Nurturing your investment

Transcription

1 helping life flow smoothly UNITED UTILITIES PENSION SCHEME Investment choices Nurturing your investment

2 Contents Investment choices 1. A BRIEF GUIDE TO INVESTMENTS A reminder of the main different types of investments: equities (i.e. shares), property, bonds and cash. PAGE 3 2. INVESTMENT MANAGEMENT - ACTIVE OR PASSIVE? An explanation of the two types of investment management available under the Scheme: active and passive. PAGE 5 3. THE AVAILABLE FUNDS Details of the investment funds available through the Scheme. PAGE 6 The Personal Account which you build up in the United Utilities Pension Scheme ( the Scheme ), either as a Member of the Defined Contribution section or as an Additional Voluntary Contribution (AVC) payer in one of the Defined Benefit sections, will not only depend on the level of contributions made but also the investment returns achieved on these contributions. Your Personal Account will determine how much pension you can buy at retirement, although the type of benefits you choose to buy will also influence the amount of pension you receive. In summary, choosing the investment option that best suits your circumstances could make a significant difference to your income in retirement. 4. THE LIFESTYLE STRATEGY OPTIONS Information on the Scheme s Lifestyle Options, including an overview of how the investment strategy works including the default option. PAGE 7 5. HOW TO CHOOSE Guidance on the other issues you should consider in making your investment decisions. PAGE 8 6. MAKING A DECISION How to put your investment strategy into place and where to go if you need any further help with making your decision. PAGE 10 As a Member of the Scheme, you can choose where you would like your contributions and/or AVCs, together with those paid by the Company (where applicable), to be invested. You have a choice between a number of funds, offering a range of different investments (including cash, bonds, property and equities) and a number of the funds operate a Lifestyle profile; a specially designed investment strategy which aims at growing your contributions when you are young and then automatically switching your investments to less volatile investments as you approach retirement. This leaflet provides guidance on what you should consider when reviewing your investment choices. Please read it carefully. If you have any questions about the information contained in this leaflet, please see the Here to help section on page 10 for further details. Investment choices are about giving your money the best chance to grow for you. 2

3 1. A brief guide to investments The Scheme allows you to choose how your money is invested from a range of investment options. The funds available through the Scheme relate to either equity, diversified growth, property, bonds, cash or a combination of these. Here are some guidance notes to help you understand the characteristics of each investment type when used in the context of pension saving. 3 EQUITIES Generally, equity funds: Are made up of shares in companies traded on stock markets in the UK or overseas. Are affected by rises and falls in their markets - their value can go down or up. Are expected to experience the highest shortterm changes in value (either up or down) when compared with other investment types. Are expected to offer higher long-term returns than other investment types. Are normally suited to Members who are not planning to retire for several years (at least ten) and hence do not need to think about selling their Scheme investments to buy a pension for several years. Equity funds are expected to have the highest short-term volatility (the scale and frequency of short-term fluctuations in value), but are also expected to produce the highest future investment returns over the medium to long-term. DIVERSIFIED GROWTH Generally, diversified growth funds: Invested in several types of investment, such as equities, bonds, property and alternative assets. Have the potential to provide long-term growth. React to markets differently from equity only funds so collectively they reduce the overall risk. These investments will be actively managed (where the manager seeks to add value by choosing investments that are intended to outperform the market). Actual asset allocation will vary in response to the Manager s views on the different markets. The use of different managers can reduce risk compared to the use of one manager. Diversified growth funds aim to lessen the potential risk (the rises and falls in value) of investing only in equities. In particular, it aims to lessen the impact of a significant fall in equity markets as you approach retirement as the diversified growth funds are not closely correlated to equities. PROPERTY Generally, funds that invest in property: Earn income from rent or through leases, and can also profit by selling properties that have risen in value over time. The properties the funds invest in can be from a variety of business sectors, such as commercial, industrial or retail. Are affected by changes in the value of the property their value can go down or up. Are expected to offer higher long-term returns than bond and cash funds, and can be more stable than equity funds. Are not expected to have long-term returns as high as those of equities. Property funds can offer higher expected returns than bond and cash funds, and can be more stable than equity or diversified growth funds. However, the long-term returns are not expected to be as high as equity or diversified growth funds. BONDS Generally, bonds: Are loans by you to companies or the Government (in this latter case the bonds are known as gilts) for a fixed period. Pay interest to you on the amount loaned and repay the capital to you at the end of the fixed period. Pay interest at a fixed rate (fixed interest bonds) or a rate linked to inflation (index linked bonds). Can rise and fall in value over their lifetime, but returns are not expected to be as volatile as equities. Give a reasonably predictable return if held for their full term. Are more suitable for those nearing retirement who will soon need to buy a pension*. Bond funds are expected to produce a lower investment return than equities over the long term, but are also expected to have lower volatility of investment returns than equity funds. *Please see the Gilts and buying a pension section for a detailed explanation.

