The NOW: Pensions
2 NOW: Pensions | Investment proposition
Overall investment strategy
Funds used during the phases: Growth phase
Funds used during the phases: Protection phase
Why one investment strategy is the correct approach
Our investment goal:
To produce an investment
solution that represents good
value and secures good outcomes
for our members over the long
term. We aim to achieve this by
seeking to optimise returns
relative to the risk taken.
Investment proposition | NOW: Pensions 3
The NOW: Pensions investment
proposition is different.
In keeping with our overall objectives of
simplicity, sustainability and affordability,
we offer one investment solution.
The sophistication comes in the design structure
and ongoing management of the investment
solution throughout the lifetime of an
With a strong governance structure, we have
removed the burden of investment choice
from our members.
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During the growth phase, contributions are invested in the Diversified Growth Fund which adopts an actively risk managed approach. When the member starts approaching retirement, their fund and ongoing contributions are gradually switched towards theRetirement Countdown Fund.
The Retirement Countdown Fund has a dual role of reducing the overall risk exposure within the member’s accrued fund, while at the same time protecting the value of their fund as retirement approaches.
An investment strategy
designed to perform
The NOW: Pensions investment solution is made up of actively managed fund components
combined within two phases – growth and protection. The strategy is designed to deliver
long term stable returns and help members look forward to a secure retirement.
Members are not asked to make any investment decisions. Instead, the NOW: Pensions Trustee Board shoulders responsibility for the investment solution which is designed to generate good outcomes for our members.
Pension savings have specific requirements
and should be managed responsibly. We seek to achieve good long term results with limited uncompensated risks. Traditional asset based portfolios can
contain unacceptable concentrations of risk. The portfolio is built on asset classes with significantly different risk attributes. An ability to react quickly to market conditions is
essential for the protection, or exploitation, of value. Smart implementation ensures liquidity, agility and speed. We do not have an ability to predict the
future behaviour of investment markets. Rules-based dynamic strategies protect the value of the portfolio. It is vital to adopt a structured approach
and limit exposure to uncompensated risk. Exceptionally strong focus on management and risk controls.
The Investment Manager for the funds is NOW: Pensions Investments A/S, a subsidiary of ATP who are based within the Denmark offices. ATP has been managing pension investments for over 50 years and manages total assets in excess of £77 billion on behalf of 4.9 million members and 152,000 employees*.
Founded on ATP’s approach to measuring risk, NOW: Pensions Investment has refined the strategy by taking into account the specific requirements of UK pension funds, and our members in particular.
*All values as at 31 December 2015.
6 NOW: Pensions | Investment proposition
Overall investment strategy
The Diversified Growth Fund forms the central pillar of our investment solution and follows
a sophisticated risk based investment strategy. It is accessible to pension scheme members
at a price usually associated with UK index-tracking funds, not sophisticated
actively managed and diversified portfolios.
An appropriate measure of success for a pension investment strategy is the ability to maximise pay outs in real terms. We believe that the level of investment risk taken should be appropriate for long term investment, while at the same time, it is important to protect members from significant reductions in the value of their pension account. This is achieved by diversifying investments and by using various techniques to mitigate risk.
While diversification is an important characteristic of the Diversified Growth Fund, it cannot stand alone. As a result we have developed a set of dynamic management actions which aim to protect the portfolio in adverse market scenarios or where the diversification effect in the portfolio weakens.
Phasing from growth to protection
We have created a simple and robust glidepath strategy, where risk reduces towards retirement, helping to ensure that members are not exposed to unwelcome surprises at the time they take their benefits:
Our default position is to start switching members’ investments when they are ten years away from their selected retirement age. At that point, we gradually move their investments towards the Retirement Countdown Fund.
As an alternative to the 10 year glidepath, we also offer 5 year and 15 year versions of the glidepath strategy. These alternatives can be selected either at scheme or at member level.
For members who do not wish to draw their benefits at their Selected Retirement Age, we encourage communication with us in order that we may record a later date, and thereby delay or cancel the de-risking glidepath.
Investment proposition | NOW: Pensions 7 *Sterling Overnight Index Average
Fund Diversified Growth Fund Retirement Countdown Fund
Strategy Diversified Market
Risk Strategy Low risk value-protecting strategy
Objective To create capital growth over the medium to long term by investing in a diversified pool of assets.
To achieve returns in line with wholesale money market short term interest rates.
8 NOW: Pensions | Investment Proposition
8 NOW: Pensions | Investment proposition
Funds used during
Diversified Growth Fund
The Diversified Growth Fund adopts a multi-asset diversified strategy to deliver strong, stable returns in most scenarios.
