1. Introduction

This Statement of Investment Principles (“SIP”) sets out the policy of the Trustee of the Nelson Hurst Group Pension Scheme 4 (“the Trustee”) on various matters governing decisions about the investments of the Nelson Hurst Group Pension Scheme 4 (“the Scheme”), a Defined Benefit (“DB”) Scheme. This SIP replaces the previous SIP dated August 2020.

The SIP is designed to meet the requirements of Section 35 (as amended) of the Pensions Act 1995 (“the Act”), the Occupational Pension Schemes (Investment) Regulations 2005 (as amended) and the Pension Regulator’s guidance for defined benefit pension schemes (March 2017). The SIP also reflects the Trustee’s response to the Myners voluntary code of investment principles.

This SIP has been prepared after obtaining and considering written professional advice from LCP, the Scheme’s investment adviser, whom the Trustee believes to be suitably qualified and experienced to provide such advice. The advice considers the suitability of investments including the need for diversification given the circumstances of the Scheme and the principles contained in this SIP. The Trustee has consulted with the relevant employer in producing this SIP.

The Trustee will review this SIP from time to time and, with the help of its advisers, will amend it as appropriate. These reviews will take place as soon as practicable after any significant change in investment policy and at least once every three years.

• Appendix 1 sets out details of the Scheme’s investment governance structure, including the key responsibilities of the Trustee, investment advisers and investment managers. It also contains a description of the basis of remuneration of the investment adviser and the investment managers.

• Appendix 2 sets out the Trustee’s policy towards risk appetite, capacity, measurement and management.

• Appendix 3 sets out the Scheme’s investment manager arrangements.

2. Investment objectives

The primary objective is to ensure that the Scheme should be able to meet benefit payments as they fall due.

3. Investment strategy

To achieve its investment objective, the Trustee has entered into two bulk annuity contracts, which match the pensions payable to all of the Scheme’s members. The annuity policies are “buy-ins” and therefore remain assets of the Scheme.

The first annuity policy was purchased in November 2010 and matches the pensions payable to the Scheme’s pensioners who retired before April 2012. The second annuity policy involved the transfer of the Scheme’s remaining liabilities in May 2022. A cash balance is also held within L&G’s Sterling Liquidity Fund and the Trustee’s bank account.

4. Considerations in setting the investment arrangements

When deciding how to invest the Scheme’s assets, the Trustee considers several risks, including, but not limited to, those set out in Appendix 2.

Some of these risks are more quantifiable than others, but the Trustee has tried to allow for the relative importance and magnitude of each risk.

The Trustee considered a wide range of asset classes (including annuity policies) for investment, taking account of the expected returns and key individual risks associated with those asset classes as well as how these risks can be mitigated where appropriate.

In setting the strategy the Trustee considered:

• the Scheme’s investment objectives, including the target return required to meet the Trustee‘s investment objectives;

• the Scheme’s cash flow requirements in order to meet benefit payments in the near to medium term;

• the best interests of all members and beneficiaries;

• the circumstances of the Scheme, including the profile of the benefit cash flows (and the ability to meet these in the near to medium term), the funding level, and the strength of the employer covenant;

• the risks, rewards and suitability of a number of possible asset classes and investment strategies and whether the return expected for taking any given investment risk is considered sufficient given the risk being taken;

• the need for appropriate diversification between different asset classes to ensure that both the Scheme’s overall level of investment risk and the balance of individual asset risks are appropriate;

• any other considerations which the Trustee considers financially material over the time horizon that the Trustee considers is needed for the funding of future benefits by the investments of the Scheme; and

• the Trustee’s investment beliefs about how investment markets work, and which factors are most likely to impact investment outcomes.

The Trustee also considers any other factors which we believe to be financially material over the applicable time horizons to the funding of the DB and AVC benefits, including environmental, social and governance factors and the risks and opportunities relating to climate change.

