AVC
NEWS
Important
Information: Update
on AVCs for members invested in the
I note
from our records you hold investments in the Equitable Life Building
Society
Fund.
As you
are aware the Equitable Life Building Society Fund has been managed by
Halifax
Life since 2001. Halifax
Life has been
advised by Nationwide Building Society (with whom Equitable Life
Building
Society invests), that Nationwide Building Society has withdrawn from
the AVC
market from the end of February 2008.
Equitable
Life has agreed that the funds currently held in their Building Society
Fund
can be transferred to the Bank of Scotland.
Neither Equitable Life nor Bank of Scotland will make any
charge in
respect of such transfers.
The Bank
of Scotland deposit account provides capital security and a return
linked to
the Bank of England Base Rate. The
account was compared with a number of similar accounts available in the
market
which confirmed that the rate available on the Bank of Scotland’s
account
(currently 5%) is in line with or greater than many similar accounts.
The
account offered by Bank of Scotland is a Corporate Deposit Account with
the
following features:
- Minimum
balance of £1
- Credit
Interest rates linked to Bank of England Base Rate
- Same day
access to funds
- Interest rate
paid on full balance
- Interest
calculated daily on cleared balance and paid to account on last
business day of the month
- No exit
penalties
Equitable
Life are also taking this opportunity to rename the Building Society
Fund to
more accurately reflect its purpose.
With immediate effect it will be known as the Equitable
Life Deposit
Account Fund, and their documentation and outputs will be amended over
the
coming months to reflect this change.
There is
no need for you to take any action regarding this change, although you
should
satisfy yourself that the Deposit Account Fund is the correct option
for any
AVC investment you have previously held in the Equitable Life Building
Society
Fund.
Prudential,
our other in-house AVC provider also has a Deposit Fund investment
option available. The
enclosed leaflet explains and provides an
understanding of the Prudential Deposit Fund.
The current Prudential Deposit Fund rate is 5% gross per
annum. This fund
currently tracks the Bank of
England base rate.
If you
wish to transfer your AVC fund from Equitable Life to Prudential please
contact
Carole McSherry on
It should
be noted, however, that there is no guarantee that our other AVC
provider,
Prudential, will perform better than the funds available through the
Equitable
Life policy. I would add that we do review the fund performance of
Prudential
on a regular basis.
Prudential
AVC
Dear Member
Announcement to Members
with Additional
Voluntary Contributions (AVCs) held in Prudential Funds
The
Committee, in
consultation with its advisers, Hewitt, Bacon and Woodrow, has recently
completed its annual review of the Scheme’s AVC arrangement with
Prudential.
The Committee is happy to retain Prudential as its AVC provider. This
letter is
to inform existing AVC members of information arising from that review
which
may influence your investment decision.
The
letter includes the
details of the risk ratings and management charges for all of the AVC
funds
(Annex A). In conjunction with this list, and the performance report
you will
have received directly from the Prudential, you may wish to ensure you
are
content with the fund you invest in.
In
addition, this letter
includes specific information on the following funds (Annex B):-
|
Fund
Type |
Summary
of |
|
Prudential
With-Profits Fund |
Advisers
feel that With-Profits funds in general are not transparent and have
higher management charges |
|
Prudential
Deposit Fund |
This
fund is not a Building Society type cash fund as the name might suggest
but is part of the With-Profits fund |
|
Deutsche
Asset Management (now known as Aberdeen Asset Management [AAM]) Funds |
Advisers
have concerns over the fund managers' performance and investment
processes |
|
Prudential
Passive Funds |
Advisers
have concerns about the investment process |
Making Investment
Decisions
As
with any choice of
investments, no one can predict with certainty which fund will offer
the best
return. When you compare Prudential’s funds, you need to decide which
investment is most suitable for your needs. Often this will depend upon
how
near or how far you are from retirement.
- Bonds and cash are
often used to help protect the value of investments for members closer
to retirement, as bond prices move broadly in line with the cost of
pensions and members generally take part of their fund as cash.
- Members who are not
close to retiring might consider investing mainly in shares.
Historically, shares have produced higher returns than other types of
investment. But, the value of share investments can go up and down
quite sharply, especially in the short term.
Any investment decision
is a personal one,
reflecting your financial circumstances, approach to investment and
attitude to
risk. If you are in any doubt, you are recommended to get independent
financial
advice. The Committee and its advisers cannot give you financial advice. If you do not
already use a financial adviser, IFA Promotions can give you details of
an
independent financial adviser in your area. You can contact them at:
IFA Promotions Limited
Tel
0117
971 1177 or 0800 085 3250
Brislington
Email:
ifap_mail@orchestrabristol.co.uk
Bristol
BS4
5PF
Internet:
www.unbiased.co.uk
If
you require more
information, the NILGOSC Members’ Team will try to answer your
questions, but
please remember that they cannot give you financial advice about your
investments. They can be contacted on 028 9076 8025 or by email at info@nilgosc.org.uk
Fact
sheets on each of the
funds offered by Prudential are available on its website at:
www.pru.co.uk/content/memberfactsheets/.
