BASF UK GROUP PENSION SCHEME (the “Scheme”) DC GOVERNANCE STATEMENT – YEAR ENDED 31 DECEMBER 2019

1. Introduction

1.1 This statement describes how the Trustee has governed the DC Section of the Scheme and the Additional Voluntary Contribution (AVC) arrangements during the year and, in particular, the steps the Trustee has taken during the year to improve the likelihood of members experiencing a good outcome for life after work.

1.2 The Occupational Pension Schemes (Scheme Administration) Regulations 1996 require the Trustee to include an annual statement regarding governance in the annual report. This statement covers the period from 1 January 2019 to 31 December 2019.

1.3 The Trustee Board delegates certain matters relating to the DC Section to its DC Committee which is chaired by the Chair of the Trustee Board. The Trustee Board has agreed appropriate terms of reference for the DC Committee, which meets at least three times per year to consider matters relating to the DC Section. The DC Committee reports after each DC Committee meeting to the Trustee Board.

1.4 The DC Committee is supported by an independent DC investment adviser, who also covers wider DC matters and governance, and attends meetings of the DC Committee. The Trustee's legal adviser and representatives of the Scheme administrator also provide support and attend meetings of the Trustee Board and / or the DC Committee when required.

1.5 Day to day support to the DC Committee is further provided by the principal employer’s in-house pensions team.

1.6 The DC Committee also meets with the DC Section’s investment managers and the investment platform provider.

1.7 The statement covers four principal areas:

1. Investment, with focus on the Scheme’s default investment arrangements.

2. Internal controls, with focus on the processing of core financial transactions.

3. Value, including details of the charges and transaction costs deducted from members’ funds.

4. The knowledge and resources available to the Trustee, including how the Trustee maintained the statutory levels of knowledge and understanding to govern the Scheme and how these help the Trustee to ensure that the Scheme is governed effectively.

2. Investment Arrangements

2.1 A copy of the Scheme’s latest Statement of Investment Principles (SIP), prepared in accordance with regulation 2A of the Occupational Pension Schemes (Investment) Regulations 2005 is attached. This covers the Trustee’s aims and objectives in relation to the investment strategy, including the default investment arrangement. It also contains policies in relation to matters such as risk, diversification and responsible investment. The SIP details why the Trustee believes the default investment arrangement to be designed in members’ best interests.

Default Arrangement

2.2 The default investment arrangement during the year covered by this statement was the Moderate Flexible Income LifePlan. This is a lifestyle strategy designed to help members planning to withdraw their benefits in a flexible way, typically through staying invested in retirement and drawing down on their savings over time (at the current time, this needs to be outside of the Scheme).

2.3 The default Moderate Flexible Income LifePlan invests in the Moderate Fund (a blended fund that invests c50% in global equities and c50% in diversified growth funds) until a member is 5 years away from their chosen Target Pension Date. The investments are then gradually switched each quarter so that at the point of retirement the member’s investments are invested in a multi-asset “Cautious” Fund which holds a range of growth and defensive assets, and a pooled Sterling Liquidity Fund which holds cash and related money market investments.

2.4 There were no changes to the default investment arrangement during the year.

2.5 As reported in last year’s Chair’s Statement, a detailed strategic review of the default investment arrangement was completed in 2017. As a consequence of the review, a number of changes were made to the default investment arrangement in 2017 and early 2018, as detailed in last year’s Statement. The Trustee Board will be carrying out its triennial review of the Scheme’s overall DC investment strategy, with a particular focus on the default arrangement, in 2020 and will report on this review in next year’s Chair’s Statement.

Other Investment Governance activity in 2019

2.5 At the DC Committee meeting held on 8 March 2019, a review of the Scheme’s FreePlan (Self-select) funds was carried out in conjunction with the DC Investment adviser. This review included consideration of:

– Member demand for FreePlan funds, including feedback sourced at face-to-face member sessions and through contact with the in-house team

– Market trends and emerging practice on the size of self-select fund ranges

– New options available in the market.

The conclusion was at that time that no changes to the FreePlan range were required, on the basis that the existing range provides a manageable number of funds across the risk / return spectrum, allowing members to tailor their strategy to meet their objectives. The DC Committee will continue to conduct reviews of the range from time to time.

2.6 Whilst there have been no changes to the Scheme’s overall investment strategy or policies, in 2019 the Trustee reviewed and updated the SIP in order to provide further details and disclosures regarding how the Trustee takes into account financially material considerations over the time horizon of the Scheme, including environmental, social and corporate governance (ESG) issues, and specifically climate change. The details of the Trustee’s policies on investment stewardship and the exercise of voting rights were also reviewed and updated. A copy of the SIP is attached to this statement.

