Welcome to the fifth edition of Outline, Redington’s quarterly collection of thought-pieces designed to help institutional investors make smarter and more informed decisions.
This edition features short articles on the future of pensions policy, the complexities of running a pension scheme and how technology can help overcome them, risks inherent from gilt and swap rate differences, an outcome-driven approach to fund management, a review of asset classes in 2013, plus an overview of the global macro environment.
We hope you find the articles interesting and helpful as you consider how best to manage the risk-adjusted return of your portfolios
The document provides a derivation of the Capital Asset Pricing Model (CAPM) formula in 3 pages. It begins by explaining that CAPM is used to estimate the expected return on securities based on their systematic risk relative to the market. The derivation shows that the expected return is equal to the risk-free rate plus a risk premium that is proportional to the security's beta. Securities with higher systematic risk (beta greater than 1) receive a higher risk premium, while those with lower risk (beta less than 1) receive a lower premium. The CAPM helps investors understand the relationship between risk and return in financial markets.
- Pension plans face a major mystery in accurately valuing their assets and liabilities given uncertainties around future market returns, inflation, and other economic factors.
- They estimate future returns, called the expected rate of return, to smooth out market volatility but these estimates are often unrealistic and do not reflect the global bond bubble.
- With most pension plans already running deficits, an accurate expected rate of return that incorporates the risks of the bond bubble popping could show significantly larger deficits than currently reported and require greater employer contributions.
What is the difference between Whole Life and Indexed Universal Life for Reti...Michael Grigsby
I get asked a lot about how Whole Life insurance differs from Indexed Universal Life insurance, particularly when it comes to retirement planning. In this presentation, I note the similarities between these forms of permanent insurance, the differences, and why you might use one instead of the other.
The document discusses retirement income solutions within 401(k) plans (in-plan) versus outside of plans (out-of-plan). It notes that only 25% of 401(k) participants achieve retirement success due to challenges in saving enough and converting savings to reliable income. In-plan solutions aim to help but face barriers like fiduciary concerns and lack of features. Recent regulatory guidance addressed some barriers like applying survivor annuity rules to deferred annuities and allowing longevity annuities in plans. Overall solutions are still missing features around portability, fee transparency, and survivor options.
Planning Your Way Out of the Financial CrisisAegon
This document discusses the challenges facing companies and pension funds in dealing with pension risks and funding shortfalls during the current financial crisis. It notes that while some funds hedged risks in the past, many did not, and the crisis has exposed pension funds and sponsoring companies to significant volatility and funding issues. International accounting rules now require pension funding status to be reported on balance sheets, increasing transparency but also volatility. Differences between national pension regulations and international accounting standards make it difficult for multinational companies to assess pension risks and align stakeholders. The document proposes that developing a roadmap to "derisk" pensions by reducing risks at the right times can help companies regain control of their balance sheets and pension obligations.
Investing for Insurers: Review and PreviewAlton Cogert
The document discusses how low interest rates are expected to persist for an extended period, posing challenges for insurers. It outlines strategies insurers can take to improve investment income in a low rate environment, such as enhancing their investment processes and considering alternative asset classes. It emphasizes the importance of understanding risk appetite and having a disciplined investment process focused on goals and risk management over outcomes.
Robert Feinholz: What is the top asset class indentified for retirementForman Bay LLC
The study found that lifetime income annuities can provide secure retirement income for 25-40% less than other traditional methods thanks to risk pooling. Income annuities address the risk of outliving one's savings by providing guaranteed lifetime income that cannot be replicated by other asset classes. Covering basic living expenses with income annuities provides greater flexibility to take more investment risk in other portions of one's portfolio. Recent innovations have increased the desirability of income annuities.
The document discusses recent developments in employee benefits, specifically focusing on "de-risking" pension plans. It notes that de-risking actually involves transferring risks to other parties rather than fully eliminating them. There are a few main types of risk transfers: 1) exchanging a volatile risk for a more predictable long-term risk, 2) transferring risks to an insurance company in exchange for a specific cost through annuity purchases, and 3) paying lump sums to plan participants instead of monthly benefits. The key point is that while de-risking strategies aim to reduce a company's risk exposure, the risks are actually shifted to other entities rather than disappearing completely.
The document provides a derivation of the Capital Asset Pricing Model (CAPM) formula in 3 pages. It begins by explaining that CAPM is used to estimate the expected return on securities based on their systematic risk relative to the market. The derivation shows that the expected return is equal to the risk-free rate plus a risk premium that is proportional to the security's beta. Securities with higher systematic risk (beta greater than 1) receive a higher risk premium, while those with lower risk (beta less than 1) receive a lower premium. The CAPM helps investors understand the relationship between risk and return in financial markets.
- Pension plans face a major mystery in accurately valuing their assets and liabilities given uncertainties around future market returns, inflation, and other economic factors.
- They estimate future returns, called the expected rate of return, to smooth out market volatility but these estimates are often unrealistic and do not reflect the global bond bubble.
- With most pension plans already running deficits, an accurate expected rate of return that incorporates the risks of the bond bubble popping could show significantly larger deficits than currently reported and require greater employer contributions.
What is the difference between Whole Life and Indexed Universal Life for Reti...Michael Grigsby
I get asked a lot about how Whole Life insurance differs from Indexed Universal Life insurance, particularly when it comes to retirement planning. In this presentation, I note the similarities between these forms of permanent insurance, the differences, and why you might use one instead of the other.
The document discusses retirement income solutions within 401(k) plans (in-plan) versus outside of plans (out-of-plan). It notes that only 25% of 401(k) participants achieve retirement success due to challenges in saving enough and converting savings to reliable income. In-plan solutions aim to help but face barriers like fiduciary concerns and lack of features. Recent regulatory guidance addressed some barriers like applying survivor annuity rules to deferred annuities and allowing longevity annuities in plans. Overall solutions are still missing features around portability, fee transparency, and survivor options.
Planning Your Way Out of the Financial CrisisAegon
This document discusses the challenges facing companies and pension funds in dealing with pension risks and funding shortfalls during the current financial crisis. It notes that while some funds hedged risks in the past, many did not, and the crisis has exposed pension funds and sponsoring companies to significant volatility and funding issues. International accounting rules now require pension funding status to be reported on balance sheets, increasing transparency but also volatility. Differences between national pension regulations and international accounting standards make it difficult for multinational companies to assess pension risks and align stakeholders. The document proposes that developing a roadmap to "derisk" pensions by reducing risks at the right times can help companies regain control of their balance sheets and pension obligations.
Investing for Insurers: Review and PreviewAlton Cogert
The document discusses how low interest rates are expected to persist for an extended period, posing challenges for insurers. It outlines strategies insurers can take to improve investment income in a low rate environment, such as enhancing their investment processes and considering alternative asset classes. It emphasizes the importance of understanding risk appetite and having a disciplined investment process focused on goals and risk management over outcomes.
Robert Feinholz: What is the top asset class indentified for retirementForman Bay LLC
The study found that lifetime income annuities can provide secure retirement income for 25-40% less than other traditional methods thanks to risk pooling. Income annuities address the risk of outliving one's savings by providing guaranteed lifetime income that cannot be replicated by other asset classes. Covering basic living expenses with income annuities provides greater flexibility to take more investment risk in other portions of one's portfolio. Recent innovations have increased the desirability of income annuities.
The document discusses recent developments in employee benefits, specifically focusing on "de-risking" pension plans. It notes that de-risking actually involves transferring risks to other parties rather than fully eliminating them. There are a few main types of risk transfers: 1) exchanging a volatile risk for a more predictable long-term risk, 2) transferring risks to an insurance company in exchange for a specific cost through annuity purchases, and 3) paying lump sums to plan participants instead of monthly benefits. The key point is that while de-risking strategies aim to reduce a company's risk exposure, the risks are actually shifted to other entities rather than disappearing completely.
Robert Feinholz: Planning for a 30 year retirementForman Bay LLC
Robert Feinholz: Planning for a 30 year retirement.
Funding a 30-year retirement will take financial planning prowess as you juggle the effects of inflation, distributions, taxes, asset allocation, and expenditures. Are you up to the task?
Robert Feinholz: The art of managing retirement assumptionsForman Bay LLC
Robert Feinholz: The art of managing retirement assumptions
A retirement plan is built on a set of assumptions that can’t be validated until it’s too late. One key to successful retirement planning is carefully setting assumptions and revising them often.
Employers are increasingly recognizing the need to help employees prepare for retirement. Only about one-third of employees covered by a retirement plan have over $100,000 saved. This savings gap poses challenges for both employees and employers. Employers can help by assessing employees' retirement readiness, communicating the importance of saving through tools and education programs, and designing retirement plans that automatically enroll employees and increase their contributions over time. Simple plan designs using target-date funds also support retirement readiness.
Five Trends Reshaping the Global Pension Fund IndustryState Street
This executive briefing explores how pension funds are adapting to the challenges of a new investment environment. The research presented in this report is based on an international State Street survey, conducted by the Economist Intelligence Unit in August 2014, of 134 senior executives in the pension fund industry.
This document discusses strategies for using a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, in retirement planning. It summarizes that tapping home equity through a HECM can help offset inflation risks and stabilize retirement portfolios. It then presents three scenarios comparing a retiree's outcomes with and without a HECM: 1) No HECM used, 2) Refinancing existing mortgage into a HECM line of credit, and 3) Paying off mortgage and establishing a HECM line of credit. A Monte Carlo analysis shows that using a HECM through either strategy 2 or 3 increases the probability of meeting retirement goals and maintains a higher level of available wealth over 30 years
This document summarizes a study that examines how household portfolio diversification varies with financial literacy and financial advice. The study finds that households with below-median financial literacy that do not seek financial advice incur the largest losses from failing to properly diversify their portfolios. Specifically, these households have portfolios that provide significantly lower expected returns given the amount of risk taken, compared to households that have higher financial literacy or seek advice. The results suggest that both increasing financial literacy and the uptake of financial advice could help reduce welfare losses from suboptimal investment strategies among households.
The document discusses the Ameriprise Financial Confident Retirement approach, which provides a framework to create a sound retirement plan. The approach is built on four principles: 1) Cover essential expenses with guaranteed income sources like Social Security, annuities, and bonds. 2) Ensure lifestyle through flexible withdrawal plans and diversified growth investments. 3) Prepare for unexpected costs like long-term care and medical expenses using insurance. 4) Leave a legacy by controlling assets through estate planning and maximizing amounts given to heirs using life insurance. The approach aims to provide clients with strategies to manage risks and confidently fund retirement.
