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Investment Policy Review for Pension PlansA presentation to:Trusteesand other related parties
October 28, 2015
Review of the Performance and Governance of Managed Funds in Barbados
A presentation to:Trustees and Other Related Parties
October 28, 2015
What we will cover
- Legislative Requirements- Reviews to be carried out- Assets Under Management for each fund- Asset Allocation- Fund Charges- Fund Performance- My $6,000 investment- Governance
Occupational Pension Benefits Act
- Registration of pension plans
- Submission of annual returns
- Statement of Investment Policies and Goals (SIP&G)
- Registration of pension plans
- Submission of annual returns
- Statement of Investment Policies and Goals (SIP&G)
Why have a SIP&G?
- Requirement of the Act
- Good governance
- Requirement of the Act
- Good governance
Annual Review
- Requirement of the Act
- Performance Review
- Governance Review
- Requirement of the Act
- Performance Review
- Governance Review
Investment Providers
- Sagicor
- Fortress Fund Managers
- Royal Fidelity
- Republic Bank
- ICBL
- Sagicor
- Fortress Fund Managers
- Royal Fidelity
- Republic Bank
- ICBL
Comparisons-Older Funds
- Equity Styled Funds- Sagicor Equity Fund- Fortress Caribbean Growth Fund
- Fixed Income Styled Funds- Sagicor Bonds Fund- Fortress High Interest Fund
- ICBL
Comparisons-Other Funds
- Aggressive Styled Pension Fund/Mutual Fund- Sagicor Select Growth Fund- Fortress AA Fund- Royal Fidelity Strategic Growth Fund
- Balanced Styled Pension Fund/Mutual Fund- Sagicor Global Balanced Fund- Fortress CC Fund- Royal Fidelity Select Balanced Fund- Republic Bank Capital Growth Fund
- Secure Styled Pension Fund/Mutual Fund- Sagicor Preferred Income Fund- Fortress CS Fund- Royal Fidelity Preferred Income Fund- Republic Bank Income Fund
Assets Under ManagementAssets Under Management
Assets Under Management- Equity
$0
$100
$200
$300
$400
$500
$600
Sagicor Equity Fund Fortress Caribbean Growth Fund
AUM($M)
Assets Under Management- Fixed Income & ICBL
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
Sagicor Bonds Fund Fortress High Interest Fund ICBL
AUM($M)
Assets Under Management- Aggressive
$0
$20
$40
$60
$80
$100
$120
Sagicor Select Growth Fund Fortress AA Fund Royal Strategic Growth Fund
AUM($M)
Assets Under Management- Balanced
$0
$20
$40
$60
$80
$100
$120
Sagicor Global BalancedFund
Fortress CC Fund Royal Select BalancedFund
Republic Capital GrowthFund
AUM($M)
Assets Under Management- Secure
$0
$5
$10
$15
$20
$25
$30
Sagicor PreferredIncome Fund
Fortress CS Fund Royal Premium IncomeFund
Republic Income Fund
AUM($M)
Asset AllocationAsset Allocation
Asset Allocation- Equity
Equities76%
Bonds6%
Mortgages1%
Real Estate11%
Cash5%
Deposits1%
Sagicor Equity Fund
Equities 73%
Bonds5%
Real Estate6%
Cash & Equiv16%
Fortress Caribbean Growth Fund
Asset Allocation- Fixed Income
Equities2%
Bonds66%
Mortgages24%
Cash2%
Deposits6%
Sagicor Bonds Fund
Equities12%
Bonds51%
Cash & Equiv37%
Fortress High Interest Fund
Asset Allocation - Aggressive
Equities87%
Bonds3%
Cash10%
Sagicor Select Growth Fund
Equities37%
Mutual Funds60%
Cash3%
Royal Fidelity Strategic Growth Fund
Equities72%
Bonds26%
Real Estate2%
Fortress Pension Fund‐ AA Share
Asset Allocation - Balanced
Equities58%
Bonds42%
Fortress Pension Fund‐CC Share
Equities47%
Bonds53%
Royal Fidelity Select Balanced Fund
Equities64%
Bonds29%
Cash7%
Sagicor Global Balanced Fund
Equities51%Bonds
44%
Money Market5%
Republic Capital Growth Fund
Asset Allocation- Secure
Equities8%
Bonds85%
Cash7%
Sagicor Preferred Income Fund
Preference Shares14%Mutual Funds9%Bonds
73%
Cash4%
Royal Fidelity Premium Income Fund
Equities10%
Bonds90%
Fortress Pension Fund‐CS Share Preference Shares14% Mutual
Funds9%
Bonds73%
Cash4%
Royal Fidelity Premium Income Fund
Fund ChargesFund Charges
Fund Charges- Front End
Fund Charges- Annual Fees
Fund Total Annual
Equity Type
Sagicor Equity Fund 0.75%
Fortress Caribbean Growth Fund 1.90%
Fixed Income
Sagicor Bonds Fund 0.50%
Fortress High Interest Fund 0.92%
Fund Charges- Annual FeesFund Total Annual
Aggressive Styled Pension Fund/Mutual Fund
Sagicor Select Growth Fund1.00%
Royal Fidelity Strategic Growth Fund1.00%
Fortress AA Fund0.50%
Balanced Styled Pension Fund/Mutual Fund
Republic Capital Growth Fund2.50%
Sagicor Global Balanced Fund2.00%
Royal Fidelity Select Balanced Fund1.00%
Fortress CC Fund0.50%
Secure Styled Pension Fund/Mutual Fund
Republic Income Fund 1.75%Sagicor Preferred Income Fund 1.00%Royal Fidelity Premium Income Fund 0.75%Fortress CS Fund 0.50%
ICBL 0.75%
Republic Bank – 0.5% if funds are invested and withdrawn within 6 months, otherwise 0%.
