Outline 2012


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Outline 2012

  1. 1. OUTLINEDecember 2012
  2. 2. ContentsIntroduction................................................................................................................27 Steps to Full Funding............................................................................................3The Thief of Time.......................................................................................................4What Should I Ask My LDI Manager?.................................................................5Volatility Control and Pension Fund Assets.....................................................6Central Clearing: What it means for Pension Funds......................................7Pensions Risk to the Corporate Sponsor...........................................................8Illiquid Credit – PFI loans........................................................................................9Index-linked Utility and PFI Swaps...................................................................10Models on Models..................................................................................................11Escaping“Friction”– Pension Fund .Governance and the Eurozone Crisis..............................................................12Further Information and Disclaimer................................................................131O U T L I N EDecember 2012
  3. 3. Introduction2O U T L I N EDecember 2012Gurjit DehlVice President, Education and Researchgurjit.dehl@redington.co.ukWelcometothefirsteditionofOutline,Redington’squarterlycollection of thought-pieces designed to help institutionalinvestors make smarter and more informed decisions.Over the next ten pages you’ll find articles on the key topicswe think institutional investors should be addressing as weenter the NewYear.We hope you find the articles interesting and helpful as youconsiderhowbesttomanagetherisk-adjustedreturnprofileof your portfolios.For more information on these or any other topics, pleasecontact your Redington representative, the author or emailenquiries@redington.co.uk.Best wishes for 2013,Gurjit DehlOUTLINE
  4. 4. The 7 Steps to Full FundingTMStruggling to tie all thosemoving parts together in .one cohesive strategy? Takethe 7 Steps to Full FundingTMto achieve your goals.The challenges of the pensions industry are wellknown. People are living longer; historically theindustry has placed too strong a focus on assetsand failed to pay adequate attention to liabilities;there has been an obsession with return but scarceheed paid to risk. Defined benefit pension schemesremain vulnerable to falling funding levels fromseveral sources: low interest rates, inflation, volatilemarket conditions, and an uncertain economicoutlook that renders returns uncertain too.Therefore, the risk of generating insufficient realreturns to meet liabilities and to pay pensionershas never been greater. So how should pensionschemes be acting in the face of this uncertainenvironment? How can a pension scheme beprudently managed today, so that it hedgesits risks and still achieves the return it needs tosurvive and succeed?Our 7 Steps to Full FundingTMapproach placescontrol of assets and liabilities back into thehands of the pension scheme, allowing them tocontrol risk and return and, ultimately, pay theirpensioners and avoid insolvency through theseuncertain times.STEP ONE: Pensions Risk ManagementFramework DocumentDefine the situation clearly by laying out goals .and objectives that are written into a robust PRMF. .The document includes the required rate of return,risk budget, and other goals and constraints ofboth trustees and sponsor.STEP TWO: Set up an LDI HubConstruct an LDI hub that allows you to manageinterest rate, inflation and longevity riskdynamically and using the right tools.STEP THREE: Liquid Active (alpha) and Market(beta) StrategiesWhen it comes to risk-based asset allocation, lookto invest across a range of risk premia; liquid alphaand beta strategies include any liquid strategyacross equity risk-premia through active/passiveequities, as well as equity overlay strategies,volatility-controlled equity strategies, and hedge-fund strategies.STEP FOUR: Liquid and Semi-Liquid CreditCredit consists of a range of sub-classes withdifferent risk-return characteristics and liquidityprofiles. This includes alpha-oriented mandateswhere the manager can operate in the entire fixedincome universe.STEP FIVE: Illiquid CreditWe believe there are a number of opportunitiesavailable which can provide“long-dated, inflation-linked”cash flows at a higher yield than traditionalmatching assets (for example, infrastructure debtand social housing).STEP SIX: Illiquid Alpha and Beta StrategiesAssets under this category provide attractivereturns but are typically more complex and illiquid(for example, private equity and PFI equity).STEP SEVEN: MonitoringAccurately measure where you are along the pathto full-funded status, constantly. Re-evaluate,consider new opportunities and change direction.Robert GardnerFounder & Co-CEO3O U T L I N EDecember 2012robert.gardner@redington.co.uk
