Ateb 2011 Greenwich Speech V F2

Pension Plans: Challenges and Responses

Continental European Investment Management 2011

CONFIDENTIAL

29 September 20111

2 CONFIDENTIAL

Summary of Key Findings

▪ Continental European institutions reported rising asset levels on the back of the rebound in equities; however they stand well below 2007/8 levels and recent events in global markets and substantial falls in key risk assets will have been detractive to most portfolios.

▪ In the broad market, international equity allocations have risen on the back of positive markets and now almost match allocations to domestic equities, which have contracted. Fixed income remains the dominant asset category and allocations to alternatives remain anemic. A minority of institutions anticipate making significant asset allocation changes. The weight of responses indicate reductions in European government bonds and increases in private equity.

▪ The proportion of total assets managed externally has increased meaningfully. Fixed income dominates externally managed assets, although equities is becoming increasingly important. Of total assets, a higher proportion of equities is externalized than fixed income. Both equity and fixed income external allocations are focused on European product except in the case of pension funds, where international equities is dominant.

▪ Defined benefit pension fund asset allocations are quite dislocated from their policy targets. The sovereign debt crisis has driven a tactical rotation out of passive European government bonds into active product and international bonds; Meantime, European credit and active equities are well below target and passive equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target allocations.

▪ Large funds have expanded the number of external managers used, diversifying away manager-specific risk and hiring more specialist firms. In aggregate, however, both manager hiring and solicitation activity has slipped while forward looking hiring expectations have fallen to a new low characterized by little product focus.

▪ A significant minority of institutions – mostly pension funds – are applying derivatives for the purposes of liability and risk management. The focus on liabilities is being driven by maturing pension funds, accounting regulations, and the market environment.

▪ Investment consultant usage has fallen again.

Representative Quotes

•“Capital markets will not generate the fund return demanded

within reasonable risk limits.” –German Corporate Pension

Fund

•“We need 3.5% performance every year which is a challenge

as long as Swiss bonds return only 2%.” –Swiss Insurance

Company

•“Issuer risk [is driving us] away from high-risk Euro-Govies.”

–German Endowment/Foundation

•“The Euro debt crisis is currently our major concern.” –

Belgian Insurance Company

•“[We are] very worried about an interest rate increase.” –

Belgian Corporate Pension Fund

•“We want to get out of interest rate guarantees [/] I am

deeply worried about high interest rates.” Danish Corporate

Pension Fund

•There are major political issues to worry about, the U.S.

deficit, the Japan disaster, the Arab dictator states etc.” –

Swedish Corporate Pension Fund

3 CONFIDENTIAL

Key issues facing institutional investors

Source: Greenwich Associates 2011, CEIMF-11

▪ Achieving the target rate-of-return is cited

as the number one concern by many

institutional investors

▪ Other key issues include:

— Sovereign debt crisis

— Risk of inflation

— Interest rate increases

— U.S. deficit

— Japan disaster

— Arabian political turmoil


• “Increased regulation coming from the central bank [is] putting

pressure on smaller pension funds and making their life difficult to

impossible” –Dutch Corporate Pension Fund

• “[We are experiencing] undue and irresponsible big pressure

from the 2 regulators on pension funds.” – Dutch Corporate

Pension Fund

• “We have to become so transparent that we have to inform the

regulator beforehand what investments we intend to make. This

is not in the interest of our clients at all.” –Dutch Corporate

Pension Fund

• “The restricting regulations imposed on the pension funds created

by the state to contribute to the Swedish general pension system

limits the placement possibilities and thereby makes it difficult to

obtain a satisfactory rate of return.” – Swedish Corporate Pension

Fund

• “Solvency II regulations and at the same time, the bank regulation

Basel III, keeps me up at night.” –Danish Bank

• Basel III regulations and its consequences [are leading to] tighter

liquidity, forced equity increases and more difficult refinancing.” –

German Insurance Company

• “It is unclear at this time what the impact of Basel III will be on the

capital requirements of the bank which could affect substantially

our Depot A.” –German Bank

4 CONFIDENTIAL

Key issues facing institutional investors


▪ Regulatory developments are causing

additional stresses across the region:

— Regulations impacting Dutch pension

funds are widely seen as overly

restrictive and not in member’s best

interests

— Solvency II implementation

— Basel III and liquidity requirements


• “ [We are becoming] more active and less passive because of the

PIIGS problems.” –Norwegian Endowment/Foundation

• “[We are] shifting the government bonds portfolio to low-risk-

government bonds.” –German Corporate Pension Fund

• “Shift from government bonds to inflation linked corporate

bonds.” –German Corporate Pension Fund

• “There is too much enthusiasm for emerging markets, so we are

liquidating Asia and moving into Global Emerging Markets

including Eastern Europe and Latin America.” –Dutch Insurance

Company

• “We are increasing our investments in Emerging Markets such as

BRIC, but nothing in Africa.” – Swedish Corporate Pension Fund

• “Alternatives are potentially interesting but there is still lack of

transparency and liquidity in some products.” –Swiss

Endowment/Foundation

• “We are short duration, and now contemplating doing a swap or

buying put options or even inflation linked bonds.” –Swiss

Corporate Pension Fund

5 CONFIDENTIAL

Asset allocation trends


▪ A significant number of institutional

investors are contemplating more active

management of their assets in order to

selectively avoid exposure to perceived

risk areas.

▪ Investors are diversifying out of

government bonds.

▪ While positioning portfolios to benefit

from the shifting economic balance

between emerging and developed

markets, there is growing concern of a

bubble forming.

▪ Transparency remains a major hurdle to

investing in alternatives.

▪ Use of derivatives for risk management

purposes is growing.

6 CONFIDENTIAL

Institutional assets levels are recovering, but still fall well short of 2007

highs

C.E. Institutional Investors’ Total Institutional Assets 2001 – 2011, by Type of Institution (excluding Banks and Savings Banks)

€ 192 € 195 € 143 € 217€ 360 € 330 € 412 € 434

€ 309 € 334€ 467

€ 490 € 483€ 449

€ 493

€ 653 € 631

€ 750€ 491

€ 371 € 417

€ 549

€ 505

€ 658€ 763

€ 778

€ 100

€ 736

€ 575

€ 939 € 890

€ 1,161

€ 882

€ 1,258

€ 1,281

€ 1,489

€ 1,214

€ 1,484

€ 2,035€ 1,978

€ 2,454

€ 2,305

€ 1,699 € 1,655

€ 1,885

€ 0

€ 500

€ 1,000

€ 1,500

€ 2,000

€ 2,500

€ 3,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Eu

ros (

billio

ns)

Corporate Pension Public Pension Corporate Treasury Foundations Insurance

Source: Greenwich Associates 2011, CEIMF-11, Top Tier Research.

Note: C.E. assets shown in billions of Euros. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit and defined

contribution plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. Banks and Savings Banks not shown as

trend impacted by change in question methodology.

7 CONFIDENTIAL

While fixed income continues to dominate, international equity allocations

have grown on the back of positive markets and now almost match

European equity allocations which have contracted

C.E. Institutional Investors Asset Allocation 2011

10.7%

9.6%

60.6%

6.6%

3.3%

6.1%

5.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011

Pro

po

rtio

n o

f T

ota

l C

.E. A

sse

ts

European equities International equities Fixed income

Cash Real Estate Alternatives

Other


Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets

together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.

Fixed income is broadly stable,

growing by about 3% since 2009

International Equity allocations

have more than doubled since

2009

European Equity has reduced

by15% since 2009

Cash allocations are little changed

Real Estate has increased by 7%

Allocations to Alternatives have

reduced since 2009 from a low

base

8 CONFIDENTIAL

A minority of institutions anticipate making significant changes to their

overall asset allocation in the next 3 years; weight of responses indicate

reductions in European government bonds and increases in private equity

4

5

2

1

13

14

28

1

10

14

2

48

16

31

26

28

15

2 4

4

6

8

8

9

10

11

12

14

19

22

24

28

29

31

33

12

60 50 40 30 20 10 0 10 20 30 40 50 60

European Bonds – Passive

Other

International Equities – Passive

International Bonds – Passive

Infrastructure

European Equities – Passive

European Credit Bonds – Passive

Cash and Short-Term Investments

European Government Bonds – Passive

Hedge Funds

Commodities or Natural Resources

International Bonds – Active

Private Equity

European Government Bonds – Active

Real Estate

European Equities – Active

International Equities – Active

European Credit Bonds – Active

Number of C.E. Investors

Significantly Decrease Significantly Increase

C.E. Institutional Investors’ 3-Year Allocation Expectations for Institutional Asset Allocation


Note: Three year outlook.

