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Telefónica UK Pension Plan
Trustee’s annual report and financial statements for the year ended 30 September 2020
Registered number: 1026
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Table of Contents
Trustee, Principal Employer and its advisers ................................................................. 3
Trustee’s report ........................................................................................................... 5
Independent Auditor’s report to the Trustee of the Telefónica UK Pension Plan ........... 25
Fund account............................................................................................................. 28
Statement of net assets (available for benefits) ........................................................... 29
Notes to the financial statements ................................................................................ 31
Independent Auditor’s Statement about Contributions ................................................. 71
Summary of Contributions payable during the year ended 30 September 2020 ............ 73
Appendix A - Certification of Schedule of Contributions ............................................... 74
Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020.. 75
Appendix C – Implementation Statement .................................................................. 119
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Trustee, Principal Employer and its advisers
Trustee Telefónica UK Pension Trustee Limited
Directors of the Trustee Company Anthony Soothill – Chair
Andrew Davies – Member Nominated Director
Capital Cranfield Pension Trustees Ltd – represented by
Martine Trouard-Riolle
Jeannie Drake – Member Nominated Director
Adrian Gorham
Amanda Stokes-Waters – Member Nominated Director
Mark Leonard
Secretary to the Trustee Robert Harwood
Principal Employer Telefónica UK Limited
Scheme Actuary Bart Huby FIA, Lane Clark & Peacock LLP
Pension administrators Defined Benefit section
Lane Clark & Peacock LLP (for Sections 2, 2A, 3 and 3A)
Defined Contribution section
Aberdeen Standard Investments PLC (for Sections 1, 1A and
1B)
Independent auditors RSM UK Audit LLP
Investment managers Defined Benefit section
BlackRock Investment Management (UK) Limited
M&G Investment Management Limited
Apollo Capital Management L.P.
Partners Group Private Market Strategies 2 S.A.
Morgan Stanley Investment Management (appointed
12 December 2019)
Defined Contribution section
Aberdeen Standard Investments PLC
Telefónica UK Pension Plan
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for the year ended 30 September 2020
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Trustee, Principal Employer and its advisers continued
AVC providers Standard Life Investments Limited
Utmost Life and Pensions Limited (from 1 January 2020 until
1 May 2020)
Investment adviser KPMG LLP (until 2 March 2020)
Isio LLP (appointed 2 March 2020)
Custodians Defined Benefit section
BlackRock - BNY Mellon Asset Servicing
The custodians for all other investments are selected by the
investment managers
Legal adviser Sacker & Partners LLP
Covenant adviser Trevor Civval, Penfida Limited
Banker HSBC UK Bank plc
Enquiries Defined Benefit section
Lane Clark & Peacock LLP (For Sections 2, 2A, 3 and 3)
St Paul’s House
St Paul’s Hill
Winchester
SO22 5AB
Email: [email protected]
Defined Contribution section
Aberdeen Standard Investments PLC (for Sections 1, 1A and
1B)
Standard Life House
30 Lothian Road
Edinburgh
EH1 2DH
Email: [email protected]
Further information about the Telefónica UK Pension Plan can
also be found at www.telefonicapensions.com
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Trustee’s report
The Trustee is pleased to present its annual report on the Telefónica UK Pension Plan (‘the Plan”), together
with the financial statements of the Plan for the year ended 30 September 2020.
Constitution of the Plan
The Plan provides pension or lump sum benefits payable to members on retirement from their employment or
to their dependants on death before or after retirement in respect of both the Defined Benefit section (“DB”)
and the Defined Contribution section (“DC”).
There are eight sections to the Plan:
Section 1 – A money purchase or DC section of the Plan open to all employees joining the Principal
and Participating Employers on or after 1 April 2001.
Section 1A – A DC section of the Plan for employees who have opted out of one of the DB sections
of the Plan since 1 July 2011 or who chose to join the section following the closure of sections 2,
2A, 3 and 3A to future accrual on 28 February 2013.
Section 1B – A DC section of the Plan for employees who were auto enrolled between 1 April 2013
and 31 December 2017. At that date, all section 1B members became Section 1 members and
Section 1 became the receiving scheme for all auto-enrolments.
Section 2 – A final salary or DB section of the Plan which is closed to new entrants but was open to
new employees between March 1986 and April 2001. This section of the Plan was closed to future
accrual on 28 February 2013.
Section 2A – A DB section of the Plan for Section 2 members who chose Option 2 as part of the
2011 Pensions Review. This section of the Plan is closed to new entrants and was closed to future
accrual on 28 February 2013.
Section 3 – A DB section of the Plan which is closed to new entrants, but was open to new
employees before March 1986. This section of the Plan is closed to new entrants and was closed to
future accrual on 28 February 2013.
Section 3A – A DB section of the Plan for Section 3 members who chose Option 2 as part of the
2011 Pensions Review. This section of the Plan is closed to new entrants and was closed to future
accrual on 28 February 2013.
Life Assurance Only – Non-pension members are covered for life assurance only through the Plan.
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Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Trustee’s report continued
Constitution of the Plan continued
The Plan is registered under the Finance Act 2004 and the Trustee knows of no reason why this status
should be prejudiced or withdrawn.
Management of the Plan
The Trustee of the Plan is Telefónica UK Pension Trustee Limited and the Directors are listed on page 3.
Under the Definitive Trust Deed, subject to the rules regarding Member Nominated Directors, the Trustee
and Trustee Directors are appointed and removed by the Principal Employer. The board currently comprises
seven Trustee Directors, including three who are elected by the active and pensioner members of the Plan.
The Directors meet at quarterly intervals to conduct normal business and on such other occasions as are
deemed to be necessary. The Directors have appointed committees in circumstances where it is felt that the
conduct of its affairs would be facilitated by a committee structure.
Financial statements and financial development of the Plan
The financial statements have been prepared and audited in accordance with regulations made under
sections 41(1) and (6) of the Pensions Act 1995.
The fund account and statement of net assets (available for benefits) on pages 28 to 30 show that the value
of the Plan’s assets increased by £33,330,000 to £2,163,216,000 during the year. The increase was
comprised of net additions from dealings with members of £12,016,000 together with net returns on
investments of £21,314,000.
Further details of the financial developments of the Plan may be found in the audited financial statements on
pages 28 to 70.
Transfers
Cash equivalents paid during the year with respect to transfers have been calculated and verified in the
manner prescribed by the Pension Schemes Act 1993 and in accordance with the regulations under the
Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008, Pensions Act 2004.
No discretionary benefits were included in the calculation of the transfer values.
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for the year ended 30 September 2020
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Trustee’s report continued
Pension increases
A bulk pension increase exchange (PIE) exercise was carried out in 2019 which permitted existing Plan
pensioners to surrender their non-statutory pension increase in exchange for an additional fixed rate
pension. In exercising the PIE option, a member would surrender the part of their entitlement to pension
increases that related to pre 6 April 1997 pensionable service (in excess of GMP). 99 pensioner members
opted to take this option.
In accordance with the Plan’s Rules pensions in payment were increased as follows:
▪ The Guaranteed Minimum Pension (GMP) in respect of any contracted-out employment between
6 April 1988 and 5 April 1997 is increased each year by the Plan in line with the increase (if any) in the
Consumer Prices Index (CPI) up to a maximum of 3%. This year the increase was 1.7%.
▪ The GMP in respect of any contracted-out employment prior to 6 April 1988 was not increased by the
Plan.
▪ Pension in respect of pre 6 April 1997 service for members who opted for pension increase exchange
received no increases.
▪ Pension in excess of GMP increases each year in line with the increase (if any) in the Retail Price
Index (RPI) capped for Section 2 and 2A members at 5.0%. This year the increase was 2.4%.
The deferred pensions in respect of members who have left the Plan with an entitlement to benefits at
normal retirement date were also increased as follows:
Members of Sections 2 and 2A:
▪ GMP and deferred pensions were increased in accordance with legislative requirements.
▪ Excess – Statutory Section 52A Orders (CPI.) Post April 2009 revaluation is CPI capped at 2.5% pa.
Members of Sections 3 and 3A:
▪ Full benefit receives increases in accordance with the Pension (Increase) Act 1971 (CPI). There is a
proportionate first increase. There is no cap but it is floored at zero each year.
▪ GMP and deferred pensions were increased in accordance with legislative requirements.
No discretionary increases were awarded during the year (2019: £Nil).
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for the year ended 30 September 2020
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Trustee’s report continued
Report on actuarial liabilities (DB sections only)
As required by Financial Reporting Standard 102, “The Financial Reporting Standard applicable in the United
Kingdom and the Republic of Ireland” (FRS 102), the financial statements do not include liabilities in respect
of promised retirement benefits.
Under section 222 of the Pensions Act 2004 every scheme is subject to the Statutory Funding Objective,
which is to have sufficient and appropriate assets to cover its technical provisions, which represent the
present value of benefits to which members are entitled based on pensionable service to the valuation date.
This is assessed at least every 3 years using assumptions agreed between the Trustee and the Employer
and set out in the Statement of Funding Principles.
The latest actuarial valuation was completed by the Scheme Actuary as at 30 September 2017. The results
of this valuation were presented in a report dated 29 November 2018. The results showed that the
calculated technical provisions were £1,561.9m, the Plan’s assets were £1,409.4m and the resulting deficit
was £152.5m. The Plan was therefore 90% funded on a technical provisions basis as at
30 September 2017. It was agreed that the funding shortfall would be eliminated by the payment of the six
deficit funding contributions of £25m each, payable by each 10 January from 2019 to 2024 inclusive.
The next full valuation is to be carried out as at 30 September 2020 and is due to be completed no later than
31 December 2021.
Assumptions
The 2017 valuation adopted the ‘projected unit method’, under which the technical provisions are calculated
as the amount of assets required as at the valuation date to meet the projected benefit cashflows, based on
benefits accrued to the valuation date and the various assumptions made.
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for the year ended 30 September 2020
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Report on actuarial liabilities (DB sections only) continued
Assumptions continued
The technical provisions were calculated on the following key assumptions;
Key financial assumptions % pa
Rate of RPI price inflation 3.4
Rate of CPI price inflation 2.4
Rate of return from gilts 1.8
Rate of investment returns above gilts
until 30 September 2029
1.8
Rate of investment returns above gilts
from 1 October 2029
0.25
Rate of pension increases
RPI price inflation capped at 5% pa 3.3
CPI price inflation capped at 3% pa 2.1
Financial assumptions shown are single equivalent average rates.
Other assumptions
Other assumptions applied are as follows:
▪ The timing of retirement is allowed for having regard to the Plan’s past experience. The following table
describes the rate of retirements assumed at each age.
Age Percentage of members retiring each year at
each age
50-59 5%
60 100%
▪ Members over age 60 who have not yet retired are assumed to retire immediately at the valuation date.
▪ Non-pensioner members of section 2 are assumed to commute 20% of their pension on retirement.
For non-pensioner members of section 3, it is assumed that they will commute 10% of their pension in
addition to the standard amount they receive on retirement. Commutation is assumed to take place on
the current terms offered by the Plan, with allowance made for the assumed rates of improvement in
member mortality over time.
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Trustee’s report continued
Report on actuarial liabilities (DB sections only) continued
Other assumptions continued
▪ There is insufficient experience within the Plan to determine bespoke mortality tables based on the
Plan’s membership. Standard tables have therefore been selected, adjusted appropriately for the
demographics of the Plan membership, and allowance for future improvements in longevity, resulting in
the following assumptions both pre and post retirement:
▪ S2NA tables with:
▪ the proportion of members dying at each age being 95% of the proportion in the standard
tables; and
▪ allowance being made for future improvements from 2007 according to the CMI_2017
projections based on each member’s actual date of birth, with a long-term rate of
improvement of 1.5% pa and a smoothing parameter Sk=8.
▪ 85% of current pensioners are assumed to have a spouse or civil partner as at the valuation date. 85%
of other members assumed to be married or have a civil partner at retirement, or earlier death.
▪ Spouses/civil partners assumed to be three years younger than male members or three years older
than female members.
▪ Allowance is made for the potential additional costs of rectifying inequalities in benefits due to GMPs,
by including an additional reserve equivalent to increasing the Technical Provisions by 10% in respect
of post-1988 GMP liabilities (resulting in a reserve of £5m for the 2017 valuation).
▪ Expenses are met from the Plan’s assets and so an allowance is made with a reserve in the Technical
Provisions of 2% of benefit payments.
▪ Pension Protection Fund levies are either met directly by the Company or paid as additional
contributions.
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Trustee’s report continued
Impact of Employer activity on the Plan
On 7 May 2020, Telefonica SA and Liberty Global announced the terms of a proposed merger of Telefonica
UK with UK Virgin Media. This transaction will, if completed, have an impact on the covenant of the Plan; the
Trustee has engaged with Telefonica in order to assess the materiality of that impact and agreed a mitigation
settlement should the merger complete. The Trustee understands that completion of the merger is expected
to occur around the middle of 2021.
The Trustee has received the initial results of the actuarial valuation as at 30 September 2020, and has
reached agreement with the Principal Employer on the funding basis to be used for the valuation and on the
deficit recovery contributions, contingent on whether the proposed merger of Telefónica UK with UK Virgin
Media goes ahead. As part of this agreement the Employer made a payment to the Plan of £55m on
31 December 2020, in place of the £25m due under the existing Recovery Plan in January 2021 and in
anticipation of the contributions that will be agreed for the 2020 valuation.
During March 2020 the worldwide spread of Covid-19 (Coronavirus) caused increased investment market
volatility and significant falls in global equity markets. This had an adverse impact on the funding level of the
Plan, which was taken into account in the actuarial valuation as at 30 September 2020 and has been
reflected in the deficit recovery contributions agreed with the Principal Employer contingent on whether the
proposed merger of Telefónica UK with UK Virgin Media goes ahead. Since then, investment markets have
been stable and the funding position has improved slightly (as of mid-February 2021). The Trustee
continues to monitor the impact of market movements on the Plan’s funding position with support from its
actuarial and investment advisers.
The Telefonica UK Pension Plan was closed to future accrual with effect from 30 November 2020.
The Employer has set up a new pension scheme within the Legal & General Worksave Pension Mastertrust
from 1 December 2020. A bulk transfer to the Mastertrust covering the majority of the DC Section members
is expected later in 2021.
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Membership
DB sections (2, 2A, 3 and 3A)
The membership of the Plan at the beginning and end of the year and changes during the year are set out below.
Deferred members 2020
Deferred members at the start of the year 3,314
Adjustment 1
Retirements (90)
Transfers out (29)
Deaths (6)
Deferred members at the end of the year 3,190
Pensioners 2020
Pensioners at the start of the year 1,101
Adjustment (1)
New pensioners 90
New dependants 11
Deaths (4)
Pension cessation (2)
Pensioners at the end of the year 1,195
Pensioners include 75 dependants (2019: 66 [Restated]) receiving a pension following the death of a member.
Non-pension members are covered for life assurance only through the Plan.
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Trustee’s report continued
Membership continued
DC sections (1, 1A and 1B)
Active members 2020
Active members at the start of the year 6,061
New actives 664
Adjustments (1)
Retirements (8)
Transfers out (49)
Deaths (2)
Refund of contributions (2)
Active to deferred (947)
Active members at the end of the year 5,716
Deferred members 2020
Deferred members at the start of the year 7,114
Adjustments 3
New deferred members 947
Retirements (24)
Transfer out (211)
Deaths (7)
Deferred at the end of the year 7,822
Included within the new actives above are the Auto-enrolled members who have subsequently decided to opt
out of the Plan. New actives are therefore shown gross of opt outs.
The Employer has set up a new pension scheme within the Legal & General Worksave Pension Mastertrust
from 1 December 2020. A bulk transfer to the Mastertrust covering the majority of the DC Section members
is expected later in 2021.
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Regulatory bodies
The Pensions Ombudsman is appointed by the Secretary of State for the Department for Work and Pensions
to investigate and determine any complaint or dispute of fact of law in relation to occupational pension
schemes.
The Pensions Ombudsman can be contacted at:
10 South Colonnade
Canary Wharf
London
E14 4PU
Tel: 0800 917 4487
www.pensions-ombudsman.org.uk
The Pensions Regulator is responsible for occupational pension schemes and enforcing the law that relates
to them. It has wide ranging powers which include the ability to:
▪ suspend, disqualify and remove trustees for consistently not carrying out their duties;
▪ wind up schemes where necessary;
▪ apply for information to prevent the misuse and misappropriation of scheme assets and apply for
restitution where necessary; and
▪ take action to prevent schemes being left in deficit with nobody to meet the liability.
The Trustee, its advisers, the Employer and anyone connected with the administration of the Plan have a
statutory duty to report in writing to The Pensions Regulator if there are any breaches of legislation which are
deemed to be materially significant to The Pensions Regulator.
The Trustee also has certain responsibilities in respect of contributions which are set out in the statement of
Trustee’s responsibilities.
The Pensions Regulator can be contacted at:
Napier House
Trafalgar Place
Brighton
BN1 4DW
Tel: 0345 600 0707
www.thepensionsregulator.gov.uk
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Regulatory bodies continued
The Pension Tracing Service is designed to help former members of pension schemes trace their benefits if
they have lost contact with the pension scheme in question. The Pension Tracing Service can be contacted
at:
The Pension Tracing Service
The Pension Service 9
Mail Handling Site A
Wolverhampton
WV98 1LU
Tel: 0800 731 0193
www.gov.uk/find-pension-contact-details
Further information
Any enquiries about the Plan or a member's own pension position should be addressed as follows:
DB sections (2, 2A, 3 and 3A)
Lane Clark & Peacock LLP, St Paul’s House, St Paul’s Hill, Winchester, SO22 5AB.
Email: [email protected]
DC sections (1,1A and 1B)
Aberdeen Standard Investments PLC, Standard Life House, 30 Lothian Road, Edinburgh, EH1 2DH.
Email: [email protected]
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Investment management
The Trustee delegates the day-to-day management to professional external investment managers. The
Trustee sets the investment strategy for the Plan after taking advice from the Plan’s investment adviser. The
Trustee has put in place investment mandates with their investment managers which implement this
strategy. The Plan’s investments are regarded as readily marketable.
The investments of the Plan are managed on behalf of the Trustee by the Plan’s investment managers:
DB section
▪ BlackRock Investment Management (UK) Limited (“BlackRock”) – Segregated portfolios
▪ M&G Investment Management Limited (“M&G”) – Pooled Investment Vehicles
▪ Apollo Capital Management, L.P. (“Apollo”) - Pooled Investment Vehicles
▪ Partners Group Private Market Strategies 2 S.A. (“Partners Group”) - Pooled Investment Vehicles
▪ Morgan Stanley Investment Management (“Morgan Stanley”) (appointed 12 December 2019)
DC section
▪ Aberdeen Standard Investments plc (“Aberdeen”) - Pooled Investment Vehicles
Custodial arrangements
The assets managed by BlackRock are segregated portfolios, which are held by the Plan’s global custodian,
BNY Mellon Asset Servicing (“BNYM”).
The DB section’s other assets are invested in pooled funds and the respective Investment Managers are
responsible for appointing a custodian.
The DC section assets are managed by Aberdeen and all assets are held by their custodian Citi.
The custodians are responsible for the safe keeping, monitoring and reconciliation of documentation relating
to the ownership of investments. Investments are held in the name of the custodian’s nominee companies, in
line with common practice for pension scheme investments.