2.7 Over the year to 31 December 2019, performance and risk-based reviews were undertaken on a quarterly basis. These reviews incorporate independent quarterly reports from the DC adviser. The reports provide detailed analysis of the performance of the Scheme’s investments against benchmarks, target performance levels and peer groups, as well as risk measures (for example, the volatility of returns). The DC Committee discusses the reports at each DC Committee meeting.

3. Internal Controls and Core Financial Transactions

3.1 To ensure that the Scheme is being run as effectively as possible, the Trustee regularly reviews third party providers. As a result of such a review, in 2019 the Trustee appointed a new Scheme administrator, moving from Willis Towers Watson to Buck. This change was effective from 4 November 2019.

3.2 The project to change the Scheme’s third-party administrator was undertaken with careful planning to ensure that “business as usual” processing of core financial transactions remained unaffected. Muse Advisory were appointed as an independent provider to assist with project management. The project timeline ran from April to December 2019. During this period, the Scheme held 10 steering meetings, at which 10 “tollgates” were approved, covering 33 key project milestones. In addition, regular checkpoint calls were held to ensure effective communication between relevant stakeholders and to mitigate risks.

3.3 The requirements of regulation 24 of the Regulations have been met and core financial transactions have been processed promptly and accurately by:

Having in place service level agreements (SLAs) with the third-party administrator which include target timescales for processing core financial functions relating to contribution handling, quoting, switching and paying benefits. The target timescales are all well within applicable statutory timescales. The SLAs are monitored on a quarterly basis by the Trustee Board, via the

Administration & Communications Committee and the in-house team. Over the nine months to 30 September 2019 (representing quarterly reporting from Willis Towers Watson prior to the change of administrator), the average percentage level of SLAs achieved for the Scheme stood at 90.3%. The Administration & Communications Committee takes a proactive approach to questioning the administrator about their service level reports.

Arranging for ah-hoc testing of administration processes. For example, the Trustee has requested that the Scheme auditor tests how lifestyle de-risking switches are checked for accuracy and timeliness by the Scheme’s administrator.

Maintaining close working links between the in-house Human Resource, Payroll and Pension teams, along with the administrator.

Ensuring that detailed disaster recovery plans are in place with the administrator, other relevant third parties, and within the sponsoring employer.

Ensuring that all third-party providers share their data security and cyber risk policies with the Trustee. These policies are reviewed, and the parties are questioned on any areas requiring clarity.

Maintaining and monitoring a risk register which includes risks in relation to core financial transactions, along with details of mitigation strategies adopted by the Trustee.

Appointing a professional firm to undertake an annual audit.

The Trustee receives the administrator’s assurance report on internal controls. For the Scheme year, the report received for Willis Towers Watson was for the period 1 October 2017 to 30 September 2018 and the Buck report received was for the period 1 May 2017 to 30 April 2018. In both cases, the Independent Service Auditor’s opinion was that, in all material aspects, the administrator’s controls were suitably designed and those tested operated effectively. The Buck assurance report covering the year to 30 April 2019 has been delayed due to the separation of Buck from Conduent mid 2019 – a report is expected by 30 June 2020. The internal controls audit report is reviewed by the Administration & Communications Committee.

3.4 In addition, the Trustee has oversight of the core financial transactions of the “bundled” AVC arrangements with Utmost Life (previously Equitable Life) and Prudential. These transactions are limited given the small number of members involved and the closed nature of the arrangements.

3.5 In the last Scheme year there have been no material administration service issues which need to be reported here by the Trustee. The Trustee is confident that the processes and controls in place with the administrator are robust and will ensure that the financial transactions which are important to members are dealt with properly.

4. Value, Charges and Transaction Costs

4.1 The range of the levels of charges and transaction costs applicable to the default arrangements during the period are detailed in this section.

Charges

4.2 All of the funds available to Scheme members have total expense ratios that fall below the charge cap of 0.75% p.a. Note that a "total expense ratio" reflects the total costs associated with managing and operating an investment fund, including investment management fees, fund legal fees, investment platform fees and any other expenses.

4.3 The table shows the total expense ratios on the funds used in the default investment arrangement as at 31 December 2019:

Fund

Total Expense Ratio % p.a.

Moderate 0.485

Cautious 0.364

Sterling Liquidity 0.138 Source: Scottish Widows.

