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Monday 1 February 2010. Welcome Nigel Peaple, NAPF Director of Policy.

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Presentation on theme: "Monday 1 February 2010. Welcome Nigel Peaple, NAPF Director of Policy."— Presentation transcript:

1 Monday 1 February 2010

2 Welcome Nigel Peaple, NAPF Director of Policy

3 FIDELITY INTERNATIONAL Improving default funds for non-investment professionals Julian Webb Head of UK DC 1 st February 2010 DC PensionsConnection This presentation is for Investment Professionals only, and should not be relied upon by private investors

4 4 FIDELITY INTERNATIONAL Agenda The simple facts in DC Default fund designs under scrutiny The new era of default fund design Client examples Summary

5 5 FIDELITY INTERNATIONAL The simple facts in DC There are now more people in open DC scheme than there are DB 2012 pensions legislation will further increase DC membership Individuals are responsible for investment decisions The majority of DC members struggle to understand the difference between Equities and Bonds 82% of members make no investment decision (NAPF employee benefits survey 2008) Conclusion - Default funds are therefore crucial to ensuring: Members have as big a ‘pot’ as possible upon retirement Without taking undue risk along the way

6 6 FIDELITY INTERNATIONAL Default fund requirements Long term growth Some level of protection in down markets Comfort that long term investment decisions taken on their behalf are appropriate New joiners don’t want to see negative returns early on Sensible risk / return balance A reduced range of member outcomes Sufficient transparency to ensure changes can be made easily and in a cost effective way Lifecycle options to suit all members Member Trustee / Plan sponsor

7 7 FIDELITY INTERNATIONAL Legacy default designs 1) With – Profits Funds The theory Smooth returns by using diversified mix of assets Underpinned with guarantee on investment and terminal bonus In reality Concerns over insurance company financial strength (Equitable Life) In severe down markets the ‘guarantee’ and bonus is at risk 2) Balanced / Managed The theory Investing in a mixture of Equities, Bonds and Cash Achieves diversification and reduces volatility In reality Limited asset allocation flexibility reduces growth prospects Provides only limited protection in down markets

8 8 FIDELITY INTERNATIONAL Legacy default designs 3) Lifecycle / Lifestyle The theory Young members invest regularly into equities to achieve growth. Automatic switches into bonds and cash as retirement approaches to preserve accumulated capital and reduce volatility In reality Automated switches out of growth assets can lock in negative returns Often limited use of diversification during growth phase 4) Passive Global biased equities The theory Global equities are the best source for long term returns Sufficient diversification achieved with equities In reality Limited effects of equity diversification as correlations converging Limited downside protection with significant losses during recent market down turns

9 9 FIDELITY INTERNATIONAL Volatility is key to plan sponsors 30 year asset class returns – a big difference in both the returns and the journey Highest returns from equities overall, but big difference in returns based on timing of exit Source: Datastream Nov 2009. For illustration only. (Inflation)(Cash)(Bonds)

10 10 FIDELITY INTERNATIONAL Annual returns less sensitive to economic conditions… Multi – Asset: near the middle of the pack but a good long-term risk adjusted performance Source FIL Limited as at 18.01.10. For illustration only: Indices used are MSCI World, MSCI Emerging Markets, JP Morgan UK Government Bonds, JP Morgan UK 3 month Cash; DJ UBS Commodity Index, FTSE EPRA/NAREIT Global Property index ; all in sterling terms. Multi Asset Mix comprises: 20% FTSE All Share, 30% MSCI AC World, 15% DJ UBS Commodity Index, 10%FTSE EPRA/NAREIT Global Real Estate, 20% ML Sterling Lg Cap, 5% GBP 7 Day LIBID (Cash)

11 11 FIDELITY INTERNATIONAL Modern default designs – what the market thinks Shortlist for the Corporate Advisor ‘Ultimate Default Fund 2010’ Fund / Fund rangeInvestment Style BGI Global Equity (50:50) Index Fund Passive Global Equity Invesco Perpetual Distribution Fund Balanced / Managed Newton Real ReturnDiversified Growth Ruffer Total Return FundMulti Asset / Diversified Growth Scottish Life Governed RangeBalanced / Managed Skandia Index Balanced FundBalanced / Managed Source: Corporate Advisor, January 2010

12 12 FIDELITY INTERNATIONAL Multi Asset and Diversified Growth lead the way Source: Micropal as at 31.12.09. Performance of funds is net of fees. For illustration only

13 13 FIDELITY INTERNATIONAL Common uses: Light trustee governance role Client requires an ‘off-the shelf’ design Single multi asset funds e.g. Diversified Growth Funds Provide exposure to wider range of asset classes Typically include ‘alternative’ investments e.g. commodity funds, infrastructure Managed to reduce volatility whilst maintaining a long term growth objective What is commonly missing from DGFs Limited tactical asset allocation powers Inability to fully exploit asset allocation opportunities that arise during the economic cycle Achieving Multi Asset investing through a single fund