Sagicor– 3% charge if funds are divested from the Sagicor Segregated Pension Funds only. No charge if the divestment is to pay benefits.
ICBL- Surrender penalty is charged on any surrenders except benefit payments.
All other funds- No charges
Republic Bank – 0.5% if funds are invested and withdrawn within 6 months, otherwise 0%.
Sagicor– 3% charge if funds are divested from the Sagicor Segregated Pension Funds only. No charge if the divestment is to pay benefits.
ICBL- Surrender penalty is charged on any surrenders except benefit payments.
All other funds- No charges
Fund Charges- Redemption Charges
Fund PerformanceFund Performance
BenchmarksEquity /Aggressive
3% +Inflation rate
Balanced
2% + Inflation Rate
Fixed Income/Secure
1% + Inflation Rate
Fund PerformanceEquity Styled – Short Term
‐3.00%
‐2.00%
‐1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
YTD 2014 3YR
Equity Styled Funds
Sagicor
Fortress
Benchmark
Fund PerformanceEquity Styled – Long Term
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
10YR
Equity Style Funds
Sagicor
Fortress
Benchmark
Fund PerformanceFixed Income Styled - Short Term
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
YTD 2014 3YR
Fixed Income Style
Sagicor
Fortress
Benchmark
Fund PerformanceFixed Income Styled – Long Term
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
10YR
Fixed Income Style
Sagicor
Fortress
Benchmark
Fund PerformanceAggressive Styled Mutual Funds – Short Term
‐8.00%
‐6.00%
‐4.00%
‐2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
YTD 2014 3YR
Aggressive
Sagicor
Fortress
Royal
Benchmark
Fund PerformanceAggressive Styled Mutual Funds – Long Term
‐6.00%
‐4.00%
‐2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
5YR 10YR
Aggressive
Sagicor
Fortress
Royal
Benchmark
Fund PerformanceBalanced Styled Funds – Short Term
‐4.00%
‐2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
YTD 2014 3YR
Balanced
Sagicor
Fortress
Royal
Republic
Benchmark
Fund PerformanceBalanced Styled Funds – Long Term
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
5YR 10YR
Balanced
Sagicor
Fortress
Royal
Republic
Benchmark
Fund PerformanceSecure Styled – Short Term
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
YTD 2014 3YR
Secure
Sagicor
Fortress
Royal
Republic
Benchmark
Fund PerformanceSecure Styled – Long Term
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
5YR 10YR
Secure
Sagicor
Fortress
Royal
Republic
Benchmark
• Average annual return of 4.5% to 7.4% over the last nine years.
• Fund has a guaranteed interest rate currently set at 4.5% payable semiannually.
• Bonus interest of 50% of the rate earned in excess of the guaranteed rate is payable at December 31 in each year.
• Average annual return of 4.5% to 7.4% over the last nine years.
• Fund has a guaranteed interest rate currently set at 4.5% payable semiannually.
• Bonus interest of 50% of the rate earned in excess of the guaranteed rate is payable at December 31 in each year.
