John Anderson Alexander Forbes Financial Services Head of Institutional Strategy Next Generation Benefit Design

The only constant is CHANGE! The only constant is CHANGE...

OUR ENVIRONMENT AT HOME & ABROAD HAS CHANGEd!!!

Legislative changes Abound!

The New Breed of Workers Increased Longevity Informed Consumers Social Connectivity & flow of information Increased appetite for Choice & Flexibility We need to understand the trends impacting us...

The numbers paint a SCARY picture! >70% The number of funds which had the same contribution rate structure over last 10 yrs. 75% Percentage of people who selected Living Annuities at retirement. 43% Percentage of retirees with living annuity drawdown rates of 15% or more.

NRRs over time... Age: 2001 Projected NRR: 2001 Projected NRR: year old75%??? 40 year old75%??? 50 year old75%??? Return 30 year old14.1% p.a. (8.1% real) 40 year old14.1% p.a. (8.1% real) 50 year old12.8% p.a. (6.4% real) Invested in typical life-stage model

NRRs over time... Age: 2001 Projected NRR: 2001 Projected NRR: year old75%63% 40 year old75%69% 50 year old75%67% ReturnSalary increase 30 year old14.1% p.a. (8.1% real) 11.1% p.a. (5.1% real) 40 year old14.1% p.a. (8.1% real) 9.0% p.a. (3.1% real) 50 year old12.8% p.a. (6.4% real) 8.5% p.a. (2.4% real) Invested in typical life-stage model Cost of retiring increased: Increased longevity and falling interest rates Assumes preservation Contributions unchanged as % of salary

Do you have enough death cover? 94% The proportion of funds that kept their benefit structure fixed over the last 10 years. ~ Alexander Forbes Member Watch, 2011

Are Trustees concentrating on the right stuff? Source: Alexander Forbes Hot Topics, November 2010, Audience Participation Results

Are Trustees concentrating on the right stuff? Source: Alexander Forbes Hot Topics, November 2010, Audience Participation Results

We know what the issues are: Behavioural tendencies!Fixed benefit structures!Not focusing on outcomes!

Our take on the other side of the door...

A more Engaged Employer is needed...  Ensuring appropriate benefit structures  Educating employees  Assessing benefit structures

Consideration of the Lifecycle... Stage 1: The Value Creation/ Learning Stage Stage 2: The Earning or Accumulation Stage Stage 3: The Retirement or Decumulation Stage

Understanding the real asset allocation problem Asset Allocation Strategy EquitiesBondsCashInternational Asset WealthHuman Capital Wealth Age This is the problem that a retirement fund is designed to address.

Is an auto-solution the answer?

A Fixed Benefits Design affects members’ lives Age % 100% 80% 60% 40% 20% 0% % of need covered Marriage1 st child2 nd child3 rd childYields fallDivorceRe-marry Expected retirement benefitDisability protectionDeath benefit

A Proposed Framework... Benefit Structures with Full Flexibility Increasing Risk of Behavioural Factors Influencing Choices Fixed Benefit Structures Increasing Risk of Individual Shortfall/Excess Appropriate solution lies between the 2 extremes if you have appropriate support mechanisms