1. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Pension Risk Management Framework in Practice:
Dynamic De-risking Case Study
04 June 2013
1

2. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Contents
Introduction 3
Strategy Design 5
Implementation 10
Summary & Conclusion 16
2

3. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Background: Challenging Economic Landscape (May 2008-May 2013)
3
20-Year Nominal Gilt Yields 20-Year Breakeven Inflation
Credit Spreads Equity Markets
2.0
2.5
3.0
3.5
4.0
4.5
%
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
%
30
40
50
60
70
80
90
100
110
120
Rebasedat100asofMay2008
FTSE 100 MSCI World MSCI Emerging Markets
0
50
100
150
200
250
300
350
400
Bps

4. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Case Study: The Journey
Before: May 2008
• No clear funding objectives or risk budget in place
• No monitoring in place
• Strained relationship with the sponsor
• Quarterly Trustee meeting
• Over 70% allocation to equities, hedge ratios close to 0%
4
After: May 2013
• A clear Pension Risk Management Framework (PRMF)
• Daily monitoring of funding level; quarterly monitoring of PRMF
• Improved relationship between Trustees and Sponsor
• Flexible governance schedule
• 0% allocation to equities, fully hedged against interest rates and
inflation
60%
65%
70%
75%
80%
85%
90%
95%
Fundinglevel
Original Strategy
Actual Strategy
De-Risking Triggers
De-Risking Triggers
Re-Risking Trigger
De-Risking Trigger
89.2%
81.0%

5. Teach-in Pension Risk Management Framework in Practice 04 June 2013 5
Strategy Design

6. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Process – 7 Steps Framework
6
To be fully funded at the minimum level of risk
Mission Statement

7. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Sample Pension Risk Management Framework
Step 1: Setting clear goals and objectives
7
Putting clients in Control of the Decision-Making Process:
We believe that the most effective way to ensure that the investment strategy remains relevant over time is the Pension Risk Management
Framework – a clear, strategic and market-consistent approach for capturing market opportunities and identifying, monitoring and controlling risks.
2013 2014 2015 2016 2017 2018 2019 2020
GBPMillions
Liabilities Path Actual Liabilities Assets Path Actual Assets
Contributions and
asset returns
Liability Basis
Time Horizon

8. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Strategic Asset Allocation
15%
10%
13% 19%
33%
1% 1%
13%
11%
4%
1%
0%
10%
20%
30%
40%
50%
60%
70%
1y VaR95 - Risk Attribution - New vs. Old Strategy
Step 2-4: Design and implementation of an efficient investment strategy
8
Implementation via a single manager
Reduce unrewarded risk
Increase rewarded risk
Equity
Futures
Active Credit Mandate
Buy-and-Hold Index-Linked Gilts Portfolio
Closely Matching the Liabilities’ Profile
Money Market Instruments
PooledSegregated
Active Credit Market
Key benefits
• Low governance solution
• Efficient collateral management for derivative positions
• Fully integrated platform to deploy future strategies

9. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Step 7: Ongoing monitoring
Calls to Action: Dynamic Risk Management Framework
• Disciplined yet dynamic approach to manage risk
• Triggers linked to “required return”
• Pre-approved by the Scheme actuary
9
Daily funding level trigger monitoring
• De-risking triggers implemented on a non-recourse basis
• Re-risking trigger to initiate “discussion”
• Quarterly monitoring of Pension Risk Management
Framework
75%
80%
85%
90%
95%
100%
105%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Target flight plan
Dynamic
De-risking
Reach full
funding
faster
Funding Level Trigger Required Return Total Equity Exposure
As of 31 Dec 2010
87.0% 2.60% 50.0%
90.0% 2.30% 40.0%
92.0% 2.00% 30.0%
93.5% 1.70% 20.0%
95.5% 1.40% 10.0%
96.5% 1.10% 5.0%
97.0% 0.80% 0.0%

10. Teach-in Pension Risk Management Framework in Practice 04 June 2013 10
Implementation

11. 11
Portfolio Structure
An overview of the initial solution
Source: Schroders, Redington. For Illustration Purposes only.
Liability coverage obtained by corporate bonds and index linked
gilts not to scale
Liability
coverage
Investment
Liabilities Liabilities £92m
Equity Futures overlay
Corporate bonds Cash
Portfolio Structure
Corporate
Bonds
Index linked gilts
Index Linked
Gilts
Liability Risk Coverage
Corporate bonds and index-linked gilts
cover approximately half the liability risks
Corporate Bonds
Actively managed corporate bond funds
Index-linked Gilts
A bespoke portfolio, delivering stability,
certainty and low cost liability coverage
Minimal Cash holdings
Supporting the futures exposure, managed
to maximise liability coverage.
Bespoke equity exposures
A bespoke portfolio of equity futures that can be adjusted as the Plan’s requirements change

