private pension plans: the multi-funds proposal… the freedom of “multiple choice” investment!...

PRIVATE PENSION PLANS:PRIVATE PENSION PLANS:

THE MULTI-FUNDS PROPOSAL…THE MULTI-FUNDS PROPOSAL…

THE FREEDOM of “MULTIPLE CHOICE” INVESTMENT!THE FREEDOM of “MULTIPLE CHOICE” INVESTMENT!

by ERIC CONRADS – CIO AFP Santa Maria / INGby ERIC CONRADS – CIO AFP Santa Maria / ING

2

COMPETITION

PRICE

SERVICE QUALITY

FUND RETURNS

RISK CONTROLBASED ON…

CLIENTFREEDOM OF CHOICE

FUND TYPE FAMILY (MULTI-FUNDS)

ASSET MANAGER

(AFP)

PHILOSPOHY PILARS: COMPETITION & FLEXIBILITYPHILOSPOHY PILARS: COMPETITION & FLEXIBILITY

3

PORTABLE PENSIONPORTABLE PENSION: CLIENTS CAN PICK THEIR MANAGER

PENSION RISK PROFILERISK PROFILE IN THE HANDS OF THE CLIENT!

AVAILABILITYAVAILABILITY OF DIFFERENT FUND RISK PROFILES

GUIDED FREEDOMGUIDED FREEDOM OF CHOICE VIA AGE RESTRICTIONS or AUTOMATIC ASSIGNATION IF NO CHOICE IS MADE

EXPERIENCE DEMONSTRATES IMPROVING RETURNIMPROVING RETURN VIA MULTI - FUNDS

AFFILIATE MORE ACTIVELY INVOLVEDAFFILIATE MORE ACTIVELY INVOLVED IN THE DYNAMIC OF HIS RETIREMENT

LOWER COSTLOWER COST TO MANAGE THE RETIREMENT SYSTEM

STABILZATION & DEEPENING OF THE LOCAL CAPITAL MARKETLOCAL CAPITAL MARKET

NECESSITY OF WIDE SPECTRUM OF INVESTMENT POSSIBILITIES FOR DIVERSIFICATION NEEDS AND FACE GROWTH OF ASSETS

MULTI FUNDS EXPERIENCE: KEY MESSAGES MULTI FUNDS EXPERIENCE: KEY MESSAGES

4

Fuente: Asociación de AFP

AFP CHILE: EXAMPLE OF DETAILED PORTFOLIOSAFP CHILE: EXAMPLE OF DETAILED PORTFOLIOS

5 FUNDS SYSTEM: different RISK-RETURN PROFILES…DIFFERENTIATED BY LIMIT OF EQUITY EXPOSURE

73.60%

26.30%

61.70%

38.30%

46.50%

53.50%

26.40%

73.60%

0%

100%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

A B C D E

FIXED INCOME

EQUITIES

5

MULTI-FUNDS: EMPIRICALLY DIFFERENT RETURN PROFILESMULTI-FUNDS: EMPIRICALLY DIFFERENT RETURN PROFILES

AS ONE WOULD EXPECT…MORE AGRESSIVE FUNDS DELIVERED HIGHER RETURNS…

return (base 100)

80

100

120

140

160

180

200

220

240

260

FONDO A

FONDO B

FONDO C

FONDO D

FONDO E

6

MULTI-FUNDS: DIFFERENT CHESTS OF RISK PROFILEMULTI-FUNDS: DIFFERENT CHESTS OF RISK PROFILE

…AND OBVIOUSLY IT IMPLIES HIGHER RISK!