This document discusses deficit elimination programs for defined benefit pension schemes. It promotes the financial solutions of Leveraged & Equity Investment Partners, which provide an immediate bulk investment into pension schemes to eliminate deficits. This allows schemes to become fully funded immediately while reducing costs and improving cashflow for sponsors. The solutions offer tax benefits and remove risk for both schemes and sponsors by fully funding schemes upfront through bulk annuity purchases or buyouts.
This document provides an overview of indexed annuities, including:
- Indexed annuities can help achieve retirement savings objectives by accumulating assets on a tax-deferred basis and providing lifetime income.
- Indexed annuities have characteristics of both fixed annuities and variable annuities, offering potential returns linked to market indexes while providing a minimum guaranteed rate of return.
- Key features of indexed annuities like participation rates, caps, and indexing methods determine interest credits and impact performance.
- Indexed annuities may offer riders providing guarantees like lifetime withdrawal benefits or death benefits for additional fees.
The document discusses David X. Li, the inventor of the Gaussian copula formula which was widely used to rate collateralized debt obligations (CDOs) containing mortgage-backed securities in the run-up to the 2008 financial crisis. While the formula helped fuel the rapid growth of the CDO market, it had significant flaws and limitations that were not properly understood. When the housing market collapsed, it revealed that CDOs given high credit ratings based on the formula were in fact highly risky and worthless. This contributed greatly to the financial crisis and global recession.
DC plans have largely failed to adequately prepare U.S. workers for retirement, leaving many relying solely on Social Security. By 2025, more employers are expected to adopt characteristics of successful pension plans to help employees create a fully funded retirement income stream. This includes improving investment governance, increasing savings contributions, utilizing more efficient portfolios, and providing tools to help employees translate savings into reliable monthly retirement income to replace lost pensions.
Federica Teppa, Maarten van Rooij. Are Retirement Decisions Vulnerable to Fra...Eesti Pank
This document summarizes the results of a study on how framing effects influence retirement decisions. The study used hypothetical questions from surveys in the Netherlands and US to examine how individuals' preferences for pension contributions and investment profiles are affected by how the choices are framed or presented. The results show strong evidence that framing effects, choice set effects, and the standard option presented influence individuals' decisions. Preferences were also found to be more vulnerable to framing for more complex decisions. The findings suggest communication around retirement choices needs to properly frame options to avoid unintended influences on individuals' decisions.
The document describes a scenario planning method called AMPROSS that helps organizations identify future risks and opportunities. It considers how social, technological, economic, political, and other factors may interact and impact a business case over time. The model can be used before making investments, during monitoring, and for annual planning. Senior managers, consultants, students, and others can use it to thoroughly assess situations. Case studies demonstrate its use in various industries and regions.
The document provides information about Quantum News, a publication that provides topical pension issues. It contains the following key points:
1) Quantum News is distributed via email but hard copies are still available upon request. The publication contains articles on topics like sponsor covenants, benefits, early intervention, and regulatory issues.
2) An article discusses value at risk (VaR) which measures potential funding deficit increases over time periods like 1-5 years under different economic scenarios. It helps trustees understand investment strategy risks.
3) Another article reviews what has been learned about assessing sponsor covenant over the past 10 years since more regulatory focus. There is now better understanding of covenant strength and integrating it into risk management.
Weak analogies make poor realities – are we sitting on a Security Debt Crisis...44CON
Cyber Security is often framed in terms of ‘Risk’- the possibility of suffering harm or loss – and the ‘Management’ of Risk to reduce uncertainty. This is familiar territory for businesses. Cyber Security falls in neatly under Risk Management, is assigned a suitable place on the organigramme, tossed some spare budget and granted a few paragraphs in the board report. NIST defines Risk as a ‘function of the likelihood of a given threat-source’s exercising a particular potential vulnerability, and the resulting impact of that adverse event on the organisation’.
Key theme:
This presentation explores the idea that making cyber security analogous to risk is holding us back. How about we talk about security ‘debt’ instead? Technical Debt is already a well understood concept in software development – the cost of additional rework caused by choosing an easy solution now instead of using a better approach that would take longer or cost more. Changing our language changes how we think and how we behave. This presentation argues that such a change could have a significant impact on software security.
In this presentation we will comment on the power of ‘analogies’ and how they’ve shaped our industry. We’ll then consider the difference between the ‘security as risk’ and the ‘security as debt’ paradigms and explore how changing paradigms may change the way we think about, talk about and measure software security. We believe this could have a very empowering effect on development managers and other security professionals who are struggling to articulate the relative benefits of security (or a lack of security) to a software product.
Interactive Symposium on "Corporate Savings & Retirement Schemes"Sohail Jaffer
The document discusses retirement planning and savings schemes. It notes that retirement is no longer a fixed age but a flexible period requiring financial planning. People are living longer so retirement savings must be optimized through saving more and working longer. Several myths about retirement are addressed, such as the idea that retirement means ending work, and that new careers are only for the young. Flexibility is becoming the new model for retirement. The document also provides an overview of corporate savings plans and their benefits for both employees and employers.
Successful Financial Planning for RetirementSohail Jaffer
The document discusses retirement planning and savings schemes. It notes that retirement is no longer a single event at a preset age, but a longer phase that requires financial planning. People are living longer but often leave the workforce at a standard pension age, wasting resources. Successful retirement planning needs to encompass both saving more and working longer to optimize finances and human capital. The document also discusses challenges like inadequate retirement savings, rising life expectancies, and shifting responsibilities from employers to employees. It provides an overview of corporate savings plans and their benefits for both employees and employers.
Ask the Experts – Mercer’s 2013 European Asset Allocation survey
In this Quarterly Mercer Ask the Experts podcast, I’m joined by three Mercer investments experts Nick Sykes, Phil Edwards and Atul Shinh. They will be discussing key trends from Mercer’s 2013 European Asset Allocation survey.
Questions for our Experts included:
Against a continued uncertain macro-economic backdrop with investors facing the challenge of generating real returns while managing risk, what are the key trends that we see emerging from this years’ European Asset Allocation survey?
What are the key areas of focus for Alternative investments?
What are the trends for the future? What is the expected direction of travel?
http://www.mercer.com/asktheexperts
http://www.mercer.com/assetallocation
What are the Current Dynamics Driving UK Pensions Investment?Redington
1) The document discusses various strategies and assets for UK pension investment, focusing on liability driven investments (LDI).
2) It provides examples of pension funds that implemented LDI strategies at different times, outlining how their allocations changed in response to market events.
3) The document promotes the use of a Pension Risk Management Framework and "Flight Plan" tool to help pension funds develop clear investment strategies and evaluate opportunities based on their objectives and constraints.
Mountains of the Mind, Pension Funds greatest challenges in 2013 - Redington ...Redington
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.
Robert Feinholz: Planning for a 30 year retirementForman Bay LLC
Robert Feinholz: Planning for a 30 year retirement.
Funding a 30-year retirement will take financial planning prowess as you juggle the effects of inflation, distributions, taxes, asset allocation, and expenditures. Are you up to the task?
Robert Feinholz: The art of managing retirement assumptionsForman Bay LLC
Robert Feinholz: The art of managing retirement assumptions
A retirement plan is built on a set of assumptions that can’t be validated until it’s too late. One key to successful retirement planning is carefully setting assumptions and revising them often.
Employers are increasingly recognizing the need to help employees prepare for retirement. Only about one-third of employees covered by a retirement plan have over $100,000 saved. This savings gap poses challenges for both employees and employers. Employers can help by assessing employees' retirement readiness, communicating the importance of saving through tools and education programs, and designing retirement plans that automatically enroll employees and increase their contributions over time. Simple plan designs using target-date funds also support retirement readiness.
Five Trends Reshaping the Global Pension Fund IndustryState Street
This executive briefing explores how pension funds are adapting to the challenges of a new investment environment. The research presented in this report is based on an international State Street survey, conducted by the Economist Intelligence Unit in August 2014, of 134 senior executives in the pension fund industry.
This document discusses strategies for using a Home Equity Conversion Mortgage (HECM), also known as a reverse mortgage, in retirement planning. It summarizes that tapping home equity through a HECM can help offset inflation risks and stabilize retirement portfolios. It then presents three scenarios comparing a retiree's outcomes with and without a HECM: 1) No HECM used, 2) Refinancing existing mortgage into a HECM line of credit, and 3) Paying off mortgage and establishing a HECM line of credit. A Monte Carlo analysis shows that using a HECM through either strategy 2 or 3 increases the probability of meeting retirement goals and maintains a higher level of available wealth over 30 years
This document summarizes a study that examines how household portfolio diversification varies with financial literacy and financial advice. The study finds that households with below-median financial literacy that do not seek financial advice incur the largest losses from failing to properly diversify their portfolios. Specifically, these households have portfolios that provide significantly lower expected returns given the amount of risk taken, compared to households that have higher financial literacy or seek advice. The results suggest that both increasing financial literacy and the uptake of financial advice could help reduce welfare losses from suboptimal investment strategies among households.
The document discusses the Ameriprise Financial Confident Retirement approach, which provides a framework to create a sound retirement plan. The approach is built on four principles: 1) Cover essential expenses with guaranteed income sources like Social Security, annuities, and bonds. 2) Ensure lifestyle through flexible withdrawal plans and diversified growth investments. 3) Prepare for unexpected costs like long-term care and medical expenses using insurance. 4) Leave a legacy by controlling assets through estate planning and maximizing amounts given to heirs using life insurance. The approach aims to provide clients with strategies to manage risks and confidently fund retirement.
This document discusses deficit elimination programs for defined benefit pension schemes. It promotes the financial solutions of Leveraged & Equity Investment Partners, which provide an immediate bulk investment into pension schemes to eliminate deficits. This allows schemes to become fully funded immediately while reducing costs and improving cashflow for sponsors. The solutions offer tax benefits and remove risk for both schemes and sponsors by fully funding schemes upfront through bulk annuity purchases or buyouts.
This document provides an overview of indexed annuities, including:
- Indexed annuities can help achieve retirement savings objectives by accumulating assets on a tax-deferred basis and providing lifetime income.
- Indexed annuities have characteristics of both fixed annuities and variable annuities, offering potential returns linked to market indexes while providing a minimum guaranteed rate of return.
- Key features of indexed annuities like participation rates, caps, and indexing methods determine interest credits and impact performance.
- Indexed annuities may offer riders providing guarantees like lifetime withdrawal benefits or death benefits for additional fees.
