Investment Strategy Webinar

Transcription

1 Investment Strategy Webinar May 16, 2012 Conference Call Information: (877) / (201)

2 Presenters Michelle LaPlante, Partner Phone: Alan Parikh, Partner Phone: Colin Robertson, Principal, Global Head of Asset Allocation Phone: colin.robertson@aonhewitt.com Mary Bates, Senior Consultant Phone: mary.bates@aonhewitt.com 2

3 Discussion Topics Hewitt EnnisKnupp 2012 Client Conference Preview Market Update and Outlook Complex Credit Opportunities Lump Sum Payouts: Strategic and Liquidity Issues Brief Q&A following each session 3

4 Medium Term Views Colin Robertson

5 U.S. Relatively Steady at Moderate Pace, China Slowing 60% 50% 40% 30% 20% 10% ISM Index 0% 30 May-10 Nov-10 May-11 Nov-11 US Year ISM on (RHS) year change in Chinese industrial production (3 month moving average, LHS) Year US ISM on (RHS) year change in Chinese industrial production (3 month moving average, LHS) Source: Datastream, Bloomberg 5 5

6 Eurozone in Trouble Austerity vs Growth Grexit Sovereign vs Banking Crisis Vicious circle in Spain? 120, ,000 80,000 60,000 40,000 How house building collapsed in Spain Housing approvals 6 month moving average Structural issues mean ongoing problems 20, Source: Datastream 6

7 Bond Markets: Short Term vs. Longer Term Factors Short term Longer term Financial repression No Japanese style deflation Near zero short term interest rates Extreme valuations Safe haven flows Huge debt issuance 7

8 End of a 30 Year Secular Ball Market? US 30 year Treasury yield 16% 14% 12% 10% 8% 6% 4% 2% Source: Datastream

9 Selected Medium Term Views May 2012 Very Unfavorable Unfavorable Neutral Favorable Very Favorable U.S. Equity Non-U.S. Equity Global Bonds Bank Loans High Yield Real Estate Hedge Funds ¹ Commodities ACTIONS TO CONSIDER WITHIN STRATEGIC FRAMEWORK SELL CONSIDER SELLING / DELAY PURCHASES HOLD CONSIDER BUYING / DELAY SALES BUY 9

10 Question & Answer Questions may be submitted at any time during the web seminar by typing the question in the "Ask a Question" text field and clicking "Submit." Questions will be answered live as time permits during the question and answer sessions. 10

11 Lump Sum Payouts: Strategic and Liquidity Issues Alan Parikh

12 About This Material On April 27, 2012, Ford Motor Company announced its plans to offer lump sum payments to 90,000 salaried retired and terminated vested plan participants. This material provides a summary of relevant public information for Ford s pension plan as well as a summary of Ford s recent announcements of their long-term strategy to derisk their funded pension plans, including the lump sum offering recently announced. This material also provides a high-level discussion of the potential benefits and issues to consider associated with the offering of lump sums to retirees. In addition, a one-hour webinar devoted to this topic was delivered by Aon Hewitt consultants on May 3. For a recording, please go to the following URL: For a more detailed discussion of the important investment, compliance and administrative issues raised by such a program, please contact your HEK or Aon Hewitt consultant. 12

13 Ford Motor Company High Level Pension Summary Source: Ford Motor 2011 Fiscal Year 10-K Ford sponsors numerous pension plans around the world Funded Position at December 31, 2011 $billions U.S. Plans Non-U.S. Plans Total Obligations $ 48.8 $ 25.2 $ 74.0 Assets Deficit $ (9.4) $ (6.0) $ (15.4) Expect to pay out $3.5B in benefit payments for U.S. Plans in 2012 December 31, 2011 actual asset allocation U.S. Plans Non-U.S. Plans Total Fixed Income $ 22.1 $ 7.8 $ 29.9 Equities Alternatives Other (1.3)

14 Ford Motor Company High Level Pension Summary Source: Ford Motor Company General Retirement Plan Form 5500 (DOL Website) General Retirement Plan generally covers non-bargained participants hired prior to December 31, 2003 Summary of participant counts and IRS Funding Target from 2010 Form 5500 Schedule SB Count Funding Target ($millions) Actives 23,256 2,582 Terminated Vesteds 33, Retirees 66,788 13,581 Total 123,221 17,023 Potential PBGC flat-rate premium savings of $1.2 million per year if 100% of terminated vested participants elect lump sum and $2.3 million per year if 100% of retired participants elect lump sum 14

15 Ford Pension De-Risking Source: Ford Motor Investor Presentations In early 2012, Ford announced long-term strategy to de-risk funded pension plans Reduces balance sheet and cash flow volatility Improves risk profile of company Key elements of strategy Limit liability growth Many plans have been closed to new entrants Lump sum payment option at retirement for U.S. retirees Discretionary cash contributions Better match plan assets to plan obligations Rebalance assets as funded status improves From: 45% Fixed Income, 30% Equity, 25% Alternative Investments To: 80% Fixed Income, 20% Growth Assets (primarily alternative investments) Other actions under development 15

