For a finance executive confronting volatile market conditions, what's the right balance of risk and return in a defined benefit (DB) pension plan? If you're committed to a DB plan, what strategies can remove excessive risk? Or is it time to refresh your exit strategy? Towers Perrin and CFO Research Services have completed a study that examines the risk management approaches that finance executives have already taken for their defined benefit pension programs in the United States and Canada. Risk management is clearly "top of mind" for corporate finance executives throughout North America, though risk management solutions may vary widely. Learn more about the findings and implications of this survey and its relevance to your pension plan as Sylvia Pozezanac, practice leader for Towers Perrin Retirement Risk Solutions, Monica McIntosh, business leader for Towers Perrin Asset Consulting in Canada, and Sam Knox, VP of CFO Research, discuss the findings with a panel.

1. Defined Benefit Plans
amid Market Volatility
Highlights of the 2nd Annual Towers Perrin —
CFO Research Services Pension Plan Study
September 18, 2008
Sylvia Pozezanac Sam Knox Monica McIntosh
Managing Principal VP and Director of Research Managing Principal
Retirement Risk Solutions CFO Research Services Asset Consulting
Towers Perrin Boston, MA Towers Perrin
New York, NY Toronto, Canada
© 2008 Towers Perrin

2. Today’s agenda
Review findings from the
report, Defined Benefit Plans
amid Market Volatility
Towers Perrin’s point of view
on the research and the
broader business challenge of
pension risk
Open dialogue with our panel,
including audience Q&A
© 2008 Towers Perrin 1

3. Research methodology
The Survey: 214 senior finance executives in U.S. and Canada
All respondents have defined benefit (DB) plans
Broad industry representation with more than half of respondents
from $1B+ companies
The Interviews: 12 senior finance executives
Explore the broader business context for pension decision-
making
The opinion/performance analysis: Linked data on respondents’
opinions to their companies’ financial and pension performance
Publicly available data collected from filings of 65 public
companies that participated in the survey
© 2008 Towers Perrin 2

4. A solid majority of companies
focus on eradicating risk from their
pension portfolios, as opposed to increasing returns
In your opinion, is your company more likely to focus on increasing
the return on, or managing the risk in, its pension portfolios in the
next several years?
Asset intensive: 85%
24%
Labor intensive: 67%
Asset intensive: 15%
Equity %: Hi 83% Low 68%
Labor intensive: 33%
Assets/cap: Hi 85% Low 68%
76%
Percentage of all respondents
Company will reduce risk more than seek higher returns in its pension portfolios
Company will seek higher returns more than reduce risk in its pension portfolios
Source: CFO Research Services.
© 2008 Towers Perrin 3

5. Why? Concerns about cash and
compliance top the list of reasons
What aspects of your DB plan do you expect senior management
to be most concerned about over the next 24 months?
Cash & Compliance
Impact on our cash flow 38% Plan sponsors must
be sure they have the
Conforming to regulatory requirements 35% cash they need to run
their business —
Impact on our income statement 27% especially at a time
when credit is not
Impact on our current employees 21%
always readily
available. A return-
Impact on our balance sheet 20%
focused investment
Impact on recruitment and retention 12% strategy could result
in needing to make
Impact on our credit rating 8% contributions at a time
when they can least
Impact on public perception of our company 6% afford it
Other 3%
0% 10% 20% 30% 40%
Percentage of all respondents
Source: CFO Research Services. Note: Respondents were asked to select up to two.
© 2008 Towers Perrin 4

6. While a sizeable number of respondents have closed
or frozen their plans, very few have terminated them
In what ways, if any, has your company How likely is your company to take any
changed its DB plan design or offerings of the following actions over the next 24
since 2000? months with respect to your DB plan?
We closed existing DB plans to
new employees while continuing 36%
benefit accruals for current employees Replace DB plans with defined
We replaced DB plans with contribution (DC) plans, cash- 31% 20%
defined-contribution (DC) plans outs or other alternatives
28%
or shifted contributions from DB
to DC plans Close plans to new employees,
We offered new DB plans to 22% but continue benefit accruals for 23% 20%
current employees current employees
We closed existing DB plans for
all employees and froze benefit 19% Convert to hybrid plans (e.g.,
accruals 24% 9%
cash balance)
We converted DB plans to hybrid 15%
plans such as cash balance plans
Close plans and cease benefit 20% 11%
accruals for all employees
We terminated DB plans for an 4%
ongoing line of business
Terminate some or all plans 18% 10%
None of the above 22%
0% 20% 40% 0% 20% 40% 60%
Percentage of all respondents
Note: Respondents were asked to select all that apply.
Somewhat likely Very likely
Source: CFO Research Services.
© 2008 Towers Perrin 5

