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LDI nine years onRobert Gardner, RedingtonSimon Wilkinson, Legal & General Investment Management7 June 2013
History7 June 2013
History7 June 2013 3-1-0.500.511.522.53%30-Year Gilt Real Yield
The Evolution of LDI7 June 2013
Evolution of LDI7 June 2013 5LDI 1.0Liability ImmunisationLDI 2.0The LDI “Manager”LDI 3.0Holistic ALM• Interest rate swaps...
Market for Gilt-Based Hedging7 June 2013 602004006008001,0001,2001,4001,600Demand SupplyGBPBillionsPPF 7800 Aggregate Sche...
LDI 2.07 June 2013 7
Growing Asset Class Toolkit7 June 2013 8
Pension Risk Management7 June 2013
RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away7 June 2013 10Objec...
To hedge or not to hedge...7 June 2013
7 June 2013 12Roll-Down and Carry0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%0 10 20 30 40 50 60ParRateTenor6m LIBOR Curvepar ...
0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%0 5 10 15 20 25 30 35 40 45Gilt ZC ZC 1y ZC 3y ZC 5y ZC 10yPayment of £100m132...
Case Study7 June 2013
1560%65%70%75%80%85%90%95%100%FundinglevelOriginal Strategy Dynamic De-Risking StrategyDe-riskingDe-riskingDe-Risking Trig...
Roll-Down and Carry Exercise7 June 2013
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LDI Nine Years On

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LDI Nine Years On

  1. 1. LDI nine years onRobert Gardner, RedingtonSimon Wilkinson, Legal & General Investment Management7 June 2013
  2. 2. History7 June 2013
  3. 3. History7 June 2013 3-1-0.500.511.522.53%30-Year Gilt Real Yield
  4. 4. The Evolution of LDI7 June 2013
  5. 5. Evolution of LDI7 June 2013 5LDI 1.0Liability ImmunisationLDI 2.0The LDI “Manager”LDI 3.0Holistic ALM• Interest rate swaps• Nominal gilts• Inflation swaps• Index-linked gilts• Gilt repo and TRS• Swaptions• Unfunded assetexposures• Corporate linkers• Sophisticated option overlays• Flight Plan Consistent Assets
  6. 6. Market for Gilt-Based Hedging7 June 2013 602004006008001,0001,2001,4001,600Demand SupplyGBPBillionsPPF 7800 Aggregate Scheme Liability Index-Linked Gilts OutstandingCorporate Linkers RPI Swaps OutstandingSource: Barclays, Pension Protection Fund, RedingtonPotential demand for long-dated linkersoutweighs available stock of RPI-linkedassets and RPI swap market capacity•The Pension Protection Fund 7800 Index of DBschemes estimated aggregate liability of£1,385.1bn at end of March 2013•£280bn (inflation-uplifted notional) of index-linkedgilts outstanding•£32bn of corporate linkers by market value (asmeasured by Barclays GBP non-govt inflationlinked index)•£100bn* of RPI Swaps outstanding*Rough estimate from Barclays, based on general consensus
  7. 7. LDI 2.07 June 2013 7
  8. 8. Growing Asset Class Toolkit7 June 2013 8
  9. 9. Pension Risk Management7 June 2013
  10. 10. RAG Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away7 June 2013 10Objective Measurement (Assumed) Performance Indicators Performance (May 12) RAGFundingObjectiveTo reach full funding on the TechnicalProvisions discount basis by [2023]Expected Returns (ER) > Required Returns(RR)RR:ER:Difference:Gilts + xxxbpsGilts + 73bpsxxxbpsInvestmentStrategyActual Returns should exceed ExpectedReturns (implying outperformance)Actual Returns (AR) > Expected Returns(ER)AR:ER:Difference:Gilts + xxxbpsGilts + 73bpsXxxbpsRisk BudgetThe investment strategy should not riskthe deficit worsening by [20%] of liabilitiesover a 1-year periodVaR95 < 20% of liabilities VaR95: [xx]%HedgingStrategyNominal/Inflation hedge ratio should bemaintained within +/- 5% of the fundingratio.Funding Ratio (Technical Provisions basis) 84%Nominal Hedge Ratio (TP basis) xx%Inflation Hedge Ratio (TP basis) xx%CollateralMaintain sufficient eligible for thepurposes of covering margin calls thatmay arise from the Scheme’s currentderivative positions over a 1 year period.Total available eligible collateral >£[100]mPotential collateral call after VaR95 event <£[100]mPension Risk Management Framework
  11. 11. To hedge or not to hedge...7 June 2013
  12. 12. 7 June 2013 12Roll-Down and Carry0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%0 10 20 30 40 50 60ParRateTenor6m LIBOR Curvepar 1y fwd 3y fwd 5y fwd 10y fwd•Carry occurs as a result of themarket pricing in rising short-termrates. It is easiest to explain in thecontext of a receiver par swap(say 20 years)•In the first year, the fixed leg islarger than the floating leg- this iscoupon income•If rates follow the forward curve,then the remainder of the swapwill have negative PV, to balancethe coupon income•However, if rates do not rise aspriced in, the remainder of theswap will have positive PV, as itwill be a 19y swap paying the 20yrate; this is roll-downCarry = coupon income + roll-down
  13. 13. 0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%5.0%0 5 10 15 20 25 30 35 40 45Gilt ZC ZC 1y ZC 3y ZC 5y ZC 10yPayment of £100m132.55%3.73%•Imagine a payment of £100m in20 years’ time•The PV of this cashflow is £56m•In five years’ time, the PV isprojected to be £58m•However, if rates don’t changethe PV is projected to be £69m•This means if rates don’t rise asis priced into the forward rates,the value of the cashflow will growby 3.51%paRoll-Down and CarryTenor7 June 2013
  14. 14. Case Study7 June 2013
  15. 15. 1560%65%70%75%80%85%90%95%100%FundinglevelOriginal Strategy Dynamic De-Risking StrategyDe-riskingDe-riskingDe-Risking TriggersDe-Risking TriggersDe-Risking TriggerRe-RiskingTriggersNot just a real yields view...7 June 2013
  16. 16. Roll-Down and Carry Exercise7 June 2013

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