The Diversified Growth Fund is different from traditional multi-asset approaches in that our approach to allocation focuses on the risk characteristics of each asset class. Traditional asset allocation approaches often have a high proportion of total risk allocated to equities. We believe that our risk allocation approach enables us to maximise the benefits of diversification
We have two main objectives when investing on behalf of our members:
Achieve a return of Cash plus 3% per annum over a rolling five year period.
Protect our investments against what might go wrong. Our aim is to only take on risk that is adequately compensated by potential returns; leading to higher risk adjusted long term returns than traditional portfolios. It is important to be agile so that strategic decisions can be implemented very quickly. To achieve this, the fund must have high levels of liquidity. The NOW: Pensions Diversified Growth Fund is armed with a set of dynamic strategies which aim to protect the portfolio in adverse market conditions.
Investment PropositionInvestment proposition | | NOW: PensionsNOW: Pensions 9 9
The diversified strategy consists of a total risk target and a diversification target for exposure to each asset class:
• The total risk target is consistent with a 60% equity / 40% bond portfolio
• Risk is measured as the biggest average loss that could be expected with 1% probability over a 3 month horizon
• The share of total risk relating to each asset class should target specific levels
• We allocate risk in the portfolio between five risk classes with very different profiles in order to ensure that returns are stable and that the portfolio is able to perform in a broad variety of economic conditions.
The long term horizon of pension savings can sometimes conflict with members’
willingness to tolerate large short term deviations in returns. We have therefore
designed and implemented a set of dynamic processes which aim to address this conflict.
Our core strategy is centred on the principle that over the long term, diversification of assets provides higher risk adjusted returns. This approach provides a very simple form of protection because in normal markets, assets with different return characteristics behave in different ways i.e. some go up and some go down in each economic cycle.
10 NOW: Pensions | Investment proposition
10%Rates Equities Inflation Inflation Commodities Credit
The Equity class predominantly contains exposure to global equity risk. The exposure is achieved by investing in equities, equity derivatives or in funds containing similar investments. Such investments produce returns which generally reflect economic growth.
The Inflation class predominantly contains exposure to inflation risk. The exposure is achieved by investing in index linked government and other bonds with low credit risk and inflation and interest rate derivatives, in order to achieve returns which are driven by inflation developments.
The Rates class invests in government and other bonds with low credit risk and in interest rate derivatives, reflecting movements in interest rates in order to deliver returns based on investment in high quality bonds.
The Credit class contains exposure to credit risk on companies, supranational institutions and governments, investing in bonds with credit risk or in funds containing similar investments, which normally have higher yields than the lower risk investments in the Rates class.
The Commodity class invests in commodity derivatives or in funds containing similar investments, providing access to a range of commodities including energy and precious metals.
Target allocations of risk within
the Diversified Growth Fund
Dynamic strategies are our way of enhancing the return dynamics of the Core Strategy. The objective is to be proactive when the portfolio is suffering from adverse market conditions or when the diversification effects in the portfolio weakens.
1. Portfolio risk control
The purpose of Portfolio Risk Control is to protect the fund against sever and unexpected drawdowns. This strategy will reduce the risk in the portfolio through a stepped process, if the performance trends downwards from a rolling three month high water mark level. The chart below illustrates the process.
3. Correlation Control
Whilst we believe that diversification will provide better risk adjusted returns over the long term, there are occasions when assets become more correlated than our assumptions would suggest. We therefore employ a strategy that protects the portfolio when assets become overly correlated. The strategy becomes active when correlation in the portfolio breaches our proprietary threshold, at which time we initiate a programme which redistributes risk from the poorest performing asset class to the top performing class.
Investment proposition | NOW: Pensions 11
-10%100% risk 80% risk 60% risk 40% risk 20% risk 0% risk
–High Water Mark
– – –Risk Levels within DGF
12 NOW: Pensions | Investment proposition
The core portfolio is not the only return generating engine in the portfolio. We also employ two tactical strategies to enhance returns within the portfolio.
1. Economic cycle tilt
Over time, the economy goes through different cycles, during which certain assets perform better than others. Because of this phenomenon, there are periods when, historically, it has been beneficial to be overweight in some asset classes and underweight in others. We therefore employ a strategy which identifies our position within the economic cycle and tilts the portfolio appropriately – in other words we will hold more of the assets that are likely to outperform and sell assets that normally underperform in these market conditions. Application of the cycle tilt is a subjective decision, as there may be other economic considerations in play.
2. Ad-hoc strategies
Financial markets sometimes misprice assets. In order to take advantage of these inefficiencies, we enter into specific strategies to generate additional returns for the portfolio. These strategies are typically short term and the risk allocated to these strategies is limited.
