Ole Beier Sørensen Chief of analysis, Strategy and SRI [email protected] Keep your eyes on the ball -...
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Transcript of Ole Beier Sørensen Chief of analysis, Strategy and SRI [email protected] Keep your eyes on the ball -...
Ole Beier SørensenChief of analysis, Strategy and [email protected]
Keep your eyes on the ball- design, cost and risk
Good pensions at best possible costs- towards a well-funtioning pension market?FAFO, Oslo11 February 2009
www.atp.dk 2
The rating of the industry is not impressive….
Source: Danish National Consumers Agency, 2008
Consumerconfidence
Trans-parency
Complaintsaccess
Index 2007
Index 2006
Index 2005
Charter travel 10 2 17 1 2 2Entertainment 2 3 37 2 4 3Air travel 21 9 21 8 3 14Funeral services 4 41 2 17 26 5Driving instructors 23 31 30 27 15 8Real estate agents 42 35 7 32 39 43Pharmaceuticals 12 46 45 43 46 50Pension providers 43 50 19 44 48 48
Lotteries & casinos 33 21 47 46 44 34Cosmetics 44 30 49 50 50 47Auto repair shops 46 44 51 51 51 51
The Danish Consumer Relationships Index 2007 - 51 industries
www.atp.dk 3
…reflecting a notoriously bad reputation…
A closed and introvert industry
Products nobody understands
Complex and very technical information
“Credible advisors are hard to find!”
www.atp.dk 4
…but it is nevertheless sadly astonishing!...
Currently app. € 300 bio. – and counting
12-21 pct. of wages
The largest and most important financial transaction for
most households
A low interest area
Recent survey by F&P:
- “People know they are paying…
- …but they only have faint ideas as to what they get”
www.atp.dk 5
…and it may call for government intervention
Strong pressure on the industry to inform…
…and to increase the quality of its’ information
Politicians:
- ”If the industry does not succeed, government may become helpfull”
A new industry initiative based on a look through principle
is to enhance transparency
- administration costs
- investment costs
www.atp.dk 6
Background: A three layer pyramid…
Individualsavings
ATP &
tax financed basic pension
Labour marketpensions
Poverty protection
Proportional income replacement
Individual flexibility
www.atp.dk 7
…. is in the making...
Pension income and composition by decile - 2045
0
5
10
15
20
25
30
35
40
45
50
1 2 3 4 5 6 7 8 9 10
Income decile
Pen
sion
inco
me
€ 1,
000)
Private Individual Savings
Labour Market Pension a.o.
ATP
Basic Pension
Source: Ministry of economic affairs, 2005
www.atp.dk 8
… driven by labour market schemes
Mostly industry wide schemes set up by the social
partners
Outside general collective agreements similar
schemes may be set up at company level
App. 80 pct. of all pension contributions are
compulsory…
… and they are collected by pension providers
designated by the social partnes
www.atp.dk 9
Administration costs vary greatly
Administration cost per member 2007 (€)
0
50
100
150
200
250
300
FSP
Norde
aPFA AP
Danica
Bankp
ensio
n
Avera
geJØ
PDIP M
P LP
PenSam PBU KP
Pensio
nDan
mar
k
PKA IPATP
www.atp.dk 10
Simple products => lower costs – and vice versa
”Higher costs reflects more complex products and the
access to individual advise”
- product complexity drives cost while customer demand demand and need is questionable
”Higher cost levels in the commercial sector reflect
marketing costs”
- the market is almost saturated – at least as far as attractive segments are concerned -…
- hence, market shares can almost only be won by aquisition and by selling-up on existing clients
www.atp.dk 11
A current ”war” over administration costs
Industry agreement to disclose uniformly calculated cost
data as from 2008
Even so, some companies creatively hide costs:
- IT-investments allocated to a subsidiary and hence turned into a investment return factor
- splitting up the company and only providing information on selected sections
The sought after ”look through principle” is in danger
www.atp.dk 12
Operational prices: Instructive examples
Traditional standard letter: € 1,5
Electronically distributed standard letter: € 0,15
Individual letter: ??
Receiving a phone call (call center): € 1.2 per minute
Face to face counceling: ??
Payment by bank transfer: € 0.1 per transfer
Payment by check: € 4 per transfer
www.atp.dk 13
Onwards all investment costs are to be reported...