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Trustee’s report continued
Statement of Investment Principles
In accordance with section 35 of the Pensions Act 1995, a Statement of Investment Principles (“SIP”) has
been prepared by the Trustee which incorporates the investment strategy. There were no significant
departures from the SIP during the year. The deviation from the strategic weights are due to market
movements. The relative positioning versus the benchmark is reviewed at least on a quarterly basis. The SIP
was updated in September 2020.
Investment strategy – DB section
The Trustee has opted to follow a “spread-value investing” approach, which is designed to help close the
deficit with a relatively high degree of certainty, alongside any other funding. It is expected that this approach
will exhibit much less volatility than an equity-based investment strategy. The Trustee considers this a long-
term strategy that is expected to remain in place until the Plan achieves its secondary objective of becoming
self-sufficient – i.e. this approach is strategic in nature, rather than opportunistic / tactical.
Spread-value investing involves taking advantage of the legal protections (such as seniority in the case of
liquidation) and contractual obligations (such as fixed temporal constraints regarding contractual lifetime and
payments) of credit assets, which the Trustee believes are well suited to meeting the Plan’s objectives with
greater certainty than a strategy which utilises subordinate non-contractual income assets (e.g. equities).
Liability Driven Investing (LDI) is used to manage the re-investment and inflation risk of the credit assets –
most credit assets have much shorter maturities than the Plan’s liabilities and so must be re-invested when
they mature. This significantly reduces the asset and liability mismatch risk.
The Plan’s Partners Group mandate has been fully drawn since November 2018 and is distributing capital on
a regular basis. To maintain the strategic allocation to private market credit, the Trustee has committed
capital to the M&G Real Estate Debt Fund (REDF VI).
The private market credit, REDF VI and semi-liquid credit assets have been selected as the Trustee believes
they offer an illiquidity and/or a complexity return premium which more than compensates for the loss of
liquidity. However, the Trustee has limited the allocation to such assets to manage the potential liquidity risk.
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Investment strategy – DB section continued
The Plan’s current investment strategy is expected to return LIBOR + 2.3% p.a. using the following
investment strategy:
Asset Investment
Manager
Exposure
(% of total
assets)
Net Spread (1)
(above LIBOR)
(%)
Active investment grade corporate
bonds
BlackRock
Investment
Management
20.0 1.3
Liquid credit M&G 15.0 2.3
Semi-liquid credit Apollo 10.0 3.5
Private market credit M&G 12.5 3.7
Private market credit (illiquid) Partners Group 12.5 3.7
Credit Default Swaps (CDS) overlay BlackRock 30.0 1.3
LDI overlay BlackRock n/a n/a
Collateral for CDS and LDI BlackRock 30.0 -
Total 130.0 2.3
(1) Estimated spread as at 31 December 2016, net of expected default losses and fees
Investment performance – DB section
The tables below show the performance versus benchmarks (net of investment management fees) for the
aggregate Plan:
1 Year
%
3 Years
% pa (1)
5 Years
% pa(1)
Plan -0.1 8.1 n/a
Benchmark 0.6 7.2 n/a
Source: BNYM, Isio Calculations, BlackRock.
Notes: Performance is net of fees and as at 30 September 2020.
The Plan’s benchmark is based on the performance of Liability matching gilts (“LMG”) + 2.3%. LMG is a
bespoke portfolio of gilts that reflects the nature of the Plan’s liabilities.
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Investment performance – DB section continued
The DB Section’s benchmark composition is currently:
▪ 100% liability proxy returns
▪ LMG + 2.3%
▪ LMG is a bespoke portfolio of gilts that reflects the nature of the Plan’s liabilities.
In Q1 2020 markets experienced significant volatility as economies shut down to control the spread of
COVID-19. Despite this, the Plan’s assets recovered strongly in Q2 and Q3 2020, in line with wider credit
markets.
The Plan’s investment in M&G Liquid Credit had a particularly strong year as M&G used the COVID-19
volatility to select credits that they felt were priced cheaply relative to their chance of default. Therefore, the
credit market recovery seen in Q2 and Q3 2020, led to M&G comfortably outperforming the Fund’s
benchmark.
As at 30 September 2020, the Plan is invested solely in credit assets. It invests in such a way that these
assets closely match the nature of the Plan’s liabilities – both in respect to term and sensitivity to changes in
interest rates or inflation expectations. The Plan invests in a range of credit assets of differing liquidity, with
illiquid assets utilised in order to earn a return premium, whilst ensuring enough liquidity remains to meet any
cash requirements.
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Trustee’s report continued Investment performance – DB section continued
1 Year
Fund Index
%
3 Years
Fund Index
% p.a.
5 Years
Fund Index
% p.a.
BlackRock Liability Driven
Investment (LDI) Overlay 5.4 N/A 20.3 N/A N/A N/A
BlackRock Investment Grade
Corporate Bonds 6.4 5.0 7.9 7.2 7.7 7.0
BlackRock Credit Default
Swaps (CDS) Overlay -3.7 N/A -0.2 N/A N/A N/A
M&G Liquid Credit 4.4 0.4 2.9 0.3 N/A N/A
Apollo Semi-liquid Credit 0.1 0.2 2.6 1.7 N/A N/A
Partners Group Private
Market Credit (Illiquid) N/A N/A N/A N/A N/A N/A
M&G REDFVI (illiquid) N/A N/A N/A N/A N/A N/A
Source: Isio, BlackRock, M&G, Apollo
Note: Performance is net of fees to 30 September 2020
Investment strategy – DC section
The Trustee aims to provide a range of investments that are suitable for meeting members' long and
short-term investment objectives in a prudent manner. They have taken into account their understanding of
members' circumstances, in particular members' attitudes to risk and term to crystallising their pension
savings.
There are four lifestyle strategies offered by the Plan which gradually de-risk over time and a range of
investment options for members who want to create a bespoke portfolio. If a member does not want to select
an investment option themselves their investments will be directed into a default arrangement.
The Trustee has decided to make changes to the underlying investments within the growth phase of the
default, introducing an explicit investment in equities, incorporating ESG considerations and factor-based
investment. The changes are being implemented in a phased approach and started in January 2020
continuing into 2021.
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Market performance – DC section
Fund 1 Year
Fund Index
%
3 Years
Fund Index
% p.a.
5 Years
Fund Index
% p.a.
SL Mobile Diversified Growth Fund* 4.8 2.5 3.8 3.6 N/A N/A
SL Mobile Flexible Retirement Fund** 3.3 3.8 N/A N/A N/A N/A
SL Veritas Global Focus Fund 4.3 8.2 8.7 12.1 14.3 17.0
SL BlackRock UK Focus Fund -0.5 -12.6 4.3 0.8 6.9 7.5
SL BlackRock (50:50) Global Equity Fund -6.8 -4.8 1.8 2.8 8.4 9.2
SL iShares UK Equity Index Fund -16.6 -16.6 -3.4 -3.3 3.3 3.4
SL iShares Index Linked Gilt Fund 1.3 0.4 7.3 7.0 8.4 8.3
SL BlackRock Over 15 Year Corporate
Bond Fund 5.9 6.2 7.4 7.9 8.6 9.0
Standard Life Deposit and Treasury Fund 0.2 0.4 0.3 0.5 0.2 0.4
SL HSBC Islamic Global Equity Index Fund 22.8 23.6 17.1 17.9 19.2 20.0
Note
* SL Mobile Diversified Growth Fund inception date is August 2016 and therefore 5 year returns are not yet available for this fund. ** SL Mobile Flexible Retirement Fund inception date is February 2019 and therefore returns are not yet available for this fund over the periods stated. Units of investments are purchased in a Standard Life wrapped fund which is then invested in the underlying funds (managed by BlackRock, iShares, HSBC, Standard Life or Veritas). Performance figures are quoted net of fees prior to any pricing basis swings being applied. Source: Standard Life
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Trustee’s report continued
Voting rights and socially responsible investment
Most decisions about the day-to-day management of the assets have been delegated to the investment
managers via written agreements. This delegation includes decisions about:
▪ realisation of investments;
▪ social, environmental and ethical considerations in the selection, retention and realisation of
investments; and
▪ the exercise of rights (including voting rights) attached to the investments.
The Trustee takes the Investment Managers’ policies on the above items into account when selecting and
monitoring them.
The Trustee has also undertaken an Impact Assessment of Plan assets in line with the DWP requirements
and expect to review Plan assets with regard to Environmental, Social, and Governance factors on an
annual basis.
Employer-related investment
As at 30 September 2020, the Plan was indirectly exposed to various employer-related investments of less
than 0.05% of assets of the Plan, as detailed below. There were no other employer-related investments
within the meaning of section 40(2) of the Pensions Act 1995 and the Occupational Pension Schemes
(Investment) Regulations 2005 during the year.
The percentage of invested assets of indirect employer-related investments as at 30 September 2020 as
follows:
▪ M&G Alpha Opportunities Fund 0% (2019: 0.22%)
▪ M&G Liquid Credit: 0.24% (2019: 0%)
▪ Apollo: 0.20% (2019: 0%).
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Trustee’s report continued
Statement of Trustee’s responsibilities
The financial statements, which are prepared in accordance with UK Generally Accepted Accounting
Practice, including the Financial Reporting Standard applicable in the UK (FRS 102) are the responsibility of
the Trustee. Pension scheme regulations require, and the Trustee is responsible for ensuring, that those
financial statements:
▪ show a true and fair view of the financial transactions of the Plan during the Plan year and of the
amount and disposition at the end of the Plan year of its assets and liabilities, other than liabilities to
pay pensions and benefits after the end of the Plan year; and
▪ contain the information specified in Regulation 3A of the Occupational Pension Schemes (Requirement
to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, including a statement
whether the financial statements have been prepared in accordance with the relevant financial
reporting framework applicable to occupational pension schemes.
In discharging the above responsibilities, the Trustee is responsible for selecting suitable accounting policies,
to be applied consistently, making any estimates and judgments on a prudent and reasonable basis, and for
the preparation of the financial statements on a going concern basis unless it is inappropriate to presume
that the Plan will not be wound up.
The Trustee is also responsible for making available certain other information about the Plan in the form of
an annual report.
The Trustee also has a general responsibility for ensuring that adequate accounting records are kept and for
taking such steps as are reasonably open to them to safeguard the assets of the Plan and to prevent and
detect fraud and other irregularities, including the maintenance of an appropriate system of internal control.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Page 24 of
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Trustee’s report continued
Statement of Trustee’s responsibilities continued
The Trustee is responsible under pensions legislation for preparing, maintaining and from time to time
reviewing and if necessary revising a schedule of contributions showing the rates of contributions payable
towards the Plan by or on behalf of the Employer and the active members of the Plan and the dates on or
before which such contributions are to be paid. The Trustee is also responsible for keeping records in
respect of contributions received in respect of any active member of the Plan and for adopting risk-based
processes to monitor whether contributions are made to the Plan by the Employer in accordance with the
Schedule of Contributions. Where breaches of the Schedule occur, the Trustee is required by the Pensions
Acts 1995 and 2004 to consider making reports to The Pensions Regulator and the members.
The Trustee is responsible for the maintenance and integrity of the pension and financial information
included on the Telefonica UK Pension Plan website.
Legislation in the United Kingdom governing the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Signed for and on behalf of the Trustee
11 March 2021
Date:
Anthony Soothill, Chair Telefónica UK Pension Trustee Limited
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 25 of
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Independent Auditor’s report to the Trustee of the Telefónica UK Pension Plan
Opinion
We have audited the financial statements of the Telefonica UK Pension Plan for the year ended
30 September 2020 which comprise the fund account, statement of net assets and notes to the financial
statements, including a summary of significant accounting policies. The financial reporting framework that
has been applied in their preparation is applicable law and United Kingdom Accounting Standards including
FRS 102 “The Financial Reporting Standard applicable in the UK and Republic of Ireland” (United Kingdom
Generally Accepted Accounting Practice).
In our opinion the financial statements:
▪ show a true and fair view of the financial transactions of the Plan during the year ended
30 September 2020 and of the amount and disposition at that date of its assets and liabilities, other
than the liabilities to pay pensions and benefits after the end of the year;
▪ have been properly prepared in accordance with United Kingdom Generally Accepted Accounting
Practice; and
▪ contain the information specified in Regulation 3A of the Occupational Pension Schemes (Requirement
to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996, made under the
Pensions Act 1995.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and
applicable law. Our responsibilities under those standards are further described in the Auditor’s
responsibilities for the audit of the financial statements section of our report. We are independent of the Plan
in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
UK, including the FRC’s Ethical Standard and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 26 of
138
Independent Auditor’s Report to the Trustee of Telefónica UK Pension Plan continued
Conclusions relating to going concern
We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to
report to you where:
▪ the Trustee’s use of the going concern basis of accounting in preparation of the financial statements is
not appropriate; or
▪ the Trustee has not disclosed in the financial statements any identifiable material uncertainties that
may cast significant doubt about the Plan’s ability to continue to adopt the going concern basis of
accounting for a period of at least twelve months from the date when the financial statements are
authorised for issue.
Other information
The other information comprises the information included in the annual report, other than the financial
statements and our auditor’s report thereon. The Plan’s Trustees is responsible for the other information. Our
opinion on the financial statements does not cover the other information and we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information,
and in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material misstatements, we are required to determine
whether there is a material misstatement in the financial statements or a material misstatement in the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of
this other information, we are required to report that fact.
We have nothing to report in this regard.
Responsibilities of Trustee
As explained more fully in the statement of Trustee’s responsibilities set out on pages 23 and 24, the Trustee
is responsible for the preparation of financial statements and for being satisfied that they give a true and fair
view, and for such internal control as the Trustee determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Trustee is responsible for assessing the Plan’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern
basis of accounting unless the Trustee either intends to liquidate the Plan or to cease operations, or has no
realistic alternative but to do so.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 27 of
138
Independent Auditor’s Report to the Trustee of Telefónica UK Pension Plan continued
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial
Reporting Council’s website at http://www.frc.org.uk/auditorsresponsibilities. This description forms part of
our auditor’s report.
Use of our report
This report is made solely to the Plan’s Trustee as a body, in accordance with Regulation 3 of the
Occupational Pension Schemes (Requirements to obtain Audited Accounts and a Statement from the
Auditor) Regulations 1996 made under the Pensions Act 1995. Our audit work has been undertaken so that
we might state to the Plan’s Trustee those matters we are required to state to them in an auditor’s report and
for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the Plan and the Plan’s Trustee as a body, for our audit work, for this report, or for the
opinions we have formed.
RSM UK Audit LLP
Statutory Auditor
Chartered Accountants
Portland
25 High Street
Crawley
West Sussex
RH10 1BG
Date:
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 28 of
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Fund account
Note DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Total
2019
£’000
Employer contributions 25,000 41,269 66,269 63,728
Employee contributions - 722 722 668
Total contributions 5 25,000 41,991 66,991 64,396
Transfers in 6 - 943 943 493
Other income 7 1,943 - 1,943 2,741
26,943 42,934 69,877 67,630
Benefits paid or payable 8 (26,440) (1,470) (27,910) (28,530)
Payments to and on account of leavers 9 (16,105) (12,248) (28,353) (28,683)
Administrative expenses 10 (1,598) - (1,598) (1,530)
Other payments 11 - - - (2)
(44,143) (13,718) (57,861) (58,745)
Net (withdrawals)/additions from dealings with
members (17,200) 29,216 12,016 8,885
Returns on investments
Investment income 12 18,510 - 18,510 36,712
Change in market value of investments 13 (4,916) 10,997 6,081 306,858
Investment management expenses 16 (3,277) - (3,277) (2,941)
Net return on investments 10,317 10,997 21,314 340,629
Net (decrease)/increase in the fund during the year (6,883) 40,213 33,330 349,514
Net assets of the Plan
At 1 October 1,723,912 405,974 2,129,886 1,780,372
At 30 September 1,717,029 446,187 2,163,216 2,129,886
The notes on pages 31 to 70 form part of these financial statements.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 29 of
138
Statement of net assets (available for benefits)
Note DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Total
2019
£’000
Restated
Investment assets
Bonds 13 1,430,329 - 1,430,329 1,445,671
Pooled investment vehicles 13/18 859,813 442,921 1,302,734 1,176,885
Derivatives 13/20 21,053 - 21,053 57,054
AVC investments 13/24 8,648 - 8,648 9,824
Cash 13 34,320 - 34,320 -
Other investment balances 13/21 4,346 100 4,446 1,538
2,358,509 443,021 2,801,530 2,690,972
Investment liabilities
Derivatives 13/20 (11,610) - (11,610) (12,924)
Cash 13 - - - (14,071)
Other investment balances 13/21 (11,449) - (11,449) (4,026)
Amounts due under repurchase
agreements 13/22 (624,398) - (624,398) (534,613)
(647,457) - (647,457) (565,634)
Total net investments 13 1,711,052 443,021 2,154,073 2,125,338
Current assets 27 7,883 3,533 11,416 6,977
Current liabilities 28 (1,906) (367) (2,273) (2,429)
Net assets of the Plan at 30 September 1,717,029 446,187 2,163,216 2,129,886
The notes on pages 31 to 70 form part of these financial statements.
The prior year values have been restated due to assets which were previously classified as cash instruments
being reclassified as pooled investment vehicles which is deemed to be more appropriate.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 30 of
138
Statement of Net Assets (available for benefits) continued
The financial statements summarise the transactions of the Plan and deal with the net assets at the disposal of
the Trustee. They do not take account of obligations to pay pensions and benefits which fall due after the end
of the Plan year. The actuarial position of the Plan, which takes into account such obligations, is dealt with in
the Report on actuarial liabilities on pages 8 to 10 of the Trustee’s report and these financial statements
should be read in conjunction with this Report.
These financial statements were approved for and on behalf of the Trustee by:
11 March 2021
Date:
Anthony Soothill, Chair Telefónica UK Pension Trustee Limited
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 31 of
138
Notes to the financial statements
1. Basis of preparation
The individual financial statements have been prepared in accordance with the Occupational Pension
Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor) Regulations 1996,
Financial Reporting Standard 102 – The Financial Reporting Standard applicable in the UK and Republic of
Ireland, and the guidance set out in the Statement of Recommended Practice (Revised 2018).
The financial statements have been prepared on a going concern basis. On 6 May 2020, Telefónica SA and
Liberty Global announced the terms of a proposed merger of Telefónica UK with UK Virgin Media. This
transaction will, if completed, have an impact on the covenant of the Plan; the Trustee has engaged with
Telefónica in order to assess the materiality of that impact and agreed a settlement should the merger
complete. The Trustee understands that completion of the merger is expected to occur around the middle of
2021.
The Trustee has assessed the Plan’s assets, technical provisions and the employer covenant. At the date of
signing these financial statements the Trustee of the Plan is able to comfortably cover its related outgoings
until at least 12 months from signing. As a result, and together with the strong position of the Principal
Employer, the Trustee considers the preparation of the financial statements on a going concern basis to be
appropriate.
