1. 0194866-00007-01 Confidential; notProfessional Use Only.
For Financial for further distribution.
For Financial Professional Use Only.

2. Opening Remarks
Paul Rogers, EVP & COO, Pacific Resources
Managing Employee Benefits in a Challenging Environment
Charles Lowrey, EVP & COO, U.S. Businesses, Prudential
The Significance of 2/7/64 and the Implications of Pension De-risking in the U.S.
Richard Farr, Head of Pensions Advisory, BDO
Healthcare Reform and the Use of Technology to Manage Employer Costs
Rohail Khan Executive Managing Director, ACS, Human Resource Services, A Xerox Company
Khan, Director ACS Services
Audience Q&A
Paul Rogers, EVP & COO, Pacific Resources
Closing R
Cl i Remarksk
Paul Rogers, EVP & COO, Pacific Resources
For Financial Professional Use Only.
For Financial Professional Use Only.

3. Charles Lowrey
Executive Vice P id t &
E ti Vi President
Chief Operating Officer, U.S. Businesses
Prudential Financial, Inc.
Managing E l
M i Employee B Benefits
fit
in a Challenging Environment
Confidential; notProfessional Use Only.
For Financial for further distribution.
For Financial Professional Use Only.

4. Senior What senior finance executives are saying
Executive
Forum about managing employee benefits
Playing more of a role in
benefits decisions
Increased focus on
pension benefits risk
management
Reliance on DC plans for
employees’ retirement
p y
savings and income
Increased focus on cost of
benefits, particularly
b fit ti l l
healthcare costs
Source: 2010 Prudential Financial survey of CFOs. Survey results shown are based on companies
with DB plans with $5 billion or more in assets.
4
For Financial Professional Use Only.

5. Senior
Executive
Forum
Increased Focus on
Pension Benefits Risk
Management
M t
5
For Financial Professional Use Only.

6. Senior
Executive Increased focus on pension benefits risk management
Forum
Drivers of i
Di f increased focus
df Implications for companies
I li ti f i
by finance executives
Funding • 54% of finance executives
• Stiffer funding requirements report that their companies are
h h i i
introduced by 2006 Pension either likely to increase, or have
Protection Act (PPA) already increased, contributions
• Although conditions are to close a funding gap
improving, the financial crisis
continues to have an impact on
DB plans
Accounting • Increases in financial statement
• Funding status appears on the volatility affect a company’s:
ff ’
corporate balance sheet – no – Stock price
longer relegated to footnotes – Beta
• FASB is likely to reconsider – Cost of capital
p
pension smoothing rules in favor
of mark-to-market accounting,
• Risk management strategies
which would increase income
more important
statement volatility
Source: 2010 Prudential Financial survey of CFOs. Survey results shown are based on companies
6
with DB plans with $5 billion or more in assets.
For Financial Professional Use Only.

7. Senior
Executive Current environment for pension risk transfer
Forum
The environment has changed You wouldn’t acquire a pension plan
• Balance sheet volatility is here • Pensions are not a core business
• Income statement volatility is for most companies
inevitable • Rating agencies and equity analysts
• PPA funding rules shift focus to view pension underfunding as debt
short-term investment results • Company stock prices incorporate
• PPA allows employer to fully fund pension risk
plan on a tax deductible basis • Financial leverage is better taken
elsewhere
Value is attractive Waiting entails risk
• First-mover pricing is available today • Waiting for the “right” interest rate
• Attractive borrowing rates mitigate environment to execute a risk transfer
concerns about Buy-In or Buy-Out strategy raises the challenge of how to
costs in a low interest rate invest assets in the meantime
environment • Capacity is available today, but may
not be tomorrow
• The market is beginning to move
7
For Financial Professional Use Only.

8. Senior
Executive Range of solutions to mitigate or transfer risk in DB plans
Forum
Buy-out
Buy-in • Liability transferred to
insurance company
• A guaranteed annuity • Settles a plan
asset with a market value sponsor’s obligation
p g
Liability Driven Investing to match the value of a
(LDI) –Does trigger
Funding liability
settlement accounting
• An investor’s approach –Insurance contract
insulation
that correlates version of LDI
investments in a DB plan –Does not disrupt current
to the liabilities in the funded status
plan –Liability remains on plan
–Imperfect hedge sponsor's balance sheet
–Credit and duration risk –Revocable – does not
• Liability remains on plan trigger settlement
gg
sponsor's balance sheet accounting
Cost
Annual One time One time premium
management fee premium +
Settlement charge
8
For Financial Professional Use Only.

