BAE Systems Pension SchemePension SchemeAVC Investment Fund Improvements 2019

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BAE Systems Pension SchemeBAE Systems Pension SchemeAVC Investment Fund Improvements 2019

Contents

Page

3 Overview

4 Changes to the Lifestyle Investment Profiles (LIPs)

9 Changes for existing Lifestyle investors

10 Changes to the Self-Select fund range

11 Changes for existing Self-Select investors

12

Information for all Scheme members- Timing- ‘Black-out’ period- Fund charges- Financial advice- Where to go for further information

13 Old and new Self-Select fund ranges

14 New Fund Objectives

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OverviewThe BAE Systems Pension Scheme (‘the Scheme’) Trustee regularly takes professional advice about the investment options available to members who pay Additional Voluntary Contributions (AVCs) to Standard Life.

This leaflet explains the fund changes which the Trustee will be implementing as a result of its latest review and explains any actions you will need to take to ensure your AVCs are invested according to your current wishes.

Please review carefully the actions which the Trustee intends to take in relation to your investments and your options to advise us of a different course of action.

In particular, for those members who currently invest in Self-Select Funds (SSF), the Regulatory position means that the Trustee is unable to move your investments into the new ‘white labelled’ SSFs without your express permission. The Instruction Form included in this pack allows you to provide this permission and/or to make a different choice for the investment of your AVC fund. If we do not receive an Instruction Form, your current SSF(s) investments will be moved into the new Cash Lifestyle Investment Profile (see page 8 for details). The exception to this is any With Profits fund assets members currently have, which will only be switched with a member’s consent. More details are included on page 11.

TimingScheme members’ existing AVC funds will transition to the new Lifestyle Investment Profiles or Self-Select Fund(s) during the period 11 to 21 March 2019.

Active members’ ongoing AVCs will be applied to the revised fund range as soon as it becomes operational during the period 11 to 21 March 2019.

The letter accompanying this leaflet shows how your AVC fund is currently invested.

If you are currently a Lifestyle Investment Profile investor, please refer to pages 4 to 9, 12, 14 and 15.

If you are currently a Self-Select Funds investor, please refer to pages 10 to 15.

Important: action required by 25 February 2019

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Changes to the Lifestyle Investment Profiles (LIPs)Lifestyle Investment Profiles (LIPs)

LIPs - a refresherA LIP provides an ‘off the shelf’ investment strategy which is designed to meet specific objectives for certain groups of Scheme members. A key feature is automated asset switching, which ensures that (as far as possible) the types of assets held in your AVC fund shift over time to reduce the range and volatility in potential outcomes, taking account of your Target Retirement Age (TRA) and how your AVC fund is expected to be used.

Current LIPsThere are currently two LIPs available to Scheme members. These are the Cash LIP and the Pension LIP.

The Cash LIP is for members who expect to use their AVCs as cash at retirement. This LIP is the current ‘default investment option’.

Investment profile of the current Cash LIP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20+ 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Growth Fund (LSP)

Transition Fund (LSP)

Mixed Bond Fund (LSP)

Deposit and Treasury Fund (LSP)

Fun

d h

old

ing

%

Years to Target Retirement Age (TRA)

LSP - Lifestyle Profile

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The Pension LIP below is for members who expect to use all of their AVCs to buy a pension (annuity) at retirement.

Investment profile of the current Pension LIP

New and revised LIPsNew UK pension flexibilities mean that members can now choose from the following retirement options:

• Income drawdown whereby, having first taken a certain level of tax free cash, the remaining AVC fund is used to make payments to the member as (taxable) income as and when the member chooses.

• Annuity purchase.

• A series of lump sum withdrawals each year, where the first 25% of each withdrawal is tax free and the balance is taxed at the member’s marginal tax rate.

With this in mind, the Trustee has decided to replace the two current LIPs with three new LIPs, each designed for one of the above retirement income options. The three new LIPs are the Flexible LIP, the Annuity LIP and the Cash LIP.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20+ 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Growth Fund (LSP)

Transition Fund (LSP)

Annuity Fund (LSP)

Fun

d h

old

ing

%

Years to TRA

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New Flexible LIP The Flexible LIP aims to provide an investment portfolio at retirement which, relative to the alternative LIPs, should be more appropriate for members moving their AVCs into an income drawdown arrangement.

