UTC (UK) Pension Scheme - Statement of Investment Principles (SIP)
United Technologies Corporation (UK) Pension Scheme
Statement of Investment Principles
Barnett Waddingham LLP
22 August 2023
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
1 of 13
Contents
1 Introduction ................................................................................................................................................................................................. 3
2 Governance arrangements.....................................................................................................................................................................3
3 Setting investment objectives ..............................................................................................................................................................4
4 Choosing investments .............................................................................................................................................................................5
5 Kinds of investments to be held ..........................................................................................................................................................6
6 The balance between different kinds of investments .................................................................................................................6
7 Risks ................................................................................................................................................................................................................ 7
8 Expected return on investments ..........................................................................................................................................................8
9 Realisation of investments .....................................................................................................................................................................8
10 ESG-related risks, view of members, the exercise of voting rights, engagement activities, manager incentivisation and conflicts of interest ............................................................................................................................................8
11 AVCs ................................................................................................................................................................................................................ 9
12 Monitoring ................................................................................................................................................................................................... 9
13 Agreement................................................................................................................................................................................................. 10
Appendix .......................................................................................................................................................................................................... 11
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
2 of 13
1 Introduction
1.1. This Statement of Investment Principles has been prepared by UTC Pension Trustee Ltd (‘the Trustee ’) of the United Technologies Corporation (UK) Pension Scheme ( ‘ the Scheme ’ ). It sets down the principles that govern the decisions about investments that enable the Scheme to meet the requirements of:
• the Pensions Act 1995, as amended by the Pensions Act 2004;
• the Occupational Pension Schemes (Investment) Regulations 2005 as amended by the Occupational Pension Schemes (Investment) (Amendment) Regulations 2010;
• the Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018; and
• the Occupational Pension Schemes (Investment and Disclosure) (Amendment) Regulations 2019.
1.2. The Scheme is a defined benefit arrangement, with a smaller proportion of funds accrued in respect of Additional Voluntary Contributions (‘AVCs’) and historical transfers invested on a defined contribution basis. This Statement focuses on the principles governing the investment of assets backing defined benefit liabilities. The approach taken for assets supporting benefits provided on a defined contribution basis is discussed in Section 11.
1.3. In preparing this statement the Trustee consulted Ceesail Ltd (‘the Principal Employer’) as well the Principal Employer’s ultimate parent, RTX.
1.4. The Trustee has obtained associated investment advice from its investment consultant, Barnett Waddingham LLP. Barnett Waddingham LLP is authorised and regulated by the Financial Conduct Authority.
1.5. This statement has also been prepared with regard to the 2001 Myners review of institutional investment (including subsequent updates), and relevant scheme funding legislation.
1.6. The investment powers of the Trustee are set out in the Trust Deed and Rules dated 2 January 2009, as amended. This statement is consistent with those powers.
1.7. The Trustee will review this statement at least every three years or if there is a significant change in any of the areas covered by the statement.
2 Governance arrangements
2.1 The Trustee has ultimate responsibility for decision making in relation to the Scheme’s investments and, in particular, for setting the Scheme’s benchmark asset allocation and target hedging ratios.
2.2 T he Trustee invests the majority of the Scheme’s assets through a common investment fund – the UTC Common Investment Fund (‘the CIF’). The CIF allows the Scheme’s assets to be managed in common with those of other pension arrangements associated with the participating employers and the wider group.
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
3 of 13
2.3 Under this arrangement, certain decision-making responsibilities are delegated to the administrator of the CIF (‘the CIF administrator’ ). The CIF Administrator is responsible for the following in respect of assets held in the CIF:
• Providing access to a range of asset classes, investment approaches and implementation methods that meet the needs of schemes that participate in the CIF.
• Appointing and removing the investment managers used for the purposes of the CIF.
• Monitoring the performance of investment managers, including value for money.
• Providing appropriate reporting to the trustees of schemes that participate in the CIF.
• Selecting and monitoring the administrator of the CIF and custodian its assets.
• Managing the processes of investing, disinvesting and restructuring of assets.
2.4. At the time of preparation of this Statement, the CIF Administrator is the Trustee.
2.5 The Trustee’s duties in acting as the CIF Administrator are separate and distinct to its fiduciary and legal responsibilities to members of the Scheme. The role of CIF Administrator could, in theory, be undertaken by another party.
