BBC Pension Scheme

STATEMENTOF INVESTMENTPRINCIPLES

investm

en

t

The Statement of Investment Principles contains the following Sections and Appendices*.

Section Page

1 Introduction 1

2 Governance 2

3 Objectives of the Scheme 3

4 Strategic Asset Allocation 4

5 Manager Structure 5

6 Corporate Governance, SRI and Activism 6

7 Monitoring 8

Appendix

A Current Advisers and Investment Managers 9

B Division of Responsibilities 10

C Current Strategic Asset Allocation 12

D Current Manager Structure 13

E Corporate Governance, SRI and Activism 15

F Risk Management 17

*Note: Appendix A is included for information only, and does not form part of the Statement of Investment Principles.

Statement of Investment Principles

prin

ciple

s Background

1.1 Under the Pensions Act 1995, as amended by the Pensions Act 2004, (“Pensions Act”), the Trustees (BBC Pension Trust Limited) are required to prepare a statement of the principles governing investment decisions of the BBC Pension Scheme (the Scheme). This document contains that statement.

1.2 In preparing this document, the Trustees have had regard to the requirements of the Pensions Act and the Occupational Pension Schemes (Investment) Regulations 2005 (“Investment Regulations”). They have also consulted the BBC, and have sought written advice from the Scheme's Investment Consultant and the Scheme Actuary. It is the intention of the Trustees to review this document annually or sooner following any unscheduled actuarial valuation triggered by regulatory funding requirements, or any other material change in the asset or liability position of the Scheme. The Investment Managers have been provided with copies of this Statement.

1.3 This document has been drafted in the light of the Myners' Principles and specifically Myners' recommendations relating to the content of Statements of Investment Principles generally.

1.4 The Trustees will consult the BBC on changes in investment policy. The ultimate power and responsibility for deciding investment policy, however, lies solely with the Trustees.

1.5 In accordance with the Financial Services and Markets Act 2000, the Trustees set general investment policy, but delegate the responsibility for selection of specific investments to appointed Investment Managers.

In preparing this document the Trustees have had regard to the requirements of the Pensions Act and the Investment Regulations.

Scheme Details

1.6 The Scheme operates for the exclusive purpose of providing retirement benefits and death benefits for eligible participants and beneficiaries.

1.7 Members of the Scheme (other than members of the Career Average Benefits section) are contracted out of the State Second Pension under the Pension Schemes Act 1993.

1.8 The Scheme is registered with HM Revenue and Customs under Chapter 1 of Part 4 of the Finance Act 2004.

1 Introduction

investm

en

t

2.1 The Trustees have ultimate responsibility for decision-making on investment matters. However, an Investment Committee handles the majority of investment matters and makes recommendations to the Trustees where decisions are required to be taken by the Trustees.

The Trustees' investment responsibilities include:

reviewing from time to time the content of this Statement of Investment Principles (SIP) and modifying it if deemed appropriate, in consultation with the BBC and with written advice from the Investment Consultant and the Scheme Actuary

reviewing the suitability of the investment policy following the results of each actuarial review, and/or Asset Liability Study in consultation with the Investment Consultant and Scheme Actuary

assessing the quality of the performance and processes of the Investment Managers by means of regular reviews of performance and other information in consultation with the Investment Consultant

strategically allocating the assets and the cash flow of the fund between investment mandates and making periodic adjustments to the portfolio allocations

consulting with the BBC when reviewing investment policy issues

appointing (and dismissing) Investment Managers and the Cash Manager

appointing, dismissing and monitoring the Custodians

monitoring compliance with this Statement on an ongoing basis

in addition to the considerations articulated within this Statement, the Trustees will formulate a forward-looking business plan.

2.2 Decisions affecting the Scheme's investment strategy should be taken with appropriate advice from the Scheme's Actuary and Investment Consultant and the Trustees’ other advisers.

2.3 Only persons or organisations with the necessary skills, information and resources are actively involved in taking investment decisions affecting the Scheme. The Trustees of the Scheme draw on the expertise of their internal advisers, and where necessary employ the skills and expertise of external advisers including the Investment Managers, Cash Manager, Master Record-keeper, Custodians, Investment Consultant and Scheme Actuary. In addition the Trustees have appointed an independent investment specialist to advise the Investment Committee.