  5. 5. The thief of timeProcrastination is an accomplishedthief.  You believe you haveplenty of time, but just whenyou need it, it’s gone - stolen bya practised and dextrous artiste -you. And as you leave“it”undone,it becomes exponentially harderto get“it”done. Leave it longenough, and the “cost”of getting“it”done, starts to rise. Welcome to the.concept of theta.Imagine you buy a one year put option to protectyourself against a fall in the value of your equitiesportfolio. After purchase, the value of your putoption decreases by a certain amount each daythat passes (since there is less time within whichyou can receive a pay-out). You can quantify thisdaily loss. In the markets, this erosion of value(or“time decay”) through the passage of time isknown as“theta”. The higher the theta, the moreyou lose each day that goes by. Passing time costsyou money!Pension Fund Risk ManagementNowhere is theta / time decay more in evidencethan when it comes to the failure to manage riskin the pension fund. This is where the price ofprocrastination comes into its own.The problem is, the sands of time aresinking and theta is rising.One pension fund I met recently is due to pay outan increasingly large stream of members’benefitcash flows scheduled to peak around 2035, fromwhich point they will slowly diminish steadily, untilthe final benefits are paid out to the last survivingpension fund members circa 2090.Except, in the real world that won’tactually happen. The pension fund is badlyunderfunded. Unsurprisingly, it has no riskmanagement framework. On any prudent view, the pension fund nowhas insufficient assets to make pension benefitpayments past about 2028. The pensionfund would need to earn over 8% on its assetsevery year until 2090 to pay all its pensions out.Unfortunately, the  pension fund’s youngermembers (now in their late 30s) are still dutifullypaying in their hard-earned contributions, unawarethat by the time they come to draw their benefitsin 30 years time, the assets will almost certainlyhave dwindled to nothing. They are unwittinglyfunding the full benefits of current pensionersbut will themselves, in all likelihood, be leftcompromised.Come to think of it, there’s an Italian word for whenyour money gets paid out of a scheme to otherpeople –“ponzi”.To conclude on a less downbeat note; althoughtime is running out, there are key steps you canstill take to manage pension plan risk in theseincreasingly uncertain times.Dawid Konotey-AhuluFounder & Co-CEO“Let’s not hedge the real yield right now. Yes, it is far and awaythe biggest risk facing the pension fund, and yes we’ve known thatfor years, but there’s bound to be a better time to deal with it.”4O U T L I N EDecember 2012dawid@redington.co.uk
  6. 6. What Should I AskMy LDI Manager?An LDI manager isn’t just .another asset manager….How much time do you spend interacting .with your LDI manager? A quarterly report, .a conference call or two, a semi-annual face .to face update? Many trustees may believe that .an LDI manager is“just another asset manager”,but an LDI manager can provide a valuableextension of a scheme’s ability to dynamicallyde-risk and access market opportunities, as wellas informing a better understanding of schemerisks, if brought within an enhanced governanceframework.An LDI mandate enables much more than justliability hedging. Your LDI manager serves as a“derivative hub”which allows access to strategiesoutside the scope of passive liability hedging.Today’s LDI manager is able to identify and exploitmarket opportunities on behalf of the pensionscheme client to allow rapid reaction to evolvingmarkets that would otherwise simply not bepossible.Moreover the LDI manager, as a“hub”for .de-risking, can give you access to unfundedmarket exposures and tactical opportunities.Want to rapidly de-risk equity exposure withoutthe hassle of managing down a segregated activeequity manager? The LDI manager can achievethis, through equity futures, total return swaps .or options. Want to lock in a range of fundinglevels at a particular valuation date? Again, theLDI manager can assist, with customised equityoptions and swaption strategies. Want the LDImanager to take into account the cash flowsfrom a portfolio of social housing debt or longdated commercial property leases? Again, theLDI manager can do this and put in place a“completion”hedge.But