The document discusses David X. Li, the inventor of the Gaussian copula formula which was widely used to rate collateralized debt obligations (CDOs) containing mortgage-backed securities in the run-up to the 2008 financial crisis. While the formula helped fuel the rapid growth of the CDO market, it had significant flaws and limitations that were not properly understood. When the housing market collapsed, it revealed that CDOs given high credit ratings based on the formula were in fact highly risky and worthless. This contributed greatly to the financial crisis and global recession.
DC plans have largely failed to adequately prepare U.S. workers for retirement, leaving many relying solely on Social Security. By 2025, more employers are expected to adopt characteristics of successful pension plans to help employees create a fully funded retirement income stream. This includes improving investment governance, increasing savings contributions, utilizing more efficient portfolios, and providing tools to help employees translate savings into reliable monthly retirement income to replace lost pensions.
Federica Teppa, Maarten van Rooij. Are Retirement Decisions Vulnerable to Fra...Eesti Pank
This document summarizes the results of a study on how framing effects influence retirement decisions. The study used hypothetical questions from surveys in the Netherlands and US to examine how individuals' preferences for pension contributions and investment profiles are affected by how the choices are framed or presented. The results show strong evidence that framing effects, choice set effects, and the standard option presented influence individuals' decisions. Preferences were also found to be more vulnerable to framing for more complex decisions. The findings suggest communication around retirement choices needs to properly frame options to avoid unintended influences on individuals' decisions.
The document describes a scenario planning method called AMPROSS that helps organizations identify future risks and opportunities. It considers how social, technological, economic, political, and other factors may interact and impact a business case over time. The model can be used before making investments, during monitoring, and for annual planning. Senior managers, consultants, students, and others can use it to thoroughly assess situations. Case studies demonstrate its use in various industries and regions.
The document provides information about Quantum News, a publication that provides topical pension issues. It contains the following key points:
1) Quantum News is distributed via email but hard copies are still available upon request. The publication contains articles on topics like sponsor covenants, benefits, early intervention, and regulatory issues.
2) An article discusses value at risk (VaR) which measures potential funding deficit increases over time periods like 1-5 years under different economic scenarios. It helps trustees understand investment strategy risks.
3) Another article reviews what has been learned about assessing sponsor covenant over the past 10 years since more regulatory focus. There is now better understanding of covenant strength and integrating it into risk management.
Weak analogies make poor realities – are we sitting on a Security Debt Crisis...44CON
Cyber Security is often framed in terms of ‘Risk’- the possibility of suffering harm or loss – and the ‘Management’ of Risk to reduce uncertainty. This is familiar territory for businesses. Cyber Security falls in neatly under Risk Management, is assigned a suitable place on the organigramme, tossed some spare budget and granted a few paragraphs in the board report. NIST defines Risk as a ‘function of the likelihood of a given threat-source’s exercising a particular potential vulnerability, and the resulting impact of that adverse event on the organisation’.
Key theme:
This presentation explores the idea that making cyber security analogous to risk is holding us back. How about we talk about security ‘debt’ instead? Technical Debt is already a well understood concept in software development – the cost of additional rework caused by choosing an easy solution now instead of using a better approach that would take longer or cost more. Changing our language changes how we think and how we behave. This presentation argues that such a change could have a significant impact on software security.
In this presentation we will comment on the power of ‘analogies’ and how they’ve shaped our industry. We’ll then consider the difference between the ‘security as risk’ and the ‘security as debt’ paradigms and explore how changing paradigms may change the way we think about, talk about and measure software security. We believe this could have a very empowering effect on development managers and other security professionals who are struggling to articulate the relative benefits of security (or a lack of security) to a software product.
Interactive Symposium on "Corporate Savings & Retirement Schemes"Sohail Jaffer
The document discusses retirement planning and savings schemes. It notes that retirement is no longer a fixed age but a flexible period requiring financial planning. People are living longer so retirement savings must be optimized through saving more and working longer. Several myths about retirement are addressed, such as the idea that retirement means ending work, and that new careers are only for the young. Flexibility is becoming the new model for retirement. The document also provides an overview of corporate savings plans and their benefits for both employees and employers.
Successful Financial Planning for RetirementSohail Jaffer
The document discusses retirement planning and savings schemes. It notes that retirement is no longer a single event at a preset age, but a longer phase that requires financial planning. People are living longer but often leave the workforce at a standard pension age, wasting resources. Successful retirement planning needs to encompass both saving more and working longer to optimize finances and human capital. The document also discusses challenges like inadequate retirement savings, rising life expectancies, and shifting responsibilities from employers to employees. It provides an overview of corporate savings plans and their benefits for both employees and employers.
Ask the Experts – Mercer’s 2013 European Asset Allocation survey
In this Quarterly Mercer Ask the Experts podcast, I’m joined by three Mercer investments experts Nick Sykes, Phil Edwards and Atul Shinh. They will be discussing key trends from Mercer’s 2013 European Asset Allocation survey.
Questions for our Experts included:
Against a continued uncertain macro-economic backdrop with investors facing the challenge of generating real returns while managing risk, what are the key trends that we see emerging from this years’ European Asset Allocation survey?
What are the key areas of focus for Alternative investments?
What are the trends for the future? What is the expected direction of travel?
http://www.mercer.com/asktheexperts
http://www.mercer.com/assetallocation
What are the Current Dynamics Driving UK Pensions Investment?Redington
1) The document discusses various strategies and assets for UK pension investment, focusing on liability driven investments (LDI).
2) It provides examples of pension funds that implemented LDI strategies at different times, outlining how their allocations changed in response to market events.
3) The document promotes the use of a Pension Risk Management Framework and "Flight Plan" tool to help pension funds develop clear investment strategies and evaluate opportunities based on their objectives and constraints.
Mountains of the Mind, Pension Funds greatest challenges in 2013 - Redington ...Redington
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.
Social housing- Opening New Doors for Liability Matching InvestmentRedington
This document discusses social housing as an asset class for pension funds to invest in. It outlines traditional models of financing social housing projects through government grants and bank loans, but notes that since 2008 these sources have dried up. It then describes three new models for pension funds to provide financing: long-dated index-linked debt issued by housing associations; sale and leaseback agreements where a pension fund purchases and leases housing units back to an association; and development partnerships where a pension fund provides equity funding for new housing projects. Each option presents different risk-return opportunities for pension funds.
CIO Report - Investing in a World without Credit SpreadsRedington
- Asset allocations over the past 5 years have relied on credit spreads, but credit spreads are now declining and may not be a reliable source of returns going forward
- Without attractive credit spreads, asset allocation will depend more on returns from liquid markets, which are more uncertain
- There are four approaches that can help manage but not remove this uncertainty: risk-based asset allocation, diversification across asset classes, diversification within asset classes, and manager skill
- Combining these four approaches provides the best risk-adjusted returns, but incorporating some of the approaches still provides most of the benefits
"I haven’t told you the best part,” said Grandpa. “When you save your acorns, they don’t just sit there and wait for you. They grow into trees, and the trees give you more and more acorns.”
Join Oliver and Amelia as Grandpa teaches them the importance of saving. They hear the story of how the bears saved the monkeys. They learned about the consequences of wasting bananas, sharing berries and saving acorns. The best part is the acorns they save can grow over time into trees with more acorns.
This document provides an overview of alternative investment opportunities for pension schemes and insurance companies in 2010 as the financial markets continue to recover from the credit crisis. It identifies several asset classes that offer illiquidity premiums, such as infrastructure investments, social housing, and insurance linked securities. The document also notes that a lack of funding from traditional sources like banks has led to opportunities in secured leases, ground rents, and equity release mortgages. Constraints on governance budgets are discussed as impacting the ability to invest in some of these alternative assets.
The document discusses the shift from defined benefit pensions to defined contribution plans, with individuals taking on more responsibility for retirement savings. It notes this is an issue not just in the UK and explores strategies to reduce risks for individuals as they invest for the long term, including balanced income and asset allocation approaches. The document also discusses how financial technology and consulting are evolving to better serve individuals by offering personalized strategies and engagement.
The document discusses the benefits of exercise for mental health. Regular physical activity can help reduce anxiety and depression and improve mood and cognitive function. Exercise causes chemical changes in the brain that may help protect against mental illness and improve symptoms for those who already suffer from conditions like depression and anxiety.
The document provides an overview of Redington's 7 Steps to Full Funding process for helping pension funds close their funding gap with minimum risk. The steps include:
1. Laying out clear goals and objectives and assigning tasks and responsibilities.
2. Building an LDI Hub (risk management toolkit).
3. Crafting the right investment strategy using a range of tools to fit the fund's needs and constraints.
4. Ongoing high-quality monitoring to continually track progress against objectives and guide changes as needed.
The document emphasizes the importance of goals and constraints at each step and of ongoing monitoring to navigate changes in pursuit of the original objectives. It presents Redington's process as a
The document provides an outline for Redington's quarterly publication called "Outline" which features thought pieces on key investment topics for institutional investors.
The March 2013 issue includes articles on:
1) Arguments against smoothing asset and liability valuations for pension schemes.
2) The importance of considering both risk and return, rather than an "either-or" approach, when developing investment strategies.
3) How carry, or the mark-to-market impact of the passage of time, is an important factor for liability driven investment strategies given current low interest rates.
4) Challenges with relying on historical estimates of the equity risk premium to inform investment decisions.
5) Potential alternatives
Book Recommendation: Waring, M. Barton. Pension Finance – Putting the Risks and Costs of Defined Benefit Plans Back under Your Control. New Jersey: John Wiley & Sons, Inc., 2012. Print
Asset Class Spring/Summer Collection 2013Redington
This document discusses how pension funds and insurance companies need to access innovative investment ideas in order to meet their funding goals in the current challenging financial environment. The author's investment consultants identify the best ideas in the market, help develop them for clients' needs, and deliver them to clients. The publication, called Asset Class, aims to provide clients with the latest cutting-edge investment strategies and ideas being used or considered by other pension funds and insurance companies. It is organized according to the "7 Steps to Full Funding" framework to help clients make intelligent investment decisions and achieve strong results.
This document discusses four steps for successful retirement plan management:
1) Build a strong plan foundation with purposeful design features like automatic enrollment and escalation.
2) Deliver outcomes-based education and advice to participants through targeted communications.
3) Take a comprehensive view of fees to balance efficiency and value in supporting positive participant outcomes.
4) Follow fiduciary and compliance best practices, such as satisfying ERISA standards, even for non-ERISA plans.