Fund PerformanceICBL
My $6,000 investmentMy $6,000 investment
My $6,000 investment- EquityEffective
Fund Value Annual ReturnSagicor Bonds Fund $6,904 5.7%Republic Capital Growth Fund $6,903 5.7%Royal Fidelity Premium Income Fund $6,865 5.5%Select Growth Fund $6,647 4.2%Republic Income Fund $6,614 4.0%Fortress High Interest $6,430 2.8%Conservative Consolidator $6,425 2.8%Capital Secure $6,415 2.7%Sagicor Equity Fund $6,414 2.7%Aggressive Accumulator $6,364 2.4%Fortress Caribbean Growth Fund $6,291 1.9%Sagicor Global Balanced Fund $6,252 1.7%Royal Fidelity Select Balanced Fund $6,207 1.4%Sagicor Preferred Income Fund $6,179 1.2%Royal Fidelity Strategic Growth Fund $5,763 -1.6%
GovernanceGovernance
GovernanceChecklist
Date of
Most Recent Freq.Audited Latest of
Fund Financials NAV Val.Sagicor Equity Fund 31-Dec-14 30-Sep-15 M
Sagicor Bonds Fund 31-Dec-14 30-Sep-15 M
Sagicor Select Growth Fund 30-Sep-14 09-Oct-15 W
Sagicor Global Balanced Fund 30-Sep-14 09-Oct-15 W
Sagicor Preferred Income Fund 30-Sep-14 09-Oct-15 W
Fortress Caribbean Growth Fund 30-Sep-14 23-Oct-15 WFortress High Interest Fund 30-Sep-14 23-Oct-15 WFortress Pension Funds 30-Sep-14 30-Sep-15 M
Royal Fidelity Strategic Growth Fund 30-Jun-14 30-Sep-15 MRoyal Fidelity Select Balanced Fund 30-Jun-14 30-Sep-15 MRoyal Fidelity Premium Income Fund 30-Jun-14 30-Sep-15 M
Republic Capital Growth Fund 30-Sep-14 23-Oct-15 W
Republic Income Fund 30-Sep-14 23-Oct-15 W
Thank you
How to pay Pensions and Reduce Risk
A presentation to:Eckler’s Annual Investment Review Seminar
October 28, 2015The LES Centre
Background
>The Risk:>DC Plans have no longevity risk or
investment risk to the plan sponsor.>If pension are paid from the fund then
risk to the sponsor is introduced.>In this presentation we explain the risk
and how it can be avoided.
Three Alternatives to avoid risk.
>Annuity Purchase>Drawdown Arrangement>Conservative conversion
Purchasing Annuities
>This is the easiest BUT>Annuities can be expensive and
pensioners may receive less that was targeted or expected.
>The process:• Plan Administrator/Record keeper requests
annuity quotes from all eligible insurance companies.
• Pensioner selects quote.• Premium is paid from Pension Plan• Insurance company assumes risk and pays
pension.
Purchasing Annuities
>The insurance companies that offer annuities in Barbados are:• Sagicor Life• Guardian Life• Insurance Corporation of Barbados Limited• Pan American
>From time to time some of these decline to quote.
Purchasing Annuities
>Current Rates reflect discount rates of 4% - 5%p.a.
>Male age 60 $5.69 - $5.13 per month per $1,000 of single premium.
>Given the current S&P rating of Barbados Government Bonds insurers are cautious in issuing annuities.
Drawdown Arrangements
>The Pension Act – defines a “pension benefit” as a periodic payment and does not seem to disallow drawdown arrangements.
>In the Budget Speech 2013 the Minister announced that Regulations were being drafted to permit drawdown arrangements in pension plans.
>Fortress Insurance Company Limited has been selling policies which mimic drawdown arrangements.
Drawdown Arrangements
>How it works:• Pensioner continues to have a DC Account• Pensioner continues to have the right to select
the investment fund• Monthly payments are deducted from the DC
Account• Payments stop when the Account runs out.• When the pensioner dies the account balance
is paid to his estate.
Drawdown Arrangements
>How it works:• Monthly payments are recomputed annually
and fixed for the next 12 months.• There is a minimum and maximum rate for
each age which is applied to the current Account Balance.
• If the maximum rate is used the Account runs out at age 90 and if the minimum rate is used the account runs out at age 100.
• In any year if the account earns more than 5% then the payments in the next year increase and conversely.
