remploy limited pension and assurance scheme

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Remploy Limited Pension and Assurance Scheme Implementation Statement May 2021

Document classification: Public

May 2021

© Isio Group Limited/Isio Services Limited 2021. All rights reserved Document classification: Public | 2

Background

The Department for Work and Pensions (‘DWP’) is increasing regulation to improve disclosure of financially material risks. This regulatory change recognises Environmental, Social and Governance (ESG) factors as financially material and schemes need to consider how these factors are managed as part of their fiduciary duty. The regulatory changes require that schemes detail their policies in their statement of investment principles (SIP) and demonstrate adherence to these policies in an implementation report.

Statement of Investment Principles (SIP)

The Scheme has updated its SIP in response to the DWP regulations and covers:

• Policies for managing financially material considerations including ESG factors and climate change.

• Policies on the stewardship of the investments.

The SIP can be found online at the web address https://schemedocs.com/remploy-statement-investment-principles.html.

Implementation Report

This implementation report is to provide evidence that the Scheme continues to follow and act on the principles outlined in the SIP. This report details:

• actions the Scheme has taken to manage financially material risks and implement the key policies in its SIP

• the current policy and approach with regards to ESG and the actions taken with managers on managing ESG risks

• the extent to which the Scheme has followed policies on engagement, covering engagement actions with its fund managers and in turn the engagement activity of the fund managers with the companies they invest

• voting behaviour covering the reporting year up to 31 March 2021 for and on behalf of the Scheme including the most significant votes cast by the Scheme or on its behalf

Summary of key actions undertaken over the Scheme reporting year

There have been no key actions taken by the Scheme over the reporting year in respect to investment strategy or asset allocation.

Background and Implementation Statement

https://schemedocs.com/remploy-statement-investment-principles.html

https://schemedocs.com/remploy-statement-investment-principles.html


Implementation Statement

This report demonstrates that the Remploy Limited Pension & Assurance Scheme has adhered to its investment principles and its policies for managing financially material consideration including ESG factors and climate change.

Signed

Position

Date


Risk / Policy Definition Policy Actions and details on changes to policy

Interest rates and inflation

The risk of mismatch between the value of the Scheme assets and present value of liabilities from changes in interest rates and inflation expectations.

To hedge 90% of the Scheme’s Technical Provisions liabilities against these risks.

Increased the hedge ratio from 80% to 90%, on a Technical Provision basis.

Liquidity Difficulties in raising sufficient cash when required without adversely impacting the fair market value of the investment.

To maintain a sufficient allocation to liquid assets so that there is a prudent buffer to pay members benefits as they fall due (including transfer values), and to provide collateral to the LDI/synthetic equity portfolio.

There have been no changes to policy over the reporting year.

Market Experiencing losses due to factors that affect the overall performance of the financial markets.

To remain appropriately diversified and hedge away any unrewarded risks, where practicable.


Credit

Default on payments due as part of a financial security contract.

To appoint investment managers who actively manage this risk by seeking to invest only in debt securities where the yield available sufficiently compensates the Scheme for the risk of default.

The strategic allocation to the credit fund managed by Apollo was increased, while the allocation to both the credit funds with Partners Group and Barings was decreased to maintain the optimal level of diversification.

Environmental, Social and Governance

Exposure to Environmental, Social and Governance factors, including but not limited to climate change, which can impact the performance of the Scheme’s investments.

To appoint managers who satisfy the following criteria, unless there is a good reason why the manager does not satisfy each criteria:

1. Responsible Investment (‘RI’) Policy / Framework

2. Implemented via Investment Process

3. A track record of using engagement and any voting

The managers’ ESG policies were reviewed and presented to the Trustee in an Impact Assessment report in November 2020. The Trustee will review the managers’ ESG policies on an annual basis, assessing the managers’ progress on addressing the actions raised within the Impact Assessment report.

Managing risks and policy actions DB


rights to manage ESG factors

4. ESG specific reporting

5. UN PRI Signatory

The Trustee monitors the mangers on an ongoing basis.

Currency The potential for adverse currency movements to have an impact on the Scheme’s investments.

Hedge all currency risk on all assets that deliver a return through contractual income.

Hedge 100% of currency risk on equities/other assets.



Changes to the SIP

Policies added to the SIP

Date updated: August 2020

How the investment managers are incentivised to align their investment strategy and decisions with the Trustee’s policies.

• As the Scheme is invested in predominantly pooled funds, there is no scope for these funds to tailor their strategy and decisions in line with the Trustee’s policies. However, the Trustee invests in a portfolio of pooled funds that are aligned to the strategic objective.

• Three of the Scheme’s mandates are subject to a performance related fee to align the interests of the fund managers with the Trustee.