The Trustee’s key investment beliefs, which influenced the setting of the investment arrangements, are as follows:

• asset allocation is the primary driver of long-term returns;

• risk-taking is necessary to achieve return, but not all risks are rewarded;

• equity, credit and illiquidity are the primary rewarded risks;

• risks that do not have an expected reward should generally be avoided, hedged or diversified;

• investment markets are not always efficient and there may be opportunities for good active managers to add value;

• investment managers who can consistently spot and profitably exploit market opportunities are difficult to find and therefore passive management, where available, can offer better value;

• environmental, social and governance (ESG) factors are likely to be one area of market inefficiency and so managers may be able to improve risk-adjusted returns by taking account of ESG factors;

• long-term environmental, social and economic sustainability is one factor that trustees should consider when making investment decisions; and

• costs have a significant impact on long-term performance and therefore obtaining value for money from the investments is important..

5. Implementation of the investment arrangements

Before investing in any manner, the Trustee obtains and considers proper written advice from its investment adviser on the question of whether the investment is satisfactory, having regard to the need for suitable and appropriately diversified investments.

The Trustee has signed agreements transferring the liability for meeting member benefits as they fall due to the annuity policy providers. The Trustee has signed an agreement with the investment manager, setting out in detail the terms on which the portfolio is to be managed. The investment manager’s primary role is the day-to-day investment management of the Scheme’s investments. Details of the annuity policy providers and investment manager are set out in Appendix 3.

The Trustee, annuity policy providers and investment manager to whom discretion has been delegated exercise their powers to giving effect to the principles in this Statement of Investment Principles, so far as is reasonably practicable.

The Trustee has limited influence over its annuity policy providers and investment manager’s investment practices because the Scheme’s assets are held in annuity policies and a pooled fund, but it encourages its manager to improve their practices where appropriate.

The Trustee’s view is that the fees paid to the investment managers, and the possibility of their mandate being terminated, ensure they are incentivised to provide a high quality service that meets the stated objectives, guidelines and restrictions of the fund. However, in practice managers cannot fully align their strategy and decisions to the (potentially conflicting) policies of all their pooled fund investors in relation to strategy, long-term performance of debt/equity issuers, engagement and portfolio turnover.

It is the Trustee’s responsibility to ensure that the managers’ investment approaches are consistent with its policies before any new appointment, and to monitor and to consider terminating any existing arrangements that appear to be investing contrary to those policies. The Trustee expects investment managers, where appropriate, to make decisions based on assessments of the longer term financial and non-financial performance of debt/equity issuers, and to engage with issuers to improve their performance. It assesses this when selecting and monitoring managers.

The Trustee evaluates investment manager performance by considering performance over both shorter and longer-term periods as available. The duration of a manager’s appointment will depend on strategic considerations and the outlook for future performance (except in any closed-ended funds where the duration of the investment is determined by the fund’s terms). Generally, the Trustee would be unlikely to terminate a mandate on short-term performance grounds alone.

The Trustee’s policy is to evaluate each of its investment managers by reference to the manager’s individual performance as well the role it plays in helping the Scheme meet its overall long-term objectives, taking account of risk, the need for diversification and liquidity. Each manager’s remuneration, and the value for money it provides, is assessed in light of these considerations.

The Trustee recognises that portfolio turnover and associated transaction costs are a necessary part of investment management. Since the impact of portfolio turnover costs is reflected in performance figures used in our assessment of the investment managers, we do not explicitly monitor portfolio turnover. The Trustee expects its investment adviser to incorporate portfolio turnover and resulting transaction costs as appropriate in its advice on the Scheme’s investment mandates.

6. Realisation of investments

The annuity policies are structured to meet Scheme members’ benefits in cash as they fall due.

The assets held in the Sterling Liquidity Fund are well diversified and readily realisable. The investment manager has discretion over the timing of realisation of assets within the fund.

7. Financially material considerations and non-financial matters

The Trustee has considered how environmental, social, governance (“ESG”) and ethical factors should be taken into account in the selection, retention and realisation of investments, given the time horizon of the Scheme and its members.

The Trustee expects its annuity policy providers and investment managers to take account of financially material considerations (including climate change and other ESG considerations). The Trustee seeks to appoint providers and managers that have appropriate skills and processes to do this, and from time to time reviews how its managers are taking account of these issues in practice.

