UNIVERSITIES AND COLLEGES RETIREMENT SAVINGS SCHEME THE INVESTMENT SOLUTION

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1 This brochure is for professional use only. Published August UNIVERSITIES AND COLLEGES RETIREMENT SAVINGS SCHEME THE INVESTMENT SOLUTION PENSIONS PEOPLE VALUE FROM MERCER

2 MERCER DC AND SAVINGS PENSIONS PEOPLE VALUE, WHATEVER THEIR PRIORITIES IN LIFE You employ different people with widely differing aspirations, attitudes, and priorities. So how can you engage all of them in thinking seriously about the value of pensions and savings? CONTENTS INTRODUCING THE INVESTMENT SOLUTION TAILORED INVESTMENTS FOR YOUR DIFFERENT TYPES OF MEMBERS DO IT FOR ME THE DEFAULT STRATEGY DO IT FOR ME THE GROWTH PHASE DO IT FOR ME THE PRE-RETIREMENT PHASE HELP ME DO IT AND LEAVE ME TO IT WHY CHOOSE THE MWS INVESTMENT SOLUTION? Mercer s strategic and collaborative approach to workplace pensions and savings is designed to help ensure that employees outcomes are at the centre of pension provision by creating pensions people value. Pensions and savings aren t just about personal finances they re about people as individuals and employees. Effectively managed, pensions and savings can help to motivate your people and ensure that they continue to contribute to the success of your business. This is why Mercer has created a single team combining a wide range of pensions and savings experts. Dedicated to ensuring that all of your employees understand, value, and appreciate their pensions and saving benefits, our people want to ensure your people are able to retire at a time that is right for them and you.

3 INTRODUCING THE INVESTMENT SOLUTION The Universities and Colleges Retirement Savings Scheme (UCRSS) solution has been designed to provide investment options that meet the needs of different types of members. These include: The 80% 90% of members who just want decisions taken for them, and for whom there should be a keenly priced, high-quality default fund. Members who want to play an active part in planning for their retirement but need some assistance in choosing the right fund from a carefully selected range. Members who are confident about making investment decisions and want access to a choice of funds across different asset classes. We refer to these different types of members as Do it for me, Help me do it, and Leave me to it. This brochure outlines the steps we ve taken in our efforts to attain the best possible investment outcomes for all these types of members, now and in the future. The Mercer funds outlined in this brochure can be accessed via the Friends Life insured fund platform. The providers will make these funds available to clients by blending and white-labelling a range of underlying funds. More information is available on request. 1

4 TAILORED INVESTMENTS FOR YOUR DIFFERENT TYPES OF MEMBERS As defined contribution (DC) schemes grow in size, whether as a result of auto-enrolment or the closure of defined benefit schemes to future accrual, many of our clients are re-evaluating their DC investment arrangements and asking whether these schemes are fit for purpose. As the main aim of the the UCRSS investment solution is to deliver pensions people value, it s vital that the fund range available to members reflects the best of DC thinking and nowhere is this more important than in the default fund. Clearly, the amount a member and employer pay into the scheme is the biggest determinant of the overall outcome, but how the money is invested is also critical. The UCRSS investment solution is built around our understanding of different member needs. In our experience, rather than asking members to choose from a list of funds, or asking them about their appetite for risk, it makes more sense to start with a different question: How do you like to make investment decisions? We have found that members find this question easier to answer and that their responses fall into one of three main groups: Do it for me, Help me do it, and Leave me to it. Ongoing Mercer governance is central to the investment offering and draws on the output from our global manager research group and our asset allocation views to allow the fund range offered to continually evolve and reflect the group s best ideas. The structure we offer is summarised below. WHAT DOES THIS MEAN IN PRACTICE? Because we believe that each of these three groups has distinct requirements, UCRSS investment options are designed to meet these needs in a cost-effective manner, while enabling members to benefit from ongoing Mercer governance. MEMBER SEGMENTS DO IT FOR ME HELP ME DO IT LEAVE ME TO IT IMPLEMENTED GUIDED FACILITATIVE MERCER DEFAULT STRATEGY MERCER CORE FUNDS MERCER ASSET CLASS FUNDS 2