The Flexible LIP uses four funds:

• the Growth Fund (CR)

• the Multi Asset Fund (CR)

• the Bond Fund (CR) and

• the Inflation-Linked Government Bond Fund (CR)

Up until 10 years prior to your TRA, your contributions are invested in the Growth Fund (CR). Then, your investments are gradually moved into and between the remaining funds, as illustrated in the chart below.

(CR) denotes the fact that the fund has been designed specifically for this Scheme and is therefore ‘Client Restricted’.

The final funds allocation shown above at TRA then remains unchanged until you transfer your AVCs to your chosen income drawdown provider.

Growth Fund (CR)

Multi Asset Fund (CR)

Bond Fund (CR)

Inflation Linked Government Bond Fund (CR)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20+ 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Fun

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%

Years to TRA

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New Annuity LIPThe Annuity LIP offers an asset structure and phasing which, relative to the alternative LIPs, should be more appropriate for members who are planning to buy an annuity at their TRA.

The Annuity LIP uses five funds:

• the Growth Fund (CR)

• the Multi Asset Fund (CR)

• the Bond Fund (CR)

• the Inflation-Linked Government Bond Fund (CR)

• the Annuity Purchase Fund (CR)

Up until 10 years prior to your TRA, your contributions are invested in the Growth Fund (CR). Then, your investments are gradually moved into and between the remaining funds as illustrated in the chart below.

At your TRA, 100% of your AVCs will be invested in the Annuity Purchase Fund (CR) reflecting the expectation that you will choose to purchase a pension at retirement. The Annuity Purchase Fund (CR) has been selected to offer a broad match for annuity prices.

Growth Fund (CR)

Multi Asset Fund (CR)

Bond Fund (CR)

Inflation Linked Government Bond Fund (CR)

Annuity Purchase Fund (CR)

0%

10%

20%

30%

40%

50%

60%

70%

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100%

20+ 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Fun

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Years to TRA

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New Cash LIPThe new Cash LIP aims to provide members with an investment profile at retirement which should, relative to the alternative LIPs, be more appropriate if you plan to take all of your AVCs as cash.

The Cash LIP is made up of five funds:

• the Growth Fund (CR)

• the Multi Asset Fund (CR)

• the Bond Fund (CR)

• the Inflation-Linked Government Bond Fund (CR) and

• the Money Market Fund (CR)

Up until 10 years prior to your TRA, your contributions are invested in the Growth Fund (CR). Then, your investments are gradually moved into and between the remaining funds, as illustrated in the chart below.

At TRA, 100% of your AVCs will be invested in the Money Market Fund (CR) which represents a low risk asset class for members wishing to take all of their AVCs as cash at retirement.

Growth Fund (CR)

Multi Asset Fund (CR)

Bond Fund (CR)

Inflation Linked Government Bond Fund (CR)

Money Market Fund (CR)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20+ 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0

Fun

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%

Years to TRA

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ChangesChanges for existing Lifestyle investors

Unless Standard Life receives the enclosed Instruction Form by 25 February 2019 with alternative instructions, the Trustee will implement changes to existing LIP investors’ AVCs, as follows:

1. Current Cash LIP investors

Your AVC fund will automatically move to the Scheme’s new default investment option, the new Cash LIP. If you wish, you can ask the Trustee to instead switch your AVC fund to an alternative LIP or SSF(s) by using the enclosed Instruction Form.

2. Current Pension LIP investors

The Trustee will switch your current AVC fund into the new Annuity LIP, unless Standard Life receives the enclosed Instruction Form with alternative written instruction by 25 February.

After the transition exercise has been completed, LIP investors will have the ability to switch funds at any time within the revised fund range.

CashLIP

AnnuityLIP

CashLIP

FlexibleLIP

Current LIPs

New LIPs

Pension LIP

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Changes to the SelfSelf--SelectSelectfund range

The Trustee is taking two actions regarding the existing Self-Select Fund range:

• White labelled fundsAt present, making changes to the Self-Select Fund range involves a significant amount of work and cost. Having taken advice on possible ways to simplify matters, the Trustee has decided to introduce the concept of ‘white labelled’ funds which is already used by many other UK DC pension schemes.

