AN INDEPENDENT REVIEW OF SCOTTISH LIFE’S INVESTMENT …€¦ · schemes incorporating...

AN INDEPENDENT REVIEW OF

SCOTTISH LIFE’S INVESTMENT GOVERNANCE PROCESS – GROUP BUSINESS

JANUARY 2014

INDEPENDENT GOVERNANCE PROCESS REVIEW

AKG Actuaries & Consultants Ltd Page 2 January 2014

CONTENTS

1. INTRODUCTION ............................................................................. 3

2. GOVERNANCE ................................................................................ 6

3. ATTITUDE TO RISK ....................................................................... 9

4. THE DEFAULT OPTION .............................................................. 10

5. THE GOVERNED RANGE ........................................................... 12

6. INVESTMENT ADVISORY COMMITTEE ............................... 16

7. CONCLUSION ................................................................................ 18

APPENDIX 1 PORTFOLIO BENCHMARKS ..................................................... 19

APPENDIX 2 INFORMATION ABOUT AKG .................................................... 20



1. INTRODUCTION

1.1. BACKGROUND

In January 2009, Scottish Life launched its Governed Range, incorporating Governed Portfolios and Governed

Lifestyle Strategies, as a replacement for Managed Strategies.

As with Managed Strategies, the Governed Portfolios comprise nine risk‐rated and term‐dependent

portfolios. They are subject to a rigorous on‐going governance process. This involves a quarterly review by

the Investment Advisory Committee (IAC), a body made up of 6 pension and investment experts, four from

Royal London (the Group CEO, the CEO of Royal London Intermediary, the Royal London Intermediary

Proposition and Strategy Director and the CEO of Royal London Asset Management) together with two

independent experts. The IAC is supported through the governance process by experts including Barrie &

Hibbert and Morningstar OBSR. The second layer of the governance process is in the form of a tactical

overlay which takes overweight and underweight positions against the long term benchmarks according to

the Royal London Asset Management Chief Investment Officer’s view of short term market conditions.

The governance theme runs throughout Scottish Life’s investment proposition. Combined with re‐balancing

and lifestyling functionality, it is designed to help advisers ensure that their advice is suitable at outset and

remains suitable for the lifetime of the contract.

1.2. ABOUT AKG AND THE REVIEW’S LEAD AUTHOR

AKG Actuaries & Consultants Ltd (AKG) is an actuarially based organisation specialising in the provision of

information and consultancy to the financial services industry and a well known and respected provider of

evaluated information within the UK financial services sector.

An independent company, AKG has provided expert detailed assessments of life company financial strength,

propositions and services for over 20 years.

Within AKG's specialist focus on the financial services industry, there is a broad complementary range of

clients, including life and pension companies, intermediary software and services providers, financial press

and publishers, fund management companies and banks. However, AKG has a particular focus on the needs

of intermediaries. As a result, AKG has developed an enviable reputation for providing information and

support, specifically designed to meet their needs through the focused application of an actuarial and

technical skill set blended with market knowledge.

AKG has a particular focus on the assessment and rating of financial services product providers. Within this,

AKG’s ratings and associated assessments are widely used by both providers themselves and across all forms

of intermediary distribution.

Used to working in conjunction with third parties, and to distributing its independent information through

third party mechanisms, AKG brings an essential dimension to the assessment of providers, their propositions

and support services, in a form that incorporates its specialist actuarial expertise, together with its reputation

and wide market footprint.

Lead author – Assessment and compilation of this review was led by Gary Bown. Gary is an actuary with 30

years of experience in UK financial services and has been with AKG for over 15 years, following spells working

in UK life offices and consultancies.



1.3. AKG’S ASSIGNMENT

In October 2013, Scottish Life (the Client) commissioned AKG to review Scottish Life’s Investment Governance

process for its retail pension investment proposition, with particular reference to the following changes:

Pension & Cash Lifestyles

Rathbone Global Alpha fund

the Scheme Risk Profiler

The regulatory context should also be updated to consider:

Department for Work and Pensions (DWP): Guidance for offering a default option for defined

contribution automatic enrolment pension schemes (May 2011)

The Pensions Regulator (TPR): Six principles of good workplace DC (December 2011)

The Investment Governance Group (IGG): Six principles for best practice in investment governance

of work‐based pension schemes

The Office of Fair Trading (OFT): Defined contribution workplace pension market study (September

2013)

The review of Scottish Life’s governance and performance track record should also be updated. This report

focuses on group business particularly from an auto‐enrolment perspective. There is a separate report, which

considers individual business.

