Statement of Investment Principles

This Statement of Investment Principles (“SIP”) sets out the policy of the Trustees of the Associated Board of the Royal Schools of Music Pension Scheme (“the Scheme”) on various matters governing decisions about the investments of Scheme, a Defined Benefit (“DB”) Scheme.  This SIP replaces the previous SIP dated May 2023.

The SIP is designed to meet the requirements of Section 35 (as amended) of the Pensions Act 1995 (“the Act”). The SIP also reflects the Trustees’ response to the Myners voluntary code of investment principles and the Occupational Pension Schemes (Investment) Regulations 2005.

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

The Trustees will review this SIP from time to time and, with the help of their 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 respective key responsibilities of the Trustees, 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 Trustees’ policy towards risk appetite, capacity, measurement and management.

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

The Trustees’ primary objectives are:

• To make sure that the obligations to the beneficiaries of the Scheme are met; and
• To ensure that the Scheme has sufficient assets to meet its technical provisions, calculated in accordance with the Scheme’s statement of funding principles.

The Trustees are aware that there are various measures of funding, and have given due weight to those considered most relevant to the Scheme.

The Trustees’ investment objective is to maximise the return on the Scheme’s assets whilst managing and maintaining investment risk at an appropriate level, and taking into account the primary objectives.

The Trustees, with the help of their advisers and in consultation with the employer, review the investment strategy from time to time, taking into account the objectives described in Section 2 above.

The result of the latest review was that the Trustees agreed that the investment strategy of the Scheme should be based on the target allocation below.

There is no formal rebalancing policy.  The Trustees will instead review the asset allocation from time to time and if material deviations from the target strategic allocation occur, the Trustees will consider with its advisers whether it is appropriate to rebalance the assets (taking into account factors such as market conditions and anticipated future cash flows).

The Trustees consider a deviation from the target allocation of +/-5% as one where rebalancing should be seriously contemplated, though action may not be taken for various reasons (and the Trustees may take action for small deviations).

When deciding how to invest the Scheme’s assets, the Trustees consider a number of risks, including, but not limited to, those set out in Appendix 2.  Some of these risks are more quantifiable than others, but the Trustees have tried to allow for the relative importance and magnitude of each risk.

The Trustees considered a wide range of asset classes for investment, and the expected returns and risks associated with those asset classes.  The key financial assumption made by the Trustees in determining the investment arrangements are as follows:

• average long-term return on diversified growth funds above gilts: 2.3%
• average long-term return on liability driven investment above gilts: 0.4%
• average long-term return on corporate bonds above gilts: 1.0% to 1.4%

In setting the strategy the Trustees also took into account:

• the best interests of members and beneficiaries;
• the circumstances of the Scheme, including the profile of the benefit cash flows, 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
• the need for appropriate diversification between different asset classes.

The Trustees’ 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;
• 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 the 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.

The Trustees obtain and consider proper written advice from their investment adviser on the question of whether their investments are satisfactory, having regard to the need for suitable and appropriately diversified investments.

Details of the investment managers are set out in Appendix 3.

The Trustees have signed agreements with the investment managers, setting out in detail the terms on which the portfolios are to be managed.  The investment managers’ primary role is the day-to-day investment management of the Scheme’s investments.  The managers are authorised under the Financial Services and Markets Act 2000 (as amended) to carry out such activities.

The Trustees have limited influence over managers’ investment practices because all the Scheme’s assets are held in pooled funds, but they encourage their managers to improve their practices where appropriate.

The Trustees’ view is that the fees paid to the investment managers, and the possibility of their mandate being terminated, ensures 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 Trustees’ responsibility to ensure that the managers’ investment approaches are consistent with their 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 Trustees expect 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.  They assess this when selecting and monitoring managers.

The Trustees evaluate investment manager performance by considering performance over both shorter and longer-term periods as available.  Generally, the Trustees would be unlikely to terminate a mandate on short-term performance grounds alone.

The Trustees’ 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 Trustees recognise that portfolio turnover and associated transaction costs are a necessary part of investment management and that the impact of portfolio turnover costs is reflected in performance figures provided by the investment managers.  The Trustees expect their investment consultant to incorporate portfolio turnover and resulting transaction costs as appropriate in its advice on the Scheme’s investment mandates.

The investment managers have discretion over the timing of realisation of investments of the Scheme within the portfolios that they manage, and in considerations relating to the liquidity of investments.  When appropriate, the Trustees, on the administrators’ recommendation, decide on the amount of cash required for benefit payments and other outgoings and inform the investment managers of any liquidity requirements.

The Trustees have considered how social, environmental and ethical factors should be taken into account in the selection, retention and realisation of investments, given the horizon of the Scheme and its members.

The Trustees expect their investment managers to take account of financially material matters (including climate change and other ESG considerations). The Trustees seek to appoint managers that have appropriate skills and processes to do this, and from time to time reviews how their managers are taking account of these issues in practice.

The Trustees have limited influence over managers’ investment practices where assets are held in pooled funds, but they encourage their managers to improve their practices where appropriate.

The Trustees do 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).

The Trustees recognise their responsibilities as owners of capital and believe 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 Trustees have delegated to their investment managers 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, risks and ESG considerations. They expect the investment managers to exercise ownership rights and undertake monitoring and engagement in line with the managers’ general policies on stewardship, as provided to the Trustees from time to time, taking into account the long-term financial interests of the beneficiaries. The Trustees do not monitor or engage directly with issuers or other holders of debt or equity.

The Trustees monitor managers’ activities in relation to ESG factors, voting and engagement from time to time. The Trustees seek to understand how they are implementing their stewardship policies in practice to check that their stewardship is effective and aligned with expectations. The Trustees have selected some ESG themes to provide a focus for the monitoring of investment managers’ voting and engagement activities. The Trustees communicate these stewardship priorities to their managers.

If the monitoring identifies areas of concern, the Trustees will engage with the relevant manager to encourage improvements.

The Trustees seek to appoint managers that have strong stewardship policies and processes, reflecting where relevant the recommendations of the UK Stewardship Code issued by the Financial Reporting Council, and from time to time the Trustees review how these are implemented in practice.

Agreed and adopted by the Trustees of the Associated Board of the Royal Schools of Music Pension Scheme on 7 February 2024.