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 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

D E F I N E D BE N E F I T P E N S I O N S C H E M E S
IN THE UK
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

Defined Benefit
Pension Schemes in
the United Kingdom
Asset and Liability Management

PHILIPPE-N. MARCAILLOU

1
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

3
Great Clarendon Street, Oxford, OX2 6DP,
United Kingdom
Oxford University Press is a department of the University of Oxford.
It furthers the University’s objective of excellence in research, scholarship,
and education by publishing worldwide. Oxford is a registered trade mark of
Oxford University Press in the UK and in certain other countries
© Philippe-N. Marcaillou 2016
The moral rights of the author have been asserted
First Edition published in 2016
Impression: 1
All rights reserved. No part of this publication may be reproduced, stored in
a retrieval system, or transmitted, in any form or by any means, without the
prior permission in writing of Oxford University Press, or as expressly permitted
by law, by licence or under terms agreed with the appropriate reprographics
rights organization. Enquiries concerning reproduction outside the scope of the
above should be sent to the Rights Department, Oxford University Press, at the
address above
You must not circulate this work in any other form
and you must impose this same condition on any acquirer
Published in the United States of America by Oxford University Press
198 Madison Avenue, New York, NY 10016, United States of America
British Library Cataloguing in Publication Data
Data available
Library of Congress Control Number: 2015935263
ISBN 978–0–19–873879–4
Printed and bound by
CPI Group (UK) Ltd, Croydon, CR0 4YY
Links to third party websites are provided by Oxford in good faith and
for information only. Oxford disclaims any responsibility for the materials
contained in any third party website referenced in this work.
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

To my family
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

Preface

This book is the product of twenty-five years’ experience, technical knowledge,

and more than 700 meetings with investment experts in the pension industry.
This book is also the product of twenty-five years’ of practical experience and
technical knowledge in corporate finance, investment portfolio management,
debt structuring, and business creation in various fields. I always had it in mind
to pass on this knowledge and to contribute further to the finance industry.
The pension sector gave me this opportunity: as a Chief Investment Officer
(CIO) of a defined benefit pension scheme (DB) in the United Kingdom and
later, as a consultant, I use my skills, knowledge, and contacts to maximize the
asset and liability (ALM) structure of DB pension funds and their compo-
nents: typically, the main objectives are to protect the interests of members by
paying their benefits in the future whilst also protecting the interests of the
shareholders and bond-holders of the sponsor.
During the last four years, I have interviewed more than 700 investment
experts from various fields and examined and challenged each investment
solution. At each meeting, I would write a few bullet points about ideas we
discussed and how they could bring value to the industry. This is the main reason
why there are few books mentioned in the biography section. There are a very
large number of presentations provided by investment banks and by various
asset and liability driven investment (LDI) managers and it is not possible to
mention them all specifically. This book is the product of all these meetings.

WHERE DID THE IDEA TO WRITE

THIS BOOK COME FROM?

I regularly meet pension fund decision-makers who ask me to share my views,

experience, and technical knowledge. Here are a few typical examples:
A trustee of a large pension fund asked me recently what the main items of
an ALM strategy are.
A chairman of a trustee board asked me to explain the consequences for a
seller of payer swaptions on the asset–liability structure; he had had a meeting
a few days before with investment consultants who presented this instrument;
he understood 20 per cent of the presentation.
On another occasion trustees had to select a LDI manager, define a LDI
strategy, and present the framework of its implementation. During the beauty
contest, LDI managers presented various technical solutions; as the trustees
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

viii Preface
and the sponsor did not understand the full consequences of the decision they
were going to make, they asked me to support their thoughts by simplifying as
much as possible very technical and complex concepts.
The last example is about a CIO and trustees who had to select an active or a
passive risk parity manager and wanted to understand the impact on the
portfolio of growth assets and the ALM.
There are many other examples I could mention which illustrate the current
lack of technical knowledge and the problems of communication between
sponsors, trustees, and investment solutions providers.
Recently, investment experts, my peers the CIOs, trustees, lecturers, and
others encouraged me to write a book about ALM maximization of DB schemes
and explain how its building blocks work based on this global experience.
I spent countless hours in thinking about this project I feel passionate about;
on a day-to-day basis, as I was writing this book, I wondered:
• Will decision-makers who encouraged me to write it find this book practical?
• Will I contribute value to the pension funds they are currently managing
and to the members?
• How can I help avoid the consequences of bad decisions?
• Will they identify where the tricks are hidden?
Another key concern was the use of maths:
• Is the level of maths too high or not?
• Will it be accessible to the audience, that is, decision-makers, solutions
providers, undergraduates, graduates, and so on?
My vision was to write a very practical book; my objective is to present a
methodology to maximize from A to Z the complete restructuring and
monitoring of a DB pension scheme and each building block. To achieve
that, I have included more than 400 tables and charts.

WHAT ARE THE OBJECTIVES OF THIS BOOK?

It will help decision-makers to understand the ALM mechanics of DB schemes:

• How to define an ALM strategy and how to monitor it.
• How liabilities work and the techniques available to hedge them.
• How to select a LDI manager, define a LDI strategy, and to monitor its
efficiency.
• How to build an efficient investment portfolio.
• How to build a ALM report and which metrics to monitor.
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

Preface ix
Decision-makers will also understand how financial instruments designed to
maximize ALM strategies work and what are the statistical formulae behind
the results of the calculations.
Readers will also be introduced to complementary tools such as buy-in,
buyout, and longevity swaps.

W H A T EL S E D O ES T HI S B O O K O F F E R ?

• Pension scheme decision-makers and solution providers will use it to

prepare for investment committees: it will support their homework and
review the items which will be discussed.
• It will help to prepare questions and challenge investment experts.
• It will also help decision-makers to fully understand the consequences of
their decisions.

HOW I S THE BOOK STRUCTURED?

Each section starts with some basic principles and the further you read, the
further the level of complexity increases.
I have organized it in six chapters, with four appendices:
• Chapter I introduces the DB pension scheme environment in the UK.
• Chapter II provides an understanding of how ALM works (objectives,
strategy, liability valuation methodologies) and shows how to assess
the efficiency of a strategy. This chapter also covers the topic of cash
management. The conclusion will show readers how to build a precise
ALM framework.
• Chapter III covers the liability side of the asset–liability structure and how
it works.
• Chapter IV defines liability driven investment (LDI) and explains how to
maximize it. This chapter will help you to select a LDI manager and to
monitor risks and performances.
• Chapter V presents the asset side of the asset–liability structure, the
principles of portfolio construction, and the building blocks, illustrated
by examples.
• Chapter VI addresses how to build reports of ALM risk and performance
and how to monitor them.
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

x Preface
The four appendices and the table explain in more detail the following:
• Appendix I presents the financial instruments used to manage assets and
liabilities of DB pension schemes.
• Appendix II provides a general introduction to the statistics used to
manage the assets and liabilities of DB pension schemes.
• Appendix III presents the principles of portfolio construction.
• Appendix IV introduces buy-in, buyout, and longevity risk management.
• Table of present value factors.
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

Acknowledgements

At the outset, I would like to thank Professor Bernard Marois for stimulating my
reflection, for his insightful comments, and for sharing his experience. Professor
Denis Dubois played a significant part in my undertaking. I am forever grateful
for his expert guidance, for sharing his enthusiasm, and for his kind encour-
agement which motivated me throughout my research and drafting of this book.
Without his supervision and help, this book would not have been possible. It
was a real honour and also a privilege to have worked with them indeed.
I wish to thank especially, Mr Ashley Pover and Mr Bob Turner for their
useful and pragmatic comments and for their patience.
Special thanks to my family. Words cannot express how grateful I am to my
sister Agnes; your attention and prayers were very important to me. I would
not have been able to carry my research work through nor achieve my goal of
sharing my practitioner’s expertise without my beloved wife Ingrid who
supported me at all times; to my son Benjamin who is my ‘superhero’; to
my daughter Victoria who is my ‘little princess’; and my stepson, Aymeric; my
research would not have been possible without their love, prayer, and care.
Lastly, a special thought for my parents Gilbert Maxime and Colette, who
made me who I am today, and for my brother Alain-Noël. Sadly they are no
longer with us but they will forever remain in my heart and thoughts.
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

