1 LIFESTYLE PROFILE GUIDE FOR SCHEME TRUSTEES AND EMPLOYERS How your members could benefit from our Lifestyle investments
2 INTRODUCTION Lifestyle Profile Guide Introduction This guide is for use with the Group Personal Pension, Group Stakeholder Pension, Group Occupational Pension, Group Additional Voluntary Contribution Schemes and the Trustee Transfer Plan. 2 One of the most important aspects of investing for retirement is to develop and maintain the correct investment strategy. This can be costly and time-consuming to do over the lifetime of a retirement plan. Especially for group pensions where all the individuals will have different needs at different times. We can help with this. We offer three types of lifestyle investments. They all aim to meet the overall objective as retirement approaches of moving from assets with a higher risk (but with the potential to give higher returns) e.g. stocks and shares, to those with a lower risk e.g. money market and fixed interest. The three different lifestyle investment options to choose from are described in this guide. In summary, they are as follows: 1. Lifestyle Retirement funds actively managed funds, each linked to a target date. The member will typically choose a fund with a target date close to their retirement date. See page 6 for an explanation of Lifestyle Retirement funds. 2. Risk Rated Lifestyle Profiles a choice of three ready-made lifestyle profiles that are geared to the member s expected retirement date. They automatically switch between a range of funds at certain times. See page 8 for an explanation of Lifestyle Profiles. 3. Bespoke Lifestyle Profile where an automated profile targeted to the member s expected retirement date is specified by the employer or scheme trustee. This can use a combination of funds from our range. This option is not available under the Trustee Transfer Plan. See page 11 for an explanation of the Bespoke Lifestyle Profile. Whilst these strategies aim to preserve the retirement fund built up for each member, there are no guarantees they will prove beneficial to each retirement fund. Please remember that the value of investments can fall as well as rise and is not guaranteed - this means that the member may get back less than they invest. It s also important to remember that there are other factors which will affect the level of benefits that members may receive. These include how much has been paid in, the level of charges associated with the plan, the level of annuity rates at the time the member takes their pension, and tax legislation. These factors are subject to interpretation, change and individual circumstances. Further information on our investment funds is given in the Where do you want to be?' pension funds guide available from your financial adviser. If you would like to discuss investment strategies in further detail, you should talk to your financial adviser. Please note that your financial adviser may charge you for any advice provided.
3 Lifestyle Profile Guide RISK CATEGORIES Risk categories Make sure you know exactly what we mean Risk categories There are various ways to measure risk, but we have chosen to categorise the risks involved in our fund range by taking into account the volatility of each asset class. This means the ups and downs in the returns of an investment in relation to its value over a fixed period. Our asset classes are detailed on page 6 of the 'Where do you want to be?' pension funds guide. Volatility is used as a guide to help the member understand the potential risks and rewards involved with our funds and the types of assets they hold. Each increase in risk level represents an increase in the potential for the member s investment to grow. But it also means an increase in the likelihood of the value of the member s retirement fund fluctuating dramatically, or the member losing all or part of their investment. How accurate are the risk categories? They are simply a guide. values will normally fall and rise in line with movements in the investment markets. Over time a fund manager may change the assets they invest in. This may mean that funds move from one risk category to another. The member should review their fund choice regularly to make sure it s still meeting their objectives. But remember, past performance is not a guide to the future. The risk categories may not prove to be accurate. Please note that funds have been assigned a risk category based on our methodology for assessing risk, which is described above. It is important that you look up the risk category for each fund and do not rely on the fund name as this may contain the same words as one of our defined risk categories. 3
4 RISK CATEGORIES Lifestyle Profile Guide Our investment risk categories We grade our investment funds on a scale of Very Cautious to Very Adventurous, with Very Cautious being the lowest and Very Adventurous being the highest level of risk. The risk category assigned to each fund will match one of the defined categories, or investment approaches, below: Very Cautious Cautious Managed Balanced Managed Adventurous Very Adventurous You are only willing to accept a very low risk to your investment and wish typically to invest wholly in money market assets. You understand that the potential for growth is small and that over the long term inflation will reduce the buying power of money market assets. As you typically wish to invest wholly in money market assets, an investment product is likely to be unsuitable for you as investments in such products will fluctuate in value and are not guaranteed to return your capital. Product and fund charges could exceed any growth meaning you could get back