Kia: Hey, it's Kia. We've talked a lot on this podcast
Kia: about the importance of workplace pensions. Kim Brown did two
Kia: great episodes with me on getting to grips with your
Kia: workplace pension and why they matter so much. But today,
Kia: we're diving deeper into how your pension is invested. If
Kia: you've been saving into your workplace pension and wondering about
Kia: its performance, this is the episode for you. So what
Kia: does your dream retirement look like? Holidays twice a year,
Kia: being completely mortgage free, or having the money to pay
Kia: for your grandkids' education? Well, however your ideal retirement looks,
Kia: knowing where your money is invested and how it's growing
Kia: for you is going to be crucial. Welcome to another
Kia: episode of A Little Bit Richer, brought to you by
Kia: my friends at Legal & General. Today, we have another expert
Kia: from Legal & General, Michael Porter. Michael heads up the Workplace
Kia: Pension Product Team at Legal & General, so he's the right
Kia: man to explain more on how pension savings are invested,
Kia: changes you can make, and how investment risk is defined.
Kia: Welcome, Michael.
Michael Porter: Thank you, Kia. Nice to be here.
Kia: I'm really excited to have you here and talk about
Kia: one of my favorite topics ever, pensions. So first things
Kia: first, can you explain more about how your pension savings
Kia: are actually invested?
Michael Porter: Absolutely. So the first thing to understand is that your
Michael Porter: pension savings are invested, as you say in your question.
Michael Porter: Your pension savings aren't held in a bank account or
Michael Porter: a cash savings account, so where it gathers interest and
Michael Porter: the value tends to go up and not down. Pension
Michael Porter: savings are pooled together with other pension saver money, and
Michael Porter: they then are invested into something called an investment fund,
Michael Porter: which buy and sell different types of investments, which I'll
Michael Porter: come on to explain later. But the value of those
Michael Porter: can go up and down.
Kia: I think when it comes to pensions, they're such a
Kia: great tool when it comes to planning for your retirement
Kia: and having that money stored there, but it can be
Kia: quite confusing. So I'm glad that you broke it down
Kia: for us. But let's get a bit deeper then. So
Kia: can you talk a bit more about investment risk and
Kia: what that actually means? Because I think when we talk
Kia: about investments and pensions, retirement, you want to make sure
Kia: that you've got that secure cushion there. So when you
Kia: hear the word risk, you get a bit scared, but
Kia: what does that actually mean?
Michael Porter: So the first thing to note is that there are
Michael Porter: different types of investments that your pension savings might buy.
Michael Porter: There are equities, bonds, property, cash, or a combination of
Michael Porter: those. Now equities are where your money gets put to
Michael Porter: good work by investing into companies, and those are typically
Michael Porter: listed on a stock exchange, and the value of those
Michael Porter: companies goes up and down depending on how they perform.
Michael Porter: Then you've got bonds. Bonds are basically companies or governments
Michael Porter: that are taking out a loan, and with that loan,
Michael Porter: they pay interest on the amount of money that is
Michael Porter: being borrowed, and then at the end of that loan,
Michael Porter: once it matures, they pay back the original amount of
Michael Porter: that loan. You then have property. Property is investing into
Michael Porter: commercial real estate or commercial properties. So that might be
Michael Porter: a factory, a commercial unit, it could be an office
Michael Porter: block. And when an investment fund purchases one of these
Michael Porter: types of properties, the value of that property goes up
Michael Porter: and down. But also, those properties tend to be let
Michael Porter: out and then they receive rental income, which all goes
Michael Porter: towards helping your savings grow. Then you have cash, and
Michael Porter: cash isn't physically held cash, so it's not like cash under a
Michael Porter: mattress. It's held on something called overnight deposit. Now that
Michael Porter: might be with a financial institution or it might be
Michael Porter: with the government, and they tend to be a bit
Michael Porter: more secure. They're not guaranteed to not go down, but
Michael Porter: they are a bit more secure. And then you have
Michael Porter: a combination. So some investment funds might not be specific
Michael Porter: to one of those types of investments. They might hold
Michael Porter: multiple investment types, and those tend to be called multi-
Michael Porter: asset funds or diversified funds, diversified growth funds. Then risk.