Members will still be able to choose from a range of Self-Select Funds that will be invested in different types of assets using different investment styles. However, each Self-Select Fund will itself be invested in an underlying fund (or a combination of underlying funds) chosen by the Trustee as being appropriate for that Self-Select Fund. The Trustee will be able to change the underlying fund(s) used by a Self-Select Fund without first having to inform or consult members, provided that the new underlying fund (or combination of underlying funds) is appropriate for that Self-Select Fund. This will make it easier for the Trustee to change the underlying funds used by the white-labelled Self-Select Funds when the Trustee considers this to be in members’ best interests, and to do so more quickly.

• Review of underlying fundsThe Trustee has reviewed the current Self-Select Funds and has made decisions about which of them should be retained as underlying funds for the new ‘white labelled’ Self-Select Funds and which should be withdrawn and replaced by funds that the Trustee believes offer better investment prospects.

Pages 13 to 15 provide details of the current Self-Select Funds and the new ‘white-labelled’ Self-Select Funds. Details of the underlying funds that will initially be used by the new Self-Select Funds are also included. As explained above, the Trustee will periodically review the underlying funds and, after taking appropriate advice, will be able to replace them with different underlying funds. Fact Sheets will be available on the Standard Life website for all Self Select Funds and will include details of the underlying funds being used from time to time.

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Changes for existing SelfSelf--SelectSelectinvestors

General positionCurrent Regulations prevent the Trustee from moving your AVCs into a new SSF without your express permission. Therefore, if you currently invest in one or more of the current SSFs (see the table in the accompanying letter and the table at the back of this leaflet) the Trustee will move your AVCs into the new Cash Lifestyle Investment Profile (see page 8) unless you instruct otherwise.

If you wish to transfer your current self-selected investments into the new SSFs – or make any other instruction regarding your investments – you must complete the enclosed Instruction Form and ensure it is received by Standard Life no later than 25 February. If no such instruction is received, the Trustee will transfer all your investments in the current SSF(s) into the new Cash LIP.

Position for members investing in the With Profits FundThis fund operates in a different way to all other funds available under the Scheme. In relation to the current funds transition exercise, the key difference is that, if a member wishes to switch With Profits assets into a different fund, Standard Life (in line with other pension providers) can levy a ‘Market Value Reduction’ (MVR) at the point the With-Profits asset is disinvested. This feature means that it is only viable for members themselves to consider any disinvestment once Standard Life have advised if an MVR is applicable (if it does, it can also change day to day). As such, it would not be appropriate for these funds to form part of an automatic fund transition process.

Members of course retain the option to disinvest / reinvest their With Profits assets in any of the white labelled Self Select funds and we recommend that, as well as first checking the MVR position, members should always consider taking professional advice before making changes.

After the transition exercise has been completed, SSF investors will have the ability to switch funds at any time within the revised fund range.

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Information for all Scheme membersTimingThe Trustee wishes to give all Scheme members sufficient notice of the planned changes in order that members have time to digest and, if appropriate, issue an alternative instruction. This member review period will expire on 25 February, which is the final date of receipt of members’ instructions by Standard Life.

With regard to implementation of the fund changes, the bullet points below set out the Trustee’s current intentions. The Trustee, with assistance from their Investment Advisers, will monitor investment markets on the approach to the planned transition period. In the event that advice is received recommending that, on account of extreme market volatility, the funds transition should not proceed as planned, the Trustee will write to members to confirm the revised plan.

• Scheme members’ existing AVC funds will transition to the new Lifestyle Investment Profiles or Self-Select Fund(s) during the period 11 to 21 March 2019.

• Active members’ ongoing AVCs will be applied to the revised fund range as soon as it becomes operational during the period 11 to 21 March 2019.

‘Black-out’ periodIn order to implement these changes quickly and safely, it is necessary to impose a short period during which Scheme members are unable to make any investment fund changes. This ‘black-out’ period will run from 25 February to 21 March.

Fund chargesThe total expense ratio (‘TER’) is the total charge to a member of investing in a fund. The TER includes the annual management charge and all other operational expenses of running the fund. The TER may vary over time, as the operational expenses vary or if any of the underlying funds are changed. As such, the TERs shown in the table at the end of this leaflet can only represent the TER at the point this document was produced in November 2018.

