2014 PENSION INCREASES Pensions OptiPlus Platinum Pension Platinum Pension 2003 OLD MUTUAL WITH-PROFIT ANNUITIES

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1 2014 PENSION INCREASES Pensions OptiPlus Platinum Pension Platinum Pension 2003 OLD MUTUAL

2 DEAR PENSIONER We have pleasure in presenting you with the annual performance report outlining the bonus declarations (pension increases) for Old Mutual Corporate s With Profit Annuity Portfolios for the calendar year The report also contains valuable information serving as a background to the pension increases, together with a Glossary explaining many of the terms used in the report. We trust that our clients, trustees and pensioners alike, will find it useful. Highlights of the report 2013 provided a year with improved investor sentiment as seen in strong equity market performance. Increases in 2013 for the majority of categories of Pensions OptiPlus, Platinum Pension and Platinum Pension 2003 have beaten inflation, with this trend extending to periods of up to 10 years. Over 10 years, the average increase for the top Pensions OptiPlus category has been 7.8%, while CPI inflation over the same period has averaged some 5.7%. The average increases for the top four Platinum Pension 2003 categories have also exceeded and matched inflation since inception. Old Mutual believes that With-Profit Annuities such as Platinum Pension 2003 continue to provide good value for money. South African and world markets are showing some signs of improvement; however investors remain sufficiently uncertain as to the short-term prospects for some investment markets.

3 CONTENTS Introduction... 1 Market Review Introduction... 3 Domestic market... 3 International market... 4 With-Profit Annuity Portfolios Overview of With-Profit Annuities... 7 Benefits of Old Mutual s With-Profit Annuities... 8 Other Annuities offered by Old Mutual Corporate... 9 History of Old Mutual s With-Profit Annuity Portfolios Pension Increases for Old Mutual Corporate Annuities Pensions OptiPlus increases for the year Platinum Pension increases for the year 2014/ Platinum Pension 2003 increases for the year 2014/ Looking Ahead Future outlook for With-Profit Annuity Investors Important Note Frequently Asked Questions Glossary... 25

4 INTRODUCTION A message from the Annuities Actuary There is a continuing need within the South African pensioner market for trustees and advisors to educate their members and clients about retirement planning and annuity products. Particularly information pertaining to: n How annuities work in the broader sense. n Reasons for compulsory annuity purchase. n Guarantee of income for life provided by annuities, which other investments might not necessarily provide. n Income level each individual will need at retirement, and how their current level of savings is likely to provide for this. n Pension increases granted and the effect of investment markets on the future increases. This education should include how changes in the general economic environment affect the pensioner annuity market. With this in mind, pensioner clients should be educated on the security offered by pension annuities and value of the guarantees offered in uncertain times. Old Mutual With-Profit Annuities This report therefore outlines the bonus declarations (pension increases) for the Old Mutual Corporate Pensions OptiPlus, Platinum Pension and Platinum Pension 2003 to be applied over the following periods: Pensions OptiPlus: 1 January December 2014 Platinum Pension: 1 April March 2015 Platinum Pension 2003: 1 April March 2015 Investment Markets in Perspective Old Mutual With-Profit Annuity increases for 2014 are based primarily on investment returns during 2013 as well as the level of the bonus smoothing reserve at the time of the increase declaration. We are pleased to announce that the 2013 investment returns on the Platinum Range enabled both improved bonuses for 2014 and a strengthened BSR position. A stronger BSR is essential given the future uncertainty in investment markets locally and abroad. One key consideration in deciding the pension increase for 2014 is what is likely to happen at the next increase declaration in one year s time. Although it is believed that the world will not fall back into a recession, the outlook for 2014 still remains uncertain and it is therefore difficult to attach much confidence to an opinion regarding future investment market performance. Security in turbulent times Assets backing Old Mutual s pensioner liabilities, including bonus smoothing reserves, are held in policyholder funds these funds may not be accessed by shareholders. Shareholder capital is separate from, and over and above policyholder funds. Shareholder capital has no impact on the level of pensioner increases. However, it does represent the security backing the pension guarantees offered by Old Mutual. 1

5 The assets backing pensioner liabilities (policyholder funds) have to be in the name of the insurer and may not be encumbered this means that no outside party may have a claim on those assets, they are for the benefit of the pensioners only. Furthermore, in the case of South African insurers with overseas parents, such as Old Mutual, the Long Term Insurance Act and exchange controls limit the parent from accessing South African shareholder capital. Old Mutual plc would only be able to access capital by way of either dividends or loans. In both instances the Statutory Actuary and the OMLACSA board would need to approve the dividend or loan. In addition Reserve Bank approval is required for funds transferred from OMLACSA to Old Mutual plc. As the amount invested offshore by Old Mutual South Africa is already close to the exchange control maximum, the scope for loans to Old Mutual plc is very limited. Old Mutual South Africa retains its AAA credit rating, the highest rating available and the highest of any insurer in South Africa, and remains very well capitalized. In summary, pensioners may rest assured that the guarantees from Old Mutual are safe. Their pensions are guaranteed to be paid for life, and will never be decreased. The capital adequacy requirement (CAR) cover ratio for Old Mutual South Africa is 3.3x at 31 December The cover ratio represents the multiple of solvency capital that Old Mutual holds, where 1x represents the regulatory requirement. Essentially, it provides a measure of the security that is afforded to pensioners, with 3.3x representing a significant level of security. Purpose of this report Our primary intention with this With-Profit Annuity Performance Report is to ensure transparent communication with our clients, advisers and stakeholders. The report also provides a general overview of Old Mutual s With-Profit Annuity Portfolios, sketches the background to the pension increases declared and outlines any market-related issues that exerted an influence on these pension increases. We hope that this report offers some insight into the With-Profit Annuity Portfolios from Old Mutual Corporate, thereby making the role of educating employers and members a little easier for trustees and advisers. This report also includes a brief overview of some of the most frequently asked questions by pensioners regarding their with-profit annuities as well as brief answers to these questions. I would like to use this opportunity to thank you for your continued support. Roy Stephenson Annuities Actuary Old Mutual Corporate 2