2. Identification of the financial statements
The Plan is established as a trust under English law. The address for enquires to the Plan is included in the
Trustee’s Report on page 4.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 32 of
138
Notes to the financial statements continued
3. Comparative disclosures for the Fund Account
FRS 102 requires presentation of comparative information in respect of the preceding period for all amounts
presented in the current period’s financial statements. In order to comply with this requirement the DB and
DC comparative amounts which are aggregated on the face of the fund account and are not shown
elsewhere in the notes to the financial statements are presented below:
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Change in market value of investments 292,628 14,230 306,858
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Net (withdrawals) / additions from dealings with
members
(16,864) 25,749 8,885
Net returns on investments 326,399 14,230 340,629
Net increase in the fund during the year 309,535 39,979 349,514
Net assets as at 30 September 2018 1,414,377 365,995 1,780,372
Net assets as at 30 September 2019 1,723,912 405,974 2,129,886
4. Accounting policies
The principal accounting policies of the Plan are as follows:
4.1. Currency
▪ The Plan's functional currency and presentational currency is pounds sterling (GBP). Assets
and liabilities in foreign currencies are expressed in sterling at the rates of exchange ruling
at the year-end. Foreign currency transactions are translated into sterling at the spot
exchange rate at the date of the transaction. Gains and losses arising on conversion or
translation are dealt with as part of the change in market value of investments.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 33 of
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Notes to the financial statements continued
4. Accounting policies continued
4.2. Contributions
▪ Employer normal contributions and salary sacrifice contributions that are expressed as a
rate of salary are accounted for on the same basis as the employees' contributions, in
accordance with the Schedule of Contributions in force during the year.
▪ Employee contributions, including AVCs, are accounted for by the Trustee when they are
deducted from pay by the Employer.
▪ Employer deficit funding contributions are accounted for on the due dates on which they are
payable in accordance with the Schedule of Contributions and Recovery Plan under which
they are being paid.
4.3. Transfer values
▪ Individual transfers in or out of the Plan are accounted for on a cash basis which is when
members’ liability is accepted or discharged.
4.4. Other income
▪ Claims on term insurance policies and other forms of income are accounted for on an
accruals basis.
4.5. Benefits paid or payable
▪ Pensions in payment are accounted for in the period to which they relate.
▪ Where members can choose whether to take their benefits as a full pension or as a lump
sum with reduced pension, retirement benefits are accounted for on an accruals basis on
the later of the date of retirement and the date the option is exercised.
▪ Other benefits are accounted for on an accruals basis on the date of retirement or death as
appropriate.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 34 of
138
Notes to the financial statements continued
4. Accounting policies continued
4.5 Benefits paid or payable continued
▪ Where the Trustee agrees or is required to settle tax liabilities on behalf of a member (such
as where lifetime or annual allowances are exceeded) with a consequent reduction in that
member's benefits receivable from the Plan, any taxation due is accounted for on the same
basis as the event giving rise to the tax liability and shown separately within ‘Benefits Paid or
Payable’.
4.6. Payments to and on account of leavers
▪ Refunds and opt-outs are accounted for on an accruals basis on the date on which the
Trustee is notified of the member's decision to leave the Plan.
4.7. Administrative and other payments
▪ Administrative expenses are accounted for on an accruals basis and where applicable net of
VAT.
4.8. Other Payments
▪ Other payments are accounted for on an accruals basis.
4.9. Investment income and change in market value
▪ Income from pooled investment vehicles which distribute income is accounted for when
declared by the investment manager.
▪ Investment income arising from the underlying investments of the pooled investment
vehicles which do not distribute income is rolled up and reinvested within the pooled
investment vehicles. This is reflected in the unit price and reported within 'Change in market
value'.
▪ Income from bonds is accounted for on an accruals basis and includes interest bought and
sold on investment purchases and sales.
▪ Other interest on cash and short-term deposits and income from other investments are
accounted for on an accruals basis.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 35 of
138
Notes to the financial statements continued
4. Accounting policies continued
4.9. Investment income and change in market value continued
▪ Receipts and payments under swap contracts, representing the difference between the
swapped cash flows, are included in investment income. Receipts and payments of all other
derivative contracts are reported with sales proceeds and purchases at cost respectively.
▪ Income and expenditure received and paid under repurchase contracts is accounted for on
an accruals basis and included within investment income.
▪ The change in market value of investments during the year comprises all increases and
decreases in the market value of investments held at any time during the year, including
profits and losses realised on sales of investments during the year.
▪ Income received by the Plan in respect of unfunded pension payments is accounted for on
an accruals basis.
4.10. Investment management expenses and transaction costs
▪ Investment management expenses are accounted for on an accruals basis and shown net
within investment returns.
▪ Transaction costs are included in the cost of purchases and sale proceeds. Transaction
costs include costs charged directly to the Plan such as fees, commissions, stamp duty and
other fees.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 36 of
138
Notes to the financial statements continued
4. Accounting policies continued
4.11. Investment assets/liabilities
▪ Investment assets and liabilities are included in the financial statements at fair value. Where
separate bid and offer prices are available, the bid price is used for investment assets and
the offer price for investment liabilities. Otherwise, the closing price, single dealing price or
most recent transaction price is used.
▪ Bonds are stated at their clean prices. Accrued income is accounted for within investment
income. Bonds and certain pooled investment vehicles which are traded on an active market
are included at the quoted price, which is normally the bid price.
▪ Unitised pooled investment vehicles have been valued at the latest available bid price or
single price provided by the pooled investment manager. Shares in other pooled
arrangements have been valued at the latest available net asset value (“NAV”), determined
in accordance with fair value principles, provided by the pooled investment manager.
▪ Exchange traded futures are valued as the sum of the daily mark-to-market, which is a
calculated difference between the settlement prices at the reporting date and the inception
date.
▪ Over the counter (OTC) Swaps are valued taking the current value of future cash flows
arising from the swap determined using discounted cash flow models and market data at the
reporting date.
▪ Over the counter (OTC) Forward foreign exchange contracts are valued by determining the
gain or loss that would arise from closing out the contract at the reporting date by entering
into an equal and opposite contract at that date.
▪ Repurchase agreements - the Plan continues to recognise and value the securities that are
delivered out as collateral, and includes them in the financial statements. The cash received
is recognised as an asset and the obligation to pay it back is recognised as a liability.
▪ With profits insurance policies (including those held as AVC investments) are reported at the
policy value provided by the insurer based on cumulative reversionary bonuses declared
and the current terminal bonus.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 37 of
138
Notes to the financial statements continued
5. Contributions
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Employer contributions:
Deficit funding 25,000 - 25,000
Normal - 41,269 41,269
25,000 41,269 66,269
Employee contributions:
Normal - 672 672
Additional voluntary contributions - 50 50
- 722 722
25,000 41,991 66,991
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Employer contributions:
Deficit funding 25,000 - 25,000
Normal - 38,728 38,728
25,000 38,728 63,728
Employee contributions:
Normal - 662 662
Additional voluntary contributions - 6 6
- 668 668
25,000 39,396 64,396
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 38 of
138
Notes to the financial statements continued
5. Contributions continued
Employer normal contributions include contributions in respect of salary sacrifice arrangements made
available to members by the Employer.
In order to remove the shortfall assessed for the actuarial valuation as at 30 September 2017, a Recovery
Pan dated 24 October 2018 provided for deficit funding contributions to be payable by the Employer of £25m
per annum by each 10 January from 2019 to 2024 inclusive. The valuation as at 30 September 2020 is now
ongoing and, although it is not as yet complete, the Employer made a payment of £55m on 31 December
2020 in place of the £25m due in January 2021 and in anticipation of the contributions that will be agreed for
the 2020 valuation, these being £157.5m on or before 31 December 2021 and if the merger completes, a
further £212.5m before 31 December 2022.
6. Transfers in
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Individual transfers in from other schemes - 943 943
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Individual transfers in from other schemes - 493 493
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 39 of
138
Notes to the financial statements continued
7. Other Income
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Claims on term insurance policies 1,785 - 1,785
Compensation 150 - 150
Sundry income 8 - 8
1,943 - 1,943
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Claims on term insurance policies 2,735 - 2,735
Sundry income 6 - 6
2,741 - 2,741
8. Benefits paid or payable
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Pensions 18,812 - 18,812
Commutation of pensions and lump sum
retirement benefits 6,769 969 7,738
Lump sum death benefits 859 477 1,336
Taxation where lifetime or annual
allowance exceeded - 24 24
26,440 1,470 27,910
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 40 of
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Notes to the financial statements continued
8. Benefits paid or payable continued
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Pensions 16,977 - 16,977
Commutation of pensions and lump sum
retirement benefits
7,230
1,291
8,521
Lump sum death benefits 2,830 202 3,032
27,037 1,493 28,530
Taxation arising on benefits paid or payable is in respect of members whose benefits exceeded the lifetime or annual
allowance and who elected to take lower benefits from the Plan in exchange for the Plan settling their tax liability.
9. Payments to and on account of leavers
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Refunds of contributions in respect of:
Non-vested leavers 1 - 1
Individual transfers out to other schemes 16,104 12,248 28,352
16,105 12,248 28,353
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Refunds of contributions in respect of:
Non-vested leavers 2 - 2
Individual transfers out to other schemes 16,034 12,647 28,681
16,036 12,647 28,683
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
Page 41 of
138
Notes to the financial statements continued
10. Administrative expenses
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Actuarial, Administration and processing 985 - 985
Audit fees 102 - 102
Legal fees 322 - 322
Pension Protection Fund levies and
regulatory fees 1 - 1
Other professional fees 187 - 187
Bank and sundry charges 1 - 1
1,598 - 1,598
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Actuarial, Administration and processing 973 - 973
Audit fees 50 - 50
Legal fees 331 - 331
Other professional fees 175 - 175
Bank and sundry charges 1 - 1
1,530 - 1,530
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for the year ended 30 September 2020
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Notes to the financial statements continued
11. Other payments
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Guaranteed Minimum Pension - - -
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Guaranteed Minimum Pension 2 - 2
12. Investment income
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Income from bonds 20,499 - 20,499
Expense from repurchase agreements (4,484) - (4,484)
Foreign exchange gain (107) - (107)
Income from pooled investment vehicles 17,623 - 17,623
Income/(payments) from swaps (15,017) - (15,017)
Income received in respect of unfunded
pensions
59
-
59
Interest on cash deposits (63) - (63)
18,510 - 18,510
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for the year ended 30 September 2020
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Notes to the financial statements continued
12. Investment income continued
DB
2019
£’000
Restated
DC
2019
£’000
Total
2019
£’000
Restated
Income from bonds 26,319 - 26,319
Expense from repurchase agreements (4,856) - (4,856)
Foreign exchange gain 466 - 466
Income from pooled investment vehicles 5,892 - 5,892
Income/(payments) from swaps 8,857 - 8,857
Income received in respect of unfunded
pensions 99 - 99
Interest on cash deposits (65) - (65)
36,712 - 36,712
Included within interest on cash deposits is interest on the cash trading accounts with the investment
managers.
The prior year values have been restated due to assets which were previously classified as cash instruments
being reclassified as pooled investment vehicles which is deemed to be more appropriate.
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for the year ended 30 September 2020
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Notes to the financial statements continued
13. Reconciliation of investments
DB (Sections 2, 2A, 3 and 3A) reconciliation of investments held at the beginning and the end of the year:
Value at
30 September
2019
£’000
Restated
Purchases at
cost and
derivative
payments
£’000
Sales proceeds
and derivative
receipts
£’000
Change in
market value
£’000
Value at
30 September
2020
£’000
Bonds 1,445,671 250,540 (277,994) 12,112 1,430,329
Pooled investment
vehicles
774,163
594,441
(502,840)
(5,951)
859,813
Derivatives 44,130 14,698 (38,657) (10,728) 9,443
2,263,964 859,679 (819,491) (4,567) 2,299,585
AVC investments 9,824 15 (842) (349) 8,648
2,273,788 859,694 (820,333) (4,916) 2,308,233
Cash deposits (14,071) 34,320
Amounts due under
repurchase
agreements
(534,613)
(624,398)
Other investment
balances
(2,488)
(7,103)
1,722,616 1,711,052
The prior year values have been restated due to assets which were previously classified as cash instruments
being reclassified as pooled investment vehicles which is deemed to be more appropriate.
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for the year ended 30 September 2020
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Notes to the financial statements continued
13. Reconciliation of investments continued
DC (Sections 1 and 1A) reconciliation of investments held at the beginning and the end of the year:
Value at
30 September
2019
£’000
Purchases at
cost and
derivative
payments
£’000
Sales proceeds
and derivative
receipts
£’000
Change in
market value
£’000
Value at
30 September
2020
£’000
Pooled investment
vehicles
402,722 42,920 (13,718) 10,702 442,921
Other investment
balances
- 100
402,722 443,021
14. Transaction costs
Transaction costs are included in the cost of purchases and deducted from sale proceeds. Direct transaction costs
include costs charged to the Plan such as fees, commissions and stamp duty.
DB transaction costs analysed by main asset class and type of cost are as follows:
Fees
£’000
Commission
£’000
Taxes
£’000
Total 2020
£’000
Total 2019
£’000
Bonds - - - - -
Other 156 9 - 165 286
Total 2020 156 9 - 165 286
Total 2019 286 - -
In addition to the transaction costs disclosed above, indirect costs are incurred through the bid-offer spread on
investments within pooled investment vehicles and charges made within those vehicles for both DB and DC
investments. It has not been possible for the Trustee to quantify such indirect transaction costs.
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for the year ended 30 September 2020
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Notes to the financial statements continued
15. Allocation of Defined Contribution investments
The DC section investments purchased by the Plan are allocated to provide benefits to the individuals on whose behalf
corresponding contributions are paid. The investment manager holds the investment units on a pooled basis for the
Trustee. The Plan administrator allocates investment units to members. The Trustee may hold investment units
representing the value of employer contributions that have been retained by the Plan that relate to members leaving
the Plan prior to vesting.
DC section assets are allocated to members and the Trustee as follows:
2020
£’000
2019
£’000
Members 442,726 402,429
Trustee 295 293
443,021 402,722
16. Investment management expenses
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Administration, management and custody 2,733 - 2,733
Advisory fees 586 - 586
Fee rebates (42) - (42)
3,277 - 3,277
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Administration, management and custody 2,380 - 2,380
Advisory fees 561 - 561
2,941 - 2,941
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for the year ended 30 September 2020
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Notes to the financial statements continued
17. Taxation
The Plan is a registered Pension Scheme under Chapter 2 of Part 4 of the Finance Act 2004 and is therefore exempt
from income tax and capital gains tax.
18. Pooled investment vehicles
The Plan’s investments in pooled investment vehicles at the year-end comprised:
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Liquid credit 225,573 - 225,573
Semi liquid credit 134,241 - 134,241
Private credit 345,027 - 345,027
Real estate debt fund 112,297 - 112,297
Equity - 76,485 76,485
Bonds - 22,898 22,898
Absolute return/Diversified growth - 332,666 332,666
Cash 42,675 10,872 53,547
859,813 442,921 1,302,734
DB
2019
£’000
Restated
DC
2019
£’000
Total
2019
£’000
Restated
Liquid credit 221,916 - 221,916
Semi liquid credit 141,236 - 141,236
Private credit 394,069 - 394,069
Real estate debt fund - - -
Equity - 77,477 77,477
Bonds - 21,121 21,121
Absolute return/Diversified growth - 295,307 295,307
Cash 16,942 8,817 25,759
774,163 402,722 1,176,885
The prior year values have been reclassified to asset classes deemed to be more appropriate.
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for the year ended 30 September 2020
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Notes to the financial statements continued
19. Pooled investment vehicles – Sole investor fund
The Plan is the sole investor in the Partners Group Private Markets Credit Strategies Fund. This is included
within the pooled investment vehicles included in note 18. A breakdown of the underlying assets are
detailed below.
2020
£’000
2019
£’000
Senior secured debt 276,021 323,137
Subordinated debt 34,503 47,288
Preferred equity 24,152 15,763
Equity 10,351 7,881
345,027 394,069
20. Derivatives (DB section only)
The Trustee has authorised the use of derivatives by their investment managers as a part of their investment
strategy as follows:
▪ Forward foreign exchange: in order to maintain appropriate diversification of investments, a proportion
of the underlying investment portfolio is invested overseas. To balance the risk of investing in foreign
currencies whilst having an obligation to settle benefits in GBP, the investment managers use forward
foreign exchange contracts to remove as far as possible the currency exposure of these overseas
investments.
▪ Credit default swaps (“CDS”): In order to target an expected return above LIBOR on the collateral held
to support the LDI portfolio, the Plan enters into credit default swaps on specific indices. This means
the Plan receives a premium on an ongoing basis, but is subject to the credit risk that any of the
underlying companies could default.
▪ Futures: Futures are used in the active corporate bond portfolio, at the discretion of the investment
manager, for efficient portfolio management.
The total collateral available for use for the derivative contracts was £548.7m as at 30 September 2020,
(2019 £522.3m) which supports both the LDI and CDS mandates. The management of collateral is
delegated to BlackRock who can use any assets held within the LDI / CDS portfolio for this purpose. As at 30
September 2020, £4.0m of this was pledged and £8.1m was held as collateral.
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for the year ended 30 September 2020
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Notes to the financial statements continued
20. Derivatives (DB section only) continued
At the year-end the Plan had the following derivatives:
2020
Assets
£’000
2020
Liabilities
£’000
2020
Total
£’000
2019
Assets
£’000
2019
Liabilities
£’000
2019
Total
£’000
OTC Swaps 20,945 (11,484) 9,461 56,919 (12,869) 44,050
Futures 54 (41) 13 73 (51) 22
Forward FX
contracts
54
(85)
(31)
62
(4)
58
21,053 (11,610) 9,443 57,054 (12,924) 44,130
A summary of the Plan’s outstanding derivative contracts at the year-end aggregated by key characteristics is set out
on the following pages.
