The Sheldon Manifesto - Credit Suisse Pensions Conference

Private & Confidential Credit Suisse Pensions Conference April 2014

The Sheldon Manifesto

Dawid Konotey-Ahulu

Co-Founder and Co-CEO

Redington

1

Private & Confidential Credit Suisse Pensions Conference April 2014 2

This is Sheldon


Sheldon is a very cool guy. He’s a helicopter pilot.


Flying a helicopter is very hard. So many levers…

The Cyclic tilts the aircraft omni-directionally


The Pedals. For changing direction


The Collective. For controlling take-off and landing

The Throttle. More power / less power


It’s a delicate, difficult balance


Verb: To run a pension scheme:

Defn: A process akin to flying a helicopter


The Funding PositionG

BP

Mill

ions

Liabilities Assets

700

944

Discount rate: Risk-free Rate +50bps

3

74%244

0

50

100

150

200

250

300

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GB

P M

illio

ns

%

Deficit Funding Level

The Pension Scheme


500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

The Pension Scheme

The Flight Plan

Full funding on a Risk-free + 50bps basis in 2022

Required Rate of Return

2.34%

Exc

ess

ove

r th

e R

isk-

free R

ate

4


The Pension Scheme

The Asset Allocation

Expected Return: Risk-free +1.72%

Equities

Corporate Bonds

Gilts

30%

50%

20%

5


The Pension Scheme’s Risk

5


Using the Levers …

13


It’s a balance …

14


Lever 1. Changing the Fuel Mixture

Equities

Corporate Bonds

Gilts

Diversifed Growth Funds

Hedge Funds

30%

50%

20%13%

33%

15%

15%

25%

15


2.34% 2.34%

Expected Return Required Return

1.72%

2.34%

Expected Return Required Return

Lever 1. New Fuel, More PowerA

nn

ual

Ret

urn

ove

r th

e R

isk-

free

Rat

e

An

nu

al R

etu

rn o

ver

the

Ris

k-fr

ee R

ate

16


244

[VA…

But Higher Returns mean More Risk

6.4% 0.6%3.5%

20.4%

9.6% 16.9%

23.6%

0%

25%

50%

VaR

as

% o

f lia

bili

ties

GB

P M

illio

ns

Current Deficit

1-in-20 potential increase in Deficit over the next year: [23.6% ×£944m = £212m]

17


500

750

1000

1250

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

If the Risk materialises

18


2.34%

Projected RequiredRate of Return

Potential RiskMaterialises

194 194

220

Projected Deficit Potential RiskMaterialises

The Required Rate of Return shoots UpG

BP

Mill

ion

s

An

nu

al e

xces

s o

ver

the

Ris

k-fr

ee

R

ate

5.98%

19


500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

20

Lever 2. More Sponsor Contributions…

An

nu

al e

xces

s o

ver

the

Ris

k-fr

ee

R

ate


2.34%

20

GB

P M

illio

ns

Annual Sponsor Contributions


1.72%


GB

P M

illio

ns

An

nu

al e

xces

s o

ver

the

Ris

k-fr

ee

R

ate

25

500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

Annual Sponsor Contributions

21

The Required Rate of Return falls…


20

25

30

GB

P M

illio

ns

But the Sponsor is Constrained

Annual deficit recovery contributions

EBITDA

[Contribution limit]

46

2025

30

GB

P M

illio

ns

22

Qn: Can we have another £5m a year in additional contributions please?

A: No


2.34%

500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

Lever 3. Extend the Time to full funding

2022 2030

1.57%

23

An

nu

al R

etu

rn o

ver

the

R

isk-

free

Rat

e

Require RF +1.57%

More time


0.0%

2.0%

4.0%

6.0%

8.0%

2018 2023 2028 2033 2038 2043

Annual Exc

ess

Retu

rn o

ver

the R

isk-

free R

ate

Target Year for Full Funding

More Time: It is a Decreasing Benefit


24


Do not rely heavily on Lever 3

25


500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

Risk-

free+50bps

Risk-free +100bps

26

Lever 4. Increase the “discount spread”


500

750

1000

1250

2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041

But Now Run Harder for Longer

Assets earning risk-free rate +1.0%

GB

P M

illio

ns

Assets earning risk-free rate +0.5%

27


Bad Weather…

28


500

750

1000

1250

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

Lever 5. The Hedging Lever

Hedged

2.27%2.34%

4.21%

Annual exc

ess

ove

r

the R

isk-fre

e R

ate

Requir

ed R

ate

of R

etu

rn

ove

r R

isk-fre

e r

ate

Original asset path

Inflation rises by 1%

29

GB

P M

illio

ns


…may result in insufficient Liquid Assets (Collateral)…

Equities

Corporate Bonds

Gilts

250

210

LiquidityRequired

LiquidityAvailable

30%

50%

20%

30


5. But, increasing Liquid Assets…

Equities

Corporate Bonds

Gilts

250

LiquidityRequired

LiquidityAvailable

298

43%

38%

20%

31

Lower Expected Return: Risk-free +1.33%

More Gilts!


500

750

1000

1250

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

5. …means lower Returns: and a missing £70m

Missing

£70m

32

GB

P M

illio

ns


The Sheldon Manifesto

33


500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

Use ALL the Levers

A Bit More Time…A bit more Contribution…

Lever 1 Lever 2

20

2.5

GB

P M

illio

ns

34

Additional Sponsor

Contributions


500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

Maintain the spread over the discount rate

Discount rate

Lever 3

Maintain RF +0.5%

35


The Required Rate of Return falls

1.89%

Annual R

etu

rn R

equir

ed

ove

r th

e R

isk-fre

e R

ate

Annual R

etu

rn R

equir

ed

ove

r th

e R

isk-fre

e R

ate

2.34%

1.89%

36


Increase Expected Returns

Equities

Corporate Bonds

Gilts


Hedge Funds

Lever 4

30%

50%

20%30%

40%

10%

5%

15%

37


1.89%

Annual R

etu

rn R

equired o

ver th

e R

isk-fre

e R

ate

1.72%Annual R

etu

rn o

ver

the

Ris

k-fre

e R

ate

The Expected Rate of Return rises…

Lever 4

1.72%1.89%

38


Expected Return UP / Required Return DOWN

1.72%

Annual R

etu

rn o

ver

the

Ris

k-fre

e R

ate

1.72%

39

Annual R

etu

rn R

equir

ed

ove

r th

e R

isk-fre

e R

ate

2.34%

-

1.89%

-

1.89%

AN

D


Do Some Hedging

Lever 5

74% 74%

Interest ratehedge ratio

Inflation hedgeratio

74% 74%199 210

LiquidityRequired

LiquidityAvailable

199

40


199 210

LiquidityRequired

LiquidityAvailable

Stay within the Pension Scheme’s Liquidity Constraints

Equities

Corporate Bonds

Gilts


Hedge Funds

30%

40%

10%

5%

15%

Lever 5

199 210

41


With an appropriate Risk Budget

Lever 5

7.5% 0.3%3.0%

5.0%4.4%

7.0%

13.2%

0.0%

25.0%

50.0%

VaR

as

% o

f lia

bili

ties

42


500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

Now heading to Full Funding and Beyond!

Risk-free +1.89% Risk-free +0.55%

43

Switching to a safer portfolio thereafter


500

750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

P M

illio

ns

Reached full funding? Time to switch to Safe Mode.

50%

00

50%

0

Corporate Bonds

Gilts

Expected Return:

Risk-free Rate +0.55%

Risk-free +1.89% Risk-free +0.55%

44


Lima!

Economy & Finance

The Sheldon Manifesto - Credit Suisse Pensions Conference