My pension scheme
The form below can be used to make changes to your investment choices within the Plan. If you require details of where you are currently invested or have any questions about the Plan please contact the Citibank Pensions Unit.
Understanding investment - Asset types: an overview
Equity funds invest in company shares on the stock market.
Historically, equities have been the asset with the highest growth over long periods, but carrying a greater risk of sudden falls in value in the short term.
Equities are expected to carry the highest risk of account volatility - in other words, the possibility that your investment will go down as well as up. Accepting this risk can pay off in the longer term, so equities are commonly chosen by savers early to mid-career. People approaching retirement may want to limit their exposure to this risk.
The investment options include equity funds across a range of global locations. You can also choose:
An ethical fund, which invests in company shares chosen on an ethical basis. For example, it may choose environmentally sound companies, and avoid the alcohol, tobacco or arms sectors.
A Sharia fund, which invests according to Sharia Islamic law. Wealth generation is only allowed through certain types of trade and asset. For example, interest-bearing assets, and trade in alcohol and pork are excluded.
Companies and Governments issue bonds to raise money. If you invest in bonds, you effectively "lend" money to the company or Government and the interest on the loan is your investment return. After an agreed period of time the loan is repaid.
Bonds are regarded as a relatively stable investment. They may not give returns as high as equities, for example, but equally they are less likely to suddenly fall in value - the real "risk" is simply that the company issuing the bond goes out of business.
Savers nearing retirement become increasingly vulnerable to the risk of the pension they are able to buy decreasing in value due to fluctuations in the cost of purchasing a pension. Investing in bonds can safeguard against this risk to some extent as pension prices tend to move in line with bond values. They can also help manage "diversity risk".
Bonds issued by the Government are called gilts. As a result, they are regarded as more secure than company bonds since the Government is unlikely to default on the loan.
This fund invests in short term cash deposits and short term government debt where interest provides the investment return.
The average maximum maturity of the fund is two weeks excluding government debt, and the maximum maturity of any one investment will be three months. The performance benchmark will be overnight LIBOR. Permissible investments will be restricted to sterling denominated overnight deposits, fixed interest deposits,certificates of deposit,T-Bills and government gilts with up to 90 days maturity. There will be a minimum credit rating for each investment of A1 (Standard & Poor's) or P1 (Moody's), and the maximum held with any counterparty will be 5%.
Members should note that capital values still cannot be guaranteed and that this fund is a lower risk option than the other funds on the platform.
Investing in the fund over long periods can incur "pension adequacy" risk. The returns could be so low they do not keep pace with inflation. This means that it may actually be losing real value and may not buy a high enough pension.
Cash is sometimes invested in as a way of building up a lump sum which can then be taken tax-free at retirement, or giving more short-term security just before retirement.
Understanding investment - Active and passive funds
Fund managers use benchmarks as their performance "targets" - the benchmark will usually be a market index relevant to the type of asset they are investing (such as the FTSE All Share Index for an equity fund). The terms "active" and "passive" refer to investment styles - that is, what the managers are trying to achieve in relation to the benchmark, and the investments they choose as a result.
For an active fund, the manager will use their expertise to try and choose investments that will "beat" the benchmark - that is, perform better than the market index.
While the aim is to generate higher returns, the approach also increases the risk of underperforming the benchmark. So, returns from an active fund could be significantly higher or lower than the market index.
Passive funds are also called "tracker" funds. This is because the manager invests in approximately the same proportion of assets that make up the index itself. By "tracking" the market, this approach minimises the risk of performing worse than the benchmark, but equally there is no attempt to achieve higher returns than the market either.
Please note that both investment styles follow the benchmark to some extent and it is not simply the case that active investment is "risky" and passive is not. As the market index rises and falls, so too will the value of active and passive funds.