สรุปสาระจาก International Conference

On “Pensions & Investments: Lessons Learnt and Challenges Ahead”

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ชื่องาน : Pension & Investment: Lesson Learnt and Challenges Ahead วัน/เวลา : 27 มีนาคม 2560 (จันทร์) สถานที ่: รร ดุสิตธานี (09:30-16:30) ผู้เข้าร่วมงาน : 1. สมาชิก กบข 2. หน่วยงานภาครัฐที่เป็นผู้เกี่ยวข้องเชิงนโยบายกับ กบข. 3. สื่อมวลชน 4. พันธมิตรธุรกิจ 5. คณะกรรมการและผู้บริหาร กบข. เนื้อหาที่เกี่ยวข้อง : Pension:

• หลักคิดและหลักการบริหารจัดการกองทุนบ านาญจากภูมิภาคส าคัญทั่วโลก • บทเรียนที่ผ่านมา การเปลี่ยนแปลงส าคัญ ของกองทุนบ านาญต่างๆ • สิ่งท้าทายส าหรับกองทุนบ านาญในอนาคต Investment • บทเรียนตลอดระยะเวลา 20 ปี ของการบริหารสินทรัพย์เพื่อการลงทุนส าคัญ เหตุการณ์ที่ส่งผล

กระทบต่อการเรียนรู้สิ่งใหม่ในการจัดการลงทุน • สิ่งท้าทายส าหรับการลงทุนในอนาคตข้างหน้า

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Overview of Public Pension

Systems in Emerging Asia

and Thailand

• Dr. Donghyun Park

• Principal Economist, Asian Development Bank

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• Old-age income support will be one of developing Asia’s biggest social and economic challenges in the 21st century.

• Social changes have weakened family-based old-age support mechanisms.

• Formal pension systems will have to play a bigger role.

• In contrast to OECD countries, Asia does not yet have mature, well-functioning pension systems.

• Many Asians are at risk of old-age poverty.

• Population ageing is an Asia-wide phenomenon

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Table 1. Pension Age and Basic Structure of Pension Systems, 2012

Note: Refers to public pension schemes, except for Australia which is a private pension plan. *Enclosed in parenthesis is the pension age for women. **In June 2015, a defined benefit scheme was introduced in Indonesia, with retirement age at 56 gradually increasing to 57 in 2019, and by an additional year every 3 years until NRA is 65. Source: OECD (2013); ADB (2011).

Diversity of key pension parameters

Economy Pension Age

(Years)*

Difference between Life

Expectancy and Pension

Age (Years)

Pension Scheme Income support for

elderly poor

Male Female

Developing Asia

China, People's Rep. of 60 (55) 14 17

Defined Benefit, Defined

Contribution (funded or

notional)

Yes

Indonesia 55 12 16 Defined Contribution** Yes

Korea, Rep. of 65 13 20 Defined Benefit Yes

Malaysia 55 17 22 Defined Contribution Yes

Philippines 65 5 9 Defined Benefit Yes

Singapore 65 15 19 Defined Contribution Yes

Thailand 55 16 23 Defined Benefit Yes

Viet Nam 60 (55) 11 20 Defined Benefit Yes

Advanced Economies

Australia 67 13 17 Defined Contribution

Japan 65 15 21 Defined Benefit

United States 67 9 14 Defined Benefit

Diagnosis of Asian Pension systems

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• The biggest challenge for Asian pension systems is limited

coverage.

• The share of the labor force which is covered by pension systems

ranges from 11% to 84%.

• The coverage rate for working-age population ranges from 8% to

64%.

• In advanced economies, pension systems typically cover around

90% of the labor force and between 60% and 75% of the working-

age population.

• Even in high-income Asian countries such as Korea, coverage falls

well short of developed-country levels.

Limited coverage as a challenge

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Figure 2. Share of Labor Force and

Share of Population Aged 15-64 Covered by Pension Systems

Note: Years are between 2009 and 2012 for developing Asian economies and 2005-2009 for advanced economies. Source: OECD (2013).