The charge for each fund is determined by the underlying fund manager charges, as well as the cost to Standard Life for offering the fund and administering the Scheme, based on the terms agreed with the Trustee. The charge may therefore be higher or lower than the range of charges applied by Standard Life to its other pension products and to other UK institutional clients. The TER is only one of a number of factors considered by the Trustee when deciding which funds to offer to Scheme members. In this way the Trustee seeks to ensure the funds offered provide good value to members.

Financial adviceNeither the Trustee nor the Company can provide Scheme members with Financial Advice and nothing within this document should be considered advice. If members are at all unsure of the implications of this document, the Trustee recommends that members consider seeking Independent Financial Advice. If you require professional advice you can find a local Independent Financial Advisor at www.unbiased.co.uk

Where to go for further informationIf you have any questions about these changes please contact:

Pensions Service Centre Equiniti PaymasterPO Box 1194Crawley West Sussex RH10 0FZ

Tel: 0800 917 9568

Email: farnborough.pensions@equiniti.com

The explanations in this leaflet are subject to the rules of the BAE Systems Pension Scheme as amended from time to time and applicable legislation.

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More information about the new Self-Select Funds and their underlying funds can be found at www.baesystemspensions.com

OldOld and new new Self-Select fund rangesType of fund

Previous fund name

TER (% p.a)

New Fund Name

Underlying Fund NameTER (% p.a)

Cash

Standard Life Deposit and Treasury Fund

0.41Money Market Fund (CR)

SL BlackRock Cash Pension Fund

0.36Standard Life Money Market Pension Fund

0.41

Multi Asset

SL Newton Multi-Asset Growth Pension Fund

0.83

Diversified Asset Fund (CR)

SL BlackRock Dynamic Diversified Growth Fund

0.94Standard Life Managed Pension Fund

0.41

SL SLI Global Absolute Return Strategies Pension

0.84

Annuity Matching Bonds

Standard Life Annuity Targeting Pension Fund

0.41Annuity Purchase Fund (CR)

Standard Life Annuity Targeting Pension Fund

0.36

Index-Linked Government Bonds

N/A N/AInflation Linked Government Bond Fund (CR)

SL iShares Index Linked Gilt Index Pension Fund

0.31

Corporate BondsStandard Life Mixed Bond Pension Fund

0.41 Bond Fund (CR)Standard Life Corporate Bond Pension Fund

0.36

Fixed Interest Government Bonds

SL iShares Over 15 Year Gilts Index Pension Fund

0.36Fixed Government Bond Fund (CR)

SL iShares Over 15 year Gilt Index Pension Fund

0.31

PropertyStandard Life Property Pension Fund

0.43 Property Fund (CR)SL Threadneedle UK Property Pension Fund

1.16

UK Equity (passive)

SL iShares UK Equity Index Pension Fund

0.36Passive UK Equity Fund (CR)

SL iShares UK Equity Index Pension Fund

0.31SL FTSE Tracker Pension Fund

0.36

UK Equity (active)SL SLI UK Equity High Income Pension Fund

0.80Active UK Equity Fund (CR)

SL Majedie UK Equity Pension Fund

1.12

Global Equity (passive)

SL BlackRock Managed (50:50)Global Equity Pension Fund

0.37Passive Global Equity Fund (CR)

SL BlackRock ACS 50:50 Global Equity Tracker Pension Fund

0.31

Global Equity (active)

SL Veritas Global Focus Pensions Fund

1.29Active Global Equity Fund (CR)

SL Veritas Global Focus Fund

1.24

Emerging Market Equity

N/A N/AEmerging Market Equity Fund (CR)

SL Schroder Global Emerging Markets Pension Fund

1.32

EthicalStandard Life Ethical Pension Fund

0.41Socially Responsible Investment Fund (CR)

SL Vanguard SRI Global Stock Pension Fund

0.32

Shariah CompliantHSBC Islamic Global Equity Index Pension Fund

0.71 Shariah Fund (CR)SL HSBC Islamic Global Equity Index Pension Fund

0.60

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Fund May invest in Objectives

Growth Fund (CR)25% UK Equity10% Emerging Markets Equity40% Global Equity25% Factor Weighted Equity

Shares of companies The fund invests primarily in equities, both in the UK and overseas markets. The fund aims to provide returns consistent with the markets in which it invests and provides exposure to countries around the world.

