International Insights Into Key Distinguishing Features of Excellent
Retirement Funds & Systems, Including The Use Of Low Cost Passive Investments
In Portfolio Construction
Mike Brown
Managing Director
etfSA.co.za
Presentation to:
5th Annual Audit Committee Conference
3rd August 2015
Sandton Convention Centre
• Current trends in global retirement
systems.
• Ten principles for excellence in
retirement funds.
• Using passive investment ETP products
in retirement funds.
Agenda
• Need to fund 20-30 years in retirement.
• Portfolio shifts to equities as the asset class providing the
returns necessary to build up and preserve capital for
extended periods of retirement.
• People are working longer as life expectancy increases.
• Longevity issues require more flexibility in contributions
and allowing partial drawing down of capital pension
benefits.
Current Trends in Global Retirement Systems
Demographics – Ageing Populations
• From US$79 million in total assets in 2000, the global
ETP industry will shortly exceed US$3 trillion in assets.
• 68% of US investor’s new investments now going into
passive investments, much of it retirement fund money.
• ETFS becoming product of choice worldwide– For broad market exposure
– Core satellite strategies – blending passive and active products
– Smart beta
– Multi factor indices.
Current Trends in Global Retirement Systems
Swing to Passive Asset Management
Report published by Mercer and Chartered Financial
Analysts (CFA) InstituteMarch 2015
Excellence in Global Retirement Funds
“An Ideal Retirement System”
Identified 10 principles for global excellence in retirement funds
Government must identify clear objectives for the whole retirement system.
4 pillar approach
Ten PrinciplesOne
Pillar 1
A basic public pension that
provides a minimum income
Tax Funded for poverty relief amongst aged
Pillar 2
A mandatory, fully funded system linked to the
working years
Government / private funded or
both
Pillar 3
A voluntary, fully funded system
Private sector management
Pillar 4
Savings from outside the pension
system
Minimum level of retirement funding for all workers by
employers, employees, self-employed and temporary workers.
Ten PrinciplesTwo
Suggested level 8% of earnings in developed economies
MOVE TOWARDS COMPULSION
Taxation support by Government to provide
incentives for voluntary savings and to compensate
individuals for lack of access to retirement savings
before retirement.
Ten PrinciplesThree
Contributions (or accrued benefits) must have
immediate vesting and portability
Ten PrinciplesFour
• Benefits should only be accessible under certain conditions of:– Retirement
– Death
– Permanent disability
• “Leakage reduces the effectiveness of the retirement system
and should not be permitted in an ideal retirement system”*
TREND TO PRESERVATION
*CFA Report – An Ideal Retirement System – (March 2015)
Value of R200 000 Capital Preserved in a RA Fund
After 10 Years After 20 Years After 30 Years
R200k (lump sum in etfSA
Wealth Enhancer Fund) (16%
per annum)
R1 042 200 R5 492 800 R28 295 730
Future performance extrapolated on actual 10 year returns for etfSA Wealth Enhancer
Fund.
Cost effective and attractive default arrangements,
both before and after retirement, are required for
individuals who do not wish to make decisions
Ten PrinciplesFive
Passive low cost options ideal
Overall costs should be fully disclosed.
• Very little transparency about overall costs, which need to
include all investment, administration, marketing and
operating costs
• Competition is important in encouraging fair pricing.
Ten PrinciplesSix
“A difference of 2,1% in annual costs between an actively
managed fund and an index fund, means a 65% enhancement
in capital available for retirement after 40 years.”
John Bogle “The Arithmetic of “All-In” Investment Expenses”
Financial Analyst Journal (2014)
Lump Sum R200k Investment10 Years 20 Years 30 Years 40 Years
Low cost, high return RA
Fund (etfSA Wealth
Enhancer Fund)
R1 042 200 R5 492 800 R28 295 730 R147 450 000
High cost RA Fund (2,5%
per annum higher costs)R805 000 R3 220 000 R12 880 000 R51 520 000
The “penalty” cost of
underperformance
23% 41% 54% 65%
Do costs matter?
You bet they do!
Flexibility
In contributions as individuals’ financial or personal
circumstances vary as well as post-retirement
Ten PrinciplesSeven
The global workforce is aging; people are working for longer, but more flexibly.
Individuals should be able to receive a part pension whilst continuing to receive or make contributions whilst working part-time.
Benefits in retirement should have an income focus
Ten PrinciplesEight
But, permit some capital withdrawals without
impacting on overall capital adequacy.
Governance of pension funds should be independent
from the Government or any employer control.
Ten PrinciplesNine
• The role of independent trustees becomes critical as to: – the Regulatory framework
– Communication with members
– Member protection
– Access to education and advice.
Appropriate regulation
Ten PrinciplesTen
• Prudential regulation of pension plans
• Investment policy framework, including restrictions on in-
house assets
• Risk management strategy, including outsourcing
• Governance standards, including conflicts of interest and
audit requirements
• Protection of members interests.
Passive Investments for Retirement Funds
How Well Do Actively Managed Funds Perform?
(% by which active managers were outperformed by their benchmarks)
1 Year 3 Years 5 Years
USA (benchmark S&P 500) 86% 76% 89%
Europe (benchmark S&P Europe 350) 83% 76% 82%
South Africa (S&P SA DSW) 84% 82% 85%
Source: S&P Dow Jones Indices (SPIVA Scorecard) (June 2015).
Constructing Pension Fund Portfolios with ETFs
etfSA RA Fund (CPI +7%) Wealth Enhancer Fund
Benchmark Strategic Asset Allocation
Constructing Pension Fund Portfolios with ETFs
etfSA RA Fund (CPI +7%) Wealth Enhancer FundPortfolio Holdings
Note: The theoretical historic performance is based on the strategic asset allocation and reference index performance of the ETPs selected for this RA Fund.
• ETPs now provide sufficient exposure to all asset classes
to construct Regulation 28 compliant retirement
portfolios with– Competitive investment performance
– Lower risk
– Lower costs – 0,85% per annum for retail investors.
– Full transparency
– High liquidity
– Full scalability
The Case for Passive Index Trackers in Retirement Funds
Can certainly be used as a viable alternative or addition to active mandates.
Comparative Risk and Return Profilesof Passive and Active strategies
Notes: Average performance for the 10 years from Jan-05 to Dec-14Source: ProfileMedia data; etfSA calculations
0
2
4
6
8
10
12
14
16
18
0 2 4 6 8 10 12
Retu
rn (%
p.a
.)
Risk (Standard deviation % p.a.)
Historical Performance of Balanced Funds - Medium Equity Mandate
etfSA RA Builder Fund
Actively managed balanced
funds
X: CPI+5
Significant reduction in risk for no sacrifice in
return!
Advice worth taking home…..?“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and the rest in a very low-cost S&P 500 index fund. (I suggest Vanguard’s). I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.”
Contact Details
etfSA RA Funds (Retirement Investments)Website www.etfsara.co.zaEmail [email protected]
Or contact Mike Brown for advice and queriesTel 011 274 6171Email [email protected]
“The Retirement Annuity Fund for the 21st Century”
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