The key challenges facing UK pension funds according to survey respondents include: 1) Interest rates and inflation, as real yields have fallen relentlessly, exposing funds to volatility. 2) The Eurozone crisis, as it remains a macroeconomic risk and could further lower gilt yields. 3) Sponsor funding and balance sheet issues, as higher deficits force sponsors to divert cash away from other uses. Trustees, sponsors, and advisors generally agreed on these top strategic challenges in the medium term, though trustees placed somewhat more emphasis on regulatory and political risks than other groups.

1. 1
MOUNTAINS OF
THE MIND
Pension Funds’ Greatest Challenges in 2013

2. 2
At the end of March 2013, according to the Pension Protection Fund’s 7800 index, the aggregate deficit of
the 6,316 comprising funds was £236.6 billion. Over 80% of those in the index were underfunded with the
average funding ratio at 82.6%.
The futures of these pension funds and the well being of their members rests firmly on the decisions of a
few: what trustees feel are the key challenges facing UK defined benefit pension funds in the near future
(3-5yrs) and over the longer time horizon (10-20yrs), will define the actions they take and the condition of
the pension funds they manage. Similarly, the views and opinions of those advising and working with
trustees will affect the decisions they take; sponsors, advisors, pensions managers and members of
in-house pensions teams all play a vital role in shaping the future of pensions. In March 2013, Redington
created an online survey to collect said views and opinions.
This report collates the subsequent responses of these influential individuals, as well as investment banks,
fund managers, media players, academics and other solutions providers to pension funds, to the question
of what the key challenges of the pensions industry are right now, and what factors they see becoming so in
the future. At the end of the report, challenges we feel are significant to pension funds, but were not listed
by the respondents, are also noted.
The results in this report are based on an online survey completed in March 2013, and comprise the
answers from 88 respondents covering influential pensions roles:
Each respondent was asked to list the top three challenges in each of four categories over two time
horizons. That is, 24 answers were required from each respondent in total:
• Strategic Challenges (Top 3 challenges over the medium and over the long term)
• Financial and Economic Challenges (Top 3 challenges over the medium and over the long term)
• Political and Regulatory Challenges (Top 3 challenges over the medium and over the long term)
• Operational Challenges (Top 3 challenges over the medium and over the long term)
The survey allowed open responses rather than selection of pre-set options, so similar descriptions have
been grouped into themes and described in the summary (8). There was no weighting of the answer order,
all three responses were considered similarly important. Results for each category on each time horizon
have been shown in two main graphs:
• Graph 1. Based on total respondents, challenges listed shown as a percentage of total responses
• Graph 2. Based on responses from trustees, corporate sponsor, pensions managers and advisors
only. Votes to each challenge split by relative votes of respondents within each member group.
About This Report

3. 3
About this report ...............................................................................2
Contents ............................................................................................3
Introduction .......................................................................................4
Executive Summary ..........................................................................5
Summary............................................................................................8
Key Challenge Descriptions .............................................................8
Summary of Responses ..................................................................10
Spotlight: Where Trustees and Sponsors Diverge .........................12
Below the Radar ..............................................................................14
Contacts ...........................................................................................15
Contents

4. 4
Introduction
Robert Gardner
Co-CEO | Co-Founder
Pensions has always been a tricky business. But perhaps never more so than in 2013. The regulation
changes of the early 2000’s rewrote the rulebook for those running pension funds, and a survey of the key
challenges of that time would have produced, it seems logical to assume, a set of concerns about
changing regulations, accounting issues that accompany them, and governance.
Today, the landscape has changed. Pension funds, on the whole, got to grips with those systemic changes
in pension infrastructure only to be faced, in 2008 onwards, with the greatest seismic economic shift of
our lifetimes. It wasn’t just that markets plummeted and equities didn’t turn out to be the knight in shining
armour pension funds had hoped and planned they would be; it was that the very foundations of modern
economic markets changed. Everything we thought we knew about risk, return and the relationship
between the two, was called into question. Now, in 2013, we are all still acclimatising to our new normal.
For those managing pension funds and guarding the well-being of their members’ retirement pots, the last
five years have been no easy ride. The actions they have taken and will continue to take will determine the
well-being of our ageing population, and the challenges they perceive as the greatest ones will shape those
actions. This report collates the answers to a survey that asks the pensions industry – those actively
running pension funds as well as those advising and providing services to them – what they consider the
greatest challenges they face today, in the medium and longer terms, in the categories of Strategic
challenges, Financial and Economic challenges, Political and Regulatory challenges and Operational ones.
Each respondent listed the top three challenges in each of these categories as they saw it, and thereby
provided a rare and candid insight into those items that occupy the tops of their agendas.
This report provides a glimpse into the minds of those influential people in the UK who hold the well-being
of the retiring population in their hands. I hope you find it interesting and informative, and that, if you are
so inclined, you will use the contact details at the back of this report to reach out to us and continue the
conversation. Above all, we hope this report acts as a conversation-starter within pensions, and that you,
the reader, will use it to engage with others in the industry to question, analyse and discuss the challenges
reported herein.
“it’s not been the strongest of the
species to survive, but the most
adaptive to change.” Darwin

