october 2017, mexico city how to integrate a strategy with a long … · 2018-10-22 · mexican...
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The content of this document is approved by Pioneer Global Investments Limited, a member of the Amundi group ('PGIL') for use with AMAFORE conference attendees only, on an individual
basis in Mexico only and shall be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
How to integrate a strategy with a long term view
today and be able to achieve proper retirement goals
Francesco Sandrini, Head of Multi Asset Securities Solution, PhD
October 2017, Mexico City
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Agenda
1. Demographic Trend Shaping
2. …In a Strenuous Financial Markets Environment
3. Dealing with the Challenge Today
4. How to Proceed?
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01DEMOGRAPHIC TRENDS SHAPING
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16%of Worldwide
Population
12%of Worldwide
Population
8%of
Worldwide
Population
Source: United Nations, Department of Economic and Social Affairs. World Population Prospects, the 2015 Revision compared to the 2013 Edition. Icons designed by Freepik.
The World is Getting Older and Living LongerGlobal Proportion of People Aged 65 and Above
Globally, the number of elderly people is forecast to increase and account for a larger share of the
world population. In addition, life expectancy is expected to grow from 71 years in 2015 to 77 in
2050 (rising by 1 year more compared to the 2013 United Nations forecast).
2015 2030 2050
71Yr 77Yr74YrWorld Life Expectancy at Birth World Life Expectancy at Birth World Life Expectancy at Birth
610 Million
People 65+
995 Million
People 65+
1,559 Million
People 65+
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Source: United Nations, Department of Economic and Social Affairs. World Population Prospects, the 2015 Revision compared to the 2013 Edition. Icons designed by Freepik.
More Pensioners Living Longer and Less Workers to
Support their Retirement
2015 2030 2050
7 to 1 5 to 1 3.5 to 1
While the old-age population is increasing, the number of working people to support their pensions
is expected to decline. In 2050 there should be 3.5 working people per pensioner (deteriorating
from the 2013 forecast of 4 to 1). These demographic trends will pose great challenges to the
public pension and healthcare systems.
0 1 2 3 4 5
Australia
France
Germany
Italy
Japan
Spain
UK
US
2015 2030
Global Ratio of Workers (24-65 years) to
Pensioners (>65 years)Number of Working Age (20-64) People
per Pensionable Person (>65) by Country
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- 20 40 60 80 100
Australia
France
Germany
Italy
Japan
Spain
UK
US
Transfers
Work
Capital
$
$
$
Income Sources of People Aged Over 65, %
Source: OECD, Pensions at a Glance, 2015 and 2013. Data as at 2013 or latest available. Note: Income from work includes both earnings (employment income) and income from self-employment. Capital income includes private pensions as
well as income from returns on non-pension savings. Transfers include public and occupational transfers. The net replacement rate is defined as the individual net pension entitlement divided by net pre-retirement earnings, taking into account
personal income taxes and social security contributions paid by workers and pensioners. It measures how effectively a pension system provides a retirement income to replace earnings, the main source of income before retirement. This indicator
is measured in percentage of pre-retirement earnings.
Implication: Pensioners Could Need Additional Sources
of Income
58%
68%
50%
80%
40%
90%
29%
45%
Pensioners are already sourcing income from work and capital to supplement their pension. With
expected reforms in pension systems, we believe this trend is set to continue.
$
$
$
$
$
Net Replacement Rate
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
US Household Expenditures by Type and Age Medical Care vs Total Inflation in US
0 10 20 30 40
Housing
Health care
Transportation
Food
Entertainment
Pensions & SocialSec.
Other(1)
Share (% of total)
Age 55–64 Age 65–74 Age 75 and older
In the retirement phase, the share of expenditure for Housing and Health care increases and
represents around 50% of average household costs. 70% of people turning age 65 can expect
to use some form of long-term care at some point1.
Source: Consumer Expenditure Survey 2015, U.S. Bureau of Labor Statistics. Other (1) includes clothing, cash contributions, alcohol, tobacco, personal care products and services,
reading, education, life and personal insurance, and miscellaneous expenses. 1 Source: U.S. Department of Health and Human Services. The graph on the right is updated at
December 30, 2016.
