustee calculated the Total Expense Ratio charges and, as far as they were able to do so, the transaction costs, borne by members during the Plan Year. Transaction costs and charges borne by members may have a significant impact on their pension savings, so it is important we keep the levels of these deductions under review.

The administration charges for the Plan are met by Fremantle and therefore are not charged to individual members’ investment accounts. The expenses which are met by the members are the investment management charges levied by the investment managers.

The member borne charges for the Plan’s default arrangements complied with the charges cap during the Plan Year.

Default Lifestyle Option arrangement

During the Plan Year the Total Expense Ratio charges that applied to the Default Lifestyle Option:

were a total of 0.37% per annum in the period prior to 10 years before the member’s selected retirement date
ranged from 0.37% to 0.29% per annum over the de-risking period for the 10 years before the member’s selected retirement date.

Legacy Lifestyle Option arrangement

During the Plan Year the Total Expense Ratio charges that applied to the Legacy Lifestyle Option:
were a total of 0.26% per annum in the period prior to 6 years before the member’s selected retirement date
ranged from 0.26% to 0.13% per annum over the de-risking period for the 6 years before the member’s selected retirement date.

Self-select funds

The Total Expense Ratio charges and transaction costs for the self-select funds currently available are set out in the table below:

Fund Name	Total Expense Ratio Charges (% p.a.)	Average transaction costs (% p.a.)
LGIM Fremantle Consensus Index Fund	0.257	0.022
LGIM Fremantle UK Equity Index Fund	0.132	-0.016
LGIM Fremantle Ethical UK Equity Index Fund	0.206	0.011
LGIM Fremantle World (ex UK) Index Fund	0.224	-0.005
LGIM Fremantle Over 5y Index-Linked Fund	0.079	0.055
LGIM Fremantle Cash Fund	0.125	0.004
LGIM Fremantle Bond Fund	0.128	-0.011
LGIM Fremantle Global Equity MW (50:50) Fund	0.183	-0.010
LGIM Fremantle Global Equity MW (30:70) Ind Fund – 75% GBP Currency Hgd	0.213	0.039
LGIM Fremantle Investment Grade Corp Bond – All Stocks Index Fund	0.151	-0.026
LGIM Fremantle All Stocks Index-Linked Gilts Fund	0.100	0.052
LGIM Fremantle BlackRock Aquila Life Market Advantage (ALMA) Fund	0.526	0.041

Transaction costs

With effect from 3 January 2018, firms that manage money on behalf of DC workplace pension schemes were required, on request, to provide information about administration charges and transaction costs. In addition to this, new measures require the disclosure of costs, charges and investments in occupational DC schemes.

The Trustee has requested, via its advisers, transaction costs information, covering each of the past five scheme years, for every fund in the Plan’s fund range, from the Plan’s investment platform provider Legal & General Investment Management (“LGIM”). However, as these are new regulations investment managers have not previously had the processes in place to monitor transaction costs as such it has only been possible to obtain 24 months’ transaction cost information. Where we have been able to obtain transaction costs information, we have provided this in section 4.i) above.

Where the transaction cost is a negative number, this means the returns on the fund have been positively affected by the transaction costs.
Illustrations of the effect of costs and charges on members’ retirement outcomes

In order to achieve greater transparency about costs, new regulations came into force on 6 April 2018 which require the Trustee to provide members with additional information in relation to investment charges and core transaction costs. These must be set out as example member illustrations that have been prepared with regard to the relevant statutory guidance: Reporting of costs, charges and other information: guidance for trustees and managers of relevant occupational schemes.