A schedule of their respective responsibilities is provided in Appendix B.

2.4 The Trustees agree with the Myners Review Principle of separate competition for actuarial and investment consulting contracts. The Trustees reviewed the investment

2 Governance

consultancy services used by the Scheme in 2007, and the actuarial appointment will be reviewed in 2008.

prin

ciple

s3.1 The general investment objectives of the Scheme are:

to maintain a suitably diversified portfolio of secure assets of appropriate liquidity that will generate income and capital growth to meet, together with new contributions from members and the BBC, the cost of current and future benefits which the Scheme provides as set out in the trust deed and rules

to limit the risk of assets failing to meet liabilities over the long term, in particular, in relation to the scheme specific funding requirements introduced by the Pensions Act

to control the long-term costs of the Scheme by maximising the return on the assets whilst having regard to the objectives shown above.

3.2 These investment objectives of the Scheme are not framed relative to the performance of other pension funds or market indices.

3 O bjectives of the Scheme

investm

en

t

4.1 The strategic asset allocation is driven by the financial characteristics of the Scheme, in particular the Scheme’s liabilities and the risk tolerance of the Trustees and the BBC.

4.2 The Trustees seek to achieve the Scheme's investment objectives through investing in a suitably diversified mix of real and monetary assets that balances investment return against volatility.

4.3 The Scheme’s strategic asset allocation has been set following an Asset Liability Study as at 1 April 2007 which has considered the full range of investment opportunities available to the Scheme including an assessment of all the major asset classes, including private equity and alternative asset classes such as hedge funds and property.

4.4 The current strategic asset allocation and assumptions used in the last Asset Liability Study are included in Appendix C.

4 Strategic Asset Allocation

prin

ciple

s5.1 The Trustees have considered the use of both passive and active investment

management when reviewing the Scheme's strategy. The resultant allocation to active and passive management is formed following consideration of the efficiency, liquidity and level of transaction costs likely to prevail within each market as well as the impact of the investment manager fees on future expected returns net of fees.

5.2 The Scheme employs a number of managers to ensure adequate diversification by fund management organisation and investment style.

5.3 The Investment Managers have been set mandate-specific benchmarks which have clear performance objectives attached. Work is underway to develop risk tolerances which will best enable the Investment Managers to achieve their performance targets.

5.4 The expectation is that the Investment Managers should achieve their objectives in the majority of three year periods under consideration. It is not expected that the Managers (other than the passive equity managers) will necessarily achieve these objectives in every three-year period. Investment Managers should, however, demonstrate that the skill they exercise in managing the portfolio and the process that they follow is consistent with these objectives given the level of risk adopted. The current manager structure is set out in Appendix D.

5.5 The Scheme’s overall benchmark and asset ranges specified are designed to ensure that the Scheme’s investments are adequately diversified and suitable for the Scheme given its liability profile. In this regard, the Trustees have taken written advice from the Scheme Actuary and the Investment Consultant.

5.6 The Trustees have taken into account various risks to which the Scheme is exposed when setting the Scheme's strategic asset allocation and investment policy including the manager structure, choice of Investment Manager and the detailed terms of the investment management agreements. Further details of these risks are included in Appendix F.

5.7 Managers may be permitted to use exchange-traded equity index, bond and interest rate futures and traded options for the purposes of efficient portfolio management. For these purposes bond managers may also be allowed to use swaps, or swap-related instruments.

5.8 The pensions department of the BBC, on behalf of the Trustees, assesses the likely benefit outgo of the Scheme on a regular basis and ensures that sufficient cash reserves are available to meet the outgo. Contributions and investment income together should be adequate to meet benefit outgo, thus avoiding the need for asset sales. Consequently, the Scheme's policy on retention or realisation of investments is at the discretion of the active Investment Managers reflecting the liquidity characteristics of the portfolios the Trustees have established.

5 Manager Structure

investm

en

t

5..9 The Investment Managers have provided the Trustees with details of the commission payments they make on asset transactions. In addition, the Trustees have commissioned transaction cost and foreign exchange cost studies of their Managers and Custodians.

