Monday 1 February 2010. Welcome Nigel Peaple, NAPF Director of Policy

Monday 1 February 2010

Welcome

Nigel Peaple, NAPF Director of Policy

FIDELITY INTERNATIONAL

Improving default funds for non-investment professionals

Julian Webb

Head of UK DC

1st February 2010

DC PensionsConnection This presentation is for Investment Professionals only, and should not be relied upon by private investors

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Agenda

The simple facts in DC

Default fund designs under scrutiny

The new era of default fund design

Client examples

Summary

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The simple facts in DC

There are now more people in open DC scheme than there are DB

2012 pensions legislation will further increase DC membership

Individuals are responsible for investment decisions

The majority of DC members struggle to understand the difference between Equities and Bonds

82% of members make no investment decision (NAPF employee benefits survey 2008)

Conclusion - Default funds are therefore crucial to ensuring:

Members have as big a ‘pot’ as possible upon retirement

Without taking undue risk along the way

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Default fund requirements

Long term growth

Some level of protection in down markets

Comfort that long term investment decisions taken on their behalf are appropriate

New joiners don’t want to see negative returns early on

Sensible risk / return balance

A reduced range of member outcomes

Sufficient transparency to ensure changes can be made easily and in a cost effective way

Lifecycle options to suit all members

Member Trustee / Plan sponsor

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Legacy default designs

1) With – Profits Funds

The theory

Smooth returns by using diversified mix of assets

Underpinned with guarantee on investment and terminal bonus

In reality

Concerns over insurance company financial strength (Equitable Life)

In severe down markets the ‘guarantee’ and bonus is at risk

2) Balanced / Managed

The theory

Investing in a mixture of Equities, Bonds and Cash

Achieves diversification and reduces volatility

In reality

Limited asset allocation flexibility reduces growth prospects

Provides only limited protection in down markets

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Legacy default designs

3) Lifecycle / Lifestyle

The theory

Young members invest regularly into equities to achieve growth.

Automatic switches into bonds and cash as retirement approaches to preserve accumulated capital and reduce volatility

In reality

Automated switches out of growth assets can lock in negative returns

Often limited use of diversification during growth phase

4) Passive Global biased equities

The theory

Global equities are the best source for long term returns

Sufficient diversification achieved with equities

In reality

Limited effects of equity diversification as correlations converging

Limited downside protection with significant losses during recent market down turns

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0

500

1000

1500

2000

2500

3000

3500

4000

FTSE All Share FTSE All Stocks UK Savings 2500+ Invmt net UK Retail Price Index

Volatility is key to plan sponsors

30 year asset class returns – a big difference in both the returns and the journey

Highest returns from equities overall, but big difference in returns based on timing of exit

Source: Datastream Nov 2009. For illustration only.(Inflation)(Cash)(Bonds)

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Annual returns less sensitive to economic conditions…

Multi – Asset: near the middle of the pack but a good long-term risk adjusted performance

Source FIL Limited as at 18.01.10. For illustration only: Indices used are MSCI World, MSCI Emerging Markets, JP Morgan UK Government Bonds, JP Morgan UK 3 month Cash; DJ UBS Commodity Index, FTSE EPRA/NAREIT Global Property index ; all in sterling terms. Multi Asset Mix comprises: 20% FTSE All Share, 30% MSCI AC World, 15% DJ UBS Commodity Index, 10%FTSE EPRA/NAREIT Global Real Estate, 20% ML Sterling Lg Cap, 5% GBP 7 Day LIBID (Cash)

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 YTD 18Y VolSharpe Ratio

1Emerging markets

Commodities UK Cash CommoditiesEmerging markets

Global Property

Emerging markets

Global Property

Emerging markets

UK BondsEmerging markets

Global StocksEmerging markets

71.8% 42.2% 5.6% 13.8% 40.5% 28.6% 50.5% 24.9% 37.4% 13.6% 59.4% 1.4% 10.5% 34.6% 0.13

2 Global StocksGlobal

PropertyUK Bonds UK Bonds

Global Property

Emerging markets

CommoditiesEmerging markets

Commodities UK CashGlobal

PropertyEmerging markets

Global Property

29.4% 22.8% 3.4% 9.1% 26.5% 17.4% 35.7% 16.3% 14.3% 6.9% 23.1% 1.2% 9.5% 24.3% 0.15

