Inflation- Linked Assets


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Inflation- Linked Assets

  1. 1. Redington13-15 Mallow StreetLondon EC1Y 8RDT. 020 7250 Linked AssetsIntroduction18 March 2011
  2. 2. Inflation-Linked AssetsScheduleSCHEDULE
  3. 3. Previous Education Sessions3Inflation Linked AssetsRedington Education Seminars
  4. 4. Inflation Linked AssetsCreativity Exercise: Thinking Outside the Box
  5. 5. More than one solution...Inflation Linked AssetsCreativity Exercise: Thinking Outside the Box
  6. 6. OverallObjectiveRiskTargetsAspirationalTargetsSchemeConstraints6The pension risk management framework is a market consistent, transparent and actionable tool which is key for any trustee, sponsor or memberObjective Triggers Performance IndicatorsWhat is the overall objective? To reach full funding on self-sufficiency basis By 2020 on a Swaps +75bps with £50m ofcontributions p/yrHow will we measure the objective? Using the required return on the Scheme’s assets Required Return of assets is Swaps +160bpsWhat are the primary risk targets? Required rate of Return at Risk (RRaR)Contributions at Risk (CaR)RRaR should be no more than 300bpsCaR should be kept below £50mWhat is the secondary risk target? Value at Risk (VaR) VaR should not exceed 20% of the liabilitiesWhat are the primary aspirational targets? To increase interest rate and inflation hedge ratios Hedge ratios equal to funding levelWhat is the secondary aspirational target? Dynamic de-risking Based upon regular monitoringWhat is the primary Scheme constraint? Liquidity Enough liquidity to pay pension paymentsWhat is the secondary Scheme constraint? Collateral Requirements Enough eligible collateral to cover the 1yr derivativeVaR95Regular monitoring allows a call to action that enables trustees and sponsors to anticipate and recalibrate the investment strategyGovernance and Investment StrategyPension Risk Management Framework (PRMF)“‘If a man knows not what harbour he seeks, any wind is the right wind’”Seneca
  7. 7. 7Flight Plan – Projected CashflowsThis is the expected path of the liabilities over the next 20 years.Risk management, governance, markets and strategic asset allocation all play a part.Governance and Investment StrategyPension Risk Management Framework (PRMF)
  8. 8. 8£10.0bn£12.0bn£14.0bn£16.0bn£18.0bn£20.0bn£22.0bn£24.0bn£26.0bn2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025Example:Actual Assetand Liability Path (Actuarial Basis)Projected Liabilities Projected Assets Actual Liabilties Actual AssetsThe Flight Plan: Long-Term Objective Setting and Risk Management FrameworkInflation Linked AssetsThe Flight Plan
  9. 9. 9Growth• Equities• Property• AbsoluteReturn/Hedge Funds• Private Equity• CommoditiesTraditional “Growth” and “Matching” AssetsMatching• Nominal Gilts• Index-LinkedGilts• NominalSwaps• InflationSwaps?Credit•Nominal/ index-linked corporatebonds•Loans•Structured FinanceAssets•Other debt productsC?FlightplanConsistent Assets•Long term secured leases•Social housing•Commercial mortgages•Ground rents•Equity release mortgages•Social and economicinfrastructurePension Risk Management Framework (PRMF)“Flight Plan Consistent” Assets
  10. 10. 10FPCAs Matching Growth CreditHigh Correlation to Liabilities    /Contractual Cashflows    Senior Secured    Long Duration  /  /Excess Returns    (Il)Liquidity Premium    /Potential for Upside Gain    10Pension Risk Management Framework (PRMF)“Flight Plan Consistent” Assets
  11. 11. Redington Publications11Spring Collection Highlights: LDI 2.0,Secured Leases, Ground Rents, EquityRelease Mortgages, Social Housing,Insurance-Linked Securities, InfrastructureSpring Collection 2011 Collection Coming Soon: Enhanced MatchingAssets, Socially Responsible Investing and Long-Term Growth AssetsPension Risk Management Framework (PRMF)“Flight Plan Consistent” Assets
  12. 12. SECURED LEASES• Take advantage of attractive yields on long-term secured property leases• Yields may be in excess of yields on corporate bonds issued by same borrower• Long-dated (up to 25 years) index-linked cashflows - helps hedge inflation risksSOCIAL HOUSING• Low-cost rental housing provided for disadvantaged people in need of housing• Generally provided by local councils and housing associations• Offers long-dated, inflation-linked cashflows from secured borrowers (i.e. housingassociations) with quasi-government guaranteeINFRASTRUCTURE•Investing in public sector projects through Private Finance Initiatives (PFIs)•PFIs enable government to fund new infrastructure projects•Long-term, potentially inflation-linked revenue streams12Example Flight Plan Consistent AssetsPension Risk Management Framework (PRMF)“Flight Plan Consistent” Assets
  13. 13. ContactsFeel free to share, contact, discuss...Direct Line: +44 (0) 20 7250 3416Telephone: +44 (0) 20 7250 3331Redington13-15 Mallow StreetLondon EC1Y 8RDRobert GardnerFounder & addition...