THE GROUP PENSION SCHEME

Transcription

1 THE GROUP PENSION SCHEME Defined Contribution (DC) Investment Guide MY PENSION

2 INTRODUCTION As a member of the DC section of the Electrocomponents Group pension scheme, one of your main decisions will be, Where should I invest my pot of money? This guide is designed to help you understand the factors that should be considered in reaching this decision. It is divided into five sections. Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Your investment strategy Understanding risk Characteristics of the different asset classes Available funds My Pension Projector Investment Charges Where can I get more information on the Scheme investments? As pensions can appear complicated at first, we are keen to help you understand and take full advantage of our pension scheme and maximise your investments for the future. We offer a special pension helpline where members and prospective members can call to ask questions about how the pension scheme works, or to help with investment decisions. If you would like to discuss the contents of this guide, please telephone the helpline on The continuing suitability and performance of the investment funds and the investment managers is monitored on a quarterly basis by the Trustees, with advice from their investment consultant, Mercer. The Trustees may decide, from time to time, to replace any of the funds or the investment managers. In the event that this does occur, the Trustees will write to you with full details. This version of the investment guide was first published in June The guide is for information only and nothing in it should be construed as financial advice or a recommendation by the Trustees. You should ensure that your investment funds are appropriate for your own needs. 2 Investment Guide (DC)

3 MY PENSION SECTION 1 YOUR INVESTMENT STRATEGY How you invest your Pension Investment Account is very important as your decision will have a direct effect on your income (including any cash lump sum) when you retire. Under the Electrocomponents Group Pension Scheme, there are three different approaches for investing your pension account: Option 1 Default Investment Strategy Option 2 Risk Graded Option 3 Freestyle These strategies target differing levels of growth and are subject to differing levels of risk. Under each strategy, your pension account is allocated for you in accordance with the target growth levels. The Scheme offers three different strategies (See section 4.) Alternatively, you can decide to select your own investments to fit with a savings strategy that you devise. If you wish to take this option, you can select any number of the funds on offer and invest part of your Pension Investment Account in each one. An overview of each available fund can be found in section 4. You can also find more detailed information on each fund in the fund information sheets, available on Past performance of funds in which contributions are invested is no guarantee of future returns. The value of your investment can fall as well as rise and you may get back less than you had originally invested. Investment Guide (DC) 3

4 SECTION 2 UNDERSTANDING RISK Making an investment choice involves choosing a fund or funds that match your attitude to the risks and rewards of investing. As you may know, being an investor usually means taking a certain amount of risk. This can sound quite nervewracking if you re new to investing, so it might help to think of risk as an essential element in everything we do from crossing a road to catching a plane. Weighing up risks is something we do a lot of, and we all know that risks can come with rewards. What this means for investments is that you can think of risk as an opportunity it gives you a chance to increase the growth potential of your pension account. There is a simple relationship between risk and reward (return) in investment terms. Generally, the lower the potential risk, the lower the potential rewards. The higher the potential risk, the higher the potential rewards. There are two main types of risk that should be taken into account when considering investments: VOLATILITY Volatility is a word that describes the chances that the value of your investments may go up as well as down. The risk is that the value of your Pension Investment Account may change, for example fall in value, quite suddenly. This is very important in the years near your selected retirement age, as there may not be enough time for the value of your investments to recover from any losses suffered. Equities are considered among the most volatile asset classes, but are expected to give higher returns than other asset classes over the long term. INFLATION If the return on your investments is less than the rate of inflation, the real value of your investment reduces. This happens because although the monetary amount of your investment may increase, the general price of items you would buy with the money would be expected to increase at a faster rate. If, for example, a car costs 5,000 today, at 3% per annum inflation, the cost of the same car in 10 years time may be 6,720 If you invest 5,000 today and achieve an investment return of 2% per annum, the value of your investment in 10 years time will be 6,100. So, in this example, you could afford to buy the car today, but you would not be able to afford the same car in 10 years time. Index linked bonds are considered the best asset class for protecting against inflation risk because they can be designed to give a return linked to inflation. However, inflation linked returns are likely to be lower than the potential return on equities over a long period of time. This means that you may have to save more, or accept a lower fund value at retirement. UK Equities usually provide a degree of (UK) inflation protection over the longer term. 4 Investment Guide (DC)