The illustrations for Plan members are set out and explained on pages 8-9 of this Chair’s Statement.
Value for members

In accordance with the Pensions Regulator’s current DC Code of Practice and with the relevant legislation available at the time of this statement, the Trustee has concluded that the Plan’s overall benefits and options represent value for money for the following reasons:
- The members are not charged for the administration costs of the Plan and the Total Expense Ratio of the investments available is relatively low;
- Administration quality and turnaround times are reviewed against stated service levels;
- Charges for the Plan’s Legacy and Default Lifestyle Option investment strategies are below the charge cap of 0.75% a year;
- Investment performance is regularly reviewed and action is taken where regular underperformance is observed;
- Investment strategy is reviewed on a triennial basis or before if required, action is taken where the current strategy is underperforming, not compliant with legislation and/or does not meet the needs of the membership;
- Members have access to various asset classes;
- Members have access to plan documents via a plan microsite and
- Communications issued to members from time to time provide an understanding of legislative changes.
Trustee knowledge and understanding (TKU)
1. Trustee training
  
  Upon appointment and subsequently, we are required to maintain appropriate levels of trustee knowledge and understanding, both individually and collectively. The Trustee reviews current pension developments at each meeting and receives training from the advisers.
  
  In summary the Trustee has met the requirements of the Pensions Act 2004 for trustee knowledge and understanding by:
  - Meeting periodically with advisers in attendance to ensure the Trustee remains abreast of key issues and developments;
  - Receiving bespoke formal training periodically for example Environmental, Social and Governance (‘ESG’) investing; and
  - Having the objective to work through some or all of the Pensions Regulator’s Trustee toolkit.
2. Trustee experience and skills

The Trustee board directors collectively have a wealth of knowledge and expertise across a number of areas. Each member of the Board has different skills which provide for an overall strong composition, enabling the Trustee to address the following areas:

Finance: experience of adopting a methodical approach to business strategy (including outside the Trustee role), enabling the Trustee to consider how to monitor and develop the Trustee's relationship with Fremantle and third parties such as the Plan administrator;

HR and member Insights: looking at all Trustee decisions from a member perspective, enabling the Trustee to consider the impact of their decisions on members and to challenge existing processes, procedures and communication channels to meet member needs.

Pensions Trusteeship: experience of liaising with investment managers and advisers on expectations and actual experience of changes to funding, covenant and asset values including understanding the impact for members, Fremantle and Trustee;

Legal: understanding of legal obllgations and also entitlements as regards the Trustee, Its trust law duties and contractual commitments, enabling the Trustee to challenge third parties (indudlng Fremantle and advisers);

In addition to the skllls within the Trustee board, we have also appointed a number of professional advisers who provide specialist support and advice. This includes our Plan's actuaries, lawyers, auditors and investment consultants.

Actuarial, investment and DC pension advisers – lsio (formerly KPMG Pensions) Legal advisers – Shoosmlths

Auditor – Crowe (formerly CCW)

Pooling all these resources means that the Trustee board Is well equipped to exercise our functions as trustees and manage the Plan effectively.

Signed by the Chair of the Trustee on behalf of the Trustee

Name: ANDREW BOTT

Appendix

Illustrations of the effect of costs and charges

Background

The next few pages contain illustrations about the cumulative effect of costs and charges on member savings within the Plan over a period of time. The illustrations have been prepared having regard to statutory guidance.

As each member has a different amount of savings within the Plan and the amount of any future investment returns and future costs and charges cannot be known in advance, the Trustee has had to make a number of assumptions about what these might be. The assumptions are explained in the Notes section below the illustrations.

Members should be aware that such assumptions may or may not hold true, so the illustrations do not promise what could happen in the future. This means that the information contained in this Chair’s Statement is not a substitute for the individual and personalised illustrations which are provided to members each year by the Plan.

Key points to note

The tables below illustrate the potential impact that costs and charges might have on different investment options provided by the Plan. Not all investment options are shown – the Trustee has chosen a number of illustrations which they believe will provide an appropriate representative sample of the different investment choices that members can make.

In each of the illustrations, the “Before charges” column gives the hypothetical value of the investments if members were able to invest in funds at no cost. However, there will always be some cost to investing. This is because the organisations which manage the funds charge fees for their services, and also because buying and selling the stocks and shares which drive the funds’ performance also has a cost. The “After all costs and charges deducted” column reflects the performance of the funds after these costs have been deducted.

