TORONTO8 JANUARY 2015

2015 PENSION OUTLOOK ANDFEARLESS FORECASTARE WE ENTERING A NEW ERA FOR PENSIONS?

MERCER

TODAY’S SPEAKERS

PAULFORESTELL

DAVIDZANUTTO

BENOITHUDON

MATHIEUTANGUAY

SOFIAASSAF

SIMONCABRAL

1

MERCER

1 FEARLESS FORECAST

2

MERCER

2014 Fearless ForecastA Few Surprises

3

Interest rates droppedeven lower

Despite manyheadwinds, equity

markets performed well

Canadian dollarweakened significantly

Typicalpension

plan return10-15%

MERCER

2014 Fearless ForecastThe Economy

2014Forecast 2014 Actual

Real Canadian GDP Growth Rate 2.0% 2.3% (est.)

Real Global GDP Growth Rate 3.5% 3.3% (est.)

WTI Crude Oil Price (US$) $95 $53

US/CAD Exchange Rate 0.93 0.86

Spot Price of Gold (US$) $1,200 $1,184

Source: Bloomberg, IMF

4

xx

MERCER

2014 Fearless ForecastLong-term Yields

2014 Forecast 2014 Actual

FTSE TMX Canada Universe Bond 1.5% 8.8%

FTSE TMX Canada Long Bond 0.5% 17.5%

Source: Datastream

84% Long termyieldsdropped by 0.90%

xx

Expected rates tostay unchanged or

to increase

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MERCER

1-year Canadian Dollar Returns

2014 Fearless ForecastEquity Markets ($CDN)

8.0% 8.0%9.1% 9.0% 9.0%

15.0% 15.0% 15.0%

13.0%

19.5%

4.4%

-0.4%1.3% 1.5%

-2.0%-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2014 Returns

S&P/TSX S&P 500 MSCIEAFE

MSCIACWI

MSCI EM

10.6%

23.9%

4.1%

14.1%

7.0%

6

MERCER

Fearless Forecast

• Survey of Canadian and globalinstitutional investment managers

• Includes predictions and views of theeconomy and capital markets

• 46 managers surveyed

• Surveyed in December 2014

2015 “There are two kinds of forecasters:

those who don't know, and thosewho don't know they don't know.”

John Kenneth Galbraith

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MERCER

Looking Ahead to 2015

A few tailwinds including:

• Low interest rate environment• US and UK moving in the

right direction• Trans-Pacific Partnership

within reach• Efficient responses to Ebola

and ISIS

But also many challengesincluding:• Our high household debt and

overvalued residential market inCanada

• Potentially higher interest ratesin the US and the UK

• Potential recession in Eurozoneand Japan

• Slower growth in China• Political uncertainty in countries

such as Russia and Greece

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MERCER

2015 Fearless ForecastThe Economy

2014Actuals

2015Forecast

Real Canadian GDP Growth 2.3% (est.) 2.3%

Real Global GDP Growth 3.3% (est.) 3.2%

WTI Crude Oil Price ($US) $53 $80

US/CAD Exchange Rate 0.86 0.87

Spot Price of Gold ($US) $1,184 $1,200

CDN Inflation Rate (CPI) 2.2%* 1.9%

Source: Bloomberg, IMF, Bank of Canada*YTD to November 2014

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MERCER

2015 Fearless ForecastInvestment Benchmark Returns

LONG-TERM (10+ YEARS)

Expectations of managers: Interest rates increasing or decreasing over 2015

4%

13%

37% 36%

11%

Rates declineby 0.75% or

more

Rates declineby 0.25% to

0.75%

Rates remain atcurrent levels +/-

0.25%

Rates increaseby 0.25% to

0.75%

Rates increaseby 0.75% or

more

47% of managers expect longterm rates to increase by 0.25%

or more(vs 51% last year)

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MERCER

2015 Fearless ForecastInvestment Benchmark Returns

11

UNIVERSEBONDS

HIGH YIELDBONDS

LONGBONDS

REALRETURNBONDS

-3.3% 3.0%

-8.3% 6.0%

-6.1% 3.7%

-5.1% 3.7%

1.5%

3.8%

0.9%

0.6%

I. FIXED INCOME Forecasted at December 31, 2015

MERCER

2015 Fearless ForecastInvestment Benchmark Returns

12

S&P/TSXCOMPOSITE

S&P 500 (C$)

