Dawid Konotey-Ahulu

Articles from Dawid Konotey-Ahulu

  • Defined Benefit Pension Schemes - Understanding the Risks

    This is an article I wrote in 2003. Thirteen years later, the debate is still raging! Original article can be found here. There can be little doubt that the defined benefit pension scheme business is going through a bad time, with UK and Irish pension schemes still underperforming. To address this problem, going forward, pension schemes and their sponsors should establish a platform to understand, monitor and control their short-term exposure to both the assets and the liabilities Did they see it coming? - For the most part, no. While both pension schemes and insurance companies ... ..read more
  • Dear Market Diary...

    28 June 2005 – Market Diary Avid readers of this column will know that ten days ago, with the real yield at a June ‘05 high of 1.56%, we drew a trend line and tentatively predicted that those levels wouldn’t last. It’s not that the market believes the 2% 2035 index linked gilt is fundamentally too cheap at 120.03; this asset’s price is driven by supply and demand. The five storey early 1800s Victorian home in Belgravia costs £15m, not because the price of bricks has gone up in Central London, but because the buyers have decided Eaton Squa ... ..read more
  • “PENSION PLAN LANDS ON THE HUDSON RIVER”: A DECADE LATER…

    Exactly ten years ago today, on a cold, grey, autumnal day much like today, a small team of financial engineers pulled off an audacious transaction that changed the art of what, up until then, had been considered possible in the world of risk management for pension plans. I was one of those involved, and this is the story of how it happened.   By 2003, pension funds had begun to feel the effects of an esoteric accounting rule change. Introduced in 2001, FRS17 obliged corporations to recognise on their balance sheets, the impact of wildly volatile deficits in their defined benefit p ... ..read more
  • THE 5 GLOBAL CHALLENGES

    Pensions is one of the five global challenges we all face; it’s up to us to solve it. The first challenge facing the planet is global security. We are spending trillions of dollars trying to keep the bad guys at bay. Vast resources and effort are being deployed to keep ourselves safe. The second challenge is how to live sustainably; in other words, how to minimise and control the world’s ever-growing carbon footprint. Third, we face a global health epidemic. The four non-communicable diseases – Alzheimer’s, cancer, coronary heart disease and diabetes – are ... ..read more
  • PENSIONS POLICY MAKERS - BEWARE THE ROMANIAN HORSES

      I owe my buddy, Paul McGill, an apology. Fifteen years ago, we disagreed over whether or not it was acceptable for Tesco and the other supermarket big boys to muscle out small high street shops that had sold high-quality produce for several generations. I reasoned that whilst it was undeniably unfortunate for the small butcher and baker, who simply could not compete with the hyper-stores, that was simply brutal commercial reality. Tesco and Co were able to offer the consumer greater choice and better quality at lower cost through their massive purchasing power. What was ... ..read more
  • RPI/CPI: THE SOAP CONTINUES

      More drama from the Office of National Statistics (ONS) today, although it’s possible you missed it. Avid followers of these things will know that pension plans have, for the last couple of years, been in a sort of limbo as regards the two leading (but crucially different) measures of inflation: Retail Price Indexation (RPI) and Consumer Price Indexation (CPI). Back in 2010, the government announced that it had had enough of RPI generally, and preferred CPI. Because the government is the government and can do what it likes, it also announced a wholesale swi ... ..read more
  • THE SIGNAL AND THE NOISE

      I’ve just started reading Nate Silver’s new book The Signal and The Noise (Why so many predictions fail - but some don’t). If you’re looking for something stimulating to read over the Christmas break, this should do the trick. There’s still time to order it.   Nate Silver, (34), is the US’s latest media darling - he has accurately predicted the outcome of several major elections in fine detail. In the race between Barack Obama and Mitt Romney, Silver correctly predicted the winner of all 50 states and the District of Columbia. ... ..read more
  • HAPPY ANNIVERSARY, MR COOPER!

      Nine years ago today, Paul Cooper, actuary, and true visionary pioneer, implemented a brave and hugely effective derivatives transaction which saved his firm’s pension scheme (the Friends Provident Pension Scheme) an enormous amount of money and future hassle. Back then, I was working at Merrill Lynch, the investment bank, and, with Paul, we had been fine-tuning the details of the transaction for several months.   It was an extraordinary and significant day which, in the end, almost didn’t happen. Late in the afternoon, the day before we were du ... ..read more
  • PERILS OF THE PENSION PLAN PROCRASTINATORS (OR “THETA OF THE ABSURD”)

