Risk / Policy

Definition

Policy

Actions over reporting period

Interest rates and inflation

The risk of mismatch between the value of the Scheme’s assets and present value of the liabilities from changes in interest rates and inflation expectations.

To hedge 50% of the impact of interest rates and inflation on the value of the Scheme’s liabilities (measured on a gilts basis).

The Trustee agreed during the accounting year to rebalance the Scheme’s LDI mandate to a new target hedge ratio of 65% (on a gilts flat basis) against changes in inflation and interest rates, based on updated cashflows from the Scheme Actuary.

This change will be reflected in the SIP once implemented.

Liquidity

Difficulties in raising sufficient cash when required without adversely impacting the fair market value of the investment.

To maintain a sufficient allocation to liquid assets so that there is a prudent buffer to pay members benefits as they fall due (including transfer values), and to provide collateral to the LDI manager.

The Trustee monitors the Scheme’s liquidity position as part of quarterly performance reporting.

Market

Experiencing losses due to factors that affect the overall performance of the financial markets.

To remain appropriately diversified and hedge any unrewarded risks (e.g. interest rates, inflation), where affordable and practicable.

The Trustee agreed to:

-               A new allocation to a semi-liquid credit mandate of 15% of Scheme assets; and

-               Rebalance the LDI portfolio, to protect against interest rates and inflation.

Both allocations also serve to increase the Scheme’s overall level of diversification and will be implemented in early 2021.

These changes will be reflected in the SIP once implemented.

Risk / Policy

Definition

Policy

Actions over reporting period

Credit

Default on payments due as part of a financial security contract.

To diversify this risk by investing in a range of credit markets across different geographies and sectors.

As mentioned above, the Trustee agreed to a new semi-liquid credit mandate to be implement in early 2021.

This change will be reflected in the SIP once implemented.

No other Trustee actions or amendments were implemented over the reporting period in respect of credit risk.

Environmental, Social and Governance (ESG)

Exposure to ESG factors, including but not limited to climate change, which can impact the performance of the Scheme’s investments.

To appoint managers who satisfy the following ESG criteria, unless there is a good reason why the manager does not satisfy each criteria:

1. Responsible Investment (‘RI’) Policy / Framework

2. Implemented via Investment Process

3. A track record of using engagement and any voting rights to manage ESG factors

4. ESG specific reporting

5. UN PRI Signatory

The Trustee monitors the managers on an ongoing basis.

The ESG policy was reviewed by the Trustee as part of the SIP update in September 2020.

The Trustee is expected to receive training on the investment managers’ ESG policies over the next 12 months, in the form of an ‘Impact Assessment’.

Currency

The potential for adverse currency movements to have an impact on the Scheme’s investments.

The Scheme’s diversified growth and credit mandates hedge all currency risk back to Sterling.

No Trustee actions or amendments were implemented over the reporting period in respect of currency risk.

Non-financial

Any factor that is not expected to have a financial impact on the Scheme’s investments.

Non-financial matters are not taken into account in the selection, retention or realisation of investments.

No Trustee actions or amendments were implemented over the reporting period in respect of non-financial risks.

Policies added to the SIP

Date updated: 28 September 2020

How the investment managers are incentivised to align their investment strategy and decisions with the Trustee’s policies.

As the Scheme is invested in pooled funds, there is not scope for these funds to tailor their strategy and decisions in line with the Trustee’s policies. However, the Trustee invests in a portfolio of pooled funds that are aligned to the strategic objective.

How the investment managers are incentivised to make decisions based on assessments of medium to long-term financial and non-financial performance of an issuer of debt or equity and to engage with them to improve performance in the medium to long-term.

The Trustee reviews the investment managers’ performance relative to medium and long-term objectives as documented in the investment management agreements.

The Trustee monitors the investment managers’ engagement and voting activity as part of their ESG monitoring process.

The Trustee does not incentivise the investment managers to make decisions based on non-financial performance.

How the method (and time horizon) of the evaluation of investment managers’ performance and the remuneration for their services are in line with the Trustee’s policies.

The Trustee reviews the performance of all the Scheme’s investments on a net of cost basis to ensure a true measurement of performance versus investment objectives.

The Trustee evaluates performance over the time period stated in the investment managers’ performance objective, which is typically 3 to 5 years.

Investment manager fees are reviewed annually to make sure the correct amounts have been charged and that they remain competitive.