MSCI EM(C$)

MSCIWORLD (C$)

-6.5% 10.6%

2.4% 11.1%

0.0% 13%

-0.3% 11%

7.5%

7.5%

8.0%

8.0%

II. EQUITIES Forecasted at December 31, 2015

MERCER

2015 Fearless ForecastInvestment Benchmark Returns

13

CDN DIRECTREAL ESTATE

PRIVATEEQUITY

HEDGEFUNDS

INFRA

-2.4% 7.2%

3.3% 9.7%

1.9% 8.3%

2.4% 8.3%

5.0%

7.4%

5.0%

5.8%

III. ALTERNATIVES Forecasted at December 31, 2015

MERCER 14

Top and bottom performing sectors of the S&P/TSX Composite Index in 2015

PERCENTAGE OFMANAGERS WHOFORECASTSECTORS TOOUTPERFORM

PERCENTAGEOF MANAGERSWHO FORECASTSECTORS TOUNDERPERFORM

Industrials IT MaterialsConsumerDiscretionary

ConsumerStaples Energy Financials Health

CareTele-

communicationsUtilities

21% 12% 9% 15% 21% 24% 58%12% 3% 24%

15% 12% 55% 21% 24% 15% 6%12% 6%33%

2015 Fearless ForecastCapital Markets

MERCER

2015 Fearless ForecastEnvironmental, Social and Governance (ESG)

“In what time frame do you anticipate an increase in demand for specialistinvestment strategies built on ESG analysis?”

15%

46%

31%

8%Over thenext 1-2

years

Over thenext 3-5

yearsOver thenext 5-10

years Never

92% of managersanticipate an

increase in demandfor ESG products

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MERCER

2015 Fearless ForecastConclusion

Find ways to capitalizeon a low interest rate

environment

Improve diversification

Revisit currency hedgingstrategy

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MERCER

2 THE FUTURE OF THECANADIAN RETIREMENTSYSTEM

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MERCER

MERCER

A Look At 2014

19

PRPPs introduced with no impact

CPP expansion - debated

No clear answer for individuals

MERCER

The ORPP – A Move Forward?

Earnings covered Up to $90,000Contributions 1.9% for employees and employersBenefit 15% of earnings for a 40 year careerService Prospective from 1.1.2017

20

Design is expected to be fully funded by contributions with no intergenerationaltransfers

MERCER

The ORPP – Details To Sort Out

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• Definition of ComparableWorkplace Pension Arrangement

Issue 1

• The Right Minimum EarningsThreshold

Issue 2

MERCER

The ORPP – The Details

Coverage - Ontario employees who are not covered by a “comparable”workplace pension plan

22

DB Plans and TB Multi-employer plans are most comparable to the CPP and ORPP

Key Features of theORPP

CanadaPension

Plan(CPP)

DefinedBenefitPension

Plan(DB Plan)

TargetBenefit Multi-

EmployerPension Plan(TB MEPP)

DefinedContribution

PensionPlan

(DC Plan)

PooledRegistered

PensionPlan

(PRPP)

GroupRegisteredRetirement

SavingsPlan

(RRSP)

DeferredProfit

SharingPlan

(DPSP)

1. Benefit Providedfor Life (LongevityPooling)

2. Indexed to Inflation Varies by Plan Varies by Plan

3. MandatoryEmployerContributions

4. Pooled InvestmentRisk

5. Locked-in Funds

MERCER 23

DC plans should be considered comparable

GRRSPs, TFSAs and PRPPs likely not comparableIf you have a GRRSP, TFSA or PRPP what to do?• Switch to a DC Plan?• Reduce contributions?• Get rid of your plan?

What do national employers do?