5 DO IT FOR ME In our experience, the majority of members in most DC schemes end up in the default option, either through inertia or because they don t feel they have the expertise or time to make their own investment decisions. For most DC schemes, the structure of the default option will therefore have the greatest effect on member outcomes at retirement so its design must meet members needs over time and aim to deliver adequate returns with an acceptable level of risk. The Mercer default strategy represents our best thinking in DC investment and is designed to evolve in line with our latest views, market opportunities, and market trends. HELP ME DO IT These individuals want to play an active part in planning for their retirement but need assistance in understanding the investment options available to them. We can facilitate this with Mercer risk-profiled funds. As they require some guidance in choosing the right investment options, these members also need a strong governance framework around the funds available to them, so we ll monitor the risk-profiled funds as part of our ongoing investment governance. LEAVE ME TO IT At the other end of the spectrum from the Do it for me members are the financially active Leave me to it members, who want to tailor their investment decisions to suit their personal risk and return profile. We re able to offer these members a suite of asset class funds. These investors are offered an extensive line-up of asset classes and have the option of selecting their own funds. 3

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7 DO IT FOR ME THE DEFAULT STRATEGY Default arrangements can generally be split into three components: the growth phase, the pre-retirement phase, and the retirement phase. In a traditional lifestyle strategy, the growth phase typically consists of an investment solely in equities, the pre-retirement phase typically comprises investments in bonds and cash, and the final retirement phase involves the purchase of a standard annuity from a provider. This traditional approach has some attractive features, but it also has a number of flaws, which we ve sought to address in the design of our default strategy. Our approach enhances each stage of the traditional lifestyle strategy with the objective of improving member outcomes and reducing uncertainty at retirement. GROWTH PHASE At the heart of our default strategy is the Mercer Mixed Investment Pension Fund 3 (the Growth Fund). In our experience, many members of DC schemes have a buildingsociety outlook, in the sense that they re looking for an investment that delivers steady growth, and they re uncomfortable with significant falls in value along the way. Taking this into account, the Mercer Mixed Investment Pension Fund 3 invests in a diversified portfolio of growth assets, including asset classes that are not traditionally used in DC investments (such as emerging market debt and commodities) in order to reduce the volatility of returns and, consequently, the range of potential outcomes. PRE-RETIREMENT PHASE We ve also created a range of target retirement funds that switch members from the Mercer Mixed Investment Pension Fund 3 (the Growth Fund) to assets that should best match their requirements for purchasing an annuity at retirement. Active management of the switching process within the pre-retirement funds further enhances the potential outcome at retirement. As members approach retirement they will be asked to choose the target retirement fund that best reflects both their likely retirement date and their requirements for retirement income. For example, an individual looking to retire in 2017 and to purchase a fixed annuity would be switched into an appropriate 2017 Mercer target retirement fund. We believe that asking members to make these decisions when they are six or seven years away from retirement provides a much more realistic decisionmaking horizon than traditional target-date funds, which often ask members to make retirement decisions 30 to 40 years in advance. RETIREMENT PHASE To increase the income that members are likely to be able to secure with their accumulated assets, members have the opportunity to purchase their annuity via an open market option service. And we re developing a range of funds that will be suitable for use with income drawdown, an option that is likely to be used more frequently as an increasing number of members retire with a greater portion of their retirement assets derived from DC schemes or from income in excess of the Minimum Income Requirement. So how will our default fund s growth and pre-retirement phases work in detail? 5