less than you invest. These funds will hold investment in shares and other non-cash investments so there may be potential risk to the amount you invest. You are looking for an investment where the return over the long term is expected to be an improvement on that available on high street deposit accounts. You are willing to take some risk in order to seek some growth potential. You understand that this will increase the amount by which your investment will fall and rise in value. However, under normal circumstances, you would feel uncomfortable if your investments fell and rose sharply in value. You could get back less than you invest. Typically, you would consider investing in Money Markets, Fixed Interest, Property and also in Shares. You are looking for a balance of risk and reward with the aim that, in the long term, higher returns may result than those available from more cautious investments. You are willing to accept that the value of your investment will fall and rise in value. You could get back less than you invest. Typically, you would consider investing in a wide variety of assets, such as Shares, Property, Fixed Interest and Money Market. Risk will usually be reduced by spreading investment across a variety of sectors and markets and/or limiting exposure to overseas markets. You are willing to accept a high level of risk on your investment in order to seek higher growth potential, in the longer term, than is available on less speculative investments. You are prepared to accept that this will increase the risk of large fluctuations in the value of your investment and of losing some or possibly all of your capital. You could get back less than you invest. Typically, you would consider investing in a narrow range of asset classes, primarily in Shares. There may also be exposure to currency risk via investment in overseas markets. You are willing to accept a very high level of risk on your investment in order to seek very high growth potential in the long term. You are willing to accept sudden and large day-to-day fluctuations in the value of your investments and you accept the risk of losing some or all of your capital. 4 Typically, you would consider investing in Shares in specialist equity markets or sectors, which are expected to be particularly volatile e.g. Emerging Markets. There will be exposure to currency risk via significant investment in overseas markets. You could get back less than you invest.
5 Lifestyle Profile Guide RISK CATEGORIES Special risk factors Some funds carry risks because of the type of assets they invest in. For the benefit of members making their own investment decisions, the special risk factor(s) applicable to the each fund is shown under the Special Risks column in the table of funds. Special risk rating A Currency B Emerging Markets C Smaller Companies D Income s E Specialist Sector F Property G Offshore Investment H Bond I Unit Trust Definition Where a fund holds investments in a different currency to that of the fund, the value of the fund may rise and fall purely because of exchange rate fluctuations. Emerging Market funds may be subject to large fluctuations in value and in our opinion such funds are high risk. Companies in emerging markets may not be regulated as strictly and their shares may be harder to buy and sell than companies in more developed markets. The price fluctuations of funds investing in smaller companies may be greater than the price fluctuations of funds investing in larger companies. s that invest in income-producing assets incur the cost of re-investing the income within the fund. This cost will be higher for funds that invest more in income-producing assets than those that do not. s Investments in specialist sector funds, such as technology or healthcare, are considered to be higher risk due to their concentrated exposure to specific areas. Such funds can offer the potential for greater returns over the long term but this tends to be coupled with higher volatility. Cash in, or switches from, funds investing in property may be deferred by up to six months or longer in exceptional circumstances. This is to enable property to be sold if necessary. The value of properties held is generally a matter of the valuer s opinion rather than fact. From time to time valuations are carried out by independent chartered surveyors. An offshore fund is one that has been established outside of the UK Mainland (e.g. Luxembourg). Investment in such funds may suffer higher taxation than investment in an equivalent UK-based fund because income is taxed differently, and will be subject to different regulatory controls. Companies issue corporate bonds in order to raise capital, so effectively investors in corporate bonds are loaning the company money. This means that the more financially secure a company issuing the bond is, the more likely it is that it will be able to pay back the loan. Less financially secure companies have a higher risk of default (on the loan). These higher risk bonds are sometimes known as sub-investment grade or junk bonds. s that invest in these higher risk bonds also have an increased risk of default (on the loan). This means the capital value of the fund is more likely to be adversely affected as would the income being generated by the fund. Where a fund invests in a unit trust there may be a cost to the fund to cover the buying and selling of underlying assets levied by the underlying unit trust manager. When this happens it will have a negative effect on the performance of the fund. 5
