ldi & risk management workshop

Private & Confidential BNY Mellon iRIS Teach-In 05 June 2013

Redington and BNY

Mellon

iRIS Teach-In

5th June 2013

Private & Confidential BNY Mellon iRIS Teach-In 05 June 2013 2

Examples of Current Clients Acknowledged Excellence

Recent Award Wins

Risk Management Firm

of the Year Best Consulting Firm

of the Year

Pension Consultant

of the Year

Redington Overview

Investment Consultant

of the Year

https://intranet.redington.co.uk/Rednet/philipspensionfund/PublishingImages/philips logo.jpg


The Evolution of Our Business

21

55

98 100

185

225

250

270

0

50

100

150

200

250

300

2006 2007 2008 2009 2010 2011 2012 Current

GB

P m

illio

ns

Client size

Trustee –

Full

Advisor

Trustee –

Project Sponsor

Non-

Pension Total

> £10Bn 1 2 3 1 7

£5Bn - £10Bn 0 4 1 1 6

£1Bn - £5Bn 7 2 5 6 20

£500m - £1Bn 0 6 1 0 7

< £500m 4 3 1 3 11

Total 12 17 11 11 51

Assets Under Consulting (GBP millions)

Number of Clients

Client Breakdown by Type and Size

1

7

11

17

31

37

44

51

0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011 2012 Current


Who Are We?

4


Our Mission:

To Design, Develop, and Deliver the best investment strategies for our clients

5


We live in uncertain times...


People Are Living Longer


Uncertain Economic Outlook


Immense Pressure for Schemes

Today the aggregate funding level of pension funds in the FTSE 100 is only 63%


The Future is Uncertain


CLEAR GOALS &

OBJECTIVES

ACCESS TO

DERIVATIVE HUB

LIQUID MARKET STRATEGIES

LIQUID & SEMI-LIQUID

CREDIT STRATEGIES

ILLIQUID CREDIT

STRATEGIES

ILLIQUID ALPHA & BETA

STRATEGIES

ONGOING MONITORING

7 Steps to Full Funding

Mission Statement

To help our clients achieve full-funding with the minimum level of risk


Dynamic

Continuous

Monitoring

Deliver

Develop

Design

7 Steps to Full Funding

"Redington is the only investment consulting firm with a clear and coherent process” Trustee at Law Debenture, speaking of the 7 Steps to Full Funding


Why do Your Clients Need iRIS?


Challenge 1 – Managing the End Game

Objective Measurement (Assumed) Performance Indicators Performance (31 March 2013) RAG

Funding Objectives

Primary Funding Objective:

To remain fully funded on an Ongoing

(Gilts +60bps) basis.

Expected Returns > Required Returns

Required Return:

Expected Return:

Difference:

Gilts +25bps

Gilts +40bps

+15bps

Secondary Funding Objective:

To build up a sufficient buffer to withstand an

adverse demographic shock and still return to

full funding by 2023.

Expected Returns > Required Returns to return

to full funding by 2023 (following an adverse

demographic shock)

Required Return:

Expected Return:

Difference:

Gilts +129bps

Gilts +40bps

-89bps

Investment Strategy Actual Returns should exceed Expected

Returns (implying outperformance). Actual Returns > Expected Returns

Actual Return:

Expected Return:

Difference:

Gilts + xxxbps

Gilts + xxxbps

xxxbps

Risk Budget

The investment strategy should not risk the

deficit worsening by [10%] of liabilities over a 1-

year period (including longevity risk).

VaR95 < 10% of liabilities VaR95: 7.8%

Hedging Strategy

Nominal/Inflation hedge ratio should be

maintained within +/- [5]% of the funding ratio.