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for the year ended 30 September 2020
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Notes to the financial statements continued
20. Derivatives (DB section only) continued
OTC Swaps
Nature Notional
amounts
£’000
Expires Asset
value
£’000
Liability
value
£’000
Cleared Inflation Swaps 46,230 10 - 20 years - (3,553)
Cleared Inflation Swaps 25,460 1 - 10 years - (1,167)
Cleared Interest rate Swaps 33,314 10 - 20 years 4,075 -
Cleared Zero Coupon Swaps 188,257 5 - 10 years 6,459 -
Cleared Zero Coupon Swaps 62,930 10 - 20 years 5,852 -
Cleared Zero Coupon Swaps 10,850 5 - 10 years - (508)
Cleared Zero Coupon Swaps 10,565 10 - 20 years - (1,128)
Credit Default Swaps 64,437 5 - 10 years 4,167 -
Credit Default Swaps 128,874 10 - 20 years 390 -
Credit Default Swaps 138,661 10 - 20 years - (124)
Inflation Swaps 743 5 - 10 years 2 -
Inflation Swaps 61,290 < 5 years - (1,027)
Inflation Swaps 135,917 5 - 10 years - (2,186)
Inflation Swaps 49,554 10 - 20 years - (1,655)
Inflation Swaps 541 20 - 30 years - (135)
Interest rate Swaps 5,320 < 5 years - (1)
Total 2020 20,945 (11,484)
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for the year ended 30 September 2020
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Notes to the financial statements continued
20. Derivatives (DB section only) continued
Futures
Nature Economic
exposure
£’000
Expires Asset
value
£’000
Liability
value
£’000
EURO-BTP FUTURE (EUX) 2,239 < 3 months 22 -
EURO-BUND FUTURE (EUX) 5,889 < 3 months - (19)
EURO-BUXL 30Y BND FUTURE (EUX) 1,575 < 3 months - (22)
LONG GILT FUTURE (ICF) 5,592 < 3 months 12 -
US 10YR ULTRA FUTURE (CBT) 4,102 < 3 months 20 -
Total 2020 54 (41)
Forward FX
Contract Settlement
date
Currency
bought
Currency
sold
Asset
value
£’000
Liability
value
£’000
OTC Forward FX < 1 month GBP 1,360,833 EUR 1,490,000 9 -
OTC Forward FX < 1 month GBP 7,815,790 EUR 8,700,000 - (77)
OTC Forward FX < 1 month EUR 3,990,000 GBP 3,575,440 44 -
OTC Forward FX < 1 month EUR 1,470,000 GBP 1,337,809 - (4)
OTC Forward FX < 1 month USD 200,000 GPB 157,610 - (3)
OTC Forward FX < 1 month GBP 109,030 USD 140,000 1 -
OTC Forward FX < 1 month USD 68,667 GBP 90,000 - (1)
Total 2020 54 (85)
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for the year ended 30 September 2020
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Notes to the financial statements continued
21. Other investments
The Plan’s other investments at the year-end comprised:
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Unsettled trades (sales) 4,341 - 4,341
Unsettled trades (purchases) (7,814) - (7,814)
Cash in transit 5 - 5
Investment income receivable/Payable (3,635) - (3,635)
(7,103) - (7,103)
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Unsettled trades (sales) - - -
Unsettled trades (purchases) (4,026) - (4,026)
Cash in transit 8 - 8
Investment income payable/receivable 1,530 - 1,530
(2,488) - (2,488)
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for the year ended 30 September 2020
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Notes to the financial statements continued
22. Repurchase agreements
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Repurchase agreements (624,398) - (624,398)
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Repurchase agreements (534,613) - (534,613)
The Plan uses repurchase agreements (“repos”) within the BlackRock LDI Portfolio, whereby the Plan has sold
assets with the agreement to repurchase at a fixed date and price. The cash raised from repos are used to purchase
additional UK Government Bonds (“Gilts”), with the aim of better matching the Plan’s assets with its liabilities. The
Plan enters into new repo contracts when existing ones expire in order to retain the target exposure to Gilts.
At the year-end September 2020 £636.2m (2019 £603.1m) of bonds reported in the Plan's assets are held by
counterparties under repurchase agreements.
23. Concentration of investments
The following investments represent more than 5% of the net assets of the Plan.
2020
£’000
%
2019
£’000
%
Partners Group Private Markets Credit Strategies 345,027 16.0 394,069 18.5
Aberdeen Mobile Diversified Growth Pension Fund 315,986 14.6 283,462 13.3
M&G Alpha Opportunities Fund 225,574 10.4 221,916 10.4
Apollo Total Return Fund (offshore) Ltd 134,241 6.2 141,236 6.6
M&G Real Estate Debt Fund 112,297 5.2 - -
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for the year ended 30 September 2020
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Notes to the financial statements continued
24. DB - Additional Voluntary Contributions (“AVCs”)
The Trustee holds assets invested separately from the main fund securing additional benefits on a money purchase
basis for those members electing to pay additional voluntary contributions. Members participating in this arrangement
each receive an annual statement confirming the amounts held in their account and the movements in the year. The
aggregate amounts of AVC investments are shown in note 13.
25. Fair value hierarchy
The fair value of financial instruments has been estimated using the following fair value hierarchy:
▪ Level 1: The unadjusted quoted price in an active market for identical assets or liabilities that the entity can
access at the measurement date.
▪ Level 2: Inputs other than quoted prices included within Level 1 that are observable (ie developed using market
data) for the asset or liability, either directly or indirectly.
▪ Level 3: Inputs are unobservable (ie for which market data is unavailable) for the asset or liability.
The Plan’s investment assets and liabilities have been fair valued using the hierarchy categories as follows:
DB at 30 September 2020 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Bonds - 1,430,329 - 1,430,329
Pooled investment vehicles 42,676 225,574 591,563 859,813
Derivatives 13 9,430 - 9,443
AVC investments - 8,648 - 8,648
Cash 34,320 - - 34,320
Repurchase agreements - (624,398) - (624,398)
Other investment balances (7,103) - - (7,103)
69,906 1,049,583 591,563 1,711,052
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for the year ended 30 September 2020
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Notes to the financial statements continued
25. Fair value hierarchy continued
DB at 30 September 2019 Level 1
£’000
Restated
Level 2
£’000
Restated
Level 3
£’000
Restated
Total
£’000
Restated
Bonds 755 1,444,916 - 1,445,671
Pooled investment vehicles 27,576 211,281 535,306 774,163
Derivatives 22 44,108 - 44,130
AVC investments - 9,812 12 9,824
Cash (14,071) - - (14,071)
Repurchase agreements - (534,613) - (534,613)
Other investment balances (2,488) - - (2,488)
11,794 1,175,504 535,318 1,722,616
The prior year values have been restated due to assets which were previously classified as cash instruments
being reclassified as pooled investment vehicles, repurchase agreements being reclassified as level 2 from
level 1 and the M&G Alpha Opportunities Fund being reclassified from Level 3 to level 2.
DC at 30 September 2020 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Pooled investment vehicles - 442,921 - 442,921
Other investment balances 100 - - 100
100 442,921 - 443,021
DC at 30 September 2019 Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Pooled investment vehicles - 402,722 - 402,722
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for the year ended 30 September 2020
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Notes to the financial statements continued
26. Investment risk disclosures
Investment risks
FRS 102 requires the disclosure of information in relation to certain investment risks. These risks are set out by
FRS 102 as follows:
▪ Credit risk: this is the risk that one party to a financial instrument will cause a financial loss for the other party by
failing to discharge an obligation.
▪ Market risk: this comprises currency risk, interest rate risk and other price risk.
▪ Currency risk: this is the risk that the fair value or future cash flows of a financial asset will fluctuate
because of changes in foreign exchange rates.
▪ Interest rate risk: this is the risk that the fair value or future cash flows of a financial asset will fluctuate
because of changes in market interest rates.
▪ Other price risk: this is the risk that the fair value or future cash flows of a financial asset will fluctuate
because of changes in market prices (other than those arising from interest rate risk or currency risk,
whether those changes are caused by factors specific to the individual financial instrument or its issuer,
or facts affecting all similar financial instruments traded in the market).
The Plan has exposures to these risks because of the investments it makes to implement its investment strategy. The
Trustee manages investment risks, including credit risk and market risk, within agreed risk limits which are set taking
into account the Plan’s strategic investment objectives. These investment objectives and risk limits are implemented
through the investment management agreements in place with the Plan’s investment managers and monitored by the
Trustee by regular review of the investment portfolios.
Further information on the Trustee’s approach to risk management and the Plan’s exposures to credit and market risks
are set-out below. These fit in with the Plan’s investment strategy. Other risks include those associated with the cash
and pooled investment vehicles and the risks inherent within derivative contracts.
The Plan is the sole investor in the Partners Group Private Markets Credit Strategies Fund. As such the investment
risk disclosures have been written on a ‘look through’ basis in respect of this investment.
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for the year ended 30 September 2020
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Notes to the financial statements continued
26. Investment risks disclosures continued
Investment Strategy – DB Section
The Trustee has opted to follow a “spread-value investing” approach, which is designed to help close the
deficit with a relatively high degree of certainty, alongside any other funding. It is expected that this approach
will exhibit much less volatility than an equity-based investment strategy. The Trustee considers this a long-
term strategy that is expected to remain in place until the Plan achieves its secondary objective of becoming
self-sufficient – ie this approach is strategic in nature, rather than opportunistic / tactical.
Spread-value investing involves taking advantage of the legal protections (such as seniority in the case of
liquidation) and contractual obligations (such as fixed temporal constraints regarding contractual lifetime and
payments) of credit assets, which the Trustee believes are well suited to meeting the Plan’s objectives with
greater certainty than a strategy which utilises subordinate non-contractual income assets (eg equities).
Liability Driven Investing (LDI) is used to manage the re-investment and inflation risk of the credit assets –
most credit assets have much shorter maturities than the Plan’s liabilities and so must be re-invested when
they mature. This significantly reduces the asset and liability mismatch risk.
The Plan’s Partners Group mandate has been fully drawn since November 2018 and is distributing capital on
a regular basis. To maintain the strategic allocation to private market credit, the Trustee has committed
capital to the M&G Real Estate Debt Fund (REDF VI).
The private market credit, M&G Real Estate Debt Fund and semi-liquid credit assets have been selected as
the Trustee believes they offer an illiquidity and/or a complexity return premium which more than
compensates for the loss of liquidity. However, the Trustee has limited the allocation to such assets to
manage the potential liquidity risk.
The Plan’s current investment strategy is expected to return LIBOR + 2.3% pa using the investment strategy
on the next page.
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for the year ended 30 September 2020
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Notes to the financial statements continued
26. Investment risk disclosures continued
Investment Strategy – DB Section continued
Asset Investment Manager Exposure (%
of total assets)
Net spread (1)
above LIBOR
Active investment grade
corporate bonds
BlackRock Investment
Management
20.0%
1.3%
Liquid credit M&G Investment
Management Limited
15.0%
2.3%
Semi-liquid credit Apollo Global Management
10.0% 3.5%
Private market credit M&G Investment
Management Limited
12.5% 3.7%
Private market credit* Partners Group (UK) Limited 12.5% 3.7%
Credit default swaps
(CDS) overlay
BlackRock Investment
Management
30.0% 1.3%
Liability driven
investments (LDI)
overlay
BlackRock Investment
Management
N/A N/A
Collateral for the LDI
and CDS overlays
BlackRock Investment
Management
30.0% 0.0%
Cash fund Morgan Stanley Investment
Management
N/A N/A
130.0% 2.3%
Notes: (1) Estimated spread as at 31 December 2016, net of expected default losses and investment management fees.
*The Plan is the only investor in the pooled fund.
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for the year ended 30 September 2020
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Notes to the financial statements continued
26. Investment risk disclosures continued
Investment Strategy – DC Section
The Trustee aims to provide a range of investments that are suitable for meeting members' long and short-
term investment objectives in a prudent manner. They have taken into account their understanding of
members' circumstances, in particular members' attitudes to risk and term to crystallising their pension
savings.
There are four lifestyle strategies offered by the Plan which gradually de-risk over time and a range of
investment options for members who want to create a bespoke portfolio. If a member does not want to select
an investment option themselves their investments will be directed into a default arrangement.
The Trustee has decided to make changes to the underlying investments within the growth phase of the
default, introducing an explicit investment in equities, incorporating ESG considerations and factor-based
investment. The changes are being implemented in a phased approach and started in January 2020
continuing into 2021.
The tables below summarises the allocations that have significant exposure to these risks:
DB Section Credit
risk
Currency
risk
Interest
rate
risk
Other
price
risk
Market value
2020
£’m
Market value
2019
£’m
BlackRock - Collateral and
LDI/CDS overlay (Direct) ● ○ ● ○ 547.8 690.3
BlackRock - Corporate Bonds
(Direct) ● ○ ● ○ 266.0 281.8
M&G – Liquid Credit (Direct and
Indirect) ● ○ ○ ○ 225.6 221.9
Apollo – Semi-Liquid Credit (Direct
and Indirect) ● ○ ○ ○ 134.2 141.2
Partners Group – Private Credit
(Direct and Indirect) ● ○ ○ ○ 345.0 394.0
M&G – REDF VI (Direct and
Indirect) ● ○ ○ ○ 112.3 -
Other ○ ○ ○ ○ 71.4 44.5
Key: The risk noted affects the fund significantly (●) or hardly / not at all (○).
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for the year ended 30 September 2020
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Notes to the financial statements continued
26. Investment risk disclosures continued
DC assets (including AVCs in respect of DB section)
Credit risk Currency
risk
Interest
rate risk
Other
price
risk
Market
value
2020
£’m
Market
value
2019
£’m
SL Mobile Diversified Growth
Fund* ● ● ● ● 318.5 286.2
SL Mobile Flexible Retirement
Fund** ● ● ● ● 2.9 0.8
SL Veritas Global Focus Fund ○ ● ○ ● 11.3 9.0
SL BlackRock UK Focus
Pension Fund ○ ○ ○ ● 2.6 2.2
SL BlackRock (50:50) Global
Equity Fund ○ ● ○ ● 49.0 51.4
SL iShares UK Equity Index
Fund
○ ○ ○ ● 21.8 24.8
SL iShares Index Linked Gilt
Index Fund
● ○ ● ● 4.8 4.9
SL BlackRock Over 15 Year
Corporate Bond Fund ● ○ ● ● 19.1 17.4
Standard Life Deposit and
Treasury Fund ● ○ ● ● 11.0 9.5
SL HSBC Islamic Global Equity
Index Fund ○ ● ○ ● 10.1 6.4
Credit risk
The Plan is exposed to direct credit risks as a result of the financial instruments held in the segregated
accounts. The Plan invests in pooled investment vehicles (“PIVs”) and is therefore directly exposed to credit
risk in relation to the units it holds in these PIVs. The Plan is also exposed to indirect credit risk where the
PIV invests in bonds.
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Notes to the financial statements continued
26. Investment risk disclosures continued
Credit risk continued
Credit risk arising on bonds is mitigated by investing in investment grade corporate bonds which are rated at
least investment grade, i.e. Bonds which are BBB rated or above (as per Standard & Poor’s ratings system).
The Plan invests in UK government bonds which are considered to have low credit risk. The Plan also
invests in some non-investment grade bonds. The Trustee manages the associated credit risk through
diversification to minimise the impact of default by any one issuer.
Credit risk arising on derivatives depends on whether the derivative is exchange traded or over the counter
(OTC). OTC derivative contracts are not guaranteed by any regulated exchange and therefore the Plan is
subject to risk of failure of the counterparty. The credit risk for OTC derivatives is reduced by collateral
arrangements.
Cash is held within financial institutions which are at least investment grade credit rated. The Plan’s holdings
in pooled investment vehicles are unrated. Direct credit risk arising from pooled investment vehicles is
mitigated by the underlying assets of the pooled arrangements being ring-fenced from the pooled manager,
the regulatory environments in which the pooled managers operate and diversification of investments
amongst a number of pooled arrangements. The Trustee carries out due diligence checks on the
appointment of new pooled investment managers.
The Plan also invests in gilt repurchase agreements as part of its hedging portfolio. The underlying assets
are UK government bonds which are considered to have low credit risk.
Credit risk on direct corporate bonds is broken down by type:
Credit rating 2020
£’m
2019
£’m
Investment Grade 1,430.3 1,445.7
Non-Investment Grade 5.8 -
Unrated* 345.1 394.0
*Includes Partners Group Private Credit where the Plan is the sole investor in the pooled fund.
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Notes to the financial statements continued
26. Investment risk disclosures continued
Credit risk continued
The table below summarises the allocations that have significant exposure to credit risk:
Category Risk Nature 2020
£’m
2019
£’m
BlackRock - Collateral and LDI/CDS
overlay Direct
547.8 690.3
BlackRock - Corporate Bonds Direct and Indirect 266.0 281.8
M&G – Liquid Credit Direct and Indirect 225.6 221.9
M&G – REDF VI Direct 112.2 -
Apollo – Semi-Liquid Credit Direct 134.2 141.2
Partners Group – Private Credit Direct and Indirect 345.0 394.0
Total Defined Benefit Assets 1,630.8 1,729.2
Defined contribution assets (including AVCs in respect of DB section)
Asset Class Risk Nature 2020
(£’m)
2019
(£’m)
Bond PIV (1) Direct/Indirect 24.0 22.2
Cash PIV (2) Direct/Indirect 11.0 9.5
Other PIV (3) Direct 416.3 380.8
Total
451.3 412.5
(1) BlackRock over 15y Corporate Bond Fund and BlackRock over 15y Index Linked Gilt fund.
(2) Aberdeen Deposit and Treasury Fund.
(3) Other PIVS include all remaining funds listed on page 21
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Notes to the financial statements continued
26. Investment risk disclosures continued
Credit risk continued
A summary of pooled investment vehicles by type of arrangement is as follows:
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Open ended investment companies 225.6 - 225.6
Public limited liability company** 345.0 - 345.0
Cayman Islands exempted company 134.2 - 134.2
Real estate debt fund 112.2 - 112.2
Authorised unit trusts 16.3 442.9 459.2
Investment company with variable capital
(SICAV)***
26.5
-
26.5
859.8 442.9 1,302.43
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Open ended investment companies 221.9 - 221.9
Public limited liability company** 394.1 - 394.1
Cayman Islands exempted company 141.2 - 141.2
Authorised unit trusts 16.9 402.7 419.6
774.1 402.7 1,176.8
** Public limited liability company orgamised and existing under the laws of the Grand-Duchy of Luxembourg, and which has the status of an unregulated securitization company within the meaning of the Securitization Law.
***investment company with variable capital (SICAV) incorporated and authorised under Part I of the Law in accordance with the provisions of the UCITS Directive and listed on the official list of UCITS approved by the Luxembourg Regulatory Authority.
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Notes to the financial statements continued
26. Investment risk disclosures continued
Interest rate risk
The Plan is subject to interest rate risk from bonds owned within the defined benefit segregated accounts
and the defined contribution pooled funds.
Defined Benefit assets
Category Risk Nature 2020
(£’m)
2019
(£’m)
BlackRock LDI / CDS Direct 547.8 740.3
BlackRock Corporate
Bonds
Direct 266.0 281.8
813.8 1,022.1
The interest rate risk above is mitigated by the present value of the Plan’s liabilities being calculated based
on current yield curves. Therefore, any loss on assets due to changes in interest rates will also result in a
reduction in the present value of the Plan’s liabilities.
Defined Contribution assets (including AVCs in respect of DB section)
Category Risk Nature 2020
(£’m)
2019
(£’m)
Bond Funds Direct/Indirect 24.0 22.2
Bond Funds include BlackRock over 15y Corporate Bond Fund and BlackRock over 15y Index Linked Gilt
fund.
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Notes to the financial statements continued
26. Investment risk disclosures continued
Interest rate risk continued
Defined Contribution assets (including AVCs in respect of DB section)
Category Risk Nature 2020
(£’m)
2019
(£’m)
Cash Direct/Indirect 11.0 9.5
Other PIV Direct 416.3 380.8
Other PIV includes multi-asset and equity funds.
In the DC section, the Plan invests in pooled vehicles that invest in fixed income products that will be
exposed to indirect interest rate risk. Investing in pooled funds, the interest rate risk is diversified by term,
investing in assets from a range of maturities. Interest rate risk has been considered in the design of the
investment strategies and funds appropriate for how members may wish to take their benefits at retirement
e.g. using bond assets that closely align with price movements in the cost of purchasing an annuity.
Other price risk
The DB section invests solely in contractual assets whose market value is determined predominantly by
credit and interest rate conditions. As a result, direct and indirect other price risks are not deemed to be
significant in the DB section’s investment strategy. The DB section is exposed to inflation derivatives in its
LDI mandate, however, these are structured in line with the Plan’s inflation-linked liabilities and therefore are
not expected to contribute significantly to other price risk.