50
70
90
110
130
150
170
190
210
230
1996 2001 2006 2011 2016
100 =
Dec 1
996
Medical Care CPI Total CPI
Risk of Rising Costs: Particularly for Health Care and Housing
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Mexican demographics in line with worldwide trend− Increased life expectancy and decreasing nativity rate to continue into first half of 21st century
− Aging of population has led to significant increase in pensioners
− +56% from 2007-2017
− Number of pensioners expected to accelerate for foreseeable future
Source: Consejo Nacional de Población Envejecimiento del a Población de Mexico (Reto del siglo XXI) 2004, 5to Informe de Gobierno .
Changing Demographics of Mexico
Challenge of the 21° Century
72
74
76
78
80
-
10
20
30
40
50
2020 2030 2040 2050
Life E
xpecta
ncy
(yrs
)
Po
p o
f +
60
yrs
old
(M
M)
Projected aging population with life expectancy
Population of +65 yrs old (LHS) Life Expectancy (RHS)
3,101 3,235 3,407 3,596 3,757 3,920 4,0914,299 4,490
4,728 4,848
0
1000
2000
3000
4000
5000
6000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Beneficia
ries (
Thousa
nd
s)
Growing number of Pensioners
IMSS ISSSTE
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02…IN A STRENUOUS FINANCIAL MARKETS ENVIRONMENT
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Annualized Return (1987-2017) of a Traditional
Balanced Portfolio (50% U.S. Bond, 50% U.S. Equity)
Return Drivers:
Source: Bloomberg. Indices considered are Barclays U.S. Aggregate Bond TR Index
for U.S. Bond and Morgan Stanley North America TR Index for U.S. Equity. Data as at
September 2017.
Challenging Market Backdrop Reduces Return PotentialWe Expect a 20% Probability of Negative Returns Over a 3 Year Horizon
47%
53%
Bond Contribution Equity Contribution
8.03% p.a.
− EPS Growth
− Multiple
Expansion
− Carry
− Yield Compression
Source: Amundi Asset Management. Data as 13 October 2017. For illustrative purposes
only This is not a recommendation to buy or sell any particular security. Based on Pioneer
Investments’ 3 Year Forward Annualized Return for US Bond and US Equity. US Bond is a
proxy for the US Aggregate Bond Index (combines 20% US Corporate IG and 80% US
Government).
Amundi Asset Management 3 Year Forward
Annualized Return of a Traditional Balanced Portfolio
(50% U.S. Bond and 50% U.S. Equity)
50% US Equity - 50% US Bond
3 Years Forward Looking Distribution
0.0% 0.2% 0.7%
3.0%
6.4%
12.2%
15.5%
19.1%
15.9%
11.5%
7.2%
4.5%
2.6%
0.9%0.1% 0.2%
0%
5%
10%
15%
20%
25%
-10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%
20% Probability of Negative
Returns
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Policy actions of Central Banks has distorted asset prices, thus impacting the
nature of market, liquidity and credit risks
Source: Amundi Asset Management. For Illustrative Purposes Only.
The Risk Paradigm is Expected to Change in the Era of
Debt Deleveraging
Market Risk
(Volatility,
TE, VaR)
Credit Risk Liquidity
Risk
Last 20 Years
Market Risk
(Volatility,
TE, VaR) Credit
Risk
Liquidity
Risk
Next 10 Years
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Distortions from QE: massive risky asset reflation with prolonged negative short
term rates
-6
-4
-2
0
2
4
6
8
10
12
0
200
400
600
800
1000
1200
1400
1600
1800
2000
31
/01/1
962
31
/01/1
963
31
/01/1
964
31
/01/1
965
31
/01/1
966
31
/01/1
967
31
/01/1
968
31
/01/1
969
31
/01/1
970
31
/01/1
971
31
/01/1
972
31
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973
31
/01/1
974
31
/01/1
975
31
/01/1
976
31
/01/1
977
31
/01/1
978
31
/01/1
979
31
/01/1
980
31
/01/1
981
31
/01/1
982
31
/01/1
983
31
/01/1
984
31
/01/1
985
31
/01/1
986
31
/01/1
987
31
/01/1
988
31
/01/1
989
31
/01/1
990
31
/01/1
991
31
/01/1
992
31
/01/1
993
31
/01/1
994
31
/01/1
995
31
/01/1
996
31
/01/1
997
31
/01/1
998
31
/01/1
999
31
/01/2
000
31
/01/2
001
31
/01/2
002
31
/01/2
003
31
/01/2
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31
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31
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31
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31
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31
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31
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31
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31
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012
31
/01/2
013
31
/01/2
014
31
/01/2
015
31
/01/2
016
31
/01/2
017
Real Short Rates US: US equities, US HY
Real Short Rates US HY Bonds Equities US (lhs)
Real R
ate
s
Source: Amundi Asset Management and Bloomberg as of 31 July 2017
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Source: Amundi Asset Management. Deutsche Bank. Data from 7 April 2001 to