3 Setting investment objectives
3.1 The Trustee has set objectives for its investment strategy in light of an analysis of the Scheme’s projected liability profile, an understanding of the relationship that exists between the value of investments and the actuarial value placed on the liabilities, as well as the constraints the Trustee faces in meeting possible objectives. 3.2 The Trustee’s investment objectives and associated strategy are also set with reference to the guarantee and associated de-risking framework agreed between the Trustee and RTX. The guarantee and de-risking framework agreement are set out in separate documents. 3.3 The guarantee provides the Scheme with security underwritten by RTX, in return for which the Trustee and RTX agree key parameters for the investment strategy, i.e. the benchmark asset allocation and permissible parameters for allowed deviations from the benchmark asset allocation. 3.4 The de-risking framework sets out an agreement between the Trustee and RTX as to how the benchmark asset allocation and permissible parameters may change as the Scheme’s funding position develops , with an objective of reaching a strong funding position with a low-risk investment strategy by t he mid 2030’s. The expectation is that the Scheme will then have limited need to rely on the participating employers or RTX for further financial support. 3.5 A further input into the Trustee’s investment objectives and the resulting strategy are the asset-backed contribution arrangements ( ‘ ABCs ’ ) in place. The ABCs consist of loan notes issued by RTX and held in two Scottish Limited Partnerships in which the Trustee is a limited partner. 3.6 The loan notes will provide capital repayments in 2036, contingen t on the level of the Scheme’s funding position at that time, totalling £320m. Interest payments of 4.1% per annum are payable half-yearly on the loan notes.
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
4 of 13
3.7 The ABCs are managed directly by the Trustee and are not held in the CIF. The Trustee undertakes a monthly valuation of the ABCs, with an independently audited valuation obtained annually.
3.8
The Trustee’s main investment objectives are set out below:
• To maintain a level of assets that, together with the support of the participating employers, the guarantee and the ABCs, allows benefits to be met in full when they fall due.
• To target a level of return consistent with the Trustee’s ongoing funding plan and the de-risking framework.
• To use the investment strategy to appropriately constr ain volatility in the Scheme’s funding position, taking account of the nature of the employer covenant, inclusive of the guarantee.
• To adjust the investment strategy over time in a way that is consistent with the de-risking framework to improve the ability of the Scheme to meet members’ benefits with greater certainty and, ultimately, to bring the Scheme into a position where it has a low dependence on the participating employers and RTX. The target timeframe for reaching this position is the mid 2030’s.
4 Choosing investments
4.1 The Trustee sets a benchmark asset allocation and target hedging ratios expected to meet its investment objectives.
4.2 In setting the benchmark asset allocation and target hedging ratios, the Trustee considers the advice of its professional advisers. The Trustee considers Barnett Waddingham LLP to be suitably qualified and experienced for this role. 4.3 The Trustee will consult the Principal Employer and RTX before amending the benchmark asset allocation and target hedging ratio, reaching agreement where this is required under the guarantee and/or de-risking framework.
4.4 Selection and day-to-day management of the Scheme’s assets is delegated to professional investment managers.
4.5 The investment managers are authorised by either the Financial Conduct Authority and/or the Prudential Regulation Authority and are regulated by the Financial Conduct Authority. The investment managers are responsible for security selection and the exercise of any rights associated with the investments, e.g. voting rights on ordinary shares. 4.6 The suitability of the investment managers is reviewed by the CIF Administrator and the Trustee on an ongoing basis. This review includes consideration of the ability of the investment managers to meet their objectives, as well as the managers’ charges and level of service provision.
4.7 Details of the specific investments held by the Scheme through the CIF are contained in a separate document, the Investment Implementation Pol icy (‘the IIP’) .
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
5 of 13
5 Kinds of investments to be held
5.1 The Scheme is permitted to invest in a wide range of assets including equities, bonds, cash, property and alternative asset classes, such as target return funds, private equity, debt and infrastructure. The Scheme is also permitted to invest in derivatives including swaps and gilt repurchase agreements. 5.2 The Trustee monitors the employer-related investment content of the portfolio as a whole and will take steps to alter this should they discover this to be more than 5% of the portfolio. This check is carried out annually as part of the preparation and audit of the Scheme’s annual report and accounts .
6 The balance between different kinds of investments
6.1 The Scheme invests in assets that are expected, in combination, to achieve the Trustee’s objectives. The target allocation between different asset classes is recorded in the IIP .
6.2 The Trustee considers the merits of different styles of investment management for the various elements of the portfolio. The current investment management arrangements are set out in the IIP .
