Joint Meeting Of The NIC And PERB Capital Market Assumptions
Joint Meeting of the NIC and PERBCapital Market AssumptionsNovember 2015Aon HewittRetirement and InvestmentInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.
Capital Market Assumptions What are they?– Aon Hewitt's asset class return, volatility and correlation assumptions– Long-term; based on 10-year and 30-year projection periods Forward looking assumptions Best estimate assumptions (50/50 better or worse) Market returns; i.e., no manager alpha (other than hedge funds and private equity which areentirely actively managed)– Global geographic coverage– Updated quarterlyAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.2
CoverageEquitiesBondsAlternativesAll major regions coveredincluding emerging marketsNominal U.S. and non-U.S.government bondsHedge fundsInflation-linked governmentbondsReal estate (total market andcore)Corporate bondsPrivate equityHigh yieldInfrastructureEmerging market debtCommoditiesAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.3
Current Assumptions (10-Year): Expected Returns and Risks (Q3 2015)Asset ClassExpected Nominal ReturnExpected Risk (Volatility)U.S. Equity6.6%17.4%Global Equity (Developed & Emerging)7.018.5International Equity (Developed)6.920.0Emerging Markets Equity8.030.0TIPS2.74.5Core Fixed Income (Market Duration)2.94.0High Yield Bonds4.712.0Non-US Developed Bonds (Unhedged)1.910.0Emerging Market Bonds (USD)4.611.0Hedge Funds (FoF)5.09.0Real Estate (Total Market)6.712.5Private Equity8.824.0Infrastructure7.214.5U.S. Inflation (CPI)2.1--Aon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.4
Current Assumptions (30-Year): Expected Returns and Risks (Q3 2015)Asset ClassExpected Nominal ReturnExpected Risk (Volatility)U.S. Equity6.6%17.9%Global Equity (Developed & Emerging)7.019.0International Equity (Developed)6.820.5Emerging Markets Equity8.130.5TIPS3.24.5Core Fixed Income (Market Duration)3.75.0High Yield Bonds5.512.0Non-US Developed Bonds (Unhedged)3.011.0Emerging Market Bonds (USD)5.713.5Hedge Funds (FoF)5.510.0Real Estate (Total Market)6.712.5Private Equity8.824.5Infrastructure7.414.5U.S. Inflation (CPI)2.1--Aon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.5
Projected ReturnsLong-TermPolicyAllocationAnnualizedReturn (10YearForecast)StandardDeviation (10YearForecast)AnnualizedReturn (30YearForecast)StandardDeviation (30YearForecast)6.6%17.4%6.6%17.9%U.S. Equity29.0%Non-U.S. Equity13.57.321.37.221.8Global Equity15.07.018.57.019.0Fixed Income*30.03.44.24.24.8Private Equity5.08.824.08.824.5Real Estate7.56.712.56.712.5Total Fund100.0%6.3%12.2%6.6%12.5% Given existing market conditions, exceeding the actuarially assumed rate of return of 8.0% will likelyprove challenging*Modeled as 20% core bonds, 1.5% international bonds, 3.5% high yield bonds, and 5% bank loansAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.6
Projected Returns (cont’d) Based on our capital market assumptions and the defined benefit plans’ asset allocation targets, thedefined benefit plans have between a 1 in 3 and a 1 in 4 chance of meeting or exceeding the assumedrate of return of 8% over the next 10-to-30 yearsAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.7
Aon Hewitt Annual 10-Year Assumptions: Expected Returns and VolatilityAsset ClassExpected Nominal ReturnLarge Cap U.S. EquityQ3 20156.5%20146.7%20137.1%Small Cap U.S. Equity6.76.97.3201220117.5%Expected Nominal Risk (Volatility)8.0%Q3 .025.025.027.021.0Global ational Equity ging Markets Equity8.08.48.99.49.830.028.528.531.531.5Cash (Gov't)Core Fixed Income(Market e Funds Universe5.05.05.25.25.79.08.08.014.08.014.0Real Estate (Broad Market)6.77.07.27.47.312.514.514.516.016.0Private 2.12.22.12.32.1----------High Yield Bonds1 Hedge1Fund Universe assumptions are capital market assumptions for fund of hedge funds With a few exceptions, our return expectations have generally decreased over the past 4 yearsColor KeyIncreased from 2011No Change from 2011Decreased from 2011Aon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.87.5
Ask 29 Consultants and Expected Geometric Returns by Asset imumAverageAHIC 30-Yr This data reflects a recent survey of 29 investment consulting firms regarding their capital marketassumptions In many cases, AHIC’s assumptions for future returns are slightly more conservative than peersSOURCE: Horizon Actuarial survey of 2015 capital market assumptions from 29 independent investment advisorsExpected returns of the survey are annualized over 10-20 years (geometric). Returns are 'blended,' using 10-year assumptions when 20-year assumptions are not available.AHIC expected returns are annualized over 30-years.Aon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.9
NIC DB Plan Historical Fiscal Year and Cumulative Period PerformanceAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.10
AppendicesAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.11
Appendix I: Alternative Asset Allocation Policy Scenarios Earlier this year, the Nebraska Investment Council asked Aon Hewitt what an asset allocation policyscenario designed to achieve an 8.0%* return might look like We present such a scenario on the following slide We also highlight the differences in investment management fees and liquidity between the currentportfolio and the alternative policy scenario*Based on our current capital market assumptionsAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.12
Appendix I: Alternative Asset Allocation Policy Scenarios (cont’d)Alternative TargetAllocationAnnualized Return(10 Year Forecast)Standard Deviation(10 Year Forecast)15.0%7.0%18.5%Core Bonds10.02.94.0Real Estate25.06.712.5Private Equity50.08.824.0100.0%8.0%15.5%5th Percentile--16.2%--25th Percentile--11.3--50th Percentile--8.0--75th Percentile--4.8--95th Percentile--0.3--Probability of Achieving8.00%--50%--Global EquityTotal FundAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.13
Appendix I: Alternative Asset Allocation Policy Scenarios (cont’d)InvestmentManagement FeeCurrent PolicyAlternative Policy 33.2 Million 134.0 Million*% of Portfolio in Illiquid/ Semi-Liquid AssetsCurrent Policy15%Alternative Policy75%*Estimated The tables above illustrate the estimated investment management costs and liquidityprofiles of the current long-term policy portfolio vs. a policy that “solves” for an 8% returnAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.14
Appendix II: Asset Allocation – NIC vs. 5 Billion Public %15%10%9.4%7.5% 8.0%5.0%5%0.0%0%U.S. Stocks Non-U.S. Core-Plus Real %HedgeFundsCashPublic Funds 5 Billion*Greenwich Associates – Institutional Investors Market Trends 2014Aon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.1.6%150.0%Other
Appendix III: AHIC Forward Looking Return Expectations by Asset ClassAon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.16
Appendix III: AHIC Forward Looking Return Expectations by Asset Class(cont’d)Aon Hewitt Retirement and InvestmentProprietary & ConfidentialInvestment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc., an Aon Company.17
2 Capital Market Assumptions What are they? – Aon Hewitt's asset class return, volatility and correlation assumptions – Long-term; based on 10-year and 30-year projection periods Forward looking assumptions Best esti
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