AKG has performed previous reviews on Scottish Life’s Investment Governance process in March 2009 and

November 2010. In September 2012, AKG has also issued an Independent Review of Scottish Life’s Governed

Retirement Income Portfolios (GRIPs) and Income Planning Tool.

1.4. INFORMATION SOURCES

The main documents used in producing this review were as follows:

Scottish Life: Investment Advisory Committee (5L22302 January 2013)

Our guide to default investment: Supporting you every step of the way (5G2021/3 June 2013)

Default investment options for auto enrolment: Helping existing customers find the right solution

(5G2041 August 2013)

Default investment suitability report: template (not dated)

Scottish Life: Investment Solutions Presentation (not dated)

Scottish Life: Scheme Risk Profiler Presentation (not dated)

DWP: Guidance for offering a default option for defined contribution automatic enrolment pension

schemes (May 2011)

OFT: Defined contribution workplace pension market study (September 2013).

Information has also been obtained from the Scottish Life website.



1.5. AUTO-ENROLMENT

The Pensions Act 2008 imposed compulsory workplace pensions for most employees. Workplace pension

schemes incorporating auto‐enrolment must adhere to certain ‘qualifying’ standards and are subject to a

phased implementation between 2012 and 2017.

The implementation of auto‐enrolment began in October 2012 and is staged according to a timetable based

upon the number of employees. Large employers with 250 workers or more must comply between October

2012 and February 2014, medium employers with 50 to 249 workers from April 2014 to April 2015, and small

employers with five to 49 workers, or micro employers with fewer than five workers, from June 2015.

Implementation will be complete in 2018, by which time approximately 1.35m employers are required to

have implemented auto‐enrolment.

A default option must be available, being the investment vehicle(s) that will be selected automatically for a member joining a pension scheme, unless the member specifies an alternative.

1.6. RELIANCES AND LIMITATIONS

The information upon which AKG’s comments are based has been supplied by the Client. AKG has relied

upon the accuracy and completeness of such information, and will not accept any responsibility or liability for

any inaccuracies or omissions or for any consequences arising. Under no circumstances will AKG accept any

liability in respect of the investment decisions of investors or for any loss arising there from. It should be

assumed that AKG has not conducted any due diligence investigations to confirm the accuracy of any of the

information supplied, unless it is explicitly stated to the contrary herein.

Whilst it is not the purpose of this report to analyse or otherwise comment on the past or future absolute

performance of one or more of the various funds or portfolios of funds which together comprise Scottish

Life’s pension proposition, some reference has been included regarding the relative performance of the

portfolios.

Whilst many aspects underlying AKG’s recommendations are likely to change only slowly, the financial

services industry is a competitive, dynamic marketplace, with new products and developments being

announced regularly. As a result, AKG cannot guarantee that any particular comment will remain appropriate

at any future date.

AKG personnel are available to expand upon the comments in this report, if required.

1.7. CONFIDENTIALITY

This report has been produced for the Client’s consideration.

AKG is happy for the Client to reproduce all or part of this report in any internal or external published

material, subject to prior written agreement of the content, context, duration and volume of such

reproduction and of any reference, explicit or implicit, to AKG’s involvement in producing this report.



2. GOVERNANCE

2.1. WHAT IS GOVERNANCE?

There appears to be no ‘one size fits all’ definition of what constitutes good governance. AKG has therefore

drafted the following paragraph, having reviewed various sources from a number of different spheres of

business and governmental activity.

In general terms, governance can be regarded as the combination of competent

processes and structures within an organisation that ensures its meets its objectives

in a legal, ethical and honest way. Most importantly, governance, which put

another way is a framework of control and competence, must be transparent. An

organisation is accountable for its governance and must be able to demonstrate the

same.

This overarching definition then needs to be interpreted in the context of financial services in general and the

role of intermediary‐led advice in particular. Good governance resonates very strongly alongside the

Financial Services Authority’s (FSA’s) theme of Treating Customers Fairly (TCF), which continues under the

stewardship of the Financial Conduct Authority (FCA). It also resonates strongly with The Pensions Regulator.

Intermediaries provide investment advice to their clients, a process which implicitly brings with it a duty of

care. Advice provided to its clients by an intermediary should be relevant and appropriate at the time it is

given and based on a sound, transparent and robust process. Where necessary, the process should also

encompass ongoing reviews to ensure the advice remains appropriate.

Good governance encapsulates the duty of care an intermediary has for their client and ultimately it is the

responsibility of the intermediary.

