Transcript Slide 1

Restrictions on Pension Investing:
An Australian Perspective
2008 06 04 ICPM
Leo de Bever
Chief Investment Officer
Victorian Funds Management Corporation
Victorian
Funds
Management
Corporation
Australian Pension System
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No Public Plan (e.g. Canada Pension Plan)
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Required pension savings 9% of salary
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Contributions taxed at 15% instead of marginal tax rate
Fund income taxed @ 15%, capital gains @10%,
dividend tax credit is deductible from taxes
Tax Free withdrawals on reaching age 60
Incremental growth largely in DC “super funds”
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Small size generally means high management costs
“Do it yourself” accounts (e.g. Canadian RSPs)
have >1% overhead for balance <A$200,000
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Audit fees can be $2000 or more
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Australia Pension Savings: Global Context
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High Growth Rate of Pension Assets
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Only Top 25% of Funds Have Index Returns
280%
VFMC Passive Benchmark +1%
260%
VFMC Passive Benchmark
VFMC Actual net of 6% effective tax and fees
240%
Intech upper quartile
Intech median growth fund
220%
200%
180%
160%
140%
120%
100%
Jun-97
Jun-98
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
An extra 1% above index for 10 years would have been stellar
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Investment Costs Fall With Asset Size
Better Australian Retail Funds
Australian Super
Victorian Funds Management Corp
Alberta Inv Mgt
OTPP
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Funds Merging, More Individual Accounts
Source: Australian Prudential Regulatory Authority (APRA)
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Larger Funds Have Greater Return Potential
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Tend to have better systems that can assist
with better implementation
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Risk management
Cash management
Implementation error detection
Larger funds make better investment partners
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Better internal staff
Access to better alternatives on better terms
Cooperation with other funds can be substitute
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Requires strong alignment, similar decision process
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What It Takes to Be Exceptional
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Independent Board
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Must be willing to help push boundaries of comfort
Empowered internal investment team
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Quality and pay must be commercially competitive
Pragmatic internal - external management balance
Focus on maximising return/risk
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We are risk managers more than asset managers
Long term investment horizon
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Willingness to invest in unusual opportunities
Doing the basic better
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Strong risk and back office systems
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Better Mix of Internal – External Management
Ontario
Teachers’
2006
Victorian Funds
Management Co
2006
Investment staff Salaries
~2 bps
~1 bps
STI and LTI in bps of assets
~10 bps
~1 bps
External Fees (includes embedded fees)
~3 bps
~35 bps
~15 bps
~37 bps
% managed externally
~10-15%
~100%
IT
~3 bps
~0.5 bps
Rent, Legal, Financial,
Compliance, Custody, etc
~4 bps
~4bps
Total Investment cost bps
~22bps
~42bps
Total Investment Costs
Value added/Assets last 5 yrs
Assets Under Mgt
~4%
AUD$110B
none
AUD$40
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Asset Allocation Issues
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Home country bias still strong
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Dividend tax credits used as justification
“Endowment envy” encourages uncritical
imitation of what worked in the nineties
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Taking big risks in inefficient markets had a payoff
Tendency to fill alternative asset class buckets
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Not enough focus on managing return/risk
May need to create new alternatives
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Also should not disregard traditional assets
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Only Long Term Focus Justifies Short-Term Risk
VFMC Risk Profile at $40 Billion
Annual
Monthly
Weekly
Daily
Hourly
1 in 6 Worst Outcome
4000
10.0%
1155
2.9%
553
1.4%
250
0.6%
88
0.2%
1 in 100 Worst Outcome
12000
30.0%
3464
8.7%
1658
4.1%
750
1.9%
265
0.7%
Most Shareholders and Boards want good long term results
As long as it does not interfere with making money in the short run
Expected long-term payoff from taking risk 2.5% / year
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Governance Challenges
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Independence of Boards not always clear
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Public sector: shareholders control strategy, regulation
DC Funds: Consultants support “blame avoidance” regime
Boards often act like management
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Few funds have strong internal investment team
VFMC is one of handful of exceptions
Funds lack the scale for internal management possible
“Manager of Manager” model costly
Freedom to switch funds creates peer pressure,
encourages short-term management horizon
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Practical significance of clients moving is questionable
A good management team would stay the course
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Other Systemic Issues
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Pension adequacy
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Low average savings balance for larger % of population
Saving 9% of salary is not enough
DC lack of Longevity insurance implicit in DB
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Funds are discussing collective insurance
Not clear clients would be willing to pay
Lump sum distributions out of DB plans
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At 54 years and 11 months
Fear of legislative change
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E.g. tax free withdrawals at age 60
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Direction of Change
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Fund Consolidation
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Best thing trustees can do in many cases is vote
themselves out of a job
Fewer, stronger and more independent Boards
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Need more degrees of separation
Stronger internal teams empowered to act
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Better delegation from the Board
More cooperation among funds on alternatives
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Industry fund efforts have not been totally effective
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