Panel 3: Use of Default Vehicles: Different Countries, Different Takes

(1)

Panel 3: Use of Default Vehicles:

Different Countries, Different Takes

Stephen P. Utkus,

Moderator

Vanguard Center for Retirement Research

Jaime de la Barra

Compass Group

Nick Callil

Towers Watson

Richard Gröttheim

AP7

(2)

Chilean Pension System

(3)

Chilean Pension Fund System

>

Inception: 1981

>

Three Pillars: Mininum Government Guarantee, Mandatory DC, Voluntary (Tax

incentives)Defined Contribution Individual Accounts

>

Managed by private sector single purpose Pension Fund Management

Companies (AFPs) that act as fiduciary third party manager

>

AFPs manage mandatory and voluntary accounts

>

Individual “worker” choice:

Between AFP and type of “Asset allocation fund”

Freedom to change manager and fund

Flexible pension redemption schemes

>

Universal rules

>

Asset allocation funds serve as “savings” vehicles and building blocks for glide

paths.

>

Funds differ among each other based on the range of equity and fixed

income allocation allowed by law. (asset class based guidelines)

(4)

Chilean Pension Fund System

4

Number of AFPs

6 Asset Allocation Funds Offered

5 Total Industry AUM

USD 162bn

59% of GDP

Worker Contribution

10% of gross salary

Employer Contribution

0 AFP Fees

1.45% of salary

1.26% disability Insurance

Number of Accounts

9.5 million

Number of Contributing Accounts

4.9 million

(5)

Multifund Asset Allocation

5

>

Maximum total foreign investment for funds A+B+C+D+E is 80% of total assets.

40 A

D

C

B

Fund

E

Minimum

25

15

5

0 Maximum

80

60

40

20

5

(6)

Pension Fund current Allocation

6 0%

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

A B C D E Total

Domestic Equity

Foreign Equity

Domestic Fixed Income

Foreign Fixed Income

Alternatives

26.0 bn 26.8 bn 61.8 bn 25.3 bn 22.2 bn 162.2 bn

(7)

Default Path & Fund Options

Men

_{35 or youger}

_{Between 36 and 55}

_{Older than 56}

_Retirees

Women

_{35 or youger}

_{Between 36 and 50}

_{Older than 51}

_Retirees

D

C

B

E

A

Default

(8)

Challenges & Current Issues

8

>

Focus on Replacement Rate or Risk Profile?

>

Default Path

>

Choice v/s “implied guarantees”

>

“Once you choose you are on your own”

>

Multi asset funds as building blocks

>

Investment guidelines based on asset class and issuer limits

>

Role of Alternative Investments

>

Peer group competition

>

Pricing not a relevant issue for informed / high income participants

>

Fees on contributions v/s AUM

>

Service

>

Performance

(9)

Panel 3: Use of Default Vehicles:

Different Countries, Different Takes

Stephen P. Utkus,

Moderator

Vanguard Center for Retirement Research

Jaime de la Barra

Compass Group

Nick Callil

Towers Watson

Richard Gröttheim

AP7

(10)

54% 106% 76% 84% 0% 20% 40% 60% 80% 100% 120% 200 400 600 800 1,000 1,200 1,400 1,600 1,800

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

A

UD

30-Jun

Australian System – a Snapshot

• Mandatory employer contributions commenced in 1992

»

now 9.25% of earnings, increasing to 12% by 2023

• No mandated income stream in retirement

»

investment defaults must cater for both “to” and “through” investors

Assets (% of

GDP) (RHS)

DC Assets (% of total assets) (RHS) Superannuation

(11)

Member Choice Occurs at Two Levels

• An individual employee may choose:

»

the fund to which employer contributes (“fund choice”)

»

investment option(s) within their chosen fund (“investment

choice”)

• Default funds are typically selected by employer, or (in

unionised sectors) through industrial agreements

• Default investment option (and other default settings) is

(12)

MySuper – Commenced 1 July 2013

• Standardised product offering for funds accepting

default fund members

• Investment default must be diversified or lifecycle

• No fee cap, but

»

uniform fees for all members

»

limits on types of fees

• Standardised member reporting (returns, fees, risk)

(13)

