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LCP Annual Pensions Conference
Wednesday 16 September 2015
Turning uncertainty
to your advantage:
Making sense of the
pensions world in
2015 and beyond
#LCPpensionsconf
Bob Scott
Chairman’s welcome
#LCPpensionsconf
Crispin Odey
Odey Asset Management
Opening address
Crispin Odey
LCP Conference
September 2015
The post 2008 world averted recession by cutting rates to 0%, hoping for healing, then
growth and then inflation, after which rates would rise
Source: Bloomberg as at 07-Sep-2015.
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
-1
0
1
2
3
4
5
6
7
Sep-2005 Sep-2006 Sep-2007 Sep-2008 Sep-2009 Sep-2010 Sep-2011 Sep-2012 Sep-2013 Sep-2014
Fed Funds target rate BoE Official rate ECB Deposit rate BoJ Overnight rate
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
0
5
10
15
20
25
30China Li Ke Qiang Index for
GDP
6
8
10
12
14
China official GDP
Li Ke Qiang Index: tracking bank lending, rail freight, and electricity consumption
Source: Bloomberg as at 31-May-2015 Source: Bloomberg as at 30-Jun-2015
Chinese GDP growth is now just 3% according to the Li Ke Qiang Index; rather
than the official 7%
The new “Two Chinas” questions
“What is increasingly apparent is that China’s leaders want the economic growth that
capitalism produces, but without the downturns that come with it.
They want the innovation that an open society generates, but without the intellectual
freedom that defines it. Something has to give.”
Richard N. Haass
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
How to save the Party? China has 4 main problems, from its 4 bubbles; Housing, Debt,
Stock Market and FX Investment and consumer spending shares
% of GDP, nominal data
Source: Bloomberg
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
50%
100%
150%
200%
250%
300%
1985
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2013
2014
2015
Pvt debt/ GDP Total debt/ GDP
The first chart shows OECD real effective exchange rates based on unit labour costs for the whole economy and on CPI relative to a long
run average; the second chart shows REER (ULC) relative to a long-run average and a ‘guesstimated’ par as well.
1500
2000
2500
3000
3500
4000
4500
5000
5500
Aug-2010 Aug-2011 Aug-2012 Aug-2013 Aug-2014 Aug-2015
Shanghai stock exchange (SHCOMP)
Chinese growth was driven by debt, and it is still rising
Source: Lombard Street Research
China’s paradox
For the Renminbi to become a reserve currency
the Renminbi must be allowed to float
A floating currency means opening the foreign
capital account
Open capital accounts can drive further capital
flight out of China
China will have to act to devalue further to stop
the capital flight…
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000China FX reserves ($m)
Source: Bloomberg as at 31-Aug-2015
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
6
6.05
6.1
6.15
6.2
6.25
6.3
6.35
6.4CNY currency (year to date)
Productivity growth has been very steady the last two hundred years, apart from 3
notable kinks, the third of which is happening now
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
UK Productivity: 1830-2010
The next few years will be about FX and Trade
Source: Datastream as at 27/07/15
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
The current implosion of Asian trade
90
95
100
105
110
115
120
125
130
135
140
World Trade Volume Index (SA)
World trade volume has started to roll over
Average world tariffs have declined since the Great Depression, while World Exports
have risen – what happens when Exports fall?
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
Average of World Tariffs (1870-2000)
Source: Adapted from Mitchell (1992) and Coatsworth and Williamson (2002) . Source: Adapted from Maddison (1989), Mitchell (1992) and Coatsworth and Williamson (2002) .