3 Commodities UK BondsEmerging markets

UK Cash Global StocksMulti-Asset

MixGlobal

PropertyGlobal Stocks

Multi-Asset Mix

Multi-Asset Mix

Global Stocks UK BondsMulti-Asset

Mix

28.4% 9.1% 0.2% 4.2% 20.3% 9.0% 29.0% 5.8% 8.0% -10.4% 16.4% 0.5% 8.8% 11.5% 0.25

4Multi-Asset

MixMulti-Asset

MixGlobal

PropertyGlobal

PropertyMulti-Asset

MixGlobal Stocks Global Stocks UK Cash Global Stocks Commodities

Multi-Asset Mix

Multi-Asset Mix

UK Bonds

20.9% 7.7% -1.3% -7.1% 15.6% 7.5% 23.0% 4.8% 7.7% -10.9% 13.3% 0.4% 7.9% 8.1% 0.24

5Global

PropertyUK Cash

Multi-Asset Mix

Multi-Asset Mix

Commodities UK BondsMulti-Asset

MixMulti-Asset

MixUK Cash Global Stocks Commodities UK Cash Global Stocks

12.4% 6.5% -8.5% -9.5% 11.5% 6.6% 22.8% 4.5% 6.1% -17.4% 5.9% 0.0% 7.5% 16.8% 0.10

6 UK Cash Global Stocks Global StocksEmerging markets

UK Cash UK Cash UK Bonds UK Bonds UK BondsGlobal

PropertyUK Cash

Global Property

Commodities

5.9% -6.0% -14.3% -15.0% 3.8% 4.7% 8.1% 0.2% 5.1% -27.6% 2.2% -1.0% 7.1% 18.9% 0.06

7 UK BondsEmerging markets

Commodities Global Stocks UK Bonds Commodities UK Cash CommoditiesGlobal

PropertyEmerging markets

UK Bonds Commodities UK Cash

-1.3% -25.1% -17.4% -27.3% 2.0% 1.8% 4.9% -10.5% -8.5% -35.2% -1.0% -1.9% 5.9% 1.6% 0.00

Ran

king

Calendar Year

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Modern default designs – what the market thinks

Shortlist for the Corporate Advisor ‘Ultimate Default Fund 2010’

Fund / Fund range Investment Style

BGI Global Equity (50:50) Index Fund

Passive Global Equity

Invesco Perpetual Distribution Fund

Balanced / Managed

Newton Real Return Diversified Growth

Ruffer Total Return Fund Multi Asset / Diversified Growth

Scottish Life Governed Range Balanced / Managed

Skandia Index Balanced Fund Balanced / Managed

Source: Corporate Advisor, January 2010

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Multi Asset and Diversified Growth lead the way

Source: Micropal as at 31.12.09. Performance of funds is net of fees. For illustration only

60

70

80

90

100

110

120

130

140

150

Skandia Index Balanced Life (LF) CF Ruffer Total Return O Inc (UT) IP Distribution Acc Net (UT)

Newton Real Return BGI 50/50

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Common uses:

Light trustee governance role

Client requires an ‘off-the shelf’ design

Single multi asset funds e.g. Diversified Growth Funds

Provide exposure to wider range of asset classes

Typically include ‘alternative’ investments e.g. commodity funds, infrastructure

Managed to reduce volatility whilst maintaining a long term growth objective

What is commonly missing from DGFs

Limited tactical asset allocation powers

Inability to fully exploit asset allocation opportunities that arise during the economic cycle

Achieving Multi Asset investing through a single fund

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Achieving Multi Asset investing through Blended Funds

Implement consultant / advisor advise through bespoke multi asset funds

Combine a multitude of funds, managers, styles to meet long term investment objectives

Allows Trustees to design fund(s) to meet investment requirements of all members

Governance

Daily dealing, valuation, NAV pricing

Transparent processes

Maintains price tracking

Rigid internal and external SLA’s

Clear fund objectives

Innovation

Ability to re-engineer fund while remaining “open”

No member trading “blackout’s”

Option of cash rebalancing for new funds/sectors

Bespoke Factsheets

Global Equities

Manager A (Passive)

UK EquityManager A

(Active)

Global Equity

Manager B (Active)

Global Equity

Manager C

(Active)

Diversified

Manager D

(Active)

Bespoke Fund Design

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Client example 1

UK Trust based client

5,000 members

Fund launched October 2008

Default fund uses a mix of:

6 underlying Managers

Asset classes

Geography

Investment Style

Active and passive

Members offered a range of 4 blended funds

Diversified funds

Alternatives

Global active & passive

DiversifiedGrowth Fund

Global Equity(Active)

Global Equity(Active)

World ex UKEquity (Passive)

UK Equity(Active)

UK Equity(Active)

UK Equity(Passive)

Property Fund

XYZ Diversified Growth Fund

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Client example 2

UK contract based client

2,000 members

Launched March 2009

The client offers members a range of three multi asset Blended Funds

A range of risk / return expectations

Using 4 Investment Managers

‘Moderate’ fund is the default

Lifestyle overlay incorporated into chosen fund

Global Equity

(Passive)

World Ex UK Equity(Passive)

UK Equity

(Active)


Emerging Markets(Active)

PropertyFund

Global

Bonds

Global Equity

(Passive)

World Ex UK Equity(Passive)

UK Equity

(Active)


Property

Fund

UK Corp

Bonds

Diversified

Growth Fund

Global Equity

(Passive)Proper

ty

Fund

Global

Bonds

UK Corp

Bonds

Index Linke

d

Bonds

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Multi – Asset funds used in a Lifestyle

Multi Asset Growth Fund Multi Asset Strategic Fund Multi Asset Defensive Fund

Global Bonds

CashUK

Equity

Global Equities

Real Estate

Commodities

75% “Growth assets”

25% “Store of value”


50% “Store of value”


75% “Store of

value”

Years to NRA

Growth

Strategic

Defensive

Bonds

Cash

Ris

k

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Conclusion – A new era of default design

Sensible risk / return balance

A reduced range of member outcomes

Transparency / Governance

Lifecycle options

Long term growth objective with downside protection through diversification and flexibility

Reduced volatility through the economic cycle

Focus on default strategy rather than a range of funds

Applied to single multi-asset, Blended Funds or spectrum of multi-asset funds

Trustee / Plan sponsor requirements

How do new era of default meet these requirements?

Case Study

Alexandra KitchingPQM Executive

PQM – 4 months on

DC PensionsConnection

1 February 2010

Outline

• PQM & NAPF• PQM Standards• 4 months on• What people say

The NAPF members say….

• “We have a great pension but our employees still don’t join it”

• “Employees often don’t realise the value of the pension offered”

• “If employees don’t value a good pension, employers won’t provide them”

• “We need a simple way of helping employers communicate the value of their pension”

NAPF Policy Objectives

• Policy and regulatory environment that enables workplace pensions to thrive

• Encouraging high standards, better governance and the effective operation of schemes

• Speaking for all forms of provision: DB, DC etc.• Promoting public confidence in workplace

pensions

PQM – a new award for good workplace pensions

• Contributions

• Governance

• Communications

How to apply

Visit www.pensionqualitymark.org.uk

http://www.pensionqualitymark.org.uk/

4 months on

33 schemes qualified

Approximately 100,000 active

scheme members covered

15 contract-based18 trust-based

15 PQM18 PQM PLUS

Using the PQM award

• PQM logo on the literature, intranet and presentations

• PQM logo on the e-mail signature• Displaying the PQM trophy at the main

company reception• Displaying the PQM certificate in the offices• Presence in the press

What the awardees say“Going forward new hires are

coming in and, instead of thinking they can’t get into the defined benefit scheme,

they will say the PensionSaver has got a

pension quality mark so it must be a good scheme.”

Teresa BerkengoffDMGT

“The application for the PQM+ was easy to understand and

took very little time to complete. We at Accenture are

excited about this new programme and feel privileged to be involved with the launch.

We are committed to supporting this useful benchmark for

defined contribution schemes in the UK alongside our colleagues

at the NAPF.”Yvonne Pearce

Accenture“Applying for the Pensions Quality

Mark was important to the Company as it meant that all current and future

members could see that Pensions was a highly valued and supported benefit

provided by their employer. The application process was

straightforward and Volkswagen Group are very pleased to be at the forefront

of the award for this important new development within pensions as it stands for providing best in class

within the pensions arena.” Roy Platten

Volkswagen

Friend of PQM

• For consultants and advisers • Use of Friend of PQM logo• Friend of PQM certificate• Free of charge• Reviewed annually

Questions

Open Q&A forum

Documents

Monday 1 February 2010. Welcome Nigel Peaple, NAPF Director of Policy