A tale of two pensions: UK & Australia
Australian Superannuation Investment
Conference,
Sept 5th 2013
Bev Durston, Edgehaven Pty Ltd
A tale of two pensions: UK & Australia
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Background and experience
Overview of pensions: UK & Australia
Compare & contrast
DB ideas for DC pension funds
Investment observations
Next generation pensions
Summary
Background and Experience
• Pensions experience in Australia, Singapore & UK
• Head of Portfolio Risk, Global Portfolio Manager, Deputy CIO
• 2008 to 2013:
• BA Pensions: Head of Alternative Assets;
• DC Trustee for BA Pensions
• Edgehaven Pty Ltd (Royal Mail Pension Plan)
Overview of pensions: UK
• Heavy DB influence but now switching focus to DC
• Cutting back on DB promises, closing schemes to future accrual
• Industry dominated by DB assets
• Initiation of “compulsory” DC to broaden the scope of pensions
investing
• Australia 20 years ago?
Overview of pensions: UK
Overview of pensions: UK
Overview of pensions: Australia
• Heavy focus on accumulation: aim only to produce a pot of
money at retirement
• Balances not (yet) big enough for meaningful incomes in
retirement
• Longevity risk: Members face a very real risk of running out of
money in old age
• Increasing age care costs with no policy (insurance) solution in
place
• Members can take 100% cash at retirement
Compare & contrast
Pension Policy Framework:
Item
Australia
UK
DC Super contributions Compulsory, 9%
Auto enrolled to 8%, opt out
Taxation in accumulation Taxed but advantaged
Tax free
At retirement
Up to 100% cash
Max 25% cash
Govt (Age) pension
Mean tested
Non means tested
Income stream in retirement
N/a
Forced annuitisation
Compare & contrast
A key difference:
No member choice of scheme in the UK
 Bespoke member analysis: Trustees focus on their
member characteristics and devise policy according to
their needs;
 No league tables produced which rank returns;
 No “peer group risk”;
 No “one size fits all” investment default policy in DC;
DB ideas for DC pension funds
1. Switch to an income focus in retirement
DB ideas for DC pension funds
1. Switch to an income focus in retirement;
2. Benchmarking: Define your income objective as an
inflation linked bond
 Gap Analysis: “Glide path” plan to move towards it
DB ideas for DC pension funds
1. Switch to an income focus in retirement
2. Benchmarking: Define your income objective as an inflation
linked bond
 Gap Analysis: “Glide path” plan to move towards it
3. Manage longevity risk: Build tools to transfer longevity risk
 Consider annuitisation: Ideally “staged” but possibly
forced
Investment observations
DC Default investment policy:
“One size fits all” investment is a poor proxy for risk return
appetite across time.
• Why is a 25 year old invested identically to a 59 year old?
• Do they have the same risk appetite as one approaches a
retirement decision point?
 Consider Target date (or Lifecycle) investing
Investment observations
Source Mercer Consulting
Investment observations
DC investment breadth
Why is this different from DB?
DC members seem “second class citizens”
 Over reliance on equity risk rather than diversified growth
Investment observations
Capital allocation DOES NOT EQUAL risk
Source: Blackrock
Investment observations
Using diversified growth strategies and tapering risk before
retirement offers less extreme outcomes than 100% equities:
Investment strategy
100% Equities
Median income replacement ratio:
Downside 1 in 10 chance:
Min income replacement ratio:
Max income replacement ratio:
70%
33%
20%
220%
50/50 DGF
+ Equities
72%
42%
28%
150%
(Assuming 40 year investing of 14% contributions and 5 year lifestyle policy)
Source: Mercer Consulting
100% DGF
69%
44%
35%
125%
Investment observations
DC investment breadth
Why is this different from DB?
DC members seem “second class citizens”
 Inappropriate focus on liquidity rather than on risk
Investment observations
Return %
Using only a risk and
return lens this
investment strategy
look diversified…..
Equities
Property
Bonds
Cash
Risk %
Investment observations
More Liquid
Return %
Equities
Equities
Property
Cash
Bonds
Listed Property
Medium Liquidity
Bonds
Less Liquid
Cash
Property
Risk %
Using risk and return only it looks
diversified…..
But this strategy becomes one
dimensional using a liquidity lens
Risk %
Investment observations
More Liquid
More Liquid
Equities
Equities
Cash
Bonds
Listed Property
Medium Liquidity
Cash
Listed Property
Medium Liquidity
High Yield
Frontier markets
Emerging mkt debt
Convertibles
Distressed debt
Direct lending
Less Liquid
Bonds
Private Debt
Loans
Absolute return
Infrastructure
Less Liquid
Property
Risk %
A one dimensional strategy on liquidity misses out on diversifying, less liquid
opportunities
Private Equity
Property
Risk %
Next generation pension schemes
• Recognition that the individual is ill equipped to manage
the many risks of DC:
 The European ideal: risk sharing between employer
and employee
 UK considering “Defined Ambition” and “DB minus”
 Consider a guaranteed minimum outcome for DC
Summary
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Similar origins for UK and Australian schemes
Australia now moving to focus on the decumulation phase
Ideas from DB may be useful for DC
Investment strategy has evolved beyond one size fits all
Policy changes may be needed
Next generation pensions will be different again…..
Summary
If you do what you’ve always done,
you’ll get what you’ve always got.
(Henry Ford)
Summary
If you do what you’ve always done,
you’ll get what you’ve always got.
(Henry Ford)
For Australian Super Schemes:
“Static is the new risk”
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