Funding Ratio (Ongoing Basis) 106%

Nominal Hedge Ratio (Ongoing Basis) 90%

Inflation Hedge Ratio (Ongoing Basis) 90%

Liquidity

Maintain sufficient eligible collateral to meet

potential margin calls on derivative positions

and cover one-year’s worth of benefit payments

Total available liquid assets £[xxx]m

One-Year Collateral Requirement + One-Year

Cash Flow £[xxx]m

Status Metric is at or above target Metric is within [10%] of target Metric is more than [10%] away

Strategic Challenge


Challenge 2 - Governance and Decision Making

Online – login anytime, anywhere Where are you? - Funding Level Tracker

Required Return at Risk and Funding Ratio at Risk

Where are you going? – Required Rate of Return Clarity, Accountability and Transparency

Operational Challenges


17

Challenge 3 – Deficit Funding and Management

General Healthcare Group - Set up clear goals and objectives through Pension Risk Management Framework

17

Objective Measurement 17/09/2012 RAG

Funding To reach full funding by 2022 on Gilts + 25bps basis

Market value of assets £103m

Estimated value of liabilities £124m

Funding level 83.4%

Next de-risking trigger 87.0%

Required return to achieve target full funding Gilts + 218bps

Expected return of assets under current strategy Gilts + 207bps

Margin (Expected return less required return) 11 bps

Risk Value at Risk should be less than [24%]

Total VaR95 23.6%

Equity VaR 7.3%

Credit VaR 3.4%

FX VaR 1.2%

Interest Rate VaR 11.6%

Inflation VaR 10.1%

Hedging Interest rate and inflation rate hedge should be maintained within +/-10% of Funding Ratio

Nominal hedge ratio (range 73.4% - 93.4%) 69%

Inflation hedge ratio (range 73.4% - 93.4%) 71%

Collateral Collateral required for equity futures and Synthetic Gilts As calculated by Schroders [£22m]

Total cash available As calculated by Schroders [£30m]


Financial and Economic


Challenge 3 – Deficit Funding and Management

General Healthcare Group- Daily monitoring of funding level to implement de-risking as funding level improves

60%

65%

70%

75%

80%

85%

90%

95%

Fu

nd

ing

le

ve

l

Original Strategy

Actual Strategy

De-Risking Triggers

De-Risking Triggers

Re-Risking Trigger

De-Risking Trigger 89.2%

81.0%

18

Financial and Economic


Challenge 4 - Investment Returns

SAA allows agile decisions around the asset portfolio Clear required returns to meet future liabilities

Clear accountability of SAA and managers

Developed Equities (Inc. Equity Future), 8.0%

Developing Equities, 2.0%

Euro ABS, 4.8%

Property, 6.8%

Hedge Fund, 3.5%

ILS, 2.2%

ENW Structured Note, 0.6%

Cash, 3.8%

Swaps (ex. Linker Asset Swaps), 10.9%

UK Gilt, 2.8%

Index-Linked Bonds +Asset Swaps+Repo, 9.8%

Corporate, 44.8%

Positive Negative TotalReturn Over Flight Plan

Required ReturnReturn Over Expected

Return

Total Return 667 492 466

Gain/ Loss on Dollar Overhedge

Index Linked Gilts 8

Hedge Fund 10

ILS 20

Property -16

Equity 124

Credit 521

521

124

20

667

492 466

-100

0

100

200

300

400

500

600

700

800

Exc

ess

Retu

rn o

ver

LIB

BO

R in

basi

s poin

ts

“I think it is a very good document.

In addition, I think more pension schemes should be looking at the performance of their assets on this basis i.e. with the primary focus being on risk and on performance against liabilities”

Trafalgar House Pension Scheme

Strategic Challenge


Challenge 5 – Economy (Financial Markets)

Performance in context of key financial market factors “What if” analysis in context of adverse market scenarios

Sensitivity analysis against interest rates and inflation Risk in context of key financial market factors

Strategic Challenge


iRIS. Same But Different....


iRIS. Same But Different

iRIS gives clarity to pension schemes to help them get back on track and reach their goals

Monitor risk. Measure progress. Stay on track.


Partnership Structure

Custody Client Data Provider

Ongoing monitoring - iRIS

Pension Fund Redington


Key Features of iRIS

24


Step 1: Setting Clear Goals and Objectives

Objective Measurement (Assumed) Performance Indicators Performance (31 March 2013) RAG

Funding Objectives

Primary Funding Objective:

To remain fully funded on an Ongoing

(Gilts +60bps) basis.

