The purpose of the Statement of Investment Principles (“the Statement”) is to document the principles and policies governing decisions about the investment of the assets of the Baker Group of Companies Retirement Benefits Scheme (“the Scheme”).  This statement has been prepared by the Trustees of the Baker Group of Companies Retirement Benefits Scheme (“the Trustees”).  It sets out the Trustees’ policy for complying with the Pensions Act 1995 and the Occupational Pension Scheme (Investment) Regulations 2005 and is adopted with effect from July 2015.

The Trustees have consulted Butchers Pet Care Limited (“the Company”), who are required to give the views of the Sponsoring Company on the Statement, and have received written advice from the Scheme’s Investment Consultant, Mercer Limited (“Mercer”), which is regulated by the Financial Conduct Authority (“FCA”) in relation to investment services.

The Trustees seek to maintain a good working relationship with the Company and will discuss any proposed changes to the Statement with the Company.  However, the Trustees’ fiduciary obligations are to the Scheme’s members and will take precedence over the Company’s wishes.

The Scheme’s investment arrangements, based on the principles set out in this Statement, are detailed in the Investment Implementation Policy Document (“IIPD”).  Both documents are available to members on request.

The Scheme is governed by its Trust Deed and Rules which sets out all of the benefits in detail and specifies the Trustees’ investment powers.  The investment powers do not conflict with this Statement.

Mercer has confirmed in writing to the Trustees that it has the appropriate knowledge and experience to give the advice required by the Pensions Act 1995 and the Occupational Pension Scheme (Investment) Regulations 2005.

The Trustees do not expect to revise this Statement frequently because it covers broad principles rather than their implementation.  The Trustees will review it at least once every three years and without delay upon a material change to the Scheme or the Company.

The Trustees have appointed Mercer to act as discretionary investment manager, by way of Mercer’s Dynamic De-risking Solution, to implement the Trustees’ strategy whereby the level of investment risk reduces as the Scheme funding level improves. In this capacity, and subject to agreed restrictions, the Scheme’s assets are invested in multi-client collective investment schemes (“Mercer Funds”) managed by a management company (Mercer Global Investments Management Limited (“MGIM”)). MGIM has appointed Mercer Global Investments Europe Limited (“MGIE”)) as investment manager of the Mercer Funds. In practice, MGIE delegates the discretionary investment management for the Mercer Funds to third party investment managers based in countries such as Ireland, UK and USA and those sub-investment managers will manage either a sub-fund or certain segments of a sub-fund. Mercer has expertise in identifying, selecting and combining highly rated fund managers who are best placed and resourced to manage the Scheme’s assets on a day to day basis.

In considering appropriate investments for the Scheme, the Trustees have obtained and considered the written advice of Mercer, whom the Trustees believe to be suitably qualified to provide such advice. The advice received and arrangements implemented are, in the Trustees’ opinion, consistent with the requirements of Section 36 of the Pensions Act 1995 (as amended).

3.1 Investment Objectives

The Trustees’ primary objective is to act in the best interest of the members, and ensure that the obligations to beneficiaries of the Scheme can be met. In meeting this objective, the Trustees’ further objective is to reach a position such that in the long term the Scheme assets would be sufficient to buyout the members’ liabilities with an insurance company.

To control risk, the Trustees set the split between the Scheme’s growth and matching assets such that the expected return on the portfolio is expected to be sufficient to meet the Scheme’s long-term objectives. As the funding level improves, investments will be switched from growth assets into matching assets with the aim of reducing overall investment risk.

The Trustees recognise that a portfolio of bonds (or bond like instruments) is the strategy which will best protect against changes in the value of the liabilities and the Scheme’s ongoing and solvency positions. However, the Trustees and the Company have also considered the use of some growth asset investment within the portfolio and feel that some growth asset investment is appropriate to target the higher expected returns over bonds. The Trustees do recognise that holding growth assets (such as equities) investment will bring increased volatility in the ongoing and solvency levels in favour of potentially reduced Company contributions.

