S INVESTMENTS LIFE INSURANCE Personal Lifestyle Strategy 2015 Review november 2015 Audience: Brokers and Financial Consultants We launched our Personal Lifestyle Strategy (PLS) in 2010. In order to ensure PLS remains at the forefront of innovation in the Irish Defined Contribution (DC) pension market, we undertake an annual review of the overall process and the PLS constituent parts. During this review we take account of changes to the investment landscape over the past year and also any changes in legislation which impact on individual scheme members and how they will most effectively drawdown their benefits at retirement. contents 1. What does PLS do? 2 2. Review of Phase 1 3 The accumulation phase more than 20 years to retirement Pension Stability Fund Investment Volatility Management Global Equity Allocations with Volatility management 3. Review of Phase 2 switching into benefit target funds 4 Target Benefit 1: Tax Free/Taxable Lump Sum Target Benefit 2: Annuity/Pension for Life Target Benefit 3: Approved Fund (ARF) 4. Summary 6 What does PLS do? To recap, the key objectives of PLS are to place each DC scheme member s assets in appropriate investment funds throughout the duration of their pre-retirement savings, to ensure the members are in funds suitable for their likely retirement choices, and to protect their fund as they get closer to retirement; With 20 + years to retirement PLS invests member assets solely in a growth focused fund. With less than 20 years to retirement members assets are slowly transitioned from a growth focused fund to a mix of growth seeking assets and lower risk assets. 1
Finally when members get to within 6 years of retirement, PLS begins to smoothly transition each individual member s pension assets to investment funds which best match how each individual member will most likely drawdown their benefits at retirement (i.e. Tax Free Cash, annuity and ARF). Warning: The value of your investment may go down as well as up. Review of Phase 1 The accumulation phase more than 20 years to retirement The Personal Lifestyle Strategy consists of two phases which span the years of your pensions savings. It starts from the moment you join the strategy up on to your retirement. PHASE 1: GROWING SAFELY PERIOD PHASE 2: SWITCHES INTO BENEFIT TARGET S Contributions and Investment Growth STABILITY STABILITY STABILITY TAX FREE CASH FOR LIFE Depending on: Age Salary Date Fund value Additional Voluntary Contribution (AVCs) FLEXIBLE 20 years to 6 years to RETIREMENT Over the last two years we made adjustments to the growth fund within PLS. These changes were designed to introduce additional asset diversification and to reduce the level of volatility within the fund, whilst not obstructing potential strong investment returns over time. In 2015 we reviewed the asset mix of the growth fund again and decided that no further changes are required at this time. We will however keep the allocations for the fund under review. Consensus Plus - Growth Fund Asset Split (as at 30 September 2015) Equity 68.3% Bonds 22.1% Cash 5.3% Property 4.3% Source: Irish Life Investment Managers With less than 20 years to go to retirement, investment return volatility asset management becomes more focused within PLS and is achieved by smoothly switching small percentages of each member s assets each month into a lower risk fund - the Pension Stability Fund. The percentage invested into each fund by a member at a given point is determined by the number of years each member is from retirement. 2
Pension Stability Fund The Pension Stability Fund is mainly invested in diversified bond assets and cash with a satellite weighting to global equities with return volatility management overlays. The fund s objective is to achieve above inflation returns with relatively low levels of volatility. By switching into this fund, we ensure members assets are appropriately de-risked as they approach retirement. The de-risking process is achieved with small adjustments every month as the member moves towards retirement age. When each individual member gets to within 6 years from their expected retirement date their assets will be 6 invested in the Consensus Plus Fund and 4 in the Pension Stability Fund. Years to PRSA Consensus Plus Fund PRSA Pension Stability Fund PRSA Benefit Target Fund Growing Safely Phase Over 20 10 6 6 4 Switches into Benefit Target Funds 5 48% 32% 2 4 36% 24% 4 3 24% 16% 6 2 12% 8% 8 1 10 0 10 Investment Volatility Management within the Pension Stability Fund Diversified Bond Allocations Given the potential future volatility in the European government bond, we take a diversified approach with the fund s overall bond exposure. To protect the members from excessive exposure to a single asset, we invest the fund s assets in a mix of short-dated Eurozone government bonds, corporate bonds, inflation linked bonds and emerging market debt. Global Equity Allocations with Volatility management The fund invests in global equities which benefit from our volatility management tools via: - Dynamic Share to Cash (DSC) Model is an innovative quantitative model developed by Irish Life which seeks to take money out of equity markets when the potential for large falls in equity markets is foreseen and return money into equity markets when the outlook for equity markets return positive. - Global Low Volatility Equity Strategy is a collection of stocks selected on the basis that they are expected to deliver investment returns with less downside risk relative to the wider equity market and also which display positive dividend, earnings quality, market momentum and valuation characteristics. Such a portfolio of stocks is expected to deliver general equity style returns over time but with a lower risk of large falls in investor values in the short term. Cash element of the Pension Stability Fund The cash element is managed to a low-risk strategy, in line with the primary objective to provide capital security to the members. The fund currently invests solely in highly rated international counterparties / banks deposits whose credit rating is A- or higher. The bank deposits held range in duration up to 12 months. Pensions Stability Fund - Asset Split (30 September 2015) Bond 60.7% Cash 25.6% Equity 13.7% Source: Irish Life Investment Managers 3
