PERFORMANCE FACTSHEET DECEMBER 2017

Transcription

1 PENSION INVESTMENT APPROACHES PERFORMANCE FACTSHEET DECEMBER 2017 This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person.

2 AT THE HEART OF OUR GROUP PENSION PROPOSITION IS OUR CORE INVESTMENT OFFER A CHOICE OF STRAIGHTFORWARD PENSION INVESTMENT APPROACHES INCORPORATING DYNAMIC ASSET ALLOCATION, AND REFLECTING DIFFERENT ATTITUDES TO RISK AND REWARD. OUR PENSION INVESTMENT APPROACHES Our Adventurous, Balanced and Cautious Pension Investment Approaches were launched in Underpinning our Pension Investment Approaches are our Pension Portfolio Funds One to Four, which were also launched in 2006 and have a performance track record of over ten years. In the last five years leading up to retirement, we move customers investments into specific funds for the preretirement phase. These funds are the Scottish Widows Pension Portfolio Five Fund, the Scottish Widows Pension Protector Fund and the Scottish Widows Cash Fund. ADVENTUROUS BALANCED CAUTIOUS Periods of market volatility highlight the need to look to protect accumulated funds as members approach retirement. This factsheet demonstrates how our Pension Investment Approaches aim to help smooth out volatility in the final years to retirement, by charting the experience at various points in the lifestyling journey. A KEY LINK TO STATE STREET Our Pension Investment Approaches are composed of Pension Portfolio Funds and specialised funds for the pre retirement phase. The equity component used for the Pension Portfolio Funds comes from key fund links to State Street Global Advisors (SSGA), an acknowledged leader in institutional investing. Institutions worldwide have entrusted SSGA with 2.07 trillion to manage on their behalf as at 31st December The bond component is managed by Aberdeen Standard Investments. All the equity and bond components of the Pension Portfolio Funds are invested on a passive basis. 15 years before retirement, each approach gradually switches into funds that have historically been less volatile. Five years from a member s selected retirement date, we will start to automatically adjust their plan so that it will be invested in one of three ways, depending on whether they will want to purchase an annuity, keep their pension money invested (including taking withdrawals as an income), or take a cash lump sum. We offer a smoothed approach to lifestyle switching, which ensures a reassuringly predictable transition between funds. 1

3 BELOW IS AN ILLUSTRATION SHOWING HOW OUR PENSION INVESTMENT APPROACHES GRADUALLY MOVE BETWEEN FUNDS, INCREASING EXPOSURE TO LOWER RISK INVESTMENTS AS THE MEMBER MOVES CLOSER TO THEIR CHOSEN RETIREMENT AGE. We offer three different retirement outcomes, designed to prepare a member s pension investment in its last five years for whichever retirement choice they expect to make. In addition to the original retirement outcome designed for those planning to buy an annuity, we have added an outcome for those who plan to encash their fund, and an outcome for customers who will want flexible access and plan to move into a suitable product so they can stay invested. The underlying funds used for each of these three outcomes are covered below. ADVENTUROUS Targeting Annuity in Pension Portfolio 1 (PP1) PP1 into PP2 PP2 into PP3 PP3 into Pension Protector & Cash ADVENTUROUS Targeting Encashment in Pension Portfolio 1 (PP1) PP1 into PP2 PP2 into PP3 PP3 into PP5 ADVENTUROUS Targeting Flex Access in Pension Portfolio 1 (PP1) PP1 into PP2 PP2 into PP3 and PP5 Highest risk Term to retirement Lowest risk Term to retirement Pension Portfolio One (PP1) Pension Portfolio Two (PP2) Pension Portfolio Three (PP3) Pension Portfolio Four (PP4) Decreasing levels of risk Pension Protector Pension Portfolio Five (PP5) Cash 2

