Blake Lapthorn Thames Valley Pensions conference - 5 Dec 2012
1. Thames Valley Pensions
Conference
2012
Are we (anywhere near) there yet?
Seacourt Tower, Oxford
5 December 2012
Adrian Lamb
Blake Lapthorn
2. Thames Valley Pensions Conference 2012
Health & safety and
housekeeping!
Feedback forms
Ask questions
throughout
Participate
Challenge
Enjoy
3. Thames Valley Pensions Conference 2012
Agenda and timetable
9.30 am Introduction – look back in anger, look forward in hope
9.40 am What really worries me is ……
9.45 am So what are my liabilities exactly? – Mark Da Silva,
Barnett Waddingham
10.20 am Picking up the pieces - Richard Portlock and Nicola
Walker, Blake Lapthorn
10.50 am Communication not just information – Alex Thurley-
Ratcliff, Shilling Communication
11.20 am COFFEE BREAK
11.40 am Where in the world – and what – Claire Glennon, Baring
Asset Management
12.15 pm Auto enrolment – the duties and the challenges – Shaun
Thompson, Blake Lapthorn
12.35 pm The Trustee’s perspective and the crystal maze
12.50 pm Questions and open forum
1.00 pm LUNCH!
5. Previous questions
Is there such a thing as a risk free investment?
Can I ever know what our liabilities really are?
Data, what data?
Is there such a thing as an equity risk premium now … or is it
just an equity risk?
Can I get smarter with my/our investment strategy?
What does it take to make DC adequate?
What is adequate?
Is auto enrolment just a precursor to more tax?
Can it work?
What do we need to do?
Can I do anything about this (other than pray)?
6. Current questions
Can DC deliver what employers and
employees want?
How real is the measure of my liabilities – or
what measure is the most realistic – TP, PPF
or buy out?
Mistakes happen but what can I do about
them?
Where can I achieve the most in the time
available?
Can I make auto enrolment into a positive
rather than just a headache?
How can I improve understanding?
What is the “big picture” here?
8. Thames Valley Pensions Conference 2012
- the economic backdrop
“Fiscal cliff”
“Flat is the new growth”
“Zombie companies”
“Extend and pretend”
More for less (or at least no more)
Eurozone crisis (chronic)
Triple dip?
QE – a necessary evil?
BRIC & CIVETS v. PIIGS+ ?
15. Low gilt yields
Government bond yields are at historic lows
A combination of economic factors:
• Supply and demand
• UK bonds perceived as a relative safe haven
• Bank of England’s quantitative easing (QE)
15
23. Steep Yield Curve – Case Study
Previous method: yield on an index with a shorter average term
Revised method: reflects the full profile of the liabilities
•Change results in a higher discount rate
Single yield 85.7%
Yield curve 100%
23
24. Long-Term Equity Model
• Alternative equity model
• Return = Dividend yield + GDP growth
• Current ERP implied by DDM is ca. 5-6% pa
24
28. Consultation on changes to RPI
• Various options to reduce RPI
• Formula effect could be removed entirely
• Market already partially pricing in anticipated
change ?
• Decision expected in January 2013
• Effect on gilts
• Some gilts have ‘materially detrimental’ price
protection
• Another ca. £240bn without protection
28
32. Regulator’s Statement - Summary
Not appropriate to second-guess gilt yields in the
valuation results
• Need to recognise your technical provisions in full
Flexibility in the Recovery Plan
• Can reflect post-valuation events
• or future investment views
• Starting point: maintain contributions in real terms
• Reduced contributions or longer recovery plans require “sound
justification”
Scheme should be equitably treated among
competing demands of employer
32
33. Other Possible Actions
Uprisking
• Can reflect in recovery plan
Liability management
• Add PIE option at retirement
Break salary link?
