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The Sheldon Manifesto - Credit Suisse Pensions Conference
- 1. Private & Confidential Credit Suisse Pensions Conference April 2014 The Sheldon Manifesto Dawid Konotey-Ahulu Co-Founder and Co-CEO Redington 1
- 2. Private & Confidential Credit Suisse Pensions Conference April 2014 2 This is Sheldon
- 3. Private & Confidential Credit Suisse Pensions Conference April 2014 2 Sheldon is a very cool guy. He’s a helicopter pilot.
- 4. Private & Confidential Credit Suisse Pensions Conference April 2014 2 Flying a helicopter is very hard. So many levers… The Cyclic tilts the aircraft omni- directionally
- 5. Private & Confidential Credit Suisse Pensions Conference April 2014 2 The Pedals. For changing direction
- 6. Private & Confidential Credit Suisse Pensions Conference April 2014 2 The Collective. For controlling take- off and landing The Throttle. More power / less power
- 7. Private & Confidential Credit Suisse Pensions Conference April 2014 2 It’s a delicate, difficult balance
- 8. Private & Confidential Credit Suisse Pensions Conference April 2014 2 Verb: To run a pension scheme: Defn: A process akin to flying a helicopter
- 9. Private & Confidential Credit Suisse Pensions Conference April 2014 The Funding Position GBPMillions Liabilities Assets 700 944 Discount rate: Risk- free Rate +50bps 3 74% 244 0 50 100 150 200 250 300 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% GBPMillions % Deficit Funding Level The Pension Scheme
- 10. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions The Pension Scheme The Flight Plan Full funding on a Risk-free + 50bps basis in 2022 Required Rate of Return 2.34% ExcessovertheRisk- freeRate 4
- 11. Private & Confidential Credit Suisse Pensions Conference April 2014 The Pension Scheme The Asset Allocation Expected Return: Risk-free +1.72% Equities Corporate Bonds Gilts 30% 50% 20% 5
- 12. Private & Confidential Credit Suisse Pensions Conference April 2014 The Pension Scheme’s Risk 5
- 13. Private & Confidential Credit Suisse Pensions Conference April 2014 Using the Levers … 13
- 14. Private & Confidential Credit Suisse Pensions Conference April 2014 It’s a balance … 14
- 15. Private & Confidential Credit Suisse Pensions Conference April 2014 Lever 1. Changing the Fuel Mixture Equities Corporate Bonds Gilts Diversifed Growth Funds Hedge Funds 30% 50% 20% 13% 33% 15% 15% 25% 15
- 16. Private & Confidential Credit Suisse Pensions Conference April 2014 2.34% 2.34% Expected Return Required Return 1.72% 2.34% Expected Return Required Return Lever 1. New Fuel, More PowerAnnualReturnover theRisk-freeRate AnnualReturnover theRisk-freeRate 16
- 17. Private & Confidential Credit Suisse Pensions Conference April 2014 2 4 4 [ V A… But Higher Returns mean More Risk 6.4% 0.6% 3.5% 20.4% 9.6% 16.9% 23.6% 0% 25% 50% VaRas%ofliabilities GBPMillions Current Deficit 1-in-20 potential increase in Deficit over the next year: [23.6% × £944m = £212m] 17
- 18. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 1250 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions If the Risk materialises 18
- 19. Private & Confidential Credit Suisse Pensions Conference April 2014 2.34% Projected Required Rate of Return Potential Risk Materialises 194 194 220 Projected Deficit Potential Risk Materialises The Required Rate of Return shoots Up GBPMillions Annualexcess overtheRisk-free Rate 5.98% 19
- 20. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions 20 Lever 2. More Sponsor Contributions… Annualexcess overtheRisk-free Rate Required Rate of Return 2.34% 20 GBPMillions Annual Sponsor Contributions
- 21. Private & Confidential Credit Suisse Pensions Conference April 2014 1.72% Required Rate of Return GBPMillions Annualexcess overtheRisk-free Rate 25 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions Annual Sponsor Contributions 21 The Required Rate of Return falls…
- 22. Private & Confidential Credit Suisse Pensions Conference April 2014 20 25 30 GBPMillions But the Sponsor is Constrained Annual deficit recovery contributions EBITDA [Contribution limit] 46 20 25 30 GBPMillions 22 Qn: Can we have another £5m a year in additional contributions please? A: No
- 23. Private & Confidential Credit Suisse Pensions Conference April 2014 2.34% 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions Lever 3. Extend the Time to full funding 2022 2030 1.57% 23 AnnualReturnoverthe Risk-freeRate Require RF +1.57% More time
