Gbv issue 2016_008 - oliveira

global-benefits-vision.com May 2016
Knowledge & Wisdom for Global Employee Benefits Professionals
18 Lifecycle DC Pensions in Brazil
Andrego Barbosa De Oliveira
26 Pension Funds Investing in Hedge
Funds – the New Normal?
Eric Muller-Borle
40 Picking a Winner
Managing Expatriate Selection Risk
Paul Pittman, Natalie Richter
50 Time for a Revolution in Executive Pay?
Dr. Sandy Pepper

May 2016 - Global Benefits Vision 3
global-benefits-vision.com
09 Index of Articles
3
Table of Contents
56 News
notices
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hoMMAge à JACques rouxel
Picking a Winner – Managing Expatriate Selection Risk
Paul Pittman, Natalie Richter
40
Pension Funds Investing in Hedge Funds – the New Normal?
Eric Muller-Borle
26
Lifecycle DC Pensions in Brazil
18
Time for a Revolution in Executive Pay?
Dr. Sandy Pepper
50
Yellow Fingers and Diversity
Why Gender Related Quotas Often Fail
to Deliver Desired Diversity Outcomes
Norman Dreger
10
08 Upcoming Conferences and Events

6 Global Benefits Vision - May 2016
Profiles of Contributors
Andrego Oliveira is a certified and experienced professional within
the Brazilian financial market, assisting high net worth individuals and
multinational corporate clients, working primarily with financial planning
and investment advisory.
Since 2012 at Icatu Seguros, Andrego has carried out duties related to employee benefits and
multinational pooling risk within the Swiss Life Network and with Insurope, as well as the management
of corporate clients’ pension schemes and life insurance policies.
Previous work experience, mostly at banks, embraced the trade and consultancy of financial services
such as loans, investment funds, treasury structured products, and insurances, in addition to counseling
and guidance to help investors achieve their financial goals.
page 18 : LifecycLe Dc Pensions in BraziL
→
aNDrego oliVeira
andrego@icatuseguros.com.br
icatu seguros sa
Manager - Multinational Corporate Clients

©KrM_Design-©luzitAniJA-©viniCiustupinAMbA|FotoliA—AgnèsM.
in Brazil
Lifecycle DC Pensions

DB VS DC
Over the past few decades there has been a
significant shift from the traditional defined-
benefit (DB) plan toward defined-contribution
(Dc) plans. In defined benefit (DB) pension
plans sponsored by employers, employees
must rely on the employer’s investment
decisions to guarantee their retirement benefit
in the future. The risks posed to employers,
associated primarily with the estimation of
the employee’s pension benefit obligation, and
the complexity of investment and financial
decisions have required employers to remove
such responsibilities from their shoulders and
place them upon employees.
In defined-contribution (Dc) plans, partic-
ipants and IRA holders decide how much to
contribute to their plan, and how to invest
their contributions and the contributions that
their employer might make on their behalf.
In Brazil, two main types of corporate
pension vehicles are available for long-
term savings: closed pension plans and open
pension plans. Closed pension plans can have
in-house management or be multi-sponsored.
Since 2008, the regulatory agency PREVIC has
increasingly observed a tendency to switch
from in-house to multi-sponsored plans,
and 90% of the new plans created in closed
entities are managed on a multi-sponsored
basis. The reasons given are: possible lower
costs, outsourcing of liabilities and structures,
modern governance structure, state-of-the-
art services and technologies, focus on core
business by the multi-sponsored entity, and
flexibility of choice of asset management and
investment profile.
In 2010 PREVIC issued a market guide of
best practices for pension funds, focusing on
governance structure. Open pension plans
can be either collective or individual, and
may be operated by insurance companies,
banks, or non-profit organizations. The most
common open pension plans available are the
Plano Gerador de Beneficios Livres (pgBl)—a
product similar to the US 401k plan—and
the Vida Gerador de Beneficios Livres (VgBl).
The employee’s choice of plan is based on the
individual income-tax situation.
The number of companies in the private
sector with private employee benefit plans
has grown rapidly in the past five years. The
trend in plan design is to avoid any direct
association with Social Security benefits in
order to eliminate the possibility that, should
the benefit provided by the government be
reduced, the difference will be assumed by the
company, increasing its costs.
DB
Defined Benefit
DC
Defined Contribution
PGBL
Plano Gerador de
Beneficios Livres
VGBL
Vida Gerador de
Beneficios Livres
Social Security began in Brazil in 1919, when work accident insurance
was established by government decree, providing workers with
indemnities for physical injuries suffered while at work.

