john anderson alexander forbes financial services head of institutional strategy next generation...

John Anderson

Alexander Forbes Financial Services

Head of Institutional Strategy

Next Generation Benefit Design

The only constant is CHANGE!

The only constant is CHANGE...

OUR ENVIRONMENT AT HOME & ABROADHAS CHANGEd!!!

Legislative changes Abound!

The New Breed of Workers

Increased Longevity

Informed Consumers

Social Connectivity & flow of informationIncreased appetite for Choice & Flexibility

We need to understand the trends impacting us...

The numbers paint a SCARY picture!

>70%

The number of funds which had the same contribution rate structure over last 10 yrs.

75%

Percentage of people who selected Living Annuities at retirement.

43%

Percentage of retirees with living annuity drawdown rates of 15% or more.

NRRs over time...Age: 2001 Projected NRR: 2001 Projected NRR: 2011

30 year old 75% ???

40 year old 75% ???

50 year old 75% ???

Return

30 year old 14.1% p.a.(8.1% real)

40 year old 14.1% p.a.(8.1% real)

50 year old 12.8% p.a.(6.4% real)

• Invested in typical life-stage model

NRRs over time...Age: 2001 Projected NRR: 2001 Projected NRR: 2011

30 year old 75% 63%

40 year old 75% 69%

50 year old 75% 67%

Return Salary increase

30 year old 14.1% p.a.(8.1% real)

11.1% p.a.(5.1% real)

40 year old 14.1% p.a.(8.1% real)

9.0% p.a.(3.1% real)

50 year old 12.8% p.a.(6.4% real)

8.5% p.a.(2.4% real)

• Invested in typical life-stage model

• Cost of retiring increased: Increased longevity and falling interest rates• Assumes preservation• Contributions unchanged as % of salary

Do you have enough death cover?

94%The proportion of funds that kept their benefit structure fixed over the last 10 years.

~ Alexander Forbes Member Watch, 2011

Are Trustees concentrating on the right stuff?

Source: Alexander Forbes Hot Topics, November 2010, Audience Participation Results

Are Trustees concentrating on the right stuff?

Source: Alexander Forbes Hot Topics, November 2010, Audience Participation Results

We know what the issues are:

Behavioural tendencies!Fixed benefit structures!Not focusing on outcomes!

Our take on the other side of the door...

A more Engaged Employer is needed...

Ensuring appropriate benefit structures Educating employees Assessing benefit structures

Consideration of the Lifecycle...

Understanding the real asset allocation problem

Asset Wealth Human Capital Wealth

Age 0 18 25 35 45 55 65 85

This is the problem that a retirement fund is designed to address.

Is an auto-solution the answer?

A Fixed Benefits Design affects members’ lives

Age

25 30 35 40 45 50 55 60

120%

100%

80%

60%

40%

20%

0%

% o

f ne

ed c

over

ed

Mar

riage

1st c

hild

2nd c

hild

3rd c

hild

Yie

lds

fall

Div

orc

e

Re-

mar

ry

Expected retirement benefit Disability protectionDeath benefit

A Proposed Framework...Benefit Structures with Full Flexibility

Increasing Risk of Behavioural Factors Influencing Choices

Fixed Benefit Structures

Increasing Risk of Individual Shortfall/Excess

Appropriate solution lies

between the 2 extremes if you

have appropriate support

mechanisms

Appropriate solution lies

between the 2 extremes if you

have appropriate support

mechanisms