J Sainsbury Executive Pension Scheme
Statement of Investment Principles
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
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.
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 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
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.
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
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.
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
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
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.
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
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
• 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
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.
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.
The Trustee publishes its annual Report and Accounts on its website. These include details of the
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
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 32.050.05.0 5.9
Index-linked 5.0 5.04.55.9 total bonds 37.0 55.0Hedge funds
3.03.07.19.4Property 4.05.06.48.7Cash 0.00.03.5 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%.
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.
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)
Asset class Sub- External formance Fund of funds
class Investment Benchmark index target % (FoF)
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
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
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
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
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
Hedge funds La Fayette UK cash (7 day LIBID) +3% 1.0G FoF
Financial Risk UK cash (7 day LIBID) + 3% 1.0G FoF
Property Arlington Property HSBC/APUT All Funds Index (median value) 0.5G FoF
(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.
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
Custodian The Northern Trust Company
Bankers National Westminster Bank Plc
Performance measurers The Northern Trust Company Monthly investment return data
and investment accounting
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
Website design and CAMRA Associates
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
Adams Street Partners, HarbourVest, FRM, Partners Group, FX Concepts