Pensions Management Institute

Retirement Provision Certificate
Learning Materials

Introduction


Introduction
Welcome to the Retirement Provision Certificate for 2021 examinations.

RPC aims to provide you with essential knowledge and understanding of retirement provision in the UK, and to build a foundation for those who plan to develop a career specialising in one aspect of retirement provision or for those seeking a broad understanding of the subject.

PMI is pleased to be working in partnership with leading companies in the pensions field on the production of study support for a range of PMI qualifications under the banner of “Moving Pensions Forward”.

Pensions professionals within the company have worked on this on line learning programme for 2021

However, if you have any queries on the content of the material please contact the Qualifications Team at PMI.

In the first instance e-mail: pmiqualifications@pensions-pmi.org.uk or Telephone 020 7392 7400.

The RPC online learning programme is updated each year. The online learning programme for 2022 is based on the syllabus for 2022 which was based on the law and practice of the United Kingdom as it existed on 5 April 2021 unless stated otherwise.

Retirement Provision Study Manual 2022 

This programme contains various external links to other websites that are included for useful further/background information. However, all of the content that is required for examination purposes is included within the different pages.

Pensions Industry


The Pensions Industry


The study manual is broken down into sections.  This section, the Pensions Industry, and can be found in the relevant pages of the RPC Study Manual. 

In this section we give you an overview of pensions. We look at the:

  1. Origins of and Overview of Pensions
  2. The Employment Package
  3. Parties involved in Pensions
  4. We also reference the Current Pensions' scene by directing you to the Resources Page and reviewing current legislation.

Each section has four different types of learning activity:

  • References (the relevant parts of the Study Manual for you to revise and learn)
  • Think About it  (a current topic for you to revise and learn about)
  • Fact Finding  (factual questions with checkable answers)
  • Test (multiple choice questions with answers)




Pensions Industry - Origins and Overview


Origins and Overview

Some seventeenth century employers started to offer ex gratia pensions to chosen employees as a reward for long service. These were usually on an unfunded basis, with the amounts being subject to the whim of the employer and the ability of the workforce to provide sufficient profits to enable the employer to pay. The whole system was open to abuse by the employer since the employee had nothing more than an expectation that the benefit would continue. On an individual basis, it was common practice for a successor in a position to continue to pay a proportion of his current salary to his predecessor, until that person died. Samuel Pepys is a well known example. This was a direct transfer of funds from one generation to another. It worked well for the better off employees, but created a heavy burden for lower paid employees who needed all their earnings to live. 

The State only became involved in the welfare of the poor in the Elizabethan era (Elizabeth I), when the welfare of the poor became a national concern.  Legislation was passed through the Pool Laws of 1597 and 1601, which made local borough responsible for providing for the poor within their own areas.

The first occupational pension scheme was set up for the benefit of Customs and Excise Officers. It operated on a ‘pay as you go’ unfunded system, which meant that the contributions collected from the employer and the employees were paid out almost immediately in pension benefits to other retired members. This scheme set the precedent for the initial design of all occupational pension arrangements. Throughout the eighteenth century it was gradually extended and altered to include other civil servants. The Civil Service Pension Scheme was historically the model for HMRC approval, and even today the level of benefits offered in defined benefit occupational schemes are strongly influenced by it. 

Even though employers began to introduce occupational schemes for some of their senior employees, few employers offered occupational pensions to all their workers until mid to late nineteenth century when the Industrial Revolution was really underway. One of the first such employers to offer a scheme to all their employees was the Gas Light and Coke Company, shortly followed by the independent railway companies. 


1. References

This section of study, The Origins and Overview of Pensions can be found in the relevant pages of the RPC Study Manual. 

2.Think about it

Pensions crisis?

Currently we are all very aware of the so-called 'pensions crisis': the issue of whether there will be enough money in pension funds to support the retirement of today's working population. This issue has arisen mainly due to our increasing life expectancy, but has also been precipitated by volatile stock market returns. Take a little time now to explore the issue in a bit more detail and think about any implications it might have for you as an individual, and in your working role.

In the Resource Pages there is a summary of key features of recent legislation.

You can read through a DWP summary of pensions reform in the UK by clicking on the logo below:


The Pensions Policy Institute (PPI) was launched in January 2002 by the Pension Provision Group, who recommended that an organisation independent of government needed to lead responsibility for accumulating, analysing and publishing information about current and future pension provision and its implications for future pensions policy. They carry out original research and compile existing information to inform the analysis of the whole pensions policy framework.

You can visit their website to find out more about their current work. If you find it useful, you might like to bookmark it for future reference.


3. Fact Finding

STEP 1 - Visit the GOV.UK website by clicking the logo here: 



STEP 2  Follow the 'Plan your retirement income' link and click on 'Pensions from the Government' menu option.

STEP 3  Now, use what you've learned from this section, and the GOV.UK website, to try and answer the following questions: 


  1. If someone reaches State Pension Age before April 2016, how many qualifying years do they need to have before they receive a full Basic State Pension?
  2. And if someone reaches State Pension Age after April 2016 how many qualifying years do they need to qualify for a State Pension?
  3. What will be the State Pension Age for a male born on 22 June 1966? (see the calculator)
  4. What are the two elements that make up Pension Credit?

 

Check your Answers

 

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Origins and Overview Test

Origins and Overview Test Answers


Pensions Industry - The Employment Package


The Employment Package

The main element of an employee's benefits package comes in the form of an agreed rate of salary (which can include variable elements such as bonuses).  However an employer often offers other benefits, including some form of retirement provision and sometimes benefits in kind. 

The amount of salary an employee will receive is determined by the contract of employment, as amended from time to time. European law defines pay  as salary, wages or other consideration, whether in cash or benefits in kind which the worker receives directly or indirectly in respect of his employment with an employer. When comparing remuneration, benefits in kind, including retirement provision, must be considered. Any other benefit which is a payment of money or capable of being turned into money is also subject to tax. Remuneration from employment is subject to tax. Certain other payments such as statutory maternity pay and statutory sick pay are also subject to tax. The definition is very broad and the list of what can be taxed is very long.

National Insurance (NI) contributions are also payable on remuneration. Employees do not have to pay NI on certain benefits in kind, while employers have to pay on almost all benefits, for example company cars.

 1. References

This section of study, The Employment Package can be found in the relevant pages of the RPC Study Manual. 

2.Think about it

Think about the organisation for which you currently work, or a previous employer. What types of benefits in kind do they offer?

You will be surprised at the similarities - but more so in some cases at the breadth of differences.