5. 5
Executive Summary
Medium-term Risk Radar (3-5yr)
This section provides a summary of all the survey’s results, shown as two Risk Radars which illustrate the
greatest challenges respondents identified in each of the four categories. The first radar displays the chal-
lenges respondents identified in the medium term (3-5 years), and the second radar displays those listed in
the longer term (10-20 years).
Each dot represents a challenge, and the size and position of the dot simultaneously signifies the total
relative votes by respondents. The larger and closer the dot to the centre, the more times the challenge was
mentioned by respondents.
STRATEGIC
CHALLENGES
RISK
FACTOR
FINANCIAL &
ECONOMIC
CHALLENGES
POLITICAL &
REGULATORY
CHALLENGES
OPERATIONAL
CHALLENGES
%

6. 6
Long-term Risk Radar (10-20yr)
STRATEGIC
CHALLENGES
RISK
FACTOR
FINANCIAL &
ECONOMIC
CHALLENGES
POLITICAL &
REGULATORY
CHALLENGES
OPERATIONAL
CHALLENGES
%
Wherever you see these icons throughout this report
you can click on them to bring you back to our
medium and long term Risk Radars.

7. 7
Key Challenge Descriptions
This section describes some of the key challenges mentioned
by respondents and provides a summary description of why it
is categorised as such.
INTEREST RATES / INFLATION
EUROZONE CRISIS
SPONSOR AND/OR BALANCE SHEET
For the majority of funds, exposure to real yields (falling interest rates and rising inflation) represents the
single largest source of risk. With real yields plunging relentlessly lower in recent years, funds that have
opted not to hedge this risk face the dilemma of whether to do so now and lock in at current levels or to
continue to expose their funds to further volatility. Some commentators are predicting a great rotation from
bonds back into equities and a reversion of yields back to historical “norms”. However, the prospect of
financial repression, where governments deliberately target low or negative real yields to reduce their debt
burdens, presents a particularly compelling counter argument. As one US researcher recently noted, an
average negative real yield of 2% over the next 20 years would reduce debt to GDP from 100% to a
manageable 60%. Even if rates do nothing, pension funds face the time-decay effects of rolldown and
carry, which become another strong argument for hedging interest rate risk no matter what.
http://bit.ly/Yt35HP
http://bit.ly/18hoKH8
The Eurozone debt crisis has settled into an uneasy calm since Mario Draghi’s pledge to do “whatever it
takes” to save the single currency. Nevertheless, the toxic combination of high debt burdens, low
competitiveness, non-existent growth, and the absence of a long-term political solution to the crisis means
that it remains the dominant macroeconomic tail risk for financial markets (and therefore a key driver of
pension fund asset returns in the short to medium-term). The crisis also presents more direct risks for UK
pension funds with the prospect of further safe haven demand driving down gilt yields.
New accounting and regulatory requirements have rendered pension funds an increasingly visible part
of corporate financial statements, with investors and credit rating agencies now far more attuned to the
relationship between pension funds and wider balance sheet volatility. At the same time, rising pension
fund deficits have forced sponsors to divert scarce cash into the pension fund, reducing free cash flow and
withholding potential dividends for shareholders. From the Trustee’s perspective, the ability and willingness
of the sponsor to support the fund on an ongoing basis remains key to determining the risk appetite and
setting the long-term investment strategy.
Scan this QR code with your smart phone or
click on the hyperlink below for a direct link to:
REDVIEWS
Scan this QR code with your smart phone or click on
the hyperlink below for a direct link to:
PENSION RISK TO THE
CORPORATE SPONSOR