In the illustrations, we have shown the projections for the following:

The default lifestyle strategy
The fund most used by members and highest expected return (LGIM Fremantle World (ex UK) Index)
The fund with the highest charge (LGIM Fremantle BlackRock Aquila Life Market Advantage (ALMA))
The fund with the lowest charge (LGIM Fremantle UK Equity Index)
The fund with the lowest expected return (LGIM Fremantle Over 5y Index-Linked)

Member projections – the default lifestyle strategy

The table below sets out how the pension pot of a member currently aged 30 will increase over time, with and without charges. Please see the Notes below for more details.

	30 year old, with a starting pot of £41,500 and no future contributions
Years from 31/12/2019	Before charges	After all costs and charges deducted
1	£42,359	£42,189
3	£44,130	£43,601
5	£45,976	£45,061
10	£50,935	£48,927
15	£56,428	£53,125
20	£62,514	£57,683
25	£69,257	£62,633
30	£75,186	£66,701
35	£77,563	£67,656

Notes

Projected pension pot values are shown in today’s terms, and do not need to be reduced further for the effect of future inflation

Retirement is assumed to be at age 65
The starting pot size is assumed to be £41,500
Inflation is assumed to be 2.5% each year
No future contributions are included within the illustration
Values shown are estimates and are not guaranteed
The charges and transaction costs assumed for each fund are those as shown in the Chair's Statement
The projected growth rates in relation to inflation for the default strategy at various periods to retirement are:

2.1% for periods up to 10 years to retirement 1.5% for 7 years to retirement, reducing to 0.9% for 4 years to retirement, reducing to 0.0% at retirement age

Member projections – Individual fund projections

The tables below set out how the pension pot of a member currently aged 30 will increase over time, with and without charges for a range of the Plan’s funds. Please see the Notes below for more details.

	LGIM Fremantle World (ex UK) Index		BlackRock Aquila Life Market Advantage
Years from 31/12/2019	Before Charges	After all costs and charges deducted	Before Charges	After all costs and charges deducted
1	£42,548	£42,456	£42,175	£41,939
3	£44,722	£44,436	£43,558	£42,832
5	£47,009	£46,508	£44,986	£43,744
10	£53,249	£52,120	£48,765	£46,108
15	£60,317	£58,409	£52,861	£48,601
20	£68,323	£65,457	£57,301	£51,229
25	£77,392	£73,355	£62,114	£53,998
30	£87,665	£82,207	£67,332	£56,918
35	£99,302	£92,127	£72,987	£59,995

	LGIM Fremantle Investment Grade Corporate Bond All Stocks Index		LGIM Fremantle Over 5y Index-Linked
Years from 31/12/2019	Before Charges	After all costs and charges deducted	Before Charges	After all costs and charges deducted
1	£41,272	£41,220	£40,827	£40,772
3	£40,820	£40,666	£39,515	£39,353
5	£40,373	£40,120	£38,244	£37,984
10	£39,276	£38,785	£35,244	£34,765
15	£38,209	£37,495	£32,480	£31,820
20	£37,171	£36,248	£29,932	£29,124
25	£36,161	£35,042	£27,584	£26,656
30	£35,179	£33,877	£25,420	£24,397
35	£34,223	£32,750	£23,426	£22,330

Notes

Projected pension pot values are shown in today’s terms, and do not need to be reduced further for the effect of future inflation
Retirement is assumed to be at age 65
The starting pot size is assumed to be £41,500
Inflation is assumed to be 2.5% each year
No future contributions are included within the illustration
Values shown are estimates and are not guaranteed
The charges and transaction costs assumed for each fund are those as shown in the Chair's Statement.
The projected growth rates (net of inflation) for each fund are shown in the table below:

Fund	Return assumption above inflation (% p.a.)
LGIM Fremantle World (ex UK) Index Fund	2.52
LGIM Fremantle BlackRock Aquila Life Market Advantage (ALMA) Fund	1.63
LGIM Fremantle Investment Grade Corporate Bond All Stocks Index Fund	-0.55
LGIM Fremantle Over 5y Index-Linked Fund	-1.62