6 LIFESTYLE RETIREMENT FUNDS Lifestyle Profile Guide Lifestyle Retirement funds Actively managed 6 What are the Lifestyle Retirement funds? There are currently nine Lifestyle Retirement funds: FL Lifestyle Retirement 2010 AP FL Lifestyle Retirement 2015 AP FL Lifestyle Retirement 2020 AP FL Lifestyle Retirement 2025 AP FL Lifestyle Retirement 2030 AP FL Lifestyle Retirement 2035 AP FL Lifestyle Retirement 2040 AP FL Lifestyle Retirement 2045 AP FL Lifestyle Retirement 2050 AP Here is some key information about the funds. On the next page we show how they work in practice. Manager: AXA Investment Managers UK Limited ('AXA IM UK'). AXA IM UK is a 'multi-expert' investment management company in the UK, part of the AXA Group. Friends Life has historically provided a wide range of funds covering the major asset classes. One of our investment partners, AXA IM UK, manage these funds on our behalf. Aim: to provide an appropriate mix of assets for investors who wish to build capital to purchase a pension in or around the years 2010, 2015, 2020, 2025, 2030, 2035, 2040, 2045 and Risk category: Adventurous initially, then about 10 years before the end date, the assets in which the fund invests start to switch to lower risk investments. Therefore the risk rating of each Lifestyle Retirement fund will move through Balanced Managed to a Cautious Managed risk rating. For example, the 2040 fund has an Adventurous risk category but the 2015 fund has a Balanced Managed risk category. Special risk factors: A and C for all. You can refer back to page 5 for an explanation of each special risk factor. Each fund s number refers to the year when the fund assets match () the required low risk profile for a member wishing to purchase a pension income in, or around, the same year. All members are automatically invested in the fund(s) required to meet their planned retirement date (see chart overleaf). For example, the chart shows that a member with a retirement date in 2037, will have their pension contributions invested as follows in Retirement fund 2035 and in Retirement fund A Lifestyle Retirement fund may remain available for up to five years after its target year, to allow continued investment for members whose retirement date means that they hold part of their investment in that fund. A Yearly Management Charge will apply to the scheme but there is currently no additional charge for choosing to invest in the Lifestyle Retirement funds. Details of the Yearly Management Charge for your scheme can be found in the Key Features Illustration. Please see the relevant plan booklet for your product for details of how and when we may make changes to charges.
7 Lifestyle Profile Guide LIFESTYLE RETIREMENT FUNDS Percentage of investment allocated for each fund Member s expected retirement date or later The fund changes over time; to seek to grow the fund, the managers will mainly invest in shares (equities). Then, to aim to preserve the pension fund that has been built up, as the fund's target date approaches, the managers will move to hold fixed interest and money market investments. Whilst this strategy aims to help preserve the fund that has built up over the previous years, there is no guarantee that it will prove beneficial to the pension fund. To illustrate the difference in the assets of these funds, please see the pie charts below. These charts show what the asset allocations were for the 2015 and 2040 funds as at 31 December The overall objective is to move the assets to a split between gilts/fixed interest investments (75%) and a money market holding (25%) in the fund's target year. Please remember that the value of investments can fall as well as rise and is not guaranteed - this means that the member may get back less than they invest asset allocation as at December 2012 n UK Corporate Bonds % n UK Government Bonds..18.3% n UK Equities % n Overseas Equities % n Money Market...0% 2040 asset allocation as at December 2012 n UK Equities % n Overseas Equities % n Money Market...0.7% 7
8 LIFESTYLE PROFILES Lifestyle Profile Guide Risk Rated Lifestyle Profiles Designed to help make pension investing simpler A Lifestyle Profile is a mix of funds where the mix changes automatically on nearing retirement. We offer three pre-defined (although subject to change at our discretion) Lifestyle Profiles Cautious, Balanced and Adventurous. They are each designed to be suitable for a different attitude to risk. We have selected funds from our range, and have pre-defined the proportion of each fund that will make up the mix at each stage of each profile. There are two stages to our Risk Rated Lifestyle Profiles: n n Initial Stage This is where the funds are chosen for potential long term growth prospects e.g. higher share content. Higher share content will pose a higher risk to capital. Destination Stage This represents the final five to seven years of the profile, with the investments increasingly geared towards retirement, with a lower risk to capital. During this stage, there will be a gradual transfer of fund holdings to ensure the target split of destination funds are reached just before retirement. The timing of the stages profile is stipulated. As this timing is given in years to retirement, the profiles are suitable for people of any age. It should always be remembered that with any of the choices, each investment fund carries its own individual investment risks. A fund s value is not guaranteed and can fall as well as rise. Members may get back less than they pay in. Furthermore, there is no guarantee that this strategy will prove beneficial to the pension fund. The details of each profile are shown overleaf. 8
