GSCG Market Intelligence – All Rights Reserved 1 6/20/2012 Jos Berkemeijer AAG Johan de Witt lecture , AG-AI June 19, 2012 Source: Tjeert Mensinga © golden sky GSCG Market Intelligence – All Rights Reserved Opening: Overture I 2 6/20/2012 GSCG Market Intelligence – All Rights Reserved Opening: Overture II (Adagio) 3 S alt is essential for life — you cannot live without it. Salt has been important to humanity for life on this planet. The word "salary" comes from “ sal ”, or salt, which was part of the pay of Roman soldiers. African and European explorers traded an ounce of salt for an ounce of gold — salt was literally worth its weight in gold Salt is important to many biological processes, but too much salt can hurt you, but the same can be said of most things — even oxygen and water. H 0 : Gold in our asset mix is like salt in our food Q:Do you eat saltless? 6/20/2012 GSCG Market Intelligence – All Rights Reserved Agenda 4 6/20/2012 It takes a 40 meters runway to make a 9 meter long jump.... Economic Perspective Financial Institutions Increasing Risk Risk Perception & Manipulation Linear Thinking In Between Conclusion Gold as Asset Class Change to Gold New Solutions Conclusion GSCG Market Intelligence – All Rights Reserved Economic Perspective Financial Institutions Financial Sustainability at stake 5 The financial sustainability of financial institutions is at stake To ensure their obligations, financial institutions have to optimize ‘Risk – Return’ and diversify their portfolio Worldwide, pension fund funding ratios (assets/liabilities) fall short Insurers, banks and pension funds all have to face more volatile markets, lower interest rates and more systemic risk All financial Institutions have to meet higher regulation standards to withstand the future economic climate and developments More diversification power and less counterparty risk are key issues in reducing future risk 6/20/2012 GSCG Market Intelligence – All Rights Reserved Economic Perspective Financial Institutions Economic and Pensions Status Quo 6 • Economic SQ - 2007: subprime crisis - 2007-2008: from housing crisis to banking crisis - 2009-2011: from bank crisis to country crisis - 2011-2012: from country crisis to world Crisis - Declining confidence, negative economic outlook - Future Euro and Dollar is under discussion • Pensions SQ - Increasing attention to governance and compliance - Considerable uncertainty main asset classes (fixed income, equities) - Low interest rates, rising inflation, risk of hyperinflation - Increasing reserve and coverage gaps: no serious signs of recovery - Risk-free discount rate fluctuates and is under discussion - Limited ability to recover from premium, discounts threaten - No clear regulatory framework surrounding Pension Agreement - No clear vision or approach on 'ancient pension rights‘ - Historical ‘proven’ linear based models fall short in modeling the new economy - To what extent are models based upon ‘historical data’ also ‘future proof’? 6/20/2012 GSCG Market Intelligence – All Rights Reserved Economic Perspective Financial Institutions Market Outlook & Key Questions 7 Key Questions 1. Is the actual asset mix is still 'in line' with the defined risk appetite? 2. Does the actual asset mix still guarantee the required diversity? 3. Can investing in gold contribute to a sustainable ‘risk return profile’ and an improved diversity? Market Outlook 2012 and Further • Prolonged period of continuing uncertainty with low economic growth • Increasing volatility and covariance of all major asset classes (equities, bonds) • Besides ‘Performance R isk’, other risks demand attention: Economic Risk, Principal Risk, Credit Risk, Collateral Risk, Collateral Margin Call Risk, Country Default Risk, Currency Risk, Euro-Risk, Longevity Risk, Cost Risk, etc. • Continuously changing regulatory requirements with still uncertain effects: EMIR, Mifid2, Cost Transparency, FTK1/2, AIFMD, etc. • Risk-free interest rate curve based on the adjusted EUR swap curve varies strongly over time. • Free lunches: There appear to be no more "safe havens”. Return = Risk 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk Global Pension Asset/Liability Development 8 Source: Rubbaniy L A A/L Conclusions • Global pension fund balance sheets worsened during 1998-2011, losing 25.4% in the A/L indicator • A/L Indictor lost 4.3% in 2011 • The growth in liabilities exceeds by far the growth in assets Asset/Liability Indicator (Global Basis) Source: Towers Watson 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk Return and Risk Outlook 9 Return Climate Outlook • Low Interest Rates • High Risk Stocks • Increasing Volatility Advice Commission Parameters • Fixed Income : 4.5% • Listed Stocks: 7.0% • Other Stocks & real Estate: 7.5% 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk DNB Dutch Pension Funds Investigation 10 1. Conclusion DNB Actual performance 2000- 2010 is 0.2% better than ‘own defined’ benchmark 2. Other Conclusions • Compound average performance (4.2%) equals arithmetic average performance • Average performance (4.2%) < 10Y Eurobonds performance There’s no pay out on risk!!! Source: DNB 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk EU Government Bonds 11 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk EU Country Default Risk 12 Rfr= risk free rate 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk European Stability Mechanism (ESM) Treaty 13 Line 2012 IF (SPAIN==FALSE) THEN {EUROPE=DEFAULT} ; END • ESM may demand an unlimited amount of money from European countries • ESM is not accountable for what happens to the money • ESM has the power to reduce private customer savings • There are no compliance or control measures defined • ESM has no targets, cost-limitation and enjoys complete immunity. 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk Longevity Risk Outlook 14 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk Pension Fund Confidence Level Risk 15 Discussion 1. A real pension objective puts the nominal pension at risk 2. How sure is your pension? 6/20/2012 GSCG Market Intelligence – All Rights Reserved Increasing Risk Realistic Pension Perspectives? Basel III Solvency II 16 6/20/2012 GSCG Market Intelligence – All Rights Reserved Risk Perception & Manipulation New Insights Definition of Risk-levels by United States Secretary of Defense Donald Rumsfeld during the Iraq war (2002): What we know • Known Knowns There are known knowns; there are things we know that we know • Known Unknowns There are known unknowns; that is to say, there are things that we now know we don’t know • Unknown Unknowns But there are also unknown unknowns; there are things we do not know we don’t know ." 17 6/20/2012 GSCG Market Intelligence – All Rights Reserved Risk Perception & Manipulation Intermezzo: The Actuary as Risk Manager I Actuary Anno 1100 A.D. Actuary Anno 2012 A.D. 18 6/20/2012 GSCG Market Intelligence – All Rights Reserved Risk Perception & Manipulation Intermezzo: The Actuary as Risk Manager II Actuary Anno 2012 Where are we today? 19 6/20/2012 GSCG Market Intelligence – All Rights Reserved Risk Perception & Manipulation We overestimate our Mathematical abilities... 20 6/20/2012 30 37 42 1 7 13 2 8 15