Chair’s Statement for the Spar (UK) Limited Pension Fund for the year ended 30 April 2019

Welcome to the annual Chair’s Statement for the Spar (UK) Limited Pension Fund (the Fund).  This statement relates to the defined contribution (DC) section of the Fund and covers the requirements set out in the Occupational Pension Schemes (Scheme Administration) Regulations 1996 (‘the Administration Regulations’). It also incorporates the requirements relating to the disclosure and publication of the level of charges and transaction costs within the Occupational Pension Schemes (Administration and Disclosure) (Amendment) Regulations 2018 [SI 2018/233] (‘the 2018 Regulations’), which amends the Administration Regulations to reflect these new requirements.

This Statement will be available online on the Spar (UK) Limited website, www.spar.co.uk.

The DC section of the Fund closed to new contributions from 1 May 2004 and therefore does not provide a default arrangement under the meaning of regulation 3 of the Occupational Pension Schemes (Charges and Governance) Regulations 2015 for automatic enrolment purposes or the meaning of regulation 2A of the Occupational Pension Schemes (Investment) Regulations 2005.    The Fund is not being used as a qualifying scheme for automatic enrolment purposes.

The Trustees are in the process of winding-up the DC section of the Fund and securing members’ benefits outside of the Fund.

Investment arrangements

Members’ pension pots within the DC section are invested through Scottish Equitable operating as Aegon Asset Management (‘Aegon’).  At the time of initial investment, members’ pots were invested in the Universal Lifestyle Collection Fund.  All but one member remain invested in this fund.  One member, who has passed his normal retirement age and not yet taken receipt of his benefits, has reached the end of the lifestyle phase and so his pot has been moved into the Scottish Equitable Retirement Fund.

Members may choose to invest in other funds within Aegon’s single priced fund range, of which there are currently 373 other fund options.  These options have not specially been selected by the Trustees, but should a member wish to invest in any, they are asked to contact the Trustees.  The Trustees will then make a decision as to whether to select the requested fund and make it available within the Fund; however, these have not been selected by the Trustees.  Within the annual benefit statements, members are informed that they must speak to the Trustees if they want to change their investment funds. 

The objective of the Universal Lifestyle Collection Fund is to provide investment growth by investing in return seeking assets in a moderate risk diversified portfolio, followed by a gradual switching of assets to lower risk assets during the 6 years before the members’ retirement ages to minimise risk and target an asset mix that matches the cost of taking maximum tax free cash and purchasing an annuity with 75% of the member’s pot.  It offers a mix of active and passive fund management, which means it doesn’t rely on the performance of one manager or management style alone.

The Universal Lifestyle Collection Fund strategy has three stages:

  • The Growth Stage – If a member is 6 or more years away from his or her chosen retirement date, their investment account is invested in the Universal Balanced Collection.  The Universal Balanced Collection invests at least 60% of its asset allocation in UK and overseas equities;

 

  • The Lifestyle Stage – Over the 6 years before a member’s retirement age, their investment account is progressively switched into the Long Gilt Fund.

 

  • The Pre-Retirement Stage - Within one year of their target retirement date, members are automatically switched into the Scottish Equitable Retirement Fund.  This fund invests 75% in the Long Gilt Fund and 25% in the Cash Fund to help protect the purchasing power of members’ funds, whilst also allowing for members to take their maximum tax-free cash sum at retirement.  Members’ funds will remain invested in this proportion until they decide otherwise.

 By investing in this manner, the Trustees expect the lifestyle fund to deliver growth without excessive risk taking, with an increased focus in the years approaching retirement of reducing volatility to enable members to make financial plans for the period after retirement. 

The DC section is in the process of being wound up and it is expected that members’ benefits will be secured with an insurer within the next year.  As a result, the Trustees have not carried out any formal review of the funds that members are invested in or of the continued appropriateness of the structure of the lifestyle strategy in the scheme year.  The last full review of performance was carried out as at 31 May 2013 and the last review of strategy was carried out in August 2013.  At that point, it was decided that the Trustees would seek advice on how to wind-up the DC section.

Over the last 5 years, the Trustees believe that the Universal Lifestyle Collection Fund has achieved its objective as it has exceeded its benchmark of broadly matching the performance of the Association of British Insurers (ABI) Mixed Investment 40% - 85% Shares sector average. 

Processing Fund transactions

The Trustees have a specific duty to ensure that core financial transactions (transfer of member assets out of the Fund, transfers between different investments within the Fund and payments to and in respect of members) relating to the DC section are processed promptly and accurately.