The Trustee has limited influence over managers’ investment practices where assets are held in pooled funds, but it encourages its managers to improve their practices where appropriate.

The Trustee does not take into account any non-financial matters (ie matters relating to the ethical and other views of members and beneficiaries, rather than considerations of financial risk and return) in the selection, retention and realisation of investments.

8. Voting and engagement

The Trustee recognises its responsibilities as owners of capital, and believes that good stewardship practices, including monitoring and engaging with investee companies, and exercising voting rights attaching to investments, protect and enhance the long-term value of investments.

The Trustee has delegated to its annuity policy providers and investment manager the exercise of rights attaching to investments, including voting rights, and engagement with issuers of debt and equity and other relevant persons about relevant matters such as performance, strategy, capital structure, management of actual or potential conflicts of interest, risks and ESG considerations.

The Trustee does not monitor or engage directly with issuers or other holders of debt or equity. It expects the annuity policy providers and investment manager to exercise ownership rights and undertake monitoring and engagement in line with the managers’ general policies on stewardship, as provided to the Trustee from time to time, considering the long-term financial interests of the beneficiaries.

The Trustee has limited influence over managers’ stewardship practices where assets are held in annuity policies and pooled funds, but it encourages its managers to improve their practices where appropriate.

SIP signed for and on behalf of the Trustee of the Scheme:

Investment governance, responsibilities, decision-making and fees

The Trustee has decided on the following division of responsibilities and decision-making for the Scheme. This division is based upon the Trustee’s understanding of the various legal requirements placed upon it, and its view that the division of responsibility allows for efficient operation and governance of the Scheme overall. The Trustee’s investment powers are set out within the Scheme’s governing documentation.

1. Trustee

In broad terms, the Trustee is responsible in respect of investment matters for:

• developing a mutual understanding of investment and risk issues with the employer;

• setting the investment strategy, in consultation with the employer;

• formulating a policy in relation to financially material considerations, such as those relating to ESG considerations (including but not limited to climate change);

• setting a policy on the exercise of rights (including voting rights) and undertaking engagement activities in respect of the investments;

• setting the policy for rebalancing between asset classes;

• putting effective governance arrangements in place and documenting these arrangements in a suitable form;

• appointing, monitoring, reviewing and dismissing investment managers, investment advisers, actuary and other service providers;

• monitoring the exercise of the investment powers that they have delegated to the investment managers and monitoring compliance with Section 36 of the Act;

• communicating with members as appropriate on investment matters;

• reviewing the investment policy as part of any review of the investment strategy;

• reviewing the content of this SIP from time to time and modifying it if deemed appropriate; and

• consulting with the employer when reviewing the SIP.

2. Investment manager

In broad terms, the investment manager is responsible for:

• managing the portfolios of assets according to its stated objectives, and within the guidelines and restrictions set out in its investment manager agreements and/or other relevant governing documentation;

• taking account of financially material considerations (including climate change and other ESG considerations) as appropriate when managing the portfolios of assets;

• exercising rights (including voting rights) attaching to investments and undertaking engagement activities in respect of investments;

• providing the Trustee and investment platform provider with regular information concerning the management and performance of their respective portfolios; and

• having regard to the provisions of Section 36 of the Act insofar as it is necessary to do so.

The custodians of the portfolios (whether there is a direct relationship between the custodian and the Trustee or not) are responsible for safe keeping of the assets and facilitating all transactions within the portfolios.

3. Annuity providers

The annuity providers’ responsibility is to meet the pensions secured under the bulk annuity contracts accurately and on a timely basis.

4. Investment adviser and actuary

In broad terms, the investment adviser and actuary will be responsible, in respect of investment matters, as requested by the Trustee, for:

• advising on how material changes within the Scheme’s benefits, membership, and funding position may affect the manner in which the assets should be invested and the asset allocation policy;

• advising on the selection, and review, of the investment managers. Such advice takes account of its assessment of the nature and effectiveness of managers’ approaches to financially material considerations (including climate change and other ESG considerations); and

• participating with the Trustee in reviews of this SIP.