3. Fact Finding

Statutory Sick Pay

Let's find out exactly what Statutory Sick Pay (SSP) entails, so that when you consider disability benefits you are aware of the basic entitlements.

STEP 1 - Visit the GOV.UK website by clicking the logo here: 



STEP 2  Follow the menu link for 'Working, jobs & pensions' to view the 'holidays, time off, sick leave...' 

STEP 3  Now click on 'Statutory Sick Pay', then follow the links contained in the text for further information to try and answer the following questions: 

  1. How long is SSP paid for?
  2. How much is SSP?
  3. Who pays SSP?

Answers


4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

The Employment Package Test

The Employment Package Test Answers

Pensions Industry - Parties Involved in Pensions


Parties Involved in Pensions

In the UK there are legal and financial professionals specialising in pensions.  These professions and professional bodies range from those with legal and financial expertise, to those that provide qualifications in pensions provision.

A selection of these bodies are found in the relevant pages of the Study Manual.

 1. References

This section relates to the Parties Involved in Pensions and can be found in the relevant pages of the RPC Study Manual. 


2.Think about it

Can you think why having a broad understanding of these organisations and their objectives might be useful or helpful for you in your working role?

Think of how these organisations impact on you in your day to day role.


3. Fact Finding

The logos shown below belong to some of the main pensions related organisations in the UK.

Each logo is also a weblink so that you can explore the organisation to find out more about them:

 


Can you correctly identify the best organisation (from the list given above) to help each of the following people with their problems? 

  1. I am an ordinary member of the public, unhappy with the way I have been treated by the Trustees of my occupational pension scheme.
  2. I am an employer wanting some advice on my occupational pension scheme, which I am sure is being mismanaged.
  3. I am a Trustee for a small self-administered scheme and I would like some help and advice.


Answers


4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Parties Involved in Pensions Test

Parties Involved in Pensions Test Answers


Pensions Industry - Current Pensions Scene


The Current Pensions Scene

How to provide for retirement is a very important financial decision for everybody and needs regular review.

The State Pension is unlikely to provide a level of benefits that can be considered sufficient to live on in old age.

There are two main factors driving the change in pensions, these are financial considerations and social changes. 

Pensions provide a means of survival, sustenance and shelter for those who are no longer able to earn. This can mean those who are sick and disabled as well as those who have had a full working life and have retired.

The Government has confirmed that its objective is to make people more self-sufficient.

Its aim is for more people to have another income, on top of the State Pension, when they come to retire. This is why it introduced automatic enrolment in October 2012. Stakeholder pensions were introduced back in 2001 with the aim of providing cost effective benefits targeted at the lower paid. But from October 2012, the Government started the phasing in of automatic enrolment, in an attempt to increase the level of self-sufficient pension provision. It also wanted to give protection to those who for various reasons cannot work and encourage those who do work to save.

Changes to State Pension provision have also been made so that the State Pension will be fairer and available to more people. The State Pension is a foundation for retirement, but most people will want to or will need to build up their own savings on top of this. This is why the Government started to introduce workplace pension reforms from 2012 to encourage more people to save in a private pension.

Retirement benefits are a long term commitment. They are built up over 40 years or so while at work and, with increasing longevity, need to provide for a long period in retirement. The earlier someone starts to save, the better chance they have of building up sufficient financial resources for a comfortable retirement.

Retirement provision includes a number of elements, the major one being a formal pension (probably from a combination of company and personal arrangements). It also includes income from other savings and from the State. This is why we cover all of these elements in the syllabus for this certificate.

Financial considerations
People are living much longer than they used to and this means that financial provision needs to be carefully planned to take account of their longer lifespan. The Government has been making changes to pension provision in order to encourage individuals to provide for themselves rather than relying on the State to provide for them.   For example automatic enrolment schemes have been introduced in recent years and recently changes have been made to defined contribution arrangements to make them more attractive to individuals giving them greater access to their money.

Changes have also been made to State provision to increase the age at which benefits can be taken to reflect the fact that people are living longer. The age of mortality has been steadily increasing and so it was increasingly unaffordable for the State Pension Age to remain static.

The ‘financial crisis’ of the past few years has also driven change as schemes and the Government try to reduce the cost of providing pensions. The Government has been changing taxation regulations to reduce the thresholds for benefits that can be taken without paying any tax. The introduction of the new flexibilities is also a way of raising taxes as only part of the funds can be taken tax-free.  The Government has also been reducing costs by abolishing contracting out and raising the State Pension Age.

The Pensions Act 2004 introduced sweeping changes to the structure of pension schemes. This was known as simplification and the driver behind this was a reduction in costs for both Government and Schemes.

Employers and Trustees have also been trying to reduce the costs of their pension schemes. Many schemes have been carrying out liability reduction exercises such as:

  • Pension increase exchanges (PIE) – where members are offered a higher pension in exchange for no further increases in the future.
  • Enhanced transfer value exercises (ETV) – where members are encouraged to transfer their benefits out of the scheme by giving them an increased transfer value for a limited period.
  • Trivial commutation exercises – with increases to the threshold for trivial commutation many schemes have undertaken exercises to offer members the option of trivially commuting their benefits.

Social considerations

There have been many changes to legislation in recent years to reflect the changes that have been taking place in Society. The legislation ensures that there is equality and that there is no discrimination in many different areas such as:

  • age
  • sex
  • gender (transsexuals)
  • civil partners/same sex partners
  • maternity/paternity

All of the above considerations affect the type of legislation necessary to fund pensions.


 1. References

This section of study relates to the Current Pensions Scene and the Legislation Changes over time.  Information can be found by using the Resources Page of this website.  

2.Think about it

Future of pensions - It is generally regarded that the best possible protection for members of Defined Benefit schemes is a strong profitable employer.  In regard of the COVID 19 situation, is it possible a pension scheme can push an employer into insolvency?

Write your answers down to structure your revision practice.


3. Fact Finding

Statutory Sick Pay

Let's find out exactly what the State Pension entails. 

STEP 1 - Visit the GOV.UK website by clicking the logo here: 



STEP 2  

Follow the link to at the bottom of the page under Departments and policy to ‘Policies’ 

In the search box to the right hand side type 'State Pension'.

Follow the link entitled 'the new State Pension'.


STEP 3  Now click on 'the new State Pension', then read the text to try and answer the following questions: 

  1. Who can claim the new State Pension?
  2. What are the rules on National insurance?
  3. What happens if someone continues to work after retirement age?

Answers


4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Current Pensions Scene Test

Current Pensions Scene Test Answers


The Role of Government


The Role of Government


This section, The Role of Governmentcan be found on Pages 11-26 of the RPC Study Manual.