If
you wish to change your investment, please contact
the Prudential Customer Service helpline on 0845 6000 343.
The
transfer value of your
funds will be based on the value of the units you hold on the date of
transfer.
There may be a small cost involved in the transfer of your units, which
reflects the cost of trading in the underlying investments rather than
being an
explicit charge levied by Prudential for making the change. Overall,
you should
not notice any cost associated with transferring, unless Prudential
introduce a
Market Value Reduction (MVR) to transfers from the With-Profits Fund,
in which
case you will be advised of the amount of the MVR before making a final
decision to transfer.
Yours sincerely,
Lynda
White
Lynda White (Mrs)
Pensions Manager
----------------------------
Annex
A
Available Prudential
Funds
The
funds currently
available under the LGPS(NI) AVC Scheme and their annual management
charges are
listed in the table below. Prudential intends to make additional funds
available later in the year, which the Committee will assess and decide
whether
to add them to the options available under the Scheme.
Fund
|
Risk Rating
|
Ann
Mgt Charge
|
|
Funds
refered to in Annex B |
|
|
|
Prudential With-Profits |
Medium |
1%
** |
|
Prudential Deposit |
Low |
n/a
* |
|
AAM Balanced Managed ex
Property |
Medium |
0.85% |
|
AAM North American
Equity |
High |
0.85% |
|
AAM |
High |
0.85% |
|
Prudential Long-Term
Growth Passive |
High |
0.65% |
|
Prudential Overseas
Equity Passive |
High |
0.65% |
|
Prudential
Pre-Retirement Passive |
Low |
0.65% |
|
Prudential Retirement
Protection Passive |
Low |
0.75% |
|
Prudential |
High |
0.65% |
Equity
funds
|
|
|
|
BGI (60/40) Global
Equity Index |
High |
0.75% |
|
BGI |
High |
0.75% |
|
Prudential Equity |
High |
0.75% |
|
Prudential |
High |
0.75% |
|
Prudential Global Equity |
High |
0.75% |
|
Prudential
International Equity |
High |
0.75% |
|
Prudential Socially
Responsible |
High |
0.75% |
Bonds
and fixed interest securities
|
|
|
|
Prudential Fixed
Interest |
Low |
0.75% |
|
Prudential Index-Linked |
Low |
0.75% |
|
Prudential Corporate
Bond |
Medium |
0.75% |
Other
|
|
|
|
Prudential
Discretionary (mostly equities, some bonds and cash) |
Medium |
0.75% |
|
Prudential Cash |
Low |
0.75% |
|
Prudential Property |
High |
0.75% |
|
Lifestyle Options |
High |
variable |
* Prudential does not
apply an explicit charge to
the Deposit Fund but instead takes account of the charge in the
interest rate
it declares.
** Prudential does not
apply an explicit charge to
the With-Profits Fund but instead takes account of the charge in the
bonus rate
it declares. This is currently expected to be 1% a year, assuming
future
investment returns in the With-Profits Fund are 7% a year.
There are also three
Lifestyle options which initially
invest in the Prudential UK Equity Passive Fund and switch into the
Retirement
Protection Fund starting six, eight or ten years before retirement
dependent on
which option is chosen. The charge will depend on which funds you are
invested
in and the proportion invested in each.
Annex B
Fund
Type:
Prudential
With-Profits Fund
Historically, this has
been a popular choice with
members and the Prudential With-Profits Fund has provided good returns
over the
years compared to other with-profits funds. However, changes in the
industry in
recent years mean that the way with-profits funds are now run and the
prospects
for future bonuses from them are significantly different than when the
fund was
first introduced. Historically
their objectives were
to provide a competitive level of returns for a long term investment,
however
there is now a much greater focus on paying out any guaranteed level of
benefits applicable under a policy rather than trying to generate
returns over
and above such amounts. This means that bonus rates on with-profits
policies
are expected to be lower in the future than may have been achieved in
the past.
One of
the main aims of with-profits
funds is to try to give continual investment returns by smoothing peaks
and
troughs experienced in investment markets. Smoothing works by holding
back some
of the returns when the underlying performance is good (e.g. when stock
markets
perform well) and using these to boost payouts when the underlying
performance
is poor. During 2005 the gross investment return achieved by the
With-Profits
Fund was 20%, whilst the regular bonus rate was 3%.
However,
there are a number of issues
associated with with-profits investing:
- The returns on
with-profits contracts are not guaranteed and may vary, because some
bonuses are discretionary.
- With-profits
investments can fall in value. Any poor performance in the underlying
investments will ultimately be reflected in the policy values and
bonuses.
- With-profits
investments are not transparent, which means that often members do not
know whether they have received or will receive a fair return on their
investment.