Expected Returns > Required Returns

Required Return:

Expected Return:

Difference:

Gilts +25bps

Gilts +40bps

+15bps

Secondary Funding Objective:

To build up a sufficient buffer to withstand an

adverse demographic shock and still return to

full funding by 2023.

Expected Returns > Required Returns to return

to full funding by 2023 (following an adverse

demographic shock)

Required Return:

Expected Return:

Difference:

Gilts +129bps

Gilts +40bps

-89bps

Investment Strategy Actual Returns should exceed Expected

Returns (implying outperformance). Actual Returns > Expected Returns

Actual Return:

Expected Return:

Difference:

Gilts + xxxbps

Gilts + xxxbps

xxxbps

Risk Budget

The investment strategy should not risk the

deficit worsening by [10%] of liabilities over a 1-

year period (including longevity risk).

VaR95 < 10% of liabilities VaR95: 7.8%

Hedging Strategy

Nominal/Inflation hedge ratio should be

maintained within +/- [5]% of the funding ratio.

Funding Ratio (Ongoing Basis) 106%

Nominal Hedge Ratio (Ongoing Basis) 90%

Inflation Hedge Ratio (Ongoing Basis) 90%

Liquidity

Maintain sufficient eligible collateral to meet

potential margin calls on derivative positions

and cover one-year’s worth of benefit payments

Total available liquid assets £[xxx]m

One-Year Collateral Requirement + One-Year

Cash Flow £[xxx]m



Funding Level

26

Funding ratio is as an indicator of the scheme’s health


2013 2014 2015 2016 2017 2018 2019 2020

GB

P M

illio

ns

Liabilities Path Actual Liabilities Assets Path Actual Assets

The Flight Plan - Illustrative

Liability Basis

Contributions & Asset Returns

Time Horizon

The Flight Plan acts as a SatNav, informing Trustees where they are, and whether they are on track towards their goals.

27


SatNav for Pension Schemes

Schemes with a Flight Plan know exactly where they are and can take appropriate investment opportunities when they arise

28


Three Lenses

29


Sensitivity Microscope

Interest rate PV01 allows Trustees to understand how sensitive their assets and liabilities are to interest rates and inflation

30


Risk Telescope

Value-at-Risk allows Trustees to measure risk and understand the impact of their investment strategy on their current position

2.5%

0.5% 0.5%

2.7%

0.4%

3.9%

4.0%

6.2%

7.9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Per

cen

tage

of

Tota

l Lia

bili

ties

Risk Type

Risk Attribution by Risk Type (% of Liabilities)

Asset Risk

Liability Risk

31


Scenario Kaleidoscope

32

The stress tests allows Trustees to understand how sensitive the scheme is to adverse market scenarios


Collateral Requirements

33

255

178

62 14

97

341

157

410

0

200

400

600

800

1,000

1,200

Collateral Requirement Available Collateral

GB

P M

illio

ns

1 Year VaR of Swaps 1 Year VaR of Gilts 1 Year VaR of Equity Future+TRS Initial Margin of Equity Future

Conventional Gilts Index Linked Gilts+Asset Swaps+Repo Cash Swap MtM

Collateral analysis monitors whether the Scheme has sufficient collateral to meet derivative calls over the next year on a minimum worst-case basis


13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk

Contacts

Robert Gardner Founder and Co-CEO Direct Line: 0207 250 3416 [email protected] LinkedIn: http://linkd.in/134mv6H Twitter: https://twitter.com/robertjgardner

34

Steven Yang Yu Director and Co-Head of ALM

Direct Line: 0203 326 7118

[email protected]

LinkedIn: http://linkd.in/11fvC1S

Teresa Ngone Investment Consultant Direct Line: 0203 326 7132 [email protected] Linkedin: http://linkd.in/ZqUaIs Twitter: https://twitter.com/


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