of course, as we all know, unless you ask .a manager to report on compliance of a particularrisk limit, they are unlikely to. It is vital to expectreporting from the LDI manager that allowsfor effective monitoring of the strategies andenhances the scheme’s awareness of what is .going on“under the hood”.A gold standard governance framework demandsregular reporting from the manager, with updateson performance within the clearly defined risklimits. This will improve the understanding of therisks being taken and allow for greater confidenceto be placed in the LDI manager.For trustees, this kind of enhanced reporting .can be crucial in building the trusting relationshipthat this framework requires.A gold standard LDI governance frameworkrequires tri-partite buy-in, from the pensionscheme, the LDI manager, and the advisors. .With an effective framework like this in place, .a pension fund can achieve the ability to ACT:A Agility: an LDI manager can enhance thescheme’s agility in identifying and quicklytaking advantage of evolving marketopportunities.C Control: a closely monitored LDIframework can give the pension schemethe control over their dynamic de-riskingpath via access to a wide toolkit ofinstruments and asset classes.T Transparency: with an effectivemonitoring and reporting systemin place, pension schemes can haveconfidence in their ability to dynamicallyde-risk as part of a flight plan.Pete DrewienkiewiczDirector, Head of Manager Research5O U T L I N EDecember 2012pete.drewienkiewicz@redington.co.uk
  7. 7. Volatility Control and .Pension Fund AssetsVolatility Control is a simpleinvestment approach advocatedby banks and asset managers forsome time, but it has failed togain significant traction amongpension funds.We believe this could be about to change.Volatility Control may have a role to play within themainstream approach to pension fund equity assetmanagement. Volatility Control as a concept is the managementof an equity allocation through continualrebalancing between equity and cash holdings.At any given point in time, the volatility of theportfolio measured on a trailing basis shouldremain roughly constant: if the trailing volatilityof the equity holding goes up (usually associatedwith an equity market fall), then the allocation toequity will decrease in favour of cash.The underlying idea is to keep the overall amountof risk (as measured by volatility) coming from thetotal equity plus cash portfolio roughly constant.This contrasts the conventional approach ofmaking a fixed allocation in monetary termsto equities and allowing the risk to vary widelythrough time.Despite the simplicity of the concept, a studyof returns since 1998 shows that, across equitymarkets and time, the strategy has deliveredequity-like returns with substantially lowervolatility. The results are robust to changes in therebalancing frequency and precise calculation ofvolatility measure.The July/August issue of Insurance Risk featuredan article entitled“The Volatility Challenge”,highlighting the possible Solvency II capitalsavings that could be realised as a resultof investing in equities via this Volatility Controlframework as opposed to via“straight”equity. .The article cites examples of Fund Managersrunning mandates for insurers targeting a capitalcharge of 15-20%, compared to the StandardFormula capital charge of c40% for developedmarket equity.Although the two seem similar, the VolatilityControl approach is different to the ill-fatedConstant Proportion Portfolio Insurance (“CPPI”),which has been popular at various points in thepast but which has come out with a less thanfavourable reputation. The main difference is thatCPPI looks to replicate the delta of an option,which can involve a much sharper deleveragingout of equity in the case of a market fall. .The Volatility Control approach, by contrast,rebalances as the trailing measure of equityvolatility increases.Although Volatility Control is a new concept formany pension funds, it is an established approachthat has been applied with success within hedgefunds and other asset managers for some time.Indeed, there is a broad category of“DiversifiedBeta”funds that broadly use a Volatility Controlmethodology to control their allocation to a broadset of market risk factors such that a constantamount of risk comes from each factor.As we look to the past, we see many of the majorshifts in pension funds’activities stemming fromsuccessful approaches used within the traditionalbanking or asset management space; it may bethat Volatility Control offers pension funds a newapproach to managing assets that helps them tobe aware of and react to changes in risk, volatilityand reward.Dan MikulskisDirector, ALM Investment Strategy.6O U T L I N EDecember 2012dan.mikulskis@redington.co.uk