The document discusses how insurers are reconsidering their fixed income and private asset investment strategies in response to persistent low interest rates and slow economic growth. It finds that insurers are increasingly focused on absolute returns, diversification through private markets like real estate and infrastructure, and managing duration risk over book yield. However, barriers like lack of suitable opportunities and regulatory uncertainty remain challenges for increasing allocations to private assets. The report surveys global insurers and analyzes their evolving investment outlook.
“Challenges of Dealing with Uncertainty”, published in this month’s edition of PM World Journal, takes a look at uncertainty as it relates to the economics of investments in community resilience. I have chosen to focus on how one deals with uncertainty in this area since it presents several characteristics which I find relevant in a broader array of programs and projects. These characteristics include:
• The long term nature of both initial investments but also utility and “return on investment”
o Increasingly we find extended timeframes in large scale programs
• The need to meet the long term needs of multiple, interlocking stakeholder groups, with potentially differing views of risk, investment horizons and potential futures
• Consequences of getting it materially wrong.
o These consequences can include loss of life, economic impacts at scale and even lost generations.
• The programmatic nature at scale, dealing with whole communities, broader than even many of today’s giga-programs
• Complexity, that only allows insights into how to prepare for tomorrow through almost unweighted consideration of scenarios
• The emerging nature of the problem and its likely relationship to many future projects
I consider this paper as exploratory and actively solicit your feedback and thoughts as I will co-chair a panel on this subject shortly and believe the subject would benefit from broader thoughts and insights.
This document provides an overview of nonqualified deferred compensation (NQDC) plans. It discusses how NQDC plans help address retirement savings gaps for highly compensated executives due to ERISA contribution limits. NQDC plans allow flexible deferral of salary and bonuses, company matching, and tax-deferred growth. While unfunded, companies often informally fund NQDC plans through investment vehicles like rabbi trusts. The document aims to help company leaders understand NQDC plans and their value in attracting, retaining, and rewarding top talent.
The document summarizes the key differences between a Cashflow Driven Investment (CDI) strategy and a Return Driven Investment (RDI) strategy for pension schemes. A CDI strategy aims to match asset cashflows to liability cashflows like insurers, focusing on low-risk credit assets. However, pension schemes have different objectives than insurers. An RDI strategy targets higher returns through diversified assets like equities and credits. It is more adaptable to changing circumstances over time. The document argues that for many schemes, an RDI approach can improve member security through higher expected returns while still managing risk appropriately.
The document provides information on three key topics:
1. The three pillars of retirement - how much one saves, withdraws, and how well their portfolio performs. Saving adequately and avoiding excessive withdrawals are emphasized.
2. Harry Markowitz and his pioneering work developing Modern Portfolio Theory in the 1950s, which revolutionized investing through diversification and analyzing risk and return.
3. How artificial intelligence and new technologies can boost productivity and economic growth over the long run, though their impacts are often overestimated in the short term. Maintaining a level-headed perspective on new technologies is advised for investors.
The document summarizes 9 key drivers of change that will impact the global wealth and asset management industry in the coming year. The drivers include: 1) Increased regulation and transparency requirements in Europe and the US, 2) Accelerated M&A activity as firms seek to grow rapidly, 3) Cooling spending on private wealth management growth and a refocus on organic growth, 4) Increased scrutiny of pension funding gaps, 5) Continued growth of robo-advisors and automated platforms, 6) Continued dominance of ETFs over other investment products, 7) Persistence of fixed income assets despite predictions of demise, 8) Limited growth expected in emerging markets, and 9) Accelerated share buybacks by publicly
AgeWage response to the DWP call for evidence on options for DB schemes.pdfHenry Tapper
The document discusses options for how the UK government could encourage defined benefit pension schemes to invest more in productive assets while maintaining security of promised benefits. It gives four recommendations: 1) change the mindset that led to over-investment in LDI funds, 2) allow schemes to pay a super-levy to the Pension Protection Fund in exchange for higher investment in growth assets, 3) promote pension superfunds as an alternative to insurance buyouts, 4) promote collective defined contribution schemes. It argues the PPF could act as a consolidator for schemes but would need to demonstrate it is not unfair competition for private consolidators.
Dealing With tPR's New Scheme Funding CodeRedington
This document summarizes a presentation on the Pension Regulator's new defined benefit pension scheme funding code. The presentation discusses the key changes in the new code, including a greater focus on balancing the needs of pension schemes and employers through an integrated approach to managing funding, investment and covenant risks. It emphasizes the importance of collaboration between trustees and employers to develop appropriate funding plans given the covenant strength of the sponsoring employer.
The Evolving DB Endgame Agenda (2).pdfHenry Tapper
The document summarizes a conference on new initiatives facing defined benefit pension schemes in the UK. The conference will feature presentations and panel discussions on topics like the government's new policy environment for DB pensions, practical consequences of initiatives like expanded investment opportunities and increased consolidation, alternative risk transfer approaches besides bulk annuities, and managing surpluses in creative ways. Breakout groups will discuss on-balance sheet and off-balance sheet solutions. Experts from organizations like the DWP, M&G Investments, Railpen, Aon, and Goldman Sachs will participate. The goal is to have an interactive debate on challenges and opportunities in the evolving DB pensions landscape.
This document provides an introduction and overview of ULIPs (Unit Linked Insurance Policies) and mutual funds. It discusses that ULIPs combine life insurance with investment aspects, with the policyholder's returns linked to the performance of underlying market-linked instruments. ULIPs offer flexibility to allocate premiums across equity, debt, and balanced funds. Mutual funds allow investors to participate in stock markets without having to buy individual stocks. The document outlines the benefits of ULIPs like life insurance coverage, flexibility to switch funds, and rupee cost averaging of premiums. It also discusses how ULIPs can meet different financial needs at various life stages through their flexibility.
This document provides an introduction and overview of ULIPs (Unit Linked Insurance Policies) and mutual funds. It discusses that ULIPs combine life insurance with investment, with the value of policies linked to the performance of underlying market-linked instruments like stocks and bonds. ULIPs offer flexibility to shift between equity and debt allocations. Mutual funds allow investors to participate in stock and bond markets through diversified portfolios. The document then discusses the benefits and flexibility offered by ULIPs, such as the ability to switch between aggressive, balanced, and conservative options based on market conditions. It also notes that ULIPs, like mutual funds, offer rupee cost averaging through regular or lump sum premium payments.
The documents discuss developing a new strategic decision-making framework that can withstand volatility. It proposes splitting value drivers into market drivers and model drivers to provide stability. A key part of the framework is understanding the full return exposure, including downside and upside, rather than single-point forecasts. It also emphasizes identifying and utilizing options within investment, operating, and ownership models to influence return exposure. Testing potential return outcomes under different scenarios is presented as an important way to apply the framework and understand the impact of strategic decisions.
JWI 556 Lead Change by Putting People FirstAssignment 1, TempTatianaMajor22
JWI 556: Lead Change by Putting People First
Assignment 1, Template #2
Applying Kotter’s Model to Individual Change
While Kotter’s change model is a framework designed to support large-scale change initiatives in organizations, it is built around understanding and managing the very human forces that undermine successfully implementing and sustain change. Use the template below to collect and organize your thoughts on how these principles might apply to individual/personal change initiatives.
Kotter’s 8 Errors
Parallel in Individual Change
1. Allowing Too Much Complacency
2. Failing to Create a Sufficiently Powerful Guiding Coalition
3. Underestimating the Power of Vision
4. Undercommunicating the Vision by a Factor of 10 (or 100 or Even 1000)
5. Permitting Obstacles to Block the New Vision
6. Failing to Create Short-Term Wins
7. Declaring Victory Too Soon
8. Neglecting to Anchor Changes Firmly in the Corporate Culture
5
Defining and Categorizing Various Forms of Risks
Student's Name
Professor's Name
Course Name and Code
Date
Defining and Categorizing Various Forms of Risks
LTD Acceptance has been operating successfully without a risk mitigation plan in place. Although a major crisis has not arisen out of this omission, it might be looming, especially given that the company serves its clients via proxies. This danger underlines the significance of having a risk mitigating framework in place that will aid in overcoming any threats that crop up.
Importance of Risk Identification
Highlighting the apparent risks that may encounter the organization is a significant process. When operational risks are not identified at their formative stage, there is a chance that normal functioning will be hampered. Also, the workforce may be subject to encountering risks. If affected, execution of their mandated duties is curtailed and thus operations will also stall. Failure to identify risks also means that the business cannot accurately define its objectives. Doing so without a risk identification framework would be a recipe for failure as risks can completely damage the company’s operations.
Market Risks
There are several market risks that LTD Acceptance may face and therefore the need of having an identification framework in place. For example, the interest rates at which the company prices its premiums can be affected by a shift in the monetary policy (Leybag, 2018). Also, there is the foreign exchange risks that are likely to impact the company as it deals in automobiles that are subject to importation. The other market risk is commodity price. For example, the price of commodities such as fuel may rise and stay high for a prolonged period (Leybag, 2018). This will impact the automobile owners who may be unwilling or incapable of paying insurance premium rates that they deem high.
Business Risks
The company is also not immune to business risks and faces a couple of them in day to day operations. Economic ...
Technology and Investing - Where to from here?Redington
The document discusses the benefits of exercise for mental health. Regular physical activity can help reduce anxiety and depression and improve mood and cognitive function. Exercise causes chemical changes in the brain that may help protect against mental illness and improve symptoms.
The Impact of Technology on the Pensions IndustryRedington
The impact of technology on the pensions industry (past, present, future).
Prezi version: https://prezi.com/aadascppmnor/the-impact-of-technology-on-the-pensions-industry
21st Century Schemes – Deciding on the right scheme design for your membersRedington
This document discusses considerations for designing retirement schemes for members. It highlights collecting data on members' current pension pots, contributions, ages and where they are in their retirement journey. The goal is to help employees securely plan their financial futures through empowering individual decision making with easy, attractive, social and timely communication. Technology like personalized pension apps and emotional connections are seen as ways to improve pension savings success.
"Hi Alexa, how should I save for my pension?"Redington
The document discusses various ways for people to save effectively for their pension. It recommends understanding where you are in your retirement journey, engaging members through education and technology, and using behavioral insights and personalized approaches to empower people to make good savings decisions. Gamification and simple ideas can help communicate complex choices. Members have different risk profiles and a one-size approach does not fit all, so pensions should be tailored individually. The goal is to help people save and invest adequately for a secure retirement.