Drawdown Arrangements
Age Last Birthday
Proportion of Account Value to be paid each month for the next 12 months
Age Last Birthday
Proportion of Account Value to be paid each month for the next 12 months
55 0.4847% 73 0.7040%56 0.4901% 74 0.7323%57 0.4960% 75 0.7646%58 0.5022% 76 0.8018%59 0.5090% 77 0.8449%60 0.5163% 78 0.8954%61 0.5242% 79 0.9555%62 0.5327% 80 1.0278%63 0.5420% 81 1.1166%64 0.5521% 82 1.2280%65 0.5631% 83 1.3716%66 0.5752% 84 1.5636%67 0.5884% 85 1.8331%68 0.6029% 86 2.2382%69 0.6190% 87 2.9144%70 0.6368% 88 4.2683%71 0.6567% 89 8.3333%72 0.6789% 90 100.0000%
Maximun Rate
Drawdown Arrangements
Age Last Birthday
Proportion of Account Value to be paid each month for the next 12 months
Age Last Birthday
Proportion of Account Value to be paid each month for the next 12 months
55 0.4465% 78 0.6029%56 0.4493% 79 0.6190%57 0.4523% 80 0.6368%58 0.4555% 81 0.6567%59 0.4589% 82 0.6789%60 0.4625% 83 0.7040%61 0.4664% 84 0.7323%62 0.4705% 85 0.7646%63 0.4749% 86 0.8018%64 0.4796% 87 0.8449%65 0.4847% 88 0.8954%66 0.4901% 89 0.9555%67 0.4960% 90 1.0278%68 0.5022% 91 1.1166%69 0.5090% 92 1.2280%70 0.5163% 93 1.3716%71 0.5242% 94 1.5636%72 0.5327% 95 1.8331%73 0.5420% 96 2.2382%74 0.5521% 97 2.9144%75 0.5631% 98 4.2683%76 0.5752% 99 8.3333%77 0.5884% 100 100.0000%
Minimum Values
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Drawdown IllustrationAge 60Single Premium 1,000,000.00$ Inv Yield 5.00%Schedule A
Drawdown Arrangements
$50,000
$52,000
$54,000
$56,000
$58,000
$60,000
$62,000
$64,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Drawdown IllustrationAge 60Single Premium 1,000,000.00$ Inv Yield 5.00%Schedule B
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Drawdown IllustrationAge 60Single Premium 1,000,000.00$ Inv Yield 5.00%Schedule A
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Drawdown IllustrationAge 60Single Premium 1,000,000.00$ Inv Yield 6.00%Schedule A
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Drawdown IllustrationAge 60Single Premium 1,000,000.00$ Inv Yield 4.00%Schedule A
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Flexible Annuity IllustrationAge 60Single Premium 1,000,000.00$
Schedule A
Mean 6.0%STD 4.0%
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Flexible Annuity IllustrationAge 60Single Premium 1,000,000.00$
Schedule A
Mean 6.0%STD 4.0%
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Flexible Annuity IllustrationAge 60Single Premium 1,000,000.00$
Schedule A
Mean 6.0%STD 4.0%
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Flexible Annuity IllustrationAge 60Single Premium 1,000,000.00$
Schedule A
Mean 6.0%STD 4.0%
Drawdown Arrangements
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
$100,000
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 100
Annu
al In
come
Age
Flexible Annuity IllustrationAge 60Single Premium 1,000,000.00$
Schedule A
Mean 6.0%STD 4.0%
Drawdown Arrangements
>Providers• Currently only Fortress Insurance Company
Limited has a policy that works this way.• Any individual pension plan can make
payments in this way.
Conservative Conversion
>In a pension is paid from the plan then:>The there are two assumptions that are
used to convert the Account Balance to a monthly pension: Discount rate and Mortality rates.
>The Discount rate is the rate that the investments must earn in the future and is generally the largest risk.
>Mortality risk can not be diversified in a small pension plan.
Conservative Conversion
>If a low discount rate of say 3% p.a. is used then:
> the initial pension will be small• Whenever investment returns greater than 3%
are earned a pension increase can be given.• Lower investment returns would be carried
forward and recovered from future high returns or paid by the sponsor.
• Higher returns might also be used to cover longevity but this is difficult to manage at older ages.
Conservative Conversion
>This method also results in am IAS19 requirement since the plan is no longer Pure DC.
>Paying annuities from a DC Plan is NOT recommended.
Comparison
Male Age 60Single Premium $1,000,000
Initial Monthly Annuity From:Annuity Purchase G10 $5,687 Never changesDrawdown; Maximum Scale $4,625 Changes depending on investment yieldDrawdown; Minimum Scale $5,163 Changes depending on investment yieldConservative Conversion G10 $4,831 Changes depending on investment yield
Defined Benefit Plans
>DB Plans sponsors are no strangers to risk but in a period of sustained low returns are generally tired of losses.
>Often pensions are reserved for with an assumption for pension increases. These can be reduced when returns are low.
>If the plan is large then mortality experience is more likely to “average out”.
Defined Benefit Plans
>DB Plans may still wish to consider the following at retirement:• Purchasing an annuity.• Explaining to the member that he has an
option to transfer to an individual plan and use a draw down arrangement.
Defined Benefit Plans
>Why a DB pensioner might prefer a draw down arrangement:• He can direct the investment of his fund.• The balance in his account goes to his estate
on death.• The investments might have a FX component.• He can afford to take the risk.
Recommendations
>DC Plans should decide whether they will offer drawdown arrangements from the plan or just from a provider.
>DC Plan should always offer a drawdown arrangement as an alternative to an annuity.
>DC Plans should NOT pay regular pensions from the plan.
>DB Plans should consider explaining transfer options at retirement.
Discussion