Improving DC a risk sharing case study
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Improving DCA risk sharing case studyLCP 19 September 2013Morten Nilsson, Chief Executive
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1. Who we are?
2. Why ‘pure’ DC has a bad name in the UK
3. A case study: ATP– a ‘hybrid’ scheme from Denmark
Agenda
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New independent UK multi-employer Trust Supported by ATP, Denmark’s leading pension provider.
Business segments in which we currently operate:
• Auto Enrolment solutions
• Workplace pension solutions for all employers (not AE related)
Serving several hundred thousand British workers in September 2013
45 years
+10.3% p.a. (average) for the last 10 years
4.7 mn members
c£74bn FUM
Our heritage and experience
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Why does purehave such a bad name in the UK
DC ?
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Contributions are generally too small
Costs have been eroding funds
Charges have been complicated
and not fully communicated
•Investment solutions and default funds have not been fit for purpose
The transition into retirement is not working:
• huge exposure to interest rate risk
• inefficient and complicated annuity market
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Risk sharingA case study:ATP a hybrid Danish Scheme
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Individual Savings
Labour Market Pensions
ATP Lifelong Pension
Tax Financed Basic State Pension
Pillar 1:Poverty Protection
Pillar 2:Proportional Income
Replacement
Pillar 3:Individual flexibility
ATP and the Danish Pension System
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2001 2002 2009 2014
Traffic light
regulation
Market values of liabilities
Solvency 1½ Solvency II
A new paradigm
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• Ageing necessitates higher returns in pension funds
• Significant regulatory changes in 2001 enhanced risk awareness 1) Mark-to-market accounting – liabilities behave like a very long bond2) ‘Minimum surplus requirement’
• Ageing plus new regulation = dilemma– “Higher returns with less risk”
• As a result, ATP began to rethink its business model
A new paradigm
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Two Important Questions:Objective and risk tolerance
Objective What are you trying to achieve?
– Maximize the real value of future pensions
Risk Tolerance How much money would you risk losing?
– < 1% risk of not passing Minimum Surplus Requirement on a 3 month horizon
1 2
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Incoming contributions are split in two:
1. Pension contribution (80%)• Used to buy additional deferred pension rights• The underlying discount rate is equal to the hedging rate achieved by ATP in
the market place• The discount rate is set annually ahead of the accrual
2. Bonus contribution (20%)• Allocated to ATP’s reserves• New contributions contribute to the reserves on an equal footing with old
contributions• Indexation requires reserves at a funding ratio in excess of 120 after indexation
and longevity adjustments• Longevity expectation adjusted on a yearly basis
Accrual model
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ATP – A lifelong Pension Product
40 41 42 67 68 69 70 71 72 73 74 75 76 770
20
40
60
80
100
120
201020092008
Contribution in ’09Int. rate: 5.5%
Contribution in ’10Int. rate: 3.5%
Cont
ributi
ons/
pens
ions
15
27
20
Pensions
Contribution in ’08Int. rate: 4.5%
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• Legislation needs to be changed
• Providers need scale
• Employers shouldn’t have a broader sponsoring role
• Be clear on whose ambition it is and who shares what risk
• How does this apply to a transient workforce
Defined Ambition in the UK
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Questions?
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NOW: Pensions is a UK occupational pension plan. Membership is only available through an employer. NOW: Pensions Limited, registered in England and Wales. Registered address: 3rd floor, 164 Bishopsgate, London, EC2M 4LX, UK. Our VAT number is 127894966.
This is written as a general guide only. It should not be relied upon as a substitute for specific professional advice. Please note past performance is not a guarantee of future returns.
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