6 MARKET REVIEW Introduction South African equity markets performed strongly over the investment period with the JSE All-share Index (or ALSI) returning around 22% for the year ended 31 December Global equity markets also provided strong growth with the MSCI World index indicating a return of 27% over the same period. The weakening of the Rand by approximately 23% over the investment year boosted global asset returns in Rand terms. Future market conditions remain uncertain at the moment. It is expected that equity market prospects for 2014 will accelerate moderately in light of the diminishing European crisis, however, fiscal tightening will still continue to affect investors on a broad front, globally. Domestic market South African equity markets rallied over the investment period with the JSE Index (or ALSI) returning around 22% for the year ended 31 December This high return on equity markets was partly due to renewed investor confidence during This enhanced investor sentiment is mainly attributed to macroeconomic events occurring both within and outside of South Africa. Intervention from the EU and the European Central Bank materialised and settled fears that the Eurozone would not degenerate into another financial meltdown. This, coupled with a very expansionary monetary policy in the US and the cutback in quantitative easing policies, helped to deter a broad-based global economic slowdown. On the local front, performance was led by industrials and financials, with resources struggling on the back of a sell-off in gold. Other headwinds for the resources sector are China s well documented slow-down, as well as continued strikes and labour unrest within the sector. The performance of local equities was consistent with the general pick up in global growth over the past year. The renewed confidence in the market as a result of solid policy reforms and support by the US Federal Reserve and Chinese policy makers, in an effort to encourage growth and job creation, has improved investor sentiment was yet another mixed year for South Africa on the macro-economic front. In the last quarter of 2013, South African GDP growth accelerated to 2% over the 2013 year, beating market expectations and up from a revised 1.7% growth rate as at the third quarter of This was mainly due to a surge in the mining sector. Interest rates remained well contained over the year as well. The weaker Rand drove up inflation, but not as much as anticipated. The weaker Rand improved prospects on local production, although job creation did not follow suit. Tensions in the labour market as well as the widening current account deficit were key local risks over the year. The view for 2014 is that, while global conditions should improve moderately, the local economic prospects for 2013 still remain poor. Local inflation is expected to breach the upper end of the 3-6% target band during the second quarter of 2014, and is only expected to fall back within the band by the second quarter of Growth is expected to again be sub-3%, a rate at which very few jobs will be created. 3

7 The performance of the benchmark indices of the major domestic asset classes to 31 December 2013 are shown below: Asset Class Index 3 Months 12 Months 24 Months** Domestic Equities SWIX Total Return Index 6.05% 20.71% 55.82% Domestic Interest Bearing Assets Composite Index* 0.71% 2.91% 13.88% * A combination of the BEASSA ALBI (All Bond Index) and the STeFI Money Market Index. ** Cumulative returns. Domestic Equities The FTSE/JSE All Share Index (ALSI) ended the year on a positive note with a performance of 2.8% for December. That brought the total return for 2013 to a very respectable 22%. The period under consideration was characterised by a strong momentum cycle. In aggregate, the largest contributors to underperformance were an underweight position to industrial shares which performed strongly over the period delivering a threeyear annualised return of 28.0%. The biggest single driver of strength in the industrial index was the rand s weakness against most major currencies, resulting in a very strong run in rand hedge industrial shares. The portfolios were particularly underweight industrial shares which were trading at high Price-Earnings multiples but continued to rally nonetheless. There were also some poor performing stocks within the resources sector that dampened performance over the period. Domestic Interest-Bearing Assets Multi-decade low short-term interest rates, the weakening of the Rand, the widening current account deficit due to a lack of sufficient capital flows and thus rising inflation, lent strong support to the inflation-linked bond market. Bonds returned a respectable 1.13% in December 2013, however the BEASSA ALBI (All Bond Index) only returned 0.64% over the 2013 calendar year. This was significantly due to the sharp rise in nominal and real yields from their respective historical lows in May Interest rates are unlikely to reduce during 2014 due to the inability to tighten monetary policies, the uncertainty over the country s balance of payments as well as upside risks to inflation. Longer-dated bonds will therefore be prone to higher volatility levels and there will therefore be an active approach to invest any surplus cash in these higher yielding longer-dated bonds. Domestic Property Listed property provided an 8.4% total return in Property did well to provide a positive total return over the final quarter of 2013 in light of bond yields rising 0.33%, and property yields falling by 0.16% over the quarter. Companies continued to deliver above-inflation distribution growth, despite the tough operating environment. While capital values may remain volatile and at the mercy of the bond market, the growing distribution income stream of listed property should be the focus of long-term investors. 4

