the sheldon manifesto - credit suisse pensions conference
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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
Private & Confidential Credit Suisse Pensions Conference April 2014 2
Sheldon is a very cool guy. He’s a helicopter pilot.
Private & Confidential Credit Suisse Pensions Conference April 2014 2
Flying a helicopter is very hard. So many levers…
The Cyclic tilts the aircraft omni-directionally
Private & Confidential Credit Suisse Pensions Conference April 2014 2
The Pedals. For changing direction
Private & Confidential Credit Suisse Pensions Conference April 2014 2
The Collective. For controlling take-off and landing
The Throttle. More power / less power
Private & Confidential Credit Suisse Pensions Conference April 2014 2
It’s a delicate, difficult balance
Private & Confidential Credit Suisse Pensions Conference April 2014 2
Verb: To run a pension scheme:
Defn: A process akin to flying a helicopter
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
The Pension Scheme
The Asset Allocation
Expected Return: Risk-free +1.72%
Equities
Corporate Bonds
Gilts
30%
50%
20%
5
Private & Confidential Credit Suisse Pensions Conference April 2014
The Pension Scheme’s Risk
5
Private & Confidential Credit Suisse Pensions Conference April 2014
Using the Levers …
13
Private & Confidential Credit Suisse Pensions Conference April 2014
It’s a balance …
14
Private & Confidential Credit Suisse Pensions Conference April 2014
Lever 1. Changing the Fuel Mixture
Equities
Corporate Bonds
Gilts
Diversifed Growth Funds
Hedge Funds
30%
50%
20%13%
33%
15%
15%
25%
15
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
500
750
1000
1250
2013 2015 2017 2019 2021 2023 2025 2027 2029
GB
P M
illio
ns
If the Risk materialises
18
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Required Rate of Return
2.34%
20
GB
P M
illio
ns
Annual Sponsor Contributions
Private & Confidential Credit Suisse Pensions Conference April 2014
1.72%
Required Rate of Return
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…
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Required Rate of Return
24
Private & Confidential Credit Suisse Pensions Conference April 2014
Do not rely heavily on Lever 3
25
Private & Confidential Credit Suisse Pensions Conference April 2014
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”
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
Bad Weather…
28
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
…may result in insufficient Liquid Assets (Collateral)…
Equities
Corporate Bonds
Gilts
250
210
LiquidityRequired
LiquidityAvailable
30%
50%
20%
30
Private & Confidential Credit Suisse Pensions Conference April 2014
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!
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
The Sheldon Manifesto
33
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
Increase Expected Returns
Equities
Corporate Bonds
Gilts
Diversifed Growth Funds
Hedge Funds
Lever 4
30%
50%
20%30%
40%
10%
5%
15%
37
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
Do Some Hedging
Lever 5
74% 74%
Interest ratehedge ratio
Inflation hedgeratio
74% 74%199 210
LiquidityRequired
LiquidityAvailable
199
40
Private & Confidential Credit Suisse Pensions Conference April 2014
199 210
LiquidityRequired
LiquidityAvailable
Stay within the Pension Scheme’s Liquidity Constraints
Equities
Corporate Bonds
Gilts
Diversifed Growth Funds
Hedge Funds
30%
40%
10%
5%
15%
Lever 5
199 210
41
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014
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
Private & Confidential Credit Suisse Pensions Conference April 2014 45
Lima!
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