Contents

List of Figures xv
List of Tables xxiii
1. Introduction to Defined Benefit Pension Schemes 1
1.1 UK Pension Statistics at a Glance 1
1.2 Introduction to Defined Benefit Pension Schemes 3
1.3 Who Are the Members? 4
1.4 What Is the Trend? 5
1.5 Pension Governance 5
2. Understanding Asset and Liability Management (ALM) 8
2.1 Definition of the Objectives 8
2.2 ALM Structure of a Scheme: Risk and Performance Assessment 17
2.3 Liquidity Management 45
2.4 Asset and Liability Management Framework 48
2.5 Conclusion 55
3. Understanding Liabilities 59
3.1 Introduction 59
3.2 Liabilities 59
3.3 Liability Risks 65
3.4 Liability Valuation 70
4. Understanding Liability Driven Investment 75
4.1 Introduction: The Basics 75
4.2 Hedging Strategy and LDI Process 89
4.3 Conclusion 162
5. Investment Policy: Understanding Asset Allocation Construction 164
5.1 Introduction 164
5.2 Asset Management and Portfolio Construction:
Introduction to Basics 165
5.3 Asset Class Universe 165
5.4 Alpha and Beta 167
5.5 Growth Asset Portfolio: Risk-adjusted Performance Objectives 172
5.6 Implementation Risk of the Strategy 180
5.7 Conclusion 181
6. ALM Risk and Performance Monitoring: Risk and
Performance Report 184
6.1 Introduction 184
6.2 ALM Framework Monitoring 184
6.3 Case Studies 185
7. Conclusion 217
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

xiv Contents

Appendix I: Understanding Financial Instruments 219

Holistic Risk Management 219
A1.1 Hedging Asset Exposure 219
A1.2 Hedging Liabilities Exposure 232
Balance Sheet Management 292
A1.3 Repo Gilt 292
A1.4 Gilt Total Return Swaps 293
A1.5 Liquidity Management 294

Appendix II: Introduction to Statistics 301

A2.1 Some Definitions 301
A2.2 Descriptive Statistics 302
A2.3 Measuring Variation 306
A2.4 The Normal Distribution 314
A2.5 Correlation 323
A2.6 Regression 328

Appendix III: Growth Asset Portfolio Construction Principles 331

A3.1 Risk-Adjusted Return Portfolio Maximization 331
A3.2 Illustration 333
A3.3 Overview of the Markowitz Model 337

Appendix IV: Buyout, Buy-in, and Longevity Swaps 339

A4.1 Buyout 340
A4.2 Buy-in 341
A4.3 Longevity Swap 342

Appendix V: Present Value Factors 347

Bibliography 349

Index 351
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

List of Figures

1.1. Funding ratio evolution from September 2003 and March 2013
(s179 valuation basis) 3
1.2. Assets and liabilities evolution (£bn), September 2003–March 2013
(s179 valuation basis) 3
1.3. Parties involved in the pension funds environment 5
2.1. Typical asset and liability structure of a pension fund 9
2.2. ALM risk management 10
2.3. Factors that influence the funding ratio 11
2.4. Design of a strategic solution process 12
2.5. Future benefits payment 14
2.6. Recovery plan to get a funding ratio (assets/liability) at
100 per cent in ten years 16
2.7. Asset outperformance and impact on the funding ratio
(assets/liabilities) in TP 17
2.8. Risk-adjusted return chart 19
2.9. The Sharpe ratio per asset class 20
2.10. Asset allocation 22
2.11. Risk allocation 22
2.12. Correlation measurement 23–4
2.13. Hedging assets 25
2.14. Comparison of the performance of the current
portfolio to alternatives 28
2.15. VaR graph representation (Gaussian distribution) 32
2.16. CVaR and VaR illustration 33
2.17. Negative and positive skewness 35
2.18. Monthly returns distributions 38
2.19. Historical funding ratio evolution analysis (2007–10) 42
2.20. Pension assets and liabilities, one-year VaR confidence
interval 95th (£m) 43
2.21. In/out cash flows 46
2.22. Forecast of the liquidity position for pension fund XYZ
for the next three years 47
2.23. Typical ALM structure 49
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

xvi List of Figures

2.24. Typical building blocks of an ALM funding, monitoring,
and duration management 50
2.25. Funding ratio monitoring and duration management
illustration 50
2.26. ALM: risk and performance management against a
common benchmark 51
2.27. Necessary outperformance of the assets against the liability
to reduce deficit 52
2.28. Risk management: flight path (or recovery plan) with upper
and lower limits 54
2.29. Risk management of the funding ratio 55
2.30. Dynamic ALM management as the funding ratio improves 56
3.1. Funding level 60
3.2. Future payments (benefits) 61
3.3. Present value for future payments 62
3.4. Compound rate illustration 63
3.5. Future benefits: nominal and inflation-linked cash flows and
present value 64
3.6. Relation between real rate, nominal rate, and inflation 64
3.7. Cash flows can be split between fixed payments and inflation
(LPI and RPI) 65
3.8. Example of different inflation indexation for a deferred
member 66
3.9. Illustration of the impact of an improvement of longevity 67
3.10. Overview of liability risks and impacts on liabilities 67
3.11. Payment of a nominal cash flow of £44 68
3.12. Examples of expected pension scheme cash flows 72
4.1. Funding level 76
4.2. Effect of an implementation of a LDI solution 76
4.3. Assets and liabilities: pre and post LDI solutions 76
4.4. Overview of a pension scheme and LDI solution 77
4.5. Overview of a typical LDI approach 77
4.6. Impact of inflation on future payments 78
4.7. Present value of the future payments 79
4.8. Future value and present value of the future payment 80
4.9. Example of a series of seventy years of expected cash flows 84
4.10. Present value of the expected cash flows 84
4.11. Relation between a price and a yield: sensitivity and
convexity concepts 85
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

List of Figures xvii

4.12. Illustration of the difference between using a unique yield
(i.e. a flat yield curve assumption) to discount the entire set
of future payments and using the appropriate yield of
date of payments (i.e. using a real yield curve) 88
4.13. LDI process 90
4.14. Historical nominal and inflation swap yield curves from
two to fifty years maturity (one year variation from 7 August
2012 to 7 August 2013 in bps) 93
4.15. Fixed and inflation-linked cash flows (£m) and present value 97
4.16. PV01s fixed and real cash flows risks per bucket 98
4.17. Fixed and real cash flows PV01 per bucket 98
4.18. Interest rates and inflation rate (RPI) PV01s per bucket 99
4.19. Current holdings: coverage from interest rates risk
(PV01 per bucket) 102
4.20. Current holdings: coverage from the nominal rates–interest
rates risk (PV01 per bucket) and sum of PV01 102
4.21. Current holdings: coverage from inflation rate–inflation
risk (PV01 per bucket) 103
4.22. Current holdings: coverage from inflation rate–inflation
risk (PV01 per bucket) and sum of PV01 103
4.23. Change in liability value versus change in asset value 104
4.24. Correlation risk between liabilities and assets sensitivities 105
4.25. Pension assets and liabilities 95% one-year VaR (£m) 105
4.26. VaR representation (Gaussian distribution) 106
4.27. Historical risk calculation, the ‘bell curve’ 110
4.28. Hedging the deficit and consequences 117
4.29. Impact of liability hedging on risk (VaR and tracking error) 118
4.30. Mechanism of an inflation swap and cash flows 119
4.31. Mechanism of a zero-coupon inflation swap and cash flows 119
4.32. Hedging with a single gilt (swap) at the highest yield and risks 121
4.33. Economic cycle and shape of yield curve variations (1) 121
4.34. Economic cycle and shape of yield curve variations (2) 122
4.35. Nominal gilt and nominal swap rates (%), 12 August 2013
vs 12 August 2012 yield curves variation 123
4.36. Nominal gilt and nominal swap rates (%), 12 August 2013
vs 12 August 2012 yield curve variation in bps 123
4.37. Index-linked gilt and inflation swap rates (%), 12 August
2013 vs 12 August 2012 yield curve variation 124
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