2.2. GOVERNANCE AND THE REGULATORY CONTEXT

The Pensions Regulator, the Department for Work and Pensions and the Investment Governance Group are

strongly promoting governance for Defined Contribution Schemes as follows:

The Pensions Regulator

The Pensions Regulator (TPR) has issued six principles for good design and governance of workplace defined

contribution (DC) pension provision as follows:

1. Schemes are designed to be durable, fair and deliver good outcomes for members.

This principle covers the features necessary in a scheme to deliver good outcomes for members, including features such as the provision of a suitable default fund, transparent costs and charges, protected assets and sufficient protection for members against loss of their savings.

2. A comprehensive scheme governance framework is established at set‐up, with clear accountabilities and responsibilities agreed and made transparent.

This includes identifying key activities which need to be carried out, and ensuring each of the activities has an ‘owner’ who has the necessary resources to carry out the activity.



3. Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.

This principle ensures that those who are given accountability or responsibility for a key governance task are able to carry this out. The principle will cover definitions of fitness and propriety for accountable parties and also conflicts of interest that may arise.

4. Schemes benefit from effective governance and monitoring through their full lifecycle.

This principle looks at the ongoing governance and running of the scheme, including the internal controls and monitoring needed to ensure that the scheme continues to meet its objectives, and continues to be run with the best interests of its membership in mind.

5. Schemes are well‐administered with timely, accurate and comprehensive processes and records.

This principle is informed by previous work on record keeping, looking specifically at the administration processes required in a DC scheme.

6. Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.

This includes all communications to members during their time with the scheme – from joining through to making decisions about converting their pension pot into a retirement income, including promotion of the Open Market Option.

The Investment Governance Group

In March 2008 the Government consulted on proposals to update the Myners principles and establish a new

industry‐led framework for the application of the principles. Respondents presented a range of views and

opinions on the questions raised in the consultation document.

As part of their response to this consultation, HM Treasury suggested the establishment of the Investment

Governance Group (IGG), which would allow the pensions industry to take responsibility for the principles for

investment governance. The group would also look at ways in which engagement with, and standards of,

investment governance could be improved, without any requirement for further regulation.

The IGG has set out a framework of principles and best practice guidance to help those running work‐based

DC schemes improve their investment decision‐making and scheme governance. The six DC principles are:

1. Clear Roles and Responsibilities – aiming to help ensure that firm foundations are in place for the process of investment governance.

2. Effective Decision Making – decisions relating to investment governance must be taken on a fully informed basis and that the processes must be sound.

3. Appropriate Investment Options – to make certain that investment options take account of the range of risks and needs within the scheme membership.

4. Appropriate Default Strategy – determining that an appropriately designed investment strategy is offered for members who prefer not to make a choice.

5. Effective Performance Assessment – the performance of the chosen investment options must be monitored.

6. Clear & Relevant Communications – to ensure that members are provided with clear, relevant and timely information so they can make an informed choice about where to invest.



Department for Work and Pensions

In May 2011 the Department for Work and Pensions (DWP) issued “Guidance for offering a default option for

defined contribution automatic enrolment pension schemes”.

This provided guidance in four main areas:

i. Governance of the default option

ii. Designing a default option

iii. Reviewing the default option

iv. Communicating the default option

Office of Fair Trading

In September 2013 the Office of Fair Trading (OFT) issued its Defined Contribution (DC) workplace pension

market study. This raised some concerns over scheme governance, particularly over its independence and

whether there was sufficient scrutiny. The OFT has said that it would like to see the Government introduce

minimum governance standards set for all pension schemes in order to ensure a consistent degree of ongoing

scrutiny and assessment of value for money now and into the future.

AKG View

From a regulatory perspective there has been a significantly increasing focus on governance in recent times

and this is only set to increase. Indeed the DWP monitors adherence with its guidance. The guidance will also

be reviewed periodically by the DWP to ensure that it evolves with experience and consistently reflects good

practice. TPR also regularly reviews standards of governance and their findings will feed into the DWP’s

review of the guidance. Crucially, following a review, if there is strong evidence to suggest that the guidance

is being wilfully ignored, or that it is not having the desired effect of promoting good practice, the DWP may

consider issuing statutory instruments to uphold the guidance and protect members’ interests.

It is therefore imperative that good governance is a central component of the design, implementation and

running of a DC scheme.

Scottish Life’s Governed Range has been designed from inception around a central theme of good

governance, a feature which has developed in line with both market and regulatory evolution. It meets the

concerns raised by the OFT in that it offers an independent and ongoing solution.

Scottish Life’s Governed Range also offers a solution that can meet the DWP’s requirements for a default

option. This is covered in more detail later in this report.

In the context of auto‐enrolment, there is particular focus on the governance around the default option. This

is therefore covered in more detail later in this report.



3. ATTITUDE TO RISK

Assessing attitude to risk in a group context is very much different to assessing attitude to risk at an individual

level. Within a scheme there will clearly be members with different attitudes to risk. Nevertheless the

scheme is required to offer a default fund that is deemed to be appropriate to its membership. This includes

attitude to risk.

Of particular relevance here is “Guidance for offering a default option for defined contribution automatic

enrolment pension schemes” issued by the DWP in May 2011. In this the DWP states that:

“It is likely that the vast majority of individuals being automatically enrolled will end up in the default option. Therefore the design, governance and communication of the default option will play an important role in securing good outcomes for members.

The default option should take account of the likely characteristics and needs of the employees who will be automatically enrolled into it. It is likely that employees in the default fund will not be engaged in financial decisions. Decisions will need to be taken for them about their risk profile. As such there should be an appropriate balance between risk and return for the likely membership profile and the charging structure should reflect this balance.“

With this in mind, Scottish Life has designed its Scheme Risk Profiler, a tool designed to analyse the scheme

risk profile and so select a suitable default fund for a scheme based on its membership profile.

The Profiler recommends a governed lifestyle strategy by establishing both the ability and willingness to take

risk via a series of simple questions based around such things as average earnings, gender make up of the

scheme, education and employment sector.

It recommends one of three fixed lifestyle strategies, moderately cautious, balanced and moderately

adventurous. Further information on asset allocation and lifestyle strategies appears as Section 5 of this

report.

AKG View

AKG considers this a sensible approach to take. The Scheme Risk Profiler is a useful tool and it is logical to

select a default fund around such things as earnings, sex, education and financial awareness. There may be

issues in schemes where there is a wide variance in one of these areas, for example salary. However, with the

Governed Range, there is the option of choosing different funds other than the default.

AKG believes that the Scottish Life Scheme Risk Profiler is a useful tool in helping advisers and employers

meet the DWP’s requirements referred to above.



4. THE DEFAULT OPTION

This plays a crucial role in auto‐enrolment.

In a presentation, dated September 2013, on Default Fund Design and Governance in DC Pensions, the

National Association of Pension Funds (NAPF), estimated that around 72% of members across all workplace

DC schemes invest via a default fund, although this number fluctuates depending on the size of the scheme.

Smaller plans average 65%, while their larger counterparts tended to average closer to 80%. Further, the

Chief Investment Officer at the National Employment Savings Trust (NEST) has been quoted as saying that

99% of its current members are using its default retirement fund.

The NAPF go on to say that default fund assets are believed to represent 70% of DC workplace pension

scheme assets today, but according to one projection they will account for 83% of all DC assets in 10 years.

Clearly the vast majority of individuals being auto‐enrolled will end up in the default fund, meaning that the

design, governance and communication of the default option will play an important role in securing good

outcomes for members. The DWP has stated that the default option should take account of the likely

characteristics and needs of the employees who will be automatically enrolled into it. It is likely that

employees in the default fund will not be engaged in financial decisions. Decisions will need to be taken for

them about their risk profile. As such there should be an appropriate balance between risk and return for the

likely membership profile and the charging structure should reflect this balance.

The DWP has issued specific guidance relating to the default option around governance, designing, reviewing

and communication.

The DWP has stated that ongoing responsibility for the default option may vary between provider, adviser,

fund manager, employer and governance committee in different situations and for different aspects of a

scheme. Below is a list of issues which should be considered:

deciding on the suitability of the default option for the membership;

designing the default option;

monitoring the performance of funds within the default option;

communicating information about the default option to members; and

reviewing and/or changing the default option.

AKG View

The Scottish Life Governed Range offers a solution that can meet all the DWP’s requirements for a default

option. Indeed Scottish Life’s Governed Range has been named as Ultimate Default Fund in the 2010, 2011,

2012 and 2013 Corporate Adviser awards.

Scottish Life offers a range of default options which has been designed to cater for corporate schemes. The

range has been designed so that the employer can delegate some of all of their ongoing responsibilities

mentioned above. The employer can decide how responsibility is split between Scottish Life and the

adviser/employer. With the Scottish Life Selected Range, Scottish Life takes responsibility for suitability and

design. The adviser/employer can take responsibility for suitability under the Scottish Life Designed Range

with the adviser/employer taking responsibility for both suitability and design under the Scottish Life

Supported Range.



Considering the above points further:

Deciding on the suitability of the default option for the membership

The Scottish Life Scheme Profiler can help as part of this process and identify a relevant strategy depending

upon the characteristics of the scheme.

Designing the default option

The Governed Range looks to take account of the likely characteristics and needs of the employees who will be automatically enrolled into it. It meets the DWP’s detailed guidance for designing a default option. This includes taking account of members’ retirement profiles and using appropriate and diversified asset allocation to manage risk in the best interest of members.

Monitoring the performance of funds within the default option

The IAC performs this role on a regular basis. Further information on the IAC and performance appears

elsewhere in this report.

Communicating information about the default option to members

Scottish Life makes a significant amount of information available here. This can easily be accessed from the

Scottish Life website and includes information on charges, performance data, benchmarks and minutes of IAC

meetings.

Reviewing and/or changing the default option

The IAC governance process is designed to ensure that each default option remains suitable. Any changes to

it will be automatically passed on to all members investing in it.



5. THE GOVERNED RANGE

There is general consensus that, when constructing an investor’s portfolio, investment returns are

determined more by appropriate asset allocation than by stock/fund selection. Asset allocation should

therefore be an integral part of the advice process and the intermediary requires a robust and credible

approach to asset allocation, based on the client’s risk appetite. A robust asset allocation approach results in

appropriate diversification whilst allowing for risk and reward allied to the specific risk profile.

Depending on an intermediary’s preferred approach, resources and competence, this can range between

adopting a pre‐populated asset allocation through to determining their own asset allocation tailored for a

particular client or group of clients.

At the pre‐populated end of the spectrum Scottish Life provides a range of nine Governed Portfolios, the

asset allocations for which are determined by the IAC based on information provided by Barrie & Hibbert.

Barrie & Hibbert is well known and respected for providing stochastic modelling solutions to clients around

the world, helping them to improve their understanding of financial market risk in what are complex and

increasingly volatile world markets. Central to this is their Economic Scenario Generator (ESG) ‐ the engine

that powers their range of products and services.

Using output from the Barrie & Hibbert ESG, Scottish Life has derived a set of investment strategies which

depend both on the investor’s outstanding term to vesting/retirement and their attitude to risk. These

strategies are referred to as the Governed Portfolios and are set out in the table below.

At 15 years At 10 years At 5 years

Governed Portfolio 1

(target volatility 10.5)

















The table also shows the target volatility for each portfolio. Volatility is a high level proxy for risk i.e. the

higher the volatility the higher the risk but equally the higher the potential return.

Each Governed Portfolio has its own benchmarks for asset allocation purposes, although at any one time the

actual allocation will reflect tactical positions taken by RLAM Chief Investment Officer Robert Talbut. Details

of the current benchmarks are shown in Appendix 1 and reflect the generally accepted pattern, that is an

increased exposure to “riskier” assets e.g. equities as the risk appetite increases.

As an alternative to adopting the standard asset allocations, intermediaries have the flexibility to determine

their own asset allocations, developing customised portfolios with the added option of branding the portfolio.

Market movements will mean that unless action is taken regularly, a portfolio will “drift” from its

benchmarks, thereby potentially changing its risk profile. All Governed Portfolios are automatically

rebalanced monthly. Customised portfolios can select the frequency for re‐balancing.



An investor’s appetite for risk is likely to reduce as retirement approaches and to reflect this it is accepted

practice to move from riskier to less risky assets, a process generally referred to as lifestyle profiling. This is

potentially a very onerous and costly task for intermediaries should they undertake this task themselves

As part of its Governed Range, Scottish Life offers the option of Governed Lifestyle Strategies.

The table below sets out how, under a Fixed Lifestyle Strategy, an investor will see their investment move

successively from one Governed Portfolio to another as they approach retirement. Switches occur gradually

each month.

Risk Category At 15 years At 10 years At 5 years

Cautious Governed Portfolio 1 Governed Portfolio 2 Governed Portfolio 3

Moderately Cautious Governed Portfolio 4 Governed Portfolio 5 Governed Portfolio 3

Balanced Governed Portfolio 4 Governed Portfolio 5 Governed Portfolio 6

Moderately

Adventurous

Governed Portfolio 7 Governed Portfolio 5 Governed Portfolio 6

Adventurous Governed Portfolio 7 Governed Portfolio 8 Governed Portfolio 9

There are now three Lifestyle Strategies to choose from depending on the preferred equity fund:

The Fixed Lifestyle Strategy invests the equity holding in the SL Global Managed Fund.

The Fixed Lifestyle Strategy – Tracker option invests the equity holding in the SL/BlackRock Aquila

Global Blend Fund.

The Fixed Lifestyle Strategy – Active option invests the equity holding in the SL Global Blend Core

Plus (Rathbone Global Alpha) Fund. This fund is considered further later in this report.

Scottish Life offers additional flexibility through its Flexible Lifestyle Strategy. Here the intermediary is free to

choose any three Governed Portfolios to match their client’s attitude to risk as they approach retirement,

rather than be constrained by the Fixed approach.

Relative Performance

AKG has been provided with information on the performance of each of the 9 Governed Portfolios for 1, 3

and 5 year periods up until 12 January 2014, the date at which the Governed Portfolios reached their fifth

anniversary. This revealed that all the portfolios had outperformed their strategic benchmarks over 1 and 3

years. The performance of GP1, GP4 and GP7 is slightly below benchmark over the 5 year period.

These strategic benchmarks are set not by using sector averages, where, within any sector there may reside

funds of different risk profiles, but by using a weighted set of market indices. In this way each benchmark

more accurately reflects the risk profile of each of the funds within the Governed Range.



It is interesting to note the relative performance of the nine portfolios.

Performance relative to Risk :

The expectation would be that the greater the risk taken by the portfolio, as measured by the volatility, the

greater the expected return. The actual results were as follows:

GP7>GP4>GP1; GP8>GP5>GP2; GP9>GP6>GP3 over 1 year and 5 years to 12 January 2014

GP7<GP4<GP1; GP8<GP5>GP2; GP9>GP6>GP3 over 3 years to 12 January 2014

Performance relative to Duration:

The expectation would be that the longer the duration, with inherently a heavier weighting towards riskier

assets, the greater the expected return. The actual results were as follows:

GP1>GP2>GP3; GP4>GP5>GP6; GP7>GP8>GP9 over 1 year and 5 years to 12 January 2014

GP1>GP2>GP3; GP4<GP5>GP6; GP7<GP8>GP9 over 3 years to 12 January 2014

From the above it can be seen that over 1 year and 5 years the portfolios have each performed relative to

each other exactly as would be expected within the risk matrix over the time periods considered. The

position over 3 years is not as consistent, for example GP5 has outperformed GP4.

Whilst there are inevitably time periods over which performance is behind benchmark, generally

performance is good when compared with benchmarks.

Lifestyle Strategies (Pension & Cash)

In June 2012, Scottish Life introduced Pension & Cash Lifestyle Strategies, designed to deliver above inflation

growth in the value of the fund and income at retirement, assuming 25% is taken in cash and 75% is used to

purchase an annuity. There are 15 such strategies available, depending upon the investor’s attitude to risk

and choice of equity fund. The strategy uses three of the governed portfolios. A gradual switching process is

employed between portfolios so that the holding is 25% cash and 75% index linked at retirement.

If this strategy is chosen, the investor is automatically invested into it at the point that matches their term to

retirement.

Rathbone Global Alpha Fund

On 19 August 2013 Scottish Life added the Rathbone Global Alpha Fund, a new global fund of funds. This

fund is core to the proposition and can be used within the Governed Portfolios as the equity component in an

Active Lifestyle Strategy and sits alongside the in‐house SL Global Managed Fund and the passive

SL/BlackRock Aquila Global Blend Fund. It replaces the Close TEAMS Global Alpha Fund.

Rathbone Brothers plc has a history dating back to 1742 and is a leading provider of investment management

services. Rathbones had funds under management of £20.8bn as at 30 September 2013.

AKG View

The Governed Range represents a coherent and sensible range of risk rated portfolios and lifestyle strategies

which also take into account the outstanding term of the investment.

The asset allocation process combines seamlessly with the profiler and forms the core of the governed

offering, leaving intermediaries with the option of customising it as best suits their needs. The Governed

Range, with its various options, provides intermediaries with a range of possible support facilities.



The need to manage risk as retirement approaches is very important. Whilst it is inherently a very

straightforward process with the right systems, it can be very time consuming, and hence costly, if

intermediaries carry it out themselves.

The approach to setting benchmarks relative to the risk profile of the funds, rather than a more simplistic

overall sector average approach, is both logical and appropriate.

Intermediaries can either opt for the Fixed Lifestyle Strategy approach or alternatively, if preferred, mix and

match funds and portfolios to suit their business model and/or their clients’ requirements. There is now also

the option of three different equity funds with differing investment styles, itself providing more choice to

meet the client’s needs. The Lifestyle Strategies (Pension and Cash) are a useful option to have available as

part of the retirement planning process.

The inclusion of Discretionary Fund Managers is a logical and welcome move and sees the proposition evolve

in line with the requirements of advisers and their clients. Offering such a fund as a core part of the

proposition is also seen to be positive and is a demonstration of Scottish Life’s commitment to the Governed

Range.

Note: Investors and intermediaries should be aware that past performance is not necessarily a guide to future performance.



6. INVESTMENT ADVISORY COMMITTEE

The Investment Advisory Committee (IAC) is central to the Scottish Life governance proposition, as well as

being an integral part of investment management and operations.

The IAC meets quarterly and is comprised of six members, and as from November 2011, at least two of whom

will not be a director or employee of Royal London. The current membership is:

Julius Pursaill Independent Chairman

Phil Loney Royal London Group CEO

Hugh McKee CEO Royal London Intermediary

Andy Carter CEO Royal London Asset Management

Ewan Smith Royal London Intermediary Proposition and Strategy Director

Colin Taylor Independent Representative

It is readily apparent from this list that the IAC occupies a very important part in the Scottish Life governance

proposition. It represents an array of experience and expertise that an intermediary is very unlikely to be able

to replicate, or indeed afford.

In addition to the above, various other experienced investment personnel will be in attendance.

The role of the IAC as set out within its Terms of Reference is as follows:

To appoint and terminate the appointment of investment managers

To approve the agreements between asset managers and Scottish Life

To determine asset allocation benchmarks, performance objectives and performance benchmarks

To monitor investment performance

It is the latter two which have most bearing on the operation and governance of the Governed Portfolios.

During the course of the meeting the IAC will consider detailed reports from Barrie & Hibbert (for investment

outlook and asset allocation), Morningstar OBSR (for fund analysis and considerations of selection/de‐

selection) and RLAM (for economic outlook and short term tactical positioning – tactical investment decisions

being delegated to RLAM’s Chief Investment Officer, Robert Talbut).

Each governed portfolio has its own predetermined “risk budget” which enables tactical positions to be

taken. Risk budgets are defined in terms of maximum tracking error. The risk budget for each portfolio

controls the extent to which Robert Talbut can take tactical positions away from the long‐term benchmark

asset allocations. Higher risk portfolios can benefit from larger tactical positions than lower risk portfolios.

Actions Taken

In addition to the normal quarterly meetings, the IAC also held two additional special (interim) meetings in

2009, against the background of the unprecedented market volatility.

Not only must governance be done it must be seen to be done. Detailed minutes of the IAC meetings are

published on the Scottish Life website, thereby ensuring the process is very transparent.

Since August 2009, Scottish Life also produces a summary of the meeting of the IAC and the decisions that

have taken place with regards the Scottish Life Governed and fund ranges. This highlights the fact that there

was a strategic benchmark change to some of the portfolios on 12 January 2010 to reduce the risk within the

benchmarks, which had resulted from increased equity volatility. To date, there have been 17 tactical

portfolio changes and 10 fund changes.



In November 2012 Julius Pursaill was appointed as Independent Chairman of the IAC.

AKG View

Specialist input is a key part of the overall governance process. The IAC is supported through the governance

process by a number of internal and external areas and has access to a significant amount of detail (including

sophisticated stochastic model outputs) and access to a wide range of knowledge and experience. This

enables it to provide a robust challenge and make consistent recommendations.

The use of tactical positions is a tangible improvement to the overall proposition, although this is an area

where intermediaries may need more insight and understanding into the extent of likely movement outwith

the agreed benchmarks.

Rather than sticking rigidly to a quarterly pattern of meetings, the IAC has consistently demonstrated that it is

able and willing to convene as and when conditions require it, as evidenced by two special meetings in 2009,

one of which took place to consider the changes to the benchmarks referred to above. This is a clear

demonstration of governance in action. As for regular meetings, full details of special meetings are published

on the Scottish Life website.

Any model is just a tool and there are no right answers. Stochastic models are complex and the Barrie &

Hibbert ESG is no exception to this. However, it does provide meaningful input into the IAC discussions. The

result is a blend of Barrie & Hibbert quantitative expertise and the IAC’s qualitative experience‐based input.

The IAC is a key element of the Scottish Life governance proposition and provides serious grown up

transparent governance – a combination of high level experienced internal input and extensive third party

input. Whilst the members of the IAC have changed quite a lot recently, this is more about the evolution of

the Royal London Group as a whole, internal representation is still of a high and relevant calibre. An

Independent Chairman and additional independent representation are also seen as positive to the overall

process.

The IAC provides governance that can be beneficial to corporate advisers, employers and scheme members,

for example:

taking on relevant roles and responsibilities

providing relevant expertise and resource to investment governance

monitoring and reviewing the Governed Range.