All assets in the DC Section are held in pooled vehicles that are well diversified and other price risks are
mitigated by the investment managers investing in a diverse range of assets.
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Notes to the financial statements continued
26. Investment risk disclosures continued
Currency risk
Within the DB section’s segregated mandates the investment managers use forward foreign exchange
contracts to remove as far as possible the currency exposure on overseas investments. There is no direct
currency risk within the Plan's pooled vehicles (in either the DB or DC sections), as all units are held in a
sterling share class. Indirect currency risk may exist within the pooled vehicles if the underlying investments
are held in non-sterling assets, however, the Plan’s investment managers invest in a diverse range of
positions which mitigates this risk.
27. Current assets
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Contributions due in respect of:
Employer - 3,214 3,214
Employees - 53 53
Due from the Employer 630 - 630
Other debtors 1,117 - 1,117
Cash balances 6,136 266 6,402
7,883 3,533 11,416
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Notes to the financial statements continued
27. Current assets continued
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Contributions due in respect of:
Employer - 3,198 3,198
Employees - 54 54
Other debtors 244 - 244
Due from the Employer 627 - 627
Cash balances 2,854 - 2,854
3,725 3,252 6,977
All contributions due to the Plan at 30 September 2020 and 30 September 2019 relate to September 2020 and
September 2019 respectively and were paid in full to the Plan in accordance with, and within the timescales of, the
Schedule of Contributions in force for those years, and therefore do not constitute employer-related investments.
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Notes to the financial statements continued
28. Current liabilities
DB
2020
£’000
DC
2020
£’000
Total
2020
£’000
Unpaid benefits 372 362 734
Tax due to HM Revenue & Customs - PAYE 252 5 257
Accrued expenses 1,282 - 1,282
1,906 367 2,273
DB
2019
£’000
DC
2019
£’000
Total
2019
£’000
Unpaid benefits 599 - 599
Tax due to HM Revenue & Customs - PAYE 237 - 237
Accrued expenses 1,593 - 1,593
2,429 - 2,429
29. Employer-related investments
Except for the amount due from the Employer shown in note 27, as at the year ended 30 September 2020 there
were no direct employer-related investments as defined in the Pensions Act 1995.
The percentage of invested assets of indirect employer-related investments as at 30 September 2020 were
as follows:
▪ M&G Alpha Opportunities Fund 0% (2019: 0.22%)
▪ M&G Liquid Credit: 0.24% (2019: 0%)
▪ Apollo: 0.20% (2019: 0%).
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Notes to the financial statements continued
30. Related-party transactions
Certain administration and secretarial activities are carried out on behalf of the Trustee by the Principal
Employer. The costs, which cannot be identified, are borne by the Principal Employer.
£629,734 (2019: £627,401) is due back to the Plan from the Employer in respect of VAT paid on
administration expenses.
The following Trustee Directors who served during the year are members of the Plan:
▪ Anthony Soothill (Pensioner)
▪ Adrian Gorham (Deferred)
▪ Andrew Davies (Pensioner)
▪ Amanda Stokes-Waters (Deferred, also active member of DC section until 30 November 2020)
▪ Mark Leonard (Deferred)
All contributions and benefits are paid in accordance with the Plan Rules. Included within note 10 is £69,544
(2019: £54,938) in respect of Trustee fees of which £25,162 (2019: £9,985) was outstanding at year end.
Income of £29,485 (2019: £94,427) was received by the Plan during the year and £29,887 (2019: £4,864)
was outstanding at the year end from the Employer in respect of unfunded pension payments. This income
was used to pay pensions during the year for certain members.
31. Capital commitments
The Plan had capital commitments at the Plan year end of £87m (2019: £Nil) in respect of investments
managed by M&G Investment Management Limited.
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Notes to the financial statements continued
32. GMP
On 26 October 2018, the High Court handed down a judgment involving the Lloyds Banking Group’s defined
benefit pension schemes. The judgment concluded that schemes should be amended to equalise pension
benefits for men and women in relation to GMP benefits. The issues determined by the judgment arise in
relation to many other defined benefit pension schemes.
Under the ruling schemes are required to backdate benefit adjustments in relation to equalisation and
provide interest on the backdated amounts. A further consequential ruling on 20 November 2020 means that
the Trustee will have an obligation to provide top up payments for members who transferred out of the Plan
in the past, where they would have been entitled to extra benefits in the Plan due to GMP equalisation,
should such members make a claim for a top up payment.
The Trustee of the Plan is aware that this issue affects the Plan and is taking advice on what should be done
and what the financial impact is likely to be. The impact on the Plan of any backdated benefits and related
interest that might be payable and due before the effective date of the accounts is however not expected to
be material. The Trustee has therefore not included a liability in respect of these matters in these financial
statements. They will be accounted for in the year they are determined.
33. Post year end event
The Trustee has received the initial results of the actuarial valuation as at 30 September 2020, and has
reached agreement with the Principal Employer on the funding basis to be used for the valuation and on the
deficit recovery contributions, contingent on whether the proposed merger of Telefónica UK with UK Virgin
Media goes ahead. As part of this agreement the Employer made a payment to the Plan of £55m on
31 December 2020, in place of the £25m due under the existing Recovery Plan in January 2021 and in
anticipation of the contributions that will be agreed for the 2020 valuation.
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Independent Auditor’s Statement about Contributions, under Regulation 4 of The Occupational
Pension Schemes (Requirement to obtain Audited Accounts and a Statement from the Auditor)
Regulations 1996, to the Trustee of the Telefonica UK Pension Plan
Statement about contributions payable under Schedule of Contributions
We have examined the Summary of Contributions payable to the Telefónica UK Pension Plan (“the “Plan”)
on page 73 for the year ended 30 September 2020.
In our opinion contributions for the Plan year ended 30 September 2020 as reported on page 73 and payable
under the Schedule of Contributions have in all material respects been paid at least in accordance with the
Schedule of Contributions certified by the Plan Actuary on 24 October 2018.
Scope of work on Statement about Contributions
Our examination involves obtaining evidence sufficient to give reasonable assurance that contributions
reported on page 73 have in all material respects been paid at least in accordance with the Schedule of
contributions. This includes an examination, on a test basis, of evidence relevant to the amounts of
contributions payable to the Plan and the timing of those payments under the Schedule of Contributions.
Respective responsibilities of Trustee and the Auditor
As explained more fully on pages 23 and 24 in the Statement of Trustee’s responsibilities, the Plan’s Trustee
is responsible for ensuring that there is prepared, maintained and from time to time revised a Schedule of
Contributions showing the rates and due dates of certain contributions payable towards the Plan by or on
behalf of the employer and the active members of the Plan. The Trustee is also responsible for keeping
records in respect of contributions received in respect of active members of the Plan and for monitoring
whether contributions are made to the Plan by the employer in accordance with the Schedule of
Contributions.
It is our responsibility to provide a statement about contributions paid under the Schedule of Contributions
and to report our opinion to you.
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Independent Auditor’s Statement about Contributions to the Trustee of the Telefónica UK Pension Plan continued
Use of our statement
This statement is made solely to the Plan’s Trustee as a body, in accordance with the Pensions Act 1995.
Our audit work has been undertaken so that we might state to the Plan’s Trustee those matters we are
required to state to them in an auditor’s statement and for no other purpose. To the fullest extent permitted
by law, we do not accept or assume responsibility to anyone other than the Plan and the Plan’s Trustee as a
body, for our audit work, for this statement, or for the opinions we have formed.
RSM UK Audit LLP
Statutory Auditor
Chartered Accountants
Portland
25 High Street
Crawley
West Sussex
RH10 1BG
Date:
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for the year ended 30 September 2020
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Summary of Contributions payable during the year ended 30 September 2020
During the year, the contributions payable to the Plan were as follows:
DB
£’000
DC
£’000
Total
£’000
Contributions payable under the Schedule of Contributions:
Employer:
Deficit Funding 25,000 - 25,000
Employer normal - 41,269 41,269
25,000 41,269 66,269
Members normal contributions - 672 672
Total contributions payable under the Schedule
of contributions
25,000 41,941 66,941
Other contributions
Members’ additional voluntary contributions - 50 50
Total contributions included in note 5 of the
financial statements
25,000 41,991 66,991
Signed for and on behalf of the Trustee:
11 March 2021
Date:
Anthony Soothill, Chair Telefónica UK Pension Trustee Limited
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for the year ended 30 September 2020
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Appendix A - Certification of Schedule of Contributions
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for the year ended 30 September 2020
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020
Telefónica UK Pension Plan (the “Plan”)
Annual Chair’s Statement for the Plan Year
This statement has been prepared by the Trustee of the Telefónica UK Pension Plan (“the
Trustee”) in accordance with legal requirements. It explains how the Trustee has met its legal
obligations in relation to the management of the defined contribution sections of the Plan over
the period 1 October 2019 to 30 September 2020 (“the Plan Year”).
During the Plan Year, Telefónica (“the Company”) undertook a review of the pensions market.
The review concluded after the Plan Year end, when the Company decided to build up future
pension savings for employees in a Master Trust arrangement. As a result, from 1 December
2020, no new DC Section contributions have been made to the Plan. The impact on existing DC
Section benefits that had already built up in the Plan is currently being worked through with the
Trustee, and will be explained in more detail within the Annual Chair’s Statement for the period
ending 30 September 2021.
1. The Default Arrangements
i) Statement of Investment Principles
The Statement of Investment Principles (“SIP”) covering the Plan Year is attached to
this statement.1 It explains the decisions made by the Trustee about investments. It
covers the Trustee’s policies on risk, return and Environmental, Social and
Governance (“ESG”) considerations, its aims, objectives and policies for the Plan’s
default arrangements and how those default arrangements are intended to ensure
that assets are invested in the best interests of the members. The default
arrangement is the investment structure that members will be placed into, should
they not make their own choice when they join the Plan. A number of other funds
are classified as default arrangements for some members following historic mapping
processes where members’ funds have been transferred without them expressing a
choice.
ii) Review of the default arrangements
The Trustee reviews the appropriateness of the default arrangements on an ongoing
basis and formally at least every three years (or sooner, if there is any significant
change in investment policy or member demographics), to ensure that the return on
investments is consistent with the Trustee’s aims, objectives and policies.
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
A formal review of the strategy of the Plan’s default arrangements took place on 16
July 2018, on the back of which a new default arrangement was implemented in
February 2019. Members who were invested in the previous default, who were
more than 5 years from retirement automatically switched to the new default which
is more suitable for supporting flexible retirement choices. Members who were
invested in the previous default, who were less than 5 years from retirement
remained in the previous default, which is more suitable for members wishing to
purchase an annuity at retirement.
A further review of the default investment strategy was considered by the Trustee
on 20 November 2019, focusing on the growth phase (the period from joining the
Plan up to five years prior to the member’s selected retirement date) of the lifestyle
options. Based on this review, the Trustee has decided to make changes to the
underlying investments within the growth phase, introducing an explicit investment
in equities, incorporating ESG considerations and factor-based investment. The
Trustee decision on the growth phase changes were communicated to the
membership in December 2019. The changes are being implemented in a phased
approach and started in January 2020.
The next formal review of the default arrangements is due to take place in 2021.
In addition to the strategy review, the Trustee undertakes a review of the
performance of the default arrangements against their aims, objectives and policies
on a quarterly basis. This review includes analysis of both fund performance and
member experience/activity to assess whether the risk and return levels are in line
with expected levels for the strategy design across the growth and pre-retirement
phases. The reviews that took place during the Plan Year led the Trustee to conclude
that the investments were performing in line with expectations.
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
iii) Aims, objectives and policies relating to the Plan’s main default arrangement
From 1 February 2019, members who do not make an active decision regarding their
investment upon joining the Plan are placed into the “Getting ready for flexible
retirement” lifestyle strategy. Details are set out in the attached SIP document, with
key points noted below. 1
During the growth phase the member is invested in a diversified growth fund which
has a long-term target to exceed price inflation and general salary growth, which is
represented by the benchmark of the Consumer Price Index + 2% p.a. As a member
approaches their selected retirement date the default arrangement transfers a
portion of member’s savings into a bond fund and a cash fund, whilst retaining a
portion in the diversified growth fund. This mix of assets is designed to reduce risk
whilst still offering the expectation of real rates of growth over the long term and is
considered to be an appropriate mix regardless of the type(s) of benefit a member
chooses at retirement.
Three additional lifestyle investment options are available for members to select if
they have a specific retirement target. These invest in the same funds as the main
default arrangement in the growth phase but then invest in different funds in the
pre-retirement phase appropriate for the benefits being targeted, as follows:
• ‘Annuity Lifestyle’: the majority of the members’ assets remain in the same
fund as in the growth phase of the “Getting ready for flexible retirement”
lifestyle strategy. In the pre-retirement phase instead of investing in assets
which target a flexible retirement, members begin switching 75% of their
assets into long dated bonds and 25% into cash over the 5 years before the
selected retirement date. The aim is to track annuity rates and protect cash,
to help reduce volatility for those members intending to purchase an
annuity and take their tax-free cash at retirement.
1 The attached SIP was adopted during the Plan Year and reflects both the changes made to the pre retirement phase of the Plan’s main
default arrangement in February 2019 and also the changes to the growth phase which will be implemented in a phased approach from January 2020 .
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
• ‘Drawdown Lifestyle’: the majority of the members’ assets remain in the
same fund as in the growth phase of the “Getting ready for flexible
retirement” lifestyle strategy. In the pre-retirement phase instead of
investing in assets which target a flexible retirement, members retain 75% of
their assets in the SL Mobile Diversified Growth Pension Fund and 25% is
switched into cash over the 5 years before the selected retirement date. The
aim is to strike a balance between investing in return seeking assets and
protecting the value of members’ savings, to help prepare them to draw
down their savings in retirement.
• ‘Cash Lifestyle’: the majority of the members’ assets remain in the same
fund as in the growth phase of the “Getting ready for flexible retirement”
lifestyle strategy. In the pre-retirement phase instead of investing in assets
which target a flexible retirement, member’s assets are automatically
switched into a cash fund over the 5 years before the selected retirement
date, which aims to protect the savings of those members intending to take
their entire savings as cash.
iv) Aims, objectives and policies relating to the Plan’s other default arrangements
In addition to the three additional lifestyle structures, the Plan also offers a range of
investment options. These are alternative options for individuals who may wish to
create their own investment portfolio with no lifestyle profile.
The following are ‘freestyle’ funds available in the Plan, but are also classed as
“default arrangements” for the purposes of legislation:
SL Mobile Diversified Growth Pension Fund
At the start of the Plan Year, this fund invested in diversified growth funds,
consisting of the SL BlackRock Diversified Growth Pension Fund (70%) and the SL ASI
Dynamic Multi Asset Growth Pension Fund (30%). These invest in a diversified
portfolio of equities, bonds, alternative assets and cash, targeting a similar return to
equities, but with less risk of significant falls in value in the short term. Changes are
being made to this fund on a phased basis, with a final target asset allocation of 80%
diversified growth funds and 20% equities.
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
SL Mobile Flexible Retirement Pension Fund
Invests in the SL BlackRock Diversified Growth Fund (21%), the SL ASI Dynamic Multi
Asset Growth Pension Fund (9%), the SL iShares Corporate Bond Index Fund (45%)
and the Standard Life Deposit & Treasury Pension Fund (25%). The fund is designed
to provide members with a mix of investments which could be considered suitable
irrespective of their retirement objective. This fund was added to the investment
options during the Plan Year.
SL BlackRock UK Focus Pension Fund / SL iShares UK Equity Index Pension Fund
Invest in UK company shares. The returns will be more volatile and less secure than
from UK government bonds. To compensate for extra risk, investors expect higher
investment returns from this asset class.
SL BlackRock Managed (50:50) Global Equity Pension Fund
Invests in company shares from around the world. Investing in shares of overseas
companies often entails currency risk. Broader geographical diversification is
expected to reduce risk.
SL BlackRock Aquila Connect Over 15 Year Corporate Bond Pension Fund
Aims to perform broadly in-line with annuity prices although returns are expected to
be lower than for equities over the long term.
SL iShares Index Linked Gilt Index Pension Fund
Returns are linked to the rate of Retail Prices Inflation (RPI) but are expected to be
lower than equities and corporate bonds over the long term.
SL Deposit & Treasury Pension Fund
Provides short-term capital protection but may not keep pace with price and salary
inflation.
SL HSBC Islamic Global Equity Index Pension Fund
Invests in the largest 100 companies engaged in Shariah-compliant activities
globally.
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
I) The Plan also offers the option of investing in the SL Veritas Global Focus
Pension Fund (which is not a “default arrangement”). The fund is designed for long term
investors who wish to build capital over a number of years through investment in a
focused portfolio of global companies.
2. Financial Transactions
i) Service Level Agreements
During the Plan Year the Trustee, as part of ongoing monitoring, has reviewed the
existing service provided by its third party administrator. The administration
agreement contains service levels setting out the required turnaround times of all
core financial transactions. The Company reviews Plan level statistics and analysis
against those agreed service levels on a monthly basis and reports their findings to
the Trustee. Throughout the Plan Year there were no reportable issues, from a
service level perspective relating to the application of payments to member records,
record-keeping functions, normal retirement member events and the application of
contributions to the investments specified. The Trustee regularly monitors the
administrator’s compliance with the required service levels (set out in the
administration agreement) in respect of core financial transactions. These include
the investment of contributions, fund switches, and transfers into and out of the
Plan.
The Trustee reviewed the administrator’s performance and processes in more detail
from March 2020 in light of the impact of the COVID-19 pandemic and guidance
published by the Pensions Regulator. The Trustee reviewed monthly management
information containing performance levels against their respective benchmarks for
turnaround of core administration tasks, monthly contribution uploads, and the
waiting times for callers to the contact centre. The Trustee also reviewed the
number of members using the additional methods of communication and
engagement with the administrator namely, website log in, app log in and secure
messaging to the administration team.
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
During the Plan Year, the Trustee ensured that such core financial transactions were
processed promptly and accurately by:
• monitoring administrator service levels outlined in quarterly reports from
the Plan’s administrator against those required by its service level
agreement;
• monitoring the end to end process for the investment of monthly
contribution payments;
• carrying out an external audit of financial statements including sampling of
transactions.
The Trustee is therefore satisfied that the administrator was operating appropriate
procedures and controls, and operating within the agreed Plan administration
service level agreement.
ii) Accuracy of record keeping and data security
The Trustee reviews the accuracy of record keeping on an ongoing basis but more
formally at least every three years. The Trustee worked closely with the Company to
undertake a data review in the Plan Year including address tracing for deferred
members. Further work was also carried out by Standard Life and the Company. Any
areas of improvement have been identified, risks have been documented in the risk
register and processes agreed for ongoing data monitoring, reporting and dealing with
errors.
The Trustee recognises the importance of systems and processes to the effective
operation of the Plan and the fact that many of these are provided by the Plan
administrator. There were no significant internal control recommendations for the DC
sections of the Plan identified by the Plan auditors, RSM, during their statutory audit of
the financial statements for the 2018/19 Plan year.
It was identified that Standard Life Assurance Limited did not hold ISO accreditations for
data security and the Trustee had challenged them to seek this externally recognised
standard as best practice. Standard Life Assurance Limited initially planned to undertake
this but was deferred given the transition to Phoenix Group. It is understood that the IT
systems in place with the Phoenix Group have received ISO accreditation for data
security.
