THE WORLD AS WE KNOW IT - IPMA-HR Southern...

LCN-1004562-090314 For plan sponsor use only. Not for use with plan participants

Products issued by: The Lincoln National Life Insurance Company Lincoln Life & Annuity Company of New York

RETIREMENT PLAN SERVICES

©2014 Lincoln National Corporation

THE WORLD AS WE KNOW IT A Review of the Economic, Investment, and Retirement Landscape

Andrew Yorks

Senior Vice President Head of Alternatives and Private Debt Strategies

May 19, 2015

TODAY’S DISCUSSION

• The US Economy

• Market Dynamics

• Retirement Trends

2

For plan sponsor use only. Not for use with plan participants. LCN-1004562-090314

0.2%

-3%

-2%

-1%

%

1%

2%

3%

4%

5%

6%

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

GD

P(%

)

US GDP Growth Rate

MACROECONOMIC BACKDROP

• Domestic economic growth has improved, but with an uneven path

3

Source: Bureau of Economic Analysis, St. Louis Federal Reserve


US Real Monthly Retail Sales

150

155

160

165

170

175

180

185

190

195

Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15R

eal M

on

thly

Ret

ail S

ales

($

Bill

ion

s)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%


% U

nem

plo

ymen

t

Unemployment Rate


• Employment has steadily improved across most measures

4

Source: Bureau of Labor Statistics, U.S. Department of Labor, St. Louis Federal Reserve


Jobless Claims

0

50

100

150

200

250

300

350

400

450

500


Job

less

Cla

ims

(Th

ou

san

ds)

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Mar-01 Mar-03 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15

Percent change year over year

0.0%

2.0%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

Percent change in Consumer Price Index from year ago


• Inflation has remained low even as wage income has gathered upward momentum

5

Source: Bureau of Labor Statistics, U.S. Department of Commerce: Census Bureau, St. Louis Federal Reserve, Bloomberg

Inflation

For plan For plan sponsor use only. Not for use with plan participants. LCN-1004562-090314

Salaries & Wages1

Infl

atio

n

Def

lati

on

Low inflation since 2008

1Reflects the salaries and wages component of the BLS employment cost index

Wage growth is just now beginning to reaccelerate from

its sharp decline in 2008


• Oil prices dropped sharply last year, but have stabilized recently and on balance are expected to be beneficial for the US

6


59

40

50

60

70

80

90

100

110

Jul-14 Sep-14 Oct-14 Dec-14 Jan-15 Mar-15 Apr-15

NYM

$/b

bl

Positive Impact on…

• Personal consumption and wealth

• Retailers, transportation companies, high energy consuming corporations

Negative Impact on…

• Domestic shale oil producers

Source: FactSet of 04/30/2015

WTI Oil Price (As of 04/30/15)


7

Source: Bloomberg as of 4/30/2015


• The US Dollar strengthened sharply over the past year, which will have a varied impact across the economy

-5%

0%

5%

10%

15%

20%

25%

30%

Jul-14 Sep-14 Oct-14 Dec-14 Jan-15 Feb-15 Apr-15

Ch

ange

in U

SD (

%)

(B

ase

dat

e =

07

/30

/20

14

)

Euro British Pound Yen

Stro

ng

USD

W

eak

USD

US Dollar vs. Major World Currencies

Positive Impact on…

• Imports, Non-domestic M&A

• Personal Consumption, Retail

Negative Impact on…

• Exports

£

€

¥

MARKET DYNAMICS

8


• These macroeconomic factors are shaping key trends in the investment environment …

– Low global interest rates

– Strong equity markets

– Shifting employment demographics

– Evolving impact of technology

• Global demand for safety and low inflation are depressing US yields

YIELDS REMAIN LOW, BUT ARE EXPECTED TO MOVE MODESTLY HIGHER

9


Source: Bloomberg as of 4/30/2015

2.2% 2.2% 2.3% 2.4%

2.6% 2.7% 2.8% 2.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

SPOT 3MO 6MO 1YR 2YR 3YR 4YR 5YR

Yiel

d

Forwards

Market Expectation for Future 10yr US Treasury Rate

(As of 4/30/15)

0.0%

0.5%

1.0%

1.5%

2.0%

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

Jan-14 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15

10 Y

ear

Inte

rest

Rate

- G

erm

any

10 Y

ear

Inte

rest

Rate

– U

S

US 10 Yr. (LHS) Germany 10 Yr. (RHS)

Global Interest Rates (As of 04/30/15)

2%

3%

4%

5%


Bar

clay

s A

gg. U

S C

orp

YT

W(%

)

EQUITY MARKETS HAVE PERFORMED WELL

• Equity markets are benefitting from low borrowing costs and record share repurchases

10


S&P 500

Source: Bloomberg, FactSet as of 04/30/2015

1000

1200

1400

1600

1800

2000

2200


S&P

50

0 In

dex

250,000

350,000

450,000

550,000

2010 2011 2012 2013 2014

S&P

50

0 S

har

es R

epu

rch

ased

(m

m)