volatility 30d

0.00

1.00

2.00

3.00

4.00

5.00

6.00

Oc

t/0

2

De

c/0

2

Fe

b/0

3

Ap

r/0

3

Ju

n/0

3

Au

g/0

3

Oc

t/0

3

De

c/0

3

Fe

b/0

4

Ap

r/0

4

Ju

n/0

4

Au

g/0

4

Oc

t/0

4

De

c/0

4

Fe

b/0

5

Ap

r/0

5

Ju

n/0

5

Au

g/0

5

Oc

t/0

5

De

c/0

5

Fe

b/0

6

Ap

r/0

6

Ju

n/0

6

Au

g/0

6

Oc

t/0

6

De

c/0

6

Fe

b/0

7

FONDO A

FONDO B

FONDO C

FONDO D

FONDO E

7

RETURN DIFFERENTIALS = COMPETITION & TRANSPARENCYRETURN DIFFERENTIALS = COMPETITION & TRANSPARENCY

1.5%9.6%8.7%10.2%FUND E

1.3%13.7%13.2%14.5%FUND D

0.6%18.1%17.8%18.4%FUND C

1.2%21.2%20.9%22.1%FUND B

1.3%24.7%24.3%25.6%FUND A

DIFFERENTIALINDEXWORSTBEST2006

1.1%4.8%4.2%5.3%FUND E

0.7%6.7%6.5%7.2%FUND D

0.9%8.5%8.2%9.1%FUND C

1.1%11.4%10.8%11.9%FUND B

1.4%14.9%14.1%15.5%FUND A


1.5%7.9%6.8%8.3%FUND E

0.7%9.3%9.0%9.7%FUND D

1.3%11.4%10.6%11.9%FUND C

1.8%12.8%12.2%14.0%FUND B

1.6%15.5%14.6%16.2%FUND A


1.5%9.6%8.7%10.2%FUND E

1.3%13.7%13.2%14.5%FUND D

0.6%18.1%17.8%18.4%FUND C

1.2%21.2%20.9%22.1%FUND B

1.3%24.7%24.3%25.6%FUND A


1.1%4.8%4.2%5.3%FUND E

0.7%6.7%6.5%7.2%FUND D

0.9%8.5%8.2%9.1%FUND C

1.1%11.4%10.8%11.9%FUND B

1.4%14.9%14.1%15.5%FUND A


1.5%7.9%6.8%8.3%FUND E

0.7%9.3%9.0%9.7%FUND D

1.3%11.4%10.6%11.9%FUND C

1.8%12.8%12.2%14.0%FUND B

1.6%15.5%14.6%16.2%FUND A


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MULTI-FUNDS: AFFILIATES ARE USING THE FREEDOM OF CHOICE!MULTI-FUNDS: AFFILIATES ARE USING THE FREEDOM OF CHOICE!

AFFILIATES HAVE BEEN KEEN TO USE THE FREEDOM OF CHOICE FOR THEIR RETIREMENT PLAN…

0%

5%

10%

15%

20%

25%

30%

35%

40%

1 2 3 4 5

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

2002

2003

2004

2005

2006

% of affiliates (lhs) % of contributors (rhs)

0%

5%

10%

15%

20%

25%

30%

35%

40%

1 2 3 4 5

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

2002

2003

2004

2005

2006

% of affiliates (lhs) % of contributors (rhs)


9

FUND TYPE EVOLUTION: CLIENTS MIGRATE TO HIGHER RETURN FUNDSFUND TYPE EVOLUTION: CLIENTS MIGRATE TO HIGHER RETURN FUNDS

…AND THEY HAVE MOSTLY GONE FOR THE HIGHER RETURN FUNDS (92% OF FUND A & B clients are under 40)

BALANCED FUND C IS ASSIGNED BY DEFAULT (nearly half of the total…syndrom of excess of choice = you dont choose?)

19.0%

23.1%

45.5%

10.8%

1.6%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

FUND A FUND B FUND C FUND D FUND E

2002

2003

2004

2005

2006

2006 TOTAL: $88.6BN (75% of GDP)

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AFP FOREIGN INVESTMENTS EVOLUTION: NEEDS OF FLEXIBILITY!AFP FOREIGN INVESTMENTS EVOLUTION: NEEDS OF FLEXIBILITY!

THE MANAGERS HAVE USED AT THE MAXIMUM THE AVAILABILITY OF INTERNATIONAL DIVERSIFICATION

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2001 2002 2003 2004 2005 2006

0

5000

10000

15000

20000

25000

30000

35000

%

$

TOTAL FOREIGN INVESTMENTS


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MULTI-FUND SYSTEM: INTERNATIONAL EXPERIENCEMULTI-FUND SYSTEM: INTERNATIONAL EXPERIENCE

2002: CHILE moves from 1 to 5 funds & MAX 30% internationally invested

Initially 2 funds for RISK needs: people close to pension preoccupied by volatility

Expanded to 5 funds for RETURN needs: critic was the lack of equities exposure in the fund.

2004: MEXICO offers the choice between 2 funds with MAX 15% in equities

2005: SLOVAKIA introduces 3 multi - funds: growth-balanced-conservative

2006: PERU introduces 3 multi - funds: growth-balance-conservative

THE AFP have the freedom to introduce more if they want…3 was a CHOICE!

2007: MEXICO moves from 2 to 5 funds and raises MAX equities to 30%

CHILE has a reform plan on the table to improve the system.

PERU increased the foreign limit to 13.5% from 10.5%

• TO OFFER CHOICE OF “TAILOR-MADE” FUNDS RATHER THAN ONE “READY-TO-WEAR” FUND

• TO BALANCE INVESTMENT FLEXIBILITY WITH THE REALITY OF THE LOCAL CAPITAL MARKET

WHAT MATTERS?

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MULTI-FUND SYSTEM: SOME KEY CONCLUSIONS…MULTI-FUND SYSTEM: SOME KEY CONCLUSIONS…

MULTI-FUND SYSTEM IS OFFERING RISK-RETURN ALTERNATIVES

EXPERIENCE SHOWS DIFFERENT SCALES OF CHOICE BUT POOR CONSIDERATION FOR RISK

RANKING IS MAIN SELLING POINT…DUE TO TIMING OF MULTI-FUNDS…MARKETS WERE ONLY UP

“RISK”: CONTRIBUTORS MIGHT HAVE TO LEARN THE CONCEPT OF RISK… BY EXPERIENCE!

