1. 1
Pension Risk Management:
ALM in Today’s Market
Robert Gardner, Partner, Redington Partners LLP
Dawid Konotey-Ahulu, Partner, Redington Partners LLP

2. Executive Summary
Non-Market Factors
Market Factors
Risk Management is Critical
Through the Lenses
Planning the Long Term Flight Plan
Non-Linear Assets
Implementation
Monitoring
Conclusions
Contents
ALM in Today’s Market
2

3. 3
Non-Market Factors
3

4. 4
RLAM
RLAM

5. 5
RLAM
RLAM

6. 6
RLAM
RLAM

7. 7
RLAM
RLAM

8. 8
RLAM
RLAM

9. 9
RLAM
RLAM

10. Non Market Factors
• Changing Accounting Standards
• FRS17
• IAS19
• Pension Protection Fund
• Risk Based Levy
• Changing Regulation
• The Pensions Regulator
• Financial Services Authority
• Rating Agencies
10
Non-Market Factors
Factors Driving Behavioural Change

11. The risk that a specific population will live longer than anticipated (Blake et al, 2006).
Facts
• Life expectancy is increasing 5 hours a day.
• The most frequently used life expectancy by
FTSE100 DB pension schemes for a 65 yr
old man is 20 years.
• The Pension Protection Fund (PPF)’s latest
S143 and S179 valuation assumptions set life
expectancy for a 65yr old man as 22 years.
• “If the life expectancy for a male currently
aged 60 is understated by two years,
depending on the assumptions adopted, this
could understate the value of his pension by
around 5%.”
The Purple Book (2007).
Longevity Risk
0
5
10
15
20
25
1920 1940 1960 1980 2000
LifeExpectancy
Increase in Life Expectancy
65 year old in England & Wales
Male Female
11
Non-Market Factors
Impact of Other Factors

12. 12
KIPPERS - Who is… What is… Generation Y?
Source: KPMG
Non-Market Factors
The Longer Term Issue

13. 13
Market Factors
13

14. 14
Market Snapshot
30 Year Inflation Swap Rates (steady increase above 3.20% “ceiling”)
Source: Bloomberg

15. 15
Market Snapshot
Historical 30 Year Interest Rate Swap (Volatile and Low)
Source: Bloomberg

16. 16
Market Snapshot
Real Yield on 1.125% 2037 Index-Linked Gilt (Significantly below 2% “floor”)
Source: Bloomberg

17. 17
Market Snapshot
Historical Credit Spreads (Major Market “Distortion”)
Source: Bloomberg

18. 18
Market Snapshot
Historical 1 Year FTSE 100 Performance
Source: Bloomberg

19. Market Snapshot
Breakeven 30 Year Inflation (last 5yrs) (Up, up and away)
19
Source: Bloomberg

20. Market Snapshot
30 Year Australian and Canadian Inflation (LDI goes Global)
20
Source: Bloomberg

21. 21
Risk Management is Critical
Lessons Learned from 2008
21

22. 22
Historical Performance of Brent Crude
Too expensive?
Source: Bloomberg
Why Risk Management is Important
Lessons Leaned from 2008

23. 23
To our dear customers,
When our inaugural flight took off in January 2007, we pledged to change the face of air travel. Your appreciation of our
unique values and your belief in our product has allowed us to achieve this.
Your belief in us was shared by our investors ‐ but regrettably, due to unforeseen circumstances, they were unable to
unlock the finance that we needed. As a result, we are very sad to announce that from 30 May 2008, we will cease
operations and we are no longer able to honour flight reservations.
We extend our sincerest apologies to those of you who have travel plans with Silverjet in the future and at present. You
are advised to seek alternative travel arrangements with other carriers, and contact your credit card company or travel
agent directly for information on obtaining refunds.
We are working actively with new investors who are prepared to inject new funds so we can recommence operations. If
we are able to achieve this, we will make an announcement as soon as possible and we hope to be able to bring you our
very 'sivilised' flying experience again.
Thank you for your support ‐ it has meant everything.
Yours sincerely,
Lawrence Hunt, CEO
Why Risk Management is Important
Lessons Leaned from 2008

24. 24
“Southwest owns long‐term contracts to buy most of its fuel through 2009
for what it would cost if oil were $51 a barrel. The value of those hedges
soared as oil raced above $90 a barrel, and they are now worth more than
$2 billion.”
Source: The New York Times, 27 November 2007
First Quarter 2008 Financial Highlights
•Record first quarter revenues of $2.53 billion, up 15 percent;
•Net income, excluding special items, of $43 million, up 30 percent;
•Net income per diluted share, excluding special items, of $.06, up 50 percent.
Source: Southwest, 17 April 2008
Why Risk Management is Important
Lessons Leaned from 2008

25. 25
"Unfortunately, the huge fuel price
hike and the inability of the business
to hedge all its fuel has increased our
costs year on year by over $80m.
So where many people have been
making hay with high oil prices, this
is the repercussions of that hay -
1,700 people potentially out of work
today in the UK.
We've made every effort - myself and
my fellow directors - to find new
funding for the business, and it's a
very sad day for me personally. I am
totally devastated."
- Phil Wyatt, XL Chairman (12
September 2008)
Why Risk Management is Important
Lessons Leaned from 2008

