Merrion's presentation on "The Challenges Facing DC Schemes" at the PensionSource Fund Manager Conference 2012

1. THE CHALLENGES FACING DC PENSION SCHEMES
November 28th 2012

2. PENSION SCHEME PROBLEMS
What risks need to be addressed?
Income in retirement - interest rate risk
Income at retirement - inflation risk
Retirement income period - longevity risk
Pension cost - funding risk
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3. IS IT POSSIBLE?
Non static nature of liabilities = Moving goal posts
Non-linear progression of salary = Funding difficulties
Longevity + Falling Interest Rates = Lethal combination
Example: £100 of UK Pension liabilities to meet liability 20 year hence
PENSION FUND LIABILITIES
1997 Index Linked +4.0% 100
1998 Index Linked +2.0% 150
1999 Changes in Mortality +10.0% 165
2003 Changes in Mortality +10.0% 180
Source: Institute of Actuaries
This is before considering impact of equity market movements
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4. THE EMPLOYED PRODUCE THE GOODS
UK: Life Course, Men retiring in 1950 and 2004
(years spent in education, work & retirement)
10% decrease in
working years
1950 14.1 53.1 10.8
Education
Work
Retirement
45% Increase in
2004 16.2 47.6 20.1 Consumption
years
0 10 20 30 40 50 60 70 80 90
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5. A PROFOUND CHANGE IN WORLD POPULATION BREAKDOWN
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6. S&P 2006 REFERENCE SCENARIO
Australia Canada France Germany Italy Japan S. Korea Spain Sweden UK US
2005 AAA AAA AAA AAA AA AA A AAA AAA AAA AAA
2012 AAA AAA AA AAA BBB AA A BBB AAA AAA AA
2020 AA AAA A AAA A Non-IG A AAA AAA AAA BBB
2030 BBB AAA Non-IG A Non-IG Non-IG Non-IG BBB A A Non-IG
2040 Non-IG AA Non-IG Non-IG Non-IG Non-IG Non-IG Non-IG Non-IG Non-IG Non-IG
Source: Standard & Poors 2006, SG Cross Asset Research
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7. WHICH IS WHY WE HAVE SEEN.........
An increase in retirement age for benefits
Row back on welfare levels and commitments
Land grab for savings
Pension assets seen as easy target
Sovereign annuities
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8. WHICH MEANS THAT
Domestic savers forced to buy more domestic sovereign bonds
Disguised under notion of prudence/supervisory/regulatory
Domestic ownership of debt increases as debt sustainability
and repayment capacity questionable
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9. WHAT HAS HAPPENED IN DEBT RESTRUCTURING
Greece- official lenders took no haircut on debt
Greek savers through pension funds and banking system
took significant write down - capital losses
Concept of subordination - previously unheard of in
sovereign debt markets
Where do sovereign annuities rank?
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10. WHAT CAN SAVERS DO?
Understand true nature of risk exposure
No risk free instrument
Investment risk - price paid is key - technology, property,
bond bubbles
Returns will still only comes from equities, bonds, cash
Framework for understanding risk pricing
Are savers / trustees / advisors equipped?
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11. WHAT CAN FUND MANAGERS DO FOR YOU ?
Provide framework for understanding market pricing
Provide inputs to assist in timing of asset shifts
Look for an investment manager who has capacity to deliver
strong returns at a competitive price - strong performance can
make a real difference to the value of your pension on
retirement
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12. THE EVIDENCE
Initial Since
Investment inception 15 Years 10 Years
€ 5 Million Merrion Managed Fund 25.9 M 12 M 7.9 M
€ 5 Million Passive Managed Fund 12.1 M 9.4 M 7.5 M
Difference 13.9 M 2.6 M 0.4 M
€ 5 Million Merrion High Alpha Fund 10.1 M
Active Management can address funding cost
€ 5 Million
Passive Managed Fund 4.5 M
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13. HOW DOES ONE DECIDE ASSET ALLOCATION?
Price is the most important decider of returns from any asset
What returns are implied by market price ?
Are return assumptions credible / sufficient ?
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14. WHAT’S CURRENTLY PRICED INTO MARKETS ?
US - VALUATION ANALYSIS
Dec- 2000 Dec- 2008 Current
Equity Earnings Yield 2.0% 4.9% 3.9%
Inflation Protected Yield (30yr) 3.8% 1.9% 0.4%
Real Excess Return -1.8% 3.0% 3.5%
Subsequent Real return on equities 0.3% p.a. 12.9% p.a. ?
Subsequent Real return on bonds 5.8% p.a. 3.8% p.a. ?
Expensive valuations in 2000 Current – Real excess return available is
attractive, this reflects more expensive bonds
- Equity risk premium was negative than cheap equities
- Subsequent returns were poor
Dec 2008 – equity earnings yield and real excess
return meant equities were attractive
Subsequent returns were positive
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15. UK GILT YIELDS ARE AT RECORD LOWS
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16. SUMMARY
Greater obligation on personal funding
Utilise any incentive whilst it remains
Understanding of real risks
Re-assess life styling strategies?
ARF over annuities?
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17. Merrion Investment Managers
Block C
The Sweepstakes Centre
Ballsbridge
Dublin 4
Phone: 353-1-670 2500
Fax: 353-1-670 2356
Past performance may not be a reliable guide to future performance. Investments may fall as well as rise.
Funds may be affected by changes in currency exchange rates. Merrion Capital Investment Managers (Trading as Merrion investment
Managers) is regulated by the Central Bank of Ireland.
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