Amendments to future service
Additional security
• SPV / contingent assets
• Improve funding and reduce PPF levy
33
36. Buy-In or Matching Opportunities
Pricing attractive for schemes currently holding
gilts
• Especially shorter-term gilts
Pensioner buy-in may have a small or no impact
on the scheme funding position
Reduce volatility of the funding position
36
37. Strategy changes
Inflation Hedging
• Lock into current low rates
• Especially if selling fixed interest gilts to do so
Uprisking?
• Opportunity to ‘bank’ gilt rises
• Forms part of a wider strategy review
37
38. Quick transaction case study
Example Ltd is a mature DB Scheme with 80% pensioners. It is fully
funded on a solvency basis with £40m assets.
Investments: 75% gilts , 15% corporates, 10% equities
BUT…
Scheme provides discretionary increases
•Funding for these leaves a £4m deficit
Valuation in progress – issues faced:
38
39. Quick transaction case study
Insure pensioners • Guaranteed benefits only – costs £1m less than TPs
with Met Life
Split remaining • Protection for other guaranteed benefits (pooled swap funds)
assets • Growth to back future discretionary benefit
Growth assets
• Required return 2% p.a. above gilts if buy-in with Met Life
split between cash • No further contributions needed from employer
and DGF
Trustees and Employer compromised but achieved objectives:
• Trustees - security for guaranteed benefits and continuation of discretionary increases
• Employer - affordable funding commitments
• Both - framework for managing scheme going forward
39
40. Regulatory Information
The information in this presentation is based on our understanding of current
taxation law, proposed legislation and HM Revenue & Customs practice,
which may be subject to future variation.
This presentation is not intended to provide and must not be construed as
regulated investment advice. Returns are not guaranteed and the value of
investments may go down as well as up.
Barnett Waddingham LLP is a limited liability partnership registered in
England and Wales.
Registered Number OC307678.
Registered Office: Cheapside House, 138 Cheapside, London, EC2V 6BW
Barnett Waddingham LLP is authorised and regulated by the Financial
Services Authority and is licensed by the Institute and Faculty of Actuaries
for a range of investment business activities.
40
41. Thames Valley Pensions
conference
Picking up the pieces
Nicola Walker, Associate
nicola.walker@bllaw.co.uk
and
Richard Portlock, Partner
richard.portlock@bllaw.co.uk
42. Picking up the pieces
(when you wish you could travel back in time)
43. Common pitfalls
Insufficient detailed knowledge of Deed and Rules
– Over reliance on advisers
– Understanding particular benefits issues - eg
revaluation, application of increases to pensions in
payment
Lack of care when making specific changes
– eg equalisation, changes in benefit structure
– ask questions!
– Check the amendments reflect what you are trying
to achieve
44. Common pitfalls - continued
Failing to act promptly
– Do not rely on right to let drafting catch up with
decision making/administrative practice
– Restrictions on taking away benefits
45. Rescue missions
Applications for directions
– Duty of Trustees to understand scope of scheme liabilities
– Support for Trustee decision making by the Courts
– Involvement of representative beneficiaries
Rectification
– Available where a document fails to record what you
intended it to record
– Distinction between a mistake as to the content of a
document and its effect
– Filling the funding gap
46. Rescue missions – continued
Principal employer
Claims against advisers
– Negligence
– What would have you done,
properly advised?
– Quantifying loss - actuarial
evidence
– Contributory negligence?
47. Tips for sound sleep at night
Appoint advisers carefully
Rely on advice - but test assumptions and ask questions
Maintain a secure grasp of the detailed effect of changes
Remember help is available when things go wrong
48. Some of our happy endings…….
Directions Applications
– Foster Wheeler
Negligence proceedings
– Out of Court settlement
Rectification
– Successful amendment of
incorrect documentation
57. What do they
THINK AND FEEL?
what really counts
major preoccupations
worries and aspirations
What do they What do they
HEAR? SEE?
what friends say environment
what boss says friends
what influencers say what the market offers
What do they
SAY AND DO?
attitude in public
appearance
behaviour towards others
PAIN GAIN
fears wants and needs
frustrations measures of success
obstacles obstacles
59. Getting attention
• Recognise that people
aren’t interested
– Channels: optimised for
your audience
– Packaging: first
impressions count
– Relevant: make it
personal and meaningful
– Tone: honesty
“Fits with me”
67. Getting real decisions through
calls to action
• What is a real
decision?