5.10 The Investment Managers of segregated portfolios are prohibited from engaging in stocklending. The Trustees will not, however, preclude the Investment Managers from investing in pooled funds in which stocklending occurs.

5.11 The Trustees may permit the Custodian to undertake a stocklending programme on their behalf.

prin

ciple

s Corporate Governance Policy

6.1 The Trustees support the Principles of Good Governance and the Code of Best Practice, incorporated in the Combined Code issued by the London Stock Exchange in July 1998 following the recommendations of the Hampel Committee and the Cadbury and Greenbury Reports.

6.2 The Trustees recognise that they have a duty to act in the long term interests of the beneficiaries and believe that environmental, social and corporate governance can affect the performance of investment portfolios. To this end the Trustees have signed up to the UNEP Finance Initiative Principles for Responsible Investment.

Policy on Socially Responsible Investment (SRI)

6.3 The Trustees have delegated responsibility to their active equity managers to take account of the social, environmental and ethical considerations in the selection, retention and realisation of Scheme investments so far as such considerations will affect the prospects or performance of the companies in which they invest for the Scheme.

Activism

6.4 The Trustees also support the policies on activism set out in the Myners Report and Statement of Principles drawn up by the Institutional Shareholders’ Committee. To this end they have appointed an Engagement overlay adviser, with this specific area of responsibility. Further details are included in Appendix E.

6 Corporate Governance, SRI and Activism

investm

en

t

7.1 Independent performance monitoring agencies measure the Scheme’s and the Investment Managers’ performance against objectives.

7 2 The Investment Committee receive regular reports to satisfy themselves that the Investment Managers continue to carry out their work competently and have the appropriate knowledge and experience to manage the investments of the Scheme. The internal investment advisers meet with the Managers and Custodian periodically.

7.3 Service level agreements have been drawn up with the external advisers. These agreements provide for:

timeliness of response

confirmation of work

regular billing

a complaints mechanism.

7.4 The Trustees keep under review ways of assessing the effectiveness of the Trustees’ decisions and the governance of the Trustee Board and currently undertake an annual self assessment of these processes. They are also considering ways of measuring the performance of the Investment Consultant.

7 Monitoring

prin

ciple

sScheme Actuary: A Blay FIA

Investment Consultant: Watson Wyatt

External Investment Adviser: David Gamble

Specialist equity: Capital International

NewSmith Asset Management

AllianceBernstein

Marvin & Palmer Associates

Baillie Gifford

Trilogy Global Advisors

Artemis Asset Management

Invesco Investment Management

Private equity: HgCapital Investment Managers

Henderson Private Capital

Sun Capital Partners

Warburg Pincus

Pantheon Ventures

Infrastructure: Goldman Sachs

Mezzanine Finance: Goldman Sachs

Bonds: Henderson Global Investors

Morley Fund Management

Western Asset Management Company

Passive equity: State Street Global Advisors

Property: Grosvenor International Holdings

CB Richard Ellis Investors

CBRE

A Current Advisers and Investment Managers

Hedge Fund: NewSmith Asset Management

Currency Fund: AllianceBernstein

Engagement overlay: Hermes Equity Ownership Services

Cash Manager: Barclays Global Investors

Custodian: HSBC Bank

Master Record-Keeper: ABN AMRO Mellon Global Securities Services

Solicitors: Sacker & Partners

Property Solicitors: Nabarro

Brodies

Scheme Auditors: PricewaterhouseCoopers

investm

en

t

Investment Managers

The Investment Managers’ responsibilities include:

for active Managers at their discretion, but within any guidelines given by the Trustees, selecting securities within each asset class. For the passive Managers, tracking the relevant benchmark return within an appropriate tracking error

providing the Trustees with quarterly statements of the assets along with a quarterly report on actions and future intentions, and any changes to the investment processes applied to their portfolios

informing the Trustees of any material changes in the internal objectives and guidelines of any pooled funds used by the Scheme and managed by the Investment Manager or an associated company.

Custodian

The Custodian’s responsibilities include:

the safekeeping of all the assets of the Scheme, excluding property

processing the settlement of all transactions

providing the Trustees with statements of the assets and the cashflows

undertaking all appropriate administration relating to the Scheme’s assets

processing all dividends and tax reclaims in a timely manner

dealing with corporate actions

undertaking a stocklending programme.