4 BALANCED Targeting Annuity in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into Pension Protector & Cash BALANCED Targeting Encashment in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into PP5 BALANCED Targeting Flex Access in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into PP4 and PP5 Highest risk Term to retirement Lowest risk Term to retirement Pension Portfolio Two (PP2) Pension Portfolio Three (PP3) Pension Portfolio Four (PP4) Pension Protector Decreasing levels of risk Pension Portfolio Five (PP5) Cash CAUTIOUS Targeting Annuity in Pension Portfolio 3 (PP3) 100% in PP4 PP4 into Pension Protector & Cash CAUTIOUS Targeting Encashment in Pension Portfolio 3 (PP3) 100% in PP4 PP4 into PP5 CAUTIOUS Targeting Flex Access in Pension Portfolio 3 (PP3) 100% in PP4 PP4 into PP4 and PP5 Highest risk Term to retirement Lowest risk Term to retirement Pension Portfolio Three (PP3) Pension Portfolio Four (PP4) Pension Protector Pension Portfolio Five (PP5) Decreasing levels of risk Cash 3

5 ASSET ALLOCATIONS AS AT 31ST DECEMBER 2017 STRATEGIC ASSET ALLOCATION FOR MULTI-ASSET PENSION PORTFOLIO FUNDS USED IN PIAs PP1 PP2 PP3 PP4 KEY: UK equities Overseas developed markets equities Emerging markets equities Corporate bonds Source: Scottish Widows, as at 31/12/2017 ASSET ALLOCATION UPDATE AS AT 31ST DECEMBER Following the allocation adjustments outlined in the previous quarterly report, there were no strategic asset allocation changes to the Pension Portfolio funds during the quarter. Further details on the governance process are covered in The Reassurance of Ongoing Governance section. 4

6 MARKET COMMENTARY FOR THE PERIOD 30TH SEPTEMBER TO 31ST DECEMBER 2017 The fourth quarter of 2017 was generally positive for equity and bond markets amid a robust global economic backdrop and expectations for continued growth over the coming year. Equity markets in particular benefited from this environment, adding to their progress over the first three quarters of the year, with many continuing to test or reach new record-high levels. After a lacklustre start to the quarter, equity markets in the UK made strong headway in the final month of the period amid well-received developments in the country s negotiations over its exit from the European Union. However, although the UK s gross domestic product (GDP) growth over the year to the third quarter was revised upwards from preliminary estimates, it was the weakest pace of growth in over four years. Meanwhile, the Bank of England increased interest rates by 25 basis points in early November its first rate increase in ten years as it looked to shepherd inflation back towards the target level. In currencies, sterling gained slightly against the US dollar, but weakened marginally against the euro. In October, the European Central Bank (ECB) announced that it was to halve the level of its monthly asset purchases for the first nine months of However, the central bank kept its benchmark interest rate unchanged and could extend the timeframe for the asset purchase programme beyond September Meanwhile, the European economic bloc s GDP growth continued to improve. On the political front, Chancellor Angela Merkel struggled to form a coalition government in Germany, while pro-independence parties did well in the election in Catalonia. US equities generally pushed higher as companies were boosted by ongoing economic strength. Additionally, new tax reform legislation influenced stock markets as businesses look set to see a reduction in the corporate tax rate. In the third quarter, annualised US GDP grew at the fastest pace in over two years, while the unemployment rate reached lows not seen since There was a further rate hike from the US Federal Reserve (Fed) the central bank s third increase during 2017 as it noted continuing economic strength. The US dollar slipped marginally, adding to the decline seen over much of Emerging markets continued to post strong gains, rounding off a buoyant year. China s GDP growth matched expectations for the year to the third quarter, while India s annual GDP growth figure to the third quarter rebounded somewhat from the weakness seen in the previous quarter. On the other side of the world, Brazil s GDP growth continued to progress through to the third quarter of 2017, following contraction during 2015 and 2016, partly aided by an improvement in exports. In developed Asia, Japan s central bank sustained its supportive monetary policy, while Shinzo Abe, the country s incumbent prime minister, bolstered his mandate with a sweeping election win. In local currency terms, Japan s equities proved the strongest, advancing by 8.6% over the fourth quarter, while Asia Pacific ex Japan moved 5.6% higher. Elsewhere, North America and emerging markets also posted strong returns, of 5.9% and 5.8%, respectively. The UK (represented by the FTSE All-Share Index) gained by 4.3%, while developed Europe (ex-uk) lagged, with a fall of 0.1%. Translated into sterling, market performance in Japan was weaker (rising 7.7%), but stronger for Asia Pacific ex Japan (up 6.8%). In North America, the return slowed to 5.1%, while for emerging markets it was unchanged. In developed Europe (ex UK), returns moved into marginally positive territory in sterling terms (gaining just 0.1%). All figures are based on FTSE indices. Influences on developed-market government bond markets included progress of the US tax bill and a further rate hike by the Fed, while political worries came to the fore in Europe. Italy saw mounting concerns ahead of a general election in 2018, and in Spain there was a strong showing for parties in favour of independence amid a parliamentary election in Catalonia at the end of the period. In sterling-denominated fixed-income markets, government bonds (gilts) ended the quarter up 1.5%. Notable themes during the period included generally lacklustre UK economic updates and the Bank of England s rate rise. Investmentgrade corporate bonds rose by 0.8%, while the riskier high-yield corporate bond segment slightly outperformed, rising 0.9%. The UK index-linked market also advanced, increasing 3.3% over the quarter. Looking on a global basis, corporate bonds rose by 0.9%, in sterling terms. The information contained in this update has been derived from sources which we consider to be reasonable and appropriate. It may also include our views and expectations, which cannot be taken as fact. Investment markets and conditions can change rapidly and, as such, the views expressed in this update should not be taken as statements of fact nor be relied on when making investment decisions. Forecasts are opinions only, can not be guaranteed and should not be relied on when making investment decisions. 5

