Pension fund management…

…with a difference

An introduction to Cardano

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Welcome to Cardano Our multi-award winning approach – The Cardano Way – has had quite an impact in the last seven years. We hope this overview will give you an idea of how we’ve helped our clients achieve steady improvements in their funding ratios in a robust way.

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An introduction to Cardano

An uncomfortable reality Old-style pension fund management isn’t working. As a result, most pension funds are badly underfunded.

Pension fund trustees bear a significant responsibility and have a difficult balancing act to maintain. They have to protect the interests and future financial security of their beneficiaries. They also have to be mindful of the cost impact on the sponsor, especially at a time when demands on many sponsors’ businesses have never been so great. Yet there is an uncomfortable reality in our industry. The old way of doing things hasn’t delivered. The huge number of underfunded pension funds makes this clear. Even so, the natural tendency is to hope that the good times will return and to take more risk now, so that if the upturn comes, things will be back on track. Yet the truth is, if it doesn’t, things will only get worse. Funding ratios will fall and it will be even harder to recover in the future, some funds may never do so. The temptation is to continue with the old approach, because it’s what everyone else is doing – despite all the historical evidence showing that it doesn’t work.

An introduction to Cardano

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But it doesn’t have to be this way. There is an alternative…

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An introduction to Cardano

Investing for pension schemes can be different A different approach to managing investments to meet pension liabilities. Delivering steady and planned performance – reducing the potential impact of nasty shocks and surprises.

Our approach to helping pension funds meet their liabilities is founded on four fundamental observations:

1. Don’t take more risk than you can afford Historically, many pension funds have overemphasised maximising return, without giving enough consideration to the risks they are taking. In particular, whether they could recover from a severe shock. The recent financial crisis has shown that even large, sophisticated institutions can fail by taking more risk than they can afford.

2. Predictability and control of assets relative to the liabilities are crucial Steady growth delivers better performance. Modest incremental improvement in the funding ratio produces dramatic results over time. If steady growth in the assets relative to the liabilities is achieved, pension schemes can stop thinking they have to take large investment risks.

An introduction to Cardano

3. Avoiding large deficits is crucial

4. Always plan for the unexpected

Large deficits place unpredicted and unwelcome pressures on sponsor companies, usually at a time when they need it least. However, a large deficit also places a lot of pressure on the need for the assets to perform well in the future. Yet as pension funds mature and enter their payout phase, the assets must deliver a steady, inflation-linked income to the members. The combination of a maturing pension fund and large deficit leads to impossible demands on the assets to produce both high returns and stable but growing income.

It’s a well-known human trait that we tend to be over-optimistic and choose to ignore information that could be painful to acknowledge. In the pension scheme context, this has led to portfolios that are very biased toward a positive economic outcome, a single big ‘bet’. No one knows for sure how the economy will perform. So building a portfolio that is robust to different economic circumstances means that you are much better placed to achieve what is required, whatever the future holds.

These are some of the insights we’ve used to develop our approach to managing assets and liabilities. It’s an approach that takes advantage of steady growth in a way that meets the needs of beneficiaries, trustees and sponsors.

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An introduction to Cardano

The Cardano approach Planned and controlled performance. Greater certainty that you can achieve your goals by focussing on stability of results.

Cardano’s philosophy is different from the rest of the industry. We think about investments – and their risks. Importantly, we won’t allow the pension scheme to reach a position from which it can’t recover. We start by taking a holistic view of each client’s position, working collaboratively to fully understand and assess current and future liabilities. This helps us set a clear target for reaching a 100% funding ratio. Then we analyse and, where necessary, redeploy portfolios.

Our aim is to make sure that the portfolio is not reliant on any one particular economic outcome. We don’t know for certain whether the economy will be strong or weak, or how financial markets will perform. So we make sure a portfolio holds a wide range of different assets, some of which will perform well in a rebounding economy, some in a return to recession or others in a period of high inflation. This way, whatever happens in the world, we can be confident the results will be within an acceptable range. As well as this, we use wellestablished tools to reduce unwanted exposure to, for example, changes in inflation and/or interest rates.

We’re constantly analysing the market and use an agile approach to remove unwanted risks and take advantage of interesting opportunities. We work with a carefully selected range of investment managers (who we research thoroughly and get to know in person) to implement our clients’ investment needs. The result is planned and controlled performance, reduced uncertainty and protection against catastrophic loss. Above all, we deliver steady growth designed to reach goals in line with liabilities.

An introduction to Cardano

The Cardano Way in practice This chart shows the performance of our longest established funds relative to the average pension scheme.* The figures are net of all Cardano’s and underlying managers’ fees. This performance, unique in the industry, is based on our philosophy of planned and controlled performance.

Change in funding ratio 20% 10% 0% -10% -20%

Cardano

20 15

20 14

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20 12

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20 10

20 0

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-30%

Average pension scheme

Source: Cardano. 30/06/2008 to 30/09/2015. Performance shown is for our clients following our fiduciary management approach with a full liability benchmark and net of all Cardano’s and underlying managers’ fees. * Due to the lack of published information, average pension scheme performance is estimated based on information contained in the Purple Book published by The Pensions Regulator and the Pensions Protected Fund using market index returns and implied hedge ratios based on the bond asset allocation only. No allowance for deficit repair contributions have been made. The liability benchmarks in the calculation of relative returns are taken from the composite of Cardano clients. Past investment performance is not a reliable indicator of future results, no guarantees of future performance are provided.

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An introduction to Cardano

Working in partnership The way we work with our clients is structured around their needs, not ours. That’s why we offer different ways of using our services.

