XPS Administration - IBM Pension Trust

2020 SMPI Assumptions

Updated on 23 April 2021

In preparing this Statutory Money Purchase Illustration the Trustee has made a number of assumptions about the nature of your investments and their likely performance.  In setting these assumptions the Trustee is required to comply with the guidelines set by the Financial Reporting Council (FRC) in their Actuarial Standards Technical Memorandum 1 (TM1).

TM1 has specific requirements for some aspects of the calculation, but allows the Trustee to use its judgment on the assumptions to use elsewhere including investment growth assumptions. In setting the investment growth assumptions, the Trustee has consulted with its actuarial advisers, Willis Towers Watson.

The assumptions adopted, as advised by Willis Towers Watson, are:

  • Future inflation will be 2.5% a year between now and your retirement
  • Your pension fund:

    - Will remain invested in the funds or Lifecycle strategy in which they are currently invested; and

    - Will increase in value by the assumed annual rate of investment return net of annual management charges as set out in the below table for the funds in which you are invested.

  • On retirement:

    - You will use your entire fund, without taking a tax free lump sum, to buy an inflation-linked annuity;

    - Your pension will increase each year in line with inflation (assumed to be 2.5%); and

    - You are married or in a civil partnership and the annuity you purchase will provide your spouse or civil partner half of your pension on your death.

 

Additional assumptions adopted, as prescribed by the FRC, are:

  • The annuity rates used in the illustration reflect the annual interest rate of British Government Index-Linked securities on 15 February 2020.

  • An allowance of 4% of the value of the annuity at retirement is made for expenses.
  • The tax legislation currently in force does not change before your retirement.

Year on Year Pensions Assumptions Impact

The cost of inflation-linked annuities for the 2020-2021 SMPI statements are around 4% to 8% higher than for 2019-2020 SMPI statements.  As a result, projected pensions in SMPIs with 2020-2021 illustration dates will be correspondingly lower from the previous year's statements.

In addition, the Covid-19 global pandemic has created a lot of uncertainty and volatility in the financial markets. This has resulted in some savers seeing the value of their pensions savings fall when compared to last year's SMPI statements, with correspondingly lower pension projections in 2020-2021 SMPI statements.

The table below shows the assumed annual rate of return (as advised by Willis Towers Watson) and assumed annual management charge* for each L&G fund for both this year and last year. 

 

 
2020
2019
Fund
Annual Rate of Return
Annual Management Charge
Annual Rate of Return
Annual Management Charge
All World Equity Index Fund
5.5%
0.083%
6.0%
0.082%
Annuity Protection Fund
0.5%
0.042%
1.5%
0.042%
Emerging Markets Debt Index Fun
0.5%
0.042%
1.5%
0.042%
Ethical Global Equity Index Fund
5.5%
0.083%
6.0%
0.082%
Ethical UK Equity Index Fund
5.5%
0.083%
6.0%
0.082%
Global Equity (70:30) Index Fund
5.5%
0.083%
6.0%
0.082%
Global Equity Fixed Weights (60:40) Index Fund
5.5%
0.083%
6.0%
0.082%
Global Real Estate Fund
5.0%
0.139%
5.5%
0.148%
Growth Fund
3.5%
0.130%
4.0%
0.139%
Growth Plus Fund (including former Consensus fund)
5.0%
0.139%
5.5%
0.148%
Index Linked Gilts Fund
0.5%
0.042%
1.5%
0.042%
Inflation Linked Pre-Retirement Fund
0.5%
0.042%
1.5%
0.042%
Infrastructure Equity Fund
5.5%
0.083%
6.0%
0.082%
Investment Grade Corporate Bond – All Stocks Index Fund
2.0%
0.070%
2.5%
0.070%
Over 15 Year Gilts Index Fund
0.5%
0.042%
1.5%
0.042%
Pre-Retirement Fund
2.0%
0.070%
2.5%
0.070%
The Money Fund
0.5%
0.050%
1.5%
0.050%
UK Equity Index Fund
5.5%
0.083%
6.0%
0.082%
World Emerging Markets Equity Index Fund
5.5%
0.083%
6.0%
0.082%
World (ex UK) Developed Equity Index Fund
5.5%
0.083%
6.0%
0.082%

 

*Please note that the Annual Management Charges above are the assumed charges for the purpose of this illustration.  You can find the actual Annual Management Charges on our website.  Once you have selected your member status and plan, click on Investing> Your IBM Investment Funds.