World Average of World Tariffs and World Exports (1870-2000, Logs)
China now accounts for 13% of World Nominal GDP and Emerging Markets c. 50%
Source: Bloomberg as at 31-Dec-2014 The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
0%
2%
4%
6%
8%
10%
12%
14%China nominal GDP as % of global GDP (world bank
estimates)
Similarities with 2007 – China’s issues will be felt globally
In 2007-8, US housing indebtedness and lack of visibility was the problem; we see the same in China now -
huge debt and true affordability being hidden
In 2007-8 the interbank markets started the recession, now that risk comes from China and if individuals lose
confidence and try to get their money out, that is a big problem
In 2007 Bear Stearns and Northern Rock were seen as containable; commentators are saying the same about
China’s debt and other bubbles…
Markets are already fragile - US companies with high EM exposure at 12-year lows vs
broad US equities
Note: relative total return
Source: BofA Merrill Lynch Global Investment Strategy, MSCI
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
US credit markets have been declining since mid 2014
Source: Bloomberg as at 19-Aug-2015
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
1000
1200
1400
1600
1800
2000
2200
80
82
84
86
88
90
92
94
96
Jul-2
010
Sep-
2010
Nov
-201
0
Jan-
2011
Mar
-201
1
May
-201
1
Jul-2
011
Sep-
2011
Nov
-201
1
Jan-
2012
Mar
-201
2
May
-201
2
Jul-2
012
Sep-
2012
Nov
-201
2
Jan-
2013
Mar
-201
3
May
-201
3
Jul-2
013
Sep-
2013
Nov
-201
3
Jan-
2014
Mar
-201
4
May
-201
4
Jul-2
014
Sep-
2014
Nov
-201
4
Jan-
2015
Mar
-201
5
May
-201
5
Jul-2
015
High yield bond USD (HYG US Equity - Left) S&P 500 Index (Right)
iShares iBoxx $ High Yield Corporate Bond ETF is an exchange-traded fund incorporated in the USA. The ETF seeks to track the investment results of an index composed of U.S. dollar-denominated, high yield corporate bonds.
[FIGI BBG000R2T3H9]
Breadth has narrowed in equity markets: only 47% of stocks in the SPX were above their
respective 150-day moving average before August, when the S&P 500 was only 2% off all-time high
Source: Cornerstone Macro
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
Momentum has broken down; Dow Jones short term moving averages have broken the
long term, which did not happen in the October market decline
Source: Bloomberg as at 01-Sep-2015
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
A simple moving average is constructed by taking a mean average of a time series over a given period of time. Here we use 21, 63, and 270, equating to the working days in a month, quarter and year.
6,000
8,000
10,000
12,000
14,000
16,000
18,000
02/09/2008 02/09/2009 02/09/2010 02/09/2011 02/09/2012 02/09/2013 02/09/2014 02/09/2015
Dow Jones Index SMAVG (21) SMAVG (63) SMAVG (270)
12,000
13,000
14,000
15,000
16,000
17,000
18,000
Dow Jones Index SMAVG (21) SMAVG (63) SMAVG (270)
Source: Citigroup and DataStream
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
When do we buy it? – With momentum broken, now one waits for value; but valuations remain near all-time highs when we look at equity market
value as % of GDP
When would we buy the S&P 500? 10x EBIT indicates 1,452
500
700
900
1,100
1,300
1,500
1,700
1,900
2,100
2,300
S&P 500 Index
10x EBIT indicates a further 25% fall
(10 x Bloomberg current EBIT estimate for S&P 500)
Source: Bloomberg as at 08-Sep-2015
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
There’s a recession every decade, and we are now due ours
Excerpt from Andy Haldane speech, 30 June 2015:
–Over the course of a decade, the risk of experiencing at least one recession rises steadily, reaching
between 85-90% after ten years. Using post-war data, this cumulative probability is just less than
80%. So over any plausible sample period, a recession remains considerably more likely than not over
the course of a decade.
