This document summarizes a breakfast teach-in on the Eurozone sovereign debt crisis and its potential impacts on UK pension funds. It provides background on the crisis and analyzes two sample pension fund allocations (A and B) under three potential Eurozone scenarios: a Greek default, breakup of the Eurozone periphery, and a full breakup of the Euro currency. Allocation B is found to better manage risks through a reduced equity allocation and increased allocation to less volatile assets.

1. Redington
13-15 Mallow Street
London EC1Y 8RD
T. 020 7250 3331
www.redington.co.uk
Breakfast Teach-In
The Eurozone Crisis and UK Pension Funds
1st March 2012

2. Contents
1. The Eurozone Sovereign Debt Crisis 3
2. Three Eurozone Scenarios 14
5. A Framework for Managing Risks 22
6. Contacts and Disclaimer 24

3. 3
5
7
9
11
13
15
Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12
%
1st Greek bailout agreed; €440bn
European Financial Stability
Facility (EFSF) established
Portugal requests
€77bn bailout
package from EFSF
ECB starts buying Italian
and Spanish government
bonds
Ireland receives
€85bn bailout
package from
EFSF
Eurozone Periphery: 10-Year Government Bond Yields (1)
(1) Calculated as un-weighted average of Italian, Spanish, Irish, Greek & Portuguese 10-Year yields
Source: Redington, Bloomberg
S&P downgrades
Greek debt to
“junk” status
EFSF given enhanced powers
to buy government bonds &
recapitalise banks
Greece’s private
sector creditors
agree to 50%
haircut
S&P downgrades 9
Eurozone countries
including France
LTRO: ECB provides
€490bn in 3-year
loans to banks
The Eurozone Sovereign Debt Crisis
Timeline
2nd Greek
bailout and
€107bn
restructuring
agreed
3

4. -1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
12-month rolling Correlation between Equity Returns and Gilt Returns
Correlation[-1;1]
As equities rise,
yields on government
bonds fall (prices
increase)
As equities fall, yields
on government bonds
fall (prices increase)
Periods of extreme market
stress: investors seek to
preserve their capital.
Source: Redington Calculations Based on the FTSE 100 total return and the FTSE Actuaries +15yr gilts total return indices 4
The Eurozone Sovereign Debt Crisis
Equity Returns vs. Gilt Returns

5. The Eurozone Sovereign Debt Crisis
A Change of Focus
• Peripheral government bonds perceived as low
risk by investors
• Underlying financial and economic problems
widely ignored
• Manipulation of data (e.g. Greece’s “off balance
sheet” actions)
• Deficit and debt rules of the (first) Stability and
Growth Pact widely ignored
Pre Crisis • Risk reassessed by investors - government bond
yields rise
• Focus on economic problems:
• High levels of public debt / deficits,
exacerbated by recession, falling tax revenues
and non-discretionary spending increasing
(e.g. unemployment benefits)
• Low economic growth and low external
competitiveness because of high wage costs
• Lack of political will for reform
• Systemic threats to the banking system
Post Crisis
Financial
Crisis
A Change of Focus
5

6. 6
Yields increase
Ability to (re)finance debt decreases
The government has to pay
more to service its debt.
Risk of default increases,
investors continue to sell.
New Equilibrium
Circuit Breaker
Ability vs. willingness to pay
Default
Credit risk vs. return
Austerity, central bank action,
bailout
Cycle of Debt
The Eurozone Sovereign Debt Crisis
Cycle of Debt

7. Maturity Profile – The European Union
The Eurozone Sovereign Debt Crisis
Maturity Profile – The European Union
7
Source: The Economist

8. Percent
PercentofTotalDebt
PercentofTotalDebtPercentofTotalDebt
PercentofTotalDebt
Maturity Profile – Southern Periphery
The Eurozone Sovereign Debt Crisis
Maturity Profile – Southern Periphery
8
Source: Thomson Reuters Credit Views
Italy Spain
Greece Portugal

9. Gov debt/GDP: 166% Gov debt/GDP: 121%
Gov debt/GDP: 87% Gov debt/GDP: 83%
Source: BBC
Please note that
figures include
government and
corporate debt.
Gov debt/GDP
figures as per
Sep 2011.
The Eurozone Sovereign Debt Crisis
Who Owes What to Whom?
9
Who Owes What to Whom?

