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INCREASE ANNOUNCEMENT 2020

CORPORATEDO GREAT THINGS EVERY DAY

PENSIONPLATINUM

PLATINUM PENSION INCREASE ANNOUNCEMENT 2020

CONTENTS1. Platinum Pension Increase Announcement ............................................................................................................................... 3

2. Investment Structure ................................................................................................................................................................................... 5

3. Investment Markets in Perspective and Future Outlook ................................................................................................... 6

4. Portfolio Performance ................................................................................................................................................................................. 8

5. Increase Declaration Relative to Investment Returns .......................................................................................................... 9

6. Long-Term Annuity Increase Scenarios ........................................................................................................................................ 10

7. AnnuityIncreaseHistoryandInflationProtection ................................................................................................................ 11

8. Security in Turbulent Times ................................................................................................................................................................... 13


The Board of Old Mutual Life Assurance Company (South Africa) Limited (OMLAC(SA)) has approved the following Platinum Pension increases, effective for increase dates from 1 April 2020 to 31 March 2021:

Profit Category Pricing Interest Rate (PRI) 2020 Increase1 CPI2

A 3.5% 6.0%

4.0%

B 4.0% 5.5%

C 4.5% 4.5%

D 5.0% 4.0%

E 5.5% 3.5%

F 6.0% 3.0%

1. Applicable to Platinum Pension annuitants only.2. Year-on-year increase in the Consumer Price Index (CPI) as at December 2019.

This note provides an understanding of the factors considered in this increase declaration. It also provides some insights into the investment markets leading up to the declaration, and the security of Old Mutual’s Corporate With-Profit Annuity range.

Communication to individual annuitants will be distributed during the month in which their increase becomes effective.

1. PLATINUM PENSION INCREASE ANNOUNCEMENT


In support of improved disclosure on the management of your Platinum Pension investment, we will continue to make available reports for Old Mutual Corporate’s With-Profit Annuity portfolios (which include Platinum Pension). These include the:

•With-ProfitAnnuitiesDisclosureReport• Principles and Practices of Financial Management (PPFM)

The above Platinum Pension reports are available on Old Mutual’s website at:https://www.oldmutual.co.za/corporate/platinum-pension

https://www.oldmutual.co.za/corporate/platinum-pension


2. INVESTMENT STRUCTUREPlatinum Pension increases declared in 2020 are based primarily on investment returns for the year from 1 January 2019 to 31 December 2019 (the investment year). We are pleased to inform you that the 2020 increases for the various PRI categories were higher than their comparable CPI inflation expectation (see Section 6).

Before analysing the underlying performance of some of the asset classes over the investment year, it is useful to understand how the assets underlying Platinum Pension with-profit annuities are structured.

Platinum Pension annuitant assets are split between three funds, with each of these funds accommodating certain PRI categories. Each of these individual funds has its underlying assets split between a matched interest-bearing asset (IBA) portfolio and a portfolio of growth assets.

The table below details the strategic split between the matched assets and the unmatched portfolio (or ‘growth portfolio’) for each of the Platinum Pension funds:

Fund 1 Fund 2 Fund 3

PRI Category 3.5% & 4% 4.5% & 5% 5.5% & 6%

Matched Portfolio 42% 52% 62%

Unmatched Portfolio 58% 48% 38%

Total 100% 100% 100%

Note: The actual split between the matched and unmatched portfolios fluctuates from time to time, as the market values of the underlying assets change.

The matched IBA portion of the portfolio is made up of holdings in investment grade South African bonds, as well as interest-bearing instruments known as swaps. The purpose of the matched portfolio is to enhance stability by investing in assets that provide an income cash flow that exactly matches a specified proportion of future expected cash outflows (annuity payments). The locked-in yield (LIY) is the rate at which returns from the matched portfolio are released for increase purposes.

It is the performance of the unmatched portfolio or ‘growth portfolio’, together with the LIY, that is used to support the increases.


3. INVESTMENT MARKETS IN PERSPECTIVE AND FUTURE OUTLOOK

The 2019 investment year achieved strong returns, following the disappointing investment returns of 2018. The All Share Index (ALSI) gained 8.2% of its capital value in 2019. While this performance is off a low base, following the sharp decline at the end of 2018, it has nevertheless taken the ALSI to well above its 2015 and 2016 highs.

The stronger 2019 performance of the local equity market can be seen in the graph of the ALSI shown below. The strong growth from 2012 to the end of 2014 was followed by a period of slow growth from 2015 to date.

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JSE ALL SHARE INDEX (ALSI)

1/1/2010 1/1/2011 1/1/2012 1/1/2013 1/1/2014 1/1/1015 1/1/2016 1/1/2017 1/1/2018 1/1/2019TIME

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Over the recent five-year period, from the start of January 2015 to the end of December 2019, the ALSI has grown steadily by 2.9% per annum, however this is still a rate well below the average annual increase in the CPI. As a large portion of the growth portfolio consists of local equities, low returns in this asset class have a substantial impact on the total return delivered by the Platinum Pension portfolio and, ultimately, the increases declared on your annuity.