How the investment managers are incentivised to make decisions based on assessments of medium to long-term financial and non-financial performance of an issuer of debt or equity and to engage with them to improve performance in the medium to long-term.

• The Trustee reviews the investment managers’ performance relative to medium and long-term objectives as documented in the investment management agreements.

• The Trustee monitors the investment managers’ engagement and voting activity on a periodic basis as part of their ESG monitoring process.

• The Trustee does not incentivise the investment managers to make decisions based on non-financial performance.

How the method (and time horizon) of the evaluation of investment managers’ performance and the remuneration for their services are in line with the Trustee’s policies.

• The Trustee reviews the performance of all the Scheme’s investments on a net of cost basis to ensure a true measurement of performance versus investment objectives.

• The Trustee evaluates performance over the time period stated in the investment managers’ performance objective, which is typically 3 to 5 years.

• Investment manager fees are reviewed annually to make sure the correct amounts have been charged and that they remain competitive.

The method for monitoring portfolio turnover costs incurred by investment managers and how they define and monitor targeted portfolio turnover or turnover range.

• The Trustee does not directly monitor turnover costs. However, the investment managers are incentivised to minimise costs as they are measured on a net of cost basis.


The duration of the Scheme’s arrangements with the investment managers

• The duration of the arrangements is considered in the context of the type of fund the Scheme invests in.

o For closed-ended funds or funds with a lock-in period, the Trustee ensures the timeframe of the investment or lock-in is in line with the Trustee objectives and Scheme’s liquidity requirements.

o For open-ended funds, the duration is flexible and the Trustee will from time-to-time consider the appropriateness of these investments and whether they should continue to be held.


ESG as a financially material risk

The SIP describes the Scheme’s policy with regards to ESG as a financially material risk. This page details how the Scheme’s ESG policy is implemented, while the following page outlines Isio’s assessment criteria as well as the ESG beliefs used in evaluating the Scheme’s managers’ ESG policies and procedures. The rest of this statement details our view of the managers, our actions for engagement and an evaluation of the engagement activity.

Implementing the Current ESG Policy

Areas for engagement Method for monitoring and engagement

Circumstances for additional monitoring and engagement

Environmental, Social, Corporate Governance factors and the exercising of rights and engagement activity

• The Scheme’s investment advisor, Isio, will monitor managers’ ESG policies on an ongoing basis.

• The manager has not acted in accordance with their policies and frameworks.

• The manager’s policies are not in line with the policies of the Trustee in this area.

Current ESG policy and approach


The below table outlines the areas which the Scheme’s investment managers are assessed on when evaluating their ESG policies and engagements. The Trustee has adopted Isio’s standard ESG beliefs, shown below:

Risk Management

1. Integrating ESG factors, including climate change risk, represents an opportunity to increase the effectiveness of the overall risk management of the Scheme

2. ESG factors can be financially material and managing these risks forms part of the fiduciary duty of the Trustees

Approach / Framework

3. The Trustees should understand how asset managers make ESG decisions and will seek to understand how ESG is integrated by each asset manager.

4. ESG factors are relevant to investment decisions in all asset classes.

5. Managers investing in companies’ debt, as well as equity, have a responsibility to engage with management on ESG factors.

Reporting & Monitoring

6. Ongoing monitoring and reporting of how asset managers manage ESG factors is important.

7. ESG factors are dynamic and continually evolving; therefore the Trustees will receive training as required to develop their knowledge.

8. The role of the Scheme’s asset managers is prevalent in integrating ESG factors; the Trustees will, alongside the investment advisor, monitor ESG in relation to the asset managers’ investment decisions.

Voting & Engagement

9. The Trustees will seek to understand each asset managers’ approach to voting and engagement when reviewing the asset managers’ approach.

10. Engaging is more effective in seeking to initiate change than disinvesting.

Collaboration 11. Asset managers should sign up and comply with common codes and practices such as the UNPRI & Stewardship code. If they do not sign up, they should have a valid reason why.

12. Asset managers should engage with other stakeholders and market participants to encourage best practice on various issues such as board structure, remuneration, sustainability, risk management and debtholder rights.


Manager and Fund

ESG Summary Actions identified Engagement with manager commentary

Apollo

Total Return Fund

Apollo have been actively incorporating ESG into their investment process for a number of years and are recognised as one of the leaders in ESG integration. They have a robust framework in place for successfully promoting ESG factors across the industry and portfolio companies.

Set-out formal ESG criteria for each potential credit investment and emphasise ESG factors in day-to-day investment decisions. This could include more clarity on how Apollo analyses what constitutes ‘material’ ESG risks.

Apollo should provide ESG metrics and qualitative comment specific to the Fund on a regular basis where possible. This could include factors such as carbon emissions exposure, company engagement activity, and a summary of investments which exhibit high ESG risks.

