Pensions Profile. Welcome to the 2009 edition of Pensions Profile, the annual newsletter for members of the Allen & Overy Pension Scheme.

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1 Pensions Profile Welcome to the 2009 edition of Pensions Profile, the annual newsletter for members of the Allen & Overy Pension Scheme. The Trustee wishes to keep you informed of changes that may affect your pension with Allen & Overy and to help you with your decisions on what choices you have and where you can obtain more information. New features in this issue... Defined Contribution investments under the microscope Your income in retirement Life after A&O... what happens to your pension? This year s budget new tax rules Early retirement don t miss your chance! September 2009

2 Defined Contribution investments under the microscope What is the role of the Trustee? The Trustee is not responsible for your personal investment strategy! What the Trustee does is take advice from its own investment adviser in order to be able to offer an appropriate range of investment options to help you pick the funds that are right for you. The Trustee puts a lot of effort into ensuring that plenty of information is available to you so that you can make an informed decision. It is very important that you read this information to ensure that you can manage your pension fund effectively. You can also find full details of your options by going to the Scheme website at Different needs have different strategies Investment is something that is very individual the funds you want to invest in depend on your personal circumstances and your attitude to risk. This is why the Trustee does not choose your investment strategy for you but instead makes a range of different funds available, including two Lifecycle options. Factors that affect your investment strategy will include: Your age - if you are quite young, you might be happy to take more risk because your fund has more time to bounce back from any short-term falls in market value. Your planned retirement date if your plan is for a late retirement your pension has more time to grow, so you might be comfortable with a higher level of risk (because your fund has more time to recover from any short-term falls in market value). Other pension savings you may have a pension from a previous employer or personal savings, but if your A&O pension is all you are relying on for your income in retirement you may prefer to invest it more conservatively. Your attitude to risk whether you are happy to take more risk in the hope of achieving higher returns, or whether you are quite conservative, you need to feel comfortable with the level of risk you are taking. The range of funds available gives you the freedom to choose the funds that best match your circumstances. Jargon buster These are shares in companies. The day-to-day value of equities will go up and down, largely depending on the performance of the individual companies as well as general investment market conditions and the state of the economy. Bonds These are loans to governments, companies and institutions who need to borrow money. These are less volatile than equities, but their value can still vary due to changes in general investment market conditions. Diversified growth funds The investment manager invests in a wide range of different asset classes. This diversification helps to reduce the risk level. Property fund This invests in commercial property. Please note that there is currently a disinvestment deferral period in place for this fund. Cash funds This is an investment in various cash deposits and cash instruments, so there is a low chance of capital depreciation but expected returns will also be lower than other asset classes over the long-term. management The manager aims to beat a certain index, by choosing specific investments which he thinks will do well. This can lead to higher returns, but because it requires a lot of time and effort from the manager, a higher annual management charge applies. Passive management The fund manager aims to track the performance of a chosen index (instead of trying to beat the index, as in active management). Passive funds normally have lower charges than active funds. 2

3 Your investment choices This section gives a brief overview of all the choices open to you, but don t forget that you can find full details on the website, The Lifecycle option 5 or 10 year The Lifecycle options are designed to provide a blueprint for a sensible investment strategy which is suitable for a wide range of members, although whether it is suitable for you depends on your personal circumstances. The idea behind a Lifecycle strategy is that while you are younger you invest in high-risk, high return assets, which maximises the potential for growth in your fund. However, as we have seen in recent months, such assets are volatile and prone to short-term falls in value. This means that as you approach retirement you need to prioritise security of capital over growth, so the Lifecycle strategy automatically switches your fund from high-risk, high return funds, into lower risk, lower return funds, as you approach retirement. How it works There are two Lifecycle funds, one which switches your investments from higher risk, higher return funds to lower risk, lower return funds when you get within ten years of your normal or chosen retirement age, and one that makes the switch at five years before your normal or chosen retirement age. The switches are gradual, as you can see from the graphs below, and they happen automatically so you don t need to do anything. However, if you do subsequently decide that the Lifecycle strategy is not right for you then it is possible for you to change to the Self-Select option at any time. It is very important that you tell the Scheme Administrator well in advance if you do not plan to retire at your normal or chosen retirement age. This is because a different retirement age effectively changes the goalposts of the Lifecycle strategy. For example, if you want to retire at age 55, rather than the normal A&O retirement date of age 62, and you are in the ten year switching Lifecycle fund, your switches will need to begin happening at age 45 so if you don t tell the Administrator your planned retirement age until you reach age 54, you have effectively lost the benefit of investing in the Lifecycle strategy. The two Lifecycle funds: The Five-year switching option % Investment 100% 80% 60% 40% 20% 0% Managed Cash UK Fixed interest Diversified Growth Fund Global Equity Tracker Fund Years from retirement The Ten-year switching option % Investment 100% 80% 60% 40% 20% 0% Managed Cash UK Fixed interest Diversified Growth Fund Global Equity Tracker Fund Years from retirement You can find out more about the funds used in the Lifecycle options in the chart on the next page. 3

