Sustainable Income in Retirement                                Peter Kempen                             9 November 2012
State of the retirement income market    278,000 living annuities                         Average size: R560,000     Avera...
Potentially far-reaching policy interventions to makethe post-retirement income market more sustainable
Technical discussion paper B:“Enabling a better income in retirement”
Key proposals Increased automation in the retirement process Increased longevity protection for most retirees Reforming li...
Increased automation
Increased automation in the retirement process Retirement funds must select a single default retirement income product Ret...
Increased longevity protection
Increased longevity protection for most retirees First R1.5m of capital available to purchase a retirement income to be in...
Increased longevity protection for most retirees Source: National Treasury
Reforming living annuities
Reforming living annuities Introduction of retirement income trust (RIT) Modelled on CIS – transparent and well understood...
Retirement income planningtrade-offs
Retirees’ risks Inflation risk   • Balance spending needs between 1st and 2nd halves of retirement   • Have enough exposur...
Income sustainability: 7.5% initial drawdown rate                             If you earn a net real                      ...
Income sustainability: 5% initial drawdown rate                             If you earn a net real                        ...
More lessons from the literature / history  SAFEMAX   • Highest sustainable withdrawal rate if you retired in the year whe...
Meeting higher spending needs Shorter than average life expectancy Using spending rules  • Formally matching drawdown rate...
Coronation Balanced DefensiveCautious investors requiring stable returns Investment                                       ...
Balanced Defensive Fund
Coronation Balanced Defensive FundPerformance since launch                                Value of a R100,000 investment o...
Coronation Balanced Defensive FundPositive returns over all 12-month periods                                  Rolling 12 M...
Coronation Balanced Defensive FundConsistent 1st quartile performance                                                     ...
Coronation Balanced DefensiveAsset Allocation since launch  100%                                                          ...
Coronation Balanced DefensivePortfolio positioning       SA Corp Bonds                                34.5%               ...
Capital Plus Fund
R 150.000                                                                                                                 ...
reinvested.                                                                                                               ...
Coronation Capital Plus FundConsistent 1st quartile performance                                         1 Year            ...
Coronation Capital Plus FundBear Market Returns 5.0% 0.0% -5.0%-10.0%-15.0%-20.0%-25.0%-30.0%-35.0%-40.0%          Jul 01 ...
Coronation Capital Plus FundBull Market Returns180.0%160.0%140.0%120.0%100.0%80.0%60.0%40.0%20.0% 0.0%         Oct 01 to M...
Coronation Capital PlusAsset Allocation History100%                                                                       ...
Coronation Capital PlusPortfolio Positioning  SA IL Bonds                       10.7%                                     ...
Protection strategiesPhilosophy guiding protection strategy  Deployed to protect, not to make money    (i.e. like buying i...
Protection strategiesOur experience around protection over the last 12 months  Buying at-the-money puts work best if the m...
Actual experience in Capital Plus since inceptionValue of R1m invested 11 years ago given different real income rates     ...
Actual experience in Capital Plus since inceptionValue of R1m invested 11 years ago given different real income rates     ...
Questions?
Disclaimer     Coronation Asset Management is an Authorised Financial Service Provider.     The content of this presentati...
Thank you!
Upcoming SlideShare
Loading in …5
×

Coronation p kempen - november 2012

659 views

Published on

0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
659
On SlideShare
0
From Embeds
0
Number of Embeds
88
Actions
Shares
0
Downloads
11
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Coronation p kempen - november 2012

  1. 1. Sustainable Income in Retirement Peter Kempen 9 November 2012
  2. 2. State of the retirement income market 278,000 living annuities Average size: R560,000 Average income rate: 7% >50% 90% …of living annuitants under 70 draw an income above …of the R27bn invested in compulsory annuities in 2011 were invested in living annuities 7.5%Source: ASISA Living Annuity Statistics for calendar year 2011.
