PLATINUM PENSION INCREASE ANNOUNCEMENT 2018
CONTENTS 1. Investment Markets in Perspective... 5 2. Increase Declaration Relative to Investment Returns... 9 3. Long-term Pension Increase Scenarios... 11 4. Pension Increase History and Inflation Protection... 12 5. Security in Turbulent Times... 14 PAGE 2
OLD MUTUAL CORPORATE ANNUITY FUNDS INCREASE ANNOUNCEMENT The Board of Old Mutual Life Assurance Company (South Africa) Limited (OMLAC(SA)) has approved the following Platinum Pension increases, effective for increase dates from 1 April 2018 to 31 March 2019: Profit Category Pricing Interest Rate (PRI) 2018 Increase 1 CPI 2 A 3.5% 9.0% B 4.0% 8.5% C 4.5% 6.5% D 5.0% 6.0% 4.7% E 5.5% 5.5% F 6.0% 4.0% 1. Applicable to Platinum Pension annuitants only. 2. Year-on-year CPI rate as at 31 December 2017. This note provides an understanding of the factors considered in this increase declaration. It also provides some insights into the investment markets leading up to the declaration and the security of Old Mutual s Corporate With-Profit Annuity range. Communication to individual annuitants will be distributed during the month in which their increase becomes effective. PAGE 3
In support of improved disclosure on the management of your Platinum Pension investment, we will continue to make available reports for Old Mutual Corporate s With-Profit Annuity Portfolios (which includes Platinum Pension), including: With-Profit Annuities Disclosure Report; Principles and Practices of Financial Management (PPFM). The above Platinum Pension reports are available on Old Mutual s website at: https://www.oldmutual.co.za/corporate/retirement-investments/annuity-portfolios/platinum-pension PAGE 4
1. INVESTMENT MARKETS IN PERSPECTIVE Platinum Pension increases declared in 2018 are based primarily on investment returns for the year from 1 January 2017 to 31 December 2017 (the investment year). We are pleased to inform you that the 2018 increases for the various pricing interest rate (PRI) categories were significantly higher than their comparable CPI inflation expectation. Before analysing the underlying performance of some of the asset classes over the investment year, it is useful to understand how the assets underlying Platinum Pension with-profit annuities are structured. Platinum Pension pensioner assets are split between three funds, with each of these funds accommodating certain pricing interest rate categories. Each of these individual funds has its underlying assets split between a matched, interest-bearing asset (IBA) portfolio and a portfolio of growth assets. The table below details the strategic split between the matched assets and the unmatched portfolio (or growth portfolio ), for each of the Platinum Pension funds: Fund 1 Fund 2 Fund 3 Pricing Interest Rate (PRI) Category 3.5% & 4% 4.5% & 5% 5.5% & 6% Matched Portfolio 42% 52% 62% Unmatched Portfolio 58% 48% 38% Total 100% 100% 100% Note: The actual split between the matched and unmatched portfolios fluctuates from time to time, as the market values of the underlying assets change. The matched, IBA portion of the portfolio is made up of holdings in investment grade South African bonds, as well as interest-bearing instruments known as swaps. The purpose of the matched portfolio is to enhance stability through investment in assets that provide an income cash flow that exactly matches a specified proportion of future expected cash outflows (annuity/pension payments). The locked-in yield (LIY) is the rate at which returns from the matched portfolio are released for increase purposes. For Platinum Pension, the LIY is currently 11.3% p.a. PAGE 5
It is the performance of the unmatched portfolio or growth portfolio, together with the LIY that is used to support the increases. The performance of the investment markets and assets underlying the unmatched portfolio is considered in more detail in the sections below. The investment markets had no lack of surprises during 2017 and included threats to global trade under the Trump administration, downgrades by rating agencies and the collapse of the local giant Steinhoff. Despite of these surprises the local markets performed well as the FTSE/JSE All Share index returned 21% over the 2017 investment year. This good performance was a result of all the main sectors performing strongly, of which industrials led the way increasing by 22.5% over the year. The Local Bond market did not perform as well as