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What changes have been made to the Statement of Investment Principles?

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This is the first Implementation Statement that has been prepared by the Trustee of the BAE Systems Executive Pension Scheme (‘the Scheme’) and it covers the year to 31 March 2021.

The Implementation Statement sets out how the Trustee has followed and acted on the principles outlined in the Scheme’s Statement of Investment Principles, with a focus on stewardship activities, implementation of the main investment principles and Environmental, Social and Governance factors.

The Implementation Statement focuses on

• The role of the Trustee

• The changes that have been made to the Scheme’s Statement of Investment Principles

• The Trustee’s investment policies for the Defined Benefit and Defined Contribution sections of the Scheme

• The stewardship of the Scheme’s investments, including the voting decisions made by, or on behalf of, the Trustee

The role of the Trustee

The role of the Trustee is to ensure that the Scheme is well run in accordance with the Scheme’s Rules, relevant legislation and regulation. The Trustee Directors on the Board are appointed by the Employers and by the Scheme’s membership.

The Board meets on a formal basis six times per year to discuss the management of the Scheme and at other times when necessary. Meetings are held in person or by video, as appropriate, with members sometimes joining by phone if necessary.

The Board recognises the vital importance of good governance and great emphasis is placed on the expertise and skills that are required to ensure the effective oversight of the Scheme. The members of the Board have relevant skills and experience ranging across pensions, finance, law and audit, amongst other disciplines. On appointment all members of the Trustee Board complete the ‘Trustee tool kit’, developed by the Pensions Regulator and the entire Board is involved in a regime of continual professional development. There are formal training sessions and discussions of any ad-hoc topics at the regular Board meetings.

What changes have been made to the Statement of Investment Principles?

The Statement of Investment Principles (SIP) details the policies which control how a pension scheme invests and it sets out the principles governing how decisions about investments are made. The Scheme operates separate SIPs for the Defined Benefit Section and the Defined Contribution Section and this Implementation Statement covers both SIPs. You will find the SIPs for each Section of the Scheme on the BAE Systems pensions website at: baesystems.com/disclosableinformation

During the Scheme year, the Defined Benefit Section SIP had a strategic review as part of its triennial valuation. This was completed by the Trustee in conjunction with BAE Systems and the Scheme actuary.

There were no substantive changes made to the SIP during this review. The Defined Contribution Section also completed a strategic review during the Scheme year (which is detailed further below). The

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© 2021 BAE Systems. All Rights Reserved 2 Trustee found that the Scheme’s default investment arrangements continue to be appropriate for the majority of members.

The SIPs were also updated in September 2020 to include new rules governing how the Trustee manages its relationships with the people who invest the Scheme’s assets and how it engages with the underlying companies that the assets are invested in. This is to ensure that they are following the Trustee’s objectives and policies and making decisions that are in your interests.

What is the Trustee’s investment policy for the Defined Benefit (DB) Section of the Scheme and how was it implemented over the Scheme year?

As part of our governance framework, the Trustee has appointed independent investment advisers, a legal adviser and a Scheme actuary. Their roles include making recommendations to us on the Scheme’s investment strategy and they are also involved in the review process to ensure the Scheme meets with our principles and policies as contained in the SIP.

We have an in-house investment manager, BAE Systems Pension Funds Investment Management Limited (BAPFIM), which is the Scheme’s principal investment manager. BAPFIM are also involved in the review process to ensure our investments meet with our principles and policies as contained in the SIP.

For the DB Section of the Scheme, we follow a plan to meet the promise to pay your pension on time.

Since the valuation in 2017, the Scheme has been in surplus. The opportunity has therefore been taken to substantially de-risk the Scheme by reducing equities and other growth assets and reinvesting the released funds into assets (such as Government Bonds and Corporate Bonds) whose cash-flows and maturities better match our expected cash requirements for pension payments.