Recovery Boom Recession Slump Recovery Boom Recession
Inflation Equities Commodities Inflation Bonds Bonds Equities Commodities Credit
Investment proposition | NOW: Pensions 13
Retirement Countdown Fund
As members begin their approach to retirement, we will start to gradually switch investments into the
Retirement Countdown Fund. While the Diversified Growth Fund creates the right environment for the growth of members’ funds, as retirement gets nearer, it is important to alter the investment strategy in order to reduce the risk of sudden and unexpected losses.
Normally, we start switching members’ funds when they are ten years away from retirement. However there is full flexibility to change the glidepath and as an alternative to the 10 year lifestyle strategy, we also offer a 5 year and 15 year version of the lifestyle strategy.
These alternatives can be selected either at scheme or at member level.
The glidepath into retirement
In response to the new flexibility afforded to members who retire after April 2015, we have adopted a glidepath strategy which reflects the new retirement landscape.
As members approach retirement, their funds are transitioned from the Diversified Growth Fund into the Retirement Countdown Fund.
Diversified Growth Fund Retirement Countdown Fund
Time to go until retirement…
Return Target: Annuity Return Target: Cash
14 NOW: Pensions | Investment proposition
Retirement Countdown Fund
The fund invests in cash deposits, money market funds, short-dated bonds with low credit risk, and interest rate derivatives. We believe that when combined with reducing exposure to the Diversified Growth Fund, this is the appropriate de-risking strategy for our members.
We cannot predict how and when members will draw their retirement benefits, and we do not believe that many members will be in a position to do so until they reach retirement. Our glidepath strategy addresses this need for flexibility.
For those who take the full fund as cash
The glidepath gradually moves members’ funds towards cash, reducing volatility risk as well as protecting the ultimate value of the fund.
For those who purchase an annuity
A few members may still wish to purchase an annuity. However in the current economic environment, we do not believe that an annuity hedging strategy is an appropriate means to protect members’ options. With increased retirement flexibility, the possibility of a reducing fund value as annuity rates improve does not suit our members’ needs.
For those who opt for Income Drawdown
A minority of members with larger retirement funds may elect to transfer their accrued fund to an income drawdown product. Our member communications reminds members of the possibility of extending their retirement age to delay or cancel the glidepath strategy and ensure they remain invested in the growth phase.
Member returns for the Diversified Growth Fund during Q4 2013, Q1 and Q2 2014 included extraordinary returns in respect of assets sold by the NOW: Pensions Trust during 2013.
Investment proposition | NOW: Pensions 15
The decisions made by our Investment Managers are focused on the risk characteristics of
the different asset classes.
Diversified Growth Fund annualised member returns 1 January 2013 to 31 December 2014
Cash + 3%
60% Equity / 40% Bond Portfolio
16 NOW: Pensions | Investment proposition
Investment risks and how we address them
Risk Description Mitigation
Currency Risk The additional risk that the value of any overseas investments may rise or fall because of movements in currency exchange rates.
The target is 100% hedge +/- 5% of all non-GBP holdings.
Counterparty Risk Counterparty risk is related to assets held in credit institutions and to derivative exposures, tothe extent that the other party to an agreement will default.
The risks are mitigated by thorough counterparty selection and monitoring, spreading the exposures between several counterparties, using standardised agreements and by collateralisation of
Concentration Risk The risk of having too much exposure to a particular instrument, or a particular issuer.
Concentration risk is mitigated by diversifying the investments across asset classes and investment products used for implementation. For instance, the fund’s holding of equities issued by a specific company may not exceed 10% of the total issuance by that specific issuer or 5% of total fund size.
Liquidity Risk Liquidity risk mainly relates to futures margin calls and member withdrawal.
The risk is mitigated by keeping a sufficient level of cash on margin accounts and a sufficient level of cash holdings in each fund to provide for cash withdrawals from members. The cash holdings outside margin accounts is capped at 5% of fund value.
Asset Liquidity Risk This primarily relates to the ability to reduce risk evenly in all asset classes at a required pace, and sustaining second order effects of cash drawdowns.
Investments are concentrated in liquid instruments to mitigate these risks.
Operational Risk The risk that internal
operating procedures fail. We have a number of safe guards and controls in place to mitigate operational risks: • Governance Principles: Separation of Management
and Board (Management executes – Board supervises and holds to account) • Independent risk management and compliance
functions provide additional oversight
• Straight through processing ensures compliance with guidelines and minimises human error
• Post trade controls – conducted on a ‘four eyes’ principle • Business continuity contingency plans in place
NOW: Pensions is committed to delivering better workplace pension provision
in the UK by offering a simple, risk managed, stable performing pension product,
which delivers better retirement savings for UK employees.
Investment proposition | NOW: Pensions 17
Why one investment strategy
is the correct approach
The UK Defined Contribution pensions market has traditionally offered members
choice of investment, perhaps in an attempt to achieve greater awareness and
engagement. The number of funds being offered has reduced over recent years,
as the challenges and flaws associated with too much choice have been identified.
