RETHINKING DISTRIBUTION

tax treatment for pension plans. Alternatively, mandatory plans, similar to the Australian Superannuation scheme, may be introduced. Overall, the awareness of individual investors regarding the inoperability of the pay-as-you-go system in the long-term is slowly increasing, especially ‘Generation Y’ (those deemed to have been born sometime between the late Seventies and the late Nineties) who will be more likely to invest earlier for the long-term. Either way, private schemes are forecast to grow, albeit at gradual pace and in response to public policy. Risks will be transferred to sponsors of pension vehicles With the withdrawal of the state from retirement funding, the obvious question is raised as to who will accept the future risks of providing for retiree income when the state will no longer do so. As it seems unlikely that individual investors will be left alone to bear the risk of their long-term savings, only the private sector is left. While we strongly believe that the asset management industry may have a critical role to play in the area, the extent of the opportunity will be based on a number of factors described below. Partner with insurance companies to develop tailor-made products embedded in insurance wrappers When considering the risk of decreasing assets (given that investment is mainly held by people near retirement age), the asset management industry needs to consider how they can gain in amarket whichwill shift to providing future retirees with investment solutions. However, when it comes to retirement products, the asset management industry is not currently equipped to endorse the inherent risks of the decumulation What will be the key implications?

phase. To do so may impose on asset managers similar capital requirements now required in the insurance industry. Instead, an alternative is for the asset management industry to combine its expertise with that of the insurance industry to offer more long-term, guaranteed (capital and annuities) solutions and outcome-oriented products. Adapt pricing (low margins) required for long term savings products Retirement planning is widely recognised as the most vital long-term savings need of all working age individuals, due to the changing demographics described previously in our key drivers. As a consequence, to support the growth of voluntary savings within pension vehicles, it is important for sponsors of pension funds to be able to benefit from a scale of economy whereby lowmargins can be applied to high volume products. How this should be specifically accomplished is a matter of debate, but it seems clear that continuing government incentives or regulationwill formpart of the solution. Regardless of how the volume is reached, it will assist in competitive pricing and potentially an attractive and innovative fee-structure. Regarding innovation in the fee structure, in our previous report published in 2009:“Ideal Fund - Reengineering the fund value proposition”one of our recommendations was the introduction of an ‘objective fee’. As the goal of pension vehicles is to meet the investor‘s financial objectives (i.e. providing investors with capital at the retirement age rather than to adhere to a fixed strategy), it was suggested that fees for retirement products be linked to the risk/return objectives within the investor’s timeframe. This is intended to align the investor and asset managers’goals, andwould differ fromperformance fees which are based on outperforming a certain level of return.

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