Michael Porter: Different investments have different levels of risk. So basically what
Michael Porter: risk means is it's the likelihood that the value of
Michael Porter: your pension savings might go down. Now they go up
Michael Porter: and down all the time, but in the shorter term,
Michael Porter: it's all about how likely is your money going to
Michael Porter: go down the following day or that particular day, and
Michael Porter: that's what we call volatility. So one of the benefits
Michael Porter: of having a pension is that your monthly savings go
Michael Porter: into buying these investments. Now, you might have heard of
Michael Porter: something called pound cost averaging. What this basically means is drip-
Michael Porter: feeding your money into pension savings, and some months you'll
Michael Porter: be buying investments when they're lower, sometimes you'll be buying
Michael Porter: investments when it's higher. This smooths out your investment experience
Michael Porter: and reduces the level of risk attributed to your funds,
Michael Porter: but ultimately, it averages out and it reduces the amount
Michael Porter: of risk that your pension savings have. You can think
Michael Porter: about it a little bit like British weather, particularly in
Michael Porter: summertime, when there might be dry days, there might be
Michael Porter: wet, rainy, cold days. But if you look back across
Michael Porter: history, typically, summer tends to be warmer, hotter, and drier
Michael Porter: more often than not. So that's the benefit of pound
Michael Porter: cost averaging. So sometimes your money might go in and
Michael Porter: you're buying investments at higher cost, sometimes you'll be buying
Michael Porter: them at a lower cost, but ultimately it averages out
Michael Porter: and it reduces the amount of risk that your pension
Michael Porter: savings have.
Kia: So that is a good thing to note there. So thank you
Kia: for telling us about that. You've done a really good
Kia: job at breaking down the different assets that can come
Kia: with an investment fund. So can you explain to us
Kia: a bit more when it comes to workplace pension, where
Kia: are our savings usually invested?
Michael Porter: So your savings are automatically invested somewhere. So that tends
Michael Porter: to be called a default fund, or you might also
Michael Porter: see it referred to as a default investment option. Now,
Michael Porter: there are different types of default investment options. It might
Michael Porter: be a single fund or it might be a combination
Michael Porter: of different types of funds that leads to an investment
Michael Porter: strategy. So you have somebody that's there managing your funds
Michael Porter: and your investments on your behalf. So you've got the
Michael Porter: safety and comfort in knowing that your pension is invested
Michael Porter: by an expert. It's managed and it's looked after. It's
Michael Porter: not guaranteed in terms of it may still go down
Michael Porter: because in investments markets, you do get turbulence and you
Michael Porter: do get volatility in the shorter term. But over the
Michael Porter: longer term, equities, for example, they've proven typically to outperform
Michael Porter: cash savings accounts.
Kia: So when it comes to your pension, especially the workplace
Kia: pension, is it best to leave the investing decisions to
Kia: the experts and use the default fund that your pension
Kia: company offers?
Michael Porter: So, generally, default funds are most appropriate for the majority
Michael Porter: of investors. However, if you do want to take that
Michael Porter: little bit of extra risk, there are different investment options
Michael Porter: available for you, and the best way to find out
Michael Porter: what they are is by going onto your pension account
Michael Porter: online, or you might actually have received an investment guide
Michael Porter: or an investment brochure, which will tell you exactly the
Michael Porter: different types of investments that are available to you. So
Michael Porter: firstly, you want to really check, does this default fund
Michael Porter: really meet my needs in terms of my expected retirement
Michael Porter: outcomes, my level of risk and my attitude towards risk,
Michael Porter: or should I choose my own investments? One of the
Michael Porter: most important things to say though is if you do
Michael Porter: go ahead and choose your own investments, it's a bit
Michael Porter: like you are now on your own. So those investments
Michael Porter: don't change throughout time. If you choose to be, say,
Michael Porter: a hundred percent invested into one of those equity funds
Michael Porter: that we talked about where it's buying money in companies across
Michael Porter: the world, then it will stay invested in that fund
Michael Porter: until you review it or until you make an investment change.
