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THE GLOBAL PENSION FUNDS OVERVIEW –
HOW CAN WE ENSURE RETIREMENT
SECURITY AND AFFORDABILITY
Roger Urwin, FSIP
Strategic Director, Future of FinanceGlobal Head of Investment Content, Willis Tower Watson
June 2016
Future of Finance Initiative | Putting Investors First
Ljubjana-Sofia-Budapest-Kiev
2
Future of Finance Strategic Objective:
To shape a trustworthy, forward-thinking investment profession that better
serves society.
The future of finance will be better if financial market practices are fair
and efficient and financial service providers put investors’ interests first.
CFA Institute mission: To lead the investment profession globally by promoting the highest
standards of ethics, education, and professional excellence for the ultimate benefit of society.
What
THE CFA INSTITUTE FUTURE OF FINANCE INITIATIVE
How
Why
By creating and curating content, and convening discussions where
critical issues can be socialized to motivate the industry, individually and
collectively to be professional and effective
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Retirement Security & Affordability
Putting Investors First
Industry Structure, Content & Culture
NEW
THE FUTURE OF FINANCE AREAS OF FOCUS
GLOBAL WRINKLINGDEPENDENCY RATIO GOES FROM 21% TO 44%
4
0
1,000
2,000
3,000
0-19 20-39 40-59 60+
Po
pu
lati
on
(m
illi
on
s)
0
1,000
2,000
3,000
0-19 20-39 40-59 60+
Po
pu
lati
on
(m
illi
on
s)
0
1,000
2,000
3,000
0-19 20-39 40-59 60+
Po
pu
lati
on
(m
illi
on
s)
2010
Source: U.S. Census Bureau and Watson WyattSource: OECD and author
2030
2050
5
PENSION FUNDS UNPACKED
Participants
Members and Pensioners
Workplace providers, not-for-profits
(including industry, regional or national
funds)
Commercial providers
Wider stakeholders - society
Components
Pension design Governance Investment model Pension platforms Execution
Collaboration/social capital Engagement Fiduciary sole interest test
Criteria for success
Value-for-money: efficiency* in
producing affordable secure income
Fairness between members
Trust
*Efficiency is tested in the conversion of contributions into income – ‘the pensions dollar’
Pension types
Defined Benefit: employer bears the
risk
Defined Contribution: member bears
the risk
- workplace funds
- retail funds
Hybrids: mixes of DB and DC
1 3
2 4
6
Big investment issues
DB and DC – switching ownership and control
Investing – low for longer, rates and returns
Investment governance – fiduciary tests
Costs – need to be contained
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$38.4tn Total Pension
Assets
$ 2bn+Total Pension
Fund Members
7Big Pensions
Countries
Canada
Netherlands
Switzerland
UK
US
Australia
Japan
P7
Source: WTW Global Pensions Study 2016
GLOBAL PENSION ASSETS
7
GLOBAL PENSION ASSET ALLOCATIONAggregate P7 asset allocation from 1996 to 2015
16%
8%
Source: Willis Towers Watson and secondary sources
52% 50% 48%
44%
37%
38%
32%29%
7% 9%
19%24%
5% 3% 1% 3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996 2002 2008 2015e
Equities Bonds Other Cash
Other/ Alternatives
Equities
Domestic Equities
Foreign Equities
8
40% 42% 48%
60% 58%52%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2010 2015e
GLOBAL DB/DC ASSET SPLITChange over the last 10 years
DC 8%
Source: Willis Towers Watson and secondary sources
DC
DB
9
Some key conclusions from the study include:
Their allocations average 41% to equities, 34% to bonds and 25% to alternatives and
support an expected 10 year return of CPI + 2.9% pa
These funds are seeking returns well in excess of the liquid market bulk beta
principally through their private market reach, increasing allocations to smart betas
and continuing commitments to alpha; and through strengthening internal capabilities
These funds are increasingly transparent and increasingly influential
Source: WTW Thinking Ahead Institute
DB TOP TEN STUDY
Americas Europe, Middle East,
Africa
Asia Pacific
CalPERS (US) PGGM (Netherlands) GPIF (Japan))
New York (US) ABP (Netherlands) NPS (Korea)
CPPIB (Canada) ATP (Denmark)
Ontario Teachers (Canada) GPFG (Norway)
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THE DECLINE OF DB (DEFINED BENEFITS)
Defined Benefits have been increasingly
costly over time because of bargaining,
longevity and guarantees
Pensions have become even more expensive
in the QE era with low for longer, rates and
returns
The social capital in defined benefits
pensions (shared values and understanding
of stakeholders – members, pensioners,
sponsors, media, government and others)
has got worse
So inevitably, Defined Contribution has
replaced Defined Benefit as the most viable
