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View Statement

  1. 1. J Sainsbury Executive Pension Scheme Statement of Investment Principles Introduction Purpose of this Statement This Statement of Investment Principles (SIP) sets out the principles governing decisions about the investment of the assets of the J Sainsbury Executive Pension Scheme (the Scheme). It has been prepared on behalf of the Scheme’s trustee, J Sainsbury Executive Pension Scheme Trustees Limited ( “the Trustee”) to comply with Section 35 of the Pensions Act 1995 (PA95). It also has been prepared in light of the Myners Review of Institutional Investment, March 2001; the Government’s subsequent recommendations; and in the light of a consultation document on investment requirements from the Department for Work and Pensions. It is effective from the date of this statement (page 5). It supersedes any SIPs previously adopted by the Trustee. Description of the Scheme The Scheme is a contributory defined benefit arrangement, providing pensions based on either final salary, career average revalued earnings, or under a cash balance arrangement. A DC underpin also applies to final salary members. The Scheme is closed to new employees. The Scheme is contracted out of the State Second Pension. Its investments are commingled in the J Sainsbury Common Investment Fund (CIF) with those of the J Sainsbury Pension and Death Benefit Scheme, the investment policies of which are consistent with those set out in this SIP. The CIF is set up as a trust, under its own trust deed and rules. The Trustee of the CIF is J Sainsbury Common Investment Fund Limited. Advice and consultation This SIP has been prepared in consultation with the Investment Committee and with Russell Investment Group (formerly Frank Russell Company Limited), the Trustee's appointed investment consultant. Russell Investment Group is authorised under the Financial Services and Markets Act 2000. The Investment Committee has, on behalf of the Trustee, consulted J Sainsbury plc ("the Company") in its preparation. Investment powers and decision making The Trustee's investment powers are set out in the Scheme's trust deed and rules. This SIP is consistent with those powers. The Trustee's decisions on investment matters are based mainly on the advice of its Investment Committee and in consultation with its appropriately authorised external advisors (specifically Russell Investment Group). The Trustee has delegated the implementation of its investment policies to the Investment Committee. The Investment Committee has in turn delegated day-to-day decisions as to which securities or other assets to buy, sell or hold to external investment managers which are authorised in accordance with PA95 and the Financial Services and Markets Act 2000. Maintaining the Statement The Trustee’s policy is to review its SIP annually, or sooner if there is reason to do so. -1-
  2. 2. Other sources This document comprises a broad statement of the Trustee’s investment principles. Further specific details on investment policies and their implementation are contained in; (i) the investment management agreements between the Trustee, the CIF, and the external investment managers appointed to manage the assets; (ii) the custody agreement between the Trustee, the CIF, and the custodian; (iii) papers prepared from time to time for the Investment Committee; and (iv) other advice from the Scheme’s advisors. Investment principles Investment objectives and risk The Trustee considers that its primary responsibility in respect of investments is to ensure, for the duration of the Scheme, that funds will be available to meet the benefit payment obligations as they fall due. Based on this responsibility and its obligation to manage the investments its investment objectives are to: 1. maximise the long-term return on its investments, consistent with the following further objectives 2. ensure that the risk of insolvency or of a loss of asset value that would be disruptive to the Scheme’s capacity to pay benefits when they fall due is controlled. 3. ensure that the risk that the scheme-specific funding level might fall below 100% is controlled to an appropriate level. In addition, the Trustee recognises that the Company has an interest in the control of the long-term cost of funding the Scheme and in the stability of the contribution rate. It therefore aims to accommodate these considerations, as appropriate, in setting its investment policies. As an example of this interest, the Company reached an agreement with the Trustee in February 2006 to improve the scheme’s funding level and agreeing a higher level of bond holdings. The Trustee recognises that risk can take may forms. For example, the Trustee may regard ‘risk’ as: • the failure to pay benefits as and when they fall due, • the likelihood of failing to achieve investment objectives (as set out above), • the failure of some investments, • the future ability or willingness of the company to pay contributions, • risks associated with actions of investment