THE CHALLENGES FACING DC PENSION SCHEMES               November 28th 2012
PENSION SCHEME PROBLEMSWhat risks need to be addressed?   Income in retirement       - interest rate risk   Income at reti...
IS IT POSSIBLE?  Non static nature of liabilities                          = Moving goal posts  Non-linear progression of ...
THE EMPLOYED PRODUCE THE GOODS           UK: Life Course, Men retiring in 1950 and 2004                    (years spent in...
A PROFOUND CHANGE IN WORLD POPULATION BREAKDOWN                       5
S&P 2006 REFERENCE SCENARIO          Australia Canada     France Germany       Italy       Japan    S. Korea   Spain    Sw...
WHICH IS WHY WE HAVE SEEN.........An increase in retirement age for benefitsRow back on welfare levels and commitmentsLand...
WHICH MEANS THATDomestic savers forced to buy more domestic sovereign bondsDisguised under notion of prudence/supervisory/...
WHAT HAS HAPPENED IN DEBT RESTRUCTURING  Greece- official lenders took no haircut on debt  Greek savers through pension fu...
WHAT CAN SAVERS DO?Understand true nature of risk exposureNo risk free instrumentInvestment risk - price paid is key - tec...
WHAT CAN FUND MANAGERS DO FOR YOU ?Provide framework for understanding market pricingProvide inputs to assist in timing of...
THE EVIDENCE   Initial                                     SinceInvestment                                   inception   1...
HOW DOES ONE DECIDE ASSET ALLOCATION?Price is the most important decider of returns from any assetWhat returns are implied...
WHAT’S CURRENTLY PRICED INTO MARKETS ?                                              US - VALUATION ANALYSIS               ...
UK GILT YIELDS ARE AT RECORD LOWS                15
SUMMARYGreater obligation on personal fundingUtilise any incentive whilst it remainsUnderstanding of real risksRe-assess l...
Merrion Investment Managers      Block C      The Sweepstakes Centre      Ballsbridge      Dublin 4      Phone:        353...
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Merrion's presentation on "The Challenges Facing DC Schemes" at the PensionSource Fund Manager Conference 2012

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

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

  1. 1. THE CHALLENGES FACING DC PENSION SCHEMES November 28th 2012
  2. 2. PENSION SCHEME PROBLEMSWhat 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 2
  3. 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% 180Source: Institute of Actuaries This is before considering impact of equity market movements 3
  4. 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 years1950 14.1 53.1 10.8 Education Work Retirement 45% Increase in2004 16.2 47.6 20.1 Consumption years 0 10 20 30 40 50 60 70 80 90 4
  5. 5. A PROFOUND CHANGE IN WORLD POPULATION BREAKDOWN 5
  6. 6. S&P 2006 REFERENCE SCENARIO Australia Canada France Germany Italy Japan S. Korea Spain Sweden UK US2005 AAA AAA AAA AAA AA AA A AAA AAA AAA AAA2012 AAA AAA AA AAA BBB AA A BBB AAA AAA AA2020 AA AAA A AAA A Non-IG A AAA AAA AAA BBB2030 BBB AAA Non-IG A Non-IG Non-IG Non-IG BBB A A Non-IG2040 Non-IG AA Non-IG Non-IG Non-IG Non-IG Non-IG Non-IG Non-IG Non-IG Non-IGSource: Standard & Poors 2006, SG Cross Asset Research 6
  7. 7. WHICH IS WHY WE HAVE SEEN.........An increase in retirement age for benefitsRow back on welfare levels and commitmentsLand grab for savingsPension assets seen as easy targetSovereign annuities 7
  8. 8. WHICH MEANS THATDomestic savers forced to buy more domestic sovereign bondsDisguised under notion of prudence/supervisory/regulatoryDomestic ownership of debt increases as debt sustainabilityand repayment capacity questionable 8
  9. 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? 9
  10. 10. WHAT CAN SAVERS DO?Understand true nature of risk exposureNo risk free instrumentInvestment risk - price paid is key - technology, property,bond bubblesReturns will still only comes from equities, bonds, cashFramework for understanding risk pricingAre savers / trustees / advisors equipped? 10
  11. 11. WHAT CAN FUND MANAGERS DO FOR YOU ?Provide framework for understanding market pricingProvide inputs to assist in timing of asset shiftsLook for an investment manager who has capacity to deliverstrong returns at a competitive price - strong performance canmake a real difference to the value of your pension onretirement 11
  12. 12. THE EVIDENCE Initial SinceInvestment 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 12
  13. 13. HOW DOES ONE DECIDE ASSET ALLOCATION?Price is the most important decider of returns from any assetWhat returns are implied by market price ?Are return assumptions credible / sufficient ? 13
  14. 14. WHAT’S CURRENTLY PRICED INTO MARKETS ? US - VALUATION ANALYSIS Dec- 2000 Dec- 2008 CurrentEquity 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 14
  15. 15. UK GILT YIELDS ARE AT RECORD LOWS 15
  16. 16. SUMMARYGreater obligation on personal fundingUtilise any incentive whilst it remainsUnderstanding of real risksRe-assess life styling strategies?ARF over annuities? 16
  17. 17. Merrion Investment Managers Block C The Sweepstakes Centre Ballsbridge Dublin 4 Phone: 353-1-670 2500 Fax: 353-1-670 2356Past 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 investmentManagers) is regulated by the Central Bank of Ireland. 17

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