We believe that providing one unified investment strategy, tailored to the planned
retirement date of each member, is far more beneficial to the long term wellbeing of
our members than offering a wider choice of funds. Our view is that the vast majority
of people saving for retirement would prefer to sit comfortably in the knowledge
that someone else is managing their investments on their behalf and is taking
responsibility for their long term savings needs.
18 NOW: Pensions | Investment proposition
At the time when an employee joins the pension scheme, the more decisions they are asked to make, the more prone they are to disengage. Attitudes to risk; fund descriptions; fund fact sheets; risk warnings; and investment choices take time to interpret and digest and that leaves less time to consider the important issues such as – When do I want to retire? What do I want to do? What level of contribution should I make to the scheme?
If we focus on the automatic enrolment market for a second, we
know from our peer group that more than 99.5% of member have
invested in the default fund offered. Choice is not supported.
There is strong evidence to support the concept
that choice is often
a good thing.
Members who self select are normally guided by the risk classifications of the funds available. However, regardless of the tools at their disposal, members continue to struggle to determine their own attitude to risk. Their investment decisions are also influenced by market reports. If, at the time of joining the scheme, market reports are optimistic, members often have a lower perception of risk and higher expectations of return and will therefore be more likely to select adventurous funds. The converse is also true. Whichever scenario may apply, the results can have dangerous consequences, as while these emotional influences may be short-lived, those investment decisions may be long term.
Few members ever change their investment decision. Research has shown that approximately 80% of self select members change their investment selection less than once every five years, and more than half of them never make a change to their initial investment selection. While perceived attitude to risk may alter during the lifetime of a scheme member, this inertia means that the chances of a member changing his/her initial decision are low.
To make matters worse, we know that members who do switch their investment funds will often chase the market. The buy high/sell low behaviour of even the most experienced investors is well documented. Evidence shows that pension scheme members who do make active investment decisions, however seldom, will often fall into this trap.
NOW: Pensions is part of the ATP Group, the Danish Labour Market Supplementary
Pension. Our investment solution is built on the Danish experience, which has shown demonstrable and significant
benefits to the Danish ATP members for more than
Charges and pricing
The annual investment management charge of 0.3% is applicable to throughout the Growth and Protection phases*. Units allocated to members’ funds represent their share of the funds and will be single priced. That is to say, on any given trading date, we use one price for both the purchase and the sale of units.
As the investment world develops, so the NOW: Pensions investment solution will adapt to market developments. By way of illustration, it’s worth studying the way in which the ATP fund has developed since its launch in 1964:
1964 | The ATP fund is launched with 100% investment in Danish bonds and equities
1982 | A more traditional 60% bonds / 40% equities portfolio is adopted
2001 | Hedging capabilities are introduced to the fund
2007 | The portfolio adopts a diversified multi asset strategy
This ability to embrace developments within the investment world avoids one of the traps which have caught out many UK pension savers who remain in outdated investment funds, while modern fund designs are made available to new investors.
The ATP Group
Arbejdsmarkedets Tillaegspension (ATP) / Danish Labour Market Supplementary Pension is a statutory pension fund. It was established as an independent entity in 1964 with the objective of ensuring a greater retirement income for the Danish population.
ATP has since developed to become the largest pension fund in Denmark. Together with the tax-financed basic state pension, ATP provides basic income security in old age for the Danish people. ATP covers almost the entire Danish population representing 4.7 million members and 160,000 employers. In addition to the ATP Scheme, the ATP Group administers a number of pension and social insurance schemes, including several for the Danish state.
The Investment team of approximately a hundred professionals manages ATP’s assets which totalled over £85 billion as at 31 December 2014.
* A separate monthly administration charge of £1.50 is also applied.
Investment proposition | NOW: Pensions 19
• The World’s Most Influential CIO: Henrik Gade Jepsen (2013)
Conferred by Asset International (aiCIO)
• Risk Management Innovation (2013)
Conferred by aiCIO European Innovation Awards
• Gold Award: Best European Pension Fund
(2011, 2009, 2005)
Conferred by Investment & Pensions Europe (IPE)
• Gold Award: Best European Long-Term Investment
Conferred by Investment & Pensions Europe (IPE)
• Theme award for “Risk Management” – Best Risk
Management in Europe (2011, 2008, 2006, 2005) Conferred by Investment & Pensions Europe (IPE)
Selection of awards won by ATP
164 Bishopsgate London
Tel: +44 (0)330 100 3336
Smarter. Simpler. Better.Information correct as at April 2016
NOW: Pensions is a UK occupational pension plan. Membership is only available through an employer, following satisfactory checks on the employer. This is written as a general guide only. It should not be relied upon as a substitute for speciﬁc professional advice. Please note, past performance is not a guarantee of future returns.