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Preparing for the End Game
 

Preparing for the End Game

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    Preparing for the End Game Preparing for the End Game Presentation Transcript

    • External Presentation Europe Institutional Pensions Training 31 January 2013Preparing for theEnd GameRobert GardnerEurope Institutional Pensions Training1
    • External Presentation Europe Institutional Pensions Training 31 January 20131. Transfer to membersChange benefit format,e.g. ETVs, EarlyRetirement2. Transfer to externalentityBuy-In/Buy-out3. Preparing for theEnd GameA 7-Step Plan to FullFundingWhat is the End Game?2
    • External Presentation Europe Institutional Pensions Training 31 January 2013Preparing for the End Game3The Seven Steps to Full Funding
    • External Presentation Europe Institutional Pensions Training 31 January 2013Adjusting the sails4The pessimist complains about the wind;The optimist expects it to change;The realist adjusts the sails.- William A. Ward
    • External Presentation Europe Institutional Pensions Training 31 January 2013Step 1 Description• A strategic Pension Risk Management Framework that sets out funding objectives, risk budgetand other constraints such as liquidity and collateral requirements• A Flight Plan that charts each plan’s path to full funding and generates required returns usedto set investment strategySetting Clear Goals and Objectives5
    • External Presentation Europe Institutional Pensions Training 31 January 2013Objective Measurement Performance Indicators Performance (31 Jan 13) RAGPrimary FundingObjectiveTo reach full funding by [2026] (basedon discount rate of Gilts + 0.75%)Expected Returns (ER) > RequiredReturns (RR)RR: Libor + 300bpsER: Libor + 200bpsDifference: -100bpsSecondaryFunding ObjectiveTo reach full funding on a buyout basisby [2032] (based on a discount rate ofgilts flat)Expected Returns (ER) > RequiredReturns (RR)RR: Libor + 250bpsER: Libor + 200bpsDifference: -50bpsInvestmentStrategyActual Returns should exceedExpected ReturnsActual Returns (AR) > Expected Returns(ER)AR: Libor + xxxbpsER: Libor + 200bpsDifference: xxbpsRisk BudgetThe investment strategy should not riskthe deficit worsening by [20%] ofliabilities over a 1 year periodVaR95 < [20%] of liabilities VaR95: 28.0%Hedging StrategyNominal/Inflation hedge ratio should bemaintained within +/- 5% of the fundingratio.Funding Ratio (gilts + 0.75%) 60%Nominal Hedge Ratio (gilts + 0.75%) 20%Inflation Hedge Ratio (gilts + 0.75%) 25%CollateralMaintain sufficient eligible for thepurposes of covering margin calls thatmay arise from the Scheme’s currentderivative positions over a 1 yearperiod.Total available eligible collateral xx mnRemaining collateral after VaR95 event yy mnThe Pension Risk Management Framework6RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away
    • External Presentation Europe Institutional Pensions Training 31 January 20131,0001,5002,0002,5003,0003,5004,0002012201320132014201420152015201620172017201820182019202020202021202120222022202320242024202520252026£mmFlight Planliability (swapflat) asset(swapsflat)The Flight Plan7100% - Swaps Flat by 2026Required Returns Libor + 300bpsExpected Returns Libor + 200bpsContributions & Asset ReturnsLiability BasisTime Horizon
    • External Presentation Europe Institutional Pensions Training 31 January 2013Access to LDI Hub8Step 2 Description• Interest rate and inflation risk are typically one of the largest “unrewarded risks” for apension scheme• Setting up an LDI hub which gives the scheme the ability to manage inflation and interestrate risk efficiently and effectively
    • External Presentation Europe Institutional Pensions Training 31 January 2013Step 3 Description• Generating returns in highly marketable asset classes via risk premia and activemanagement• Examples: volatility control, risk parity, equity, and CTA strategiesLiquid Alpha & Beta Strategies920%80%50%50%85%15%40%60%Cash Asset Allocation Risk ContributionTraditionalRisk Parity0%10%20%30%40%50%60%AnnualizedVolatility(%)FTSE 100 Rolling Volatility Vol Control Rolling VolVolatility Control Strategy Risk Parity Strategy
    • External Presentation Europe Institutional Pensions Training 31 January 2013Liquid & Semi-Liquid Credit StrategiesStep 4 Description• Credit consists of a range of sub-classes with different risk-return characteristics• Bulk of excess returns are compensation for credit riskEmerging Market DebtInvestment Grade10
    • External Presentation Europe Institutional Pensions Training 31 January 2013Liquid & Semi-Liquid Credit Strategies11LLHYEMDIGSFABSLLHYEMDIGSFABS01002003004005006000 100 200 300 400 500 600GBPCreditSpreadoverSwaps(bps)Credit Spread VaR 95 (bps)Leveraged Loans High Yield Investment Grade Sub Financials ABS Emerging Market DebtQ1 2007Q4 2012Equity expectedreturn: 300bpsover swapsSources: Babson Capital, Redington 25
    • External Presentation Europe Institutional Pensions Training 31 January 2013Liquid & Semi-Liquid Credit Strategies12
