Evaluating Corporate Pensions from a Rating Agency Perspective

1. Evaluating Corporate Pensions from a Rating Agency Perspective Waylon Iserhoff Vice President CIA Pension SeminarColloque sur les régimes de retraite April 16, 2007

2. Corporate Pensions - A Rating Agency Perspective Canadian Pension Obligations Overview • Moody’s views the underfunded status of defined benefit pension plans as a debt-like obligation. • No revisions necessary to Moody’s standard methodologies for Canadian based issuers. Plan Valuations • Moody’s will make inquiries about valuation dates as minimum triennial valuation requirement often exacerbates underfunding

3. Corporate Pensions - A Rating Agency Perspective Canadian Pension Obligations Ranking in Bankruptcy • Senior Unsecured claim Funding Requirements • Recent 2006 federal changes which extended the period for companies to fund solvency deficits, will benefit an entity’s financial flexibility. Proposed Accounting Changes • Minimal impact from a credit perspective

4. Corporate Pensions - A Rating Agency Perspective What’s wrong with pension accounting? Smoothing inconsistent with economics Excessive netting of components into pension expense Inappropriate classification in cash flow statement Sometimes aggressive, unrealistic assumptions

5. Corporate Pensions - A Rating AgencyPerspective Moody’s pension adjustments

6. Corporate Pensions - A Rating Agency Perspective Pension adjustments (continued) 1 We limit gains to amount of interest on PBO to avoid net pension income

7. Corporate Pensions - A Rating Agency Perspective Pension adjustments (continued) 1 We do not adjust the cash flow statement if pension contributions are less than the service cost

8. Corporate Pensions - A Rating Agency Perspective Scrutiny of assumptions • Comparability and reasonableness ofassumptions: • Discount rate • Expected return on plan assets • Salary progression • Nothing below public radar screen • Changes • Plan amendments • Measurement date

9. Asset Allocation Corporate Pensions - A Rating Agency Perspective • Evaluate reasonableness of asset allocation and investment guidelines • Evidence of swinging for the fences • Rarely see plans with unreasonable asset allocations or big investments in illiquid assets

10. Corporate Pensions - A Rating Agency Perspective Assess volatility in future pension contributions • Through private discussions we seek to understand: • Expected payments for next few years • Required minimum payments • Factors that affect required payments (including impact of asset liability mismatch) • Possible and worst case scenario

11. Corporate Pensions - A Rating Agency Perspective Other considerations • Unfunded plans, defined benefit plan considered partially debt-like • Adjustment reduces debt and increases equity • Simulates a pre-funding of the obligation • OPEB’s not considered debt-like, unless: • Workforce significantly unionized • Older workforce • Discretionary adjustment considered by rating committee

12. Corporate Pensions - A Rating Agency Perspective Typical metrics most affected • Pension adjustments affect leverage, profitability and coverage ratios, that are used as key metrics in industry methodologies used to assign ratings

13. Corporate Pensions - A Rating Agency Perspective Change in Pension Accounting • Funded status of pension and OPEB plans fully recognized on the balance sheet • Increases balance sheet volatility related to pensions • Minimal impact from a credit perspective

14. Corporate Pensions - A Rating Agency Perspective Impact of Proposed Accounting Changes

15. Corporate Pensions - A Rating Agency Perspective Moody’s Early Observations – SFAS 158 • No significant changes to credit metrics subsequent to the adoption of SFAS 158 • Moody’s adjustment to debt to be more precise due to enhanced disclosure requirements.

16. Corporate Pensions - A Rating Agency Perspective Moody’s Early Observations – SFAS 158