In this section we give you an overview of pensions. We look at the:

  1. The Role of Government
  2. State Benefits
  3. Regulation and Policing

Each section has four different types of learning activity:

  • References (the relevant parts of the Study Manual for you to revise and learn)
  • Think About it  (a current topic for you to revise and learn about)
  • Fact Finding  (factual questions with checkable answers)
  • Test (multiple choice questions with answers)


The Role of Government - The Role of Government in Pensions


The Role of Government in Pensions

The role of Government is to set the rules and legal framework within which the various methods of making retirement provision are to operate, and to supervise and monitor these arrangements.

The Government sets the system for the social security system and makes decisions about the level of State Benefits that it pays.

The Government also decides the minimum level of income that every pensioner should have. 


1. References

This section relates to the The Role of Government in Pensions and can be found in the relevant pages of the RPC Study Manual. 

2.Think about it

Fred is a member of his employer's DB scheme. He retires at his normal retirement date on 31 August 2016 on a salary of £60,000 having completed 40 years' pensionable service. The scheme provides pension using a 60ths accrual basis.

How much is Fred's retirement pension?

What is the value of Fred's pension for testing against the Lifetime Allowance?

Has Fred exceeded his Lifetime Allowance?

Answers


3. Fact Finding

HM Revenue & Customs

HM Revenue & Customs' website offers a lot of useful information and advice on pensions. Visit their website here

See the Pensions Tax Manual here and see if you can use that area to find the answers to the following questions:

  1. Including the Glossary how many sections make up the Pensions Tax Manual?
  2. What is the PTM page reference number which provides details of the contents information on the Annual Allowance?
  3. What does PTM071000 refer to and what Act of Parliament an schedules does it reference

Check your answers

 

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

The Role of Government Test

The Role of Government Test Answers


The Role of Government - State Benefits


State Benefits

The main purpose of the State scheme is to provide benefits for people over the State Pension Age (SPA), but it also provides certain other benefits such as those for the sick or disabled, and for those who are unemployed. Current levels of benefit can be found on the gov.uk website.  

The Basic State Pension is payable to people reaching SPA before 6 April 2016. Those reaching SPA on or after that date will get  the New State Pension.

1. References

This section relates to State Benefits and can be found in the relevant pages of the RPC Study Manual. 

2.Think about it

The Government has been asked to rethink state pension age increases due to prospective lower age expectancy in future years.

What are the reasons for this?

Is a better argument to not increase state pension age in the future, as we have a declining birth rate, rather than reduce it now?

Write your comments down as part of your revision structure/practice.


3. Fact Finding

The Government introduced a single-tier State Pension in April 2016. This meant the end of contracting out as there is now no additional State Pension to contract out of. Since the introduction of automatic enrolment in 2012, individuals can decide whether to stay in or opt out of a workplace pension.

 A simpler system will mean individuals are better able to make informed decisions about how much they need to save privately. This will make it easier to plan for their retirement.

 Take a look at the link below to see what options were considered for simplifying the State Pension system:


Summarise the options as part of your revision.


4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

State Benefits - Test

State Benefits Test Answers


The Role of Government - Regulation and Policing


Regulation and Policing

In this section we look at how the pensions industry is regulated and who regulates it. We outline the roles of the regulatory organisations TPR (the Pensions Regulator), the FCA (Financial Conduct Authority), and the PRA (Prudential Regulation Authority) and look at how financial advice should be given. 

1. References

This section relates to Regulation and Policing of Pensions Schemes and can be found in the relevant pages of the RPC Study Manual. 

2.Think about it

Independent advice

Imagine you are a financial adviser. Think about what information you may need from your customer in order to provide 'independent advice'. Make a notes to structure your revision practice.


3. Fact Finding

Statutory Sick Pay

Let's find out exactly what Statutory Sick Pay (SSP) entails, so that when you consider disability benefits you are aware of the basic entitlements.

STEP 1 - Visit TPR's website using the logo link below: 




STEP 2  Follow the link at the bottom of the page under About us: 'How we regulate and enforce' and click on the 'Our powers' link under the section headed 'Our approach to regulating'. What are the three key powers listed here? 

Answers


4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Regulation and Policing Test

Regulation and Policing Test Answers


Workplace Pension Schemes - Overview


Workplace Pensions Schemes

In this section we look at occupational schemes in more detail, outlining the types of occupational schemes that are available to employees and how the schemes are funded. It also covers trusts and trusteeship and gives information about the importance of clear communication and the administration of pension schemes. 

This section relates to your Study Manual - Workplace Pensions Schemes and can be found on pages 27-55 of the RPC Study Manual. 

In this section we give you an overview of pensions. We look at the:

  1. Introduction to Occupational Pensions Schemes
  2. Financing Occupational Pensions Schemes
  3. Trusteeship
  4. Communications and Administration

Each section has four different types of learning activity:

  • References (the relevant parts of the Study Manual for you to revise and learn)
  • Think About it  (a current topic for you to revise and learn about)
  • Fact Finding  (factual questions with checkable answers)
  • Test (multiple choice questions with answers)

Workplace Pension Schemes - Introduction to Workplace Pension Schemes


Introduction to Occupational Schemes

Here we look at occupational schemes as work related benefits. Most employed people will have the opportunity to join an employer sponsored occupational pension scheme at some point or another during their working lives. Indeed the introduction of automatic enrolment from 1 October 2012 means that the majority of employees will be automatically enrolled into a workplace pension. These schemes provide benefits on retirement and may also provide benefits for occurrences like death in service or ill health.

Employers are responsible for choosing the level of benefit and the format of the scheme and then offering it to their employees but if the scheme is to be used for automatic enrolment, there is a prescribed level of contributions that have to be paid to the scheme, in the case of a defined contribution (DC) scheme, or a prescribed level of benefit, where the scheme is a defined benefit (DB) scheme.

There is a choice of scheme structures and schemes that can be offered by individual employers, or by a group of similar employers, these are known as centralised schemes. Public sector schemes are those set up by the Government to cover public sector employees such as civil servants, teachers and the police. These schemes may be statutory (i.e. set up under an Act of Parliament) and can either be funded, as in the case of the Local Authority Pension Scheme, or unfunded and paid for out of general taxation revenue.

1. References

This section relates to Workplace Pension Schemes and can be found in the relevant pages of the RPC Study Manual. 

2.Think about it

Retirement Benefits

James Roberts has worked for Makepiece Ltd for 30 years.  He is 65 in 3 months time, which is the normal retirement age within the company.

