WILLIS BREAKFAST SEMINAR

Transcription

1 WILLIS BREAKFAST SEMINAR Defined Contribution Investment How To Achieve Better Outcomes For Members Thursday, 13 th March 2014

2 WELCOME AGENDA Introduction 8.00am Kirstie Flynn Defined Contribution Challenges 8.10am 8.25am John Feely Optima Funds 8.25am 8.40am Ollie Fahey Panel Discussion 8.40am 8.55am * Questions & Answers 8.55am 9.10am Close 9.10am 9.15am Tea & Coffee 9.15am Housekeeping * The panel discussion will include the above speakers and they will also be joined by Phil Barker (Standard Life Investments) and Martin Dietz (Legal & General Investment Management). Willis DC Investment Seminar 1

3 SOLVING P = DC 2

4 ASK ALBERT! Einstein was born 135 years ago, on March 14 th His pension from Princeton was $6,000-a-year He was offered a pension of $7,500-a-year but refused it as too generous Willis DC Investment Seminar 3

5 A MULTITUDE OF PARAMETERS Everything should be made as simple as possible, but not simpler Member contributions Retirement age Investment strategy Member Investment returns Interest rates Inflation Market Options at retirement Mortality / morbidity / family Employer / Trustee Employer contributions Tax Government Investment options Salary Pay-out options Mandatory requirements Salary increases Charges Operational Willis DC Investment Seminar 4

6 WHAT FORMULA WOULD ALBERT USE? Expected Pension (Today) in real terms P = Sum for all Future Years to Retirement (T) of ([(MC rate % + EC rate %) * Salary (Today) * (1+Salary Increase %) ^ (T Today) Fixed Charge (T)] * (1 + Average Investment Return to Ret Age at T % Pension Levy % Annual Management Charge %) ^ (Ret Age T) Cash at Retirement) * Annuity Rate (Ret Age) % * (1-Tax) / (1 + CPI)^(Ret Age Today) So much for P = DC 2 Which basically means Pensions are more complicated than the Theory of Relativity! Willis DC Investment Seminar 5

7 KEY CHALLENGES We cannot solve our problems with the same thinking we used when we created them Changing attitudes I don t understand pensions ( so I opt out) Pensions are for older people I have other things to spend my money on The State Pension will be there for me when I retire I have a Company pension, so I m ok Pensions are expensive, other savings are better I can t afford a pension ( but expect to be able to afford to retire) I have some savings I can live off the interest Pensions are a necessary evil There s no point in saving for a pension just so the government can take it back through the pension levy Too much of my pension is eaten up in charges Willis DC Investment Seminar 6

8 RESPONDING TO THE COMMUNICATION CHALLENGE If you can t explain it simply, you don t understand it well enough Introducing the 2 to 1 rule Balance between time at work and time in retirement Balance between salary and pension 500, , , , ,000 - (100,000) Paying In Fund Taking Out Income 50,000 40,000 30,000 20,000 10,000 - Salary Pension Willis DC Investment Seminar 7

9 FOCUS ON WHAT CAN BE CONTROLLED What is right is not always popular and what is popular is not always right Member contributions Retirement age Investment strategy Member Investment returns Interest rates Inflation Market Options at retirement Mortality / morbidity / family Employer / Trustee Employer contributions Tax Government Investment options Salary Pay-out options Mandatory requirements Salary increases Charges Operational Willis DC Investment Seminar 8

10 THE VALUE OF COMPOUND INTEREST Einstein, when asked what he considered to be the most powerful force in the Universe answered Compound Interest 60% 50% 40% 30% 20% 10% 0% -10% -20% Impact of Key Decisions % of Final Salary 47% 44% 40% 38% 34% 31% -3% -7% -9% -13% -16% Pension based on Total Contributions 15% Salary, Retirement Age 68 Pension based on Total Contributions 14% Salary Pension after Tax Free Cash of 1.5 x Salary Pension based on Retirement Age 65 Pension based on 1% lower Investment Return Pension based on starting contributions 10 years later Willis DC Investment Seminar 9

11 BEWARE THE DE-FAULTY FUND Insanity: doing the same thing over and over again and expecting different results. Willis DC Investment Seminar 10

12 WHERE NOW FOR TRADITIONAL ASSETS? Learn from yesterday, live for today, hope for tomorrow. The important thing is not to stop questioning Willis DC Investment Seminar 11

13 SOLVENCY IN DC? Anyone who doesn t take truth seriously in small matters cannot be trusted in large ones either. In a defined benefit scheme, solvency (the ability of the scheme to meet the expectations of its members) is determined at a given point in time. In a defined contribution scheme, solvency is determined one member at a time. Willis DC Investment Seminar 12

14

15 AGENDA Optima Funds Outline Why is a new solution needed? How The Mechanics Lifestyle Asset Managers Summary Willis DC Investment Seminar 14

16 FUND OUTLINE Defensive Assets OPTIMA I VOLATILITY TARGET 2-4% OPTIMA II VOLATILITY TARGET 4-8% OPTIMA III VOLATILITY TARGET 8-12% OPTIMA IV VOLATILITY TARGET 10-16% Growth Assets 0% 20% 40% 60% 80% 100% RETURN TARGET 3.5% per annum 4.5% per annum over 2 years 6.5% per annum over 3 years 7.5% per annum over 5 years Lower Risk I OPTIMA II OPTIMA STANDARD LIFE INVESTMENTS III OPTIMA IV OPTIMA LEGAL & GENERAL INVESTMENT MANAGEMENT The split between defensive and growth assets is illustrative and will vary over time as the investment managers react to economic and investment market changes. Note however that the investment managers will constantly seek to target a risk exposure within the defined ranges. These return targets are not guaranteed. Each fund s return range reacts the return that the investment manager is targeting to achieve while staying within the fund s volatility target range. Higher Risk Willis DC Investment Seminar 15