  8. 8. Central Clearing: What it .means for Pension FundsDerivative regulations arechanging globally to improvetransparency and reducecounterparty risk. Pension .funds must act now to make .sure they take the necessary .steps to prepare.In the aftermath of the financial crisis of 2008,the G20 called for global reforms of the Over TheCounter (OTC) derivative markets. The existingsystem, the G20 suggested, failed to engenderproper counterparty risk management andprovided inadequate transparency. As a result,they suggested some wholescale reforms in thisspace that it has now come down to EuropeanSecurities and Markets Authority (ESMA) toimplement:• all standardized OTC derivative .contracts should be traded on exchanges .or electronic trading platforms, .where appropriate;• all standardized OTC derivative contractsshould be cleared through centralcounterparties by end-2012 at the latest;• OTC derivative contracts should be .reported to trade repositories; and• non-centrally cleared contracts should besubject to higher capital requirements.These reforms have been agreed, and now theywill be implemented over the course of the nextyear. For pension funds, one of the key pointsis that their new derivative contracts will all besubject to initial margin in order to mitigateclose-out risk. Calculations of this margin willlikely be based on a VaR model, but exactly whatconstitutes acceptable collateral is still to bedetermined.Usually for variation margin only cash is accepted,but there are calls for greater flexibility for pensionfunds considering their need to put every availableresource to work in the quest to close their fundinggap. Some market participants are calling forvariation margin to be extended to include G7government bonds.These changes, then, could have serious effects onnot just asset allocation and risk management forpension funds, but also on liquidity requirements.On the upside, though, the new system willengender an upgrade in counterparty quality (acentral clearing house rather than a corporate),and can lead to a release of collateral if swaps arenovated.The new system will seriously affect any pensionfunds that have derivatives in place or plans to putthem in place. Given that implementation of thenew regulations is imminent, now is the time toconsider whether the changes will have positiveor negative effects, on the whole, and what to doabout them.Derivative contracts in place before the regulationschange will be grandfathered and exempt fromthe new regulation; so it could be valuable forsome pension funds to move forward theirderivative activities. Those pension funds that actnow to understand this issue fully will certainly bebetter off later.Tom McCartanAssociate, Manager Research7O U T L I N EDecember 2012tom.mccartan@redington.co.uk
  9. 9. Pensions Risk to theCorporate SponsorThe risk imposed by definedbenefit pension schemes ontheir corporate sponsors is now,with good reason, under greaterscrutiny than ever before.Once viewed as little more than a footnote .to the accounts, pension scheme exposure hasbeen a source of growing attention and anxiety .for many UK corporates in recent years.Falling real yields have driven up liabilityvaluations, leading to sharp declines in theaggregate funding positions of UK pensionschemes. This has forced many sponsors tosubstantially increase deficit repair contributions,serving as a drain on scarce corporate cash. .At the same time, the introduction of newaccounting standards over the past decade .and tougher regulations have made pensions .and the risks they pose to companies .significantly more visible to shareholders, .equity analysts and rating agencies.The difficult market environment has made itincreasingly important for corporate sponsorsto put in place a clear, strategic framework tomeasure, monitor and address pensions risk.We call this the“Pension Risk ManagementFramework”(PRMF). The PRMF serves as anexcellent governance tool by focusing the mindsof sponsors and trustees on core objectives, .which can be used to guide investment strategyover time.One of the considerations that may be used tohelp construct the PRMF is how to“right-size”thepension scheme risk relative to the sponsor’s keycorporate metrics, for example“Additional annualdeficit repair contributions in a downside scenario(Contributions-at-Risk) should be less than half offree cash flow”.Just as trustees should be alert to the financialposition of their sponsor and the potential impactof pension scheme risk on the corporate, theyshould also ensure that the scheme’s investmentstrategy takes into account the sponsor’s ability .to bear risk and to support the scheme.Awareness of these considerations will helpto align the objectives of sponsors andtrustees, ensuring that both stakeholders arebetter positioned to face an uncertain marketenvironment, both today and into the future.Karen HeavenVice President, Investment Consulting8O U T L I N EDecember 2012karen.heaven@redington.co.ukScale: How large are the pensionschemes compared to thecorporate?Impact: How does pension exposure .impact key corporate financialmetrics (e.g. the impact ofpension deficits on the netdebt/EBITDA ratio)?Risk: By how much could the fundinglevel or contributions move inany given time period?From the sponsor’s perspective, pension scheme exposure .might be assessed in three dimensions:
  10. 10. Illiquid Credit – PFI loansEver since George Osborne’s AutumnStatement and the announcement ofa National Infrastructure Plan in 2011there has been increased focus oninfrastructure amongst investmentadvisors and trustees.What is PFI?The UK government has been supporting privatelending to UK infrastructure since the 1990’s viathe Private Finance Initiative (PFI) framework.The initiative aims to ensure that local authoritieshave access to a steady stream of private fundingto help build, refurbish or operate assets such asschools, hospitals, roads, police stations and socialhousing.Why are PFI loans attractive .to pension schemes?Secondary PFI loans provide investors withimmediate access to already-complete assets (i.e.no construction risk) generating steady, long datedcashflows with liability matching characteristics.PFI loans also offer a significant illiquidity premium(c.1%) relative to publicly traded bonds (by thesame or similar issuers); and investors also benefitfrom increased security and seniority in thecapital structure (senior secured loans vs. seniorunsecured bonds)In 2011, to our eternal regret, a Danish pensionscheme purchased £270mm of UK PFI loans fromBank of Ireland...we strongly believe these shouldhave been bought by a UK pension scheme!9O U T L I N EDecember 2012Conrad HolmboeAssociate, Investment Consultingconrad.holmboe@redington.co.ukTypical Financing StructureThe equity and mezzanine financing is typicallyprovided by institutional investors, leaving themuch safer (and therefore lower yielding) seniorsecured debt to banks.Fast forward to 2012The majority of banks have now withdrawnfrom the market due to regulatory and financialpressure, and many are now actively deleveraging.This has created a significant funding gap, drivenup yield on senior secured debt, and createdan opportunity for investors to purchase theseassets from banks at very attractive levels. Priorto 2008, these loans would typically yield Libor +[0.5%-1%]. Since then there has been a steady risein spreads and investors can now expect to earnLibor + [2%-3%] on the same loans.The opportunitySo whilst details of the government’s NationalInfrastructure Plan have yet to be finalised (letalone implemented), opportunities do exist forinvestors to purchase PFI loans at highly attractivelevels through the secondary market.To access these opportunities UK schemes areincreasingly collaborating with each other andtheir advisors, realising that their combined sizeand scale could allow them to secure opportunitiesof this nature at very cost effective levels.About time I say!
  11. 11. Index-linked Utilityand PFI SwapsFinding Flight Plan ConsistentAsset opportunities in the UKutility and PFI sectorsAs pension schemes continue to establish deficitrepair strategies, demand for inflation-linked assetsremains strong. While most schemes access theirexposure to inflation-linked assets through eithertheir LDI or gilt manager, more agile schemes arealso starting to consider opportunities beyond theindex-linked gilt and collateralised swap markets.One opportunity that has arisen recently is thattighter capital standards, in particular Basel III, .are incentivising banks to reduce the index-linkedswap exposures they have on their books toregulated UK utility companies and PFI projects;this has created an opportunity for pensionschemes to benefit from the comparative strengthof their own balance sheets to source newinflation-linked assets. These swaps deliver longdated inflation-linked cash flows with additionalcompensation for the credit risk of facing a utilitycompany or PFI project on an uncollateralisedbasis.When assessing the swaps and their suitabilitywithin a pension portfolio, their background isimportant. The main source of inflation supplyin the UK is the index-linked gilt market; it isapproximately £265 billion, compared to a definedbenefit pensions market of more than £1.3 trillion. Regulated utility companies and PFI projects arealso important sources of inflation.These entities tend to have revenue streamscontractually linked to RPI and, as such, are keento issue inflation-linked bonds