4 Self-Select If you would prefer to choose your own investment strategy, you should opt for the Self-Select option. You can then choose to invest in any combination of the funds on offer, which are described in the next section. There is no automatic switching as you get older, as with the Lifecycle funds, so you need to review your fund choices regularly to ensure they remain relevant. Fund name Institutional UK Equity Select Fund Newton International Growth Fund Asset type Management style Risk Annual management charge 0.70% 0.75% Risk Indicator Key Manager of Managers Overseas Equity Fund 0.80% 7 FTSE Tracker Fund Passive 0.10% 6 Global Equity Tracker Fund Overseas Equity Tracker Fund Passive Passive 0.125% 0.15% 5 UK Fixed Interest 60:40 Fund Bonds 0.30% 4 Index Linked Fund Bonds 0.30% 3 Pooled Property Fund Diversified Growth Fund Property Various 0.50% 0.90% 2 Managed Cash Fund Cash and Short term deposits 0.15% 1 (1-10, 10 being most volatile/risky) PLEASE NOTE As part of its duty to provide an appropriate range of investment options for members, the Trustee periodically reviews the suitability of investment managers. Following some changes to the managers at the Newton International Growth Fund ( the Newton Fund ), and after taking advice from the Scheme s investment advisers, the Trustee has decided that from 1 September investment in the Newton Fund will be restricted. The M&G Global Leaders Fund As a replacement for the Newton Fund, from 1 September members can opt to invest in the M&G Global Leaders Fund. The M&G Fund typically invests in equities located in developed economies globally and has an annual management charge of 0.90% p.a. More information is available on the Allen & Overy Pension Scheme website: and a fund factsheet is available on the Standard Life website: Keeping up-to-date You will receive a benefit statement each year, giving you details of your fund value as at the statement date as well as an estimate of how much pension this could buy you (based on certain assumptions, which the statement explains). You can also view daily unit prices online by following the links on the website, or visiting: com/allenovery/prices/index.html. How to change your investments If you are registered on the website, you can login and switch your investments online. Alternatively, if you are not registered, you can download an investment form and return this to the Scheme Administrator at the address shown on the back page. Important Nothing in this newsletter is intended as advice it is provided for information only. If you need financial advice, you should visit an independent financial adviser find one in your area by visiting 4

5 Your income in retirement What is an annuity? is one of the most common questions asked by people contemplating their retirement. When you retire, your pension pot is used to buy an annuity with an insurer who will then pay you regular payments for the rest of your life (and your spouse s life if you choose a joint life annuity). Members may take a cash lump sum on retirement, generally up to 25% of the fund. This amount is paid to you, and the remaining amount is paid to the insurer in exchange for an annuity. The reason it is not just called a pension is that it is provided by an independent insurer and not by the pension fund you have been saving with throughout your working life. Annuity rates (i.e. the cost of converting your pension pot into a regular income) are very important. Buying an annuity when rates are high can have a big impact on the amount of money you receive during your retirement if you buy when rates are high, you ll get a smaller income during your retirement. And once you ve bought an annuity, you are tied into it for life so it s worth making sure you get a good rate. The factors that affect annuity rates can be complicated, but to summarise they include: Long-term bond yields and Longevity expectations To make your choices and understand these factors you will be sent all the information you need shortly before your retirement. The Scheme Administrator will guide you through the process and will obtain various different annuity quotes for you depending on the information you provide. If you have any queries about anything in this article or your benefits, you can contact the Scheme Administrator, Capita Hartshead, at the address shown on the back page. Life after A&O......what happens to your pension? If you leave A&O, you must stop paying contributions into your A&O pension account. Your options on leaving depend on how long you have been a member of the Scheme: A member for less than three months A member for between three and eighteen months A member for between eighteen months and two years A member for more than two years You will receive a refund of the value of your account derived from your own contributions, less an amount in respect of income tax. You can choose between a refund of the value of your own contributions, less an amount in respect of income tax, or you can transfer the total value of your account, including the Employer contributions, to a new pension scheme but you must do this within three months of receiving your leaver s statement otherwise you will receive a refund. Again, you have the option of a refund of the value of your own contributions less an amount in respect of income tax or you can transfer the total value of your pension to a new pension scheme or you can have a deferred pension and leave your fund in the A&O scheme. You are not able to take a refund but you can transfer your pension to a new scheme or you can have a deferred pension and leave your fund in the A&O scheme. Your leaver s statement will give you all the information you need to make this decision. Deferred pension more details A deferred pension is when you leave your account within the Scheme until you reach retirement. It continues to be invested, but you cannot make any new contributions after you have left A&O. You have all the same options as an active member for example, you can still choose to take early retirement, you can access the Scheme website and you can still change your investment options. It is important that you continue to manage your pension to ensure that you make the most of this valuable benefit. Once deferred, you have a right to a statutory transfer of benefits to another pension provider up to one year prior to Normal Retirement Age. 5