8. 8
http://bit.ly/182zD20
http://bit.ly/WuCZ2y
FUNDING MANAGEMENT
REGULATION / POLITICS
INVESTMENT RETURNS
In negotiating any deficit recovery plan, sponsors and trustees must strike the optimal balance between
cash contributions from the company and reliance on investment returns. Set contributions too high, and
pension funds and sponsors risk diverting cash that could have been used to grow the business into the
pension fund, ultimately weakening the company (and therefore the sponsor covenant). Set contributions
too low and expected returns too high, and the fund becomes reliant on an overly risky investment strategy,
potentially resulting in much higher deficit contributions in future years. Some sponsors and their funds
have squared this circle by agreeing innovative non-cash funding strategies whereby the company provides
the fund with secure or collateralised assets while retaining cash for investment in the business.
In January, the Consumer Price Advisory Committee (CPAC) announced, following months of speculation to the
contrary, that it would maintain the existing approach for calculating RPI inflation rather than align the measure
with CPI inflation. The move resulted in a sharp upward move in market inflation and a corresponding increase
in UK pension liabilities. Two months later, UK Chancellor George Osborne announced that the government had
rejected a proposal to allow smoothing in the valuation of pension assets and liabilities, a move that could have
allowed some companies to sharply reduce deficit contributions. These “moving goalposts” erode the trust that
the government and regulators have funds’ or members’
wellbeing at heart. Ongoing developments emphasise that political and regulatory uncertainty will remain a
key challenge for pension funds in the years ahead.
With major central banks committed to keeping interest rates low for the foreseeable future, investors have
been encouraged to “reach for yield”, driving down returns on riskier fixed income (such as high yield) to
near historic lows. Equities no longer appear the obvious solution: in a recent study, researchers at London
Business School revised down their estimate of the historical equity risk premium to a meagre 3.0%-3.5%,
reflecting poor performance over the past decade and more accurate adjustment for “survivorship bias”.
Given the bleak outlook for conventional asset classes, pension funds have shown increasing interest in a
range of illiquid alternatives that offer a rare combination of secure and attractive real returns (for example,
infrastructure debt).
Governance bandwidth is a perennial challenge for UK pension funds. In recent years, the already limited
resources of trustee boards and investment committees have been further strained by an increasingly wide
and complex array of available asset classes and strategies, as well as greater volatility in financial markets
more generally. This makes it ever more important for funds to have in place clear strategic framework to
evaluate opportunities against the fund’s objectives and to focus governance resources on the areas of
greatest potential value add to the fund. Those funds that have spent time and resource in building a robust
governance framework have been repaid handsomely.
GOVERNANCE / DECISION-MAKING
Scan this QR code with your smart phone or click
on the hyperlink below for a direct link to:
Journal #33 (The Pensions Risk Managment
Framework)
Scan this QR code with your smart phone or click
on the hyperlink below for a direct link to:
RED-BLOG
ESTIMATING THE EQUITY RISK PREMIUM

