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Pensions Management Institute – Trustee Seminar 26 June 2013
Looking after Members’ Interests
PMI Trustee Seminar
America Square Conference Centre, London
1
Redington
13-15 Mallow Street
London EC1Y 8RD
T. 020 7250 3331
www.redington.co.uk
http://twitter.com/redingtontweets
Pensions Management Institute – Trustee Seminar 26 June 2013 2
Non-cash funding
Statement by The Pensions Regulator (November 2010)
The regulator’s view remains that – generally – the best form of
support for a scheme is direct and unconditional cash
contributions. However, there has been an increase in the use of
mechanisms that do not involve only direct and unconditional
cash payments from scheme employers to fund schemes. These
mechanisms can strengthen the employer covenant, or support
to the scheme, by providing the scheme with an enforceable
legal arrangement which reduces risks to members.
Pensions Management Institute – Trustee Seminar 26 June 2013 3
Contingent assets
• Guarantees
• Security
• Escrow
• Letters of Credit
Business assets
• Direct transfer
Asset-backed
• Priority of cash
flows
• Security over assets
Cash
Alternatives to cash
Pensions Management Institute – Trustee Seminar 26 June 2013
20122008200620042002
Sponsors fear trapped surplus
Smarter use of balance sheet
TPR/PPF brings
focus on
contingent
assets
Letters of credit
(National Grid)
Corporate
guarantee
Sponsor affordability
tested
Escrow
(Marconi) Banks
develop
products
LP/trust structures
(M&S,
Sainsbury’s,
Diageo)
Super-security
(KKR/Boots)
Leveraged
transactions
Accelerated cash
(Somerfield)
Business assets
(John Lewis, HSBC)
Market drivers
Popular solutions
4
Non-cash funding – a brief history
2010
2013 TPF funding
statement and
emphasis on flexibility
(?)
Pensions Management Institute – Trustee Seminar 26 June 2013
Case study: Non-cash contributions can result in smarter use of balance sheet
5
Simplified bank balance sheet Pension scheme balance sheet
Securities
Loans
Asset
contribution
Equity
Deposits and
other funding
Pension
deficit
Assets Liabilities
Investments
Asset
contribution
Pensioners
Deferreds
Actives
Assets Liabilities
Portfolio of assets is contributed to pension scheme. This
reduces both the asset and liability sides of the bank’s
balance sheet, while increasing pension assets and
reducing pension deficit.
Sponsor is regulated UK banking institution
Pensions Management Institute – Trustee Seminar 26 June 2013 6
 Reduces pension deficit and risk
 Reduces bank balance sheet leverage
and funding requirements
 Reduces capital consumption on assets
contributed (RWAs)
 Reduces capital charges for pensions
risk
 Improves bank liquidity position
 Improves P&L as reported under IAS19
by reducing interest on the deficit
Benefits to the bank sponsor
Benefits to the pension scheme
 Improves funding position of the
scheme
 Strengthens sponsor covenant
 Provides access to attractive assets,
often consistent with the liabilities
 Reduces risk of scheme
Challenges to overcome
 Valuation differences (eg, pension
scheme MTMs its investments whereas
bank may value an asset at accrual
plus impairments)
 Structure and complexity of the
exposure
 Ongoing portfolio management
requirements
 Operational and administrative
requirements
 Illiquidity considerations
 Due diligence requirements of pension
scheme
 “Headline” risk and managing the
message
Case study: benefits and challenges
Pensions Management Institute – Trustee Seminar 26 June 2013
13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
Contacts
7
Disclaimer text
The information herein was obtained from various
sources. We do not guarantee every aspect of its
accuracy. The information is for your private information
and is for discussion purposes only. A variety of market
factors and assumptions may affect this analysis, and
this analysis does not reflect all possible loss scenarios.
There is no certainty that the parameters and
assumptions used in this analysis can be duplicated with
actual trades. Any historical exchange rates, interest
rates or other reference rates or prices which appear
above are not necessarily indicative of future exchange
rates, interest rates, or other reference rates or prices.
Neither the information, recommendations or opinions
expressed herein constitutes an offer to buy or sell any
securities, futures, options, or investment products on
your behalf. Unless otherwise stated, any pricing
information in this document is indicative only, is subject
to change and is not an offer to transact. Where
relevant, the price quoted is exclusive of tax and delivery
costs. Any reference to the terms of executed
transactions should be treated as preliminary and
subject to further due diligence.
This presentation may not be copied, modified or
provided by you , the Recipient, to any other party
without Redington Limited’s prior written permission. It
may also not be disclosed by the Recipient to any other
party without Redington Limited’s prior written
permission except as may be required by law. “7 Steps
to Full Funding” is a trade mark of Redington Limited.
Redington Limited is an investment consultant company
regulated by the Financial Conduct Authority. The
company does not advise on all implications of the
transactions described herein. This information is for
discussion purposes and prior to undertaking any trade,
you should also discuss with your professional, tax,
accounting and / or other relevant advisers how such
particular trade(s) affect you. All analysis (whether in
respect of tax, accounting, law or of any other nature),
should be treated as illustrative only and not relied upon
as accurate.
Registered Office: 13-15 Mallow Street, London EC1Y
8RD. Redington Limited (reg no 6660006) is registered in
England and Wales.
