Your guide to investing – making your money work by Towers Watson Ltd

Your guide to investing – making your money work for members of the money purchase section of the RAC (2003) Pension Scheme (the Scheme)

Contents:

– Taking control

– Your choices

– Risk types

– Strategy 1: Lifestyle

– Investment asset types

– Strategy 2: Self-select

– Investment management

– Next steps

– Your investment

Staff Pensions, Money Purchase

April 2015

Making your money work Every month, as a member of the money purchase section of the RAC (2003) Pension Scheme (the Scheme), money is going into a pension account set up for you – to build up savings for your future. But have you thought about what this money is doing? It’s important that, whatever stage of life you’re at and whatever your attitude to risk, you choose an investment approach that suits you best. Making your investment choices can seem a daunting task. But, to help you along the way, the Trustee regularly reviews the investment funds the Scheme offers to ensure that there is an appropriate selection for members. The Trustee is also responsible for monitoring the performance of the investment managers it selects. This guide is designed to help you understand the two different investment strategies and the risks involved, so that you can choose the level of involvement that’s right for you. And remember – investing your money is not a one-off decision! Everyone wants different things at different stages of life, so there is a good chance that what you want now from your pension account and investments will change over time.

New choices In April 2015, the Government introduced changes to pensions giving you more flexibility over how you take your money purchase savings. The main change is that you now don’t have to buy a pension (annuity) when you take your benefits. Instead, you’ve got more freedom, with several options available. The different options may need a different investment strategy for your money purchase savings, both in the lead up to and possibly beyond the day you retire. To find out more about the options available, and possible investment strategies, read Explore more: your new choices at retirement in your library section at www.avivastaffpension.co.uk

Remember to review your choices regularly.

DID YOU KNOW? You can make your investment choices on Pension Tracker or by completing an Investment Choices form, available in your library section at www.avivastaffpension.co.uk

So how much will you need when you retire? Here are three steps you may wish to consider:

STEP 1 KNOW WHERE YOU ARE GOING Consider the lifestyle you want in your retirement; think about how much this might cost and set yourself a pension savings goal. You can use the tips and tools section on the online Pension Tracker to help work out this goal. Visit www.myaviva.co.uk to find out more.

STEP 2 MAKE A SMALL CHANGE; MAKE A BIG DIFFERENCE Contribute to meet your goal. Think about what you can afford – even saving a little more as soon as possible can have a big impact. Remember, the more you pay, the more the Company will contribute! Choose your contributions through my Aviva flex.

STEP 3 GET INVOLVED; CHOOSE THE RIGHT INVESTMENT STRATEGY FOR YOU Review your account at least once a year to make sure you’re on track and your strategy is right for you. Use Pension Tracker to see the effect of choosing different investment strategies. Lifestyle strategy – The funds are invested for you in medium to high-risk funds, switching to more stable funds as you get closer to retirement. You can choose when you want this switching period to start, either 3, 5 or 10 years before your target retirement date. Important: This strategy is geared towards members who plan to buy a pension (annuity) when they retire, so – if you’re planning to take your benefits in other ways – you may want to consider changing your investments. You can do this at any time and you should review your account at least once a year. It’s particularly important to review your investment strategy before your funds start to switch, and during the switching period, to make sure it’s the right approach for you. If you do not make any investment choices, your pension account will automatically start to switch 10 years before your target retirement date (this is when you reach age 65, unless you choose otherwise). Self-select strategy – You have more involvement and choose which funds to invest in from the range of funds offered by the Trustee. You can change funds as often as you like. You’ll need to review your choices regularly, especially as you approach retirement, as there is no automatic switching.

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Taking control The amount you build up in your pension account depends on three things: • how much you and your employer contribute; • how you choose to invest your pension account; and • t he investment performance of the funds you have chosen. You have some influence over the first two factors but investment performance is difficult to manage; financial markets rise and fall and investment values can be more volatile than you might expect. However, you do have more control over your understanding and approach to the risks and potential rewards involved. This means that you can choose an investment strategy and funds that are appropriate for your personal circumstances. An important part of planning for your retirement is careful selection and regular review of your investment choices.