managers, and/or • custody risk. In defining, implementing and monitoring investment strategy the Trustee has taken several steps to control and minimise these risks. It considers that asset-liability mismatch risk is one of the most important measures to control in terms of risk magnitude. It therefore conducts asset/liability studies following three-yearly actuarial valuations. These focus on the impact of asset allocation on expected future funding levels. Consequent asset allocation decisions are then reviewed regularly. The Trustee considers the results using advanced modelling techniques and, with the assistance of expert advisers, is able to measure and quantify these results in terms of their definitions of risk. This allows it to assess the probabilities of funding falling below certain levels associated with different investment strategies. . -2-
  3. 3. The process of risk management continues through to implementation. For example, the investment managers are bound by the terms and conditions of an Investment Management Agreement in which investment guidelines and restrictions are formalised. These include measures of risk as defined by tracking error. The allocation of the Scheme’s investments within major asset classes is set out in appendix 1. To ensure diversification, the investment managers are required to work within specified limits of concentration in individual asset class sub-sectors and securities. Risks associated with investment manager performance are addressed through a regular review process. Operational risks associated with the safekeeping of the Scheme’s assets are managed through the employment of a custodian. Expected return The majority of the Scheme’s liabilities are expected to increase at least in line with price or wage inflation. Part of the Trustee’s investment policy is to invest assets in securities whose values are expected at least to keep pace with wage inflation in the long term. Kinds of investments to be held The Trustee considers that the following asset classes are generally suitable investments for the Scheme: • UK or overseas equities (public and private); • UK or overseas bonds (conventional and index-linked); • UK or overseas cash or money market investments; • Hedge funds; • UK or overseas property; • Currencies; and • Commodity futures. These asset classes may be accessed either directly (e.g. as securities) or indirectly, either through a collective instrument (e.g. pooled fund or Fund of Funds) or through the use of derivatives. These can be used to gain efficient exposure, for the purposes of day-to-day operating, or risk control. The trust deed allows for investment via futures, options, swaps, forward contracts, and other appropriate derivative instruments. From time-to-time the Investment Committee evaluates and recommends investments in other asset classes. The Trustee may elect to invest in such investments. Diversification and the policy for compliance with Section 36 of the Pensions Act 1995 (choosing investments) The Trustee regards its policy for allocating assets across diverse asset classes, and the amount to be held within each class, as the factors that most influence the likelihood that its objectives will be achieved and that risk will be controlled. It determines its asset allocation policy by using Asset/Liability Models (ALMs) or other appropriate techniques, based on the results of the most recent actuarial valuation. Asset allocation policy provides the principal means of ensuring that the Scheme’s assets are appropriately diversified. The day-to-day choice of which investments to buy, sell or hold is delegated to external, professional investment managers, which are appropriately authorised or qualified as required under PA95. Diversification is ensured by employing a number of external investment managers for each of the main asset classes. These managers are required to invest in a diversified portfolio of investments in the context of the objectives, benchmarks and risk parameters that they are set. This is consistent with both the requirements of Section 36 (2) (b) of PA95 and the overall Scheme risk and benchmark objectives. Details of the investment managers are shown in appendix 2. -3-
  4. 4. Rebalancing policy In defining its strategic asset allocation policy the Trustee has adopted rebalancing ranges around the strategic allocation for each asset class. The amount to be allocated to bonds specifically has been agreed between the Trustee and the Company. The strategic asset allocation is being rebalanced over five years from 1 July 2006, taking the bond allocation from 37% to 55% (as shown in appendix 1). In the event that strategic asset classes move outside of their pre-determined range (noted in that appendix), the fund is automatically rebalanced. Process for investment decision-making and implementation Significant investment decisions are made by a process of consultation with external advisors and debate within the Investment Committee and the Trustee board (such decisions include asset allocation