International Insights Into Key Distinguishing Features of Excellent

Retirement Funds & Systems, Including The Use Of Low Cost Passive Investments

In Portfolio Construction

Mike Brown

Managing Director

etfSA.co.za

Presentation to:

5th Annual Audit Committee Conference

3rd August 2015

Sandton Convention Centre

• Current trends in global retirement

systems.

• Ten principles for excellence in

retirement funds.

• Using passive investment ETP products

in retirement funds.

Agenda

• Need to fund 20-30 years in retirement.

• Portfolio shifts to equities as the asset class providing the

returns necessary to build up and preserve capital for

extended periods of retirement.

• People are working longer as life expectancy increases.

• Longevity issues require more flexibility in contributions

and allowing partial drawing down of capital pension

benefits.

Current Trends in Global Retirement Systems

Demographics – Ageing Populations

• From US$79 million in total assets in 2000, the global

ETP industry will shortly exceed US$3 trillion in assets.

• 68% of US investor’s new investments now going into

passive investments, much of it retirement fund money.

• ETFS becoming product of choice worldwide– For broad market exposure

– Core satellite strategies – blending passive and active products

– Smart beta

– Multi factor indices.

Current Trends in Global Retirement Systems

Swing to Passive Asset Management

Report published by Mercer and Chartered Financial

Analysts (CFA) InstituteMarch 2015

Excellence in Global Retirement Funds

“An Ideal Retirement System”

Identified 10 principles for global excellence in retirement funds

Government must identify clear objectives for the whole retirement system.

4 pillar approach

Ten PrinciplesOne

Pillar 1

A basic public pension that

provides a minimum income

Tax Funded for poverty relief amongst aged

Pillar 2

A mandatory, fully funded system linked to the

working years

Government / private funded or

both

Pillar 3

A voluntary, fully funded system

Private sector management

Pillar 4

Savings from outside the pension

system

Minimum level of retirement funding for all workers by

employers, employees, self-employed and temporary workers.

Ten PrinciplesTwo

Suggested level 8% of earnings in developed economies

MOVE TOWARDS COMPULSION

Taxation support by Government to provide

incentives for voluntary savings and to compensate

individuals for lack of access to retirement savings

before retirement.

Ten PrinciplesThree

Contributions (or accrued benefits) must have

immediate vesting and portability

Ten PrinciplesFour

• Benefits should only be accessible under certain conditions of:– Retirement

– Death

– Permanent disability

• “Leakage reduces the effectiveness of the retirement system

and should not be permitted in an ideal retirement system”*

TREND TO PRESERVATION

*CFA Report – An Ideal Retirement System – (March 2015)

Value of R200 000 Capital Preserved in a RA Fund

After 10 Years After 20 Years After 30 Years

R200k (lump sum in etfSA

Wealth Enhancer Fund) (16%

per annum)

R1 042 200 R5 492 800 R28 295 730

Future performance extrapolated on actual 10 year returns for etfSA Wealth Enhancer

Fund.

Cost effective and attractive default arrangements,

both before and after retirement, are required for

individuals who do not wish to make decisions

Ten PrinciplesFive

Passive low cost options ideal

Overall costs should be fully disclosed.

• Very little transparency about overall costs, which need to

include all investment, administration, marketing and

operating costs

• Competition is important in encouraging fair pricing.

Ten PrinciplesSix

“A difference of 2,1% in annual costs between an actively

managed fund and an index fund, means a 65% enhancement

in capital available for retirement after 40 years.”

John Bogle “The Arithmetic of “All-In” Investment Expenses”

Financial Analyst Journal (2014)

Lump Sum R200k Investment10 Years 20 Years 30 Years 40 Years

Low cost, high return RA

Fund (etfSA Wealth

Enhancer Fund)

R1 042 200 R5 492 800 R28 295 730 R147 450 000

High cost RA Fund (2,5%

per annum higher costs)R805 000 R3 220 000 R12 880 000 R51 520 000

The “penalty” cost of

underperformance

23% 41% 54% 65%

Do costs matter?

You bet they do!

Flexibility

In contributions as individuals’ financial or personal

circumstances vary as well as post-retirement

Ten PrinciplesSeven

The global workforce is aging; people are working for longer, but more flexibly.

Individuals should be able to receive a part pension whilst continuing to receive or make contributions whilst working part-time.

Benefits in retirement should have an income focus

Ten PrinciplesEight

But, permit some capital withdrawals without

impacting on overall capital adequacy.

Governance of pension funds should be independent

from the Government or any employer control.

Ten PrinciplesNine

• The role of independent trustees becomes critical as to: – the Regulatory framework

– Communication with members

– Member protection

– Access to education and advice.

Appropriate regulation

Ten PrinciplesTen

• Prudential regulation of pension plans

• Investment policy framework, including restrictions on in-

house assets

• Risk management strategy, including outsourcing

• Governance standards, including conflicts of interest and

audit requirements

• Protection of members interests.

Passive Investments for Retirement Funds

How Well Do Actively Managed Funds Perform?

(% by which active managers were outperformed by their benchmarks)

1 Year 3 Years 5 Years

USA (benchmark S&P 500) 86% 76% 89%

Europe (benchmark S&P Europe 350) 83% 76% 82%

South Africa (S&P SA DSW) 84% 82% 85%

Source: S&P Dow Jones Indices (SPIVA Scorecard) (June 2015).

Constructing Pension Fund Portfolios with ETFs

etfSA RA Fund (CPI +7%) Wealth Enhancer Fund

Benchmark Strategic Asset Allocation

Constructing Pension Fund Portfolios with ETFs

etfSA RA Fund (CPI +7%) Wealth Enhancer FundPortfolio Holdings

Note: The theoretical historic performance is based on the strategic asset allocation and reference index performance of the ETPs selected for this RA Fund.

• ETPs now provide sufficient exposure to all asset classes

to construct Regulation 28 compliant retirement

portfolios with– Competitive investment performance

– Lower risk

– Lower costs – 0,85% per annum for retail investors.

– Full transparency

– High liquidity

– Full scalability

The Case for Passive Index Trackers in Retirement Funds

Can certainly be used as a viable alternative or addition to active mandates.

Comparative Risk and Return Profilesof Passive and Active strategies

Notes: Average performance for the 10 years from Jan-05 to Dec-14Source: ProfileMedia data; etfSA calculations

0

2

4

6

8

10

12

14

16

18

0 2 4 6 8 10 12

Retu

rn (%

p.a

.)

Risk (Standard deviation % p.a.)

Historical Performance of Balanced Funds - Medium Equity Mandate

etfSA RA Builder Fund

Actively managed balanced

funds

X: CPI+5

Significant reduction in risk for no sacrifice in

return!

Advice worth taking home…..?“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and the rest in a very low-cost S&P 500 index fund. (I suggest Vanguard’s). I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”

Contact Details

etfSA RA Funds (Retirement Investments)Website www.etfsara.co.zaEmail rafunds@etfsa.co.za

Or contact Mike Brown for advice and queriesTel 011 274 6171Email mikeb@etfsa.co.za

“The Retirement Annuity Fund for the 21st Century”