6.3 From time to time the Scheme may hold cash as a working balance or for tactical reasons, and deviate from its benchmark asset allocation in order to accommodate asset restructuring exercises, short-term cashflow requirements or other unexpected events.
6.4 The Trustee may also hold insurance policies such as deferred or immediate annuities that provide income to the Scheme, matching part of all of the liabilities due from it.
6.5 The Trustee is aware that the appropriate balance between different kinds of investments will vary over time. T he Scheme’s benchmark asset allocation is therefore expected to change as the liability profile m atures and/or as the Trustee’s funding and investment objectives are achieved.
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
6 of 13
7 Risks
7.1 The Trustee has considered the following risks associated with the Scheme’s investment holdings and the nature of its liabilities, and considered ways of managing/monitoring these risks:
Risk relative to the valuation of the Scheme’s liabilities
The Trustee will review the investment strategy with respect to the characteristics of the Scheme’s liabilities when they are reassessed at each actuarial valuation. Such characteristics include interest rate risk, inflation risk and longevity risk. The investment strategy will be set with consideration to the risks associated with these characteristics in the context of the Trustee’ s agreed funding plan, the de-risking framework and allowing for the Trustee’s view of covenant risk. The Trustee recognises that the returns from its holdings may be volatile and seeks to manage the risk of falls in the value of the portfolio (outside of assets used to hedge changes in the value of the liabilities), through the use of diversification and active management, as appropriate. Ultimately, the Trustee would typically aim to avoid being unnecessarily exposed to market volatility, subject to the inv estment strategy’s expected return being consistent with the Trustee’s funding plan and the de-risking framework, and the associated level of risk being consistent with the Trustee’s view of covenant risk. In determining its investment objectives and strategy, the Trustee considers the ability and legal obligation of the participating employers to support the Scheme (including allowance of the additional security provided by the guarantee).
Return volatility for assets that are not used to hedge changes in the value of the Scheme’s liabilities
Covenant risk
Asset allocation risk
The benchmark asset allocation is detailed in IIP and any deviation from the benchmark asset allocation is monitored on a regular basis by the CIF Administrator/the Trustee.
Manager performance risk
The CIF Administrator/the Trustee monitors the performance of each of the Scheme’s investment managers on a regular basis, inclusive of meetings with each manager from time to time. The Trustee has a written agreement with each investment manager, which sets out the parameters within each investment manager may operate. ESG-related risks, including climate risk are potentially financially material risks across all future time periods. The Trustee will continue to develop its policy to consider these, alongside other factors, when selecting or reviewing the Scheme’s investments, in order to manage the risk of loss and, where appropriate, to take associated opportunities. Each asset manager is expected to undertake good stewardship and positive engagement in relation to the underlying securities held. The Trustee monitors these and will report on the managers’ practices in the annual Implementation Statement.
Environmental, Social and Governance (ESG) related risks, including climate risks
Concentration risk
Each investment manager is expected to manage broadly diversified portfolios and to spread assets across a number of individual shares and securities, as appropriate to the mandate.
Liquidity risk
The Trustee invests in asset classes such that there is a sufficient allocation to liquid investments that can be converted into cash at short notice given the Scheme’s cashflow and collateral management requirements. The Scheme’s administrators and the RTX Pensions Department assess the level of cash held in order to limit the impact of the cashflow requirements on the investment strategy, while potential collateral requirements resulting from derivative-based holdings are monitored by the Trustee, Barnett Waddingham and the relevant investment manager on an ongoing basis.
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
7 of 13
Currency risk
The Scheme’s liabilities are denominated in sterling. The Scheme may gain exposure to overseas currencies by investing in assets that are denominated in a foreign currency or via currency management. Currency hedging is employed, as appropriate, to manage the impact of exchange rate fluctuations. The risk of loss of assets by each investment managers and the appointed custodian and sub- custodians are considered on appointment and reviewed periodically by the CIF Administrator/the Trustee. This includes losses beyond those caused by market movements (e.g. default risk, operational errors or fraud). The CIF Administrator/the Trustee undertakes periodic reviews of the internal controls and processes of its custodian and each of the investment managers. The Trustee is aiming to be in a position to be in a low dependency position in the mid- 2030’s . At or before this point it may be viab le to secure some or all of the Scheme’s liabilities with an insurer through a bulk annuity policy. The Trustee acknowledges that the value of the Scheme’s liabilities when priced by an insurer is likely to be materially different to the value on other funding measures, e.g. low dependency/self-sufficiency. The asset allocation required to minimise volatility in the funding position on the buy-out basis will also likely be different to that required on other funding measures. As the Scheme moves closer to being able to secure member benefits with an insurer, this position will be monitored more closely by the Trustee.
