PENSION FUNDS AND CAPITAL MARKETS

1. Fagmeedah PetersenLurie PENSION FUNDSAND CAPITAL MARKETS Independent Actuary OECD / IOPS GLOBAL FORUM ON PRIVATE PENSIONS Pensions Governance Investment

2. Long Term investors? Fagmeedah PetersenLurie Independent Actuary • Pension funds and insurers represent significant savings • Drivers of development of Listed and unlisted capital markets • Especially in developing countries – biggest source of capital for diversified, third party investments • Pension Funds are Asset Allocators relative to liabilities • Pension fund liabilities – Clearly long to very long term for DB Pensions Governance Investment

3. Long Term investors? Fagmeedah PetersenLurie Independent Actuary • Mature DB fund has DMT of around • 7yrs for pensioner members (NRA 60), • 18yrs for active members (salary-weighted average age 40) • Opportunity to invest for very long term, e.g. unlisted equity held to maturity (IPO) • What is risk for a long term investor? • Volatility is noise • Valuations are academic • Liquidity is irrelevant Pensions Governance Investment

4. Long Term investors? Fagmeedah PetersenLurie Independent Actuary • Primary measure of risk not in sentiment (market volatility), but real capital at risk • Patient capital unlocks growth potential and offers opportunity for long term growth • In Developing countries, with young populations, and immature pension funds (I.e. very young average age of membership), opportunity to invest for very long term. • Opportunity for Treasuries to issue debt along full yield curve, even very long term • 30 years plus, as observed in SA (stable inflation or inflation-indexation) Pensions Governance Investment

5. Or a series of short terms? Fagmeedah PetersenLurie Independent Actuary • Manage funding to triennial valuation reporting, solvency illustrated for RegulatorsSolvency reserves need funding, trustees need to learn to accept fluctuations in funding level. • Investment performance monitoring 1/4ly, yearly, 3 yearly. • Drives churn in market in pursuit of dubious value opportunities – about 60% of listed equities portfolio holding churned per yearUse longer term performance periods (in surveys, for performance fees calculations) • Regulation limits “more risky” unlisted investments. Limits gradually being relaxed Pensions Governance Investment

6. Or a series of short terms? Fagmeedah PetersenLurie Independent Actuary • “Previous trustees did a bad job” • Lack of expertise on part of trustees, coupled with trustee liability – aversion for complex long term investments – default to listed investments with good informationCompulsory investment skill to exist within board • Cash payouts on exit: • Fund becomes short term savings account • Valuation, liquidity, volatility become important Legislate compulsory preservation Pensions Governance Investment

7. Driving market efficiency Fagmeedah PetersenLurie Independent Actuary • Gravitate towards listed investments • Improve integrity of market • Less government interference • Demutualisation • Regulation • Increased demand for capital market services leads to increase in capital investments in market services • IT – speed of processing, reporting, settlement • Increased regulation – increased knowledge in market • Increased competition as providers seek market share Improve efficiency Pensions Governance Investment

8. Driving market efficiency Fagmeedah PetersenLurie Independent Actuary • DB funds (and insurers) create demand for Index-linked bonds • Creates critical mass for certain markets – e.g. derivatives market created by demand for effective TAA • Foreign (developed market investors) seeking alternative alpha • Demanding fledgling capital markets grow up Increases efficiency Pensions Governance Investment

9. Crowding out unlisteds • Listed’s get disproportionate allocation of capital flows • Listed’s hothouse – valuations and consensus forecasts don’t support price • Listed’s management fees high, despite number of listed’s service providers • Lucrative, high margin listed fees disincentivises unlisted investment management • Trustees need to negotiate more

10. GDP’s &market caps in Africa Fagmeedah PetersenLurie Independent Actuary Pensions Governance Investment

11. Fagmeedah PetersenLurie Independent Actuary Pensions Governance Investment

12. Fagmeedah PetersenLurie Independent Actuary Pensions Governance Investment

13. Investors driving markets Fagmeedah PetersenLurie Independent Actuary • Pension funds demand infrastructure and greenfields investments – increased packaging / preparation of investment opportunities • Unfortunately very few venture capital opportunities offered – deal pipeline restriction for private equity type of investments • Uncertain / opaque private equity investments and vehicles create mistrust on part of willing long term investors, especially in less developed markets in Africa • Need to be seen as more mainstream • Regulator to provide guidelines • Regulators and market entities need to share information and expertise, and platforms, both in the private and listed space Pensions Governance Investment