The title deeds to UK properties are held by the Scheme’s Property Solicitors.

Cash Manager

The Cash Manager’s responsibilities include:

investing cash in a suitable manner consistent with the Trustees’ guidelines. There are also constraints on the amount of cash deposited with any one organisation.

Master Record-keeper

The Master Record-keeper’s responsibilities include:

recording, monitoring and reconciling all activities of the Investment Managers, Cash Manager and Custodians, based on the electronic take-on of data from the parties. This encompasses the identification and resolution of any mismatches between positions as stated by the Investment Managers, Cash Manager, Custodians and the Master Record Keeper itself

maintaining complete and accurate records of accounts based on the double entry principle, including the nominal ledger and trial balance for all the Scheme’s activities

B Division of Responsibilities

providing and maintaining on-line links between its own computer systems and the Trustees' offices for the viewing and printing of all the data

providing a management reporting system that satisfies both statutory and non-statutory reporting requirements and enables the Trustees to exercise effective control over the Scheme’s activities and assets.

prin

ciple

sInvestment Consultant

The role of the Investment Consultant is to work with the internal Investment advisers to make recommendations or give advice to the Trustees and Investment Committee in the following areas:

formulation of an efficient governance structure particularly in the light of the Myners Report

regular updating of the Statement of Investment Principles

development of a clear investment strategy for the Scheme

Asset Liability Modelling process

construction of an overall investment management structure that meets the objectives of the Scheme outlined in section 3

selection and appointment of appropriate investment management organisations

provide current views of the Investment Managers employed by the Scheme

potential new areas or tools of investment such as hedge funds, currency hedging, interest rate swaps etc

commentary on investment performance and risk taken by the Managers

trustee education

general advice in respect of the Scheme's investment activities.

The Investment Consultant receives a monthly retainer to cover the provision of regular services. For any major projects the appropriate fee is agreed in advance.

External Investment Adviser

The External Investment Adviser’s responsibilities include:

Providing an independent view on the advice provided to the Investment Committee by the Investment Consultant and the internal advisers.

Scheme Actuary

The Scheme Actuary’s responsibilities include:

liaising with the Investment Consultant on the suitability of the Scheme’s investment strategy given the financial characteristics of the Scheme

assessing the funding position of the Scheme, including any regulatory measures, and advising on the appropriate response to any deficit or surplus

performing the triennial (or more frequently as required) valuations and advising on the appropriate contribution levels.

Engagement O verlay Adviser The adviser’s responsibilities include:

voting equities in accordance with Myners requirements and the Institutional Shareholders’ Committee principles and such higher standards as the adviser agrees with the Trustees

engaging with companies in which the Scheme has an interest to ensure that they are run in the best long term interests of shareholders.

investm

en

t

Asset Allocation

Based on the Asset Liability Study, and further advice from the Investment Consultant, the Trustees consider that the following distribution of assets represents a suitable overall asset allocation benchmark for the Scheme. The Scheme may hold funds within the limits specified in the table:

Current Asset Allocation (Target Asset allocation)

Asset Ranges

% Minimum % Maximum % UK Equities 24 (25) 20 60 Overseas Equities 38 (25) 10 40 Alternative Assets 6 (10) 0 20 Bonds 20 (30) 10 50 Property 10 (10) 5 15 Cash 2 (0) 0 15

The Current Asset Allocation shows the actual position as at, 31 December 2007 whilst the figures in parentheses show the target asset allocation following the Asset Liability Study undertaken during 2007. It is intended to transition to the new benchmark over a period of time, the speed of which will be determined by market conditions. Once reached new asset ranges will be reviewed.

C Current Strategic Asset Allocation

Expected return on investments and other assumptions

UK Asset Return Assumptions derived from the Global Model used in the Asset Liability Study1 as at 1 April 2007.

10-year median real returns

% pa

Volatility of returns O ne year standard deviation

% pa Global (ex UK) equities, unhedged 5.1 14.9 UK equities 4.7 17.9 UK long corporate bonds 2.1 9.5 UK long government bonds 1.6 9.4 UK index-linked gilts 1.5 5.9 Fund of hedge funds, hedged 3.8 6.9 Private equity, hedged 4.7 29.4 Property 3.1 10.2

1 Inflation: 10 year median expected figure is 2.5 % pa; expected volatility is 2.5% pa

prin

ciple

sThe Scheme employs eight specialist equity managers, three specialist bond managers, one passive equity and bond manager, three property managers, nine managers of alternative assets and a cash manager.