• How do you
increase the
likelihood of
employees
making firm
decisions?
68. Opt Out Join
3 year anniversary? All at once?
Annual reminders?
Contributions phasing?
Eligible Jobholders
Printed or
Printed or
Payroll data Web info as
Web info as
• One or multiple required
required
payroll uploads
• Common format
required
• Stage test of data • System carries out Email
Email
and then push live checks against SMS
SMS
• “Live” feed could be eligibility data: age, AE PDF
PDF
discussed pay and joining date PURL
PURL
Comms Web Not Eligible &
• Could include cost of Web
contributions at point Platform dPrint
dPrint Entitled Workers
of AE
Opt in
Change in eligibility
Management info
• Can be pulled or pushed via email
1‐3 month postponement communications
Online updates / checks and end result communicated effectively
72. AE Comms Platform
Dear Mrs Jones
You may have heard about Auto‐Enrolment or AE. This is the
Government’s plan to help more people save for their retirement.
Auto‐Enrolment means that employees who meet the criteria will be
automatically enrolled in the XYZ Pension Scheme, pay a small
contribution towards membership, but receive contributions from the
James Smith
company as well.
Pension Manager
XYZ Pension Scheme
Tel: 01234 567890
www.xyzpensions.co.uk
E: james/smith@xyzpensions.co.uk
74. FOR PROFESSIONAL ADVISERS ONLY
Where in the world - and what?
Blake Lapthorn – Thames Valley Pensions Conference
December 2012
Baring Asset
Management Limited Claire Glennon
155 Bishopsgate,
London, EC2M 3XY
Tel +44 (0)20 7628 6000
Fax +44 (0)20 7638 7928
www.barings.com
Authorised and regulated by the CONFIDENTIAL
Financial Services Authority
75. Introduction
• Most pension funds require an allocation to growth assets
• Equity investment has been the traditional route
• Is there a better alternative?
• How do Diversified Growth Funds work?
• How can they replace equities in a growth portfolio?
75
76. How do Diversified Growth funds work?
Aim
• To deliver equity like returns with less risk than equities by targeting an absolute return
over cash or inflation
Approach
• Not benchmark driven - every investment held is because it will contribute to the
risk/return profile
• Multi-asset investing – potential to hold the broadest range of assets
• Manager has control over asset allocation – seeking returns in different markets
An investment and governance solution
76
77. Why a cash or inflation + target?
Log scale % change year on year
10,000,000 140
120
1,000,000
100
100,000 80
10,000 60
40
1,000 20
100 0
-20
10
-40
1 -60
1899
1904
1909
1914
1919
1924
1929
1934
1939
1944
1949
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
2004
2009
Gilt returns % (RHS)~ UK equity returns % (RHS)~
UK Equity Nominal TR Index (LHS)* UK Cash + 4% Index (LHS)*
UK Cost of Living + 5% Index (LHS)*
Libor +4% = equity return with less risk
Source: Barclays Equity Gilt Study 2012, 1899 – 2011
* Cumulative ~ Annual 77
78. Some examples of Diversified Growth Funds
Passive Asset Active
Allocation Asset Allocation
Active Stock Passive
Selection Stock Selection
Derivatives
Strategies/
Currencies
?