We always ensure we have enough cash available to pay current pensions. This way we are not forced to sell any assets when we don’t want to - for example during March and April 2020 when asset prices were negatively impacted by the developing COVID-19 pandemicwhich would have been a suboptimal time to sell, and we did not need to given our cash balance.

Risk is an important factor that we consider carefully. Investment risks are reduced by investing in a variety of assets which perform differently in different economic environments. As these investments are driven by different factors, they do not always move in the same direction as each other so when some investments are going down in price, we generally have other investments that are going up in price. The result is a much smoother and predictable investment return profile, which is ideal to make sure we meet our pension commitments year after year.

We also have to take into account the strength of our underlying sponsor BAE Systems plc. Although we did not perform a formal review of our sponsor during the year, the last full review took place in 2019 where the sponsor was assessed as ‘Tending to strong’, the next full review is due 2022.

We are all aware of the environmental changes that are happening around us and it is up to us as long term investors to make sure we take into account the associated risks and opportunities that these changes may have on our investments.

It is not just the environment we are concerned about, but also the governance of the companies we invest in. We ensure that they are aware of our objectives and policies and we hold them to account if they do not follow them. We have delegated to BAPFIM, Hermes EOS (our proxy voting adviser) and our other investment managers the exercise of rights (including voting rights) and engagement activities in respect of the Scheme’s investments. As part of this, we expect BAPFIM to have regard to the voting and engagement policies in our SIP. This also applies where BAPFIM is selecting, appointing and monitoring external managers on the Trustee’s behalf. We also expect BAPFIM and any external fund managers to take account of Responsible Investment and ESG, including climate-related risks, as financially material considerations.

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What is the Trustee’s investment policy for the Defined Contribution (DC) Section of the Scheme and how was it implemented over the Scheme year?

As part of our governance framework, the Trustee has appointed a market leading investment adviser, Aon, and their role includes making recommendations to us on the Scheme’s DC investment strategy.

They are also involved in the review process to ensure the Scheme meets with our principles and policies as contained in the SIP.

Alongside the DB Section, we are considering the impact on climate and broader areas of responsible investment for the DC Section and expect to confirm our strategy in the early part of 2022.

For the DC Section of the Scheme, the investments are made, via a fund platform operated by Standard Life, through to external investment managers who are included on that platform. The Trustee has appointed a market leading investment adviser, Aon, who keeps the Trustee abreast of everything that is happening to your investments. They also bring new propositions to the table for the Trustee to consider, which may involve negotiating with Standard Life to include new or additional funds on their fund platform.

DC pension investments are different to DB pension investments and the Trustee is responsible for providing suitable investment options to help your investments grow.

The Trustee has selected a range of suitable funds for you to invest in. Each Section features a ‘default fund’ for those of our members who do not wish to make any investment decisions or seek independent investment advice. The default funds are ‘Lifestyle Investment Profiles’ which automatically invest on your behalf into a range of equity funds in the initial years and systematically switches into a more diversified mix of bonds and equities as you approach retirement. The majority of members are invested in the default funds and a significant proportion of the Trustee’s DC governance work is therefore spent analysing the performance and make up of these funds. For those members who wish to choose their own investment funds for their retirement savings, there is also a range of other suitable funds for them to choose from.

Risk adjusted returns are important factors to consider and we reduce risk by diversifying, or offering alternative investments, that react differently to each other under various economic circumstances. We also manage risk further, in the default fund, by switching some of the higher return and higher risk investments into safer investments with a lower but more consistent return as you approach retirement.

This is because at this stage of your life, your pension pot would usually be approaching its peak value, with an imperative to protect the pot from large falls in markets such as those we witnessed in March and April 2020 due to the COVID-19 pandemic.

