Preparing for the End Game

External Presentation Europe Institutional Pensions Training 31 January 2013
Preparing for the
End Game
Robert Gardner
Europe Institutional Pensions Training
1

1. Transfer to members
Change benefit format,
e.g. ETVs, Early
Retirement
2. Transfer to external
entity
Buy-In/Buy-out
3. Preparing for the
End Game
A 7-Step Plan to Full
Funding
What is the End Game?
2

Preparing for the End Game
3
The Seven Steps to Full Funding

Adjusting the sails
4
The pessimist complains about the wind;
The optimist expects it to change;
The realist adjusts the sails.
- William A. Ward

Step 1 Description
• A strategic Pension Risk Management Framework that sets out funding objectives, risk budget
and other constraints such as liquidity and collateral requirements
• A Flight Plan that charts each plan’s path to full funding and generates required returns used
to set investment strategy
Setting Clear Goals and Objectives
5

Objective Measurement Performance Indicators Performance (31 Jan 13) RAG
Primary Funding
Objective
To reach full funding by [2026] (based
on discount rate of Gilts + 0.75%)
Expected Returns (ER) > Required
Returns (RR)
RR: Libor + 300bps
ER: Libor + 200bps
Difference: -100bps
Secondary
Funding Objective
To reach full funding on a buyout basis
by [2032] (based on a discount rate of
gilts flat)
Expected Returns (ER) > Required
Returns (RR)
RR: Libor + 250bps
ER: Libor + 200bps
Difference: -50bps
Investment
Strategy
Actual Returns should exceed
Expected Returns
Actual Returns (AR) > Expected Returns
(ER)
AR: Libor + xxxbps
ER: Libor + 200bps
Difference: xxbps
Risk Budget
The investment strategy should not risk
the deficit worsening by [20%] of
liabilities over a 1 year period
VaR95 < [20%] of liabilities VaR95: 28.0%
Hedging Strategy
Nominal/Inflation hedge ratio should be
maintained within +/- 5% of the funding
ratio.
Funding Ratio (gilts + 0.75%) 60%
Nominal Hedge Ratio (gilts + 0.75%) 20%
Inflation Hedge Ratio (gilts + 0.75%) 25%
Collateral
Maintain sufficient eligible for the
purposes of covering margin calls that
may arise from the Scheme’s current
derivative positions over a 1 year
period.
Total available eligible collateral xx mn
Remaining collateral after VaR95 event yy mn
The Pension Risk Management Framework
6
RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away

1,000
1,500
2,000
2,500
3,000
3,500
4,000
2012
2013
2013
2014
2014
2015
2015
2016
2017
2017
2018
2018
2019
2020
2020
2021
2021
2022
2022
2023
2024
2024
2025
2025
2026
£mm
Flight Plan
liability (swapflat) asset(swapsflat)
The Flight Plan
7
100% - Swaps Flat by 2026
Required Returns Libor + 300bps
Expected Returns Libor + 200bps
Contributions & Asset Returns
Liability Basis
Time Horizon

Access to LDI Hub
8
Step 2 Description
• Interest rate and inflation risk are typically one of the largest “unrewarded risks” for a
pension scheme
• Setting up an LDI hub which gives the scheme the ability to manage inflation and interest
rate risk efficiently and effectively

Step 3 Description
• Generating returns in highly marketable asset classes via risk premia and active
management
• Examples: volatility control, risk parity, equity, and CTA strategies
Liquid Alpha & Beta Strategies
9
20%
80%
50%50%
85%
15%
40%
60%
Cash Asset Allocation Risk Contribution
Traditional
Risk Parity0%
10%
20%
30%
40%
50%
60%
AnnualizedVolatility(%)
FTSE 100 Rolling Volatility Vol Control Rolling Vol
Volatility Control Strategy Risk Parity Strategy