        A friend of mine, who I'll call "Dave" (because that was his name) said he would do anything to avoid A-level revision. At one point he infamously found himself weighing the cat, convinced that he would only be able to settle down to work if he had that data to hand. As a result, some 25 years later, the act of procrastination is referred to by my family as "weighing the cat". Ian Whitten, Sittingbourne, Kent (BBC Readers’ tales of epic time wasting) ---------------------------------------------------------------------------- ... ..read more
  • EUROPEAN PENSIONS - COMMON ISSUES, BESPOKE SOLUTIONS

    What do you see as the big issues affecting European pension funds?   Regulation, accounting and these days, convention, mean that mark to market has finally come to most jurisdictions. Pension funds no longer enjoy diplomatic immunity. As yields fall, the present value of liabilities rises. At very low yields, that effect becomes increasingly pronounced. Thus a fall in yields from 6% to 5% does not increase long dated liabilities as much as a fall from say 3% to 2%. Thus, at these super cooled levels, European funds are experiencing extreme increases in liabilities, unmatched by t ... ..read more
  • UNDERFUNDED PENSION FUNDS AND THE LESSON OF FLIGHT 447

    On June 1, 2009, Air France Flight 447 crashed into the mid-Atlantic during what should have been a routine night flight from Rio de Janeiro to Paris. All 228 passengers and crew perished. The cause of the crash was, on the face of it, a complete mystery. The Airbus A330-200 was a highly sophisticated aircraft and was being flown by three well-qualified pilots. The captain alone had 11,000 hours of flying experience.   In theory, such a crash should have been nigh-on impossible. But it happened. The results of the crash inquiry have finally been published. It turns out t ... ..read more
  • HOW DISAPPOINTING, MY DEAR OSBORNE

    It was instructive to watch the UK's Chancellor, Mr Osborne, describe yesterday’s horrendous GDP figures as “disappointing”. That’s like Team GB finishing below Guatemala in the medals tables and calling it "unhelpful".   Of course, the English genius for understatement is the stuff of legend. “I’m not entirely convinced” means “I profoundly disagree” and “I take your point but...” translates as “you must be off your rocker”. But even for a chap schooled from birth in the art of playing ... ..read more
  • GROUP THINK

    Pearl Harbor, 7 Dec 1941 - Group Think Disaster. On the morning of December 7, 1941 the US Pacific fleet was bombed by enemy aircraft in an audacious and devastating attack that stunned the watching world. The Japanese invasion of Pearl Harbor went down in history as a date that would "live in infamy" (the words of President Roosevelt).   It also went down as a classic illustration of Group Think - which is what occurs when a group of individuals makes a disastrous decision or series of decisions despite lengthy discussions and consideration. Other Group Think ex ... ..read more
  • ARIGATA-MEIWAKU (VERB)

    Arigata-meiwaku is a Japanese word with no English equivalent. Which is not surprising, since it means: “an act someone does for you that you didn’t want to have them do and tried to avoid having them do, but they went ahead and did it anyway, determined to do you a favour. Then things went wrong and caused you a lot of trouble; yet in the end social convention obliged you to say Thank you”.   In the last few days, the commonly-used risk measurement, Value at Risk, (or VaR) has been given stick for performing arigata-meiwaku (or some variant of it) for JP Mor ... ..read more
  • THE DEATH LINE

    Tempest. Not in a teacup. France has unceremoniously kicked out Le President. Greece has unequivocally flipped Chancellor Merkel den vogel. Spain is worth less than Facebook. JP Morgan has just woken up to a US$2 Billion loss it breezily dismissed as a tempest in a teacup a few weeks ago. Equities are about to [cue Daily Mail headline] plummet (so much for the Equity Risk Premium – plenty of risk / no premium). UK gilt real yields are negative (i.e. you pay the government for the privilege of lending to the government. Che??). The new French President’s plane got hit by ... ..read more
  • CONNECT THE DOTS...

    From the earliest age, we love to connect the dots. On any holiday charter flight, a child with furrowed brow is concentrating hard, drawing lines between numbered dots on a page. Dots that look random and meaningless until the carefully drawn pencil lines finally reveal an etching of the three bears staring in disbelief at Goldilocks asleep in Baby Bear's bed.   Life is a bunch of dots. It always has been. Some people are better at seeing the picture than others.  A man in ancient Greece lowers himself into a steaming bath. Dot. The water level rises. Dot. The man k ... ..read more
  • CRY! IT'S A KODAK MOMENT

