Pension Schemes AVC Investment Funds Guide Understanding your investment options For members of the Ulster Bank Pension Scheme (Republic of Ireland) and the First Active Pension Scheme Contents Page 2. Investing in your future 2. Choosing the right approach 3. The different types of risk 5. The investment options 6. Disclaimer
Investing in your future Your AVCs are retirement savings in addition to pension benefits provided under the main pension scheme of which you are a member. Your Personal Account builds up until you retire at which point you can buy benefits in return. The savings in your Personal Account can be invested in a range of six different funds, depending on your particular priorities. This guide is designed to tell you about the investment options and how to choose the right ones for you. You can also get a more detailed fact sheet on each individual fund just contact The Pensions Manager, Group Pension Services, for more details. Choosing the right approach Ultimately, it s up to you to choose the investment options that are right for you. This will depend on your circumstances and your personal attitude to risk and reward. Whatever your decision, it s important to understand the risks involved, as well as the potential returns. If you are unsure about which investment options are right for you, you should consider taking independent financial advice. Making pension savings is usually a long-term commitment. This is a good thing, because it means you have a long time to build up a personal account that can provide a decent pension. However, there will always be a level of risk along the way. This applies to any successful investment, from a deposit account to a stock market fund they all have risks attached to them, as well as potential benefits. There are two main things to remember when it comes to risk: As a general rule, the higher the potential returns, the greater the degree of risk. So if you want to maximise your potential rewards, you need to accept a greater level of risk. For most people, it s a matter of striking the right balance. If you need to access your savings in a few years time for example, if you re approaching retirement then shares may be too risky for you. You may prefer a lower-risk investment such as bonds or cash. But if your retirement is several years away, short-term falls in the stock market may be less of a risk than inflation and bonds and cash may not offer the returns you need. Again, it s a judgement call you need to make.
The different types of risk Once you understand the risks and how they apply to you, you ll be in a much better position to make your investment decision. These are some of the main types of risk to weigh up: Inflation risk If your investments don t grow sufficiently, you may find your Personal Account doesn t keep pace with inflation. So, over the longer term, you need to invest in funds that have the potential to achieve the level of growth you may expect. If you are attracted by the security of a cash investment, it is important to bear in mind that cash investment may not deliver attractive investment over the long term. You may not lose money in cash, but the value of your savings in real terms could be affected. Investment risk It s important to remember that prices can go down as well as up. So your investments may actually fall in value and the value of your Personal Account could end up being less than you originally contributed. This is particularly relevant if you re considering a fund that invests in assets with more variable returns like shares or property. Of course, it s only natural to be disappointed if you see the value of your investments going down over a period of weeks or months. But it s all part and parcel of being a long-term investor. The idea is that, in the long term, your investment will have time to recover from short-term setbacks and go on to grow overall. However, this can never be guaranteed. If you re approaching retirement, investment risk may be a more significant factor for you if the markets fall just as you re planning to retire, your Lump sum risk This is only relevant if you intend to take your AVCs as part of the tax free lump sum allowed at retirement. If you have not paid AVCs, this lump sum can only be taken by giving up some of your pension under the Scheme. The risk here is that if your AVCs are not invested in cash as you approach retirement, your fund may fall in value just before you take the lump sum. Pension conversion risk This is only relevant if you intend to buy additional pension with your AVCs on retirement. The price of buying a pension changes all the time. So the amount of income you can buy with each 1,000 in your personal account can change from one year to the next. The risk here is that, when you reach your retirement date, the price of buying a pension may just have risen, which will reduce the amount of income you have to live on. There s little you can do about this in the early years of your working life. If you do intend to use your AVCs to purchase additional pension then, in the years just before you retire, you may want to consider investing in the Passive Long Bond Fund, which will move in similar ways to the prices of pensions. Historical returns The following table shows some historical returns for Irish pension fund investors over the 30 years to 2007. It must be emphasised that past performance is not a guide to the future. A particular example may be that returns on Irish property have been very strong in recent years and might not be expected to continue savings may not have time to regain their value. If you are planning to transfer your AVCs to an ARF and draw down flexibly over a longer period you may be less concerned about markets falling shortly before you retire.
Managing risk It s impossible to avoid risk altogether, but you can manage it by choosing investments that are suitable for your goals, circumstances and age. It also helps to spread your investment across a number of different countries (so it doesn t depend on the fortunes of just one stock market) and a mixture of investment types. For example, you could invest some of your savings in shares, at these levels. Also, the returns on cash and bonds are affected by the very high interest rates experienced in the 1970s and 1980s. The table does illustrate that equities have delivered higher returns than bonds and cash over the long term but with much greater risk over the shorter term. giving them a good opportunity to grow, and some in bonds and cash, so you don t expose all your savings to the risk of a sudden fall in the stock market. These examples may help you decide on the best investment strategy for you although these are just broad illustrations and your particular situation may be different.
The six investment options Set out below is a list of the six investment options. These funds are managed by Irish Life Assurance plc. For more information on each individual fund contact The Pensions Manager, Group Pension Services and ask for a fact sheet. The range of funds covers all the main investment types equities, bonds, property and cash as well as funds combining all four types. Fund Name Objective Charges Consensus Fund World Equity Indexed Fund The typical asset mix for this fund would be in the range of 60% to 80% in equities, 10% to 30% in fixed interest securities, 5% to 10% in property and a small balance in cash. The actual allocation is set to be the average allocation of managed pension funds run by providers in the Irish market. This fund invests in the shares of companies in markets around the world according to market capitalisation weightings. The Fund aims to achieve returns consistent with the FTSE Wold Index. Other charges 0.03% p.a. Other charges 0.02% p.a. European Equity Indexed Fund This fund invests in the shares of companies across Europe. It aims to achieve returns consistent with a combination of the FTSE Europe (excluding UK) and FTSE Eurobloc indices. Other charges 0.02% p.a. Cash Fund This fund aims to achieve returns in line with wholesale Euro money market short-term interest rates. Management fee 0.75% p.a. Other charges - minimal. Property Fund This fund invests in properties in Ireland and abroad and in a range of types including commercial, retail and industrial. The fund may also invest in cash. Management fee 0.75% p.a. Other charges 0.1% p.a. Indexed Long Bond Fund This fund invests in long-dated government bonds denominated in Euro. The Fund aims to achieve returns consistent with the Merrill Lynch over 10 year Government EMU bond index and can be expected to protect against changes in annuity rates. Other charges 0.01% p.a. Note: Other charges relate to expenses such as transaction and custody costs that are incurred by the funds. In addition to these costs there are costs incurred such as stamp duty which is most relevant in the case of property. If there are more investors selling fund units rather than buying them, then the price may change to reflect market costs of transacting in the underlying assets. In the case of Irish property this may result in a fall in the unit price of the order of 13% (this reflects the stamp duty on Irish property of 9% as well as other transaction costs). Note that you are permitted to allocate to a maximum of 5 funds. All this information is up to date as of February 2012, however, the Trustees may change these funds and these options in the future. The charges shown are those levied by the investment managers and are typical of deductions made on investment funds offered in the pensions industry. Charges are reviewed regularly by the providers.
Disclaimer Nothing in this guide is, or should be taken as financial or other professional advice. You should contact your independent legal adviser if you are unsure about whether to pay AVCs or how to invest AVCs. Contact Details Ulster Bank Pension Scheme (Republic of Ireland) First Active Pension Scheme RBS Group Pension Services PO Box 1390 Croydon, Surrey CR9 5WP, UK Freephone: 1800 245 971 Email: ubgpensions@rbs.co.uk Email: firstactivepensions@rbs.co.uk