Ernst & Young Retirement Benefits Plan. A tumultuous period for financial markets

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1 Ernst & Young Retirement Benefits Plan A tumultuous period for financial markets What has happened? As you may be aware, investment markets have suffered in recent months following Standard & Poor's (the rating agency) decision to downgrade the US credit rating, the escalating Eurozone Sovereign Debt crisis and concerns over prospects for economic growth. Some of the funds available to you under the EY Pension Plan may have struggled to perform positively during this tumultuous period and, depending upon which funds you are invested in, this may have reduced the value of your Personal Account. In addition, because some investors have been trying to find safer investments such as bonds (loans to governments and companies), the cost of buying such investments has gone up. This, in turn, has had the knock-on effect of increasing the cost of purchasing a pension (an income stream largely based on bonds) at retirement. For some members close to retirement, the combined effect of these could result in a significant reduction in their pension, depending on the investment choices they have made. The Trustee is providing this note to members to provide some guidance on the possible implications of these events and on the sorts of issues members should be thinking about. However, the Trustee cannot provide advice specific to your own circumstances and this note should not be treated as such. If you need assistance with making any decisions then you should consider speaking to an Independent Financial Adviser (IFA). A list of advisers in your area can be found at Should I be immediately concerned? This depends to a certain extent on how far you are from retirement, your view on whether the current turmoil should be seen as a concern or even whether it represents an opportunity. Investing for retirement is long-term investment, short-term variations in the market (including the recent volatility) should not, in themselves, be a cause for concern if you are some way from retirement. Indeed, there may even be some long term advantage, as your contributions will buy investments at lower prices than before. The Trustee suggests, however, that you take this opportunity to review the options open to you. If you are close to the date you expect to retire (say within ten years), you should certainly be thinking about the level of income you would like to receive and, possibly, considering investing in funds which aim to match that level of income as closely as possible. For example, there are steps you can take to cushion the impact of sudden falls in markets in the run up to retirement.

2 What might I do? The Trustee provides within the Plan a Lifestyle Option which automatically switches you from the relatively higher growth but more risky funds (that is, funds whose value is subject to larger volatility) towards funds holding less volatile investments which are better matched to buying an annuity at retirement. The proportion of your investment split between the different asset classes if you are invested in this default Lifestyle Option will depend on the length of time to your retirement date and the length of the switching period which you have selected. You should go to the Mercer OneView site to check where your account is currently invested (see details at the end of this note). Nevertheless, regardless of whether you are in the default Lifestyle Option or you have made your own investment selections under the Freestyle Option, the investment choices you make, and the level of contributions you are making into your personal account, will be important considerations for you. 1. Think about whether the funds you are investing in are suitable There are a number of investment fund options available under the Plan from which you can choose from. These are set out in the Plan Investment Guide available on OneView and the Trustee website. One important factor influencing the funds you invest in is your attitude to risk. A general rule of thumb with investments is the higher the expected return, the higher the expected risk. Members closer to retirement may feel they want to take less risk as they approach the time when they need to draw on their investments. Higher risk investments, such as funds which invest in equities (shares in companies), are generally considered more appropriate for younger members, given the time available before retirement to recover any losses. The general expectation is that their funds will rise in the longer term. It s important to bear in mind that it s not until you cash in your investments that you crystallise a profit or loss, so current market falls may not be an issue at retirement. Equity markets are renowned for significant fluctuations over short periods. Investors believe they should be rewarded by relatively higher returns over the longer term (compared to lower risk bond and cash funds) for taking on this uncertainty or risk. By looking at the investment returns over the last 25 years or so to mid- August 2011 (see chart below), you can see the extent of the variation of the equity markets. You will also see that, over this period, the trend has been upwards overall and the pound amount has continued to rise, despite shortterm falls along the way. So the current downturn could simply be seen as part of the roller coaster ride that is the equity market and values can fall as well as rise.

