pension - New Ireland Assurance

INVESTMENT RISK FACED BY PENSION INVESTORS
Risk to Capital Value
This is the risk most familiar to investors and the one on which most investors focus - the risk that the value of their
investment will fall. This risk is of particular importance to investors with a short time horizon - e.g. one or two years - as
they are most likely to be affected by a fall in capital values. For longer-term investors, the risk to the value of their capital is
reduced as investment returns in the long run are more likely to be positive. For long term investors other risks become
significantly more important, especially inflation risk.
Inflation Risk
This is perhaps the most important risk facing medium to long-term investors but one that is often overlooked in favour of
the more obvious Capital Value risk, outlined above. The inflation risk relates to purchasing power. If your investments are
earning a return of, say, 2% p.a. but prices are rising at 5% p.a., you are actually losing purchasing power at the rate of
approximately 3% p.a. - even though the value of your fund is rising, prices are rising even faster so with every year that
goes by, your money is able to buy you less and less.
Annuity Rate Risk
This risk is somewhat specific to pension investors. When you come to retire, a substantial portion of your accumulated
fund may be used to purchase a pension. The amount of pension you can purchase depends on annuity rates at the time
you retire and these can be somewhat volatile. The main factor leading to this volatility is long-term interest rates - if longterm
interest rates fall, the cost of purchasing a pension can increase and vice versa. If the cost of purchasing a pension
increases immediately before retirement, you may not be able to afford as much of a pension as you had hoped. Note that
this risk is typically not relevant to money which will be invested in ARFs or taken as tax-free cash at retirement.
Risk Trade-offs
Unfortunately there is no one investment that protects you from all these risks - it's a question of finding the right balance,
depending on your investment needs. The following table summarises how each investment type protects against each
risk:
Asset Type Capital Risk Inflation Risk Annuity Rate Risk
Cash Maximum protection Little or no protection No protection against
movements in long-term interest
rates
Equities No protection Good protection over the long
term
Fixed interest
Some protection over the long
term
No protection
No protection against
movements in long-term interest
rates
With the right type of bonds,
maximum protection
For more information on risk and the different level of risks faced by investors, you can log on to the Financial Regulators
website - www.itsyourmoney.ie.
Catering for many kinds of investors' risk appetite
At New Ireland we classify our wide range of funds into 6 different risk categories - Low to Very High Risk and Lifestyle - to
help you understand the risks to capital associated with each of these funds. These categories are explained in more detail
on the next page:
Warning: Past performance is not a reliable guide to future performance.
Warning: The value of your investment may go down as well as up.
Warning: These funds may be affected by changes in currency exchange rates.
Warning: If you invest in this product you may lose some or all of the money that you invest.
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