Loss of assets
Buy-out pricing mismatch
8 Expected return on investments
8.1 In setting its investment strategy, selecting asset classes and investment managers, the Trustee has regard to the investment return that each asset class is expected to provide alone and in combination. The Trustee is advised by its professional advisors on these matters 8.2 The Trustee requires the Scheme’s assets to produce a return in excess of the discount rate used to determine the Scheme’s Technical Provision and in line with the expected return presently required under the de-risking framework. In addition, the expected return would also be required to meet the requirements requirement of any Recovery Plan in place at a future date (this requirement does not apply at the time of preparation of the current Statement).
9 Realisation of investments
9.1 The Trustee makes disinvestments from the investment managers with the assistance of its advisers and administrators, as necessary, to meet the Scheme’s cashflow requirements.
10 ESG-related risks, view of members, the exercise of voting rights, engagement activities, manager incentivisation and conflicts of interest
10. The Trustee has set policies in relation to these matters. These are set out in the Appendix .
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
8 of 13
11 AVCs and other defined contribution assets
11.1 The Scheme holds assets in respect of AVCs paid by members to provide benefits on a defined contribution basis, i.e. where contributions are invested to accumulate a fund that can be used to provide different forms of benefit at retirement, reflecting the preferences and needs of members.
11.2 The Scheme also holds assets in respect of historical transfers that provide benefits on a defined contribution basis.
11.3 The Trustee acknowledges that individual members with such defined contribution assets have different requirements in terms of risk and return, and that these may c hange over the course of a member’s working life.
11.4 The Trustee has adopted the following approach in respect of funds invested in respect of AVCs and other defined contribution assets:
• To provide members with a range of investment options to enable them to invest in a way that meets their own needs with respect to risk and return.
• To offer members approaches that help improve the certainty of benefits they will receive as they approach retirement.
• To avoid offering an excessive range of options in order to help with member understanding and manage governance costs.
11.5 For certain members who have not made their own investment choices, the Trustee has, at times, needed to select an investment option on behalf of the members. In selecting these investments, the Trustee has typically sought to preserve the purchasing power of members ’ funds, while seeking to reduce risk relative to emerging benefits as members approach an expected retirement date. This approach necessarily strikes a balance between targeting a sufficient high investment return, while managing risk. 11.6 The Trustee uses a number of providers to manage the Scheme’s defined contribution assets , and to provide a range of fund options. The Trustee has an expectation that underlying investment approaches will produce returns consistent with their specific risk-return targets.
12 Monitoring
12.1 The Trustee employs its investment consultant to assist it in monitoring the performance of the Scheme’s investment strategy and investment managers.
12.2 The Trustee receives quarterly reports from the investment managers and meets with their representatives periodically to review their investment performance and processes.
12.3 The Trustee and its advisers will monitor the investment m anagers’ performance again st the objectives set out in the IIP .
12.4 The appropriateness of the investment m anagers’ remuneration will be assessed relative to market costs for similar strategies, the skill and resources required to manage the strategy, and the success or otherwise a manager has had in meeting its objectives.
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
9 of 13
12.5 The Trustee expects the investment managers to change underlying holdings only to an extent required to meet their investment objectives. The reasonableness of such turnover will vary by fund and change according to market conditions. The Trustee therefore does not set a specific portfolio turnover target for their strategy or the underlying funds. The investment managers provide information on portfolio turnover and associated costs to the Trustee so that this can be monitored, as appropriate.
12.6 The Trustee will consider on a regular basis whether or not the investment managers and AVC/defined contribution providers remain suitable to manage the Scheme’s investments.
13 Agreement
13.1 This statement has been agreed by the Trustee and replaces any previous statements.
This Statement of Investment Principles was approved by UTC Pension Trust Ltd as Trustee of the UTC (UK) Pension Scheme on 22 August 2023
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
10 of 13
Appendix - ESG-related risks, view of members, the exercise of voting rights, engagement activities, manager incentivisation and conflicts of interest
1. ESG-related risks (including climate change)
The Trustee recognises that Environmental, Social and Governance ( ‘ ESG ’ ) issues can and will have a material impact on the companies, governments and other organisations that issue or otherwise support the assets in which the Scheme invests. In turn, ESG issues can be expected to have a material financial impact on the returns provided by those assets. The Trustee delegates responsibility for day-to-day decisions on the selection of investments to its investment managers. The Trustee has an expectation that the investment managers will consider ESG issues in selecting securities and other investments, or will oth erwise engage with the issuers of the Scheme’s underlying holdings on such matters in a way that is expected to improve the long-term return on the associated assets.