MULTI-FUND SYSTEM PERMITS FREE-CHOICE OF PENSION PLAN

EXPERIENCE DEMONSTRATES THAT PEOPLE HAVE EXPLOITED IT & ARE ACTIVELY INVOLVED.

MULTI-FUND SYSTEM SHOULD CONSIDER AGE AS A DIVISION BREAKER

GENERATION NEEDS SEEMS THE EASIER WAY TO GUIDE THE CONTRIBUTOR BY DEFAULT.

LIFE-CYCLE FUNDS BOOM IN DEVELOPED MARKETS IS A SOURCE OF INSPIRATION.

MULTI-FUND SYSTEM NECESSITATES EDUCATION

ESSENTIAL TO FOSTER KNOW-HOW AMONG THE POPULATION

THE MORE SOPHISTICATED IS THE SYSTEM, THE MORE KNOWLEDGE IS NEEDED…

13

MULTI-FUND SYSTEM: SOME KEY CONCLUSIONS…MULTI-FUND SYSTEM: SOME KEY CONCLUSIONS…

MULTI-FUND SYSTEM DEFINES STRICTLY THE FUND PROFILES

NECESSITY OF A “POLICE REGULATOR” TO ENFORCE THE LIMITS

ESSENTIAL THAT FUNDS MANDATE ARE ALIGNED WITH CLIENT EXPECTATIONS

MULTI-FUND SYSTEM: PRIVATE MANAGEMENT / PUBLIC REGULATIONS

ODD WEDDING REQUIRES TO MELT FLEXIBILITY OF INVESTMENT DECISIONS WITHIN A PUBLICLY REGULATED LIMITED-FIELD TO ENSURE A MINIMUM RETURN.

ASSET ALLOCATION IS STILL THE LEADING FACTOR IN INVESTMENT PERFORMANCE

BUT THE RISK IS THAT AN EXCESS OF REGULATION = PUBLIC ENTITY IS THE ALLOCATOR! THE MULTI-FUNDS SYSTEM IS A GOOD ONE BUT HAS SOME YOUTH IMPERFECTIONS…

Is it normal to be restricted in foreign investments? (Government currency management!?) Is it normal that an agressive fund has to hold 20% of cash? (what a long-term cost!) Is it normal that an agressive fund has a maximum of 15% in equities? (interest of the youngsters?) Is it wise to keep most of your investments locally when the market tripled in a year? (bubble trigger?)

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Contributors want to feel confident that their retirement savings are being managed in their best interest by professionals.

The next level is ACTIVE participation of the contributor to the future of his retirement.

Leave it tothe pros

Do ityourself

MULTI-FUNDS SYSTEM

Contributors select a portfolio basket (conservative, moderate, aggressive) based on their risk profile.

Ideally it should be linked to the LIFE CYCLE of the person.

MULTI-FUNDS available

ONE FUND SYSTEM

Contributors leave the selecting and monitoring to the professionals through the only ONE FUND available for his pension

Manage Your Own Portfolio of Funds

Contributors select, manage and monitor their own portfolio by advice and help of AFP Model Portfolio Asset Allocations taking into consideration their age, goals and investment horizon.

3rd PILAR -APV

Increasing level of choice

Increasing need for education

CONCLUSION: INSPIRATION FOR TRADITIONAL PENSION SYSTEMSCONCLUSION: INSPIRATION FOR TRADITIONAL PENSION SYSTEMS

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CONCLUSION: INSPIRATION FOR TRADITIONAL PENSION SYSTEMSCONCLUSION: INSPIRATION FOR TRADITIONAL PENSION SYSTEMS

CITIZENS IN DEVELOPED COUNTRIES RETIRED AT 61 AND CAN EXPECT TO LIVE FOR A FURTHER 17 YEARS

SOON A MAJORITY OF THE VOTING POPULATION IN DEVELOPED COUNTRIES WILL BE OVER RETIREMENT AGE = HIGHER BURDEN DEPENDENCY RATIO!

FINANCING CURRENT PENSION SYSTEM IS UNSUSTAINABLE:

SOLUTION 1SOLUTION 1: YOU WILL WORK TILL YOU DROP

SOLUTION 2SOLUTION 2: YOU RAISE TAXES

SOLUTION 3SOLUTION 3: THE FINANCING MODEL OF PENSION HAS TO BE REVISED.

PAY-AS-YOU-GO SCHEME PRIVATE DEFINED CONTRIBUTION PLANS

BEST SOLUTION: MULTIFUNDS SYSTEMBEST SOLUTION: MULTIFUNDS SYSTEM

WITHOUT TRANSITION FROM ONE FUNDWITHOUT TRANSITION FROM ONE FUND

private pension plans: the multi-funds proposal… the freedom of “multiple choice” investment!...

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