10. 0
100
200
300
400
Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12
EUR GBP USD
0
20
40
60
80
100
May 11 Aug 11 Nov 11 Feb 12
EUR GBP USD 10
Tensions in the Bank Funding Market
The Eurozone Sovereign Debt Crisis
Tensions in the Bank Funding Market
• The graphs on the right show the
spread between 3-month Libor and
the 3-month Overnight Index Swap
(OIS).
• Essentially, Libor is uncollateralised
borrowing whereas the OIS is a
collateralised transaction.
• Consequently, the spread between
the two can be regarded as a
measure of the general stress in
bank funding markets as it is a
metric for how banks assess each
other’s creditworthiness.
• If creditworthiness is perceived to be
low, higher rates will be demanded
for Libor transactions and the spread
will therefore increase.
Source: Bloomberg

11. Central Bank Intervention
• ECB purchase of government bonds
• LTRO: unlimited 3-year loans to banks at a fixed rate of 1%
to address tensions in interbank funding and government
bond markets (take-up of €489bn in December 2011,
€530bn yesterday, 29 Feb 2012)
Firewalls & Bailout Funds
• European Stabilisation Mechanism (ESM), expected to be
operational from July 2012, with a lending capacity of
€500bn to provide funding for Eurozone members unable
to raise money in the bond markets
• The ESM will replace the European Financial Stability
Facility (EFSF)
Short-term Solutions
Debt Restructuring/Defaults
• Greek bondholders accept “haircuts” of c.53.5% of the
nominal value to bring the country’s debt to a
“sustainable” level. Note that even after the restructuring,
investors remain exposed to mark-to-market and credit
losses.
Economic Reform
• Fiscal austerity and structural reform, especially aiming at
internal devaluation (reducing labour costs to make
exports more competitive) and primary surpluses
(government revenues higher than outlays before interest
rate payments)
• Revised Stability and Growth Pact with “quasi-automatic
sanctions” for countries that break deficit rules
Long-term Solutions
Solutions (?)
The Eurozone Sovereign Debt Crisis
Solutions (?)
11

12. The Eurozone Sovereign Debt Crisis
Growth in the ECB Balance Sheet
Growth in the ECB Balance Sheet
Source: Federal Reserve, European Central Bank, Bank of Japan, Bank of England (via blogs.ft.com/gavyndavies/) 12

13. • Are the firewalls/bailout funds big enough? Are countries like Italy or France credible financial backers of the bailout funds?
• Will banks be able to raise enough capital to withstand the ongoing market turmoil? If they are not able to raise it in the markets,
will governments be able to offer support?
• Is the new Stability and Growth Pact credible?
• How will the Long Term Refinancing Operation (LTRO) be unwound/rolled over in an environment of ongoing bank balance sheet
deleveraging?
• Will core Eurozone members be prepared to offer support to the periphery on an ongoing basis? Will politicians be able to act
quickly enough to prevent the crisis from spreading even further? Will the European Central Bank be prepared to intervene on an
ongoing basis?
• How likely are other long-term solutions like Eurobonds? Are the proposed solutions sufficient?
(Some) Open Questions
The Eurozone Sovereign Debt Crisis
(Some) Open Questions
13