9 Lifestyle Profile Guide LIFESTYLE PROFILES Cautious Lifestyle Profile 100 Initial Stage Destination Stage Risk: Cautious FL Cash AP FL Index Linked AP FL Fixed Interest AP FL Property AP FL Global Equities AP FL UK Equity AP 0 Balanced Lifestyle Profile 100 Initial Stage Destination Stage Risk: Balanced FL Cash AP FL Index Linked AP FL Fixed Interest AP FL Property AP FL Global Equities AP FL UK Equity AP 0 Adventurous Lifestyle Profile 100 Initial Stage Destination Stage Risk: Adventurous FL Cash AP FL Index Linked AP FL Fixed Interest AP FL Global Equities AP FL UK Equity AP The funds held and the timing of the automatic switching varies between each of the Lifestyle Profiles and helps ensure a smooth transition to less risky funds. The charts shown above are for illustrative purposes only and show the target fund splits. These may vary on a daily basis due to market movements. 9
10 LIFESTYLE PROFILES Lifestyle Profile Guide How does this investment strategy work in practice? New contributions in any phase are initially invested in the destination funds for that phase but will form part of the re-balancing of the overall investment split each month. As an example, let s look at the Adventurous Profile. It has two funds (FL UK Equity AP and FL Global Equities AP) into which a member will be invested in the initial stage. All contributions are invested in the percentages shown. Each month we re-balance the overall investment so that the split remains in line with the profile. When a member is seven years away from their retirement date, the automatic switching phase will begin. New contributions will be invested in the three new funds (FL Fixed Interest AP, FL Index Linked AP and FL Cash AP), and the whole portfolio will be rebalanced each month to achieve a smooth phased switch into the destination funds with the final switch taking place one month before the end of the stage. The table below gives an example of how the fund holding differs at different stages of the profile: the Initial Stage, the stage reached after a year of phased switching (6 years to retirement) and the Destination (figures rounded to one decimal place): Initial Stage 6 years to retirement Destination FL UK Equity AP 65% 55.7% - FL Global Equities AP 35% 30.0% - FL Fixed Interest AP - 7.1% 50% FL Index Linked AP - 3.6% 25% FL Cash AP - 3.6% 25% Total holding 10 Will the Lifestyle Profiles change? We may change the investment percentages of the funds included, add in new funds or remove existing ones, in order to maintain the overall aim of a profile. Each member s plan will be altered accordingly. Are there any additional charges for the Lifestyle Profiles? A Yearly Management Charge will apply to the scheme but there is currently no additional charge for choosing a Lifestyle Profile. Details of this can be found in the Key Features document. Please see the relevant plan booklet for your product for details of how and when we may make changes to charges. Bespoke Lifestyle Profile Also we offer employers and trustees the chance to create a Lifestyle Profile of their own. Employers and/or trustees design a Bespoke Lifestyle Profile for use by the members of their scheme. This profile can invest in funds from our wide range. The range of funds available is described in 'Our Pension s' guide. You can find more information on Bespoke Lifestyle Profiles on the following page.
11 Lifestyle Profile Guide BESPOKE LIFESTYLE PROFILES Bespoke Lifestyle Profile Choose the fund mix and investment phases You can create your own Lifestyle Profile, tailored to the needs of your scheme. As with our Risk Rated Profiles, this offers members a conveniently packaged solution. The profile should be designed with your adviser s assistance. They can help you fully understand the investment risks and ensure that an appropriate strategy is put in place. Then you just let us do the rest. How do I create a Bespoke Lifestyle Profile for my scheme? There can only be one Lifestyle Profile per scheme. It works by dividing the pension investment needs into two or three distinct stages. The profile is built up as follows: n select the initial mix of funds aimed at capital growth; n choose the mix of funds required at retirement; n decide on how many years before retirement the Destination Stage should start; and n if an intermediate stage is desired, select the funds for this period and specify at what point it should begin. 11
12 BESPOKE LIFESTYLE PROFILE Lifestyle Profile Guide Now let s look at an example Bespoke Profile where the aim is to help reduce risk as retirement approaches: Lifestyle Broad s/timescale (a maximum Profile stage investment aim of 5 funds in each stage) INITIAL Capital growth Until 12 years to retirement potential FL Global Equities AP 30% FL UK Equity AP FL Newton Oriental AP 10% FL AXA Framlington Health AP INTERMEDIATE Capital growth potential From 12 years to retirement (optional) with a reduction in the to 6 years to retirement level of risk compared 30% FL Global Equities AP to the Initial Stage 30% FL UK Equity AP 15% FL Ethical Distribution AP 15% FL Newton International Bond AP 10% FL Property AP DESTINATION Investment in From 6 years to retirement less volatile 50% FL Fixed Interest AP assets 25% FL Index Linked AP 25% FL Cash AP What funds can be used in the Lifestyle Profile? We offer a wide range of pension funds, covering many asset classes. These include some funds managed by specialist investment companies. 'Our Pension s' guide has more information on the funds available, their risk categories and any additional charges. In the guide you will also find the Lifestyle Retirement funds. These funds can t be used for the Lifestyle Profile because they are designed for specific retirement years. The With Profits is also unavailable. External funds are accessed via 'mirror funds'. These mirror funds invest in the external funds, which are subsequently often referred to as 'underlying funds'. When you invest in a mirror fund you will be allocated units in that mirror fund. The mirror fund will in turn invest in the underlying fund and so hold units in that underlying fund. 12