xviii List of Figures

4.38. Index-linked gilt and inflation swap rates, 12 August 2013
vs 12 August 2012 yield curve variation in bps 125
4.39. Gilt real rates and real swap rates (%), 12 August 2013
vs 12 August 2012 yield curve variation 126
4.40. Gilt real rates and real swap rates (%), 12 August 2013
vs 12 August 2012 yield curve variation in bps 126
4.41. Overview of liabilities hedging process 127
4.42. Illustration of liability PV01 128
4.43. Thirty years nominal, inflation, and index-linked gilt
evolution, January 2006 to January 2014 131
4.44. RPI too high regarding economic context
in March 2008 131
4.45. Spread twenty-year vs forty-years gilt: spread opportunity 132
4.46. Tactical trade: historical spread of the twenty-year
index-linked gilt vs twenty-year swap 132
4.47. Illustration of the correlation between the
ten-year–thirty-year spread and two-year gilt rate 133
4.48. Overview of historical real rates and inflation data 134
4.49. Overview of historical inflation rates 136
4.50. Roll-down effect 137
4.51. Current swap curve and forward one-, three-, and
five-year swap curves 138
4.52. Example of two hedging triggers on gilts 140
4.53. Illustration of the results when triggers are breached 140
4.54. Scenario1: what are the consequences on the funding ratio? 141
4.55. Gilt and swap spread from April 2005 to April 2010 143
4.56. Relative value of various assets 144
4.57. Two options to hedge the liabilities 146
4.58. (Simplified) Fisher formula 146
4.59. Relative value of various assets 148
4.60. Example of a wide variation of thirty-year nominal, inflation,
and index-linked gilts (from January 2006 to January 2014) 149
4.61. Ranking of collateral assets 149
4.62. Breakdown of the results of Table 4.36 151
4.63. Transition management: how does it work? 152
4.64. Assets transition risk management: VaR approach 154
4.65. Performance in line with the LDI benchmark 155
4.66. Outperformanced benchmark example 156
4.67. Underperformed benchmark example 156
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

List of Figures xix

4.68. Example of performance between the LDI benchmark
against the performance of the hedging assets and the spread
between both 157
4.69. Timetable of the processes 163
5.1. Growth asset management formula 165
5.2. Investment universe style 166
5.3. Breakdown of the performance between beta and alpha 168
5.4. Typical ALM structure of a defined benefit pension fund 173
5.5. Overview of the current asset allocation 174
5.6. Breakdown of the current asset allocation 174
5.7. Efficient frontier 179
5.8. Portfolio E 180
6.1. Example of a recovery plan and corridor of risk tolerance 185
6.2. Example of a recovery plan and tactical adjustments 185
6.3. Deficit recovery path (£) and actual deficit evolution 187
6.4. Evolution of an ALM structure from one period to another 187
6.5. Asset allocation 190
6.6. Risk allocation 190
6.7. Five-year performance of the portfolio vs a benchmark 192
6.8. Illustration of a real rate PV01 position 192
6.9. Illustration of nominal PV01 position 193
6.10. Illustration of an inflation PV01 position 193
6.11. Asset class breakdown of the portfolio of growth assets 199
6.12. Funding strategy monitoring report 200
6.13. Monthly returns of the investment strategy 200
6.14. Cumulative returns of investment strategy 201
6.15. Risk analysis 201
6.16. Risk assessment 202
6.17. Inflation and nominal hedge ratio evolution report 203
6.18. Comparison between the available collateral and the
collateral required 204
6.19. The movement of in and out cash flows 211
6.20. Forecast of in and out cash flows for the next three years 211
A1.1. S&P500 and Eurostoxx volatility indexes, first five
months of 2013 220
A1.2. Impact of positive and negative equity returns and
consequences 221
A1.3. Purchase of call option at expiry date vs purchase of stock 221
OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

xx List of Figures
A1.4. Seller of a call option 222
A1.5. Put option example at expiry date 223
A1.6. Seller of a put option at expiry date 224
A1.7. Buyer of a strangle at expiry date 225
A1.8. Buyer of a straddle at expiry date 225
A1.9. CDS: buyer and seller of a protection, cash flows 227
A1.10. Credit event: exchange of cash flows 227
A1.11. CDS mechanics 227
A1.12. Credit risks 229
A1.13. Relation between gilt or swap, corporate bonds, and CDS 229
A1.14. No credit event (no default): payment of the premium to
protection seller 230
A1.15. Credit event (default) 230
A1.16. Evolution of the value of the principal 234
A1.17. Factors that influence nominal and ILB 236
A1.18. ILB price formula 237
A1.19. Illustration of a five-year ILG cash flow with a fixed
coupon of 2 per cent 238
A1.20. Forward components calculation 242
A1.21. Spot and forward interest rates curves 244
A1.22. Spot and forward interest rates, start date in five years 245
A1.23. Interest rate swap 246
A1.24. Present value of 100 in twenty years at two different
discount rates 247
A1.25. Another example of a bootstrap method 253
A1.26. Illustration of an interpolation 254
A1.27. Overview of a pricing of a plain vanilla swap through the
forward methodology 257
A1.28. Mechanics of a zero-coupon swap 258
A1.29. Example of a twenty-year zero-coupon swap and
cash flow payments 258
A1.30. Asset swap 260
A1.31. Difference between two expiry dates and impact of
the time decay 266
A1.32. Example of a receiver swaption 5y20y fixed rate against
floating rate 266
A1.33. Pay-off profile at expiry of receiver swaption 267
 OUP CORRECTED PROOF – FINAL, 15/2/2016, SPi

List of Figures xxi

A1.34. Protection against a deterioration of the funding ratio
due to a fall of interest rates in buying a receiver 267
A1.35. Example of a payer swaption 7y18y fixed rate against
floating rate 268
A1.36. Pay-off profile at expiry of a payer swaption 268
A1.37. Impact of a sale of a payer on the funding ratio at
expiry date of the options 269
A1.38. Mechanics of a swaption collar at expiry date 269
A1.39. Illustration of swap vs swaption delta hedge ratio 272
A1.40. In-the-Money swaption: variation of the swaption delta
hedge in percentage relative to the variation of the
underlying twenty-year swap 272
A1.41. Out-of-the-Money swaption: variation of the swaption
delta hedge in percentage relative to the variation of the
underlying twenty-year swap 273
A1.42. At-the-Money swaption: variation of the swaption delta
hedge in percentage relative to the variation of the
underlying twenty-year swap 274
A1.43. Implied volatility, volatility surface 275
A1.44. Mechanics of fixed and floating inflation swaps 276
A1.45. Zero-coupon inflation swap, cash flows payments (1) 277
A1.46. Zero coupon inflation swap, cash flows payments (2) 278
A1.47. Components of the nominal rate 280
A1.48. Components of the real rate 280
A1.49. Components of the return of an index-linked bond 281
A1.50. Combining inflation and interest rates swaps 281
A1.51. Future value and present value 282
A1.52. Inflation and interest rates swaps (IRS) 284
A1.53. Inflation cap illustration 287
A1.54. Effect of an inflation cap on the liabilities’ risks 287
A1.55. Pay-off of an inflation floor buyer 288
A1.56. Effect of an inflation floor on the liabilities’ risks 288
A1.57. Illustration of an inflation cap with a strike at 5.50% 289
A1.58. Using liability pooled funds and three hedging alternatives 290
A1.59. Pooled funds mechanics/maturities-specific swap-based funds 291
A1.60. Mechanics of a repo gilt 292
A1.61. Mechanics of a repo gilt (example) 293
A1.62. Mechanics of a TRS 294
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xxii List of Figures

