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Schroders — Schroders Secular Market Forum 2006

25 slides from Schroders's conference presentation, Jun 6, 2006

1. Slide 1: Schroders Secular Market Forum

   Schroders Secular Market Forum 6th June 2006 Adair Turner

2. Slide 2: Projected State Spending per Pensioner Indexed in Constant 2003/04 Price Terms

   Projected State Spending per Pensioner Indexed in Constant 2003/04 Price Terms: 2004 Projections 1

3. Slide 3: Components of Funded Pension Contributions as a % of GDP

   Components of Funded Pension Contributions as a % of GDP 5% 4% 3% 2% 1% 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Special employer contributions to self-administered occupational schemes Normal employer and employee contributions to self administered occupational schemes In

4. Slide 4: Change in pension savings as a % of GDP with the maturing of the DB-DC Shift

   Change in pension savings as a % of GDP with the maturing of the DB-DC Shift 4.4 4.4 0.7 0.3 3.1 3.1 0.3 2.1 1.5 1.2 1.2 2004 Following DB-DC shift Personal Private occupational funded Public funded DB special contributions 3

5. Slide 5: National Pension Savings Scheme: Key Flows

   National Pension Savings Scheme: Key Flows ƒ Automatic enrolment, but with right to opt-out ƒ Minimum default employee contributions of 5%, of which 1% paid by tax relief ƒ Modest compulsory matching employer contribution (3%) if employee stays enrolled ………impact on total labour cost 0.6% ƒ Payroll

6. Slide 6: Possible Approaches to Fund Range and Default Fund Design

   Possible Approaches to Fund Range and Default Fund Design Thrift Saving Plan Swedish Premium For US Federal employees Pension Scheme Choice of 6 funds: ƒ Fund managers can register up to 25 funds each ƒ Government Bond (default) ƒ 670 funds from 80 fund ƒ Fixed income index management companies ƒ Co

7. Slide 7: Aggregate NPSS Funds at Different Rates of Return

   Aggregate NPSS Funds at Different Rates of Return 25% 20% Percentage of GDP 15% 10% 5% 0% 2010 2020 2030 2040 2050 2060 2070 2080 2% real rate of return 3.5% real rate of return 4.5% real rate of return 6

8. Slide 8: Long Run Effect of NPSS on Private Pension Savings as a % of GDP

   Long Run Effect of NPSS on Private Pension Savings as a % of GDP 4.4 0.7 3.7 3.7 0.3 3.1 0.6 0.3 0.3 2.1 2.1 1.5 1.5 1.5 1.2 1.2 1.2 1.2 1.2 2004 Following DB-DC shift Following DB-DC shift with the NPSS Personal Private occupational funded Public funded NPSS Defined benefit special contributions 7

9. Slide 9: Stock of Annuities Arising from the NPSS

   Stock of Annuities Arising from the NPSS 14% 12% 10% Percentage of GDP 8% 6% 4% 2% 0% 2010 2015 2020 2025 2030 2035 2040 2045 2050 2055 2060 2065 2070 2075 2080 Stock of annuities in payment 8

10. Slide 10: Demographic Challenges to PAYG Systems

    Demographic Challenges to PAYG Systems Tax/contribution rate up Increasing longevity Increased ratio of + Pension age up pensioners to Lower fertility workers Pensions relative to average earnings down Uncertainty in Planned increases in Longevity increases longevity forecast pension age more than i

11. Slide 11: Demographic Challenges to Funded Systems

    Demographic Challenges to Funded Systems People attempt to save Capital/output ratio rises Increasing longevity more to fund a higher % of life spent in retirement Rate of return on capital falls Savers of generation 1 Fertility decline have to sell accumulated Asset prices may fall assets to smalle

12. Slide 12: Demographic Impacts on Returns to Capital: Model Results

    Demographic Impacts on Returns to Capital: Model Results ƒ Garry Young: Baby-boom generation -0.1% Increased longevity -0.1% Falling fertility -0.3% ƒ David Miles: Given future actual trends in UK demographics, returns fall: ƒ 4.56% (1990) to 4.22% (2030) ƒ 4.56% (1990) to 3.97% (2060) if PAYG phase