Brazilian Social Security
BackGround inForMation
Social Security began in Brazil in 1919, when work accident insurance was established
by government decree, providing workers with indemnities for physical injuries suffered
while at work. In 1923, several retirement and pension funds were created independently
by government-instituted nationwide entities, bringing together workers in the same
trades. The INSS covers state pensions, and the SUS covers medical assistance.
eliGiBility:
Participation in the INSS system is compulsory
for all gainfully employed persons.
contriButions:
Social Security is financed on a pay-as-you-go
basis. The benefits offered by INSS are financed
by employers and employees. Employer
contributions are 20% of full payroll, plus 1% to
3%, depending on the relevant economic activity,
plus 12% on profits. Employee contributions
vary between 8% and 11% of salary, limited
to a pre-established amount. Financial sector
employers contribute 22.5% of payroll, plus
18% on profits. In addition, the employer pays
1% of salary to finance insurance for accidents
at work. Contributions are calculated on
the basis of the employee’s monthly salary;
contribution salary is limited to 10 minimum
monthly salaries. Small companies pay lower
contributions; they vary between 2.75% and
7.83% of the earnings that are declared on a
monthly basis. The annual earnings of the past 12
months of a small company also are taken into
consideration when paying the contributions.
retireMent aGe:
Normal retirement: After 35M/30F years
of contributions (long service). Old age
retirement: 65M/60F, minimum 180 monthly
contributions. Special retirement: 15, 20, or
25 years of work, in hazardous occupations.
retireMent BeneFits:
Between 70% and 100%, depending on type
of retirement and duration of contributions.
disaBility BeneFits:
Waiting period 12 months, unless accident at
work. Accident: 100% salary on date of accident.
death BeneFits:
100% value of retirement benefit if death
is due to a specified illness. 100% of
contribution salary on date of death or
100% of value of disability benefit.
Medical BeneFits:
Medical, pharmaceutical, and clinical assistance.

taxation
PriVate BeneFit Plans
eliGiBility:
Normally all employees after a
specified waiting period.
retireMent aGe:
65M/60F
contriButions:
Private plans are normally financed
by both employee and employer
contributions (percentage of salary).
retireMent BeneFits:
Normally defined contribution plans.
Benefit in addition to Social Security.
disaBility BeneFits:
In private retirement plans: 100% of
the retirement benefits with service
projected to normal retirement age.
GrouP liFe Policy:
Lump sum permanent disability (partial or total).
death BeneFits:
Widow’s Pension: 50% projected old age
pension. Orphan’s Pension: 10% pensionable
salary up to age 18, often limited to five children
(the age of majority was changed by the new
Brazilian Civil Code). Lump Sum Death: Usually a
multiple of monthly salary (normally 24 or 36).
Medical BeneFits:
Frequently provided. Health Maintenance
Organization and Preferred Provider
Organization plans are available,
as well as free choice plans.
VestinG:
Surrender value upon termination after three
years of participation and according to specific
provisions agreed upon with the company.
The employer defines the rules with the
intention of attracting new talent
and keeping the
most qualified.
Brazilian Social Security
eMPloyer contriButions:
Contributions to Social Security are not
deductible. Contributions to pension plans
are deductible up to 20% of full payroll.
eMPloyee contriButions:
Contributions to Social Security are not
deductible. Contributions to pension plans are
deductible up to 12% of gross taxable income.
BeneFits:
Taxable income.