0 20 40 60 80

SingaporeKorea, Rep. of

MalaysiaChina, People's Rep. of

ThailandPhilippines

Viet NamIndonesia

JapanUnited States

Australia

%

Share of Population aged 15-65

0 20 40 60 80 100

SingaporeKorea, Rep. of

MalaysiaChina, People's Rep. of

PhilippinesThailand

Viet NamIndonesia

JapanUnited States

Australia

%

Share of Labor Force

Adequacy of Retirement income as another challenge

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0 20 40 60 80

Indonesia

Malaysia

Philippines

Singapore

Korea, Rep. of

Thailand

Viet Nam

China, People's Rep. of

%

Men

Women

Figure 3

Replacement Rate—Ratio of Retirement Income to Pre-Retirement

Income, 2012

Adequacy of Retirement income as another challenge

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0 20 40 60 80

Indonesia

Malaysia

Philippines

Singapore

Korea, Rep. of

Thailand

Viet Nam

China, People's Rep. of

%

Men

Women

Figure 3

Replacement Rate—Ratio of Retirement Income to Pre-Retirement

Income, 2012

Pension Reform: Asia wide

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1. National Blueprint

2. National consensus on old-age income support

3. Set up an independent National Social Security

Council (NSSC)

4. Improve transparency, accountability and

professionalism

5. Promote equity and sustainability

6. Achieve adequate retirement income

7. Mitigate old-age poverty

8. Improving returns on pension assets

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The NEW Landscape of

Retirement Provision in the

OECD and Latin America

• Dr. Pablo Antolin

• Head Private Pensions Unit

• Deputy Head OECD Financial Affairs Division

Main objectives of pension systems

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1. Reduce or eliminate poverty at old age

2. Make sure people save during their

working life to finance their retirement:

saving for retirement – consumption

smoothing

Two natures of pension systems

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1. Defined benefits plans:

• pension benefits are pre-defined (e.g.

public pensions, funded DB pension

plans)

2. Defined contribution plans:

• pensions benefits depend on the amount

of assets accumulated at retirement

Replacement rate in public pension

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41.6

0

10

20

30

40

50

60

70

80M

exico

Icela

nd

Israe

l

Esto

nia

Switz

erla

nd

Denm

ark

Irela

nd USA

Kore

a

Belg

ium

Germ

any

Cana

da

Norw

ay

Portu

gal

Luxe

mb.

Turk

ey

Hung

ary

Aust

ria

15

Changing Pension Landscape

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• Pensions landscape is changing in the face of challenges

– ageing populations,

– the fallout from the financial and economic crisis,

– the current environment of low economic growth and low returns.

• Increased role of pension arrangements in which asset

back pension benefits (funded pensions)

• There were 13 OECD countries assets than 50% of GDP

in 2015, up from 10 in the early 2000s.

• The number of OECD countries where assets in funded

private pension arrangements represent more than 100%

of GDP increased from 4 to 7 countries.

OECD main policy messages

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• Financial economics: do not put all your eggs in the same

basket

Diversify the sources to finance

retirement

• It is necessary to have public pensions as well as private

pensions, PAYG and funded pensions

Funded private pensions are

complementary to public pensions and

not a substitute.

Risks

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• Planning for retirement requires to make assumptions regarding several parameters going forward.

• Parameters such as: GDP growth, productivity, employment/ unemployment, wage growth, inflation, returns, interest rates (discount rates), and life expectancy.

• Future is uncertain, assumptions rarely materialize as expected: risks – Labour market risks: spells unemployment, career real wage paths

– Macroeconomic risks: inflation, growth, productivity

– Financial risks: returns,

– Demographic risks: longevity risk

– Pension management risks: costs, asset and risk management

– Social risks: disability and family members survivors

– Political risks: pension policy changes

• All these risks will affect the adequacy, coverage and the sustainability of pension policies.

Risks and pension arrangements: who bears the risks

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Non

contributory

Contributory

PAYG

Contributory

Funded DB

Contributory

Funded DC

Demographics (LR) PA PA PA Ind

Macro risks (growth,

productivity, inflation) PA Ind., Ind., PA Ind., Ind., PA Ind., (depends)

Labour mkt risks (wages,

unemployment) PA Ind., PA Ind. Ind.

Financial risks (interest

rates, returns) n.a. n.a PA Ind.

Pension management

(e.g. costs, risk mgt) PA PA PA Ind.

Social risk (disability,

survivors) PA Ind. Ind. Ind. (?)

Policy risk Ind. Ind. Ind. Ind.

Best practices?

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There is not best pension system. It depends on different criteria and the weight the society gives to each of them and their trade0ffs

1. Level of retirement income (replacement rates)

2. Coverage rates (mandatory vs voluntary, soft compulsion)

3. Fiscal and/or financial sustainability

4. Level of contributions

5. Individuals bearing risks

Public systems provide high coverage, high replacement rates and individuals do not have to bear risks, but they are expensive and their fiscal sustainability is in question.