21 December 2016.
Lower Trading Volumes in Sovereign Bonds and Credit Sectors
Impact of Quantitative Easing (QE)
Lower trading activity of securities under the scope of QE
Consensus investor positioning on QE trades
Crowded trades at risk of being unwound simultaneously leading to liquidity pressures
-
2
4
6
8
10
12
14
16
12mo Average Daily Trading Volume in Treasuries,Pct of Market Size
Treasury: -70%
Source: Amundi Asset Management. Deutsche Bank. Data from 31 January 2005 to
31 December 2016.
0
0.2
0.4
0.6
0.8
1
1.2
1.4
12mo Average Daily Trading Volume,Pct of Market Size
HY IG
HY: -30%
IG: -50%
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Facing the Income Dilemma from Short to Long RunHow to escape the spyral?
Subduedinterestrates
Credit and Liquidity
Risk
IncreaseLeverage
Low Productivity
Containedwage and Inflation
dynamics
Abundantliquidity via
QE
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03DEALING WITH THE CHALLENGE TODAY
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Source: Mercer Melbourne Global Pension Index 2015.
Implication: Governments Pushed to Reform
Their Pension Systems
Many countries have already reformed their pension systems. Nevertheless there
continues to be significant room for improvement. Investors should prepare in advance
for potential changes in their pension entitlements.
CANADAB
CHILEB
BRAZILC
UNITED STATESC
SOUTH AFRICAC
CFRANCE
DKOREA
DINDIA
SINGAPOREC+
DJAPAN
DINDONESIA
DCHINA
ADENMAR K
ANETHERLANDS
BUNITED KINGDOM
C+
IRELAND
BFINLAN D
BSWEDEN
POLANDC
AUSTRIAC
ITALYC
SWITZERLANDB
AUSTRALIAB+
C+
GERMANY
MEXICOC
Global Scorecard of Pension Systems. Index Value based on Adequacy, Sustainability and Integrity
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Past 7 year of increasing pension cost expected to continue in future
Estimated 2018 pension cost to be +170% with respect to 2009 cost, resulting in 35% of current
government expenses
Trend expected to rise until 2050
− Significant portion of pension fund liability under Defined Benefit scheme (“Generation of
Transition”)
− “Generation of Transition” average age: 52, median age: 45
− Regulated under the regime preceding the reforms of 1995 (IMSS) and 2007 (ISSSTE)
Source:Source: CEFP, SHCP, 5to Informe de Gobierno as at 30 Sept 2017
Growing Pension CostDirect consequences of demographics trends
«Generation of Transition» age distribution
0%
10%
20%
30%
40%
-
200,000
400,000
600,000
800,000
1,000,000
Billio
ns P
eso
s
Growing total pension cost
Pension expense (LHS) % of Current govt. expense (RHS)
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Current Mexican Pension SystemPost reforms of 1995 (IMSS) and 2007(ISSSTE)
Information as of September 30th, 2017 with the exception of AUM as % of GDP.Sources: CONSAR and OCDE.