The local bond market also performed well in 2019, achieving an overall return for the year of 6.5% compared to 0.8% in 2018.

The performance of global equity markets was very strong toward the end of the 2019 investment year with 24% return compared to 5% over the previous year. One of the keys to the market’s 2019 success was starting from a low base. The 2019 return was also attributed to a combination of a booming technology sector and an easing monetary policy from the United States (US) Federal Reserve – the two tech giants, Apple and Microsoft, both with a market capitalization of more than US $1 trillion, were up 85% and 15% respectively; and over 2019, the Federal Reserve lowered rates three times – the key rate is now back to a range of 1.5% to 1.75%. The fears of a global economic slowdown, disruptive trade wars and potential missteps from Federal Reserve policy were also never realised, contributing to positive sentiment toward the end of 2019.

The global bond markets, however, performed quite poorly in 2019 (0.8%) when compared to 2018 (14%).

A further key consideration in deciding the annuity increase for 2020 is what is likely to happen over the next investment year and at the next increase declaration in one year’s time.


GLOBALLooking ahead, we expect global returns to be much harder to come by in 2020. Our global view is shaped by the theme that the US will underperform. US equities have outperformed global equities for a decade now and valuations are expensive relative to the rest of the world. This outperformance has been supported by a stronger earnings performance from US corporates. We expect the US economy to slow down and this is likely to put pressure on US corporate profit margins and earnings.

Another key theme for global markets is the very low yield on government bonds available in most countries around the world. About US $12 trillion worth of global government bonds – a fifth of the total market – trade on negative yields. In other words, investors are prepared to pay the governments issuing these bonds for the privilege of lending them money. We think this will continue to drive capital from areas of low yield to areas of higher yield.

We have recently reduced our return expectations for global equities following the strong rally in global equities. Our return expectations for global cash and bonds are deeply unattractive. Central banks have eased policy in response to weaker global growth on the back of the US-China trade war. While the US and China are expected to ease policy further over the next year, there is little that central banks in Europe and Japan can do to bolster growth, given already very easy monetary policy stances. Monetary policy is reaching its limits.

LOCALSouth African government bonds are amongst the highest yielding assets available to global investors and this theme has the potential to benefit South Africa in 2020. Of course, to take advantage of these potential capital flows South Africa will need to up the ante on economic reform. Incremental reforms are gradually resulting in the outlook improving off a low base. It’s clear though that the pace of reform is too slow for the ratings agencies. Both Moody’s and Standard & Poor’s (S&P) have recently downgraded their outlook on South Africa’s sovereign credit ratings from stable to negative implying further downgrades unless progress is made in resolving South Africa’s fiscal crisis and improving growth prospects.

Markets, of course, are forward-looking and, while there is likely to be some volatility around a downgrade by Moody’s – the only ratings agency to currently have South Africa rated investment grade – we think local bonds have already priced in much of the bad news. We also see evidence that the South African government is serious about reform even if it is slow in implementing.

South African assets continue to derate – in other words, they are becoming cheaper and offering better value. We have increased our long-term real return expectation for South African equity and property while our return expectation for bonds is unchanged. South African bonds continue to offer exceptional returns when compared to global bonds.

Q1 2020 DEVELOPMENTSWhile returns were reasonably good for 2019, as described above, growth and other risk assets came under significant pressure towards the end of February 2020 with the situation still unfolding at the time of writing (mid-March). The spreading COVID-19 pandemic weighed heavily on investor sentiment with increasing uncertainty as to the impact it would have on economic growth. A further concern to investors was the collapse in the oil price and how that may affect capital markets.

Policy makers were already seen to be taking action to provide support to the economy and markets and further measures were expected to be announced. The level of uncertainty, however, remained elevated, at least for the near term.

We have, therefore, adopted a more prudent stance of reducing the level of increases compared to the 2019 rates in order to protect the Bonus Smoothing Reserves (BSR’s) of the annuity portfolios.


4. PORTFOLIO PERFORMANCEFor the Platinum Pension portfolio, global equities performed strongly producing investment returns of 24.2% (in rand terms) over the 2019 investment year. Global interest-bearing assets and global alternative assets were the two worst performing asset classes over 2019 as can be seen in the table below.

The table below outlines the gross investment returns per asset channel underlying the unmatched investment portfolio for periods ended 31 December 2019. They are for one-year and three-year periods. Also provided is the actual asset allocation at 31 December 2019.