9. 9
CONFLICTS WITH AGENTS
DEATH OF DB
MANAGING THE END GAME
RISK MANAGEMENT
EMPLOYEE BENEFIT
Good help can be hard to find. There are those who believe they are receiving “poor advice from consult-
ants” and others that feel there may be a “misalignment between the objectives of the trustees with their
agents”. However, while funds battle service costs and drive to push for lower management and advisory
fees, this begs the question: can one expect the best service from the lowest bidder? Pension funds
continue to fight this battle of needing good advice like never before, but needing the costs to be
manageable and, perhaps, linked to performance of the pension fund.
Members of Generation Y would be lucky to get into a defined benefit fund (if they are even offered a job
first). Final Salary funds are no longer widely viewed as an effective reward tool to attract and retain top
talent. While some believe the challenge lies in “making people understand pensions are affordable”, others
believe the legacy is “just a burden to be managed”. In the face of closing funds, maturing membership and
negative cashflows, the challenge lies in managing ways to meet the liabilities as funds walk the green mile.
In managing the transition to the End Game, funds face a complex marketplace of solutions ranging from
longevity swaps to synthetic “buy-ins” to full buy-out. However, some respondents ask a more fundamental
question: “what is the end game”? The finishing line lies at buy-out for some pension funds, and in self suf-
ficiency – meeting benefit payments without reliance on investment returns or sponsor contributions – for
others. The challenge rests in managing the fund’s journey to arriving at their respective destinations.
Pension funds face a myriad of risks and hurdles; first to full funding and then at full funding. Some risks
are rewarded (assets), some are unrewarded (interest rate and inflation), and pension funds are having to
devise increasingly complex strategies to address these risks. And then there are operational (governance)
risks too. Finally, risk management is not unidirectional: funds should have an effective framework to
re-risk, as necessary, in response to funding level declines.
As an employee benefit and reward tool, it is important to ensure “members appreciate the value of the
benefit” defined within defined benefits. Between “demands for higher payouts” and “integration with
non-equal benefits needed for employee recruitment”, funds face the challenge of “changing or lowering
member expectations should present promises prove unsustainable due to changed economic and demo-
graphic circumstances”.
SUMMARY OF RESPONSES
Many of the risks described above were chosen as respondents’ top three risks in each of the four
categories over the medium and longer terms. Below is a summary of responses for the greatest risks
within each of the four categories of challenges: Strategic challenges, Financial and Economic challenges,
Political and Regulatory challenges and Operational ones.
Results for each category on each time horizon have been shown in two main graphs:
• Graph 1. Based on total respondents, challenges listed shown as a percentage of total responses
• Graph 2. Based on responses from trustees, corporate sponsors, pensions managers and advisors
only. Votes to each challenge split by relative votes of respondents within each member group.
“Not my problem, I hope to have
retired or died” Respondent Quote

10. 10
Graph 2. Top Strategic Challenges by Member Group - Medium-Term (3-5yr)
0%
5%
10%
15%
20%
25%
30%
Sponsor
and
Balance
Sheet
Funding
Regula;on
&
Poli;cs
Investment
Returns
and
the
Economy
Interest
Rates
Risk
Management
Death
of
DB
Managing
the
End
Game
Conflicts
with
Agents
Governance
and
Decision
Making
Employee
Benefit
Trustees
Sponsor
Advisor
Pensions
Manager
18%
14%
11%
11%
9%
7%
7%
7%
6%
5%
3%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Sponsor
and
Balance
Sheet
Funding
Governance
and
Decision
Making
Investment
Returns
and
the
Economy
Death
of
DB
Risk
Management
Interest
Rates
RegulaJon
&
PoliJcs
Managing
the
End
Game
Employee
Benefit
Conflicts
with
Agents
Strategic
Challenges
(3-­‐5yr)
Graph 1. Top Strategic Challenges by Total Votes - Medium-Term (3-5yr)
Respondents identified Sponsor and Balance Sheet related issues as their number one medium-term
challenge (18%) closely followed by Funding issues (14%) Governance (11%) and Investment Returns (11%).
Surprisingly, Risk Management (7%) appears relatively low on the medium-term agenda for respondents.
The majority of respondents identified the Sponsor and it’s Balance Sheet as the main concern in the
medium-term. Trustees also listed Funding as a key issue while Sponsors, Advisors and Pensions Managers
collectively listed Governance and Decision Making.
Over a longer-term horizon, Managing the End Game (29%) is unsurprisingly viewed as the dominant
concern. The Sponsor and its Balance Sheet remains a key issue (15%) while Funding follows once more in
third place (11%).
29%
15%
11%
8%
8%
8%
7%
6%
4%
2%
1%
0%
5%
10%
15%
20%
25%
30%
Managing
the
End
Game
Sponsor
and
Balance
Sheet
Funding
Investment
Returns
and
the
Economy
Death
of
DB
Interest
Rates
RegulaHon
&
PoliHcs
Governance
Employee
Benefit
Risk
Management
Conflicts
with
Agents
Strategic
Challenges
(10-­‐20yr)
STRATEGIC
CHALLENGES
Graph 3. Top Strategic Challenges by Total Votes - Long-Term (10-20yr)