5. Fee structures

The Trustee recognises that the provision of investment management and advisory services to the Scheme results in a range of charges to be met, directly or indirectly, by deduction from the Scheme’s assets.

The Trustee has agreed Terms of Business with the Scheme’s actuarial and investment advisers, under which work undertaken is charged for by an agreed fixed fee or on a “time-cost” basis.

The investment manager receives fees calculated by reference to the market value of assets under management. The fee rates are believed to be consistent with the managers’ general terms for institutional clients and are considered by the Trustee to be reasonable when compared with those of other similar providers. See also Section 5 of the SIP.

The fee structure used in each case has been selected with regard to existing custom and practice, and the Trustee’s view as to the most appropriate arrangements for the Scheme. However, the Trustee will consider revising any given structure if and when it is considered appropriate to do so.

6. Performance assessment

The Trustee is satisfied, taking into account the external expertise available, that there are sufficient resources to support its investment responsibilities. The Trustee believes that it has sufficient expertise and appropriate training to carry out its role effectively.

It is the Trustee’s policy to assess the performance of the Scheme’s investments, investment providers and professional advisers from time to time. See also Section 5 of the SIP. The Trustee will also periodically assess the effectiveness of its decision-making and investment governance processes and will decide how this may then be reported to members.

7. Working with the Scheme’s employer

When reviewing matters regarding the Scheme’s investment arrangements, such as the SIP, the Trustee seeks to give due consideration to the employer’s perspective. While the requirement to consult does not mean that the Trustee needs to reach agreement with the employer, the Trustee believes that better outcomes will generally be achieved if the Trustee and employer work together collaboratively.

Policy towards risk

1. Risk appetite and risk capacity

Risk appetite is a measure of how much risk the Trustee is willing to bear within the Scheme in order to meet its investment objectives. Taking more risk is expected to mean that those objectives can be achieved more quickly, but it also means that there is a greater likelihood that the objectives are missed, in the absence of remedial action. Risk capacity is a measure of the extent to which the Trustee can tolerate deviation from its long term objectives before attainment of those objectives is seriously impaired. The Trustee aims is to strike the right balance between risk appetite and risk capacity.

When assessing the risk appetite and risk capacity, the Trustee considered a range of qualitative and quantitative factors, including:

• the strength of the employer’s covenant and how this may change in the near/medium future;

• the agreed journey plan and employer contributions;

• the Scheme’s long-term and shorter-term funding targets;

• the Scheme’s liability profile, its interest rate and inflation sensitivities, and the extent to which these are hedged;

• the Scheme’s cash flow and target return requirements; and

• the level of expected return and expected level of risk, now and as the strategy evolves.

2. Approach to managing and monitoring investment risks

The Trustee considers that there are several different types of investment risks that are important to manage and monitor. These include, but are not limited to:

2.1 Risk of inadequate returns

A key objective of the Trustee is that, over the long-term, the Scheme should have adequate assets to meet its liabilities as they fall due. There is also a risk that the performance of the Scheme’s assets and liabilities diverges in certain financial and economic conditions in the short term. This risk has been considered in setting the investment strategy and is monitored by the Trustee on a regular basis.

2.2 Risk from lack of diversification

This is the risk that failure of a particular investment, or the general poor performance of a given investment type, could materially adversely affect the Scheme’s assets. This was a key consideration when determining the Scheme’s investment arrangements and is largely mitigated by purchasing the bulk annuity policies.

2.3 Investment manager risk

This is the risk that an investment manager fails to meet its investment objectives. 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. The Trustee monitors the investment managers on a regular basis to ensure it they remain appropriate for their selected mandates.

2.4 Counterparty risk

This is the risk that one party to a contract (such as a derivative instrument) causes a financial loss to the other party by failing to discharge a contractual obligation. This risk applies in particular for those contracts that are traded directly between parties, rather than traded on a central exchange.

