PENSION INVESTMENT APPROACHES - Scottish …

1 PENSION INVESTMENT . APPROACHES . PERFORMANCE FACTSHEET JUNE 2018. This information is for UK financial adviser use only and should not be distributed to or relied upon by any other person. PENSION INVESTMENT APPROACHES AT THE HEART OF OUR GROUP PENSION PROPOSITION IS OUR CORE. INVESTMENT OFFER A CHOICE OF STRAIGHTFORWARD PENSION . INVESTMENT APPROACHES INCORPORATING DYNAMIC ASSET ALLOCATION, AND REFLECTING DIFFERENT ATTITUDES TO RISK AND REWARD. OUR PENSION INVESTMENT Periods of market volatility highlight the need to look APPROACHES to protect accumulated funds as members approach retirement. This factsheet demonstrates how our PENSION Our Adventurous, Balanced and Cautious PENSION INVESTMENT APPROACHES aim to help smooth out volatility INVESTMENT APPROACHES were launched in 2006. in the final years to retirement, by charting the experience Underpinning our PENSION INVESTMENT APPROACHES are at various points in the lifestyling journey.

2 Our PENSION Portfolio Funds One to Four, which were also launched in 2006 and have a performance track A KEY LINK TO STATE STREET. record of over ten years. Our PENSION INVESTMENT APPROACHES are composed of In the last five years leading up to retirement, we move PENSION Portfolio Funds and specialised funds for the pre customers' investments into specific funds for the retirement phase. preretirement phase. These funds are the Scottish Widows The equity component used for the PENSION Portfolio PENSION Portfolio Five Fund, the Scottish Widows PENSION Funds comes from key fund links to State Street Protector Fund and the Scottish Widows Cash Fund. Global Advisors (SSGA), an acknowledged leader in institutional investing. Institutions worldwide have entrusted SSGA with trillion to manage on their ADVENTUROUS. behalf as at 31st March 2018. The bond component is managed by Aberdeen BALANCED Standard Investments. All the equity and bond components of the PENSION CAUTIOUS Portfolio Funds are invested on a passive basis.

3 15 years before retirement, each approach gradually switches into funds that have historically been less volatile. Five years from a member's selected retirement date, we will start to automatically adjust their plan so that it will be invested in one of three ways, depending on whether they will want to purchase an annuity, keep their PENSION money invested (including taking withdrawals as an income), or take a cash lump sum. We offer a smoothed'. approach to lifestyle switching, which ensures a reassuringly predictable transition between funds. 1. PENSION INVESTMENT APPROACHES BELOW IS AN ILLUSTRATION SHOWING HOW OUR PENSION INVESTMENT APPROACHES . GRADUALLY MOVE BETWEEN FUNDS, INCREASING EXPOSURE TO LOWER RISK INVESTMENTS. AS THE MEMBER MOVES CLOSER TO THEIR CHOSEN RETIREMENT AGE. We offer three different retirement outcomes', designed to prepare a member's PENSION INVESTMENT in its last five years for whichever retirement choice they expect to make.

4 In addition to the original retirement outcome designed for those planning to buy an annuity, we have added an outcome for those who plan to encash their fund, and an outcome for customers who will want flexible access and plan to move into a suitable product so they can stay invested. The underlying funds used for each of these three outcomes are covered below. Initial years 100% PP3 into PENSION ADVENTUROUS Targeting Annuity in PENSION Portfolio 1 (PP1). PP1 into PP2 PP2 into PP3. Protector & Cash Initial years 100%. ADVENTUROUS Targeting Encashment in PENSION Portfolio 1 (PP1). PP1 into PP2 PP2 into PP3 PP3 into PP5. Initial years 100% PP3 into PP4. ADVENTUROUS Targeting Flex Access in PENSION Portfolio 1 (PP1). PP1 into PP2 PP2 into PP3. and PP5. Term to retirement 15 10 5 0. Highest risk Lowest risk Term to retirement PENSION Portfolio One (PP1). PENSION Portfolio Two (PP2). PENSION Portfolio Three (PP3). Decreasing PENSION Portfolio Four (PP4) levels of risk PENSION Protector PENSION Portfolio Five (PP5).

5 Cash 2. PENSION INVESTMENT APPROACHES Initial years 100% PP4 into PENSION BALANCED Targeting Annuity in PENSION Portfolio 2 (PP2). PP2 into PP3 PP3 into PP4. Protector & Cash Initial years 100%. BALANCED Targeting Encashment in PENSION Portfolio 2 (PP2). PP2 into PP3 PP3 into PP4 PP4 into PP5. Initial years 100% PP4 into PP4. BALANCED Targeting Flex Access in PENSION Portfolio 2 (PP2). PP2 into PP3 PP3 into PP4. and PP5. Term to retirement 15 10 5 0. Highest risk Lowest risk Term to retirement PENSION Portfolio Two (PP2). PENSION Portfolio Three (PP3). PENSION Portfolio Four (PP4) Decreasing levels of risk PENSION Protector PENSION Portfolio Five (PP5). Cash Initial years 100% PP4 into PENSION CAUTIOUS Targeting Annuity in PENSION Portfolio 3 (PP3). PP3 into PP4 100% in PP4. Protector & Cash Initial years 100%. CAUTIOUS Targeting Encashment in PENSION Portfolio 3 (PP3). PP3 into PP4 100% in PP4 PP4 into PP5. Initial years 100% PP4 into PP4.