He has approached you to talk about the implications of taking late retirement because he is hoping to carry on working until his 68th birthday.

He explains that he has been a member of Makepiece's final salary occupational scheme for 25 years, then asks what the implications of late retirement might be on his retirement benefits.

What options might Julius have with a pension of this structure? 

Write your comments down as part of your revision structure/practice.


3. Fact Finding

CPI and RPI

In occupational schemes early leavers are often entitled by law to benefits at retirement. With DB schemes these benefits relate back to the length of their service and their final salary at leaving. Benefits are now often revalued with reference to the Consumer Prices Index (CPI).

STEP 1 - To find out more about the CPI and RPI visit the Government's statistics website using this logo link: 




STEP 2  Click on 'Economy' at the top of the page to visit a summary table of economic factors 

STEP 3  Follow the link ‘Inflation and price indices’ and then follow the link on the left hand side of the page to the 'On this page' section. Try to answer the following questions:

  1. What methodology is used to calculate Consumer Price Inflation?
  2. Who are the users and what are the uses of the CPI?

Answers

 

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Introduction to Occupational Schemes Test

Introduction to Occupational Scheme Test Answers

Workplace Pension Schemes - Financing occupational schemes


Financing Occupational Schemes

We can now look at how occupational pension schemes are financed. We cover how the financing of an occupational scheme is set up, the management of pensions contributions and the role of the actuary. We also look at the actuarial valuation report and how benefits are secured. 


1. References

This section relates to Financing Workplace Pension Schemes and can be found in the relevant pages of the RPC Study Manual.

2.Think about it

Many large organisations have announced large deficits in their occupational pension scheme funds.

What do you think the key reasons for these gaps might be?

Write down your answers to structure your understanding/revision.


3. Fact Finding

When setting up the financing of an occupational scheme the trustees and employers will need to seek the advice of an actuary. Can you think of three ways in which you might go about finding an actuary? 

Check your Answers

 

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Financing Occupational Schemes Test

Financing Occupational Schemes Test

Workplace Pension Schemes - trusteeship


Trusteeship

In this section we examine trusteeship. We explain what trusts and trustees are, how trusts are set up, and outline the advantages of setting up a pension scheme under trust. We also look at the responsibilities and duties of the trustees.

A trust is defined as an equitable obligation binding a person to deal with assets over which he has control, for the benefit of persons of whom he himself may be one. Put more simply, it is a way of creating a sense of trust between the parties.

There are three parties involved in a trust: the settlor who establishes the trust, the trustees who administer the trust, and the beneficiaries who will benefit from the trust. In the case of a pension scheme, the employer (the settlor) establishes the trust and the trustees hold the pension fund assets for the beneficiaries.

Subject to the scheme's rules, the beneficiaries may include a variety of people. There are seven types of beneficiary in this scene. Click them to identify which type of beneficiary they are. 

There are also circumstances in which the employer can be classed as a beneficiary in the wider context. In a final salary scheme funded on a balance of cost basis, the employer can benefit from good investment performance by paying lower (or no) contributions. The employer may also be entitled under the rules to any surplus on winding up.

An irrevocable trust is one where the trust assets cannot revert to the settlor except in narrowly defined circumstances, for example in a pension scheme where there are surplus funds after all the benefits are secured and the trust documents permit a refund to the employer.

Trust law has existed for several centuries. There is no one statute which lays down what a trustee must or must not do; the principles have been laid down by the courts at various times. There are several Acts of Parliament that have affected trust law. The effects of the various acts are:

  • To set down minimum standards and rules for the operation of trusts
  • To establish powers to invest in specified investments if a pension fund's documentation gives no broader powers of investment
  • To set down the maximum term for a private trust to continue in operation (but pension funds are exempt under other legislation)
  • To introduce a requirement for member nominated trustees and an expansion of trustee functions for occupational pension schemes
  • To introduce a general statutory duty of care owed by trustees in respect of all of their duties (except in relation to investment) - this operates by default unless a different standard is contained in the scheme's documentation
  • To comply with the Trustee Knowledge and Understanding requirements

Master Trusts

A master trust is an occupational trust based pension scheme set up for multiple employers who are not connected. Each employer has its own division within the master arrangement but there is one legal trust and therefore one trustee board. Employers are deemed to be ‘connected’ if they are part of the same group of companies (including partially owned subsidiaries and joint ventures).

The trustee retains decision making independence for each employer division on things such as investment funds and service providers under a trust-wide governance structure whereas decisions over benefit and contribution levels typically reside with the employer.

Master trusts may appeal to employers who wish to sponsor a trust based occupational pension scheme, benefit from the good governance which accompanies this, but only with minimal involvement with running the scheme. They may also appeal to employers with existing trust-based defined contribution arrangements who no longer feel able to bear the cost burden alone.

Many of the master trusts which have been set up are sponsored by insurance or investment companies. They are also useful for employers in the same industry such as plumbing and the railways, and for automatic enrolment NEST is a well known master trust.

The voluntary master trust assurance framework has been developed by the Institute of Chartered Accountants of England and Wales (ICAEW) in association with the Pensions Regulator (TPR) to enable auditors to provide independent assurance on scheme quality.

TPR expects those running a master trust to obtain independent master trust assurance to help demonstrate that they have standards of governance and administration that meet TPR’s Code of Practice and regulatory guidance for DC schemes.

The Pension Schemes Act 2017 (PA 2017) includes new requirements for master trusts which will require them to meet higher operating criteria.  This will include a new approval regime for master trusts and will give TPR new powers to intervene where schemes are at risk of failing.  TPR will also have the power to authorise and de-authorise master trusts according to strict authorisation criteria.

PA 2017 received Royal Assent on 27 April 2017 and its primary aim is to provide for the greater regulation of master trusts.  Among other things, the Act will:

  • introduce an authorisation regime for master trusts which provide DC benefits
  • require master trusts to demonstrate to the Pensions Regulator (TPR) that they meet certain key criteria on establishment (or, for existing master trusts, when the relevant provisions are brought into force)
  • give TPR new supervisory powers to authorise and de-authorise master trusts according to strict criteria, ensuring that master trusts continue to meet the required standards throughout their existence
  • introduce specific trustee requirements on wind-up or closure of master trusts
  • make provision for Regulations to be published containing further detail

A draft of the Occupational Pension Schemes (Master Trusts) Regulations 2018 was laid before Parliament, in May 2018 following the Government’s response in March 2018 to a consultation launched in November 2017.  The Regulations, when finalized, will implement the new authorisation and supervisory regime for master trust schemes under the provisions of PA 2017 and deal with such things as:

  • the conditions that must be met by master trusts seeking authorisation, and the matters TPR must take into account in its assessments of schemes
  • the authorisation fees payable by new and existing master trusts
  • the scope of exemptions from the regime
  • information and notification requirements.

