SCHEME RISK PROFILING TOOL

Transcription

1 SCHEME RISK PROFILING TOOL For professional adviser use only Completed By: For: Default Investment Recommendation: Mr IFA of Smart Advice Date Produced: 9 January 2014 Newco AE Group Pension Scheme Category 51 category Royal London Moderately Adventurous Tracker Lifestyle Strategy (Pension & Cash) DISCLAIMER The scheme risk profiling tool is designed to help you provide advice to corporate clients and assess the demographics of their group pension schemes. The suggested default investment is based on the responses provided to the questionnaire. The final report should not be considered as Royal London providing a recommendation or giving advice. Royal London will not be held responsible for any advice or recommendations made on the back of these results. You should ensure that the final report meets your company compliance requirements. Factors used in assessing the risk profile A default investment should reflect members' needs, capacity and willingness to take risk. Research suggests that these can be influenced by factors such as income, gender and education level. The factors used to ascertain the suggested risk level were: Average member earnings Proportion of males Education level Business sector Alistair Byrne, David Blake, Graham Mannion, (2010) "Pension Plan Decisions", Review of Behavioral Finance, Vol. 2 Iss: 1, pp T. Hallahan, R. Faff, M. McKenzie (2003) 'An exploratory investigation of the relation between risk tolerance scores and demographic characteristics'. Suggested risk profile Based on the answers provided, the scheme demographics would suggest a balanced risk profile as being appropriate. Balanced investors typically have moderate levels of knowledge about investment matters and will pay some attention to keeping up to date with investment matters. They may have some experience of investment, including investing in products containing riskier assets such as equities and bonds. In general, balanced investors understand that they have to take investment risk in order to be able to meet their long-term goals. They are likely to be willing to take risk with part of their available assets. Balanced investors will usually be able to make up their minds on investment matters relatively quickly, but do still suffer from some feelings of regret when their investment decisions turn out badly.

2 Confirmation of risk profile You have chosen to alter the suggested risk profile to a moderately adventurous risk profile. Moderately adventurous investors typically have moderate to high levels of investment knowledge and will usually keep up to date on investment issues. They will usually be fairly experienced investors, who have used a range of investment products in the past. In general, moderately adventurous investors are willing to take investment risk and understand that this is crucial in terms of generating long-term return. They are willing to take risk with a substantial proportion of their available assets. Moderately adventurous investors will usually be able to make up their minds on investment matters quite quickly. While they can suffer from regret when their investment decisions turn out badly, they are usually able to accept that occasional poor outcomes are a necessary part of long-term investment. The output report has been created with this selected risk profile. The additional comments you provided around this are as follows: This is some text to show what 255 characters would look like on the documents xxxxxxxxxxxxx xxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxx Important information You should remember that the scheme demographics, and therefore the suggested risk profile, can change in future. You should look to review the suggested risk profile and default option at a later date or when significant changes to the membership profile occur. Existing default investment review You selected to review the existing default investment. The comments you provided around this are as follows: This is some text to show what 255 characters would look like on the documents xxxxxxxxxxxxx xxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxx The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Marketing Limited is authorised and regulated by the Financial Conduct Authority and introduces Royal London s customers to other insurance companies. The firm is on the Financial Services Register, registration number Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL. Royal London Corporate Pension Services Limited is authorised and regulated by the Financial Conduct Authority and provides pension services. The firm is on the Financial Services Register, registration number Registered in England and Wales number Registered office: 55 Gracechurch Street, London, EC3V 0RL.

3 Newco AE Group Pension Scheme Category 51 category Default investment suitability report Prepared for Newco 9 January 2014

4 1 EXECUTIVE SUMMARY Over the last couple of years we've seen a raft of guidance on designing investment solutions for Defined Contribution (DC) pensions. Most recently the Department for Work and Pensions (DWP) has issued specific guidelines for designing and governing an appropriate default for automatic enrolment (AE) schemes. This guidance focuses heavily on the employers responsibilities for selecting, designing and reviewing their default. Mr IFA of Smart Advice welcomes the opportunity of advising Newco on the selection of a default investment, in complying with their employer duties under AE. In preparing this recommendation, we have taken into account the Newco AE Group Pension Scheme Category 51 category prospective membership profile, and data established during the fact-find conversation. Having considered the membership profile and the best practice guidelines for default options, the recommendation is that the default becomes the Royal London Moderately Adventurous Tracker Lifestyle Strategy (Pension & Cash). This investment is part of the Royal London Governed Range and meets all the DWP criteria. It also benefits from the governance of the Royal London Investment Advisory Committee. All figures quoted in this report are as at 1 November 2013.

5 2 SCHEME DEFAULT OPTION TAKE-UP Newco is helping 250 members save for their retirement. The scheme is a Defined Contribution (DC) style pension arrangement, which is a popular way for responsible employers to help their employees save for retirement. A feature of all DC style schemes is that they offer a range of investment options, and the value of each member's savings changes in line with the funds they are invested in. Many people are understandably reluctant to select their own investment strategy, and so it is important to have a well designed, governed, scheme default in place for members.