Annual accounts only report direct investment costs…
…making comparison impossible since most funds have out
sourced their asset management
Industry initiative to report investment costs including direct
as well as indirect costs
- asset management by subsidiaries, separate funds or by external managers
Hence, the industry will be complying with a long time
practise of ATP
www.atp.dk 14
… and it certainly matters! - the example of ATP
€ Mio. Pct. € per.
member
Reported investment cost 19,1 0.04 4,2
Internal asset management 18,7 0.05
External asset management (listed eq.) 14,6 0,34
Private equity 40,0 0.93
Real estate direct 3,8 0.27
Real estate indirect 10,9 0.68
Total direct and in-direct 87,8 0.17 19,2
www.atp.dk 15
Few things can be said with some certainty…
Size matters greatly to investment costs…
…and so does implementation style
- ATP is app. 30 pct. below peer group level
Cost levels and return levels do not correllate…
…if they do it is probably a negative one
www.atp.dk 16
…and economies of scale matter more than ever
New regulatory demands and new client demands put
smaller funds under pressure
- e.g. asset management is increasingly being outsourced
Formation of joint administration operations
Market consolidation in the longer term?
www.atp.dk 17
2008 was a very dramatic year…
Nominal and real pension fund returns in selected OECD countries, January-October 2008
-40
-30
-20
-10
0
10
Irela
ndU
nite
d S
tate
sIc
elan
dH
unga
ryA
ustra
lia (1
)C
anad
aO
EC
D a
vera
geP
olan
dJa
pan
Net
herla
nds
Bel
gium
(2)
Uni
ted
Kin
gdom
Nor
way
Finl
and
(3)
Sw
itzer
land
Por
tuga
lA
ustri
a (2
)S
wed
en (2
,4)
Spa
in (2
)D
enm
ark
Ger
man
yM
exic
o (5
)
Slo
vak
Rep
ublic
(6)
Italy
(2,7
)Tu
rkey
Kor
ea (2
)
Cze
ch R
epub
lic (2
)G
reec
e (2
)
Real
Nominal
Source: OECD 2008.
www.atp.dk 18
…but ATP did rather well….
Investment result -3.2 pct. ….
…in an upside down market
Solvency ratio of 115 pct.
Risk management is the key
Diversification and liability hedging are the key tools
www.atp.dk 19
…a success we may partly owe to the Danish FSA
Fair valuation on the liabilities introduced i 2002
Observing absolute solvency at all times while
discounting liabilities at market rate
Consequences:
- the interest rate risk becomes readily visible
- hedging strategies and advanced risk management become key business areas
Strong need for innovation:
- a new business model is needed!
www.atp.dk 20
Restructuring based on a new business model
Traditionally pensions and
investments are viewed as
separate entities
Fair valuation calls for a different
perspective
The model views the different
aspects as mutually defining
elements
The “three sisters” of pension
excellence
Objectives and
risk tolerance
PensionsInvestment
www.atp.dk 21
0%
5%
10%
15%
20%
25%
30%
35%
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
after-tax interest rate match
risk
of c
ompa
ny e
xper
ienc
ing
inso
lven
cy
25% equity 45% equity 65% equity
Fair valuation: Explicit need for a new strategy
Q3 ’01
Q4 ’01
Q1 ’03
Q1 ’04Q3 ’02
Q1 ’02
3Q 2001
www.atp.dk 22
Enhanced and advanced diversification
Beta portfolioMV: € 47.0 bn.Risk € 0.8 bn.Diversification
€ 0.3 bn.
InterestAll. € 25.0 bn.Exp. € 0.7 bn.Risk € 0.2 bn.
Examples:Government bonds
Mortgage bonds
CreditAll. € 5.0 bn.
Exp. € 5.9 bn.Risk € 0.1 bn.
Examples:Low-rated gov.
and corp. bonds(EM and HY bonds)
EquityAll. € 5.5 bn.
Exp. € 3.9 bn.Risk € 0.5 bn.
Examples:Listed equitiesPrivate equitiesVenture capital
InflationAll. € 10.9 bn.
Exp. € 16.5 bn.Risk € 0.3 bn.
Examples:Index-linked bonds
Real estateInfrastructure assets
CommoditiesAll. € 0.7 bn.
Exp. € 0.2 bn.Risk € 0.03 bn.
Examples:Commodity-
indexed bonds
www.atp.dk 23
New pension model
Incoming contributions are split in two:
- a bonus contribution of 20 pct.
- a guarantee contribution of 80 pct.
The latter is used to buy new guaranteed pension rights…
… while the former is transferred to ATPs bonus potential
- the bonus potential serves as an investment buffer allowing ATP to pursue a return seeking investment strategy
- it returns to the membership by way of future indexations
The bonus contribution is a “payment for future indexations”
www.atp.dk 25
Shifting risk onto individuals?
The ATP strategy is slightly unique
Strong provider-driven drive towards ”market products”
- traditional preference for guaranteed products – DC-based defereed annuities is to some extent abandoned
- investment risk and longevity risks are shifted onto the individual
Disturbing,..?
- there are strong alternatives allowing return seeking investment strategies and guarantees to co-exist
Keep your eyes on the ball!