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 & ABROADHAS CHANGEd!!!

Legislative changes Abound!

The New Breed of Workers

Increased Longevity

Informed Consumers

Social Connectivity & flow of informationIncreased 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: 2011

30 year old 75% ???

40 year old 75% ???

50 year old 75% ???

Return

30 year old 14.1% p.a.(8.1% real)

40 year old 14.1% p.a.(8.1% real)

50 year old 12.8% p.a.(6.4% real)

• Invested in typical life-stage model

NRRs over time...Age: 2001 Projected NRR: 2001 Projected NRR: 2011

30 year old 75% 63%

40 year old 75% 69%

50 year old 75% 67%

Return Salary increase

30 year old 14.1% p.a.(8.1% real)

11.1% p.a.(5.1% real)

40 year old 14.1% p.a.(8.1% real)

9.0% p.a.(3.1% real)

50 year old 12.8% 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...

Understanding the real asset allocation problem

Asset Wealth Human Capital Wealth

Age 0 18 25 35 45 55 65 85

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

25 30 35 40 45 50 55 60

120%

100%

80%

60%

40%

20%

0%

% o

f ne

ed c

over

ed

Mar

riage

1st c

hild

2nd c

hild

3rd c

hild

Yie

lds

fall

Div

orc

e

Re-

mar

ry

Expected retirement benefit Disability 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

Appropriate solution lies

between the 2 extremes if you

have appropriate support

mechanisms