4 1. A brief guide to investments (continued) CASH Generally, cash funds: Work in a similar way to a deposit account with a bank or building society. Are expected to provide lower returns over the long term than equities, property or bonds. Ensure that your capital will not go down although inflation may reduce the real value of the investment. Help to protect the value of any tax-free cash amount from falls in value just before you retire. Are generally thought less suitable for Members who are a long way from retirement. Cash funds are expected to provide a lower investment return than either bonds, property, equity or diversified growth funds over the medium to long term, but with much lower volatility. GILTS AND BUYING A PENSION If interest rates are high, then buying a pension costs less (as the insurance company selling the pension will expect to receive a good return on the money you pay them and this good return can be used to pay a higher pension). At the same time, high interest rates reduce the value of gilts. So your gilt fund is worth less, but each 1 buys more pension and the changes roughly cancel out. Similarly, when interest rates are low, the cost of buying a pension increases, but so does the value of your gilt fund. So your fund is worth more, but each 1 buys less pension, again the figures roughly cancelling out. In this way, a gilt fund can provide a higher degree of certainty as to the pension buying power of your money as you approach retirement: increasing in value when pensions are expensive and reducing when pensions are cheaper. BLENDED FUNDS A COMBINATION OF FUNDS A number of the funds available through the Scheme are blended funds, which means they are made up of a combination of different funds. The aim is to capture the most favourable characteristics of each of the component funds and create a blended fund that might be an attractive alternative to Members alongside the other investment options available through the Scheme. Generally, blended funds: Aim to balance risk and reward by investing in a combination of funds, managed by the same or separate investment managers. Will have a risk rating based on their underlying funds investment objectives. There are four blended funds (the higher growth fund, the medium growth fund, the lower growth fund and the defensive fund ). Fund factsheets are available for the blended funds and can be found on the pension website at PAST PERFORMANCE You can see how returns from the different types of investment have varied in the past by viewing the fund factsheets or the past performance tables, both of which are available on the pension website at Please remember that the value of investments, and the income from them, can go down as well as up and you may not get back the full amount invested. Also, past returns are not necessarily a guide to the returns you can expect in the future. 4

