1. Private & Confidential The-Pensions-Net-Work 20 June 2013
Robert Gardner
Founder and Co-CEO
Redington Ltd
Repairing the Pension Deficit using an
Integrated Funding and Investment Risk
Management Framework
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2. Private & Confidential The-Pensions-Net-Work 20 June 2013 2
We live in uncertain times...

3. Private & Confidential The-Pensions-Net-Work 20 June 2013 3
People are living longer

4. Private & Confidential The-Pensions-Net-Work 20 June 2013
The economic outlook remains uncertain
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5. Private & Confidential The-Pensions-Net-Work 20 June 2013 5
Pension schemes remain under pressure

6. Private & Confidential The-Pensions-Net-Work 20 June 2013
Crisis to recovery: a bumpy ride so far ...
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20-Year Nominal Gilt Yields 20-Year Breakeven Inflation
Credit Spreads Equity Markets
2.0
2.5
3.0
3.5
4.0
4.5
May 2008 May 2009 May 2010 May 2011 May 2012 May 2013
%
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
May
2008
May
2009
May
2010
May
2011
May
2012
May
2013
%
20
40
60
80
100
120
May
2008
May
2009
May
2010
May
2011
May
2012
May
2013
Rebasedat100asofMay2008
FTSE 100 MSCI World MSCI Emerging Markets
0
50
100
150
200
250
300
350
400
May
2008
May
2009
May
2010
May
2011
May
2012
May
2013
Bps

7. Private & Confidential The-Pensions-Net-Work 20 June 2013
But deficits have grown
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Buy-Out Deficit
Buy-Out Funding Ratio
Aggregate of PPF eligible schemes
March 2012
60%
Down 7.0%
GBP 675.8bn
Aggregate of PPF eligible schemes
March 2012
Up £208.8bn

8. Private & Confidential The-Pensions-Net-Work 20 June 2013 8
1. Transfer to members
Change benefit
format, e.g. ETVs, Early
Retirement
2. Transfer to external
entity
Buy-In/Buy-out
3. Self Sufficiency
A 7-Step Plan to Full
Funding
Choosing the End Game

9. Private & Confidential The-Pensions-Net-Work 20 June 2013 9
Preparing for the End Game
VUCA

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Volatility
Uncertainty
Complexity
Ambiguity
Vision
Understanding
Clarity
Agility
QE Japan
CPAC and RPI
Economy, Politics,
Products
Who, what, when,
why?
Repair Deficit
Education
S.M.A.R.T
Calls to action
Preparing for the End Game
VUCA

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Preparing for the End Game
The Seven Steps to Full Funding

12. Private & Confidential The-Pensions-Net-Work 20 June 2013 12
Step 1 Description
• A strategic Pension Risk Management Framework sets out funding
objectives, risk budget and other constraints such as liquidity and collateral
requirements
• A Flight Plan charts each plan’s path to full funding and generates required
returns that are used to set investment strategy
Clear Goals and Objectives

13. Private & Confidential The-Pensions-Net-Work 20 June 2013 13
The Flight Plan
Map path to full
funding
Focus investment
strategy decisions
Identify best
opportunities

