Investment Challenges for Pension Trustees - A Whole New Ballgame?

1. The CFA Institute SeminarThe Investment Challenges Facing Pension Trustees-Are We Entering a Whole New Ballgame?

2. Agenda • Trustees duties in DC context • What is reasonable and appropriate? • Identifying and measuring risks • It’s not about the league table • The member viewpoint

3. IAPF Investment GuidelinesEnsure adherence to basic best practice guidelines Guidelines 1 – 3: • Formal annual discussion • Take expert advice • Confirm compliance with investment regulations Guidelines 4 – 5: • Reasonable range of appropriate options • Triennial review • Three key investment risks • Particular attention to older members Guideline 6: • Sufficient member communication • Appropriate default strategies Guideline 7: • Focus on high level strategic decisions • “Delegate implementation where you do not have the necessary skills”

4. Key investment risks Risks have varying relevance depending on member age

5. Historically Irish DB Plans followed an Irish ‘balanced’ fund approach and this approach was transplanted to the DC market Managed and consensus funds have been “all things to all men” But no attention paid to the key DC investment risks In theory, these are multi-asset and diversified portfolios However, returns are driven by high weighting (70%+) to equity markets, with a residual amount derived from the performance of short dated government bonds and Irish property market Within equities, approx 7% now invested in the sector-concentrated and stock-specific Irish stockmarket (was previously in the region of 15%) Property holdings, which are heavily exposed to Irish market, are periodically illiquid leading to deferred or partial redemptions DB Plans have long recognised shortcomings of the Irish ‘balanced’ approach and have broadened exposure within and across asset classes The managed fund

6. Key DC investment risksUnderstanding and monitoring

7. Default strategiesAVC plans are different Cash Annuity ARF • DC members have limited choices and therefore behave in similar ways • AVC members have greater choice and are less alike • Some AVC members will take cash • Some AVC members will purchase an annuity • Some AVC members will move their account to an Approved Retirement Fund (ARF) The investment options made available to members in their DC or AVC scheme should facilitate safe arrival at the chosen destination, whichever is ultimately chosen. For the AVC default strategy, Trustees face a dilemma as the destination is either not chosen or is chosen but not known to the Trustees.

8. Aligning strategy with psychology Green Zone I like to make one decision that will have a long shelf life I can trust someone else to handle this for me over the long term Blue Zone I like to think about this every two or three years I can trust someone else for short-term adjustments, but I want to control major shifts Orange Zone I like to think about this a few times a year I want someone to give me the basic building blocks and I’ll take it from there “Investment choice is only as good as the explanation provided” Brendan Kennedy, CEO of the Pensions Board, speaking at IAPF on 14th May 2009 • Green Zone • Default life style strategy Green Zone Default strategy • Blue Zone • Low • Medium • High • Orange Zone • Euro equity • Global equity • Alternatives Cash and long bonds included in each zone

9. Investment strategy – which funds, and how many 310 DC appropriate funds available from 25 managers

10. Is the target a compliance level fund range or a best practice fund range? Compliance level Sector average Best practice • Number of funds and rationale will vary by sector • Four funds (cash, bonds, managed, equity) • No regard to member decision making preferences • Likely to fall in 5-10 range or possibly (but less likely) 10-15 range, depending on overall governance budget • Increasing focus on differences between members Investment strategy – how many funds?

11. Members communicationMembers are not the same • Greater fund choice increases equity allocations among low knowledge investors • The higher equity position comes mostly at the expense of bond allocations • High knowledge investors’ allocations are not significantly affected • Trustees may wish to consider communicating at two levels: • Low interest • Higher interest Source: Morrin, Broniarczyk, Inman, and Broussard: “Saving for Retirement”, 2008

12. Occupational Pension Schemes (Disclosure of Information Regulations), 2006 Schedule I prescribes the information concerning investment choices that must be made available to DC plan members For each investment alternative a “general description” is needed of Investment objectives Risk and return characteristics Type and diversification of assets comprising the portfolio An explanation of when members can make investment decisions (for example, in relation to switches) An explanation of any limitations applying Information on any restrictions in or out of a particular investment option A description of the charges levied Communication – are manager fact sheets compliant?

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