4.4 The charges applicable to the Scheme's other investment funds as at 31 December 2019 are:

Fund

Total Expense Ratio % p.a.

Adventurous 0.408

Pre-Retirement Annuity 0.142

Ethical 0.277

Islamic 0.377 Source: Scottish Widows.

Transaction Costs

4.5 When buying and selling investments, transaction costs can be incurred. Such costs are not explicitly deducted from a fund but are captured in its performance (in other words, the higher the transaction costs, the lower the returns produced by a fund). The Financial Conduct Authority has provided guidance (in Policy Statement 17/20) to investment managers regarding calculations and disclosures of transaction costs. Due to the way in which transaction costs are required to be calculated, they can be negative or positive in nature; a negative figure is effectively a gain from trading activity, whilst a positive figure is effectively a cost from trading activity.

4.6 In the following table, we set out the transaction costs incurred in the Scheme’s default investment arrangement and other investment funds over the year to 31 December 2019.

Fund Transaction Costs %

Moderate 0.146

Cautious 0.080

Sterling Liquidity -0.022

Adventurous -0.011

Pre-Retirement Annuity 0.007

Ethical 0.008

Islamic 0.047 Source: Scottish Widows. Note that for funds with more than one underlying sub-fund component, transaction cost calculations are based on blended fund-level holdings at 31 December 2019. Impact of Costs and Charges

4.7 Using the charges and transaction cost data provided by Scottish Widows and in accordance with Regulation 23(1)(ca) of the Administration Regulations, the Trustee has prepared an illustration detailing the impact of the costs and charges typically paid by a member of the Scheme on their retirement savings pot. The statutory guidance has been considered when providing these examples.

4.8 Regulations require the Trustee to provide a disclosure of costs and charges for the following funds: Default option (and / or most popular) Lowest cost fund Most expensive fund The fund with the lowest assumed future growth* The fund with the highest assumed future growth* *according to assumptions made in the Scheme’s Statutory Money Purchase Illustrations (SMPI).

4.9 The Moderate Flexible Income LifePlan is the default investment arrangement and the most popular investment choice. The Moderate Fund is the most expensive fund. The Sterling Liquidity Fund is both the lowest cost fund and has the lowest assumed future growth. The fund with the highest assumed future growth is the Ethical Fund.

4.10 The illustrations have taken into account the following elements: Typical Scheme savings pot size Contribution levels Real terms investment returns gross of costs and charges Adjustment for the effect of costs and charges Time period of investment.

4.11 To show the impact across a typical working lifetime, the Trustee has based this on a member joining the Scheme as a graduate at age 21, using a starting pot of £0 and a salary based on the 2018 graduate employee average (for consistency with illustrations shown in the 2018 statement) increased with inflation. It assumes an overall contribution level in line with the employer’s current default contribution structure (note that this default contribution level increased during the period, and as such the illustration is not directly comparable to that shown in last year’s statement).

Year end

Default and Most Popular investment option

Most Expensive Fund Cheapest Fund and Fund with the Lowest Assumed

Future Growth

Fund with the Highest Assumed Future Growth

Moderate Flexible Income LifePlan Moderate Sterling Liquidity Ethical

Pot size with no charges incurred

(£)

Pot size with charges incurred

(£)

Pot size with no charges incurred

(£)

Pot size with charges incurred

(£)

Pot size with charges incurred

(£)

Pot size with charges incurred

(£)

Pot size with no charges incurred

(£)

