Shareholder Rights Directive II

The Railways Pension Trustee Company Limited (RPTCL), the corporate Trustee (Trustee) of the Railways Pension Scheme is responsible for ensuring that the requirements of the Shareholder Rights Directive (SRD II) to disclose information are met. The Trustee’s wholly owned subsidiary Railway Pension Investments Limited (Railpen) provide this information to the Trustee. Railpen is authorised and regulated by the FCA to carry out investment management and related activities on behalf of the Trustee. The Trustee considers the responsibilities of stewardship to be part of its fiduciary duty to its beneficiaries.

The scheme arrangements for the railways pension schemes are detailed in the annual report. It has master trust authorisation, and both defined benefit and defined contribution elements. The Railways Pension Scheme includes many open defined benefit sections, which means that the Trustee expects to be paying the pension of an eighteen year old who is in their first job today out to 2100 and beyond, therefore we consider our investment time horizon to be to 2100 and beyond. The investments are managed in line with this mandate from the Trustee.

Railpen uses a mix of internal and external management, although the number of external managers has been significantly reduced over the last few years. Both internal and external mandates are designed to align with the long-term perspective of our beneficiaries. Our equity portfolios are invested on both a quantitative and fundamental basis. The quantitative portfolios seek to harvest long-term risk premia, which have been evidenced to provide an additional return above the equity risk premium over multiple decades. Our fundamental equity approach is to invest in concentrated portfolios of best in class companies across multiple sectors. The portfolio managers are encouraged to adopt a “buy & maintain” approach, minimising turnover and focussing on the long-term characteristics of holdings. The “buy & maintain” approach also extends to internally managed government bond and externally managed corporate bond portfolios, minimising turnover and aligning with our long-term focus.

Railpen has separate Investment and Fiduciary teams. The Investment team reports up to the Chief Investment Officer, and the Fiduciary team reports up to the Chief Fiduciary Officer. This separation of reporting lines ensures the Fiduciary team can oversee the work of the Investment team, as well as working collaboratively.

Company engagement is a core element of the internal investment management process. Our internal teams work closely with colleagues on the Sustainable Ownership team to draw up target lists of portfolio holdings for engagement. A number of these are assigned specific ‘asks’ – actions that we feel will improve their corporate governance. These asks are given reasonable future deadlines, as we are conscious that changing corporate behaviours in certain ways may not be achievable in the short-term. Where an external manager is responsible for managing assets on the Scheme’s behalf, there is regular monitoring carried out by the Investment and Sustainable Ownership teams. This covers a wide range of subjects, including portfolio performance, activity and company engagement. We monitor the portfolio trading activity and associated costs of both internally and externally managed portfolios using a third-party Transaction Cost Analysis provider.

Railpen also ensures that remuneration structures for both internal and external managers are aligned with the long-term nature of the liabilities. Railpen’s teams are eligible for participation in both a corporate and personal bonus programme, for which they are assessed against a number of personal and company-wide objectives. The bonus plan for the Investment team is tied to long-term scheme performance to ensure alignment of interests. However, external mandates are generally structured without performance-related fees, as it is recognized that this can encourage third-party agents to engage in excessive risk-taking and builds in an asymmetry to the compensation structure.