8 Factors detracting from recovery are disappointing GDP growth prospects and cost increases that constrain net rental growth. The rise in bond yields also introduces a short term capital risk. Inflation Headline CPI inflation decreased over the past year, dropping from 5.7% (year on year) at December 2012 to a level of 5.4% (year on year) at December The volatility of the Rand exchange rate has introduced concerns regarding inflation targets. Inflation is expected to breach the upper end of the target range in the second quarter of 2014, and to reach a peak of 6.6% in the final quarter of the year, before declining to 6.0% in the second quarter of International Market On the global front, the year was dominated by a number of scares from the US Federal Reserve Bank (the Fed) that it was to begin the tapering of its asset purchases. However, the Fed s decision to hold off on this process indicates that it remains concerned about underlying economic conditions on the back of weaker than expected economic indicators. US GDP growth has been hovering around a very moderate 2% p.a. and the market has interpreted the Fed s actions as an indication that it will err on the side of ease with respect to monetary policy in order to ensure that the recovery does not stall. There is continued uncertainty surrounding the timing of the Fed s tapering of its asset purchases. Also, the partial shutdown of US government operations during October 2013 was reversed by lifting the debt ceiling, but this was only a temporary measure and another debt ceiling debate looms. When the Fed s process of policy normalisation (the tapering of asset purchases) eventually begins, vulnerable emerging markets such as South Africa may suffer further currency and asset market sell-offs. Over the investment year, the South African Rand weakened by some 27% relative to the US Dollar. This had a positive effect on the returns that were earned on overseas assets when measured in Rand terms. To give an idea of the impact of currency movements on the returns from overseas assets, consider the following: A commonly quoted benchmark for global equities is the Morgan Stanley Capital International Index (or MSCI Index), which gave a total return (in US Dollar terms) of 27%. Given that the Rand weakened by approximately 27% over the period, the net effect was that the weakening of the Rand served to increase the returns made on overseas assets, with the total return on the MSCI Index (in Rand terms) equating to some 57%. On a slightly more positive note, there are growing signs that the cyclical growth slowdown in China has ended and that the Eurozone is finally pulling out of a recession. Global inflation has also remained low which will allow global growth to gain momentum during

9 The performance of the benchmark indices (in Rands) of the major asset classes in the international market is shown below: International Money Market performance (in Rands) to 31 December % 110.0% 95.0% 80.0% 65.0% 50.0% 35.0% 20.0% 5.0% -10.0% -25.0% Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-12 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Equities Bonds Cash (Morgan Stanley Capital (JP Morgan (OMIGSA Multi-GlobaL All Country World Index) International Bond) Money Market) The following table shows the performance of the same benchmark indices over 3, 12 and 24 months ending 31 December 2013 (performance in US dollars is shown in brackets): Asset Class Index 3 Months 12 Months 24 Months* International Equities International Bonds International Cash Morgan Stanley Capital International All Country World Index J.P. Morgan International Bond OMIGSA Multi-Global Money Market Benchmark 11.61% 56.96% 90.32% (8.11%) (27.35%) (48.39%) 2.77% 17.90% 25.52% (-1.26%) (-4.50%) (-3.25%) 4.50% 23.84% 30.43% (0.41%) (0.31%) (0.54%) * Cumulative returns. 6

10 Overview of With-Profit Annuities With-Profit Annuities enable pensioners to share in the profits made on the underlying annuity portfolio by way of annual increases to their pensions. These profits are based mainly on investment returns, but include mortality profits too. Pension categories and increases Different categories of pension are offered under with-profit annuities. Each category involves a different assumption of the expected returns on the underlying assets, also called the after retirement interest (a.r.i.) rate. The higher the pension category selected, the higher the starting income, but the lower the expected increase each year (and vice versa). The after retirement interest rate is also the minimum net return that needs to be earned on the underlying portfolio to maintain the current level of pension. This means that only the net returns in excess of the after retirement interest rate can be used to provide increases in pensions. So, if a net return of 8% is achieved and the after retirement interest rate for a given pension category is 6%, only 2% (8% - 6%) will be available for increases to pensions. Pension increase rates and smoothing Pension increase rates depend on investment performance and the smoothing principle applied by Old Mutual. This means that they are not constant and can be higher or lower from year to year. The aim, when declaring the increases, is generally to ensure a stable return over time, so that market volatility is absorbed as far as possible and not passed on to the policyholder. This means that in years of exceptional market performance the pension increases declared will be lower than the actual return as the difference is kept in reserve so that higher increases than actual returns can be declared in years of poor market performance. Ultimately the smoothing process takes the performance over a number of years into account. The smoothing effect is exclusively for the benefit of annuity policyholders and is never used to the benefit of Old Mutual shareholders. The effect of smoothing is illustrated in the graph below: A typical Market Return Portfolio versus a Smoothed Return Portfolio Return n Smoothed Returns n Market Returns Time 7

