Your Retirement Account is made up of your AVC contributions plus the returns made from investing your contributions. Over the years, you may invest a large amount of money in the AVC Plan, so it makes sense to understand what your investment options are. This section looks at how you can make informed investment choices, the types of investments available and how the time left until your retirement may affect your investment choices.
What should I consider when choosing my investment options?
There are a few essential issues that you should consider when deciding on your investment options:
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How much time do you have to save and invest for retirement?
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How much risk are you comfortable with?
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How much money will you need when you retire?
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What combination of benefits (cash, pension or ARF) are you going to use your Retirement Account for when you reach retirement?
These considerations will help you decide on the degree to which you want to invest in more aggressive (i.e. high in equity content) versus more conservative funds. Remember that the choice is yours, so give it due consideration. It is important to choose carefully where to invest your individual Retirement Account. If you are unsure of your options, you should seek independent financial advice.
Types of investment
When it comes to investing your Retirement Account, there are five main types of investments or assets:
Equities - This is a commonly used term for ordinary shares or stocks in a company. In essence, an equity is a unit of ownership in a company. An equity fund will hold a number of equities issued by a range of different companies. Although equities tend to be the riskiest or most volatile of the main asset classes (i.e. over the shorter term their value can fluctuate widely), over the long term they also have the highest expected return potential.
Bonds - Bonds are securities, issued by a government or company, which guarantee regular payments of interest and repayment of the original loan amount on a specified date or range of dates. A fixed interest security is another word for a bond, while gilt is another word for a fixed-interest security or bond issued by a government. A bond fund invests in a range of bonds with differing types and maturities (i.e. the period until the last repayment). Bond returns tend to be less volatile than equity returns, but the expected long-term returns on bonds are lower than those of equities.
Property - Property investments include a mixture of retail, office and industrial property. Property is expected to have a long-term return lower than equities, but higher than bonds. However, property investments incur significant buying and selling costs, and can be difficult to ‘cash-in’ quickly. As a result, property is typically invested as part of a wider portfolio of assets or via a managed fund.
Cash - A cash fund invests in short-term, liquid deposit instruments. Although cash returns are the least volatile of these main asset classes, over the long term cash is also expected to provide the lowest returns.
Managed - A managed fund invests in all of the above asset classes, typically in the region of 60-80% in equities and the balance in bonds, property and cash.
Balancing risk and reward
The Trustee has carefully selected a range of funds from which you can choose. There are funds to suit your attitude towards risk and your age.
All investors want the maximum return for the minimum risk. However, as risk cannot be completely excluded from any kind of investment, you need to understand the different kinds of risk involved when saving for retirement.
Each fund has different levels of risk. Generally, the higher the potential reward of an investment, the higher the investment risk. This means that if you choose a higher-risk fund, you may get higher returns over the long term (although this is not guaranteed).
If you are a more cautious person, you may choose a low risk option; however, you should note that low-risk funds tend to give lower returns in the long term.
Here is a brief explanation of the three kinds of risk that you need to think about:
Investment Risk - This is the risk that the value of investments can go down as well as up. This can happen with funds invested in equities and to a lesser extent with bonds. If you invest in equities and bonds, there is the risk that the value of your Retirement Account may fall just before you want to take your benefits. Equities, in the past, have performed well compared to other investments over the long term (although past performance is no guarantee of future performance).
Inflation Risk - This is the risk that the value of investments will not grow quickly enough to keep up with inflation. Even if your Retirement Account grows in value, if it does not grow in line with inflation, then the real value of your Retirement Account is eroded. This can happen with low investment risk funds, such as a deposit fund.
Pension Conversion Risk -When you retire you may wish to buy a pension with your Retirement Account. The cost of a pension depends on the rates used by insurance companies or other pension providers. The rates used are influenced by the price of bonds and other factors, such as interest rates, expected investment returns and life expectancy.
Why your age matters
Your age matters because the relative importance of investment risk, inflation risk and pension conversion risk changes as you approach retirement.
How does the time I have to retirement affect my investment choices?
Unless you are reasonably close to retirement age, your Retirement Account is a long-term investment. The number of years you have to save and invest until retirement could be up to 30 years or more. During this time, the amount you save, the investment returns achieved, and the rate of inflation will have a significant impact on the buying power of your Retirement Account.
In general, if you are not retiring for many years, you may decide that an investment in an equity or managed fund is appropriate, as equities offer the highest growth potential over the long term. Put another way, if you have many years to go until you retire, you may decide that you can afford to ride out the ups and downs of the equity market with the aim of capturing the higher expected long-term returns that equities offer.
In contrast, as you begin approaching retirement your strategy would probably be to begin phasing out of equities and into fixed income and cash. The main aim of this is to protect your Retirement Account against the short-term volatility of equity markets in the period prior to your retirement.