Pot size with charges incurred

(£) 0 (start value) 0 0 0 0 0 0 0 0

1 4,408 4,380 4,408 4,380 4,330 4,324 4,410 4,397

2 8,990 8,905 8,990 8,905 8,660 8,642 8,996 8,957

3 13,751 13,578 13,751 13,578 12,990 12,955 13,765 13,686

4 18,697 18,402 18,697 18,402 17,322 17,262 18,722 18,588

5 23,834 23,382 23,834 23,382 21,654 21,566 23,874 23,668

6 29,168 28,522 29,168 28,522 25,988 25,865 29,226 28,932

7 34,705 33,825 34,705 33,825 30,325 30,161 34,787 34,385

8 40,452 39,297 40,452 39,297 34,664 34,454 40,561 40,032

9 46,415 44,941 46,415 44,941 39,006 38,745 46,556 45,880

10 52,601 50,761 52,601 50,761 43,351 43,034 52,779 51,935

11 59,017 56,763 59,017 56,763 47,701 47,321 59,238 58,202

12 65,670 62,951 65,670 62,951 52,055 51,607 65,939 64,687

13 72,569 69,329 72,569 69,329 56,413 55,893 72,892 71,398

14 79,719 75,903 79,719 75,903 60,777 60,179 80,103 78,340

15 87,130 82,678 87,130 82,678 65,146 64,465 87,581 85,521

16 94,810 89,658 94,810 89,658 69,522 68,752 95,335 92,948

17 102,767 96,849 102,767 96,849 73,904 73,041 103,374 100,627

18 111,009 104,256 111,009 104,256 78,293 77,332 111,706 108,566

19 119,546 111,885 119,546 111,885 82,689 81,625 120,341 116,773

20 128,387 119,741 128,387 119,741 87,093 85,921 129,288 125,255

21 137,541 127,829 137,541 127,829 91,506 90,220 138,558 134,020

22 147,017 136,157 147,017 136,157 95,927 94,524 148,160 143,077

23 156,827 144,729 156,827 144,729 100,357 98,831 158,106 152,434

24 166,980 153,553 166,980 153,553 104,797 103,144 168,406 162,100

25 177,487 162,633 177,487 162,633 109,247 107,462 179,071 172,084

26 188,359 171,978 188,359 171,978 113,707 111,786 190,113 182,394

27 199,607 181,592 199,607 181,592 118,179 116,116 201,543 193,041

Year end

Default and Most Popular investment option

Most Expensive Fund Cheapest Fund and Fund with the Lowest Assumed

Future Growth

Fund with the Highest Assumed Future Growth

Moderate Flexible Income LifePlan Moderate Sterling Liquidity Ethical

Pot size with no charges incurred

(£)

Pot size with charges incurred

(£)

Pot size with no charges incurred

(£)

Pot size with charges incurred

(£)

Pot size with charges incurred

(£)

Pot size with charges incurred

(£)

Pot size with no charges incurred

(£)

Pot size with charges incurred

(£)

28 211,243 191,484 211,243 191,484 122,661 120,453 213,375 204,034

29 223,279 201,660 223,279 201,660 127,156 124,797 225,620 215,382

30 235,727 212,126 235,727 212,126 131,663 129,149 238,292 227,097

31 248,599 222,891 248,599 222,891 136,182 133,509 251,404 239,188

32 261,910 233,962 261,910 233,962 140,715 137,878 264,969 251,667

33 275,672 245,346 275,672 245,346 145,261 142,256 279,003 264,545

34 289,899 257,051 289,899 257,051 149,821 146,643 293,520 277,833

35 304,606 269,085 304,606 269,085 154,396 151,041 308,534 291,542

36 319,807 281,457 319,807 281,457 158,986 155,450 324,062 305,685

37 335,517 294,174 335,517 294,174 163,591 159,870 340,120 320,275

38 351,753 307,244 351,753 307,244 168,213 164,301 356,724 335,323

39 368,529 320,678 368,529 320,678 172,850 168,745 373,891 350,844

40 384,928 333,799 385,863 334,484 177,504 173,201 391,639 366,850

41 400,856 346,545 403,772 348,670 182,176 177,670 409,985 383,355

42 415,144 358,039 422,273 363,247 186,865 182,153 428,950 400,374

43 427,604 368,151 441,384 378,224 191,573 186,649 448,551 417,921

44 438,631 377,186 461,125 393,610 196,299 191,161 468,808 436,012 Notes: i. Projected values are shown in today’s terms, and do not need to be reduced further for the effect of future inflation.

ii. The starting pot size is assumed to be £0.

iii. Contributions in line with the employer’s default contribution rate are assumed to be paid.

iv. Values are estimates and are not guaranteed.

v. The projected growth rates use the same underlying assumptions as the SMPI assumptions plus any transaction costs.

vi. Salaries are expected to increase in line with inflation + 1% p.a.

Value for Members

4.12 The Trustee has assessed the extent to which the charges and transaction costs set out above represent good value for members. The Trustee concluded in its meeting on 5 March 2020, following receipt of a report from its independent DC adviser dated March 2020, that the Scheme offers good value for money relative to peers including other pension schemes of a similar size and nature (using data from Mercer, the Pensions Regulator and other public surveys) and relative to options available to the Trustee with alternative investment managers and providers.

4.13 The Trustee recognises that a range of pension scheme vehicles (for example, master trusts) is available in the market. The Scheme has benefit features in the Scheme rules, which currently preclude some of these options being viable, but the Trustee remains very open to considering a wide range of design models in future, with value for members in mind.

