Reward Masterclass July 2013

Smarter. Simpler. Better.www.nowpensions.com

From default to design:why good governance matters

Niall Ferguson | 4 July 2013

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• NOW: Pensions is a UK multi-employer Trust

• Supported by ATP, Denmark’s leading pension provider

• Low cost operating model

• ATP investment team

• Equiniti Paymaster administrator to 2.9m UK workers

4.7m members

C 160,000 employers

45 years

+7.95% p.a. (average) for the last 5 years*

c£74bn FUM

* Back tested data for the UK based on ATP’s investment strategy and NOW: Pensions’ implementation strategy to 30 Sept 2012

Our achievements

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• Costs met by members

• No Trustee Board

• Wide range of funds

• Undefined Governance framework

• Costs met by employer

• Trustee Board set up by employer

• Funds selected by Trustees

• Defined Governance framework

Multi-Employer Trust– Best of both worldsGPP Trust DC

• Cost options are your choice

• Trustee Board in place

• No fund selection required

• Defined Governance framework

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Design of Default Investment Funds matterPensions Institute Findings

• 90–97% of members will be enrolled into default

funds for Auto Enrolment therefore funds need to be

‘fit for purpose’

• Wide variety of default funds available to members

• Some have very high equity content

• Therefore enormous range of expected outcomes on

model and wide range of associated volatility

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The results, displayed in the chart, show there is a huge lack of understanding about investments and finance amongst the population shown by the high “No” responses

10%5%

Yes

No

Don’t Know

85%

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We surveyed consumers to ask if they would be able to rank the riskiness of assets (bonds, cash, commodities and equities) from very risky to least risky

Does your workforce understand pensions?

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Do members make good investment managers ?

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What’s the most you would bet on the toss of a coin, if you stood to win £1,000?

£450 £100£200

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Even professional investors end up chasing the market

Source: FTSE, Investment Management Association and AllianceBernstein

FTSE All Share IndexNet Retail Flows into UK Equity and Property Collective Mutual Funds £bn

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It is important to focus on the right issues

• When do I want to retire?

• What do I want to do when I retire?

• Do I need to make contributions in excess of the minimum?

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Advantages of

investment solution?

one

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Why do other providers offer a range of funds?

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Contract Based DC = Insurance Company has full responsibility …and is conflicted

Trust Based DC = Scheme Trustee Board has full responsibility

…and is nervous

Master Trusts = Independent Trustee Boards have responsibility

• They may be nervous about press reaction

• Their wider distribution strategy may compromise their ability not to offer choice

• Distancing themselves from a conventional approach may be too difficult

But…

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• They may be nervous about press reaction

• Their wider distribution strategy may compromise their ability not to offer choice

• Distancing themselves from a conventional approach may be too difficult

Our Master Trust• Knowledgeable and independent Trustee Board takes full responsibility

for investment solution

• New Proposition, so no blind spots created by considering legacy issues/ existing proposition

• No unwelcome pressure from other sources influencing our decisions

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Guided investment solutionGrowth phase

Rates Credit

Equities Inflation

Commodities

25%(+/- 10%)

10%(+/- 10%)

20%(+/- 10%)

10%(+/- 10%)

35%(+/- 15%)

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• They may be nervous about press reaction

• Their wider distribution strategy may compromise their ability not to offer choice

• Distancing themselves from a conventional approach may be too difficult

Growth PhasePerformance & Protection

Protecting the Buying Power of your Pension Fund

Protecting your Tax Free Cash Entitlement

Annuity Rates

Fund Values

10 years 8 years 6 years 4 years 2 years Retirement0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Managed Diversified Growth Fund Retirement Protection Fund Cash Protection Fund

Return Target: Cash + 3%

Return Target: Annuity Prices

Return Target: Cash

Guided investment solutionGlidepath phase

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Charges matterPensions Institute Findings

• Caveat Venditor Report found that members face

vastly different retirement lifestyles depending on

the scheme into which they are auto enrolled

• Some employees can end up paying multiple times

the annual charge available to them if they enrol into

poor quality schemes with TERs of c3%

• Opaque charging structures cause severe detriment

to members in the long-run

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• They may be nervous about press reaction

• Their wider distribution strategy may compromise their ability not to offer choice

• Distancing themselves from a conventional approach may be too difficultTwo explicit elements to our charges

Simple charging structure for allProviding a better pension for employees