5 2. Investment management ACTIVE OR PASSIVE? Through the Scheme, you have access to funds managed by a number of professional investment managers. (Please see pages 6 and 7 for further information on the available funds.) The most important differences between these funds is the type of assets they invest in (for example, UK equities, corporate bonds, etc.). Another difference is how they manage the assets within the fund: passive or active management. PASSIVE MANAGEMENT Passive management (sometimes known as index-tracking) is the process of buying and selling investments with the intention of matching the performance of a chosen market index. For example, for the UK stock market, this could be the FTSE All-Share Index. The passive manager is trying to match the index return and so will hold almost all the different shares or bonds making up the index. This means passive investment returns should closely follow the index returns whether the index goes up or down. Importantly, whilst investing in index funds should allow an investor to enjoy the majority of the general return in a particular market, it does remove the potential for outperformance of a particular market (or index) that otherwise might be achieved by an active manager. As an active investment manager can also underperform an index, passive investment has the effect of removing active investment manager risk for an investor. Charges for passive management tend to be lower than for active management. ACTIVE MANAGEMENT Active investment management is the process of buying and selling investments with the intention of outperforming a specific market index. If successful, active management can generate significant extra return over the long term when compared with passive investment management. However, the opposite could also be true. Actively managed investments carry a higher risk than passively managed investment. They also usually have higher fees. However, the potential returns from active investment (if successful) are higher than passive investment over the long term and the extra return could also potentially be higher than the saving in fees available through passive funds. There are a number of funds available through the Scheme which are actively managed. Fund factsheets, which are available from the pensions website, contain details of each of the fund s investment objectives. In particular, a higher outperformance target generally means that a manager will take more risk (relative to the benchmark) which may lead to more volatile returns over the short-term. 5

6 3. The available funds To assist you in your decision making, the Trustee has divided the funds available to you into different categories, which it refers to as Core Funds, Non-Core Funds and the Default Fund. CORE FUNDS These are the funds that the Trustee has been advised meet the needs of the majority of the membership of the Scheme. The Trustee s aim is to provide you with access to what it regards as the main investment building blocks. The Core Funds are detailed below and are named according to the investment risk assessment of the fund. Each fund carries an annual management charge (which the investment manager charges to manage the fund) and this is included in the fund unit prices. Higher Growth Lifestyle Strategy Medium Growth Lifestyle Strategy Lower Growth Lifestyle Strategy Defensive Fund NON-CORE FUNDS These are additional fund options offered by the Trustee for those Members who want to invest more actively and feel comfortable with selecting from a wider range of investment options. Funds are available on all major asset classes including equities, diversified growth, bonds, property and cash. Also both actively and passively managed funds are available. For a full list of the current funds available please visit the pension website at HOW TO CHOOSE The funds most appropriate to you will depend on a number of factors, including your attitude to investment risk and the length of time until your retirement. Your attitude to investment risk will depend on your personal circumstances and aspirations. Please see section 5 How to choose for further help on making your investment choices. The investment managers and the individual funds available through the Scheme may be reviewed by the Trustee from time to time, in conjunction with their investment advisers. FINDING OUT MORE If you d like to find out more about any of the available funds, please refer to the pensions website at 6

7 4. Lifestyle strategy options A PRE-DETERMINED STRATEGY If you do not wish to be actively involved in making investment decisions, the Scheme has three Lifestyle Strategy Options. The Lifestyle Strategy Options automatically switch your investments as you approach retirement, to help reduce unexpected fluctuations in the value of your fund when you are close to retirement. The Lifestyle Strategy Options invests in funds that aim to increase the value of your Personal Account (including any Additional Voluntary Contributions AVCs you are making) while you are some time from retirement. As you approach retirement, the value of your Personal Account is automatically moved to funds designed to protect the amount of pension you can purchase (this process is referred to as switching ). You will see from the table below that your funds are progressively switched from equities to a mix of bonds and cash over a period commencing five years before retirement: You can find further information on the funds in which the Lifestyle Strategy Options will be invested on the pensions website at www. unitedutilities.com/pensions. Note: the Lifestyle Strategy Funds will not necessarily be appropriate for unexpected events such as death or earlier than anticipated retirement. It may also not be appropriate for all individuals who have different personal and financial circumstances. You are strongly encouraged to consider your own circumstances when making an investment decision. THE DEFAULT OPTION You should note that the Medium Growth Lifestyle Strategy Fund is the default investment option for the Scheme. This means that if you don t make an investment selection when you first join the Scheme, then your contributions and the Company s (where appropriate) will be invested in the Medium Growth Lifestyle Strategy fund. This assumes a retirement age of 65 for switching purposes. The Scheme allows you to change funds, or switch in and out of the Lifestyle Strategy funds on the first day of any month without charge. If you would like to make a change, please see page 10 for further information. RETIRING EARLY The Scheme s Normal Retirement Date is 65, which means - if you select the Lifestyle Strategy Option for your contributions the switching periods detailed below will start when you reach age 60. If your plans change and/or you would like to retire before or after age 65, you may wish the switching periods to begin earlier or later. If you are considering retirement at a different age to 65 you should contact the Scheme Administrator to change your selected retirement age. This will be done on a confidential basis. Your investments will then be adjusted so that the end of the switching period can coincide with your retirement. Years to Target Retirement Date > Medium Growth Fund 100% 90% 70% 50% 30% 10% 0% Defensive Fund 0% 10% 30% 50% 70% 90% 100% 7