  3. 3. Potentially far-reaching policy interventions to makethe post-retirement income market more sustainable
  4. 4. Technical discussion paper B:“Enabling a better income in retirement”
  5. 5. Key proposals Increased automation in the retirement process Increased longevity protection for most retirees Reforming living annuities
  6. 6. Increased automation
  7. 7. Increased automation in the retirement process Retirement funds must select a single default retirement income product Retirees will be auto-enrolled into the default option May opt out of default option, subject to taking advice When opting out, they must choose a conventional life annuity or another product that meets certain criteria
  8. 8. Increased longevity protection
  9. 9. Increased longevity protection for most retirees First R1.5m of capital available to purchase a retirement income to be invested in an income plan that provides some form of longevity protection Simplicity the word – very little choice, transparency, only initial commission and only on initiation and first two switches Suggested designs include conventional annuities, variable annuities and a default version of a RIT When opting out, they must choose a conventional life annuity or another product that meets certain criteria
  10. 10. Increased longevity protection for most retirees Source: National Treasury
  11. 11. Reforming living annuities
  12. 12. Reforming living annuities Introduction of retirement income trust (RIT) Modelled on CIS – transparent and well understood Same tax treatment as living annuities No investment choice to reduce fees, but may choose different underlying investment strategies Age-dependent drawdown limits Limited commission to intermediaries Will be able to transfer from a RIT to a conventional annuity free of charge Reform existing living annuities to make them consistent with RIT
  13. 13. Retirement income planningtrade-offs
  14. 14. Retirees’ risks Inflation risk • Balance spending needs between 1st and 2nd halves of retirement • Have enough exposure to growth assets • Capital Plus has 60% risk budget specifically to assist with long horizon income drawdown programmes Sequence-of-returns risk • Manage downside risks (Goldilocks approach to risk exposure required) • Select more conservative drawdown rates when assets are expensive / outlook poor • Adjust income drawdown in line with actual returns (spending rule approach) Longevity risk • Most clients underestimate their life expectancy • If you can afford advice, you are likely to live longer than average • Hence the need for a 30-40 year planning horizon when retiring at 60-65 • You can only insure against this risk by buying a life annuity at the moment (but poorly priced because of low rates environment)
  15. 15. Income sustainability: 7.5% initial drawdown rate If you earn a net real … you can maintain return of… purchasing power for 2% 9 years 3% 11 years 4% 12 years 5% 15 years 6% 20 years 7% 23 yearsSource: Asisa Standard on Living Annuities. Assumes constant inflation-adjustedwithdrawals.
  16. 16. Income sustainability: 5% initial drawdown rate If you earn a net real … you can maintain return of… purchasing power for 2% 19 years 3% 24 years 4% 34 years 5% 40+ years 6% 40+ years 7% 40+ yearsSource: Asisa Standard on Living Annuities. Assumes constant inflation-adjustedwithdrawals.
  17. 17. More lessons from the literature / history SAFEMAX • Highest sustainable withdrawal rate if you retired in the year when a 50:50 equity: bond portfolio offered the worst 30 year future return • In SA this was 1930, when your sustainable withdrawal rate was 3.86% (assuming zero fees!) It’s all about the first ten years • 80% of variation in safe drawdown rates is explained by interplay between investment return, drawdowns and inflation over the first decade of retirement Individual circumstances matter • Significant opportunity for advice to add value…