equities. The ALBI BEASSA Bond Index returned 10.2% over the 2017 investment year. Global markets also performed strongly with the MSCI World Index showing a return of 23.1% in US dollar terms over the investment year. This, however, only translated into an 11.4% return in rand terms due to exchange rate movements. For the Platinum Pension portfolio, Local and Global Equity performed strongly delivering returns in excess of 16% over the past investment year while Local Property and Alternatives struggled. Global Interest- Bearing Assets lost value in rand terms, but given that none of these assets were held during 2017 it did not negatively affect the overall portfolio performance. PAGE 6
The table below outlines the gross investment returns per asset channel underlying the unmatched investment portfolio for periods ended 31 December 2017. They are for one-year and three-year periods. Also provided is the actual asset allocation at 31 December 2017. Returns 1 One Year Three Years (annualised) Actual Asset Allocation 2 Local IBA 10.47% 7.78% 4.2% Local Equity 16.52% 7.50% 34.0% Local Alternative 2.55% 7.68% 12.2% Local Property 1.49% 10.00% 12.7% Global IBA -0.73% 4.99% 0.0% Global Equity 16.08% 13.01% 29.2% Global Alternative 8.61% 12.10% 5.6% African Assets 15.21% 3.09% 2.1% Total Unmatched Portfolio 12.2% 9.75% 100% 1 The returns shown are gross of asset manager fees. Returns shown for Global assets are in rand terms. 2 The asset allocations are reflected as a proportion of the unmatched portfolio. A key consideration in deciding the annuity increase for 2018 is what is likely to happen over the next investment year and at the next increase declaration in one year s time. GLOBAL Looking into 2018, consensus views are for an even better growth year (albeit only moderately better than in 2017) and another year of good performance from investment markets. We remain positive on the outlook for the world economy expecting growth of 3.2% both this year and next. This is, however, a broad view and 2018 has its own share of concerns and risks. The main one being the risk of a further rise in wage growth in the US and/or a rise in US inflation both of which could cause the US Fed to lift interest rates more aggressively and triggering a renewed strengthening of the US dollar. Elsewhere around the world, inflation in the euro zone slowed at the start of the year to 1.3%, from 1.4% in December 2017, highlighting the limited inflationary pressures that exist in Europe. Rising energy prices could provide an uplift to headline inflation in the coming months. However, with a stronger euro and PAGE 7
relatively high unemployment in much of southern Europe, inflation is likely to only gradually rise to the European Central Bank (ECB) s goal of 2%. This soft inflation outlook would justify continued ECB stimulus, which should be supportive for growth this year. LOCAL While there are still many uncertainties, it seems reasonably clear that the improved political backdrop provides for a more positive outlook for 2018 than before. The Cyril Ramaphosa win has resulted in notable upgrades to GDP forecasts for 2018, from around 1% to 1.5%. This is a decent uplift from the 0.3% GDP growth in 2016 and the expected 0.9% growth in 2017. This increase is essentially on account of an expected recovery in confidence and the possibility of a renewed cycle of rate cuts by the South African Reserve Bank (SARB). While this better growth outcome will be welcome, it still falls short of the growth pace required to merely stabilise the already high unemployment rate of 27%. The JSE has been a weak performer over the past three to five years, particularly if you exclude the performance of the big multinational industrials such as Naspers, Richemont and British American Tobacco whose earnings are derived largely from overseas operations. While one may view this relatively weak performance as a signal to buy, the local market is currently still reasonably expensive in absolute terms and this may dampen returns in 2018. PAGE 8