THE DESIGN OF LIFE-CYCLE FUNDS FOR
PENSION PLANS
Generally, age-based investing is the core
of the design of life-cycle funds, but there is a
challenge for a notion of age-based investing
that builds on the idea of mean-reversion in
stock returns. A portion of the savings allocated
into stocks should be a function of investors’
retirement horizon and risk tolerance. Modern
financial economics have clear suggestions
about the assets that should be included in
these funds, such as long-term inflation-
indexed bonds for long-term investors, instead
of long-term nominal bonds that are subject
to inflation risk and which are only safer when
this risk is low. Therefore, the suggestion is
that long-term inflation bonds should play
an important role in these funds, especially
in conservative ones.
To help investors with their choice about an
adequate equity profile within lifecycle funds,
the creation of “conservative,” “moderate,”
and “aggressive” investor profiles inside the
funds can help them choose the one that best
fits their risk appetite. However, these funds can
be an inefficient way of implementing an “age-
based” investment strategy for participants
who have the ability to save outside the plan.
These employees might want to build their own
efficient life-cycle investing strategy.
Similarly, employees who feel financially
educated enough might want to build an asset
allocation strategy specifically designed for
their own risk profiles, retirement spending
goals, and other assets. Similar to balanced
funds, life-cycle funds automatically rebalance
the investments in the underlying funds to
keep the fund’s overall portfolio composition
in line with a pre-specified asset target mix.
Unlike balanced funds, however, life-cycle
funds do not keep their target mix constant
over time; instead, they change their target mix
according to a predefined “roll down” schedule
until they reach what is called the target date
or target maturity date of the fund. This roll-
down schedule becomes more conservative over
time, in the sense that it tilts the target mix
away from equities and toward bonds and cash.
After the target date, these life-cycle funds are
typically folded into a lifestyle fund that keeps
its target asset allocation constant.
The target data funds simplify the investment
process in the long term, because the main
characteristic is the dynamic allocation of
resources, which are periodically rebalanced
by the account manager to accompany the
different phases of the investor’s life. It mainly
means that there will be a decrease in long-
term investments in stocks and an increase in
short-term ones (exhiBit 1).
The goal of Life Cycle Funds by and large is to
promote the balance between the duration of the
investment and the risks to which the investor
will be exposed in different phases of life, in
order to maximize the financial returns and
minimize problems at the moment of cashing
out the reserves accumulated. By minimizing
the investment’s exposure to risks throughout
the years, life cycle can provide higher security
and returns to investors up to the target
date for retirement.
The target audiences are people who do
not have the experience or the time to follow
the financial market, its tendencies and
perspectives, on a daily basis. The investment
fund decisions are made by highly qualified
asset managers who search for the best
opportunities in the financial markets, always
considering the target date selected. In other
words, the client just defines when they will
need to redeem the investment, and based on
that information the asset manager offers the
most suitable investment funds.

exhibiT 1. Life cycLe dynamic aLLocaTion of fundS
Long Term Fixed Income
Short Term Fixed Income
Variable Income (Stocks)
10
20
30
40
50
60
70
80
90
100
0
2012
Conservative
2020
10
20
30
40
50
60
70
80
90
100
0
2012
Aggressive
2020 2030 2040
Moderate
2020 2030
10
20
30
40
50
60
70
80
90
100
0
2012
Life Cycle Funds already have proliferated in
some countries, and others are likely to follow
the trend. In the United States, at least 70% of
funds set as the default investment option by
pension providers are based on either life cycle
or target date funds. According to the American
research company Financial Research Corp.,
there are about 246 Life Cycle Funds bound
to 36 family funds in the United States alone.
In Europe, the importance of these funds is
also increasing rapidly, especially in terms
of retirement planning with a settled target
date. In Brazil, as of 2005, corporate pension
schemes began offering life cycle funds soon
after individual retirement plans had access to
this investment option.
Although the Life Cycle segment in the
Brazilian market is relatively small, with
around BRL 4.6 billion total reserves (about
$1.29 billion US), it has great potential to grow
once the Brazilian investor gets educated on its
benefits and advantages compared to traditional
portfolios in fixed income and balanced plans.
There the participant enters and remains in the
same investor profile the whole time, and faces
big losses from being highly exposed to stocks
near the retirement date.
LIFE CYCLE FUNDS IN THE BRAZILIAN MARKET
exhibiT 2. Life cycLe inveSTmenT horizon
Return-seeking Assets
Less Risky Assets
Bonds
Later years
Middle years
Earlier years
Focus on return Focus on security
aCCuMulation PHase ConsoliDation PHase