Returns1 One Year Three Years (annualised) Actual Asset Allocation2

Local IBA 6.5% 5.1% 2.4%

Local Equity 7.2% 3.8% 31.6%

Local Alternative 7.6% 5.7% 13.1%

Local Property 4.6% 4.4% 13.6%

Global IBA 0.8% 4.5% 0.8%

Global Equity 24.2% 14.8% 29.7%

Global Alternative -6.8% 7.2% 6.2%

African Assets 13.7% 14.3% 2.6%

Total Unmatched Portfolio 11.5% 8.3% 100.0%

1. The returns shown are gross of asset manager fees. Returns shown for global assets are in rand terms.2. The asset allocations are reflected as a proportion of the unmatched portfolio.


5. INCREASE DECLARATION RELATIVE TO INVESTMENT RETURNS

The bonus smoothing reserves (BSRs) for Platinum Pension as at the end of 2018 and 2019 were within the following bands:

Date ST-BSR LT-BSR

31 December 2018 0% to 5% 0% to 5%

31 December 2019 0% to 5% 0% to 5%

The long-term BSR (LT-BSR) is the difference between the value of the cash flows that are matched, and the market value of the said matching assets. This difference is released gradually over the full lifetime of the annuitants.

The short-term BSR (ST-BSR) is the difference between the value of the remaining liabilities and the market value of the remaining assets. The level of the ST-BSR is significantly impacted by the net investment returns earned on the unmatched portfolio and the LIY referred to earlier. It is the level of this ST-BSR that is the most relevant for determining the level of increase that can be afforded.

It is useful to review how the ST-BSR changed over the period as a result of the experience over the investment year and the impact of the declared increases. The table below outlines how the ST-BSR movements can be estimated for the Platinum Pension portfolio as a whole.

Platinum Pension

Opening ST-BSR range at 31 December 2018 0% to 5%

Add: Investment Return1 11.8%

Less: Charges and Fees 2.1%

Less: PRI2 4.2%

Less: Increase Declared3 4.5%

Less: Other4 0.6%

Closing ST-BSR range at 31 December 2019 0% to 5%

1 This is the gross return, for the year ended 31 December 2019, into the ST-BSR. This includes the return on the growth assets and the contribution from the LIY on the matched bonds. The difference between this estimated return and the total return earned on the portfolio would have an influence on the level of the LT-BSR.

2 ‘PRI’ is the pricing interest rate. It represents the amount of credit for future investment returns that is given to the annuitant at the outset of the contract. The PRI deduction of 4.2% in the table above represents the weighted average PRI across all the categories.

3 This is the weighted average cost of annuity increases across all the categories.4 ‘Other’ includes smaller items like underwriting profit/loss, client cash flows, economic assumption differences, basis and model changes and

process adjustments.


6. LONG-TERMANNUITYINCREASESCENARIOS

The level of increases that can be expected over the long term depends on the South African and global investment and economic environments. This is because the investment returns earned on the Platinum Pension portfolio are dependent on these environments and, in particular, how they change over time, which may result in a wide range of outcomes for investment returns.

Once granted, annuity increases are guaranteed. However, future annuity increases depend on unknown future market performance and are therefore not guaranteed.

Below we outline a few of the potential future scenarios for Platinum Pension. These scenarios are not exhaustive, but represent some of the more likely scenarios over the long term.

The table below shows the level of inflation protection from annuity increases, given various levels of portfolio real returns. The 4% column in orange is the central long-term average expectation.

PRI CategoryPortfolio Net Real Return (p.a.)

3% 4% 5%

3.5% CPI – 0.5% CPI + 0.5% CPI + 1.5%

4% CPI – 1% CPI CPI + 1%

4.5% CPI – 1.5% CPI – 0.5% CPI + 0.5%

5% CPI – 2% CPI – 1% CPI

5.5% CPI – 2.5% CPI – 1.5% CPI – 0.5%

6% CPI – 3% CPI – 2% CPI – 1%

Note: The scenarios above show a range of average increases for Platinum Pension over the long term. It is important to note, however, that different performance might be achieved in the future, especially in the short term. The worst case scenario is that pensions stay level and there is no increase in a given year.


7. ANNUAL INCREASE HISTORY AND INFLATION PROTECTION

The table below shows the historical annuity increases that have been declared for the various PRI categories offered on Platinum Pension. It also shows the increases annualised over three-, five- and ten-year periods as well as a comparison of these increases against CPI inflation over the same three-, five- and ten-year periods.