16 Ford Pension De-Risking Source: Ford Motor Earnings Release and Conference Call In first quarter earnings release on April 27, 2012, Ford announced that it will offer to about 90,000 eligible U.S. salaried retirees and U.S. salaried former employees the option to receive a voluntary lump-sum pension payment In addition to the recently added lump sum payment option available to U.S. salaried future retirees as of July 1, 2012 The lump-sum offering will reduce our pension obligations and balance sheet volatility as part of an effort to continue to improve the underlying strength of our balance sheet In verbal comments made on the April 27 earnings call, Bob Shanks, Ford CFO notes: In terms of financial impact in the company, we expect minimal impact on operating income. We expect to incur noncash special item charges, reflecting the accelerated recognition of unamortized losses. There will be no impact to company cash as payments will be funded from plan assets, and we do not expect planned company contributions to our funded plans to be affected Analyst questions during call focused on interest rates used to determine lump sums and the potential to extend this to union groups 16

17 Ford Pension De-Risking Source: Ford Motor Earnings Release and Conference Call Other details about lump sum offering (taken from April 27 Press Release and comments made during April 27 earnings call) The program provides participants with a one-time choice Individual offers will be made over time to accommodate the size and complexity of this program Expect to complete the program sometime next year (2013) This is the first time a program of this type and magnitude has been offered by a U.S. company for ongoing pension plans 17

18 Why are Lump Sums a Hot Topic in 2012? The Pension Protection Act (PPA) eliminated the subsidy inherent in lump sum payments from pension plans PPA replaced a U.S. Treasury Rate with a corporate bond rate as the minimum basis for determining lump sums, with full phase-in achieved in 2012 Before PPA PPA 2012 and Later 30-year Treasury Rates Corporate Bond Rates This would appear to allow sponsors to effectively lock in a no-risk return equal to the yield on high-quality investment grade credit bonds a return that ordinarily carries a non-negligible amount of credit risk This benefit needs to be weighed against adverse selection costs and other planspecific factors that can more than offset the value of this benefit HEK consultants work with Aon Hewitt actuaries to evaluate these tradeoffs for clients who are exploring this opportunity 18

19 Should We Offer Lump Sums to Retirees? Pro Conversations with IRS indicate this strategy may be available to a significant number of plan sponsors Con At the moment, it appears that many plans may not be able to pursue this strategy due to plan-specific factors Offers participants choice and access to benefits earlier Will participants manage their own investments appropriately? Reduces PBGC premiums How will investors react to large settlement charges? Settles obligations at value close to actuarial liability May increase deficit if plan is not well funded Limits future risk exposure Reduces ongoing administrative costs Are interest rates at a bottom? Adverse selection costs are likely, especially at higher retiree ages and at acceptance rates in the 30%-60% range Reduced administration in future plan termination Executing program requires significant planning, clear communication, and close coordination between administrative, compliance, and investment activities 19

20 Question & Answer Questions may be submitted at any time during the web seminar by typing the question in the "Ask a Question" text field and clicking "Submit." Questions will be answered live as time permits during the question and answer sessions. 20

21 Complex Credit Opportunities Mary Bates

22 Corporate credit HAS been the place to be Prospective returns for traditional fixed income, including High Yield, are likely going to be lower -- as yields are low and interest rates likely will not trend further downward. But significant opportunities in alternative complex credit exist and we believe they represent some of the most compelling opportunities in the market today. Difficult to source Less Liquid Regulation Structuring Expertise 22

23 Complex Credit Opportunities - Overview European Credit Mortgage Credit Corporate Credit Current Opportunities in Alternative Complex Credit Regulatory Capital Relief Trades. Potential distressed opportunity as European banks must improve their balance sheets (likely through the sale of assets) to meet new regulatory requirements. Size of the opportunity estimated to be 2 trillion Euro. Timing uncertain. Middle Market Lending. Access to capital remains constrained for middle market companies, presenting opportunities for financial restructuring and/or liquidity providers. Default rates for middle market companies are significantly higher than large cap companies. Mortgage Credit. Distressed opportunity focused on non-agency residential mortgages. Dwindling supply as no new paper is being issued. Structured Credit. Inefficiencies present as the market was formerly dominated by ratings-based buyers and other yieldfocused investors. Source: Grosvenor (left, middle) 23

24 Complex Credit Opportunities Why these Opportunities Exist Why these Opportunities Exist Liquidity Vacuum. No natural buyers for intermediate terms opportunities between hedge fund and private equity liquidity exist, creating a void (i.e., opportunity). Uneconomic Sellers. Regulatory changes (Basel III) are forcing banks to dispose of assets to meet capital ratio requirements. Less Competition. Proprietary desks were the primary buyers of these types of opportunities and regulatory changes (Volcker Rule) dramatically reduced their size Disappearing Asset Classes. Some of these markets have experienced essentially no new origination since the 08 Financial Crisis and are self-amortizing. Complexity. As the name implies, THIS IS COMPLEX meaning, there are not many managers with the resources to invest in these opportunities. 24

25 Complex Credit Opportunities Summary Prospects for traditional fixed income are limited Few places in the market to generate low- to mid-teen returns Opportunistic i.e., not an evergreen opportunity Few managers with the skill-set to capitalize Intrigued?? Learn more about these opportunities at the Client Conference or ask someone on the Liquid Alternatives team. Mary Bates Peter Hill 25

26 Thank you Question & Answer Questions may be submitted at any time during the web seminar by typing the question in the "Ask a Question" text field and clicking "Submit." Questions will be answered live as time permits during the question and answer sessions. 26