Common aim to deliver real returns,
reduce volatility and improve governance
78
79. Our approach
The Baring Dynamic Asset Allocation Fund
• We target Cash +4% absolute returns within 70% of equity risk
• Focus on dynamic asset allocation- the most important generator of returns
• Dynamically participating in up-markets and dampening volatility in down markets
• Diversify in different ways at different times
• Simple building blocks - clear and transparent implementation
79
80. Why Dynamic Asset Allocation is Critical
Best and worst performing asset classes
2007 2008 2009 2010 2011
Emerging Equities 37.4 Overseas Bonds 58.1 Emerging Equities 59.4 Gold Bullion 33.4 Index Linked Gilts 23.3
Gold Bullion 29.6 Gold Bullion 42.8 Asia Ex Japan 53.3 Asia Ex Japan 24.0 UK Gilts 15.6
Asia Ex Japan 29.0 UK Gilts 12.8 UK Equities 30.1 Emerging Equities 22.9 Gold Bullion 11.9
European Equities 15.3 Cash 4.7 European Equities 19.4 N American Equities 19.0 Property 8.1
Hedge Funds 4.5 European Equities -24.4 Cash 0.5 UK Gilts 7.2 Asia ex Japan -13.0
Corporate Bonds 1.8 UK Equities -29.9 UK Gilts -1.2 European Equities 5.3 Japanese Equities -13.1
Property -5.5 Asia Ex Japan -31.3 Japanese Equities -5.9 Hedge Funds 5.2 European Equities -15.2
Japanese Equities -6.5 Emerging Equities -35.2 Overseas Bonds -9.7 Cash 0.4 Emerging Equities -17.6
The right asset class at the right time is key
Source: Barings as at 31.12.11 80
81. Changes in asset allocation since inception
Baring Dynamic Asset Allocation Fund
(%)
100 Cash/Near Cash
Alternatives
80
Property
Themed Fixed Fund*
60
Corporate/Convertible Bonds
40 Overseas Govt Bonds
UK Gilts
20
Overseas Equity
0 UK Equity
31-Oct-12
31-Jan-07
30-Jun-07
30-Jun-08
30-Jun-09
30-Jun-10
30-Jun-11
30-Jun-12
21-Mar-07
31-Mar-08
31-Mar-09
31-Mar-10
31-Mar-11
31-Mar-12
28-Sep-07
31-Dec-07
30-Sep-08
31-Dec-08
30-Sep-09
31-Dec-09
30-Sep-10
31-Dec-10
30-Sep-11
31-Dec-11
30-Sep-12
Source: Barings, as at 31.10.12, Gross Exposure
Inception date: 16.01.07
*Themed Fixed Fund composition: Aug ’07-Feb ’08: 0-3yr Ster bonds. Mar ’09-June ’10: Overseas ILGovt; Aug 10-to date: EMD 81
82. Dynamic Asset Allocation Fund Performance
Quarterly Returns Since Inception
30 Return %
20
12.5
10 6.4 6.6
5.7 3.8 3.3
3.1 3.0 1.3 -2.3 -1.3 -2.6 -2.4 2.9 3.7 -3.1 -1.9
-0.9 1.8
1.1 0.7 0.2 1.2 2.0
0
-0.4 -1.5
3.0 4.5 -1.8 10.9 22.4 5.5 6.4 13.6 7.4 1.0 1.9 8.4 6.1 -2.6 4.7 2.5
-10
-9.1
-9.9 -12.2 -10.2 -11.8 -13.5
-20
SI (ann.)
Q1 07
Q2 07
Q3 07
Q4 07
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
Q3 09
Q4 09
Q1 10
Q2 10
Q3 10
Q4 10
Q1 11
Q2 11
Q3 11
Q4 11
Q1 12
Q2 12
Q3 12
Fund FTSE All Share
Past performance is no indication of current or future performance. The performance data does not take
account of the commissions and costs incurred on the issue and redemption of units.
Source: Barings & Morningstar, as at 30.09.12. SI (ann) as at 30.09.12. DAAF performance figures are shown for I Class shares in Sterling on a
NAV per share basis, with net income reinvested. Reference to the index is for comparative purposes only.