OECD: combination public and private, complementing each other. Public sector safety net paid out from general budget

Conclusions

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Main objectives of pension systems: poverty alleviation and saving

for retirement (consumption smoothing).

All countries have a combination of different pension arrangements,

what varies is the weight.

Saving for retirement involves risks

Diversify sources to finance retirement: combine private and public

pensions

Private provision is complementary to public provision

Their complementarity is defined by how the objectives of pensions

are met and how the risks of saving for retirement are shared.

Shift from DB to DC

Advantages and disadvantages of DB and DC arrangements

Mandatory individual accounts: Latin America

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Pension Investment

- Challenges for Japanese

Pension Funds -

Mr. Yohtaro Takahara

Japan Investment Trusts Association

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Thai Government Pension

Fund (GPF):

Lessons Learned and Going

Forward

นาย ยิ่งยง นิลเสนา รองเลขาธิการกลุม่งานบริหารเงินกองทนุ

กองทนุบ าเหน็จบ านาญข้าราชการ (กบข)

31

GPF Overview

1997 Established

1 million Members

Defined Contribution Pension scheme

$ 22 billion Assets as of Feb 2017

6.6% Return per annum for 20 years

As of Feb 2017

Teachers 33%

Police 14%

Military 16%

Civil Servants 33%

Others 4%

GPF Members

32

GPF in Thai Pension System

In Labor Market

Pillar II Saving & Growth of

Pension Capital

Pillar I Social Safety Net

Pillar III Additional saving & capital development

Provident Fund $ 6 billion

Senior Citizen Allowance

Government Officers

Private Employees

Self Employed & Outside Labor Market

Social security Fund National Savings Fund

Social security Fund $ 45 billion

Pay-As-You-Go Pension Plan

Member Fund, $10.3 billion Reserved Fund, $11.4 billion

Retirement Mutual Fund($ 28 billion), Life Insurance

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GPF Development

But adapt strategy to economic cycle and market environment

Long-term Focus

Diversify globally Diversify into alternative assets

Diversification

Good fundamental investments High Quality

Assets

$ 2 bn (1997)

$ 6.1 bn (2003)

$ 8.8 bn (2008)

$ 13.0 bn (2016)

34

Diversify to seek good return within acceptable risk level

GPF Exposure to Private Market Exposure to Global Investment

Others

Equities

GPF Development

Comparison with Leading Asia Pacific Pensions

Size Ranking

Names

Size ($ bn)

Avg. Return 2002-2015

Standard Deviation

Investment Allocation % Risky Asset

% Foreign Asset

% Private Market

1 GPIF

(Japan) 1,162.3 3.95% 7.63% 46% 36% -

3 NPS

(South Korea) 415.0 5.96% 2.84% 42% 24% 10%

13 EPF

(Malaysia) 180.9 5.68% 0.92% 36% 23% 3%

34 MPF (HK)

76.7 4.43% 14.02% 68% 38% -

191 GPF

(Thailand) 20.7 5.61% 4.28% 35% 25% 11%

Remark: Annual Reports and Willis Towers Watson September 2016

35

GPF experienced 5% negative return in 2008 This led to dis-satisfaction and option for some founding members to reverse to PAYG

defined benefit scheme 36

Comparison of cumulative returns of leading pensions in Asia Pacific

Global Financial

Crisis

Return Comparison

37

1 year perspective

Misperception of Risk

Long-term perspective

38

GPF members’ characteristics

GPF members survey

Preference on Investment Plans

Attitudes Towards Risk

Members with some investment experiences (39% of total members surveyed)

Can accept some volatility to earn 2-3% higher return 37.4%

Can withstand less than 1% return but cannot accept any loss 29.4%

Need higher return and can take some loss 23.7%

Can accept losses in some years to earn 4-6% higher return 9.4%

No loss in any year 52.0% Like to choose but have no time 20.6% Prefer default plan 17.4% Want to choose my own plan 10.0%

1-5% Loss 82%

6-10% 13%

11-15% 4%

>15% 1%

Maximum Tolerance for Annual Loss

39

Government Officers after Retirement

Government officers receive approximately 1 million baht from investment by GPF when retire

They also receive monthly salary after retirement (defined benefit portion - 70% of average last 5 yr. salary), funded by annual government budget

Proportion of Amount Received at Retirement

Remark: 1) The Retirement age at 60, assuming rate of interest of 3%, final salary of 50,000 Baht, and the salary raise of 5% 2) The life expectancy is in the parentheses

Defined Benefit

Defined Contribution (GPF)

40

Source: Ministry of Finance

PAYG Pension can cause future fiscal burden

Projection of PAYG Pension Paid by the Government

Government expense for pension was THB132.3b in 2014 or almost 1/3 of government budget of THB345.5b, still increasing going forward

The burden from pension increases the risk in fiscal budget in the future.