11. 11
Graph 4. Top Strategic Challenges by Member Group - Long-Term (10-20yr)
Similarly, the majority of the groups believe Managing the End Game is the main concern in the long-term.
While the Sponsor and it’s Balance Sheet remains a top concern for Trustees, Sponsors on the other hand
are more concerned about the Death of DB and the challenges associated with structural changes as funds
close.
Respondents identified Investment Returns (26%) and Deficit Funding (26%) as the joint top financial and
economic challenges over the next 3-5 years, followed by Interest Rates (18%). This may suggest that the
emphasis is now on strategies to close funding deficits rather than de-risking to avoid further volatility.
“Is the market big enough to cope if
all private sector DB funds try to wind
up?” Respondent Quote
0%
5%
10%
15%
20%
25%
30%
35%
40%
Managing
the
End
Game
Sponsor
and
Balance
Sheet
Funding
Interest
Rates
Investment
Returns
and
the
Economy
RegulaCon
&
PoliCcs
Death
of
DB
Governance
Risk
Management
Employee
Benefit
Conflicts
with
Agents
Trustees
Sponsor
Advisor
Pensions
Manager
FINANCIAL AND
ECONOMIC
26%
26%
18%
14%
9%
7%
0%
5%
10%
15%
20%
25%
30%
Deficit
Funding
/
Management
Returns
Interest
Rates
&
Infla@on
Eurozone
&
UK
Growth
Sponsor
Solvency
Economic
Policy
Financial
and
Economic
Challenges
(3-­‐5yr)
Graph 5. Top Financial & Economic Challenges by Total Votes - Medium-Term (3-5yr)

12. 12
21%
19%
19%
13%
12%
10%
4%
0%
5%
10%
15%
20%
25%
Deficit
Funding
/
Management
Returns
Eurozone
&
Global
Growth
Interest
Rates
&
InflaFon
Longevity
and
Buy-­‐out
Sponsor
Solvency
Economic
Policy
Financial
and
Economic
Challenges
(10-­‐20yr)
0%
5%
10%
15%
20%
25%
30%
35%
Returns
Eurozone
&
Global
Growth
Interest
Rates
&
Infla;on
Longevity
and
Buy-­‐out
Deficit
Funding
/
Management
Sponsor
Solvency
Economic
Policy
Trustees
Sponsor
Advisor
Pensions
Manager
Graph 6. Top Financial and Economic Challenges by Member Group - Medium-Term (3-5yr)
Graph 7. Top Financial and Economic Challenges by Total Votes - Long-Term (10-20yr)
Graph 8. Top Financial and Economic Challenges by Member Group - Long-Term (10-20yr)
0%
5%
10%
15%
20%
25%
30%
35%
40%
Deficit
Funding
/
Management
Returns
Eurozone
&
UK
Growth
Interest
Rates
&
InflaFon
Sponsor
Solvency
Economic
Policy
Trustees
Sponsor
Advisor
Pensions
Manager
Collectively, the group consensus on the key Financial and Economic challenge appears to be Deficit
Funding / Management. However, more specifically, advisors listed Returns as the top challenge faced by
funds.
Over the long-term, respondents were more evenly balanced in their distribution of challenges with
Deficit Funding (21%), Investment Returns (19%) and the Eurozone Crisis/Global Growth (19%) still
featuring strongly while interest rates and inflation (13%) still remain a concern.
Sponsors, Advisors and Pensions Managers maintain that Deficit Funding / Management is the top
challenge facing funds, while trustees cite Returns as the top challenge in the long-term. Trustees and advi-
sors broadly agree on the level of significance of the challenges posed by the Eurozone and Global Growth
and Economic Policy, while these did not register at all with Sponsors and Pensions Managers.

13. 13
29%
20%
17%
10%
10%
6%
6%
2%
0%
5%
10%
15%
20%
25%
30%
Valua-on
and
Repor-ng
Regulatory
Burden
Capital
Requirements
Uncertain
/
Unfair
Poli-cal
Interferance
The
Pension
Protec-on
Fund
Monetary
Policy
Central
Clearing
The
Pensions
Regulator
Poli,cal
and
Regulatory
Challenges
(3-­‐5yr)
Graph 10. Top Political and Regulatory Challenges by Member Group - Medium-Term (3-5yr)
Respondents identified Valuation and Reporting (29%) as the number one medium-term political/regulatory
risk, perhaps reflecting concern about upcoming triennial valuations. Regulatory Burden (20%) and Capital
Requirements (17%) were identified as the next greatest challenges.
“Trying to prevent the TPR from
being any more painful and
unhelpful” Respondent Quote
0%
5%
10%
15%
20%
25%
30%
35%
40%
Valua-on
and
Repor-ng
Capital
Requirements
Regulatory
Burden
Uncertain
/
Unfair
Poli-cal
Interferance
The
Pension
Protec-on
Fund
Central
Clearing
The
Pensions
Regulator
Monetary
Policy
Trustees
Sponsor
Advisor
Pensions
Manager
Graph 9. Top Political and Regulatory Challenges by Total Votes - Medium-Term (3-5yr)
POLITICAL AND
REGULATORY CHALLENGES
Sponsors see the implications associated with Capital Requirements as the top Political and Regulatory
challenge to their funds in the medium-term, while Trustees, Advisors and Pensions Managers together
believe Valuation and Reporting will be the biggest challenge. Collectively, all member groups agree that
Regulatory Burden in general will be a key challenge for pension funds.
Unsurprisingly given the recent debate around smoothing of liabilities and potential changes to RPI
inflation, respondents identified Uncertain or Unfair Political Influence (37%) as the key long-term
political and regulatory challenge. Also featuring strongly was the Death of DB funds (17%), Regulatory
Burden (15%) and Capital Requirements (15%).

