We are extremely saddened to see the recent developments in Ukraine and their devastating humanitarian impact. Our thoughts remain with everyone impacted by these actions and anyone who has friends and family in the region. We are also acutely aware of the impact that the sharp rise of the cost of living will have on households.

As Trustee of the Novartis UK Pension Scheme, we understand you may be concerned about the impact of the current environment, both on the benefits which you receive from the Scheme and on the security of those benefits.

What has happened?

Following a series of escalations, on 24 February Russian military forces began a large-scale military assault on Ukraine. Western nations, having already increased sanctions on Russian entities and individuals following Russia’s formal recognition of separatist states in eastern Ukraine, have introduced further sanctions. This kind of event creates a great deal of uncertainty for investors and increases the range of possible outcomes for economic growth. This increased uncertainty manifests itself with heightened levels of volatility across investment markets as are being experienced at the moment.

The rate of inflation in the UK has recently reached its highest level in the last 25 years due to pressures such as the COVID-19 pandemic, increasing energy prices and Brexit. The Bank of England has moved to control inflation by increasing its base rates and its monetary policy committee expects that the rate of inflation will fall to below 2% again within three years. However, there are a wide range of potential outcomes and financial markets anticipate that inflation will remain high in the short term.

Benefit levels and inflation

Since the transfer of money purchase benefits to L&G’s Master Trust and closure of the Scheme’s defined contribution section, the majority of benefits provided by the Scheme are not impacted by movements in values in assets. This means that market volatility caused by the war in Ukraine does not impact directly on levels of benefits provided by the Scheme. However, pension benefits can be eroded in real terms should the rate of inflation exceed the rate at which pensions are increased. The level of inflation protection provided by the Scheme through annual pension increases is determined by the Scheme’s rules and can depend on the section of the Scheme in which members have accrued benefits in the past.

• Some pension benefits increase in line with an inflation index, up to a maximum amount,
• others increase at a fixed rate each year, and
• for some members, increases are discretionary, meaning that the Trustee and Company decide whether an increase can be granted and, if so, the size of that increase.

The Scheme’s rules therefore provide for benefits to be at least partially protected against the effects of inflation in most cases, and where increases are discretionary rather than guaranteed, the Trustee will take into account the current level of inflation, balanced against the cost to the Scheme of providing any increase when making recommendations to the company.

Benefit security

For schemes like the Novartis UK Pension Scheme where benefits are defined and pensions are linked to members’ final salaries, the security of member benefits depends on the amount of assets in the scheme compared with the expected cost of providing them to its members. Should market volatility cause the value of the assets to fall relative to the expected cost of providing benefits, the security of those benefits could deteriorate. The Trustee has taken steps to reduce risk in the Scheme’s investment strategy in recent years, and no longer has any exposure to some of the riskiest types of assets such as equities. It has also taken steps to reduce the impact of changes in inflation (as well as interest rates) on the Scheme’s funding level. This means that there has not been a material deterioration in the Scheme’s funding level as a result of recent events.

Scheme Investments

The Scheme has only minimal direct exposure to assets domiciled in Russia, Ukraine and Belarus, estimated to be c.£0.6m or c.0.04% of total Scheme assets as at 15 March 2022. This exposure relates to small allocations to Russian and Ukrainian debt instruments within the Wellington Responsible Values Multi-Sector Credit portfolio.

The greatest impact on the Scheme’s assets might come from indirect exposure, either from companies with revenues stemming from Russia or Russian assets, or more materially, as a result of the market uncertainty these events have led to.

Due to restrictions imposed by Russia, it is currently not possible to sell Russian assets and transfer the proceeds outside of Russia. As such, actions the Trustee can take are limited. The Trustee has not made any immediate changes to the Scheme’s investment arrangements, however the Trustee continues to monitor the situation closely as it evolves.

Novartis UK Pension Trustees