Liability Driven Investments (LDI)
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    Liability Driven Investments (LDI) Liability Driven Investments (LDI) Presentation Transcript

    • Redington13-15 Mallow StreetLondon EC1Y 8RDT. 020 7250 Investor & Pension Corporation Trustee Training SeminarLiability Driven Investments (LDI)Robert Gardner, Redington6th October 2011
    • 2Good GovernanceACT
    • 3Liability Driven Investments (LDI)Maximise your toolset
    • The PRMF Dashboard4
    • 5Respond to changes: Set up to take decisions quickly as conditions change or falls away from roadmap to full fundingActive asset allocation Dynamic de-risking Efficient governanceMonitor regularly: Clear framework to measure progress against those objectivesFunding level Risk metricsLiquidity and collateralrequirementsSet objectives: Achieve a fuller understanding of objectives and constraintsIntermediate goals Longer term aspirations Risk toleranceKey stages in building a Pension Risk Management Framework
    • 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020GBPMillionsLiabilities Path Actual Liabilities Assets Path Actual AssetsLiability BasisContributions & Asset ReturnsTime HorizonThe Flight Plan is an effective tool for making focussed asset allocation decisions andidentifying the best opportunities.It allows schemes to identify the assets which contribute most towards their progressto full funding – we call them Flight Plan Consistent Assets.Moving from “set and forget” to“anticipate and recalibrate”6
    • Funding LevelCase study: Dynamic De-RiskingPension Risk Management Framework in action27 Sep 2010 28 Oct 2010 15 Dec 2010 04 Feb 2011Funding Ratio 80% 86% 89% 91%Equity Allocation 85% 65% 50% 40%Value at Risk* 33% 29% 25% 23%
    • 8Case study: Dynamic De-RiskingPension Risk Management Framework in actionOriginal1 New2 withoutde-riskingNew2 withde-riskingFunding level01 Oct 201078.4% 79.2% 79.2%Funding level 7Sep 201170.6% 71.8% 76.2%Volatility offunding level17.5% 15.9% 13.3%1Old strategy prior to Redington’s appointment2New strategy consisting of index-linked gilts, corporate bonds and cash overlaid withequity futures.
    • 9An example Pension Risk Management Framework
    • 10Today’s economic environmentGrowth“FlightPlanConsistentAssets”Matching
    • 11-6-4-2024680 5 10 15 20 25 30GBPMillionsYearsInitial investmentAttractive realreturnsInflation-linkedcashflowsProviding a matchfor liabilitiesInflowsOutflowsSource: RedingtonFlight Plan Consistent Asset – Example Cashflow ProfileFlight Plan Consistent Assets – How?
    • • Take advantage of attractive yields on long-term secured propertyleases• Yields may be in excess of yields on corporate bonds issued bysame borrower• Long-dated index-linked cashflowsSecured Leases• Ground rent created when freehold land or building is sold on longlease• Typically “pepper-corn” rent for land only (not buildings)• Offers attractive returns, limited credit risk and high level ofsecurityGround Rents• Low-cost rental housing provided for disadvantaged people inneed of housing• Generally provided by local councils and housing associations• Offers long-dated, inflation-linked cashflows from securedborrowers (i.e. housing associations) with quasi-governmentguaranteeSocial Housing• Investing in public sector projects through, for example, PrivateFinance Initiatives (PFIs), bespoke investments structures or bypurchasing a suitable infrastructure asset• Wide range of possible assets, from roads to power generation• Long-term, potentially inflation-linked revenue streamsInfrastructureExamples of “Flight Plan Consistent Assets”
    • Social Housing: Risk profileFlight Plan Consistent Assets – How?• The diagram shows a typicalsocial housing portfolio for apension fund investor with ablended real return of ca. 3-4%p.a.• The portfolio consists of differenthousing types with specificrisk/return profiles.• By adapting the share of thedifferent housing types in theportfolio, an investor can tailorthe portfolio’s return and the riskcharacteristics so that they fitrequirements.Social Housing is typically a low-risk asset class but the returnsand the risk on a portfolio can be tailored (to some extent) tomeet pension funds’ requirements.13Source: Evolution Securities,Redington
    • Flight Plan Consistent Assets – How?Example: Tapping the illiquidity premium in waterThe UK water sector is an excellent example of a Flight PlanConsistent Asset, providing the security, returns and cashflowsthat pension funds need.• Economic environment has small impact on returns:water is a necessity and will therefore be demandedirrespective of economic growth.• Inflation-linked cashflows and returns: water companiescan increase prices in line with the agreed price reviewwhich in turn is based on a formula related to RPI.• Low regulatory risk: The regulator’s desire to increasecompetition in the area could have a negative impact onreturns but the Government is likely to block any suchmove.Water sector: key characteristics• Currently up for sale• Bought by HSBC in August 2011 (for warehousing) for £74m• Provides water for 300,000 people in Cambridgeshire• 2010/2011: Revenue of £20m with profits of £7m before tax withno external debt except for a revolving credit facility to coverworking capital• Attractive purchase opportunity for a large pension fund or aconsortium of funds.Case study: Cambridge Water14
    • ContactsDisclaimer15ContactsDirect Line: +44 (0) 20 7250 3416Telephone: +44 (0) 20 7250 3331Redington13-15 Mallow StreetLondon EC1Y 8RDRobert GardnerFounder & DESTINATION FOR ASSET & LIABILITY MANAGEMENTDisclaimer 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 marketfactors 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 actualtrades. 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. Neitherthe 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 informationin 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 betreated 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 theliabilities 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 anyparty 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 priorto 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 orof any other nature), should be treated as illustrative only and not relied upon as accurate.©Redington Limited 2010. 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 toRedington Limited at the address below.Redington Limited (reg no 6660006) is registered in England and Wales. Registered office: 13-15 Mallow Street London EC1Y 8RD
    • The PRMF Dashboard16The Dashboard summarises provides a comprehensive, easy-to-understand overview of how well a scheme is performingagainst objectives.Risk Radar – What are your biggest riskfactors? What risks should you be focussingon?Scheme Gauge – What condition is yourscheme in judged on four fundamentalvariables?Risk Monitor – Putting numbers to yourexposure: How much risk is the schemetaking at the moment? (as measured by fourelemental risk metrics)Performance Monitor – Shows how the mostimportant markets have performed.Traffic light system – Where your scheme ismeeting targets (green), falling short by asmall margin (yellow) or underperformingsignificantly (red). Ideal for identifying areaswhere effective action is needed.PRMF checker – A summary of your scheme’sobjectives and whether they are being metDashboard – Key Features13465212123456
    • Redington Publications17Spring Collection Highlights: LDI 2.0, Secured Leases,Ground Rents, Equity Release Mortgages, SocialHousing, Insurance-Linked Securities, Infrastructure 2011 Collection: Enhanced Matching Assets,Socially Responsible Investing and Long-Term Growth Assets Risk Management Framework (PRMF)“Flight Plan Consistent” Assets