14. 14
27%
17%
14%
13%
13%
9%
5%
2%
0%
5%
10%
15%
20%
25%
30%
Governance
and
decision
making
Costs
&
Efficiency
Admin
Regulatory
Burden
Strategy
ImplementaEon
and
Monitoring
Lack
of
Quality
Providers
Auto-­‐Enrolment
Member
CommunicaEon
Opera,onal
Challenges
(3-­‐5yr)
37%
17%
15%
15%
8%
3%
2%
2%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Uncertain
/
Unfair
Poli7cal
Interference
Death
of
DB
Capital
Requirements
Regulatory
Burden
Who
knows?
The
Pensions
Regulator
Monetary
Policy
The
Pension
Protec7on
Fund
Poli+cal
and
Regulatory
Challenges
(10-­‐20yr)
The member groups agree that Uncertain / Unfair Political Interference poses the greatest challenge in the
long-term. In a similar response to Strategic challenges, sponsors view the implications associated with the
Death of DB funds as a key challenge. Regulatory entities in the industry also feature as a challenge:
some trustees believe The Pension Protection Fund will be a long-term issue, some advisors are looking
more pointedly at The Pensions Regulator.
Graph 11. Top Political and Regulatory Challenges by Total Votes - Long-Term (10-20yr)
Graph 12. Top Political and Regulatory Challenges by Member Group - Long-Term (10-20yr)
Graph 13. Top Operational Challenges by Total Votes - Medium-Term (3-5yr)
0%
5%
10%
15%
20%
25%
30%
35%
40%
Managing
the
End
Game
Sponsor
and
Balance
Sheet
Funding
Interest
Rates
Investment
Returns
and
the
Economy
RegulaCon
&
PoliCcs
Death
of
DB
Governance
Risk
Management
Employee
Benefit
Conflicts
with
Agents
Trustees
Sponsor
Advisor
Pensions
Manager
Governance (27%) is viewed as the key medium-term operational challenge facing funds as trustees grapple
with the question of how to spread scare resource across an ever more complex investment environment.
Costs and Efficiency (17%) and Administration (14%) are viewed as the next most significant challenges in
this category.
“Most overestimate their ability to
manage complexity” Respondent Quote
OPERATIONAL
CHALLENGES

