Different classes of investment

There are three basic classes of investment available under the Plan — equities, bonds and cash. It is important that you understand the differences between them because they have different risk profiles.

Equities (or company shares)

These are shares in UK and overseas companies. The Trustees have been advised that, in their investment adviser's opinion, over the long term, the return from shares has the potential to rise by more than bonds and cash. However, the success of shares depends on economic and market conditions as well as the performance of the individual companies.

Share prices can rise and fall quite sharply, so there is no guarantee that you will get back the capital you have invested. Sudden falls in share prices can be a particular problem if they take place immediately before your retirement, when your investments need to be sold. Investing in shares in overseas companies carries with it an exposure to currency risk.

The Trustees have been advised that shares are generally considered by their investment adviser to be more suitable for members at least five to ten years until retirement who can take advantage of long-term growth and may be better placed to bear any loss. But there is no guarantee that long-term growth will be achieved and shares may not be a suitable investment for all members. It is important to note that when losses arise they can be significant.

Bonds

Bonds are issued by companies or governments as a way of raising money. The issuer normally promises to repay the money at an agreed time and to pay interest in the meantime. The interest can be at a fixed rate, or the interest rate can be linked to increases in inflation.

Gilts are bonds issued by the UK Government.

Bonds are traded in the investment markets and the value of a bond can fall as well as rise depending on changes in interest rates, as well as supply and demand, and expectations about rises or falls in future inflation rates.

The Trustees have been advised by their investment adviser that the long-term return on bonds is expected to be lower than that offered by shares.

The amount of pension that you can buy at retirement is currently linked to the price of bonds and therefore such investments may be useful close to retirement, if you are trying to minimise any major changes to the amount of pension you will receive when you retire.

Cash

You will be familiar with deposit accounts from your bank or building society. Cash and deposit funds are similar. Because the money which is lent or placed on deposit is payable back on demand or on giving a short period of notice, the rate of interest earned on the money tends to be lower than the rate of return available on bonds. The interest earned on a cash or deposit fund may not keep up with price inflation.

The Trustees have been advised that cash and deposit funds are normally considered by their investment adviser to be low-risk, in that the amount of the investment never normally decreases. However, in return for this security, the returns that can be expected over the long-term are lower than those expected from equities and bonds. The Trustees have been advised that currently cash and deposit funds are not considered to be suitable for achieving long term investment growth.