pensions choice going forward
DB IN SOME
PLACES IS A TRAIN-WRECK
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THE RISE OF DC (DEFINED CONTRIBUTIONS)
DC investment is a highly complex pension delivery system because of the multiple
membership segments – all with unique needs and wants
Investment models have delivered simple models to DC in pre-retirement investing
Balanced and growth fund investing
Target and lifecycle designs
Default funds and choice funds
But effective overall pensions delivery has
not yet
been attained anywhere because of the
limitations of the platforms, the alignments,
and the engagement
The engagement/combination is the
biggest issue – how the product of the DC
provider and member can produce a
product more than the sum of the parts
DC REQUIRES
BETTERENGAGEMENT
AND TRUSTTO FUNCTION
HEALTHILY
INVESTORS LACK TRUST IN FINANCIAL SERVICES
12
77%
61%RETAIL
47%
57%INSTITUT-
IONAL
51%GENERAL
PUBLIC
TECHNOLOGY
FINANCIAL
SERVICES
MEDIA
Source: CFA Institute Trust to Loyalty Survey 2016
How much do you trust businesses in these industries to do what’s right?
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DC CHALLENGES
Five DC challenges Integration of
individual’s
whole financial
position, other
investments and
commitments
1
Platform issues
of high costs,
low scale, low
contributions
and weak
governance
3
Integration of
post- and pre-
retirement
positions,
investing and
insurance
2
Create the
auto-strategy
and auto-
management
options
5Engagement/
communication
by streamlining
the user
interface
4
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Some key conclusions from the study include:
Funds’ internal capabilities are being significantly strengthened
Sustainable investing strategies among these funds are diverse but appear set to take
a step up
These funds give increasing attention to their communications and user interfaces
Complexity, culture and managing change are major pre-occupations for all funds
These funds are increasingly transparent and increasingly influential
Source: WTW Thinking Ahead Institute (forthcoming)
DC TOP TEN STUDY
Americas Europe, Middle East, Africa Asia Pacific
TIAA (US) British Telecom PS (UK) Q Super (Australia)
IBM (US) NEST (UK) Australian Super (Australia)
Microsoft Plan (US) GEPF (South Africa) First State Super (Australia)
CPF (Singapore)
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DC COMPETITIVE AND DISRUPTIVE FORCES
The bargaining power of DC
funds with participants
- including regulatory factors
- including ESG/UO ship
The substitution
opportunities in
internalisation
The intense competition
- for returns
- for talent
The bargaining power of DC
funds with suppliers,
particularly asset managers
Threat of competition
– opting out/alternative
providers
e.g., Aus
Super
e.g.,
NEST
e.g., UK cost caps
& ESG/UO at FSSe.g., CPF
e.g.,
Microsoft
DISRUPTIONS IN THE INVESTMENT INDUSTRY
There is an accelerating pace of change in the investment industry
The best way to get a grasp of this change is by looking at the industry as an
ecosystem – people and firms, technologies and other forces, and markets
The single factor most associated with organisational success or failure is
ability to adapt to the changing realities of the ecosystem, recognising the
disruptions and innovations possible, factoring in:
The competitive forces that challenge organisational success
The technology forces in ‘Fintech’ and ‘Soctech’ and other forms of
revised thinking and working
Macro forces in geopolitics and economics
Societal forces in how investing touches society – inequality and
inclusion; environment and climate; societal cohesion
All of the above are topics in our line of sight in the Future of Finance
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TIMELINE FOR DC – THREE ERAS
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1. Emergent
Technology Era
Lifecycle/
Lifecycle/ TDF
Growth Model
and multi-asset
investing
Post retirement
income
Flexible annuities
2. Clunky
Product Era
Poor
engagement
Expensive admin
Clunky plumbing
Poor diversity
No post
retirement
integration
Platform
integration
Whole of life
integration
Full investment
efficiency
Streamlined
plumbing
Social media
Deferred annuities
3. Integrated
Delivery Era
Investment Innovation Platform Innovation
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37%
23%
15%
11%
2%
40%
13%11%
30%
2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Robo-advisers Marketplace /Peer-to-Peer
lending
Crowdfunding Blockchaintechnology
Other
Which technology do you see as having the greatest impact on the financial services industry 1 year and 5 years from now?