in order to optimisetheir overall capital structure. However, thecorporate index-linked bond market is relativelysmall at about £30 billion, and much less liquidthan the gilt market.For this reason, utility companies and PFIprojects have historically been able to achievelower financing costs by using alternatives toissuing index-linked bonds, either by taking outbank loans or by issuing conventional bonds inconjunction with entering into inflation-linkedswaps with banks. While banks have used the inflation supply thatthe swaps create to support their LDI businesses,the cost of holding these utility company and PFIswaps is increasing with the new Basel III capitalrequirements. Therefore, they are increasinglylooking for opportunities to sell these exposures .to suitable investors, particularly pension schemes.Because the swaps effectively combine LDI withcredit research, it often takes some bespoke workto ensure that they can be supported by your LDIor credit manager. From the perspective .of a pension scheme, a number of practicalissues must be considered: the swaps’cash flowprofile, credit risk and seniority, collateral terms,counterparty rating requirements, and breakclause. But the overriding consideration is theprice at which banks are prepared to sell theseexposures.With the upcoming regulatory change, it is notsurprising that banks are willing to offer theseassets at more attractive prices than previously,and indeed a few transactions have alreadycompleted this year. With interest rates expectedto remain low and banks continuing to countthe cost of tighter capital requirements, pensionschemes can benefit from new opportunities suchas this and step into a space historically occupiedby banks alone. These opportunities will exist not only for pasttransactions already on banks’books but alsoincreasingly for new transactions going forward.John TownerDirector, Investment Consulting10O U T L I N EDecember 2012john.towner@redington.co.uk
  12. 12. 11O U T L I N EDecember 2012Models on ModelsThe calculation of inflationrisk for pension funds ishighly dependent on theunderlying model, with theresults varying dramatically.The terms PV01 and IE01 have becomepart of the language of pension schemetrustees and actuaries, when previouslythey were restricted to Fixed Incometraders and structurers in investmentbanks.PV01isthechangeinpresentvalueof an asset or liability for a 1 basis pointchange in the nominal yield curve used to value theasset or liability (usually the swap curve); IE01 is thechange in present value of an asset or liability for a1 basis point change in the implied inflation curveused to value the asset or liability (usually the RPIzero-coupon curve).While calculating PV01 for a fixed/floating swap isa relatively straightforward calculation, IE01, in thecontext of a pension scheme, is complicated by thepresence of caps and floors on inflation increases inthe benefit structure.A little thought and capital markets knowledgemade people realise that various option-pricingmodels could be brought to bear on this problemand that the true value of the sensitivity of theLPI benefit to changes in RPI (in the language ofoption pricing, the delta) is not 0% or 100% butsomewhere in between.These option pricing models could be readilycalibrated to the market-observed levels for LPIswaps, which have been quoted by a number ofbanks since 2007 (shown in graph).Given the opaque nature of some of thesecalculations, the model-dependency is not in ourview always appreciated by advisors and trustees.If I gave the same fixed cashflow to four differentfund managers I would expect them to agreeon the PV01 of that swap to within less than 1%.The calculation is standard and, on the whole,unchangeable. However, if I were to give the sameLPI cashflow to four fund managers, it is quitepossible they would not agree on the IE01 to within20% of each other.The calculation of IE01 lacks a prescribed standard;values of the IE01 of your pension scheme could bematerially different to those identified by anotheradvisor or fund manager, and this could have animpact on the portfolio that would most closelyhedge the liabilities. While the perfect formulafor an IE01 calculation is still an elusive concept,pension funds should be asking their advisors whocalculate this value for them, and asking for moreclarity in order to initiate a debate on the correctapproach.Dan MikulskisDirector, ALM Investment Strategydan.mikulskis@redington.co.uk