Why we need to teach our children how to budget, save, invest and give backRedington
The document discusses the benefits of meditation for reducing stress and anxiety. Regular meditation practice can help calm the mind and body by lowering heart rate and blood pressure. Making meditation a part of a daily routine, even if just 10-15 minutes per day, can have mental and physical health benefits over time by helping people feel more relaxed and focused.
Making Decisions; An Effective Trustee BoardRedington
What are the 10 core strengths of a Trustee Ninja?
1. Passion
2. Trust
3. Open Minded
4. Intellectual Curiosity
5. Numeracy
6. Collegiate
8. Prepare to challenge and be challenged
7. Seeing the wood for the trees
9. Prepare to stand out from the crowd
10. Make decisions and live with the consequences
Critical Friends - The Need for Straight TalkingRedington
This document summarizes a presentation on providing constructive feedback between pension trustees and their advisers. It discusses the need for "critical friends" to have honest conversations and help each other improve. A survey found that advisers rarely give critical feedback to trustees. The presentation advocates using a framework called "Radical Candor" to build feedback into the relationship through open and caring criticism. It encourages trustees and advisers to find a trusted partner to help them strengthen governance through respectful feedback.
Five steps to help your employees secure their financial futuresRedington
The document outlines five steps to help employees secure their financial futures: 1) Engagement, 2) Education, 3) Digital tools and solutions, 4) Having an outcome focus, and 5) Personalization. It discusses challenges like defined benefit pensions ending, economic uncertainty, and lack of financial education. It emphasizes the importance of engaging employees, teaching them about concepts like compound interest, using digital tools, focusing on desired outcomes, and creating personalized plans tailored to individual risk profiles and needs.
Is Your Property Allocation RIght for You?Redington
The document discusses the impact of Brexit on the UK property market and different property investment options. It notes that commercial rental markets are expected to weaken due to uncertainty after Brexit. It then discusses suspensions of redemptions in some UK property funds and notes that institutional money funds have experienced less redemption pressure. Finally, it outlines different property investment strategies and their risk-return profiles that may be suitable depending on whether a pension fund is in the opening, middle, or end stage of its funding journey.
Introduction and outlook of EU pension systemRedington
This document summarizes the pension system and challenges in Europe. It discusses the three pillars of pension systems: social security, employer pensions, and personal pensions. It then focuses on defined contribution pensions in the UK, including typical plan designs, contributions, taxation, and investment options. The document notes challenges like lack of financial literacy and planning. It proposes solutions such as personal retirement planning, lifecycle investment strategies, and education initiatives to increase participation and knowledge.
Challenges and opportunities for financial market globalisationRedington
This document summarizes an event discussing opportunities and challenges of financial market globalization. It presents examples from China and Japan showing how capital controls have limited China's contribution to global financial integration compared to its contributions to trade and GDP. It also discusses how financial institutions must innovate their business models to maintain growth as traditional sources of revenue decline. Overall, the document examines how globalization brings opportunities like expanded financing sources but also challenges like increased vulnerability to external shocks for financial markets and institutions.
What role do consultants play in the value chainRedington
The document provides contact information for Robert J Gardner including links to his Twitter and LinkedIn profiles and a request to get in touch. It lists two URLs for Robert J Gardner's social media profiles and a brief message asking anyone who sees the document to contact him.
Summary of the key messages from the 2016 Annual Funding StatementRedington
The document provides guidance for pension scheme trustees undertaking 2016 valuations from the Pensions Regulator. It emphasizes that an integrated risk management approach is key to assessing the risks impacting scheme assets and liabilities. Trustees are expected to set realistic investment return assumptions based on current market conditions. Most schemes will likely have larger deficits than expected and trustees should discuss increasing employer contributions or alternative options with employers where affordability allows. Trustees are also advised to focus on longer term risks and rewards rather than short term market volatility.
Why we need to think differently about retirementRedington
This document discusses the need to rethink retirement and encourage more savings. It notes that less than one in five people are saving adequately for retirement. Improving retirement savings should be a top public policy priority to help prepare individuals and society for longer lifespans. The document also suggests that the UK should consider mandating retirement contributions higher than the current 8% of salary.
Redington tax consultation response - A worker's pension tax free for lifeRedington
The document proposes changes to the UK pension system to increase the probability that "most people" achieve a "living wage" income in retirement by 2035. It recommends increasing auto-enrollment contribution rates and limiting tax relief to £5k contributions per year. It also proposes making auto-enrolled pensions tax-free in retirement to improve outcomes and reduce costs. The proposals aim to build on the success of auto-enrollment while encouraging further retirement savings through tax-exempt ISAs.
The document discusses the demographic challenges facing developed nations as populations age and birth rates decline. It cites Alan Greenspan warning that most developed countries are on the edge of an unprecedented demographic abyss. It then provides contact information for Robert J. Gardner on Twitter and LinkedIn and invites the reader to get in touch.
“Amidst Tempered Optimism” Main economic trends in May 2024 based on the results of the New Monthly Enterprises Survey, #NRES
On 12 June 2024 the Institute for Economic Research and Policy Consulting (IER) held an online event “Economic Trends from a Business Perspective (May 2024)”.
During the event, the results of the 25-th monthly survey of business executives “Ukrainian Business during the war”, which was conducted in May 2024, were presented.
The field stage of the 25-th wave lasted from May 20 to May 31, 2024. In May, 532 companies were surveyed.
The enterprise managers compared the work results in May 2024 with April, assessed the indicators at the time of the survey (May 2024), and gave forecasts for the next two, three, or six months, depending on the question. In certain issues (where indicated), the work results were compared with the pre-war period (before February 24, 2022).
✅ More survey results in the presentation.
✅ Video presentation: https://youtu.be/4ZvsSKd1MzE
Dr. Alyce Su Cover Story - China's Investment Leadermsthrill
In World Expo 2010 Shanghai – the most visited Expo in the World History
https://www.britannica.com/event/Expo-Shanghai-2010
China’s official organizer of the Expo, CCPIT (China Council for the Promotion of International Trade https://en.ccpit.org/) has chosen Dr. Alyce Su as the Cover Person with Cover Story, in the Expo’s official magazine distributed throughout the Expo, showcasing China’s New Generation of Leaders to the World.
Madhya Pradesh, the "Heart of India," boasts a rich tapestry of culture and heritage, from ancient dynasties to modern developments. Explore its land records, historical landmarks, and vibrant traditions. From agricultural expanses to urban growth, Madhya Pradesh offers a unique blend of the ancient and modern.
In World Expo 2010 Shanghai – the most visited Expo in the World History
https://www.britannica.com/event/Expo-Shanghai-2010
China’s official organizer of the Expo, CCPIT (China Council for the Promotion of International Trade https://en.ccpit.org/) has chosen Dr. Alyce Su as the Cover Person with Cover Story, in the Expo’s official magazine distributed throughout the Expo, showcasing China’s New Generation of Leaders to the World.
In World Expo 2010 Shanghai – the most visited Expo in the World History
https://www.britannica.com/event/Expo-Shanghai-2010
China’s official organizer of the Expo, CCPIT (China Council for the Promotion of International Trade https://en.ccpit.org/) has chosen Dr. Alyce Su as the Cover Person with Cover Story, in the Expo’s official magazine distributed throughout the Expo, showcasing China’s New Generation of Leaders to the World.
What Lessons Can New Investors Learn from Newman Leech’s Success?Newman Leech
Newman Leech's success in the real estate industry is based on key lessons and principles, offering practical advice for new investors and serving as a blueprint for building a successful career.
KYC Compliance: A Cornerstone of Global Crypto Regulatory FrameworksAny kyc Account
This presentation explores the pivotal role of KYC compliance in shaping and enforcing global regulations within the dynamic landscape of cryptocurrencies. Dive into the intricate connection between KYC practices and the evolving legal frameworks governing the crypto industry.
Fabular Frames and the Four Ratio ProblemMajid Iqbal
Digital, interactive art showing the struggle of a society in providing for its present population while also saving planetary resources for future generations. Spread across several frames, the art is actually the rendering of real and speculative data. The stereographic projections change shape in response to prompts and provocations. Visitors interact with the model through speculative statements about how to increase savings across communities, regions, ecosystems and environments. Their fabulations combined with random noise, i.e. factors beyond control, have a dramatic effect on the societal transition. Things get better. Things get worse. The aim is to give visitors a new grasp and feel of the ongoing struggles in democracies around the world.
Stunning art in the small multiples format brings out the spatiotemporal nature of societal transitions, against backdrop issues such as energy, housing, waste, farmland and forest. In each frame we see hopeful and frightful interplays between spending and saving. Problems emerge when one of the two parts of the existential anaglyph rapidly shrinks like Arctic ice, as factors cross thresholds. Ecological wealth and intergenerational equity areFour at stake. Not enough spending could mean economic stress, social unrest and political conflict. Not enough saving and there will be climate breakdown and ‘bankruptcy’. So where does speculative design start and the gambling and betting end? Behind each fabular frame is a four ratio problem. Each ratio reflects the level of sacrifice and self-restraint a society is willing to accept, against promises of prosperity and freedom. Some values seem to stabilise a frame while others cause collapse. Get the ratios right and we can have it all. Get them wrong and things get more desperate.
Explore the world of investments with an in-depth comparison of the stock market and real estate. Understand their fundamentals, risks, returns, and diversification strategies to make informed financial decisions that align with your goals.
Poonawalla Fincorp’s Strategy to Achieve Industry-Leading NPA Metricsshruti1menon2
Poonawalla Fincorp Limited, under the leadership of Managing Director Abhay Bhutada, has achieved industry-leading Gross Non-Performing Assets (GNPA) below 1% and Net Non-Performing Assets (NNPA) below 0.5% as of May 31, 2024. This success is attributed to a strategic vision focusing on prudent credit policies, robust risk management, and digital transformation. Bhutada's leadership has driven the company to exceed its targets ahead of schedule, emphasizing rigorous credit assessment, advanced risk management, and enhanced collection efficiency. By prioritizing customer-centric solutions, leveraging digital innovation, and maintaining strong financial performance, Poonawalla Fincorp sets new benchmarks in the industry. With a continued focus on asset quality, digital enhancement, and exploring growth opportunities, the company is well-positioned for sustained success in the future.
2. 1
1 Clear Goals
and Objectives
2 LDI and
Overlay
Strategies
3 Liquid Market
Strategies
4 Liquid and
Semi Liquid
Credit Strategies
5 Illiquid Credit
Strategies
6 Illiquid Market
Strategies
7 Ongoing
Monitoring
SEVEN
STEPS
Redington designs, develops and delivers investment strategies to help pension funds and their sponsors
close the funding gap with the minimum level of risk. We take our clients through a rigorous 7 Steps to Full
Funding™, which begins with laying out clear goals and objectives and assigning tasks and responsibilities.
