2. Longevity and Retirement Funds

3. Growing Older Jeanne Calment 122 years 164 days b. 21 February 1875 d. 4 August 1997

4. Secrets of Longevity Secrets of Longevity (According to Jeanne) She took up fencing at 85 and was still riding a bicycle at 100 She could walk upright until 114 She took up smoking at age 70 and quit at 117 Her secret was olive oil She enjoyed port wine and at a kilogram of chocolate a week She reverse leased her apartment at age 90!

5. Agenda Tale of two trends What trends mean for our funds What can be done about it? Pensioners Active Members

6. Tale of Two Trends LONGEVITY MORTALITY OLDER YOUNGER

7. Longevity This increases by 1 year every 20 years

8. Mortality Decreasing life expectancy at birth due to the effect of AIDS on the young

9. Tale of Two Trends BIRTH 0 WORK 20 RETIRE 65 DEATH ? DECREASING INCREASING

10. Impacts of the Trends

11. Impacts of Longevity More benefits needed at retirement – Retirement lasts longer – Exposed to inflation for longer – Increased Medical Costs Vulnerability at older ages – Benefits insufficient or depleted Increase dependence on alternative support – Work – Family – Government

12. Increasing Medical Costs Health declines with age Decline starts earlier for manual workers More healthcare needed each year Twice as much at 70 than at 50 (US data) Medical schemes limit impact Medical inflation Costs are difficult to predict

13. Inflation Risk 83% of pensioners feel their pension has not kept up with inflation (OMRFS) Some pensioners forfeit inflation protection Increasing longevity means more people may feel this more keenly

14. Inflation 2000 White Bread (700g)R3.12 Brown Bread (700g)R2.56 Maize Meal (10kg)R25.26 Rice (1 kg)R6.63 Cooking Oil (750ml)R4.16 Full Cream Milk (1l)R2.56 Fresh Chicken Whole R11.94 Apples (1.5kg)R6.30 Onions (per kg)R2.57 Potatoes (10kg)R13.55 White Sugar (2.5kg)R9.39 Ricoffy Coffee (750g)R23.02 TotalR111.06 Today R5.79 R4.99 R47.00 R7.99 R8.99 R6.29 R28.00 R16.95 R5.99 R41.99 R15.39 R51.99 R241.36 Incr. 186% 195% 186% 121% 216% 246% 235% 269% 233% 310% 164% 226% 217% p.a. 6.4% 6.9% 6.4% 1.9% 8.0% 9.4% 8.9% 10.4% 8.8% 12.0% 5.1% 8.5% 8.1%

15. Inflation In January 2000 Petrol cost R2.88 per litre and Diesel cost R2.47 per litre At February 2010 Petrol was R7.85 per litre and Diesel cost R6.99 per litre An increase of 173% (10.5% p.a.) for Petrol and 183% (11% p.a.) for Diesel

16. Loss of family support 23% of pensioners receive family support (OMRFS) 27% of working people expect their children to support them in retirement (OMRFS) Families can act as an informal annuity market Declining birth rate and AIDS may reduce possibility of support

17. Impact of Mortality For every 3 25 year olds in your fund, 1 will die before age 65 and 2 will retire Trustees have a duty to protect the interests of all members. How do you balance retirement and death benefits?

18. Impact of Mortality Reduces the economically active part of the population – Reduces funding for state pensions Creates more orphans and dependents – Increases burden on state – Increases burden on pensioners

19. Impacts – Bomb 1 Active Members Current savings achieves less benefits at retirement (DC) Current service costs the Employer more (DB) Higher risk of insufficient retirement benefit – Or benefits being depleted Could face reduced state support Could face increased state taxes

20. Impacts – Bomb 2 Pensioners Whole Life Annuities – Payments not depleted – Pressure on increases means inflation a concern Living Annuities – Reduce starting payments – Risk of benefit depleting In the Fund – Strain on reserves and active lives as basis changes – Pressure on increases with inflation concerns

21. Impacts – Bomb 2 So pensioners are more vulnerable More likely to need support of government and families But now faced with having to support families – Grand children And government looking to reduce support

22. Impacts – Bomb 3 Growing burden on the state pension – Growing retired population – Who lives for longer – Increased orphans Reducing funding – Large spend versus GDP – Tax pool not growing as fast due to mortality – Poor economy leading to budget deficits (temp)

23. Managing the Impacts

24. Pensioners

25. Pensioners In the Fund – Keep healthy reserves for future basis increases – Keep close watch on mortality basis – Monitor investments closely Minimise risk of market losses

26. Pensioners Whole Life Annuities Check the capital strength of the insurers when outsourcing Avoid level annuities Monitor increases and increase expectations carefully

27. Pensioners Living Annuities Allow for longer life span when calculating draw down Monitor investment risk carefully Control spending, especially in early years

28. Active Members 1.Save More 2.Protect Savings 3.Invest Wisely 4.Preserve 5.Empower members

29. Save More Save for longer Almost 10% of over 65s earn a salary or run a business (IES 2005/2006) Attitudes of employers make it difficult to find work after 65 A study of over 85s in 1991 found that about 30% of them only stopped working at or after 70. Start earlier! Increase contributions and savings 15% of salary for 40 years

30. Protect Savings There is a need for death and disability benefits There is a need for death and disability benefits But higher cover levels mean lower savings levels But higher cover levels mean lower savings levels Cap risk benefits and/or move to DC risk Cap risk benefits and/or move to DC risk Offer flexible risk benefits where members Offer flexible risk benefits where members Aim for reasonable replacement ratios on all benefits Aim for reasonable replacement ratios on all benefits Preserve! Preserve! Accumulated credits are also death benefits Accumulated credits are also death benefits

31. Invest Wisely Investment returns make up the overwhelming majority of the eventual retirement benefit Ensure optimal returns are being achieved Invest for the long term Allow for growth assets Avoid unnecessary switching Control costs Monitor performance and strategy Educate members about their investment choices

32. Preserve The typical replacement ratio of the industry is around 30%, when it could easily be above 80%. Lack of Preservation is a leading cause of insufficient retirement benefits

33. Empower Members Members should understand The benefits available to them from their Fund The choices they can make The impact of the choices they make today on their retirement tomorrow

34. Thank you Craig Aitchison Craig Aitchison Managing Director Managing Director OMAC Actuaries & Consultants OMAC Actuaries & Consultants caitchison@omac.co.za caitchison@omac.co.zacaitchison@omac.co.za www.omac.co.za www.omac.co.zawww.omac.co.za