14. Three Eurozone Scenarios
Allocation A – A Typical UK Pension Fund
Equity,
50.0%
Index-
linkedgilts,
17.5%
Corporate
bonds,
17.5%
Property,
10.0%
Funds of
hedge
funds,
2.5%
Private
equity,
2.5%
Allocation A
• Allocation A represents what we believe is a fairly typical asset
allocation for a UK pension fund
• Whilst there is some protection against movements in interest and
inflation rates and a sizeable investment in fixed income, the
largest allocation is to equity and comparable asset classes (e.g.
hedge funds)
Key Stats
Expected Return over Swaps 229bps
Funding Ratio 80.0%
Net Interest Rate PV01 £1.78m
Interest Rate Hedge Ratio 16.9%
Net Inflation PV01 - £1.35m
Inflation Hedge Ratio 16.8%
Value at Risk 95 (% of liabilities) 28.4%
Expected returns are based on Redington’s in-house assumptions
Total Assets: £800m
Total Liabilities: £1,000m
14

15. Three Eurozone Scenarios
Flight Plan Analysis
Flight Plan Analysis
750
800
850
900
950
1,000
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
£millions
Yearsto full funding
Liabilities
Swaps+ 275bps Swaps+ 196bps
Swaps+ 159bps
15

16. 16
Three Eurozone Scenarios
Assumptions
Scenario 1 Scenario 2 Scenario 3
Background Hit by a continuing economic
collapse and spreading social
unrest, the Greek
government goes into a
disorderly default. Concerns
about other peripheral
Eurozone members increase
to the point of panic.
However, Greece remains in
the Eurozone.
Deciding that the social and
economic cost of continuing
austerity are unbearable, the
southern periphery (Italy,
Spain, Portugal and Greece)
leaves the common currency.
The crisis continues to spread
despite the combined efforts of
Eurozone and international
policymakers. Eventually, the
common currency breaks apart
with member states re-
introducing national
currencies.
Asset Assumptions Scenario 1 Scenario 2 Scenario 3
Equities
(MSCI World Index)
-20% -30% -40%
Credit Spreads
(Bank of America/Merrill Lynch GBP
Non-Gilt)
+100bps +150bps +200bps
Interest Rates
(GBP gilt/swap curve)
-50bps -75bps -50bps
Inflation
(RPI swap curve)
Unchanged Unchanged +50bps
Three Eurozone Scenarios
16

17. Equity-
linked
bond fund,
30.0%
Index-
linkedgilts,
25.0%
Credit,
15.0%
Diversified
growth
fund,
10.0%
Social
housing,
5.0%
Secured
leases,
5.0%
Macro
hedge
fund,
10.0%
Three Eurozone Scenarios
Allocation B – A More Efficient Approach
Allocation B
• Allocation B represents what we consider to be a more efficient
asset allocation. Expected Return is lower than for Allocation A, but
exposure to risks should be reduced significantly.
• The allocation to equities is significantly smaller than for Allocation
A. New return-seeking assets and “Flight Plan Consistent Assets”*
have been introduced and the allocation to index-linked gilts is
larger.
Key Stats
Expected Return over Swaps 204bps
Funding Ratio 80.0%
Net Interest Rate PV01 £0.43m
Interest Rate Hedge Ratio 80.0%
Net Inflation PV01 - £0.32m
Inflation Hedge Ratio 80.0%
Value at Risk 95 (% of liabilities) 13.2%
Hedging Swaps Overlay
Expected returns are based on Redington’s in-house assumptions
*Flight Plan Consistent Assets provide long-dated, relatively secure and inflation-
linked cash flows at attractive returns and are a good match for pension liabilities.
Total Assets: £800m
Total Liabilities: £1,000m
17

18. 1%
7% 0% 1%
2%
7%
5% 10%
13%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
PercentageofTotalLiabilities
1%
11% 1% 1% 1%
21%
8% 16%
28%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
PercentageofTotalLiabilities
Three Eurozone Scenarios
Initial Risk Analysis
Value at Risk 95
Minimal increase in the
deficit in a worst-case (1-in-
20) scenario over the next
year
Initial Risk Analysis
Metric Allocation A Allocation B
Single Factor Stress Test
Change in the deficit as a
result of stressing a single
risk factor
-160
-211
-142
-10
-250
-200
-150
-100
-50
0
Equitiesdown
40%
Interestrates
down100 basis
points
Inflationrates
up100 basis
points
Creditspreads
up100 basis
points
£millions
-96
-51
-21 -24
-250
-200
-150
-100
-50
0
Equitiesdown
40%
Interestrates
down100 basis
points
Inflationrates
up100 basis
points
Creditspreads
up100 basis
points
£millions
18