These transactions are undertaken on the Trustees’ behalf by the Fund administrator, Hughes Price Walker Limited (HPW), and Aegon as fund manager.  The DC section of the Fund is closed and therefore no contributions or transfers are paid into the DC section.  HPW administers the Scheme in accordance with set service levels, which cover the accuracy and timeliness of all core financial transactions.  The processes adopted by HPW to help meet these service levels include comprehensive checklists, regular monitoring of bank accounts and authoriser and releaser process for transactions.

No core financial transactions have been processed in the DC section of the Fund within the scheme year.

With effect from April 2019, the Trustees receive reports of performance against service levels at the Trustees’ meetings and these reports, together with regular conversations with HPW are used to help monitor HPW’s performance.  HPW is accredited with ISO 9001 certification and is subject to an annual audit of their procedures. 

The Scheme’s accounts are audited annually by Paul Crowdy Partnership.

The Trustees are confident that all of the required processes and controls are in place to ensure that the DC section is compliant with the Regulator’s Code of Practice 13 on DC governance.  

Charges and transaction costs

The Administration Regulations require the Trustees to make an assessment of charges and transaction costs borne by DC section members and the extent to which those charges and costs represent good value for money for members.

Once members reach The Lifestyle Stage within the Universal Lifestyle Collection Fund, members are automatically switched to the lifestyle fund that is matched to the year they reach their target retirement age (TRA).  The table below shows the charges and transaction costs of all funds members are currently invested in during the Scheme year:

Fund name

Members invested

Annual Management Charge (%)

Additional expenses (%)

Transaction costs (%)

Universal Lifestyle Collection

Members aged more than 6 years from TRA

1.00

0.02

0.13

Retirement Fund

Members aged over TRA

1.00

0.00

0.06

SE Universal 2018

Members with TRA in 2018

1.00

0.00

0.06

SE Universal 2020

Members with TRA in 2020

1.00

0.01

0.11

SE Universal 2024

Members with TRA in 2024

1.00

0.01

0.12

SE Universal 2025

Members with TRA in 2025

1.00

0.02

0.13

There is no administration charge if members decide to transfer to another provider. 

Value for money for members

The Trustees are satisfied in the Universal Lifestyle Collection Fund’s performance and its ability to achieve its aim of broadly matching the performance of the Association of British Insurers (ABI) Mixed Investment 40% - 85% Shares sector average.  Over the last 5 years, the lifestyle fund has exceeded its benchmark.  

The Trustees have considered the following points in order to assess whether the DC section of the Fund provides good value for members:

  • A comparison of the charges borne by members against the levels of return; and
  • A comparison of the charges borne by members (‘the costs of membership’) against the services and benefits provided by the DC section (‘the benefits of membership’).  The benefits of membership include, amongst other things:
    •  the design of the lifestyle strategy and how this reflects the interests of members;
    • the choice of funds provided to members;
    • the options at retirement;
    • the efficiency of administration processes;
    • the quality of communications delivered to members; and
    • the quality of support services and Scheme governance.

 

The Trustees have assessed the charges disclosed by Aegon and are satisfied that the DC section of the Fund represents reasonable value for members in the context of the outcomes targeted by the lifestyle and retirement fund and the current market rates for similar investments levied on members of schemes with a similar membership profile. 

 

The members have a wide range of investment options available and the administration of the Fund is carried out effectively.  However, other DC options available in the market could provide more choice regarding lifestyling approach, retirement options and more wide-ranging communication and on-line access.  The Trustees recognise this and are in the process of winding up the DC section of the Fund and transferring members’ benefits to an alternative arrangement.

 

The Trustees have set up processes to publish relevant information on the costs and charges of the funds and to notify members about this in their annual benefit statements. 

 

Illustrative impact of costs and charges

Illustrative examples of the cumulative effect of costs and charges incurred by a typical member up to retirement age are shown within the table below.  The table shows the projected pension pot, both before and after charges are deducted, for a member aged 50 whose starting pot is assumed to be £35,000.  These illustrations have been calculated in line with the statutory guidance.

Projected pension pot in today’s money for a member aged 50 (£)

Years

Before charges deducted

After all charges deducted

1

36,385

35,966

3

39,321

37,980

5

42,494

40,106

10

46,894

41,772

Notes on projected scenario calculation:

  1. Projected pension pot values are shown in today’s money and do not need to be further adjusted for inflation.
  2. Starting pot size is assumed to be £35,000 at age 50.
  3. Age 50 is the approximate average of all members of the DC section.
  4. Target Retirement Age is assumed to be the member’s 60th
  5. No further contributions are paid into the pot.
  6. Inflation is assumed to be 2.5% each year.
  7. Values shown above are estimates and are not guaranteed.
  8. The example member is assumed to be invested in line with the lifestyle strategy.
  9. The projected growth rates for the funds under the lifestyle strategy are assumed to be as follows:
    • Universal Balanced Collection: 4.1% above inflation
    • Long Gilt: 0.1% below inflation
    • Cash: 0.5% below inflation

These growth rates are used to calculate the pension pots before charges are deducted.