Default Design – Static vs Lifecycle

Not-for-profit funds only

2009

2013

• Some growth in age-based lifecycle

• Some “lifecycle” funds are static in accumulation phase, derisk in retirement

phase only

Lifecycle, 5%

Lifecycle

-derisks in

retirement

zone only,

18%

Static, 77%

Lifecycle,

14%

Lifecycle

-derisks in

retirement

zone only,

25%

Static, 61%

(14)

2%

6%

16%

61%

16%

50% and under

50% - 60%

60% - 70%

70% - 80%

80% - 100%

Default Option Asset Allocation

Not-for profit funds with static defaults only, 2013

Distribution of strategic growth weightings

(15)

37% 35% 7% 6% 5% 2% 8% Australian equities International equities Unlisted infrastructure Australian unlisted property

Private equity Hedge funds Other

2%

6%

16%

61%

16%

50% and under

50% - 60%

60% - 70%

70% - 80%

80% - 100%

Default Option Asset Allocation

Not-for profit funds with static defaults only, 2013

Distribution of strategic growth weightings

among funds

(16)

Lifecycle glidepath design

Australian not-for-profit funds with lifecycle design, December 2013

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

30 35 40 45 50 55 60 65 70 75 80 85

A

ll

o

cat

io

n

to

g

ro

w

th

ass

ets

Age

AustralianSuper Auscoal Super First State Super HESTA Super Fund SunSuper Telstra Super QSuper (balance <$300K) QSuper (Balance >=$300K) Local Govt Super (NSW) LG Super

• Wide range of derisking start and end ages

• Some funds do not have any declared default beyond retirement age

(17)

Topical Issues – Default funds

• Focus on fees and pressure on inclusion of expensive

asset classes (e.g. alternatives)

• Provision of annual estimate of retirement income

• Better illustration of investment/retirement outcome

risk

• How to mitigate sequencing risk in retirement risk zone

(18)

Panel 3: Use of Default Vehicles:

Different Countries, Different Takes

Stephen P. Utkus,

Moderator

Vanguard Center for Retirement Research

Jaime de la Barra

Compass Group

Nick Callil

Towers Watson

Richard Gröttheim

AP7

(19)

2014 Global Retirement Savings

Conference, Geneva

18 June 2014

Use of Default Vehicles - The Swedish case of AP7

Richard Gröttheim

CEO AP7

(20)

The Seventh Swedish National Pension Fund

• Acts within the defined contribution system which is a part of

the government pension plan

• Manage premium pension means, mainly for those that do

not appoint a private fund manager “The default fund”

• AP7 has been invested since September 2000

• A new setup, Såfa since May 2010

• Has the same investment rules as a private mutual fund

Some restictions on what we can invest in

• Equities

• Bonds

• A part in private equity (max 10% commitments)

• ...and there is a equity risk premium i.e. equities will over longer

periods give better returns than bonds

(21)

The mission

-

Those who do not want or can’t choose should

have just as good a pension as others

Good pension is our contribution to creating security …

• We shall minimize the likelihood that someone who

retires talks to their neighbour and discovers that

he/she has a lower state pension than the neighbour

• To get a good pension you need to take financial risk

• We need to glance at the rest of the system (just as

(22)

(23)

In the long run we are all dead...

IJa oJI- DJ Industr ia l Avera ge , Quart er ly l!!lliJ

18000.[ 16000.[ 14000.[

DJIA

Quartly

Log

Do stocks go up

..Iong term..

?

Yes,

if

you hold

the position

over 30 years

12000.[

10000.[

8000.[

----

-L3

6000.[

11 years

and counting

2000.[

( RANGE

16 yrs

1Byrs

5yrs 3yrs

J

5yrs

RANGE 13yrs

13 yrs

1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

(24)

How did we build the portfolio in 2000?

(AP7 up to. 21st May 2010)

Premium savings fund

Lower risk than the other funds in the system

Target to have a return as good as the average of the other funds

New guidelines in 2009

The default fund

• Holistic perspective on the government pension

• Choice

o Take in consideration the risk in the income pension

o Higher total risk level in the premium pension creates

possibility for higher government pension

• Lifecycle perspektive

o One product for life

(25)

Payments to Government pension

(26)

Conservative

Offensive

Såfa

Balanced

Equity Fund

Bond Fund

Cohort management

Government

Fund

portfolios

Building block

Funds

(27)

The thinking behind the AP7 Såfa

Risk

E (R)

Global Equity

portfolio

Risk free

interest rate

Swedish

Equities

(28)