Isio engaged with Apollo in Q2 2020 on the Trustee’s behalf to review their ESG policies and set actions and priorities for each manager.

Aviva Lime Property Fund

Aviva Investors Real Assets has an established ESG team which proactively reviews and reports on ESG issues across their fund range. Aviva place considerable importance on ESG and are continuously looking for ways in which they can improve on ESG. Aviva have been able to demonstrate that ESG is strongly considered in the decision-making processes.

Provide more granular information/data on the diversity metrics in place at portfolio level, including ethnicity, gender and social mobility stats.

Isio engaged with Aviva in Q2 2020 on the Trustee’s behalf to review their ESG policies and set actions and priorities for each manager.

Barings Investment Grade CLO Fund

Barings has a clear firm wide ESG framework, managed by a dedicated team who integrate ESG considerations across their business. We note that Barings ability to influence CLO managers

Barings to report on ESG metrics and provide qualitative comments specific to the Fund within the quarterly report. Barings to implement KPIs to measure engagement effectiveness.

Isio engaged with Barings in Q2 2020 on the Trustee’s behalf to review their ESG policies and set actions and priorities for each manager.

ESG summary and actions with the investment managers


is limited as an investor, but we are comforted by Baring’s commitment to ESG through their business level ESG priorities and collection of ESG data from CLO managers to develop further insight into the industry.

Barings to implement a quantitative scorecard to quantify ESG risks through a standardised process.

Insight LDI, Synthetic Credit and Equity

Insight have shown they have sufficient resource and capability to assess the extent of ESG risks on counterparty exposure for LDI and synthetic mandates. Insight recognise that their ESG framework can be developed even further and we believe this is a positive sign that they are continually improving their approach for considering ESG factors.

Insight should consider developing internal diversity targets, focused not just on gender but also race. Also, consider greater emphasis on D&I issues in assessing companies / counterparties. Insight should add counterparty ESG scores to client reporting.

Isio engaged with Insight in Q2 2020 on the Trustee’s behalf to review their ESG policies and set actions and priorities for each manager.

Insight ABS Fund Range

We acknowledge ESG integration is more difficult within the ABS market. However, we believe Insight can do more, particularly within engagement and reporting.

Insight should develop Fund specific quantifiable ESG objectives. Insight should set KPIs to measure engagement effectiveness. Insight should develop a framework for reporting on ESG issues and include this in regular client reporting.

Isio engaged with Insight in Q2 2020 on the Trustee’s behalf to review their ESG policies and set actions and priorities for each manager.

M&G Alpha Opportunities Fund

M&G have evidenced their ability to consider the significance of ESG factors in this Fund. M&G should consider measurable ESG aims for the Fund and increase the number of ESG risk metrics that are being monitored. Although M&G are actively developing their integrated ESG approach in investment decisions, M&G should consider more in-depth reporting for clients and progress reports on aims for the Fund.

M&G currently have a qualitative approach and are working towards a more quantitative approach (scorecard). M&G should seek to roll this out for all analysts, and they can also develop an integrated ESG scoring system which scores both at an individual issuer level and at a sector/country level. M&G should clearly publicise engagements throughout the quarter in quarterly reports and on their website and provide updates on past engagements, with engagements focused on companies the Fund invests in. M&G should increase the number of risk metrics they

Isio engaged with M&G in Q2 2020 on the Trustee’s behalf to review their ESG policies and set actions and priorities for each manager.


monitor such as climate change and the sensitivity to these metrics to the portfolio.

Partners Group Direct Lending

Partners Group have a specialist ESG and Sustainability team, who support the business in achieving their ESG objectives. At a fund level they can demonstrate that ESG is a key aspect of the due diligence process and ongoing engagement is apparent through an investment’s lifecycle. Partners Group could improve the level of ESG reporting compared to its peers and we would like to see a clearer focus on diversity metrics in their ESG risk assessment at a fund level.

In future reports, Partners Group should include examples of where they have worked with portfolio companies to bring about a desired change highlighted by Partners Group. Provide more granular information/data on the diversity metrics in place at portfolio level, including ethnicity, LGBTQ+ and social mobility stats. In future reports, include examples of where Partners Group have worked with other industry managers to bring about a positive ESG change.

Isio engaged with Partners Group in Q2 2020 on the Trustee’s behalf to review their ESG policies and set actions and priorities for each manager.


As the Scheme invests via fund managers, the managers provided details on their engagement actions including a summary of the engagements by category for the 12-month period to the 31 March 2021.