19. 334
333
333
220
75
-418
-416
-416
-275
-94
-600 -400 -200 0 200 400 600
41Y+
31Y - 40Y
21Y - 30Y
11Y - 20Y
0 - 10Y
£ thousands
Assets
Liabilities
49
46
89
62
25
-418
-416
-416
-275
-94
-600 -400 -200 0 200 400 600
41Y+
31Y - 40Y
21Y - 30Y
11Y - 20Y
0 - 10Y
£ thousands
Assets
Liabilities
-401
-423
-447
-316
-122
502
528
559
395
153
-800 -600 -400 -200 0 200 400 600 800
41Y+
31Y - 40Y
21Y - 30Y
11Y - 20Y
0 - 10Y
£ thousands
Assets
Liabilities
-60
-48
-112
-90
-51
502
528
559
395
153
-800 -600 -400 -200 0 200 400 600 800
41Y+
31Y - 40Y
21Y - 30Y
11Y - 20Y
0 - 10Y
£ thousands
Assets
Liabilities
Interest Rate PV01
Change in the value of
assets, liabilities and deficit
as a result of 1basis point
(0.01%) move in interest
rates
Initial Risk Analysis
Metric Allocation A Allocation B
Inflation PV01
Change in the value of
assets, liabilities and deficit
as a result of 1basis point
(0.01%) move in inflation
rates
Net: £1.78m
16.9% hedged
Net: £0.43m
80.0% hedged
Net: -£1.35m
16.8% hedged
Net: -£0.32m
80.0% hedged
Three Eurozone Scenarios
Initial Risk Analysis

20. 75%
80%
78%
73%
80%
77%
70%
80% 80%
76%
60%
65%
70%
75%
80%
85%
Equities Interest Inflation Creditspreads
Scenario1 Scenario2 Scenario3
Original FundingRatio (80%)
Three Eurozone Scenarios
Scenario Impacts
Single Factor Stress Test Single Factor Stress TestAllocation A Allocation B
Scenario Impacts – Single Factor Stress Tests
Impact on Deficit
Impact on Funding
Level
-80
-97
-10
-120
-151
-14
-160
-97
-71
-18
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
Equities Interestrates Inflation Creditspreads
£millions
Scenario1 Scenario2 Scenario3
-48
-23 -24
-72
-36 -34
-96
-23
-16
-43
-120
-100
-80
-60
-40
-20
0
Equities Interestrates Inflation Creditspreads
£millions
Scenario1 Scenario2 Scenario3
72% 73%
79%
68%
70%
79%
64%
73% 75%
78%
60%
65%
70%
75%
80%
85%
Equities Interest Inflation Creditspreads
Scenario1 Scenario2 Scenario3
Original FundingRatio (80%)
20

21. Three Eurozone Scenarios
Scenario Impacts
Allocation A Allocation B
Scenario Impacts – Multifactor Stress Tests
Impact on Deficit
Impact on Funding
Level
-190
-291
-366-400
-350
-300
-250
-200
-150
-100
-50
0
£millions
Scenario1 Scenario2 Scenario3
-90
-135
-195
-400
-350
-300
-250
-200
-150
-100
-50
0
£millions
Scenario1 Scenario2 Scenario3
65%
58%
53%
50%
55%
60%
65%
70%
75%
80%
85%
Scenario1 Scenario2 Scenario3
Original FundingRatio (80%)
74%
72%
67%
50%
55%
60%
65%
70%
75%
80%
85%
Scenario1 Scenario2 Scenario3
Original FundingRatio (80%)
21