14. Private & Confidential The-Pensions-Net-Work 20 June 2013
Pension Risk Management Framework
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Objective Measurement (Assumed) Performance Indicators Performance (31 March 2013) RAG
Funding Objectives
Primary Funding Objective:
To become fully funded on a Technical
Provisions (Gilts +100bps) basis by 2023.
Expected Returns > Required Returns
Required Return:
Expected Return:
Difference:
Gilts +140bps
Gilts +125bps
-15bps
Secondary Funding Objective:
To build up a sufficient buffer to withstand an
adverse demographic shock and still return to
full funding by 2023.
Expected Returns > Required Returns to return
to full funding by 2023 (following an adverse
demographic shock)
Required Return:
Expected Return:
Difference:
Gilts +175bps
Gilts +125bps
-50bps
Investment Strategy
Actual Returns should exceed Expected
Returns (implying outperformance).
Actual Returns > Expected Returns
Actual Return:
Expected Return:
Difference:
Gilts + xxxbps
Gilts + xxxbps
xxxbps
Risk Budget
Primary Risk Objectives
The investment strategy should not risk the
deficit worsening by [10%] of liabilities over a 1-
year period (including longevity risk).
VaR95 < 10% of liabilities VaR95: 7.8%
Secondary Risk Objectives
The investment strategy should not risk annual
contributions increasing by more than £10m
p.a. over a 1-year period (including longevity)
CaR95 < £10m
VaR95: £8.2m
Hedging Strategy
Nominal/Inflation hedge ratio should be
maintained within +/- [5]% of the funding ratio.
Funding Ratio (Ongoing Basis) 106%
Nominal Hedge Ratio (Ongoing Basis) 90%
Inflation Hedge Ratio (Ongoing Basis) 90%
Liquidity
Maintain sufficient eligible collateral to meet
potential margin calls on derivative positions
and cover one-year’s worth of benefit payments
Total available liquid assets £[xxx]m
One-Year Collateral Requirement + One-Year
Cash Flow
£[xxx]m
Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away

15. Private & Confidential The-Pensions-Net-Work 20 June 2013
Funding Objectives
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 Relative importance of contributions vs. returns in funding the deficit
depends on the funding and risk objectives set out in PRMF
Time

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 Schemes face demographic, operational, insolvency and investment risks
‘Reduce deficits and improve member security by designing, developing and
delivering investment strategies that manage risk effectively and generate
outperformance’
 Question: What is the risk in a 1-in-20 downside scenario?
Risk Objectives
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Risk: Trustee Perspective Risk: Sponsor Perspective
 Deficit Value (VaR)
 Required Contributions (CaR) Funding Ratio (FRaR)
 Required Return on Assets (RRaR)

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Sponsor Covenant Load
 Estimate the sponsor Covenant Load by combining cash contributions with
the value of the sponsor’s implicit support of the scheme’s investment risk
 A PRMF which integrates funding considerations will explicitly consider the
covenant load and the risk of contributions increasing in a downside
scenario
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Sponsor
Covenant
Load
Cash
Contributions
over Horizon
Investment
Return over
Horizon
CaR over
Horizon

18. Private & Confidential The-Pensions-Net-Work 20 June 2013
Integrating Funding and Investment Risk
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Time Horizon
Contributions
Risk
Contributions
Time Horizon
RequiredReturns
Risk
RequiredReturns
Time
Horizon
Contributions

19. Private & Confidential The-Pensions-Net-Work 20 June 2013
Integrating Funding and Investment Risk
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20. Private & Confidential The-Pensions-Net-Work 20 June 2013
Implementing an Integrated PRMF
Case Study: The journey of a small scheme (a)
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21. Private & Confidential The-Pensions-Net-Work 20 June 2013
Scheme 2008 2013 Comments
Clear Funding Objectives   Pension Risk Management Framework
Risk Budget   Reduced VaR from 30% to 15%
Monitoring   Missed Buy-Out opportunity in 2008
Allocation to Equities 90% 0% Dynamic asset allocation
Hedge Ratio 5% 90% Funding Level immunised to rates & inflation
Recap:
- What is the end game?
- What is the most efficient investment strategy for meeting the
investment and funding objectives?
- How will the investment strategy be implemented?
- How will the investment strategy be adjusted over time?
Case Study: The journey of a small scheme (b)
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22. Private & Confidential The-Pensions-Net-Work 20 June 2013
13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
Contacts
Robert Gardner
Founder and Co-CEO
Direct Line: 0207 250 3416
robert.gardner@redington.co.uk
LinkedIn: http://linkd.in/134mv6H
Twitter: https://twitter.com/robertjgardner
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23. Private & Confidential The-Pensions-Net-Work 20 June 2013
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