Fund name Engagement summary Commentary

Apollo Total Return Fund

Total engagements: 31 Environmental: 7 Governance: 5 Social: 5 Other: 14

Apollo have a clear due diligence and engagement framework. The team continuously engages with portfolio companies through discussion with management. This engagement has been a key driver for the production of formal company ESG reports and key performance indicators. As bond investors, Apollo’s voting rights are limited, making it more difficult to engage with portfolio companies in comparison to equity investors. Examples of significant engagements include: Clearway Energy – Apollo met with the firm’s CEO and CFO to discuss the efficiency of the company’s existing renewable wind farms, as well as the acquisition of new renewable wind and solar powered projects. Following this engagement, the company intend to invest at least $300m in new renewable energy projects during 2020. Gannett Co. Inc. – Apollo discussed with the Board the firm’s transition to digital subscribers to reduce newsprint usage. Following the engagement, Garnett has set a one million digital subscriber target by the end of 2020. Separately, Apollo also discussed the firm’s response to COVID-19 and the protection of employees through the provision of PPE. Following Apollo’s engagement, the firm has not experienced any material disruptions to production while employees remain safe.

Aviva Lime Property Fund

Total Engagement: 29

Environmental: 29

The team undertake ESG risk and opportunity analysis through origination, while also engaging with tenants and stakeholders on an ongoing basis. The team also collates and reports ESG data through the Global Real Estate Sustainability Benchmark.

The fund has been reducing its greenhouse gas emissions over the year with further reductions

Engagement


expected to align with Aviva’s net zero commitment by 2040.

Example of significant engagements include: Buro Happold – Aviva hired the sustainable design specialist Buro Happold to integrate their ESG knowledge into Aviva’s development pipeline. The appointment will cover over 140 projects, covering Real Estate Equity and Long Income funds.

The latest example of this is the integration of sustainable design within 100 Bristol Business Park, comprising of three Grade A office buildings. The design measures implemented at this site include sustainable urban drainage systems to minimise flood risk, the use of low Volatile Organic Compound (VOC) materials to improve internal air quality for occupiers and over 200 cycle storage facilities to promote sustainable travel.

Next – Aviva have commenced the installation of a solar photovoltaic installation at a distribution centre in Southampton which is due to complete in June 2021. The project will allow for the generation of clean energy for on-site consumption by Next, enabling them to generate electricity independently of the power grid.

Barings Investment Grade CLO Fund

Barings’ currently does not share a log of company engagements but provides a percentage split of the underlying holdings against their internal ESG scorecard. Roughly 83% of the underlying holdings have received an ESG outlook score of either Good or Average.

We note that Barings ability to influence CLO managers is limited as an investor, but we are comforted by Baring’s commitment to ESG through their business level ESG priorities and collection of ESG data from CLO managers to develop further insight into the industry.

Insight LDI, Synthetic Credit and Equity

We requested this data from the manager however currently the manager cannot produce this level of reporting. We are working with them to ensure that this data is available in the future.

We note that Insight’s ability to influence ESG factors in relation to LDI is limited as an investor, but we are comforted by Insight’s commitment to ESG through their business level ESG priorities while also being a signatory of UNPRI and Institutional Investors Group on Climate Change.

Insight ABS Fund Range

We requested this data from the manager however currently the manager cannot produce this level of reporting. We are working with them to ensure that this data is available in the future.

Insight engage with issuers when underwriting deals. These engagement activities are consistent with the firm’s stewardship and ESG policies.


M&G Alpha Opportunities Fund

Total Engagements: 7

Environmental: 1

Social: 2

Governance: 4

M&G’s activities are consistent with their ESG policies and they have a systematic approach around engagements in which specific objectives are outlined in advance and measured based on the outcomes from the engagements. Examples of significant engagements include: Pilgrims Pride – M&G engaged with meatpacking companies to understand how they were dealing with the impacts of COVID-19 due to a series of outbreaks linked to similar facilities. The companies have since adapted their policies and procedures to ensure the safety of their employees and their products, with several extending their employee emergency pay policies and implementing better tracking of COVID cases in their work force. AB InBev – M&G engaged with the firm to encourage the setting of medium-term emission reduction targets and a net zero target of 2050 or sooner. The sustainability team and M&G identified the main sources of the emissions (brewing and product packaging) and are currently working on the solution to reduce these emissions using recyclable materials. M&G will follow up with the firm once it has published its next ESG report to assess if near-term engagement is necessary.

Partners Group Direct Lending

Partners Group have not engaged on ESG Issues over the last 12 months.

Partners Group have a specialist ESG and Sustainability team, who support the business in achieving their ESG objectives.


There were no voting rights attached to the Scheme’s investments over the 12-month period to 31/03/2021. The majority of the assets are credit based where there are no voting rights attached. The Scheme’s equity mandate invests in equity index derivative contracts rather than physical stocks, and therefore no voting rights are attached to the investment.

Voting (for equity/multi asset funds only)


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Isio Services Ltd is authorised and regulated by the Financial Conduct Authority FRN 922376. Document classification: Public

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

remploy limited pension and assurance scheme

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