A1.63. Mechanics of a TRS (example) 296
A1.64. In and out flows chart 296
A1.65. An estimation of the in and out cash flows for the
next three years 297
A1.66. Evolution of CPI and RPI (%) from January 2007 to
July 2013 298
A2.1. Frequency 302
A2.2. Presentation of discrete data 303
A2.3. Presentation of discrete data in a pie chart 303
A2.4. Historical ten-day volatility variation and yields 310
A2.5. Negative and positive skewness 311
A2.6. The bell curve 314
A2.7. Normal distribution 315–16
A2.8. Standard normal distribution with cumulative percentage 317
A2.9. Case study 2 318
A2.10. Relationship between yields and volatility of an asset 324
A2.11. Correlations from +1 to –1 325–6
A2.12. Correlation between risk vs return of asset ABC 328
A2.13. Regression line 329
A3.1. Illustration of the efficient frontier with no risk-free asset 334
A3.2. The ‘curve’ of the portfolios ‘P’ 335
A3.3. Expected return, standard deviation, and correlation of a
portfolio of two assets 336
A4.1. Buyout 340
A4.2. Mechanism of a buyout exercise 341
A4.3. Buy-in exercise 342
A4.4. Mechanism of a buy-in exercise 342
A4.5. Illustration of the impact of an improvement of longevity 343
A4.6. Hedged liabilities through a longevity swap 343
A4.7. Mechanism of a longevity swap (1) 344
A4.8. Mechanism of a longevity swap (2) 344
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List of Tables

1.1. Key funding statistics as at 31 March 2013 2

1.2. Asset allocation comparison between 2006, 2012, and 2013 4
2.1. How do the differences of methodology impact the funding ratio? 15
2.2. Risk-adjusted return table 18
2.3. Sharpe ratio per asset class 20
2.4. ALM metrics of Almanar Pension Fund 21
2.5. Comparison of the current investment policy and three alternative
portfolios 26
2.6. Examples of returns 29
2.7. Example of a standard deviation of a stock 30
2.8. Historical current and alternative portfolios performance and
risk analysis 34
2.9. Skewness and kurtosis overview 37
2.10. Long-term return and risk assumptions 39
2.11. Long-term correlation assumptions 40
2.12. Comparison of risks metrics 41
2.13. Performance and risks metrics 42
2.14. Deficit Value-at-Risk: forward-looking analysis 43
2.15. ‘What if?’ approach: comparison of the current portfolio
to alternatives 44
2.16. In/out cash flows 46
2.17. Estimate of the liquidity position for pension fund XYZ for
the next three years 47
2.18. Example of asset allocation and expected income 48
2.19. ALM objective and strategy framework 57
3.1. Case 1: Accrual rate 1/60th 60
3.2. Case 2: Accrual rate 1/80th 60
3.3. Example of a calculation of future cash flows payments 61
3.4. Overview of liability risks and impacts on liabilities 67
3.5. PV of liabilities for various discount factors and expected
inflation rate (£) 69
3.6. Difference in assumptions and impact of the PV of the liabilities 71
3.7. Overview of liabilities valuation 73
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4.1. Example of a calculation of the duration of a bond 82
4.2. Example of a bond sensitivity calculation 83
4.3. Example of a calculation of the convexity of a bond 86
4.4. Comparison of the two methodologies: economic basis and technical
provisions 89
4.5. LDI: key questions 91
4.6. Breakdown of the liabilities risk exposure 91
4.7. Overview of the PV and PV01 of the liabilities 92
4.8. Historical, nominal, and real swap yield curves, 8 August 2013 92
4.9. Overview of the PV01 of the liabilities and assets 93
4.10. Breakdown of the liabilities risk exposure 94
4.11. Present value of fixed and real cash flows and PV01s 95
4.12. Summary of the present value and PV01 97
4.13. Overview of the liabilities and assets and the mismatches 101
4.14. Example of a parametric VaR calculation of a portfolio of two assets 108
4.15. Example of a historical risk calculation of a portfolio of two assets 109
4.16. Historical risk calculation, rank performance based on 100 observations 111
4.17. PV and PV01 assessment 113
4.18. Stress Test 113
4.19. VaR calculation and impact on the deficit reduction/surplus protection 114
4.20. Illustration of full de-risking strategy and consequences 115
4.21. Impact of a new investment policy on contributions 120
4.22. Nominal gilt and nominal swap rates (%) 123
4.23. Index-linked gilt and inflation swap rates, spot rate and variation,
12 August 2013 124
4.24. Gilt real rates and real swap rates, spot rate and variation,
12 August 2013 125
4.25. Liabilities and assets risk assessment 128
4.26. Variation of the yield curve buckets over twenty, thirty, and forty years 129
4.27. Overview of an analysis approach 130
4.28. Correlation table 133
4.29. Example of a correlation matrix (April 2010: ten years of asset
classes correlation) 135
4.30. Yields and shape of the yield curve scenarios 138
4.31. Example of real rates and nominal triggers per bucket 141
4.32. Overview of hedging assets 142
4.33. Which hedging asset to cover which risks? 143
4.34. Example of index-linked gilts relative value sheet, 27 October 2010 145
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4.35. Nine scenarios with inflation hedged only 146
4.36. Example of collateral monitoring 150
4.37. Bank score 152
4.38. Transition management: key points 154
4.39. Performance monitoring of the liabilities vs hedging assets 158
4.40. LDI manager selection and due diligence process 159
4.41. Main mandate structure options 160
4.42. LDI process: key points 163
5.1. Asset classes 166
5.2. Illustration of the breakdown of the expected return of a portfolio 170
5.3. Beta and Alpha management, per asset class, from liquid to illiquid 171
5.4. Overview of Alpha and Beta 172
5.5. Breakdown of the current asset allocation 175
5.6. Overview of the metrics of the current asset allocation 175
5.7. Portfolios simulation 177–8
5.8. Risk and performance metrics of portfolio E 179
5.9. Comparison of the risk and performance metrics of the current
strategy and portfolio E 179
5.10. Expected compound return, volatility, and correlation
hypothesis 182–3
6.1. Case study 1: overview of the position 186
6.2. Performance attribution (£) 189
6.3. Risk attribution (£) 190
6.4. Growth portfolio performance metrics 191
6.5. Growth portfolio risk metrics 192
6.6. Liability risk assessment 194
6.7. Net liabilities: performance and risk attribution (£) 194
6.8. Overview of the investment policy and the ALM framework 195–6
6.9. ALM key metrics 198
6.10. Collateral management report 204
6.11. Risk management—deterministic approach—stress test scenario report 205
6.12. Asset performance analysis 206
6.13. Comparison between the performance of the current strategy and the
recovery plan 207
6.14. Nominal PV01 table 208
6.15. Inflation PV01 table 209
6.16. Statement of movement of cash flows 210
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xxvi List of Tables