Key figures
Regulator National Commission of the Retirement Savings System (CONSAR)
Number of AFORES 11
Number of accounts 59 million
AUM MXN 3,094,881 AUM, equivalent to close to 170,432 million USD
AUM as % of GDP 15.60%
System historical
net rate of return11.53% nominal, 5.58% real
Net return indicator
SB4 (Investment horizon 84 months) 7.10%
SB3 (Investment horizon 84 months) 6.47%
SB2 (Investment horizon 60 months) 5.15%
SB1 (Investment horizon 36 months) 3.78%
SB0 (Investment horizon 12 months) 4.62%
Investment target Most AFOREs around 200 bp above inflation.
Investment Policy Age Equity Risk (including Private Equity)
Siefore 4 Less than 36 years old 65.0%
Siefore 3 between 37 and 45 years old 55.0%
Siefore 2 between 46 and 59 years old 45.0%
Siefore 1 60 years or older 20.0%
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Sources: Amundi Asset Management, Institutional Solutions. For Illustrative purpose only.
Main Features a “transition” DC Plan should embed
Address the INDIVIDUAL PENSION GAP
Finding the Optimal trade-off between a
sustainable SUBSTITUTION RATE and
its shortfall (or volatility)
The substitution rate of the salary is defined as the ratio between the retirement pension
and the last salary (the pension gap is its complement to one).
Last salary is function of salary inflation, salary evolution and age at retirement.
The maximization of substitution rate can be represented as a defined benefit
problem with individual liabilities linked to salary inflation.
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Sources: Amundi Asset Management, Institutional Solutions. For Illustrative purpose only.
Focusing on Individual Liabilities
Salary dynamics depend on :
1. MACRO DYNAMICS
• Inflation, wages, economic growth
2. MICRO Features
• Age, Sex, Sector, Carreer Path, Human capital (education and skills)
The dynamics of salaries affect the Substitution Rate:
• numerator cumulate contributions and investment performances
• denominator is the salary at retirement
Retirement at Salary
Annuit
rate onsubstituti
T
T
S
yA
S
AG
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Sources: Amundi Asset Management, Institutional Solutions. For Illustrative purpose only.
Defining Default Investment Solutions
1. From individuals to groups: cluster analysis of the adherents by age, sex,
sector, carrier path, human capital. Our approach should not be focused only
on age.
2. From groups to types: definition of employee types for each representative
cluster
3. From types to default solutions: design the investment solution for the
employee types
• Asset allocation decisions
• Based on salary dynamics
• To maximize the substitution rate
4. From default solutions to individual solutions
• Integrating different building blocks to approximate the
individuals requirements and targets
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04HOW TO PROCEED?
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Sources: Amundi Asset Management, Institutional Solutions. For Illustrative purpose only.
What Investment Process Makes Sense?
Investment Features
• Broad Asset Diversification
• Multiple Time Dimension (addressing short term issues with overlays)
• See it as an Asset Liability Mangement problem!
Asset Allocation
Tools
• Simulation models for generating correlated paths of assets and salary determinants
• Multistage optimization to manage different horizons
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Identified KEY long term investors’ investment decision drivers:
− Macroeconomic variables and asset prices - long term direction
− Economic and financial cycle - medium term evolution
− Possible market deviations - short term misalignments
Source: Amundi Asset Management, Global Financial Data, Bloomberg. Data as of 28th of April 2015.
Identify Trends and CyclesEmbrace the Scary Uncertainty
0
1
2
3
4
5
6
7
8
9
17
92
17
97
18
02
18
07
18
12
18
17
18
22
18
27
18
32
18
37
18
42
18
47
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92
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97
20
02
20
07
20
12
20
17
Lo
g P
ric
e
S&P 500
SPX Trend Trend & Cycle
Return Sample Used
− Different variables/cycles affect Long/Medium/Short term dynamics
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Real GDP Trend evolves dynamically
based of an assumptions on:
Labor Force (L)
Total Factor Productivity (TFP)
Capital (K)
Source: Amundi Asset Management, Global Financial Data, Bloomberg. Data as of 28th of April 2015.
