Agenda

Why is the Pension Investor different?Why is the Pension Investor different?

The journey, the destination or both?The journey, the destination or both?

Saver or Investor?Saver or Investor?

Tailored SolutionsTailored Solutions

Managing the journey to the destination with confidenceManaging the journey to the destination with confidence

1.) Investment manager hired

2.) Asset allocation decision

3.) Understanding my risk appetite

4.) Timing the market

Rank in order of importance What is the most important investment-related decision facing

pension savers?

Question

Investment Manager – difference between best and worst over 20 years

x% : (Lipper Survey of UK managers)

Asset allocation decision – need for risk and the need for protection

Understanding my risk appetite – a plan with conviction

Timing the market – 10 Years to 16.09.2011

Annualised Return 4%*Annualised Return if missed best 10 days -3%Annualised Return if missed worst 10 days 18%

Why the Pension Investor is different

* 6 of the top 10 days over the last decade were in 2008

Why the Pension Investor is different

The Pension Investor – the last of the long term investors The Pension Investor – the last of the long term investors

Behavioural Economics – greatest risk to adequacy of benefitsBehavioural Economics – greatest risk to adequacy of benefits

Risk must be taken when appropriate – investment time horizon – growth assetsRisk must be taken when appropriate – investment time horizon – growth assets

Risk must be reduced when appropriate – benefit drawdown time horizon; orderly and strategicallyRisk must be reduced when appropriate – benefit drawdown time horizon; orderly and strategically

Time is a natural smoother of volatility

But…… Pension investors must not step off the journey

Risk reduction can be strategically scheduled – via lifestyling

Typical fund mix in the accumulation phase with a strategic Lifestyling strategy will deliver

The Destination

Example 75% Growth Assets25% Defensive Assets

Only if…….

Member activated switching activity

Stepping Off The Journey

0

100

200

300

400

500

600

700

800

900

1000

Ja

n

Ma

y

Sep Oct

No

v

Dec

Ja

n

Fe

b

Ma

r

Ap

r

Ma

y

Ju

n

Ju

l

Au

g

Sep Oct

No

v

Dec

Ja

n

Fe

b

Ma

r

Ap

r

Ma

y

Ju

n

Ju

l

Au

g

Sep Oct

No

v

2005 2007 2008 2009

Source: Irish Life Corporate Business

Recognise that risk appetite and time horizon (age) are not necessarily linked Behavioural economics explores the difference between ‘savers’ and ‘investors’ Research suggests that pension savers evolve from one to the other How do we:- Segment our client base

Monitor the behaviourEnsure movement between segments

Ultimately as part of the drive for retirement income adequacy:- Risk is requiredRisk must be desired and understoodRisk must be appropriate

Is one starting point the solution…..

Both …

Has come a long way – but further to go …

Pension Savings – The Evolution

Single ManagerActive Managed Fund

Consensus Funds that removed • Single Manager Risk• Asset Allocation Risk• Stock Selection Risk

TailoredLifestyle Solutions

InflationInflationInvested contributions will not keep pacewith earnings inflation and the real value

of retirement savings will fallGrowth Assets Growth Assets

CapitalCapitalThe value of the retirement fund could fallsharply due to investment market volatility

Volatility Management &

Defensive Assets

Volatility Management &

Defensive Assets

Pension Conversion

Pension Conversion

Fluctuation of annuity rates leading to uncertainty about the amount of

retirement income receivable

Fixed Interest /Bond Fund

Fixed Interest /Bond Fund

Types of Investment Risk for Pension Investors

Risk Danger to Pension Investor Investmentstrategy

Evolution of growth assets – diversification

Evolution of volatility management

Evolution of defensive assets – match the benefit drawdown Manage risk through diversification of

Asset Class Investment Style (indexed & alpha) Investment Manager

Building long term strategic growth asset allocations Managing the Destination via the Journey

Tailored Solutions

Access a wide range of asset classes - efficiently & effectively

Evolution of Growth Assets

PrivateEquitiesPrivateEquities

InfrastructureEquities

InfrastructureEquities

GlobalEquitiesGlobal

Equities

ForestryForestryCorporate

BondsCorporate

BondsIndexed

CommoditiesIndexed

CommoditiesHedge Fund

Hedge Fund

High YieldEquities

High YieldEquities

Emerging Markets

Emerging Markets

European Property

European Property

Small CapEquities

Small CapEquities

CurrencyCurrency

Access genuine sources of alpha generation by:-

- Identify skilled managers

- Select genuine alpha strategies

- Monitor and understand performance drivers

- Tactically allocate between strategies

- Carry out due diligence on operational and investment process

Evolution of Volatility Management

Bond Fund Country Credit Duration exposure

Cash Fund Counterparty risk

Structured Products Capital Guarantees CPPI

Evolution of Defensive Assets

Long Term Strategic Growth Asset Allocation

Developed World Equities

50%

International Property 5%

Tactical Trading Strategies 5%

Relative Arbitrage 5%

Event Driven 5%

Equity Long/Short 5%

Managed Futures 5%

Commodities 5%

Small Cap Equities 5%

Emerging Market Equities 10%

Long Term Strategic Balanced Asset Allocation

Developed World Equities 25%

Government Bonds 25%

International Property 5%

Tactical Trading Strategies 5%

Relative Arbitrage 5%

Event Driven 5%

Equity Long/Short 5%

Managed Futures 5%

Commodities 5%

Small Cap Equities 5%

Emerging Market Equities 10%

Range of possible portfolios when alpha generation is added and we assume some of the

managers will deliver

Range of possible portfolios when restricted to standard asset classes

Range of possible portfolios when alternative asset classes are added

to opportunity set

Objective is to move up and/or left, i.e. higher return and/or lower risk

Risk

Exp

ecte

d R

etu

rnEfficient Frontier:Illustration of Expanding the Risk/Return Frontier

11

22

33

Typical Managed Fund

Conclusion

Recognise that for some investors the ‘journey’ matters and dictates actionsRecognise that for some investors the ‘journey’ matters and dictates actions

Segment clients by risk appetiteSegment clients by risk appetite

Provide solutions to meet these segmentsProvide solutions to meet these segments

Facilitate satellite investment options outside their ‘core’ requirement Facilitate satellite investment options outside their ‘core’ requirement

1.) 0%

Question

2.) Up to 25%

3.) Up to 50%

4.) 50%+

What do you now think an appropriate allocation to growth (equities) assets is?

Investing intelligently is about controlling the controllable. You can’t control whether the funds you invest in will outperform the

market today, next week, month or next year; in the short run your returns will always be hostage to the market and its whims

A Principled Framework for Investing !

But you can control:

Your Expectations, by using realism, not fantasy, to forecast your returns

Your Risk, by deciding how much of your assets to put at risk in the stock market, by diversifying and by rebalancing

Your own behaviour