UTC (UK) Pension Scheme - SIP - 2019

UNITED TECHNOLOGIES CORPORATION (UK) PENSION SCHEME Statement of Investment Principles

Introduction

1.

The Trustee of the UTC (UK) Pension Scheme (“the Scheme”) is UTC Pension Trust Ltd and that company and the Directors of that company are referred to in this document as the Trustees. The Trustees have drawn up this Statement of Investment Principles (“the Statement”) to comply with the requirements of the Pensions Act 1995 (“the Act”) and subsequent legislation. The Statement is intended to affirm the investment principles that govern decisions about the Scheme’s investments. A separate document called the Statement of Investment Objectives (“SIO”) of the UTC Common Investment Fund (the CIF) details the specifics of the Scheme’s investment arrangements in the CIF. The Trustees of the Scheme agreed to accept the transfer (the Transfer) into the Scheme of the assets and liabilities of the Goodrich (UK) Pension Scheme (the Goodrich Scheme) on 1 June 2016. In conjunction with the Transfer, an asset-backed contribution (ABC) structure was implemented in respect of the Scheme. The ABC structure consists of two loan notes issued by United Technologies Corporation (UTC), held by two Scottish Limited Partnerships (SLPs) in which the Trustee is a limited partner. The loan notes provide for: • Coupon payments (interest) to be paid to the SLPs (and in turn passed onto the Scheme) in respect of each loan note of 4.10% per annum; and • A final payment to the SLPs (and in turn to the Scheme) at the end of the 20- year term of the two loan notes of £134 million and £186 million respectively. The ABC structure is governed by the Scheme’s Trustees and not the Administrator of the CIF. The ABC is held directly by the Scheme, outside of the CIF. The ABC structure is not tradable and therefore will form part of the Scheme’s assets until 30 May 2036. In preparing this Statement the Trustees have consulted with the Principal Employer of the Scheme, Ceesail Ltd (the “Company”) to ascertain whether there are any material issues of which the Trustees should be aware in agreeing the Scheme’s investment arrangements. The Trustees have also consulted the Company over the investment objectives and investment strategy and have taken into account the Company’s views. The final decisions, however, have been made by the Trustees having taken advice from the Scheme Actuary and the Trustees’ investment consultants. Sections 2 to 7 relate to the Scheme’s defined benefit sections and Sections 8 to 11 relate to the Scheme’s additional voluntary contribution (AVC) arrangements provided on a defined contribution (DC) basis. Sections 12 onwards relate to both sections.

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DEFINED BENEFIT SECTIONS The investment arrangements of the Scheme can be divided into two areas. The first, the strategic management of the assets, is fundamentally the responsibility of the Trustees and is driven by their investment objectives as set out in Section 2 below. The second area is the day to day management of the assets in the CIF, which the Trustees have delegated to the CIF Administrator. The Trustees of the Scheme have ultimate responsibility for decision making on investment matters for their particular scheme. The Trustees of the Scheme have chosen to delegate some of their responsibilities to the CIF Administrator, UTC Pension Trust Ltd. The CIF Administrator is responsible for the following in respect of the defined benefit assets in the CIF:  Providing a range of sub funds representing the broad asset classes and spread of risk in which the participating schemes can invest.  Appointing (and dismissing) the investment managers for the management of the sub funds’ assets, including deciding on the active/passive split, and agreeing the mandates and remuneration.

 Manager monitoring and reporting to the trustees of the participating schemes.

 Administration of the CIF and custody of the CIF assets.

The CIF Administrator has produced a Statement of Investment Objectives (SIO), a copy of which is provided to the participating schemes’ trustees. Amongst other disclosures, the SIO sets out the appointment of the investment managers of the CIF and the mandates for which they have been appointed. 2. Investment Objectives

2.1

The Trustees have a duty to act in the Members' best interests.

2.2 In establishing an investment strategy for the defined benefit sections, the Trustees take into account the impact of both short term and longer term considerations. A key short term consideration will be the effect of different asset mixes on the scheme specific funding level. However, the Trustees also recognise the potential impact of the mix of investments on the long term benefit costs. An investment strategy with a relatively low expected real return may jeopardise the Company's continued support of the defined benefit sections, since this strategy may lead to increasing costs. The Trustees will seek to achieve reasonable investment performance against a benchmark appropriate for the chosen strategy. The Scheme’s current investment strategy is detailed in Section 4.