2. INCREASE DECLARATION RELATIVE TO INVESTMENT RETURNS The bonus smoothing reserves (BSR s) for Platinum Pension as at 31 December 2016 and 2017 were within the following bands: Date ST-BSR LT-BSR 31 December 2016 5% to 10% 5% to 10% 31 December 2017 5% to 10% 5% to 10% The long-term BSR (LT-BSR) is the difference between the value of the cash flows that are matched, and the market value of the said matching assets. This difference is released gradually over the full lifetime of the pensioners. The short-term BSR (ST-BSR) is the difference between the value of the remaining liabilities and the market value of the remaining assets. The level of the ST-BSR is significantly affected by the net investment returns earned on the unmatched portfolio and the LIY, referred to earlier. It is the level of this ST-BSR that is most relevant for determining the level of increase that can be afforded. PAGE 9
It is useful to review how the ST-BSR changed over the period as a result of the experience over the investment year and the impact of the declared increases. The table below outlines how the ST-BSR movements can be estimated for the Platinum Pension portfolio as a whole. Platinum Pension Opening ST-BSR range at 31 December 2016 5% to 10% Add: Investment Return 1 13.2% Less: Charges and Fees 2.2% Less: PRI 2 5.2% Less: Increase Declared 3 6.9% Add: Other 4 1.2% Closing ST-BSR range at 31 December 2017 5% to 10% 1 This is the gross return, for the year ended 31 December 2017, into the ST-BSR. This includes the return on the growth assets and the contribution from the LIY of 11.3%. The difference between this estimated return and the total return earned on the portfolio would have an influence on the level of the LT-BSR. 2 PRI is the pricing interest rate. It represents the amount of credit for future investment returns that is given to the pensioner at the outset of the contract. The PRI deduction of 5.2% in the table above represents the weighted average PRI across all the categories. 3 Weighted average cost of annuity increases across all the categories. 4 Other includes smaller items like underwriting profit/loss, client cash flows, economic assumption differences, basis and model changes and process adjustments. PAGE 10
3. LONG-TERM PENSION INCREASE SCENARIOS The level of increases that can be expected over the long term depends on the South African and Global investment and economic environment. These environments can potentially result in a wide range of outcomes for investment returns, including the Platinum Pension portfolio. Below we outline a few of the potential future scenarios for Platinum Pension. The scenarios below are not exhaustive, but represent some of the more likely scenarios over the long term. Once given, annuity increases are guaranteed. Future annuity increases, however, depend on unknown future market performance and are, therefore, not guaranteed. The table below shows the level of inflation protection from annuity increases given various levels of portfolio real returns. The 4% column in green is the central long-term average expectation. PRI Category Portfolio Net Real Return (p.a.) 3% 4% 5% 3.5% CPI 0.5% CPI + 0.5% CPI + 1.5% 4% CPI 1% CPI CPI + 1% 4.5% CPI 1.5% CPI 0.5% CPI + 0.5% 5% CPI 2% CPI 1% CPI 5.5% CPI 2.5% CPI 1.5% CPI 0.5% 6% CPI 3% CPI 2% CPI 1% Note: The scenarios above show a range of average increases for Platinum Pension over the long term. It is important to note, however, that different performance might be achieved in the future, especially in the short term. The worst case scenario is that pensions stay level and there is no increase in a given year. PAGE 11
4. PENSION INCREASE HISTORY AND INFLATION PROTECTION The table below shows the historical annuity increases that have been declared for the various PRI categories offered on Platinum Pension. It also shows the increases annualised over three, five and ten year periods as well as a comparison of these increases against consumer price index (CPI) inflation over the same three, five and ten year periods. Year CPI* PRI Category 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% Annual increases declared: 2008 9.0% 11.0% 10.5% 9.0% 8.5% 7.0% 6.5% 2009 9.5% 8.0% 7.5% 7.5% 7.0% 7.0% 6.5% 2010 6.3% 4.0% 3.5% 3.5% 3.0% 3.0% 2.5% 2011 3.5% 4.5% 4.0% 4.0% 3.5% 3.5% 3.0% 2012 6.1% 4.5% 4.0% 4.0% 3.5% 3.5% 3.0% 2013 5.7% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 2014 5.4% 9.0% 8.5% 7.5% 7.0% 6.0% 5.5% 2015 5.3% 10.0% 9.5% 7.5% 7.0% 5.5% 5.0% 2016 5.2% 10.0% 9.5% 7.5% 7.0% 5.5% 5.0% 2017 6.8% 9.5% 9.0% 7.0% 6.5% 5.0% 4.5% 2018 4.7% 9.0% 8.5% 6.5% 6.0% 4.5% 4.0% Annualised figures over 3, 5 and 10 years: 3 years 5.6% 9.5% (CPI + 3.9%) 9.0% (CPI + 3.4%) 7.0% (CPI + 1.4%) 6.5% (CPI + 0.9%) 5.0% (CPI 0.6%) 4.5% (CPI 1.1%) 5 years 5.5% 9.5% (CPI + 4.0%) 9.0% (CPI + 3.5%) 7.2% (CPI + 1.7%) 6.7% (CPI + 1.2%) 5.3% (CPI 0.2%) 4.8% (CPI 0.7%) 10 years 5.8% 7.4% (CPI + 1.6%) 6.9% (CPI + 1.1%) 6.0% (CPI + 0.1%) 5.5% (CPI 0.4%) 4.7% (CPI 1.1%) 4.2% (CPI 1.6%) * The CPI rates are the year-on-year figures that correlate with the corresponding investment year/period i.e. they are the year-on-year figures to December of the previous year. Note: Care should be taken when comparing Platinum Pension increase histories with the histories of other products. Different with-profit annuity products may function quite differently from each other e.g. some offer higher starting annuities while others offer higher increases over time. PAGE 12
