slide1 n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
Creating Sustainable Retirement Solutions A Global Perspective PowerPoint Presentation
Download Presentation
Creating Sustainable Retirement Solutions A Global Perspective

Loading in 2 Seconds...

play fullscreen
1 / 27

Creating Sustainable Retirement Solutions A Global Perspective - PowerPoint PPT Presentation


  • 107 Views
  • Uploaded on

Creating Sustainable Retirement Solutions A Global Perspective. Ghalid Bagus, FIA FSA CFA Principal March 2013. Limitations and disclosures. For investment professional use only. Not for public use or distribution.

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Creating Sustainable Retirement Solutions A Global Perspective' - gaura


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1

Creating Sustainable Retirement Solutions

A Global Perspective

Ghalid Bagus, FIA FSA CFA

Principal

March 2013

slide2

Limitations and disclosures

For investment professional use only. Not for public use or distribution.

Past performance is not indicative of future results. Recipients must make their own independent decisions regarding any strategies or securities or financial instruments mentioned herein.

Milliman, Inc. does not make any representations that products or services described or referenced herein are suitable or appropriate for the recipient. Many of the products and services described or referenced herein involve significant risks, and the recipient should not make any decision or enter into any transaction unless the recipient has fully understood all such risks and has independently determined that such decisions or transactions are appropriate for the recipient.

Any discussion of risks contained herein with respect to any product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved.

The recipient should not construe any of the material contained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not act on any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors.

Milliman, Inc. does not ensure a profit or guarantee against loss.

Nothing herein should be construed as a solicitation or offer or recommendation to buy or sell any security or to make any transaction. The information contained herein is derived from sources who are believed reliable, but the accuracy of data or advice cannot be guaranteed. No chart, strategy or tactic guarantees gains or losses. No assurances can be given that objectives will be met.

slide4

US retirement assets

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide5

Aging populations … impact on investors

Traditional retirement systems breaking down

Investors forced to take on investment and longevity risk

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide6

What are the top investor concerns?

What are the top investor concerns?

Investment losses

Outliving investments

Inflation

Medical care during retirement

Taxes

Four of the five are risk management issues

Investors are concerned about both pre- and post-retirement issues

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide7

How has the industry responded?

The focus has been mainly on investment risk

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide8

Issues have come to the fore

CPPI

A method of portfolio insurance where the investor sets a floor on the portfolio value

Many products were cash locked during the financial crisis

Guarantee products

Guarantee provider credit risk has come to the fore

Capital requirements have increased for providing guarantee products

Designs have become more opaque as interest rates have declined

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide9

Target date funds

Target Date Funds evolved from the need to offer more tailored solutions to investors planning for retirement

Funds tailor their risk profile by reducing holdings of risky assets as retirement approaches

  • Using risky assets as a risk proxy ignores
    • volatility and correlation changes
    • the length of the retirement time horizon

Projection based on quarterly rebalance between EAFE Index and Barclays Capital Aggregate Bond Indexover the period 1 Jan 2003 to 31 Dec 2012.

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide10

Balanced funds

Similar to asset allocation models but within a fund structure

Fund invests in a mixture of bonds and equities and dynamically rebalance between to avoid market declines

Benchmark allocations are not wide enough to provide suitable protection during a financial crisis

Large return effect due to decline in interest rates on bond portion of the fund – may not be the case going forward

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide11

Diversification is still the primary risk management tool

Diversification is still the primary risk management tool

Diversification fails during crises when all asset classes decline together (i.e. 2008 plunge)

Trading equity exposure for bond exposure may be unappealing in down markets with low interest rates

Investors are challenged to find effective investment risk management approaches

Source: Milliman, Inc. 2010

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide12

Problems for investors

Source: gallup.com, 2012

This chart is from Gallup's annual Economy and Personal Finance survey, conducted April 9-12, 2012, available at http://www.gallup.com/poll/154178/Expected-Retirement-Age.aspx

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide14

Unbundling the key concerns

New solutions to capture market and longevity risks

Existing solution

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide15

Investment strategies with protection

Two risk management techniques

Adding a protection strategy can reduce downside exposure - it aims to provide investors with much greater certainty that they can achieve retirement funding objectives

Capital Protection Strategy

Volatility Management

  • Current asset allocation
    • Target a specific equity allocation (i.e., 60%) as a proxy for risk
    • Maintain constant equity allocation regardless of market conditions
  • Target volatility asset allocation
    • Target a specific volatility level
    • Aims to prevent portfolio volatility from dramatically increasing during market crises
  • Attempts to cushion losses
    • Aims to cushion losses in market downturns
    • Amount of cushion customizable to plan needs
  • Keep protection relevant
    • Ratchet protection level up to preserve gains
    • Reset protection level down after extreme market declines to harvest gains

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide16

Volatility spikes frequently

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide17

How do investors react to volatility?

Investor return versus Morningstar Category return

Investor return: not all investors bought shares at the beginning of a period and held them until the end

More volatile funds tend to show the greatest differential between Investor return and Morningstar Category return

Investors tend to buy high and sell low

Source: Morningstar 2012. Returns and volatilities are annualized.

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide18

Capital protection strategy characteristics

Use dynamic rebalancing to replicate a put option inside the portfolio

The value of a put is asymmetric – market downturns result in large gains, market upturns result in small losses

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide19

Protection strategy across market cycles

  • Bull/Bear Market Examples
  • Bear Market Bull Market

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide20

Who’s out there?

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide21

Historical backtest

The Protection Strategy reduces the drawdown and improves the Sharpe Ratio while maintaining the same average level of equity exposure

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide22

Benefits when making withdrawals

Protected portfolios are especially valuable when investors are making withdrawals

Before crisis: September 9, 2008

First six months of crisis: September 9, 2008 to March 9, 2009 (bottom of market)

Next six months of crisis: March 9, 2009 to September 9, 2009 (recovery)

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide23

Outliving assets is a real risk

Life expectancy: 83 years

Significant probability of living longer than the average life expectancy

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide24

Longevity account

Longevity risk is addressed by making small annual allocations to deferred income annuities for a period before retirement

During retirement, income sources are diversified

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide25

Protection + Longevity Account = Member Goals

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide26

In summary

Individual investors more focused on risk management than in the past

Existing investment solutions

Continue to focus on diversification

Do not address risks investors view as major concerns

Next generation investment solutions are more attuned to investor concerns focusing on

Volatility management

Capital protection

Longevity

addressing pre- and post-retirement needs

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.

slide27

Milliman Pty. Ltd.L5, 32 Walker Street North Sydney NSW, 2060Phone: +61 2 8090 9100Email: wade.matterson@milliman.comwww.milliman.com/frm

Performance is hypothetical and does not represent the holdings of any particular investment. Past performance is not indicative of future results. There is no assurance that the investment process will consistently lead to successful investing.