KEEPING ON TRACK You can use the online Pension Tracker to see the effect of different contribution rates and investment strategies on the value of your account. Visit www.myaviva.co.uk to find out more. You will also receive a personal statement each year until you retire showing what your pension might be.

To help you work out what’s right for you, it’s important to consider how long you will be investing for (i.e. when you plan to take your benefits) and how you plan to take your benefits. For example: • When you are a long way from retirement, you might want to take on a longer-term growth strategy. This means that you may choose funds that have typically higher investment risk, such as equities. Over the short term, the value of your pension account has a greater potential to rise and fall. When you are a long way from retirement, it’s important to remember that your pension savings are a medium to long-term investment, so you should have time to ride out any ups and downs in financial markets. • As you get closer to retirement, you should review how your money purchase savings are invested to make sure they’re appropriate based on how you plan to take your benefits. The different options may need a different investment strategy, both in the lead up to and possibly beyond the day you retire.

• If you’re planning to buy a pension (annuity), and prefer a lower level of involvement with your investments, the Lifestyle strategy may be right for you. That’s because it automatically switches your investments into less volatile funds (to protect the value of your pension account from potential falls in the financial markets) as you approach your target retirement date.

• If you’re planning to take your benefits in other ways and are happy taking the time to monitor and maintain your investments, you may want to consider the Self-select strategy instead. Alternatively, if you’d prefer a more ‘hands off’ approach, you could keep your savings invested in the Lifestyle strategy, but change your investment mix before your account automatically starts to switch into less volatile funds as you approach your target retirement date. That way, you won’t have to manage your funds for as long. Remember, you can change your investments at any time, and if your account has already begun to automatically switch to more stable funds, it’s important to review your approach to make sure it’s right for you. To learn about your options and see some illustrations of what different investment strategies might look like, read Explore more: your new choices at retirement available in the library at www.avivastaffpension.co.uk. You should carefully consider which strategy is best for your personal circumstances and, if appropriate, speak to a financial adviser.

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Risk types Risk comes in many different forms and when it comes to making your investment decision it’s important to consider the main types: • I nvestment risk – the risk that the value of your savings could go down as well as up. Different types of assets carry different levels of investment risk; for example, equities (see page 7 for more details) have higher investment risk and returns are more likely to fluctuate, compared to a more predictable investment, like money market funds. • The key thing to remember when considering investment risk is that it also has a link to potential returns. As a general rule, the lower the investment risk, the lower the likely return and vice versa. So while money market funds may appear safer in relation to investment risk, you could also be missing out on higher returns – especially if you are quite a long way from retirement.

• Inflation risk – the risk that the value of your savings does not increase by as much as the cost of living, so that when you come to retire the ‘buying power’ of your savings will be reduced. Inflation risk is generally higher with low investment risk assets, like money market funds. • Pension conversion risk – the risk that the cost of buying your pension rises, compared to the value of your pension account, so that your money buys you less. The cost of buying your pension varies from year to year and is dependent on a number of things, including the price of gilts and bonds (see page 7 to find out more). This means that the higher the price of gilts and bonds, the less pension you will be able to buy. This is a particularly important risk to consider as you get closer to retirement. • M issed opportunity risk – the risk that you are too cautious with your investments. This could mean that you end up with a smaller amount of savings when you retire than you could have had if you had invested it otherwise. It’s important to understand the types of risk and your own personal circumstances to make sure you are getting the most out of your investments and taking on the right level of risk for you.

Want to know more? Go to your toolkit on www.avivastaffpension.co.uk to watch Penny and Shaun’s Adventures in Investment Episode 1.

Investment asset types Different types of investments carry different risks and may be more appropriate for different stages of your life. Three of the main asset types are: Equities When you purchase equities you are purchasing a share of a company. This type of asset is generally considered the least stable, going up and down in value, which suggests that equities carry the most investment risk. However, it is expected that this asset could provide you with the greatest return over the longer term.

Money market Money market funds aim to provide a lower-risk return in line with bank and building society interest rates, although the value can fall. The fund will typically hold cash investments and similar assets with first class banks and major UK companies.