3 Source: Thomson Datastream On the other hand, lower risk investments, such as cash and bond funds, may be a better option for older members, who may be more concerned with sudden falls in investments, because there is less time to make good any unexpected losses from higher risk funds. However, you should bear in mind that the return on cash is currently very low because of the low base interest rate. Bonds might also help protect against the fluctuations of annuity prices (the cost of buying your pension), although they should not be considered a perfect match. The degree to which you need to consider the funds you are investing in will be primarily driven by whether you are a Freestyle Option member of a Lifestyle Option member: a) Freestyle Option members If you are a member who has made your own investment selection from the range of funds available under the Plan, the performance of your account will be dependent on which investments you selected. As mentioned, now may be a good time to review your investment selections to ensure they remain appropriate. It is important to note that reviewing your fund choices does not necessarily mean you need to make a change to them. You are advised to seek independent financial advice whilst considering your options. Tips: Consider your attitude to risk, this will be defined by a number of factors including your personal attitude to risk and how long you have until retirement. Keep a regular eye on your chosen investment strategy not just in turbulent times b) Lifestyle option members (the default) Members who have not made their own investment selection, will be invested in the Lifestyle Option. The Lifestyle Option is a predetermined investment strategy that automatically moves you out of the higher risk funds to safe harbour (low risk funds) as you approach retirement. If you are investing in the Lifestyle Option, your

4 contributions are invested fully in the Global Assets Funds which is a diversified fund with a mix of equities and alternative assets, then five or ten years before your chosen retirement date (members have a choice over the length of this period), assets are automatically and progressively switched into a combination of bond investments and also a cash fund up until your retirement date. The extent to which your pension fund in the Lifestyle Option has been impacted by the recent equity market falls will depend on how far away you are from your target retirement date and the degree to which you have been automatically switched out of the Global Assets Fund noted above. If you are more than five/ten years from your target retirement date, it is unlikely that you will have avoided negative returns recently, due to the still relatively high exposure to the equity market within the Lifestyle Option. Should you remain in the Lifestyle Option, you will continue to hold a proportion in these funds but as the Lifestyling progresses you will gradually move out of these funds towards the bond and cash funds, seen as lower risk. Should markets then recover over the short term, you will partially benefit from some uplift through this process. Members less than five/ ten years from target retirement date are likely to have experienced varying degrees of protection from the falls due to the gradual transfer of funds into the perceived lower risk funds. Tips: Consider whether the appropriate Lifestyle switching period (5 years or 10 years) has been selected. Review your target retirement age to ensure that this continues to represent your intended date of retirement. This is to ensure that the start date of your switching period is not too early or too late. It should be remembered that with investment choice past performance is no guide to future performance and the amount available at retirement may be more or less than the amount paid into your plan.

5 2. Consider the level of contributions you are making Your benefit statement includes an illustration of the potential pension income you will receive at retirement. This will help you decide whether you are contributing enough to achieve your desired level of income in retirement, although please remember State benefits and any other savings will also contribute to retirement income. It might be useful to make a list of what long term savings you have already, from within the Ernst & Young Retirement Benefits Plan (including any Final Salary benefits), previous employers schemes, the State Scheme and your spouse s/partner s assets. Any short term savings, such as cash in the bank or ISAs and other assets, such as your home, might also be considered as part of your retirement planning. Assess what you can realistically afford to save towards retirement, taking into account your other financial commitments, together with any additional firm contributions and the tax relief on your own contributions. Also, after market falls, remember that your monthly contributions should now buy a greater number of investment units as they will be cheaper than before the fall, and potentially cheaper than they may be in the future. And when markets rise, the opposite applies for ongoing contributions, although the units you have already bought will increase in value. Please note, as contributions to the Plan are made via salary sacrifice you are only able to amend your contribution rate via the FlexEY flexible benefits site during each annual enrolment window which takes place in November each year, with any selections you make in this window being effective from the following 1 January. Communications will be issued to all employees notifying them of the exact dates of enrolment windows. Finally, the Trustee continues to review regularly the performance of all funds available to members, as well as the impact of any firm wide developments that have occurred at the underlying managers. Professional advice is provided by Mercer the appointed investment consultancy, who supports the Trustee in monitoring the managers on a regular basis. Where it is deemed necessary, the Trustee might take a decision to remove a manager and replace with another. Contacts Should you have any questions regarding your current investment arrangement or the investment options available to you, please feel free to contact Mercer, the Plan administrators, on Should you have any questions regarding your contribution selections, please contact EY Help HR on (internal extension 65555, option 2) Further information Further information can be found on Mercer OneView which you can access at