Kia: That's a really good point that you make there. I think,
Kia: yeah, if you make that change, now you've kind of
Kia: committed to being hands- on to your pension until you
Kia: get to the point where you draw down on it.
Kia: We've touched on it a bit because you explain the
Kia: different types of assets that are available, but can you,
Kia: just for our listeners, explain diversification in simple terms? Because
Kia: we hear diversifying your risk, diversifying your investments, but can
Kia: you explain it in simple terms and what this means
Kia: for not just your pension, but also other savings as well?
Michael Porter: Definitely. So diversification, in its simplest terms, is not putting
Michael Porter: all of your eggs into one basket, so not going
Michael Porter: all in on equities or all in into a bond
Michael Porter: fund. So if you think about it a bit like
Michael Porter: going to a buffet, so actually at a buffet you
Michael Porter: would go and try a few different types of food,
Michael Porter: and the chances are then that if there's one part
Michael Porter: of that meal that you don't like, then there are
Michael Porter: going to be other options available to you that you
Michael Porter: will like, ultimately. So that's the first thing. And the
Michael Porter: other thing I would say is that you should probably
Michael Porter: have a balanced diet as well. So not just all
Michael Porter: about pension savings, you probably want to diversify where your
Michael Porter: savings are invested, because they all serve a different purpose.
Michael Porter: So pensions for example, saving into a pension is going
Michael Porter: to help you towards saving for retirement. But then if
Michael Porter: you've got medium- term savings goals, you might want to
Michael Porter: invest in something like a stocks and shares ISA, or
Michael Porter: have a cash ISA.
Kia: Michael, you are the expert that we needed for this
Kia: to break it down. We're going a bit further now.
Kia: We hear the words active and passive, and whenever I
Kia: think about it in non- financial terms, I'm thinking about
Kia: if I'm in the gym, I'm active, if I'm sitting
Kia: at home on a sofa, I'm passive. But these have
Kia: slightly different meanings when it comes to investments. So what's
Kia: the difference between a fund that's actively managed versus one
Kia: that's passively managed?
Michael Porter: So an active fund is where you have a fund
Michael Porter: manager that is actively looking to find different investment types
Michael Porter: or investment opportunities. So they would go out and they
Michael Porter: would research companies. So if you're talking about an equity
Michael Porter: fund, they'd go out and research the companies and then
Michael Porter: identify those that they want to put into their investment
Michael Porter: fund. So for a passive fund, that's where an investment
Michael Porter: manager or a fund manager would invest into every company
Michael Porter: that is listed on a particular stock exchange or within
Michael Porter: an index. So if you invest in a UK equity
Michael Porter: index fund, let's say, the index is the FTSE All-
Michael Porter: Share. Now that is made up of the top 600
Michael Porter: companies within the London Stock Exchange, which is about 2000
Michael Porter: companies. What your passive fund tries to do is it
Michael Porter: tries to match the performance of all of those companies.
Michael Porter: So it will hold those companies based on their relative
Michael Porter: value, and then you'll see your fund go up and
Michael Porter: down depending on how all of those companies in combination
Michael Porter: perform. So active funds tend to hold less companies or
Michael Porter: less investments, which might mean that it has a greater
Michael Porter: amount of risk that we talked about because it's less
Michael Porter: diversified, but a passive fund, because it would hold more
Michael Porter: of those companies or investments, it will be potentially less
Michael Porter: risky. But that's not to say that it wouldn't go
Michael Porter: down in value.