What fund options are offered by the AVC plan?
“Do It For Me” which is the default option
“Do It For Me” gives you the option of being less involved in your investment approach. Links to the factsheets in relation to the default option are provided below. It is a ready-made investment approach which automatically changes your asset mix as you approach retirement. It is designed for those who:
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Do not feel comfortable making regular investment decisions
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Do not want to review their investment selection regularly as they approach retirement.
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Would prefer to select an automated approach that switches their funds for them into less risky funds (like bonds and cash) as they approach retirement as follows:
If you choose the “Do It For Me” option this assumes that the AVC funds will be taken as cash at retirement. Please ensure you are satisfied with this assumption when reviewing your investment selection.
OR
“Do It Myself” which allows you to take control of your investment choices
“Do It Myself” is designed for those who:
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Want greater control over their pension investments.
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Understand investment decision making and are comfortable with the idea of selecting investment funds.
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Are happy to review their investment approach regularly, taking particular care as they approach retirement.
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Want access to specific investments.
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Know how they would like to take their benefits at retirement (cash, pension, ARF).
Links to the factsheets for the different funds are provided below:
High Risk/Return Growth Strategy
Medium Risk/Return Growth Strategy
EMPOWER Cash Fund
Indexed Corporate Bond Fund
Indexed World Equity Fund (partially hedged)
EMPOWER Pension For Life Fund
Low Risk/Return Growth Strategy
Capital Protection Fund (this fund is closed to new joiners and accepts regular contributions only for existing members)
Secured Performance Fund (this fund is closed to new contributions)
While the Trustee has taken great care in selecting the investment options that are available to you, they cannot accept responsibility for any loss, which may be incurred as a result of poor performance of the funds. Your choice of fund(s) will always be influenced by your own circumstances and your personal views of different types of investment risk. In particular, it must be emphasised that past performance is not necessarily a guide to future performance. The value of an investment can go down as well as up.
The Trustee regularly monitors the investment manager and the performance of the investment funds. In certain circumstances, the Trustee may deem it necessary to switch both existing assets and new contributions to a new investment manager. You will be notified if any such change is planned.
How do I choose the right investment(s) for me?
The AVC Plan provides you with seven investment funds to choose from.
As discussed above, there are many issues that you should consider when deciding how to invest your contributions, including the short-term and long-term performance expectations for each fund and the expected volatility of each fund. You also need to review how close you are to retirement. If you are likely to retire shortly, the expected volatility of each fund is of particular importance.
The table below shows general return and risk characteristics for each of the fund types available.
FUND NAME |
RISK PROFILE |
OBJECTIVE |
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Indexed World Equity Fund (partially hedged)
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High |
To achieve average global equity fund growth on a consistent basis, with reduced currency risk. |
High Risk/Return Growth Strategy
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High |
To target Volatility (risk) of less than two thirds that of equities. You could expect this strategy to achieve a return in the region of Inflation +4-6% p.a., gross of fees, over the long term (20 year horizon). Note that this is a long term target and is not guaranteed.
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Medium Risk/Return Growth Strategy
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Medium |
To target Volatility (risk) of less than one half that of equities. You could expect this strategy to achieve a return in the region of Inflation +2-4% p.a., gross of fees, over the long term (20 year horizon). Note that this is a long term target and is not guaranteed.
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Indexed Corporate Bond Fund
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Medium |
To produce a return in line with the benchmark index, by investing in debt issued in Euro by large global companies. This is a Bond investment, see page 5 for a description.
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EMPOWER Pension for Life Fund
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Medium |
To broadly follow the long-term changes in annuity prices due to interest rates. This is a passively managed fund, which invests only in high quality rated Eurozone Government Bonds.
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Low Risk/Return Growth Strategy
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Low |
To target Volatility (risk) of less than one third that of equities. Approximately 25% of the fund is invested in shares, with the remainder of the fund made up of bonds, property and cash.
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EMPOWER Cash Fund
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Low |
To achieve a reasonable rate of interest with a high degree of security./p>
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Capital Protection Fund(This fund is closed to new joiners and accepts regular contributions only from existing members)
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Low |
To achieve average market returns over the long term. |
Secured Performance Fund
(this fund is closed to new contributions) |
Low |
To achieve average market returns over the long term. |
Please note the value of funds, and income from them, may fall as well as rise. Exchange rates may affect the value of an overseas investment. As a result, an investor may not get back the amount originally invested. Past performance is not necessarily a guide to future performance.
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Caveat
- These characteristics are intended to only give a broad overview of the funds.
- They are not intended to capture all aspects of the funds and do not represent guarantees or assurances from the Trustee as to the performance or risk level which may actually be experienced.