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2013 Pension Investment Approach Review

We’ve completed our annual comprehensive review of our three Pension Investment Approaches.

Our Pension Investment Approaches are at the heart of our group pension investment proposition. As our core investment offer, they reflect different attitudes to risk and reward, with three approaches to choose from:

  • Adventurous
  • Balanced
  • Cautious

With all three Approaches, a customer’s pension will gradually move into lower risk investments which can help protect the value of the plan from large fluctuations in investment markets in the years leading up to retirement.

Each of the Approaches is invested in one or a combination of our four Pension Portfolio funds, until the customer is five years from retirement. In these last five years, their investment is progressively switched into lower risk funds, our Pension Protector and Cash Funds.

You can find more details about how our Pension Investment Approaches work in our Pension Investment Approach Guide, along with more information about our Pension Portfolios, Pension Protector and Cash funds.

The reassurance of regular reviews

When we launched the Pension Investment Approaches in 2006, we put an ongoing review process in place with input from independent specialists to check if they are meeting our customers’ needs.

The latest annual review was conducted using analysis provided by financial risk specialists Barrie & Hibbert. We are pleased to report the review has confirmed that our Pension Investment Approaches have delivered in line with our expectations. However please see below the proposed changes to further enhance the Pension Investment Approaches and help ensure that they are fit for purpose in the future.

The objectives of the latest review were to:

  • assess whether the funds currently used in the Approaches have met their aims and objectives
  • review the equity (i.e. stocks and shares) content to find out if we can improve on the balance between UK and overseas equities
  • review the assets currently included (e.g. stocks and shares, bonds) to assess if any other types of assets should be added
  • assess if we should change the make up of the bonds element in the Pension Investment Approaches
  • assess if we can make the blend of equities and corporate bonds more effective for our customers.

The results of our recent review were as follows:

  • the funds have been meeting their aims and objectives
  • including a small amount of Emerging Markets equities in Pension Portfolios One, Two and Three could improve the expected balance between the risk taken and investment returns achieved
  • adding other types of assets does not appear to provide any additional benefit to the risk and return profile
  • changing the make up of the bonds element provides no benefit to the overall risk and return profile
  • switching some of the assets from equities into corporate bonds in Pension Portfolio Four could help us to meet the needs of customers who are less comfortable with taking investment risks
  • we should proceed with recommendations from previous reviews:
    • move bond fund management from active to passive
    • move UK/Overseas equity split from 50/50 to 30/70

Changes recommended in previous reviews:

  • Move bond fund management from active to passive
  • Move UK/Overseas equity split from 50/50 to 30/70

Previous Annual Governance Reviews made the above two recommendations, which we delayed implementing due to a combination of inappropriate market conditions and operational constraints.

Both of these changes are being implemented in 2014.

Moving Bonds funds to Passive

We will change three of the underlying funds used for our Pension Investment Approaches, by changing the element which invests in bonds from active to passive (tracker) management.

We believe this change to passive bond investment is appropriate, as the element invested in equities, which is the majority of the investment in our Pension Investment Approaches, is already managed on a passive basis.

Passively managed funds can be a way for investors to gain access to the world’s equity and bond markets, providing access to funds covering many of the popular market indices. Passive management is where the fund is aiming to match the performance of a benchmark. Active management is where a fund manager actively tries to beat a benchmark, or target, such as a stockmarket index.

Increasing the Overseas equity investment

Previous reviews indicated a potential benefit in increasing the proportion of investment in overseas stocks and shares. After further research and work with our fund managers to agree the best way and time to implement this change, we are now in a position to go ahead with the move from a 50/50 to 30/70 UK/Overseas equity split.

Investment in Emerging Market equities (Pension Portfolios One, Two and Three)

We have proposed adding some Emerging Market equity exposure to three of the underlying investment funds: Pension Portfolio One, Two and Three. This was driven by our assessment of the modelling output provided by Barrie & Hibbert and the potential benefits of broadening the overall investment mix. We have only recommended making this change to Pension Portfolios One, Two and Three. This is because Emerging Markets can be susceptible to more pronounced rises and falls in value (or volatility) than more established markets, and we recognise that customers who are further from retirement or prepared to take more investment risk are more likely to be comfortable with additional volatility, in return for the additional expected gains.

This change is being implemented in early 2014, at the same time as the move from a 50/50 to a 30/70 UK/Overseas equity split.

Move from equities to corporate bonds (Pension Portfolio Four)

In order to reduce the overall level of risk for customers close to retirement in the Balanced and Cautious Approaches, we have recommended switching 10% of the current equity allocation into corporate bonds, for Pension Portfolio Four only. This change will happen once the move from active to passive management of all the bond funds has taken place.

Do I need to do anything?

No, these changes will happen automatically. We will be including details of the changes with customers’ annual Pension Benefit Statements, and there are further details on the Scottish Widows website.

How do I find out more?

For more information on the impact of this review on your investments, please contact your financial adviser. You can also find more information about our Pension Investment Approaches and the underlying funds in our Pension Investment Approach Guide.

You can also use our Investment decision tool and our Interactive pension planning tool to help with your investment decisions. You should speak to a financial adviser before making any investment decision.

Scottish Widows cannot provide customers with financial advice, but if you have any queries, you can contact the existing member helpline on 03457 556 557.

The helpline operates 8am–6pm, Monday to Friday.

* Calls may be recorded and monitored to help us improve our service