Measurable objectives have been developed for the Investment Managers of segregated portfolios consistent with the achievement of the Scheme's overall longer-term objectives. Their individual benchmarks and performance objectives are, in aggregate, consistent with the overall Scheme benchmark. The benchmarks and performance objectives are shown in the table below.

Manager Mandate Benchmark Manager performance objective

UK Equity Specialists FTSE All-Share Index Passive: to track the benchmark return

within a tracking error of 0.5% per

annum over any rolling 3 year period.

Active: to outperform by 3% per annum

over rolling 3 year periods

Global Equity Specialists 10% -FTSE All-Share Index, 90%: FTSE -All World Indices

- 27% North America, 31.5% Developed Europe ex UK,

13.5% Japan, 9% Developed Asia Pacific ex Japan, 9% All-

Emerging.

Passive: to track the benchmark return

within a tracking error of 0.5% per

annum over any rolling 3 year period.

Active: to outperform by 1.5%/2.5% per

annum over rolling 3 year periods

Global Equity Specialists FTSE AW All World Index To outperform by at least 3% per annum

over rolling 5 year periods

Specialist Bonds 34% FTSE Actuaries All Stocks Gilts Index

33% iBoxx Non Gilt All Stocks Index

33% FTSE Actuaries All Stocks Index linked Gilts Index

Outperform by at least 1.25% per annum

over rolling 3 year periods

UK Property Investment Property Databank (IPD) index / Absolute

return

Outperform by 1% per annum over

rolling 3 year periods / change in the RPI

plus 5-6% per annum over the long term

Overseas Property Appropriate local property index Outperform by 0.5% per annum over

rolling 3 year periods

The Scheme invests in alternative assets through collective investment vehicles. Specialist Investment Managers have been mandated to invest in a hedge fund, private equity, infrastructure, mezzanine finance, active currency, private finance initiative and Central and Eastern European property. The Trustees have received independent advice from the Scheme’s Investment Consultant that each Fund is a suitable investment for the Scheme. Each Fund is monitored against an appropriate benchmark and performance objective.

Fee Basis

Investment Manager fees for the Scheme are based on either ad valorem fees, or a mix of ad valorem and performance related fees. The basis for each manager is looked at on a case-by case basis to ensure the interests of the Scheme are best served. The Trustees believe that it is not in the commercial interests of the Fund to disclose a detailed schedule of Investment Manager fees.

D Current Manager Structure

investm

en

t

Additional Voluntary Contributions (AVCs)

The Fund provides a facility for Old and New Benefits members to pay AVCs to enhance their benefits at retirement. The members are offered a range of funds in which to invest their AVC payments. The Trustees' objective is to provide a range of funds that will provide a suitable long term return for members, consistent with members' reasonable expectations.

The Trustees wish to give members a reasonable degree of freedom over the investment policy of their AVCs. Consequently a wide range of funds have been made available for those members who pay AVCs including:

a with profits fund (closed to new contributions from 1 April 2008)

a deposit fund

unit linked funds

an ethical fund.

prin

ciple

sCorporate Governance

The Trustees believe that voting rights are an important part of overall shareholder value. They therefore believe that institutional shareholders should make considered use of their voting rights on all resolutions at annual and extraordinary general meetings held by UK companies.

The Trustees have delegated responsibility for voting to Hermes Equity Ownership Services as Engagement overlay adviser, and wish them normally to exercise these votes in accordance with the Code of Best Practice referred to in Appendix B above, unless they believe that doing so would not be in the best financial interests of the Scheme.

SRI

The Trustees will advise all their active Investment Managers of their desire to discourage socially irresponsible behaviour through the Scheme's investments. Both the adviser and the Active Managers will be asked to be vigilant against the effects on companies' long-term performance prospects that could arise from any practices which alienate civilised society, including socially irresponsible behaviour.

UK Property Managers will be asked to comply with the foregoing in relation to the Scheme's UK property investments.