Year CPI*PRI Category

3.5% 4.0% 4.5% 5.0% 5.5% 6.0%

Annual increases declared

2011 3.5% 4.5% 4.0% 4.0% 3.5% 3.5% 3.0%

2012 6.1% 4.5% 4.0% 4.0% 3.5% 3.5% 3.0%

2013 5.7% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5%

2014 5.4% 9.0% 8.5% 7.5% 7.0% 6.0% 5.5%

2015 5.3% 10.0% 9.5% 7.5% 7.0% 5.5% 5.0%

2016 5.2% 10.0% 9.5% 7.5% 7.0% 5.5% 5.0%

2017 6.8% 9.5% 9.0% 7.0% 6.5% 5.0% 4.5%

2018 4.7% 9.0% 8.5% 6.5% 6.0% 4.5% 4.0%

2019 4.5% 8.0% 7.5% 6.0% 5.5% 4.5% 4.0%

2020 4.0% 6.0% 5.5% 4.5% 4.0% 3.5% 3.0%

Annualisedfiguresover3,5and10years

3 years 4.4% 7.7% 7.2% 5.7% 5.2% 4.2% 3.7%

5 years 5.0% 8.5% 8.0% 6.3% 5.8% 4.6% 4.1%

10 years 5.1% 7.6% 7.1% 5.9% 5.4% 4.5% 4.0%

* The CPI rates are the year-on-year figures that correlate with the corresponding investment year/period, i.e. they are the year-on-year figures to December of the previous year.

Note: Care should be taken when comparing Platinum Pension increase histories with the histories of other products. Different with-profit annuity products may function quite differently from each other e.g. some offer higher starting annuities while others offer higher increases over time.

Platinum Pension increases over the last three, five and ten years compare well with CPI inflation over the corresponding periods, with increases on the 3.5% to 5% PRI categories being higher than CPI inflation.

The table in section 6 reflects the average long-term increase expectation for each PRI category relative to CPI inflation. We are pleased that every PRI category within Platinum Pension has outperformed its increase expectation over each of the three-, five- and ten-year periods. The performance is exceptional given the difficult economic environment over the past few years.


INFLATION OUTLOOKThe year-on-year increase in the CPI remained within the South African Reserve Bank’s (SARB) target band of 3% to 6% for the full investment year reaching a peak of 4.5% in June 2019, and landing on 4.0% as at 31 December 2019; slightly below market expectations of 4.2%. Prices slowed mainly for housing and utilities; and transport; driven by actual housing rents and cheaper vehicles being available. The depreciating rand further contributes to the recessionary environment.

While South Africa remains in a low growth environment, we are hopeful that the renewal and rebuilding of the state, the corruption fight, the strengthening of SA’s institutions, the policy debate and other small changes will gather momentum and get some traction with respect to building confidence and lifting growth.


8. SECURITY IN TURBULENT TIMESAssets backing Old Mutual’s policyholder liabilities, including bonus smoothing reserves, are held in policyholder funds – these funds are not accessible by shareholders. Shareholder capital is separate from, and over and above, policyholder funds. Shareholder capital has no impact on the level of annuity increases. It does, however, represent the security backing the annuity guarantees offered by Old Mutual.

The assets backing policyholder liabilities (policyholder funds) have to be in the name of the insurer and may not be encumbered. This means that no outside party may have a claim on those assets. They are for the benefit of the annuitants only.

By law, South African insurers must hold funds of sufficient quality and quantity to absorb significant unforeseen losses arising from the risks associated with their activities. The level of capital required for regulatory purposes should address the risk areas insurers are exposed to and should be proportionate to the nature, scale and complexity of the business involved. As at the end of June 2019, OMLAC(SA) had 2.18 times as much capital as was required on a Solvency Assessment and Management (SAM) basis.

OMLAC(SA) has a BB+ credit rating from S&P Global Ratings, which is higher than the overall South African sovereign debt rating as at the middle of November 2019. This rating is a measure of the security Old Mutual provides to its clients.

In summary, annuitants may rest assured that the guarantees from Old Mutual are safe. Their annuities are guaranteed to be paid for life, and will never decrease.

FOR MORE INFORMATION

Contact your Old Mutual Corporate consultant, or intermediary, or call your nearest Old Mutual Corporate

office.

Johannesburg: 011 217 1246

Pretoria: 012 368 3540

Western Cape: 021 504 7813

KwaZulu-Natal: 031 582 0600

Eastern Cape: 041 391 6300

You can ask for a copy of this report by calling the Pencare Service Centre at 0860 40 60 90.

Email: [email protected]

Visit the Corporate website: oldmutual.co.za/corporate

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Old Mutual Corporate is a division of Old Mutual Life Assurance Company (South Africa) Limited, a licensed Financial Services Provider situated at Mutualpark, Jan Smuts Drive, Pinelands 7405, South Africa. The company registration number is 1999/004643/06. The information contained in this document is provided as general information and does not constitute advice or an offer by Old Mutual. Every effort has been made to ensure that the information provided meets the statutory and regulatory requirements. However, should you become aware of any breach of such statutory and regulatory requirements, please address the matter in writing to: The Compliance Officer, Old Mutual Corporate, PO Box 1014, Cape Town 8000, South Africa.


https://www.oldmutual.co.za/corporate/annuity-portfolios

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