Results are for corporate and public defined benefit plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.

179

147

173

156

176

137

138

110

144

129

133

150

146

105

128

134

45

145

No Change

9 CONFIDENTIAL

Anticipated change levels in Belgium

0

5

1

3

5

4

3

0

1

0

0

5

1

3

0

0

1

0

1

3

5

3

6

5

1

1

0

0

0

0

1

1

2

0

0

0

10 9 8 7 6 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 10


Other

International Equities – Passive

International Bonds – Passive

Infrastructure



Cash and Short-Term Investments

European Government Bonds – Passive

Hedge Funds

Commodities or Natural Resources

International Bonds – Active

Private Equity

European Government Bonds – Active

Real Estate


International Equities – Active


Number of Belgian Investors

Significantly Decrease Significantly Increase

Belgian Institutional Investors’ 3-Year Allocation Expectations for Institutional Asset Allocation


Note: Three year outlook.

Results are for corporate and public defined benefit plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations.

17

10

14

13

13

11

10

8

8

10

10

9

11

7

8

8

4

10

No Change

10 CONFIDENTIAL

C.E. Institutional Investors’ Assets

Managed Internally versus Externally –

Matched Sample

63.9% 62.0%

47.9%

10.3% 11.5%

18.0%

25.8% 26.5%34.1%

2009 2010 2011

Pro

po

rtio

n o

f T

ota

l C

.E. A

sse

ts

Discretionary Mandate

Pooled or Commingled Funds

Internally Managed

The trend towards the use of external managers is gathering pace;

Belgian and Norwegian Schemes are least likely to go external

C.E. Institutional Investors’ Assets Managed Internally versus Externally 2011, by

Country

64.3%80.2%

30.6%49.7%

61.4% 67.0%

9.5%

41.7%

49.4%12.7%

30.6%10.3%

27.7% 25.9% 25.0%

7.9%

Austria Belgium Denmark Finland France Germany

Pro

po

rtio

n o

f T

ota

l C

.E. A

sse

ts

C.E. Institutional Investors’ Assets Managed Internally versus Externally 2011, by

Country

69.2%50.5%

31.7%

71.3%

45.1% 47.4%

22.2%

25.3%

17.8%

33.3% 29.3%

42.9% 43.0%

10.9%21.6% 23.3%

6.6%

8.6%

Iberia Italy Netherlands Norway Sweden Switzerland

Pro

po

rtio

n o

f T

ota

l C

.E. A

sse

ts


Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit and defined

contribution plan assets together with other institutional assets and non-defined benefit plan assets held by corporate treasury, insurance, banks, and foundations. Question methodology was changed in

2011 in order to raise the accuracy of responses.

11 CONFIDENTIAL

Asset mix of total DB pension assets and externally managed assets; a

higher proportion of equities than fixed income is externalized

C.E. Institutional Investors Defined Benefit Plan Asset Allocation 2011 – Total Mix versus External Mix, by Type of Institution

11.6% 13.3% 15.2% 15.3%8.5% 10.7%

18.9%22.4%

11.2% 13.7% 25.6%

33.6%

45.6%42.3%

54.6%53.7%

37.8%

27.9%

11.1%14.9% 8.9% 7.5%

13.1%24.4%

6.1%3.8%

7.3%4.6% 5.2%

2.9% 5.5%4.2%4.5%5.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Pension Funds -

Total Mix

Pension Funds -

External Mix

Corporate Pensions -

Total Mix

Corporate Pensions -

External Mix

Public Pensions -

Total Mix

Public Pensions -

External Mix

Pro

po

rtio

n o

f T

ota

l C

.E. D

B P

lan

Asse

ts o

r

To

tal E

xte

rna

lly M

an

ag

ed

C.E

. D

B P

lan

Asse

ts

European equities International equities Fixed income Cash Real Estate Alternatives Other


Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets.

Question methodology was changed in 2011 in order to raise the accuracy of responses.