15. 15
30%
16%
11%
11%
11%
11%
4%
4%
2%
2%
0%
5%
10%
15%
20%
25%
30%
35%
Governance
and
decision
making
Admin
Costs
&
Efficiency
Wind-­‐up
and
declining
membership
Strategy
ImplementaGon
and
Monitoring
Technology
and
member
engagement
Regulatory
Burden
Who
knows?
Auto-­‐Enrollment
Lack
of
Quality
Providers
Opera,onal
Challenges
(10-­‐20yr)
Sponsor concerns over operational challenges were fairly evenly spread across those listed. Trustees
distinctly view Governance and Decision Making as the key challenge, while pension managers discernibly
regard Costs and Efficiency as a key matter. Together, pension managers and trustees were the only groups
who listed Member Communication.
The picture is similar over the longer-term, with Governance (30%) listed as the primary burden, following
which concerns were more evenly distributed across Administration (16%), Costs and Efficiency (11%),
Strategy Implementation and Monitoring (11%),Technology and Member engagement (11%) and Wind-Up
and Declining Membership (11%), the latter of which is a new concern.
Graph 14. Top Operational Challenges by Member Group - Medium-Term (3-5yr)
Graph 15. Top Operational Challenges by Total Votes - Long-Term (10-20yr)
Graph 16. Top Operational Challenges by Member Group - Long-Term (10-20yr)
0%
5%
10%
15%
20%
25%
30%
35%
40%
Governance
and
decision
making
Admin
Regulatory
Burden
Lack
of
Quality
Providers
Strategy
ImplementaEon
and
Monitoring
Costs
&
Efficiency
Auto-­‐Enrolment
Member
CommunicaEon
Trustees
Sponsor
Advisor
Pensions
Manager
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Governance
and
decision
making
Admin
Wind-­‐up
and
declining
membership
Technology
and
member
engagement
Costs
&
Efficiency
Lack
of
Quality
Providers
Who
knows?
Strategy
ImplementaNon
and
Monitoring
Auto-­‐Enrollment
Regulatory
Burden
Trustees
Sponsor
Advisor
Pensions
Manager
The concerns appear fairly similar across the listed challenges, although trustees do not appear to view
Strategy Implementation and Monitoring as a long-term concern. Collectively, the groups show similar
levels of interest in Wind-Up and Declining Membership and Technology and Member Engagement.
Some trustees and advisors pragmatically suggest, “Who Knows?”

16. 16
25%
22%
11%
13%
13%
13%
13%
13%
0%
5%
10%
15%
20%
25%
30%
Sponsor
and
Balance
Sheet
Funding
Regula;on
&
Poli;cs
Risk
Management
Governance
and
Decision
Making
Conflicts
with
Agents
Sponsor
and
Balance
Sheet
Trustee
Sponsor
31%
31%
12%
12%
36%
27%
18%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Managing
the
End
Game
Sponsor
and
Balance
Sheet
Funding
Interest
Rates
Death
of
DB
Governance
Trustee
Sponsor
Graph 18. Top Strategic Challenges by Trustees and Sponsors – Long-Term (10-20yr)
Graph 19. Top Financial and Economic Challenges by Trustees and Sponsors - Medium-Term
(3-5yr)
Graph 17. Top Strategic Challenges by Trustees and Sponsors - Medium-Term (3-5yr)
25%
20%
20%
36%
14%
14%
14%
14%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Deficit
Funding
/
Management
Returns
Eurozone
&
UK
Growth
Interest
Rates
&
InflaGon
Sponsor
Solvency
Trustee
Sponsor
STRATEGIC
CHALLENGES
FINANCIAL AND
ECONOMIC CHALLENGES

17. 17
41%
18%
12%
12%
12%
30%
20%
40%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Uncertain
/
Unfair
Poli7cal
Interference
Capital
Requirements
Death
of
DB
Regulatory
Burden
Who
knows?
Trustee
Sponsor
29%
24%
18%
22%
33%
22%
0%
5%
10%
15%
20%
25%
30%
35%
Returns
Eurozone
&
Global
Growth
Interest
Rates
&
Infla>on
Deficit
Funding
/
Management
Longevity
and
Buy-­‐out
Trustee
Sponsor
Graph 20. Top Financial and Economic Challenges by Trustees and Sponsors - Long-Term (10-
20yr)
Graph 21. Top Political and Regulatory Challenges by Trustees and Sponsors - Medium-Term (3-
5yr)
Graph 22. Top Political and Regulatory Challenges by Trustees and Sponsors - Long-Term (10-
20yr)
36%
18%
18%
36%
21%
14%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Valua/on
and
Repor/ng
Capital
Requirements
Regulatory
Burden
Monetary
Policy
Trustee
Sponsor
POLITICAL AND REGULATORY
CHALLENGES

18. 18
38%
19%
13%
13%
40%
10%
10%
10%
20%
10%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
Governance
and
decision
making
Admin
Wind-­‐up
and
declining
membership
Technology
and
member
engagement
Strategy
ImplementaFon
and
Monitoring
Costs
&
Efficiency
Trustee
Sponsor
Graph 23. Top Operational Challenges by Trustees and Sponsors - Medium-Term (3-5yr)
Graph 24. Top Operational Challenges by Trustees and Sponsors - Long-Term (10-20yr)
38%
16%
13%
23%
15%
15%
15%
15%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Governance
and
decision
making
Admin
Regulatory
Burden
Lack
of
Quality
Providers
Costs
&
Efficiency
Strategy
ImplementaKon
and
Monitoring
Trustee
Sponsor
OPERATIONAL
CHALLENGES