13. Slide 13: Real S&P500 Price Index and % of 40-64 Year Olds Among Total U.S Population

    Real S&P500 Price Index and % of 40-64 Year Olds Among Total U.S Population 1950-2003 Forecast 2000 34 Percentage of 40-64 Population 1800 33 Real S&P500 Price Index 1600 32 1400 31 1200 30 1000 29 800 28 600 27 400 26 200 25 0 24 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Real S&P500 (L

14. Slide 14: Theoretical & Empirical Approaches to Measuring Demographic Effects

    Theoretical & Empirical Approaches to Measuring Demographic Effects “Given the limited amount of time series on returns and demographic variation, and the difficulty of controlling for all of the other factors that may affect asset values and asset returns, the theoretical models should be accorded

15. Slide 15: Dependency Ratio Forecasts: 2000 – 2050

    Dependency Ratio Forecasts: 2000 – 2050 Ratio of 65+ year old to 20 – 65 Year 2000 Year 2050 UK 0.27 0.48 Italy 0.29 0.71 USA 0.21 0.36 China 0.11 0.42 Korea 0.11 0.59 World 0.13 0.28 314

16. Slide 16: Global Glut of Savings Hypothesis

    Global Glut of Savings Hypothesis In China and other East Asian countries ƒ Fewer children enable higher savings rate ƒ Awareness of greater longevity, fewer children and Global glut of lack of social welfare net, savings relative to require a high savings rate investment Long-term, not just cyclica

17. Slide 17: Real Yields to Maturity on UK Index-linked Gilts

    Percent 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 01/01/1986 01/01/1987 1986 – 2004 01/01/1988 01/01/1989 01/01/1990 01/01/1991 01/01/1992 01/01/1993 01/01/1994 01/01/1995 01/01/1996 01/01/1997 01/01/1998 01/01/1999 01/01/2000 01/01/2001 01/01/2002 01/01/2003 01/01/2004 01/01/2005 Real Yields to Maturity on U

18. Slide 18: UK Long-term Real Interest Rates

    UK Long-term Real Interest Rates 11% Real interest rate 9% Long-term average (1700-2004) 7% Estimate for 2005 5% 3% 1% -1% -3% Estimate for 2005, as of 02 -5% March 2005 -7% 1700 1716 1732 1748 1764 1780 1796 1812 1828 1844 1860 1876 1892 1908 1924 1940 1956 1972 1988 2004 Source: Morgan Stanley Res

19. Slide 19: Whole World Gross Savings Rate

    Whole World Gross Savings Rate 1981 - 2005 25 20 15 1981 1986 1991 1996 2001 2006 Source: IMF World Economic Outlook database 18

20. Slide 20: Gross Savings Rates: Developing Asia and the US

    Gross Savings Rates: Developing Asia and the US % of GDP 1981 - 2005 40 35 Developing 30 Asia 25 20 15 USA 10 5 1981 1985 1989 1993 1997 2001 2005 Source: IMF World Economic Outlook database 19

21. Slide 21: Alternative Hypothesis on Global Labour/Capital Balance

    Alternative Hypothesis on Global Labour/Capital Balance Very long-term future increase Low real wage growth in in K/L driven by demography developed countries, driven by: ƒ China and India in traded goods/services … but short/medium term ƒ Immigration in non-traded massive increase in the services e

22. Slide 22: Profit Share of GDP – U.S.

    Profit Share of GDP – U.S. % of GDP 1970 - 2004 35 30 25 20 1970 1980 1990 2000 Note: Gross Operating Surplus and Gross Mixed Income as % of GDP (Income approach) Source: OECD: www.oecd.org/statistics/national-accounts 21

23. Slide 23: Overall Return and Risk-return trade-off

    Overall Return and Risk-return trade-off High Return Low High Low Risk 22

24. Slide 24: Overall Return and Risk-return trade-off

    Overall Return and Risk-return trade-off High Return Average combination for all asset classes combined set by • Balance of capital supply and labour • Inherent operating risk Low High Low Risk 23

25. Slide 25: Overall Return and Risk-return trade-off

    Overall Return and Risk-return trade-off Slope of line is driven by High relative demand for different risk/return combinations: Return • Perceptions of risk • Price of risk • Institutional barriers Low High Low Risk 24

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