5 MY PENSION SECTION 2 UNDERSTANDING RISK Performance of UK equities and cash over the last 24 years Return UK equities Cash 1 0 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Date Date Please remember that past performance is not a guide to future performance. Jan-10 Jan-12 Jan-14 There is a simple relationship between risk and reward in investment terms. Generally, the lower the potential risk, the lower the potential rewards. The higher the potential risk, the higher the potential rewards. Investment Guide (DC) 5

6 SECTION 3 CHARACTERISTICS OF THE DIFFERENT ASSET CLASSES There are many different asset classes available to investors - the main three categories are equities, bonds and cash. Other asset classes include property, currency, commodities etc, but these fall beyond the scope of this guide, as members do not have the option to access these asset classes directly (the Diversified Fund may include some of these assets from time to time). The descriptions below aim to help you understand the main characteristics of each type of asset class. These tables only describe the general characteristics of these asset types. If you are in doubt about how to invest your contributions, you are recommended to take independent financial advice or call the dedicated pensions helpline on EQUITIES Made up of shares in companies traded on stock markets in the UK or overseas. Affected by rises and falls in their respective markets - their value can go down or up. Expected to experience the highest short-term volatility when compared with gilts or cash. Equity funds generally have higher volatility, but better long-term return expectations BONDS AND GILTS Made up of debt issued by the companies (corporate bonds) or UK government (gilts) where the government or company borrows an amount of money for a fixed period. Pay interest on the amount borrowed and repay the capital at the end of the fixed period. Interest can be a fixed rate (fixed interest) or linked to the rate of inflation (index-linked). Rise and fall in value over their lifetime, but returns are not expected to be as volatile as equities. Bond funds generally have lower volatility than equity funds, and lower expected returns CASH Expected to provide lower returns over the long term than equities or gilts/bonds. Aims to ensure that your capital will not decrease in absolute terms, although inflation may reduce the real value of the investment. Helps to protect the value of any tax-free cash amount from falls in value just before your retirement. Cash funds provide an element of protection for your capital 6 Investment Guide (DC)

7 MY PENSION There are many different asset classes available to investors - the main three categories are equities, bonds and cash. Investment Guide (DC) 7

8 SECTION 4 AVAILABLE FUNDS INVESTMENT STRATEGIES Making an investment choice involves choosing a fund or funds that match your attitude to the risks and rewards of investing. If you know how you feel about investment risks but not how that might fit with your fund choices, then you might find it helpful to choose one of the Scheme s three different investment strategies. EPS DEFAULT STRATEGY The Default Investment Strategy is set by the Pension Scheme Trustees, with the help of their investment advisors and is designed to be suitable for members who do not want to make their own fund selection The EPS Default Investment Strategy aims to achieve long-term growth in a risk aware manner and ultimately aims to create a smoother journey for your investments as you head towards retirement. There is no guarantee that this objective will be met. It invests in a range of different investment funds with different levels of risk that the Trustees believe are appropriate to your age and term to retirement. Currently, the EPS Default Investment Strategy consists of three phases and as you approach retirement (Phase Three) your assets will be switched gradually to funds which aim to provide a better match to benefits you might anticipate to be paid during your retirement. If you are Automatically Enrolled into the Electrocomponents Group Pension Scheme, or do not actively select one or more of the funds available, both your and the Company s contributions will be invested in the EPS Default Investment Strategy. EPS MEDIUM POTENTIAL GROWTH (MEDIUM RISK) This strategy targets a medium potential growth rate with a medium level of risk (relative to the other strategies that have been developed). To do this, the strategy invests in a range of assets with different levels of risk. Whilst the aim is to produce a medium level of return in the longer term, there is still some risk of shorter term losses. Over time, the expectation is that the gains will more than outweigh the losses but there is no guarantee that this can be achieved. People choosing this strategy are more likely to be investing for the medium to long term but are unwilling to accept the level of risk associated with the higher risk strategy. EPS LOWER POTENTIAL GROWTH (LOWER RISK) This strategy targets a cautious level of growth (but with a lower level of risk relative to the other strategies that have been developed). To do this, the strategy invests in a higher proportion of assets which have a lower level of risk. The strategy aims to provide a steady, but more cautious level of growth over the longer term. People choosing this strategy are more likely to be investing for the shorter term and requiring lower volatility of returns to their pension account. EPS MANAGED CASH This strategy aims to match the average return of similar cash funds without incurring excessive risk. In the longer term, it is expected that this strategy will produce a lower level of return than the other strategies but it aims to ensure that the pension account should not decrease in absolute terms, although inflation may reduce the real value of the investment. People choosing this strategy are more likely to be investing for the shorter term and unable or unwilling to ride out any short term falls in investment. 8 Investment Guide (DC)