Cohort Management

Risk

Age

55

75 3-4 % yearly decrease in the equity Fund

Global Equity Fund

1,5

(29)

Return since inception

-60.00% -40.00% -20.00% 0.00% 20.00% 40.00% 60.00% 80.00% 11 /2/20 00 5/2 /200 1 11 /2/20 01 5/2 /200 2 11 /2/20 02 5/2 /200 3 11 /2/20 03 5/2 /200 4 11 /2/20 04 5/2 /200 5 11 /2/20 05 5/2 /200 6 11 /2/20 06 5/2 /200 7 11 /2/20 07 5/2 /200 8 11 /2/20 08 5/2 /200 9 11 /2/20 09 5/2 /201 0 11 /2/20 10 5/2 /201 1 11 /2/20 11 5/2 /201 2 11 /2/20 12 5/2 /201 3 11 /2/20 13 5/2 /201 4

(30)

Panel 3: Use of Default Vehicles:

Different Countries, Different Takes

Stephen P. Utkus,

Moderator

Vanguard Center for Retirement Research

Jaime de la Barra

Compass Group

Nick Callil

Towers Watson

Richard Gröttheim

AP7

(31)

For institutional investor use only. Not for public distribution.

Developments in US

default funds

Steve Utkus

Vanguard Center for Retirement Research

June 2014

(32)

US retirement income system

Social Security

DC / 401(k) plans

Individual Retirement

Accounts (IRAs)

• First pillar PAYGO

• Contributions: 12.4% (split ER/EE)

• Progressive benefits

• Payouts: inflation-indexed annuity

• Voluntary, funded occupational system

• Median 9% contributions (6% + 3%) with great variation

• Payouts: ad hoc or periodic withdrawals or lump sum

• Individually managed accounts offered by all financial institutions

• Recipients of “rollovers” from DC / 401(k) system

• Payouts: ad hoc or periodic withdrawals or lump sum

(33)

History of 401(k) default fund policy

• Since founding in 1980s, 401(k) plans characterized by high degree of “investor

autonomy” (Benartzi and Thaler, 2002).

• Past decade has seen shift toward reliance on defaults, such as default

contributions through automatic enrollment (now, >60% of new system entrants).

• In 2006/2007, government authorized new default investments (QDIAs), including

target-date funds, traditional balanced strategies, and managed accounts

Employer choice of defaults

• Over 85% of DC plans offer target-date funds, and of those selecting a default, over

95% are target-date funds (Vanguard, 2014).

• Target-date assets are expected to reach over half of all DC assets in the coming

decade (McKinsey, Cerrulli Associates).

(34)

The power of defaults (and voluntary choice)

$0B $100B $200B $300B $400B $500B $600B $700B $800B $900B

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

A ss ets u n d er man agemen t in $B

Vanguard

Fidelity Investments

T. Rowe Price

BlackRock

JPMorgan

Other

Annual target date assets under

management

2003 AUM: $25B

Vanguard enters the market

1997 AUM: $2B

Fidelity enters the market

2013

AUM: $850B

Annual industry cash flow exceeds $100B

2006

AUM: $126B

Pension Protection Act passed

1993 AUM: $0

BlackRock and Wells Fargo launch first TDFs

(35)

Target-date glide paths of leading providers

Source: Morningstar, Vanguard analysis. As of December 31, 2013.

0% 20% 40% 60% 80% 100%

2050 2045 2040 2035 2030 2025 2020 2015 2010 Income

Industry Industry Avg Vanguard Fidelity

T. Rowe Price BlackRock JPM

Equity

allocat

(36)

• Should the glidepath be “to versus through” – are assets used at retirement or

throughout retirement?

• What asset diversification strategies are appropriate at each stage of the lifecycle?

–

Liquid market asset classes and allocations to them?

–

Any role for alternatives?

• Should the default be invested with a passive or active approach?

• Should TDF strategies be integrated with a guaranteed income feature? Or will

nonguaranteed “drawdown” services suffice?

(37)

Important information

For more information about Vanguard funds, call +1 610-669-3348 (collect calls accepted), to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

This information is intended for investors outside the United States. The information contained herein does not constitute an offer or solicitation and may not be treated as an offer or solicitation in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments (stocks) to more conservative ones (bonds and short-term reserves) based on its target date. An investment in a target-date fund is not guaranteed at any time, including on or after the target date.