Capturing the Risk PremiumExploit Long Term Equity Returns
LONG TERM
Dividend
Yield
Equity Long Term Total Return
Nominal
GDP
Growth
0
5
10
15
20
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
S&P 500 Dividend Yield
Average
0
500
1000
1500
2000
2500
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015
Pri
ce
S&P 500
S&P 500 Index GDP Growth + Inflation
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Equity
Fundamental metrics (e.g. Corporate Earnings) are affected by cycles;
e.g. (Revenues – Costs) affects margins − On the Revenue side, normally sales are affected by the Business cycle
− On the Cost side, variables like leverage, interest rates levels or
commodity prices (e.g. Oil) are more related to the cycle of credit and
monetary policies
Source: Amundi Asset Management, Bloomberg, Factset. For Illustrative purpose only.
Identify Medium Term Cyclical PatternsFocusing on Financial Cycles
Modelling Cyclical Patterns proved to be extremely important when forecasting
returns with a 1-5 Year Horizon
300
400
500
600
700
800
900
1000
1100
1200
1.2%1.7%2.2%2.7%3.2%3.7%4.2%4.7%5.2%5.7%6.2%6.7%7.2%
ene-10 ene-11 ene-12 ene-13 ene-14 ene-15 ene-16 ene-17
Cyclical Patterns
US speculative default rates, 8m lag US high-yield spreads, bps, rhs
Credit
Normally meaningful variables such as the amount of
leverage companies take during the phases of low interest
rates can identify the cycle.
When Monetary policies revert or signs of late cycles are
visible rates might rise, revenues may shrink and default
rates can be affected; a more cyclical variables tend to rise.
MEDIUM TERM
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Robust short term Outlook analysis takes into account both financial variables and
market misalignments.
Update as of 31st of March 2017. Source: Amundi Asset Management Global Asset Allocation Research, Bloomberg, FactSet.
Build Short Term OutlookMerge Macroeconomic and Financial Theory with Empirical Evidence
SHORT TERM
Short term Outlook
should look at:
Fair Value Valuation
Technical and Momentum analysis
Sentiment and Consensus analysis and risk perception.
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
mar-
00
mar-
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mar-
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10
mar-
11
mar-
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mar-
14
mar-
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mar-
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mar-
17
EPS Growth YoY
EPS Growth
0
500
1000
1500
2000
2500
20
03
20
04
20
05
20
06
20
07
20
08
20
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10
20
11
20
12
20
13
20
13
20
14
20
15
20
16
Fair Value
Fair Value S&P 500 Index
S&P 500
Fair Value Drivers
LTM EPS level
10 YRS YIELD Government Rate
GDP GROWTH (QoQ ANN, %)
UNEMPLOYMENT
CPI YOY (%)
OIL PRICE
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Sources: Amundi Asset Management, Institutional Solutions. For Illustrative purpose only.
Modelling Salary DynamicsJoining Macro and Micro Dimension
Modeling Future Salaries
MACRO DIMENSION
• trend of nominal salaries (growth) estimated on
an autoregressive component, on the increase
in prices on the real growth of the economy
MICRO DIMENSION
• three macro categories are identified:
blue-collars, white-collars and
executives/managers,
• the following equation has been estimated
for gross remuneration:
where DS indicates the vector of sector dummies
(Agriculture, Industry, Trade, Transport, Finance and
insurance, Public administration), while the
third grade polynomial is aimed at capturing the age
affect, as shown in the graph.
)1(d 41 Ardyw ttt
DSageageageRL 43 3^2^
0
5
10
15
20
25
30
35
40
45
50
20 30 40 50 60 70 80
Blue Collars White Collars Managers
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be treated confidentially. It may not be distributed by the recipient to any third party or to the public.
Bridging between DB legacy and DC future
ConclusionThink about the right retirement target
Address structural correlation between assets and individual liabilities (salaries)
Long term return opportunities with short term challenges (QEs)
Design robust default solutions where to transition members
Transitioning schema at individual level with an individual advisory planning
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05APPENDIX
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Additional Notes
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Unless otherwise stated all information contained in this document is from Amundi Asset Mangement and is as at 30 September 2017.
Past performance does not guarantee and is not indicative of future results. Unless otherwise stated, all views expressed are those of Amundi
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Date of First Use: 30 October 2017.
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