Trustees’ knowledge and understanding

Sections 247 and 248 of the Pensions Act 2004 set out the requirement for Trustees to have appropriate knowledge and understanding of the law relating to pensions and trusts, the funding of occupational pension schemes, investment of Fund assets and other matters to enable them to exercise their functions as Trustees properly.  This requirement is underpinned by guidance in the Pension Regulator’s Code of Practice 07: Trustee knowledge and understanding (TKU).  The comments in this section relate to the Trustees as a body in dealing with the whole Fund and are not restricted to the DC section.

The Trustees have put in place arrangements for ensuring that they take personal responsibility for keeping themselves up-to-date with relevant developments and carry out a self-assessment of training needs.  The Trustees discuss training needs as a group and will take appropriate training from their appointed advisers when required.  In addition, the Trustees receive advice from professional advisers, and the relevant skills and experience of those advisers is a key criterion when evaluating adviser performance or selecting new advisers.  The Trustees also receive training at Trustee meetings from their advisers and will attend external training courses and conferences to improve their knowledge when needed.

A professional trustee and a new individual trustee with pensions experience were appointed to the Scheme on 11 April 2019, replacing two former trustees.  All key Fund documentation was circulated to the Trustees upon their appointment and is available upon request from HPW and held on a secure online portal.  A training session was also held for the new Trustees to provide them with relevant information on the background to and the current running of the Fund.  In making decisions and in the context of their routine work, the Trustees will take advice and refer to the Fund’s documentation, including the Trust Deed and Rules and the Trustees’ current policies (for example, to underline their powers and discretion).

The Trust deed and rules is saved centrally for Trustees to view and it is referenced in trustee meetings where relevant.  The Trustees have access to the Scheme documents and policies and refer to these as required in meeting.  This includes the Statement of Investment Principles (SIP) which is taken into account in Trustee discussions on the investment strategy.  These actions mean that the Trustees have sufficient knowledge and understanding of trust law and pension legislation, as well as having good working relationships with their professional advisers that lead to the Trustees obtaining a good working knowledge and understanding of the principles relating to scheme funding and investment.

One of the existing Trustees completed the Pensions Regulator’s Trustee Toolkit in August 2019.  The other two Trustees are in the process of completing it and have committed to complete the training within the next 6 months.  New Trustees are expected to complete this within six months of taking up office.  The Trustee Toolkit provides modular online training designed to help Trustees understand the aspects of governance, legal requirements, funding and investment that are essential in running a pension scheme effectively. 

The addition of a professional trustee who has worked in the pensions industry as an actuary for over 17 years, gives the trustee body as a whole, access to additional technical and market knowledge.  This also ensures that the Trustees have the confidence and knowledge to challenge advisers appropriately and understand when additional advice is required.

Taking account of actions taken individually and as a trustee body, and the professional advice available to them, the Trustees consider that they are enabled properly to exercise their functions as Trustees – that they have sufficient knowledge and understanding of the relevant law, scheme documentation and principles underlying the funding and investment of defined contribution schemes.

 

This Statement regarding DC section Governance was approved by the Trustees and signed on their behalf by:

 

 

……………………………………………………………………………………..

Chair

Signed on 26 November 2019

 

 

 

Defined Contribution Section

Investment Policy

The Trustees have appointed Aegon Asset Management (‘Aegon’) as investment manager.  At the time of initial investment, members’ pots were invested in a lifestyle fund – the Universal Lifestyle Collection Fund.  This balanced and diversified fund was chosen by the Trustees as part of a lifestyle strategy for members who intend to buy an annuity when they retire and do not wish to make their own investment decisions.  The DC section of the Fund closed to new contributions from 1 May 2004. 

The objective of the Universal Lifestyle Collection Fund is to provide investment growth by investing in return seeking assets in a moderate risk diversified portfolio, followed by a gradual and automatic switching of assets to lower risk assets close to members’ retirement ages.  It offers a mix of active and passive fund management, which means it doesn’t rely on the performance of one manager or management style alone.