6.17. Observations regarding the reports 212
6.18. Performance of the strategy 213
6.19. Market data which should be regularly monitored 214–15
A1.1. Overview of pension funds de-risking tools 220
A1.2. Credit risks scale 228
A1.3. Example of the mechanics of CDS in case of a credit event 230
A1.4. Overview of a CDS 231
A1.5. How is an ILB listed in the financial papers? 232
A1.6. Example of the mechanics of an ILB 233
A1.7. ILB mechanics 233
A1.8. Example of a Bund e inflation cash flows calculation 235
A1.9. Example of the price calculation of a nominal bond 236
A1.10. Overview of ILG characteristics 238
A1.11. Illustration of a five-year ILG cash flow with a fixed coupon of 2% 238
A1.12. Overview of the key factors that influence ILB 240
A1.13. Macro-economic analysis and nominal, breakeven, and real
rates curves vision 241
A1.14. Example of a calculation of forward rates: spot interest rates 243
A1.15. Spot and forward interest rates 243
A1.16. Spot rates and forward rates with start dates in five and ten years 245
A1.17. Overview of a swap 246
A1.18. Example of a swap transaction 248
A1.19. Interest rates curve 248
A1.20. Fixed cash flows timetable 248
A1.21. Floating cash flows timetable 249
A1.22. Consolidated timetable of cash flows 249
A1.23. Bootstrap method calculation 250
A1.24. Overview of the zero-coupon yield curve 251
A1.25. Another example of a bootstrap method 251
A1.26. Comparison between yields to maturity and zero-coupon yields 253
A1.27. Forward rate calculation 254
A1.28. Calculation of the present value of the swap 256
A1.29. Profit and loss for a receiver and payer of the swap 257
A1.30. Example of zero-coupon swap pricing 259
A1.31. Yield curve 259
A1.32. Cash flows timetable 259
A1.33. Calculation of the present value of the cash flows 259
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A1.34. Overview of zero-coupon swap 260
A1.35. Overview of an asset swap 261
A1.36. Example of z-spread calculation of a bond 262
A1.37. Overview of the strategies used by pension funds 264
A1.38. Overview of the strategies used by pension funds 264
A1.39. Example of swap vs swaption delta hedge ratio 272
A1.40. Swaption overview 274
A1.41. Implied volatility per expiry dates and swap’s maturity
(At-The-Money) 275
A1.42. Overview of the inflation swaps’ main applications 277
A1.43. Overview of the inflation and interest risks and inflation
and IRS results 285
A1.44. Pros and cons in using an inflation cap 287
A1.45. Pros and cons overview in using an inflation floor 289
A1.46. Comparison between using pooled funds and a segregated approach 291
A1.47. Overview of gilt TRS and repo gilt 295
A1.48. In and out flows statement 295
A1.49. Estimate of the in and out cash flows for the next three years 297
A1.50. Example of asset allocation and expected income 297
A1.51. CPI and RPI measures of inflation 298
A2.1. Frequency table 302
A2.2. Illustration of groups and percentage 302
A2.3. Example of the returns of stocks 304
A2.4. Example of a median calculation 305
A2.5. Example of a mode calculation 305
A2.6. Example of a standard deviation calculation 306
A2.7. Asset I: difference between the returns and the mean 306
A2.8. Asset II: difference between the returns and the mean 306
A2.9. Squared deviations 307
A2.10a. Standard deviation calculation process 309
A2.10b. First standard deviation calculation 309
A2.11. Skewness and kurtosis overview 312
A2.12. Illustration of quartile deviation 313
A2.13. Example of Excel functions 313
A2.14. Probability table that a random variable Z, normally distributed
with zero mean and unit variance will be less than or equal to z0 320–1
A2.15. Example of the standard deviation calculation of a portfolio 322
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xxviii List of Tables

A2.16. Steps of the calculation 323
A2.17. Example of the calculation of the correlation coefficient r of an asset 327
A3.1. Calculation of an efficient frontier of a portfolio of two assets 334
A3.2. Expected return, standard deviation, and correlation of a portfolio
of two assets 335
A3.3. Expected return, standard deviation, and correlation of a portfolio
of two assets 336
A4.1. Buyout exercise and risk removed 341
A4.2. Buyout: subset of liabilities typically targeted 341
A4.3. Buy-in: subset of liabilities typically targeted 342
A4.4. Benefit amounts and economic risks of bulk annuities 343
A4.5. Longevity swap: risks removed 344
A4.6. Subset of liabilities typically targeted 345
A4.7. Buyout–Buy-in: longevity swap overview 346
A5.1. Present value factors 347
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December 13. The boats of the squadron, carrying about a thousand
seamen and marines,[491] left the ships during the night of
December 12 in search of the American gunboats, which tried to
escape, but were becalmed and obliged by the tide to anchor. After a
tedious row of thirty-six hours the British boats overtook the gunboat
flotilla December 14, and after a sharp struggle succeeded in
capturing the whole, with a loss of seventeen men killed and
seventy-seven wounded.[492] The American crews numbered one
hundred and eighty-two men, and lost six killed and thirty-five
wounded.
News of the capture of the gunboats, which occurred at noon
December 14 about forty miles to the eastward of New Orleans,
arrived on the evening of December 15, and produced the utmost
consternation.[493] Jackson hurried back to the city, where his
presence was no longer a matter of choice but necessity. Instantly
on hearing the news he sent expresses to Coffee at Baton Rouge,
and to Carroll and Thomas, wherever they might be found on the
river, urging them to hasten with all possible speed to New Orleans.
He issued a proclamation to the people of the city, in which he
threatened them with punishment if they were not unanimous,[494]
and at the same time he recommended the legislature to suspend
the writ of habeas corpus. Finding the legislature hesitate, Jackson
declared martial law by proclamation[495] the same day, December
16, and assumed dictatorial powers.
 MAP
SHEWING THE LANDING OF THE
BRITISH ARMY
its several Encampments and fortifications
on the Mississippi and the works
they erected on their Retreat; also the
different posts Encampments and fortifications
made by the several Corps of the
American Army during the whole campaign.
By Major A. LACARRIERE LATOUR,
Late principal Engineer 7th Military District, U. S. Army, 1815.
STRUTHERS & CO., ENGR’S, N.Y.