The regulations are due to come into force generally on 1 October 2018.

The Pension Schemes Act 2017 (Commencement No. 1) Regulations 2018 have now been published and these bring into force from 1 February 2018 the part of PA 2017 that relates to TPR’s Code of Practice on master trusts.  The Code of Practice will include:

  • the process for applying for authorisation of a master trust scheme, and
  • the matters that TPR will take into account in deciding whether it is satisfied that a master trust scheme meets the authorisation criteria.

Code of Practice no.15, ‘Authorisation and supervision of master trusts’ was laid before Parliament in July 2018 (http://www.thepensionsregulator.gov.uk/doc-library/master-trust-code-consultation-2018.aspx.)  Separate guidance will also be published by TPR to accompany the code and the authorization and supervision scheme.

Guidance on the authorisation of master trusts is given in TPR’s website at http://www.thepensionsregulator.gov.uk/trustees/master-trust-authorisation.aspx

1. References

This section relates to Trusteeship and can be found in the relevant pages of the RPC Study Manual. 

2.Think about it

Duties and responsibilities

Trustees are the legal owners of the trust assets and they have some important obligations to fulfil. They must act in the best interests of the trust beneficiaries and use their legal ownership of the trust assets for the beneficiaries' benefit.

Can you think of five specific duties or obligations that a trustee is bound to perform?

Write down your answers to structure your understanding/revision.


3. Fact Finding

The trustees appointed to a scheme can be individuals, corporations or a combination of both. However, there are restrictions on who can and cannot be a trustee. Take a look at the table below and decide if they could become a trustee, then check your answer to see if you are correct: 

Scheme Beneficiary

Scheme Actuary

Scheme Auditor

Person disqualified by the Pensions Regulator

An employee

Person convicted of fraud


Answers

 

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Trusteeship Test

Trusteeship Test Answers

Occuptional Pensions Schemes - communications and administration


Communications and Administration

Good and clear communication is vital for any literature covering retirement provision as it is a complicated subject. Verbal explanations must also be easy to understand if members are going to be able to make good decisions. Many pension providers now have helplines to assist members in answering queries. 

Misunderstandings often arise in conversation and, especially in formal situations, people will not always readily admit to the fact that they don't understand what is being said to them. There are some basic principles that are useful to apply to all methods of communication and can help you to avoid situations like that of Jack and his customer.

  • Focus on who will receive the communication 
  • Be sure of your objectives in communicating 
  • Find an easier way to explain 
  • Make a point and then support it 
  • Check that the person receiving the message has understood it 
  • Don't use jargon 

Jargon should be avoided if at all possible. It is often used as a short cut but should not be used when communicating with  clients or members of the general public. The best example of jargon is the use of acronyms to describe something (e.g. TPAS, PMI, GMP).

Trustees should also use all communication media available to them to make sure that any messages that they want to convey to their membership get through. This can include: electronic communications via websites, social media, emails to members at work or at home, telephone helplines as well as the more traditional printed literature. Many of the parties involved in pensions have Facebook or Twitter links that individuals can access to easily find out information about pensions.  In addition, YouTube is providing a platform for PensionTube to help people understand the facts about UK pensions.  This brings together videos from independent experts, charities and the government on the changes happening to UK Pensions that individuals want to know about.  Take a look at this: https://www.youtube.com/user/PensionTube

We can see the importance of clear communication and this section focusses on the need to give advice on how to communicate clearly. We also look at why accurate record keeping is important and what disclosure requirements exist for pensions provision.


1. References

There isn't a direct reference to an area of the Study Manual here, as it forms a 'golden thread;' throughout all of the materials the RPC Study Manual can also be found in pdf format in the Resources Page of this website.


2.Think about it

Good communication

Good and clear communication is vital for anyone working within retirement provision as it can be a complicated subject.

Jason is talking to a potential client:

"If you believe the scheme administrator has provided you with an incorrect ABS and SMPI statement then you could invoke the IDRP for the scheme or go to TPAS, TPR or the PO"

The client hears and thinks:

"If the blah blah blah complicated and boring blah blah.  Blah blah blah jargon is incomprehensible blah blah...I wonder what is on TV tonight?"

I'm sure you agree that this could be better phrased! Can you think of a way to say the same things to your client, so that they are more likely to understand it all? 

Write down your answers to structure your understanding/revision.


3. Fact Finding

The General Data Protection Regulation (GDPR)

GDPR affects the record keeping side of pensions administration, aiming to make sure that individual's rights are protected. 

Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data.  The regulation entered into force on 24 May 2016 and applies since 25 May 2018. 

Can you list the seven key principles of this Act?

Answers

 

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Communication and Administration Test

Communication and Administration Test Answers

Individual Provision - Overview


Individual Provision

In this section we look at individual provision, explaining how employment packages work and what different types of packages are available. We also look at other types of individual retirement provision, outlining the different types of individual pension which are available and what sort of personal savings or investments someone might have.

This section relates to Individual Pension Provision and can be found in the relevant pages of the RPC Study Manual. 

In this section we give you an overview of pensions. We look at the:

  1. Individual Pensions
  2. Personal Savings

Each section has four different types of learning activity:

  • References (the relevant parts of the Study Manual for you to revise and learn)
  • Think About it  (a current topic for you to revise and learn about)
  • Fact Finding  (factual questions with checkable answers)
  • Test (multiple choice questions with answers)

Individual provsion - Individual Pensions


Individual Pensions

Many different individual arrangements are available as retirement provision. The different types of individual pension arrangement can be divided into three broad categories:

  1. Personal Pensions
  2. Stakeholder Pensions
  3. Retirement Annuities

Personal pensions, stakeholder pensions and retirement annuities are the types of non-occupational pension schemes that are available to individuals.  Originally, Retirement Annuity Contracts (RACs) were available for self-employed individuals who could not join an occupational pension scheme or employees whose employer did not provide one although it has not been possible to take out a new RAC since 1 July 1988 when personal pensions were introduced.

The introduction of personal and stakeholder pensions made it easier for people to save for retirement outside the traditional occupational pensions route.

Stakeholder pensions were made available from 6 April 2001 as part of the Government’s intention to simplify and reduce the cost of pension planning for the consumer.