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
Source: Odey Internal Research
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
Premiership content accounts for 10% of sales. Cost inflation of 83%
therefore accounts for 8%
We think an 8% ARPU hike (£3.80/month) is manageable without causing a
spike in churn
In fact a £2.50 ARPU hike has already been put through
Transactional Revenues (OTT) likely more incremental than cannibalistic,
and at substantially higher margins
Netflix values each international sub at $150 NPV while Sky’s shares treat
this opportunity as potentially dilutive
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
-
50
100
150
200
250
300
350
400
FY'13 FY'14 FY'15 FY'16E FY'17E FY'18E FY'19E FY'20E
Transactional Revenue (£, mn)
% of UK sales
£28
£30
£32
£34
£36
£38
£40
£42
£44
£46
£48
8.0%
9.0%
10.0%
11.0%
12.0%
13.0%
14.0%
1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
Mo
nth
ly A
RP
U (
£)
An
nu
ali
sed
Ch
urn
Annualised Churn (left) Monthly ARPU (£, right)
Poly. (Annualised Churn (left)) Poly. (Monthly ARPU (£, right))
Sky: Quality subscriptions revenues –
Inflationary pricing alongside lower churn (Long)
Sky: Inflationary pricing alongside lower churn (Long)
Source: Odey Internal Data Research
The information and any opinions expressed are believed to be reliable, but accuracy and completeness cannot be guaranteed
Sky Profitability
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
0p
20p
40p
60p
80p
100p
120p
FY'15 FY'16E FY'17E FY'18E FY'19E FY'20E
Retail Subscription Revenue FCF/share
Retail Subscription Revenue EPS
Retail Subscription Revenue cash ebit margin (ebitda-capex)
(rhs)
Odey European Inc.
Source: Odey Internal Data. Performance is net of fees and other charges and includes the reinvestment of dividends. Past performance does not guarantee future results and the value of all investments and the income derived therefrom can
decrease as well as increase. Investments that have an exposure to currencies other than the base currency of the fund may be subject to exchange rate fluctuations.
To End-Aug-15
0
200
400
600
800
1000
1200
1400
1600
1800
2000
Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Jun-08 Jun-10 Jun-12 Jun-14
Odey European Inc(€) MSCI Daily TR Net Europe
Disclaimer
This is a marketing communication from Odey which is not intended to be viewed as a piece of independent investment research.
© 2015 Odey Asset Management LLP (“OAM”) has approved this communication which is for private circulation only, and in the UK is directed to persons who are professional clients or eligible counterparties for the
purposes of the FCA’s Conduct of Business Sourcebook and it is not intended for and must not be distributed to retail clients. It does not constitute an offer to sell or an invitation to buy or invest in any of the securities or
funds mentioned herein and it does not constitute a personal recommendation or investment taxation or any other advice. The information and any opinions have been obtained from or are based on sources believed to be
reliable, but accuracy cannot be guaranteed. Past performance does not guarantee future results and the value of all investments and the income derived therefrom can decrease as well as increase. Investments that have an
exposure to currencies other than the base currency of the fund may be subject to exchange rate fluctuations. This communication and the information contained therein may constitute a financial promotion for the purposes
of the Financial Services and Markets Act 2000 as amended by the Financial Services Act 2012 of the United Kingdom (the “Act”) and the rules of the FCA. This communication is not subject to any restrictions on dealing
ahead. The distribution of this communication may, in some countries, be restricted by law or regulation. Accordingly, anyone who comes into possession of this communication should inform themselves of and observe
these restrictions. OAM is not liable for a breach of such restrictions or for any losses relating to the accuracy, completeness or use of information in this communication, including any consequential loss. Please always
refer to the fund’s prospectus. OAM whose company No. is OC302585 and whose registered office is at 12 Upper Grosvenor Street, London, W1K 2ND, is authorised and regulated by the Financial Conduct Authority.