Source: Ministry of Finance

41

But…. Encourage the ‘Life Path’ plan for new members

To achieve sufficiency at retirement…

Only 10% Want to Choose and Modify their Own Investment Plan

Only 9.4% Can take loss in some years to earn additional return of 4-6% per year

Sufficiency of Retirement savings study

Only 1.7% Can take >15% loss in any year

Member’s Contributions Mandatory 3% of salary >3% - 12% add-on

42

Encourage more contributions

Others

GPF encourages more savings from members …

Only 3% of total members save more than mandatory of 3%

Members with Additional Saving on the Rise

GPF introduced Life Path plan in 2013 …

Encourage the ‘Life Path’ plan for new members

43

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20... 30... 40... 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60

Fixed Income

Equity

Others

% A

lloca

tion

44

Return simulation of Life Path plan …

Default Plan Life Path

Lower risk

More likelihood to achieve sufficiency

Encourage the ‘Life Path’ plan for new members

45

Centralized Governing Entity Rules & Regulations

Fund Mobility & Portability

Fund Committee and Public education

To create proper rules & regulations and proper asset allocation

To stimulate financial literacy

Improve investment regulation To reduce overinvestment in low-

return assets

To solve structural problems for semi-government organization

Proper Asset Allocation for long-term sufficiency

More efficiency

Implications from GPF experiences

46

Encourage more savings Encourage and promote Add-on

Contribution

Provide guidance for proper long-term investment return

To ensure adequacy of retirement funds

Implications from GPF experiences

Financial Literacy To better prepared for retirement Understand retirement risk

Facilitate savings and investment culture

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Pension investment:

Challenges in Europe, USA

and Swiss pension funds

Dr. Greg Haenni,

CIO of the pension fund of the state of Geneva (CPEG)

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• Not enough macro analysis to determine:

1. Investment opportunities and

2. foreseeable market risks

• Importance of portfolio construction

1. Asset allocation and position sizing to optimize the yield of the

portfolio

2. Disciplined investment procedures

3. Elaborate risk reduction/hedging strategies when markets are “quiet”

• Invest with conviction, which is determined by 3 factors:

1. Fundamental analysis

2. Technical analysis

3. Catalyst(s)

• Importance of risk management

1. Assess the diversification of the portfolio

2. Stress tests and sensitivity analysis

3. Liquidity analysis

4. Operational setup (counterparties)

Lessons learnt from the last financial crisis

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Investor behaviors

1. Investors are forced to take more risks (quality, leverage, liquidity, …)

2. Investments are made on a relative basis rather than fundamental reasons

3. Investors’ time horizon is becoming shorter

4. Fee compression across the board

5. The role of fixed income strategies is questioned (low yields, low protection

benefits and interest rate risks)

6. Investors are selling active managers for passive/index solutions

7. ETFs are gaining ground (1/3 of the trading volumes of US equities)

8. Investors are reacting the same way at the same time.

Crowded trades in Europe:

• Real estate

• Infrastructure

• Insurance linked securities (ILS)

• Private lending

• Structure credit

5. Hedge fund strategies are challenged (poor performance and high fees)

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Investor behaviors

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Investment risks

• Difficult to diversify portfolios: correlation between asset classes remain high

• Liquidity: Poor across all asset classes, including equity markets

• Rising Interest Rates: Impact on long-duration bonds/credit.

• Monetary Stimulus Unwind (normalization in Europe)

• Quantitative/big data/high frequency trading could continue to impact

segments of the market

• Is the current equity market rally coming to an end?

Historically, 4 catalysts interrupted an equity bull market:

• A war

• The breakup of a country

• A spiral of rate hikes in the US

• A severe economic recession

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3 possible scenarios: S&P500 index historical graph

Scenario 1 «Paradise»: Sustainable global growth. Scenario 2 «Hell»: Economy goes sideways and this low yield low return environment situation continues for several years

Scenario 3 «Purgatory»: global economic slowdown. Financial crisis

Internet bubble

Subprime crisis

Central bank crisis?

