1. Redington
13-15 Mallow Street
London EC1Y 8RD
T. 020 7250 3331
www.redington.co.uk
twitter.com/redingtontweets
Pensions Management Institute – Boosting Confidence in UK Pensions
What are the current dynamics driving UK pensions investment?
Robert Gardner, Redington
22nd November 2011

2. 2
Liability Driven Investments (LDI)
Maximise your toolset

3. A Chronology of LDI
30-Year Gilt real yield & key events in LDI
3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
30-YearGiltRealYieldin%
Boots Pension Fund shifts to 100% AAA long-
dated sterling bond allocation
DMO issues 50-year inflation-linked gilt
XYZ implements
dynamic de-risking
framework
F&C launches
equity-linked
pooled bond
fund
30-Year Gilt Real Yield & Key Events in LDI
Inflation concerns elevated after oil price hits record $145
per barrel
Friends Provident implements first
derivative-based inflation and interest
rate hedge
Collapse of Lehman Brothers, traditional
gilt/swap spread inverts
Barclays Global Investors launches
segregated and pooled funds
for LDI
Source: Bloomberg, Redington

4. A Chronology of LDI
Key events in LDI
4
Boots pension scheme shifts out of
equities and into bonds
2001
Friends Provident hedges interest
rate and inflation risk with swaps
2003
• Head of Corporate Finance, John Ralfe, recognises pension
fund liabilities are bond-like in nature
• Allocation before rebalancing: 75% equities, 20% bonds, 5%
cash
• Allocation after rebalancing: 100% long-dated AAA sterling
bonds, half of which is inflation-linked
• First non-bank to implement LDI hedging strategy
• Locked in a 2.1% real yield on 30-year index linked gilts – the
real yield today is below 0.5%
• Conventional wisdom at the time: “equities are the biggest
source of risk to a scheme’s funding level, and real yields
cannot drop below 2%”
Lehman Brothers collapses and new
opportunities arise
2008
• Lehman Brothers collapse shows robustness of collateralised
swaps that are easily transferred to other counterparties
• Swaps are perceived as safer than gilts and the gilt/swap
spread inverts
• Pension funds can take advantage of spread dislocation and
hedge via gilts instead of swaps
XYZ Scheme engages in dynamic de-
risking
2010
• Rising equities and improved financial market conditions
allows XYZ Scheme to de-risk
• Triggers are pre-defined and linked to improvements in
funding level, using a solid framework for decision-making
• Due to de-risking, fund reaches a higher funding level with
lower VaR compared to no de-risking
XYZ

5. The PRMF Dashboard
5

6. • Having a clear game plan is essential for implementing effective strategies in a volatile environment: only when you know exactly what you want (and
what you don’t want), can you make the decisions that enable you to reach your objectives.
• We call this the Pension Risk Management Framework: a clear, concise and effective tool for making focussed investment decisions. It allows pension
funds to evaluate each opportunity according to how it supports their progress towards full funding.
• It can therefore be used to identify whether an LDI strategy fits a scheme’s individual requirements.
Objective Triggers Performance Indicators Actual Performance
What is the overall objective? Full funding on self-sufficiency basis By 2020 on a swaps + [50]bps basis with
contributions of £[25]m p.a.
How will we measure the objective? Required return on the scheme’s assets Required return of assets is swaps +
[160]bps
What are the primary risk targets? Required return at risk (RRaR)
Contributions at Risk (CaR)
RRaR < swaps +[200]bps
CaR should be kept below £[50]m
What is the secondary risk target? Value at Risk (VaR) VaR should not exceed [20]% of the
liabilities
What are the primary aspirational
targets?
To be fully inflation and interest rate
hedged
Hedge ratios should be equal to [100%]
What are the secondary aspirational
targets?
Increase efficiency of hedges by earning
more return for same risk
Regular monitoring of relative value of
swaps vs. gilts
What is the primary scheme
constraint?
Liquidity Sufficient liquidity to make pension
payments
What is the secondary scheme
constraint?
Collateral requirements Enough available collateral to cover the 1-
year derivative [VaR95]
Metric is at or
above target
Metric is within
10%of target
Metric is more
than 10% away
from target
The Pension Risk Management Framework (PRMF)
The Pension Risk Management Framework

7. 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
GBPMillions
Liabilities Path Actual Liabilities Assets Path Actual Assets
Liability Basis
Contributions & Asset Returns
Time Horizon
The Flight Plan is an effective tool for making focussed LDI decisions and identifying
the best opportunities.
Together with the PRMF, it allows schemes to identify the strategies that will provide
the most support for making progress towards full funding.
Flight Plan
From ‘set and forget’ to ‘anticipate and recalibrate’
7
The Flight Plan
• Maps out the path of a
scheme’s assets and
liabilities from their
current position to full
funding
• Requires three key
variables to build: the
assumed rate of return
on assets, the cash
contribution schedule,
and the target date for
full funding.

