PERFORMANCE FACTSHEET MARCH 2018

Transcription

1 PENSION INVESTMENT APPROACHES PERFORMANCE FACTSHEET MARCH 2018 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 MARCH 2018 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 31/03/2018 ASSET ALLOCATION UPDATE AS AT 31ST MARCH 2018 There were no strategic asset allocation changes to the Pension Portfolio funds during the first quarter of Further details on the governance process are covered in The Reassurance of Ongoing Governance section. 4

6 MARKET COMMENTARY FOR THE PERIOD 31ST DECEMBER 2017 TO 31ST MARCH 2018 The quarter started off strongly with gains recorded across many equity markets during January, against a backdrop of continuing global economic growth. Early in the period, the International Monetary Fund slightly upgraded its global gross domestic product growth (GDP) forecast for both 2018 and 2019 to 3.9%. However, stock market volatility returned as the period progressed and many equity markets sold off as worries about inflation leading to a faster pace of interest rate increases took hold, while rising international trade tensions was another factor that weakened equity markets. Additionally, negative news flow for certain large US technology stocks impacted sector valuations. The UK had a weak first quarter, as the FTSE All-Share Index shed 6.9%, and underperformed the drop of 4.4% in the FTSE All-World Index, in sterling terms. UK political uncertainty remained despite a preliminary Brexit transition agreement with the European Union. There were renewed concerns over the strength of the UK economy as year-on-year GDP growth for the fourth quarter of 2017 came in at 1.4%, down from 1.8% in the previous period. Meanwhile, inflation softened and wage growth continued to pick up. The Monetary Policy Committee (MPC) of the Bank of England held interest rates at 0.5% over the quarter. Meanwhile, sterling gained ground against the US dollar. Elsewhere, FTSE Japan slid by 4.7% (down 2.6% in sterling terms), as equities were partly hampered by the country s export-driven and technology-heavy economy amid general yen strength. Europe s equities were also in negative territory, with the FTSE Developed Europe ex UK Index sliding 3% (4.6% in sterling terms). As expected, the European Central Bank (ECB) did not alter its interest rate level, and expressed growing confidence that inflation will move towards its target level over the medium term. The ECB also said it would monitor the impact of US trade measures and the strength of the euro. Meanwhile, political risk in the aftermath of the Italian election remains an issue. The FTSE North America Index sank 0.9% (a fall of 4.5% in sterling terms). Initial buoyancy at the start of the year, following the announcement of US tax cuts, gave way to worries about inflation pushing up the pace of interest rate hikes. By the end of the period, a US decision to impose international trade tariffs prompted retaliatory measures from China and stoked fears of a wider trade war. The Federal Reserve raised US interest rates by 0.25 percentage points, to range of %, in ch. This was the sixth increase since the start of the rate-hike cycle. FTSE Developed Asia Pacific ex Japan declined by 2.1% in local currency (and down 6.1% in sterling terms). The FTSE Emerging kets Index advanced 0.7% in local terms (a drop of 2.2% in sterling terms). Brazil and Russia were among the stronger emerging markets, while India was notably weak. China advanced slightly. During the period, it was announced that China s GDP had hit 6.8% year-on-year growth in the final quarter of 2017, while the government set a target of GDP expansion of around 6.5% for this year. The two-term ceiling on China s presidency was removed during the quarter, opening the way for President Xi Jinping to extend his time in power. At the start of the period, the US 10-year bond yields rose (and prices fell). This reflected the likelihood of a higher US budget deficit following the tax cuts and general economic strength globally. However, benchmark yields fell back somewhat (and prices rose) as the period progressed against a backdrop of worries about protectionist trade policies. The yields on 10-year UK and German benchmark bonds followed a similar trajectory over the quarter. In sterling-denominated fixed-income markets, government bonds (gilts) ended the quarter slightly higher, up 0.3%. The UK index-linked market advanced slightly, up by 0.1% over the quarter. Investment-grade corporate bonds dropped back by 1.2%, while riskier high-yield corporate bonds only declined marginally. On a global basis, corporate bonds dropped by 0.8% in US-dollar terms (down 4.4% 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* % Adventurous (Targeting Annuity) Balanced (Targeting Annuity) Cautious (Targeting Annuity) Source: Scottish Widows, Lipper Hindsight, on a bid-to-bid basis, total return, tax default, in s. As at 31st ch *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 ch 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 31/03/2018 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 31/03/2018 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, Financial