Charles Dickens’ novel “A Christmas Carol” is a widely celebrated festive tale that details the transformation of the famous Christmas humbug Ebenezer Scrooge. In the book Ebenezer is a “wrenching, grasping, scraping, clutching, covetous, old sinner!" whose business is loaning money and ruthlessly chasing repayments.

What Dickens neglected to portray was that Mr. Scrooge’s money lending business also had the daunting commitment of a Defined Benefit Pension Fund.

In this blog I uncover the previously untold supplement to this classic Christmas story, which details in true festive spirit the three stages of Ebenezer Scrooge’s Pension Fund…

In summary it is a tale typical of many UK DB Pension Funds:

The first phase – Past:

  • Investment strategy that focuses solely on asset returns
  • No visibility of the large unhedged exposure to interest rates and inflation on the liability side
  • Large exposure to equity risk on the asset side

The second phase – Present:

  • Introduction of asset and liability management to calculate the return required to reach full funding by a certain date
  • Liability driven investment strategies that utilize hedging to reduce the interest rate and inflation risks
  • Greater diversification of return seeking assets away from equities
  • Dynamic de-risking strategies that trigger an increase in hedge ratio as the funding level rises and a shift from return seeking assets into liability matching assets if the fund gets ahead of its target (i.e. expected returns greater than required returns)

The third phase – Future:

  • Fully funded and fully hedged against interest rates and inflation
  • Completely invested in liability matching assets
  • Looking at end-game management

“It was late on a bleak, cold, biting Christmas Eve night and Ebenezer Scrooge was nervously climbing the creaking wooden stair case to his bedroom. Scrooge had just encountered the spirit of his dead business partner, Jacob Marley, who warned that three spirits would visit him that night. Apprehensively he edges into his bed and waits…

The chime of a clock wakes him and out of the shadows in the corner of the room appears the hazy outline of a ghost, “I am the Ghost of Christmas Past” he booms.

An ethereal mist descended upon Scrooge’s bedroom. When it clears, Scrooge and his translucent companion are on the dark, snow covered street outside his office and a dim light flickers in the office. Through the window the pair observe the image of a younger, more handsome Scrooge sitting at his old oak desk poring over his company’s financial statements and reports for his Bah Humbug Pension Fund.

The Ghost of Christmas Past has taken Mr. Scrooge back to Christmas day in the year 2000, a happier and more innocent time in Scrooge’s life not least because his pension fund had 70% of its assets in seemingly high returning equities and 30% in safe investment grade corporate bonds. Assets were growing and members were happy. No-one even thought about the liabilities. What was not to like?

Scrooge was blissfully unaware of the scale of the liability risks he was exposed to, in the form of unhedged interest rate and inflation risk; or how concentrated the asset side risks were in equities; and what this would mean in the not too distant future.

Scrooge began to feel chill resonating through his core as he remembered the consequence of this strategy in later years… In that moment, the swirling mist descended once again and, when it lifted, the same scene appeared before them; Scrooge sitting behind the same old oak desk flanked by mountains of reports and statements. This time however, the signs of age were evident in the younger Mr Scrooge’s face and he was noticeably distressed.

Ebenezer knew immediately, the Ghost of Christmas Past had taken him to Christmas day in the year 2008. In the aftermath of the financial crisis his money lending business was suffering as people could no longer repay their debts to him and at the same time the funding level of the BH Pension Fund had fallen a devastating 20% – the present value of the liabilities had risen as loose monetary policy saw gilt yields fall to record lows, whilst equity markets had plummeted causing the market value of the asset portfolio to fall significantly.

A younger Scrooge sat, on that Christmas night, and contemplated the severity of his situation: he couldn’t increase the size of the deficit repair contributions, as business was slow, but neither could he get away from the miserable fact that the liabilities had risen (and were continuing to rise) whilst assets had fallen…

The stress had got to Scrooge and triggered his chronic asthma to flare up, his doctor had warned that it could develop into Quantitative Wheezing.

At that moment the brass doorbell rang and as he opened it, a gust of icy wind billowed through the office. As was always his way, Scrooge greeted this guest with a hostile grunt and a sharp “What do you want?”

The present day Scrooge accompanied by the Ghost of Christmas Past remained an audience to these now historical events, peering in through the small window that was bordered with snow. Present day Scrooge remembered that night and this kind stranger vividly. He was a young, aspiring, investment consultant, desperate for work and he arrived in Scrooge’s office that Christmas Day to offer investment advice. Reluctantly Scrooge listened to what the investment consultant had to say:

He had three key messages:

1) Begin with the end in mind

  • Set a target date for full funding. Having a funding objective allows you to calculate the returns required to reach that objective.
  • An investment strategy can then be designed such that the expected return is equal to, or greater than, the required return to reach your funding objective.