19. 19
The results of the survey, illustrated and discussed in the previous pages, provide a rare insight into the
key challenges that those running pension funds currently face, or perceive that they face. As investment
consultants, however, we at Redington see a slightly different perspective. Some key challenges that we
expected would feature strongly in the survey results, did not. We have identified, in the course of our work
with a range of clients representing over £270bn in assets and eleven of the largest 30 UK pension funds,
some more challenges that we stand with our clients to face and that, we believe, might be some of the
most important and serious ones on the horizon. A summary of those key challenges are described below
for consideration and debate.
STRATEGIC: ROLL DOWN AND CARRY
Roll down and carry presents a more subtle – and perhaps less appreciated - variation on the interest rate
challenge. This is the impact on pension fund liabilities assuming nothing changes except for the
passage of time. The current interest rate curve is upward sloping because the market expects rates to
rise in the future. These expectations are similarly reflected in the valuation of pension liabilities. Given the
current shape of the curve, this means that a typical pension fund liability profile can be expected to grow
by around 2.5% per year if interest rates merely remain unchanged. This presents an interesting twist for
funds unwilling to hedge because they view today’s low rates as unattractive: can they afford to the pay the
price if the expected rise in rates fails to materialise?
FINANCIAL AND ECONOMIC: REINVESTMENT RISK
For well funded funds nearing the End Game, high quality credit allocations can form a key part of the
portfolio. These allocations offer a relatively secure return over Gilts while also providing predictable cash
flows to help meet benefit payments. For funds in this position, falling credit spreads (and the associated
risk that coupon payments will be reinvested at lower rates of return) can present a significant challenge to
their funding objectives.
POLITICAL AND REGULATORY: CENTRAL CLEARING
New 2013 OTC derivative regulations present complex challenges for UK pension funds. Should existing
swaps be kept out or moved to central clearing? Should funds make use of the 2015 / 2018 exemption for
new trades or move to clearing immediately? How funds respond to these questions will have important
implications for areas like counterparty credit risk, collateral efficiency, eligible collateral and, ultimately,
the strategic asset allocation. As the impact will vary depending on fund’s unique circumstances, a careful
cost/benefit assessment, soon, is crucial.
OPERATIONAL: LIQUIDITY
While pension funds have the benefit over other institutional investors of being able to take advantage
of longer investment horizons, liquidity is nevertheless a key operational challenge. Funds need to retain
enough cash both to pay benefits as they fall due and meet potential margin calls on derivative positions.
As this can have important implications for the investment strategy, careful monitoring and stress testing is
essential.
Below the Radar
http://bit.ly/16NvAHh
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Scan this QR code with your smart phone or click
on the hyperlink below for a direct link to:
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20. 20
Robert.Gardner@redington.co.uk
02072503416
twitter.com/robertjgardner
Alice Cheung
Investment Consulting | Associate
Alex Lindenberg
Investment Consulting | Analyst
Mackenzie Nordal
Communication
Contacts
Disclaimer
Robert Gardner
Co-CEO & Co Founder
Alice.Cheung@redington.co.uk
02033267103
http://uk.linkedin.com/pub/alice-cheung/22/a12/457
Alex.Lindenberg@redington.co.uk
02033267114
Mackenzie.Nordal@redington.co.uk
twitter.com/mackenzienordal
http://www.linkedin.com/in/mackenzienordal
This report is for investment professionals only and is for discussion purposes only. This report is based on data/information available
to Redington Limited at the date of the report and takes no account of subsequent developments after that date. It may not be copied
modified or provided by you, the Recipient, to any other party without Redington Limited’s prior written permission. It may also not be
disclosed by the Recipients to any other party without Redington Limited’s prior written permission except as may be required by law.
This report is not intended by Redington Limited to form a basis of any decision by the Recipient or by a third party to do or omit to do
anything.
Registered Office: 13-15 Mallow Street, London EC1Y 8RD. Redington Limited (reg no 6660006) is a company authorised and regu-
lated by the Financial Conduct Authority and registered in England and Wales.
© Redington Limited 2013. All rights reserved.
linkedin.com/in/robertjgardner

21. 21
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