The ORPP - Coverage

MERCER

The ORPP – The Details

Minimum Earnings – Proposed to match CPP at $3,500

Source: Service Canada and Ontario Ministry of Finance

Without ORPP

$6,677 $6,677

$4,747 $4,747

$6,054 $4,630

$2,848

Retirement Income

OAS CPP GIS ORPP

With ORPP

ORPP= $2,848GIS Reduction= $1,424

Net Gain= $1,424

$17,478$18,902

MERCER

Earnings Threshold

$20,000 of Earnings

25

$300 Annual Employee Contribution$300 Annual Employer Contribution

$600 x 40 = $24,000In return for $1,400 annual pension

EARNINGS THRESHOLD NEEDS TO BE HIGHER

MERCER

Defined Benefit Plans

26

Momentumbehindelimination orreducingemphasis onsolvencyfunding

SolvencyReserveAccounts inAlberta

MERCER

3 RISK MANAGEMENT

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MERCER

Where Are Interest Rates Going? Are We At The Bottom Yet?

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MERCER

The Financial Position Of Pension Plans Has Generally Deteriorated In 2014Despite Favourable Investment Returns…

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10%

MERCER

Where Are Interest Rates Going? Is The Current Level Unusual?

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4.0%annual GDP

growth

1.9%annual GDP

growth

3.2%annual GDP

growth

MERCER

Will Long-term Interest Rates Go Anywhere From Here?

...with many looking for morede-risking opportunities

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MERCER

Record Volume Of Pension Risk Transfer Transactions In 2014Despite Prevailing (And Declining) Interest Rate Environment

32

$2.5 billiongroup

annuitiespurchased

Largestpension risk

transfertransactions

ever

Motorola US settled $3 billion ofpension obligations (30,000 retirees)

MERCER

Zooming In On The Canadian Annuity MarketThe Annuity Market In Canada Is Growing At A Rapid Pace

33

RecordYear

Volume (number and size) of transactions is increasing

MERCER

Why Is Activity Increasing?

34

Fiduciaryduties

Appetitefor risk

Economicoutlook

Financialuncertainty

Plan windupor closure

Size andnature ofliabilities

MERCER

Pension De-risking Transactions2014 Forecast And Current Expectations

35

Likely to be seen inthe coming years…2014

All of the aboveremains true, plus…*New*

First jumbo annuity transaction

Significant increase in capacity- reinsurers and new entrants

Competitive pricing in the shortterm, but likely less so in the future

- more conservative view on longevity- increase in demand

Increased market efficiency(e.g., with online auctions)

Significant increase in activity levelFirst longevity swap

MERCER

Global TrendsThe Growing Variety Of Solutions To Manage Cost And Risk

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AssetsLDI

Dynamic de-riskingCash-flow driven

Complex StructuresCaptives

Combinations

FundingSolvency reserve

Special contributionsContingency funds

LiabilitiesCash-outs

Liability managementRisk transfer

MERCER

Cost of Annuities vs. LDI Bond Mandates

37

$70

$80

$90

$100

$110

Non-indexedAnnuities

Blend of BondIndices

LDI:Lower Yields

LDI:Higher Yields

Residual risks remain:longevity, credit, reinvestment, etc.

Non-indexed annuities can be attractivelypriced relative to a matched bond portfolio

MERCER

Making LDI More Competitive

LDI (matching) Bond Mandate

Greater ProvincialExposures

Less LiquidExposures

Mortgages

Private Debt

Greater CorporateExposures

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MERCER

Cost Of Annuities vs. LDI Bond Mandates

39

$70

$80

$90

$100

$110

Indexed Annuities Blend of BondIndices

LDI:Lower Yields

LDI:Higher Yields

Residual risks remain:deflation, longevity, credit,

reinvestment, etc.

Indexed annuities are muchmore expensive

MERCER

Options For Dealing With Indexed Pensions

Transform COLA?Bear the Risk

(particularly in respect ofpotential deflation)

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MERCER

Reducing Risk Within Public Equities

Various StylesValue

Growth

Low volatility

Momentum

Small cap

Style neutral

Indexed

Factor biased

Etc.

Some Concerns• Benchmarking?

• Interest rate sensitivity?

• A crowded trade?