12 CONFIDENTIAL

6.7%7.1%

3.9%

5.7%

9.1%

6.4%

6.9%

7.5%

4.0%

5.7%

8.9%

6.2%

European

equities

International

equities

Fixed income Real Estate Private

Equity

Hedge Fund

Expecte

d T

ota

l R

ate

of

Retu

rn

2010 2011

C.E. Corporate Defined Benefit Plans’ Anticipated 5-Year Average Return on Plan Assets

C.E. Corporate Defined Benefit Plans’

Average Actuarial Earnings Return on Plan

Assets

Corporate DB plans’ anticipated asset returns fall short of mean actuarial

earnings rates by 20 basis points


Note: Mean calculation excludes reported answers of "0" and / or "None".

Note: Mean calculation excludes reported answers of "0" and / or

"None".

5.4% 5.5% 5.5%

2009 2010 2011

Actu

arial E

arn

ings R

ate

of

Retu

rn

Actual

expected

rate of plan

return

Current

actuarial

earnings

rate

GAP = -0.2%

13 CONFIDENTIAL

6.6%

7.1%

3.8%

6.4%

9.7%

7.1%6.8%

7.3%

3.9%

5.8%

10.0%

6.8%

European

equities

International

equities

Fixed income Real Estate Private

Equity

Hedge Fund

Expecte

d T

ota

l R

ate

of

Retu

rn

2010 2011

C.E. Public Defined Benefit Plans’ Anticipated 5-Year Average Return on Plan Assets

C.E. Public Defined Benefit Plans’ Average

Actuarial Earnings Return on Plan Assets

Public DB plans’ anticipated asset returns exceed actuarial rates by 50

basis points


Note: Mean calculation excludes reported answers of "0" and / or "None".

Note: Mean calculation excludes reported answers of "0" and / or

"None".

4.8%5.1% 5.2%

2009 2010 2011

Actu

arial E

arn

ings R

ate

of

Retu

rn

GAP = 0.5%

Actual

expected

rate of plan

return

Current

actuarial

earnings

rate

14 CONFIDENTIAL

DB pension funds will need to unwind passive equity allocations and

increase active equity allocations to reach policy targets

-3.6%

-2.3%

0.2%

1.2%

1.7%

2.9%

3.5%

3.7%

5.2%

9.7%

-1.2%

-4.4%

-5.4%

-5.4%

-5.9%

-15% -10% -5% 0% 5% 10% 15%


European Gov't. Bonds – Passive



Int'l. Equities – Active


Cash

Int'l. Bonds – Passive


Other

Real Estate

Alternatives

Int'l. Bonds – Active

European Gov't. Bonds – Active

Int'l. Equities – Passive

Current Allocation Less Target Allocation

Currently Underweight

Currently Overweight

Difference Between C.E. Pension Investors Defined Benefit Plan Asset Allocation and

Target Defined Benefit Plan Asset Allocation 2011


Note: Percentages are Euro-weighted. C.E. assets are not projected and comprise institutional investors disclosing asset information. Results are for corporate and public defined benefit plan assets.

15 CONFIDENTIAL

In line with the lower proportion of assets managed externally Belgian

schemes on average use fewer managers than seen in most markets

C.E. Institutional Investors Average Number of Investment Managers Used, by Country

8.6

7.8

6.6

10.6

8.7

6.36.1

8.7

10.4

8.2

0

2

4

6

8

10

12

TotalInstitutions

Austria Belgium France Germany Iberia Italy Netherlands Nordics Switzerland

Num

ber

of

Investm

ent

Managers

2011


16 CONFIDENTIAL

Belgian investors’ use of investment consultants is in line with the

corporate and public pension fund averages in Europe.

C.E. Institutional Investors Using and Expecting to Hire Investment Consultants for

Advice on Investment Matters 2011, by Type of Institution

33%

42% 40% 40%

20%15%

20%

4%

5%5%

3%

4%1%

13%

0%

10%

20%

30%

40%

50%

60%

European

Investors -

Total

Corporate

Pensions

Public

Pensions

Corporate

Treasury

Insurance Banks Savings

Banks

Pro

po

rtio

n o

f C

.E. In

ve

sto

rs

Now Use 2011 Expect to Hire 2011

Belgian Institutional Investors Using

Investment Consultants for Advice on

Investment Matters

31% 31%

50%

43%

0%

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011

Pro

po

rtio

n o

f B

elg

ian

In

ve

sto

rs

Now Use 2011


Note: “Now Use” refers to investments used by investors in the past 12 months. “Expect to Hire” refers to expected hiring for investments in the next 12 months.