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From 25 May 2018, new legislation was introduced, EU General Data Protection
Regulation (“GDPR”). The Trustee, in conjunction with its legal advisors, Plan
administrator and the Company, reviews their compliance with GDPR, in relation to data
protection, ownership of data and data privacy, on an ongoing basis and captures any
risks and further reviews in the Trustee’s business plan and/ or risk register.
(iii) Administrator update
The Plan administrator for the Plan Year was Standard Life Assurance Limited. On 3
September 2018, Standard Life Aberdeen, sold Standard Life Assurance Limited to
Phoenix Group. Since the deal was completed, the Trustee has not seen a material
change to the Plan’s member experience and the administrator’s service
performance. The Trustee will continue to monitor this during the plan year ending
30 September 2021..
Charges and Transaction costs
i) Charges borne by the members
The Trustee calculated the charges (as Total Expense Ratios (“TER”)) and, as far as they
were able to do so, the transaction costs, borne by members during the Plan Year. (For
these purposes, the Trustee has agreed that the “charges year” for the purpose of
assessment shall be the same as the Plan Year).
The member borne charges for the Plan’s default arrangements complied with the
statutory charges cap during the Plan Year.
The Plan’s main default arrangement
During the Plan Year the charges that applied to the Plan’s main default arrangement
from 1 February 2019, called “Getting ready for flexible retirement” were:
o a total of 0.66% per annum in the period prior to 5 years before the member’s
selected retirement date
o ranged from 0.66% to 0.40% per annum over the de-risking period for the 5
years before the member’s selected retirement date.
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During the Plan Year the charges that applied to the ‘Getting ready to purchase annuity’
were:
o a total of 0.66% per annum in the period prior to 5 years before the member’s
selected retirement date
o ranged from 0.66% to 0.26% per annum over the de-risking period for the 5
years before the member’s selected retirement date.
During the Plan Year the charges that applied to the ‘Drawdown Lifestyle’ were:
o a total of 0.66% per annum in the period prior to 5 years before the member’s
selected retirement date
o ranged from 0.66% to 0.57% per annum over the de-risking period for the 5
years before the member’s selected retirement date.
During the Plan Year the charges that applied to the ‘Cash Lifestyle’ were:
o a total of 0.66% per annum in the period prior to 5 years before the member’s
selected retirement date
o ranged from 0.66% to 0.30% per annum over the de-risking period for the 5
years before the member’s selected retirement date.
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The Plan’s other default arrangements
During the Plan Year the charges and transaction costs that applied to the Plan’s other
default arrangements were as follows:
Fund Total Expense
Ratio (% p.a)
2019/20 Transaction
Cost (% p.a)
2018/19 Transaction
cost (% p.a)
Average Transaction
costs (% p.a)
SL Mobile Diversified Growth Pension Fund
0.66 0.54 0.37 0.46
SL Mobile Flexible Retirement Pension Fund
0.40 0.43 0.49 0.46
SL BlackRock UK Focus Pension Fund*
1.37 0.19 0.13 0.16
SL iShares UK Equity Index Pension Fund
0.25 0.27 0.10 0.18
SL BlackRock Managed (50:50) Global Equity Pension Fund
0.25 0.54 0.05 0.30
SL iShares Index Linked Gilt Index Pension Fund
0.25 0.02 0.04 0.03
SL BlackRock Aquila Connect Over 15 Year Corporate Bond Pension Fund
0.25 -0.04 -0.23 -0.14
Standard Life Deposit and Treasury Pension Fund
0.30 0.07 0.08 0.07
SL HSBC Islamic Global Equity Index Pension Fund
0.54 0.04 0.06 0.05
*Although this fund is classed as a “default arrangement”, the charge cap does
not apply for legal reasons. Before 30 September 2015 members who invested
in the fund consented to remain and pay the higher TER rather than be moved
to an alternative lower charging fund.
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The Total Expense Ratio (“TER”) measures the total cost of a fund and cost of
administration to an investor. Minor variations in TER will occur from year to year as
the funds incur some fixed costs which vary as a percentage of assets as the asset value
changes. Where the fund was available, figures above are within 0.01% of the last Plan
Year.
The Plan’s other investments which are not default arrangements
During the Plan Year the charges that applied to the SL Veritas Global Focus Pension
Fund were 1.28% on a TER basis and average transaction costs were 0.13%.
Members invested in the AVC arrangement provided for the Plan’s DB sections have
access to the same funds as the Plan’s DC sections. Where such AVC members are
invested in those funds the same charges and Trustee governance applies.
There is also one member in the Plan’s DB sections who previously held AVCs with
Equitable Life. During the Plan Year, these have been transferred to Utmost Life &
Pensions (“Utmost”) following a transfer of Equitable Life’s business to Utmost. The
Trustee reviewed the appropriateness of this arrangement following the transfer and
concluded that it was in the member’s best interest to consolidate their benefits in
Utmost with their existing DC pot with Standard Life. This transfer was completed in
April 2020.
ii) Transaction costs
With effect from 3 January 2018, firms that manage money on behalf of DC workplace
pension schemes were required, on request, to provide information about
administration charges and transaction costs. In addition to this, new measures require
the disclosure of costs, charges and investments in occupational DC schemes.
The Trustee has requested, via its advisers, transaction costs information, covering each
of the past five Plan Years, for every fund in the Plan’s fund range, from the Plan’s
administrator and investment platform provider Standard Life Assurance Limited.
However, there have been some difficulties within the industry in obtaining
comprehensive historic information about transaction costs, and these have affected the
Plan.
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The transaction costs information which Standard Life Assurance Limited provided to the
Trustee is based solely on the last two Plan Years, shown in section 3. and does not
extend to the past five Plan Years. This is due to Standard Life Assurance Limited
reporting transaction costs on an annualised basis and the data not being available for
previous Plan Years due to the regulations requiring these disclosures only being in place
from 3 January 2018. The Trustee expects that in future years, the Plan administrator
should be able to comply more fully with providing more long-term transaction costs.
Without meaningful consistent transaction costs disclosures from all asset managers, it
is very difficult for the Trustee to form a judgement on the extent to which any
transaction costs could be considered excessive. As the market develops and better
disclosure becomes available, the Trustee will look carefully at the extent to which these
costs represent value for members.
Illustrations of the effect of costs and charges on members’ retirement outcomes
In order to achieve greater transparency about costs, regulations came into force on 6
April 2018 which require the Trustee to provide members with additional information in
relation to investment charges and core transaction costs. These must be set out as
example member illustrations, that have been prepared with regard to the relevant
statutory guidance: Reporting of costs, charges and other information: guidance for
trustees and managers of relevant occupational schemes.
The illustrations for Plan members are set out and explained on pages 14-21 of this
Chair’s Statement (pages 93 to 101 of this report).
iii) Value for members assessment
The Trustee, with the support of their advisers, undertook a review which began in
December 2020 and concluded in February 2021 in respect of the Plan Year to assess
whether the Plan represents good value for its members. The Trustee has concluded
that the Plan’s overall benefits do represent good value for the costs and charges
deducted from member’s accounts, for the following reasons:
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• The Company continues to provide a contribution structure which provides
contribution levels over and above the automatic enrolment minima;
• The Company also provides a more generous contribution structure that all
members can access for those who choose to save more for their
retirement;
• Member borne costs remain below the charge cap and the Trustee is
focused on improving the member experience (as demonstrated by the
outcome of the investment strategy review, and the changes made to the
pre retirement phase and the changes to the growth phase within the Plan’s
main default arrangement);
• Increased flexibility is being offered via the changes to the default
arrangement, whereby members target a flexible approach to retirement, or
can choose from other lifestyles for annuity, drawdown and cash;
• The quality of communications provided on a regular basis continues to raise
standards in this area and provides members with a good understanding of
their pensions’ benefits and options throughout the pensions lifecycle;
• Members have access to some of the new retirement flexibilities on a basis
in keeping with those available from other similar schemes.
During the Plan Year the Trustee also made the following improvements:
• The Trustee investigated and challenged asset managers on their
disclosure of transaction costs. Further detail is available in the costs and
charges section.
• The Trustee has finalised a comprehensive risk register and Business
Plan which they continue to review and update this throughout the Plan
Year;
• The Trustee conducted an effectiveness review in respect of their role
during the Plan Year;
• The Trustee is using the data and statistics provided by the administrator
to better understand the membership and how they can further
improve value for members, in particular by regularly monitoring
members’ choices at retirement;
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• The Trustee closely monitored administration performance and
processes in line with the Pensions Regulator’s guidance, in particular
during the COVID-19 pandemic. The Trustee communicated quickly and
clearly to members to inform members of the impact of COVID-19 on
the investment market and the impact to Standard Life’s administration
processes. The communication also signposted members to further
support.
• The Trustee has regularly reviewed communications, in particular
communications in relation to investment changes;
• The Trustee has improved their knowledge and understanding on
retirement options and the support provided to members by the
administrator.
The Value for Member assessment was undertaken by the DC subcommittee, in
conjunction with their advisors, Isio, on behalf of the Trustee. It measured seven
key elements of a DC scheme aligned to the TPR’s DC Code of Practice and
guidance on DC schemes. It included the use of a detailed scoring mechanism to
determine the outcomes, which were documented and benchmarked against
the progress made from previous Plan Years, with any areas for improvement
captured in the Trustee’s remit for the year ahead. The assessment process and
weightings are re-considered each year following discussions amongst the
Trustee and their advisers, Isio and no material changes were made to the
weightings for the assessment. As a result, it can be shown that there has been
an improvement in value provided to members from the previous Plan Year.
Please note that Value for Members assessments for subsequent plan years are
likely to look different which means it may be harder to draw comparisons with
the assessment in respect of the Plan Year. There are two reasons for this. The
first is expected changes to legislation which are due to come into force. The
second reason is the Company’s decision to provide pension benefits from the
Master Trust (mentioned above) which means that that the Plan’s DC Section is
likely to be significantly smaller in the future. These two reasons mean that the
criteria for assessing value for members are likely be different for future Plan
Years.
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iv) Trustee knowledge and Understanding (TKU)
i) Trustee training
During the Plan Year, the Trustee took ongoing action to maintain and develop the
knowledge and understanding of the Trustee. Each of the Trustee directors
maintains their own personal training record, which is also passed to the Plan
Secretary to be held centrally.
In addition to regular informal training slots during Trustee board and sub-
committee meetings, the Trustee directors also took part in an annual Trustee
training day in November 2019. The training day focused on the evolving DC and
workplace savings market, business planning for the Plan Year, Trustee effectiveness
review, legislative updates and current key themes in the pensions industry, changes
to the Pension Regulator and the Regulator’s powers. A further training day was also
completed in October 2020 which focused on the wider strategy of the Plan, ESG
policy and training on climate change.
The Trustee approach to meeting the TKU requirements during the Plan Year
included:
• Regular training sessions within the quarterly Trustee meetings, which
included the opportunity for discussion with advisers, to enable the Trustee
directors to learn about and discuss current legislative and regulatory
requirements relating to pensions law and trusts, and principles relating to
funding and investment, and in particular ESG investing;
• Considering and applying the Plan’s trust deed and rules, SIP and policies,
where appropriate to Trustee decisions;
• Attendance at external seminars and accredited training sessions;
• Circulating to each Trustee director on a quarterly basis hot topics and
general update papers from its advisers about matters relevant to the Plan;
• Considering their training needs and planning a formal Trustee training day
(created by the Plan’s advisers following consultation with the Trustee)
In the light of TKU requirements, the Trustee regularly reviews personal training needs
throughout the Plan Year and reports any individual training undertaken to the Plan
Secretary for record keeping.
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ii) Evaluation of the Trustee
Following the Pensions Regulator discussion paper on 21st Century Trustees, the
Trustee decided to undertake an evaluation of the effectiveness of the Trustee, its
sub-committees and support team. The main aspect of the effectiveness review was
to assess the knowledge, behavioural and team dynamic amongst the existing
Trustee group. The Trustee completed a self assessment questionnaire and results
from this, together with insight from the advisors fed into an agreed actions list.
These follow up actions were captured in the Business Plan for the Plan Year which
was reviewed throughout the Plan Year. It was agreed that the Trustee is continuing
to perform effectively and retains the high level of skills, as documented below,
required to govern the Plan.
Trustee experience and skills
During the Plan Year the Trustee Board included individuals with a varied skillset,
some of whom were not employees of the Company, which provided valuable
insight from different perspectives, separate to that of the Company. Each member
of the Board has different skills and expertise which provide for an overall diverse
and strong composition, enabling the Trustee to address the following areas:
• Legal: understanding of legal obligations and also entitlements as
regards the Trustee, its trust law duties and contractual commitments,
enabling the Trustee to challenge third parties (including the Company
and advisers);
• Legislation: considerable experience in reviewing and debating new
legislation, understanding the impact on the membership, enabling the
Trustee to comply with its legal obligations and to challenge the
Company, advisers and Plan administrators on the application of new
legislation released by formal bodies;
• Information and Data Security: practical experience and understanding
of IT and security issues of the Company (including outside the Trustee
role), enabling the Trustee to question third party suppliers about how
they operate adequate security controls in order to protect Plan data
and members’ personal information;
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• Strategy and restructuring: experience of adopting a methodical
approach to business strategy (including outside the Trustee role),
enabling the Trustee to set appropriate business plans and consider how
to monitor and develop the Trustee’s relationship with the Company
and third parties such as the Plan administrator;
• Funding and transactions: experience (including outside the Trustee
role) of liaising with investment managers and advisers on expectations
and actual experience of changes to funding, covenant and asset values
including understanding the impact for members, the Company and
Trustee;
• Customer and Transformation: experience of dealing with the customer
viewpoint, encouraging the Trustee to consider service standards and
the member experience in terms of what members value and how they
receive Trustee communications, and to challenge all third parties on
continuous improvement and development of supporting materials and
protocols;
• Member insights: looking at all Trustee decisions from a member
perspective, enabling the Trustee to consider the impact of their
decision on members and to challenge existing processes, procedures
and communication channels to meet member needs.
In addition, the Trustee receives advice on investment, legal and other matters
from a number of advisers including:
- Isio – investment and benefit consultancy advice. Isio was formed following
the sale of KPMG UK’s Pension Practice to a private equity firm in March
2020. All employees were taken across to Isio. The quality of service has
been maintained
- LCP – actuarial advice
- Sacker & Partners LLP – legal advice
- RSM – audit advice
It is usual for Isio, LCP and Sacker & Partners LLP to be present at each Trustee
board meeting and relevant sub-committee meeting in order to provide
appropriate advice and support, as and when it is needed.
For these reasons, the Trustee believes that its combined knowledge and
understanding, together with the advice which is available to the Trustee,
enables it to properly exercise its functions as the Trustee of the Plan.
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Illustrations of the effect of costs and charges
Background The next few pages contain illustrations about the cumulative effect of costs and charges on member savings within the Plan over a period of time. The illustrations have been prepared having regard to statutory guidance. As each member has a different amount of savings within the Plan and the amount of any future investment returns and future costs and charges cannot be known in advance, the Trustee has had to make a number of assumptions about what these might be. The assumptions are explained in the Notes section below the illustrations. Members should be aware that such assumptions may or may not hold true, so the illustrations do not promise what could happen in the future. This means that the information contained in this Chair’s Statement is not a substitute for the individual and personalised illustrations which are provided to members each year by the Plan. Members seeking current projections which are more specific to their individual circumstances, may also wish to use the Pension Planner at http://telefonicapensions.com/pension-planner. Key points to note Each of the charts below illustrates the potential impact that costs and charges might have on different investment options provided by the Plan. The Trustee has chosen a number of illustrations which they believe will provide an appropriate representative sample of the different investment choices that members can make. Please note that as a result of the closure of the Plan for future contributions with effect from 30 November 2020, this year’s illustrations no longer allow for the payment of future contributions and therefore this year’s illustrations will show a smaller projected pot than those seen in last year’s Chair’s Statement. Future contributions have been paid into the Master Trust from 1 December 2020. In each of the illustrations, the “Before charges” column gives the hypothetical value of the investments if members were able to invest in funds at no cost. However, there will always be some cost to investing. This is because the organisations which manage the funds charge fees for their services, and also because buying and selling the stocks and shares which drive the funds’ performance also has a cost. The “After all costs and charges deducted” column reflects the performance of the funds after these costs have been deducted.
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A. Auto-enrolment members
The table above will be relevant to a large number of Plan members. It shows the projected pot size up to age 65 in today’s money for auto-enrolled members investing in the Plan’s current default investment arrangement (Getting ready for flexible retirement lifestyle strategy). The projections in the table assume that the member starts with a pot value equal to the median for that age group.
Age 20 on
30/09/2020 Age 30 on
30/09/2020 Age 40 on
30/09/2020 Age 50 on
30/09/2020 Age 60 on
30/09/2020
Starting pot value of:
£1,906 Starting pot value of:
£6,128 Starting pot value of:
£7,907 Starting pot value of:
£8,466 Starting pot value of:
£9,949
Years from 30/09/2020
Before Charges
After all costs and charges
deducted
Before Charges
After all costs and charges
deducted
Before Charges
After all costs and charges
deducted
Before Charges
After all costs and charges
deducted
Before Charges
After all costs and charges
deducted
1 1,935 1,914 6,219 6,151 8,025 7,937 8,592 8,498 10,097 9,986
3 1,993 1,928 6,406 6,198 8,267 7,997 8,851 8,562 10,293 9,971
5 2,053 1,943 6,599 6,245 8,516 8,058 9,117 8,627 10,345 9,836
10 2,211 1,980 7,107 6,364 9,171 8,212 9,819 8,792 - -
15 2,381 2,018 7,654 6,485 9,877 8,369 10,210 8,692 - -
20 2,564 2,056 8,243 6,609 10,637 8,529 - - - -
25 2,762 2,095 8,878 6,735 11,061 8,432 - - - -
30 2,974 2,135 9,561 6,864 - - - - - -
35 3,203 2,176 9,942 6,786 - - - - - -
40 3,450 2,218 - - - - - - - -
45 3,587 2,193 - - - - - - - -
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II) Notes on member illustrations in Table A
1. The starting pot size for each age group is the median pot size on 30 September
2020 for that group
2. Projected pension pot values are shown in today’s terms, and do not need to be
reduced further for the effect of future inflation
3. Inflation is assumed to be 2.5% each year
4. All of the illustrations assume that no further contributions are made from 30
September 2020
5. Values shown are estimates and are not guaranteed
6. Transaction costs are based on the data provided by Standard Life Assurance Limited
(further information on what data has been provided is detailed in section 3)
7. The projected growth rates (net of inflation) for each fund are shown in the table
below:
Fund Isio return
assumption (% p.a.)
SL Mobile Diversified Growth Pension Fund 1.49
SL Mobile Flexible Retirement Pension Fund -0.28
Standard Life Deposit and Treasury Pension Fund -2.01
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B. Member aged 20 on 30 September 2020
The tables below give the projected pot size up to 65 in today’s money for each fund used by
members. It assumes a starting pot size of £1,293, which is the median pot size for members
aged 20-29. It assumes the member doesn’t pay anything more into their pot. See the Notes
section below for further details.