8 DO IT FOR ME THE GROWTH PHASE Our key aim in constructing the growth portfolio for our default strategy was to create an efficient, diversified portfolio that is expected to deliver a similar return and superior risk characteristics to developed market equities over the long term. In addition to aiming to reduce the variability of returns, we ve also focused on maximising the growth of members assets by minimising fees through a passive investment approach. While the Mercer Mixed Investment Pension Fund 3 (the Growth Fund) is designed to reflect our current best ideas in portfolio construction, the asset allocation will gradually evolve in line with our views on the latest DC investment trends and market opportunities. This element of futureproofing is designed to give sponsors peace of mind that investment arrangements that are fit for purpose today will remain so in the future. THE MERCER MIXED INVESTMENT PENSION FUND 3 (THE GROWTH FUND) ASSET ALLOCATION The chart below illustrates the initial asset allocation of the growth element of our default strategy, the Mercer Mixed Investment Pension Fund 3. This asset allocation is achieved by investment in a passively managed global equity fund, a passively managed UK equity fund, and the Mercer Diversified Growth Fund, which combines an active asset allocation overlay with passive building blocks. STRATEGIC ASSET ALLOCATION OF MERCER S MIXED INVESTMENT PENSION FUND 3 (THE GROWTH FUND) (AS AT 30 SEPTEMBER 2013) Small Cap Equities, 3.75% Low Volatility Equity, 6.25% World Developed ex UK Equity, 21.50% Emerging Markets Equity, 6.25% Emerging Markets Bonds, 5.00% Overseas Corporate Bonds, 7.00% UK Corporate Bonds, 3.00% Overseas Property, 2.50% UK Property, 1.25% UK Equity, 38.50% Commodities, 5.00% 6

9 Our proprietary portfolio structuring toolkit is designed to combine asset classes and create a portfolio that maximises returns while minimising volatility. The inclusion of alternative investment allocations via the Mercer Diversified Growth Fund balances the aims of improving portfolio efficiency and avoiding unnecessary complexity and expense. This in turn provides a growth portfolio that is expected to have lower risk and higher return characteristics compared to the traditional global equity approach. Over the long term, investing in large, developed equity markets has served many investors well. Going forward, however, we believe that not only will a more diversified approach improve member outcomes, but also that the way investors seek to capture the wealth created by equity investment needs to change to respond to the transforming economic landscape. For example, the often-used Morgan Stanley Capital International (MSCI) World Index excludes emerging markets and captures only the top 85% of developed market companies. This excludes the emerging market and smaller, faster-growing companies that are expected, in the long term, to generate higher returns than their developed market peers. Mercer seeks to address these low exposures within the portfolio s equity allocation while tempering the higher volatility associated with these areas of the market through an allocation to low-volatility global equities. All aspects of the asset allocation of the Mercer Mixed Investment Fund 3 will be kept under regular review so that it reflects our best DC investment ideas and current market opportunities. Once the portfolio has been implemented, our dynamic asset allocation (DAA) process reviews and, if appropriate, changes the asset allocation to respond to changing valuations and market environments. This process looks to exploit dynamic shifts away from longterm strategic asset allocation and reduce portfolio risk when markets have significantly moved away from fair value. Our DAA team adopts a holistic approach to assessing asset class performance, believing that no single valuation variable or model will produce optimal results. For equities, for example, we consider a range of relevant factors: Valuation factors, including earnings-based, yield-based, and balance sheet measures. Momentum factors, including the evolution of the business cycle and earnings expectations. Liquidity and sentiment factors, including risk appetite measures. Rather than relying on a model-based approach, the DAA framework establishes asset class performance indicators. These are absolute valuation views, relative to our long-term return expectations, and range from extremely unattractive to extremely attractive. 7