1 year from now 5 years from now
FINTECH SURVEY OF CFA INSTITUTE MEMBERS:
UNDERSTANDING THE LANDSCAPE
The data collection was conducted online 5-19 February 2016. There were 3,803 members who were invited to participate and 775 valid responses
were received for a response rate of 20% and a margin of error of ±3.2.
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WHAT THIS MEANS FOR DC INVESTING
Less in bonds, more in diversifying growth strategies
More in passive and smart beta, less cost, more internal control
Narrower choice but allowing for wider circumstance
Lifecycle/ Target Date Funds – pre and post retirement
The integration of investment and insurance (and healthcare?)
1
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VISION OF ‘THE PENSIONS DOLLAR’
Member Contributions
- c20%
Employer Contributions
- c20%
Investment Return
- c60%
You put in $X as contributions, usually after tax
Your employer adds the same amount
Your fund can be trusted over time to generate gains of as much as three times this sum
Your income is five times your original $X contribution with some additional tax advantages
2
Note: Calculations vary widely by context, including effects of inflation | See Ezra
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WHAT THIS MEANS FOR DC PARTICIPANTS
‘Later life’ and ‘work tapering’ - a mixture of work, leisure,
education and healthcare
Pension finance for later life powered by auto-strategies and
auto-management from trustworthy, forward-thinking pension
platforms
Pensions making a contribution to well-being
3
RETIREMENT
LATER LIFEWORK TAPERING
X
22
4
WHAT THIS MEANS FOR TOMORROW’S INVESTMENT
PROFESSIONAL
Gets
involved
- Understands/deals with all the moving parts
of the investors’ circumstances
Well-
connected
- Behavioural savvy
- Good with governance
Highly
principled
- Client-centric and ethical
- Recognises their responsibilities
Technically
proficient
- Effective with the challenges of current
investment markets
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WHAT THIS MEANS FOR TOMORROW’S DC PENSION
PLAN
Minority Report - Steven Spielberg’s future vision of Washington DC
Vision of marketing engagement through retina scanning
• New technologies and platform engagement for capture of life
circumstances and peer segments
Vision of autonomous cars and road systems
• New pension auto-strategies and auto-management based on life
circumstances and social networks
5
THE INVESTMENT PROFESSION’S OPPORTUNITY
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The industry has hidden behind market conditions (“not in our control, not our fault”) and let new catalysts bring about early stages of decline in the perception of value for fees
The new model has to deliver value through all segments – from
millennials to baby boomers
That model must have more immediacy, simplicity, personalization,
and integrity
Even in a lower fee rate world, there can be higher AUM, and a bigger
value proposition exploited by those who adapt best to the new landscape
6
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CONTACT DETAILS
Roger Urwin FSIP
Strategic Director
CFA Institute Future of Finance
Roger is the Strategic Director for the Future of Finance initiative working as a consultant to the
CFA Institute. Roger was formerly a Board of Governors Member, CFA Institute from 2008 to
2014.
Also
Global Head of Investment Content
Willis Towers Watson
Roger assumed the new post of Global Head of Investment Content at Towers Watson in July
2008 after acting as the Global Head of the investment practice from 1995 to 2008.
Roger joined Watson Wyatt in 1989 to start the firm's investment consulting practice and under
his leadership the practice grew to a global team of over 600. His prior career involved heading
the Mercer investment practice and leading the business development and quantitative
investment functions at Gartmore Investment Management.