Bonds/gilts A bond is a loan, usually to a company or organisation, where the lender receives interest payments and the return of the original sum at the end of a set period. The rate of interest that you receive from bonds can either be ‘fixed’ or ‘index-linked’. Index-linked means that the rate of interest and the capital repaid are linked to the rate of inflation. Bonds issued by companies are known as ‘corporate bonds’ and bonds issued by governments are known as ‘gilts’. These two types of bonds are traded on the financial markets, and their values can rise and fall. However, these rises and falls in value are not expected to be as great as for equities.

Want to know more? Go to your toolkit on www.avivastaffpension.co.uk to watch Penny and Shaun’s Adventures in Investment Episode 2.

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Investment management The Trustee selects investment managers who manage different funds. There are two investment approaches that investment managers use when managing funds – passive and active. Passive management The investment manager aims to produce a return that mirrors that of a specific index, such as the FTSE All-Share Index (which represents the performance of UK listed companies). The actual return may be greater or less than the index return; this is known as ‘tracking error’. Passive funds are sometimes called ‘index-tracker’ funds. Because passive investment managers closely follow an index and aim to achieve a similar return, they’re unlikely to either outperform or underperform their chosen index by very much.

Active management The investment manager uses its expertise to select investments that it thinks will beat the returns of a specific index – this is known as ‘outperforming’. Active investment managers aim for higher returns than passive investment managers, although this means that they also run more of a risk of underperforming, compared to the relevant index. The Trustee monitors these investment managers and only selects managers it believes have a strong chance of outperforming the index over the longer term.

Management charges Using investment managers to look after your funds has associated costs. In particular, there is usually an annual management charge. This charge varies from fund to fund and the differences are based on a number of factors. For example, an actively managed fund requires more time and involvement from the investment manager to achieve higher-than-index returns. This added time and potential for higher returns is reflected in a higher cost compared to a passively managed fund. The cost of managing your investments depends on the funds you have chosen and the monthly charge will be deducted from your pension account. You can find out how much each fund charges, as well as how the fund has performed, in the fund factsheets. These are available in your library section of www.avivastaffpension.co.uk

Your investment Deciding on your investment strategy is one of the key decisions you’ll need to make. It will be affected by factors, such as: • how much time you have to monitor and maintain your investments; • how much you know about the financial markets; • how closely you follow investment performance and how often you change your decisions; • how long you will be investing for (see page 4); and • how and when you plan to take your benefits (see page 5). Use the online Pension Tracker to help you think about what kind of investor you might be. Visit www.myaviva.co.uk to find out more.

Within the money purchase section of the Scheme, you have the flexibility to be involved with your investment decisions as much or as little as you like; it’s important that you take an active role in deciding what’s right for you. The Scheme offers you a choice of two strategies: Lifestyle or Self-select. With the Lifestyle strategy, your pension account is managed on your behalf. You can choose this strategy if you want to be less involved in investment decisions and are happy for the Trustee to invest in medium/high-risk funds until you are close to your target retirement date (this is when you reach age 65, unless you choose otherwise). Whether you remain in the Lifestyle strategy beyond this point largely depends on how you’re planning to take your benefits when you retire. As Lifestyle is geared towards members who plan to buy a pension (annuity), it automatically switches your investments into less volatile bonds and money markets funds as you approach your target retirement date.

If you’re planning to take your benefits in other ways, you may prefer a different investment mix as you approach your target retirement date. In this case, you may want to invest through the Self-select strategy instead, or switch to this strategy as you approach your target retirement date to give you control over how your account is invested. Remember, you can change your investments at any time, and if your account has already begun to automatically switch to more stable funds, it’s important to review your approach to make sure it’s right for you.

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Your investment The Self-select strategy allows you to take on the responsibility for managing where you invest and when to switch between the available investment funds. There are two types of funds available and they carry two different levels of involvement: Core funds: If you want more involvement than you would have with the Lifestyle strategy, you can choose from this range of funds. Extended funds: You might consider choosing from this range of funds if you are a confident and experienced investor and would like to have the maximum amount of involvement.