82
83. Current Portfolio & Themes (as at 31st October 2012)
Concern Implication
US monetary policy more radical, but
US the major uncertainty for 1H 2013
fiscal policy tightening
Global growth still slow Earnings expectations still vulnerable
Slower growth in China recognised by the
Similarly recognised by Chinese markets
administration
ECB has toolbox to avoid financial Governments less threatened by markets,
market-induced failure of the Euro rather their electorates
Corporate sector hoarding cash; nervous Supporting of credit with still little scope
about investment for higher government bond yields
Source: Barings
84. The application of DGFs by pension schemes
DB Schemes
100% Substituting all growth assets
25% - 50% A core holding which dynamically changes the growth asset mix of the
scheme, while maintaining strategic allocations to other growth asset classes
5% - 10% Strategic allocation to an alternative risk/return profile
DC Schemes
An “accumulation phase” equity replacement strategy
Often used as a part of scheme default for early and middle stages of a “lifestyle” approach
84
85. Conclusion
• An alternative growth asset offering less volatility than equities
• Targeting a real rate of return
• Aiming to access equity markets at the right time
• With the ability to diversify away from risk assets to control volatility
An approach generating increased appetite from
public and private sector Pension Schemes
85
86. Important
Information
For Professional Investors/Advisers only. It should not be distributed to or relied on by Retail Investors.
This document is approved and issued by Baring Asset Management Limited, authorised and regulated by the Financial Services Authority and in jurisdictions other than
the UK it is provided by the appropriate Baring Asset Management company/affiliate whose name(s) and contact details are specified herein. The information in this
document does not constitute investment, tax, legal or other advice or recommendation. It is not an invitation to subscribe and is for information only.
Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed. Past performance is
not a guide to future performance. Where yields have been quoted they are not guaranteed. Changes in rates of exchange may have an adverse effect on the value,
price or income of an investment. There are additional risks associated with investments (made directly or through investment vehicles which invest) in emerging or
developing markets. Investments in higher yielding bonds issued by borrowers with lower credit ratings may result in a greater risk of default and have a negative impact
on income and capital value. Income payments may constitute a return of capital in whole or in part. Income may be achieved by foregoing future capital growth. We
reasonably believe that the information contained herein from 3rd party sources, as quoted, is accurate as at the date of publication.
The information and any opinions expressed herein may change at any time. Companies and employees of the Baring Asset Management group may hold positions in
the investment(s) concerned. This document may include internal portfolio construction guidelines. As guidelines the fund is not required to and may not always be
within these limits. These guidelines are subject to change without prior notice and are provided for information purposes only.
This document may include forward looking statements which are based on our current opinions, expectations and projections. We undertake no obligation to update or
revise any forward looking statements. Actual results could differ materially from those anticipated in the forward looking statements.
This document must not be used, or relied on, for purposes of any investment decisions. Before investing in any product, we recommend that appropriate financial
advice should be sought and all relevant documents relating to the product, such as Reports and Accounts and Prospectus should be read. Compensation
arrangements under the Financial Services and Markets Act 2000 of the United Kingdom will not be available in respect to any Offshore Fund.
Research Material
Baring Asset Management only produces research for its own internal use. Where details of research are provided in this document it is provided as an example of
research undertaken by Baring Asset Management and must not be used, or relied upon, for the purposes of any investment decisions. The information and opinions
expressed herein may change at anytime.
Version 08/SD
Compliance (London): 06 August 2012
Compliance (London): 06 August 2012 86
87. Auto enrolment – the duties and the
challenges
More than just pensions!
Shaun Thompson, Solicitor
Pensions team
shaun.thompson@bllaw.co.uk
88. Auto enrolment in a nutshell
Applies to all UK companies!
Workforce is split into eligible, non eligible and
entitled workers.
Different obligations in relation to each category of
worker.
Some obligations in force now, some will come into
force in coming months and years.
Re-enrolment obligations.
89. Why auto enrolment?
Cost pressures and lifestyle choices – we are living
longer and not saving enough for retirement!
The auto enrolment reforms intend to address this
issue.
90. How prepared are you?
Studies suggest many UK employers are not yet fully
prepared.