LIFE CYCLE FUNDS PROS AND CONS
The Life Cycle Fund is an investment that
holds reserves based on a mixed fixed income
and stock strategy according to the investor’s
life phases. The cautions that a company should
have when implementing life cycle in its plan
for employees are very important, and require
much planning and attention by HR managers.
Many people neither know nor care about
understanding the financial market’s structure
and the investment products offered to build
their reserves for retirement. And so the
company plays an important role in guiding
them through a well-informed decision-
making process. It is not possible to offer the
same type of life cycle fund to all employees,
since each one’s life necessities and perspectives
are different and each has distinct goals. This
is where the HR department and pension
providers should come together to disclose
the pros and cons of each product, not only at
the moment of enrollment to the scheme, but
also during the period of building up reserves.
A financial education program also should be
made available to the company’s employees.
Brazilians are not used to talking about
investments outside of the traditional
“poupança,” the most simple saving account
instrument that nowadays performs below
the inflation rate. So offering a pension plan
that is based on life cycles presents a change
in culture. It therefore is wise to include a
communication process to explain what the
product is, its potential returns and risks, and
especially that it is designed for medium- or
long-term savings. The company should offer
a plan whose funds cover different maturity
dates— Life Cycle Funds with a maturity date in
2040, for example, for younger employees, and
Life Cycle Funds with short-term assets and a
smaller proportion of investments in stocks for
employees who are near retirement.
PROS
X Provides default strategy to "what's best for me"
scheme member.
X Protects plan members from suboptimal
investment decisions and behavioral biases.
X Balances risk and return along life.
Protect the purchasing power at retirement
of plan members contributions
CONS / CHALLENGES
X Life Cycle strategies can vary strongly;
participants should make an informed decision.
X Life Cycles funds may also be subject to happy
trading; important to keep long term view.
X Portfolio size effect; Average risk taken tends to
be low since it is concentrated on periods when
balances are low.
Maximize accumulated wealth
(pension benefit)

The market changes constantly in relation
to investments and the advantage of Life Cycle
Funds is that they adjust to the different phases
of life. While no one can guarantee they are
the best option for every single investor, they
do generally protect the investor from himself
by automatically setting the percentage to be
allocated to stocks and balancing risk exposure
over the years. This prevents the investor from
making impulsive decisions toward a different
allocation. But no investment is absolutely free
of risks. In a Life Cycle Fund, the investor could
withdraw any amount at any time, and even if
the plan is the most suitable for his/her foreseen
retirement date, the short-term volatility from
the stocks portion can bring losses.
It should be noted that specialists in
retirement savings do endorse Life Cycle
Funds as a good investment opportunity that
is gaining momentum within the Brazilian
financial market. They are an important option
for the investor, offering sound financial
planning in the long term, with the possibility
to allocate resources in a more aggressive
form at the beginning and then change to a
more conservative one as the retirement date
nears. However, specialists still advise people
to seek individual investment advisors as a
way to analyze the pros and cons of each plan
in a detailed manner, to match each investor’s
profile and life goal. ∞
refereNces
1- Gomes, Francisco J.; Kotlikoff, Laurence J.; and Viceira, Luis M. Optimal Life-Cycle Investing with Flexible Labor Supply:
A Welfare Analysis of Default Investment Choices in Defined-Contribution Pension Plans. December 14, 2014. Retrieved
from: http://www.people.hbs.edu/lviceira/GomesKotlikoffViceira_OptimalLifeCycleInvesting.pdf
2- Gonçalves, Pedro. Life Cycle for Pension Funds Pros and Cons. September 2015. Retrieved from: https://www.lb.lt/n25980/pedro_
goncalves_life_cycle_for_pension_funds_-_pros_and_cons.pdf
3- Seguros, Icatu. Country Profiles. 2015. Retrieved from: https://www.swisslife.com/content/dam/id_corporateclients/downloads/ebrm/Brazil.pdf
4- Sernache, Felinto. The Brazilian Private Pension Fund Scenario for Today and the Next Decade. March, 2011. Retrieved from: https://www.
towerswatson.com/pt-BR/Insights/IC-Types/Technical-Regulatory/2011/The-Brazilian-Private-Pension-Fund-Scenario-for-Today-and-the-Next-Decade
5- VanDerhei, Jack; Holden, Sarah; Alonso, Luis; Bass, Steven; and Pino, AnnMarie. 401(k) Plan Asset Allocation, Account Balances, and Loan
Activity in 2013. December, 2014. Retrieved from: https://www.ebri.org/pdf/briefspdf/EBRI_IB_408_Dec14.401(k)-update.pdf
6- Viceira, Luis M.. Harvard Business School, NBER and CEPR – Life Cycle Funds. May 22, 2007. Retrieved from:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=988362

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