Whilst an individual can take out a personal pension or stakeholder pension, a group arrangement can be set up by an employer, much like an occupational pension scheme. It does, however, operate slightly differently from an occupational pension scheme and there is generally less involvement required from the employer although the employer may well pay contributions through its payroll to such an arrangement.  There could also be other occupational pension-type characteristics such as a group life assurance scheme involved.

A stakeholder pension scheme is a type of personal pension scheme which is subject to some additional requirements. 

Before April 2006 there were restrictions on paying into a personal pension scheme at the same time as being an active member of an occupational pension scheme. These were removed from 6 April 2006.

From a pension’s tax perspective, each of the above types of arrangement is now treated as a registered pension scheme and must comply with the requirements of the new pension tax regime from 6 April 2006, so the same requirements apply as to contribution limits and the types of benefit allowable. However, each arrangement still has its own scheme rules and/or contract terms to determine exactly what types of benefit it provides etc. within the overall general framework (personal pensions, stakeholder pensions and retirement annuities).

From a non-pension’s tax perspective, there are still clear differences between how these types of arrangement work under general pensions legislation (for which the Department for Work and Pensions (DWP) is responsible rather than HMRC). For example, RACs are exempt from some of the DWP requirements, such as the provision of information requirements. Stakeholder pension schemes are subject to special requirements which do not apply to other personal pension schemes and personal pension schemes are treated differently from occupational pension schemes.

Also, personal pension schemes (including stakeholder schemes) are contract-based, i.e. there is a contract between each individual member and the product provider while occupational pension schemes are trust-based and the scheme trustees have a duty to act in the best interests of the scheme membership although personal pension schemes and stakeholder pensions schemes can still be set up under trust.

The Financial Conduct Authority (FCA) is responsible for dealing with contract-based schemes, and makes rules which firms which provide these schemes must comply with the rules made by the FCA (under the authority given to them by financial services legislation). Trust-based schemes on the other hand are the responsibility of the Pensions Regulator (TPR), and scheme trustees and managers must comply with rules made by TPR under the authority given to it by DWP legislation. TPR also looks after all workplace pension schemes (including contract-based schemes) in terms of how they are administered.

A self-invested personal pension (SIPP) is a special type of personal pension, allowing more scope for how pension contributions are invested. This is covered in more detail in another section and in the resource material. In addition there are other types of arrangement that are in fact occupational pension scheme-type arrangements but they can be set for an individual or allow individual pension planning and can be considered to be an individual pension in that respect.

  • Small self-administered schemes (SSASs)
  • Executive pension plans (EPPs)
  • Buy-outs
  • Additional voluntary contributions (AVCs)
  • Free-standing additional voluntary contributions (FSAVCs)


1. References

This section  to Individual Pensions and can be found in the relevant pages of the RPC Study Manual.

2.Think about it

FSAVC or AVC?

You are a member of an occupational scheme that has an AVC facility. Think about why you might choose to pay into an FSAVC or stakeholder arrangement rather than pay AVCs.

Write your comments down as part of your revision structure/practice.


3. Fact Finding

Individual Pension Arrangements

You will find some useful information about saving for retirement on the Money Advice Service website. Click on the link below to go there now.


4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Individual Pensions Test

Individual Pensions Test Answers.docx

Individual Provision - Personal Savings


Personal Savings

We can now look at the different types of personal savings which a person can use to provide for their retirement, from savings accounts to even wine collections.

There are three categories of personal savings:

  1. Personal Investments
  2. Alternative Investments
  3. Insurance

Personal pensions, stakeholder pensions and retirement annuities are the types of non-occupational pension schemes that are available to individuals.  Originally, Retirement Annuity Contracts (RACs) were available for self-employed individuals who could not join an occupational pension scheme or employees whose employer did not provide one although it has not been possible to take out a new RAC since 1 July 1988 when personal pensions were introduced.

The introduction of personal and stakeholder pensions made it easier for people to save for retirement outside the traditional occupational pensions route.

Stakeholder pensions were made available from 6 April 2001 as part of the Government’s intention to simplify and reduce the cost of pension planning for the consumer.

Whilst an individual can take out a personal pension or stakeholder pension, a group arrangement can be set up by an employer, much like an occupational pension scheme. It does, however, operate slightly differently from an occupational pension scheme and there is generally less involvement required from the employer although the employer may well pay contributions through its payroll to such an arrangement.  There could also be other occupational pension-type characteristics such as a group life assurance scheme involved.

A stakeholder pension scheme is a type of personal pension scheme which is subject to some additional requirements. 

Before April 2006 there were restrictions on paying into a personal pension scheme at the same time as being an active member of an occupational pension scheme. These were removed from 6 April 2006.

From a pension’s tax perspective, each of the above types of arrangement is now treated as a registered pension scheme and must comply with the requirements of the new pension tax regime from 6 April 2006, so the same requirements apply as to contribution limits and the types of benefit allowable. However, each arrangement still has its own scheme rules and/or contract terms to determine exactly what types of benefit it provides etc. within the overall general framework (personal pensions, stakeholder pensions and retirement annuities).

From a non-pension’s tax perspective, there are still clear differences between how these types of arrangement work under general pensions legislation (for which the Department for Work and Pensions (DWP) is responsible rather than HMRC). For example, RACs are exempt from some of the DWP requirements, such as the provision of information requirements. Stakeholder pension schemes are subject to special requirements which do not apply to other personal pension schemes and personal pension schemes are treated differently from occupational pension schemes.

Also, personal pension schemes (including stakeholder schemes) are contract-based, i.e. there is a contract between each individual member and the product provider while occupational pension schemes are trust-based and the scheme trustees have a duty to act in the best interests of the scheme membership although personal pension schemes and stakeholder pensions schemes can still be set up under trust.

The Financial Conduct Authority (FCA) is responsible for dealing with contract-based schemes, and makes rules which firms which provide these schemes must comply with the rules made by the FCA (under the authority given to them by financial services legislation). Trust-based schemes on the other hand are the responsibility of the Pensions Regulator (TPR), and scheme trustees and managers must comply with rules made by TPR under the authority given to it by DWP legislation. TPR also looks after all workplace pension schemes (including contract-based schemes) in terms of how they are administered.

A self-invested personal pension (SIPP) is a special type of personal pension, allowing more scope for how pension contributions are invested. This is covered in more detail in another section and in the resource material. In addition there are other types of arrangement that are in fact occupational pension scheme-type arrangements but they can be set for an individual or allow individual pension planning and can be considered to be an individual pension in that respect.