Roger’s current role includes work for some of the firm's major investment clients both in the UK
and internationally. He leads the firm’s work on transformational change and has conducted
major strategic reviews at a number of global leading funds. He is also involved with the Towers
Watson thought leadership group (Thinking Ahead Group) and co-founder of the Thinking Ahead
Institute.
His investment innovations include three global firsts: the creation of the first target date and
lifestyle DC funds (in 1988), the risk budget framework (in 1999) and the governance budget
framework for assessing asset owner organisational effectiveness (in 2007). He is also the
author of a number of papers on asset allocation policy, manager selection and governance and
sustainability.
Roger has a degree in Mathematics from Oxford University and a Masters in Applied Statistics
also from Oxford. He qualified as a Fellow of the Institute of Actuaries in 1983. He became a
Fellow of the UK CFA Society in 2015.
Also MSCI Advisory Director Roger is part-time Advisory Director at MSCI Inc
Contact [email protected] | [email protected] | +44 7802 974003
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SOURCES AND LIMITATIONS
Sources
Professor Gordon Clark (Oxford University) and Roger Urwin (Towers Watson) have collaborated in five research
papers based on field research with asset owners undertaken between 2007 and 2016.
Clark and Urwin I: Best-Practice Investment Management: Lessons for Asset Owners from the Oxford – Watson
Wyatt Project
Clark and Urwin II: Leadership, Collective Decision-Making and Pension Fund Governance
Clark and Urwin III: Innovative Models of Pension Fund Governance in the Context of the Global Financial Crisis
Clark and Urwin IV: DC Pension Fund Best-Practice Design and Governance.
Clark and Urwin V: Best-Practice in the Outsourced CIO Model
Limitations
Roger Urwin has prepared this material in his capacity as a consultant to the CFA Institute
This material should not be taken to reflect his views as Global Head of investment Content at Willis Towers Watson or
as Advisory Director to MSCI
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BEST-PRACTICE DC FRAMEWORK – SOURCE CLARK &
URWIN
DC Design- Organisational
structure- Default/ Gates/
Engagement/ Retirement
Governance- Dual governance- Resources and
processes - Decision rights and
responsibilities
Implementation- Investment strategy
- Funds, asset allocations and
managers- Lifecycle design
Recognise alignments and
conflicts of interest implicit in
model
Recognise behavioural finance
elements
Deliver some customisation
given membership differences
Recognise costs as major factor
Take steps to limit conflicts
through independence, incentive
structure and fiduciary status of
governing entity
Governance cannot be effective
without effective design
DC governance has dual
elements
Delivery has to encompass a
degree of customisation
organised around segments
Best-practice governance still
work-in-progress because of
limitations with engagement
model
Investment implementation follows
general institutional fund
principles
DC investment design involves
the creation of multiple funds in
both default and choice segments
Strategies must recognise
lifecycle considerations
There are two pathways to choice
– a controlled choice which offers
variants on the default and an
active wider choice version
Supplementary Materials
THE FACES OF CHANGESIX MEDIUM-TERM FACTORS GROWING IN INFLUENCE ON PENSION FUND DEVELOPMENT
1. Improvements in governanceImproved recognition of return on governance feeds through in increased attention and growing focus on performance from all sources; more talent attracted to Chief Investment Officer role at funds.
2. Risk management focusFunds focus on risk intensifies, with two separate groups: those where the appetite for risk is trimmed from previous levels; those needing risk for their situation
3. Pension design, towards a DC modelDC becomes the dominant global model with its attendant risk transfer causing tension in the balance of ownership and control
4. Pressure for talentStrong competition for talent among pension funds and their asset managers, particularly on the leadership level, despite the reduced short-term demands as a result of the financial crisis.
5. New value chainA more effective “value chain” will emerge, where expense on various activities has a better value proposition than exists today. The use of passive approaches and smart betas is leading to modest fee compression.
6. New ideology emergingSome shift from a pure finance way of seeing pension investing (where short-term performance is paramount) to one where the longer-term sustainable growth aspect is considered (where longer term cash flow and stakeholder value with a longer term focus are critical); in this model, more integrated approaches to ESG and better stewardship exercised over ownership will be present
Supplementary Materials