SIA Monday 2nd March

[Allan Martin]

Good morning all,

 

May I start with an apology to last night’s attendees and listeners in for not making clear that my rant on DB -> DC transfers was based on my March Snippets which had been quietly posted to the SIA Dropbox earlier in the day! I do hope the new DC flexibility won’t turn into a mis-selling scandal or become a political football. The conflicts of interest, human short sightedness and greed are however potentially powerful forces. I hope you will enjoy a full, relaxed and objective read (you provide the objectivity!) of the big Snippet attached.

 

As promised to supplement the excellent paper and discussion on negative real interest rates, I also attach a copy of -

 

1.       The McKinsey Report; Debt & Not Much Deleverage - in brief and full versions. The position in China is arguably most scary.

2.       An email and link to a Baillie Gifford perspective of future returns. The cash base is not ideal and arguably confusing but the underlying message is clear and the change in the last 6 months stark.

3.       A KPMG perspective on liability hedging. This is essentially marketing material for their LDI offering and they also do an annual LDI survey (I can pass a copy to anyone interested). However with something around £0.5tn of UK DB funds now hedged this is something pension actuaries and trustees can’t ignore. Most FDs, lots of trustees, the PPF and risk management generally demands restriction of the investment down side.

 

Thanks to everyone for a most rewarding meeting.

 

Regards

 

Allan

07714 064964

www.acmca.co.uk

 

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[Patrick Kelliher]

Thanks Allan

To follow up on a point I made at the meeting, I attach a BoJ paper on the Japanese long recession, which I think is a worrying precedent. What I found particularly interesting was that despite QE expanding the narrow monetary base significantly, broader money supply growth has been anaemic with bank balance sheets shrinking and with nominal GDP growth somewhere between broad money and bank balance sheet growth (/contraction) rates - see figure 8 in particular.

On the subject of DB to DC transfers, this was a problem even before the abolition of compulsory annuitisation with many employers, egged on by their advisers, "bribing" deferred members to take a TV out despite the TV being well short of a fair value. I wrote on the implications for this for providers on my emerging risk blog recently:

http://www.crystalriskconsulting.co.uk/how-exposed-are-life-insurers-to-enhanced-transfer-value-misselling-6.html

Pension freedom will only exacerbate the problem but the problem is that thousands have already taken a TV out of a DB on poor terms and I think it is now a question of when not if a mis-selling scandal breaks. Given actuaries involvement in advising employers, setting TV rates and in helping life insurers write this business, I am sure the profession is going to suffer reputation damage.
 

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From: Allan Martin <al...@acmca.co.uk>
To: "ScotI...@googlegroups.com" <ScotI...@googlegroups.com>
Sent: Tuesday, 3 March 2015, 9:03
Subject: {Scottish Individual Actuaries} SIA Monday 2nd March

 

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Dear Allan,

Please find a link to our latest Long Term Return Expectations paper.  This note outlines the Diversified Growth team's views on the prospective long-term return outlook for a variety of asset classes, as at end December.

Long-Term Return Expectations - January 15

If you have any questions or would like to discuss our views in more detail, please do let me know.

Yours,

Chris

Chris Murphy — Director

Baillie Gifford Calton Square, 1 Greenside Row, Edinburgh EH1 3AN Direct:  +44 (0)131 275 2821 Email:   chris....@bailliegifford.com www.bailliegifford.com clients.bailliegifford.com

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