9 MY PENSION Making an investment choice involves choosing a fund or funds to reflect your attitude to risk and reward. The underlying composition of each strategy is set by the Trustees having received investment advice. This will be reviewed on a regular basis to make sure the strategy meets its objectives. As at January 2014, the composition was as follows: FUND CASH (%) MANAGED BONDS (%) DIVERSIFIED (%) MANAGED EQUITY (%) EQUITY (%) EPS Higher Potential Growth (Higher Risk) EPS Medium Potential Growth (Medium Risk) EPS Lower Potential Growth (Lower Risk) 0% 0% 50% 25% 25% 10% 30% 50% 10% 0% 60% 10% 30% 0% 0% EPS Managed Cash 100% 0% 0% 0% 0% Investment Guide (DC) 9

10 SECTION 4 AVAILABLE FUNDS The Trustees of the Scheme offer six individual investment funds offering different levels of expected risk and return. You can decide to select your own investments to fit with a savings strategy that you devise. If you wish to take this option you can select any number of the 6 funds on offer and invest part of your Pension Investment Account in each one. You can find more detailed information (in terms of the actual underlying assets for each fund) in the fund information sheets available on User Name: electro_dc; Password: elc-skandia (Please note these funds are subject to change.) STANDARD FUNDS Passive funds (also known as trackers) Passive management removes the potential for performance ahead of or below the index. Pre Retirement Bond Fund Equity Fund Cash Fund MANAGED FUNDS Active funds Active management involves the expertise of a fund manager in order to achieve returns over and above average returns. Managed Bond Fund Managed Equity Fund Diversified Fund The following chart shows the relative risk and return of the various investment funds in which members of the Scheme can invest. High risk / return expectation Equity Managed Equity Diversified Pre Retirement Bond Managed Bond Low risk / return expectation Cash 10 Investment Guide (DC)