    In October 2003, a leading finance magazine published an upbeat interview with the pensions manager of Kodak’s £800 million UK pension scheme, in which he disclosed details of the plan's new and daring asset strategy. The scheme, he explained, had invested 35% of its assets across 40 hedge funds with just 2% remaining in equities. It was a new and different approach, with the ambitious aim of out-performing run-of-the-mill, bog standard, equities “by around 2%”. In fact, the whole portfolio had been carefully set up to be diversified and intell ... ..read more
  • KAUTO STAR PERFORMANCE

    Every now and then, exceptional form and talent come to the fore and combine unarguably, imperiously, to blow away the competition. That's what happened on Boxing Day last year when racehorse Kauto Star won the King George VI steeplechase at Kempton Park for an unprecedented fifth time. The racing world united in praise for a horse which has been described in the following terms:"ultra consistent, incredibly tough and extremely versatile; he possesses a devastating turn of foot, a unique talent among staying chasers." Here's what we're talking about in Kauto Star: ... ..read more
  • BURGEONING PENSION LIABILITIES? WELCOME ABOARD THE COSTA CONCORDIA

    "The rock was not marked on my nautical chart. It indicated that there was deep water below. There should not have been such a rock." - Capt. Francesco Schettino, La Costa Concordia, 14 Jan 2012 ---------------------------------------------------------- You are a trustee of a pension plan. It is your responsibility to ensure that the benefits of all the plan's members are delivered in full and on time. Or, to think of it another way, you are a senior crew member of a gigantic ocean-going cruise liner. There are thousands of passengers on board - it is more of a floatin ... ..read more
  • RUNNING A PENSION PLAN IN 2012? YOU NEED A 20 MILE MARCH

    In Jim Collins' latest book (Great by Choice) he offers a compelling illustration. Imagine two people in San Diego, California, who both plan to walk to the tip of Maine on the other side of the USA. It's a journey of 3,306 miles and they both set off one sunny Saturday.  Guy One walks 40 miles on the first day (the  weather is a nice 20 degrees C); he walks 27 miles on the second (equally nice) day. By Day 3 he is on the edge of the desert and the temperature soars. That day he manages only 8 miles - it's scorching hot and he's exhausted from walking 67 mi ... ..read more
  • WALEED AND THE ACCOUNTING STANDARDS BOARD

    Here's a blog I wrote on 17 October 2005. Even then, the writing was on the wall:    Last Friday, I had occasion to spend an afternoon in Frankfurt and after my meeting I hailed a passing cab. “I need to get to the airport sharpish, bitte,” I said to the driver. “Kein Problem!”, he replied, “Mein Name ist Waleed und ich komme aus Afghanistan” before achieving the doubly impressive feat of driving at 200kph whilst simultaneously chatting to his father on his mobile phone.    In fact, it took less time for Waleed to drive from ... ..read more
  • PENSION TRUSTEES WHO TAKE DECISIVE ACTION

    At 11:00 on a freezing morning -  2 December 2003 - Friends Provident Pension Scheme took decisive action. The scheme implemented a landmark hedging transaction fully protecting itself against falling interest rates and rising inflation. They were the first pension scheme to do so, and they set in train the multi-billion hedging transactions that have since become commonplace and are known generically as Liability Driven Investing or LDI. It was the culmination of months of discussion and planning. Even so, the fledgling inflation swaps market was extremel ... ..read more
  • IF...

    If you can see the dreams of men and women,   That rest upon your promise firmly made;   If you can watch them work for fair-earned wages,   Then watch the strength of promise slowly fade;   If, watching, you can ask yourself hard questions   And, answering, resolve to face the truth   That in your hands, there lies the hope of thousands –   Of Old and Young, of Middle-Aged and Youth;        If you remember Time that you’ve invested,   Recall the sweat and tears th ... ..read more
  • IS IT TIME TO DE-RISK THE PENSION PLAN YET?

    As the European economy looks increasingly likely to derail, and with a plethora of unknown Unknowns ahead, it occurs to me that this is precisely why you take out insurance.   You don't pay your premiums to the nice guys at Chubb because you fully expect your house to burn down. No, you cough up every year, because it might burn down. Because stuff happens. Because, in the dead of night, under some hidden floorboard, a mouse might gnaw through an electric cable and set the place ablaze. Someone might leave a burning candle too close to a curtain and forget to bl ... ..read more
  • ROBERT MAXWELL - AN UNTOLD BUT SALUTARY TALE

    The Lady Ghislaine Twenty years ago today, I was a derivatives lawyer working for NatWest Capital Markets. Along with many others, I have reason to remember that first week of November, back in 1991. The biggest (yes, literally) confidence trickster in modern times (a.k.a. Robert Maxwell) had fallen from his luxury yacht, The Lady Ghislaine, on Tuesday, November 5, off the coast of the Canary Islands and drowned. I was driving through Clapham in South London that freezing evening, on my way to a fireworks display in Battersea Park when I heard the bulletin on the car radio: ... ..read more
  • FIVE REASONS YOU HAVE LOST SERIOUS MONEY IN THE PENSION PLAN YOU RUN

