LCP Annual Pensions Conference Wednesday 16 September 2015 ...€¦ · n-2015 r 2015 y-2015 l-2015...

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


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


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


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


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


UK Productivity: 1830-2010

The next few years will be about FX and Trade

Source: Datastream as at 27/07/15


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?


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


US credit markets have been declining since mid 2014

Source: Bloomberg as at 19-Aug-2015


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


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


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


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


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.


Source: Odey Internal Research


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


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

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

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

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

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

LCP Annual Pensions Conference Wednesday 16 September 2015 ...€¦ · n-2015 r 2015 y-2015 l-2015...

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Transcript of LCP Annual Pensions Conference Wednesday 16 September 2015 ...€¦ · n-2015 r 2015 y-2015 l-2015...