- With-profits funds have
additional risks which may be over-looked. For example, the risk that
the fund does not have enough assets to pay the guaranteed benefits.
This may arise because the cost of a guarantee was not expected or it
was greater than expected.
- The Scheme’s policy
with the Prudential has guaranteed rates of interest depending on when
contributions are paid, which is detailed in the table below. Contributions paid before
1 April 1996 receive a minimum rate of return of 4.75% per annum until
the benefits are taken at retirement, but the guaranteed interest rate
on contributions paid after 6 April 2003 is only 0.01% per annum. These
guarantees only apply if the benefits are taken at normal retirement
and do not apply to transfers.
|
Date
contributions paid |
Guaranteed
rate of interest (p.a.) |
|
Before 1
April 1996 |
4.75% * |
|
Between 1
April 1996 and 5 April 2003 |
2.5% |
|
After 6
April 2003 |
0.01% |
*
Few, if any, members of the LGPS(NI) qualify for this rate.
From 15 March 2006 the
regular bonus is 3% p.a. on
the part of your fund not entitled to the guaranteed rate of return of
4.75%
p.a. There are no penalties for ceasing contributions.
A
Market Value Reduction
(MVR) may apply in future on switches out of the Prudential
With-Profits Fund,
although Prudential told us that on 28 March 2006 an MVR would
not have
been applied. MVRs are widely used by with-profits funds to ensure that
payouts
are not excessive to particular members or groups of members. They are
calculated on a daily basis and the situation could therefore change.
If you
decide to transfer your fund, Prudential will inform you before
disinvesting if
an MVR is to be applied and give you the option to change your mind.
Since 2000 Prudential
has reduced the proportion of
equities held in its With-Profits portfolio from 70% to 59% at the end
of 2005.
Fund
Type:
Prudential Deposit
Fund
The Prudential Deposit
Fund appears similar to a
building society account, in that it pays a fixed rate of interest on
your
investment. However, it has been brought to the Committee’s attention
that the
Prudential Deposit Fund is not a ‘stand alone’ fund but is in fact a
part of
the Prudential’s With-Profits Fund.
The
Prudential With-Profits
Fund is one of the stronger with-profits funds in the market. However,
the
underlying assets in the With-Profits Fund (and thus the assets
supporting the
cash in the Deposit Fund) are mainly equities and bonds and therefore
this
slightly increases the risk associated with the fund as compared to a
normal
building society fund. However, to put the position into perspective,
the
Deposit Fund as at 31 December 2004 amounted to approximately £120
million out
of the total With-Profits Fund of £60,000 million (i.e. 0.2% of the
With-Profits Fund). Although the risk is slightly higher, the returns
produced
by the Deposit Fund as shown in the following table, have been higher
than the
average (median) cash fund in a survey carried out by the Committee’s
advisers. The first
bar shows the
performance of the Prudential Cash Fund, which is similar to a building
society
account and therefore slightly less risky than the Deposit Fund, over
the same
periods.
The Committee’s
advisers do not currently envisage
any problems with the Committee retaining the investment in the Deposit
Fund,
but it is only right that you should be made aware of these issues.
Fund
Type:
Deutsche Asset Management
Funds (DeAM)/
Specific
Fund Names
AAM
Balanced Managed Ex Property
AAM North American
Property
AAM
The Committee’s
advisers have had long-held
concerns about DeAM which include concerns about how investment
decisions are
made, the regular changes made to the investment process in an attempt
to improve
performance, and the significant staff turnover that it has
experienced. It
also believed that some portfolio managers had lost confidence in their
abilities and in the DeAM research base.
On
30 September 2005
Aberdeen Asset Management (AAM) completed the purchase of the majority
of DeAM
Fund
Type:
Prudential Passive Funds
Specific
Fund Names
Prudential Long-Term
Growth
Passive
Prudential Overseas
Equity
Passive
Prudential
Pre-Retirement
Passive
Prudential Retirement
Protection Passive
Prudential
A
passive fund aims to
perform in line with the index it tracks. The ability of passive
managers to
achieve their objectives rests mostly on the size of the assets
involved. The
larger the pool of assets, the easier it is to achieve close tracking
of market
indices and keep costs down. Prudential’s passive management operation
is small
and the investment process used is more reliant on the manager’s stock
picking
ability, as the fund is not big enough to fully replicate the index or
to
sufficiently reduce costs. The Committee’s advisers’ research has led
them to
believe that Prudential’s stock picking includes an element of active
stock
selection which is against the philosophy of passive management. There
are also
concerns about the effectiveness of the risk management controls and
that
performance is unlikely to track the index over either the short or
long term
due to these concerns.
This update gives
our advisers’ understanding of the situation at March 2006. Features
and issues
will change without notice. It has been based on information that is
available
to the public, research conducted by our advisers and other information
believed to be reliable. This update gives an overview of the situation
at
Prudential to help you, but you should not take it as financial advice.