As an interim target, prior to buying out the Scheme liabilities, the Trustees will aim to target reaching a suitably strong funding level in order to move to an entirely bond (or bond like instrument) based investment strategy when a suitably strong funding level is achieved. The Trustees will monitor progress against this target. The Trustees will review the investment strategy on a regular basis and aim to de-risk the Scheme investment strategy over time.

The objectives set out above and the risks and other factors referenced in this Statement are those that the Trustees determine to be financially material considerations. Non-financial considerations such as member views are discussed in section 5.

3.2 Investment Risk

The Trustees regard “risk” as the likelihood of failing to achieve the objectives set out above and have, on the advice of Mercer, taken several measures which are set out in this Statement to minimise this risk, over the Scheme’s anticipated lifetime, so far as is possible.

The Trustees pay close regard to the risks which may arise through a mismatch between the Scheme’s assets and its liabilities, and the risks which may arise from the lack of diversification of investments. Subject to satisfying the risk from a mismatch of assets and liabilities, the Trustees believe that the asset allocation policy in place provides an adequately diversified distribution of assets.

The Trustees’ willingness to take on investment risk is dependent on the continuing financial strength of the Company and its willingness to contribute to the Scheme. The strength of the Company and its perceived commitment to the Scheme is monitored by the Trustees and risk will be reviewed if either of these deteriorates.

The degree of investment risk taken will also depend on the Scheme’s funding status and liability profile.  The Trustees will monitor these with a view to altering the Scheme objectives and risk tolerances if there is a change in either.

There are various risks to which any pension scheme is exposed. The Trustees’ policy is to minimise these risks as far as possible, consistent with earning a satisfactory investment return to enable the Scheme to pay the benefits due to members.

The Trustees have considered the following risks:

1. The primary risk upon which the Trustees focus is that arising through a mismatch between the Scheme’s assets and its liabilities.
2. The Trustees recognise that whilst increasing risk increases potential returns over a long period, it also increases the risk of a shortfall in returns relative to that required to cover the Scheme’s accruing liabilities as well as producing more volatility in the Scheme’s funding position.
3. The Trustees’ willingness to take on investment risk is dependent on the continuing financial strength of the Company and its willingness to contribute to the Scheme.  The strength of the Company and its perceived commitment to the Scheme is monitored by the Trustees, and risk will be increased if either of these deteriorates.
4. Whilst moving towards the target funding level, the Trustees recognise that even if the Scheme’s assets are invested in matching assets there may still be a mismatch between the interest-rate and inflation sensitivity of the Scheme’s assets and the Scheme’s liabilities due to the mismatch in duration between matching assets and actuarial liabilities.
5. The Trustees recognise the risks that may arise from the lack of diversification of investments.  Subject to managing the risk from a mismatch of assets and liabilities, and aim to ensure the asset allocation policy in place results in an adequately diversified portfolio.
6. Investments may be made in securities that are not traded on regulated markets.  Recognising the risks (in particular liquidity and counterparty exposure), such investments will only be made with the purpose of reducing the Scheme’s mismatch risk relative to its liabilities or to facilitate efficient portfolio management.
7. In any event the Trustees will ensure that the assets of the Scheme are predominantly invested on regulated markets.
8. There is a risk that the day-to-day management of the assets will not achieve the rate of investment return expected by the Trustees. The Trustees recognise that the use of active investment managers involves such a risk. However, for specific asset classes it believes that this risk is outweighed by the potential gains from successful active management. Likewise, passive management will be used for one of a number of reasons, namely to diversify and reduce risk and when investing in markets deemed efficient where the scope for added value is limited.
9. The Trustees recognise that environmental, social and corporate governance concerns, including climate change, have a financially material impact on return. Section 5 sets out how these risks are managed.
10. The Scheme is subject to currency risk because some of the investment vehicles in which the Scheme invests are denominated or priced in a foreign currency. To limit currency risk, the Trustees set a target non-Sterling currency exposure.
11. Should there be a material change in the Scheme’s circumstances, the Trustees will advise Mercer, who will review whether and to what extent the investment arrangements should be altered.
12. Responsibility for the safe custody of the Scheme’s assets is delegated to Mercer who has appointed State Street Bank and Trust Company (“State Street”) as custodian of the assets invested in their pooled vehicles.  Mercer is responsible for keeping the suitability of State Street under ongoing review.