2) Immunize the funding level against falling real rates

  • The present value of the liabilities are highly sensitive to movements in interest rates and inflation, leaving pension funds exposed to unrewarded liability side risks.
  • Using liability driven investment strategies to hedge these risks can help to immunize the funding level to movements in real rates.
  • This reduces the liability risks and frees up the risk budget to be allocated to return generating assets to help repair the deficit.

3) Diversify asset risks

  • Looking to alternative asset classes that do not rely solely on equity markets to generate return will diversify risk exposure and reduce the impact of a fall in any one market.

Scrooge didn’t really like the message but he was between a rock and a hard place and there was something compelling about the young boy’s enthusiasm. Against his instincts, he hired him as his investment consultant and implemented his recommendations…

Again the ethereal mist descended and Scrooge was back in the comfort of his mahogany four-poster bed. ‘Was that all a dream?’ he wondered, until he rolled over and came face to face with a new translucent stranger.

The spirit arose from the bed and introduced himself as the Ghost of Christmas Present. Scrooge knew what to expect… and with a sigh he closed his eyes and felt the chill move through him. When he opened his eyes he was standing inside his lonely, dimly lit office, behind his desk this time. It was 2014, Christmas Day, and upon the desk was the pension fund’s annual report:


The Fund was on track to meet the objective of being fully funded in 10 years with Expected Return exceeding Required Return.

Earlier in the year Scrooge implemented a dynamic de-risking strategy. Therefore when the fund is ahead of its ‘flight plan’ to meet the funding objective gains could be ’banked’ by shifting away from higher risk/return seeking assets into lower risk/liability matching assets. The first round of de-risking had been implemented that year and consequently the total risk exposure had fallen.

Finally, despite the recent fall in gilt yields (in October 2014) the funding level had not fallen as the hedge ratio was equal to the funding level, immunizing the funding level from movements in interest rates and inflation.

Scrooge turned to the Ghost of Christmas Present and heaved a sigh of relief; in that moment he knew he was now in control the BH Pension Fund.

The unsettling chill to which he had now become accustomed returned and when it lifted Scrooge was home again, ostensibly alone. He wasn’t. Perched at the foot of his grand four-poster bed, barely visible through the hazy darkness was the third ghost. Introductions were not necessary; he knew this was the Ghost of Christmas Yet To Come.

With this ghost Scrooge returned to the same location, his faintly lit office, however it was now Christmas day 15 years into the future. The familiar annual report for his pension fund was present upon the same old oak desk; however, this time it was accompanied by a separate document entitled ‘End Game Management’.


It was evident from the report that the fund had reached its objective of full funding by 2024; Scrooge reluctantly allowed the corners of his mouth to break into a smile.

The fund had fully de-risked into liability-matching assets, primarily gilts and corporate bonds with a 20% allocation to illiquid credit.

The hedge ratio continued to equal the funding level (now 100%).

Present day Scrooge observed his future-self flicking through this accompanying ‘End Game Management’ document, and noticed five key considerations:

  • Tightening valuation basis – consider targeting a more prudent discount basis such as self sufficiency basis or buy-out basis
  • Buy-in/Buy-out – transferring some or all of the liabilities to an insurance company
  • Reinvestment risk management –the risk that when a bond matures credit spreads have tightened and the same yield is no longer available
  • Covenant risk management – the risk that the sponsor can no longer pay contributions
  • Basis risk management – the risk that hedging assets do not move in line with liabilities (this occurs if liabilities are discounted/inflated with gilts/gilt breakeven inflation but are hedged using interest rate/inflation swaps

It was late and Scrooge turned to the Ghost and said “End game management is another problem for another day, I now have a joyful Christmas day to attend to and a Christmas Turkey to deliver to my investment consultant.”

Why Dickens left this part of the tale out of his original novel is a mystery to all…

Merry Christmas.

Please note that all opinions expressed in this blog are the author’s own and do not constitute financial legal or investment advice. Click here for full disclaimer.

Author: Tara Gillespie

Tara joined Redington as part of the investment consulting graduate team in 2013. She now works within a number of Redington client teams providing support to the firm’s senior consultants. Previous to starting with Redington she completed two summer internships at JPMorgan Asset Management. Tara holds a First Class Honours in Biochemistry from Imperial College and enjoys a range of sports including Hockey, Netball and Sailing.