SL Mobile Diversified
Growth Pension Fund
SL Mobile Flexible
Retirement
Pension Fund
SL BlackRock UK Focus
Pension Fund
SL iShares UK Equity
Index Pension Fund
SL BlackRock
Managed (50:50)
Global Equity
Pension Fund
Years from
30/09/2020
Before Charges
(£)
After all
costs and charges
deducted (£)
Before Charges
(£)
After all
costs and
charges deducted
(£)
Before Charges
(£)
After all
costs and
charges deducte
d (£)
Before Charges
(£)
After all
costs and charges
deducted (£)
Before
Charg
es (£)
After all
costs and charges
deducted (£)
1 1,313 1,298 1,290 1,279 1,325 1,306 1,319 1,313 1,319 1,312
3 1,352 1,308 1,283 1,250 1,392 1,331 1,372 1,355 1,372 1,350
5 1,393 1,318 1,275 1,222 1,463 1,357 1,427 1,397 1,427 1,390
10 1,500 1,343 1,258 1,154 1,654 1,424 1,576 1,510 1,576 1,493
15 1,615 1,368 1,241 1,090 1,871 1,494 1,739 1,632 1,739 1,604
20 1,740 1,394 1,224 1,029 2,117 1,568 1,919 1,763 1,919 1,724
25 1,874 1,421 1,207 972 2,394 1,645 2,119 1,905 2,119 1,853
30 2,018 1,448 1,190 918 2,708 1,726 2,338 2,058 2,338 1,991
35 2,173 1,476 1,174 867 3,063 1,811 2,581 2,224 2,581 2,139
40 2,340 1,504 1,158 819 3,464 1,900 2,849 2,403 2,849 2,298
45 2,521 1,532 1,142 774 3,918 1,994 3,144 2,597 3,144 2,470
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SL iShares Index
Linked Gilt Index
Pension Fund
SL BlackRock Aquila
Connect Over 15
Year Corporate
Bond Pension Fund
Standard Life
Deposit and
Treasury Pension
Fund
SL HSBC Islamic
Global Equity Index
Pension Fund
SL Veritas Global
Focus Pension
Fund
Years from
30/09/2020
Before Charges
(£)
After all
costs and charges
deducted (£)
Before Charges
(£)
After all
costs and
charges deducted
(£)
Before Charges
(£)
After all
costs and
charges deducted
(£)
Before Charges
(£)
After all
costs and charges deducte
d
(£)
Before Charges
(£)
After all
costs and charges deducte
d (£)
1 1,267 1,264 1,282 1,280 1,267 1,262 1,319 1,311 1,325 1,307
3 1,217 1,207 1,258 1,254 1,217 1,203 1,372 1,348 1,392 1,336
5 1,169 1,152 1,236 1,229 1,169 1,147 1,427 1,387 1,463 1,365
10 1,056 1,026 1,181 1,167 1,056 1,017 1,576 1,487 1,654 1,440
15 954 914 1,128 1,109 954 901 1,739 1,594 1,871 1,519
20 862 814 1,078 1,053 862 799 1,919 1,709 2,117 1,603
25 779 725 1,030 1,001 779 708 2,119 1,833 2,394 1,692
30 704 646 984 951 704 628 2,338 1,965 2,708 1,785
35 636 576 940 903 636 557 2,581 2,107 3,063 1,884
40 575 513 899 858 575 494 2,849 2,259 3,464 1,988
45 520 457 859 815 520 438 3,144 2,422 3,918 2,098
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C. Member aged 30 on 30 September 2020
The tables below give the projected pot size up to age 65 in today’s money for each fund used by
members. It assumes a starting pot size of £6,811, which is the median pot size for members
aged 30-39. It assumes the member doesn’t pay anything more into their pot. See the Notes
section below for further details.
SL Mobile Diversified Growth Pension Fund
SL Mobile Flexible Retirement Pension
Fund
SL BlackRock UK Focus Pension Fund
SL iShares UK Equity Index Pension Fund
SL BlackRock Managed (50:50)
Global Equity Pension Fund
Years from 30/09/2020
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
1 6,913 6,837 6,792 6,734 6,981 6,877 6,947 6,917 6,947 6,910
3 7,121 6,888 6,755 6,582 7,333 7,010 7,227 7,135 7,227 7,111
5 7,335 6,941 6,717 6,433 7,704 7,146 7,518 7,360 7,518 7,319
10 7,900 7,073 6,625 6,076 8,713 7,499 8,298 7,952 8,298 7,864
15 8,508 7,207 6,534 5,739 9,856 7,868 9,159 8,593 9,159 8,450
20 9,163 7,344 6,444 5,421 11,147 8,256 10,109 9,285 10,109 9,080
25 9,868 7,484 6,355 5,120 12,609 8,662 11,158 10,033 11,158 9,757
30 10,627 7,626 6,268 4,836 14,261 9,089 12,315 10,841 12,315 10,484
35 11,445 7,771 6,182 4,568 16,131 9,537 13,593 11,714 13,593 11,265
SL iShares Index Linked Gilt Index
Pension Fund
SL BlackRock Aquila Connect Over 15
Year Corporate Bond Pension Fund
Standard Life Deposit and Treasury Pension
Fund
SL HSBC Islamic Global Equity Index
Pension Fund
SL Veritas Global Focus Pension Fund
Years from 30/09/2020
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
1 6,674 6,655 6,749 6,741 6,674 6,649 6,947 6,907 6,981 6,885
3 6,409 6,354 6,628 6,605 6,409 6,336 7,227 7,102 7,333 7,034
5 6,155 6,067 6,508 6,471 6,155 6,039 7,518 7,303 7,704 7,187
10 5,562 5,404 6,218 6,147 5,562 5,354 8,298 7,830 8,713 7,584
15 5,026 4,814 5,942 5,840 5,026 4,746 9,159 8,395 9,856 8,002
20 4,541 4,288 5,677 5,548 4,541 4,208 10,109 9,001 11,147 8,444
25 4,104 3,820 5,425 5,271 4,104 3,731 11,158 9,651 12,609 8,911
30 3,708 3,403 5,184 5,008 3,708 3,308 12,315 10,348 14,261 9,402
35 3,351 3,031 4,953 4,757 3,351 2,933 13,593 11,095 16,131 9,922
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
D. Member aged 40 on 30 September 2020
The tables below give the projected pot size up to age 65 in today’s money for each fund used by
members. It assumes a starting pot size of £24,454, which is the median pot size for members
aged 40-49. It assumes the member doesn’t pay anything more into their pot. See the Notes
section below for further details.
SL Mobile
Diversified Growth Pension Fund
SL Mobile Flexible Retirement Pension
Fund
SL BlackRock UK Focus Pension Fund
SL iShares UK Equity Index Pension Fund
SL BlackRock Managed (50:50)
Global Equity Pension Fund
Years from 30/09/2020
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
1 24,819 24,546 24,386 24,177 25,064 24,690 24,942 24,836 24,942 24,808
3 25,567 24,732 24,252 23,631 26,330 25,170 25,946 25,617 25,946 25,532
5 26,336 24,919 24,118 23,098 27,659 25,659 26,991 26,424 26,991 26,277
10 28,363 25,393 23,786 21,816 31,285 26,923 29,792 28,552 29,792 28,235
15 30,546 25,877 23,459 20,606 35,386 28,249 32,883 30,852 32,883 30,339
20 32,897 26,369 23,136 19,463 40,024 29,641 36,295 33,336 36,295 32,600
25 35,429 26,871 22,818 18,384 45,270 31,101 40,060 36,022 40,060 35,030
SL iShares Index Linked Gilt Index
Pension Fund
SL BlackRock Aquila Connect Over 15 Year Corporate
Bond Pension Fund
Standard Life Deposit and
Treasury Pension Fund
SL HSBC Islamic Global Equity Index
Pension Fund
SL Veritas Global Focus Pension Fund
Years from 30/09/2020
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
1 23,963 23,895 24,232 24,205 23,963 23,872 24,942 24,797 25,064 24,718
3 23,012 22,815 23,795 23,713 23,012 22,750 25,946 25,499 26,330 25,255
5 22,098 21,783 23,366 23,232 22,098 21,681 26,991 26,220 27,659 25,804
10 19,968 19,404 22,327 22,071 19,968 19,222 29,792 28,112 31,285 27,229
15 18,044 17,284 21,333 20,968 18,044 17,042 32,883 30,142 35,386 28,732
20 16,306 15,397 20,384 19,921 16,306 15,109 36,295 32,318 40,024 30,318
25 14,735 13,715 19,478 18,925 14,735 13,396 40,060 34,652 45,270 31,992
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
3595094
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
E. Member aged 50 on 30 September 2020
The tables below give the projected pot size up to age 65 in today’s money for each fund used by
members. It assumes a starting pot size of £44,296, which is the median pot size for members
aged 50-59. It assumes the member doesn’t pay anything more into their pot. See the Notes
section for further details.
SL Mobile Diversified Growth Pension Fund
SL Mobile Flexible Retirement Pension
Fund
SL BlackRock UK Focus Pension Fund
SL iShares UK Equity Index Pension Fund
SL BlackRock Managed (50:50)
Global Equity Pension Fund
Years from 30/09/2020
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
1 44,958 44,463 44,173 43,793 45,401 44,724 45,179 44,987 45,179 44,937
3 46,311 44,800 43,929 42,805 47,693 45,592 46,999 46,403 46,999 46,248
5 47,705 45,139 43,687 41,839 50,102 46,478 48,892 47,864 48,892 47,597
10 51,377 45,997 43,086 39,518 56,669 48,768 53,965 51,719 53,965 51,144
15 55,331 46,872 42,493 37,326 64,097 51,170 59,564 55,884 59,564 54,956
SL iShares Index Linked Gilt Index
Pension Fund
SL BlackRock Aquila Connect Over 15 Year
Corporate Bond Pension Fund
Standard Life Deposit and Treasury Pension
Fund
SL HSBC Islamic Global Equity Index
Pension Fund
SL Veritas Global Focus Pension Fund
Years from 30/09/2020
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
1 43,407 43,283 43,894 43,844 43,407 43,242 45,179 44,918 45,401 44,774
3 41,683 41,326 43,103 42,954 41,683 41,209 46,999 46,188 47,693 45,747
5 40,028 39,458 42,325 42,082 40,028 39,272 48,892 47,494 50,102 46,741
10 36,171 35,148 40,442 39,980 36,171 34,818 53,965 50,923 56,669 49,322
15 32,685 31,309 38,643 37,982 32,685 30,869 59,564 54,599 64,097 52,045
Telefónica UK Pension Plan
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for the year ended 30 September 2020
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
F. Member aged 60 on 30 September 2020
The tables below give the projected pot size up to age 65 in today’s money for each fund used by
members. It assumes a starting pot size of £40,813, which is the median pot size for members
aged 60-69. It assumes the member doesn’t pay anything more into their pot. See the Notes
section below for further details.
SL Mobile Diversified Growth Pension Fund
SL Mobile Flexible Retirement Pension
Fund
SL BlackRock UK Focus Pension Fund
SL iShares UK Equity Index Pension Fund
SL BlackRock Managed (50:50)
Global Equity Pension Fund
Years from 30/09/2020
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
1 41,423 40,967 40,700 40,350 41,831 41,208 41,627 41,451 41,627 41,404
3 42,670 41,277 40,476 39,440 43,944 42,008 43,304 42,755 43,304 42,612
5 43,955 41,590 40,252 38,550 46,163 42,824 45,048 44,101 45,048 43,855
SL iShares Index Linked Gilt Index
Pension Fund
SL BlackRock Aquila Connect Over 15 Year
Corporate Bond Pension Fund
Standard Life Deposit and Treasury Pension
Fund
SL HSBC Islamic Global Equity Index
Pension Fund
SL Veritas Global Focus Pension Fund
Years from 30/09/2020
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
Before Charges
(£)
After all costs and charges
deducted (£)
1 39,995 39,880 40,444 40,397 39,995 39,842 41,627 41,386 41,831 41,254
3 38,406 38,077 39,714 39,577 38,406 37,970 43,304 42,557 43,944 42,151
5 36,881 36,356 38,998 38,774 36,881 36,185 45,048 43,760 46,163 43,067
Telefónica UK Pension Plan
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for the year ended 30 September 2020
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
Notes on member illustrations in Table B, C, D, E and F
1. Projected pension pot values are shown in today’s terms, and do not need to be
reduced further for the effect of future inflation
2. Inflation is assumed to be 2.5% each year
3. All of the illustrations assume that no further contributions are made from 30
September 2020
4. Values shown are estimates and are not guaranteed
5. The projected growth rates (net of inflation) for each fund are shown in the table
below:
Fund Isio return assumption
(% p.a.)
SL Mobile Diversified Growth Pension Fund 1.49
SL Mobile Flexible Retirement Pension Fund -0.28
SL BlackRock UK Focus Pension Fund 2.49
SL iShares UK Equity Index Pension Fund 1.99
SL BlackRock Managed (50:50) Global Equity Pension Fund 1.99
SL iShares Index Linked Gilt Index Pension Fund -2.01
SL BlackRock Aquila Connect Over 15 Year Corporate Bond Pension
Fund -0.91
Standard Life Deposit and Treasury Pension Fund -2.01
SL HSBC Islamic Global Equity Index Pension Fund 1.99
SL Veritas Global Focus Pension Fund 2.49
11 March 2021
Date:
Anthony Soothill, Chair Telefónica UK Pension Trustee Limited
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Appendix B - DC Governance statement from 1 October 2019 to 30 September 2020 continued
Telefónica UK Pension Plan
Statement of Investment Principles
Introduction
Under the Pensions Act 1995 (as updated by the Pensions Act 2004), the Telefónica UK Pension
Trustee (“the Trustee”) is required to prepare a statement of the principles governing investment decisions. This document contains that statement and describes the investment principles pursued
by the Trustee of the Telefónica UK Pension Plan (“the Plan”).
This Statement of Investment Principles (“the SIP”) covers both the Defined Benefit and the
Defined Contribution sections of the Plan. Details of the implementation of the Plan’s investment
principles along with the Trustee’s governance policy, are set out in a separate document, the Investment Implementation Document (“IID”).
The Trustee has consulted the principal sponsoring employer, Telefónica UK Limited (“the
Sponsor”), on the principles set out in this statement and will consult the Sponsor on any changes to it. However, the ultimate power and responsibility for deciding investment policy lies solely
with the Trustee.
Before drafting this statement, the Trustee has obtained and considered written advice from the
Plan's Investment Advisor (Isio Group Ltd) and also considered advice from the Plan Actuary (Lane
Clark & Peacock LLP), the Legal Advisor (Sacker & Partners LLP) and the Covenant Advisor
(Penfida Limited).
Investment mandates
While the Trustee retains strategic management of the Plan’s assets, a number of professional
Investment Managers have been appointed for day-to-day management of the assets, as detailed in
the Plan’s Investment Implementation Document.
All of the Investment Managers are authorised and regulated by the Financial Conduct Authority
under the Financial Services and Markets Act 2000 as amended by the Financial Services Act 2012
and/or by the US Securities and Exchange Commission.
The Trustee has ensured that all advisors and third party service providers are suitably qualified and
experienced and that suitable liability and compensation clauses are included in all contracts for professional services received.
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Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Statement of Investment Principles continued
Sponsor-Related Investments
Regarding Sponsor-related investments as defined in the Pensions Act 1995 and the Occupational
Pension Schemes (Investment) Regulations 2005, other than to the extent that pooled funds are
invested in securities issued by Telefónica S.A. (or any other related group company), the Plan’s Investment Managers are not permitted to invest in such securities without the Trustee’s prior
consent. The Investment Managers should have regard to publically available information about
potential changes in the ownership of Telefónica S.A. (or any other related group company) and avoid investing in a way which could cause the Plan, should any such change in ownership occur,
to be invested in Sponsor-related investments.
Where the Plan invests in pooled vehicles that may hold sponsor-related investments the total
exposure to sponsor-related investments is not expected to exceed 5% of the Plan’s value. The Trustee monitors its Sponsor-related investments on an annual basis (as at 30 September).
Financially material considerations
The Trustee has considered all financially material considerations over the appropriate time horizon
of the investments. This includes how those considerations are taken into account in the selection, retention and realisation of investments. The Trustee has also considered how to exercise the rights
(including voting rights) attaching to the investments, and how to undertake engagement activities
in respect of the investments (i.e. stewardship).
The Trustee has decided that there are no non-financial matters which fund managers need to be
instructed to take into account in the selection, retention and realisation of investments.
Details of how risks and financially material considerations have been addressed and managed by
the Trustee are outlined in more detail in the respective DB and DC sections of this document
All decisions about the day-to-day management of the assets, including the above considerations, have been delegated to the investment managers via a written agreement. The Trustee Board and
Governance Committee takes investment managers’ policies in the above respects into account
when selecting and monitoring managers. The investment managers are expected to exercise their powers of investment with a view to giving effect to the principles contained within this statement,
so far as reasonably practicable.
The Trustee has also considered specifically how Environmental, Social and Governance (“ESG”)
risks are managed in the Plan. As part of this review, the Trustee has agreed on an ESG policy
which details the investment beliefs of the Trustee, how ESG risks are viewed by the Trustee and
how these risks are managed in the Plan. In summary, the Trustee believes that taking an active approach to include ESG factors in investment decisions reduces overall risks whilst generating
sustainable returns. The ESG policy is included within the Appendix.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Statement of Investment Principles continued
Voting and Engagement
The Trustee delegates the exercise of the rights (including voting rights) attaching to the
investments to the individual investment managers. Investment managers are expected to:
• exercise the voting rights attached to individual investments; and
• engage with key stakeholders which may include corporate management, regulators and
governance bodies, relating to their investments in order to improve corporate behaviours,improve performance and mitigate financial risks in accordance with their own house
policy.
Direct investments
Direct investments, as distinguished by the Pensions Act 1995, are products purchased without
delegation to an Investment Manager through a written contract. When selecting and reviewing any direct investments, it is the Trustee’s policy to obtain appropriate written advice from their
Investment Advisors.
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for the year ended 30 September 2020
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Statement of Investment Principles continued
Investment manager arrangements
The Trustee have the following policies in relation to the investment management arrangements for
the DB and DC Sections of the Scheme:
How the investment managers are
incentivised to align their
investment strategy and decisions
with the Trustee policies.
• Where the Trustee have segregatedarrangements with the investment managers
(DB Section), thereby allowing investment
managers to align their strategy with the
Trustee policies2, this is reviewed on anongoing basis. Where the Trustee considers
that an investment manager’s strategy
(including in relation to voting andengagement) is not sufficiently aligned with
the Trustee policies, the Trustee will engage
with the manager to discuss how alignmentmay be improved.
• Where the Scheme is invested in pooled funds
(DB and DC Section), there is not scope for
these funds to tailor their strategy and
decisions in line with the Trustee policies.However, when the Trustee selects the relevant
pooled fund they look to align it to the strategic
objectives. The Trustee will also review on anongoing basis the alignment of the pooled fund
manager’s strategy in relation to voting and
engagement with the Trustee policies.
• The Scheme’s mandates for investment gradecorporate bonds and private market credit
(illiquid) in the DB Section are subject to
performance related fees.
2 This includes the Trustee’s Environmental Social and Governance Policy Statement set out in Appendix
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Statement of Investment Principles continued
How the investment managers are
incentivised to make decisions
based on assessments of medium to
long-term financial and non-
financial performance of an issuer
of debt or equity and to engage
with them to improve performance
in the medium to long-term.