10 DO IT FOR ME THE PRE-RETIREMENT PHASE The first stage in the pre-retirement phase is to contact members approximately six years before their selected retirement age, to ascertain when they expect to retire and how they would like to receive their income. Once we ve established whether a member expects to purchase a rising or fixed annuity on retirement, his or her assets are switched to an appropriate Mercer target retirement fund based on this information and the member s expected retirement date. There are two types of Mercer target retirement funds available A and B. Target retirement funds A aim to help members looking to purchase a fixed annuity to get ready for retirement. Mercer does this by looking to ensure the fund they are investing in is closely aligned to the behaviour of a fixed annuity in the years up to retirement. Similarly, target retirement funds B aim to help members looking to purchase an inflation-linked annuity to get ready for retirement. For example, a member seeking to retire in 2019 and to purchase a fixed annuity would be switched into the 2019 Mercer Target Retirement Fund A for the remainder of his or her working life, while a member looking to retire in 2017 and purchase an inflation-linked annuity would be switched into the 2017 Mercer Target Retirement Fund B. GROWTH PHASE PRE-RETIREMENT PHASE RETIREMENT PHASE Member A chooses to retire in five years and purchase a fixed annuity. Mercer target retirement funds A: 2015 Fund A 2016 Fund A 2017 Fund A 2018 Fund A 2019 Fund A Mercer Retirement Fund A MERCER MIXED INVESTMENT PENSION FUND 3 (GROWTH FUND) Mercer target retirement funds B: 2015 Fund B 2016 Fund B 2017 Fund B 2018 Fund B 2019 Fund B Mercer Retirement Fund B Member B chooses to retire in three years and purchase an inflation-linked annuity. 8

11 DELIVERING MUCH MORE THAN LIFE-STYLING The Mercer target retirement funds switch members from assets in the Mercer Mixed Investment Pension Fund 3 (the Growth Fund) to assets that best match the annuity they expect to purchase on retirement, together with a cash lump sum. Initially this will mean switching to a combination of cash and gilts (target retirement funds A) or cash and index-linked gilts (target retirement funds B). However, as the annuity protection market and our thinking develop, the funds asset allocations will evolve to keep pace. Unlike traditional life-styling, where this switching process is mechanistic and does not take account of market conditions at the time of each switch, the target retirement funds offer active management of the switching process within the funds, giving us some discretion over the timing and size of the switches further enhancing the potential outcome at retirement. Governance of the crucial pre-retirement phase is therefore included as standard. When a member reaches the year of retirement, he or she will be switched into a Mercer retirement fund, from which the member can retire at any time during the year. At retirement, a member will be able to purchase an annuity via an open market option service provided by Mercer. We re also developing a series of drawdown funds for members to use at retirement. The benchmarks for the Mercer target retirement funds will reflect the glide path we ve developed to reduce risk gradually over the years to a member s retirement (see the chart below). However, the funds asset allocations will be actively managed to take into account current market conditions based on our medium-term market views. ASSET CLASS CHANGES FOR A MEMBER RETIRING IN % 90% 80% 70% 60% 50% 40% 30% 20% 10% Overseas equity fund UK equity fund Diversified growth fund Cash fund Gilts fund Mercer discretion 0% 1 Jan Jan Jan Jan Jan Jan Dec

12 HELP ME DO IT AND LEAVE ME TO IT While getting the right default strategy in place is key to maximising the outcomes for a large number of members, UCRSS also offers extensive, well-governed investment options for members who want to play a more active role in their retirement planning. These options can also be used by trustees or employers who wish to create their own bespoke default strategy or risk-profiled fund range. UCRSS provides a wide variety of investment options at competitive fee rates including pre-packaged Mercer risk-profiled funds, pre-packaged Mercer target retirement funds, passive Mercer asset class funds, active Mercer asset class funds, and an extensive suite of externally managed funds. Our strength within the DC investment market also means that these funds are free from the minimum investment hurdles set by many fund managers. HELP ME DO IT PRE-PACKAGED MERCER RISK-PROFILED FUNDS These funds are designed to suit the needs of members who are uncomfortable with asset class names and making asset allocation decisions. Mercer risk-profiled funds are a range of four ready-mixed funds that reflect our best ideas in DC and will evolve in line with our latest thinking. They include the Mercer Mixed Investment Pension Fund 3, which forms the cornerstone of our default strategy. Mercer Mixed Investment Pension Fund 1 (Defensive Fund) Mercer Mixed Investment Pension Fund 2 (Moderate Growth Fund) Mercer Mixed Investment Pension Fund 3 (Growth Fund) Mercer Mixed Investment Pension Fund 4 (High-growth Fund) 27% UK corporate bonds 50% Diversified growth fund 50% Diversified growth fund 35% Diversified growth fund 25% Over 15 year gilts 17% UK equity 37.5% UK equity 25% UK equity 23% Over 5 year index linked gilts 15% Overseas equity 12.5% Overseas equity 25% Overseas equity 25% Cash 10% UK corporate bond 15% Emerging markets equity 8% Over 15 year gilt 10