The second step is building an LDI Hub, or putting in place a risk management toolkit. Steps 3-6 involve
crafting the right investment strategy to fit the need using a full range of tools and bearing in mind the
goals and constraints of the scheme. Finally, ongoing high quality monitoring is essential to continually track
progress against the original objectives and guide smart and nimble changes of course.
Introduction 2
The Future of Pensions 3
Helicopter Pilots Required 4
The Evolution of ALM: Towards More Helpful Decision-Making Tools 5
Gilt and Swap Rates May Differ 2 6
Future Widening of LDI Toolkit 2 7
DGFs Revisited 3 8
Redesigning Fund Management Around Outcomes 3-6 9
The Balancing Act: Reinvestment Risk vs Illiquidity Risk 5 10
2013 Asset Class Review 1-7 11
Global Macro Overview 1-7 12
Further Information and Disclaimer 13
Contents
O U T L I N E March 2014Contents
STEP PAGE
3. Introduction
Gurjit Dehl
Vice President, Education & Research
gurjit.dehl@redington.co.uk
Welcome to the fifth edition of Outline, Redington’s quarterly collection of
thought-pieces designed to help institutional investors make smarter and more
informed decisions.
Thiseditionfeaturesshortarticlesonthefutureofpensionspolicy,thecomplexities
of running a pension scheme and how technology can help overcome them,
risks inherent from gilt and swap rate differences, an outcome-driven approach
to fund management, a review of asset classes in 2013, plus an overview of the
global macro environment.
We hope you find the articles interesting and helpful as you consider how best
to manage the risk-adjusted return of your portfolios.
For more information on any of the topics, please do get in touch.
Kind regards,
Gurjit Dehl
OUT
LINE
2O U T L I N E March 2014Introduction
4. If we are looking to the future, we
must understand how we got to
this point and where we may go
from here. Is legislation the best
path to ensure successful Defined
Contribution outcomes, or will the
pensions industry lead the way?
Today, there are a number of notable features to
UK pensions policy:
1. Consensus from all main parties on key
features, such as auto-enrolment, later
retirement and a more generous flat rate state
pension
2. Too few people are saving enough for
retirement
3. Personal responsibility to save lies at the heart
of the policy framework
4. Years of negative pensions headlines and a
culture that values consumption over saving
5. Defined Benefit (DB) is in its final stages,
Defined Contribution (DC) will do the heavy
lifting for the next generation of savers
6. State pension looks like it might be on an
unsustainable course
The key to understanding the future lies in
understanding the progress made by this policy
agenda. Firstly, auto-enrolment (AE) appears
to have been positively received, despite some
influential voices already calling for change. I
think compulsory savings are unlikely to happen
anytime soon. It is much more likely that we will
see a continuing debate about the adequacy of
contribution levels. There is good evidence now
that median earners are those most at risk of
not building up an adequate pension. Secondly,
regulatory reforms in DB have relieved financial
pressure on schemes. However, my view is that
they will not have any profound impact on the trend
away from DB to DC. Thirdly, the real focus on
future reforms will be on DC - governance, structure
and most important of all, outcomes. This is the
most interesting area to me.
Future of DC: Legislation vs Innovation
There is a clear sense in politicians of all Parties
that DC is not delivering sufficient levels of
retirement income when compared to DB. The
Department of Work & Pensions’ (DWP) agenda
is now clear: How can we improve DC? Are big
bang solutions involving all the paraphernalia of
legislation and associated regulation the right way
forward, or can the industry craft a way forward?
Legislation is likely to happen. The top-down
approach by government is looking at two options
– guarantees on the value of an individual’s
pension contributions (and possibly some form
of investment return guarantee), and Collective
Defined Contribution (CDC). I can see the
superficial attraction of both options, although the
real test of any proposal comes when you look
behind the headlines.
Is there an alternative? I would very much prefer
a bottom-up approach with the pensions industry
itself looking at how we can maximise retirement
income and manage the risk of not achieving this.
What sort of pension do savers want to realise and
how do we deliver this for them? What can we learn
from LDI and how can we apply these principles
in a DC context? That’s the debate we should be
having.
The Future Of Pensions
3O U T L I N E March 2014Overview
Lord Hutton Of Furness
Advisor to Redington
5. They say flying a helicopter is one
of the hardest skills to learn. That’s
because it involves hyper-multi
tasking under pressure: making
the helicopter tilt forward and back
(pitch), sideways (roll), and varying
the “angle of attack” of the main
rotor blades - all at the same time.
A delicate combination of gentle pressure and light
touch handling is simultaneously required on the
cyclic stick, the collective lever and the anti-torque
pedals, not to mention the twist throttle. Pull the
wrong lever, press the wrong pedal or squeeze
the wrong bit and it’s Game Over. A helicopter
pilot understands exactly how the levers work
(separately and together) and the constraints
within which they have to be operated.
This is a metaphor for managing a defined benefit
pension fund, which has its own plethora of levers
and complex, interlinked, operating constraints.
For instance, every pension plan requires a clearly
articulated Risk Budget (Lever 1) calculated with
reference to the Sponsor’s Covenant (Constraint
1) and the agreed timeframe to achieve full
funding (Lever 2). The corporate sponsor may
pour extra fuel into the tank (also known as
“making additional contributions”) and, alongside
this Lever 3, the trustees can re-allocate the
plan’s assets, so as to increase Expected Return
(Lever 4).
But, as the Bard put it: “The fault, dear Brutus, lies
not in the assets but in the liabilities”. It is pension
funds’ long-dated, (sometimes inflation linked)
obligations that are the source of the world’s
defined benefit pension deficits. Lever 5, then, is
the all-important application to the pension plan’s
liabilities of a hedge against declining interest
rates, whilst Lever 6 is the reduction of the plan’s
sensitivity to volatile, rising inflation expectations.
These levers (5 and 6) are calibrated against
the Discount Rate (Constraint 2) as well as the
Funding Level of the pension plan (Constraint 3).
Ignore that, and you begin to stress the assets; to
ask more of them than you reasonably ought. And,
as every pension plan trustee will know (at least,
those that have gained their pilot’s licence) the
use of Levers 5 and 6 (namely, the application of
a hedging strategy) dramatically impacts the plan’s
pitch, roll and angle of attack.
Now it starts to get interesting; it may make sense
to apply Levers 5 and 6 utilising your long dated,
investment-grade bonds, or a portfolio of index-
linked government bonds. Sometimes, though,
it’s better to use swaps. It all depends on the
curiously named z- spread (which happens to be
Constraint 4) and the extent to which some of the
pension plan’s assets qualify as Eligible Collateral.
That’s Constraint 5 - which is dictated (to a large
extent) by Lever 1. Talking of Lever 1 (the proper
function of which, as we have seen, is closely tied
to Lever 2), it is critical that its various sub-levers
and pedals are also understood. Without them,
you run the peril of allocating a risk budget that
ignores the pension plan’s all important Required
Rate of Return (Constraint 6).
So, in conclusion, let’s just say this: Those
pension plans that are well funded and en route
to their destination despite the desperately bad
weather? That didn’t happen by accident. And,
if most of the above is impenetrable, that’s
because, like flying a helicopter, it’s hard to
explain in 500 words.
Helicopter Pilots Required
Dawid Konotey-Ahulu
Founder & Co CEO
dawid@redington.co.uk
4O U T L I N E March 2014Overview
6. The Evolution of ALM: Towards More
Helpful Decision-Making Tools
How do an engineering degree
and a pilot’s license help one
build the tools that help pension
schemes reach their goals?
As head of the ALM Development team, my
previous experience in engineering with the
RAF has proved invaluable in building the tools
that help pension schemes better measure and
manage their risk and returns.
As always teamwork is the key. A good
development team will apply consistent hard work
to building software, whilst constantly honing their
skills. This allows the team to regularly deliver
new functionality, but also be able to respond
quickly to ideas or client demands. New ideas can
come from anywhere and often seem insignificant
at the time. It is our role to recognise the good
ones, and act on them, as they can often give the
company a massive leap forward in capability.
Early days
At the start of Redington, with five people in the
firm, we relied on best-of-breed analytics tools
built by external parties. This meant that we
could get up and running quickly, without building
anything ourselves.
Automating the analytics
We pushed these systems hard, modelling multi-
asset portfolios and pension liabilities, and soon
hit limitations. The most pressing problem was
the time it took to run a full ALM analysis using
the web interface of our core system, RiskMetrics.
We set up a small development team to focus
on this problem. Oakley was built to automate
our interactions with RiskMetrics, enabling us
to quickly and easily run analysis directly in
Excel. The outcome was a fivefold increase in
productivity.
Refining the risk modelling
As the firm’s advice to clients developed and
matured we became restricted by pension specific
modelling that generic risk systems just couldn’t
do. This became our clarion call; focus on the
tricky bits which are most important to pension
schemes. From this RedAnalytics was born.
The first module included market consistent
yield and inflation curves. This was driven by the
need for accurate PV01s and IE01s to design
and implement hedge portfolios. Since then
RedAnalytics has been continuously extended to
cover all the complexities of pension liabilities and
LDI portfolios.
What about returns?
Risk is one only one dimension of our advice;
the other is return. Analysts put together a Flight
Plan model to calculate the return needed for
a scheme to reach full funding. By building
this into our system we can run 10,000 Flight
Plans in a Monte Carlo simulation. This gives
us new metrics, Required Return at Risk and
Contributions at Risk –showing VaR-type risks for
the required returns or contributions.
Productivity
Having all these fantastic models and analytics
is great, but not if it takes an age to run the
numbers. Over the last 12 months, the team has
built Portfolio Blender. This can take outputs from
both external and internal systems and mix them
in any combination. Results are instantly updated.
The team’s productivity has leapt forward again.
Freed from much of the manual drudgery analysts
can explore many more strategies for our clients.
Excitingly, RedAnalytics and Blender have been
combined into an interactive Flight Plan. This tool
enables consultants and clients to run “What If…”
scenarios. They can instantly see the effect of
certain key decisions on their long term trajectory
and path, instead of conducting long and drawn-
out assessments of actions that may turn out not
to be appropriate. Client meetings can focus more
on exploring strategies, building consensus and
making decisions.
As pension funds navigate through increasingly
complex circumstances and financial solutions,
we will continue our work in making analyses of
these comprehensive, accurate and digestible.