12. 12
Equity Futures Overlay
Maintaining a bespoke set of exposures
Equity region Future Allocation
UK FTSE100 25%-50%
Europe Eurostoxx50 16%-25%
US S&P500 16%-25%
Japan and Asia
Topix, Hang Seng, SPI
200
16%-25%
Total 100%
Example equity future exposures
Source: Schroders, Redington For Illustration purposes only
Maintaining growth exposure
To back the equity overlay the Plan can place:
– Index linked gilts for initial margin
– Cash for the rest (~20%)
– Profits can be passed into growth assets
– Too little cash => potential sale of bonds
assets
A bespoke exposure to equity futures
Schroders can deliver equity exposures specific
to the Plan’s requirements
Schroders will manage this process, (low
governance) whilst also giving the flexibility to
re-direct profits into other assets
Portfolio Structure
Equity Futures overlay
Corporate bonds CashIndex linked gilts

13. Schroder Matching Plus
Risk controlled and effective liability matching with pooled funds
Source: Schroders, for illustration only. The liabilities above are an example Scheme.
13
Portfolio structure Scheme’s liabilities
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
2011
2021
2031
2041
2051
2061
2071
LDI Interest rate coverage LDI Real Rate coverage
Fixed Pension Cashflows Index-Linked Pension Cashflows
Gilt-based coverage
 Launched range in 2007, added Gilt funds in 2011
 Robust and effective processes unchanged since
launch and throughout the financial crisis for:
– Liability coverage
– Counterparty risk management
– Cash management process
 Flexible use of Total Return Swaps and Repo to
generate coverage

14. Schroder Matching Plus
Minimum capital requirement and robust solvency management
Other assets
Dynamic Allocation
Key :
Liabilities
Pooled Liability
Matching Fund Portfolio
Other assets
LDI Coverage
Portfolio Structure
Portfolio Management
Cash Holdings
20%
Interest rates fall / Inflation rises
Interest rates rise / Inflation falls
LDI
Portfolio
Note: Percentages shown above for illustration only. Actual amounts depend on the structure of the hedge
Source: Schroders, for illustration only
14

15. Keeps the Trustees in control of the solution
Client service
Funding level based monitoring and reporting
Schroders are delegated to:
 Undertake daily monitoring of the funding
level, and
 Adjust asset allocation automatically
Allows Trustees to focus on:
 How well the solution is working
 Which areas need attention
15
Source: Schroders. For illustration only.
-50
-25
0
Start Accrual at
disc rate
Hedge
A vs L
Differential
perf
Unhedged
liabilities
Excess
return
A vs L
net inflow
End
£'m
1
3 4
5 6
Liabilities
2
Trigger Proxy Funding
Level
DGF Equity
Futures
EM
EquityManager A Manager B
Current <87.5% 13% 14% 24% 3%
1 87.5% 13% 14% 20% 3%
2 89.0% 13% 14% 11% 3%
3 90.5% 13% 14% 6% 0%
4 92.0% 11% 14% 0% 0%
5 94.0% 7% 7% 0% 0%
6 95.5% 0% 4% 0% 0%
7 96.0% 0% 0% 0% 0%

16. 16
Summary & Conclusion

17. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Integrity
clarity
simplicity
2008 2009 2010 2011
2012
and...
 Scheme close to a full buyout;
no robust monitoring framework
 Funding position significantly
deteriorated during financial
crisis
 10 year recovery plan put in
place
 Time for a change
 Search for new investment
consultant
 Redington selected after several
meetings to get comfortable with
“new concepts”
 New investment strategy
implemented
 Dynamic de-risking framework
in September 2010
 New governance arrangements
and efficient monitoring
process
 Four triggers hit by Feb-2011
and successfully captured
 Three “Pension Awards” for
best investment strategy
 Funding level deteriorated
again - governance
arrangements meant we could
act quickly
 Funding level c8% higher
compared to original strategy
 Risk (1y VaR95) reduced from
over 30% to under 10%
 Fully hedged against interest
rates and inflation

18. Teach-in Pension Risk Management Framework in Practice 04 June 2013
Integrity
clarity
simplicity
 A clear, focussed and disciplined approach to managing investments
 A good and complementary skill set on the Board
 A flexible and robust governance structure
 Collaboration between all parties
 Nothing stands still – we have to keep learning all the time
Keys to success

19. Teach-in Pension Risk Management Framework in Practice 04 June 2013 19
Questions?

20. Teach-in Pension Risk Management Framework in Practice 04 June 2013
13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
Neha Bhargava
Senior Vice President, Redington
020 3326 7156
neha.bhargava@redington.co.uk
20
Ian Maybury
Head of Solutions Management, Schroders
020 7658 2591
ian.maybury@schroders.co.uk
Rita Powell
Managing Director, Inside Pensions
08454 377321
rita.powell@insidepensions.com
Contacts
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21. Teach-in Pension Risk Management Framework in Practice 04 June 2013
13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
About Redington
21
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