#LCPpensionsconf
Nick Clark
A 2020 vision for the future
2020 PREDICTIONS
€ $
¥
UNCERTAINTY OF PENSIONS
Low
bond
yields Reducing
tax
incentives
Insurance/
longevity
developments
Loss of
“contracting
out rebate”
GMP
equalisation
Ever
increasing
EU
regulation
The
“Pensions
Revolution”
DB DC
2020
DB
4.8% of pensionable
pay
Covenant
Investment
strategy
Funding
Long-term
recovery plan
over 15 years
Weak Strong
1 2
Source:
1
£710m
£270m
£790m
£1770m
Strong
Short-term
recovery plan
of 3 years
2
Source:
£1290m
£30m
£1670m
£3000m
2
De-risk
assets
Transfer
risk to
individual
Transfer
risk to
insurer
De-
risking
DC
Op
tio
ns
2015
Budget Tax
Consulation
A flat rate
of tax relief
for all
Pensions
ISAs
3% of salary saved
in the ISA
contribution to
the DC pension
arrangement
3% Matches
Long term saving vehicles… …will remain central
to their approach to
workforce planning
Agree an appropriate long-term
plan for funding your DB scheme
Don’t neglect the data
Futureproof your governance
CALL TO ACTION
#LCPpensionsconf
Gaining a competitive edge
Clay Lambiotte
Time
Fundin
g level
Matching
Growth
End
Game
UK DB
assets
Future supply of
matching assets
1500
500
1000
2000 (£
bn
)
0
25
50
75
100
2015/16 2016/17 2017/18 2018/19 2019/20
0
25
50
75
100
2015/16 2016/17 2017/18 2018/19 2019/20
Ground
rents
£8bn
Residential
housing
£15bn Equity
release
£30bn
Infrastructure
£70bn
Commercial
property
£30bn
Social
housing
£80bn
Estimated total: c.£230bn
Estimated size of real asset market
opportunity over the next decade
UK DB
assets
Future supply of
matching assets
1500
500
1000
2000 (£
bn
)
?
Ideas
Governance Tactics Structure
Governance
LDI Return
seeking
2
Return
seeking
1
Return
seeking
3
Scheme
Structure
Tactics
CALL TO ACTION
Improve governance and
implementation structure
Build positions now
Consider alternative strategies to de-risk
#LCPpensionsconf
Jonathan Camfield
Pension freedoms – 6 months on
Join the
DC pension
scheme
Early
retirement
Taking
transfer
value
Members
Administrators
Financial
Advisers
Insurers
Trustees &
Employers
Regulators
Members
80% great or good idea
£2.5bn of cash in the first 3 months
Members
Administrators
Financial
Advisers
Insurers
Trustees &
Employers
Regulators
Administrators
Queries +20%
TV quotations x2
Average TV £250,000
More transfers?
SURVEY
Members
Administrators
Financial
Advisers
Insurers
Trustees &
Employers
Regulators Financial
Advisers
Members
Administrators
Financial
Advisers
Insurers
Trustees &
Employers
Regulators
Insurers
Members
Administrators
Financial
Advisers
Insurers
Trustees &
Employers
Regulators Regulators
“It is not [the trustees’] role to prevent
a member from making decisions
which the trustees might consider to
be inappropriate.”
?
?
Members
Administrators
Financial
Advisers
Insurers
Trustees &
Employers
Regulators
Trustees &
Employers
Reviewed option terms
Trivial commutation
Partial transfers
Quote transfer values
Financial advice
£1billion scheme
7000 deferred
members
£1billion scheme
7000 deferred
members
30 retirees
50% contacted IFA
25% recommended to
transfer
Self financing
Better member decisions
i
2010 2011 2012 2013 2014
2015?
