Defined Contribution Investment –
How To Achieve Better Outcomes
For Members
WILLIS BREAKFAST
SEMINAR
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
ASK ALBERT!
Einstein was born 135 years ago, on March 14th
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
A MULTITUDE OF PARAMETERS
Member Market Member contributions Retirement age Investment strategy Options at retirement Mortality / morbidity / family
Investment returns
Interest rates
Inflation
Employer / Trustee Government
Employer contributions Investment options Salary Salary increases Charges Operational Tax Pay-out options Mandatory requirements
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 = DC2
Which basically means Pensions are more complicated than the Theory of Relativity!
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
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
Paying In Taking Out
Salary Pension €(100,000) €- €100,000 €200,000 €300,000 €400,000 €500,000 28 33 38 43 48 53 58 63 68 73 78 83 88 93
Fund
€- €10,000 €20,000 €30,000 €40,000 €50,000 28 33 38 43 48 53 58 63 68 73 78 83 88 93Income
FOCUS ON WHAT CAN BE CONTROLLED
Member Market Member contributions Retirement age Investment strategy Options at retirement Mortality / morbidity / family
Investment returns
Interest rates
Inflation
Employer / Trustee Government
Employer contributions Investment options Salary Salary increases Charges Operational Tax Pay-out options Mandatory requirements
THE VALUE OF COMPOUND INTEREST
Einstein, when asked what he considered to be the most powerful force in the Universe answered “Compound Interest” 47% 44% 40% 38% 34% 31% -3% -7% -9% -13% -16% -20% -10% 0% 10% 20% 30% 40% 50% 60% 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
Impact of Key Decisions
BEWARE THE ‘DE-FAULTY’ FUND
“Insanity: doing the same thing over and over again and expecting different results.”
WHERE NOW FOR TRADITIONAL ASSETS?
“Learn from yesterday, live for today, hope for tomorrow. The
important thing is not to stop questioning”
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.
AGENDA
Optima Funds Outline
Why is a new solution needed?
How – The Mechanics Lifestyle
Asset Managers
FUND OUTLINE
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
STANDARD LIFE INVESTMENTS
LEGAL & GENERAL INVESTMENT MANAGEMENT
0% 20% 40% 60% 80% 100%
Defensive Assets Growth 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% 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
I
OPTIMAII
OPTIMAIII
OPTIMA OPTIMAIV
RETURN TARGET Lower Risk Higher RiskWHY 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
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”
HOW – THE MECHANICS
On-going assessment and management of potential tail risks
Application of medium term tactical (1 to 3 years) and dynamic positioning (3 to 12 months) Development and application of long term strategic asset allocation
Analysis of forward looking economic scenarios and risk factors
TRULY DIVERSIFIED
OPTIMA
FUNDS
Commodities Euro Government Bonds Global Property Inflation Linked Bonds Diversified Growth Funds Absolute Return Global Equities High Yield Bonds Cash Small Cap Equities Currency InfrastructureTAIL 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
Tail risk management is core to the Optima Funds with active processes in place to identify and protect against these events
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
STEP 2 Identifying Potential Risks STEP 1 Forward Looking Monitoring STEP 3 Appropriate Diversification STEP 4 Insure When Appropriate
CURRENT ASSET ALLOCATION
OPTIMA I OPTIMA II
OPTIMA III OPTIMA IV
Developed Market Equities
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
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
Deliver retirement outcomes aligned with stated objectives and minimise the risk of not achieving an acceptable income in retirement
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
OPTIMA TEAM
WILLIS INVESTMENT CONSULTING TEAM
STANDARD LIFE INVESTMENTS
LEGAL & GENERAL INVESTMENT MANAGEMENT
WILLIS
ASSET MANAGERS
Leading asset manager with an expanding global reach as part of the Standard Life Group
One of Europe’s largest institutional asset managers
Emphasis on rigorous research and a strong collaborative ethos 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
Extensive experience in designing multi-asset portfolios
Optima Team - Multi-Asset team, Global Risk team and Global Investment Committee
Optima Team – Global Solutions, Strategic Investment & Risk Management Group
I
OPTIMA
II
OPTIMA OPTIMA
III
IV
SUMMARY
Tangible retirement objective
Focus on risk
Real diversification
Actively managed
Enhanced Lifestyle methodology
Monitored by Willis
Managed by global experts
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.