26. 26
Why Risk Management is Important
Spreads on 10 Year Goldman Sachs Credit Default Swap (CDS)
Collapse of
Northern Rock
Withdrawal of
liquidity in interbank
market
Bear Sterns
bought out by JP
Morgan
Lehman Brothers file
for bankruptcy.
Bank of America
announces purchase
of Merrill Lynch
Source: Bloomberg

27. 27
Why Risk Management is Important
Overnight GBP LIBOR
Source: Bloomberg
CDO crisis
Northern Rock
nationalised
Bear Sterns
bought out by JP
Morgan
Lehman Brothers
file for
bankruptcy. Fed
leave short term
rates unchanged
Overnight GBP Libor

28. 28
Through the Lenses
Multi Dimensional Analysis
28

29. Analyzing the Pension Scheme
29
Risk Telescope Sensitivity Microscope Scenario Kaleidoscope

30. Pension Fund Risk Management
Risk Attribution
30

31. Analyzing the Pension Scheme
31
Sensitivity MicroscopeRisk Telescope Scenario Kaleidoscope

32. Unhedged Inflation (PV01) Hedged Inflation (PV01)
Pension Fund Risk Management
Sensitivity Analysis (PV01) (“Delta Ladders”)
32

33. Unhedged Interest Rate (PV01) Hedged Interest Rate (PV01)
Pension Fund Risk Management
Sensitivity Analysis (PV01) (“Delta Ladders”)
33

34. Analyzing the Pension Scheme
34
Sensitivity MicroscopeRisk Telescope Scenario Kaleidoscope

35. Pension Fund Risk Management
Stress Testing (“What If?” Scenarios)
35

36. 36
Planning the Long Term Flight Plan
36

37. Ongoing Monitoring
Redington / RiskMetrics Monitor Manager Performance Monitor Funding Trajectory Monitor Risk Budget
New Strategic Investment Strategy
Manager/Counterparty selection Strategy and Tactics Execution Pricing Due-Diligence
Funding “Flight Plan”
Benefit Optimization Sponsor Funding
Investment strategy
optimization
Easy First Steps Asset Diversification Hedging Risk
Investment Objectives
Minimum Funding Level Long Term Funding Target Funding Trajectory Cone of Uncertainty Regulation / Accounting
Diagnostic ALM Review of Pension Fund
Component Risk Budget Current Risk Analysis Current Return Analysis
Establish Appropriate Risk Budget for Sponsor (B/S)
Employer Covenant Review Equity and CDS (Beta) Analysis Peer Comparisons
Road Map
Key Milestones for Pension Funds
37

38. Minimum Funding Level
Cone of Uncertainty
Cone of Uncertainty
FRS 17/IAS 19
BUYOUT S75
Cone of Uncertainty
Destination “Fully Funded”
Flight Plan
38

39. 39
Achieving Risk Adjusted Return
Hedging Risk – VaR Road Map

40. 40
Non-Linear Assets
Expanding the Investment Universe
40

41. Non-Linear Assets
Adding Options to the Asset Toolbox
41

42. Non-Linear Assets
Strategy Comparison – Current vs. New Strategy
42
Mitigating
downside risk
Maintaining Equity upside
exposure

43. Non-Linear Assets
Strategy Comparison – Current vs. New Strategy
43

44. Non-Linear Assets
Strategy Comparison
44
Original Strategy New Strategy

45. Alternative Investment Analysis
Why add AI to the asset mix?
45

46. 46
Implementation
Key Steps
46

47. Step 7: Counterparty selection and execution monitoring opportunistic hedging
Step 6: Accessing market “axes” and opportunistic hedging
Step 5: Appropriate Dealing costs
Step 4: Optimal transaction size(s)
Step 3: Optimal timing of execution
Step 2: Establish Appropriate Yield Bands as dealing / trigger points
Step 1: Framework to minimise market impact
Implementation Framework
Seven Stages
47

48. 48
Monitoring
48

49. Pension Scheme
ALM Risk Process
49

50. 50
Benchmark Design
Historical Analysis

51. Pension Scheme
“Box and Whisker” analysis
51

52. Pension Scheme
“Box and Whisker” Graph
52

53. 53
Conclusions

54. Understand pitfalls of risk management
Back test VaR calculations with different data inputs / different methodologies to
understand the strengths and weaknesses of the VaR number generated.
Estimation errors
Always ask the “what if” questions.
Stress Test.
Use full arsenal of investment tool kit
Diversification of assets to work throughout regime changes.
Consider adding non-linear assets e.g. call options.
Consider adding Alternative Investments to your portfolio.
Longevity bites once risk reduction is implemented
Understand range of solutions.
Annuity/But-out
Index Linked Longevity Swaps.
Scheme Specific Longevity Swaps.
Longevity Annuity Option.
54
Pension Fund Risk Management
Conclusion

55. 55
Pension Risk Management:
ALM Modelling in Today’s Market
Robert Gardner, Partner, Redington Partners LLP
Dawid Konotey-Ahulu, Partner, Redington Partners LLP

56. Contacts
Dawid Konotey-Ahulu | Partner Direct: +44 (0) 207 250 3415
dawid@redingtonpartners.com
Robert Gardner | Partner Direct: +44 (0) 207 250 3416
robert.gardner@redingtonpartners.com
Redington Partners LLP
13 -15 Mallow Street London EC1Y 8RD
Telephone: +44 (0) 207 250 3331
www.redingtonpartners.com
56
Contacts
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