QUESTION AND ANSWERS

When Standard Life and Aberdeen Asset Management Group (our current Investment Adviser) merged to create Aberdeen Standard Investments we thought it was appropriate to review our long-term asset management arrangements to ensure they continue to offer good value for our customers, and are capable of generating good investment outcomes.

We believe these changes will benefit your investment through the prospect of improved future performance over the longer term.

Approximately £110bn

No. However, we believe these changes will benefit your investment over the longer term.

There has been no adverse impact on either investment performance or service.

We considered factors such as, their investment capability, fees & charges, quality of services, governance and oversight, value for money, past performance and transparency.

We believe appointing Schroders to take on c£80bn of actively managed funds will benefit our customers. Schroders has leading asset management capabilities, a stable investment team and philosophy, and strong performance across multiple asset classes.

Property funds hold a smaller number of assets (properties) which are bought and sold relatively infrequently and have higher transaction costs than other types of asset.

As with other actively managed funds, a new Investment Adviser will aim to replace some existing assets with others that they expect will contribute to investment performance. However, it’s not feasible to undertake this transition quickly given the nature of property as an asset class.

The advantage of changing Investment Adviser at a later date is to give a longer lead time for change in adviser, over which period the new adviser can give input to the sale and purchase of properties.

Hermes provides active investment strategies and investment expertise to a broad and fast-growing range of global customers.

Hermes are highly experienced in ethical investment. Their goal is to provide a better financial future for their stakeholders as well as a better, more sustainable society.

They use a holistic approach to investing that incorporates environmental, social and governance (ESG) considerations into all their investment products and manage £33.5bn (as at 31st December 2018) in assets across equities, credit, infrastructure, private equity, private debt and real estate.

To find out more visit www.hermes-investment.com.

Passively managed funds, also known as tracker funds, will continue to be managed by Aberdeen until 2022.

Schroders’ selection as our preferred partner for active asset management was on the basis of a thorough review of asset management capability in the market. The decision to enter into a wealth management joint venture with Schroders was separate from, and subsequent to, the selection of the firm as Investment Adviser for our actively managed funds.

Lloyds Banking Group (LBG) Insurance and Schroders Personal Wealth have separate contracts with Schroders.

The Insurance contract has appropriate provisions to protect against conflicts of interest and will be overseen through formal governance and supplier management protocols. Any exercise of our rights under the Insurance contract will have no bearing on the Schroder Personal Wealth business.

The Wealth contract will be updated for the joint venture and will be overseen by Schroders Personal Wealth management and governance. The Schroders Personal Wealth business also has appropriate conflict of interest policies in place, including restrictions on Schroders’ ability to select its own funds within the joint venture’s investment propositions.

The changes will apply to our customers invested in a number of Scottish Widows, Halifax and Clerical Medical funds, including life and pension fund investors; and Lloyds Private Banking and Bank of Scotland Private Banking wealth portfolios (now Schroders Personal Wealth).

Whilst we’re changing the Investment Advisers, control of the mandates and the underlying funds will remain with Scottish Widows. This will ensure that the funds continue to invest in line with our commitment to our customers.

The majority of assets, including our pension default portfolios, are held in multi-asset portfolios mandated by Scottish Widows. Here we have full responsibility for the portfolios including their strategic (or long term) asset allocation and selection of component funds for each of the asset classes.

In most cases, we currently outsource stock selection within these component funds to Aberdeen. We ensure that both the portfolios and component funds are being managed in line with their mandates and in each case, monitor their investment performance.

The products in which customers invest are unchanged. There won’t be a change to the funds’ annual management charges. However we expect the new Investment Adviser to transition actively managed funds towards their preferred investments to seek outperformance. That will result in a short-term increase in transaction costs to the funds. The estimate of transaction costs that will be charged to the funds during this initial period will be capped to limit their impact on performance.

Transaction costs are incurred by our funds when investments are bought and sold. These can include transition manager fees, broker fees and commissions charged for carrying out the trade, taxes incurred when buying and selling different types of investments, and other costs. They are paid from the value of the fund. During the short transition period these may increase for some of our funds.

A transition manager is used to conduct the process of adjusting investment portfolios to align to the investment strategy of a new incoming Investment Adviser cost-effectively and over a short period of time, with minimal disruption to portfolios, while managing market risk. Efficient management of these events is an important part of a strong governance structure to protect asset values.

The transition manager’s fees are paid by the funds as part of the transaction costs. In the interests of our customers, we’ve estimated transaction costs and capped the amount that will be charged to the funds during the transition period. The level of the cap will vary by fund and is determined by our expectation of future performance, up to a maximum of 0.75%. Any amount above the individual fund caps will be paid by Lloyds Banking Group.

The following funds are expected to transfer via the transition manager from the end of September 2019:

Transition management is only required where the majority of the current holdings of a fund need to be changed to meet the new Investment Advisers’ investment targets. Where the current holdings of a fund are largely in line with the Investment Advisers’ expectations then they will manage any changes through their normal trading process.

Funds will incur transaction costs over a short period of time whilst changes are made to investments with a view to seek outperformance. These estimated costs to the funds will be capped and monitored by us in order to limit their impact on short-term performance. The cap will vary dependent on the fund and is set at a level we consider to be appropriate, determined by our expectation of future performance (considering market volatility), up to a maximum of 0.75%.

Any amount above a transaction cost cap will be paid by Lloyds Banking Group.

We believe the changes made by the new Investment Advisers will benefit your investment over the longer term. However, as part of our usual robust governance process, we’ll continually monitor their performance against benchmark and other targets.

We’ve capped transaction costs at a level we consider appropriate relative to normal market volatility to limit any impact on short-term performance.

We believe the changes made by the new Investment Advisers will benefit your investment over the longer term. However, as part of our usual robust governance process, we’ll continually monitor their performance against benchmark and other targets.

We recognise that you may have an immediate need to cash in some or all of your investment in a fund and may have questions about the impact of transaction costs on short-term fund performance.

If you are thinking of cashing in some or all of your investment in the short-term you may want to seek independent advice.

Passive investment management (also referred to as index tracking) aims to closely match the assets in a recognised financial index, such as the FTSE All Share. This means a passive fund should closely match the performance of its index before deduction of charges.

Active investment management involves an Investment Adviser making investment decisions and trying to beat returns of the relevant financial index, referred to as the benchmark.

No. The new Investment Advisers will not be increasing the annual management charges.

There is no suggestion that serving notice has led to any deterioration in performance.

We carry out robust investment governance and monitoring and will ensure there is enhanced oversight during this period. We remain responsible for the funds and portfolios provided to our customers.

We are working with Aberdeen, Schroders and Hermes to adhere to a detailed plan to implement the new arrangements.

Not in the vast majority of cases where the nature of the funds and how they are invested does not change.

To protect your interest and maintain value for money, we will set clear performance standards and targets which the new Investment Advisers will be required to meet.

The decision to change Aberdeen as the Investment Adviser for the mandated funds does not reflect an intention to change the current purpose or nature of any of the funds. The transition approach has been to mandate funds 'as is', broadly reflecting existing constraints, appetite and the risk profile of the funds.

However, at a detailed fund level, the change to the new Investment Advisers has required small changes to investment control parameters and performance targets, but these changes do not alter the nature or purpose of the funds.

Not at this stage.

Not at this stage.