The End Game
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The document outlines Redington's pension risk management framework, which provides tools to help trustees and sponsors meet objectives like reaching full funding by 2020 through regular monitoring of risk targets and performance indicators, and investing in assets that match the framework's "flight plan" like secured long-term leases, social housing, and infrastructure projects. The framework is meant to allow for calls to action to recalibrate the investment strategy and anticipate changing risks and targets.
The End Game
- 1. Redington 13-15 Mallow Street London EC1Y 8RD T. 020 7250 3331 www.redington.co.uk http://twitter.com/redingtontweets
- 2. 2 Introduction Preparing for the End Game
- 3. 3 Preparing for the End Game Source: UN Statistics Division; Economist
- 4. Overall Objective Risk Targets Aspirational Targets Scheme Constraints 4 The pension risk management framework is a market consistent, transparent and actionable tool which is key for any trustee, sponsor or member Objective Triggers Performance Indicators What is the overall objective? To reach full funding on self-sufficiency basis By 2020 on a Swaps +75bps with £50m of contributions p/yr How will we measure the objective? Using the required return on the Scheme’s assets Required Return of assets is Swaps +160bps What are the primary risk targets? Required rate of Return at Risk (RRaR) Contributions at Risk (CaR) RRaR should be no more than 300bps CaR should be kept below £50m 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 increase interest rate and inflation hedge ratios Hedge ratios equal to funding level What is the secondary aspirational target? Dynamic de-risking Based upon regular monitoring What is the primary Scheme constraint? Liquidity Enough liquidity to pay pension payments What is the secondary Scheme constraint? Collateral Requirements Enough eligible collateral to cover the 1yr derivative VaR95 Regular monitoring allows a call to action that enables trustees and sponsors to anticipate and recalibrate the investment strategy Pension Risk Management Framework (PRMF)
- 5. “Flight Plan Consistent” Assets 5 £10.0bn £12.0bn £14.0bn £16.0bn £18.0bn £20.0bn £22.0bn £24.0bn £26.0bn 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Example:Actual Asset and Liability Path (Actuarial Basis) Projected Liabilities Projected Assets Actual Liabilties Actual Assets Pension Risk Management Framework (PRMF) “Flight Plan Consistent” Assets
- 6. SECURED LEASES • Take advantage of attractive yields on long-term secured property leases • Yields may be in excess of yields on corporate bonds issued by same borrower • Long-dated (up to 25 years) index-linked cashflows - helps hedge inflation risks SOCIAL HOUSING • Low-cost rental housing provided for disadvantaged people in need of housing • Generally provided by local councils and housing associations • Offers long-dated, inflation-linked cashflows from secured borrowers (i.e. housing associations) with quasi-government guarantee INFRASTRUCTURE •Investing in public sector projects through Private Finance Initiatives (PFIs) •PFIs enable government to fund new infrastructure projects •Long-term, potentially inflation-linked revenue streams 6 Pension Risk Management Framework (PRMF) “Flight Plan Consistent” Assets
- 7. 7 Direct Line: +44 (0) 20 7250 3416 Telephone: +44 (0) 20 7250 3331 Redington 13-15 Mallow Street London EC1Y 8RD Robert Gardner Founder & Co-CEO robert.gardner@redington.co.uk www.redington.co.uk