For the annuity providers, this risk is mitigated by having selected insurers whom the Trustee believe offer long-term financial security, notwithstanding the strict regulatory regime and solvency requirements to which all UK insurers are subjected and the protection offered by the Financial Services Compensation Scheme (FSCS).

Within the L&G pooled fund, any counterparty risk is managed within the fund through careful initial selection and ongoing monitoring of trading counterparties, counterparty diversification and a robust process of daily collateralisation of each contract, to ensure that counterparty risk is limited, as far as possible, to one day’s market movements.

2.5 Illiquidity/marketability risk

This is the risk that the Scheme is unable to realise assets to meet benefit cash flows as they fall due, or that the Scheme will become a forced seller of assets in order to meet benefit payments. The Trustee is aware of the Scheme’s cash flow requirements and believes that this risk is managed appropriately via the structure of the annuity policies.

2.6 Environmental, social and governance (ESG) risks

Environmental, social and corporate governance (ESG) factors are sources of risk to the Scheme’s investments which could be financially material, over both the short and longer term. These potentially include risks relating to factors such as climate change, unsustainable business practices, and unsound corporate governance. The Trustee seeks to appoint annuity policy providers and investment managers who will manage these risks appropriately on their behalf and from time to time reviews how these risks are being managed in practice.

2.7 Credit risk

This is the risk that a borrower will cause a financial loss for the other party by failing to meet required payments for a contractual obligation.

The Scheme is subject to credit risk through its annuity policies and the insurance company for any pooled vehicles structured as life policies (L&G Sterling Liquidity Fund).

The risk is mitigated by the regulatory environment in which the insurers operate and the diversification of the policy’s underlying assets.

2.8 Currency risk

The Scheme’s liabilities are denominated in Sterling, therefore any non-Sterling currency exposure within the assets presents currency risk.

As at the time of writing, the Scheme is not subject to currency risk as none of the investments are held directly in overseas markets.

2.9 Interest rate and inflation risk

The Scheme’s assets are not directly subject to interest rate and inflation risk because some none of the Scheme’s assets are held in bonds via pooled funds. Most of the Scheme’s assets are held in two annuity policies alongside a balance in the L&G Sterling Liquidity Fund.

2.10 Other non-investment risks

The Trustee recognises that there are other, non-investment, risks faced by the Scheme and takes these into consideration as far as practical in setting the Scheme’s investment arrangements as part of its assessment of the other aspects of the Scheme’s Integrated Risk Management framework.

Examples include:

• longevity risk (the risk that members live, on average, longer than expected); and

• sponsor covenant risk (the risk that, for whatever reason, the sponsoring employer is unable to support the Scheme as anticipated).

Together, the investment and non-investment risks give rise generally to funding risk. This is the risk that the Scheme’s funding position falls below what is considered an appropriate level.

The Trustee has mitigated these risks in respect of all of the Scheme’s members by purchasing bulk annuity contracts.

By understanding, considering and monitoring the key risks that contribute to funding risk, the Trustee believes that it has appropriately addressed and are positioned to manage this general risk.

Investment manager arrangements

1. Annuity policy arrangements

The Trustee has selected Rothesay Life and Legal & General as the Scheme’s annuity policy providers.

The Legal & General policy matches the pensions payable to the Scheme’s pensioners who retired before April 2012. The Rothesay Life policy was purchased in May 2022 and involved all of the Scheme’s remaining members. The objective of the policies is to match the Scheme’s benefit payments relating to the pensions covered by the policy.

2. Pooled fund arrangements

The Scheme invests in a cash fund with Legal & General Investment Management (“L&G”). The benchmark of the Sterling Liquidity Fund is the SONIA (Sterling Overnight Index Average).

The fund is priced weekly, is open ended and unlisted.

3. Additional Voluntary Contributions

The Scheme provides a facility for deferred-active members to pay AVCs to enhance their benefits at retirement. Deferred-active members are offered a range of insurance company managed funds with which to invest their AVC payments. The Trustee’s objective is to provide a range of funds which will provide a suitable long-term return for members, consistent with members’ reasonable expectations.