Elliot M. Friedman Charles J. Clark

Can You Afford Your Defined Benefit Pension Plan ?FEI Benefits Finance CommitteeMay 17, 2004Chicago, Illinois Elliot M. Friedman Charles J. Clark Director, Benefits, Finance & Sr. Vice-President & Actuary Actuarial Services Lockheed Martin Aon Consulting

Agenda • Background • DB Plan Coverage Statistics • The Numbers • The Pressures • First Principles • Managing the Risk • Wrap Up / Q&A FEI Benefits Finance Committee May 17, 2004

Background • Defined Benefit Pension Plans and the Perfect Storm • Is it time for the mop up? • Are we waiting for the next hurricane? • Public Policy and the US retirement plan system • Are we abandoning the DB system? • Do we follow Great Britain? • Will Social Security have a self-directed component? FEI Benefits Finance Committee May 17, 2004

Participants Covered by PBGCSingle Employer Plans (000) FEI Benefits Finance Committee May 17, 2004

Single Employer Plans Insured by PBGC FEI Benefits Finance Committee May 17, 2004

Interest/Discount Rates • Discount/Interest Rates for 2004 • P&L/ Disclosure (FAS87/FAS132) 5.75% to 6.25% • ERISA Requirements 7.50% to 8.50% • Current Liability 5.89% to 6.55% • Current Liability 2003 Lookback 6.40% to 7.11% • Maximum Tax-Deduction 4.72% to 5.51% • Financial Disclosure (FAS35) 7.50% to 8.50% • Lump Sums 5.07% to 5.31% • PBGC Variable Rate Premium 4.94% FEI Benefits Finance Committee May 17, 2004

The Liabilities • Projected and Accumulated Benefit Obligations (PBO/ABO) • Actuarial Accrued Liability and Normal Cost • Current Liability and Normal Cost • PBGC Vested Benefit Liabilities FEI Benefits Finance Committee May 17, 2004

The Pressures • Media Coverage • Investment Firms Estimates and Reports • PBGC’s $11.3B deficit • Cash Balance Controversy • Plans Freezing Accruals or Future Participation • IAS19 Transition for 1/1/2006 FEI Benefits Finance Committee May 17, 2004

The Pressures • Low Interest Rate Environment • Other Cost Growth (Medical Costs) FEI Benefits Finance Committee May 17, 2004

Should Plan Sponsors KeepDB Plans? • First Principles Review • DB Plans are primarily designed to reward career employees • Who are the participants? • Who are the stakeholders? • All of us ! • Charged with stewardship of the plans FEI Benefits Finance Committee May 17, 2004

Should Plan Sponsors KeepDB Plans? • First Principles Review • Does your DB plan align with the total rewards policy of your company? • Total Rewards are sum of current and deferred compensation • DB plans are only one component of the total deferred compensation benefits • DB plans are the “fixed income” portion of a retirement portfolio • Savings plans are the “equity” component FEI Benefits Finance Committee May 17, 2004

The Wild Cards • Is the Moody’s Aa rate no longer the benchmark for pension expense? • The Monthly PFEA ’04 Current Liability rate is more conservative • December 2003 Moody’s Aa = 6.02% • December 2003 PFEA ’04 = 5.81% • A high-quality composite bond rate • IAS19 will require plan sponsors to move to Market Value of Assets from Smoothed Value • Treatment of Gains and Losses is proposed to change • Exposure draft comments due July 31st • The Administration’s Yield Curve Proposal FEI Benefits Finance Committee May 17, 2004

The Wild Cards • A Potential Overhaul of the Funding Rules • Maintain benefit security • Reduce volatility of contributions • Improve predictability of contributions • “Sense of the Senate” in the PFEA ’04 Committee Report and proposal to convene a panel of experts • Performance of the Financial Markets • Interest rates and equity performance FEI Benefits Finance Committee May 17, 2004

Our Roles– Our Choices • Reactive Approach • Sit back and watch it unfold • Risk of being blindsided with unexpected changes • Proactive Approach • Manage the risk through prudent modeling • Further Involvement with FEI Benefits Finance Committee • BFC is heard and respected in the legislative process FEI Benefits Finance Committee May 17, 2004

Managing the RiskAsset/Liability Forecast • Proactive policy • Allows plan sponsors to manage the interest rate spread • Proactive risk management • Allows plan sponsors to manage the volatility of the costs of pension plans FEI Benefits Finance Committee May 17, 2004

Managing the RiskAsset/Liability Forecast FEI Benefits Finance Committee May 17, 2004

Wrap Up / Q&A • Work closely with someone who can help explain all the moving parts • Understand the perspective of your company policy makers • Involvement in the legislative process through groups such as FEI Benefits Finance Committee FEI Benefits Finance Committee May 17, 2004

Elliot M. Friedman Charles J. Clark