changes, appointments or terminations of other external service providers). The Scheme’s main external advisors are listed in appendix 3. The Company Pensions Department is responsible for implementing the Trustee’s and the Investment Committee’s decisions. The Trustee has agreed that an appointment or termination of an investment manager of the same mandate can be implemented without referring to it in advance, in order to ensure efficient implementation. Any such replacement of a manager is then reported at the next Trustee board. Investment performance review and control The Investment Committee undertakes the measurement of the investment returns and performance. The Trustee requires that this information is sourced independently of its investment managers, to the extent practicable, and that it is reported quarterly. The investment performance of individual portfolios is measured against specific benchmarks (appendix 2), while the overall return for the fund is measured against a customised benchmark reflecting the Trustee’s strategic asset allocation (appendix 1). External investment managers are monitored formally in a twofold process: • representatives of the Investment Committee meet with the managers normally once or twice a year for a detailed review of their organisation, investment processes and investment performance. • Russell Investment Group provides quarterly assessments the investment managers, rating their capabilities to add value. These are reviewed by the Investment Committee in conjunction with the Scheme’s performance measurement process. The Trustee and Investment Committee have decided that an annual investment plan be agreed between them, its implementation regularly to be reported to the Trustee. The Investment Committee expects to undertake an external review of investment performance once every three years Custody The Trustee regards the safekeeping of the Scheme’s assets as of paramount importance and has appointed a global custodian, the Northern Trust Company, with this responsibility and for keeping the records of the Scheme’s assets. Investment management costs The investment management fees and other service-provider costs incurred in managing the assets are controlled by means of a process of half-yearly review by the Investment Committee. In addition, it operates commission re-capture programmes as a means of reducing the day-to-day trading costs incurred in the management of the Scheme’s assets. Details of fees are shown in appendix 3. -4-
  5. 5. Corporate governance and socially responsible investment (SRI) The Trustee wishes to promote corporate social responsibility as a responsible investor, however it recognises that it must act at all times in the best financial interests of the beneficiaries. It supports companies that demonstrate a positive approach to social responsibility, where practicable, and it expects its equity investment managers to invest to acceptable standards where they can. In implementing this policy, the Trustee delegates to the Scheme’s external investment managers the requirement to exercise voting rights in the best interest of the Scheme’s beneficiaries. The Trustee expects to follow appropriate standards of conduct in the area and may employ external advisors in the development and monitoring of this policy. Transparency The Trustee publishes its annual Report and Accounts on its website. These include details of the investments. Realisation of investments The Trustee delegates the realisation of individual investments to its external investment managers. It requires that the Scheme’s assets generally should be invested in marketable investment instruments, although there are exceptions to this (particularly private equity investments). The Scheme’s benefit payment obligations and other expenses are at present covered fully by its contributions and there is generally no requirement to realise investments for the purpose of paying benefits. Date: February 2007 -5-
  6. 6. Appendix 1 Strategic asset allocation and annual return expectations Strategic Expected Standard allocation return (b) deviation (c) July 2006 June 2011 (%) (%) (% p.a.) (% p.a.) Equities -- UK 15.9 10.2 7.9 18.4 overseas 37.1 23.8 7.9 19.8 total public equities 53.0 34.0 Private equity 3.0 3.012.930.0Bonds -- conventional 5.9 Index-linked 5.0 total bonds 37.0 55.0Hedge funds 5.18 Total assets 100 100 The Trustee is shifting its strategic asset allocation over five years from July 2006, readjusting the strategic benchmark quarterly. In the event that total bonds (including bond like assets) and total equities, (including equity like assets) move more than ±2.5% away from their strategic benchmark they will be rebalanced. Rebalancing is also taking place within public equities, to maintain UK, Europe and US securities within ±2% of their strategic benchmark; Japan within ±1/2% and Asia and Pacific Rim equities within ±1/4%. .Notes a. The strategic allocation figures for July 2006 largely reflect conclusions of the 2004 ALM. The expected return and standard