Want to know more? Go to your toolkit on www.avivastaffpension.co.uk to watch Penny and Shaunâ&#x20AC;&#x2122;s Adventures in Investment Episode 3. To find out more about your options for taking your money purchase savings, and to help decide which investment mix may be right for you, read the Explore more: your new choices at retirement guide in the library section at www.avivastaffpension.co.uk

Your choices Lifestyle strategy A less involved investment strategy where you invest in the Lifestyle funds. Your pension account is managed on your behalf. You are automatically switched to more stable bonds and money market funds as you approach retirement. You can choose whether you would like the switching process to start 3, 5 or 10 years before your target retirement date. If you do not make a choice, your funds will start to switch 10 years before your target retirement date. Important: if you are not planning to buy a pension (annuity) when you retire, you may want to consider changing your investment strategy before your funds start to switch into more stable bonds and money market funds. Remember, you can change your investments at any time, and if your account has already begun to automatically switch to more stable funds, it’s important to review your approach to make sure it’s right for you.

OR Self-select strategy A more involved investment strategy where you choose from a wide range of available funds. You are responsible for monitoring performance. You select which funds you wish to invest in. It’s up to you to decide if and when you want to switch funds so that they are more appropriate as you approach retirement as there is no automatic switching.

What if I don’t make a decision? If you don’t make a decision about where to invest your pension account, you will automatically be invested in the Lifestyle strategy. With the current Lifestyle strategy, your funds will start to switch into more stable bond and money market funds when you are 10 years away from your target retirement date (this is when you reach age 65, unless you choose otherwise). Remember: this ‘switching’ process may not be right for you if you’re not planning on buying a pension (annuity) when you retire.

Pages 12 to 17 outline your fund choices in the Lifestyle and Self-select strategies, looking at the level of risk and involvement associated with your investment decisions. What you need to do next is explained on pages 18 and 19. 11

Strategy 1: Lifestyle Level of involvement: low Through the Lifestyle strategy, your investments are managed on your behalf. Your pension account will automatically switch to invest in more stable money market and bond funds as you get closer to retirement. This aims to protect the value of your pension account from potential falls in the financial markets, as you near retirement, and so is geared towards members who are planning to buy a pension (annuity). If youâ&#x20AC;&#x2122;re approaching your target retirement date and are planning to take your benefits in other ways, you may want to consider a different investment strategy. Take a look at the Explore more: your new choices at retirement guide in the library section at www.avivastaffpension.co.uk to see what investment mix may be right for you. Remember: Itâ&#x20AC;&#x2122;s important that you continue to review whether the Lifestyle strategy remains appropriate for your circumstances.

Risk This table shows how the Lifestyle funds are invested and the typical risks they carry. You can find out more about these funds in the fund factsheets, which you can view in the library section of www.avivastaffpension.co.uk Lifestyle strategy

Which means

Level of risk

RAC Diversified Growth Portfolio

This fund invests in a wide range of asset classes, with the underlying manager moving the asset class mix over time with the aim of achieving equity-like returns over a long period. The fund has an objective of delivering medium-term growth with a target of Retail Price Index, plus 3% per annum over a period of 5 to 7 years.

Medium/ High

RAC Fixed Income

This fund invests in assets that have a pre-determined or fixed income, such as bonds. It aims to achieve returns which are broadly in line with changes in the cost of purchasing fixed annuities.

Low/ Medium

RAC Money Market*

This fund will typically hold cash investments and similar assets with first class banks and major UK companies. It aims to provide a lower-risk return in line with bank and building society interest rates, although the value can fall.

Low

The funds offered through the Lifestyle strategy are also offered in the Self-select strategy as Core funds. *Previously the RAC Deposit fund

Lifestyle funds The diagram below shows how this strategy will automatically start to switch as you approach retirement. Remember: 10-year switching is the default investment approach. You can also choose the more adventurous 3-year switching or 5-year switching, both of which offer higher risk. RAC Diversified Growth Portfolio

RAC Fixed Income

RAC Money Market*

% of pension account invested

100 80 60

Stage 1

Stage 2

0 start

at retirement

10 years before retirement

Stage 1: at the start All contributions will be invested in your pension account in the RAC Diversified Growth Portfolio. This will continue until 10 years before your retirement.