  13. 13. sebastian.schulze@redington.co.ukEscaping“Friction”– PensionFund Governance and theEurozone CrisisThe Eurozone’s sovereign debtcrisis continues to occupy theheadlines. How can pension fundsadapt their governance structuresso they come through the crisissafe and sound?When asked about how best to succeed, theAmerican general (and later president) IkeEisenhower replied that he had found“plans .to be useless, but planning to be indispensable”. .In the fast shifting environment of a battlefield,the ability to make the right decisions quicklyis the key to survival and victory. The famousPrussian strategist Carl von Clausewitz put thisinsight into slightly different terms: the abilityto deal with“friction”– all the little unforeseenopportunities and threats which arise during .a complex operation – whilst focussing on the .main objective is the basis of success.Luckily, the world of pension fund governance .is far less prone to grievous bodily harm than theaverage battlefield. Nevertheless, Eisenhower’sand Clausewitz’insights point towards one centrallesson for pension funds: without the ability tomake goal-consistent decisions at short notice .to react to a rapidly changing environment,success will prove elusive in today’s volatilemarkets. The Eurozone’s sovereign crisis is probably thebest example of this. Seemingly lurching fromone near miss to the next (interspersed withoccasional outbreaks of optimism), the crisis .is one of the major market drivers. Share prices,corporate bond and government bond yields,both in the Eurozone and elsewhere, go onrollercoaster rides, edged on by the latest news.of possible European Central Bank bond buyingor politicians arguing about who will foot the bill.Periods of impending doom, like late 2011 or theearly summer of 2012, alternate with periods ofrelative calm. This environment presents pension funds withboth attractive opportunities and new, suddenlyappearing threats. In order to manage this“friction”successfully, pension funds must have:• A clear set of objectives;• Clearly articulated constraints;• A nimble organisational structure that allowsdecision makers to discuss and take necessaryactions quickly to keep the pension fund on itspath to full funding.This Pension Risk Management Framework (PRMF)ensures that trustees remain in control as theEurozone crisis oscillates between catastrophe anddeliverance. It enables them to identify and exploitinvestment opportunities that will enhance theirability to achieve their objectives, and to manageany new risks threatening their progress.One of my largest clients uses weekly meetingsto benchmark the fund’s performance against thePRMF and to review any new opportunities andthreats. This fund has been able to take advantageof some of the opportunities created by theEurozone crisis, increasing its expected returns .and building a more efficient portfolio.To be victorious in a volatile market environmentdriven by policymakers’whim, trustees must puttheir Pension Risk Management Framework inplace. Only within this grand strategy frameworkwill they be able to overcome“friction”and guidetheir pension funds to full funding.Sebastian SchulzeAssociate, Investment Consulting12O U T L I N EDecember 2012
  14. 14. If you would like more details on the .topics discussed, please contact yourRedington representative, the author .or email enquiries@redington.co.ukStay up to date withour latest thinkingwww.redington.co.ukDownload .the RedAppMore Redington .PublicationsDisclaimerIn preparing this report we have relied upon data supplied by third parties. Whilst reasonable care has been taken to gauge the reliability of this data,this report carries no guarantee of accuracy or completeness and Redington Limited cannot be held accountable for the misrepresentation of databy third parties involved. This report is for investment professionals only and is for discussion purposes only. This report is based on data/informationavailable to Redington Limited at the date of the report and takes no account of subsequent developments after that date. It may not be copiedmodified or provided by you, the Recipient, to any other party without Redington Limited’s prior written permission. It may also not be disclosed bythe Recipients to any other party without Redington Limited’s prior written permission except as may be required by law. In the absence of our expresswritten agreement to the contrary, Redington Limited accept no responsibility for any consequences arising from you or any third party relying on thisreport or the opinions we have expressed. This report is not intended by Redington Limited to form a basis of any decision by a third party to do or omitto do anything.“7 Steps to Full Funding”is a trade mark of Redington Limited.Registered Office: 13-15 Mallow Street, London EC1Y 8RD. Redington Limited (reg no 6660006) is a company authorised and regulated by the FinancialServices Authority and registered in England and Wales.© Redington Limited 2012. All rights reserved.13O U T L I N EDecember 2012RRRRR