The survey findings, developed with CFO Research Services, reflect survey responses and in-depth interviews with more than 400 CFOs, treasurers and other finance executives in the United States, Canada and the United Kingdom.

1. A Qualified Commitment to DB Plans:
Risk Management Amid a Steep Downturn
The 2009 Towers Perrin — CFO Research Services Pension Study
y
Key findings and business implications
June 30, 2009
© 2009 Towers Perrin

2. Today’s Agenda
Describe the study
Reveal the headlines
Share some insights behind the headlines
Put this in context and look ahead to the next few months and years
Explore a decision-making framework that achieves desired p
p g pension risk
management objectives
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3. About the 2009 Study
Third annual defined benefit pension study of senior
finance executives
Goal
Gain corporate finance insights into impact of the financial
turmoil on defined benefit (DB) plans
— Funding, investment and business implications
— Plan design and risk reduction alternatives
— Future plans
Methodology
439 senior finance responses from large U.S., UK and
p g ,
Canadian organizations across all industries
18 senior finance executive interviews
Conducted in April/May 2009
Incorporates financial data from Capital IQ
Results segmented by:
— Company size
j
— Investment objectives
— Long-term DB plan commitment
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4. The headlines – funding perspective
The financial crisis has hurt Which of the following best describes your DB
operating performance and the plan funding policy 2 years ago and today?
financial health of most DB
plans Contribute enough to achieve explicit
funding targets
29%
30%
Impact on cash flow is of
g
greatest concern ( %),
(57%), Contribute the amount that ensures
the plan is f
fully funded
f
29%
25%
followed by income
statement and balance sheet Contribute the legal or negotiated 15%
minimum payment 21%
impact
And although cash and credit Contribute the maximum tax- 14%
deductible amount 10%
are generally scarce, most
companies (80%) are confident Make ad hoc decisions on pension
10%
funding without a formal funding
they ll
they’ll have the cash to meet policy
9%
plan funding commitments
4%
Don't know/Not applicable
With a number changing / 5%
having changed the overall
g g 0% 20% 40%
funding policy
Funding policy today Funding policy two years ago
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5. The headlines – commitment and investment
Despite tough times, most
executives remain
committed to the financial
health of their DB plans Investment Orientation
and invest pension assets
Reduce Increase
with an eye towards risk risk returns
management
Viability
7 of 10 respondents Long-Term focused
54% 17%
plan to pursue long-term DB
Commitment Alternative
te at e
viability f th i DB
i bilit for their focused
24% 5%
plans rather than seek
alternatives to DB plan
p
sponsorship p
Over 3 of 4 say they will
focus more on reducing
risk than seeking
additional investment
returns
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6. The headlines – asset allocation
Many respondents said the proportion Senior financial executives
of equities included in the pension expect to keep equity content
portfolio is lower, either because the
lower lower than they had been
market has depressed their values before this recent crisis took
more or because of a change in target hold
asset allocation
In the last six months, has your company In your opinion, will recent market events cause
adhered to a consistent portfolio a long-lasting change in the allocation of equity
rebalancing strategy? investments in your company's pension fund?
11%
No,
31%
42%
28%
Yes,
69%
18%
Yes,
Yes likely to decrease allocation
Yes, likely to increase allocation
No, will not cause a long-lasting change
Don't know
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7. The headlines – use of derivatives
Synthetic products, such as swaps and futures, have become common
pension risk management tools
Nearly
N l ½ of l f large U S companies (44% overall) use i t
U.S. i ll) interest rate swaps
t t
and a similar number of U.S. companies use futures to manage interest
rate risk
Does your company currently use the following
financial instruments to manage risk in its DB plan?
Interest rate swaps 48% 42% 10%
Interest rate futures 46% 43% 11%
Call/Put options 38% 50% 12%
Currency forwards 35% 53% 12%
Credit derivatives 31% 56% 13%
0% 25% 50% 75% 100%
Yes No Don't know
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8. Behind the headlines
While most DB plans …1 in 5 respondents said their plans fared well –
have been hurt and most of these companies were substantially
financially…
financially and consistently more likely to have used synthetic
instruments to manage pension risk
Percentage of respondents in each segment using
financial instruments to manage pension risk
79%
Interest rate futures 46%
22%
76%
Interest rate swaps 46%
28%
74%
Currency forwards 35%
29%
72%
Call/Put options 33%
19%
70%
Credit derivatives 39%
16%
0% 20% 40% 60% 80% 100%
Negative effect No effect Positive
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9. Behind the headlines
Those focused on Relative to “return-seekers,” those focused on
minimizing risk act mitigating future risks appear to have adopted
differently from those what seem to be more conservative investment
pursuing higher strategies
investment returns Suffered more damage from pension
financial results in 2008
Rely less on synthetic hedging tools
Less likely to increase equity exposure
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10. Behind the headlines
Those seeking Relative to those pursuing long-term viability of
alternatives to their DB their plans, those seeking alternatives:
plans have a different Saw their financial statements hit harder by
profile from those recent economic events
committed to the DB
plans well into the Are more likely to have design changes
future underway
Are less likely to use synthetic hedging
