1 - jan longeval, managing director, bank degroof - are pens

8/14/2019 1 - Jan Longeval, Managing Director, Bank Degroof - Are Pens

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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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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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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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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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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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1. Did we do something wrong ?

Questions to be asked


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Some 25% of all Belgian Pension Funds have filed

a herstelplan de redressement with the CBFA


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Some 75% of all Belgian Pension Funds have NOT filed

a herstelplan de redressement with the CBFA


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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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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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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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2. Should we change anything ?

Questions to be asked


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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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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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Take a bigger safety margin!


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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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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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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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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


1 - jan longeval, managing director, bank degroof - are pens

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