Review of Phase 2 switching into benefit target funds The Personal Lifestyle Strategy consists of two phases which span the years of your pensions savings. It starts from the moment you join the strategy up on to your retirement. PHASE 1: GROWING SAFELY PERIOD PHASE 2: SWITCHES INTO BENEFIT TARGET S Contributions and Investment Growth STABILITY STABILITY STABILITY TAX FREE CASH FOR LIFE Depending on: Age Salary Date Fund value Additional Voluntary Contribution (AVCs) FLEXIBLE 20 years to 6 years to RETIREMENT In 2015 we reviewed phase 2 of PLS and decided that no further changes are required at this time. When members are close to retirement (6 years or less) PLS smoothly transitions individual member s pension assets to investment funds to best match each individual member s most likely benefits at retirement (i.e. Tax Free Cash, Annuity and ARF). Based on members personal details held by us, over the last six years prior to retirement we switch each individual member s pension savings into funds that best match how members are likely to take their benefits at retirement as follows: Priority 1 2 3 Benefit Tax Free/Taxable Lump Sum Annuity/Pension for Life Approved Fund (ARF) Funding Targets We will target a lump sum of either a maximum of 1.5 times final remuneration (subject to having the relevant length of service) or 25% of the pension fund value, whichever lump sum option is greater. We will place an overall cap of 500,000 on this funding target. This 500,000 cap is based on Revenue limits and is made up of: A maximum tax-free lump sum of 200,000 a lifetime limit effective from December 2005. A taxable lump sum of 300,000, subject to the standard rate of tax (currently 2). Based on our research we recommend that a person should target a replacement income of at least 25% of their final remuneration in addition to any State Pension entitlement. This funding target allows for a minimum guaranteed income of 12,700 per year from the age you retire to the age you receive the State Pension. From the State Pension age, the income you get from your private pension will then target a minimum of 700 per year. So this private pension would be available in addition to any State Pension entitlement. Any remaining eligible contributions that are not used to fund the lump sum benefit or a pension for life can be transferred to an ARF, (subject to certain conditions). An ARF is a post retirement investment fund from which you can draw down income. It should be noted that members in PLS have the option to bypass the annuity matching fund and move their retirement savings straight to invest in the ARF Fund if they so wish. Target Benefit 1: Tax Free/Taxable Lump Sum We allocate the portion of each member s retirement savings which is expected to be used to drawdown a Tax Free Cash benefit to the Cash Fund. This ensures that there is minimal investment risk taken with this element of a member s retirement benefits as retirement approached. Our Cash Fund is currently utilised for this part. The fund is managed to a low-risk investment strategy, in line with the primary objective of providing capital security to underlying investors. The same strategy is applied to the cash section of the Pension Stability Fund and Flexible Fund as mentioned earlier. 4
Target Benefit 2: Annuity/Pension for Life Once a member s maximum tax free lump sum benefit is secured, the balance of the fund may be used to purchase an annuity to secure an income in retirement. Our Pension for Life Fund is currently utilised for this section of PLS. The fund is a passively-managed fund, which invests solely in AAA/AA rated Eurozone Government Bonds. As high grade bond yields fall, the price of annuities linked to these bonds will increase. To hedge this movement in annuity rates, we invest in high-grade government bonds whose capital values rise as bond yields fall. This has the impact of increasing members capital values to offset the rising cost of annuities. The reverse of this should also be noted, given that Eurozone government bonds yields are at all-time low levels. As high-grade government bond yields and ECB rates increase, the prices of annuities fall. However, in this environment we expect that high-grade bond values would also fall, albeit leaving the same annuity purchasing power. Target Benefit 3: Approved Fund (ARF) For members with retirement savings pots large enough to maximise their tax free cash and to also fund an annuity to the value of 25% of their final salary, we transition the residual value of their savings to a fund suited for assets set aside for an Approved Fund (ARF) - subject to certain conditions. We use the Flexible Fund for this. The fund is mainly invested in diversified bond assets and cash, with a satellite weighting to global equities, with return volatility management overlays. It is a similar fund to the Pensions Stability Fund covered earlier. The objective of the fund is to achieve inflation beating returns, while controlling levels of risk relative to traditional equity and managed fund performance. Flexible Fund - Asset Split (as at 30 September 2015) Bond 56.1% Equity 23.1% Cash 20.8% Source: Irish Life Investment Managers Summary In line with our commitment to the continuous improvement of the Personal Lifestyle Strategy concept, we will continue to monitor and review PLS to ensure the overall process and asset mix meets its overall objectives. For more information please contact your Irish Life Account Manager. Further details about the funds used in the Personal Lifestyle Strategy are available in our investment centre on our website www.irishlifecorporatebusiness.ie Warning: If you invest in this product you may lose some or all of the money you invest. Warning: The value of your investment may go down as well as up. Warning: These funds may be affected by changes in currency exchange rates. Warning: If you invest in this product you will not have any access to your money until you retire. Securities Lending: The assets in these funds (except the Tax Free Cash Fund) may be used for the purposes of securities lending in order to earn an additional return for the fund. While securities lending increases the level of risk within the fund it also provides an opportunity to increase the investment return. 5
S INVESTMENTS LIFE INSURANCE Please Note: Every effort has been made to ensure that the information in this publication is accurate at the time of going to press. Irish Life Assurance plc accepts no responsibility for any liability incurred or loss suffered as a consequence of relying on any matter published in or omitted from this publication. Readers are recommended to take qualified advice before acting on any of the matters covered. CONTACT US PHONE: 01 704 20 00 FAX: 01 704 19 05 E-MAIL: code@irishlife.ie WEBSITE: www.irishlifecorporatebusiness.ie WRITE TO: Irish Life Assurance plc, Lower Abbey Street, Dublin 1 5320cb (11-15) Irish Life Assurance is regulated by the Central Bank of Ireland. In the interest of customer service we may record and monitor calls. Irish Life Assurance plc, Registered in Ireland number 152576, Vat number 9F55923G. For more up-to-date information, see www.irishlifecorporatebusiness.ie. 6