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An actuarial valuation of the Scheme at 31 December 2015 was finalised in March 2017. Following this the Trustees considered the Scheme’s long term investment objectives and implemented some immediate reductions to investment risk. This was done by decreasing the Scheme’s allocation to potentially volatile growth assets, with a further decrease in funding and investment risks by investing the proceeds in lower volatility and matching assets. The 31 December 2018 actuarial valuation is underway and in conjunction with this the Trustees are in discussion with the Company with the aim of formalising their long-term investment objectives and putting in place a de-risking framework consistent with this. 3. Risk Management and Measurement There are various risks to which any pension scheme is exposed. The Trustees’ policy on risk management is as follows:  The primary risk upon which the Trustees focus is that arising through a mismatch between the Scheme’s assets and its liabilities.  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 short term volatility in the Scheme’s funding position. The Trustees have taken advice on the matter and (in light of the objectives noted previously) have considered carefully the implications of adopting different levels of risk.  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, the Trustees aim to ensure the asset allocation policy in place results in an adequately diversified portfolio. The Trustees believe that investing in the CIF pooled funds achieves adequate diversification of the assets in the CIF.  The documents governing the manager appointments, the responsibility for which falls to the CIF Administrator, include a number of guidelines which, among other things, are designed to ensure that only suitable investments are held by the Scheme. The managers are prevented from investing in asset classes outside of their mandate without the CIF Administrator’s prior consent. A statement on the guidelines and restrictions is attached as appendix 2 to the CIF’s SIO.  Arrangements are in place to monitor the Scheme’s investments to help the Trustees check that nothing has occurred that would bring into question the continuing suitability of the current investments. The Trustees have delegated the responsibility to monitor the day to day management of the Scheme’s investments in the CIF to the CIF Administrator, who meets as appropriate with the current managers and receives regular reports from all the investment managers and the independent investment consultants. These reports include an analysis of the overall level of risk and return, along with their component parts, to ensure the risks taken and returns achieved are consistent with those expected.  The safe custody of the Scheme’s assets is delegated to professional custodians (either directly or through professional custodians).

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Should there be a material change in the Scheme’s circumstances, the Trustees will review whether and to what extent the investment arrangements should be altered; in particular whether the current risk profile remains appropriate. 4. Investment Strategy On finalisation of the actuarial valuation at 31 st December 2015 the Trustees commenced an investment strategy review, taking advice from the Trustees’ Scheme Actuary and investment consultants. As an interim measure, the Trustees, following consultation with the Company, agreed to revise the Scheme’s investment strategy to 45% growth assets and 55% protection assets in the CIF (i.e. excluding the Asset Backed Contribution Structures). Both the growth and protection ranges may fluctuate up to +/- 5% to allow for movements in markets. As noted above under ‘Investment Objectives’, the Trustees are in discussion with the Company, with the aim of formalising their long-term investment objectives, and putting in place a de-risking framework consistent with this in conjunction with the 31 December 2018 actuarial valuation. Rebalancing Policy The actual asset mix in the CIF is monitored by the CIF Administrator on behalf of the Trustees on a regular basis to analyse any variations from the strategic allocation. If an asset class exceeds the rebalancing trigger at the end of a quarter the CIF Administrator is authorised to rebalance having regard for the current investment & economic climate. Rebalancing must return the asset allocation to within the range of the strategic allocation of 45% growth +/-5% and 55 % protection +/- 5%. Any switch out or into an asset class must pay due regard to the impact on the other asset classes and the cashflow requirements of the participating pension schemes. The CIF Administrator is also permitted to rebalance when an asset class is within the rebalancing trigger. The CIF Administrator is authorised to match off cash flows with other schemes participating in the CIF to avoid unnecessary transaction costs. Day to Day Management of the Assets in the CIF The majority of the assets of the Scheme are invested in the CIF. The CIF is a structure which allows the pooling of assets for investment purposes of pension plans/schemes associated with the UTC group of companies. Investments of the participating schemes are held via a number of sub-funds within the CIF. The Scheme’s assets in the CIF are invested in the sub-funds of the CIF in accordance with the allocations set out in the CIF’s SIO. Day to day management of the assets in the CIF is undertaken by a number of investment managers. The CIF Administrator has taken steps to satisfy itself that the managers have the appropriate knowledge and experience for managing the Scheme’s investments and that they are carrying out their work competently. 5.

