1 - jan longeval, managing director, bank degroof - are pens
TRANSCRIPT
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Are Pension Funds taking too much Risk ?
Institutional Seminar
Jan Longeval
Managing Director
March 27, 2009
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2 Are Pension Funds taking too much Risk?
A closer look at the numbers
Annual returns Belgian Pension Funds (as of end 2008)
2.4%4.4%15 years
Pension funds
Real
Pension funds
Nominal
Source : BVPI/ABIP
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3 Are Pension Funds taking too much Risk?
A closer look at the numbers
Annual returns Belgian Pension Funds (as of end 2008) vs Government bonds
4.4%
Pension
funds -
Nominal
2.4%
Pension
funds
Real
6.1%
Gov.
Bonds
Nominal
4.1%15 years
Gov.
Bonds
Real
Source : BVPI/ABIP,Bloomberg
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4 Are Pension Funds taking too much Risk?
A closer look at the numbers
Nominal return Belgian Pension Funds (15 years) 4.4%
Standard deviation 11.2%
Nominal return Government Bonds (15 years) 6.1%
Standard deviation 5.4%
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5 Are Pension Funds taking too much Risk?
How can this be?
Euro Govt 10 Year Yield
1%
2%
3%
4%
5%
6%
7%
8%
9%
1993 1996 1999 2002 2005 2008
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6 Are Pension Funds taking too much Risk?
How can this be?
MSCI Europe vs MSCI US (Local Curr.)
50
100
150
200
250
300
350
400
1993 1996 1999 2002 2005 2008
MSCI EUROPE ND MSCI USA ND
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7 Are Pension Funds taking too much Risk?
1. Did we do something wrong ?
Questions to be asked
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8 Are Pension Funds taking too much Risk?
Some 25% of all Belgian Pension Funds have filed
a herstelplan de redressement with the CBFA
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9 Are Pension Funds taking too much Risk?
Some 75% of all Belgian Pension Funds have NOT filed
a herstelplan de redressement with the CBFA
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11 Are Pension Funds taking too much Risk?
Nothing normal about this distribution
-8
-6
-4
-2
0
2
4
6
8
2001 2001 2002 2003 2004 2004 2005 2006 2007 2007 2008
1 out of 125 years
1 out of 125 years
1 out of 4,000,000 years
1 out of 4,000,000 years
Expected daily returns on the European stock market
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12 Are Pension Funds taking too much Risk?
Reminder: Long term investment really means long term!
Quiz question: what level if Dow Jones was a return index instead of a price index?
Dow Jones Industrials (since inception)
0
2000
4000
6000
8000
10000
12000
14000
16000
26/05/1896 1913 1931 1949 1966 1984 2001
Starting level = 40.9
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13 Are Pension Funds taking too much Risk?
Investing in equities delivers a risk premium
But [sometimes] requires a very long time
horizon (longer than 10, 15 even 20 years)
Stock market volatility can be very scary
ALM studies PROBABLY have underestimated
both minimum investment periods and risk
and so did all of us
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14 Are Pension Funds taking too much Risk?
2. Should we change anything ?
Questions to be asked
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15 Are Pension Funds taking too much Risk?
Very long investment horizons
High volatility
+
IAS 19 / FRS 17
Minimum return guarantee in DC plans
Higher accountability of Pension Board (WIP)
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16 Are Pension Funds taking too much Risk?
Pension funds dont even have to invest in
risky assets in order to be more advantageous
than group insurance !
Group insurance presents returns on contributions
NET OF FEES
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17 Are Pension Funds taking too much Risk?
Take a bigger safety margin!
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18 Are Pension Funds taking too much Risk?
Take a bigger safety margin!
Revise strategic asset allocation less equities
less listed real estate
more (corporate) bonds
more inflation-linked bonds
more LDI
KISS
Can ALM studies quantify this ?Can ALM studies quantify this ?
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19 Are Pension Funds taking too much Risk?
Sell equities now?
Expected risk premium European Equities
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Warren Buffets viewTHE financial world is a mess, both in the United States and abroad. Its
problems, moreover, have been leaking into the general economy, and the
leaks are now turning into a gusher. In the near term, unemployment will
rise, business activity will falter and headlines will continue to be scary.