7 HOW HAVE THE PENSION INVESTMENT APPROACHES PERFORMED? The chart below demonstrates how the Pension Investment Approaches have performed so far. In relation to the other Pension Investment Approaches, the Adventurous Approach generally provided greater growth while the market was rising, and the Cautious Approach fell less while the market was falling. PERFORMANCE SINCE LAUNCH FOR MEMBERS WHO HAVE NOT YET ENTERED THE LIFESTYLING PERIOD* % Dec 17 Adventurous (Targeting Annuity) Balanced (Targeting Annuity) Cautious (Targeting Annuity) Source: Scottish Widows, Lipper (a REUTERS Company), on a bid-to-bid basis, total return, tax default, in s. As at 31st December *Lifestyling period begins 15 years prior to selected retirement age. Pensions are a long-term investment. The retirement benefits your clients receive from their pension plan will depend on a number of factors including the value of their plan when they decide to take their benefits which isn t guaranteed, and could go down as well as up. The value of their plan could fall below the amount(s) paid in. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not receive back the full amount originally invested. 6

8 Each Approach is benchmarked against an appropriate ABI sector: Approach Adventurous Pension Investment Approach Balanced Pension Investment Approach Cautious Pension Investment Approach Benchmark Flexible Investment Sector Mixed Investment 40%-85% Shares Sector Mixed Investment 20%-60% Shares Sector Discrete Performance as at 31st December Fund Scottish Widows Pension Portfolio One (Initial fund for Adventurous) Scottish Widows Pension Portfolio Two (Initial fund for Balanced) Scottish Widows Pension Portfolio Three (Initial fund for Cautious) 06/02/2006 to 31/12/2017 Q Q Percentage growth Q Q Q Q Q Q Q Q Scottish Widows Pension Portfolio Four Scottish Widows Cash Scottish Widows Pension Protector ABI Sector Percentage growth 06/02/2006 to 31/12/2017 Q Q Q Q Q Q Q Q Q Q Flexible Investment Sector Mixed Investment 40%-85% Shares Mixed Investment 20%-60% Shares Source: Scottish Widows, Lipper (a REUTERS Company), on a bid-to-bid basis, total return, tax default, in s. As at 31st December Pensions are a long-term investment. The retirement benefits your clients receive from their pension plan will depend on a number of factors including the value of their plan when they decide to take their benefits which isn t guaranteed, and could go down as well as up. The value of their plan could fall below the amount(s) paid in. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not receive back the full amount originally invested. 7