9. Senior
Executive Developing a long-term pension risk transfer strategy
Forum
• DB plan sponsors are monitoring the capital markets to determine when favorable
pricing exists to implement a buy-in, possibly as a transition to a buy-out
• Pricing varies by plan population and is a function of mortality, interest rates,
and investment spreads
• Liability tranches (portions of the plan population) should be selected in a
strategic manner
• Develop • Price • Transition
buy-in or assets
buy-out • Market rates
strategy and spreads • Identify
Work Determine Prepare insurer(s)
with • Identify action • Settlement to
actuaries tranches to triggers charge transact • Establish
transfer terms
• Impact on
• Prepare investment • Monitor the
data return market
9
For Financial Professional Use Only.

10. Senior
Executive CFO perspectives on pension risk management
Forum
Likelihood of adopting DB Key factors that would drive
risk management strategies companies to transfer DB risk
in next two years
Source: 2010 Prudential Financial survey of CFOs. Survey results shown are based on companies
with DB plans with $5 billion or more in assets.
10
For Financial Professional Use Only.

11. Senior
Executive
Forum
Shift from DB to DC Plans
11
For Financial Professional Use Only.

12. Senior
Executive Shift from DB to DC plans
Forum
Solutions for creating
Implications of shift from Guaranteed income trends
more DB-like outcomes
DB to DC plans in large plan market
from DC plans
• For individuals: • Several solutions have • Accelerated demand to
increasing responsibility been firmly established augment target date
for managing risks they in DC plans funds with income
are typically ill-equipped – Automatic guarantees
to h dl
t handle enrollment and
– Investment risk escalation • Fewer portability
– Longevity risk – Portfolio concerns: critical mass
rebalancingg p
of recordkeepers
• For employers: – Investment defaults participating in industry
responsibility to offer – Stable value initiative to accommodate
more robust DC plans to income solutions
fill the DB void • H
However, guaranteed
t d
lifetime income solutions • Additional safeguard
are missing from most developed to address
DC plans insolvency, replaceability,
y
and continuity
12
For Financial Professional Use Only.

13. Senior
Executive CFO perspectives on guaranteed lifetime income
Forum
50% have already adopted or are Key factors that would drive companies to
likely to offer products that generate adopt guaranteed lifetime income products
guaranteed lifetime income in the
next two years
Source: 2010 Prudential Financial survey of CFOs. Survey results shown are based on companies
with DB plans with $5 billion or more in assets. 13
For Financial Professional Use Only.

14. Senior
Executive
Forum
Focus on Benefits Costs
14
For Financial Professional Use Only.

15. Senior
Executive CFO perspectives on managing benefits costs
Forum
Expected implications
of healthcare
legislation *
Planned approaches
to control
healthcare costs *
Percentage of plan
Role of voluntary sponsors that rate
benefits in managing as highly important
benefits costs **
* Source: 2010 Prudential Financial survey of CFOs. Survey results shown are based on companies
with DB plans with $5 billi or more i assets.
ith l ith billion in t
** Source: Prudential’s “Fifth Annual Study of Employee Benefits: Today and Beyond,” 2010.
Survey results shown are based on companies of all sizes. 15
For Financial Professional Use Only.

16. Senior
Executive Solutions for managing employee benefits offerings
Forum
• Finance executives face a number of challenges related to
employee benefits
p y
• Employers express concerns about managing the rising cost of
healthcare benefits, reducing DB risk, and ensuring employees are
adequately prepared for retirement
• There is a wide range of solutions to help companies manage their
employee benefits offerings, including the expansion of voluntary
p y g g p y
benefits
• Many employers are poised to consider adopting DB risk management
strategies and adding guaranteed lifetime income options to DC plans
16
For Financial Professional Use Only.