    • External Presentation Europe Institutional Pensions Training 31 January 2013Illiquid Credit Strategies13Step 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 overallobjectives of pension schemes when assessed in the context of a scheme’s PRMF• Careful consideration should be placed on ensuring the scheme invests in opportunitiesproviding the best risk-adjusted returns and offers better relative-valueSecured Leases Social HousingInfrastructure Ground Rents
    • External Presentation Europe Institutional Pensions Training 31 January 2013Illiquid Alpha & Beta Strategies14fdStep 6 Description• Assets under this category provide attractive returns but are typically more complex andilliquid e.g. private equity and PFI equity• Inclusion of these asset classes in the scheme’s investments will depend on the overallobjectives and governance budget of the scheme as set out in its PRMF• Examples: Private Equity, Property, Insurance Linked SecuritiesInsurance-Linked Securities
    • External Presentation Europe Institutional Pensions Training 31 January 2013Step 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 thatyou can make better decisions by tracking where you are against your objectives.• A scheme that regularly monitors understands the impact of their investment decisions andcan easily assess investment opportunities via-à-vis the liabilitiesOngoing MonitoringTrack scheme’s progress towards clear goals and objectives15
    • External Presentation Europe Institutional Pensions Training 31 January 201316Case Study: 7 Steps in PracticeBackground:• 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 traditionalbalanced 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 anda 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 ratio16
    • External Presentation Europe Institutional Pensions Training 31 January 201360.0%65.0%70.0%75.0%80.0%85.0%90.0%95.0%100.0%FundinglevelDynamicDe-RiskingOriginalStrategy17Re-risking and refresh of triggers Review investment strategyStep 7: Daily monitoring of funding level to implement de-risking as funding level improvesCase Study: 7 Steps in Practice
    • External Presentation Europe Institutional Pensions Training 31 January 201313-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.ukContactsRobert GardnerFounder & Co-CEOTelephone: +44 (0) 20 7250 3331robert.gardner@redington.co.uk18THE DESTINATION FOR ASSET & LIABILITY MANAGEMENTDisclaimer For professional investors only. Not suitablefor private customers.The information herein was obtained from varioussources. We do not guarantee every aspect of itsaccuracy. The information is for your private informationand is for discussion purposes only. A variety of marketfactors and assumptions may affect this analysis, andthis analysis does not reflect all possible loss scenarios.There is no certainty that the parameters andassumptions used in this analysis can be duplicated withactual trades. Any historical exchange rates, interestrates or other reference rates or prices which appearabove are not necessarily indicative of future exchangerates, interest rates, or other reference rates or prices.Neither the information, recommendations or opinionsexpressed herein constitutes an offer to buy or sell anysecurities, futures, options, or investment products onyour behalf. Unless otherwise stated, any pricinginformation in this message is indicative only, is subjectto change and is not an offer to transact. Whererelevant, the price quoted is exclusive of tax anddelivery costs. Any reference to the terms of executedtransactions should be treated as preliminary andsubject to further due diligence .Please note, the accurate calculation of the liabilityprofile used as the basis for implementing any capitalmarkets transactions is the sole responsibility of theTrustees actuarial advisors. Redington Ltd will estimatethe liabilities if required but will not be held responsiblefor any loss or damage howsoever sustained as a resultof inaccuracies in that estimation. Additionally, the clientrecognizes that Redington Ltd does not owe any party aduty of care in this respect.Redington Ltd are investment consultants regulated bythe Financial Services Authority. We do not advise onall implications of the transactions described herein.This information is for discussion purposes and prior toundertaking any trade, you should also discuss withyour professional tax, accounting and / or other relevantadvisers how such particular trade(s) affect you. Allanalysis (whether in respect of tax, accounting, law or ofany other nature), should be treated as illustrative onlyand not relied upon as accurate.©Redington Limited 2013. All rights reserved. Noreproduction, copy, transmission or translation in wholeor in part of this presentation may be made withoutpermission. Application for permission should be madeto Redington Limited at the address below. RedingtonLimited (6660006) is registered in England and Wales.Registered office: 13-15 Mallow Street London EC1Y 8RDhttp://twitter.com/robertjgardnerhttp://uk.linkedin.com/in/robertjgardner