3.3 Investment Strategy

The Trustees, with advice from the Scheme’s investment consultant and Scheme Actuary, reviewed the Scheme’s investment strategy most recently in 2023. This review considered the Trustees’ investment objectives, their ability and willingness to take risk (the “risk budget”) and how this risk budget should be allocated and implemented (including de-risking strategies).

The Trustees’ investment strategy is to “de-risk” the Scheme’s assets relative to its liabilities over time using a dynamic trigger-based de-risking framework. Mercer implement the Trustees’ de-risking strategy by way of its Dynamic De-risking Solution. The approach undertaken relates to the asset allocation to the Scheme’s funding level (on an actuarial basis using a single discount rate of 0.25% p.a. in excess of the appropriate gilt yields i.e. “gilts + 0.25% basis”). The de-risking rule mandates the following practices:

• To hold sufficient growth assets to target full funding on a gilts +0.25% basis by 2030;
• To reduce the volatility in the funding level by reducing un-hedged liability exposures;
• To monitor the progress in the funding level and to capture improvements in the funding level promptly, if they arise.

The de-risking strategy takes account of the Scheme’s initial funding level on a gilts +0.25% basis and is based on a model of the progression of the Scheme’s funding level over the period to 2030.

The de-risking triggers which form the basis of the Scheme’s dynamic investment strategy are set out in a separate document – Investment Implementation Policy Document (“IIPD”).

Once the funding level has moved through a band, the asset allocation will not be automatically “re-risked” should the funding level deteriorate. The investment strategy will be reviewed on an annual basis to ensure that the triggers set remain appropriate and amended if required.

Responsibility for monitoring the Scheme asset allocation, and undertaking any rebalancing activity, is delegated to Mercer. Mercer reports quarterly to the Trustees on its rebalancing activities.

The Trustees have taken steps to satisfy itself that Mercer have the appropriate knowledge and experience to choose and combine the underlying investment managers and ensure that they are fit to manage the Scheme’s investments.

The Trustees regularly review the continuing suitability of the Scheme’s investments, including Mercer’s ability to select, appoint, remove and monitor the appointed managers. Mercer is regulated by the Financial Conduct Authority.

Full details of the Scheme’s investment strategy being implemented can be found in the IIPD.

The investment strategy is reviewed regularly by the Trustees to ensure that it remains appropriate for meeting the objectives set out in 3.1 and for controlling the risks identified in 3.2.

3.4 Consultation with the Company

As required by the Pensions Act 1995, and as a matter of good practice, the Trustees have consulted with the Company concerning the investment arrangements set out above. 

The Trustees regard the choice of asset allocation policy as the decision which has most influence on the likelihood that they will achieve their investment objectives.

The strategic weights are targets and deviations from them may occur from time to time.  Whilst there is no strategic allocation to cash, it is accepted that the Scheme’s investment managers will need to hold part of the investments in cash or short-term deposits, in order to manage the assets in an efficient manner.

The Trustees monitor the continued appropriateness of the strategy on an ongoing basis with the help of their advisers.

It is the Trustees’ policy that the majority of the Scheme’s investments are in securities which can be realised at short notice, or in cash.

In addition, the Trustees’ policy is to endeavour to secure the safety of the Scheme’s assets. Custodial arrangements are outsourced to Mercer as detailed in Section 3.2.

The Trustees believe that environmental, social, and corporate governance (ESG) factors may have a material impact on investment risk and return outcomes, and that good stewardship can create and preserve value for companies and markets as a whole. The Trustees also recognise that long-term sustainability issues, particularly climate change, present risks and opportunities that increasingly may require explicit consideration.

The Trustees have delegated day to day management of the assets to Mercer who in turn delegates responsibility for the investment of the assets to a range of underlying investment managers. These investment managers are expected to evaluate ESG factors, including climate change considerations, and exercise voting rights and stewardship obligations attached to the investments, in accordance with their own corporate governance policies and current best practice, including the UK Corporate Governance Code and UK Stewardship Code.