11 Benefits of Old Mutual s With-Profit Annuities Guarantee offered by Old Mutual Old Mutual guarantees to pay the current pension for the rest of the pensioner s lifetime, or as determined by the benefit certificate or contract. This means that the current level of pension will not be reduced during the future lifetime of the pensioner. Old Mutual also guarantees that future increases will never be negative. Once an increase has been granted (i.e. the pension has been increased), it is added to the guaranteed income and can never be taken away. Investment strategy Old Mutual has a matching strategy for its With-Profit Annuities, which means that a large portion of the assets backing the portfolios is invested in long-term fixed-interest securities, resulting in a guaranteed fixed level of income for as long as the pensions are paid. This matching of the term of the assets to that of the pensions is a powerful built-in safety mechanism that provides security to both the pensioner and Old Mutual. Financial strength The valuable guarantee underlying the With-Profit Annuity Portfolios is backed by the considerable financial strength of Old Mutual, providing security and peace of mind. The capital levels for Old Mutual Life Assurance Company (South Africa) for the last two years are shown in the table below: December 2012 December 2013 Net Assets (Rbn)* Actuarial Liabilities (Rbn) Shareholder Capital (Rbn) Statutory Capital Requirement Ratio of Surplus to Statutory Capital Requirements 3.9x 3.3x * Net of inadmissibles and other adjustments. The extent of this capital, combined with the proven stability over time, is evidence of the quality of the guarantees that apply to our With-Profit Annuity Portfolios. It is important to note that the actuarial liabilities described here include the bonus smoothing reserves for the different classes of business. Effective administration Old Mutual Annuity Services is the division of Old Mutual South Africa that manages the annuity administration of all the annuity portfolios. Old Mutual Annuity Services provides a fully consolidated payment administration service and currently processes monthly payments for approximately pensioners, making it the largest annuity administration business in South Africa. Old Mutual Annuity Services is a single point of service that deals with all annuity-related queries, co-ordinates payments, calculates tax and ensures compliance with South African Revenue Services requirements. Pensioners are able to contact Annuity Services in a variety of ways. Incoming calls are serviced via an Annuity Call Centre, and face-to-face service is available at the Old Mutual walk-in Client Service Centers. Pensioners also have the option of sending s and other forms of written correspondence. 8

12 Staying in touch A bi-annual newsletter keeps pensioners informed about the administration of their pensions, relevant news from Old Mutual as well as general interest topics with the aim of encouraging two-way communication. Pensioners can contact Old Mutual via a service centre that offers a one-stop service solution that aims to give a quick and effective, customized query resolution. A face-to-face service is also available at the Old Mutual walk-in Client Service Centres. Pensioners also have the option of sending other forms of written correspondence. Pensioners can contact Old Mutual via the following channels: Service Centre Pencare@oldmutual.com Postal PO Box 3628, Cape Town, Other Annuities offered by Old Mutual Corporate Apart from With-Profit Annuities, Old Mutual Corporate also offers other types of annuity products, including: Inflation-Linked Annuity for pension funds - guaranteed to provide increases equal to inflation. Level Annuity for pension funds - with a fixed level of income guaranteed for life. Guaranteed Escalating Annuity for pension funds - provides increases equal to a predetermined guaranteed increase rate. Max Income for individuals - Consists of two annuity products, which can be purchased individually or combined: Income for Life, where pensioners can choose from: A) A fixed income for life. B) An escalating income for life based on a fixed escalating rate of up to 8% per annum or an inflation-linked rate. C) Income for life with a guaranteed term for payments. If the pensioner dies before the term is completed, the pension is payable to another person for the rest of the term. D) Joint life income, where income is paid as long as the pensioner or the second life is still alive. E) Income for Life with bonus escalation, where the income will increase each year with a bonus declared by Old Mutual, based on the performance of the underlying investment portfolio. F) Income for Life with capital preservation, where some or all of the original investment is protected and is paid out to a nominated beneficiary on the death of the pensioner. Investment Funded Income, where pensioners will be paid an income based on the performance of an underlying investment fund chosen to fit the pensioner risk profile. 9

13 History of Old Mutual s With-Profit Annuity Portfolios Old Mutual Corporate s With-Profit Annuity offering that is currently open to new business is Platinum Pension The previous With-Profit Annuity Portfolios, which are now closed to new business, include: Platinum Pension: n Launched in 1999 n Closed to new business in 2003 Pensions OptiPlus: n Launched in 1993 n Closed to new business in 1999 n Prior to 1993, Pension Plus was offered (the equivalent to Pensions OptiPlus Category I) Changes to world markets, and also significant changes to interest rate patterns in South Africa, necessitated the closure of the Pensions OptiPlus and Platinum Pension portfolios. The closure ensured that the new portfolio would earn increases related to current investment conditions, and would not need to be supported by the existing business to their own detriment (i.e. avoiding any crosssubsidisation). Each of the three Old Mutual With-Profit Annuity Portfolios is managed separately to ensure the sustained financial viability of each. The different categories of each With-Profit Annuity Portfolio are highlighted below: Pensions OptiPlus Platinum Pension Platinum Pension 2003 Profit Category After Retirement Interest rate Profit Category After Retirement Interest rate Profit Category* After Retirement Interest rate I 3.5% A 3.5% A+ 1.5% II 4.0% B 4.0% A+ 2.5% III 4.5% C 4.5% A+ 3.0% IV 5.0% D 5.0% A 3.5% V 5.5% E 5.5% B 4.0% VI 6.0% F 6.0% C 4.5% VII 6.5% D 5.0% VIII 7.0% IX 7.5% X 8.0% The equivalent category for Old Mutual s Max Income For Life annuity with Bonus Escalation is the 3.5% category of Platinum Pension