Multi Asset Fund (CR)100% Diversified Growth Funds

A range of asset classes including equities, bonds, property, commodities, hedge funds, derivatives and cash/currencies around the world

The fund aims to achieve long-term capital growth by investing in a diverse range of asset classes, including equities, bonds, cash and other alternative assets.

Money Market Fund (CR)100% Money Market

Sterling denominated cash, deposits and money market instruments

Provide capital stability and returns before charges in line with short term money market rates by investing in actively-managed short term money market funds.

Inflation-linked Government Bond Fund (CR)100% Index-linked gilts

Index-linked UK government bonds

Provide long term growth by investing in one or more passively managed underlying funds providing exposure to UK index-linked government bonds.

Bond Fund (CR)100% Bond Fund

UK corporate bonds Provide long term growth by investing in one or more actively managed underlying funds providing exposure to Sterling denominated corporate bonds.

Annuity Purchase Fund (CR) UK government and corporate bonds

The Fund is designed for investors approaching retirement and considering purchasing a level annuity. It aims to invest in assets that reflect the investments underlying a typical non-inflation linked pension annuity product.

Fund May invest in Objectives

Equities (Active)

Active UK Equity Fund (CR)

Shares of companies in the UK The Fund aims to produce a total return above its benchmark over the long term through investment in a diversified portfolio of UK equities.

Active Global Equity Fund (CR)

Shares of companies around the world

The Fund aims to produce a total return above its benchmark over the long term through investment in a diversified portfolio of global equities.

Emerging Market Equity Fund(CR)

Shares of companies in countries, designated as emerging markets

The Fund aims to produce a total return above its benchmark over the long term through investment in a diversified portfolio of emerging market equities.

Funds within Lifestyle Investment Profiles

Funds within Self-Select Fund range

New Fund Objectives

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Fund May invest in Objectives

Equities (Passive)

Passive UK Equity Fund (CR)

Shares of companies in the UK Provide long-term capital growth by investing in one or more passively managed underlying UK equity funds.

Passive Global Equity Fund (CR)

Shares of companies around the world

Provide long-term capital growth by investing in one or more passively managed underlying Global equity funds.

Shariah Fund (CR) Shares of companies that comply with Shariah law

Provide long-term capital growth by investing in one or more passively managed underlying Shariah compliant equity funds.

Socially Responsible Investment Fund (CR)

Shares in companies that are screened to meet certain ‘socially responsible’ criteria

Provide long-term capital growth by investing in one or more passively managed underlying equity funds that screen companies on certain socially responsible criteria.

Bonds and Gilts

Fixed Government Bond Fund (CR)

UK government bonds Provide long term growth by investing in one or more passively managed underlying funds providing exposure to UK government bonds.

Inflation-linked Government Bond Fund (CR)

Index-linked UK government bonds

Provide long term growth by investing in one or more passively managed underlying funds providing exposure to UK index-linked government bonds.

Bond Fund (CR) Investment grade corporate bonds denominated in Sterling of all durations

Provide long term growth by investing in one or more actively managed underlying funds providing exposure to Sterling denominated corporate bonds.

Annuity Purchase Fund (CR)

UK government and corporate bonds

The Fund is designed for investors approaching retirement and considering purchasing a level annuity. It aims to invest in assets that reflect the investments underlying a typical non-inflation linked pension annuity product.

Other Funds

Diversified Asset Fund (CR)

A range of asset classes including equities, bonds, property, commodities, hedge funds, derivatives and cash/currencies around the world

The fund aims to achieve long-term capital growth by investing in a diverse range of asset classes, including equities, bonds, cash and other alternative assets.

Property Fund (CR) Property or property-related securities, although may also hold an allocation to cash in order to pay redemptions and build up money for new investments.

The fund aims to achieve long-term capital growth by investing in a portfolio of commercial property predominantly in the UK.

Money Market Fund (CR)

Sterling denominated cash, deposits and money market instruments

Provide capital stability and returns before charges in line with short term money market rates by investing in actively-managed short term money market funds.

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