Important

The SMPI statement provides an illustration of the pension you may receive from your fund on retirement. It should be noted however, that these are illustrations only, based on a number of assumptions about the future as outlined above. The actual pension that can be purchased with your fund will depend on the size of your fund and market conditions at the point at which you retire and can only be known with certainty at that time.

The SMPI statement does not take account of the other options available to you at retirement with the introduction of Pension Freedoms in 2015.

SMPI statements are not intended to be individual financial advice or to be used in comparing the merits of particular forms of pension provision.

As well as the potential health and social impact of the Coronavirus around the world, few will have failed to notice how stock markets have reacted to the Covid-19 pandemic. Since its onset earlier in 2020, we have seen hugely increased volatility, including some sharp falls in global share markets with some element of recovery.

Why are markets so volatile?

The investment markets don’t like uncertainty. Coronavirus has created a lot of uncertainty in the markets with some significant financial impacts. For example, we have seen how demand from people for certain products and services,such as travel and hospitality, has adversely affected companies.

Markets were also affected during past virus outbreaks (such as SARS), and after a period of uncertainty, markets recovered.This is the most likely outcome for Coronavirus, but there is no knowing how long this uncertainty could last nor how long a recovery could take.

How is my pension affected?

As a member with Defined Contribution (DC) retirement savings (which include M Plan and/or DB additional contributions), you are likely to find that the value of your pension savings fell fairly sharply at the height of the market volatility in March 2020. Longer-term ‘growth’ assets,such as equities and diversified growth funds, will have suffered the more significant falls. Other types of investment options, such as gilts and bonds will have also seen sharp drops but were much quicker to recover.  Investments in cash (the Money Fund) were largely not impacted.

Seeing the value of your pension savings fall can be very uncomfortable – particularly if you’re close to retirement, but you should bear a few factors in mind:

  1. Your pensions savings should be viewed as a medium to long-term investment. Share markets have had significant falls in the past,for example following the 2008 financial crisis – but recovered strongly after;
  2. Don’t panic – while it’s sensible to know how your pension savings are performing, short-term decisions could make things worse over the longer-term by locking in losses;
  3. If you are invested in one of the Lifecycle strategies,these strategies aim to reduce the volatility of your savings as you get closer to retirement by being invested in less risky assets such as cash and bonds;
  4. If you are still contributing into your pension, where funds have fallen in value, you will be investing in funds at lower prices.This means that your contributions along with IBM's contributions buy more‘units’ than before where prices are lower.

 

What if I’m close to retirement?

How you’re affected is likely to be influenced by how you plan to take your pension savings – whether you’re aiming to:

  1. draw them as cash in the short-term
  2. leave them invested and draw an income over time
  3. buy an annuity to provide a guaranteed income
  4. take them as a mix of the above.

If you are invested in one of the Lifecycle strategies, these strategies normally provide some protection from volatility before retirement, depending on their aims.

The recent market volatility should also remind you that you need to understand the aim of your Lifecycle strategy and to check that it is aligned with your retirement aims and that it accurately reflects your target retirement age.

What do I need to do?

You do not need to take any action. This update is for information only. However, it is a good idea to review your pensions savings regularly and to understand the options available to you.

Also, think carefully about the right time to make any changes, taking financial advice if appropriate.

Where can I find out more information?

You can view your DC pension savings via our secure interactive service MyPension.  (If you are not yet registered to use this service, you can sign up and request your activation key via the same link).

You can find information about the investment options available to you buy visiting this page.  Once you have selected your member status and plan, click on Investing > Choosing Your Investment Strategies(for the range of Lifecycle strategies) or Your IBM Investment Funds(for the range of Freestyle funds).

Where do I go for further advice?

The Trustee is not permitted to offer advice to members regarding investments or the financial implications of changing your investments. This is an area that is strictly regulated by the Financial Conduct Authority and only those persons who are qualified to give financial advice are allowed to do so. If you require financial advice on your investment choices or your retirement options, you can find your nearest Independent Financial Adviser (IFA) by visiting their website at www.unbiased.co.uk. Please note that an IFA may charge you for any advice given.

You could also refer to the Money Advice Services for additional information on financial help and information:  www.moneyadviceservice.org.uk/en/categories/financial-help-and-advice  

Updated on 23 April 2021