Saving for retirement A catastrophe or advantage? Anne Cabot-Alletzhauser August 19, 2013

Let’s start with an important consideration Shift focus to life experience of member Introduce broader accountability Preservation of assets over time with safety valve Annuitise savings Expand the net of coverage Control Costs Align the incentives and behaviours Just where is pension reform actually trying to take us? It’s not just about what a member retires with... ...it’s about the protections we provide a member with throughout the course of their working life that insure the mental/physical and financial well-being

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Connecting the dots for member well-being graph

The slide that can change the way trustees think graph Joe

Where is value being destroyed? By employer By trustees Not linking employee compensation/employee well-being through life Total cost to company Pensionable pay Benefit choice Contribution rates Retirement dates Not on-boarding and exiting employees effectively Preservation Choice trade-off education Financial wellness Not linking employment policy with benefit policy These issues all have financial implications to employers that they are not appreciating Not recognising the true liability of members = ability to replace salary income on retirement Income maximisation is a different investment problem to wealth accumulation Member choice typically doesn’t address this Not understanding which decisions add the most value to members’ pockets and which destroy the most value Performance chasing Short termism MIC Not using valuable meeting time wisely Use the time to understand your members – knowing what Investec or Allan Gray are buying or selling is perhaps the least important insight you need to have as fiduciaries of your members’ funds

Factors impacting replacement ratios for members Pensionable pay % Contributions Salary Progression Costs of benefits and investments Investment Returns Losses due to Non-Preservation Annuity Factors at Retirement 2 * 1 3 5 4 6

How does the employer regard this chart? An opportunity to attract with better benefits or/ An opportunity to provide employees better take home pay?

This fund has experienced high turnover in members This could be a temporary phenomenon due to business imperatives or something more permanent

Most disturbing though is the member attitude towards preservation

If these phenomenon persist then the member shortfall in NRR will be highly problematic NRR drops to 12.3%

How could policy changes by the employer or Treasury impact member level? Joe The current situation given member experience

What if National Treasury imposed preservation? Joe This would produce the biggest changes in outcomes of any one decision!

What if this employer increased the retirement age to 65? Joe Assuming full preservation – each additional year = 7% - 10% increase in NRR

Presentation name graph What on earth is happening here!!! In 2011 the average member retired with a 32% replacement ratio The AF Pensions Index projects that: a 61 year old should retire with 59.8% a 51 year old should retire with 46.1% a 41 year old should retire with 37.8%

Impact of returns and bond yields Drivers for the 1962-born

COST OF INFLATION-LINKED INCOME R1 797 152 R1 629 895