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Post crisis returns of the classic 60/40 stock and bond portfolios

• Returns of 60/40 stock and bond portfolios have been remarkably strong

• We still look for lower expected returns during the next 5 years

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• AUM: USD12Bn

• Global investment strategy

• Base currency: Swiss franc

• The investment strategy is benchmark oriented

• Long-term target return: USD 4.1%

• Since 2016, the investments strategy has been adapted to take advantage

of short-term opportunities (Central Bank put)

• ESG filters are implemented across all asset classes (no direct investments

in commodities)

• The asset allocation is composed of 3 main pillars:

1. 30% of Bonds

2. 30% of equities

3. 30% of Real estate

–

Characteristics of the portfolio of CPEG

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Investment strategy of CPEG

• The basis of the investment strategy is to collect asset class

premiums. Capital appreciation considerations come second.

• The belief is that asset class yields are foreseeable and sustainable

over time

• The investment strategy relies on both the strategic asset allocation

and tactical deviations

• The role of the investment team is to optimize the yield and the

diversification of the portfolio, as well as to implement capital

preservation decisions

• Investment decisions are based on macroeconomic and risk

analysis

• Investment constraint: since 2015, the Swiss National Bank has

implemented negative interest rates (-0.75%), which impacts cash

positions, currency hedges and Swiss bonds positions.

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The drivers of performance

• Recurrent returns (yearly basis):

1. Rents: USD 150mn

2. Dividends: USD 110mn

3. Coupons: USD 50mn

• The 3 pillars deliver an annual yield of +2.7% and should deliver a

+2.2% during a financial crisis (worst case scenario)

• Based on academic studies long term capital appreciation of our

equity portfolio should add +1.2% per annum

• The portfolio should therefore return +3.9% per annum over the next

10 years

– In the long run, most of the returns will come from the

accumulation of asset class premiums

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Allocations based on risk factors

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Conclusion

• Reduce the media noise and stay focused on your goals. Less noise can help you

make better decisions aligned with what really matters

• Assess the sensitivity of the portfolio to macroeconomic factors: to understand the

role each investment plays in the portfolio and stay invested when volatility returns.

Avoid extremes and reduce any over-concentrated investments you may own

• Take the opportunity of “quiet markets” to define/confirm your contingency plan.

This will avoid emotional or panic reactions during markets stress

• Don’t change, but adapt your investment strategy to the current environment

• Don’t neglect your currency hedging policy (currency exposure is the 2nd largest

allocation in portfolios)

• Take advantage of rallies and selloffs to rebalance the asset allocation (Central

Bank free put option)

•

• Focus on high quality assets that you would be happy to own if these is a financial

crisis

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Conclusion

• The Board should be prepared for a period of exceptional

uncertainty and low predictability. It is time to be alert on a wide

range of outcomes and higher volatility

• Diversification and liquidity will be key going forward

• Stay away from crowded strategies and trades

• Focus on investments with an asymmetric payout ratio in your

favor (for example: reduce the impact of negative/low yields)

• Rely on talented/active managers with the ability to deliver

consistent alpha and preserve capital

• Team up with other investors with the same investment philosophy

to co-invest (reduce fees, tailor-made solutions,…)

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– “It is not the strongest of the species that

survives, not the most intelligent that survives.

It is the one that is the most adaptable to

change”, Charles Darwin

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Pension Investment:

Challenges in Asia ex-Japan

Seamus Collins – Executive Director

J.P. Morgan Chase Bank N.A.

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The Environment for Pension Investment

PRESSURE ON

INVESTMENT PROCESS

Savings policy

Regulation and transparency

Consolidation and

scale drivers

Alternative

Investments

Internalisation of

asset management

Efficiency focus

Longevity and

dependency

Low investment returns

& volatility

Changing social norms

Pressure on

government budgets

GOVERNMENT

PENSION

INVESTMENT

PRESSURES

FUND

RESPONSES

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Managing

Growth & scale

Managing

Alternative

Assets

Internal

Investing

Capabilities

Regulatory

Pressure

Efficiency &

Transparency

Investment challenges of Asia Pension Funds

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Alternative assets – the complex asset challenge

Search for returns driving complex assets

Infrastructure & property

Private Equity

Credit

Legal / administration / valuation

challenges

Bundled investment across asset classes

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Leverage the global asset owner community

Shared solutions and approaches

Insights into investment jurisdictions

Industry advocacy and standards

Knowledge partnerships

Thank you