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Improving DCA risk sharing case studyLCP 19 September 2013Morten Nilsson, Chief Executive


1. Who we are?

2. Why ‘pure’ DC has a bad name in the UK

3. A case study: ATP– a ‘hybrid’ scheme from Denmark

Agenda


New independent UK multi-employer Trust Supported by ATP, Denmark’s leading pension provider.

Business segments in which we currently operate:

• Auto Enrolment solutions

• Workplace pension solutions for all employers (not AE related)

Serving several hundred thousand British workers in September 2013

45 years

+10.3% p.a. (average) for the last 10 years

4.7 mn members

c£74bn FUM

Our heritage and experience


Why does purehave such a bad name in the UK

DC ?


Contributions are generally too small

Costs have been eroding funds

Charges have been complicated

and not fully communicated

•Investment solutions and default funds have not been fit for purpose

The transition into retirement is not working:

• huge exposure to interest rate risk

• inefficient and complicated annuity market


Risk sharingA case study:ATP a hybrid Danish Scheme


Individual Savings

Labour Market Pensions

ATP Lifelong Pension

Tax Financed Basic State Pension

Pillar 1:Poverty Protection

Pillar 2:Proportional Income

Replacement

Pillar 3:Individual flexibility

ATP and the Danish Pension System


2001 2002 2009 2014

Traffic light

regulation

Market values of liabilities

Solvency 1½ Solvency II

A new paradigm


• Ageing necessitates higher returns in pension funds

• Significant regulatory changes in 2001 enhanced risk awareness 1) Mark-to-market accounting – liabilities behave like a very long bond2) ‘Minimum surplus requirement’

• Ageing plus new regulation = dilemma– “Higher returns with less risk”

• As a result, ATP began to rethink its business model

A new paradigm


Two Important Questions:Objective and risk tolerance

Objective What are you trying to achieve?

– Maximize the real value of future pensions

Risk Tolerance How much money would you risk losing?

– < 1% risk of not passing Minimum Surplus Requirement on a 3 month horizon

1 2


Incoming contributions are split in two:

1. Pension contribution (80%)• Used to buy additional deferred pension rights• The underlying discount rate is equal to the hedging rate achieved by ATP in

the market place• The discount rate is set annually ahead of the accrual

2. Bonus contribution (20%)• Allocated to ATP’s reserves• New contributions contribute to the reserves on an equal footing with old

contributions• Indexation requires reserves at a funding ratio in excess of 120 after indexation

and longevity adjustments• Longevity expectation adjusted on a yearly basis

Accrual model


ATP – A lifelong Pension Product

40 41 42 67 68 69 70 71 72 73 74 75 76 770

20

40

60

80

100

120

201020092008

Contribution in ’09Int. rate: 5.5%


Cont

ributi

ons/

pens

ions

15

27

20

Pensions



• Legislation needs to be changed

• Providers need scale

• Employers shouldn’t have a broader sponsoring role

• Be clear on whose ambition it is and who shares what risk

• How does this apply to a transient workforce

Defined Ambition in the UK


Questions?

NOW: Pensions is a UK occupational pension plan. Membership is only available through an employer. NOW: Pensions Limited, registered in England and Wales. Registered address: 3rd floor, 164 Bishopsgate, London, EC2M 4LX, UK. Our VAT number is 127894966.

This is written as a general guide only. It should not be relied upon as a substitute for specific professional advice. Please note past performance is not a guarantee of future returns.

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