13 Mercer risk-profiled funds each have different risk/return characteristics, as shown below. RISK/RETURN COMPARISON OF MERCER RISK-PROFILED FUNDS Expected return Fund 1 Fund 2 Fund 3 Fund 4 Expected risk PRE-PACKAGED MERCER TARGET RETIREMENT FUNDS These are designed to best match members annuity purchase expectations. The funds form part of the Mercer default strategy and new target retirement funds will be made available every year. LEAVE ME TO IT Members who are confident about making investment decisions and want access to funds across different asset classes will be given access to a range of funds that are highly rated by Mercer and will evolve in line with our future views. PASSIVE MERCER ASSET CLASS FUNDS These funds are managed by external passive (index-tracking) managers from our global manager research group s preferred provider list. Mercer UK Equity Mercer Emerging Markets Equity Mercer Over 5 Year Index Linked Gilt Mercer Overseas Equity Mercer Over 15 Year Gilt Mercer Corporate Bond Mercer 50:50 Global Equity Mercer Cash Mercer Shariah Investors will also have access to the Mercer Diversified Growth Fund, which combines investment in passive funds with an active asset allocation overlay provided by Mercer. Mercer Diversified Growth Fund 11

14 WHY CHOOSE THE UCRSS INVESTMENT SOLUTION? We ve gone to tremendous lengths to make sure UCRSS meets your needs now and in the future details of which you can find in our accompanying UCRSS brochure. In particular, we think the investment solution delivers the following benefits: ENHANCED OUTCOMES FOR MEMBERS By choosing UCRSS, members will have the opportunity to benefit from: Access to our best ideas and latest thinking in DC investment, portfolio structuring, and manager research. Access to a range of investment options designed with members differing needs and levels of engagement in mind. Access to a high-quality pre-packaged default strategy and a suite of asset class funds. A SOLUTION FOR NOW AND THE FUTURE UCRSS offers a flexible, cost-effective, online pension and savings solution that meets your evolving needs: Embedded governance means that investment arrangements put in place today evolve in line with our best ideas and remain fit for purpose. Innovation within the DC market (for example, drawdown funds and capital protection strategies) will be incorporated into the investment options. Embedded governance from Mercer throughout the proposition. 12

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16 To find out more, please speak to your Mercer Relationship Manager or visit Argentina Australia Austria Belgium Brazil Canada Chile Colombia Denmark Finland France Germany Hong Kong India Indonesia Ireland Italy Japan Mainland China Malaysia Mexico Netherlands New Zealand Norway Peru Philippines Poland Portugal Saudi Arabia Singapore South Africa South Korea Spain Sweden Switzerland Taiwan Thailand Turkey United Arab Emirates United Kingdom United States Venezuela Important Notices Opinions and information contained within this document are, unless stated otherwise, as at its publication date, and are subject to change. This brochure contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties to whom it was provided by Mercer. Its content may not be modified, sold, or otherwise provided, in whole or in part, to any other person or entity, without Mercer s permission. The findings, ratings, and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. Past performance does not guarantee future results. This document does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances. This does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities, and/or any other financial instruments or products. Where investments are placed with Mercer, Mercer group companies may receive ongoing periodic fees based on the value of funds under management in addition to any service fees agreed. All of Mercer s outsourced investment services are based on the intellectual capital created within our global manager research team. The Mercer funds can be accessed on Mercer Workplace Savings via our preferred providers insured fund platforms. The providers will make these funds available to clients by blending and white-labelling a range of underlying funds. More information is available on request. Issued in the United Kingdom by Mercer Limited, which is authorised and regulated by the Financial Conduct Authority. Registered in England No Registered office: 1 Tower Place West, Tower Place, London, EC3R 5BU. Copyright 2014 Mercer LLC. All rights reserved RE