14 The size of the assets under management under the Old Mutual Corporate With-Profit Annuity Portfolios was some R36 billion at the end of December This amount excludes any Long-term Bonus Smoothing reserve, which was previously included prior to The history of figures at 31 December each year, is shown in the graph below: Size of Old Mutual s With-Profit Annuity Portfolios (Rbn) Rbn n Pensions OptiPlus n Platinum Pension n Platinum Pension

15 PENSION INCREASES FOR OLD MUTUAL CORPORATE ANNUITY PORTFOLIOS Pensions OptiPlus increases for the year 2014 The Pensions OptiPlus increases are effective on the pensioner s increase date (which varies between funds) falling between 1 January 2014 and 31 December These pension increases are based on smoothed investment returns for the year ending 30 September Note that the investment performance from the end of September 2013 to the actual increase date of the pension is not lost, but will form part of the investment period on which the next pension increase will be based. The following pension increases are effective for the various after retirement interest rate categories: Profit Category After Retirement Interest Rate 2014 Pension Increase Average increase over the last 5 years Average increase over the last 10 years I 3.5% 10.0% 6.4% 7.8% II 4.0% 9.4% 5.8% 7.2% III 4.5% 8.7% 5.2% 6.5% IV 5.0% 8.1% 4.6% 5.9% V 5.5% 7.5% 4.0% 5.3% VI 6.0% 6.9% 3.4% 4.7% VII 6.5% 6.3% 2.8% 4.1% VIII 7.0% 5.7% 2.2% 3.5% IX 7.5% 5.1% 1.6% 2.9% X 8.0% 2.5% 0.5% 2.1% Comparative inflation figures The year-on-year increase in inflation, i.e. the Consumer Price Index, at 30 September 2013 was 6.0%. The average year-on-year increase in CPI for the 5 and 10 years ending 30 September 2012 was 6.7% and 5.5% respectively. Performance comparison The graph below shows average pension increases declared on Pensions OptiPlus (Category I) versus those of Old Mutual s traditional competitors in the With-Profit Annuity market. Average pension increase over the last 10 years. 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 10-Year Average Pensions Competitor 1 Competitor 2 OptiPlus 12

16 Asset allocation The Pensions OptiPlus portfolio is invested in a diversified portfolio consisting of fixed-interest, equity, property and international assets. The diversified nature of the portfolio ensures that there are assets suitable for the purpose of backing the guaranteed portion of the pension, as well as assets that provide growth to facilitate the pension increases. The assets are managed by the Old Mutual Investment Group (SA). The asset allocation of the Pensions OptiPlus portfolio at the end of September 2013 was as follows: 1.1% 1.5% Asset Allocation at 30 September % 25.1% n Domestic Equities n Domestic Matched Interest-Bearing Assets 2.1% n Domestic Unmatched Interest-Bearing Assets n Domestic Direct Property 7.3% 1.2% n Domestic Alternative Assets n International Equities n International Alternative Assets n International Interest-Bearing Assets 44.7% Platinum Pension increases for the year 2014/2015 The Platinum Pension increases are effective on the pensioner s increase date (which varies between funds) falling between 1 April 2014 and 31 March These pension increases are based on the financial position of the portfolio as at 31 December The following pension increases are effective for the various Platinum Pension after-retirement interest rate categories: Profit Category After Retirement Interest Rate 2014/2015 Pension Increase Average increase over the last 5 years Average increase over the last 10 years A 3.5% 9.0% 5.6% 7.5% B 4.0% 8.5% 5.1% 7.0% C 4.5% 7.5% 4.8% 6.4% D 5.0% 7.0% 4.3% 5.9% E 5.5% 6.0% 4.0% 5.2% F 6.0% 5.5% 3.5% 4.7% 13

17 Comparative inflation figures The year-on-year increase in inflation, i.e. the Consumer Price Index, at 31 December 2013 was 5.4%. The average year-on-year increase in CPI for the 5 and 10 years ending 31 December 2013 was 5.4% and 5.8% respectively. Performance comparison The graph below shows average pension increases declared on Platinum Pensions (Category A) versus those of Old Mutual s traditional competitors in the With-Profit Annuity market. Average pension increase over the last 10 years on Platinum Pension (Category A) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 10-Year Average Platinum Competitor 1 Competitor 2 Pension Asset allocation Three asset pools underlie the Platinum Pension portfolio. Each pool is managed separately by the Old Mutual Investment Group (SA). All the asset pools are invested in a diversified portfolio consisting of fixed-interest, equity, property and international assets. The difference in the asset allocations reflects the difference in the guaranteed structure versus the growth structure of the different categories. The asset allocations as at 31 December 2013 are as follows: Platinum Pension - Categories A & B Asset Allocation at 31 December % 1.0% 18.4% 25.9% n Domestic Equities n Domestic Matched Interest-Bearing Assets n Domestic Unmatched Interest-Bearing Assets 7.5% 2.4% 1.5% n Domestic Alternative Assets n Domestic Direct Property n International Equities n International Interest-Bearing Assets n International Alternative Assets 41.9% 14