8. 8
Good Governance
ACT

9. 9
XYZ Scheme Case Study: Dynamic De-Risking
The Pension Risk Management Framework in action
Original strategy 78.4%
Dynamic de-risking 79.2%
Low risk allocation (no derisking) 79.2%
Original strategy 70.6%
Low risk allocation (no de-risking) 71.8%
Dynamic de-risking 76.2%
Original strategy 82.3%
Low risk allocation (no de-risking) 84.9%
Dynamic de-risking 85.1%
Funding level comparison
01/10/2010 – 07/09/2011
Fundinglevel
Funding Level Volatility
Original strategy 18%
Low Risk Allocation 16%
Dynamic de-risking 13%
Source: Redington

10. 10
Growth
“Flight
Plan
Consistent
Assets”
Matching
Flight Plan Consistent Assets
Key features

11. 11
-6
-4
-2
0
2
4
6
8
0 5 10 15 20 25 30
GBPMillions
Years
Initial investment
Attractive real
returns
Inflation-linked
cashflows
Providing a match
for liabilities
Inflows
Outflows
Source: Redington
Flight Plan Consistent Asset – Example Cashflow Profile
Flight Plan Consistent Assets
Key features
Key Characteristics
Flight Plan
Consistent Assets
• Offer a particularly
efficient means of
achieving LDI.
• Enable schemes to
access attractive real
returns and long-dated
inflation-linked cash
flows .
Key Characteristics
Attractive real returns and inflation-linked cashflows High-quality, often secured cashflows
Illiquid Varying degrees of complexity/might be difficult to access

12. • 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 index-linked cashflows
Secured Leases
• Ground rent created when freehold land or building is sold on long
lease
• Typically “pepper-corn” rent for land only (not buildings)
• Offers attractive returns, limited credit risk and high level of
security
Ground Rents
• 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. housing associations) with quasi-government
guarantee
Social Housing
• Investing in public sector projects through, for example, Private
Finance Initiatives (PFIs), bespoke investments structures or by
purchasing a suitable infrastructure asset
• Wide range of possible assets, from roads to power generation
• Long-term, potentially inflation-linked revenue streams
Infrastructure
Flight Plan Consistent Assets
Examples

13. Social Housing: Risk profile
Flight Plan Consistent Assets
Social housing
• The diagram shows a typical
social housing portfolio for a
pension fund investor with a
blended real return of ca. 3-4%
p.a.
• The portfolio consists of different
housing types with specific
risk/return profiles.
• By adapting the share of the
different housing types in the
portfolio, an investor can tailor
the portfolio’s return and the risk
characteristics so that they fit
requirements.
Social Housing is typically a low-risk asset class but the returns
and the risk on a portfolio can be tailored (to some extent) to
meet pension funds’ requirements.
13
Source: Evolution Securities, Redington

14. • Bought by HSBC in August 2011 (for warehousing)
for £74m
• Provides water for 300,000 people in Cambridgeshire
• 2010/2011: Revenue of £20m with profits of £7m
before tax with no external debt except for a revolving
credit facility to cover working capital
• Attractive purchase opportunity for a large pension fund or a
consortium of funds
• Redington advised two UK schemes who bid for this asset. However,
although this bid was acceptable on price, it could not compete with
the winning cash bid which had an accelerated timetable and no due
diligence
Flight Plan Consistent Assets
Water infrastructure
Example: Tapping the illiquidity premium in water
The UK water sector is an excellent example of a Flight Plan
Consistent Asset, providing the security, returns and cashflows
that pension funds need.
• Economic environment has small impact on returns:
water is a necessity and will therefore be demanded
irrespective of economic growth.
• Inflation-linked cashflows and returns: water companies’
regulatory regime means they can increase prices in line
with the agreed price review which in turn is based on a
formula related to RPI.
• Low regulatory risk: The regulator’s desire to increase
competition in the area could have a negative impact on
returns but the Government is likely to block any such
move.
Water sector: key characteristics
Case study: Cambridge Water
14

15. Redington Publications
15
Spring Collection Highlights: LDI 2.0, Secured Leases,
Ground Rents, Equity Release Mortgages, Social
Housing, Insurance-Linked Securities, Infrastructure
http://www.redington.co.uk/Redington/media/PDFs/
knowledge/Other%20Publications/Redington-Spring-
Collection-2010.pdf
Spring/Summer 2011 Collection: Enhanced Matching Assets,
Socially Responsible Investing and Long-Term Growth Assets
http://www.redington.co.uk/Redington/media/PDFs/knowledge/Other%20Publications/Re
dington-Spring-Summer-Collection-2011.pdf
Keeping up with the latest in LDI
Redington publications

16. 16
Questions?

17. Contacts
Disclaimer
17
Contacts
Direct Line: +44 (0) 20 7250 3416
Telephone: +44 (0) 20 7250 3331
Redington
13-15 Mallow Street
London EC1Y 8RD
Robert Gardner
Founder & Co-CEO
robert.gardner@redington.co.uk
www.redington.co.uk
THE DESTINATION FOR ASSET & LIABILITY MANAGEMENT
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