8 5. How to choose This section is intended to help you make your investment choices. It will remind you of the issues you should think about when making your decisions. It can t tell you which funds you should invest in as this is a personal decision for you to make. Although, given that you will ultimately use your fund to buy a pension, you should begin with thinking about what you really want from your Personal Account: What type of benefits are you looking for in retirement? Are you willing to take risk in the hope of building up as large a pension as possible? Are you investing for others as well as yourself? When do you want to retire? How far away are you from your selected retirement age? Do you have other pensions or investments in addition to your Personal Account? Your aim is likely to be to maximise the growth of your Personal Account, over the period until your retirement, and so make the most of your savings. To meet this aim you may want to invest in funds that provide a good opportunity for growth. However, generally funds that provide the potential for higher growth also carry a higher level of risk. If you are a long way from retirement you may feel you can cope with any short-term falls in the value of your Personal Account to benefit from potentially greater longer term increases in the value of your investments. In contrast, as you approach retirement, you may want to protect your Personal Account from any short-term fluctuations in value. To do this, you may look to move your contributions into different types of funds that offer the opportunity for less growth but more protection. THINK ABOUT YOUR PERSONAL CIRCUMSTANCES AND VIEWS There are many issues involved in making your investment decision. If you are unsure you may wish to speak to an Independant Financial Adviser (details of how to find one are set out on page 10). Much will depend on your personal circumstances and aspirations, but the following questions will highlight things you may want to consider: HOW NEAR ARE YOU TO RETIREMENT? If it s a long way off, you may want to consider higher risk funds which are more volatile, as you have more time to recover from any falls in your investments. Over the long term, higher risk funds have, in the past, produced the best results (although, of course, there is no guarantee this will continue, and past performance is not necessarily an indicator of future performance). Look for investments in equity funds, but remember, the value of these investments can go down as well as up, and you may not get back all of the capital you invest. If it s very close (say within the next five years), you may want to consider low or medium risk funds because your investments will have less time to recover if their value drops. You may also be more concerned with increasing the certainty of the pension buying power of your investments and also the value of any tax-free cash. Look for defensive funds that invest in bonds to provide more certainty as to your anticipated pension and cash in respect of your tax-free cash sum. Bonds and gilts can also fall in value as well as rise. With cash, your funds will not be protected against any increases in the cost of pensions. A Lifestyle Strategy Option is available within the Scheme that makes switches in your investments during the run up to retirement. Full details are available in The Lifestyle Strategy Option section of this leaflet. 8

