Where did the term ‘capital at risk’ come from?
The UK’s financial sector is one of the most strictly regulated in the world. It’s overseen by an independent governing body called the Financial Conduct Authority (FCA).
One of the FCA’s requirements is that financial companies are “clear, fair and not misleading” when promoting their services. This means that as well as promoting the upsides of a financial product or service, a company must also state the potential downsides. Promotions include all marketing, from TV adverts to billboards to a company’s website and even its emails - anywhere that a company encourages people to use its service.
The FCA doesn’t have a ‘capital at risk formula’ or state the exact wording that companies should use to indicate investments can lose value as well as gain value. But over the years, many companies have adopted something short and to the point: “Capital at risk.”
Why does PensionBee display a ‘capital at risk’ warning?
PensionBee is a leading online pension provider that helps people invest their money today so they can receive a retirement income in the future. Most pension products in the UK, like the ones PensionBee offers, are investments.
Pensions are designed as long-term savings products that have the potential to grow in value over time. They can also fall in value, particularly in the short-term. However, since pensions are invested over a number of years, any short-term falls are usually recovered over the long-term. Pension funds can be invested in a range of assets, including company shares, spread across geographic regions. This diversification balances out risk and reward, and further mitigates any sudden rises or falls.
It’s important to understand that the money (capital) invested in a pension is at risk of losing value, even if this is typically corrected in the long-term. This is why PensionBee regularly uses the phrase ‘capital at risk’.
Reducing capital risk
Both individual companies and the government have initiatives that reduce (but don’t eliminate) capital risk for investors.
For example, at PensionBee, we provide a range of investment options that are designed for savers with different appetites for risk.
- Our higher-risk pension plans invest money in investments deemed to be at higher risk of growth and loss, such as company shares. These plans provide a greater opportunity for growth, but there’s also increased exposure to potential stock market slumps.
- Our mid-risk pension plans invest money in a mix of investments such as company shares, bonds and cash. An example is the PensionBee Tailored Plan. It invests money differently as savers go through life, moving their money into safer investments as they get older.
- Our lower-risk pension plans skew investments towards fixed-income assets like bonds (guaranteed government loans). These are widely considered to be safer investments, but have limited growth opportunities.
To mitigate risk, most pension plans are globally diversified. This means that the money will be invested in many different assets in different regions of the world, such as the UK, USA, Europe and Asia. This helps to even out any fluctuations in investments when markets in one part of the world fall, as others might go up.
We clearly display each plan’s risk level on our pension plans page so that customers can choose the investment option for their circumstances and risk tolerance.
What is risk assessment in finance?
Risk assessment is a process used by financial institutions to determine the amount of risk associated with an investment, asset or loan. Once the assessment has been made, companies can then decide how to mitigate that risk.
For example, a pension provider will assess the level of risk associated with each company it invests in based on factors including its balance sheet and level of debt, and they’ll even consider broader factors such as market trends and government regulations. Only companies that meet the pension fund’s risk profile (eg. lower-risk, medium-risk or higher-risk) will be considered for investment.
The Financial Services Compensation Scheme (FSCS)
The government set up the independent Financial Services Compensation Scheme (FSCS) in 2001 to protect customers of financial companies in the event that the company went out of business.
The FSCS protects:
- the full value of pension products that are structured as an insurance policy (like PensionBee’s pension plans);
- pension products that are structured as an investment product, like a SIPP, are protected up to £85,000.
In the rare event that a pension provider were to go out of business, the FSCS would claim any lost money on behalf of its customers.
PensionBee customers can rest assured that the money in their pension is protected by the FSCS in the rare event that any of our money managers (BlackRock, HSBC, Legal & General, and State Street Global Advisors) should go out of business.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 24-02-2021