Kia: I'm interested then, off the back of that, or the active
Kia: fund, because there is someone who's actively going out there
Kia: and researching, is there a difference between the two funds,
Kia: for example, maybe in the fees because you have someone
Kia: who's actively working on that?
Michael Porter: So active funds tend to hold a bit more of
Michael Porter: an investment cost to them. So there are fees that
Michael Porter: are charged as a result of it, which it's either
Michael Porter: called an investment management charge or a fund management charge,
Michael Porter: because they are having to go out, meet with companies,
Michael Porter: they're having to do their investment research, they have analysts
Michael Porter: that do all of the investigation and research, whereas a
Michael Porter: passive fund, there's much more automation that's involved. So as
Michael Porter: it tries to track the performance of companies, it will
Michael Porter: buy and sell those companies based on how they perform
Michael Porter: on a daily basis, which is far more automated, and
Michael Porter: as a result, they tend to be a bit cheaper.
Kia: Okay, that's good to know. Thank you so much. When
Kia: you're looking at your pension savings and investments, can you
Kia: see which companies your money's actually invested in? Can you
Kia: see the breakdown or is it more of like an
Kia: overview of where your money is?
Michael Porter: So the first thing you probably want to do is
Michael Porter: log into your pension account online. That's if your pension provider
Michael Porter: or your pension scheme has that facility available. If you
Michael Porter: don't know who your pension provider is, the best thing
Michael Porter: to do is go and speak to your HR department
Michael Porter: and they will point you in the right direction. But
Michael Porter: once you've been able to register and you've got access
Michael Porter: online, you can then see where your money is invested.
Michael Porter: So what's the default fund that it holds? Typically, there's
Michael Porter: also an investment guide that comes alongside your pension. So
Michael Porter: you want to have a read of that pension guide
Michael Porter: or the investment guide to find out what's the investment
Michael Porter: strategy. Once you've identified that, if you want to even
Michael Porter: delve a little bit deeper and really find out whereabouts
Michael Porter: your pension savings are invested, pension schemes tend to offer
Michael Porter: something called a fund fact sheet. And a fund fact
Michael Porter: sheet is basically just telling you what's the name of
Michael Porter: the fund, what's its objective, where is it invested, how
Michael Porter: is it performed, what's its level of risk as well,
Michael Porter: and you might even get to see the top 10
Michael Porter: holdings of a fund. So it might be invested in
Michael Porter: the top 10 companies within the FTSE 100, for example. Also,
Michael Porter: the other thing to note is that if you're invested
Michael Porter: in one of these passive funds, the chances are you're
Michael Porter: going to be invested in all of those companies that
Michael Porter: will be held within that index.
Kia: That's good to know. So Michael, the stock market has
Kia: seen a dramatic ride in recent years, so should people
Kia: be worried that their pension savings won't grow very well,
Kia: or that it might be better to save their money
Kia: in a savings account or a cash ISA?
Michael Porter: The last few years, we've seen quite a lot of
Michael Porter: market turbulence, as we would call it. So that's where
Michael Porter: investment markets have gone up and down. Now that's been
Michael Porter: as a result of Brexit. We've had the Russian war
Michael Porter: in Ukraine. We've had a lot of political uncertainty, and also COVID
Michael Porter: as well. So these have been unprecedented times, really. But
Michael Porter: the main thing to note is that your pension savings,
Michael Porter: they're a long- term investment, so you're investing for a
Michael Porter: long time, over 30, 40 years. So it's important that you
Michael Porter: don't make any rash decisions. You might expect to see
Michael Porter: your pension savings go down in the short term, but
Michael Porter: history shows us that over the long term, they tend
Michael Porter: to do quite well from a performance perspective. But again,
Michael Porter: not guaranteed, can still go down and you might actually
Michael Porter: get back less than you put in, but typically, they
Michael Porter: will grow.
Kia: When it comes to fees and charges, I know we
Kia: touched on it a little bit, but what are the
Kia: fees and charges that we can expect on pension savings,
Kia: and how do they differ across different fund types?
