The Pension Scheme has for many years adopted an investment objective which could be briefly stated as “to achieve a return on the Scheme’s assets over the longer term that exceeds the growth of the Scheme’s liabilities (due to salary increases and price inflation) consistent with an acceptable degree of risk measured in terms of variability in funding level (defined as assets divided by liabilities)”.

The closure of the Scheme to entrants for the provision of “final salary” retirement benefits introduces for the first time a definite time horizon for the existence of the Final Salary Section (there will eventually be only one pensioner left to pay!!) and as such, the investment objectives need to change to reflect this. The Trustees are currently reviewing the objectives of the Final Salary Section with a stated desire to reduce risk over a period of time.This will be achieved by switching to less volatile assets (such as Government Gilts) which will be purchased to match the movement in the Final Salary Section’s liabilities and provide the greatest security for members.

The Scheme’s funding and investment objectives, together with full details of the relevant processes, are set out in the ‘Statement of Investment Principles’, copies of which are available by writing to the Group Pensions Department at the address shown on page 40 of the PDF. These documents are currently being revised to reflect the ongoing review and further announcements will be made over the coming months.

The charts on pages 18 and 19 of the PDF illustrate the current allocations by asset type, investment manager and geographical spread. Further details of the investment objectives and performance of each manager can be found on page 21 of the PDF.

In respect of the Money Purchase Section, the Scheme’s long-term investment objective can be stated as being to consider members’ circumstances and protect their interests and to make available a series of funds designed to enable appropriate decisions to be taken.

Socially Responsible Investment

Under the 1995 Pensions Act, from July 2000 trustees of occupational pension schemes state in their Statement of Investment Principles (SIP) whether or not they operate an ethical investment policy. The law requires that trustees should act in the best interests of all beneficiaries, which generally means their best financial interests.

The Trustee Board believes that all companies should be run in a socially responsible way the long run this will contribute to the success those companies, but equally recognises its fiduciary responsibility to act in the best financial interests of the Scheme’s members.The Trustee Board’s policy is therefore that the investment managers should take account of social, environmental and ethical considerations extent that they may have a financial impact investment performance. With this in mind, Trustee Board also encourages managers pursue policies of engagement with the companies in which they invest funds.

However, the Trustee Board recognises that because of the need to closely track the benchmarks, it is not appropriate for the Scheme’s passive managers (see page 21 of the PDF for details of the investment managers) to take account of social, environmental or ethical considerations in the construction of their portfolio. However, the Trustee Board also encourages its passive managers to pursue policies of engagement with the companies which they invest funds.

Corporate Governance

The Scheme has instructed its investment managers to, whenever possible, exercise rights attaching to investments. While in majority of circumstances the managers are instructed to exercise their professional judgement on how the ‘vote’ is exercised, potentially contentious situations the Investment Committee is consulted. To assist in this the Scheme subscribes to the voting service operated by the National Association of Pension Funds which gives information about matters which shareholders are asked to vote.

The Investment Committee regularly reviews how the investment managers exercise the Scheme's voting rights and continues to monitor the debate on corporate governance and the role shareholders should play.

Custody of Assets

In respect of the Final Salary Section, although the Trustee Board has delegated day-to-day management of the Scheme's investments to external managers, the custody (safekeeping) of most of these assets is presently carried out independently of the managers by State Street Bank and Trust Company Limited.

In respect of the Money Purchase Section, the custody (safekeeping) of these assets is carried out by the manager, Standard Life Investments.

Investment Strategy : Final Salary Section

As mentioned above, the Trustees undertook a major review of the Scheme’s investment objectives and the investment strategy required to achieve those objectives following the changes made to the Scheme in April 2004, with the Trustees’ stated desire being to reduce investment risk in a controlled manner, whilst leaving sufficient flexibility to produce positive returns in the future.

To date, the Trustees have agreed high level funding targets with the Company and are developing strategies designed to meet the objective of being ‘fully funded’ on a Gilts basis (least risk) within twenty years.This strategy will involve selling more volatile assets such as equities, and gradually buying more bonds which better match the pensions provided by the Scheme.

The final strategy will, as in previous years, involve the Scheme’s assets being spread across a number of asset classes and geographic areas. This diversified spread of assets will (as now) be designed to deliver the Scheme’s required investment performance in a risk controlled manner.

The appropriate managers for each particular asset class are selected by the Investment Committee and given specific objectives to achieve. The type of managers employed include both ‘passive’ (index-tracking) managers as well as active managers (who are expected to produce higher investment performance than the indextracking managers over the longer-term, but with greater fluctuations in their returns over the shorter term).

The Final Salary Section does not hold shares directly in Kingfisher plc.

The existing investment strategy will remain in place until the conclusion of the current review and is illustrated by target asset allocation, asset type, investment manager and geographical spread by the charts below.

Investment Strategy : Money Purchase Section

The strategy to achieve the investment objectives of the Money Purchase Section involves the Scheme’s assets being spread across a number of asset classes and geographic areas. The assets are invested in unit linked arrangements, wrapped in insurance policies, managed by Standard Life Investments.

The Trustees make available a range of investments via pooled funds, which seek to:

• Establish a financially efficient scheme that provides attractive and robust long term investment options to members that recognise their investment challenge and incorporate institutional best practices
  
• Enable members to protect their benefits as they approach retirement
  
• Limit the scope of members to need to take detailed investment decisions.

Currently the Trustees offer three Lifestyle strategies which involve automatic switches from predominantly equities to fixed interest and cash funds as the target retirement date approaches. In addition, the Trustees offer a number of funds offering specific equity, bond or cash investments which may be selected by members instead of the Lifestyle options.

The Money Purchase Section does not hold shares directly in Kingfisher plc