Platinum Pension increases over the last three and five year periods compare well with CPI inflation over the same periods, with increases on the 3.5% to 5% PRI categories being higher than CPI inflation. As per the table in section 3 above, the 4% PRI category is expected to, on average over the long term, deliver CPI inflation increases. This category has historically exceeded CPI inflation over the one, three, five and ten year periods. CPI inflation averaged 5.3% for the 2017 calendar year. This remains comfortably within the SARB s target range of 3% to 6%. Looking into 2018 a moderate rise in global inflation is expected, although not enough to trigger any significant US policy changes. CPI inflation is expected to mainly remain below the 5% mark for the first part of 2018 and may rise above 5% towards the end of 2018. PAGE 13
5. SECURITY IN TURBULENT TIMES Assets backing Old Mutual s pensioner liabilities, including bonus smoothing reserves, are held in policyholder funds - these funds may not be accessed by shareholders. Shareholder capital is separate from, and over and above policyholder funds. Shareholder capital has no impact on the level of pensioner increases. It does, however, represent the security backing the annuity guarantees offered by Old Mutual. The assets backing pensioner liabilities (policyholder funds) have to be in the name of the insurer and may not be encumbered. This means that no outside party may have a claim on those assets. They are for the benefit of the pensioners only. Furthermore, in the case of South African insurers with overseas parent companies, such as Old Mutual, the Long-term Insurance Act and exchange controls limit the parent company from accessing South African shareholder capital. Old Mutual plc would only be able to access capital by way of either dividends or loans. In both instances the Statutory Actuary and the OMLAC(SA) Board would need to approve the dividend or loan. In addition, Reserve Bank approval is required for funds transferred from OMLAC(SA) to Old Mutual plc. OMLAC(SA) has a Baa2 credit rating from Moody s Investors Service, which is higher than the overall South African sovereign debt rating and also remains very well capitalised with a cover ratio of 3.1 times the statutory adequacy capital requirement as at the end of June 2017. These ratings are a measure of the security that Old Mutual provides its clients. In summary, pensioners may rest assured that the guarantees from Old Mutual are safe. Their annuities are guaranteed to be paid for life, and will never decrease. PAGE 14
FOR MORE INFORMATION Contact your Old Mutual Corporate Consultant, or intermediary, or call your nearest Old Mutual Corporate Office. Johannesburg: 011 217 1246 Pretoria: 012 368 3540 Western Cape: 021 504 7813 KwaZulu-Natal: 031 582 0600 Eastern Cape: 041 391 6300 You can ask for these reports by calling the Pencare Service Centre at 0860 40 60 90 Email: corporateinvestments@oldmutual.com Visit the Corporate website: www.oldmutual.co.za/corporate OMBDS 03.2018 L11803 Old Mutual Corporate is a division of Old Mutual Life Assurance Company (South Africa) Limited, Licensed Financial Services Provider. Jan Smuts Drive, Pinelands 7405, South Africa. Company registration no: 1999/004643/06. The information contained in this document is provided as general information and does not constitute advice or an offer by Old Mutual. Every effort has been made to ensure that the provision of information regarding these financial funds meets the statutory and regulatory requirements. However, should you become aware of any breach of such statutory and regulatory requirements, please address the matter in writing to: The Compliance Officer, Old Mutual Corporate, PO Box 1014, Cape Town 8000, South Africa.