18 Platinum Pension - Categories C & D 1.3% 0.9% Asset Allocation at 31 December % 23.5% n Domestic Equities n Domestic Matched Interest-Bearing Assets 6.8% 2.2% 1.3% n Domestic Unmatched Interest-Bearing Assets n Domestic Alternative Assets n Domestic Direct Property n International Equities n International Interest-Bearing Assets n International Alternative Assets 47.2% Platinum Pension - Categories E & F Asset Allocation at 31 December % 0.8% 15.2% 21.4% n Domestic Equities n Domestic Matched Interest-Bearing Assets 6.2% n Domestic Unmatched Interest-Bearing Assets n Domestic Alternative Assets 2.0% 1.2% n Domestic Direct Property n International Equities n International Interest-Bearing Assets n International Alternative Assets 52.0% It is clear from the charts above that the level of guarantee for each category dictates a different proportion of interest-bearing assets versus equities in the various portfolios. So, a 42% holding of local interest-bearing assets would back the lower guarantees under categories A and B versus the 52% local interest-bearing assets that back the higher guarantees under categories E and F. 15

19 Platinum Pension 2003 increases for the year 2014/2015 The Platinum Pension 2003 increases are effective on the pensioner s increase date (which varies between funds) falling between 1 April 2014 and 31 March These pension increases are based on the financial position of the portfolio as at 31 December The following pension increases are effective for the various Platinum Pension 2003 after retirement interest rate categories: Profit Category After Retirement Interest Rate 2014/2015 Pension Increase Average increase over the last 5 years Average increase over the last 10 years 1.5% 1.5% 9.5% 5.8% N/A 2.5% 2.5% 8.5% 4.7% N/A 3.0% 3.0% 8.0% 4.2% N/A A 3.5% 7.0% 3.9% 5.4% B 4.0% 6.5% 3.4% 4.9% C 4.5% 5.5% 3.1% 4.3% D 5.0% 5.0% 2.6% 3.8% Comparative inflation figures The year-on-year increase in inflation, i.e. the Consumer Price Index, at 31 December 2013 was 5.4%. The average year-on-year increase in CPI for the 5 and 10 years ending 31 December 2013 was 5.4% and 5.8% respectively. Performance comparison The graph below shows average pension increases declared on Platinum Pensions 2003 (Category A) versus those of Old Mutual s traditional competitors in the With-Profit Annuity market. Average pension increase over 10 years since inception of Platinum Pension 2003 (Category A) 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 10-Year Average Platinum Competitor 1 Competitor 2 Pension

20 Asset allocation The assets in the Platinum Pension 2003 portfolios are managed in three asset pools by the Old Mutual Investment Group (SA). The structure of the diversified portfolios of the three asset pools takes into account the difference in the guaranteed structure versus the growth structure of the different categories. The asset allocations for the three Platinum Pension 2003 asset pools at 31 December 2013 are as follows: Platinum Pension Categories with after retirement interest rates (ARI s) of 3% and lower Asset Allocation at 31 December % 1.2% 22.0% 31.0% n Domestic Equities n Domestic Matched Interest-Bearing Assets n Domestic Unmatched Interest-Bearing Assets n Domestic Alternative Assets n Domestic Direct Property n International Equities 8.9% n International Interest-Bearing Assets n International Alternative Assets 2.9% 1.7% 30.6% Platinum Pension Categories A & B (ARI: 3.5% & 4%) Asset Allocation at 31 December % 1.0% 17.7% 25.0% n Domestic Equities n Domestic Matched Interest-Bearing Assets n Domestic Unmatched Interest- Bearing Assets 7.2% 2.3% 1.4% n Domestic Alternative Assets n Domestic Direct Property n International Equities n International Interest-Bearing Assets n International Alternative Assets 44.0% 17

21 Platinum Pension Categories C & D (ARI: 4.5% & 5%) Asset Allocation at 31 December % 1.2% 0.9% 21.9% n Domestic Equities n Domestic Matched Interest- Bearing Assets 6.3% 2.0% 1.2% n Domestic Unmatched Interest- Bearing Assets n Domestic Alternative Assets n Domestic Direct Property n International Equities n International Interest-Bearing Assets n International Alternative Assets 51.0% It is clear from the charts above that the level of guarantee for each category dictates a different proportion of interest-bearing assets versus equities in the various portfolios. So, a 44% holding of local interest-bearing assets would back the lower guarantees under categories A and B versus the 51% local interest-bearing assets that back the higher guarantees under categories C and D. 18