Feverish activity followed. General Coffee above Baton Rouge

received Jackson’s summons on the evening of December 17, and
marched the next morning with twelve hundred and fifty men. In two
days he made one hundred and twenty miles, camping on the night
of December 19 within fifteen miles of New Orleans, with eight
hundred men.[496] Carroll, with the Tennessee brigade which left
Nashville November 27, arrived at New Orleans December 21, and a
squadron of mounted Mississippi volunteers hurried down. The
British also lost no time. Their advance disembarked on the Isle aux
Poix in Lake Borgne on the night of December 14, and during the
following week all the boats and seamen of the fleet were occupied
in transporting seven thousand men, with their equipment, thirty
miles from the fleet to the island. During the night of December 18
two British officers reconnoitred the head of Lake Borgne.[497] At the
mouth of Bayou Bienvenu, not fifteen miles from New Orleans, was a
fishermen’s village. The fishermen were Spaniards, with no love for
the United States, and ready to accept British pay. They received the
two British officers, and conveyed them in a canoe up the bayou to
the Villeré plantation on the bank of the Mississippi only six miles
from New Orleans.[498] There, at their leisure, Lieutenant Peddie of
the quartermaster’s department and Captain Spencer of the “Carron”
selected the line of advance for the British army, and returned,
unmolested and unseen, through the bayou to the lake and the Isle
aux Poix.
Only December 21, two days after the British reconnaissance,
was an American picket of eight men and a sergeant placed at the
fishermen’s village,[499] where they remained thirty-six hours without
learning that British officers had been on the spot, or that the
fishermen were all away, acting as pilots for the approaching British
boats. Meanwhile the troops at Isle aux Poix were ready to move
almost as soon as Lieutenant Peddie could return to show them the
way. At ten o’clock on the morning of December 22 the light brigade
—sixteen hundred and eighty-eight rank-and-file,[500] under Colonel
Thornton, who had led the advance at Bladensburg—embarked in
boats, and after a day on the lake arrived the next morning,
December 23, at daylight, without giving alarm, at the fishermen’s
village, where they surprised and captured the picket, and then
passing up the bayou five miles, landed at a point about three miles
from the Mississippi River. No attempt at concealment was made.
[501] The troops were formed in column, and found no obstacles to
their march except the soft ground and the ditches. Through reeds
and cypress swamp they made their way about three miles, when
their advance suddenly entered open fields skirted by an orange-
grove, with the broad Mississippi beyond. They were on the Villeré
plantation; and they surprised and captured Major Villeré and his
militia company, in his own house at noon-day, after a march of three
miles with sixteen hundred men, from a point which had been
recognized by Jackson as one of two or three necessary avenues of
approach.
The record of American generalship offered many examples of
misfortune, but none so complete as this. Neither Hull nor Harrison,
neither Winder nor Samuel Smith, had allowed a large British army,
heralded long in advance, to arrive within seven miles unseen and
unsuspected, and without so much as an earthwork, a man, or a gun
between them and their object. The disaster was unprecedented,
and could be repaired only by desperate measures.
 CHAPTER XIII.
The defence of New Orleans resembled the defence of
Washington until the moment when in each case the British
expedition came within sight. Jackson was even slower than Winder
to see the point of danger or to concentrate his forces. At
Washington, Winder took command July 1, and the British expedition
arrived August 16; at Mobile, Jackson took command August 16, and
the British expedition arrived December 14. In neither case was the
interval seriously employed for defence. So much was Jackson
misled that he collected no troops, and made no inquiry as to the
military means at his disposal at New Orleans. Had he gone there
September 1, he would have felt the want of arms and equipment,
and would have been able to supply them. During the summer, while
yet among the Creeks, he was said to have made requisition for a
quantity of war material to be sent to New Orleans;[502] but he
certainly showed no interest in its shipment or the causes for its
delay in arrival. The arms should have reached New Orleans in
October, when he would have had ample time to correct any failure
or want of supply. He could have used, in case of necessity, the
steamboat “Enterprise,” which was then regularly plying on the
Mississippi, and was not the only steamboat on those waters.[503] If
New Orleans was deficient in many articles of military necessity, the
fault was not wholly in the War Department.
A similar criticism applied to the political situation at New Orleans.
Governor Claiborne wanted authority to control the factions in his
legislature, and the legislature wanted an impulse sufficiently
energetic to overcome its inertia. Probably Jackson’s presence
would at any time have given authority to Claiborne and energy to
the entire State government. From the moment of his actual arrival,
difficulties of this kind seemed to cease. “It is hardly possible,” said
the military historian of the campaign,[504] “to form an idea of the
change which his arrival produced on the minds of the people.”
 When the British expedition was once known to have appeared at
the entrance of Lake Borgne, Jackson’s task was perhaps simpler
than Winder’s, for Winder might doubt whether the British meant to
attack Washington, and in fact General Ross took the decision only
at the last moment; but no one could doubt that New Orleans was
the object of Pakenham’s expedition. Jackson had only to choose his
positions and collect his resources. These were small; but on the
other hand the British were opposed by natural difficulties much
greater at New Orleans than at Washington. Even their greater
numbers were a disadvantage when they were obliged to move in
widely separated detachments, in open boats, from a point far
distant from their column’s head, and toward a point easily fortified.
If until the moment of the enemy’s appearance Jackson showed
no more military capacity than was shown by Winder, his conduct
thenceforward offered a contrast the more striking because it proved
how Washington might have been saved. Winder lost his head when
he saw an enemy. Jackson needed to see his enemy in order to act;
he thought rightly only at the moment when he struck. At noon,
December 23, New Orleans was in greater danger than Washington
on the afternoon of August 23, when the British advanced from the
Patuxent. Had Colonel Thornton followed his impulses and marched
directly on the city, he must have reached it before a gun could have
been fired by the Americans; his own muskets would have given the
first news of his arrival. Major-General Keane, his commanding
officer, preferred caution,[505] and his delay gave a few hours time
for Jackson to show his qualities.
News that a British column had reached the Villeré plantation was
brought to Jackson at headquarters in New Orleans, at about half-
past one o’clock, much as the news was brought to Winder, August
24, that the British were marching on Bladensburg. The distances
were about the same. Winder and Jackson both allowed the enemy
to approach within seven miles before anything had been done for
defence. In one respect Jackson was more unfortunate than Winder,
for his troops were not ready to march; they were not even collected.
Jackson sent orders to the different corps, but several hours passed
before the men could be brought down and posted between the city
and the British.
Fortunately Major Latour, chief-engineer in Military District No. 7,
had been sent that morning to examine the approaches from Lake
Borgne, and as he rode down the road at noon he met persons flying
toward town with news that the British had penetrated through the
canal to Villeré’s house. Latour was a trained French engineer,
whose services were extremely valuable, not only during the
campaign but afterward; for he subsequently wrote a “History of the
War in West Florida and Louisiana,” which was far the best military
work published in the United States till long after that time, and
furnished the only accurate maps and documents of the campaign at
New Orleans.[506] On the morning of December 23 Latour
approached within rifle-shot of the British force, and judged their
number accurately as sixteen or eighteen hundred men.[507] Such
exact information, which could not have been gained from any
ordinary scout, was invaluable. Latour hastened to headquarters,
and reported at two o’clock to Jackson the position and numbers of
the enemy. The general, on that information, decided to attack.
For such a purpose Jackson’s resources were ample. Four miles
above the city his Tennessee militia were camped,—Carroll’s brigade
numbering probably about two thousand effectives, and the
remnants of Coffee’s mounted brigade numbering some seven
hundred men in the field. The Mississippi and New Orleans
volunteers could be reckoned at about seven hundred men,[508]
besides three regiments of city militia. The Seventh United States
Infantry produced four hundred and sixty-five men in the ranks; the
Forty-fourth counted three hundred and thirty-one; while a
detachment of artillerists, twenty-two in number, with two six-pound
field-pieces, added greatly to the numerical strength of the Infantry.
[509] Against Thornton’s force, numbering one thousand six hundred
and eighty-eight rank-and-file, or about nineteen hundred men all
told, Jackson could oppose about five thousand Infantry with two
field-pieces.
 Besides these land forces Jackson was provided with another
resource. In the river at New Orleans lay a war-schooner, the
“Carolina,” rated at fourteen guns, armed with one long twelve-
pounder and six twelve-pound carronades on a broadside.[510] A
sixteen-gun sloop-of-war, the “Louisiana,” was also at New Orleans,
but not ready for immediate use. The “Carolina” could be brought
instantly into action, and her broadside of seven twelve-pounders,
added to the field-battery of two six-pounders, gave Jackson
immense advantage over the British, who had no artillery except two
three-pounders and rockets, and whose lines must be enfiladed by
the “Carolina’s” fire.
Jackson, aware of his superiority, expected with reason to destroy
the British detachment. He did not even think more than half his
force necessary for the purpose, but detached the whole of Carroll’s
brigade and the three regiments of city militia,—fully twenty-five
hundred men,—to guard the town against an apprehended attack
from the north. Without giving the reasons which led him to believe
that the British could approach on that side without ample warning,
his report said,—
“Apprehending a double attack by the way of Chef Menteur, I left
General Carroll’s force and the militia of the city posted on the Gentilly
road, and at five o’clock p.m. marched to meet the enemy, whom I was
resolved to attack in his first position, with Major Hind’s dragoons,
General Coffee’s brigade, parts of the Seventh and Forty-fourth
regiments, the uniformed companies of militia under the command of
Major Plauché, two hundred men of color chiefly from St. Domingo,
raised by Colonel Savary and acting under the command of Major
Daquin, and a detachment of artillery under the direction of Colonel
McRea, with two six-pounders under the command of Lieutenant
Spots,—not exceeding in all fifteen hundred.”
More exact returns showed that Jackson carried with him eight
hundred and eighty-four regular troops and two field-pieces, five
hundred and sixty-three mounted riflemen of Coffee’s brigade, five
hundred and fifty-nine Louisiana militia, one hundred and seven
Mississippians, and eighteen Choctaw Indians,—in all, twenty-one
hundred and thirty-one men and two guns, besides the “Carolina,”
which dropped down the river at four o’clock.[511]
 Jackson did not, like Winder, pass the hours in looking at his
enemy, nor did he, like General Smith at Baltimore, send out militia
under militia officers, to stand in close order on an open field and
wait attack. His chief difficulty was due to the ground, which obliged
him to make his main assault in a narrow column along the road. To
gain the advantage of his numbers, he detached Coffee with seven
hundred and thirty-two men, mostly armed with rifles, to make a
detour toward the left and fall on the British flank and rear, while
Jackson himself, with fourteen hundred men and two guns, should
strike the British advance where it was posted on the levee.
 PLAN OF THE
Attack made by MAJ.-GEN. JACKSON
On a division of the British Army commanded
by
MAJOR-GEN. J. KEANE,
On the 23rd December, 1814, at 7 o’clock at night.
by MAJOR A. LACARRIERE LATOUR, principal Engineer in the
7th Military District U. S. Army.
STRUTHERS & CO., ENGR’S, N. Y.
The signal for battle was to be given by the “Carolina’s” guns.
Commodore Patterson in the “Carolina” received his orders at half-
past six, and getting out sweeps, brought his vessel in a few minutes
abreast of the British camp, where he anchored close in shore and
began a heavy fire,[512] soon after seven o’clock. Ten minutes later,
Jackson, waiting about two miles above, ordered his men to
advance, and moving down the road with his regulars and New
Orleans companies struck the British outposts about a mile below his
point of departure, at a few minutes before eight o’clock. At the same
time Coffee, as he marched along the edge of the swamp, hearing
the signal, wheeled to the right, and moved toward the British flank.
Night had then fallen. The weary British troops had lain down,
when their sentries on the levee gave the alarm, and immediately
afterward the roar of seven cannon close beside them threw their
camp into confusion. About half an hour afterward, while the
“Carolina” still swept the camp with its shot, the British sentries on
the levee a mile above gave another alarm, and in a few moments
the outposts were sharply attacked.
The accounts of the battle fought along the levee, under the
command of Jackson in person, were both confused and
contradictory. Thornton’s brigade was composed of the Eighty-fifth
and Ninety-fifth regiments, a company of rocketeers, one hundred
sappers and miners, and the Fourth regiment as a support,—in all,
sixteen hundred and eighty-eight rank-and-file.[513] At the point
where the fighting began the British had merely an outpost, which
was forced back by Jackson’s attack, with some difficulty, about one
hundred and fifty yards.[514] Colonel Thornton ordered two of his
regiments—the Eighty-fifth and Ninety-fifth, eight hundred rank-and-
file[515]—to support the outpost, and their arrival checked Jackson’s
advance. Indeed, the American line was driven back and lost
ground, until the two field-pieces were in danger, and were hastily
withdrawn.[516] Each party claimed that the other first withdrew from
fire; but the American report admitted that the battle which began on
the levee at eight ceased before nine, while Jackson seemed not to
regard his attack as successful. His first brief report, written
December 26,[517] said,—
“The heavy smoke occasioned by an excessive fire rendered it
necessary that I should draw off my troops, after a severe conflict of
upward of an hour.”

