In which portfolio(s) an employee’s contributions and pension account are invested will depend on his/her personal risk profile. Specifically, it will depend on three key factors: the employee’s age, income range and marital status.
This profile approach to investing is designed to help ensure the balance between investment return and investment risk reflects an employee’s individual financial needs. The plan assumptions are:
- Younger employees have a longer time horizon to invest and more time to make up any short-term drop in their investments so they can tolerate more risk.
- Employees nearing retirement have fewer years left to save for retirement and less time to recoup any losses – so a more conservative investment strategy makes sense.
- Employees who earn more save more (because pension contributions are based on income). Thus, they are in a better position to withstand a short-term drop in investments.
- The pension assets of married employees need to be invested on a slightly more conservative basis because two people may have to depend on that pension in retirement.