9 The charts below and overleaf demonstrate how the Balanced Approach (Targeting Annuity) has performed since launch for investors who were 15 years from retirement in February 2006, and who retired on 31st December Approximately 80% of members in a Pension Investment Approach are in the Balanced Approach, which is why this has been selected for the example. For comparison, the charts also show the average return of two ABI sectors for the same period. MEMBER 15 YEARS FROM RETIREMENT AT DECEMBER 2006 BALANCED in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into Pension Protector & Cash Term to retirement % Dec 17 Scottish Widows Balanced Approach ABI UK Mixed Investment 40%-85% Shares Pension Sector ABI UK Global Equities Pension Sector Source: Scottish Widows, Lipper Hindsight as at 31st December 2017, on a bid-to-bid basis, total return, tax default, in s. Pensions are a long-term investment. The retirement benefits your clients receive from their pension plan will depend on a number of factors including the value of their plan when they decide to take their benefits which isn t guaranteed, and could go down as well as up. The value of their plan could fall below the amount(s) paid in. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not receive back the full amount originally invested. 8

10 MEMBER WHO RETIRED ON 31ST DECEMBER 2017 BALANCED in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into Pension Protector & Cash % Dec 17 Scottish Widows Balanced Approach ABI UK Mixed Investment 40%-85% Shares Pension Sector ABI UK Global Equities Pension Sector Source: Scottish Widows, Lipper Hindsight as at 31st December 2017, on a bid-to-bid basis, total return, tax default, in s. Pensions are a long-term investment. The retirement benefits your clients receive from their pension plan will depend on a number of factors including the value of their plan when they decide to take their benefits which isn t guaranteed, and could go down as well as up. The value of their plan could fall below the amount(s) paid in. Past performance is not a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise. Investors may not receive back the full amount originally invested. 9

11 OUTLOOK Investment markets are starting 2018 against a backdrop of a broadly positive outlook for the global economy. The consensus view is that the world economy is heading into its strongest year since the global financial crisis, with simultaneous upswings across most major economies (with the partial exception of the UK). Risk assets such as equity and credit are being supported by expectations for robust growth. Furthermore, the tame inflation backdrop means market analysts generally perceive little pressure for central banks to raise rates quickly, helping to contain bond yields at or near low levels. Within equity, we acknowledge valuations are relatively high already across most markets, but we think the US and to a lesser degree the UK look particularly stretched. As such, we expect Europe, Japan and emerging markets to outperform relative to the US, while generally favourable economic prospects may also prove supportive for these three markets. In the US, an important factor for equities may be the success, or otherwise, of the current administration s legislative programme. Elsewhere, the final shape of the UK s deal to leave the European Union remains a major uncertainty for UK stocks, and assets more generally, although we think markets already look to be pricing quite a pessimistic scenario. The market consensus is still of the view that interest rates will rise relatively slowly across major economies. We think the balance of risk is that benchmark rates will increase faster than markets currently expect, and will drag longer-dated rates up with them. However, we do not expect interest rates to return to the much higher pre-financial-crisis levels, somewhat containing the possible price impact for bond investors, partly because of deep-rooted structural factors, including changing savings and investment behaviour. Moreover, we think bonds retain an important role in multi-asset portfolios as a diversifier, particularly in an environment of high equity valuations. We believe investors should be mindful of the risks to the above case for a slow rise in rates, including the potential for inflation to stage a surprise return. Despite solid growth, inflation has been puzzlingly weak in most major economies except in the UK, where it has picked up despite lower growth. The relatively high inflation level in the UK is viewed by many as a temporary adjustment, mainly on the back of the decline in sterling after the EU referendum. A resurgence of inflation, should it happen, would force central banks to raise interest rates and/or curtail asset-purchase programmes more aggressively than market participants currently expect. This would undermine a key assumption on which the current market regime is based, and, in our view, could be a trigger for an increase in market volatility. Many analysts have noted that the current recovery is already long in the tooth, particularly in the US. A return to recession would undermine the optimistic forecasts for corporate earnings growth on which risk-asset valuations are being based, not just in the US but globally. However, it is not obvious why the upswing should fizzle out of its own accord, although an inflation shock could be a negative trigger. kets have proven surprisingly resilient to recurrent political shocks in Some events have had a noticeable impact on local markets, but the effects have generally been temporary and have failed to dent global investor confidence. In particular, market participants appear to have become more confident in the stability of the euro area as its economy recovers. Likewise, escalating geopolitical tensions in the Middle East and on the Korean peninsula have failed to derail markets. Investors seem to have concluded that the likelihood of a shock sufficient to have a real impact on asset prices or on economic performance remains low. However, it is possible that the ongoing investigation of Russia s influence on US politics could increase uncertainty in that market in China has sunk down the list of investors concerns since its economy stabilised in early The consensus view now seems to be that the Chinese authorities can manage a gradual deleveraging of the heavily indebted economy at the price of a modest deceleration in economic growth, without precipitating a systemic crisis. However, the scale of the issue suggests China s stability should remain on investors radar screens. 10