The most important piece of work undertaken by the Trustee on your behalf during 2020 was the triennial review of the DC pension arrangements, supported by Aon. Although we continually monitor your investments, we have an obligation to perform an in-depth, detailed review with our advisers every three years to confirm that everything remains appropriate and to consider if there is any way we can improve on what you already have. The Trustee is continuing the actions arising from this review by monitoring the potential merits of introducing alternative classes (types) of investments.

Stewardship of investments for the Defined Benefit (DB) Section of the Scheme

The day to day management of the Scheme’s DB investments is carried out by our own in-house investment manager, BAE Systems Pension Funds Investment Management Limited (BAPFIM). BAPFIM is owned by our sponsor, BAE Systems plc. BAPFIM also manages external investment manager relationships on behalf of the Trustee. The Trustee, through BAPFIM, assesses the delivery of effective engagement by its fund managers and looks to hold them to account for effective delivery of engagement with assets in which they invest.

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© 2021 BAE Systems. All Rights Reserved 4 The Trustee also delegates stewardship matters to BAPFIM, although some external investment

managers do vote on behalf of the Trustee. Where this occurs we make sure that their policies are consistent with our own. BAPFIM also use the services of Federated Hermes EOS with the stewardship activities for some of the assets.

Details of the stewardship activity during the year is shown below. This DB section of the table details the votes made by external fund managers on behalf of the Trustee. A more detailed summary of the external investment manager stewardship policies and any proxy voting advisers that they use can be found in the Appendix to this Implementation Statement at: baesystems.com/disclosableinformation

Stewardship of investments for the Defined Contribution (DC) Section of the Scheme The day to day management of the DC investments is delegated to external investment managers.

As we invest in pooled funds (pooled funds are funds in a portfolio from many individual investors that are combined together for the purposes of investment), the Trustee’s ability to control stewardship activities is constrained and is therefore effected by choosing underlying investment managers with similar investment policies to us.

The DC section of the table below focuses on the voting actions of BlackRock and Aberdeen Standard Investments who manage the vast majority (c 96%) of the Scheme’s DC assets. A more detailed summary on all of the DC investment managers and any proxy voting advisers that they use can be found in the Appendix to this Implementation Statement at: baesystems.com/disclosableinformation

DB and DC voting data (principal Fund Managers)

Voting Activities BlackRock DB Aberdeen Standard

Investments BlackRock DC

% of resolutions voted 100% 97.2% 94.5%

% voted with management 93.0% 92.4% 94%

% voted against management 6.2% 5.5% 6%

% abstained from voting 0.9% 2.1% 1%

% against proxy advice 0.5% 5.7% N/A

The most significant votes made on your behalf fall into the following three categories;

• Remuneration: failing to link pay to appropriate performance.

• Governance issues: preserving shareholders’ rights.

• Environmental Issues: not taking sufficient account how environmental changes may affect the business.

Within both our DB and DC portfolios, we also carry out stewardship activities with our Private Market, Bond and Property investments to ensure that all of our investments are managed in our members’

interests. A summary of the stewardship activities in these areas can be found by visiting the website above.

Conclusion on compliance with the SIPs

BAPFIM as our principal investment manager for the DB Section of the Scheme is responsible for making sure that the assets they and their external managers invest in are done so in line with our policies, the IPID and our Statement of Investment Principles.

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For the DC Section of the Scheme, Aon advise and support the Trustee in making sure that our policies and the Statement of Investment Principles are appropriate, up to date and met in the DC Section of the Scheme.

They provide regular feedback to the Trustee allowing us to review how our investments have met the policies detailed in the SIPs during the Scheme year. Further detail on our SIP policies, and on how they have been met during the Scheme year, is set out above.

The Trustee is pleased to share the first Implementation Statement for the Scheme which confirms that, in the opinion of the Trustee, the Scheme has followed the investment policies set out in the SIPs during the year.

Signed on behalf of the Trustee, BAE Systems Executive Pension Funds Trustees Limited

Signature redacted Andrew Gallagher

Chair of the Trustee of the BAE Systems Executive Pension Scheme

References

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