9 5. How to choose (continued) THINK ABOUT YOUR PERSONAL CIRCUMSTANCES AND VIEWS (continued) WHAT IS YOUR ATTITUDE TO YOUR INVESTMENTS RISING AND FALLING? Are you relaxed about your funds falling for a while, if you believe they will rise again in the long term? Higher risk investments can be a bit of a rollercoaster ride, but over longer periods, they have in the past produced the best results. However, past performance is not necessarily an indicator of future performance. Look for equity funds. Would you rather have the peace of mind that your investments are less likely to fall in value, even though in the long run you may actually end up with a smaller fund to buy a pension at retirement? Look for cash and bond funds. If you re somewhere in between, remember you can balance risk and reward by investing in a combination of funds, or a blended fund. For example, the Higher, Medium or Lower Lifestyle Strategy Option Funds. HOW HARD WILL YOUR FUNDS HAVE TO WORK TO KEEP PACE WITH YOUR PAY RISES? Generally you won t want to take a big cut in income when you retire. So you ll need your savings to rise as your earnings do. If retirement is a long way off and you are expecting your pay to increase throughout your career, low risk investments have, in the past, not generally kept pace with rises in earnings. WILL YOU HAVE OTHER SOURCES OF INCOME APART FROM YOUR UUPS PENSION? If you have other money, e.g. from property or an inheritance, you may be comfortable investing in higher risk funds as it doesn t matter as much if things don t work out. Look for equity funds. If your pension is all you will have you might not want to be so bold. Alternatively, you may decide that as this is all you have to live on, you will have to try for as big a pension as possible but remember, you ll need to live with the consequences if it doesn t work out THINK ABOUT THE FOLLOWING RULES OF INVESTMENT SOME INVESTMENTS HAVE HIGHER CHARGES THAN OTHERS Bear this in mind when you choose your funds as you will need to get a higher return from these funds to make up for the fees. Actively managed funds generally have higher charges than passive/tracker funds. Details of fund charges are available on the factsheets that are on the pensions website INFLATION WILL AFFECT THE VALUE OF YOUR INVESTMENTS At retirement, it will be the buying power of your pension pot that counts. We all know that 100 today buys you less than it did ten years ago. In the past, some investments have not risen in line with inflation although they have gone up they will actually buy less. And, generally, people s pay and therefore their standard of living goes up at a higher rate equal to or higher than inflation. YOUR DECISION Thinking about some of the issues discussed in this section will help you think about the type of investments that might be appropriate to you. You should take all of these issues and factors into consideration before making your investment decision and, if you think it is necessary, consult a Financial Adviser. You probably need to think about all of these questions rather than just one or two. However, it may be that your answer to one of these questions is so important to you that it outweighs all of the other issues. 9 9

10 6. Making a decision YOUR DECISION Your investment strategy (and the option/s you select) should be based on a number of factors, including your attitude to risk and the length of time until your retirement. You should remember: If you do not wish to be actively involved in making investment decisions, you can select one of the Lifestyle Strategy Options for your contributions, or one of the blended funds. (See page 4 for details of the blended funds) You can invest in any number of funds from the range on offer. You can choose between Core Funds and Non- Core Funds, which may be actively or passively managed. You can change your investment fund at any time It is worth reviewing your investment strategy on a regular basis please see Reviewing your decision below. REVIEWING YOUR DECISION Your pension is a long-term investment, so you should generally only consider changing your investment strategy if your personal circumstances change. However, regularly reviewing your investment choices is an important part of your investment strategy, as you need to make sure your contributions are invested to meet your changing needs as a Member of the Scheme. The Scheme allows you to change funds, or switch in and out of the Lifestyle Strategy Options, on the first day of any month without charge. If you would like to make a change, please complete the change of Investment Form that can be found on the pension website. You may also make changes to your investments online via the website operated by the administrators where you can also view your current contributions and fund value. Please contact the administrators direct (details on the pensions website) if you require logon details or have any difficulties using the website. HERE TO HELP If you have any questions about the information in this leaflet or require further details, you can contact the Scheme Administrator contact details are on the pensions website. Whilst the Trustee and the Pensions Department can provide you with information about the available investment options, they cannot offer you advice which is specific to your circumstances. Your choice of investment options will be based on a number of personal factors, including your attitude to taking risk and the length of time until your retirement. If you need advice based on your personal circumstances, you should speak to an Independent Financial Adviser (IFA). For details of your nearest IFA, please contact IFA Promotion on or visit ADMINISTRATION Details of the Scheme administrator can be found on the Pensions website at pensions. helping life flow smoothly unitedutilities.com/pensions United Utilities Haweswater House Lingley Mere Business Park Lingley Green Avenue Great Sankey Warrington WA5 3LP Registered in England and Wales Registered Number /11/SD/4866