• The Trustee review the investment managers’
performance relative to medium and long-term
objectives as documented in the investment management agreements.
• The Trustee monitors the investment
managers’ engagement and voting activity on
an annual basis as part of their ESG monitoring process.
• The Trustee do not incentivise the investment
managers to make decisions based on non-
financial performance.
How the method (and time
horizon) of the evaluation of
investment managers’
performance and the remuneration
for their services are in line with
the Trustee policies.
• The Trustee review the performance of all of
the Scheme’s investments on a net of cost basis to ensure a true measurement of performance
versus investment objectives.
• The Trustee evaluate performance over the
time period stated in the investment managers’ performance objective, which is typically 3 to
5 years.
• Investment manager fees are reviewed
frequently to make sure the correct amounts
have been charged and that they remain competitive.
The method for monitoring
portfolio turnover costs incurred
by investment managers and how
they define and monitor targeted
portfolio turnover or turnover
range.
• The Trustee do not directly monitor turnover
costs in the DB Section. However, the
investment managers are incentivised to minimise costs as they are measured on a net
of cost basis.
• The same is true for the DC Section but in
addition investment managers are required to
provide transaction cost information on an annual basis, on the slippage cost
methodology, for disclosure to members.
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Statement of Investment Principles continued
The duration of the Scheme’s
arrangements with the investment
managers
• The duration of the arrangements is considered
in the context of the type of fund the Scheme
invests in.o For closed ended funds or funds with a
lock-in period the Trustee ensure the
timeframe of the investment or lock-in
is in line with the Trustee objectivesand Scheme’s liquidity requirements.
o For open ended funds, the duration is
flexible and the Trustee will from time-to-time consider the appropriateness of
these investments and whether they
should continue to be held.
Compliance
This Statement has been prepared in compliance with the Pensions Act 1995, the Pensions Act 2004, and the Occupational Pension Schemes (Investment) Regulations 2005. Before preparing or
subsequently revising this SIP, the Trustee consulted the Sponsor and took appropriate written
advice. The Statement is reviewed at least every three years, and without delay after any significant change to relevant aspects of the Plan (e.g. Sponsor covenant, attitude to risk etc).
Signed Anthony Soothill Date: 25 September 2020
For and on behalf of Telefónica UK Pension Trustee Limited (the Trustee of the Telefónica
UK Pension Plan)
Telefónica UK Pension Plan
Trustee’s annual report and financial statements
for the year ended 30 September 2020
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Statement of Investment Principles continued
Defined Benefit (“DB”) Section
Investment objectives
The Plan is closed to new entrants and future benefit accrual so the overall objective is to provide pension and lump sum benefits for the current members (and their dependants) on a defined benefit
basis.
The Trustee’s investment objective is to achieve the Statutory Funding Objective, which targets full
funding on the Technical Provisions basis. The method adopted for the 2017 valuation is to reach
and maintain a funding position such that all members’ benefits can be met with very little
investment risk and/or reliance on the Sponsor’s covenant, termed “self-sufficient”, by 30 September 2029. The assumptions allow for the Plan’s investments to be substantially derisked with
effect from that date. The Technical Provisions will be reviewed to be consistent with the Sponsor’s
covenant and the Trustee’s risk tolerance.
The Trustee reviews an estimate of the Plan’s funding position (on various bases) at least quarterly
to assess the position and whether the investment policy remains appropriate to the Plan’s circumstances.
Integrated risk management
The Trustee applies an integrated approach to risk management, as per the Pension Regulators
guidance, including an ongoing review of the risks associated with the:
• Sponsor’s covenant
• Investment strategy
• Plan funding
The Trustee’s management of the risks identified does not eliminate them. Rather the management
endeavours to balance them to achieve the Plan’s objectives. To do this the Trustee receives advice
from the Covenant Advisor, Investment Advisor and Plan Actuary, and holds discussions with the Sponsor.
For the purposes of this SIP the investment risks have been set out below, but it is important to note that the Trustee considers them alongside and in the context of the Plan’s other risks. For example
no more risk will be taken than can be supported by the Sponsor’s covenant and the Trustee’s risk
appetite.
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for the year ended 30 September 2020
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Statement of Investment Principles continued
• Asset and liability mismatch risk: The relative value of the assets and liabilities will be
more volatile over the short term than if investment risk had not been taken;
• Market risk: The assets might not achieve the excess return relative to the liabilities
anticipated over the short or longer term;
• Liquidity risk: The assets may not be liquidated to meet liabilities (e.g. benefit payments,collateral requirements etc) as quickly or cost effectively as anticipated;
• Concentration risk: The assets could be more volatile than anticipated due to an
idiosyncratic event (e.g. a corporate default);
• Operational risk: The risk of fraud, poor advice or acts of negligence;
• Investment manager risk: An investment manager may not achieve their objectives;
• Political risk: The legislative and tax environment could change from the environment in
which the investment strategy was designed; and
• Investment cost risk: The cost of suitable advice or day-to-day management of the assetsexceeds the anticipated cost.
• Trustee governance risk – Failure to have suitable resources / controls in place or an
inappropriate governance structure.
• Reporting risk – Failure to reconcile investment transactions or maintain accurate
Statement of Investment Principles.
• Investment strategy risk – Failure to adjust the investment strategy following changes tothe Plan's funding progression.
• Environmental, Social and Governance risk: Management of the Plan’s assets with
regard to Environmental, Social and Governance factors, including but not limited to
climate change which can impact the performance of the Plan’s investments.
Investment strategy
The Trustee has opted to follow a “spread-value investing” approach, which is designed to help
close the deficit with a relatively high degree of certainty, alongside any other funding. It is expected that this approach will exhibit much less volatility than an equity-based investment strategy. The
Trustee considers this a long-term strategy that is expected to remain in place until the Plan achieves
its objective of becoming self-sufficient – i.e. this approach is strategic in nature, rather than
opportunistic / tactical.
Telefónica UK Pension Plan
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for the year ended 30 September 2020
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Statement of Investment Principles continued
Spread-value investing involves taking advantage of the legal protections (such as seniority in the
case of liquidation) and contractual obligations (such as fixed temporal constraints regarding contractual lifetime and payments) of credit assets, which the Trustee believes are well suited to
meeting the Plan’s objectives with greater certainty than a strategy which utilises subordinate non-
contractual income assets (e.g. equities). Credit assets have a:
• Defined term to maturity and pay-out profile - equities, for example, don’t have either;
• Zero probability of delivering more than their yield to maturity if held to term – the Plan
does not need the unlimited upside of equities to achieve its objectives;
• Very high probability of delivering returns very close to their yield to maturity – equities
cannot offer this predictability; and
• Very low probability of delivering equity like downside – this downside is likely to requireadditional funding for the Plan to achieve its objectives.
Importantly, unlike the uncertain future returns from equities (accepting the returns may be above
or below expectations), the spread available on bond assets is observable and provides a platform for a more robust engineering approach to the investment strategy. Admittedly, prudently allowing
for losses from credit events introduces some subjectivity but not on the same scale as that
associated with expected equity returns. The Trustee has selected the following diversified mix of credit assets:
Asset
Exposure
(% of total
assets)
Net spread(1)
(above LIBOR)
Investment grade corporate bonds 20.0% 1.3%
Liquid credit 15.0% 2.3% Semi-liquid credit 10.0% 3.5%
Private market credit (illiquid) 25.0% 3.7%
Credit Default Swaps (CDS) overlay 30.0% 1.3%
Liability Driven Investing (LDI) overlay(2) N/A N/A Collateral for CDS and LDI 30.0% 0.0%
Cash fund(3) N/A N/A
Total 130.0% 2.3%
Note: (1) Estimated spread as at 31 December 2016, net of expected default losses and investmentmanagement costs.(2) With a target hedge ratio (IE01 and PV01) of the funded economic liabilities. This is
75% as at 30 June 2019 but will change over time.(3) Cash fund is a vehicle to facilitate investment into the M&G private market illiquid
mandate.
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The net spreads assume the underlying credit assets are held to maturity and the assets may exhibit considerable mark-to-market volatility in the period until maturity. As a long-term investor the
Trustee expects to hold the majority of credit assets to maturity and so any short term mark-to-
market volatility is tolerated. Instead, the Trustee focuses on the risk of permanent losses that may arise from credit events (e.g. defaults). This risk is managed by diversifying across many issuers
and employing active credit analysis for the majority of the assets, which is completed by
professional Investment Managers.
Liability Driven Investing (LDI) is used to manage the re-investment and inflation risk of the credit
assets – most credit assets have much shorter maturities than the Plan’s liabilities and so must be
re-invested when they mature. This significantly reduces the asset and liability mismatch risk.
The private market credit and the semi-liquid credit assets have been selected as the Trustee believes
they offer an illiquidity and/or a complexity return premium which more than compensates for the loss of liquidity. However, the Trustee has limited the allocation to such assets to manage the
potential liquidity risk.
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Defined Contribution (“DC”) Section
Investment objective
The Trustee’s objective is to make suitable investment arrangements available to members to
provide a retirement fund from which members can buy a pension, take a cash lump sum and/or
transfer to another arrangement to drawdown income. They have taken into account their understanding of members' circumstances, in particular members' attitudes to risk and term to
crystallising their pension savings.
There are four lifestyle strategies offered by the Plan which gradually de-risk over time and a range of investment options for members who want to create a bespoke portfolio. If a member does not
want to select an investment option themselves their investments will be directed into a default
arrangement.
Risk
The Trustee recognises specific investment risks that can be managed through the choice of
investment options provided to members. The different risks will have different levels of
importance for members at different stages in their membership and the Trustee has considered this when deciding on the default option and the range of funds to be made available. The Trustee’s
policy in respect of risk measurement methods and risk management processes is set out below:
• Expectations: Risk of not meeting the reasonable expectations of members, bearing in
mind members’ contributions and fund choices;
• Loss aversion: Risk of loss to a member’s pension savings from period to period and thesubsequent impact on their behaviour;
• Diverse membership: Risk of the default fund being unsuitable for the requirements of
some members;
• Inflation: Risk that the growth in members’ pension savings does not keep pace with
inflation over the long term;
• Capital risk: Risk that short term falls in fund values impact on members’ pension savings;
• Annuity conversion risk: Risk that poor investment performance impacts on the level of
annuity that a member can purchase at retirement;
• Liquidity risk: Risk that members’ pension savings may not be liquidated in line withreasonable expectations;
• Fund manager risk: The risk a fund manager may not achieve their objectives;
• Operational risk: The risk of fraud, poor advice or acts of negligence;
• Political risk: The legislative and tax environment could change from the environment in
which the investment strategy was designed; and
• Cost risk: The costs of administering and investing the assets exceeds the anticipated cost.
• Environmental, Social and Governance risk: Management of the Plan’s assets with
regard to Environmental, Social and Governance factors, including but not limited toclimate change which can impact the performance of the Plan’s investments.
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Due to the complex and interrelated nature of these risks, the Trustee considers these risks in a qualitative and a quantitative manner.
• The Trustee’s policy is to regularly qualitatively review the range of funds offered and the
suitability of the default arrangements; and
• The Trustee also measures risk in terms of the performance of the assets compared to therespective benchmarks on a quarterly basis (including the drawdowns in daily
performance).
Default arrangements
New members are auto-enrolled into the Plan so a default investment option is required in the event
that members do not specify a preferred investment choice themselves. The aims and objectives of the core default option are:
• to offer investment funds to members that will provide an opportunity to generate growth
above the rate of inflation in the accumulation phase;
• to reduce risk as the member approaches their chosen retirement age;
• to ensure the asset allocation at retirement is appropriately aligned so as to be broadly
suitable regardless of the type(s) of benefit a member chooses to take. This reflects theTrustee’s belief that, as members retire in the future the majority are more likely to take
advantage of the full range of benefit options available to them, for example, income
drawdown, annuity, a cash lump sum or a combination of these.
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The Trustee’s policies in respect of the investments in the default option are:
• The Trustee expects the long-term return of the growth phase of the core default option (i.e.the diversified growth assets) to exceed price inflation and general salary growth. The
Trustee believes it is important to manage the magnitude of drawdowns (peak to trough
losses) in this phase as behavioural studies have shown members to be ‘loss adverse’. Thismeans they are prone to react to drawdowns more negatively than the equivalent gains. In
some cases members may actually cease contributions. A diversified growth approach has
been selected due to its ability to manage drawdowns.
• As a member approaches their pension savings crystallisation point the default arrangement
transfers a portion of member’s savings into a bond fund and a cash fund, whilst retaining
a portion in the diversified growth fund. This mix of assets is designed to reduce risk whilst
still offering the expectation of real rates of growth over the long term, and is consideredto be an appropriate mix regardless of the type(s) of benefit a member chooses at retirement.
The default option is intended to ensure that assets are invested in the best interests of members and beneficiaries because it has been designed for those least likely to engage with investment decision
making, based on demographic analysis carried out by investment advisors in collaboration with
the Company. It provides a balance of investment risk and return which is managed through an automated “lifestyling” arrangement, so that members who do not choose to actively manage their
own investments are not unduly exposed to inflation risk, annuity conversion risk or capital risk at
the most inappropriate times in their lives.
A number of other funds are classified as default arrangements for some members following historic
mapping processes where members’ funds have been transferred without them expressing a choice.
The Trustee’s expectations in relation to these investments are:
• Diversified growth fund – as described for the core default option above
• Equity funds – to exceed price inflation and general salary growth
• Corporate bond fund - to perform broadly in-line with annuity prices although returns are
expected to be lower than for equities over the long term
• Index-linked bond fund - returns are linked to the rate of Retail Price Inflation (RPI) but
are expected to be lower than equities and corporate bonds over the long term
• Cash fund – to provide protection against changes in short-term capital values
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Other Lifestyle arrangements
The three alternative lifestyle strategies also invest in diversified growth assets in the growth stage.
From that point:
• One then transitions into a bond fund and a cash fund. The bond fund is expected to broadlymatch the real prices of annuities, giving some protection in the amount of secured income
for members who purchase an annuity, whilst the cash fund provides protection against
changes in short-term capital values. This Lifestyle strategy is also classified as a defaultarrangement for some members.
• One then transitions into cash with the aim of preparing members to take their entire
pension savings as a cash lump sum.
• The other transitions only a quarter into cash leaving the remainder in diversified growthassets in expectation that this will be transferred to a draw-down arrangement.
Policy on kinds of investments: balance and expected return
The Trustee’s policy on the kinds of investments to be held, the balance between the different kinds
of investments and the expected return on them is set for each fund that is offered to members on the basis of the overall objective for that fund that is chosen in line with the criteria set out above.
Realisation of investments
The investment managers have discretion over the timing of realisation of underlying investments
within the funds that they manage and the liquidity of the underlying assets is considered when the
Trustee decides which funds to offer to members. The Trustee chooses funds that offer frequent dealing to enable members to access their benefits and change their investment selections.
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Appendix: Environmental Social and Governance Policy Statement
1. Introduction
This Environmental Social and Governance (“ESG”) Policy Statement (“the Policy”) has been
prepared by Telefonica UK Pension Trustee Limited (“the Trustee”) to set out its views on ESG
factors. It considers how they are addressed whilst meeting the overall objectives of the Trustee inrespect to both the Defined Benefit (“DB”) and Defined Contribution (“DC”) Pension sections.
The Trustee defines responsible investment as an approach to investing that aims to incorporate ESG factors into investment decisions, to better manage risk and generate long-term, sustainable
returns.
The purpose of the Policy is to sit alongside the Plan’s Statement of Investment Principles
(“SIP”), formalising the Trustee beliefs on ESG factors as discussed with the Plan’s investment
advisor. The Policy provides a reference point for the Trustee for incorporating ESG factors into
investment decision making.
2. Rationale for the Policy
The Plan is a large institutional investor, on behalf of Plan members. As part of its fiduciary duty, which includes a comprehensive approach to risk management, the Trustee recognises the need
for the Plan to be a long-term responsible stakeholder.
The Trustee believes that taking an active approach to include ESG factors in investment
decisions reduces overall investment risks whist generating sustainable returns.
3. The Trustee’s ESG beliefs
The Trustee has considered and discussed ESG to establish its ESG beliefs to help underpin
Trustee decision making.
The following areas represent a consensus of ESG beliefs held by the Trustee (these have been
grouped into the main areas of ESG focus by the Trustee):
Risk Framework
1. ESG factors are important for risk management and can be financially material. Managing
these risks forms part of the fiduciary duty of the Trustee.
2. The Trustee believes that ESG integration leads to better risk-adjusted outcomes and want
a positive ESG tilt to the investment strategy.
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Investment Approach / Framework
1. The Trustee wants to understand how asset managers integrate ESG within the investment
process.
2. The Trustee believes that sectors aiming for positive social and environmental impacts
may outperform as countries transition to more sustainable economies. The Trustee will
allocate to these sectors where possible.
3. The Trustee will consider the ESG values and priority areas of the Plan’s stakeholders
and use these to set ESG targets.
Voting & Engagement
4. ESG factors are relevant to all asset classes and, whether equity or debt investments,
managers have a responsibility to engage with management on ESG factors.
5. The Trustee believes that engaging with managers is more effective to initiating change
than divesting and so will seek to communicate key ESG actions to the managers in the
first instance.
6. The Trustee wants to understand the impact of voting and engagement activity within
their investment mandates.
Reporting
7. ESG factors are dynamic and continually evolving, therefore the Trustee receives training
as required to develop its knowledge.
8. The Trustees will monitor key ESG metrics within their investment portfolio to
understand the impact of their investments.
Collaboration
9. Asset managers should be actively engaging and collaborating with other market
participants to raise ESG investment standards and facilitate best practices as well as sign
up and comply with common codes such as UNPRI and TCFD.
10. The Trustees should sign up to a recognised ESG framework to collaborate with other
investors on key issues.
4. Impact of the Policy on investment decision making
The Trustee decides the Plan’s investment strategy and asset allocation. This includes which asset
classes should be invested in. In making any portfolio construction decisions, the Trustee has
regard for the Policy.
Within each asset class, the Trustee delegates the day-to-day investment decision making to the
asset managers – e.g. holding a bond issued by a particular company or exposure to a particular
sector. In appointing and reviewing the Plan’s asset managers, the Trustee, with the assistance of its advisor, considers their expertise, track record and stated policy on ESG.
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5. Implementing the Policy
The Trustee implements the policy through the following steps:i. The Trustee continues to develop their understanding of ESG factors through training and
experience.
ii. ESG beliefs are formally reviewed triennially or more frequently if required by the
Trusteeiii. The Trustee consults the Company on ESG issues.
iv. The Trustee will take into account ESG when making any investment strategy related
decisions.v. The Trustee monitors the ESG integration of the Plan’s asset managers annually and asks
its advisor to incorporate ESG factors in any asset manager selection exercises.
vi. The Trustee will include ESG as part of its ongoing monitoring of the Plan’s assetmanagers.
6. Monitoring and reviewing the Policy
The Trustee monitors the Plan’s assets against this Policy on an ongoing basis, with the assistanceof its investment advisor. The development of the Policy is viewed as an ongoing process, with
the Trustee reviewing the Policy periodically in line with the SIP. When reviewing the Policy, the
Trustee takes account of any significant developments in the market.
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Anthony Soothill
11 March 2021
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