deviation figures are the key assumptions adopted in developing the study. Asset allocation strategy is normally determined every three years, following the Scheme’s triennial actuarial valuation. If circumstances change in the interim, it may be reviewed sooner. In the event, the Company and the Trustee agreed a new asset allocation policy in February 2006 as part of a refinancing of the Scheme this new policy is reflected in a plan to rebalance, in a controlled manner, over the five years to June 2011. b. The expected return assumptions shown are those adopted for the 2004 ALM. They reflect a long-term view and, despite recent experience, they are conservative compared with the levels of long-term returns experienced over the past century. c. Standard deviation is a statistical measure of, in this case, the variability of returns. To take the example of UK equity, if the average annual return expectation is 7.9%, and the standard deviation is 18.4%, this signifies that in two-thirds of 12 month periods measured, the return will fall between 7.9%+18.4% (i.e. 25.8%) and 7.9% -18.4% (i.e. -9.8%). It also signifies that in 95% of 12 month periods measured, it will fall between 8.0%+ 2 x 18.4% (i.e. 44.8%) and 8.0% - 2 x 18.4% (i.e. -28.8%). Over the longer periods of a pension fund’s time horizon, the standard deviation narrows substantially. -6-
  7. 7. Appendix 2 Investment managers Scheme assets are invested in portfolios managed by external investment managers shown in the table below. They are benchmarked against the indicated indices. The table shows those portfolios that are managed on a passive, index-tracking basis and whether they are held in pooled vehicles, segregated portfolios or fund of funds. Based on expert advice, investment managers may be replaced at any time and this list may not therefore always be up to date. Outper- Pooled (P) Segregated (S) Asset class Sub- External formance Fund of funds class Investment Benchmark index target % (FoF) manager (ii) Equities UK State Street (i) FTSE All Share 0.0 P Europe BlackRock FTSE World Europe ex UK 1.5 G S Taube Hodson Stonex FTSE World Europe ex UK 2.5N S Partner Ltd AllianceBernstein FTSE World Europe ex UK 1.5 G S Goldman Sachs MSCI Europe Small Cap 4.0 G S US BGI Russell 1000 Value 2.0 G P State Street (I) Russell 3000 0.0 P Jacobs Levy Russell 1000 Growth 2.0 G S Japan JP Morgan Fleming FTSE All-World Japan 3.0 G S Far East JP Morgan Fleming FTSE World Asia Pacific ex Japan 2.0 G P Emerging Capital International MSCI Emerging Markets 2.0 G P Markets Private equity HarbourVest Partners n/a n/a FoF Adams Street Partners n/a n/a FoF Partners Group n/a n/a FoF/P Bonds (iv) Convent- Aberdeen Lehman Global Aggregate 1.25 G S ional Goldman Sachs Lehman Global Aggregate 1.0 N S Goldman Sachs JP Morgan Emerging Market Bond 3.0 G P Goldman Sachs Lehman US Corporate High Yield 1.5G P PIMCO Lehman Global Aggregate Composite (iii) 1.0 N S PIMCO IBOXX Sterling Non-Gilt 10+year total return 0.5 N S Index- State Street (i) FTSE Index Linked All Stocks 0.0 P linked State Street (i) Lehman Global Inflation Linked Bonds 0.0 S Currencies FX Concepts n/a 0.0 S Record Currency n/a 0.0 S Management Hedge funds La Fayette UK cash (7 day LIBID) +3% 1.0G FoF Financial Risk UK cash (7 day LIBID) + 3% 1.0G FoF Management Property Arlington Property HSBC/APUT All Funds Index (median value) 0.5G FoF Investors (i) are index tracker funds., (ii) G denotes gross, and N net of fees, (iii) Index 80% Lehman Global Aggregate, 10% JP Morgan Emerging markets, 10% Lehman US Corporate High Yield Index, (iv) overseas bonds are hedged to Sterling. -7-
  8. 8. Appendix 3 Advisors and other service providers to the scheme Service Provider Notes Actuary Watson Wyatt Investment consultant Russell Investment Group Legal advisors Denton Wilde Sapte Main advisor Eversheds Specialist advisor on investment management agreements. Custodian The Northern Trust Company Bankers National Westminster Bank Plc Performance measurers The Northern Trust Company Monthly investment return data and investment accounting support. The WM Company Quarterly performance and attribution data. Also provides WM Universe comparator data. Accountant Janis Hawkins, J Sainsbury plc Auditor Horwath Clark Whitehill Securities lending The Northern Trust Company Commission recapture Russell Investment Group Lynch Jones Ryan Economic advisor Peter Readman, Abercromby & Co Investment advisor Geoff Lindey Acting secretary to the Trustee Law Debenture Secretary to the Investment Law Debenture Committee Website design and CAMRA Associates maintenance In addition to the above, the Trustee may seek advice from other advisors from time to time. Investment management fees Ad valorem fees: AllianceBernstein, Arlington, Barclays Global Investors; BlackRock; Capital International; Goldman Sachs; La Fayette; JP Morgan Fleming; PIMCO; Record Currency Management, State Street Global Advisors, Aberdeen Asset Management Performance-related fees: Adams Street Partners, HarbourVest, FRM, Partners Group, FX Concepts -8-