Express, on a bid-to-bid basis, total return, tax default, in s. As at 31st ch 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 ch 2006, and who retired on 31st ch 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 MARCH 2006 BALANCED in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into Pension Protector & Cash Term to retirement % 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 ch 2018, 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 MARCH 2018 BALANCED in Pension Portfolio 2 (PP2) PP2 into PP3 PP4 into Pension Protector & Cash % 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 ch 2018, 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 kets began 2018 on an upbeat, risk-taking tone, buoyed by the strongest outlook for the world economy since the global financial crisis. Fast forwarding to April and the economic outlook remains broadly positive, although the pace of activity seems to be moderating in the Eurozone and China. But markets have become more volatile as investors perceive some increased financial, political and economic risks. What s more, many risk asset valuations still appear high. kets are increasingly focused on the prospect of tighter monetary policy from global central banks, as economies run out of spare capacity and inflationary pressure starts to emerge. Strong returns and low volatility for risk assets in 2017 were underpinned by a remarkably favourable combination of strengthening growth without much inflation, which allowed central banks to keep rates low. Jitters over inflation and the possibility of a sharper-thanexpected rise in interest rates seem to have contributed to the stock market sell-off at the end of January So far this year, yields on 2-year Treasury notes have risen about 0.35% in both the US and UK the two major economies where central banks have actually started to raise interest rates. Higher interest rates on risk-free government debt make risky assets less attractive, all other things being equal. We expect markets will continue to focus on inflation and wage-rise data for clues on whether rates might increase more quickly and undermine risk asset valuations further. Political risk, in various forms, is rising up investors agenda. One key area is international trade. The US raised tariffs on steel and aluminium imports from a number of countries, including China, with China then retaliating against some US metals and agricultural products. The range of goods affected by higher tariffs so far is a tiny proportion of global trade, and both the US and China have signalled their openness to further negotiation to address the underlying issues. However, markets have to factor in an increased if still small risk of a negative outcome that could, in the worst case, have a significant negative effect on global activity akin to the trade wars of the 1930s. Scottish Widows does not expect a significant escalation in trade tension to undermine the global economy, but we believe the topic warrants continued close monitoring. Global and in particular, US stocks were driven higher in 2017 by technology firms, including the American FANGs (Facebook, Amazon, Netflix and Google). However, the political and regulatory environment for technology stocks has become more challenging in Facebook is mired in allegations about the misuse of user data. President Donald Trump has publicly criticised Amazon s business practices and impact on small retailers. This increased political noise has already had an influence on the sector s valuations, and the debate over regulation of the sector seems likely to continue. Eurozone political risk came back onto investors radar in ch, after Italy s election saw gains for Eurosceptic parties, the Five Star Movement and the Northern League. Both parties produced potentially expensive tax and spending policies during the election that could see Italy run up against European fiscal rules, if implemented. At the time of writing, Italy had yet to form a government. Italy s high public debt and slow growth constitute a relatively weak backdrop for the political drama. A return to the Eurozone sovereign debt crisis of looks unlikely, particularly while the ECB continues to buy up government debt. But the bloc s institutional weaknesses and economic disparities may come back into focus if and when the ECB winds up its quantitative easing programme. The Brexit process remains a key driver for UK markets. The pound has strengthened so far this year as the UK and the remaining EU countries managed to reach agreement on key elements of the exit process, decreasing investor concerns over a disruptive, abrupt loss of access to EU markets for British firms. UK stocks are down this year by more than global peers, despite the relative resilience of the UK economy. However, the benchmark FTSE 100 index outperformed other developed markets in the ch sell-off, partly because it is relatively light on technology stocks and is therefore insulated from the effect of weakness in that sector. We expect Brexit will remain a key factor in the outlook for UK markets over the rest of

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