Jackson’s official report of December 27 said,[518]—

“There can be but little doubt that we should have succeeded on
that occasion with our inferior force in destroying or capturing the
enemy, had not a thick fog which arose about eight o’clock
occasioned some confusion among the different corps. Fearing the
 consequences, under this circumstance, of the further prosecution of
a night attack with troops then acting together for the first time, I
contented myself with lying on the field that night.”
Although the battle was severest where Jackson commanded, it
was most successful where Coffee attacked. On hearing the
“Carolina” open fire, Coffee turning to the right advanced on the
British flank, striking it nearly opposite to the “Carolina’s” position.
The British, thus surrounded, were placed in a situation which none
but the steadiest troops could have maintained. So great was the
confusion that no organized corps opposed Coffee’s men. Squads of
twenty or thirty soldiers, collecting about any officer in their
neighborhood, made head as they best could against Coffee’s
riflemen, and the whole British position seemed encircled by the
American fire. Forced back toward the river, the British rallied behind
an old levee which happened at that point to run parallel with the
new levee, at a distance of about three hundred yards.[519] Knots of
men, mixed in great disorder, here advancing, there retreating,
carried on a desultory battle over the field, often fighting with clubbed
weapons, knives, and fists. At last the British centre, finding a strong
protection in the old levee which answered for an earthwork, held
firm against Coffee’s further advance, and were also sheltered by the
new levee in their rear from the fire of the “Carolina’s” guns. At about
the same time several companies of the Twenty-first and Ninety-third
regiments arrived from Lake Borgne, and raised the British force to
two thousand and fifty rank-and-file.[520] Coffee then despaired of
further success, and withdrew his men from the field.
“My brigade,” wrote Coffee immediately afterward,[521] “met the
enemy’s line near four hundred yards from the river. The fire on both
sides was kept up remarkably brisk until we drove them to the river-
bank, where they gave a long, heavy fire, and finally the enemy fell
behind the levee or river-bank that is thrown up. The battle had now
lasted near two and a half hours. The regulars had ceased firing near
one hour before I drew my men back.”
The “Carolina” began firing soon after seven o’clock, and ceased
at nine.[522] Jackson’s attack with the regulars began at eight
o’clock, and his force ceased firing before nine. Coffee withdrew his
men at about half-past nine. The hope of destroying the British force
was disappointed; and brilliant as the affair was, its moral effect was
greater than the material injury it inflicted. Major-General Keane
officially reported his loss as forty-six killed, one hundred and sixty-
seven wounded, and sixty-four missing,—two hundred and sixty-
seven in all.[523] Jackson reported twenty-four killed, one hundred
and fifteen wounded, and seventy-four missing,—two hundred and
thirteen in all. The two regular regiments suffered most, losing fifteen
killed and fifty-four wounded. Coffee’s Tennesseeans lost nine killed
and forty-three wounded. The New Orleans volunteer corps and the
colored volunteers lost seventeen wounded.
Compared with the night battle at Lundy’s Lane, the night battle of
December 23 was not severe. Brown’s army, probably not more
numerous than Jackson’s, lost one hundred and seventy-one men
killed, while Jackson lost twenty-four. Brown lost five hundred and
seventy-one wounded, while Jackson lost one hundred and fifteen.
Drummond at Lundy’s Lane reported a British loss of eighty-four
killed, while Keane reported forty-six. Drummond reported five
hundred and fifty-nine wounded, while Keane reported one hundred
and sixty-seven. The total British loss at Lundy’s Lane was eight
hundred and seventy-eight men; that of December 23 was two
hundred and sixty-seven. Jackson’s battle was comparatively short,
lasting an hour and a half, while the fighting at Lundy’s Lane
continued some five hours. Lundy’s Lane checked the enemy only
for a day or two, and the battle of December 23 could hardly be
expected to do more.
Conscious that the British army would advance as soon as its
main body arrived, Jackson, like Brown, hastened to place his men
under cover of works. Falling back the next morning about two miles,
he took position behind an old canal or ditch which crossed the strip
of cultivated ground where it was narrowest. The canal offered no
serious obstacle to an enemy, for although ten feet wide it was
shallow and dry, and fully three quarters of a mile long. Had the
British been able to advance in force at any time the next day,
December 24, directing their attack toward the skirts of the swamp to
avoid the “Carolina’s” fire, they might have forced Jackson back
upon New Orleans; but they were in no disposition to do on the 24th
what they had not ventured to do on the 23d, when they possessed
every advantage. Keane believed that Jackson’s force in the night
battle amounted to five thousand men.[524] Keane’s troops, weary,
cold, without food, and exposed to the “Carolina’s” fire, which
imprisoned them all day between the two levees,[525] were glad to
escape further attack, and entertained no idea of advance. The day
and night of December 24 were occupied by the British in hurrying
the main body of their troops from the Isle aux Poix across Lake
Borgne to the Bayou Bienvenu.
By very great efforts the boats of the fleet transported the whole
remaining force across the lake, until, on the morning of December
25, all were concentrated at the Villeré plantation. With them arrived
Major-General Sir Edward Pakenham, and took command. Hitherto
the frequent British disasters at Plattsburg, Sackett’s Harbor, Fort
Erie, and the Moravian towns had been attributed to their generals.
Sir George Prevost, Major-Generals Drummond and Riall, and
Major-General Proctor were not officers of Wellington’s army. The
British government, in appointing Sir Edward Pakenham to
command at New Orleans, meant to send the ablest officer at their
disposal. Pakenham was not only one of Wellington’s best generals,
but stood in the close relation of his brother-in-law, Pakenham’s
sister being Wellington’s wife. In every military respect Sir Edward
Pakenham might consider himself the superior of Andrew Jackson.
He was in the prime of life and strength, thirty-eight years of age,
while Jackson, nearly ten years older, was broken in health and
weak in strength. Pakenham had learned the art of war from
Wellington, in the best school in Europe. He was supported by an
efficient staff and a military system as perfect as experience and
expenditure could make it, and he commanded as fine an army as
England could produce, consisting largely of Peninsula veterans.
Their precise number, according to British authority, was five
thousand and forty rank-and-file, on Christmas Day, when
Pakenham took command.[526] Afterward many more arrived, until
January 6, when ten regiments were in camp at Villeré’s plantation,
—Royal Artillery; Fourteenth Light Dragoons; Fourth, Seventh,
Twenty-first, Forty-third, Forty-fourth, Eighty-fifth, Ninety-third, and
Ninety-fifth Infantry,—numbering, with sappers and miners and staff-
corps, five thousand nine hundred and thirteen rank-and-file; or with
a moderate allowance of officers, an aggregate of at least sixty-five
hundred Europeans. Two West India regiments of black troops
accompanied the expedition, numbering ten hundred and forty-three
rank-and-file. The navy provided about twelve hundred marines and
seamen, perhaps the most efficient corps in the whole body.
Deducting eight hundred men for camp-duty, Pakenham, according
to British official reports, could put in the field a force of eight
thousand disciplined troops, well-officered, well-equipped, and
confident both in themselves and in their commander. More were on
their way.
The Duke of Wellington believed such a force fully competent to
capture New Orleans, or to rout any American army he ever heard
of; and his confidence would have been, if possible, still stronger,
had he known his opponent’s resources, which were no greater and
not very much better than those so easily overcome by Ross at
Bladensburg. The principal difference was that Jackson
commanded.
Jackson’s difficulties were very great, and were overcome only by
the desperate energy which he infused even into the volatile creoles
and sluggish negroes. When he retired from the field of the night
battle, he withdrew, as has been told, only two miles. About five
miles below New Orleans he halted his troops. Between the river
and the swamp, the strip of open and cultivated land was there
somewhat narrower than elsewhere. A space of a thousand yards, or
about three fifths of a mile, alone required strong defence. A shallow,
dry canal, or ditch, ten feet wide, crossed the plain and opened into
the river on one side and the swamp on the other. All day the troops,
with the negroes of the neighborhood, worked, deepening the canal,
and throwing up a parapet behind it. The two six-pound field-pieces
commanded the road on the river-bank, and the “Louisiana”
descended the river to a point about two miles below Jackson’s line.
A mile below the “Louisiana” the “Carolina” remained in her old
position, opposite the British camp. By night-fall the new lines were
already formidable, and afforded complete protection from musketry.
For further security the parapet was continued five hundred yards,
and turned well on the flank in the swamp; but this task was not
undertaken until December 28.[527]
The first act of Sir Edward Pakenham gave the Americans at least
three days for preparation. Even veteran soldiers, who were
accustomed to storming mountain fortresses held by French armies,
were annoyed at exposing their flank to the fire of fifteen or twenty
heavy guns, which hampered not only every military movement but
also every motion beyond cover of the bank. Pakenham sent
instantly to the fleet for cannon to drive the ships away. In reality he
could not so relieve himself, for the American commodore soon
placed one twenty-four-pound gun and two twelve-pounders in
battery on the opposite bank of the river, where they answered every
purpose of annoyance, while the ships after December 28 took little
part in action.[528] Pakenham gained nothing by waiting; but he
would not advance without artillery, and the sailors, with much labor,
brought up a number of light guns,—nine field-pieces, it was said,
[529] two howitzers, and a mortar. Pakenham passed two days,
December 25 and 26, organizing his force and preparing the battery.
At daylight, December 27, the guns were ready. Five pieces
suddenly opened with hot shot and shell on the “Carolina,” and in
half an hour obliged the crew to abandon her.[530] The “Louisiana,”
by extreme exertion, was hauled beyond range while the British
battery was occupied in destroying the “Carolina.”
Nothing then prevented Pakenham’s advance, and the next
morning, December 28, the whole army moved forward.
“On we went,” said the Subaltern, “for about three miles, without
any halt or hindrance, either from man or inanimate nature coming in
our way. But all at once a spectacle was presented to us, such indeed
as we ought to have looked for, but such as manifestly took our
leaders by surprise. The enemy’s army became visible. It was posted
about forty yards in rear of a canal, and covered, though most
imperfectly, by an unfinished breastwork.”
The British left, coming under the fire of the “Louisiana,” was
immediately halted and placed as far as possible under cover. The
skirmishers in the swamp were recalled. In the evening the whole
army was ordered to retire beyond cannon-shot and hut themselves.
[531] They obeyed; but “there was not a man among us who failed to