S&P 500 Share Repurchases

US Corporate Bond Yields

EMPLOYMENT DEMOGRAPHICS HAVE HAD AN UNEVEN IMPACT

11

• Employment among prime aged (35-54) workers has not recovered

• Older workers (55+) are postponing retirement and choosing to work longer

• Permanent jobs are being added at a faster pace after having fully recovered from crisis

-8

-6

-4

-2

0

2

4

6

8

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

Ch

g. in

# o

f P

erso

ns

Emp

loye

d

Mill

ion

s

Change in employment by age since Jul-08

16 to 34 35 to 54 55 and older

Change in employment by job type since Jul-08

Source: Bureau of Labor Statistics, St. Louis Federal Reserve

-7

-6

-5

-4

-3

-2

-1

0

1

2

3

4

Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14

Ch

g. in

# o

f P

erso

ns

Emp

loye

d

Mill

ion

s

Temporary Jobs Permanent Jobs


TECHNOLOGY IS ALSO IMPACTING EMPLOYMENT AND PRODUCTIVITY

12


• Technological changes are re-shaping the economy and transforming conditions for policy, markets, and investing

• 47% of people are employed in jobs with a high likelihood of computerization

Probability of Computerization

Source: What Jobs Will the Robots Take? The Atlantic, Jan 23, 2014 http://www.theatlantic.com/business/archive/2014/01/what-jobs-will-the-robots-take/283239/, BlackRock, Inc. (June 2014) 1 Self-service point of sale computers instead of human cashiers

Recent Case Study: McDonalds

McDonald’s is operating more locations with fewer employees

1

http://www.theatlantic.com/business/archive/2014/01/what-jobs-will-the-robots-take/283239/













RETIREMENT TRENDS

13


• The macroeconomic trends and the market dynamics are impacting…

– Retirement confidence

– DC Plan asset allocation policies

– DB Plan funded status

– Allocations to fixed income asset classes

TRENDS IN WORKER CONFIDENCE ARE BEGINNING TO DIVERGE

• 2015 surveys indicate an uptick in “very confident” workers, but also an increase in workers who are “not at all” confident about retirement

14


Worker Confidence in Having Enough Money to

Live Comfortably Throughout Their Retirement Years

Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 1993‐2015 Retirement Confidence Surveys.

41%

DC PARTICIPANTS ARE CUSTOMIZING EQUITY ALLOCATIONS

• DC plan participants remain committed to the equity markets

• Shifts toward customized target date funds are continuing

15


DC Plans Average Equity Market Exposure

DC Plans Growth of Target Date Funds

Source: Callan, Target Date Solutions

Projected Historic

96%

70%

77%

80%

74% 74%

92%

82%

60%

65%

70%

75%

80%

85%

90%

95%

100%

2007 2008 2009 2010 2011 2012 2013 2014

Funded Status of Fortune 1000 Pensions

Average funded status❶

DEFINED BENEFIT PLANS FUNDED STATUS HAS VARIED

Robust equity markets improved the funded status of most DB plans from 2008 through 2013

In 2014, asset gains were offset by a rapid increase in liabilities causing the funded status to drop again

16


Source: Towers Watson calculations based on companies’ 10-K annual reports filed with the Securities and Exchange Commission (SEC)

❷

❶

❷

HIGHER ACTUARIAL RISK HAS LOWERED FUNDED STATUS OF PLANS IN 2014

17


2014

2013

Source: BNY Mellon ISSG as of March 31, 2015

Funded status for the Typical Corporate Defined Benefit Plan given an instantaneous change in discount rates and equity/alternative return

Market performance

• Driven by high equity returns

Higher actuarial risk

• Driven by

― Higher longevity risk

― Lower discount rate

DB PLANS CONTINUE TO DIVERSIFY

• DB sponsors have continued to increase allocations to fixed income in an effort to de-risk their portfolios, despite the recent decline in funded status

– DB investors are beginning to lock in gains to immunize liabilities

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Target Asset Allocation of Corporate DB Plans

Source: Goldman Sachs Asset Management; company reports; as of March 2015; S&P 500, US plans only

Equity

Fixed Income

Real Estate

Other

CONCLUSION

• US economy continues to improve with healthy employment trends

• Inflation, oil, and the dollar are impacting segments of the economy differently

• Low inflation has depressed interest rates and benefited equities, however, rates are forecasted to rise

• Employment gains have not been uniform while technology is transforming employment demand

• Retirement confidence is diverging and DC plan equity allocations are being customized

• The funded status of DB plans has dropped, despite strong markets

• Asset allocation, portfolio diversification, and regular rebalancing are key to achieving desired outcomes

19


QUESTIONS?


20

Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates, including Lincoln Retirement Services Company, LLC.

The Lincoln National Life Insurance Company, Fort Wayne, IN, and in New York, Lincoln Life & Annuity Company of New York, Syracuse, NY.

Affiliates are separately responsible for their own financial and contractual obligations.

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