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The CIF Administrator has determined, based on expert advice, a benchmark mix of asset types and ranges within which each appointed investment manager may operate. The CIF Administrator regularly reviews the continuing suitability of the Scheme’s investments in the CIF, including the appointed managers and the balance between active and passive management, which may be adjusted from time to time. Details of the appointed managers can be found in the CIF’s SIO, which is available to members upon request. 6. Expected Return The Trustees expect to generate a return on the defined benefit assets in the CIF, over the long term, in excess of that which would have been achieved had no investment risk been taken within the portfolio, i.e. invested solely in a portfolio of long dated Government debt. It is recognised that over the short term performance may deviate significantly. 7. Management of the ABC The Trustees undertake a monthly valuation of the ABC. The value of the ABC is externally audited once a year. The Trustees monitor the receipt of the semi-annual coupon payments. ADDITIONAL VOLUNTARY CONTRIBUTIONS (DEFINED CONTRIBUTION (DC)) 8. Investment Objectives The investment arrangements of the Scheme’s AVC policies can be divided into two areas. The first, the strategic management of the assets, is fundamentally the responsibility of the Trustees and is driven by their investment objectives as set out below. The second area is the day to day management of the assets. The Trustees of the Scheme have ultimate responsibility for decision making on investment matters in respect of the Scheme’s AVC policies. The Trustees recognise that members making AVCs have differing investment needs and that these may change during the course of their working lives. They also recognise that members have differing attitudes to risk. The Trustees’ investment objective is to make available a suitable range of pooled investment vehicles to enable members to make adequate provision for their retirement and to control the risks as they see them. The Trustees have adopted the following objectives in respect of the Scheme’s AVC assets:  To provide a default investment option.

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 To provide members with a range of investment options to enable them to tailor investment strategy to their own needs.  To offer members the opportunity to reduce investment volatility as they approach retirement.  To avoid over complexity in investment in order to keep administration costs and employee understanding to a reasonable level.

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9. Risk The Trustees have taken into consideration the following aspects of risk:  The risk that a low investment return over members’ working lives secures inadequate retirement benefits.  The risk that relative market movements in the years just prior to retirement lead to a substantial reduction in the pension which would otherwise be secured.  The risk that relative market movements in the years just prior to retirement lead to a substantial reduction in the tax free cash which would otherwise be available.  The risk that the chosen investment vehicle underperforms the benchmark against which the manager is assessed. 10. Investment Strategy The Trustees offer members a range of investment options. The Trustees believe that this range of options is suitable for meeting the investment objectives and risk considerations outlined in sections 8 and 9. 11. Expected Return For the Scheme’s AVC assets, long term returns are expected to be in line with the performance objectives of each of the funds open to members.

BOTH SECTIONS

Additional Voluntary Contributions (AVCs)

12.

AVCs are separately invested. The investment policies are subject to review in the event of significant changes to the balance of liabilities of the Scheme. The Trustees periodically review the appropriateness of the AVC funds with the assistance of their advisors. 13. Cash at Bank A low balance of assets is also held in current bank accounts to facilitate benefit payments.

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14. Realisation of Investments The investment managers 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. 15. Socially Responsible Investment The Trustees believe that environmental, social and governance (ESG) factors are potentially financially material and therefore have a policy to take these into account, alongside other factors, in the selection, retention and realisation of investments. However, these factors do not take precedence over other financial and non-financial factors, including but not limited to historical performance or fees. The Trustees may consider both financial and non-financial factors when selecting or reviewing the Scheme’s investments. The Trustees do not apply any specific ethical criteria to their investments. As the Scheme’s investments (except the Insight Bonds and Gilts) are held in pooled funds, ESG considerations are set by each of the investment managers. The Scheme’s investment managers will ultimately act in the best interests of the Scheme’s assets to maximise returns for a given level of risk. The Trustees do not currently impose any specific ESG-related restrictions or requirements on the segregated mandate with Insight, so ESG considerations are determined at their discretion. The Trustees are aware of the approach that each of their investment managers take in relation to ESG considerations. The Trustees believe that good stewardship and positive engagement can lead to improved governance and better risk-adjusted investor returns. The Trustees delegate the exercise of rights (including voting rights) attached to the Scheme’s investments to the investment managers. The managers are all signatories to the UN Principles of Responsible Investment and all except First Eagle are signatories to the UK Stewardship Code. In selecting, monitoring and reviewing their investment managers, where appropriate, the Trustees will consider investment managers’ policies on engagement and how these policies have been implemented. The Trustees have not considered it appropriate to take into account individual members’ views when establishing the policy on environmental, social and governance factors, engagement and voting rights. 16. Review of this Statement The Trustees will review this Statement annually and after any significant change in investment policy. Any change to this statement will only be made after having obtained and considered the written advice of someone whom the Trustees reasonably believe to be qualified by their ability in and practical experience of financial matters and to have

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