experience both shame and indignation.”[532]

Beyond doubt, such caution was not expected from Sir Edward
Pakenham. Sir George Prevost at Sackett’s Harbor and Plattsburg,
and Colonel Brooke at Baltimore had retired before American works;
but those works had been finished forts, strongly held and situated
on elevated points. Even with such excuses, and after suffering
severe losses, Prevost was discredited for his retreats. Pakenham
did not live to make a report, and his reasons remained unavowed;
but Admiral Cochrane reported that it was “thought necessary to
bring heavy artillery against this work, and also against the ship
which had cannonaded the army when advancing.”[533] The decision
implied that Pakenham considered the chances unfavorable for
storming the American line.
In effect, Pakenham’s withdrawal December 28 was equivalent to
admitting weakness in his infantry, and to calling on the artillery as
his strongest arm. The experiment showed little self-confidence. Not
only must he sacrifice two or three days in establishing batteries, but
he must challenge a contest with cannon,—weapons which the
Americans were famous for using, both afloat and ashore, with
especial skill. Jackson could also mount heavy guns and allow
Pakenham to batter indefinite lines. Sooner or later Pakenham must
storm, unless he could turn the American position.
 Sketch of the Position of the British and American Forces
NEAR NEW ORLEANS, FROM THE 23rd OF DECEMBER TO THE 8th OF
JANUARY, 1815.
From original by John Peddie, D. A. Q. M. Genl., endorsed “Enclosure in M. Genl.
Lambert’s of 29 Jany., 1815.”—British Archives.
REFERENCES.
A. Enemy’s position on the night of the 23rd of December when he attacked.
B. Bivouac of the troops for the 23rd of December.
C. Position on the night of the 23rd of December.
D. Position on the night of the 24th of December.
E. Position after the advance on the 28th of December.
F. Col. Thornton’s attack on the morning of the 8th of January.
G. Col. Thornton’s furthest advance.
1, 2, 3, 4, 5, 6, 7, 8. Redoubt and batteries constructed after the advance of the
28th.
H. The enemy retiring.
The seamen were once more set to work, and “with incredible
labor” rowed their boats, laden with heavy guns, from the fleet to the
bayou, and dragged the guns through three miles of bog to the
British headquarters. The Americans also prepared batteries. From
the lines one thirty-two-pounder, three twenty-four-pounders, and
one eighteen-pounder commanded the plain in their front. Besides
these heavy guns, three twelve-pounders, three six-pounders, a six-
inch howitzer or mortar, and a brass carronade, useless from its bad
condition,[534]—in all, twelve or thirteen guns, capable of replying to
the British batteries, were mounted along the American lines. On the
west bank of the river, three quarters of a mile away, Commodore
Patterson established, December 30 and 31, a battery of one twenty-
four-pounder and two long twelve-pounders, which took the British
batteries in flank.[535] Thus the Americans possessed fifteen
effective guns, six of which were heavy pieces of long range. They
were worked partly by regular artillerists, partly by sailors, partly by
New Orleans militia, and partly by the “hellish banditti” of Barataria,
who to the number of twenty or thirty were received by General
Jackson into the service and given the care of two twenty-four-
pounders.
The number and position of the British guns were given in
Lieutenant Peddie’s sketch of the field. Before the reconnaissance of
December 28, field-pieces had been placed in battery on the river-
side to destroy the “Carolina” and “Louisiana.” Canon Gleig said that
“nine field-pieces, two howitzers, and one mortar” were placed in
battery on the river-side during the night of December 25.[536]
Captain Henley of the “Carolina” reported that five guns opened
upon him on the morning of December 26.[537] Captain Peddie’s
sketch marked seven pieces mounted in battery on the river-side,
bearing on Commodore Patterson’s battery opposite, besides four
pieces in two batteries below. Their range was sufficient to destroy
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