Context

NatWest Pension Trustee Limited’s (the Trustee’s) policy towards monitoring business performance (other than investment returns) is set out in the Responsible Ownership (RO) Policy. When relevant, the Trustee requires its investment managers to invest with a medium to long-term horizon, and use any rights associated with its investments to drive better long-term outcomes. Some assets are held for the purposes of hedging, and for these the focus is on providing risk reduction consistent with the Trustee’s strategic asset allocation.

The Trustee requires RBS Investment Executive Limited (RIEL) to maintain oversight over its external service providers, including investment managers and EOS at Federated Hermes (EOS), through the use of proprietary monitoring and annual Engagement Plans. For example, RIEL encourages its investment managers to report on environmental, social and governance (ESG) issues as part of their regular quarterly reporting cycle.

EOS is responsible for stewardship of all listed equity and credit holdings. As such EOS is a key service provider in the Trustee’s stewardship activities and therefore it is a particular focus of RIEL’s monitoring and review activity. RIEL reviews all quarterly and annual EOS reporting, and monitors performance (e.g. voting activity) to evaluate whether the Trustee’s expectations have been met.

For investment managers overseeing listed equity and credit, RIEL will ensure these investment managers have appropriate policies in place and are engaging with assets they manage. Although the Trustee’s engagement programme is delegated to EOS, it also benefits indirectly from corporate engagement carried out by each of its investment managers in assets held by NatWest Group Pension Fund (the Fund). Where EOS and investment manager votes conflict, this is reported to RIEL for resolution.

RIEL monitors stewardship activity carried out by managers of real assets on a quarterly basis. In many cases, the Trustee owns 50% or more of the shares of certain private companies therefore, it has greater influence and can require that its RO Policy is followed (together with the equivalent policy of the relevant investment manager). Engagement in private investments takes place through the relevant investment managers and sometimes board representation or shareholder voting.

RIEL carries out an annual review of all investment managers in which it seeks assurances that investment managers have responsible ownership policies in place and the governance framework to support them. Investment managers are required to report to RIEL on ESG issues as part of the regular quarterly reporting cycle.

Finally, RIEL reports to the Trustee at least once a year on all stewardship activities.

It is important to note that stewardship is only one part of the role of the Fund’s investment managers. When assessing a manager’s performance, the focus is on long-term outcomes across a range of factors and the Trustee would not expect to terminate a manager’s appointment based purely on short-term performance of a single factor. Nevertheless managers are appointed with the expectation of a long-term partnership, which encourages a long-term approach to managing risk. The managers’ role as long-term stewards of the Fund’s assets is important to the Trustees and this is clearly communicated to the managers through the RO Policy and the Annual Review.

Activities & Outcomes

Overall, over the 2021 reporting period, the Trustee’s expectations of EOS’s service have been met. Performance is measured through voting of all eligible securities (EOS voted on 2,415 resolutions over 2021 on behalf of the Trustees), engagement on a significant number of the Fund’s assets (EOS engaged on 1,132 objectives over 2021 with 232 companies) and relevant reporting.

Where EOS and the investment managers’ votes showed conflict, the matter was reported to RIEL for resolution. Over the 2021 reporting period, there were 414 occasions where EOS’s vote instructions differed with the Management Recommendation. The majority were Management / Director related proposals. EOS outlined all voting recommendations to the Trustee, with the Trustee retaining full discretion over all final voting decisions.