How defined contribution (DC) works
DC Start and DC Core are our defined contribution (DC) sections of the Nestlé UK Pension Fund. Even if you’re not a DC Core of DC Start member, you may still save into a DC Core account. This may be because you pay ‘overcap contributions’ to DC Core once you earn over the pensionable earnings cap for the scheme year. Or, you may make additional voluntary contributions (AVCs) to DC Core either as regular or as one-off payments from your salary.
No matter how you save into our DC sections, they work in the same way – you have an account that you save into and the money that you save into this account is invested.
If you’re a member of DC Start, we invest your savings in the Lifetime Pathway (more about this in a minute), and if you are a member of DC Core or make AVCs or overcap contributions, you have a choice of where your savings are invested. You can either choose to invest in the Lifetime Pathway, or you can choose to invest in our self-select funds. And you can change how your DC Core account is invested throughout the year if you want to. We process these requests every three months so your change will take effect from the next May, August, November or February.
Your savings stay invested until you retire, or until you transfer them into a similar type of pension fund.
The value of investments can go down as well as up
As with any investments, the value of your account depends on the performance of the things, or ‘assets’, that your money is invested in. If these assets perform well, then you may receive good ‘investment returns’ which means that the value of your pension savings account could increase. If the assets don’t perform well, then you may receive poor investment returns which means that the value of your pension savings could decrease.
The Lifetime Pathway fund
If you are a member of DC Start we’ll automatically invest your savings in the Lifetime Pathway fund. You can also choose to invest your DC Core savings in the Lifetime Pathway if you don’t want to make active investment decisions yourself.
The Lifetime Pathway fund assumes that as you get older, your attitude towards risk is likely to change. You may, for example, want to reduce the chance of losses because if your investments don’t perform well you won’t have as long for your pension savings to recover. The Lifetime Pathway takes this into account and starts to move you towards lower-risk funds the closer you get to retirement.
If you are invested in the Lifetime Pathway fund, we ask you to set a target retirement age so we know when we need to start moving your investments. You can change this age very easily if your plans change by filling out a Target Retirement Age Change Form.
The graph below shows how the automatic switching starts to move your investments once you are fifteen years away from your target retirement age:
Read more about the Lifetime Pathway fund.
The self-select funds
If you are a member of the DC Core section, you can choose which investment funds your pension savings are invested in. So, if you have a particular interest in investing in funds with a focus on integrating sustainability issues for example, this might be something that you want to explore.
Read more about the different self-select funds.
How we measure how our funds have performed
Defined contribution pensions are designed to be long-term investments and generally speaking, this is how we measure investment performance. In fact, to get a true idea of their performance, we need to see results over a longer period – typically between five to ten years.
The long-term view is important as some of our funds are more volatile than others. When a fund is volatile it means that the value of its assets can change quickly and quite dramatically. Over the shorter term this can mean that funds invested in volatile assets might appear to make sudden gains or losses. However, over the longer term these movements in either direction tend to even out. Generally, we expect more volatile funds to provide higher investment returns over time.
With the support of our specialist investment advisers and fund managers, we carefully measure how our funds perform using ‘benchmarks’.
What is a benchmark?
A benchmark is an index that we use as a reference point for fund performance. In a similar way to how the consumer prices index works, a benchmark will also look at a basket of different things. But rather than these being consumer goods and services, a benchmark will measure the performance of the types of assets in that fund.
Each investment fund has a specific strategy in place which sets out what it aims to achieve. The benchmark helps us to measure how well it does that, as well as the risk and volatility levels that the fund might be exposed to.
Our governance structure
As the Trustees who look after the Fund, we are confident that we have a robust structure in place that carefully monitors the performance of our funds. We review fund performance every three months, through the Defined Contribution Committee (a sub-Committee of the overall Trustee Board with a specific role to look at the DC arrangements), and with the support of our investment advisers.
If we were concerned about past or future fund performance, or felt that our funds were unlikely to meet their benchmarks long term, we would consider investing in different funds.
How our funds performed
Below you can see each fund’s performance across 2018 compared to the benchmarks that we set. The fund performance column shows the investment returns for each fund over the year (either as a gain if the number is positive, or a loss if the number is negative). The benchmark numbers show the performance for the index of each fund. To read more about the indexes that we use as a reference (benchmark) for each fund, see the relevant fund factsheets.
*The Blended Assets fund uses a benchmark that is slightly different. Rather than measuring the performance of a range of assets, it uses inflation and interest rates as reference points. The Blended Assets fund aims to give an investment return that is above inflation over the long term.
The funds that we saw the most volatility with in 2018 were those that we use in the early stages of the Lifetime Pathway fund. These are called:
- The Equities fund;
- The Blended Assets fund; and
- The Growth fund (made up of a combination of the Blended Assets and Equities fund).
Why did the funds perform negatively?
On the whole, 2018 was a year in which the whole of the market saw investments perform badly. There were several reasons for this. Many of the world’s most significant central banks decided to tighten their monetary policies which meant that it became more difficult to borrow money. And there were also growing concerns over the sustainability and pace of global growth.
As a result of this, both the equity and bond markets experienced losses during 2018 and many of the equity and credit markets faced their worst annual performance since the financial crisis of 2008/2009.
October 2018 was a particularly volatile month for the equities market. The equities market is made up buying and selling shares in companies. And two of our funds – the Growth fund, and the Blended Assets fund - invest quite heavily in equities, so this affected their overall investment returns.
Overall however, we are positive about the various funds’ outlook for the longer term. And given the governance structure we have in place you can be confident that if we were concerned about past or future fund performance, or felt that our funds were unlikely to meet their benchmarks long term, we would take action.
The following fund factsheets from Fidelity give more information about the available funds.Growth Equities Property Blended Assets Corporate Bonds Pre-retirement to annuity Pre-retirement to cash Cash Ethical Growth Ethical Consolidation