1. 10th November 2008
The Art of Risk Management
Redington Lens Technology

2. 2
Redington Lens Technology
Contents
Market Risk Factors 3
Non-Market Risk Factors 10
Planning the Long Term Flight Plan 14
Analysing the Pension Scheme – Through the Lenses 16
Portfolio Optimisation 29
Markets Can Remain Irrational… 32

3. 3
Market Risk Factors

4. Bank Country Date Status
Fannie Mae USA 07 Sep Nationalised
Freddie Mac USA 07 Sep Nationalised
Lehman Bros USA 15 Sep Collapsed
Merrill Lynch USA 15 Sep Taken over
AIG USA 16 Sep Part-nationalised
HBOS UK 17 Sep Taken over
WaMu USA 25 Sep Collapsed and sold
Fortis Netherland 28 Sep Nationalised
Bradford & Bingley UK 29 Sep Nationalised
Wachovia UK 29 Sep Taken over
Glitnir Iceland 29 Sep Nationalised
Hypo Real Estate Germany 06 Oct Rescue package
RBS UK 13 Oct Part-nationalised
Lloyds TSB UK 13 Oct Part-nationalised
Sep 2008 Oct 2008
4
Source: BBC News Website
Impacts of the Global Financial Crisis
• Volatile markets;
• Severe lack of liquidity;
• Declining asset values.
Market Snapshot
Financial Crisis
Market Performance
1 September 2008 to 31
October 2008
UK (FTSE 100) -22% (1,225 points)
US (S&P 500) -24% (314 points)
Japan (Nikkei 225) -33% (4,257 points)
Europe
(DJ Euro Stoxx 50)
-23% (773 points)

5. 5
Market Snapshot
Breakeven 30 Year Inflation (last 5yrs)
Source: Bloomberg / Redington

6. 6
Market Snapshot
Historical 30 Year Interest Rate Swap
Source: Bloomberg / Redington

7. 7
Market Snapshot
Real Yield on 1.125% 2037 Index-Linked Gilt
Source: Bloomberg / Redington

8. 8
Market Snapshot
Historical Credit Spreads
Source: Bloomberg / Redington

9. 9
Market Snapshot
Historical FTSE 100 Performance
Source: Bloomberg / Redington

10. 10
Non-Market Risk Factors

11. Non Market Factors
• Changing Accounting Standards:
• FRS17;
• IAS19.
• Pension Protection Fund:
• Risk Based Levy.
• Changing Regulation:
• The Pensions Regulator;
• Financial Services Authority;
• European Federation of Retirement Provision;
• International Organisation of Pension Supervisors;
• Rating Agencies.
11
Non-Market Factors
Factors Driving Behavioural Change

12. The risk that a specific population will live longer than anticipated (Blake et al, 2006).
Facts
• Life expectancy is increasing 5 hours a day;.
• The most frequently used life expectancy by
FTSE100 DB pension schemes for a 65 yr old
man is 20 years;
• The Pension Protection Fund (PPF)’s latest
S143 and S179 valuation assumptions set life
expectancy for a 65yr old man as 22 years;
• “If the life expectancy for a male currently
aged 60 is understated by two years,
depending on the assumptions adopted, this
could understate the value of his pension by
around 5%.”
The Purple Book (2007).
Longevity Risk
0
5
10
15
20
25
1920 1940 1960 1980 2000
LifeExpectancy
Increase in Life Expectancy
65 year old in England & Wales
Male Female
12
Non-Market Factors
Impact of Other Factors

13. 13
KIPPERS - Who is… What is… Generation Y?
Source: KPMG
Non-Market Factors
The Longer Term Issue

14. 14
Planning the Long Term Flight Plan

15. Minimum Funding Level
Cone of Uncertainty
Cone of Uncertainty
FRS 17/IAS 19
BUYOUT S75
Cone of Uncertainty
15
Destination “Fully Funded”
Flight Plan

16. Analysing the Pension Scheme
* The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried out in order to help
formulate a clear strategy for funding, risk management and asset allocation. You should not rely upon any calculations or numbers as correct.
They are obtained from limited publicly available information and are for illustration purposes only.
16
Risk Telescope Sensitivity Microscope Scenario Kaleidoscope

17. VaR
Does not
capture “Black
Swan” events
Under-
estimates “Fat
Tails”
Inconsistent
results
Ignores Credit
Default Risk
“Backward
Looking”
Illiquidity
Reduces risk
to a single
number
17
Redington Lens Technology
Understanding the Limitations of VaR

18. Redington Lens Technology
Risk Attribution
Risk Attribution Analysis
18

19. Analysing the Pension Scheme
* The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried out in order to help
formulate a clear strategy for funding, risk management and asset allocation. You should not rely upon any calculations or numbers as correct.
They are obtained from limited publicly available information and are for illustration purposes only.
19
Sensitivity MicroscopeRisk Telescope Scenario Kaleidoscope

20. Redington Lens Technology
Present Value by Bases and Member Type
20

21. Redington Lens Technology
Sensitivity Analysis (PV01) (Delta Ladders)
Inflation PV01 (Current)Interest Rate PV01 (Current)
Inflation PV01 (100% Hedged)Interest Rate PV01 (100% Hedged)
21