12 THE REASSURANCE OF ONGOING GOVERNANCE Recent years have seen considerable change within both investment markets and the pension industry and the Pension Investment Approaches (PIAs) have responded to both, continuing our commitment to the best interests of our customers. A series of developments have taken place within the PIAs since 2014, implemented to improve and maintain their effectiveness. Throughout this period, we have maintained a strong governance capability to monitor all aspects of our multi-asset proposition, including the PIAs. The main developments have been: In 2014, we undertook a number of key strategic asset allocation changes within the PIAs. These included increasing their exposure to overseas equities at the expense of UK equities, introducing an emerging markets equities element for the first time, and making all bond investments passive. These changes were successfully implemented, increasing diversification and aiming to increase potential long-term performance. In 2015, in response to the new pensions freedoms legislation, we designed and launched new retirement options, to reflect the increased flexibility and help our PIA investors prepare for different types of retirement income. Also in 2015, we significantly bolstered our asset allocation capabilities by establishing a specialist Asset Allocation Team, comprising of five investment professionals. One of the Team s most important roles is to review and identify medium-term opportunities for all our multi-asset investment options, including the PIAs. In late 2015, the Asset Allocation Team recommended just such a medium-term move. Specifically this was an increase in emerging markets equities and a reduction in UK equities, with the aim of improving the PIAs potential performance over the medium term. ket uncertainty followed the vote to leave the European Union in June 2016, which made forecasting economic and market returns difficult. However, towards the end of 2016, market conditions had settled sufficiently to allow us to begin a full PIA review. This review continued into It was undertaken using stochastic modelling tools provided by Moody s Analytics. The results of the analysis were presented to and approved by our Unit Linked Investment Management (ULIM) Committee. ULIM s role is to govern all Scottish Widows unit linked funds, ensuring they meet our commitments to customers. Key changes from this review included: The removal of index-linked gilts from Pension Portfolios Three and Four, in favour of corporate bonds. The corporate bond allocation was diversified by reducing the sterling bond exposure and introducing an allocation to global corporate bonds (hedged back to sterling). The overseas equity component remains unhedged. A small allocation to emerging markets was introduced to Pension Portfolio Four, aligning the global equity structure of Pension Portfolio Four with that of the other Pension Portfolios. The purpose of this review was to maintain and improve the effectiveness and performance of the PIAs, ensuring they are optimally set up to deliver good results while adhering to their defined risk profiles. Since the launch of the PIAs, we have strived to maintain them as a low-cost, transparent investment proposition, with a belief that over a long time horizon the most efficient pension customer outcomes will result from a growth strategy that is predominately invested in equities, followed by a long (15-year) period of gradual de-risking. We believe that the PIAs continue to offer very good value for investors. Looking forward, we are committed to regularly reviewing the PIAs and how they are invested, both through our own ongoing monitoring and full governance reviews based on modelling from specialists such as Moody s Analytics. 11

13 HOW A PENSION INVESTMENT APPROACH INVESTMENT GLIDEPATH WORKS 5 years from retirement the glidepath diverges Level of Risk 15 years from retirement level of risk starts to fall Up to 5 years from retirement the glidepath is the same, regardless of which retirement outcome has been chosen Years to Retirement Retirement Targeting Flexible Access Targeting Annuity Targeting Encashment Please note that this graph indicates how the overall level of risk changes at different stages, not the likely performance of an investment. WILL WE EVER USE DIFFERENT INVESTMENTS? Yes if, as part of our investment fund review process, we think it would be of long-term benefit to our customers, we may decide in future to alter the asset classes or funds used by our PIAs. Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /18