 Hey guys, it's MJ, the Student Actory and in this video, we're going to be looking at a paper that was presented in 2015. It's called Define Contribution Retirement Fund Investment Strategies, an appropriate default. And it's by Leviton and Merton. Now, we we should remember this guy because we've made a video about Colorfield and we'll see that he's one of the Actories in the Colorfield team. I think he's the guy who supported Liverpool and then RC Merton you should also realize or be familiar with that name because he's got a Nobel Prize in economics. So we're looking at two heavy giants of the financial world. I actually haven't gone through this this presentation yet. So we're actually going through it together and this is in preparation of my exam. So this should be a long video because we're going to be going through it nice and slowly and seeing what they have to say. Okay, so they started with a bit of an introduction saying prior to 1980, most of the African funds were DB. DB means Defined Benefit and now a lot of us have moved to DC, which is Defined Contribution. And the whole thing was here, the benefit was defined, which created a massive liability for the sponsoring employee. Whereas with the DC, the employee just had to define their contribution, which took away this massive liability from their point of view, put it on to the members and also put on the whole investment risk on them as well. So I mean, you can have a big discussion of which one's better and all that type of stuff. Their third point says how much evolution of investment strategies is bulls and whistles. And on a clean sheet of paper, what would a default investment strategy look like for a DC fund? And now this is a topic that's under a lot of discussion. There was someone who called something the guild plus illusion where he went against the traditional investment strategy of a defined contribution. Not only into too much now because we might see it later. I mean, how many pages is this? It's 87 pages. Okay, so this is quite long. I might break this up into a few videos. All this can just be, this can be just, yeah, a super long video. So, yeah, he reached out to Merton, who we know, yeah, there you see, Nobel Prize in 1997, works at MIT, and even at Harvard, you know, all the fancy, fancy schools in America. That's the picture of them. That's Merton and that is Sean. Cool. Still on the introduction, the paper proposes a framework for the investment strategy of a defined contribution fund and challenges the status quo. Okay, so like I said, the status quo was, I don't think I have said it yet. It's a lot of bonds when you're old and a lot of equity when you're young. That's basically it. It's a little bit more, yeah, it's this whole last stage thing. But I'm sure they'll talk about it before they start challenging it. It does so by focusing on areas of the current system that we believe need to change. Life stage investment strategies need a complete overhaul. DC is what we have. How do we use it most effectively? Okay, vehicle for retirement saving has changed, but the actual needs of members has not. And this is critical. I mean, the whole thing with defined benefit and defined contribution was that defined benefit, that there was this massive liability that the employers had to deal with with a DC fund that liability goes away from a legal point of view. But the members, I mean, it doesn't really matter if they had a DB or a DC, their liability and that is having an income in retirement stays the same. So even though the financial structures changed and the liability has switched, the liability is still there. We still need to create an income retirement for our members. And that's what it's saying here. The actual needs of members has not changed, just the vehicle. And it's interesting, I mean, from a philosophical point of view, how, I mean, the vehicles of finance and the tax incentives and all these various regulations, how they can have these unforeseen consequences. But anyway, let's keep my opinion to a minimum because there are a lot of slides that we have to get through. The purpose of retirement fund, it's the journey, not the destination. Okay, that's just a picture. Purpose of retirement fund, ultimate objective for these funds is what it has always been, exactly, okay, to provide a good retirement. If you Google good retirement, these are some of the images you will see. Okay, so I can see why it's 87 pages long. There's mainly pictures, but a good retirement, I'm probably jumping the gun. It's an income in your old age. And the idea is that you don't have to work, but you're still getting an income to meet your daily expenses. So yeah, what is a good retirement? Yeah, it's old people on yachts at beaches, golf. Yeah, looks, looks fun. A good retirement one is which the standard of living is maintained. I don't think the standard of living has to be maintained. Especially here, like it's all over the world, is you can go from a city that's got a lot of high expenses, such as Cape Town, and you could very easily move to a, like what we call the retirement villages or a little Dorpey. Dorpey is an Afrikaans word for town. Just a little town where the living expenses are actually way, way lower. And then you can still, you can have the same life, but for a much lower cost. So maintaining standard of living, it's an interesting one that they're saying there. We measure standard of living based on income and consumption. So what I'm basically saying about the whole Dorpey thing is that you might need a high salary while you live in Cape Town to meet the high city expenses. But then you need a small income if you're just living in a little town or Cape Town has got a town residence, so they say village. Where, yeah, the expenses like rent and all those type of things are much, much lower. Members are used to thinking about standard of living in terms of income. Okay, travel, living. Traditional DB funds had a specific promise. Guaranteed income at retirement. All yeah, DB, the very name says defined benefit. The benefit was defined. So an employee in a fund promising an accrual rate of 2% per year of service knew that working for 35 years would result in a 70% of their pre-retirement salary payable as their starting annual pension for life. Okay, almost every retirement system except DC expresses benefit promises in terms of income. Now that's interesting. And that's that whole, in actual we say salary linked, it's a salary linked liability. Even South Africa state old age pension is a means tested benefit that provides a monthly income. Members are used to thinking about their standard of living in terms of income. Ultimate objective of the retirement fund is to maintain the members standard of living. We submit that the appropriate objective and goal for a retirement plan is to provide members with a stream of income in retirement. And your actual bills should be going off and we know that that can be provided by an annuity product. Yay. You do get lots of different annuity products, but let me not go into it because sure they talk about it. Treating retirement account as a saving account. I think that's a very South African to do that. Yeah, an actuaries role for a DB fund include placing a value on the income stream to pensioners and commenting on the appropriateness of the investment strategy. So this is what the actuary used to do. He used to say how much of liability is worth so he would value the liabilities and he would make the investment strategy. Now, I don't think you need to value the liabilities with the DC or you don't explicitly have to do it. It's just the investment strategy. But you should still be doing this. The language of DC funds in South Africa is very different. I mean, every country's kind of got like a different terminology when it comes to pensions and retirement. Some call things master funds. Others are like super funds and you have umbrella funds and there's all this weird jargon for the various countries. So no matter where you guys are watching it, in your own country, it'll probably be a little bit different. So I'll try to explain each term as we come across them. We refer to the liability of the fund as being equal to the fund's credit balance in respect of each member. So we refer to the liability of the fund as being equal to the fund's credit balance in respect of each member. And this is the big problem I think that he has is, so DC, let's say you've saved 20 grand or $20, then your savings of that $20 because they're talking about it as a savings account, the liability is then $20. Whereas let's say if you were a defined benefit, and let's say you'd also put in just say $20. The liability here would be the income that you're going to be earning in say 30 years or whenever you're going to be retiring. So this is the big switch, which is that the liability for the fund becomes different, but the liability for the member stays the same. So that's the big, that's the thing that I'm hoping you guys are seeing here. Consider the balance sheet of the members. Assets, the fund credits, liabilities, fund credits. So yeah, let's say you put $20 in, your liability would be $20. This is for a defined contribution. I hope the next slide is something different for defined benefit. Okay, they don't. So let's just say whereas if we had said defined benefit, the asset might be 20, but the liabilities would probably be a lot higher depending, or be a lot higher to the assets depending on the age. The younger the person was, the more this liability is going to be bigger than this asset. This is the defined benefit. This is the defined contribution. Don't get the too confused. Okay, treating retirement account as a saving account, actually focus on the fund credit balance. Trustees and members of focus on the fund credit balance. Regulator focuses on the fund credit balance. Focusing on the fund credit balance is an entrenched practice. The fund credit, the fund credit, the fund credit. Members talk from a very early age stage to treat their DC savings like a bank account and focus on investment performance, which I think he's going to say is wrong. Okay. Unfortunately it wasn't at this convention, so I couldn't hear how they was going through it. Aim for the moon that way even if you must you'll be among the stars. This kind of sums up the DC strategy. Whereas instead you should be saying well what income do I need to achieve and then tweaking your investments likewise towards that, either becoming more aggressive or being more passive. But anyway, jumping the gun again. The actuarial risk. Okay. The objective of an investment strategy. Maximize expected return subject to minimizing risk. Yes. Thank you. Finally asks this question, what is risk? And I know I posted a video a few days ago saying what was the big problem with the mean variance portfolio theory. And you guys came up with some good answers. Some good answers, they were valid, but this is what I was looking for, is that that mean variance portfolio theory defines variance as risk. And that is not the case. Not the case, especially it's not the actuarial risk or it's not the risk when it comes to retirement. You cannot define risk without reference to the liabilities. Thank you. Thank you. Thank you. Okay. So we are answering that question from the video a few weeks ago. That is huge. So if you're an actuary you should be like that makes so much sense. That's the whole thing is risk is not meeting your liability. And you can define liability in a wider range of things. But that's what we mean by risk. Yes. Okay. Thankfully somebody said it. Thankfully somebody has said it. In other words the individual members target income at retirement. So the risk is them not hitting their targeted income. And that makes sense. It's a big risk if you don't have enough money at the end of your working career and you can't feed yourself. Better than say variance which just means you know how volatile something is because remember variance also captures upwards stuff. And you don't mind that. It's just the downside that you don't want. And you also don't want that if that just is going to reduce your target income. Anyway let's stick to the slides. Meaningful and important information. It's important to distinguish between important and meaningful information. What do we think is important? And what do we think is meaningful information? Let's see. Poll question. You received your annual fund statement and it shows that your accumulated fund credit is one million. Okay. That's around it's just just under a hundred thousand dollars. Okay. Credit is one million based on this information. You have no idea what level of income you'll likely receive in retirement. That is true. You have some idea what level of income you'll receive but not enough confidence to make any big decisions without getting more advice information. You have a very good idea what level of income you'll likely receive in retirement. Woohoo. One million. Okay. So they're asking us a question. Poll question. Okay. So this is the question. You have a million bucks or a hundred thousand dollars. Based on this information what is all I kind of gave away because I think number one is well it's my answer. You actually have no idea what level of income you'll likely receive in retirement. The reason I'm saying that is because of interest rates. Okay. This is I'm going for one. I haven't seen this thing. Yeah. Although for woohoo one million ran. That's a bit of a weird one. You have a very good idea what level income you'll likely receive. Yeah. I don't think you can do these two. I think it's one. Let's see what the answer is. Oh no. Maybe he just gives the answer in the actual presentation. He doesn't actually tell us the answer in the slides. Well let's see. Important distinguish between important and meaningful information. We provide members with fund credit and investment return. What do we expect them to do with it? Oh I think they're saying that this is yes because interest rates. Is he going to talk about interest rates? Interest rates are very, very, very, very, very important when it comes to annuities. But let's see. I'm jumping in the gun. Yeah. Providing members with meaningful information. Lindiware age 55 receives a statement and it reveals an accumulated balance of one million. Okay. Normal retirement age at 65. She believes she is on track for a great retirement. Largely based on the perception that one million ran is a lot of money. I actually think a million ran. It is a lot of money but in retirement I don't think it's going to get you a meaningful income when you've got quite a high longevity at 65. Well let's see. Let's see what they say. Okay. One million dollars. Little, yeah. The reality is that knowing her account balance provides Lindiware with no insight. There we go. With no insight into her likely standard of living in retirement. Remember I jumped the gun, interest rates. This is the standard market practice. We might actually be encouraging undesirable member behavior. So this is, I guess this is a big problem in the retirement world. There's people like, I've got a million bucks. Ooh, I'm going to live an awesome life. But like we say, a million bucks is basically telling you nothing about the standard of living which as we've defined is your proper liability that you need to sort out. Okay. DC members do have a liability. The provision of an income that will allow the member to have a reasonable standard of living in retirement. It should increase annually with inflation and payable for as long as the member is allowed. So this is known as inflation risk. It's something that some of the early defined benefit funds didn't do. And especially in a period of high inflation, it didn't mess up a lot of people. However, inflation is kind of under control today. So this isn't too much of a problem. The big one now is longevity risk. And this is the fact that people are not dying. We are staying super old and getting lots and lots of gray hair. And longevity risk is actually becoming quite a big problem for society because it means our pensions that we were saving were not enough. Okay. 26. DC members do have a liability and inflation-linked annuity issued by an insurer is the only financial product that mitigates the three key risks present present after retirement, ignoring credit risk. Okay. And inflation-linked annuity. Okay. Because that will take care of inflation. Issued by an insurer. So by saying an insurer, he's implying that there is a bit of a guarantee in there which will take away investment risk. And also the guarantee will take away longevity risk. An appropriate default. Okay. Appropriate risk-free assets. Liability has a market value that can be determined with reference to the cost of an inflation-linked annuity provided by an insurer. Okay. So that's how they're saying how we should value the liability by the inflation-linked annuity. A key feature on the South African market is the ability to purchase inflation-linked annuities from an insurer. Okay. So we could buy these things. These things actually exist, which is great. Suppose a member retires at the end of 2009, age of 65. She requires 6,500 a month for life increasing with inflation based on the prevailing real rate. The cost of securing this income stream was approximately one million. Our member's liability to receive 65,000 per month was the success at approximately one million at the date of retirement. And that's the whole thing. This is what we need to see. We need to be knowing this amount. Okay. We need to know that amount before this amount becomes... We've been given this amount, but we need to know this amount. We need to know if this amount is enough to cover that. Can we convert our lump sum into a stream of payments? That's the whole big question. Okay. At the end of 2009, one million fund credit should be used to purchase 65,000 in inflation-linked income. Okay. Which is interesting. So now we're talking about the investment strategy. If we've got enough money, let's go in and match our position. As at the end of 2014, this had reduced to... Oh, this has reduced in inflation-linked money income. Wow. Why did that decrease? Credit fund should be used to purchase. This has reduced of almost 30%. This ignores the inflation difference. Now, I don't know what's saying deteriorated their need or the one million. The one million or the requirement deterioration of almost 30%. I think they're talking about the one million. Let's see. Oh, no, no. It's saying monthly income is volatile depending on point of retirement. Okay. Oh, no, no, no, no, no, no. What this is saying is that with one million rend, you could get that much money in 2009. But in 2014, that amount has decreased. Okay. Monthly income is volatile depending on the point of retirement. Okay. Let's see. It's probably going to tell us why. Probably about interest. Retirement objective thus cannot be met by setting a fund credit threshold as an objective or goal. Okay. I understand. What they're saying is the fund credit, okay, the fund credit, which was the one million rend that should not be the objective or the goal. The objective or the goal should be the initial monthly pension. And we can see how this changes. If in five years it's deteriorating, we need our one million to increase. By establishing an inflation-linked income goal as the retirement objective, inflation-linked instruments become the basis for the member's risk-free asset. Okay. So inflation-linked. Currently, no widely available deferred inflation-linked annuities available. Ooh, that's interesting. That's interesting that no one has made that thing yet. Good exam question. Why haven't they made that yet or how would you make one of those? Possible to create a replicating portfolio using inflation-linked bonds. Each member theoretically has their own risk-free portfolio, which will change through time. Suppose Robert is one year from retirement. I'm sure they made that as a joke. From retirement and has sufficient assets to purchase their required income stream of 10,000 rend with contributions. In DB terms, they are 100% funded. Liability is the cost of purchasing a deferred inflation-linked annuity at retirement. Ooh, cash is not the risk-free asset. Because what risk does cash take into consideration? Inflation can reduce cash as purchasing power. Consider three investment strategies in the year prior to retirement. A dedicated money market fund. That's the short-term effective interest rate thingy. A nominal bond. That's the all bond index. And a bespoke inflation is bespoke. I love that word bespoke. Basically it means custom or tailored. A bespoke inflation-linked bond portfolio. So that should be like your benchmark or your risk-free asset. What was with that? Okay, cash is not the risk-free asset. Here we go. Percentage of time where income fell below 10% real, 60%. Minimum real income. They're just showing how bad those other two were. Tracking error. They're just showing how terrible it was. Cash is not the risk-free asset. Nominal fixed income does not track the income promised at retirement. A bespoke inflation-linked bond portfolio is the risk-free asset and provides the appropriate hedge. So that is the whole thing. I did read an article on Colourfield's website where he kind of explained this in very short words, but it's quite cool going through his actual thing. So I'm just having a sip of coffee. We've been talking for a while. So this is my little mini coffee break. Okay, we're back at it. Even though deferred inflation-linked annuity cannot be purchased, it is still possible to hedge the price change of one. Okay, so that's the whole thing. It's that we want to hedge the price change. And I think we're finally going to get to this whole interest rate sensitivity thing. Why is there all these blank pages here? Life-Stage framework, allocate to cash or nominal bonds, especially in the phase down period. Implicit is that we are either focusing on front credit or that we are targeting a level in utility in retirement. Okay, let's talk about inflation as the silent assassin. Inflation was devastating back in the day, but I guess that's because still we have higher inflation than what you're experiencing in the UK and the US. So it is still a bit of a little killer. But the whole idea here is that, or what they're trying to point out, and this is the whole crux of it, is that in the last stage, the theory says, ooh, someone's getting really close to retirement. Let's be safe. So we're going to be safe by going into cash or nominal bonds. Meanwhile, these guys are saying, well, no, if you want to be safe, you want to go into the risk-free asset, which is inflation-linked bonds. Because inflation-linked bonds are the best match for the annuity, and the annuity is your liability. Cash and bonds are a great risk-free asset if you don't want your asset to go down in value. They're a great protection for capital preservation, which is what they're saying here. Focusing on the fund credit, your risk is that this amount goes down. We don't care if the annuity, and this is the thing, this annuity price can either go up or down. What we want to do is we want to follow it if it goes up and we want to follow it if it goes down. We want to match it. We don't really care too much if our fund credit goes up or down. We want to match the annuity, because the annuity is our liability. It's more of a philosophical thing that you need to focus on. We're halfway through the presentation thing. Human capital. Investment strategies should incorporate another important asset on the individual member. Their human capital. Future contributions that are expected to be made by the member towards retirement provisions. Okay, this is new. Haven't heard this stuff before. Human capital is the largest single asset most members will have for a significant part of their life before retirement. The large human capital component for youth members is the main justification for a high equity allocation. Okay, I think what they mean by human capital is the future earnings potential, I think. The large human capital component for, for a high equity allocation. Lifestate strategy does not take human capital into account and motivates high equity exposure on the basis that SD of return reduces, oh, standard deviation. I should know that. Standard deviation of return reduces through time. So there's a whole paper written that equity is very volatile in the short term, but not so much in the long term. Okay, consider the balance sheet of the member. Fund credit, fund credit, which is, remember, like we said, it's not that. It is the annuity which shows the income. Oh, there, there, I think they fixed it for us. That's the, okay, that's what people think it is. So this is, this is wrong, this is wrong. Okay, this is right. Assets, they've got the fund credit, amount that they've saved. They've got their human capital, the amount that they can still earn and their liabilities, their acquired income at retirement. Providing members with meaningful information. Supposedly Ndewey instead received a statement from her DC fund that showed her the following. Accumulated savings expect to generate 61,000 grand per month. Future contributions towards retirement savings to generate 1,100 per month. She is therefore on track to receive 7,200 a month. Increase annually with inflation for life. And this is one of the most beautiful things I've actually ever seen. Look how beautiful that is. That I think if you just copied and pasted that into whatever actual exam you're writing, the examiner will be like, oh my gosh, this is amazing and give you 100%. This is great. This talks about what she's currently going to be getting, what she can potentially get and what she's most reasonably going to be getting in the future. You know what she's on track for, what she's currently got and what her future expectations are. I love this. This is yay. This makes me happy. Okay. We're on page 47. Providing members with meaningful information. Calculations required for the statement can easily be done by act trees. Calculation required for the statement. Yeah, it can ease. I mean you can get a little computer program to do this. They are transparent, objective and market consistent. The nature of the statement has dramatically changed from referring to a pot of money. Remember back in the day, before we saw this, before we saw this, Lindy Ware saw one million ran. She was probably thinking, oh, I can go and buy a Porsche. You know, a Porsche Boxster. Now she's looking at this and she's like, yeah, I can actually, this makes sense to me. My current income is this, my expenses, my rent. Yeah, this is actually going to be good. Is 7,200 fine? Do I need to up up my earnings? Should I do this? You know, she can make more informed decision with this than with one million ran. Okay. Calculations required, yeah, easy done, pot of money to likely stream. That is it. That is the crux of this video is that instead of telling the members, this is the pot of money you're going to get, rather tell them this is the stream of real retirement income that you're going to get because this is their liability. This, this isn't. Okay. Do not require a significant education exercise on the part of the trustee and the fund or the employer. And the whole thing is their job. This is kinda simple, simple. Okay. Appropriate income goal, the replacement ratio objective. Replacement ratio, this is talking about salaries. Important for trustees to measure to set a default income goal for each member of the retirement fund. This objective will define the liabilities in our framework. We advocate the replacement ratio measure to express the income objective. Okay. Some problems with how this is done in practice. Replacement ratio targets simplified to targeting a real return or market benchmark. What does outperformance of the SWIX or CPR plus 5% mean? Exactly. I hate that as a benchmark. It's a terrible benchmark. What good is beating the benchmark if you don't reach your goals? Exactly, exactly. You know how many asset managers have got these weird benchmarks that people don't really care? Well, they don't care. Well, they don't know that they shouldn't care about something like that. Sneaky finance. Essential that an appropriate replacement ratio is targeted should be customized in a predefined way for each individual member. How are they going to customize it in a predefined way? Suppose the trustee decided a replacement ratio target for a member 35 years in the fund and retired the normal retirement age. I'll let you look at that slide and I'll have another sip of my coffee. Determining an appropriate replacement ratio target. Most common request is for the replacement ratio target to equal 100%. Okay, so people want to they're like, I'm busy working. I'm getting paid, you know, 30,000 a month. I want to retire and continue earning 30,000 a month. I don't think you don't need 30,000 a month. You don't need 100%. Many reasons why standard living can be maintained with lower, yes. The member is no longer saving for retirement. Exactly. When you're getting 30,000 a month, remember that 3,000 of that was going into the pension, which means straight away, let's say if you're if you're earning 30,000 and 3,000 is going towards the saving, straight away, you've been living of 27,000. So straight away, that's 90%. We've already taken away 10%. Because you no longer have that expense. The taxation retirement is lower than that prior to retirement. Oh, that's also a big one. Big one. Okay. So no longer saving. So again, we can take off probably, depending on the tax bracket, that could be huge. There are lower costs. Okay. Like I said, living, you know, and also when you're old, you're probably not going to nightclubs and buying rounds of drinks for everybody in the bar. So you can, you can reduce this quite drastically. They say, I have seen 80% before, but 65 to 75% sounds, sounds decent. Optimus 75% for married. Oh, look, lower for singles. Stay single people. Government objective 75% for individuals retiring at age 65 with the possibility of a lower percentage applying at higher income levels. Okay. I want to know some of my coffee. Sorry. My voice, my voice is, I've been talking for way too long. Okay. And the current conditions, we believe that government's objective is unlikely to be achieved. Ooh, they're saying that wrong. Has the government ever been wrong before? Misconceptions. Yeah, they probably spoke about a lot of them. Acknowledgement that things change. I have no idea where, where this is, this picture comes from. Clean sheet of paper. What is an achievable target? Key assumptions, contribution rate, working lifetime, investment return, annuity purchased at retirement. Contribution rate. The contribution rate is normally set for the rules of the fund. National treasury state that is reasonable to be 10%. The Alexander Forbes benefit parameter showed a range of contribution rates in the private sector towards retirement saving depending on industry. This range was between 12.1% and 15%. I think 10%. Well, it's weird because what percentage is coming from you? What percentage is coming from the employer? Are you joining these two together? Investment return assumption. Maximum expected real return per annum that can be expected of the working lifetime is full. That's a real return. I wonder if that's still 4.67%. That is inflation as a 6%. That's kind of like 10.6%. I don't know. I don't know. It's difficult to say that. I think that's a little bit too high. Although they are saying maximum. Okay. Sorry, they are saying maximum per annum. Average real rate of return is 2% on the indexed bonds. Assume an expected rate of ERP. What is ERP? I don't know what ERP of 3% or maybe that's the expected real return. Inflation risk premium 0.5%. Expected return of equities approximately 5.5%. 75% maximum inequities of that equals fees. That's going to reduce that. Cost of a new tier of retirement. Assume a new tier of retirement is inflation linked. Why? Because that is the least risky. Remember, you're old. You don't want to take risk. Risks for young people. Contribution rate of 12.5% and a real return of 5% over 35 years is an expected replacement ratio of only 54%. They only hit 75 and contribution of 12.5% and a real return. Oh, gosh, that is shocking. That is shocking. If this increases to 15% towards retirement, the rate of return is 65%. So even if you like at the max, gosh, remuneration structure is an important consideration. I don't know what TC-TC means. Essential that each fund does analysis based on their fund's circumstances. I have no idea what this picture is doing here. Prevailing yields on inflation-linked bonds have fallen. Real yields for the R202 has fallen from a level of 3.5% to 2% over 10 years. Important to reflect market consistent expectations. A fall in 1.5% in expected return over 10 years, people are living longer. So these are things that are hurting you. The fact that you're living longer means you're going to be getting less money at retirement because think paying someone for 20 years or paying someone for 10 years, you can see the cost of that annuity does vary a bit. Default investment strategy. Default investment strategy is crucial. Why is it crucial? Because people don't like making choices. So the default is when they have all these choices A, B, C, D, E, F and you're like, I don't want to choose. That's when you go to default. Draft regulation contemplates a default investment strategy. This is very topical at the moment. I know they have released the second draft. Most members stay in the default. 85% AF. I don't think that means what we think it means. Participation, members trust their employees and trustees. An engaged member. I don't get what these pictures are for. Individual members asset allocation to two board portfolio types, the risk-free portfolio or the growth portfolio, liability, outperformance, that. Individual members asset allocated to two broad portfolio types, oh, two broad portfolio types, risk-free and growth. Allocation between portfolios will change throughout time to optimize the likelihood of choosing an income goal. In theory, an individual with sufficient assets to achieve the income goal will be allocated mainly to the risk-free portfolio. Risk is a tool used to achieve the goal. The current life-stage approach has no feedback mechanism to whether a member is on course. That is such a nice thing to say in the exam. That will get you another mark. I must remember that. Change in asset allocation not based mechanically on age. Portfolio allocation will change through time for market-related and individual reasons. Market-related reasons change in the value of accumulated funds and change in the real interest rates there. We're finally seeing we're talking about the interest rates. Individual change in salary, oh, yeah, change in contribution rate, change in income goal, change in retirement day. This is actually this is such good stuff for the financial exam. I'm just drawing like a big a big purple block around it. I need to come back and, yeah, make some study notes on this stuff. This is good stuff. Most members unengaged when joining a fund. At some point, members will become engaged. When they mean engaged, I don't know what they mean. Important that a member is able to appropriately engage with their retirement. I think engage as in they become like a whale or they just stop considering it. No one engages in that they're joining the fund. Is able to appropriately engage with their retirement provisions. Well, trustees will be unable to specify a specific rent pension amount on behalf of their members. The framework can allow for individuals to select an explicit pension amount when they engage and able to specify it. Well, trustees unable to specify a specific rent amount. Okay, let's see if they give an example of that. Here we go. Lindiwe statement revealed she was on track for an income of 7200 per month. Only Lindiwe can determine if this will be sufficient. Ooh, that's actually very, very important. Why? Because Lindiwe knows her expenses. It'll be a little bit stalker stalker if the trustees knew Lindiwe was going to be spending her money on. Okay, so that's also very, very important. Lindiwe only has three options retirement income, contribute more, retire later, take more investment risk. Cool, those are all great points, but let's let's soldier ahead. We almost at the end of this thing. I don't know if anybody is still watching this video. Probably, probably like just two people, but I'm going to I'm going to finish it for those two people. Default investment strategy with the engaged member. Supposed investment statement presented with the following information, impact of contributing more, impact of changing retirement age. Oh, I think the investment statement should be presented with these extra things just to help people make a better choice. You know, you don't want someone who's an old granny and she's all poor and she's like, nobody told me, nobody told me to contribute more. Well, these guys are saying that they should, they should tell people earlier. I think that's that's a great idea. Another thing that makes me happy. Okay. Supposed Lindiwe was 100% funded largely allocate to risk-free portfolio. Okay. So if Lindiwe is like 7,200 is cool. Remember, only Lindiwe can make that statement. Then you go into the risk-free portfolio. You kind of say, thanks guys. Let's tap out. We've got what we want. Let's match. Okay. Oh, Lindiwe can be like, you know what? When I'm retired, I want to travel a little bit more. I want to go see those movies that all the kids are talking about. And, you know, spend some money on those little boosters. So she might say, I should need a little bit of more money in retirement because I want to enjoy life. Then it's only at 90%, which means she needs to maybe, the only way she's going to get this 8,000 is if she takes on either investment risk in this case, or if she contributes more. Or, like we saw in the last thing, if she retires later. Oh my gosh, look how bad my handwriting is becoming. Alternative annuity types proposed framework can equally be applied to different default annuity types that might be deemed appropriate in retirement. We submit inflation-linked annuities as the risk-free option for an individual member because it removes inflation, investment and eligibility risk, yes. These things called living annuities, they're not great for the general population. They're like, maybe if you're like super wealthy, but other than that, an inflation-linked annuity, inflation-linked guaranteed annuity, I should say, is the better one. Okay, that's another great picture. DC members do have a liability. Inflation-linked annuity is the risk-free. Okay, they've said that 100 times, but they're probably going to say it 100 times more because that is how important that piece of information is. Inflation-linked annuities default option of retirement does not imply that selecting the risk-free choice is the most appropriate option for the member. Okay, without further member-specific knowledge, the inflation-linked annuity is an appropriate default option at retirement. Okay. Trustees, on the advice of their consultants or activities, might elect a different annuity type as a default in retirement. A different annuity type will have implications for the risk-free asset in the framework. So if they change it from inflation, then all the stuff we've been talking about also needs to be changed. Other annuity types of products might have a highest starting pension. For example, this living annuity. But the problem with the living annuity is it doesn't consider the longevity risk. Yeah, exposes members to one or more of the risks. So they look better. You think you can go to the shops and one guy's like, you know, Lindy Ware, we can give you 8,000 around a month. Okay. Guaranteed, when you die, we'll keep paying it for inflation. It's lovely. Or, so that's the 8,000 round one offered by the good guys or the bad guys come and be like, yo, Lindy Ware, we can give you 10,000 around a month. 10,000 around a month, you can, you can down the Candy Crush and Clash of Clans. You can travel to, you know, Mauritius, Andrew Wonder. You can do so much more. We're going to give you so much more. Remember, these things will both cost, say, the one million that you bought. And indeed, we might be like, wow, 10,000 certainly sounds better than 8,000. And meh, let me maybe take on longevity risk, inflation risk and investment risk. And as an actuary, as a trustee, you need to warn her that, you know, this looks good in the beginning, but it's not probably the best in the ending. As Shakespeare's just saying, what's foul is fair and what is fair is foul. And I can consider to these two different annuities. And this is where the trustees and the actaries need to come in and just help people with education and informing them with their decision. Yeah, LA, that stands, well, not Los Angeles, but this living annuity thing. LA popularity, not an argument for using it as part of a default investment strategy at retirement. So the big thing is like, oh, but living annuities are so popular, we should just use them as an actuary. The annuities were great and the actaries just like attacked this paper that she wrote. She like, it was someone, I think, from Stellenbosch, she wrote this whole thing, you know, oh, living annuities are great. And these actaries just like ripped it apart. They're like, oh, you didn't consider longevity, oh, but this assumption's wrong, oh, and yeah, it was quite violent. Anyway, the policy fund is to provide a good standard of living in retirement. Can we all agree with that? We want to have a good standard of living in retirement. It can be achieved by providing a stream of inflation linked income in retirement for as long as the member is alive. There is therefore an implicit liability that can be calculated for each member, not the fund credit. Okay. Great. Income target should be expressed at a replacement ratio that should ensure that the target is appropriate and achievable. Remember, government is kind of saying 75%. These guys are showing that the study that it's probably more likely 65%. Ad hoc rules of thumb and all the targets are likely to no longer be appropriate. The target should also be adjusted at a member level to recognize their expected time in the fund. So member level, not at a scheme level. Implicit for the risk-free assets, which is an appropriate structured inflation-linked bond portfolio whose value will track the change in the cost of a notional deferred inflation-linked annuity. Risk-free in this context is not cash or nominal bonds. Remember, cash, nominal bonds don't take consider inflation or longevity. Okay. By incorporating a member's human capital, that's their futures to earn, it's possible to determine whether the member is on track to meet the income needs in retirement. Possible to select a portfolio of assets that maximizes the likelihood of achieving a given level of real-time retirement. This does not require member intervention and will be done automatically. Need to distinguish between providing important information, which is the one million round, and the meaningful information, how much money this is actually going to turn into as a stream for your future. This stage approach in widespread use today fails to meet many of the design criteria put forward. So we're seeing these guys also shitting down on the last stage that the Guildpath illusion also shucked life stage. So all the people who've learned that life stage is a good thing, oh, you learned the wrong thing. Okay, I'm getting carried away. In South Africa, we have the tools required to make substantial changes to retirement provision, draft retirement default regulation provides a unique opportunity. Okay. So in South Africa, we're busy making rules about this. So as actuaries, we can come in and save the day. We are uniquely placed to lead this. And I think this is the end of the presentation. There we go. Those are their details. And thank you so much guys for watching. We made it to probably probably one of you, one of you made it to the end just. So if you made it to the end, please comment say I made it to the end. Okay, comment, let me know if you made it to the end. I don't think anybody did because it's YouTube and people don't like superlog videos like this one. But thanks so much for watching and feel free to have any comments in the comment section below. Cheers guys.