22 LOOKING AHEAD Future outlook for With-Profit Annuity investors Inflation has a significant influence on investment returns over the medium- to long term. The level of increases that can be expected over the long term depends on the South African and Global investment and economic environment. It needs to be remembered that the Reserve Bank s target rate for inflation is between 3% and 6% and it is reasonable to assume that they can keep it in this range over the long term. The expected nominal returns on investments over the long-term are lower than was the case in the 1980 s and 1990 s. As a result, it can be expected that pension and salary increases will follow a similar trend. To position the level of the most recent increases outlined in this report, it may be helpful to consider what level of increases can be expected over the long term, given the South African investment and economic environment. Annuity increases are related to smoothed investment performance. The assets backing a with-profit annuity are invested in a balanced portfolio consisting primarily of bonds, a significant holding of equities, and smaller amounts in international assets and South African property. This is an appropriate holding for a pensioner-only asset portfolio. For such a balanced pensioner portfolio, a long-term real return (meaning the return above inflation) of 3% p.a. (after charges) is fair given the current market conditions. If inflation remains at 5% p.a. over the long term, this means that total investment returns over the long term could be expected to average some 8% p.a. (i.e. 3% real return plus 5% inflation). The long term real return could be 1% higher for Pensions OptiPlus and Platinum Pension due to their matched interest bearing assets having been purchased at a time of higher interest rates. Pension funds only invest sufficient assets in Old Mutual s annuity portfolio to be able to purchase a pension that increases at the smoothed investment return that is based on the actual returns earned less the relevant after retirement interest rate. The after retirement interest rate is the rate of investment return required to continue paying the current level of pension. Only investment returns over and above the after retirement interest rate can be used to provide smoothed increases. If investment returns were to be 8% p.a. over the long term, and the agreed after retirement interest rate is, for example, 5% p.a., the pensioner can expect pension increases of 8% less 5%, which equals 3% p.a. over the long term. Categories with lower after retirement interest rates could expect higher pension increases, and vice-versa. Bear in mind that actual investment returns will fluctuate. However, on average one could expect the total average return generated on the portfolio to be around 8% per annum over the long term (assuming 5% p.a. inflation). The smoothing applied to the annuities allows Old Mutual to reduce the impact of market volatility and maintain increases in years when market returns are poor, although some fluctuations are still possible from year to year. We trust that the above explanation goes some way in assisting trustees and advisors in providing clients and members with a clearer understanding of their With-Profit Pension increases. 19

23 IMPORTANT NOTE The information contained in this report is based on sources believed to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness or correctness. The opinions expressed herein are not intended to serve as authoritative investment advice and should not be used in substitution for the exercise of own judgement. Old Mutual therefore accepts no liability whatsoever for any direct, indirect or consequential loss arising from the use of this document. Please note that there are risks associated with investments in financial products and past performances are not necessarily indicative of future performances. For the terms and conditions of any product, the relevant policy contract should be referred to. Every effort has been made to ensure that this document and the products referred to meet the statutory and regulatory requirements pertaining to manner and format in which information regarding financial products is presented. However, should you become aware of any breach of such statutory and regulatory requirements, please address the matter in writing to: The Compliance Officer Corporate Compliance Department Old Mutual Corporate PO Box 66 Cape Town 8000 South Africa Tel Fax

24 FREQUENTLY ASKED QUESTIONS How do With-Profit Annuities operate? Assume a person aged 60 approaches a life office for a quote for the price of an annuity of R1000 per year, payable for life. Let us assume the life office calculates that the purchaser will live for 20 years. Ignoring interest and expenses, the price quoted will be R (In other words: x 20 = ) In reality the R invested with the life office will earn investment returns. But who gets the credit for this investment return? This is where a with-profit annuity comes in, the purchaser gets the benefit of the investment returns through a reduction in price and future bonus increases! Let s assume the same 60-year-old approaches the life office for a R1 000 per year annuity, but this time he chooses to get credit in advance for 3.5% per year of future investment returns (the purchase interest rate ). Now the price quoted will only be R for a guaranteed R1 000 per year payable for life. Consequently, the asset manager has to achieve investment returns of at least 3.5% on the R invested with the life office up front. In other words, the life office guarantees at least 3.5% investment returns. Over the long-term, however, we can expect the asset manager to earn more than the 3.5% guaranteed at the outset. Any investment returns in excess of the 3.5% can now be used to increase the yearly payments. Let s say the asset manager earns 8% per year on the R At the end of year one, it could therefore afford to pay R1 045 for the rest of the purchasers life. (In other words, x (8% - 3.5%) = ) After again earning 8% the following year, the payments can increase to R1 092 per year. The final payment at the end of 20 years would be R But what effect does the choice of purchase interest rate have on the price of the annuity and future increases in payments? Say the same 60-year-old chooses a purchase interest rate (also called the after retirement interest rate, or a.r.i ) of 5%. The purchase price will now be R12 462, but the first increased payment will only be R1 030 and the final payment after 20 years will be some R In summary: n A with-profit annuity gives pensioners the credit for future investment returns via a reduced purchase price and future payment increases. n The higher purchase interest rate (or a.r.i. ), the lower the cost of the pension payments but with lower increases on the pension payments. n The lower the purchase interest rate (or a.r.i. ), the higher the cost of the pension payments but with higher increases on the pension payments. n Only net investment returns in excess of the purchase interest rate are available for pension payment increases. I am concerned about the level of increases declared. Please explain. Pensions OptiPlus increases for 2014 are based on investment returns for the year ending 30 September 2013, and Platinum Pension and Platinum Pension 2003 increases for 2014 are based on investment returns for the year ending 31 December The pension increases declared for 2014 are those considered most appropriate given the performance of investment markets during 2013, taking into account the level of Bonus Smoothing Reserves and the security of the relevant pension portfolios and their policyholders. With profit annuity increases are smoothed from year to year. This means that in years when market returns are high, increases tend 21