22. A Framework for Managing Risks
• Know your biggest risks
• Set clear goals and objectives
• Have your game plan ready
• Importance of strong governance
• Set realistic trigger levels for re-risking/de-risking
• Integrate Flight Plan Consistent Assets (non-cyclical assets
with enhanced real returns)
• Diversify sources of alpha and beta
Pension Risk Management Framework
A Framework for Managing Risks
• The results of the stress tests demonstrate the importance of
understanding exactly where a pension scheme’s risks lie and what
can be done to monitor and manage them.
• We believe that the most effective way is the Pension Risk
Management Framework – a clear, strategic and market-consistent
approach for identifying, monitoring and controlling your risks.
22

23. Sample Pension Risk Management Framework
A Framework for Managing Risks
Sample Pension Risk Management Framework
Objective Triggers Performance Indicators Actual Performance
What is the overall objective? Full funding on self-sufficiency basis By 2020 on a swaps + [50]bps basis with
contributionsof £[25]m p.a.
How will we measure the
objective?
Required return on the scheme’s
assets
Required return of assets is swaps +
[160]bps
What are the primary risk targets? Required return at risk (RRaR)
Contributions at Risk (CaR)
RRaR < swaps +[200]bps
CaR should be kept below £[50]m
What is the secondary risk target? Value at Risk (VaR) VaR should not exceed [20]% of the
liabilities
What are the primary aspirational
targets?
To be fully inflation and interest rate
hedged
Hedge ratios should be equal to [100%]
What are the secondary
aspirational targets?
Increase efficiency of hedges by
earningmore return for same risk
Regular monitoring of relative value of
swaps vs. gilts
What is the primary scheme
constraint?
Liquidity Sufficientliquidity to make pension
payments
What is the secondary scheme
constraint?
Collateral requirements Enough available collateral to cover the
1-year derivative [VaR95]
Metric is at or
above target
Metric is within
10%of target
Metric is more
than 10% away
fromtarget
23

24. Disclaimer For professional investors only. Not suitable for private customers.
The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussion purposes only. A variety of
market factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that the parameters and assumptions used in this analysis can be
duplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which appear above are not necessarily indicative of future exchange rates, interest rates, or other
reference rates or prices. Neither the information, recommendations or opinions expressed herein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf.
Unless otherwise stated, any pricing information in this message is indicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs.
Any reference to the terms of executed transactions should be treated as preliminary and subject to further due diligence .
Redington Ltd are investment consultants regulated by the Financial Services Authority. We do not advise on all implications of the transactions described herein. This information is for discussion purposes
and prior to undertaking any trade, you should also discuss with your professional tax, accounting and / or other relevant advisers how such particular trade(s) affect you. All analysis (whether in respect of
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©Redington Limited 2012. All rights reserved. No reproduction, copy, transmission or translation in whole or in part of this presentation may be made without permission. Application for permission should
be made to Redington Limited at the address below.
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THE DESTINATION FOR ASSET & LIABILITY MANAGEMENT
Contacts
Direct Line: +44 (0) 20 3326 7147
Telephone: +44 (0) 20 7250 3331
Redington
13-15 Mallow Street
London EC1Y 8RD
David Bennett
Managing Director | Investment Consulting
david.bennett@redington.co.uk
www.redington.co.uk
Risk Management Firm of the Year
Direct Line: +44 (0) 20 3326 7137
Telephone: +44 (0) 20 7250 3331
Redington
13-15 Mallow Street
London EC1Y 8RD
Sebastian Schulze
Associate | Investment Consulting
sebastian.schulze@redington.co.uk
www.redington.co.uk
Direct Line: +44 (0) 20 3326 7102
Telephone: +44 (0) 20 7250 3331
Redington
13-15 Mallow Street
London EC1Y 8RD
Gurjit Dehl
Creative Economist | Education & Research
gurjit.dehl@redington.co.uk
www.redington.co.uk
Contacts
Disclaimer
24