13 Lifestyle Profile Guide BESPOKE LIFESTYLE PROFILE Although the mirror fund holds units in the underlying fund, the performance of the mirror fund may not be the same as that of the underlying fund. Several factors contribute to this. These factors can include those arising from differences in some or all of the following: n n n the amount of cash held in the mirror fund. Please note that cash is not held as an investment but cash balances can arise due to timing differences between transactions within the fund, the timing of transactions between the mirror fund and the underlying fund and the pricing basis of the underlying fund. External funds may attract an additional Yearly Management Charge, and initial oneoff charges, which will vary depending on the fund chosen. Please see the guide, 'Our Pension s' for further details. Please remember the value of investments can fall as well as rise and is not guaranteed. This means that the member may get back less than they invest. 13
14 PEOPLE AND THE LIFESTYLE PROFILE Lifestyle Profile Guide People and the Lifestyle Profile The questions and answers in this section are relevant to all three of the Risk Rated Lifestyle Profiles and to any Bespoke Lifestyle Profile created specially for a scheme. How do new members join? Most entrants join the profile with the investment split defined by the Initial Stage. If, however, a new entrant joins a profile at a later stage the situation is slightly different as the stage in which they are joining will already have begun its transition towards the destination funds (see page 10). In practice, contributions received will only be invested in the destination funds for the stage of the profile in which they joined. Then, at the first monthly rebalancing date after they join, their investment will be rebalanced to reflect the investment split applicable to the precise point they are in the profile. This means that at any given point away from an individual s selected retirement date, rebalancing will ensure that everyone is treated the same. That is, an individual who has been in the profile for a while, a brand new entrant and an individual switching into a profile from other funds will all be rebalanced to the correct point in the profile. Can a member switch into a profile at a later date? Yes, members who are not in a Lifestyle Profile but decide to switch into it at a later date will have their existing investments switched immediately to reflect the appropriate stage of the Lifestyle Profile. This works the same way as for new entrants. Rebalancing will then proceed as normal for the remainder of that stage. Members who already have a Lifestyle Profile may switch to a different Lifestyle Profile at a later date if they wish. For example, they could switch from an Adventurous Profile to a Cautious Profile. What if a member s retirement age changes? The appropriate fund switches will be made to place the member in the same position as they would have been in had they originally chosen that retirement age. Subsequent switching and rebalancing will then continue as normal. 14
15 Lifestyle Profile Guide PEOPLE AND THE LIFESTYLE PROFILE Can a member leave a profile? Yes, a member may leave a profile at any time and make a different choice of funds from our range. There is currently no switch charge. However, we reserve the right to apply a switch charge in the future in accordance with the plan terms and conditions. Please refer to the Where do you want to be? pension funds guide for details of when and how we may make changes to charges. Any automatic switching would stop at that point. Do all contributions have to be invested in the profile? Yes, if a member chooses a Lifestyle Profile, all their contributions must be invested in it. They cannot, for example, put half their contributions in it and half in other funds. Single contributions and transfer values will also be invested in the Lifestyle Profile. Can employees create their own Bespoke Lifestyle Profiles? No, a Bespoke Lifestyle Profile can only be created by the employer or trustees. And there can only be one Bespoke Profile per scheme. A member can opt out any Bespoke Profile offered by a Group Personal Pension or Group Stakeholder Pension. A member can opt out of a Bespoke Profile offered by a Group Occupational Pension if allowed by the trustees. Members who choose to opt out or leave the Bespoke Lifestyle Profile will have to make a different choice of funds from our range, or select a Risk Rated Lifestyle Profile. For the Group Occupational Pension or the Group Additional Voluntary Contribution plans, the employers and trustees must be satisfied that the Trust documentation which governs the scheme allows the members to do this. Bespoke Lifestyle Profiles are not available under the Trustee Transfer Plan. 15
16 The telephone number of our Administration Centre is The address for written communication is Friends Life, PO Box 1810, Bristol, BS99 5SN. Friends Life Services Limited distributes and administers financial products and services and is authorised and regulated by the Financial Services Authority, register No (www.fsa.gov.uk/register/home.do). A company limited by shares, registered in England No , registered office: Pixham End, Dorking, Surrey, RH4 1QA. As part of our commitment to quality service, telephone calls may be recorded. ALPBN 07/03/13