Our goal is to offer pension funds the chance to
make decisions with greater confidence, thereby
ultimately leading to better results for their
members.
Peter Howarth
Director, ALM & Technology
peter.howarth@redington.co.uk
5O U T L I N E March 2014Overview
7. Gilt and Swap Rates May Differ
Pension schemes with a
set risk budget may find
the spread between gilts
and swaps dominating it.
Daily data for both 30 year sterling swap and gilt
interest rates is available back to August 1999.
For that period the spread between 30 year gilts
and swaps has moved substantially from a high of
169bp in June 2000 to a low of minus 75bp in
January 2009.
These movements have been of a similar order of
magnitude to movements in absolute rates. Any
risk model that is based on historical data during
the 1999 to 2014 period should therefore show
a meaningful risk that this spread will change in
the future. Whilst of course the past does not
necessarily predict the future, it would perhaps be
imprudent to assume that this spread will not move
in the future given the measure’s history.
One of the main risks to a pension fund’s surplus or
deficit comes from the variation in the discount rate
used to calculate the present value of the liabilities.
If a pension scheme discounts its liabilities using a
gilt-based discount rate but hedges the interest rate
risk with swaps, it will be left with a large position
in the spread between gilt and swap rates. For a
pension scheme with a swap-based discount rate
but a gilt-based hedge, the effect will be a similar
sized position but in the opposite direction.
A pension fund can of course take the view that, on
a hold to maturity basis, the spread between the two
rates will converge, but the impact on any deficit or
risk measure in the interim may well be substantial.
The easiest way for a pension scheme to guard
against this risk is to hedge gilt discounted liabilities
with gilts, and hedge swap discounted liabilities with
swaps.
However, many LDI mandates give the manager
the ability to choose whether to hedge with gilts or
swaps according to the manager’s view of which
is currently “cheaper”. A pension fund could easily
end up with a portfolio of swaps hedging a gilt-
discounted liability or vice-versa, depending on
where swap spreads happened to be at the time.
The short-term volatility generated from this
mismatch can easily end up dominating a pension
scheme risk budget for what might be thought to be
a relatively low return strategy.
In order not to let this spread risk dominate a risk
budget, a pension scheme has two choices:
1. If it wants to retain swap spread risk as a
measured risk, then any LDI mandate should
have limits on the amount of swap spread risk
that the LDI manager can take.
2. If it wants to be able to take large amounts of
swap spread risk as implied by an unlimited
LDI mandate then the pension scheme should
choose a risk budget that excludes swap spread
risk.
A similar problem can arise between projecting
forward liability cashflows using inflation derived
from either index-linked gilts or inflation swaps. The
solution in terms of LDI mandate limits or removal
from the risk budget measure is the same.
All in all, a pension scheme must be aware of the
risks that can be inherent in handing over freedom
to a manager or taking what seems like a saving;
there is always a case for deep analysis and
forethought in the allocation of the risk budget.
Philip Rose
Chief Investment Officer - Strategy & Risk
philip.rose@redington.co.uk
6O U T L I N E March 2014STEP
Figure 1: 30 year swap spreads,1999 to 2014
Source: Bloomberg
8. Future Widening of
LDI Toolkit
7O U T L I N E March 2014
Kenny Nicoll
Director, Manager Research
kenny.nicoll@redington.co.uk
An alternative way to manage
interest rate risk is coming. NYSE
Liffe’s ultra-long gilt future will
offer a new way to gain synthetic
exposure to gilts, the biggest
challenge is whether it gains
sufficient market interest to offer
an ultra-long-term alternative.
For pension schemes looking to hedge their
long-term liabilities, the upcoming ultra-long gilt
future could well be of interest. It brings a number
of potential benefits, however, its success is not
guaranteed.
The new future will target a 30 year maturity, with
a 4% implied coupon, £100k notional size and an
underlying maturity of 28-37 year conventional gilts
for delivery into the future. The 30 year government
bond future has been tried before, in Germany, but
the UK debt market and LDI demand is arguably
different – for example, the UK has a far larger
proportion of ultra-long debt outstanding:
Figure 1: UK long dated gilt projections
Source: globalderivatives
Given the high level of issuance (and buying) of
ultra-long gilts, there is clearly sufficient demand
for this amount of duration from the investment
community.
What are the key benefits for investors?
This future provides leveraged exposure to gilts in
much the same way as Total Return Swap (TRS) or
a gilt repo trade, except the future is better than its
Over-The-Counter (OTC) equivalent in a few ways:
• Useful for LDI clients who are full on TRS or
repo lines, or do not have GMRA documents
in place
• Credit risk is versus exchange rather than a
bank
• Margin requirements can be offset against
other futures with the exchange
• Typically cheaper to execute and trade out of,
particularly compared to break costs of a TRS
• Futures are “future-proof” from Basle 3
regulations, unlike gilt TRS or gilt repo
• Gap risk is lower due to shorter close-out
period (2 days) and lower initial margin
• Standardised terms ensure transparency and
tight pricings amongst participants
What are the key challenges for the future?
The main challenge is finding natural buyers and
sellers to provide sufficient liquidity, as shown
by trading volumes of German and US ultra-long
futures. Against this, hedge fund managers should
like the credit and duration properties while banks
are likely to be long gilts so looking to sell the
future, both adding to market liquidity.
The other big challenge is the capability of the
future to meet LDI hedging needs. With fixed
maturity dates, futures cannot provide as exact
a hedge as OTC products for LDI hedging. Also,
since the future is deliverable on expiry against a
basket of underlying gilts with different maturities,
cheapest-to-deliver (CTD) risk arises as the CTD
gilt can change at short notice. This means the
duration of the futures contract will change, so
the number of contracts will need to reflect the
change in duration relative to a client’s hedging
benchmark.
What might the future hold?
For clients who are not set-up to trade futures, or
are unable to post initial margin/cash as variation
margin, TRS exposure to the 30 year future may
also become available from banks as currently
exists for 10 year futures.
Ultimately, meaningful volume and interest from
the wider investor community will determine
whether or not the ultra-long future becomes a
liquid and successful product.
STEP
9. Diversified Growth
Funds Revisited
aniket.das@redington.co.uk
Aniket Das
Vice President, Manager Research
STEP 8O U T L I N E March 2014
Diversified growth funds (or
‘DGFs’) have come to form an
iconic part of the UK investment
landscape. Their evolution is
ongoing and will take them head
on to meet hedge funds.
Multi-asset funds have come a long way in the UK.
Balanced funds employing static asset allocations
dominated the scene during the 1990s and early
2000s. However with time, the sector evolved as
there was increased demand for asset allocation
to be performed within a fund. The success of a
number of managers in navigating the financial
crisis was surely the finest hour for active asset
allocation and a great endorsement for the sector
as a whole in addition to those skilful managers.
These days, we see a large spectrum of multi-asset
managers within the UK and indeed a different
name applied to the group. The term ‘DGF’ has
emerged within the parlance though admittedly
the description is rather vague. We see the DGF
universe ranging from balanced funds, whose
popularity is undoubtedly waning, to vehicles using
dynamic asset allocation in various shades.
Within those funds employing dynamic asset
allocation, one can get more granular still. We
observe some managers tilting the portfolio from
a neutral benchmark (what we term ‘dynamic
allocation’ funds), often flooring a minimum equity
exposure at around 30% of the whole portfolio,
to those that are ‘benchmark-free’ and willing to
swing the portfolio around much more (‘total return’
managers). This latter group does have more
variation in performance between managers though
arguably this flexibility allows these managers to be
better-placed to deliver an outcome (say, cash +
5%) rather than a quartile ranking.
The newest group of DGFs come under the shell
of what we term ‘absolute return relative value’.
Though Standard Life Investment’s Global Absolute
Return Strategies (commonly referred to as ‘GARS’)
has been in existence for nearly a decade, we are
seeing other managers emerge in this area only
much more recently. For these strategies, the focus
on risk allocation (rather than asset allocation) and
tighter risk management form an integral part of
the investment process.
This last category ventures into the territory of
global macro hedge funds, which similarly employ
a range of long and short relative value positions
while utilising options and other derivatives. Indeed
we see increased competition between DGFs and
hedge funds going forward. The battle is likely
to be fought in the crucial areas of skill, fees,
capacity, transparency, appropriate vehicles and
client servicing, though the real winner should be
pension schemes and other investors who will be
able to access more efficient investment strategies
at lower costs.
Figure 1: Classifying the DGF universe
10. The vast majority of investment
management companies are not
structured to help clients meet
their long-term needs. They are
organised around historical fund,
asset class and geographical silos
that do not reflect the outcomes
clients are looking for.
“Hedge funds”, “equities”, “property’ and “bonds” are
unhelpful labels that represent a myriad of different
liquidity, risk and return profiles. Our conversations
with clients begin with an effort to understand: where
they are today; where they want to get to and by
when; how much risk they are willing to take; what
cashflow or liquidity requirements they have and what
other specific covenants, support or contingencies are
in place. We find that most clients want outcomes:
some want capital preservation, others want to draw a
predictable level of income, those with liability hedging
in place want to beat cash and many others want to
beat inflation over the long term.
These and other client outcomes are difficult to
deliver because most products are narrowly managed
against specific benchmark indices that do not
represent clients’ liabilities and the vast majority of
asset managers are fragmented into autonomous
and independent teams, with limited dialogue, each
competing for resources and rewards. Most fund
management groups separate retail, wholesale and
institutional distribution teams which won’t make
much sense in the future, especially with the blurring
of these lines and for example, Defined Contribution
Pensions straddling retail and institutional channels.
Furthermore, too many CEOs become hostage
to stars and successful products of the past that
contribute too much to a firm’s revenue to risk losing
them. This keeps the industry more backward focused
and resistant to change.
There is a need to redesign fund management around
the investment outcomes that clients need. A handful
of houses have created distinct outcome-oriented
teams though the challenge remains to apply this way
of thinking to their whole business.
We think there are 3 key considerations for anyone
building client-centric outcome-oriented fund
management businesses:
1. Focus on your strengths, rather than trying to be
all things to all people. Build internal capabilities
around areas of ‘structural competitive
advantage’ rather than traditional asset or
regional boundaries. Many opportunities exist in
the gaps between adjacent specialists/teams that
don’t talk to each other and use different tools
and approaches.
2. Design client solutions that leverage your
specialist capabilities. This requires some kind
of central allocation or risk budgeting, which
can be hard to execute effectively. It can’t be a
committee of the great and the good, it can’t
be just one star manager and it can’t be larger
than 4-5 people. Each person must bring some
distinct perspective and therefore value to the
group but clear decision-making accountability is
critical.