Retirement communications clear and balanced
CALL TO ACTION
Talk to financial advisers now Keep DC provider under review
#LCPpensionsconf
Questions
#LCPpensionsconf
Karen Goldschmidt
There’s nothing as certain in life as tax
Adjusted Income (£K)
£0
£5,000
£10,000
£15,000
£20,000
£25,000
£30,000
£35,000
£40,000
£45,000
60 90 120 150 180 210 240
Series2 Annual
Allowance
Reduce “tax relief on pension contributions for
people earning more than £150,000”
£40K Annual Allowance
Income
below
£110,000
Income
above
£110,000
A92
6 April
2016
5 April
2017
Salary
Car Allowance
Bonus
Commission
Commission
Commission
£0
£5,000
£10,000
£15,000
£20,000
£25,000
£30,000
£35,000
£40,000
£45,000
60 90 120 150 180 210 240
Series2 Annual
Allowance
A6
DB DC
Tax
B0
PIPs
RIP
5 April 2016
B1
-
5
10
15
20
25
30
35
40
45
- 20 40 60 80 100
Sc
op
e f
or
po
st-
Bu
dg
et
sa
vin
gs
(£
K)
Pre-Budget savings (£K) in the “Combined PIP”
2015/2016
05/04/2015 05/04/2016 05/04/2014
Closure 30 September 2015
DC
Summer Budget
PIPs ending 30 Junes PIPs ending 30 Junes Before
After
12/21 = 57% 9/21 = 43%
21 months “in” 2015/16
FPS jump FPS jump
Combined PIP Pre Post
£2,000
from HMRC
£8,500
Tax
20% x 3/4 =
£1,500
£8,000
Withdrawal
Pension
Scheme
Relief at Source
(Contract based)
£
Member
pays in
£80
HMRC
pays in
£20
Member
pays in
£80
HMRC
pays in
£0
Net Pay
(Trust based)
£
Help your senior employees prepare for April 2016
CALL TO ACTION
Think “tax” on any change project Ensure DC provisions are fit for purpose
#LCPpensionsconf
Mary Spencer
Enhancing investment performance
Improve by just
1%
AGENDA
Enhance the matching portfolio
Exploit the illiquidity premium
Optimise DC members’ investments
20% PA
Returns
of over
Outperformed
gilts by over
1% PA
Dynamic LDI
Manager
selection Investment
strategy
Private
credit
UK best
secondary
property
DB end game
What about
DC?
16 March 2035
Make your matching assets
work harder Embrace illiquidity Increase DC efficiency
CALL TO ACTION
#LCPpensionsconf
Michelle Wright
What do I do next?
Innovation in the buy-in/buy-out market
Why is this important?
?
Funding level of 84%
8 year plan to full funding
0 10 20 30 40 50 60 70 80 90
Longevity
Interest rate
Inflation
Return-seeking assets
Total Value at Risk
1 year Value at Risk (£m)
20%
30%
25%
25%
£80m
0
50
100
150
200
250
300
350
400
450
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Time horizon (years)
Financial risk
Longevity risk
Valu
e a
t R
isk (
£m
)
0
50
100
150
200
250
300
350
400
450
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Time horizon (years)
Financial risk
Longevity risk
Valu
e a
t R
isk (
£m
)
20% 35%
40%
When should I start
to act?
?
£££ £
What can I do?
?
Positions
scheme
ahead of
others
Future
transactions
easier
Reduce
longevity
risk
Benefits
of taking a
first step
Where do I start?
?
25
26
27
28
29
30
31
32
33A
ssum
ed life e
xpecta
ncy a
t age 6
0 (
years
)
Pension size (£ pa)
£10,000 £20,000 £30,000 £40,000 £50,000 £60,000 £70,000 £80,000 £90,000 £100,000
Up to 5%
additional
premium
What else could I do?
?
Other
innovations
Captive
longevity
swap?
Delay
pension
payments?
Deferred
premium?
Don’t ignore longevity risk
CALL TO ACTION
Consider insurance solutions
alongside your other assets Get ahead of the competition
#LCPpensionsconf
Jeremy Dell
How to bring clarity out of uncertainty
AGENDA
Pensions saving over the next 10 years
Managing the run off of DB schemes
over the next 10 years
Section
75
DB allocated pro-rata
DC allocated 100% post
DB Accrual Pre Post
“Real life” 2 pay increases,
1 year service
No pay increases,
3 months service
“PIA purposes” 58% of total 42% of total
Old PIPs Year ending 30 June
FPS jumps Each 1 July
DB Closure 30 September 2015
DC thereafter
Alig
ned P
IPs
?
CALL TO ACTION
Manage pensions tax issues and
equip members/employees
Plan for a soft landing
Manage DC effectively to get the
best bang for your buck
#LCPpensionsconf
Bob Scott
Chairman’s conclusion and questions