6 3 DESIGN AND SUITABILITY REVIEW The importance of the default investment has been highlighted in a number of regulatory guidance documents from The Pension Regulator (TPR) and Department of Work and Pensions (DWP). You can view these documents below: The Pension Regulator Guidance - Selecting a good quality pension scheme for automatic enrolment employer.royallondon.com/tprguidance Department of Work and Pensions - Guidance for offering a default option for defined contribution automatic enrolment pension schemes employer.royallondon.com/dwpguidance Design review In particular, the DWP's guidance highlights a number of key design criteria which default investments should meet. The table below illustrates that Royal London's Governed Range delivers against these criteria and hence we recommend that the default option comes from within this range. An appropriate default strategy should: Be appropriately named and described Take into account the scheme membership risk and retirement profile Use an appropriate and diversified asset allocation Be affordable Include regular design, performance and suitability reviews Audit and communicate the conclusions of the regular governance reviews Royal London Governed Range Each investment option is appropriately named and described. Members are switched to lower risk investments as they approach retirement and there are a range of different risk graded options. Each investment option utilises fully diversified portfolios which are designed to deliver optimal returns for the amount of risk taken. The in-house and external passive equity options are available at no extra cost, whilst the external active equity option is also competitively priced. The design and performance of each strategy is regularly reviewed by the Royal London Investment Advisory Committee. Full minutes of each Investment Advisory Committee meeting are published on the Royal London website, both as an audit trail of the governance and to inform members.

7 Suitability review Picking a well designed option is not enough - it should also be suitable for the membership profile. The default investment should reflect the default members' needs, capacity and willingness to take risk. Research suggests that these can be influenced by factors such as income, gender and education level. We have used the following information to get a broad sense of the scheme membership profile: Scheme membership profile Average member earnings Between 17,000 and 35,000 Proportion of males Greater than 65% Education level Between 10% and 40% graduate or equivalent Business in financial sector? No Default retirement age 65 Preferred equity style External passive management Based on the inputs provided, shown above, the scheme membership profile suggests an overall risk level of balanced. However, having taken additional information from the fact-find meeting into account, the most appropriate risk level for Newco AE Group Pension Scheme Category 51 category should be moderately adventurous. Moderately Adventurous investors typically have moderate to high levels of investment knowledge and will usually keep up to date on investment issues. They will usually be fairly experienced investors, who have used a range of investment products in the past. In general, moderately adventurous investors are willing to take investment risk and understand that this is crucial in terms of generating long-term return. They are willing to take risk with a substantial proportion of their available assets. Moderately Adventurous investors will usually be able to make up their minds on investment matters quite quickly. While they can suffer from regret when their investment decisions turn out badly, they are usually able to accept that occasional poor outcomes are a necessary part of long-term investment. Alistair Byrne, David Blake, Graham Mannion, (2010) "Pension Plan Decisions", Review of Behavioral Finance, Vol. 2 Iss: 1, pp T. Hallahan, R. Faff, M. McKenzie (2003) 'An exploratory investigation of the relation between risk tolerance scores and demographic characteristics'.

8 4 DEFAULT RECOMMENDATION We have reviewed your requirements for a default investment strategy to ensure that it: is appropriately designed is suitable for the scheme membership adopts the DWP best practice guidelines in a cost effective manner offers an externally managed, passive equity investment Taking all of this into account we recommend that the default investment option becomes: the Royal London Moderately Adventurous Tracker Lifestyle Strategy (Pension & Cash) The default should be set up to target the scheme retirement age of 65. This investment default: is aligned with the scheme demographics has a glide-path through a 15 year lifestyling approach to offer appropriate asset allocations as members progress towards retirement targets 75% index-linked bonds and 25% deposit at retirement, consistent with members wishing to take maximum tax free cash and annuity purchase at that point meets your preference for an externally managed, passive equity investment includes the appropriate oversight and governance required to ensure ongoing suitability

9 About the recommended default This investment default is part of Royal London's award winning Governed Range. Its objective is to deliver above inflation growth in the value of the fund and income at retirement, with a level of risk consistent with a moderately adventurous risk profile. Royal London are responsible for reviewing the design of this default and meeting the review criteria highlighted in the DWP guidance. Members invested in this strategy will invest in higher risk diversified portfolios until 15 years before retirement, at which point the strategy will begin to automatically move them into lower risk portfolios to help protect the value of their savings. In the last 5 years before retirement the strategy will move into a portfolio of index linked gilts and cash which is designed to deliver the 25% cash lump sum which most members take on retirement, with the remainder available to buy an annuity. The current strategic asset allocation of the Royal London Moderately Adventurous Tracker Lifestyle Strategy (Pension & Cash) is illustrated below. The global equity fund is the RLP/Blackrock Aquila Global Blend Pension fund which is an externally managed, passive global equity fund managed by Blackrock. The split of this fund between UK and overseas weightings is managed by the Royal London Investment Advisory Committee. The remaining funds are managed by Royal London Asset Management. The Investment Advisory Committee reviews the design of this strategy and the underlying performance regularly, and may adjust the asset allocation to ensure it remains suitable for moderately adventurous investors or to take advantage of market opportunities. For more information about this lifestyle strategy including details of the individual funds within each strategy and the latest Investment Advisory Committee minutes please visit employer.royallondon.com.

10 Forecast of returns To help have a discussion about the scale of investment risks that members may experience when using the default approach, the following section uses an approach called 'stochastic modelling' to forecast how the value of the investments may change. This approach uses 1000 different scenarios. Each scenario has a different outcome due to different investment returns and interest rates. This gives us an indication of how likely particular outcomes are compared to others. The data reflects the estimates of future long term returns as at 1 December The assumptions that are made are: Someone paying regular contributions that increase in line with inflation into the lifestyle strategy for a period of 20 years. An allowance has been made for a 0.75% annual management charge. Any additional charges will reduce the pension pot and returns shown. The forecasts are only estimates - the future is unknown and it is possible that the odds and outcomes are different to those shown. The value of an investment can go down as well as up and the member could get back less than the amount paid in. For the recommended option, the Royal London Moderately Adventurous Tracker Lifestyle Strategy (Pension & Cash), the forecasts are as follows, based on data as at 1 December 2013: Likelihood of outcome Equivalent to a return of (p.a.) 25% chance of beating Inflation % 50% chance of beating Inflation % 75% chance of beating Inflation 99% chance of beating Inflation %

11 CONTACT Mr IFA Smart Advice