7. CONCLUSION

Governance, in the context of a Defined Contribution Scheme, is ultimately the responsibility of the

employer/adviser. However, it is possible for the employer/adviser to get third party involvement in what,

whilst it is an essential part of the service, can also be an onerous, time consuming and expensive

undertaking.

Within auto‐enrolment, ongoing review, particularly of the default option, is an essential aspect of the role of

the employer/adviser, who may not have either the time or the resources to undertake this function

themselves.

The overriding themes underpinning the process are the need for consistency and the need for

documentation and record keeping.

The Scottish Life approach is not the only facility of its type available and more will follow. Indeed, third party

solutions may not be necessary at all if the employer/adviser is confident as to their ability, systems, process,

knowledge and experience ‐ and can prove it.

However, in this increasingly compliance‐driven world it is probably fair to say that many employers/advisers

would welcome assistance and support in meeting their obligations, particularly if it doesn’t explicitly incur

additional costs.

Governance provided by Scottish Life involves very senior buy‐in to the review process, something that clearly

demonstrates a commitment to supporting intermediaries.

The Governed Range provides the employer/adviser with a streamlined end to end investment process.

There is continuing and increasing regulatory interest and scrutiny over scheme governance. Scottish Life has

shown a commitment to adapt its governance in line with this. In particular it offers independent and

ongoing scrutiny.

The Scottish Life Governed Range has been in existence for five years. During this time, Scottish Life has

shown a clear commitment to it. It has been well maintained as evidenced by regular IAC meetings and its

evolution and development to meet the requirements of the regulator, advisers and investors.

Notwithstanding the clear compliance and regulatory framework provided by the Governed Range, it is also

apparent that relative returns produced by the Governed Portfolios in the 1, 3 and 5 year periods to 12

January 2014 are generally consistent with expectations. Furthermore the funds have mostly outperformed

their benchmarks, which are set to reflect the underlying risk profile of each fund.

The inclusion of an Independent Chairman to the IAC is a welcome addition and a clear strengthening of

Scottish Life’s proposition and its overall governance.

The Scottish Life Governed Range proposition has performed to expectations and continues to offer a

credible solution. It is up to the employer/adviser how much to use, but it offers a well designed and

governed solution, allowing responsibility to be delegated to a committed provider if required.

AKG Actuaries & Consultants Ltd

January 2014



APPENDIX 1 PORTFOLIO BENCHMARKS

Portfolio asset allocation benchmarks are reviewed at all IAC meetings.

Governed Portfolio Equities

%

Corporate Bonds

%

Index linked Bonds

%

Property

%

1 55 15 12.5 17.5

2 42.5 22.5 20 15

3 15 45 30 10

4 67.5 7.5 7.5 17.5

5 55 17.5 12.5 15

6 30 40 20 10

7 82.5 0 0 17.5

8 70 7.5 7.5 15

9 45 25 20 10

NB. Benchmarks are as at November 2013.

The performance of each Governed Portfolio is measured against a basket of suitable market indices

aggregated in the same proportions as the asset allocation benchmarks shown above.



APPENDIX 2 INFORMATION ABOUT AKG

AKG is an actuarially based consultancy specialising in the provision of ratings, information and market

assistance to the financial services industry.

A wide range of Clients

Within a specialist focus on the financial services industry, AKG has developed a broad, complementary range

of clients including: Intermediaries (IFAs), Life Companies, Friendly Societies, IFA Networks, Regulators, Fund

Managers, Trade Bodies, Service Providers, Banks, and Building Societies.

Support for Product Providers

AKG assists Providers in:

Financial Strength Analysis and Presentation

Data and Information Provision

Actuarial Consultancy

Distribution Consultancy

Assistance to Financial Intermediaries

AKG assists Intermediaries in:

Financial Strength Analysis and Ratings of Product Providers

Best Advice Panel Services

Data and Information Provision

Actuarial and Technical Support

Regular Reports

AKG publishes the following reports to assist providers and intermediaries:

AKG Company Profile & Financial Strength Reports

(Covering UK life assurance companies)

AKG Offshore Profile & Financial Strength Reports

(Covering Offshore life assurance companies)

AKG Platform Profile & Financial Strength Reports

(Covering platform operations)

AKG UK Life Office With Profits Report

(Providing further depth in the assessment of with profits funds)

For further details on any of the above please contact AKG:

Tel: +44 (0) 1306 876439, email: [email protected]

Or online at www.akg.co.uk


Produced by:

AKG Actuaries & Consultants Limited

Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW

Tel No: 01306 876439 | Fax No: 01306 885325 | E-mail: [email protected]

www.akg.co.uk

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