The United Nations’ Sustainable Development Goals (SDGs) inform Mercer’s long term investment beliefs and direct Mercer’s and the Trustees thinking when it comes to converting systemic risks into transformational investment opportunities as outlined in Mercer’s Sustainability Policy.

The Trustees consider how ESG, climate change and stewardship is integrated within Mercer’s, and MGIE’s, investment processes and those of the underlying asset managers in the monitoring process. Mercer, and MGIE,  are expected to provide reporting to the Trustees on a regular basis, at least annually, on ESG integration progress, stewardship monitoring results, and climate-related metrics such as carbon foot printing for equities and other asset classes where relevant and data is available and /or climate transition analysis for diversified growth portfolios.

Mercer undertake climate scenario modelling and stress testing on the Mercer multi sector funds used by the Plan, in line with the Task Force on Climate Related Financial Disclosures (TCFD) recommendations. The results of the latest climate scenario modelling are within the TCFD compliant Climate Change Management Report. The findings of the modelling are integrated into the asset allocation and portfolio construction decisions, with portfolios increasingly aligned with a 2˚C scenario, where consistent with investment objectives and for consistency with the Paris Agreement on Climate Change.

The Trustees recognise the conflict of interest which may arise in the context of responsible investment. Mercer and MGIE make investment decisions with the aim of improving long-term risk adjusted returns and assesses whether selected sub-investment managers have policies and procedures that manage conflicts in relation to stewardship. Sub-investment managers are required to report on any conflicts of interest and demonstrate that they have adhered to their conflicts of interest policies and reported any breaches.

Member views

Member views are not taken into account in the selection, retention and realisation of investments.

Investment Restrictions

The Trustees have not set any investment restrictions on the appointed investment managers in relation to particular products or activities, but may consider this in future.

When engaging Mercer as discretionary investment manager to implement the Trustees’ investment strategy outlined in section 3, the Trustees are concerned that, as appropriate and to the extent applicable, Mercer is incentivised to align its strategy and decisions with the profile and duration of the liabilities of the Scheme, in particular, long-term liabilities.

As Mercer manages the Scheme’s assets by way of investment in Mercer Funds, which are multi-client collective investment schemes, the Trustees accept that they do not have the ability to determine the risk profile and return targets of specific Mercer Funds but the Trustees expect Mercer to manage the assets in a manner that is consistent with the Trustees’ overall investment strategy as outlined in section 3. The Trustees have taken steps to satisfy themselves that Mercer has the appropriate knowledge and experience to do so and keeps Mercer’s performance under ongoing review.

• Should Mercer fail to align its investment strategies and decisions with the Trustees’ policies, it is open to the Trustees to disinvest some or all of the assets invested managed by Mercer, to seek to renegotiate commercial terms or to terminate Mercer’s appointment.
• To evaluate performance, the Trustees receive, and consider, investment performance reports produced on a quarterly basis, which presents performance information and commentary in respect of the Scheme’s funding level and the Mercer Funds in which the Trustees are invested. Such reports have information covering fund performance for the previous three months, one-year, three years and since inception. The Trustees review the absolute performance and relative performance against a portfolio’s and underlying investment manager’s benchmark (over the relevant time period) on a net of fees basis. The Trustees’ focus is on the medium to long-term financial and non-financial performance of Mercer and the Mercer Funds.
• Neither Mercer nor MGIE make investment decisions based on their assessment about the performance of an issuer of debt or equity. Instead, assessments of the medium to long-term financial and non-financial performance of an issuer are made by the underlying third party asset managers appointed by MGIE to manage assets within the Mercer Funds. Those managers are in a position to engage directly with such issuers in order to improve their performance in the medium to long term. The Trustees are, however, able to consider Mercer’s and MGIE’s assessment of how each underlying third party asset manager embeds ESG into their investment process and how the manager’s responsible investment philosophy aligns with the Trustees’ own responsible investment policy. This includes the asset managers’ policies on voting and engagement.
• Section 5 provides further details of the steps taken, and information available, to review the decisions made by managers, including voting history and the engagement activities of managers to identify decisions that appear out of line with a Mercer Fund’s investment objectives or the objectives/policies of the Scheme. The asset managers are incentivised as they will be aware that their continued appointment by MGIE will be based on their success in meeting MGIE’s expectations. If MGIE is dissatisfied then it will, where appropriate, seek to replace the manager.
• The Trustees are long-term investors and are not looking to change their investment arrangements on an unduly frequent basis. However, the Trustees do keep those arrangements under review, including the continued engagement of Mercer using, among other things, the reporting described above.
• The Trustees monitor, and evaluate, the fees it pays for asset management services on an ongoing basis taking into account the progress made in achieving its investment strategy objectives as outlined in section 3. Mercer’s, and MGIE’s, fees are based on a percentage of the value of the Scheme’s assets under management which covers the design and annual review of the de-risking strategy, and investment management of the assets. In addition, the underlying third party asset managers of the Mercer Funds also charge fees based on a percentage of the value of the assets under management. In some instances, some of the underlying managers may also be entitled to charge fees based on their performance.
• MGIE reviews the fees payable to third party asset managers managing assets invested in the Mercer Funds on a regular basis with any negotiated fee savings passed directly to the Scheme. Mercer’s, MGIE’s, and the third party asset managers’, fees are outlined in a quarterly investment strategy report prepared for the Trustees, excluding performance-related fees and other expenses involved in the Mercer Funds not directly related with the management fee.