Solutions to Consider

Fundamental defensive-qualitylow volatility strategies

More active systematiclow volatility strategies

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MERCER 42

The Role Of Alternative Asset Classes

Return-focusedInflation-sensitive

Diversifiers

Commodities

Tail riskhedging

strategies

Venture capital

Hedge Funds(Non-directional)

Real AssetsReal Estate

InfrastructureTimber

AgriculturePrivate Equity

MERCER

Hedge Funds Should Hedge

Short bias (equity and credit)

Tail risk hedging funds

Managed futures

Defensively oriented strategies

Hedging strategies:diversifiers against

systemic risk

Consistent return strategies:to build a core, low volatility absolute

return exposure

Performanceseeking

strategies

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MERCER

4 GETTING THE MOSTOUT OF GROWTHASSETS

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MERCER

The Return PerspectiveSearching For Yield

• Many institutional investors continue to seek ways to enhance returns– Emphasis on optimizing returns from growth assets

• Opportunity set available within:– Fixed income (growth-oriented)– Equities– Alternatives (return-enhancing)

4545

MERCER

Growth Fixed IncomeOpportunity Set

46

High YieldBonds

EmergingMarketDebt

PrivateDebt

BankLoans

UnconstrainedBonds

AbsoluteReturnBonds

Multi-AssetCredit

UnconstrainedBonds

MERCER

Unconstrained Bonds

• A “go anywhere” global fixed income portfolio

• No constraints on the sectors and types of securities

• No constraints on duration

• Not linked to any benchmark – focused on generating absolute returnsconsistently

47

MERCER

Unconstrained BondsStrategic Rationale And Return Drivers

48

Dynamic beta management

Capture best performing segments throughthe market cycle

Interest rate management

Security selection and currency positioning

Access to duration and credit risk premia

MERCER

EquitiesOpportunity Set

49

USEquities

CanadianEquities

GlobalEquities

SmallCap

Equities

LowVolatilityEquities

EmergingMarketEquities

EAFEEquities

MERCER

EquitiesOpportunity Set

50

USEquities

CanadianEquities

GlobalEquities

SmallCap

Equities

LowVolatilityEquities

EmergingMarketEquities

EAFEEquities

MERCER

Building Better Equity Portfolios

51

RECENT YEARS

Mercer’s Equity Portfolio 1.0

MERCER

Building Better Equity Portfolios

52

RECENT YEARS

Mercer’s Equity Portfolio 1.0

Bias TowardKey Return Drivers

Mercer’s Equity Portfolio 2.0

MERCER

Optimizing Equity StructureThe Style Factor Perspective

Better understanding of the drivers of return

PortfolioReturn

AlphaAlpha

FactorExposures

Market Beta Market Beta

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MERCER

What Factors To Bias Toward?

54

Size Value Momentum

SustainabilityProfitability Low Volatility

MERCER

Diversification MattersFactors Move In And Out Of Favour Over A Market Cycle

55

Recession Recovery Expansion Contraction

ValueLow VolatilityMomentum

ValueLow VolatilityProfitabilityMomentum

SizeMomentumProfitability

MomentumProfitability

SizeValue

MERCER

Alternative InvestmentsOpportunity Set

56

Short-BiasedHedgeFunds

Tail RiskHedging

Diversifiers

DirectionalHedge Funds

NaturalResources

Shipping

Non-DirectionalHedge Funds

Private Debt

Private EquityCommodities

OpportunisticReal Estate &

GrowthInfrastructure

InflationSensitive

CoreReal Estate &Infrastructure

TimberAgriculture

ReturnFocused

Emphasis onReturn-Focused

Strategies

MERCER

Summary

• In the “quest for yield”, we forecast that:– Growth fixed income will garner greater

attention– Equity portfolio construction will further

take into account those factors that drivereturns

– Alternatives will continue to move into themainstream, with a re-focus on returnenhancement strategies

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MERCER

5 DEFINED CONTRIBUTIONBUILDING BETTEROUTCOMES

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MERCER

Defined ContributionDefining The Issues: Retirement Readiness

Average DC plan memberaccount balance

* Benefits Canada 2014 CAP Member Survey** Mercer DC client data as at June 30, 2014

59

Of DC plan sponsorsfeel that the averageemployee is financiallyprepared for retirement*

70%

On average, DCplan membersexpect to retireat age 63 with

$709Ksaved*

$47K=

Half of DC planmembers don’tfeel financiallyprepared forretirement*

MERCER

Defined ContributionDefining The Issues: Retirement Readiness

* Benefits Canada 2014 CAP Member Survey** Postmedia December 3, 2014

60

DC plan members whocontribute at a level toreceive the max employercontribution* 19%