11 MY PENSION SECTION 4 AVAILABLE FUNDS PRE RETIREMENT BOND FUND This fund is commonly used by members approaching retirement to help protect the value of their pension pot as they approach retirement relative to the cost of purchasing a pension (also called an annuity). The Fund aims to provide diversified exposure to assets that reflect the investments underlying a typical traditional level annuity product. The Fund, however, cannot provide full protection against changes in annuity rates for individual members since these also depend upon a number of other factors. It consists of a mix of high quality corporate bonds and fixed interest government bonds (gilts). Gilts pay a fixed rate of interest and have the security of being issued and backed by the UK Government. which is designed to better match annuity prices. Gilts offer greater security than equities because they are backed by the UK Government. In addition, their price and therefore their value tends to be less volatile than equities. However, although gilt prices are less volatile than equities, their capital value is linked to interest rates by an inverse relationship and will fall when interest rates are rising and rise when interest rates fall. Generally, reduced risk means a lower expected return and fixed interest and index-linked gilt returns have historically been lower than equity returns over the long term. The current investment manager for the Fund is Legal and General Investment Management Limited, one of the largest investment managers in the UK, and a market leader in passive management The benchmark for the fund is a composite of UK Gilts and corporate bonds. THE EQUITY FUND The Equity Fund provides access to UK and overseas stocks and shares through passively managed funds that aim to match global equity market index returns. It has invested 60% in UK equities and 40% in overseas equities. The 40% is divided 14% in Europe (ex- UK) 14% in North America, 7% in Japan and 5% in Asia Pacific (ex-japan). Historically, equities have provided the highest returns over the long term (compared to bonds and cash), but have also been the most volatile and can be subject to periods of significant negative performance. The Fund invests in many different securities to spread risks over a number of holdings, and avoid having all eggs in one basket. Typically, the Fund will hold around over 2,500 different stocks and shares. The current investment manager for the Fund is Legal and General Investment Management Limited, one of the largest investment managers in the UK, and a market leader in passive management. The Fund aims to track the return of a composite benchmark, comprising 60% of the FTSE All Share Index, and 14% FTSE World North America Index, 14% FTSE World Europe (ex UK) Index, 7% FTSE World Japan Index and 5% FTSE World Asia Pacific (ex-japan) Index on a gross of fees basis over rolling three year periods. THE CASH FUND The Cash Fund aims to deliver competitive rates of return from cash deposits and other short-term investments. It aims to match the average return of similar cash funds without incurring excessive risk. The Cash Fund is likely to be of particular interest to members who want a cash lump sum on their retirement date and offers security of capital over the short term, rather than significant growth over the longer term. Cash is generally not considered a suitable investment for longer periods of investment (such as the whole of a working lifetime) because historically it has not kept pace with inflation. The Fund invests in several different securities to spread risks over a number of holdings, and avoid having all eggs in one basket. Typically, the Fund will hold around 15 different investments. The current investment manager for the Fund is Legal and General Investment Management Limited, one of the largest investment managers in the UK, and a market leader in passive management. The Fund aims to match the median return of similar cash funds as measured by the Russell/Mellon CAPS Pooled Pension Fund Survey (a universe of similar funds) on a gross of fees basis over rolling three year periods THE MANAGED BOND FUND The Managed Bond Fund is a combination of fixed interest government bonds (gilts) and corporate bonds and is managed on an active basis (i.e. aims to beat the market return). However, the Fund may at times under-perform the market return due to being actively managed. Gilts pay a fixed rate of interest and have the security of being issued and backed by the UK Government. Corporate bonds also typically pay a fixed rate of interest, but are issued by companies rather than governments which gives a greater level of risk. Investment Guide (DC) 11

12 SECTION 4 AVAILABLE FUNDS In turn, it is expected that investors will be compensated by an increased level of return. Bonds offer greater security than equities because their price and therefore their value tends to be less volatile. However, although bond prices are less volatile, their capital value is linked to interest rates by an inverse relationship and will fall when interest rates are rising and rise when interest rates fall. Generally, reduced risk means a lower expected return and gilt and corporate bond returns have historically been lower than equity returns over the long term. The Fund invests in several different securities to spread risks over a number of holdings, and avoid having all eggs in one basket. Typically, the Fund will hold around 200 different bonds. The current investment manager for the Fund is Legal and General Investment Management Limited, one of the largest investment managers in the UK, and a market leader in passive management. The Fund aims to outperform a composite benchmark comprising 50% FTSE A Government (All Stocks) Index and 50% iboxx Non-Gilt Index by 1.0% p.a. on a gross of fees basis over rolling three year periods. THE MANAGED EQUITY FUND The Managed Equity Fund provides access to UK and overseas stocks and shares, and is managed on an active basis (i.e. is aiming to beat the market return). However, the Fund may at times under-perform the market return due to being actively managed. The Managed Equity Fund has a benchmark geographic allocation, but has flexibility to alter weightings to different equity markets, depending on where the investment manager sees the best opportunities to generate return. Historically, equities have provided the highest returns over the long term (compared to bonds and cash), but have also been the most volatile and can be subject to periods of significant negative performance. The Fund invests in several different securities to spread risks over a number of holdings, and avoid having all eggs in one basket. Typically, the Fund will hold around 150 different stocks and shares. The current investment manager for this fund is MFS Investment Management which is majority owned by Sun Life Financial. MFS take a collaborative, research-intense approach to stock picking. The Fund aims to outperform the MSCI World Index over full market cycles on a gross of fees basis. THE DIVERSIFIED FUND The Diversified Fund invests in a variety of different asset classes including equities, bonds and cash and aims to provide a stable, positive return over the long term. The Fund is managed actively and is aiming to provide a return slightly lower than equities, but with a much lower volatility (or risk). This type of Fund is relatively new and so historical data for illustrative purposes is limited. The investment manager will be changing the asset mix regularly within the Fund in order to try and achieve the return objective. As the Fund is actively managed, it may under-perform at times. The current investment manager for the Fund is Standard Life Investments, a subsidiary of the Standard Life Assurance Company. Standard Life will invest across a range of diversified markets and asset classes, and furthermore aim to outperform within these markets in order to meet their performance objective. The Fund aims to outperform six month LIBOR (London Inter-bank Offer Rate) by 5% p.a. on a gross of fees basis over rolling three year periods. You should ensure that your investment funds are appropriate for your own needs. Past performance of funds in which Contributions are invested is no guarantee of future returns and the value of your investment can fall as well as rise. 12 Investment Guide (DC)