The method for monitoring portfolio turnover costs incurred by investment managers and how they define and monitor targeted portfolio turnover or turnover range.

The Trustee does not directly monitor turnover costs. However, the investment managers are incentivised to minimise costs as they are measured on a net of cost basis.

The duration of the Scheme’s arrangements with the investment managers.

The duration of the arrangements is considered in the context of the type of fund the Scheme invests in:

- For open ended funds, the duration is flexible, and the Trustee will from time-to-time consider the appropriateness of these investments and whether they should continue to be held.

Areas for engagement

Method for monitoring and engagement

Circumstances for additional monitoring and engagement

Environmental, Social, Corporate Governance factors and the exercising of rights and engagement activity

The Trustee’s investment managers provide annual reports on how they have engaged with issuers regarding social, environmental and corporate governance issues.

The Trustee will obtain regular training on ESG considerations in order to understand fully how ESG factors including climate change could impact the Scheme and its investments.

As part of ongoing monitoring the Trustee will use any ESG ratings information provided by its investment consultant to assess how the Scheme’s investment managers take account of ESG issues.

As part of any manager selection exercise, ESG considerations are included as part of the evaluation criteria.

The manager has not acted in accordance with their policies and frameworks.

The manager has received a ‘red’ ESG rating from the investment consultant, signifying that ESG considerations are below satisfactory.

Manager and Fund

Engagement summary

Commentary

ASI Liability Aware Absolute Return Fund

ASI are currently unable to provide quantitative engagement data at the Fund-level.

ASI are looking to align their Fund engagement reporting with the Investment Consultant Sustainability Working Group (‘ICSWG’) reporting template once finalised later in 2021.

The Fund’s engagement is restricted due to the LDI exposure being implemented by using gilts and swaps, and the growth engine part of the fund being implemented synthetically. However, ASI’s research teams perform ESG analysis on their counterparties at firm level (including any engagement) as part of the credit review provided to the ASI Credit Committee. The analysis is reviewed by the committee on a regular basis as one of the factors to approve a new counterparty or to approve the continued use of an existing counterparty – including ongoing inclusion on the ASI derivative panel.

At a firm level, ASI view ESG considerations as fundamental to how they invest. ASI believe that ESG factors are financially material and can meaningfully impact an asset’s performance, and that an asset’s ability to sustainably generate returns for investors is dependent on its ability to manage its relationship with the environment, its relationship with society and stakeholders, and on the way it is governed.

ASI also produce a quarterly global ESG investment report which summarises the voting and engagement at a firm-wide level.

Baillie Gifford Diversified Growth Fund

Total engagements: 34

Meeting (AGM or EGM) Proposals: 17

Corporate Governance: 12

Environmental/Social: 4

Executive Renumeration: 1

The Fund invests in a wide variety of underlying direct assets, pooled funds and investment trusts, some of which are operated by third parties. Active engagement is therefore difficult as the team cannot directly influence ESG policy or voting on securities not held directly.

Baillie Gifford list the primary reasons for ESG engagement as: fact finding, monitoring progress, exerting influence and supporting the management team. The team prefer to encourage changes through engagement and dialogue rather than exclusion or divestment.

Examples of significant engagements include:

Boussard & Gavaudan Holding Limited – Concerns were raised over the management of the fund, as the discount of the share price to net asset value increased steadily over the year. The Board proposed to convert all existing shares to an unlisted, open-ended share class which they would be unable to exit for three years, with subsequent restrictions on withdrawals. Baillie Gifford expressed concerns on the lack of shareholder engagement on this issue, and engaged with the chairman, manager and other shareholders to communicate their preference for the fund to be wound up and capital returned to shareholders. The Board eventually provided a follow-up proposal giving shareholders the option to convert their shares to a new pooled fund on a like-for-like basis. While this was not the outcome hoped for, Baillie Gifford voted in favour and the fund remains in the portfolio on the expectation that promised governance improvements and a rationalised shareholder base, will enable the discount to continue to narrow.