The adviser and, where appropriate, the active Investment Managers will be expected to develop policies on SRI and to engage with companies in which they invest for the Scheme so as to encourage socially responsible business practices when these will enhance or protect those companies' long-term prospects. Managers will be expected to review their policies on SRI periodically, and report any changes to the Trustees.

Corporate Governance, SRI and Activism E

investm

en

t

The Trustees view their Corporate Governance policy as an important component of their overall SRI policy. The Trustees expect their Engagement overlay adviser, to whom they have delegated their responsibility for exercising voting rights in respect of the Scheme's investments and engagement with the companies themselves, to exercise such rights (so far as is practicable) to promote SRI policies where these will enhance or protect companies' long-term prospects.

In addition to this, active Old and New Benefits members of the Scheme have the option to contribute to an Ethical AVC.

Activism

In addition to their policies on Corporate Governance and SRI, the Trustees expect their Investment Managers to intervene in an investee company in accordance with the policies on activism set out in the Statement of Principles drawn up by the Institutional Shareholders’ Committee, unless the Managers believe that doing so would not be in the best financial interests of the Scheme or their own house policy differs from those policies in a manner approved by the Trustees.

The Trustees expect their Advisor and active Investment Managers to:

monitor various aspects of corporate performance (including Corporate Governance)

maintain details of their monitoring process

intervene in a company if they believe that such action will enhance value for the Scheme after taking account of the costs involved. Intervention should be seriously considered when the Advisor has concerns about any aspect of corporate performance and where it believes that shareholder value may be at risk

maintain a regular dialogue with the management of the companies in which they hold a significant percentage of the issued capital on behalf of their clients

intervention may take several forms, according to the circumstances and may include the following:

exercising votes

discussion with management

communicating concerns in writing for the attention of the board as a whole

communicating concerns to the company’s brokers or advisers

declining to accept the terms of a takeover

exchanging information with other shareholders

working with other shareholders to requisition a shareholder meeting

attendance at general meetings, which may involve calling a poll

manage conflicts of interest effectively

monitor the response of a company during and after the period of intervention, looking for evidence that the company has addressed the concerns and responded accordingly

report back to the Trustees on a quarterly basis where the Adviser has taken meaningful steps to intervene in a company.

prin

ciple

sThe Trustees recognise a number of risks involved in the investment of the assets of the Scheme:

Solvency risk and mismatching risk:

are measured through a qualitative and quantitative assessment of the expected development of the liabilities relative to the current and alternative investment policies

are managed through assessing the progress of the actual growth of the liabilities relative to the selected investment policy

Investment Manager risk:

is measured by the expected deviation of the prospective risk and return, as set out in the managers’ objectives, relative to the investment policy

is managed by monitoring the actual deviation of returns relative to the objective and factors supporting the managers’ investment process

Liquidity risk:

is measured by the level of cashflow required by the Scheme over a specified period

is managed by the Scheme’s administrators who assess the level of cash held in the short term in order to pay benefits thus limiting the impact of the cash flow requirements on the investment policy

Custodian risk:

is assessed by reviewing the credit-worthiness of the custodian bank and the ability of the organisation to settle trades on time and provide secure safekeeping of the assets under custody

is managed by monitoring the custodian’s activities and discussing the performance of the custodian with the investment managers when appropriate

Currency risk:

is measured by the value of assets invested in overseas markets taking consideration of the volatility of the respective currencies in which investments are made

is managed by ensuring overseas investments are well diversified and are suitably balanced with domestic investments

Political risk:

is measured by the level of concentration of any one market leading to the risk of an adverse influence on investment values arising from political intervention

Sponsor risk:

F Risk Management

is measured by the level of ability and willingness of the sponsor to support the continuation of the Scheme and to make good any current or future deficit

is managed by assessing the interaction between the Scheme and the sponsor’s business, as measured by a number of factors, including the creditworthiness of the sponsor and the size of the pension liability relative to a number of metrics reflecting the financial strength of the sponsor.

Produced by: Pension and Benefits CentreTelephone: 029 2032 2811Fax: 029 2032 2408Email: myPension@bbc.co.ukWebsite: bbc.co.uk/mypension April 2008