  • Small self-administered schemes (SSASs)
  • Executive pension plans (EPPs)
  • Buy-outs
  • Additional voluntary contributions (AVCs)
  • Free-standing additional voluntary contributions (FSAVCs)


1. References

This section relates to Personal Savings and can be found in the relevant pages of the RPC Study Manual.

2.Think about it

Your friend Alex has asked you for some advice on his ideas about his retirement provision. Click on Alex to find out what his current plans are: 

"I have decided to invest all of my money in a wine collection as a provision for when I retire in 10 years time"

What would your advice be?

Write your comments down as part of your revision structure/practice.


3. Fact Finding

Like most financial areas, personal investment has its fair share of acronyms and abbreviations. Do you know what the following initials stand for?

  1. AIM
  2. ISA
  3. SAYE
  4. OEIC

Personal Savings Fact Finding Answers


4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Personal Savings Test

Personal Savings Test Answers

Investment - Overview


Investment

This section is all about investment. We look at what needs to be taken into consideration investing for retirement provision. We also look at the different classes of assets that can be held and the types of investment which can be made.

This section relates to Investment and can be found in the relevant pages of the RPC Study Manual.

In this section we give you an overview of pensions. We look at the:

  1. Investment Considerations
  2. Investment Classes

Each section has four different types of learning activity:

  • References (the relevant parts of the Study Manual for you to revise and learn)
  • Think About it  (a current topic for you to revise and learn about)
  • Fact Finding  (factual questions with checkable answers)
  • Test (multiple choice questions with answers)

Investment - Investment Considerations


Investment Considerations

The factors that the trustees of a scheme will need to take into account when determining the investment strategy of their scheme will depend on whether it is a defined benefit (DB) or defined contribution (DC) scheme, though there will be some common factors. 

When considering the way in which the investment portfolio is constructed the provider of the product, or in the case of a pension scheme the trustees, will be concerned about the:

  • Diversity of the portfolio (diversity reduces the risk associated with holding a small number of stocks, which may perform badly)
  • Level of income
  • Price variability of the asset (volatility)
  • Marketability of the asset
  • ‘Opportunity cost’ of investing in one type of asset when better returns may be available elsewhere

Diversification in investments is important, e.g. concentrating investments in a similar industry to the employer will increase the risk of underperforming if there is a downturn in that industrial sector.

Before constructing a portfolio of assets to meet particular objectives, e.g. to invest for capital growth, or to invest for income, or to invest for a specified level of total return, you need to consider certain issues.

The most important of these are:

  • the level of risk the investor is prepared to take
  • whether to use active management or passive/index tracking
  • matching assets to liabilities
  • measuring performance
  • for trustees only, the interests of the employer and the member

Active investment management is the use of a human element, such as a single manager, co-managers or a team of managers, to actively manage a fund's portfolio.  Active managers rely on analytical research, forecasts and their own judgment and experience in making investment decisions on what to buy, hold and sell.

Passive investment management (also referred to as index tracking) is an investing strategy that tracks a specified index or portfolio, often a market-weighted index.  The most popular method is to mimic the performance of an externally specified index by buying an index fund.  By tracking an index, an investment portfolio typically gets good diversification, low turnover (good for keeping down internal transaction costs), and low management fees.  With low fees, an investor in such a fund would have higher returns than a similar fund with similar investments but higher management fees and/or turnover/transaction costs.

Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.

For example, if an investment is to be made in UK equities, then it could be made in a fund that tracks the FTSE All Share Index.  This will give a broad spread of investments across the whole of the UK stock market (over 800 shares).  If a manager actively seeks to outperform the index then they will select fewer stocks, which they hope will outperform the index.

Further help with the investment term definitions in bold above and other investment terminology used throughout this document are available using the Pensions Terminology .

For defined benefit (DB) schemes, the investment strategy aims to ensure a scheme’s assets are sufficient to cover its liabilities as they become due.  The trustees will need to take into account the amount of the existing assets, the contribution levels, and the employer’s and their own attitude to risk.

The trustees will work closely with the employer to come up with an appropriate investment strategy.  This is because the investment strategy will influence the amount and timing of contributions the employer may need to pay to the scheme.  For instance, a low risk investment strategy might result in the need for higher employer contributions immediately while a high risk investment strategy may lead to higher and potentially unexpected contribution requirements in the future.

The trustees should consider how different strategies may affect the scheme’s funding position, the employer’s plans for sustainable growth and the employer covenant.  The investment strategy should be consistent with:

  • the funding objectives
  • the appetite for risk, based on the funding objectives and the level of employer covenant and tolerance to risk
  • the scheme’s liquidity needs
  • the trustees’ assessment of the employer’s position and any plans they have for sustainable growth (including how these might strengthen their covenant).

In the case of defined contribution (DC) schemes it is the members themselves who have the power to shape their own investment plan.  However, employers and trustees should offer clear information about investment options to help members understand investment strategy and the interaction between risk and return in order to help individuals make informed choices.

Where a workplace has a diverse employee profile - especially in terms of age - employers and trustees may want to ensure the scheme offers a suitable number of funds to fit different risk profiles and requirements of members.  Where a scheme has a default fund for those members who choose not to take an active investment decision, employers and trustees should ensure that the default investment funds are appropriate and that risk is reduced as the member approaches retirement.

If a member decides to invest in any default fund or lifestyle fund offered by an arrangement it is important they make sure its aims match their own.  Even where members decide it is right for them, they should review their choice from time to time to make sure its aims continue to match their own.

Informed choice is at the heart of effective decision making - monitoring and communicating investment performance can help members find the right investment strategy for their circumstances and thereby to hopefully get better returns.

With the changes introduced from April 2015 trustees will need to review their default options because now that members do not need to buy an annuity and can drawdown from their DC pot the underlying investments may well need to change.

All occupational schemes must have a Statement of Investment Principles (SIP).  This sets out an appropriate investment strategy and investment objectives.

For DB schemes the SIP must include the trustees’ policy on:

  • choosing investments
  • the kinds of investments to be held, and the balance between different kinds of investment
  • risk, including how risk is measured and managed
  • the expected return on investments
  • the realisation of investments
  • the extent to which, if at all, you take account of social, environmental or ethical considerations when taking investment decisions
  • using the rights (including voting rights) attached to investments if you have them
  • fee structures

Additionally, in this case the SIP should cover: the investment governance structure, investment beliefs (if any have been developed) and investment objectives, risk capacity and appetite, the long-term journey plan (if one has been developed) and short-term milestones, the strategic asset allocation, any strategic liability hedge ratios, cashflow management plans, details of fee structures and details of how the investments will be monitored.

