Creating Sustainable Retirement Solutions A Global Perspective

1. Creating Sustainable Retirement Solutions A Global Perspective Ghalid Bagus, FIA FSA CFA Principal March 2013

2. Limitations and disclosures For investment professional use only. Not for public use or distribution. Past performance is not indicative of future results. Recipients must make their own independent decisions regarding any strategies or securities or financial instruments mentioned herein. Milliman, Inc. does not make any representations that products or services described or referenced herein are suitable or appropriate for the recipient. Many of the products and services described or referenced herein involve significant risks, and the recipient should not make any decision or enter into any transaction unless the recipient has fully understood all such risks and has independently determined that such decisions or transactions are appropriate for the recipient. Any discussion of risks contained herein with respect to any product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved. The recipient should not construe any of the material contained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not act on any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors. Milliman, Inc. does not ensure a profit or guarantee against loss. Nothing herein should be construed as a solicitation or offer or recommendation to buy or sell any security or to make any transaction. The information contained herein is derived from sources who are believed reliable, but the accuracy of data or advice cannot be guaranteed. No chart, strategy or tactic guarantees gains or losses. No assurances can be given that objectives will be met.

3. Some background

4. US retirement assets Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

5. Aging populations … impact on investors Traditional retirement systems breaking down Investors forced to take on investment and longevity risk Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

6. What are the top investor concerns? What are the top investor concerns? Investment losses Outliving investments Inflation Medical care during retirement Taxes Four of the five are risk management issues Investors are concerned about both pre- and post-retirement issues Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

7. How has the industry responded? The focus has been mainly on investment risk Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

8. Issues have come to the fore CPPI A method of portfolio insurance where the investor sets a floor on the portfolio value Many products were cash locked during the financial crisis Guarantee products Guarantee provider credit risk has come to the fore Capital requirements have increased for providing guarantee products Designs have become more opaque as interest rates have declined Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

9. Target date funds Target Date Funds evolved from the need to offer more tailored solutions to investors planning for retirement Funds tailor their risk profile by reducing holdings of risky assets as retirement approaches • Using risky assets as a risk proxy ignores • volatility and correlation changes • the length of the retirement time horizon Projection based on quarterly rebalance between EAFE Index and Barclays Capital Aggregate Bond Indexover the period 1 Jan 2003 to 31 Dec 2012. Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

10. Balanced funds Similar to asset allocation models but within a fund structure Fund invests in a mixture of bonds and equities and dynamically rebalance between to avoid market declines Benchmark allocations are not wide enough to provide suitable protection during a financial crisis Large return effect due to decline in interest rates on bond portion of the fund – may not be the case going forward Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

11. Diversification is still the primary risk management tool Diversification is still the primary risk management tool Diversification fails during crises when all asset classes decline together (i.e. 2008 plunge) Trading equity exposure for bond exposure may be unappealing in down markets with low interest rates Investors are challenged to find effective investment risk management approaches Source: Milliman, Inc. 2010 Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

12. Problems for investors Source: gallup.com, 2012 This chart is from Gallup's annual Economy and Personal Finance survey, conducted April 9-12, 2012, available at http://www.gallup.com/poll/154178/Expected-Retirement-Age.aspx Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

13. The need for better risk management

14. Unbundling the key concerns New solutions to capture market and longevity risks Existing solution Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

15. Investment strategies with protection Two risk management techniques Adding a protection strategy can reduce downside exposure - it aims to provide investors with much greater certainty that they can achieve retirement funding objectives Capital Protection Strategy Volatility Management • Current asset allocation • Target a specific equity allocation (i.e., 60%) as a proxy for risk • Maintain constant equity allocation regardless of market conditions • Target volatility asset allocation • Target a specific volatility level • Aims to prevent portfolio volatility from dramatically increasing during market crises • Attempts to cushion losses • Aims to cushion losses in market downturns • Amount of cushion customizable to plan needs • Keep protection relevant • Ratchet protection level up to preserve gains • Reset protection level down after extreme market declines to harvest gains Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

16. Volatility spikes frequently Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

17. How do investors react to volatility? Investor return versus Morningstar Category return Investor return: not all investors bought shares at the beginning of a period and held them until the end More volatile funds tend to show the greatest differential between Investor return and Morningstar Category return Investors tend to buy high and sell low Source: Morningstar 2012. Returns and volatilities are annualized. Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

18. Capital protection strategy characteristics Use dynamic rebalancing to replicate a put option inside the portfolio The value of a put is asymmetric – market downturns result in large gains, market upturns result in small losses Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

19. Protection strategy across market cycles • Bull/Bear Market Examples • Bear Market Bull Market Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

20. Who’s out there? Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

21. Historical backtest The Protection Strategy reduces the drawdown and improves the Sharpe Ratio while maintaining the same average level of equity exposure Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

22. Benefits when making withdrawals Protected portfolios are especially valuable when investors are making withdrawals Before crisis: September 9, 2008 First six months of crisis: September 9, 2008 to March 9, 2009 (bottom of market) Next six months of crisis: March 9, 2009 to September 9, 2009 (recovery) Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

23. Outliving assets is a real risk Life expectancy: 83 years Significant probability of living longer than the average life expectancy Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

24. Longevity account Longevity risk is addressed by making small annual allocations to deferred income annuities for a period before retirement During retirement, income sources are diversified Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

25. Protection + Longevity Account = Member Goals Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

26. In summary Individual investors more focused on risk management than in the past Existing investment solutions Continue to focus on diversification Do not address risks investors view as major concerns Next generation investment solutions are more attuned to investor concerns focusing on Volatility management Capital protection Longevity addressing pre- and post-retirement needs Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

27. Milliman Pty. Ltd.L5, 32 Walker Street North Sydney NSW, 2060Phone: +61 2 8090 9100Email: wade.matterson@milliman.comwww.milliman.com/frm Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.