3. Accept that clients’ focus on outcomes will affect
your whole business model. Fund managers
need to break down silos between funds,
between equities and fixed income, between
manufacturing and distribution, between retail
and institutional and between middle and front
office in order to get their business to work
together to deliver better outcomes for end
clients.
Change is not easy but If we do what we’ve always
done, we will get what we’ve always got. As the
pensions crisis deepens and spreads, we have to
innovate and collaborate or become commoditised
and die.
Redesigning Fund Management
Around Outcomes
Mitesh Sheth
Director of Strategy
mitesh.sheth@redington.co.uk
STEP 9O U T L I N E March 2014
11. The Balancing Act:
Reinvestment Risk vs. Illiquidity Risk
Conrad Holmboe
Vice President, Investment Consulting
conrad.holmboe@redington.co.uk
STEP 10O U T L I N E March 2014
In a quest to reduce exposure
to reinvestment risk are pension
funds jumping out of the frying
pan and into the fire by taking on
more illiquidity risk, or is there a
balance to be struck?
For many pension funds 2013 was a relatively
good year. Developed market equities rallied (the
S&P500 was up nearly 30%), credit spreads
tightened and even real yields showed some
improvements, albeit marginally so.
Those funds positioned to benefit from this would
have seen their funding ratio rise, and for some,
rise faster than anticipated by their flight plan.
Those fortunate enough to find themselves in this
position will likely be contemplating how to “bank”
these gains and take a little risk off the table.
De-Risking
De-risking can take many forms but it will
typically involve moving out of more volatile, less
predictable and higher returning assets (such as
equities and hedge funds) into more stable and
predictable sources of returns, such as credit.
However, as pension funds systematically reduce
their exposure to risks such as equity, interest
rates and/or inflation (i.e. those that can be
measured using a Value-at-Risk model) other risks
that may require additional lenses to quantify and
monitor, start to become increasingly significant.
Some may even come to dominate a pension
fund’s overall risk profile.
Reinvestment Risk
A pension fund’s longer dated liabilities cannot
be perfectly matched with allocations to liquid
credit, such as corporate bonds, as these are
typically much shorter dated. Pension funds will
therefore be exposed to a significant amount of
reinvestment risk, especially as they increase their
allocation to credit through time.
Reinvestment risk is the risk that when it comes
time to reinvest the coupons and/or principal
payments, credit spreads may have tightened to
such a degree that a pension fund might have to
seek riskier/higher yielding investments to meet
their required return, and maintain the flight plan.
To counteract this risk many pension funds are
increasingly making allocations to longer dated,
and more illiquid credit, such as commercial
real estate (CRE) debt, secured long leases and
infrastructure debt.
The main benefits of these asset classes are
typically: longer maturity profiles, an illiquidity
premium and low correlation to traditional asset
classes.
Thus a pension fund is able to lock into higher/
more attractive spreads for longer, which can help
mitigate their exposure to reinvestment risk. But
at what cost?
Illiquidity Risk
As a rule of thumb, the longer dated the asset the
more difficult it will be to sell at short notice for
fair value (i.e. the more illiquid it becomes).
In addition, increasing the allocation to illiquid
assets, at the expense or more liquid assets,
reduces the overall liquidity of a fund’s portfolio.
This could have a negative impact on a pension
fund’s ability to make benefit payments and/or
collateral payments (on any out-of-the-money
derivative positions), in the event of a crisis.
The Balancing Act
There is no one-size-fits-all solution for
determining the appropriate balance between
illiquidity and reinvestment risk.
But the important thing to note is that there is
a balance to be struck. Clearly no pension fund
should be 100% allocated in illiquid assets, nor
100% blind to the risk reinvestment poses to
their chances of meeting their long term funding
objectives.
Pension funds considering what the appropriate
balance might be can develop bespoke tests
aimed at determining an appropriate “Illiquidity
Budget”. This could consist of a maximum
allocation to illiquid assets dictated by the fund’s
short/medium term collateral requirements,
medium/long term cash requirements to pay
member benefits and long term desired asset
allocation.
Integrating the Illiquidity Budget into the day-to-
day decision making of the fund will ensure that
a pension fund always maintains an appropriate
balance between these two risks.
12. As we move from the year of
the Snake into the year of the
Horse, a few key movements
in 2013 are worth a conscious
review.
In 2013, long term inflation expectations
increased, with the 30 year zero-coupon RPI swap
ending the year around 0.5% higher than it started
at 3.74%. This compares to the lows of around
3.2% in 2012 and recent highs over 4% seen in
2008. Real yields generally fell back into negative
territory over the course of the year.
Overall, interest rates in most major markets
ended the year higher than they started. In the
UK, long dated interest rates (measured by the
30-year zero coupon swap rate) ended the year
close to their highs at 3.4%, up 0.5% from the
start of the year. The yield on the 2042 gilt ended
the year at 3.61%, rising by slightly more than
the corresponding swap rate and highlighting the
increasing attractiveness of gilts compared to
swaps for long-dated liability hedging.
Benchmark 10-year interest rates in major
developed markets all followed a similar path over
the year, reacting to investor expectations on the
tapering in the US. The US 10 year yield rose from
1.6% to 3%, the UK gilt from 1.8% to 3%, and the
German bund from 1.4% to 1.9%.
Economic fundamentals in most developed
economies improved, especially in the UK
and the US. The UK’s improvements resulted
in economists’ upward revision of 2013 GDP
estimates, enabling an upbeat Autumn Statement.
Sterling strengthened against both the dollar and
the Euro in the second half of the year, the pound
closing the year on its high against the dollar of
$1.66, having started the year at a similar level
and fallen at times to lows of $1.48.
Most developed equity markets experienced returns
well above long term averages, with the highest
annual return since the 2009 bounce from the
market lows. Significant differentiation among
markets continued. The MSCI World was up 24%,
compared to 14% in 2012, with the Nikkei and
S&P500 leading the way with a 50% and 30%
return respectively, which took the S&P into new
highs, some 30% above the 2007 peaks. The FTSE
100 index experienced a gain of 14% in price index
terms, compared to a gain of 7% in 2012, a -2%
return in 2011 and a +11% return in 2010. In
Europe, the DAX and Eurostoxx both experienced
higher returns than the FTSE in 2013, with the DAX
up 25% and the Eurostoxx up 18%.
Emerging Markets performed badly, reacting to
tapering, with the MSCI Emerging index falling 5%
over the year. The volatility experienced by most
equity indices during 2013 was low by historical
standards, with the market pricing of option
hedging against market falls reflecting this.
The three main classes of credit all performed
strongly for the second year in succession. For
example, UK Investment Grade credit returned
5% in excess of swaps over the year compared to
returns of 7% in 2012.
Commodity indices generally fell during 2013, with
the DJ-UBS index ending the year around 10%
lower than it started, having been flat in 2012. The
main driver of this was Gold.
There is a continuing, growing appetite for risk-
based and risk-controlled approaches to investing
such as Volatility Controlled Equity and Risk Parity,
particularly when they are combined with portfolio
downside protection. Given the large divergence in
returns this year between equity, commodities and
fixed income (with equities substantially positive
and both commodity and fixed income negative)
multi-asset portfolios with an overweight to equities
have outperformed those with an equal balance of
risk among asset classes.
Dan Mikulskis
Co-Head of ALM & Investment Strategy
dan.mikulskis@redington.co.uk
2013 Asset Class Review
11O U T L I N E March 2014STEP
13. Global Macro Overview
The macro outlook appears rosy,
with rising GDP forecasts and
falling unemployment. Is the
global economy finally out of the
woods?
Equity markets are at or close to their all-time highs.
Credit spreads continue to tighten. UK CPI inflation
has finally fallen below the 2% target. Economic
indicators are showing improvements and pension
scheme funding ratios have generally improved also.
Apart from an early wobble in “emerging” markets,
2014 seems set to be a good year for markets. Taking
a closer look though, there are several things which
could derail the recovery.
Risks to the outlook and schemes
At a recent Redington teach-in, Gavyn Davies
(Chairman, Fulcrum Asset Management) outlined four
key macro risks:
1. US unemployment fall prompting the Fed to
tighten too early
2. China being unable to guide its economy to a soft
landing
3. Eurozone is unable to prevent “Japanifcation”
(prolonged deflation and low interest rates)
4. Bubble in equities as rising prices driven by policy
stimulus rather than fundamentals (Gavyn thinks
equity bubble risk remains low at present)
At the same event, Neil Williams (Chief Economist,
Hermes Fund Managers) rightly pointed out that
“tapering is loosening!...” Reducing asset purchases
by $10bn at each Federal Reserve meeting still adds
an extra $460bn in 2014.
Figure 1: The Bank of England’s main policy rate, 1694 to 2014
Since the teach-in, the Bank of England and US
Federal Reserve have softened their guidance on how
the unemployment rate will influence the timing of
tighter monetary policy, replacing it with a stronger
focus on inflation (and deflation).
David Miles, a member of the BoE’s Monetary Policy
Committee, has warned that rates are likely to be
below their historical average of 5% for a sustained
period (see Figure 1). “One factor behind the recent
sharp fall in real yields – changing perceptions of the
level of risk in the world – is likely to be persistent,” he
said. In recent weeks, members of the Fed and ECB
have stated they remain vigilant to downside risks and
are willing to take action if necessary.
Will QE actually end? There is a chance central banks
opt not to sell their QE holdings at all, instead making
use of their balance sheets to lend QE assets to the
market via reverse-repos. This would allow them
to remove liquidity and set short-term rates using
an alternative to Base Rate. The Fed has said it is
investigating this option. Central bank liquidity may
remain abundant for a while yet, holding down rates
(see Figure 2).
Guarding against the risks
It is vital to understand the key asset and liability
risks to your pension scheme, to decide if you are
comfortable running those risks, and then to construct
an investment strategy that is appropriately robust and
resilient to many outcomes. For example, schemes
can make use of risk factor investing and volatility-
controlled equity strategies to diversify and manage
downside risk. Illiquid credit and absolute return bond
strategies can help to boost the expected return
from assets above those available from liquid credit.
Whilst there are still many macro risks, there is also
a growing number of ways to measure, manage and
mitigate them.
Figure 2: Liquidity expectation of global central banks,
% of GDP, 12 months change
Gurjit Dehl
Vice President, Education & Research
gurjit.dehl@redington.co.uk
STEP 12O U T L I N E March 2014
Source: Bank of England Source: Fulcrum Asset Management LLP