4.14 The Trustee conducts an annual Value for Money assessment in order to arrive at this conclusion, incorporating consideration of:

Total expense ratio costs borne by members Transaction costs Net of cost performance Investment risk measures Contribution rates Governance arrangements Fund range available to members Investment manager and platform provider ratings Member feedback Additional services available to members, including at retirement options, services and

member tools.

4.15 A proportionate approach was adopted for assessing the closed legacy AVC arrangements on the basis that the AVC holdings are relatively modest. The assessment in this respect concluded that the arrangement represented reasonable value for members. However, a further review is underway to consider whether consolidation of AVC funds might deliver better value in the future. This review is due to conclude in 2020.

5. Trustee Knowledge and Understanding

5.1 The requirement under the Pensions Act 2004 (requirement for knowledge and understanding) has been met during the Scheme year by the Trustee as a body in dealing with the whole Scheme (not just the DC Section).

5.2 The Trustee has put in place arrangements for ensuring its Trustee Directors take personal responsibility for keeping up to date with relevant developments and each quarter considers training requirements. Training logs are maintained for each Director and training for the full board and its various Committees is provided regularly during meetings. Training plans are bespoke and tailored to issues that arise on the Trustee’s business plan.

5.3 The Trustee has adopted a robust training programme for newly appointed Trustee Directors. For the Scheme, upon appointment, a Trustee Director is required to undertake an induction process. This includes a training session with the in-house pensions team and completion of the Pensions Regulator’s online toolkit within six months of taking up office.

5.4 During this scheme year, Gordon Thomson and Richard Portman were appointed as Trustee Directors. Gordon and Richard undertook the required induction training on 21 June and 18 June 2019 respectively and completed all modules of the Trustee Toolkit by 6 September 2019 and 4 March 2020 respectively.

5.5 During the year, the training topics considered by the DC Committee included: ESG risks, opportunities and investment stewardship, and the policies of the Scheme’s

investment managers in this respect. For this training event, held in August 2019, the Trustee held a full day session outside of its regular meeting schedule. During the session the Trustee met with the Scheme’s investment managers to discuss how they integrate consideration of

for BESTRUSTEES LIMITED

ESG issues, including climate change, within their investment processes. The Trustee also discussed how the investment managers exercise voting rights, where relevant.

Investment benchmarks and targets and behavioural finance considerations when reviewing past performance.

Changes to disclosures required in the SIP.

New requirements for trustees to set strategic objectives for their investment advisers.

5.6 The Trustee also periodically conducts assessments of its effectiveness as a Trustee Board by seeking feedback from each Trustee Director. These assessments include candid feedback on the Trustee’s operating framework and performance generally. The results are collated and discussed openly at Trustee meetings. This was last carried out in December 2017 and will be carried out triennially.

5.7 The Trustee is conversant with, and has demonstrated a working knowledge of, the Trust Deed and Rules by carrying out a training session in July 2018, in which case studies were completed. If there are any ambiguities over the interpretation of the Trust Deed and Rules, legal advice is sought from the Scheme’s legal advisers. A new consolidated Trust Deed and Rules was signed in June 2019.

5.8 The Trustee is conversant with, and has a working knowledge of, the Statement of Investment Principles, including the requirements that will apply from October 2020 in relation to its policies in relation to how the investments are managed.

5.9 In addition, the Trustee receives advice from professional advisers and the relevant skills and experience of those advisers is a key criterion when evaluating adviser performance or selecting new advisers. The DC Committee reviewed the DC adviser during 2019 and discussed the results of this review at the 16 July 2019 meeting (no changes were made to the DC adviser).

5.10 All the Trustee Directors in office in 2019 have now completed the Pension Regulator’s Trustee Toolkit. In addition, Directors are asked to complete the Pensions Management Institute Certificate in Trusteeship and half of the Trustee Directors have achieved this to date.

5.11 Taking account of actions taken individually and as a trustee body, and the professional advice available to them, the Trustee Directors consider they are enabled properly to exercise their function as a Trustee.

6. Trustee Statement of DC Governance

6.1 The Trustee undertakes ongoing assessments of the Scheme against the DC Code of Practice and related guidance and has implemented a structured plan for governance in this respect.

6.2 The Trustee considers that its systems, processes and controls across key governance functions are consistent with those set out in The Pensions Regulator’s Code of Practice.

Signed for and on behalf of BASF Pensions Trustee Limited

Date ……26/03/2020…………………...

By …………………………………………………………………… Chair of Trustee