Liquid & Semi-Liquid Credit Strategies
Step 4 Description
• Credit consists of a range of sub-classes with different risk-return characteristics
• Bulk of excess returns are compensation for credit risk
Emerging Market DebtInvestment Grade
10

11
LL
HY
EMD
IG
SF
ABS
LL
HY
EMD
IG
SF
ABS0
100
200
300
400
500
600
0 100 200 300 400 500 600
GBPCreditSpreadoverSwaps(bps)
Credit Spread VaR 95 (bps)
Leveraged Loans High Yield Investment Grade Sub Financials ABS Emerging Market Debt
Q1 2007
Q4 2012
Equity expected
return: 300bps
over swaps
Sources: Babson Capital, Redington 25

12

Illiquid Credit Strategies
13
Step 5 Description
• Long-dated, hold to maturity instruments that pay an illiquidity premium
• Usually for high-quality, inflation-linked cash flows
• Typically, these Flight Plan Consistent Assets (FPCAs) tend to fit well with the overall
objectives of pension schemes when assessed in the context of a scheme’s PRMF
• Careful consideration should be placed on ensuring the scheme invests in opportunities
providing the best risk-adjusted returns and offers better relative-value
Secured Leases Social HousingInfrastructure Ground Rents

Illiquid Alpha & Beta Strategies
14
fdStep 6 Description
• Assets under this category provide attractive returns but are typically more complex and
illiquid e.g. private equity and PFI equity
• Inclusion of these asset classes in the scheme’s investments will depend on the overall
objectives and governance budget of the scheme as set out in its PRMF
• Examples: Private Equity, Property, Insurance Linked Securities
Insurance-Linked Securities

Step 7 Description
• Effective monitoring is key to measuring a scheme’s progress against its objectives
• Once you have set clear goals and objectives (step 1), the value of monitoring (step 7) is that
you can make better decisions by tracking where you are against your objectives.
• A scheme that regularly monitors understands the impact of their investment decisions and
can easily assess investment opportunities via-à-vis the liabilities
Ongoing Monitoring
Track scheme’s progress towards clear goals and objectives
15

16
Case Study: 7 Steps in Practice
Background:
• The client is a scheme with assets less than £100m.
• In early 2008, the scheme was close to having sufficient funds to consider a full buyout. However, with a traditional
balanced portfolio and no robust monitoring in place, this was not known until it was too late.
• The scheme suffered during the financial crisis and by the end of 2008 the funding position had deteriorated and
a 10y recovery plan put in place. Redington were appointed as investment consultants in early 2010.
Step 1: Set up clear goals and objectives through Pension Risk Management Framework
• Funding objective: To be fully funded in 2022 on a self sufficiency basis
• Target asset allocation: 100% matching assets
• Risk Targets: To reduce risk as measured by Value at Risk
• Hedge Ratio: To increase the hedge ratio to equal the funding ratio
16

60.0%
65.0%
70.0%
75.0%
80.0%
85.0%
90.0%
95.0%
100.0%
Fundinglevel
DynamicDe-Risking
OriginalStrategy
17
Re-risking and refresh of triggers Review investment strategy
Step 7: Daily monitoring of funding level to implement de-risking as funding level improves
Case Study: 7 Steps in Practice

13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
Contacts
Robert Gardner
Founder & Co-CEO
Telephone: +44 (0) 20 7250 3331
robert.gardner@redington.co.uk
18
THE DESTINATION FOR ASSET & LIABILITY MANAGEMENT
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 Ltd 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 Ltd does not owe any party a
duty of care in this respect.
Redington Ltd 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.
©Redington Limited 2013. All rights reserved. No
reproduction, copy, transmission or translation in whole
or in part of this presentation may be made without
permission. Application for permission should be made
to Redington Limited at the address below. Redington
Limited (6660006) is registered in England and Wales.
Registered office: 13-15 Mallow Street London EC1Y 8RD
http://twitter.com/robertjgardner
http://uk.linkedin.com/in/robertjgardner

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