6 CAUTIOUS Targeting Flex Access in PENSION Portfolio 3 (PP3). PP3 into PP4 100% in PP4. and PP5. Term to retirement 15 10 5 0. Highest risk Lowest risk Term to retirement PENSION Portfolio Three (PP3). PENSION Portfolio Four (PP4). Decreasing PENSION Protector levels of risk PENSION Portfolio Five (PP5). Cash 3. PENSION INVESTMENT APPROACHES ASSET ALLOCATIONS AS AT 30TH JUNE 2018. STRATEGIC ASSET ALLOCATION FOR MULTI-ASSET PENSION PORTFOLIO FUNDS. USED IN PIAs PP1 PP2 PP3 PP4. KEY: UK equities Emerging markets equities Overseas developed markets equities Corporate bonds Source: Scottish Widows, as at 30/06/2018. ASSET ALLOCATION UPDATE AS AT 30TH JUNE 2018. There were no strategic asset allocation changes to the PENSION Portfolio funds during the second quarter of 2018. Further details on the governance process are covered in The Reassurance of Ongoing Governance' section. 4. PENSION INVESTMENT APPROACHES MARKET COMMENTARY FOR THE PERIOD 1ST APRIL 2018 TO 30TH JUNE 2018.

7 The second quarter of 2018 was characterised by increasing trade tensions, particularly between the US and China, which had a ripple effect throughout markets. The UK and the US share markets recorded strong growth, while equities in China and other emerging markets posted losses. Central bank activity was divergent, with the US Federal Reserve (Fed) hiking rates, the Bank of England (BoE) holding steady but signalling hawkishness, and Europe and Japan remaining relatively accommodative. The UK had some of the strongest equity performance of the period, with the blue chip FTSE 100 Index recording its best quarter since 2010, gaining in total returns (GBP). Most of the gains were recorded in April, and to a lesser extent May, as sterling weakness contributed to a favourable environment for those firms with international exposure. The more domestically focused mid-cap FTSE 250 also had a good quarter, with a total return of , supported by higher energy prices.

8 June saw UK equities lagging the global average, however, as hawkish rhetoric from the BoE and uncertainty around the Government's ability to strike a Brexit deal kept investors wary. Economic growth was slightly higher than expected; first-quarter GDP growth of compared to estimates of , supported by household spending. In continental Europe, political headlines led to restrained performance, with the FTSE Developed Europe ex-UK recording a total return of The results of the Italian elections in March carried through until May, as two Eurosceptic parties worked to form and gain approval on a coalition government; uncertainty in Germany also troubled markets, as Angela Merkel faced a leadership crisis over the issue of migration. First-quarter economic growth reported in June was , in line with estimates but down from in the previous quarter. Amid slower growth, the Eurozone found itself facing trade tensions on two fronts, as Brexit remained unresolved and the US president turned his attention to auto imports.

9 The European Central Bank signalled it would end its asset purchase programme but keep rates unchanged through mid- 2019, which investors interpreted as remaining accommodative. The FTSE North America Index gained (total returns in sterling terms). Overall, the performance of US equities was robust, amid higher market volatility. The strong gains were aided by a record period for share buybacks, as corporations used their new tax savings to buy back their own shares, rather than invest in capital expenditure. Investors kept a close watch on the summit between the US and North Korean leaders, and the ongoing rhetoric against China, which extended to Europe and Canada over the quarter. Overall, the US economic picture remained positive, prompting the Fed to hike its target rate again in June. Canadian stocks remained resilient despite trade tensions, hitting a record high near the end of June. Elsewhere, the FTSE Developed Asia Pacific ex Japan had a total return of , while the FTSE Emerging Markets Index fell by (both in sterling terms).

10 Emerging Europe, Asia, and Latin America had the biggest losses, dragged down by Brazil and China in particular. The latter country has been at the centre of trade tensions with the United States; the next round of tariffs is due to take effect from 6th July. The FTSE Japan had a total return of in sterling terms, despite net outflow from foreign investors and a strengthening yen (which traditionally hinders equity performance). Turning to fixed-interest investments, the yield on the US 10-year Treasury ended the quarter slightly higher than where it started (the price was lower), after coming down off highs of more than The yield on the 10-year UK Gilt generally followed the trajectory of its US counterpart, while German benchmark bonds dropped sharply at the end of May. The UK index-linked market fell slightly, with prices down by over the quarter. INVESTMENT -grade corporate bonds dropped back by , while riskier high-yield corporate bonds only declined marginally.