  18. 18. Meeting higher spending needs Shorter than average life expectancy Using spending rules • Formally matching drawdown rate to return and inflation experience during the first ten years of retirement adds another 1%… • Downside: potentially more income variability than some clients can stomach Assuming declining spending as client ages • US study shows 65-74 cohort spends 20% less & 75-84 cohort 40% less than 55-64 year olds. If entirely voluntary (debatable), this justifies a 1%-2% increase in initial drawdown rate • Only works if adequate provision made for late-life medical expenses The difference three years make • If you delay retirement by 3 years, you can increase the sustainable drawdown rate by around 20% without making further contributions
  19. 19. Coronation Balanced DefensiveCautious investors requiring stable returns Investment Risk Profile Exposure to Objective Conservative Moderate Aggressive Growth Assets 2/10 3 Years → 3/10 4/10 6/10 8/10 12.3% Average exposure to growth assets through the cycle (5 years) Coro Top 100% The exposure will fluctuate as valuations change 20 17.2%Long-term Growth 9.3% Coro Avg 70% Return (Annualised Return) Balanced Max 85% Plus Reg 28 10.5% 9.3% Coro • Aim to outperform CPI + 4% over Avg 50% Capital medium term Max 60%Income & Growth Plus • Protect Capital over 12 months Reg 28  (Multi-asset) 6.7% 10.9% Coro Avg 35% • Aim to exceed cash + 3% over time Balanced Max 40% Defensive • Protected capital over 12 months 100% of the time Reg 28 9.9% 4.1% Coro Avg 15%Immediate Income Strategic Max 25% Income (0% normal 2.1% shares) Reg 28 Risk (Annualised Standard Deviation) 5 Year Performance & Risk quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions reinvested. Growth Assets are defined as domestic/foreign equities, listed property & commodities ex gold.19
  20. 20. Balanced Defensive Fund
  21. 21. Coronation Balanced Defensive FundPerformance since launch Value of a R100,000 investment on 1 February 2007 R 185.000 R 180.000 R176 373 R 175.000 R 170.000 R 165.000 Coro Balanced Defensive R 160.000 Mean Prudential Low Equity R153 289 R 155.000 R 150.000 STEFI R151 525 R 145.000 R 140.000 R 135.000 R 130.000 R 125.000 R 120.000 R 115.000 R 110.000 R 105.000 R 100.000 Mar-07 Mar-08 Mar-11 Mar-12 Mar-09 Mar-10 Apr-09 Apr-07 May-07 Apr-08 Dec-09 Apr-10 May-10 Dec-10 Apr-11 May-11 Apr-12 Dec-07 May-08 Dec-08 May-09 Dec-11 May-12 Sep-09 Sep-07 Sep-08 Sep-10 Sep-11 Sep-12 Aug-07 Aug-08 Feb-10 Aug-11 Aug-12 Feb-07 Feb-08 Nov-08 Feb-09 Aug-09 Aug-10 Feb-11 Feb-12 Nov-07 Nov-09 Nov-10 Nov-11 Jul-09 Jul-10 Jul-07 Jul-08 Jul-11 Jul-12 Jan-08 Jan-12 Jan-09 Jan-10 Jan-11 Oct-07 Oct-10 Oct-11 Oct-08 Oct-09 Jun-08 Jun-12 Jun-07 Jun-09 Jun-10 Jun-11Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with incomedistributions reinvested
  22. 22. Coronation Balanced Defensive FundPositive returns over all 12-month periods Rolling 12 Month Returns & Standard Deviation 20.00% 15.00% 10.00% 5.00% 0.00% Dec-10 Dec-11 Dec-08 Dec-09 Sep-10 Sep-11 Sep-08 Sep-09 Sep-12 Aug-10 Aug-11 Aug-08 Aug-09 Nov-10 Nov-11 Aug-12 Nov-08 Nov-09 Feb-11 Feb-12 Feb-08 Feb-09 Feb-10 Jan-11 Jan-12 Jan-09 Jan-10 Jul-10 Oct-10 Mar-11 May-11 Jul-11 Oct-11 Mar-12 May-12 Mar-08 May-08 Jul-08 Oct-08 Mar-09 May-09 Jul-09 Oct-09 Mar-10 May-10 Jul-12 Jun-11 Jun-12 Jun-08 Jun-09 Jun-10 Apr-11 Apr-12 Apr-08 Apr-09 Apr-10 -5.00% Coro Balanced Defensive Mean Prud Low Eq Coro Ann Std Dev Mean Ann Std DevPerformance quoted from Morningstar as at 30 September 2012 for a lump sum investment with incomedistributions reinvested
  23. 23. Coronation Balanced Defensive FundConsistent 1st quartile performance Since 1 Year 3 Year 5 Year launch Ranking 10/66 3/53 1/40 2/35 Quartile 1st 1st 1st 1st Returns 15.9% 12.4% 10.9% 10.7% Category 13.0% 9.8% 7.6% 8.0% AveragePerformance quoted from Morningstar as at 30 September 2012 for a lump sum investment with incomedistributions reinvested
  24. 24. Coronation Balanced DefensiveAsset Allocation since launch 100% Int Fixed Income/Cash 90% SA Pref Shares/Other 80% 70% SA IL Bonds 60% SA Corp Bonds 50% SA Gov Bonds 40% max exposure to growth assets 40% SA Cash 30% Real Estate 20% Int Equities 10% SA Equity 0% Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Dec10 Sep 07 Sep 08 Sep 09 Sep 10 Sep 11 Aug 12 Sep 12 Jun 07 Dec 07 Jun 08 Dec 08 Jun 09 Dec 09 Jun 11 Dec 11 Jun 12 Jul 12 June 10 Growth Assets are defined as domestic/foreign equities (excl. Pref shares), listed property & commodities. Asset Allocation as at 30 September 2012