17. Richard Farr
Head f P i
H d of Pensions Ad i
Advisory, BDO
The Si ifi
Th Significance of 2/7/64 and i li ti
f d implications f
for
Pension De-Risking in the U.S.
Confidential; notProfessional Use Only.
For Financial for further distribution.
For Financial Professional Use Only.

18. The Beatles bring a UK Pop explosion to the U.S.
• On February 7, 1964, the Beatles landed in New
York for
Y k f an appearance on Th Ed S lli
The Sullivan Sh
Show
and by 4 April 1964, the Beatles held twelve
positions on the Billboard Hot 100 singles chart,
including the top five positions
• So started the British Pop explosion in the U.S.
• 40 years later the UK enacted a new pensions regulatory regime which aimed to give UK
pension plans more control to maintain adequate funding
• Today that regime has created an environment of higher funding targets and more control
in the hands of the Pension Plan trustees, supported by a regulatory framework predicated
on the threat of action
• What started out as a well meaning attempt to protect ‘deferred pay’ has turned into a
headache for many UK CEOs and CFOs…and its arrival in the U.S. is as inevitable as the
Beatles in 1964
Page 18

19. The Employer’s position
• Focus on cash
• Liabilities matter as deficits consume cash that could be generate better return
on capital from internal projects or growth e g acquisitions
e.g.
• The UK Pensions Regulator has dramatically improved the funding regime of
UK pension plans
• The U S eq i alent PPA f nding r les which strengthen f nding req irements in
U.S. equivalent: funding rules, hich funding requirements
the U.S., are fully phased-in beginning in 2011
• Forecasting cash requirements (amount and timing) is very difficult
• Alternative sources of capital cannot b assumed t b f l available now
Alt ti f it l t be d to be freely il bl
• Under PPA, funding is essentially market-to-market, resulting in volatile,
difficult to forecast contribution requirements
• Accounting deficit is not a true reflection of the Employer’s f
f f f funding obligation
• IAS19 and FAS in the U.S. are at least regular and comparable
• What started out as a target has now become a minimum requirement……
Page 19

20. Shareholders and other Stakeholders
• Short-termism
• Shareholders typically focused on prospects over the next two years at most
and believe pensions is a long term issue and will not bite short term
• Demographic change (e.g. longevity) will be the greatest long term impact, but
is little understood and is not currently an easily tradable risk
• Analysts
• Very few analysts focus on pricing in pensions risk, therefore “off radar” for
shareholders…but this is changing, increasingly the p
g g, gy pension deficit ( a
(on
scheme funding, not an accounting basis) is treated as debt
• Banks/Debt Providers
• See pensions as a potential for profitable hedging business on a vast scale
• Bank providers are starting to treat pension plans as competing debt
providers
Page 20

21. The investor’s position
• Increasing publicity of public pension deficits is increasing awareness
• Whether deb o equ y, s ou d as
e e debt or equity, should ask:
• What is the pension deficit and on what basis (accounting, self
sufficiency, buy-out)?
• What
Wh t are th cash fl
the h flow consequences/priorities?
/ i iti ?
• What risks are is the company exposed to?
• Can the risk be measured, managed or migrated?
, g g
• IAS19 deficit is considered as debt, but is this the right number?
• Comparing total liability with market capitalisation indicates “pension
leverage” and so sensitivity to a change in yields
l ” d iti it t h i i ld
• Transparency is limited in current published information, it doesn’t help
identify those companies that would benefit most from de-risking
Page 21

22. The Gorilla in the Garden (data) shed
• Investors hate uncertainty
• Corporate activity (M&A restructuring) means the valuation basis shifts
(M&A,
to buy out pricing
• A peculiarly British problem!
• Solvency basis rarely assessed, even more rarely disclosed
IT’S A CASE OF MUSICAL CHAIRS –
THE MUSIC WILL STOP AS SOON AS THE ANALYSTS WAKE UP
Page 22

23. Pension Risk Quadrants© - A cash flow pipeline
Unrewarded Risks Obligation Risk
• Interest rates • Shock factor of
• Longevity Regulator change
R l t h
• Inflation • Cost of compliance
• Wide reaching
powers
• Unintended
consequences
MIGRATE UNDERSTAND
The most important Rewarded Risks
risk
• Underwriting: • Risk seeking
— Benefit promise • Duration matching
— Asset • Liability Driven
performance Investing
• Non pension risk • Dynamic Asset
• Should determine Allocation
prudency adopted by
Actuary
• Mitigation = risk
DETERMINE
reduction PENSION RISK INTEGRATION – JOINED UP MANAGE
APPROACH
Page 23