So ... Ive been buying American stocks. This is my personal account Imtalking about, in which I previously owned nothing but United States
government bonds. (This description leaves aside my Berkshire Hathaway
holdings, which are all committed to philanthropy.) If prices keep looking
attractive, my non-Berkshire net worth will soon be 100 percent in United
States equities.
Why?
A simple rule dictates my buying: Be fearful when others
are greedy, and be greedy when others are fearful. And mostcertainly, fear is now widespread, gripping even seasoned investors. To be
sure, investors are right to be wary of highly leveraged entities or businesses
in weak competitive positions. But fears regarding the long-term prosperityof the nations many sound companies make no sense. These businesses will
indeed suffer earnings hiccups, as they always have. But most major
companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I cant predict the short-term movements ofthe stock market. I havent the faintest idea as to whether stocks will be
higher or lower a month or a year from now. What is likely, however,
is that the market will move higher, perhaps substantially so, well before
either sentiment or the economy turns up. So if you wait for the robins,
spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July
8, 1932. Economic conditions, though, kept deteriorating until Franklin D.
Roosevelt took office in March 1933. By that time, the market had already
advanced 30 percent. Or think back to the early days of World War II, when
things were going badly for the United States in Europe and the Pacific.
The market hit bottom in April 1942, well before Allied fortunes turned.
Again, in the early 1980s, the time to buy stocks was when inflation raged
and the economy was in the tank. In short, bad news is an investors best
friend. It lets you buy a slice of Americas future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century,
the United States endured two world wars and other traumatic and expensivemilitary conflicts; the Depression; a dozen or so recessions and financial
panics; oil shocks; a flu epidemic; and the resignation of a disgraced
president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to losemoney during a century marked by such an extraordinary gain. But someinvestors did. The hapless ones bought stocks only when they felt comfort in
doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable.
They shouldnt. They have opted for a terrible long-term asset, one that
pays virtually nothing and is certain to depreciate in value. Indeed, thepolicies that government will follow in its efforts to alleviate the current
crisis will probably prove inflationary and therefore accelerate declines inthe real value of cash accounts.
Equities will almost certainly outperform cash over the next decade,probably by a substantial degree. Those investors who cling now to cash are
betting they can efficiently time their move away from it later. In waiting for
the comfort of good news, they are ignoring Wayne Gretzkys advice: I
skate to where the puck is going to be, not to where it has been.
I dont like to opine on the stock market, and again I emphasize that I have
no idea what the market will do in the short term. Nevertheless, Ill follow
the lead of a restaurant that opened in an empty bank building and thenadvertised: Put your mouth where your money was. Today my money and
my mouth both say equities.
Source : The New York Times, October 17, 2008
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21 Are Pension Funds taking too much Risk?
Sell equities now?
3%-4%Corporate bonds
6%-45%Equities
Expected risk
premium today
Performance 2008
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Sell equities now?
Evolution Asset Allocation Belgian Pension Funds
(source : BVPI/ABIP)
0%
10%
20%
30%
40%
50%
60%
1985 1988 1991 1994 1997 2000 2003 2006
Equit ies + Real Estate Bonds Other Cash
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23 Are Pension Funds taking too much Risk?
Sell equities now?
Evolution of S&P 500from Decem ber 1979 till Decem ber 1989
50
100
150
200
250
300
350
400
1979 1981 1982 1984 1985 1987 1988
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Old versus New medium Risk profile
Cash
Real Estate
Bonds
Equities
100%100%100%Total
2%--
5%5%7.5%EMU
50%55%42.5%Subtotal
18%17.5%10%EMU Corporate
32%37.5%32.5%EMU
43%40%50%Subtotal
23%20%25%Global ex-EMU incl Emerging
markets
20%20%25%EMU
CurrentNewOld
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Conclusions
Risk assets need long periods to deliver a risk premium and their
volatility can be scary
Changing environment makes pension funds more risk adverse
Pension funds dont even have to take risk to outperform group
insurance
ALM studies should be updated
Take a bigger safety margin!