Sun Life estimates thatCanadians are missingout on as much as

$3Billionin company matchedDC plans**

Employers paying out just

40-50%of available matching funds**

MERCER

DC Participants Have High Investment Return Expectations

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17.8% Average long termexpected return ofDC participants*

* Benefits Canada 2014 CAP Member Survey

10 Yr. Annualized Performance to Dec. 31, 2014FTSE TMX Canada Universe Bond 5.3%

S&P/TSX Composite 7.6%

S&P 500 CAD 7.3%

MSCI EAFE CAD 4.6%

MSCI World CAD 6.2%

MERCER

Are DC Plan Members Taking Enough Risk? Appropriate Risk?

Mercer DC Plan Governance Report Exhibit

62

MERCER

Misuse Of Target Date Funds Within DC Plans

• Are TDF’s being used appropriately?

• Simple solution may still be used inappropriately by “do it for me” investors

63

Mercer DC Plan Governance Report Exhibit

MERCER

What Should Plan Sponsors Do?

1

64

Develop strategies to help planmembers save enough forretirement

2Ensure plan members have thetools and investment options toinvest appropriately

MERCER

Improving Savings Levels

Push communications to those not maximizingbenefit

* Benefits Canada 2014 CAP Member Survey

80% of DC plan sponsors feel auto-featureswould be effective in helping ensure planmembers have adequate retirement savings*

– Auto-enrollment– Auto-default contribution rate to maximize employer

contribution– Auto-escalation of contribution rate– Put onus on employee to opt out or reduce

contribution level

AUTOFEATURES

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MERCER

Improving Savings Levels

• Few employees contribute above what is matched

• Consider moving from base employer contribution + match (unleveraged)or match only (leveraged) designs to super-leveraged design

• Employer cost remains static while total contribution increases

Contribution segment Unleveraged Leveraged Super-leveragedUnmatched employer base 2% 0% 0%Employee contributionrange

0% – 3% 0% – 5% 0% – 7.5%

Employer match on above 100% 100% 66%Maximum employer cost 5% 5% (unchanged) 5% (unchanged)Total (employee + employer) 8% 10% 12.5%

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MERCER

Improving Savings Levels

• Which messages shouldbe emphasized, andwhen?

• Develop a writtencommunication strategy,and re-visit it regularly

• Think of it like an adcampaign

• Keep it fresh and fun• Use the right media and

messages• Make it personal and

relevant

• Assess plan memberbehaviour

• Develop targetededucation strategies toaddress gaps

Gen Y vs.Gen X vs.

BabyBoomers

Re-marketthe DC plan

regularly

BehaviouralFinance

Considerations

67

MERCER

Mercer ViewDC Investing Guiding Principles

Plan sponsor focusshould be on enabling

better outcomes byassisting plan members

to make the bestdecisions where

possible and defaultingthem to the best options

if they do not

68

MERCER

Types of Investors

69

Do It For MeINVESTORS

The focus of plan sponsors should be:

• Protecting them against the worstoutcomes

• Providing them with intelligentdiversification

• Providing them with exposure toan appropriate level of risk ateach life stage

• Target Date Funds – a smartinvestment default for DC plans

Support informed investment decision-making, in general:

• Less is more• Keep it simple• Use specialized funds with

caution• White labelling• Automatic re-balancing• Focus should be on the best

outcome, net of fees

Let Me Do ItINVESTORS

MERCER 70

Thank You!

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MERCER

Speakers and Contact Details

71

PAULFORESTELL

DAVIDZANUTTO

BENOITHUDON

MATHIEUTANGUAY

SOFIAASSAF

SIMONCABRAL

mathieu.tanguay@mercer.com

paul.forestell@mercer.com

benoit.hudon@mercer.com

david.zanutto@mercer.com

sofia.assaf@mercer.com

simon.cabral@mercer.com

MERCER 72

Important noticesReferences to Mercer shall be construed to include Mercer LLC and/or its associated companies.© 2015 Mercer LLC. All rights reserved.

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