14 14 FIDELITY INTERNATIONAL 14 FIDELITY INTERNATIONAL Achieving Multi Asset investing through Blended Funds Implement consultant / advisor advise through bespoke multi asset funds Combine a multitude of funds, managers, styles to meet long term investment objectives Allows Trustees to design fund(s) to meet investment requirements of all members Governance  Daily dealing, valuation, NAV pricing  Transparent processes  Maintains price tracking  Rigid internal and external SLA’s  Clear fund objectives Innovation  Ability to re- engineer fund while remaining “open”  No member trading “blackout’s”  Option of cash rebalancing for new funds/sectors  Bespoke Factsheets Global Equities Manager A (Passive) UK Equity Manager A (Active) Global Equity Manager B (Active) Global Equity Manager C (Active) Diversified Manager D (Active) Bespoke Fund Design

15 15 FIDELITY INTERNATIONAL Client example 1 UK Trust based client 5,000 members Fund launched October 2008 Default fund uses a mix of: 6 underlying Managers Asset classes Geography Investment Style Active and passive Members offered a range of 4 blended funds Diversified funds Alternatives Global active & passive Diversified Growth Fund Global Equity (Active) Global Equity (Active) World ex UK Equity (Passive) UK Equity (Active) UK Equity (Active) UK Equity (Passive) Property Fund XYZ Diversified Growth Fund

16 16 FIDELITY INTERNATIONAL Client example 2 UK contract based client 2,000 members Launched March 2009 The client offers members a range of three multi asset Blended Funds A range of risk / return expectations Using 4 Investment Managers ‘Moderate’ fund is the default Lifestyle overlay incorporated into chosen fund Global Equity (Passive) World Ex UK Equity (Passive) UK Equity (Active) Diversified Growth Fund Emerging Markets (Active) Property Fund Global Bonds Global Equity (Passive) World Ex UK Equity (Passive) UK Equity (Active) Diversified Growth Fund Property Fund UK Corp Bonds Diversified Growth Fund Global Equity (Passive) Property Fund Global Bonds UK Corp Bonds Index Linked Bonds

17 17 FIDELITY INTERNATIONAL Multi – Asset funds used in a Lifestyle Multi Asset Growth FundMulti Asset Strategic FundMulti Asset Defensive Fund Global Bonds Cash UK Equity Global Equities Real Estate Commodities 75% “Growth assets” 25% “Store of value” 50% “Growth assets” 50% “Store of value” 25% “Growth assets” 75% “Store of value” Years to NRA Growth Strategic Defensive Bonds Cash Risk

18 18 FIDELITY INTERNATIONAL Conclusion – A new era of default design Sensible risk / return balance A reduced range of member outcomes Transparency / Governance Lifecycle options Long term growth objective with downside protection through diversification and flexibility Reduced volatility through the economic cycle Focus on default strategy rather than a range of funds Applied to single multi-asset, Blended Funds or spectrum of multi-asset funds Trustee / Plan sponsor requirements How do new era of default meet these requirements?

19 Case Study


21 Alexandra Kitching PQM Executive PQM – 4 months on DC PensionsConnection 1 February 2010

22 Outline PQM & NAPF PQM Standards 4 months on What people say

23 The NAPF members say…. “We have a great pension but our employees still don’t join it” “Employees often don’t realise the value of the pension offered” “If employees don’t value a good pension, employers won’t provide them” “We need a simple way of helping employers communicate the value of their pension”

24 NAPF Policy Objectives Policy and regulatory environment that enables workplace pensions to thrive Encouraging high standards, better governance and the effective operation of schemes Speaking for all forms of provision: DB, DC etc. Promoting public confidence in workplace pensions

25 PQM – a new award for good workplace pensions Contributions Governance Communications

26 How to apply Visit

27 4 months on 33 schemes qualified Approximately 100,000 active scheme members covered 15 contract-based 18 trust-based 15 PQM 18 PQM PLUS


29 Using the PQM award PQM logo on the literature, intranet and presentations PQM logo on the e-mail signature Displaying the PQM trophy at the main company reception Displaying the PQM certificate in the offices Presence in the press

30 What the awardees say “Going forward new hires are coming in and, instead of thinking they can’t get into the defined benefit scheme, they will say the PensionSaver has got a pension quality mark so it must be a good scheme.” Teresa Berkengoff DMGT “The application for the PQM+ was easy to understand and took very little time to complete. We at Accenture are excited about this new programme and feel privileged to be involved with the launch. We are committed to supporting this useful benchmark for defined contribution schemes in the UK alongside our colleagues at the NAPF.” Yvonne Pearce Accenture “Applying for the Pensions Quality Mark was important to the Company as it meant that all current and future members could see that Pensions was a highly valued and supported benefit provided by their employer. The application process was straightforward and Volkswagen Group are very pleased to be at the forefront of the award for this important new development within pensions as it stands for providing best in class within the pensions arena.” Roy Platten Volkswagen

31 Friend of PQM For consultants and advisers Use of Friend of PQM logo Friend of PQM certificate Free of charge Reviewed annually

32 Questions


34 Open Q&A forum


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