22. Convexity Chart (Current)
Redington Lens Technology
Kite Charts
Convexity Chart (100% Hedged)
22

23. Credit Exposure by Manager
Redington Lens Technology
Credit Portfolio Analysis
23
Credit Exposure by Sector
Credit Exposure by Maturity Credit Exposure by Rating

24. 24
Longevity Risk
Deterministic Projections

25. 25
Longevity Risk
Marginal Impact of Longevity on an ALM Basis

26. * The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried out in order to help formulate a
clear strategy for funding, risk management and asset allocation. You should not rely upon any calculations or numbers as correct.
They are obtained from limited publicly available information and are for illustration purposes only.
Analysing the Pension Scheme
26
Sensitivity MicroscopeRisk Telescope Scenario Kaleidoscope

27. Stress Testing
• The purpose of stress testing is to determine how a fund performs in extreme market conditions. This
is achieved by simulating market moves during a period of high market volatility.
Redington Lens Technology
Stress Testing
27
In January 2006
equities increased
and real yields
decreased
significantly.
The stress testing
shows how
unhedged schemes
lost all the gain in
equities because of
the increase in
liabilities (which
resulted from the
decrease in real
yields). Hedged
schemes captured
the former and
were protected
against the latter.

28. Single Risk Factor Stress Testing
Redington Lens Technology
Stress Testing
28

29. * The intention of this material is simply to illustrate the type of analysis that can and should, in our view, be carried out in order to help
formulate a clear strategy for funding, risk management and asset allocation. You should not rely upon any calculations or numbers as correct.
They are obtained from limited publicly available information and are for illustration purposes only.
Portfolio Optimisation
Risk Adjusted Return & Strategy Analysis
29

30. 30
Achieving Risk Adjusted Return
Hedging Risk – VaR Road Map

31. Excess Return
Risk (VaR95)
Return + Alternatives
RARoC + Alternatives
= Risk Adjusted Return
____________
31
Achieving Risk Adjusted Return
Hedging Risk and Re-Allocating Some Assets

32. 32
Markets Can Remain Irrational …

33. 33
Source: Bloomberg
Tough Decisions
Breakeven 30 Year Inflation (last 5 years) (Up, up and away)

34. 34
Historical Performance of Brent Crude
Too expensive?
Application of Risk Management
Case Study

35. 35
To our dear customers,
When our inaugural flight took off in January 2007, we pledged to change the face of air travel. Your
appreciation of our unique values and your belief in our product has allowed us to achieve this.
Your belief in us was shared by our investors - but regrettably, due to unforeseen circumstances, they were
unable to unlock the finance that we needed. As a result, we are very sad to announce that from 30 May 2008,
we will cease operations and we are no longer able to honour flight reservations.
We extend our sincerest apologies to those of you who have travel plans with Silverjet in the future and at
present. You are advised to seek alternative travel arrangements with other carriers, and contact your credit
card company or travel agent directly for information on obtaining refunds.
We are working actively with new investors who are prepared to inject new funds so we can recommence
operations. If we are able to achieve this, we will make an announcement as soon as possible and we hope to
be able to bring you our very 'sivilised' flying experience again.
Thank you for your support - it has meant everything.
Yours sincerely,
Lawrence Hunt, CEO
Application of Risk Management
Case Study

36. 36
“Southwest owns long-term contracts to buy most of its fuel through 2009 for
what it would cost if oil were $51 a barrel. The value of those hedges soared
as oil raced above $90 a barrel, and they are now worth more than $2 billion.”
Source: The New York Times, 27 November 2007
Application of Risk Management
Case Study

37. Contacts
Dawid Konotey-Ahulu | Partner Direct: +44 (0) 207 250 3415
dawid@redingtonpartners.com
Robert Gardner | Partner Direct: +44 (0) 207 250 3416
robert.gardner@redingtonpartners.com
Redington Partners LLP
13 -15 Mallow Street London EC1Y 8RD
Telephone: +44 (0) 207 250 3331
www.redingtonpartners.com
THE DESTINATION FOR ASSET & LIABILITY MANAGEMENT
Contacts
Disclaimer
Disclaimer For professional investors only. Not suitable for private customers.
The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussion
purposes only. A variety of market factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that the
parameters and assumptions used in this analysis can be duplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which appear
above are not necessarily indicative of future exchange rates, interest rates, or other reference rates or prices. Neither the information, recommendations or opinions expressed
herein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf. Unless otherwise stated, any pricing information in this message is
indicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs. Any reference to the terms of executed
transactions should be treated as preliminary and subject to further due diligence .
Please note, the accurate calculation of the liability profile used as the basis for implementing any capital markets transactions is the sole responsibility of the Trustees' actuarial
advisors. Redington Partners will estimate the liabilities if required but will not be held responsible for any loss or damage howsoever sustained as a result of inaccuracies in that
estimation. Additionally, the client recognizes that Redington Partners does not owe any party a duty of care in this respect.
Redington Partners are investment consultants regulated by the Financial Services Authority. We do not advise on all implications of the transactions described herein. This
information is for discussion purposes and prior to undertaking any trade, you should also discuss with your professional tax, accounting and / or other relevant advisers how
such particular trade(s) affect you. All analysis (whether in respect of tax, accounting, law or of any other nature), should be treated as illustrative only and not relied upon as
accurate.
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