In choosing investment managers, the Trustee and its advisers take the following factors into account in the selection, retention and realisation of investments:
Selection of investments: assessment of the investment managers' ESG integration credentials and capabilities, including stewardship.
Retention of investments: developing a process to monitor ESG considerations on an ongoing basis by regularly seeking information on the responsible investing policies and practices of the investment managers.
Realisation of investments: requesting information from investment managers about how ESG considerations are taken into account in decisions to realise investments.
The Trustee also takes these factors into account as part of its investment process to determine a benchmark asset allocation, and considers them as part of ongoing reviews of the Sch eme’s investments.
The Trustee does not currently impose any specific restrictions on the investment managers with regard to ESG issues, but will review this position from time to time. The Trustee receives information from the investment managers on their approach to selecting investments and engaging with issuers with reference to ESG issues. With regard to the specific risk to the performance of the Scheme’s investments associated with the impact of climate change, the Trustee takes the view that this falls within its general approach to ESG issues. The Trustee will continue to monitor market developments in this area in conjunction with its investment adviser.
2. Views of Member and Beneficiaries
The Scheme is comprised of a diverse membership, expected to hold a broad range of views on ethical, political, social, environmental, and quality of life issues (referred to as ‘ non-financial matters ’ in the relevant regulations). The Trustee therefore does not explicitly seek to reflect any specific views through the implementation of the investment strategy.
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
11 of 13
3. The exercise of voting rights
Responsibility for engagement with the issuers of the Scheme’s underlying investment holdings and the use of voting rights is delegated to the investment managers. The Trustee can therefore only influence engagement and voting policy indirectly. The Trustee expects that the investment managers will use their influence as institutional investors to exercise the Trustee’ s rights and duties as shareholders, including where appropriate engaging with underlying investee companies to promote good corporate governance, accountability and to understand how those companies take account of ESG issues in their businesses.
The investment managers provide regular information to the Trustee on their actions in relation to engagement and use of voting rights. The Trustee is therefore aware of the policies adopted by the investment managers.
4. Engagement activities
Responsibility for monitoring the makeup and development of the capital structure of investee companies is delegated to the investment managers. The Trustee expects the extent to which the investment managers monitor capital structure to be appropriate to the nature of the mandate. The Trustee also considers it to be part of the investment managers’ roles to assess and monitor how the companies in which they are investing are managing developments in ESG related issues, and in particular climate risk, across the relevant parts of the capital structure for each of the companies in which the managers invest on behalf of the Scheme.
Should an investment manager be failing in these respects, this should be captured in the Scheme’s regular monitoring of the investment managers and the Trustee would seek to engage with them to improve the position.
5. Incentivisation arrangements with investment managers
The investment managers are primarily remunerated based on an agreed fixed annual percentage of the asset value for each underlying fund. The Trustee does not directly incentivise the Investment Managers to align the approach they adopt for a particular fund with the Trustee’s policies and objectives. Instead, the investment managers and the funds are selected so that, in aggregate, the returns produced are expected to meet the Trustee’ s objectives. Neither does the Trustee directly incentivise the investment managers to make decisions about the medium to long-term performance of an issuer of debt or equity, or to engage with those issues to improve their performance. The Trustee expects such assessment of performance and engagement to be undertaken as appropriate and necessary to meet the investment objectives of the funds used by the Scheme.
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
12 of 13
6. Conflicts of interest
The Trustee maintains a separate conflicts of interest policy and register. Subject to reasonable levels of materiality, these documents record any actual or potential conflicts of interest in relation to investee companies or the investment managers, while also setting out a process for their management. The Scheme’s investment consultant is independent and no arm of their business provides asset management services. This, and their FCA-regulated status, makes the Trustee confident that the investment manager recommendations they make are free from conflict of interest.
The Trustee expects all investment managers to have a conflict of interest policy in relation to their engagement and ongoing operations.
The Trustee therefore believes it has managed the potential for conflicts of interest in the appointment of the investment managers and conflicts of interest between the Trustee, investment managers and the investee companies.
UTC (UK) Pension Scheme | Statement of Investment Principles | 22 August 2023
13 of 13
Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13Made with FlippingBook - Online magazine maker