  25. 25. Coronation Balanced DefensivePortfolio positioning SA Corp Bonds 34.5% SA Equity 8.5% SA Cash 14.4% Int Equity 18.7% Income Assets Growth 67.6% Assets SA IL Bonds 12.1% 32.4% Domestic Real 4.3% Estate Int. Cash / Bonds 5.0% Reg. 28 Compliant International 0.9% Real EstateSA Pref Shares & Other 1.6% Growth Assets are defined as domestic/foreign equities (excl. Pref shares), listed property & commodities. Asset Allocation as at 30 September 2012
  26. 26. Capital Plus Fund
  27. 27. R 150.000 R 250.000 R 400.000 R 100.000 R 200.000 R 300.000 R 350.000 R 450.000 R 500.000 R 50.000reinvested. Jun-01 Aug-01 Oct-01 Dec-01 Feb-02 Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 CPIX +4% Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Coronation Capital Plus Feb-05 Coronation Capital Plus Apr-05 Jun-05 Aug-05 Oct-05 Performance since launch Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 Oct-06 Mean of Domestic AA Pru Variable Equity Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Value of R100,000 invested on 02 July 2001 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-11Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions Feb-12 Apr-12 Jun-12 Aug-12 R240 660 R380 840 R455 736
  28. 28. reinvested. -30.00% -10.00% -20.00% 20.00% 10.00% 30.00% 40.00% 0.00% 50.00% Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 Feb-05 Apr-05 Rolling 1 Year Returns Jun-05 Coronation Capital Plus Aug-05 Oct-05 Dec-05 Feb-06 Apr-06 Jun-06 Aug-06 CPIX +4% Oct-06 Dec-06 Feb-07 Apr-07 Jun-07 Aug-07 Oct-07 Coronation Capital Plus Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Mean of Domestic AA Pru Variable Equity Jun-09 Aug-09 Oct-09 Dec-09 Rolling 12 month return since 02 July 2001 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11Performance quoted from Morningstar as at 30 September 2012 for a lump sum investment with income distributions Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12
  29. 29. Coronation Capital Plus FundConsistent 1st quartile performance 1 Year 3 Year 5 Year 10 Year Inception Ranking 7/44 4/40 6/32 1/7 1/5 Quartile 1st 1st 1st 1st 1st Returns 15.2% 11.6% 9.3% 14.3% 14.4% Category 11.6% 8.6% 7.2% 10.3% 10.9% AveragePerformance quoted from Morningstar as at 30 September 2012 for a lump sum investment with incomedistributions reinvested
  30. 30. Coronation Capital Plus FundBear Market Returns 5.0% 0.0% -5.0%-10.0%-15.0%-20.0%-25.0%-30.0%-35.0%-40.0% Jul 01 - Sept 01 Jun 02 to Apr 03 Mar 04 to Apr 04 Mar 05 to Apr 05 Nov 07 to Jan 08 Jun 08 to Mar 09 Apr 10 to Jun 10 May 11 to Sep 11 Cap Plus Bal Med Eqt mean ALSI Pru Var Equity Pru Low Equity Performance quoted from Morningstar as at 31 August 2012 for a lump sum investment with income distributions reinvested.
  31. 31. Coronation Capital Plus FundBull Market Returns180.0%160.0%140.0%120.0%100.0%80.0%60.0%40.0%20.0% 0.0% Oct 01 to May 02 May 03 to Feb 04 May 04 to Feb 05 May 05 to Oct 07 Feb 08 to May 08 Apr 09 to Mar 10 July 10 to Apr 11 Oct 11 to Feb 12 Mar 12 to Aug 12 Cap Plus Bal Med Eqt mean ALSI Pru Var Equity Pru Low Equity Performance quoted from Morningstar as at 31 August 2012 for a lump sum investment with income distributions reinvested.
  32. 32. Coronation Capital PlusAsset Allocation History100% Int Cash/FI 90% SA Pref Shares & Other 80% SA IL Bonds 70% 60% SA Corp Bonds 50% SA Gov Bonds 40% SA Cash 30% Max exposure to growth assets reduced to 60% Real Estate 20% Int Equities 10% SA Equity 0% Jun 07 Jun 08 Mar 11 Jun 12 Jul 12 Dec10 June 11 Mar 07 Mar 08 Mar 09 Mar 10 Mar 12 Jun10 Sep 07 Sep 08 Jun 09 Sep 09 Sep 10 Sep 11 Aug 12 Sep 12 Dec 07 Dec 08 Dec 09 Dec 11 Growth Assets are defined as domestic/foreign equities, listed property & commodities (excl Gold). Asset Allocation at as 30 September 2012.
  33. 33. Coronation Capital PlusPortfolio Positioning SA IL Bonds 10.7% SA Equity 32.5%SA Corp Bonds 15.6% Growth Int Equity 15.5% Income Assets Assets 54.1% SA Cash 6.4% 45.9% Domestic Real 3.7% Estate SA Pref 5.9% Shares/Other International 2.4% Real Estate Int. Cash/FI* 7.3% Growth Assets are defined as domestic/foreign equities, listed property & commodities. As at 30 September 2012. *Including effect of foreign currency hedge against foreign assets.