Stage 2: 10 years before your expected retirement date Your investments start to rebalance each month, gradually increasing the amount you hold in the Fixed Income and RAC Money Market*. By the time you retire, 75% of your pension account will be invested in the RAC Fixed Income fund, and 25% will be in the RAC Money Market*.

Remember: If you have not made any decision about where to invest your pension account, you will automatically be invested in the Lifestyle strategy, which will start switching 10 years before your target retirement date (this is when you reach age 65, unless you choose otherwise). *Previously the RAC Deposit fund

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Strategy 2: Self-select Level of involvement: Core fund range – medium

With the Self-select strategy, you decide where your pension account is invested and if and when you wish to change funds. You can change (switch) your funds as often as you want. Because you choose your own funds, your pension account will not automatically switch into safer assets as you get closer to retirement (as it does in the Lifestyle strategy), so it’s particularly important that you monitor your investments regularly and make sure they are the right choices for you at different stages of your life. With this strategy, you can choose between two levels of involvement.

Core fund range (medium involvement) With this option you are able to select funds simply by the type of asset you wish to invest in. The Trustee monitors the performance and has the flexibility to change the fund managers as needed.

Extended fund range – high

Extended fund range (high involvement) If you are confident about making more involved investment decisions, you have the option to choose from an extended fund range of 12 funds. Like the Core funds, they are also focused around asset types. This range requires the most involvement and gives experienced investors the ability to choose funds based on a particular manager. The Trustee monitors the performance of these funds but will not usually change the investment managers without letting you know, although it reserves the right to do so.

REMEMBER With the Self-select strategy, you can choose to invest in either Core funds, Extended funds, or a mixture of both. But remember, the Extended fund range requires the maximum level of involvement and you should only invest in these funds if you are certain that this is the right option for you.

Risk The table below and on pages 16 and 17 shows how the Self-select funds are invested and the risks they typically carry. You can find out more about these funds in the fund factsheets, which you can view in your library section at www.avivastaffpension.co.uk

Core fund range Lifestyle strategy

Which means

Level of risk

RAC Diversified Growth Portfolio

Medium/ High

RAC Fixed Income

This fund invests in assets that have a pre-determined or fixed income, such as bonds. It aims to achieve returns which are broadly in line with changes in the cost of purchasing fixed annuities.

Low/Medium

RAC Money Market*

Low

RAC Global Equity Active

This fund invests in a wide range of global equities spread across the worldâ&#x20AC;&#x2122;s major financial markets, including UK equities. It aims to maximise long term total returns.

High

RAC Global Equity Passive

This fund invests in a wide range of global equities spread across the worldâ&#x20AC;&#x2122;s major financial markets, including UK equities. It aims to achieve returns which are broadly in line with a given market index or a combination of market indices.

High

*Previously the RAC Deposit fund

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Strategy 2: Self-select Extended fund range Fund name (and manager)

Which means

Level of risk

Schroder Diversified Growth Fund (Schroders)

This fund invests in a wide range of asset classes, with the aim of achieving equity-like returns over a long period. The fund has an objective of delivering mediumterm growth with a target of Retail Price Index, plus 5% per annum over a period of 5 to 7 years.

Medium/ High

Artemis UK Special Situations (Artemis)

This fund aims to provide long-term capital growth by exploiting special situations. Investments are principally in quality, large ‘blue chip’ and medium-sized UK companies, many of which will be household names.

High

BlackRock Aquila UK Equity Index Tracker

This fund aims to track the performance of the FTSE All-Share Index (before the deduction of management fees and allowances for taxes and other expenses) by investing in UK company equities and futures.

High

Artemis Global Growth (Artemis)

This fund invests in a wide range of international equities spread across the world’s major financial markets, including UK equities. It aims to achieve long-term capital growth and outperform other similar funds or an index/benchmark.

High

First State Global Emerging Market Leaders (First State)

This fund invests in a wide range of equities in emerging markets. It aims to achieve long-term capital growth and outperform other similar funds or an index/benchmark.

High

Property (Aviva Investors)

This fund aims to provide a return from a combination of rental income and capital growth by investing mainly in commercial properties that include shops, retail parks, warehouses, offices and industrial buildings.