©Redington Limited 2013. All rights reserved.
John Towner
Director
Direct Line: 020 3326 7143
john.towner@redington.co.uk

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Looking After Members’ Interests

  • 1. Pensions Management Institute – Trustee Seminar 26 June 2013 Looking after Members’ Interests PMI Trustee Seminar America Square Conference Centre, London 1 Redington 13-15 Mallow Street London EC1Y 8RD T. 020 7250 3331 www.redington.co.uk http://twitter.com/redingtontweets
  • 2. Pensions Management Institute – Trustee Seminar 26 June 2013 2 Non-cash funding Statement by The Pensions Regulator (November 2010) The regulator’s view remains that – generally – the best form of support for a scheme is direct and unconditional cash contributions. However, there has been an increase in the use of mechanisms that do not involve only direct and unconditional cash payments from scheme employers to fund schemes. These mechanisms can strengthen the employer covenant, or support to the scheme, by providing the scheme with an enforceable legal arrangement which reduces risks to members.
  • 3. Pensions Management Institute – Trustee Seminar 26 June 2013 3 Contingent assets • Guarantees • Security • Escrow • Letters of Credit Business assets • Direct transfer Asset-backed • Priority of cash flows • Security over assets Cash Alternatives to cash
  • 4. Pensions Management Institute – Trustee Seminar 26 June 2013 20122008200620042002 Sponsors fear trapped surplus Smarter use of balance sheet TPR/PPF brings focus on contingent assets Letters of credit (National Grid) Corporate guarantee Sponsor affordability tested Escrow (Marconi) Banks develop products LP/trust structures (M&S, Sainsbury’s, Diageo) Super-security (KKR/Boots) Leveraged transactions Accelerated cash (Somerfield) Business assets (John Lewis, HSBC) Market drivers Popular solutions 4 Non-cash funding – a brief history 2010 2013 TPF funding statement and emphasis on flexibility (?)
  • 5. Pensions Management Institute – Trustee Seminar 26 June 2013 Case study: Non-cash contributions can result in smarter use of balance sheet 5 Simplified bank balance sheet Pension scheme balance sheet Securities Loans Asset contribution Equity Deposits and other funding Pension deficit Assets Liabilities Investments Asset contribution Pensioners Deferreds Actives Assets Liabilities Portfolio of assets is contributed to pension scheme. This reduces both the asset and liability sides of the bank’s balance sheet, while increasing pension assets and reducing pension deficit. Sponsor is regulated UK banking institution
  • 6. Pensions Management Institute – Trustee Seminar 26 June 2013 6  Reduces pension deficit and risk  Reduces bank balance sheet leverage and funding requirements  Reduces capital consumption on assets contributed (RWAs)  Reduces capital charges for pensions risk  Improves bank liquidity position  Improves P&L as reported under IAS19 by reducing interest on the deficit Benefits to the bank sponsor Benefits to the pension scheme  Improves funding position of the scheme  Strengthens sponsor covenant  Provides access to attractive assets, often consistent with the liabilities  Reduces risk of scheme Challenges to overcome  Valuation differences (eg, pension scheme MTMs its investments whereas bank may value an asset at accrual plus impairments)  Structure and complexity of the exposure  Ongoing portfolio management requirements  Operational and administrative requirements  Illiquidity considerations  Due diligence requirements of pension scheme  “Headline” risk and managing the message Case study: benefits and challenges
  • 7. Pensions Management Institute – Trustee Seminar 26 June 2013 13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk Contacts 7 Disclaimer text The information herein was obtained from various sources. We do not guarantee every aspect of its accuracy. The information is for your private information and is for discussion purposes only. A variety of market factors and assumptions may affect this analysis, and this analysis does not reflect all possible loss scenarios. There is no certainty that the parameters and assumptions used in this analysis can be duplicated with actual trades. Any historical exchange rates, interest rates or other reference rates or prices which appear above are not necessarily indicative of future exchange rates, interest rates, or other reference rates or prices. Neither the information, recommendations or opinions expressed herein constitutes an offer to buy or sell any securities, futures, options, or investment products on your behalf. Unless otherwise stated, any pricing information in this document is indicative only, is subject to change and is not an offer to transact. Where relevant, the price quoted is exclusive of tax and delivery costs. Any reference to the terms of executed transactions should be treated as preliminary and subject to further due diligence. This presentation may not be copied, modified or provided by you , the Recipient, to any other party without Redington Limited’s prior written permission. It may also not be disclosed by the Recipient to any other party without Redington Limited’s prior written permission except as may be required by law. “7 Steps to Full Funding” is a trade mark of Redington Limited. Redington Limited is an investment consultant company regulated by the Financial Conduct Authority. The company does not advise on all implications of the transactions described herein. This information is for discussion purposes and prior to undertaking any trade, you should also discuss with your professional, tax, accounting and / or other relevant advisers how such particular trade(s) affect you. All analysis (whether in respect of tax, accounting, law or of any other nature), should be treated as illustrative only and not relied upon as accurate. Registered Office: 13-15 Mallow Street, London EC1Y 8RD. Redington Limited (reg no 6660006) is registered in England and Wales. ©Redington Limited 2013. All rights reserved. John Towner Director Direct Line: 020 3326 7143 john.towner@redington.co.uk