Michael Porter: There are lots of different types of fees, and they
Michael Porter: might be charged in different ways, but typically the two
Michael Porter: main ones are investment fees that we talked about earlier,
Michael Porter: or a fund management charges, and then there's also an
Michael Porter: administration fee. So this is the cost of the operational
Michael Porter: servicing of your pension scheme as you change your address
Michael Porter: or whatever it might be that you're getting in touch
Michael Porter: with your pension administrator for. Investment charges can differ between
Michael Porter: investment types as well. So the active funds that we
Michael Porter: talked about earlier, they can tend to be slightly more
Michael Porter: expensive. Passive funds can be slightly cheaper, and they also
Michael Porter: differ across different investment types. There are some other charges.
Michael Porter: You have something called additional fund expenses and transaction costs.
Michael Porter: It's important that you know that these aren't charged by the pension scheme
Michael Porter: provider or by the fund manager. They're the cost of
Michael Porter: buying and selling the investments. So it's important that you
Michael Porter: don't frequently switch funds. So when we talked about earlier,
Michael Porter: can you choose a different investment from the default? Yes,
Michael Porter: you absolutely can, but you incur a cost as a
Michael Porter: result of switching, and frequently switching is going to eventually
Michael Porter: reduce the amount of money that you have at the
Michael Porter: end when you come to retire. And an example of
Michael Porter: that is like baking a cake. So if you go
Michael Porter: to bake a cake and you're constantly opening the oven
Michael Porter: door, you're letting some of that hot air out and
Michael Porter: it might not rise as much as you might expect.
Michael Porter: So keep that door closed, let the oven do its
Michael Porter: thing, and then you can experience what the cake is
Michael Porter: like once you open it and the time finishes. But it
Michael Porter: is important to say that different ovens, so if we
Michael Porter: think about ovens as the investment types, different ovens would
Michael Porter: cook at different speeds and you might get a different
Michael Porter: outcome each time, and you're not always guaranteed to get
Michael Porter: back what you put in.
Kia: Michael, you have some of the best analogies that I've
Kia: come across when it comes to explaining difficult financial jargon.
Kia: Keep going. I always want to just ask you more
Kia: questions so you can give me more analogies. That is great.
Michael Porter: I've got more.
Kia: I know you've got them loaded up. It was good.
Kia: But before we end this episode, because you've shared so
Kia: many amazing tips, can you share our listeners your top
Kia: three tips on workplace pension investments?
Michael Porter: Yep, absolutely. So it's important to remember that pensions are
Michael Porter: a long- term investment. Don't make any rash decisions. You
Michael Porter: might expect to see it go up and down, so
Michael Porter: don't react based on short- term changes. Secondly, the sooner
Michael Porter: you start saving, the more time that you give for
Michael Porter: your investments to grow, and it's important that you start
Michael Porter: early. And then finally, can you save a little bit
Michael Porter: more? So are you making the most of that employer
Michael Porter: matching contribution? Can you add a little bit extra in?
Michael Porter: Or as you get a salary increase, maybe you might
Michael Porter: be lucky enough to get a pay rise, could you put a
Michael Porter: little bit of that towards your pension savings? Ultimately, putting
Michael Porter: a little bit more aside today or sacrificing a little
Michael Porter: bit today will only benefit you when you come to retiring.
Kia: Michael, thank you so much for coming onto the podcast.
Kia: You have been incredible breaking down workplace pensions in such
Kia: simple terms for us to understand. Between your episode and
Kia: the two episodes with Kim, I think we have got
Kia: pensions down to a tee. So thank you so, so much.
Michael Porter: Thanks.
Kia: There's lots of useful information to help us get engaged
Kia: and grow our workplace pension. Next time, we're talking all
Kia: about parenting and finances with Charlotte Jessup from Looking After
Kia: Your Pennies. I'd love it if you could review the
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Kia: Thank you for listening. See you soon.