Medium

Index-Linked Gilt (Aviva Investors)

This fund invests in government bonds where the rate of return moves with inflation. It aims to provide long-term capital growth.

Low/Medium

Fund name (and manager)

Which means

Level of risk

Jupiter Ecology (Jupiter)

This fund aims to provide a return from long-term capital growth by investing mainly in international company equities, all of which must conform to predetermined social and environmental criteria.

High

Sustainable Future Managed (Alliance Trust)

This fund aims to provide a return from capital growth and investment income by investing in a range of global securities markets that have been selected for their potential long-term returns and that conform to a set of ethical criteria.

Medium/ High

HSBC Amanah Global Pensions

This fund invests in a variety of equities in a way that is consistent with Islamic law, which forbids the paying of interest and restricts the range of activities that can be invested in â&#x20AC;&#x201C; avoiding investments in companies that profit from arms, alcohol and tobacco.

High

BlackRock Aquila Market Advantage (DGS)

This fund invests in a wide range of asset classes, with the aim of achieving capital growth over the long term. The fund has an objective of delivering medium-term growth with a target of cash, plus 3.5% per annum.

Medium/ High

M&G Strategic Corporate Bond

This fund aims to maximise total return (the combination of income and growth of capital) by investing predominantly in investment grade corporate bonds. It may also invest in other debt instruments, including higher yielding corporate bonds, government debt and convertible preference stocks, as well as money market instruments and equities.

Medium

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Next steps Who are you?

Your colleagues on film

You wouldn’t buy shoes that didn’t fit you, so make sure your investment choices are the right fit for you too! Spend some time thinking about your attitudes to risk and control, as well as how you plan to take your benefits when you retire; it’s your pension account, and your choice.

Watch film three to see your colleagues’ thoughts around investments. It makes for interesting viewing.

To help you make these important investment decisions, we’ve created some useful online tools and resources. You can find all of these in your toolkit on www.avivastaffpension.co.uk

You have the answer Take a few minutes to do the fun and quick investment profiler in your toolkit on www.avivastaffpension.co.uk It uses everyday scenarios to help you discover your attitude to risk, control and review, and suggests investment strategies that might suit you. It’s not advice; just a simple way of thinking about what may be right for you.

Want to know more? Watch Penny and Shaun’s adventures in Investment, three microfilms packed with bite-size information to help you get clued up around investments. Episode 1: Investment risks Episode 2: Types of investment Episode 3: Investment strategy

Want to know more? Go to your toolkit on www.avivastaffpension.co.uk

Take action Hopefully you should now have a clearer idea about the strategy and investment choices you would like to make. The following steps set out the actions, if any, you need to take: I would like to join the Lifestyle strategy

I’m not planning to buy an annuity when I retire

I’m planning to buy an annuity when I retire

I would like the default 5-year switching period

You don’t need to do anything. When you join, you will be automatically invested in the Lifestyle funds with a 10-year switching period

I would like to join the Self-select strategy

I want to choose a different switching period (either 3 or 10 years)

You need to make your selection. You can do this online through Pension Tracker at www.myaviva.co.uk or by completing an Investment Choices form. You can find a copy by visiting www.avivastaff pension.co.uk

As you approach your target retirement date, you need to review your funds before they start to switch and change your investment choices if necessary. You can do this online through Pension Tracker at www.myaviva.co.uk or by completing an Investment Choices form. You can find a copy by visiting www.avivastaff pension.co.uk

Remember, investing your money is not a one-off decision – review your choices regularly! You can also use the online Pension Tracker to check that you’re on course. Visit www.myaviva.co.uk to find out more.

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Help and information Write to: Staff Pensions, Money Purchase Team, Aviva, PO Box 3433, Surrey Street, Norwich, NR1 3GT Tel:

0800 046 6174

Fax:

01603 689 687

Email: internal, staffmp external, avivastaffmp@aviva.co.uk Website: www.avivastaffpension.co.uk If you would like financial advice, you should speak to a financial adviser. You can find a list of financial advisers in your area by visiting www.moneyadviceservice.org.uk/en/categories/financial-help-and-advice