For trust-based DC schemes an appropriate investment strategy and investment objectives for all investment options, including the default strategy should be set.  The SIP would set out information such as the investment objectives and how investment decisions are made.  The employer would also be consulted and decisions taken would be reviewed regularly.

 

1. References

This section relates to Investment Considerations and can be found in the relevant pages of the RPC Study Manual.

2.Think about it

Investment decisions

Danny (aged 22) and his father Martin (aged 56) both have personal investments. Click on each of them to see what sort of investment they have chosen.

Danny - "I am just starting to invest and have decided to go for equities"

Martin - "I have invested in equities in the past, but over the past few years I have been moving my money into bonds"

What do you think the reasons are behind the different investment choices that Danny and Martin have made?

Write your comments down as part of your revision structure/practice.


3. Fact Finding

Track it down

If an investment is to be made in UK equities, then it could be made in a 'tracker fund', so here we are going to find out more about tracker funds.


STEP 1 - Visit the Motley Fool website (investing basics) by clicking onto the link below:



STEP 2  Select the option 'ISAs and Investment Funds'.

STEP 3  Select the option 'Choosing an Index Tracker Fund'. 

STEP 4 - Use the information in the 'Index tracker' section of the website to answer the following questions:

  1. Which indices does the Motley Fool recommend as a good starting point for a new investor?
  2. What do they advise people to look at when choosing their tracker?

Answers

 

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Investment Considerations Test

Investment Considerations Test Answers

Investment - Investment Classes


Investment Classes

We can now finally look at the three types of investment and the two asset classes. We cover the different types of investment and outline the advantages and risks of each.

What is an investment?

Many people make investments, some without realising it. For example, people buy endowment policies ('with profits') or unit trusts and contribute to pension schemes. In all of these the pool of investments is shared for the benefit of those who have contributed, and sometimes their dependants.

Most shared investments, such as unit or investment trusts and insurance company products are, indirectly, investments in assets of various types. Some smaller pension funds are also indirectly invested (generally through managed funds), as are most Individual Savings Accounts (ISAs). Larger pension funds, and some (usually called self select) ISAs and PEPs may be invested directly in these assets.

DC Pension Fund investment options

DC schemes offer a range of different investment funds designed to invest a member’s money in different ways over the years until retirement. The member should choose a fund that offers the broad investment strategy they want and then all the details – such as the choice of the specific assets that the fund invests in – are handled by the particular fund’s investment experts.

Investment funds usually invest in a number of key categories of asset, including shares, bonds and cash. The choice of funds will cover ones that specialise in specific assets – eg a fund focusing on shares in European companies - or ones that invest in a mix of different assets – eg a fund investing in both global shares and government bonds.

Most people choose to invest their pension in the second type of fund, because spreading – or diversifying – investments between different types of asset is a good way of managing risk. Members can choose to diversify their investments using multiple specialist assets funds but this requires more time and financial knowledge. 

Lifestyle funds

Over the long term, shares have historically tended to perform better than bonds or cash, which are lower risk investments. So a common strategy is for people to invest in a fund mostly holding shares until they get closer to retirement, and then start to lower the risk profile of their investments. 

This shift usually takes place automatically moving the balance of investments towards less risky assets (such as bonds and cash) as the member nears retirement. ‘Target date’ funds work in a similar way. 

SIPPs

For individuals who have a relatively large pension pot, they can take greater control of their pension and access a wider range of assets by using a SIPP (Self Invested Personal Pension). However, this is only suitable for experienced investors who are very comfortable with taking investment decisions.

Pooled investment funds

Pooled investment funds – also known as collective investment schemes – are a way of putting sums of money from many people into a large fund spread across many investments and managed by professionals. Investing this way can potentially be easier and less risky than buying shares in individual companies direct, and there are lots of funds to choose from. 

There’s a huge range of funds that invest in different things, with different strategies – high income, capital growth, income and growth and so on.

Common types of pooled investment vehicles:

  • Unit trusts and OEICs (Open ended investment companies)
  • Tracker funds (index funds)
  • With profits funds
  • Investment trusts
  • Stocks and shares ISAs

Why invest through a fund?

There are several reasons to invest through a fund, rather than directly buying assets, these are as follows: 

  • Spreading risk – even if an individual only has a small amount to invest, they can invest in a lot of different types of assets (diversifying). If one of the fund’s investments does badly, it may not do so much damage, since the fund has lots of others to fall back on
  • Reduced dealing costs – by pooling money with other investors, some savings may be made as the costs are also shared
  • Less work for individuals – the fund management company handles the buying, selling and collecting of dividends and income. But of course there are charges for this.
  • Professional fund management – fund managers make the decisions about when to buy and sell assets.

What types of asset class are there?

The major asset classes which underlie the investments are: 

  • Equities 
  • Bonds 
  • Cash 

Property is an alternative investment. Private equity and hedge funds are sometimes considered to be another asset class. 

The investment manager, in the case of shared investments, or the trustees of pension funds will decide the allocation to each asset class. For each type of investment vehicle, there are rules and regulations about which assets can be held and the appropriate taxation of capital gains and income.

These three investment categories (equities, bonds and cash) can be broken down, in turn into two main types. These two types are real assets and monetary assets.

Equities, property and index linked securities are 'real' assets. This means that over the long term they should at least retain their value (in terms of purchasing power) even if inflation is high. The increase in the value of shares in a company can be due to the company itself producing higher profits (for example from higher prices, greater efficiency or a growing market) or it can be due to general factors influencing industry everywhere. Equities have historically produced a return in excess of inflation. The price of property is driven by demand, and demand increases as profits increase. Profits increase more when there is inflation, so the price of property is indirectly linked to inflation. The terms of index linked securities are such that the investment value is protected against price inflation, and they provide an income stream which is protected against price inflation as well.

Cash and bonds (except index linked) are monetary assets. There is no direct link between inflation and the expected performance of these assets. The performance is expressed in monetary terms.

 

1. References

This section relates to Investment Classes and can be found in the relevant pages of the RPC Study Manual.

2.Think about it

Equities and Bonds

There are many different types of investment categories. See if you can think about what characteristics an equity has, and do the same for bonds.

Write your answers down to structure your revision.

3. Fact Finding

Types of Asset

Think about the organisation that you currently work for, or a company that you have previous experience of an occupational pension scheme with. Do you know what kinds of assets the pension fund was invested in?

1.Can you list two types of monetary assets?

2.Can you list two types of real assets?

Answers

4. Test

You can now check your knowledge by a short test.  Once completed then check your answers against those given.

Investment Classes Test

Investment Classes Test Answers


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