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

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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

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750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

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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

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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

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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

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750

1000

2013 2015 2017 2019 2021 2023 2025 2027 2029

GB

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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

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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

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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

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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

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

Missing

£70m

32

GB

P M

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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

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Use ALL the Levers

A Bit More Time…A bit more Contribution…

Lever 1 Lever 2

20

2.5

GB

P M

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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

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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

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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

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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!