24. Is the music stopping now?
• Latest regulatory pronouncements would point towards this.....
• Super priority for pension plans is the new reality….
• e.g. Nortel: court judgement that the pension deficit ranks as an expense of the
administration not an unsecured claim
• S l
Solvency II impacts e.g. impact on Banks and I
i t i t B k d Insurers with DB pension
ith i
plans
• When is the general market going to adopt the same approach for the same risk?
Page 24

25. We can’t just do what we’ve always done
1. Understand liability cash flows
2. Ensure assumptions are fit for
purpose
3. Forward planning – short, medium
and long term strategies
g g
4. Reduce liabilities first
5. Long-term risk plan requires
co-ordination of asset and liability
di ti f t d li bilit
strategies
6. De-risking often requires cash, but
there are clear benefits
th l b fit
7. Employer Covenant - risk or
PENSION RISK IS ASYMMETRIC – IGNORE IT
opportunity? – treat it as part of the
AT YOUR PERIL
investment strategy
Page 25

26. A new paradigm
• The pension problem is a multi-faceted combination of long-term
financial uncertainties and shorter term market sentiment
• Investment volatility arises from non-core operations managed
inconsistently with wider ERM approaches
• Few companies were established as i
F i t bli h d insurance risk
i k
carriers/asset managers
• Shareholder value will be created from stabilising cash flows – the
“certainty premium”
• This requires a clear pension risk transfer plan
• Communicated and executed
C i t d d t d
• There will never be a better time to start!
Page 26

27. What can Pensions learn from The Beatles?
Do You Want to Current accounting measures do not accurately represent the
Know a Secret?
K S t? economic reality of pensions
i lit f i
Twist and Pension volatility is already impacting the balance sheet of
Shout U.S. corporations, the income statement is next
I Want to Hold A more robust regulatory framework, that embraces economic
Your Hand risk may be inevitable
Boy, you re
Boy you’re going to Pensions will weigh on the bottom line of companies who don’t
don t
“Carry That Weight” thoughtfully address their pension risk
By setting out a thoughtful plan, many companies can add
We Can Work it Out
value by de risking today A brighter future awaits
de-risking today.
Employers should act now to prepare for a UK style pension explosion:
De-risk unrewarded risks and manage rewarded risks to close the p
g pension deficit
Page 27

28. Important notes
Whilst all reasonable care has been taken in the preparation of this presentation
no liability is accepted under any circumstances by BDO LLP for any loss or
damage occurring as a result of reliance on any statement, opinion, or any error or
d i lt f li t t t i i
omission contained herein. Any statement or opinion unless otherwise stated
should not be construed as independent research and reflects our understanding
of current or proposed legislation and regulation which may change without notice
notice.
The content of this document should not be regarded as specific advice in relation
to the matters addressed.
Page 28

29. Rohail Khan
Executive Managing Di t
E ti M i Director,
ACS Human Resource Services
A Xerox Company
Healthcare R f
H lth Reform and th U of T h l
d the Use f Technology t
to
Manage Employer Costs
Confidential; notProfessional Use Only.
For Financial for further distribution.

42. Paul Rogers
Executive Vice P id t &
E ti Vi President
Chief Operating Officer
Pacific Resources
Audience Q&A
Confidential; notProfessional Use Only.
For Financial for further distribution.

43. Paul Rogers
Executive Vice P id t &
E ti Vi President
Chief Operating Officer
Pacific Resources
Closing Remarks
Confidential; notProfessional Use Only.
For Financial for further distribution.

44. Prudential is not affiliated with ACS Human Resource Services, BDO or Pacific Resources.
Prudential, the Prudential logo and th R k symbol are service marks of P d ti l Fi
P d ti l th P d ti l l d the Rock b l i k f Prudential Financial, I
i l Inc. and it related entities,
d its l t d titi
registered in many jurisdictions worldwide.
For Financial Professional Use Only.