Statement of Investment Principals 30 September 2019 - Flipbook - Page 6
5 Expected Returns and Risks
The Trustee’s overall return target is for the Scheme’s assets to produce a return in
excess of the growth in the value of its liabilities calculated under the SFO.
The Trustee expects the assets to produce a return in excess of the growth in the value of
the Technical Provisions of between 0.9% per annum and 3.2% per annum over the
medium to longer term, depending on the level of prudence adopted in assessing future
Over the long-term, the Trustee’s expectation is to achieve the following long-term rates
of return from the investment approaches used in the strategy:
In excess of UK price inflation as measured by the Retail Prices Index.
Comparable with the return from global equities over an economic
cycle of five to seven years, with significantly reduced volatility.
The Trustee has considered various risks the Scheme faces, including market risk, interest
rate risk, inflation risk, default risk, concentration risk, manager risk and currency risk,
and considers that the Target Asset Allocation strikes a reasonable balance between risk
mitigation and seeking an appropriate level of return, taking account of the strength of
the employer covenant and the long-term nature of the Scheme.
Risk Relative to
the Value of the
The Target Asset Allocation has been determined with due regard to the characteristics
of the Scheme’s Technical Provisions.
The calculation of the Scheme’s Technical Provisions uses assumptions for future
investment returns and price inflation expectations that are based upon market values of
financial securities such as fixed interest and index-linked government bonds. This
means that the Technical Provisions are sensitive to changes in the price of these assets
as market conditions vary, and can have a volatile value.
The Trustee accepts that the investment strategy may result in volatility in the Scheme’s
funding position. Furthermore, the Trustee also accepts that there is a risk that the
assets will not achieve the rates of investment return assumed in the calculation of the
Scheme’s Technical Provisions.
To reduce the risk of concentration within the portfolio, the Trustee will monitor the
overall mix of asset classes and stocks in the investment strategy with its investment
The Trustee invests in a range of securities and asset classes through the funds they use
and consider the Scheme’s strategy to be appropriately diversified.