25 to be lower than those market returns, with the difference being put aside into the Bonus Smoothing Reserve (BSR). When market returns are poor, increases tend to be higher than market returns, with the difference being made up by a withdrawal from the BSR. Market returns during 2008 and 2009 were amongst the worst since the great depression of the 1930 s. Thus it was necessary to make use of the BSR s during these years to declare non-negative bonuses. Investment markets and returns have improved since 2008/2009, improving BSR positions and strengthening prospects for future increases. One key consideration in deciding the pension increase for 2014 is what is likely to happen at the next increase declaration in one year s time. If markets perform strongly, bonus smoothing reserves should increase and improve pension increase prospects. However, there is currently much uncertainty with respect to the outlook for local and global equity markets, and it is difficult to attach much confidence to an opinion regarding future investment market performance. It may be helpful to consider what level of increases can be expected over the long term, given the South African investment and economic environment. It needs to be remembered that the Reserve Bank s target rate for inflation is between 3% and 6% and it is reasonable to assume that they can keep it in this range over the long term. Annuity increases are related to smoothed investment performance. The assets backing a with-profit annuity are invested in a balanced portfolio consisting primarily of bonds, a significant holding of equities, and smaller amounts in international assets and South African property. This is an appropriate holding for a pensioner-only asset portfolio. For such a balanced pensioner portfolio, a long-term real return (meaning the return above inflation) of 3% p.a. (after charges) is fair given the current market conditions. If inflation remains at 5% p.a. over the long-term, this means that total investment returns over the long term could be expected to average some 8% p.a. (i.e. 3% real return plus 5% inflation). Pension funds only invest sufficient assets in Old Mutual s annuity portfolio to be able to purchase a pension that increases at the smoothed investment return less an after retirement interest rate. The after retirement interest rate is the rate of smoothed investment return required to continue paying the current level of pension. Only smoothed investment returns over and above the after retirement interest rate can be used to provide increases. If investment returns remain at an average of 8% p.a. over the long term, and the agreed after retirement interest rate is, for example, 5% p.a., the pensioner can expect pension increases of 8% less 5%, which equals 3% p.a. on average over the long term. Categories with lower after retirement interest rates could expect higher pension increases, and vice-versa. Bear in mind that actual investment returns will fluctuate. However, on average one could expect the total average return generated on the portfolio to be around 8% per annum over the long term. The smoothing applied to the annuities allows Old Mutual to maintain increases at relatively stable levels, although some fluctuations are still possible from year to year. In summary, when comparing the actual pension increase to investment returns achievable in the market, it is important to keep the following in mind: n Only investment returns in excess of your after retirement interest rate can be used for increases; n Old Mutual applies smoothing to investment returns; n Once increases are declared, they are paid for life and Old Mutual thus needs to consider future stability and security of the Platinum Pensions portfolio when determining increase rates. 22

26 Can Old Mutual review my increase and make an adjustment? The pension increases declared were determined following a rigorous process whereby different pension increase scenarios were considered. The key with pension increases is to declare as high an increase as possible, without jeopardizing the future stability and security of the relevant Old Mutual With-Profit Annuity Portfolio (and hence policyholders), and also taking the smoothing policy into account. The increases are also not declared by an individual, but are reviewed by a number of senior actuaries of Old Mutual, and finally approved by the Old Mutual Life Assurance Company South Africa Board. The pension increases declared are therefore what were considered the most appropriate. An adjustment to your pension increase is therefore not possible. Can I as an individual transfer my pension to another product or product provider? The transfer of your pension to another product or product provider is not allowed by the rules of the Old Mutual With-Profit Annuity product. Because your Old Mutual With-Profit Annuity pays a pension for life, Old Mutual needs to use mortality assumptions to determine how much pension can be paid at the inception of the policy. If transfers were allowed after inception of the policy, it would be possible for individuals to use knowledge of their own health to the detriment of other policyholders. Can it ever happen that my level of pension is reduced in the future? The level of your pension can never be reduced i.e. negative pension increases can never be declared. Old Mutual guarantees that pension increases will always be positive or zero. If your pension was purchased on a Joint & Survivorship basis, a reduction in benefit level is possible at the time of death of the main member. A Joint & Survivorship pension pays a pension to the main member, and, if at the time of death of the main member the spouse is still alive, the pension would continue to be paid to the spouse until his/her death. Whether or not the pension should reduce on the death of the main member, will be specified in the contract. What guarantees are provided in terms of future increase levels? Old Mutual provides no guarantee in terms of the level of future increases, neither in absolute levels nor in relation to inflation. On many of the categories it has been the case that pension increases have beaten inflation over the medium- to long term. This is, however, only historical pension increases and no guarantee is provided that future increases will beat inflation. What is the ratio of profit sharing between Old Mutual shareholders and policyholders? The With-Profit arrangement between Old Mutual shareholders and policyholders is not a fixed ratio profit sharing arrangement. All net returns will form part of the smoothing account, and will therefore be accounted for in the pension increases declared. This smoothing account benefits annuity policyholders only. It cannot be accessed by the shareholders of Old Mutual. A fixed percentage annual investment and capital fee is charged against the portfolio, and it is these amounts (net of expenses incurred) that generate profits for shareholders. Is there a Board of Trustees? Your Old Mutual With-Profit Annuity is a policy of insurance and not a pension fund. It is a product that pension funds can purchase, or that pension funds can purchase on behalf of their pensioners. The product provider (Old Mutual) therefore makes all decisions relating to the product and how it is managed. There is no forum, like a Board of Trustees in the case of a pension fund, where pensioners are represented and through which they can directly influence the decisions made with respect to the management of the product. 23