17 CONFIDENTIAL

Average fees paid to external managers have slipped

Average Fees Paid by C.E. Institutional Investors to External Managers

35.3

41.2

51.9

22.6

32.5

44.6

54.1

24.7

59.3

30.9

41.7

51.1

22.5

44.9

60.5

0

10

20

30

40

50

60

70

All Outside Managers Active European equity Active international

equity

Active fixed income Multi-Asset Real estate

Ba

sis

Po

ints

2009 2010 2011


Note: Shown in basis points. Mean calculation excludes reported answers of "0" and / or "None".

NA NANA

18 CONFIDENTIAL

In Summary

▪ Each in their own way, DB pension plans continue to struggle with the challenge of closing funding gaps and generating returns required to meet future obligations.

▪ As a consequence, pension plan policies are shifting away from the strong de-risking seen in 2009-2010. International equity allocations have risen and now almost match allocations to domestic equities. Fixed income remains the dominant asset category and allocations to alternatives remain anemic. Anticipated changes include reductions in European government bonds and increases in private equity.

▪ Similarly, pension schemes are more willing to see if outsiders can help generate alpha and diversification. The proportion of total assets managed externally has increased meaningfully. Fixed income dominates externally managed assets, although equities is becoming increasingly important. Of total assets, a higher proportion of equities is externalized than fixed income.

▪ Large funds have expanded the number of external managers used, however, on average both manager hiring and solicitation activity has slipped while forward looking hiring expectations have fallen to a new low.

▪ Portfolio rebalancing will be a key theme in the next year as defined benefit pension fund asset allocations are quite dislocated from their policy targets. European credit and active equities are well below target and passive equities above – meaning that an unwinding of these positions will eventually be needed to rebalance to target allocations.

▪ A significant minority of institutions – mostly pension funds – are applying derivatives for the purposes of liability and risk management. The focus on liabilities is being driven by maturing pension funds, accounting regulations, and the market environment.

19 CONFIDENTIAL

Methodology

▪ From February to May 2011, Greenwich Associates conducted personal interviews with 418 of 709 of the largest institutional funds in Continental Europe.

▪ These institutional investors comprise corporate and public pension funds, corporate treasuries, foundations, insurance companies, and banks with externally managed assets greater than €500 million. In some markets where the universe of large institutional investors is limited, we conducted supplemental interviews with institutions with between €250 million and €500 million in externally managed assets.

▪ Senior fund professionals were asked to provide quantitative and qualitative evaluations of their investment managers, qualitative assessments of those managers soliciting their business, and detailed information on important market trends.

▪ Overall, 59% of institutions targeted participated in our research. Of the 418 institutions interviewed, 96% allowed disclosure of participation and 75% allowed attribution of their individual responses.

Research Coverage of C.E. Institutional Investors 2011,

by Type of Fund

201171

123119 106

24406190

1523345170

Corp

ora

te

Pensio

n

Public

Pensio

n

Insura

nce

Savin

gs

Banks

Banks

Foundations

Corp

.

Tre

asury

C.E

. In

stitu

tions

Universe

Interview ed

Research Coverage of C.E. Institutional Investors 2011,

by Country

10285 83 82

6050

4146

6951 48

111

25304030

191515

2741

57

Sw

itzerland

Germ

any &

Austr

ia

Fra

nce

Neth

erlands

Italy

Sw

eden

Iberia

Denm

ark

Belg

ium

Norw

ay

Fin

land

C.E

. In

stitu

tions Universe

Interview ed


Note: C.E. assets shown in billions of Euros. C.E. assets are not projected and comprise institutional investors disclosing asset information.

20 CONFIDENTIAL

Contact Information

© 2011 Greenwich Associates, LLC. All rights reserved. No portion of these materials may be copied, reproduced, distributed or transmitted, electronically or otherwise, to external parties or

publicly without the permission of Greenwich Associates, LLC. Greenwich Associates®, Competitive Challenges®, Greenwich Quality Index®, and Greenwich Reports® are registered marks

of Greenwich Associates, LLC. Greenwich Associates may also have rights in certain other marks used in these materials.

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Documents

Ateb 2011 Greenwich Speech V F2