Chapter 8 Flashcards
Maximising Returns
Within risk limits:
- Defined contribution pension scheme
- Collective investment scheme
- Investment trust company
Meeting Liabilities
- Befined benefit pension scheme
- Life assurance company
- General insurance company
Collective Investment Schemes
Regulated - safe to marketed to retail investors
Unregulated - no FCA restrictions, such as hedge funds, for sophisticated investors
Regulated Funds
Authorised - UK funds by the FCA
Recognised - EU UCITS but can access UK markets via passporting or a designated territories (tax havens)
UCITS Directive
CISs under EU regulation
Before CIS can promote itself across EU it must be UCITS compliant
- Obtain a UCITS passport from home regulator
- Be open ended
- Follow all UCITS regulations, e.g. restrictions on investment powers
AIFMD
Alternative Investment Fund Managers Directive for hedge (unregulated) funds
- Properly managed and overseen
- No restrictions on how to run hedge fund
- Encourages tax transparency and compliance of hedge fund
- Allows cross border selling of funds
Defined Benefit
Guaranteed scheme based on average or end of employment salary
More common in the public sector
Defined Contribution
Also known as money purchase scheme
Both employee and employer contribute to over employment period
Upon retirement, employee decides what to do with the savings, typically purchase an annuity
Insurance Companies
Offer investment products which need to be funded
- Term assurance, usually alongside mortgage when it expires the benefit is surrendered
- Whole of life coverage
- Endowment, sum assured on death or maturity
- With profits, the above but with stock market returns
Pension
Tax efficient method for retirement saving
- Personal private pension setup by individual that has nothing to do with their job or employer
- Occupational pension schemes are DB, DC, and are regulated by the Pensions Act 2008
Pensions Act 2008
Regulate occupational schemes
- Auto-enrolment for eligible employees (over 22 years old earning above £10k)
- Setup National Employment Savings Trust (NEST)
Occupational Pension Scheme Stakeholders
- Sponsoring Company, company who is setting up defined benefit scheme
- Members/beneficiaries, employees of company though different seniorities may have different benefits
- Approval by HMRC, no income or capital gains tax liabilities
- Trustee, separate from sponsoring company to become legal owner of the assets in the scheme
- Investment manager, invest contributions to make sure employer promises can be kept
Statement of Investment Principles
Similar to investment policy statements, but for the entire fund
Formal legal document that sets out operations of the fund, suitable investments, risk tolerance and management, realisation of investments, and provision of rights
Scheme Specific Fund Requirement
Attached to the Statement of Investment Principles with detailed calculations and assumptions
Trustees required to:
- Prepare a statement of funding principles
- Prepare schedule of contributions
- Obtain regular actuarial valuations
- Put a recovery plan in place if there is a shortfall
Pensions Act 2004
- Pensions Regulator established
- Powers to act when an employer is acting to avoid pension obligations
- Protect members of work-based schemes
- Reduce risk of compensation claims
- Can force employer to make up liability gap in an underfunded scheme
- Setup the Pension Protection Fund