Hammerson plc – The company proposed changing its long-term incentive plan from being performance based to a restricted stock plan whereby executives are granted shares which have to be held for several years, with the amount available halved to what was previously received. Baillie Gifford highlighted concerns of proposed lack of performance conditions and engaged with the company that they would like to see greater assurance on preventing rewards for failure. Baillie Gifford suggested that the company should disclose a detailed framework that the renumeration committee would use to determine whether executives should receive a reward. This engagement resulted in the inclusion of a detailed framework of assessment in the restricted stock plan and the company then took this proposal forward to a vote at the AGM, which Baillie Gifford voted in favour of. Baillie Gifford also engaged with Hammerson in relation to their governance and sustainability strategy. Baillie Gifford believe they have robust governance structures and provided feedback on the company’s reporting and sustainability targets.

M&G Alpha Opportunities Fund

Total engagements: 9

Environmental and Governance: 1

Environmental: 4

Governance: 4

M&G have a systematic approach around engagements in which specific objectives are outlined in advance and measured based on the outcomes from the engagements.

Where engagements are deemed to be necessary, analysts engage with issuers supported by M&G’s CF&S Team, allowing them to leverage their expertise and sustainability themes. M&G monitor the success of engagement by assessing whether they have met their objective and log this in a central system.

Examples of significant engagements include:

EDF – M&G exchanged calls and emails with EDF to request further information on Brazilian Hydro Generation related issues, which had been raised within their 2019 Annual Report, in relation to both environmental and governance concerns. M&G subsequently received the level of detail they were looking for and were able to use this to better analyse the potential risks. They have become comfortable that EDF are dealing with the issue better than what was previously implied and have requested updates on these issues going forward, so that they can continue to monitor the situation.

Heathrow Airport – M&G engaged with management and insiders through several meetings on proposed covenant waivers and amendments related to COVID-19 impact. M&G asked shareholders to inject further equity to support the business’ liquidity throughout the period, but they were not successful. However, M&G did ensure that bondholders were treated as fairly as possible following various engagements with management, and that consent fees were not coercive in nature.

LGIM LDI and Gilts

Partly due to the nature of the Fund, LGIM are not able to provide engagement data, however have engaged with a number of industry participants, including government, on long term strategic issues in relation to LDI, including:

-               The introduction of central clearing;

-               The LIBOR transition;

-               Recognising the pricing issues with bilateral RPI swaps.

LGIM leverage the wider capabilities of the global firm to engage with companies. The team also regularly engage with regulators, governments and other industry participants to address long term structural issues, aiming to stay ahead of regulatory changes and adopt best practice.

LGIM Cash Fund

LGIM currently do not provide details of their engagement activities at the Fund level, however, this is something they are looking to implement going forwards.

Isio remains in contact with LGIM surrounding the firm’s engagement reporting.

LGIM’s Investment Stewardship team are responsible for engagement activities across all funds. LGIM share their finalised ESG scorecards with portfolio companies and the metrics on which they are based.

Given the nature of the Fund, we believe engagement is somewhat limited, and is conducted with underlying counterparties and banks as opposed to investee companies.

Fund name

Engagement summary

Examples of significant votes

Commentary

Baillie Gifford Diversified Growth Fund

Meetings eligible to vote for: 97

Resolutions eligible to vote for: 877

Resolutions voted on: 94.5%

Resolutions voted with management: 92.9%

Resolutions voted against management: 5.7%

Resolutions abstained from: 1.5%

EDP – Baillie Gifford voted against the election of a director as they believed there was a lack of diversity and independence on the Board. Baillie Gifford’s ability to influence the company is limited due to the fact that the company has a 82% controlling shareholder, however they have raised these concerns to the company multiple times and continue to take action where possible, as they believe it important to hold the board accountable regarding their concerns.

Covivio REIT – Baillie Gifford opposed five resolutions regarding the in-flight in relation to remuneration and proposed long-term incentive scheme because they believed it could lead to rewarding under-performance. They informed the company of their voting decision and advised them that they expect to see more stretching performance criteria for long-term objectives going forward and continue dialogue to improve targets.

Gecina – Baillie Gifford voted against three resolutions relating to renumeration as they believed there was not sufficient alignment between pay and performance.

All voting decisions are made by Baillie Gifford’s Governance & Sustainability team in conjunction with investment managers. Baillie Gifford analyses all meetings in-house and in line with their Governance & Sustainability Principles and Guidelines.

Whilst they are cognisant of proxy advisers’ voting recommendations (Institutional Shareholder Services (ISS) and Glass Lewis), they do not delegate or outsource any stewardship activities or follow or rely upon their recommendations when deciding how to vote. They also have specialist proxy advisors in the Chinese and Indian markets to provide more nuanced market specific information.