  34. 34. Protection strategiesPhilosophy guiding protection strategy Deployed to protect, not to make money (i.e. like buying insurance without the benefit of a no-claims bonus....) No automatic rollover or renewal (each transaction is evaluated separately before implementation) Level at which you buy protection far more important than price of volatility (hence we prefer an active approach) Aim to spread levels of protection as far as possible (in terms of strikes, terms and expiry dates) Will not off-lay costs by assuming unlimited liabilities on the downside!! (See our experience during GFC....)
  35. 35. Protection strategiesOur experience around protection over the last 12 months Buying at-the-money puts work best if the market trends strongly up or down Given lacklustre market performance over past year (with no big sell-offs) insurance didnt really add to portfolio performance But it did allow us to continue buying some of cyclical shares into weakness, knowing that we are protected in the event of a disaster hitting global growth Cost of protection continued to decline as appetite for risk increased, hence some mark-to-market losses on volatility also experienced Estimated cost was around 80-90 basis points on overall portfolio
  36. 36. Actual experience in Capital Plus since inceptionValue of R1m invested 11 years ago given different real income rates No income 3% 5% 7% 9% Nominal Real Nominal Real Nominal Real Nominal Real Nominal RealMoney market fund 2,280,321 1,173,079 1,433,732 735,802 1,051,237 538,638 770,192 393,999 563,847 287,975Coro Strategic Income 3,012,251 1,549,956 1,893,927 972,196 1,388,660 711,689 1,017,407 520,582 744,830 380,495Coro Capital Plus 4,053,696 2,085,889 2,548,728 1,308,356 1,868,773 957,774 1,369,163 700,587 1,002,346 512,061Change in income level between 2001 and April 2012 after adjustment for inflation 3% 5% 7% 9%Initial income per R1m invested in 2001 30,000 50,000 70,000 90,000Initial income as % of initial capital 3.0% 5.0% 7.0% 9.0%Current income adjusted for inflation 58,212 97,021 135,829 174,637Current income as % of nominal capital Average money market fund 4.1% 9.2% 17.6% 31.0% Coronation Strategic Income 3.1% 7.0% 13.4% 23.4% Coronation Capital Plus 2.3% 5.2% 9.9% 17.4% As at 30 April 2012 – includes 0.75% annual adviser/admin fee
  37. 37. Actual experience in Capital Plus since inceptionValue of R1m invested 11 years ago given different real income rates No income 3% 5% 7% 9% Nominal Real Nominal Real Nominal Real Nominal Real Nominal RealMoney market fund 2,280,321 1,173,079 1,433,732 735,802 1,051,237 538,638 770,192 393,999 563,847 287,975Coro Strategic Income 3,012,251 1,549,956 1,893,927 972,196 1,388,660 711,689 1,017,407 520,582 744,830 380,495Coro Capital Plus 4,053,696 2,085,889 2,548,728 1,308,356 1,868,773 957,774 1,369,163 700,587 1,002,346 512,061Change in income level between 2001 and April 2012 after adjustment for inflation 3% 5% 7% 9%Initial income per R1m invested in 2001 30,000 50,000 70,000 90,000Initial income as % of initial capital 3.0% 5.0% 7.0% 9.0%Current income adjusted for inflation 58,212 97,021 135,829 174,637Current income as % of nominal capital Average money market fund 4.1% 9.2% 17.6% 31.0% Coronation Strategic Income 3.1% 7.0% 13.4% 23.4% Coronation Capital Plus 2.3% 5.2% 9.9% 17.4% As at 30 April 2012 – includes 0.75% annual adviser/admin fee
  38. 38. Questions?
  39. 39. Disclaimer Coronation Asset Management is an Authorised Financial Service Provider. The content of this presentation and any information provided may be of a general nature and may not be based on any analysis of the investment objectives, financial situation or particular needs of the client. (as defined in the Financial Advisory Intermediary Services Act) As a result, there may be limitations as to the appropriateness of any information given. It is therefore recommended that the client first obtain the appropriate legal, tax, investment or other professional advice and formulate an appropriate investment strategy that would suit the risk profile of the client prior to acting upon such information and to consider whether any recommendation is appropriate considering the client’s own objectives and particular needs. Any opinions, statements and any information made, whether written, oral or implied are expressed in good faith.39
  40. 40. Thank you!

×