ANNUAL REPORT AND FINANCIAL STATEMENTS 2012 | 85
24. Pension benefits continued (g) Risk management
(i) FCAM Plan The Trustees set general investment policy but delegate the responsibility for the selection of specific investments (other than investments in respect of members’ voluntary contributions) to the investment manager. The Trustees regularly monitor the FCAM Plan’s investments.
The Trustees seek advice from their investment advisor and believe they have sufficient skills and expertise to make investment decisions based on this advice.
The Trustees have set performance and risk targets for the investment managers. The performance objectives are long-term, and the Trustees monitor the investment managers on a regular basis in order to ensure that the Plan is on track to meet its long-term objectives.
The results of an asset-liability review undertaken alongside the 31 March 2010 actuarial valuation of the Plan have been used to assist the Trustees and the Group in managing volatility in the underlying investment performance and the risk of a significant increase in the FCAM Plan’s deficit by providing information used to determine the FCAM Plan’s investment strategy.
Asset allocation During the year, the Trustees, with the agreement of F&C, decided to further diversify the FCAM Plan’s investment strategy by introducing an allocation to diversified growth funds. This allocation was funded by the release of collateral received when the Liability Driven Investment (LDI) pooled hedging strategy was switched from LIBOR to SONIA-based funds. In previous periods, diversifying allocations to both UK and overseas equity-linked bond funds, an overseas private equity fund and funds investing in secured leases have been made. Previously the Trustees have implemented a LDI approach to the investment strategy. Other allocations to alternative asset classes may be made in the future.
Interest rate and inflation risk The LDI pools are intended to help provide a degree of matching to the liabilities of the FCAM Plan. Each pool comprises zero coupon derivatives with the same maturity as the expected cash flows of the scheme. Each pool has leveraged exposure of varying amounts to inflation and interest rates. The pools are valued using the market values of the underlying securities.
The equity-linked bond funds also provide a degree of matching to the liabilities but in addition retain an exposure to equity market movements.
Currency risk In order to increase the diversification of the equity portfolio, the FCAM Plan invests in overseas assets. However, the FCAM Plan’s liabilities are denominated entirely in Sterling and, therefore, there is a risk that the appreciation of Sterling against other currencies will reduce the return from overseas assets.
Operational risk The investment managers do not directly hold any of the FCAM Plan’s securities. These are held by an external custodian. The assets are ring- fenced from F&C’s creditors and are therefore transferable.
(ii) Non-UK schemes The plan in The Netherlands is financed via an insurance contract. The value of the plan assets is the value of the reserve which the insurance company holds to match guaranteed pension liabilities. These reserves are, in effect, fixed interest instruments, so provide a reasonable match to pension liabilities.
The plan in Portugal is part of an industry-wide banking sector plan. Each participant company holds a share of the assets, which are invested using the same asset allocation as the overall plan assets. F&C Portugal is the asset manager for the overall scheme.
At 31 December 2012, the assets of both the F&C Portugal and F&C Ireland plans were invested in diversified portfolios that consisted primarily of debt and equity securities.
(h) Cost of defined contribution plans Note Group personal pension plans
Other defined contribution schemes Defined contribution pension expense
The Group had no pension contributions outstanding as at 31 December 2012 (31 December 2011: £0.4m). 5
2012 £m
3.3 0.8
4.1
2011 £m
3.4 0.1
3.5
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