Under the lifestyle strategy, members who are more than six years from their target retirement date will be invested in the Universal Balanced Collection Fund.  Over the six years before the target retirement date, members’ funds will be gradually moved to the Long Gilt Fund.  Within one year of their target retirement date, members are automatically switched into the Scottish Equitable Retirement Fund.  This fund invests 75% in the Long Gilt Fund and 25% in the Cash Fund to help protect the purchasing power of members’ funds, whilst also allowing for members to take their maximum tax-free cash sum at retirement.  Members’ funds will remain invested in this proportion until they decide otherwise.

By investing in this manner, the Trustees expect the lifestyle fund to deliver growth without excessive risk taking, with an increased focus in the years approaching retirement of reducing volatility to enable members to make financial plans for the period after retirement.

Members may choose to invest in other funds within Aegon’s single priced fund range; however, to date, no members have switched to their own strategy.  The funds offered give a range of different risk and return characteristics so that members can construct an overall portfolio suitable to provide for their pensions at retirement.  If members decide to select their own strategy, they will be responsible for choosing from the range of funds on offer.

 

 

Delegation of Investment Discretion

The Trustees have delegated day-to-day investment management to Aegon, which is regulated by the Financial Conduct Authority.  The investment manager manages the investments of the Scheme’s assets in accordance with the following objectives:

Fund

ISIN

Objective

Aegon / Scottish Equitable plc Universal Lifestyle Collection

GB0031449613

To match the performance of the Association of British Insurers (ABI) Mixed Investment 40%-85% Shares sector average.

Aegon / Scottish Equitable plc Retirement Fund

GB00B75BD853

To match the performance of the composite index consisting of 75% FTSE Actuaries UK Conventional Gilts Over 15 Years and 25% ICE LIBOR LIBID GBP 1 Week.

 

The terms of the delegation are set out in agreements between the Trustees and the investment manager. The agreement includes such matters as investment objectives, the procedures for instructions, custody of the assets, voting, fees and charges.

Realisation of Investments

The Trustees will realise assets as required following member requests on retirement or earlier where required, provided that the Trustees are satisfied they are acting in the best interest of members.  The Trustees’ policy is to invest in funds that offer daily dealing to enable members to readily realise and change their investments. 

Expected Return on Investments

The Trustees expect the return on the Universal Lifestyle Collection to exceed the return on the Retirement Fund as well as the rate of increase in prices and earnings.

The Trustees expect the return on the Retirement Fund to broadly preserve the size of pension and amount of tax free cash sum available at retirement.

Investment Management Monitoring

The appointment of the investment manager will be reviewed by the Trustees from time to time, based on the results of their monitoring of performance and process and of the investment managers’ compliance with the requirements in the Pensions Act 1995 (as amended by the Pensions Act 2004) and the criteria for investment set out in the Occupational Pension Schemes (Investment) Regulations 2005.

 

Fee Structures for Managers

Aegon’s fees are paid in relation to the size of assets managed.  The Universal Lifestyle Collection Fund and Scottish Equitable Retirement Fund are single priced contracts, each with a fixed annual management charge of 1.0%.

Defined Benefit and Defined Contribution Sections

Risk Management

The Trustees recognise and monitor a number of risks involved in the investment of the assets of the Scheme, including:

  • Solvency risk and mismatching risk:
  • is monitored through ongoing triennial actuarial valuations of the assets and liabilities, as well as more frequent interim estimates (only applicable to the defined benefit section).
  • Sponsor risk:
  • is measured by the level of ability and willingness of the Principal Employer to support the continuation of the Scheme and to make good any current or future deficit.
  • Manager risk:
  • is addressed through the performance objectives and the ongoing monitoring of the investment manager.
  • Prior to appointing an investment manager, the Trustee receives written advice from a suitably qualified individual, and will typically undertake an investment manager selection exercise.
  • Third party risk:
  • The chosen funds invest in underlying assets. If the underlying investments suspend trading, the investment managers may defer trading and / or payment to investors.  Therefore the value ultimately payable will depend on the amount the investment manager receives or expects to receive from the underlying investments.
  • Interest rate risk:
  • Changes to interest rate could affect the value of bond investments. Where long term interest rates rise, the value of bonds is likely to fall, and vice versa.
  • Risk from lack of diversification:
  • is mitigated by the Trustees investing in pooled funds with a diversified asset allocation.
  • The Trustees believe that the lifestyle strategy is adequately diversified between different asset classes and that the options provide a suitably diversified range for members to choose from.

