Australian Superannuation Investment Conference, Sept 5 th 2013 Bev Durston, Edgehaven Pty Ltd

1. A tale of two pensions: UK & Australia Australian Superannuation Investment Conference, Sept 5th 2013 Bev Durston, Edgehaven Pty Ltd

2. A tale of two pensions: UK & Australia • Background and experience • Overview of pensions: UK & Australia • Compare & contrast • DB ideas for DC pension funds • Investment observations • Next generation pensions • Summary

3. Background and Experience • Pensions experience in Australia, Singapore & UK • Head of Portfolio Risk, Global Portfolio Manager, Deputy CIO • 2008 to 2013: • BA Pensions: Head of Alternative Assets; • DC Trustee for BA Pensions • Edgehaven Pty Ltd (Royal Mail Pension Plan)

4. Overview of pensions: UK • Heavy DB influence but now switching focus to DC • Cutting back on DB promises, closing schemes to future accrual • Industry dominated by DB assets • Initiation of “compulsory” DC to broaden the scope of pensions investing • Australia 20 years ago?

5. Overview of pensions: UK

6. Overview of pensions: UK

7. Overview of pensions: Australia • Heavy focus on accumulation: aim only to produce a pot of money at retirement • Balances not (yet) big enough for meaningful incomes in retirement • Longevity risk: Members face a very real risk of running out of money in old age • Increasing age care costs with no policy (insurance) solution in place • Members can take 100% cash at retirement

8. Compare & contrast Pension Policy Framework: Item Australia UK DC Super contributions Compulsory, 9% Auto enrolled to 8%, opt out Taxation in accumulation Taxed but advantaged Tax free At retirement Up to 100% cash Max 25% cash Govt (Age) pension Mean tested Non means tested Income stream in retirement N/a Forced annuitisation

9. Compare & contrast • A key difference: • No member choice of scheme in the UK • Bespoke member analysis: Trustees focus on their member characteristics and devise policy according to their needs; • No league tables produced which rank returns; • No “peer group risk”; • No “one size fits all” investment default policy in DC;

10. DB ideas for DC pension funds • 1. Switch to an income focus in retirement

11. DB ideas for DC pension funds • 1. Switch to an income focus in retirement; • 2. Benchmarking: Define your income objective as an inflation linked bond • Gap Analysis: “Glide path” plan to move towards it

12. DB ideas for DC pension funds • Switch to an income focus in retirement • 2. Benchmarking: Define your income objective as an inflation linked bond • Gap Analysis: “Glide path” plan to move towards it • Manage longevity risk: Build tools to transfer longevity risk • Consider annuitisation: Ideally “staged” but possibly forced

13. Investment observations • DC Default investment policy: • “One size fits all” investment is a poor proxy for risk return appetite across time. • Why is a 25 year old invested identically to a 59 year old? • Do they have the same risk appetite as one approaches a retirement decision point? • Consider Target date (or Lifecycle) investing

14. Investment observations Source Mercer Consulting

15. Investment observations • DC investment breadth • Why is this different from DB? • DC members seem “second class citizens” • Over reliance on equity risk rather than diversified growth

16. Investment observations • Capital allocation DOES NOT EQUAL risk Source: Blackrock

17. Investment observations Using diversified growth strategies and tapering risk before retirement offers less extreme outcomes than 100% equities: Investment strategy 100% Equities 50/50 DGF 100% DGF + Equities Median income replacement ratio: 70% 72% 69% Downside 1 in 10 chance: 33% 42% 44% Min income replacement ratio: 20% 28% 35% Max income replacement ratio: 220% 150% 125% (Assuming 40 year investing of 14% contributions and 5 year lifestyle policy) Source: Mercer Consulting

18. Investment observations • DC investment breadth • Why is this different from DB? • DC members seem “second class citizens” • Inappropriate focus on liquidity rather than on risk

19. Investment observations Using only a risk and return lens this investment strategy look diversified…..

20. Investment observations But this strategy becomes one dimensional using a liquidity lens Using risk and return only it looks diversified…..

21. Investment observations A one dimensional strategy on liquidity misses out on diversifying, less liquid opportunities

22. Next generation pension schemes • Recognition that the individual is ill equipped to manage the many risks of DC: • The European ideal: risk sharing between employer and employee • UK considering “Defined Ambition” and “DB minus” • Consider a guaranteed minimum outcome for DC

23. Summary • Similar origins for UK and Australian schemes • Australia now moving to focus on the decumulation phase • Ideas from DB may be useful for DC • Investment strategy has evolved beyond one size fits all • Policy changes may be needed • Next generation pensions will be different again…..

24. Summary If you do what you’ve always done, you’ll get what you’ve always got. (Henry Ford)

25. Summary • If you do what you’ve always done, you’ll get what you’ve always got. • (Henry Ford) • For Australian Super Schemes: • “Static is the new risk”

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