Details of all costs and expenses are included in the Mercer Funds’ Supplements, the Report & Accounts and within the Scheme’s annualized, MiFID II compliant Personalised Cost & Charges statement. The Scheme’s Personalised Cost & Charges statement also include details of the transaction costs associated with investment in the Mercer Funds.

The Trustees do not have an explicit targeted portfolio turnover range, given the de-risking mandate, but rebalancing ranges have been designed to avoid unnecessary transaction costs being incurred by unduly frequent rebalancing. Performance is reviewed net of portfolio turnover costs, with the review of portfolio turnover of the underlying investment managers undertaken by MGIE.

Mercer levies an annual fee for advisory services based on a percentage of the value of assets under management.

Mercer levies additional fees for investment management services. These fees are based on percentage amounts of the value of the assets invested in each of the Mercer investment funds (the percentage amount varies by fund used).

The Trustees on behalf of the Scheme hold shares in the Mercer Funds. In its capacity as investment manager to the Mercer Funds, MGIE, and the underlying third party asset managers appointed by MGIE, within parameters stipulated in the relevant appointment documentation, have discretion in the timing of the realisation of investments and in considerations relating to the liquidity of those investments.

Mercer and the underlying investment managers selected by Mercer have discretion in the timing of realisation of investments and in considerations relating to the liquidity of those investments within parameters stipulated in the relevant appointment documentation.

Cash flows, whether positive or negative, are taken into account by Mercer when it rebalances the Scheme’s assets in line with the Scheme’s strategic allocation.  Mercer is responsible for raising cash flows to meet the Scheme’s requirements.

Rebalancing ranges have been set within the growth and matching portfolios to ensure the Scheme’s assets remain invested in a manner which is consistent with Guidelines agreed by the Sponsor.

Assets in respect of members’ AVCs are invested in a range of investment options.  The AVC arrangements will be reviewed periodically to ensure that the investment profile of the funds available remains consistent with the objectives of the Trustees and the needs of the members.  More information on the AVC providers is detailed in the IIPD.

In line with the Occupational Pension (Investment) Regulations (2005), the Trustees are required to review the Statement at least every three years and without delay after any significant changes in investment policy.

 The Trustees will review this Statement in response to any material changes to any aspects of the Scheme, its liabilities, finances and the attitude to risk of the Trustees and the Company which they judge to have a bearing on the stated Investment Policy.

This review will occur no less frequently than every three years to coincide with the Actuarial Valuation or other actuarial advice.  Any such review will again be based on written expert investment advice, and the Company will be consulted.

Data: August 2023 

For and on behalf of the Trustees Baker Group of Companies Retirement Benefits Scheme