    #1 Pension funds’ defined benefit liabilities SHRINK when (long term) interest rates are HIGH.  Six years ago when long term interest rates were historically low but somewhat higher than they are now, you and your fellow trustees convinced yourselves that rates were bound to rise to “more normal levels” so there was no need to insure (hedge) against the risk of interest rates falling. It was a supremely large one-way market bet, but you went ahead and made it anyway. Unfortunately, rates didn’t rise. They FELL.  Four years ago when interest r ... ..read more
  • THE ELEVENTH DIMENSION

    Continuing my re-release of my "Hedge your pension scheme against a falling Real Yield" blog campaign from six years ago, here is one I published on 30 July 2005:   UK Real Yield, 1.47% on 30 July 2005* (Source: Bloomberg)   Superstring theory, hyperspace and dark matter make it abundantly clear that there are more than three dimensions to the universe – in fact there are eleven. And, to complicate things further, there is probably an infinite number of parallel universes.   We just happen to live in one of them. Somewhere els ... ..read more
  • SIR THOMAS AND THE FALLING REAL YIELD

    As we gaze in sickening awe and wonder at the real yield turning negative (see the graph below) and taking pension fund promises under the waves with it, here is another of my Market Diary blogs from July 2005. (Btw, this graph is undoubtedly the most terrifying thing you have laid eyes on in recent times) 28 July 2005 Po-tay-to,   n.   On this day, 1586, the great explorer and quintessential renaissance scholar, Sir Thomas Harriot, returned to Britain from Columbia bringing with him a sackful of batatas e ... ..read more
  • THE MORE THINGS CHANGE, THE MORE THEY STAY THE SAME

    Here's a blog I wrote on 4 July 2005, when the UK real yield was at 1.39%:   Independence Day and it’s very quiet in the in the inflation and interest rate markets, affording some respite after last week’s rally, the real yield closing up today at 1.39%. Frankly, there’s not much else to say so, instead, here’s some quantum physics, as it applies to the real yield.   In 1935, Ervin Schrödinger came up with an intriguing experiment. Stick a cat in a box with a radioactive time bomb and a vial of hydrochloric acid and close the lid. After one ... ..read more
  • JULIUS CASEAR, BORIS BECKER AND THE FEDERAL RESERVE

    Over the next few days, I think I might dig out some of my old blogs.   Here's one written on 1 July 2005:  UK Real Yield (1.36%) 1 July 2005  The big news last night was the Federal Reserve. Boris Becker even mentioned it on Wimbledon Round-Up. Although, on reflection, maybe he was talking about the Federer serve.   Either way, US short interest rates are up 0.25%, pretty much as expected. There is clearly an intention to keep inflation under control, and today the markets think that means we’re unlikely to need big hikes later. So it&rsquo ... ..read more
  • ONLY FOOLS AND HORSES...

    Over the last ten years, pension funds and their corporate sponsors have found themselves on the sharply pointed horns of a dilemma. How to reconcile, on the one hand, the obvious need to recognize prudently the assets and liabilities of their pension funds with, on the other, the extreme burden of care that results from marking everything to market. Well, by and large, pension funds and their corporates have grasped the FRS17 stinging nettle to varying degrees. Most have taken some sort of action to try and align the behaviour of pension fund assets and liabilities. Many have disc ... ..read more
  • REASONS FOR THE PENSIONS CRISIS PART1

    Here’s a bleak prospect: there is every likelihood that in less than 50 years’ time there will be no fish left in the sea. Nada. This is the stuff of climatic nightmares and is due to three cumulative factors: overfishing, dumping fertilizer in industrial quantities into the oceans, and rising sea temperatures. All three are happening at breakneck speed and our fish are facing an “extinction event”.  It’s not that no-one knew about this, it’s just happening much faster than anyone realized. Something equally grim is unfolding in our own belove ... ..read more

I spend my life trying to find better ways to do things. For my clients (pension funds) that pretty much involves challenging the status quo at just about every turn.

I left Merrill Lynch in 2006 because I listened to my clients. They questioned the model and told me there had to be a better way. They were right. Wisdom of the Crowd.

I am the Founder and Co-CEO of two companies: Mallowstreet (FB for the pensions industry) and Redington ("know your kung fu" consulting for the pensions industry).

Connect with Dawid on Twitter and LinkedIn