Getting the right mix for your pension
CAPTION: How does Royal London choose the right mix of investments for your pension? And why is a mix of investments important in order to grow your pot and reduce risk? Hear from the people who manage your pension…
LORNA BLYTH: Hello, my name is Lorna Blyth and I’m Investment Strategy Manager at Royal London.
TREVOR GREETHAM: I’m Trevor Greetham. I’m Head of Multi Asset Investments at Royal London.
LORNA: So you’ll be familiar with the concept that prices rising over time, so inflation can really erode the value of your savings. So that’s why it’s important to invest your money to make it grow. Pensions allow you to invest in lots of different investments, and typically we call these asset classes, and how much we invest in each asset class depends on how much risk you’re comfortable taking. Now it’s important that you take some risk with your pension, particularly if you’ve got a long time to go because we need your investments to grow to combat the effect of inflation.
Different types of investments will behave differently depending on market conditions. So while one type of investment is doing well, the other might be doing poorly, so it’s important to have a spread of investments so you don’t have all your eggs in one basket.
Royal London have got a wealth of experience in developing investment strategies for pension schemes.
TREVOR: All of the pension portfolios at Royal London include a balance between what we would call growth assets, and other investments which are more of a store of value, trying to protect the money that you have built up so far. We invest a portion of the pension pot in company shares. We’re talking not about one or two company shares, we’re talking hundreds or thousands of company shares, both in the UK and around the world. Again that’s the concept of spreading the investments. In case one company has difficulties, you’ve got lots of other companies where the money should be working for you. Company shares have done very well over the very long run but they do see their prices swing around from time to time, sometimes quite remarkably, and that depends on things like the state of the economy and politics, and those are the sorts of things we monitor quite carefully when selecting the individual companies to invest in and how much of your pot to keep in shares.
A portion of your pension savings will be invested on your behalf in commercial property in the UK, and when you own a commercial building – it’s a bit like Buy to Let – you get a tenant who’s paying rent. All of that rent will go back into the pension pot and the rent tends to grow every year, more than the rate of inflation, and that’s one way that investment in property can help you investment to grow. A small portion of the pension pots at Royal London are investing in commodities like oil and gold and grains. The reason for this is that once in a while rapid rise in inflation can cause interest rates to go up and that may mean that shares or bonds in the portfolios hits some difficulties. By having small exposure to those royal commodities you typically find that will give you some protection in that situation.
Turning to the store of value part of the pension pot, what we’re trying to do with that is maintain the value in pound Sterling terms and grow it a little bit, so part of the portfolio would be lent to the government by buying government bonds. Government bonds are one of the safest forms of investments that you can possibly buy. The government will pay the money back at the end of 5 or 10 or 20 years, if necessary by raising taxes on all of us to get the money, or by printing the money, so you’re very sure of getting all of your money back and that’s quite a safe investment.
In a similar way you can lend money to companies, and obviously some companies are a safer bet than other companies. But our experts within Royal London can assess the credit risk of each of the individual companies they’re lending to, deciding whether it’s worth lending them money or not. Some of the money will be invested in things like bank deposits as well which gives additional security.
LORNA: So most experts agree that it’s best to have a mix of investments and Royal London have got different investment solutions, so therefore you don’t have to make a decision about whether I should be in equities or whether I should be holding property, because we will manage all that for you.
A financial adviser can talk to you about your investments and discuss what’s most appropriate for you based on your attitude to risk and how much risk you’re prepared to take with your savings, and that will then determine what the right mix of assets is for you.
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