instruments or own illiquid investments
Are moving away from full funding as a
contribution policy objective
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11. Behind the headlines
While commitment to DB …that commitment has its limits and
plans remains solid… shows signs of fraying
Among those committed t DB plan
A th itt d to l
Has the recent financial turmoil made your
company more or less likely to seek an exit
viability, half (60% in U.S.) say the
strategy for its DB plans? economic crisis has made them more
likely to seek a DB exit strategy
y gy
Nearly half would consider settling
More likely 61%
part of their pension obligation
through annuities for 105% of the
No change 33% obligation (with another 18% going
up to 120%)
Less likely 4% Almost ¾ would reconsider their
long-term
long term commitment if pension
accounting rules made income
Don't know 2%
statements more volatile
0% 25% 50% 75%
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12. Other noteworthy findings
Plan design changes are a constant amongst large companies
Less than 10% of respondents have neither made recent changes nor plan
changes i th near f t
h in the future
Alternative investments remains a popular investment option
70% have some private equity investments — the rate is higher for the
largest organizations and f those “i i f the l
l i i d for h “in it for h long h l”
haul”
Half use “alpha-seeking” strategies and unlisted real estate
The majority are likely to maintain their current investment levels, while a
quarter expect to increase their use
Survey findings were generally consistent across markets
The most notable exceptions include:
— Downturn has hit U.S. companies especially hard
— U.S. companies are especially likely to shift away from equities; UK
companies are more likely to shift toward equities
— U.S. companies are more likely to seek termination as a result of
regulatory changes
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13. Putting this in context
Asset returns for a common U.S. DB pension plan
60% Equity (40% lg cap, 10% s/mid cap,10% int’l)
40% Fixed Income (35% BC Agg, 5% cash)
25%
20%
15%
10%
5%
0%
-5%
-10%
10%
-15%
-20%
-25%
Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 May 2009
Annualized
% Return 17.1 13.2 -0.3 -3.6 -9.0 20.8 9.8 5.2 12.2 6.3 -22.8 3.5
YTD 2009
Annualized Return 10yr Dec 2008 = 2.4%
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14. Putting this in context
Fixed income yields and rates
Key Bond Yields (at end of month)
9.00%
8.00%
8 00%
Proxy for pension
7.00%
discount rates
6.00%
5.00%
4.00%
3.00%
2.00%
Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08
30-Year T-Bonds 30-Year Swaps ML 10+ HQ Spreads
Dec. 31, 2007 4.45% 5.03% 6.18% 1.73%
Dec. 31 2008
D 31, 2.69%
2 69% 2.69%
2 69% 5.92%
5 92% 3.23%
3 23%
May 31, 2009 4.34% 4.18% 6.62% 2.28%
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15. Putting this in context
Funded status under varying investment strategies
PBO Funded Ratio
135%
125%
115%
105%
95%
85%
75%
65%
55%
Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02 Dec 03 Dec 04 Dec 05 Dec 06 Dec 07 Dec 08
Dec ’07 Dec ’08 May ‘09
60/40 Average Duration Fixed Income (FI) 92.7 66.0 69.7
60/40 Long Duration, Corporate FI 96.3 66.1 69.6
0/100 Long Duration, Corporate FI / Treasury STRIPS
Duration 95.5 94.0 89.9
60/40 80% Hedged 111.7 97.4 87.1
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16. Business implications of lower funded status
Higher cash requirements at a time when cash and credit are scarce
Impact may be greater in 2010 given recent funding “relief” in the U.S.
Higher accounting cost on the Income Statement
With further increases coming through in next few years if assets
smoothed
Also lower funded status shown on Balance Sheet
Possible Pension Protection Act (PPA) implications
Benefit restrictions (lump sum p y
( p payouts, benefit accruals, etc.)
, , )
Employee notices
Deferred employee retirements
Given depressed 401(k) balances employees may need to work
balances,
longer
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17. So what comes next?
In making both strategic and tactical decisions, companies must
consider the range of economic and capital market conditions we
may face in the coming years
High Growth
Good times Overdrive
Pension ? + Pension
Business + + Business
Low inflation / High inflation /
Low interest rates High interest rates
Pension - ? Pension
Business - - Business
Perfect Storm Stagflation
Low Growth
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18. In particular, funded status could recover slowly
While assets may …discount rates could fall if high grade corporate bond yields
continue their recent continue dropping
stronger p
g performance… Business confidence grows and bond yields decline
Credit ratings decline and debt drops out of the relevant
bond universe
Global Equity Returns
Note that any Treasury-based swaps in p
y y p place before the
YTD tightening would exacerbate the negative impact on
25-Jun-09 %Change
funded ratio
S&P 500 3.23%
Russell 2500 Index 6.03% U.S. RATE:Link Bond Universe as of May 31, 2009
MSCI EAFE Index 6.38% 12%
11%
10%
9%
8%
8.00%
7%
7.00%
6%
6.00%
5%
5.00%
4%
4.00%
Financial industry bond yields (May)
3%
3.00%
Non-financial industry bond yields (May)
2%
2.00%
Dec. 10-90th yield curve/all bond issues
1%
1.00%
May 10-90th yield curve/all bond issues
0%
0 5 10 15 20 25 30
Maturity (Years)
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19. So what are you to do as a plan sponsor?
It depends on your near-term and longer-term objectives
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20. Panel discussion
Our Panelists
Sylvia Pozezanac Sam Knox
Managing Principal VP, Director of Research
Retirement Risk Solutions CFO Research Services
Towers Perrin Boston, MA
New York NY
York, (6 ) 345-9700,
(617) 3 5 9 00, Ext. 243
3
(212) 309-3663 samknox@cfo.com
sylvia.pozezanac@towersperrin.com
Mike Archer
Chief Actuary
Towers Perrin
Parsippany, NJ
(973) 331-3562
michael.archer@towersperrin.com
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