Redington13-15 Mallow StreetLondon EC1Y 8RD

T. 020 7250 3331www.redington.co.uk

Inflation- Linked AssetsIntroduction

18 March 2011

08.30 - 09.00 Registration and Refreshments

09.00 - 09.10 Inflation Linked Assets – An Overview

Robert Gardner | Redington

Session 1: The Global Economy and the UK… Not all is Rosy

09.10 - 09.40 Andrew Roberts | Royal Bank of Scotland

Session 2: Inflation Benchmark: From RPI to CPI

09.40 - 10.20 Panel Discussion moderated by Dawid Konotey-Ahulu | Redington

Session 3: Trends and Opportunities in the Inflation Linked Markets

10.20 - 11.00 David Bennett | Redington

11.00 - 11.20 Coffee Break in Marble Hall

Session 4: Using Company Assets as an Inflation Hedge

11.20 - 11.40 Jeremy Lee | Redington

Session 5: Investment Opportunities in Social Housing

11.40 - 12.10 Robin Caven | Homes and Communities Agency (HCA)

Session 6: Sourcing Inflation

12.10 - 12.40 Panel Discussion moderated by Henrietta Podd | Evolution Securities

12.45 Buffet Lunch

Schedule

Previous Education Sessions

Inflation Linked AssetsRedington Education Seminars

3

Inflation Linked AssetsCreativity Exercise: Thinking Outside the Box

4

More than one solution...

Inflation Linked AssetsCreativity Exercise: Thinking Outside the Box

5

Overall

Objective

Risk

Targets

Aspirational

Targets

Scheme

Constraints

The pension risk management framework is a market consistent, transparent and actionable tool which is key for any trustee, sponsor or member

Objective Triggers Performance Indicators

What is the overall objective? To reach full funding on self-sufficiency basis By 2020 on a Swaps +75bps with £50m of contributions p/yr

How will we measure the objective? Using the required return on the Scheme’s assets Required Return of assets is Swaps +160bps

What are the primary risk targets? Required rate of Return at Risk (RRaR)Contributions at Risk (CaR)

RRaR should be no more than 300bpsCaR should be kept below £50m

What is the secondary risk target? Value at Risk (VaR) VaR should not exceed 20% of the liabilities

What are the primary aspirational targets? To increase interest rate and inflation hedge ratios Hedge ratios equal to funding level

What is the secondary aspirational target? Dynamic de-risking Based upon regular monitoring

What is the primary Scheme constraint? Liquidity Enough liquidity to pay pension payments

What is the secondary Scheme constraint? Collateral Requirements Enough eligible collateral to cover the 1yr derivative VaR95

Regular monitoring allows a call to action that enables trustees and sponsors to anticipate and recalibrate the investment strategy

Governance and Investment StrategyPension Risk Management Framework (PRMF)

“‘If a man knows not what harbour he seeks, any wind is the right wind’”Seneca

6

Flight Plan – Projected Cashflows

This is the expected path of the liabilities over the next 20 years.

Risk management, governance, markets and strategic asset allocation all play a part.

Governance and Investment StrategyPension Risk Management Framework (PRMF)

7

£10.0bn

£12.0bn

£14.0bn

£16.0bn

£18.0bn

£20.0bn

£22.0bn

£24.0bn

£26.0bn

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Example: Actual Asset and Liability Path (Actuarial Basis)

Projected Liabilities Projected Assets Actual Liabilties Actual Assets

The Flight Plan: Long-Term Objective Setting and Risk Management Framework

Inflation Linked AssetsThe Flight Plan

8

Growth

• Equities

• Property

• Absolute Return/ Hedge Funds

• Private Equity

• Commodities

Traditional “Growth” and “Matching” Assets

Matching

• Nominal Gilts

• Index-Linked Gilts

• Nominal Swaps

• Inflation Swaps

?

Credit• Nominal/ index-

linked corporate bonds

• Loans

• Structured Finance Assets

• Other debt products

C

?

Flightplan Consistent Assets

• Long term secured leases

• Social housing

• Commercial mortgages

• Ground rents

• Equity release mortgages

• Social and economic infrastructure

Pension Risk Management Framework (PRMF)“Flight Plan Consistent” Assets

9

FPCAs Matching Growth Credit

High Correlation to Liabilities /

Contractual Cashflows

Senior Secured

Long Duration / /

Excess Returns

(Il)Liquidity Premium /

Potential for Upside Gain

Pension Risk Management Framework (PRMF)“Flight Plan Consistent” Assets

10

Redington Publications

11

Spring Collection Highlights: LDI 2.0, Secured Leases, Ground Rents, Equity Release Mortgages, Social Housing, Insurance-Linked Securities, Infrastructure

Spring Collection 2011 Collection Coming Soon: Enhanced Matching Assets, Socially Responsible Investing and Long-Term Growth Assets

Pension Risk Management Framework (PRMF)“Flight Plan Consistent” Assets

11

SECURED LEASES

• Take advantage of attractive yields on long-term secured property leases

• Yields may be in excess of yields on corporate bonds issued by same borrower

• Long-dated (up to 25 years) index-linked cashflows - helps hedge inflation risks

SOCIAL HOUSING• Low-cost rental housing provided for disadvantaged people in need of housing

• Generally provided by local councils and housing associations

• Offers long-dated, inflation-linked cashflows from secured borrowers (i.e. housing associations) with quasi-government guarantee

INFRASTRUCTURE• Investing in public sector projects through Private Finance Initiatives (PFIs)

• PFIs enable government to fund new infrastructure projects

• Long-term, potentially inflation-linked revenue streams

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Example Flight Plan Consistent Assets

Pension Risk Management Framework (PRMF)“Flight Plan Consistent” Assets

Contacts

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Direct Line: +44 (0) 20 7250 3416

Telephone: +44 (0) 20 7250 3331

Redington

13-15 Mallow Street

London EC1Y 8RD

Robert GardnerFounder & Co-CEO

robert.gardner@redington.co.uk

www.redington.co.uk

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