17 WHY IS A NEW SOLUTION NEEDED? Current DC Investment Options Often inappropriate with insufficient focus on the right strategies Lifestyle models simplistic Fund management charges are too high What happens at retirement? - Goodbye and good luck Risk outcomes achieved by commonly used investment vehicles Plenty of peaks and troughs Risk outcomes different to those expected 10 year returns negative in recent years mainly due to unmanaged equity Willis DC Investment Seminar 16

18 INVESTMENT RISK Often referred to as volatility, it describes the frequency and severity by which by the value of an investment fluctuates or the extent of the ups and downs Willis DC Investment Seminar 17

19 HOW THE MECHANICS Assessment of correlations to determine relationship between asset classes Analysis of forward looking economic scenarios and risk factors Development and application of long term strategic asset allocation Application of medium term tactical (1 to 3 years) and dynamic positioning (3 to 12 months) On-going assessment and management of potential tail risks Willis DC Investment Seminar 18

20 TRULY DIVERSIFIED Absolute Return Inflation Linked Bonds High Yield Bonds Commodities Small Cap Equities Infrastructure OPTIMA Diversified Growth Funds FUNDS Currency Global Equities Euro Government Bonds Global Property Cash This represents some of the asset classes available. Willis DC Investment Seminar 19

21 TAIL RISK Tail Risk = an unusually high loss over a short period of time e.g. Global Financial Crisis, Tech Bubble Theoretically these market shocks should occur rarely - reality has shown that they occur frequently Daily change in Dow Jones Average: 1916 to 2012 Daily Change Expected Number of Occurrences Actual Occurrences Actual v Expected 3.4% 64 days 1,104 days 17 x 4.5% 7 days 414 days 59 x 7.0% 1 in 300,000 years 64 days Significant SOURCE BENOIT MANDELBROT / PIMCO Tail risk management is core to the Optima Funds with active processes in place to identify and protect against these events STEP 1 Forward Looking Monitoring STEP 2 Identifying Potential Risks STEP 3 Appropriate Diversification STEP 4 Insure When Appropriate Willis DC Investment Seminar 20

22 CURRENT ASSET ALLOCATION OPTIMA I OPTIMA II Developed Market Equities OPTIMA III OPTIMA IV Emerging Market Equities Global Governement Bonds Global Inflation Linked Bonds High Yield Bonds Emerging Market Debt Corporate Bonds Infrastructure Global Property Commodities Money Markets Absolute Return Bonds GARS Willis DC Investment Seminar 21

23 OPTIMA LIFESTYLE Typical lifestyle model aimed only at wealth accumulation and chronological switching Insufficient, or no, attention to obtaining a specific income in retirement Optima Lifestyle brings a new approach and addresses key weaknesses Developed in conjunction with academics in UCD, objective is to deliver adequate retirement income 1. Work with trustees to identify appropriate income replacement targets and risk outcomes 2. Consider likely retirement options i.e. annuity, ARF, lump sum 3. Develop unique model based on 1 & 2 4. Implement dynamic model reacts to actual experience Deliver retirement outcomes aligned with stated objectives and minimise the risk of not achieving an acceptable income in retirement Willis DC Investment Seminar 22

24 LIFESTYLE EXAMPLE 1 Willis DC Investment Seminar 23

25 LIFESTYLE EXAMPLE 2 Willis DC Investment Seminar 24

26 OPTIMA TEAM WILLIS INVESTMENT CONSULTING TEAM WILLIS ADMINISTRATION STANDARD LIFE INVESTMENTS LEGAL & GENERAL INVESTMENT MANAGEMENT Willis DC Investment Seminar 25

27 ASSET MANAGERS I OPTIMA II OPTIMA III OPTIMA IV OPTIMA Leading asset manager with an expanding global reach as part of the Standard Life Group Emphasis on rigorous research and a strong collaborative ethos One of Europe s largest institutional asset managers Expertise ranges from index tracking and active strategies to liability-based risk management 423 investment professionals and over 692 support staff Collaborative, team-based culture, which prizes technical expertise and a detailed understanding of risk Strong market presence in more innovative investment solutions such as multi-asset and absolute return funds Large multi-asset team that sits within the Asset Allocation Group Impressive credentials in equities, fixed income, commercial real estate and private equity Optima Team - Multi-Asset team, Global Risk team and Global Investment Committee Extensive experience in designing multi-asset portfolios Optima Team Global Solutions, Strategic Investment & Risk Management Group Willis DC Investment Seminar 26

28 SUMMARY Tangible retirement objective Focus on risk Real diversification Actively managed Enhanced Lifestyle methodology Monitored by Willis Managed by global experts Competitively priced Optima I / II 0.49%, Optima III / IV 0.44% Willis DC Investment Seminar 27

29 An innovative range of investment funds that have been developed by Willis for the Defined Contribution pension market in Ireland. Managed by two of Europe's largest investment managers, the Funds target four risk bands, designed for different types of retirement saver from the cautious to the more aggressive. The Funds have access to the full range of asset classes and will be actively managed to target those that are appropriate for particular phases of an economic cycle. Optima Lifestyle is our recommended default option. It has been developed in conjunction with academics and targets specific outcomes based on pre-retirement income. By leveraging our size in the Irish pensions market, we have managed to keep the fund management costs low by comparison with other actively managed funds. Willis DC Investment Seminar 28

30 PANEL DISCUSSION

31 QUESTIONS & ANSWERS

32 CONTACT Kirstie Flynn Pensions Lawyer, Employee Benefits T: E: John Feely Director, Employee Benefits T: E: Ollie Fahey Head of Investment, Employee Benefits T: E: Willis DC Investment Seminar 31