Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
Understanding, Modelling and
Managi...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
Agenda
What is a Defined Benefit Pe...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 3
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
What is a Defined Benefit Pension F...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
How do we Measure the Health of a P...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
What are the Different Stages of a ...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
What are the Key Risks to a Pension...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 8
What are the Main Challenges to t...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 9
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
How do we Measure the Risks to a Pe...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
How can a Pension Fund Measure and ...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
How can a Pension Fund Measure and ...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
What if? Stress Testing
13
Impact o...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 14
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
How do you combine Contributions, I...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
How can a Pension Fund Manage and M...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 17
How does this Framework work in ...
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
Any Questions?
18
Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014
13-15 Mallow Street London EC1Y 8RD...
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Understanding Modelling And Defined Benefit Pension Risk

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Understanding Modelling And Defined Benefit Pension Risk

  1. 1. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 Understanding, Modelling and Managing Defined Benefit Pension Risk Oxford-Man Institute of Quantitative Finance Wednesday 21st May 2014 1
  2. 2. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 Agenda What is a Defined Benefit Pension Fund? 4 How do we Measure the Health of a Pension Fund? 5 What are the Different Stages of a Defined Benefit Pension Fund? 6 What are the Key Risks to a Pension Fund? 7 What are the Main Challenges to the Pension Industry? 8 How do we Measure the Risks to a Pension Fund? 10 How can a Pension Fund Measure and Hedge Risk? 11 What if? Stress Testing 13 How do you Combine Contributions, Investment Return and Funding Date to fund a Pension Fund? 15 How can a Pension Fund Manage and Monitor its Risks in a single Framework? 16 How does this Framework work in practice to determine Dynamic Risk Management Actions? 17 Any Questions 18 2
  3. 3. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 3
  4. 4. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 What is a Defined Benefit Pension Fund? 4 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 CashFlow£ Years Fixed Cash Flows Real Cash Flows
  5. 5. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 How do we Measure the Health of a Pension Fund? 5
  6. 6. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 What are the Different Stages of a Defined Benefit Pension Fund? 6 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 GBP Millions Liabilities (Gilts Flat) Liabilities (TP Basis) Assets Expected Return: Gilts +2.25% Risk: 11.2% Hedge Ratio: 35% Expected Return: Gilts +1.62% Risk: 6.5% Hedge Ratio = Funding Ratio Expected Return: Gilts +0.25% Risk: 2.2% Hedge Ratio = 100% 1. Managing the Deficit 2. Preparing for the End Game 3. Running Off the Pension Fund
  7. 7. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 What are the Key Risks to a Pension Fund? 7 Liabilities CovenantAssets Equity Credit Manager Skill Contributions (£): Willingness to Pay Ability to Pay Longevity Interest Rate Inflation Modelling
  8. 8. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 8 What are the Main Challenges to the Pension Industry?
  9. 9. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 9
  10. 10. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 How do we Measure the Risks to a Pension Fund? Using Value at Risk 10 Funding Ratio at Risk
  11. 11. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 How can a Pension Fund Measure and Hedge Risk? Using Sensitivity Analysis 11 Interest Rate Sensitivity (PV01)
  12. 12. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 How can a Pension Fund Measure and Hedge Risk? Using Sensitivity Analysis 12 Inflation Sensitivity (IE01)
  13. 13. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 What if? Stress Testing 13 Impact on Deficit of Stress Test by Assets and Liabilities
  14. 14. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 14
  15. 15. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 How do you combine Contributions, Investment Return and Funding Date to fund a Pension Fund? 15
  16. 16. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 How can a Pension Fund Manage and Monitor its Risks in a single Framework? 16 Objective Measurement Performance Indicators Performance RAG Primary Funding Objective To reach 100% funded on a swaps flat basis by 2026 Expected Returns (ER) > Required Returns (RR) RR: Libor + 300bps ER: Libor + 200bps Difference: -100bps Investment Strategy Actual Returns should exceed Expected Returns Actual Returns (AR) > Expected Returns (ER) AR: Libor + 210bps ER: Libor + 200bps Difference: +10bps Risk Budget The investment strategy should not risk the deficit worsening by £600mm over a 1 year period VaR95 < £600mm VaR95: £700mm Hedging Strategy Nominal and inflation hedge ratio should be maintained within +/- 5% of the funding ratio Funding Ratio (swaps flat) 70% n/a Nominal Hedge Ratio (swaps flat) 50% Inflation Hedge Ratio (swaps flat) 85% Collateral Sufficient liquidity to make pension payments and to cover margin calls that may arise from derivative positions. Total available eligible collateral £900mm Remaining collateral after VaR95 event £600mm RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away
  17. 17. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 17 How does this Framework work in practice to determine Dynamic Risk Management Actions?
  18. 18. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 Any Questions? 18
  19. 19. Oxford-Man Institute Understanding Modelling and Defined Benefit Pension Risk May 2014 13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.ukPlease get in touch 19 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: Austin Friars House, 2 – 6 Austin Friars, London, EC2N 2HD 2 - 6 Austin Friars, EC2N 2HD Robert Gardner Founder & Co-CEO Direct Line: +44 0 207 250 3416 robert.gardner@redington.co.uk @robertjgardner http://uk.linkedin.com/in/robertjgardner
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