We work in a tailored way to suit you, adapting to your needs, governance structure and appetite for day-to-day involvement. You choose how you want to work with us, which might be anywhere along the spectrum, from advisory at one end to full fiduciary management at the other end.

An introduction to Cardano

1. Fiduciary This allows you to delegate some or all of the day-to-day management of the investments. Under this approach the trustees retain control of the overall strategic direction and goals and we manage the portfolio relative to the scheme’s liabilities. We take away the hassle of managing all the subsidiary relationships, whilst making sure that we support our clients and their other advisers at all times. “ Cardano’s approach and team made them the obvious choice as our fiduciary manager. It was clear that the traditional advisory approach wasn’t working and it was taking us too long to decide and implement ideas. Our sponsor is also delighted with the decision we made.” Chair of the Investment Committee, £400m pension scheme

2. Advisory We also provide advisory services to clients. We don’t just bring ‘options’ to the table – we recognise that you want insights and recommendations. All our advice is focussed on improving funding ratios in a stable way – at all times making sure that we fit with your preferred governance structure. “ Their approach is different, but it works. Their advice is very concise, clear and tailored to the way we make decisions. They have delivered on everything they promised.” Deputy Chair of Trustees, £2bn pension scheme

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Of course these are only a couple of options and the way we work is less black and white – different clients want differing degrees of service. Whatever your requirements, we’ll be flexible and tailor our services to suit them. However we work together, our underlying philosophy and approach to managing risk and delivering steady growth in funding ratios are always the same.

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An introduction to Cardano

About Cardano Founded in 2000, there are over 150 of us at Cardano. Experts in the areas of risk management, investment management, research, actuarial and investment advisory.

Our roots are in understanding the causes and impact of risk, and how this can be used to significantly improve financial performance and resilience. We believe that financial institutions, such as pension funds, are most likely to be able to meet the needs of those that depend on them, by adopting a robust risk management approach. For us, this means taking acceptable risks with a view to generating reasonable returns, but avoiding exposures that could cause the institution to fail.

Risk management also extends to thinking about overall pension scheme design, helping to achieve better risk-sharing between stakeholders and across both current and future generations. As an organisation we currently work on behalf of over 1,300,000 pension fund beneficiaries with total assets of over £120bn and for other financial institutions with assets totalling around £20bn. Recognised by the industry, we’ve won numerous awards for both our fiduciary management and advisory services.

An introduction to Cardano

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About our wider work Expanding our unique approach to other financial institutions. Supporting entrepreneurs in developing markets.

Sharing our vision We have a broader aim. We want to educate the wider market about the importance of financial risk and how, when well-managed, it can benefit society as a whole. That’s why we believe in sharing our views on risk and its many causes. We believe that many human behavioural biases present an obstacle to sound financial decision‑making. Widely acknowledged traits, such as overconfidence, or the tendency to ignore evidence that leads to uncomfortable conclusions, often lead institutions to take too much risk and so drift towards fragility. Through the right combination of education, risk management and an effective link between strategy and implementation, we believe that financial institutions can become resilient to financial shocks. The compound effect of doing this is greater stability in the overall financial system and for society as a whole.

Helping developing markets We also apply our philosophy to our work in developing markets through Cardano Development, our not-for-profit foundation. Within developing markets we use our skills to help promote stable and sustainable economic development, bringing financial risk management innovations to frontier markets. The foundation’s focus is on creating new and practical solutions to mitigate extreme risks for end users in developing countries, such as currency risk, catastrophic risk or commodity price risks. Working in partnership with some of the world’s leading financial organisations, our approach has already supported over 1,500,000 small business entrepreneurs in developing markets, using the same philosophy and principles.

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An introduction to Cardano

If it’s time for a fresh perspective on the world of pension fund management...

An introduction to Cardano

...talk to us and get a different point of view

Visit www.cardano.com or contact Richard Dowell (Head of Clients, Cardano UK) Phone: +44 (0)20 3170 5926 Email: [email protected]

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Awards Fiduciary/Delegated Investment Provider of the Year 2014, UK Pensions Awards Fiduciary Management Firm of the Year 2014, Pensions Age Awards Fiduciary Management Firm of the Year 2015, 2014, European Pensions Fiduciary Management Firm of the Year 2015, 2014, 2013, aiCIO European Innovation Awards Best Fiduciary Management Provider 2014, Most Innovative Pensions Consultant 2012, Engaged Investor Awards Fiduciary Manager of the Year 2015, 2014, 2013, 2012, 2011, 2010, 2009, Financial News Awards Investment Consultant of the Year 2012, Pension and Investment Provider Awards

This document is intended for professional clients only (as defined in the Conduct of Business Rules issued by the Financial Conduct Authority) and Cardano Risk Management Limited (“Cardano”) only provides services to professional clients. The information contained in this document is for general purposes only; does not constitute investment, legal or tax advice and reflects, as of the date of issue, the views of Cardano and sources believed by Cardano to be reliable. The views expressed in this document, or any factual information contained in this document, may change at any time subsequent to the date of its issue. No representation or warranty is made concerning the accuracy or completeness of any data contained in this document and no liability is accepted to any person for any information contained in this document.

In addition, there can be no guarantee that any projection, forecast or opinion in this document will be realised. References to specific securities are presented solely in the context of industry analysis and are not to be considered recommendations by Cardano. Cardano and its affiliates may have positions in, and may effect transactions in the markets, industry sectors and companies described in this document. None of the contents of this document can be reproduced in any form without the express permission of Cardano. Past investment performance is not a reliable indicator of future results, no guarantees of future performance are provided. Cardano is registered in England and Wales with branch no 09050863 and with its registered office at 9th Floor, 6 Bevis Marks, London EC3A 7BA. © Cardano 2015