13 MY PENSION SECTION 5 MY PENSION PROJECTOR To help you to understand the potential risk and return of the investment options under the Scheme, the Trustees offer a modelling tool called My Pension Projector. This has been developed by the Trustees investment advisors, Mercer. In using My Pension Projector, the key questions you will need to ask yourself are: 1) How much income do I think I will need when I retire? 2) How much am I able and willing to contribute to my pension fund? 3) At what age would I like to retire? 4) What is my attitude to risk in respect of my pension fund investments? My Pension Projector can be found at: Before using My Pension Projector you should watch the video explaining how to use it, which is held on the pensions pages of the Company Intranet and read the notes and help page. If you still have questions after reading the guidance notes and watching the video, please telephone the helpline on HOW DOES MY PENSION PROJECTOR WORK? My Pension Projector allows you to see the potential impact on projected pension benefits under the Scheme of different investment options under the Scheme, different contribution levels and different target retirement ages. For each selection, My Pension Projector provides you with a chart showing the projection of Salary Replacement Level range for the ten years prior to your target retirement age and a table of best estimate outcomes. Your Salary Replacement Level is the ratio of your projected pension benefits from the Scheme to your projected salary just before you retire. Full instructions on how My Pension Projector works and what the results mean can be found by clicking on the help button in My Pension Projector. My Pension Projector only provides projections for pension benefits under the Scheme. No allowance is made for State benefits. UNDERLYING ASSUMPTIONS To estimate your projected pension at retirement, My Pension Projector uses a number of assumptions. These include: An assumption that at retirement the whole of your projected Pension Investment Account will be used to secure benefits in the form of pension and that no cash sum is taken. You stay in the Scheme until your target retirement age, and both you and your employer will continue to pay the contributions at the specified level. Full details of the assumptions are set out in My Pension Projector. It is important that you read and understand these before using My Pension Projector. The value of your investment may go up or down and you may not get back what you invested. Regular investing does not guarantee a profit or protect against a loss in declining market and past performance of funds is not a guide of future returns. IMPORTANT NOTES My Pension Projector is designed for educational and illustration purposes only and it is not intended to be considered as investment advice. It does not represent any promise or guarantee of the amount of pension benefit you will ultimately receive which will depend on how your investment grows, future contributions credited to your Pension Investment Account and the cost of buying a pension at the time you retire. The illustrative pension figures provided under My Pension Projector are only examples and are not guaranteed. They are not maximum and minimum amounts and you could get back more or less than shown. For example, your pension could be a lot less if you retire early. No-one can tell what your pension will be until you retire. It is recommended that you take advice when reviewing your pension arrangements. You can find an independent financial advisor (IFA) in your local area by searching under Find an IFA on the website Investment Guide (DC) 13

14 SECTION 6 INVESTMENT CHARGES The administration expenses of running the scheme are met by the Company, however members bear the majority of investment costs. The level of investment costs depends on your choice of fund and details of current costs can be downloaded from the Scheme website SECTION 7 WHERE CAN I GET MORE INFORMATION ON THE SCHEME INVESTMENTS? Further information on investments including recent performance can be found on the fund factsheets which are available via the Skandia website User Name: electro_dc; Password: elc-skandia 14 Investment Guide (DC)

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