7. It’s portfolio management — not
settlement or risk transfer—that proves
the most common approach to managing risk
In your opinion, how likely is your company to adopt the following methods
for managing pension risk?
Likely
Ongoing Liability-based asset
15% 30% 20% 28% 7%
management
Management
Respondents have a
Decrease equity
clear preference today
exposure in pension 12% 30% 32% 20% 7%
for managing the risk portfolio
as opposed to
transferring or settling Transfer of plan to
the risk third party
7% 21% 22% 45% 6%
Settlement with life
7% 20% 20% 46% 7%
insurer
Captive insurance
8%
solutions 6% 17% 18% 52%
0% 25% 50% 75% 100%
Percentage of all respondents
Very likely Somewhat likely Somewhat unlikely Very unlikely Don't know
Source: CFO Research Services.
© 2008 Towers Perrin 6

8. Market/economic performance, competitors
and regulation have driven change in plan design
Which of the following external events contributed most materially to the
decisions your company has made in DB plan design since 2000?
Performance of the economy or
45%
financial markets
Competitors' pension 40%
policies and offerings
Changes in retirement 37%
program regulations
Increased investor demand for
18%
profits and financial strength
Increased scrutiny of risk 17%
management practices
Other 11%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
Percentage of all respondents
Source: CFO Research Services. Note: Respondents were asked to select up to three.
© 2008 Towers Perrin 7

9. Some takeaways and insights
Companies intend to focus more on risk reduction than on higher
return generation over the next few years
Most companies have adopted an incremental approach to pension
plan design. However, the next step for a plan that is completely
frozen is a full termination, which respondents say is not in the cards
Companies indicate they are trying to coordinate their pension risk
strategy with a broader enterprise framework — but find this a
challenge
There is strong interest in LDI — which is in line with companies
having stated a clear preference for risk management over
generating return
Agreeing on a pension risk management strategy is often difficult
because it involves trade-offs
© 2008 Towers Perrin 8

10. On the issue of risk —
key risks in a defined benefit program
Type of Risk Source
Market risk posed by investments held in pension trust (equity
volatility, credit risk, currency risk, etc.)
Market risk
Market risk can be compensated: Greater returns are expected in
the long run for greater risk undertaken
Risk posed by inflation rate changes, changes in spreads and yield
Interest rate curve shapes, pension asset/liability mismatch
risk Interest rate risk is not compensated: Greater returns are generally
NOT expected from interest sensitivity mismatches
Demographic Risk posed by participant longevity and embedded design options
risk (e.g., lump sums, early retirement subsidies)
Regulatory Risk from regulatory changes
risk Asymmetric risk of surplus rules
Operational Plan governance
risk Plan administration
These risks can be managed!
© 2008 Towers Perrin 9

11. Plans are taking an incremental
approach to plan design change
Ongoing Soft Freeze for Hard Freeze
DB Plan New Entrants + DC Plan
Ongoing Hybrid DB Hard Freeze
DB Plan for All + DC Plan
Once a plan is in a hard freeze, the decision to exit has been made —
it’s only a question of when, at what pace, and through what tactics
© 2008 Towers Perrin 10

12. Managing pension risk within an enterprise context
means assessing both pension plan and company
performance under a range of economic scenarios
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
© 2008 Towers Perrin 11

13. What do market and interest rate risk really mean?
A typical defined benefit plan has:
Assets. An asset allocation of 60% equities/40% fixed income
Liability. 60% of its liability is for “inactive” participants; liability duration of 12 years
$1,120M $1,120M 3 Ways to Decrease
Interest Rate Risk
$1,018M
$1,000M Increase fixed
$1,000M
$940M income allocation
Increase fixed
income duration
Use derivatives
Invest in
portfolio whose
10% 1% decrease
movements
decrease in in discount
mirror those of
Equities rates
the liabilities
Assets
Liabilities
Fully Funded $60M Deficit $102M Deficit Fully Funded
© 2008 Towers Perrin 12

14. With the risks identified and
objectives set, the strategy starts to fall into place
© 2008 Towers Perrin 13

15. Panel discussion
Q&A
Our Panelists
Sylvia Pozezanac Sam Knox Monica McIntosh
Managing Principal VP and Director of Managing Principal
Retirement Risk Solutions Research Asset Consulting
Towers Perrin CFO Research Services Towers Perrin
New York, NY Boston, MA Toronto, Canada
(212) 309-3663 (617) 345-9700, Ext. 243 (416) 960-2674
sylvia.pozezanac@towersperrin.com samknox@cfo.com monica.mcintosh@towersperrin.com
© 2008 Towers Perrin 14