 

  • Liquidity risk:
  • is addressed by the Scheme’s administrators monitoring the level of cash held in order to limit the impact of cashflow requirements on the investment policy.
  • is managed by using pooled funds that deal on a daily basis.
  • Currency risk:
  • is measured by the level of overseas investment and the translation effect of currencies leading to the risk of an adverse influence on investment values.
  • The Universal Lifestyle Collection Fund invests overseas so its value will go up and down in line with changes in currency exchange rates. This could have positive or negative impacts, particularly if exchange rates are volatile.
  • Credit risk:
  • This is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. The Scheme is subject to credit risk because it invests in bonds or other types of debt via pooled funds. The Trustee manages its exposure to credit risk by only investing in pooled funds that have a diversified exposure to different credit issuers.
  • Political risk:
  • is measured by the level of concentration in any one market leading to the risk of an adverse influence on investment values arising from political intervention.
  • is managed by regular reviews of the actual investments relative to policy and through assessment of the levels of diversification within the existing policy.

Whilst the risk of poor investment returns (and the cost of securing pensions at retirement) within the DC section is ultimately borne by the members, the Trustees provide members with an optional lifestyle strategy which, unless they choose otherwise, gradually moves each member’s accumulated fund into the gilt and cash funds as they approach their target retirement date.

The Trustees recognise and monitor a number of risks involved in the investment of the assets of the lifestyle strategy, specifically including:

  • Fund risk – As members’ benefits are dependent on the investment returns achieved, it is important that investment options are available which can be expected to produce adequate real returns over the longer term. The lifestyle strategy helps reduce risk by moving to less volatile assets as members approach retirement. On this basis, equity and equity-based funds, which are expected to provide positive returns above inflation over the long term, have been made available to members and feature in the growth phase of the lifestyle strategy. To reduce the chance of a sharp deterioration in members’ benefits close to retirement, the lifestyle strategy gradually reduce investment risk as the member approaches their target retirement date.
  • Derivative risk - The Universal Lifestyle Collection Fund uses derivatives to achieve its objectives. Derivatives allow the manager to buy or sell an investment at a specified future date for a specified price.  This means the fund could be exposed to additional risks if the market moves up when the manager expected it to go down or vice versa.
  • Inflation risk – The Retirement Fund is suited to short-term investment as it invests in lower risk investments, where returns are likely to be lower and not keep pace with inflation. This makes it suitable for those members within one year of, and having passed, target retirement age, in order that they can access their funds quickly.
  • Lifestyle strategy risk – Long gilts and long corporate bonds are used in lifestyle strategies because of their inverse relationship with annuity rates, which protects the purchasing power of members’ funds. However, there is a risk that the relationship can fail, for example there can be a delay between changes in long bond values and annuity rates.
  • Post-retirement risk – Where members have not taken their retirement benefits after their target retirement date, they will remain invested in the Retirement Fund. This asset mix is not designed for long-term investing and returns may not keep pace with inflation, meaning the real value of investments will fall.

Environmental, Social and Corporate Governance Matters

The Scheme’s overarching responsibility is to deliver financially sustainable returns for an acceptable level of risk to meet the future pension benefits of the members as they fall due and in a way that employer contributions paid into the Scheme are as stable and affordable as possible.

However, the Trustees also have a duty to act in the best financial interests of the Scheme’s beneficiaries and the Scheme is a long-term investor.  This includes considering Environmental, Social and Corporate Governance (‘ESG’) risks and opportunities that may be financially material to the Scheme.  The Trustees invest in pooled funds and so the assets are subject to the investment manager’s own policies on ESG considerations, including climate change.  However, we expect the investment managers to have integrated climate risk into their risk analysis and investment process and, where appropriate and practical, will take it into account when managing new and existing investment arrangements.  The Trustees manage this expectation by undertaking due diligence when appointing, monitoring, engaging with and replacing investment managers by:

  • Obtaining and familiarising with the investment managers’ Responsible Investment or Sustainability policies and implementation reports, Stewardship Code statements and the United Nations-supported Principles for Responsible Investment (PRI) statements;
  • Discussing the above documentation as a trustee board;
  • Meeting face to face with the managers (when it is appropriate to do so); and
  • Take advice from their investment consultant and seek input from other relevant parties.

 

 

The current appointed investment managers have opted to sign the PRI.  As signatories to the PRI, the investment managers have made the following commitments:

As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).

We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

The investment managers’ reports related to PRI and their statements on compliance with the Financial Reporting Council (FRC) Stewardship Code, which is seen as the UK standard for good stewardship, are reviewed by the Trustees at least once every three years.

 The Trustees do not currently take non-financial matters (e.g. member ethical views) into account when setting the Scheme’s investment policy.  This matter will be kept under review and any ethical concerns related to the Scheme’s investment portfolio received from members will be addressed, should they arise.

Exercise of rights

As the Trustees invest in pooled funds, the investment managers make decisions related to:

  • the exercise of any rights, including voting rights, attaching to the investments; and
  • engagement activities in respect of the investments.