6 Early retirement don t miss your chance! As you might know, the Government has changed the age at which you can retire. At present you can take early retirement from age 50 (with the consent of your employer). But, from April 2010 onwards, the earliest permissible retirement age will be increased to age 55. If you are between 49 and 54 now this will affect you directly look at the graph below to see how. Your age on 6 April You can retire You can t retire Financial Summary You can view the full Report and Accounts for the most recent year end (30 April 2008) on the scheme website as mentioned on page 4. Once the 2009 Report and Accounts have been audited they will also be placed on the website this will be towards the end of the year. In brief, the financial dealings for the year ended 30 April 2008 were as follows: Value of fund at the start of the year ( m) 139,615,424 Incomings contributions from members and the Employer 20,910,809 Outgoings members retiring or transferring to another scheme ( 3,234,358) Net market return on investments 12,640,196 Value of fund at the end of the year 169,932,071 Deferred members of the Defined Benefit scheme receive an annual Summary Funding Statement detailing the DB section s funding level. New tax rules for high earners The 2009 Budget included a surprise announcement that contained significant changes to the taxation for higher income individuals, including measures for restricting tax relief on contributions into a registered pension scheme. From 6 April 2011, where an individual has relevant income exceeding 150,000 in the current tax year, or any of the two preceding tax years, they may have tax relief on their pension contributions tapered down to 20%. Relevant income for these purposes is much broader than an employee s earnings and will also include investment income such as interest and dividends. Where an election to join a salary or bonus sacrifice scheme is made after 22 April 2009, the amount sacrificed will also be included when determining whether income is greater than 150,000. 6

7 New tax rules for high earners continued Restrictions have been put in place ahead of 2011 to prevent high earners taking advantage of current tax rules on pension payments by making large additional pension contributions. However, people who have never had taxable earnings in excess of 150,000, and/or those who continue with a regular pattern of contributions that was established before 22 April 2009, should not be affected by these new measures as their regular pension savings will be protected from the new tax charge irrespective of their value, providing there are no changes to their contribution rate. Additional contributions made as a consequence of a salary increase do not count as a change for this purpose. High earners that increase the rate at which pension savings accumulate, or contribute to a scheme on an irregular basis, that is less than quarterly basis, after 22 April 2009, will potentially become subject to a tax charge if their total pension savings in a tax year exceed an allowance of 20,000. There is scope to increase this amount to 30,000 if contributions have been previously paid to a money purchase scheme on a less than quarterly basis in the tax years 2006/07, 2007/08 and 2008/09. If the average of contributions paid in these three years is greater than 20,000 then the allowance will increase to that amount, but capped at a maximum of 30,000. As the pension contributions made under the A&O bonus arrangements are made on an annual basis, they will not be considered protected pension contributions and therefore could be subject to the special allowance charge if all other conditions are met. The annual allowance will be reduced by the value of the regular pension savings, subject to a minimum value of zero. The 20% tax charge will be applied to the amount by which the irregular savings exceed the reduced allowance. The following example helps to illustrate how this will work in practice: An employee with relevant income of 160,000 in 2008/09 has 12,500 of annual employer pension contributions paid on a monthly basis into her defined contribution pension scheme; On 30 June 2009, she waives her entitlement to receive 16,000 of a future bonus and instead the employer pays 16,000 into the same pension scheme; She will therefore be subject to a special allowance charge of 1,700 in her Self Assessment tax return (i.e. ( 16, ,500-20,000) x 20%). Further information and an HMRC Q&A publication which helps to clarify some of the issues can be found in the library section on the A&O pension website. Advisers to the Trustee Investment Managers Defined Benefit section Legal & General Assurance (Pensions Management) Ltd Schroders Pension Management Ltd Artemis Investment Managers Ltd SKAGEN Funds Blackrock Investment Management (UK) Ltd Defined Contribution section Standard Life Investments Ltd AVC Investment Managers Investment Advisers Prudential Norwich Union Standard Life Investments Ltd Defined Benefit section Hewitt Associates Defined Contribution section Watson Wyatt LLP Scheme Actuary Independent Auditor Bankers Solicitor Scheme Administrator Jane Curtis, Hewitt Associates PricewaterhouseCoopers LLP Lloyds TSB Plc Sacker & Partners LLP Capita Hartshead (Whitstable) 7

8 Need any help? If you have any queries about your benefits or the Scheme in general, you can contact: For Members: Karen Young Allen & Overy LLP One Bishops Square London E1 6AD Telephone: For Deferred and Pensioner Members: Capita Hartshead Radio House Thanet Way Whitstable Kent CT5 3QP Telephone: Other useful contacts If you feel you need to take advice, you can find an Independent Financial Adviser in your area by visiting Or, if you would like information about State pensions, you can visit If you have lost touch with a previous pension scheme, the Pensions Tracing Service, run by the Pensions Service, may be able to help There are also plenty of useful links on the Scheme website - so if you don t see what you re looking for here, why not visit 8 This newsletter is printed on 9 Lives 55 silk which is produced with 55% recycled fibre from both pre- and post-consumer sources, together with 45% virgin ECF fibre from sustainable forests.