View
214
Download
0
Category
Preview:
Citation preview
KICK-STARTING YOUR RISK MANAGEMENTPROGRAMMELDI WITHOUT THE TEARS
10 JULY 2014
Alan BakerHelen HopeJohn Finn
MERCER 2014 DB RISK WEBCAST SERIES
MERCER WEBCAST
Date Topic
6 March Risk transfer solutions – The beginning of the end …or the end of the beginning?
13 March Pension plan data – Why improving it benefits everyone
1 April Member options – More choice for members, less risk for schemes and sponsors
1 May Integrated solutions – Case studies in new approaches
15 May Investing for income – Using benefit cash flows in setting investment strategy
3 June Getting off the rollercoaster – How are pension schemes managing the volatility of their journey?
10 July Kick-starting your risk management programme – LDI without the tears
MERCER WEBCAST
Alan Baker John FinnHelen Hope
MERCER WEBCAST
• LDI is used to reduce the uncertainty of the present value of your liabilities– You know what pensions have been promised, however their present
value changes over time
• The key drivers of this present value are changes in bond yields andinflation
3
Bondyields
Liabilitypresentvalue
Inflationassumption
Liabilitypresentvalue
AND VICE VERSA!
MERCER WEBCAST 4
0% Hedged
LiabilitiesAssets
Deficit Liabilities
Assets
Deficit
Rates fall
100% Hedged
LiabilitiesAssets
Deficit LiabilitiesAssetsRates fall
Deficit
MERCER WEBCAST 5
Example Scheme
MERCER 6
Increase in interest ratesIncrease in interest rates
MERCER WEBCAST 7
How “much” tohedge
“When” to hedge
“What” tohedge with
Strategic objective
Need to consider the currentmarket environment and
how to capture opportunities
There are a wide range ofpotential hedging assets –
look to buy the “cheapest” toreduce the cost of hedgingand reduce risk relative to
the liabilities
MERCER WEBCAST 8
Yiel
d
A. Current strategy – current coverage
C. Agree how to achieve long-term target
Time
Pres
entV
alue
Time
Pres
entV
alue
Current coverageTime
Pres
entV
alue
Time
PAST FUTURE
Yield Trigger 1
Yield Trigger 2
Yield Trigger 3
B. Set long-term hedging target
Total liabilities
D. Extend the hedge towards long-term target
Fair value
Currently c.30%
Agree long-term targethedge ratio
MERCER 9
CorporateBonds
Gilt Repos Total ReturnSwaps
Fundedinstruments“Physicals”
Unfundedinstruments
“Derivatives”
Index-LinkedGilts
Fixed-InterestGilts
InterestRate/Inflation
Swaps
MERCER WEBCAST
Counterparty
• Default of counterparty bank may lead to losses
• Significantly mitigated through collateralisation
• Tested following Lehman default
Collateral
• To manage counterparty exposure collateral most paid/received to provide someadditional security
• Need to ensure collateral is adequate quality, paid/received regularly, clearlydocumented
Funding• Pension schemes obligation to pay a cash (LIBOR) rate with interest rate swaps
• LIBOR cannot be generated without taking risk
Liquidity• Liquidity can be low at times (particularly for inflation swaps) and transaction costs
have increased in both physical and synthetic markets
Leverage• Profits or losses will vary with changes in interest rates and inflation
• May require the transferring of assets from another portfolio to the hedging mandate sothat collateral can be posted by the pension scheme to the counterparty banks
10
MERCER 11
MERCER WEBCAST 12
Real
Nominal
2022 - 2027 Maturity
c30yr Leveraged Duration
2032 – 2040 Maturity
c45yr Leveraged Duration
2050 - 2062 Maturity
c60yr Leveraged Duration
2052 - 2060 Maturity
c45yr Leveraged Duration
2040 Maturity
c45yr Leveraged Duration
2030 Maturity
c40yr Leveraged Duration
Short Medium Long
Short Medium Long
Credit
UK Credit
Better Credit investing –excl. Sub-ord & maximumsector exposures
c7.5yr duration
Global Buy & Maintain Credit
Better Credit Investing withfocus on lower turnover
c6.9yr duration
UK Global
2052 - 2068 Maturity
c45yr Duration
Over 5yr Index Linked Gilts
c21yr Duration
Longest Index
2060 - 2068 Maturity
c22yr Duration
Over 15yr Gilts
c16yr Duration
Note: Dashed boxes indicate leveraged funds, which will currently gain gilt-based exposure
Longest Index
MERCER WEBCAST
• For larger schemes with unique requirements, more bespoke de-risking and LDIstrategies can be implemented
• Example:– Move gradually from equities to a portfolio made up of corporate bonds and
LDI assets by 31 December 2016;– Interest rate & inflation coverage (LDI) increasing gradually over the journey
– Tailored solution to help implement and meet these requirements
2016 TargetLiability Hedging journey
13
MERCER WEBCAST 14
Source: Mercer 2014 European Asset Allocation Survey
MERCER WEBCAST
QUESTIONSPlease type your questions in the Q&A section of the toolbarand we will do our best to answer as many questions as wehave time for.
To submit a question while in full screen mode, use the Q&Abutton, on the floating panel, on the top of your screen.
CLICK HERE TO ASK A QUESTIONTO “ALL PANELISTS”
FEEDBACKPlease take the time to fill out thefeedback form at the end of this webcastso we can continue to improve. Thefeedback form will pop up in a newwindow when the session ends.
www.mercer.com/webcastsView past recordings and sign up forupcoming webcasts
Alan BakerPartner
alan.baker@mercer.com
John FinnPrincipal
john.finn@mercer.com
Helen HopePrincipal
helen,hope@mercer.com
MERCER WEBCAST
Reminder of webcasts in series
Date Topic
6 March Risk transfer solutions – The beginning of the end …or the end of the beginning?
13 March Pension plan data – Why improving it benefits everyone
1 April Member options – More choice for members, less risk for schemes and sponsors
1 May Integrated solutions – Case studies in new approaches
15 May Investing for income – Using benefit cash flows in setting investment strategy
3 June Getting off the rollercoaster – How are pension schemes managing the volatility of their journey?
10 July Kick-starting your risk management programme – LDI without the tears
MERCER WEBCAST
And finally… Meet our DB Risk Experts
www.uk.mercer.com/db-risk
18
© 2014 Mercer LLC. All rights reserved
• This contains confidential and proprietary information of Mercer and is intended for the exclusive use of the parties towhom it was provided by Mercer. Its content may not be modified, sold or otherwise provided, in whole or in part, to anyother person or entity, without Mercer’s written permission.
• The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to changewithout notice. They are not intended to convey any guarantees as to the future performance of the investment products,asset classes or capital markets discussed. Past performance does not guarantee future results.
• Information contained herein has been obtained from a range of third party sources. While the information is believed to bereliable, Mercer has not sought to verify it. As such, Mercer makes no representations or warranties as to the accuracy ofthe information presented and takes no responsibility or liability (including for indirect, consequential or incidentaldamages), for any error, omission or inaccuracy in the data supplied by any third party.
• This does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financialinstruments or products.
Important notices
Mercer Limited is authorised and regulated by the Financial Conduct Authority
Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU
Recommended