- 24. Private & Confidential Credit Suisse Pensions Conference April 2014 0.0% 2.0% 4.0% 6.0% 8.0% 2018 2023 2028 2033 2038 2043 AnnualExcessReturnovertheRisk- freeRate Target Year for Full Funding More Time: It is a Decreasing Benefit Required Rate of Return 24
- 25. Private & Confidential Credit Suisse Pensions Conference April 2014 Do not rely heavily on Lever 3 25
- 26. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions Risk-free+50bps Risk-free +100bps 26 Lever 4. Increase the “discount spread”
- 27. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 1250 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 But Now Run Harder for Longer Assets earning risk- free rate +1.0% GBPMillions Assets earning risk- free rate +0.5% 27
- 28. Private & Confidential Credit Suisse Pensions Conference April 2014 Bad Weather… 28
- 29. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 1250 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions Lever 5. The Hedging Lever Hedged 2.27%2.34% 4.21% Annualexcessover theRisk-freeRate RequiredRateofReturn overRisk-freerate Original asset path Inflation rises by 1% 29 GBPMillions
- 30. Private & Confidential Credit Suisse Pensions Conference April 2014 …may result in insufficient Liquid Assets (Collateral)… Equities Corporate Bonds Gilts 250 210 Liquidity Required Liquidity Available 30% 50% 20% 30
- 31. Private & Confidential Credit Suisse Pensions Conference April 2014 5. But, increasing Liquid Assets… Equities Corporate Bonds Gilts 250 Liquidity Required Liquidity Available 298 43% 38% 20% 31 Lower Expected Return: Risk-free +1.33% More Gilts!
- 32. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 1250 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions 5. …means lower Returns: and a missing £70m Missing £70m 32 GBPMillions
- 33. Private & Confidential Credit Suisse Pensions Conference April 2014 The Sheldon Manifesto 33
- 34. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions Use ALL the Levers A Bit More Time… A bit more Contribution… Lever 1 Lever 2 20 2.5 GBPMillions 34 Additional Sponsor Contributions
- 35. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions Maintain the spread over the discount rate Discount rate Lever 3 Maintain RF +0.5% 35
- 36. Private & Confidential Credit Suisse Pensions Conference April 2014 The Required Rate of Return falls 1.89% AnnualReturnRequired overtheRisk-freeRate AnnualReturnRequired overtheRisk-freeRate 2.34% 1.89% 36
- 37. Private & Confidential Credit Suisse Pensions Conference April 2014 Increase Expected Returns Equities Corporate Bonds Gilts Diversifed Growth Funds Hedge Funds Lever 4 30% 50% 20% 30% 40% 10% 5% 15% 37
- 38. Private & Confidential Credit Suisse Pensions Conference April 2014 1.89% AnnualReturnRequiredovertheRisk-freeRate 1.72%AnnualReturnoverthe Risk-freeRate The Expected Rate of Return rises… Lever 4 1.72% 1.89% 38
- 39. Private & Confidential Credit Suisse Pensions Conference April 2014 Expected Return UP / Required Return DOWN 1.72% AnnualReturnoverthe Risk-freeRate 1.72% 39 AnnualReturnRequired overtheRisk-freeRate 2.34% - 1.89% - 1.89% AND
- 40. Private & Confidential Credit Suisse Pensions Conference April 2014 Do Some Hedging Lever 5 74% 74% Interest rate hedge ratio Inflation hedge ratio 74% 74% 199 210 Liquidity Required Liquidity Available 199 40
- 41. Private & Confidential Credit Suisse Pensions Conference April 2014 199 210 Liquidity Required Liquidity Available Stay within the Pension Scheme’s Liquidity Constraints Equities Corporate Bonds Gilts Diversifed Growth Funds Hedge Funds 30% 40% 10% 5% 15% Lever 5 199 210 41
- 42. Private & Confidential Credit Suisse Pensions Conference April 2014 With an appropriate Risk Budget Lever 5 7.5% 0.3% 3.0% 5.0% 4.4% 7.0% 13.2% 0.0% 25.0% 50.0% VaRas%ofliabilities 42
- 43. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions Now heading to Full Funding and Beyond! Risk-free +1.89% Risk-free +0.55% 43 Switching to a safer portfolio thereafter
- 44. Private & Confidential Credit Suisse Pensions Conference April 2014 500 750 1000 2013 2015 2017 2019 2021 2023 2025 2027 2029 GBPMillions Reached full funding? Time to switch to Safe Mode. 50 % 00 50 % 0 Corporate Bonds Gilts Expected Return: Risk-free Rate +0.55% Risk-free +1.89% Risk-free +0.55% 44
- 45. Private & Confidential Credit Suisse Pensions Conference April 2014 45 Lima Oscar Lima!