This will affect your business – ensure you’re ready!
91. Staging date
What is it?
When is it?
Do you know when your company’s staging date is?
How do you comply with it?
Payroll issues.
Plan and prepare, don’t underestimate challenges!
92. Identifying your workforce
What is a worker?
Know which of your employees are eligible, non
eligible and entitled workers.
Keep this under review – employees can switch
between categories!
93. Which pension arrangement(s) to use?
Use an existing pension scheme?
Set up a new pension scheme - occupational or
personal/trust based or contract based?
Master trust?
Use NEST?
Use a single arrangement or a mix of the above?
Self certification.
Salary sacrifice.
Use postponement/transitional period?
94. Using contractual enrolment
Simpler but more expensive?
Watch out for potential issue as to deduction of
contributions.
Differences in communication requirements?
Remember re-enrolment obligations for
employees who opt out!
95. Notices and record keeping requirements
Prescribed requirements which employers must
meet.
Remember deadlines and time limits!
96. High earners
Potential for HMRC protection to be lost.
Potentially expensive consequences for employees with
this protection!
Duty of good faith - employer communication strategy?
97. Investment funds and charges – risks to
employers?
No “safe harbour” protection in auto enrolment
legislation.
Suitable default fund, investment options.
Pot follows member concerns.
Employer’s duty of good faith.
98. Penalties for non-compliance
Pensions Regulator can intervene and require certain
steps to be taken and/or impose financial levies for
non-compliance.
Fines can be of up to £10,000 a day.
Criminal offences.
Should help companies focus on their duties and
obligations!
99. Conclusion
Auto enrolment is not going to go away!
Ensure your company will be able to meet obligations
by its staging date.
Ongoing obligations and compliance.
Challenges and opportunities!
Success? Here to stay? Get out the crystal ball!
102. Thames Valley Pensions Conference 2012
Just when you thought things couldn’t get
any worse!
UK Fund deficits up by £20bn (or more)?
Volatile asset values – where to get some value?
Auto enrolment – more work but for what benefit?
What chance have employees got to understand all that is going
on – new arrangements; DB to DC; investment choices; AMCs,
AMDs, etc.
Continued pressure on covenants
Life expectancy???
Retirement – what retirement?
Outlook for gilt yields????
104. D =
Deficits – but how much really?
Deferred payments?
Deal with the mistakes
Defensive
De-risk (or re-risk)?
Dynamic Asset Allocation (or Diversified Growth)
Defined Contribution = disappointment and delayed
retirement
Difficult messages and decisions
Delegate more or better (or both)
105.
106. Thames Valley Pensions Conference 2012
- a Trustee’s perspective – a look back at the last
12 months
More - or at least the same - for less, eg audit fees
What next - valuations, administration, governance budgets?
Towards fiduciary management (or proxy) = fewer lunches!
Buy ins/outs in vogue and then?
Gilts v. Corp bonds
2nd/3rd valuation = better understanding but greater pressures?
Data and benefit audits
TPR expectations
Less time – more focus
108. Things to take away from today
This is all for the members – right contributions, right investments, right
benefits
Liabilities - follow the rules but check your data
Manage your risks – they come in all shapes and sizes – liability,
assets and operational
Good governance
– What are you trying to achieve?
– Plan on how to get there
– Measure what you do as well as what others do for you
– Adjust if and when you need to
– Be decisive
Most DB schemes headed for either buy out or PPF – but is there an
alternative?
Master trusts/aggregated schemes?
Other efficiencies – how hard has the pensions industry tried?
Thames Valley Pensions Conference 2012
109. Things to take away from today
IMPROVING DC OUTCOMES
Good choice of funds, including default fund
Salary sacrifice
Annual management charges
Save more tomorrow?
Governance matters just as much here
– Committee with training – replicate trustee role?
– Review processes
– Agreed objectives
Master trusts/aggregation
It’s in everybody’s interests that it is made to work
Thames Valley Pensions Conference 2012