Marketplace Update

1. Marketplace Update Recent Activity and Implications • A presentation to MAAC • by David Speier • September 13, 2012 G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

2. GM Announcement • On June 1st, GM announced that it intends to settle $26 billion in salaried retiree obligations by the end of 2012 • Retirees who retired after 10/1/1997 would receive an offer for a lump-sum to be paid by end of August, 2012 (approximately 55% of retiree obligations) • Employees and terminated vested participants would be spun-off into a separate plan • Retiree-only plan would be put through a standard plan termination process • Annuity would be purchased from Prudential on behalf of remaining retirees • Reported financial impact: • Settle $26 billion in retiree obligations for $29 billion • Additional contributions of $4 billion • One-time P&L charge of $3 billion, and reduction in pension income of $200 million annually • Increased financial flexibility G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

3. Current MarketplaceFord vs. GM: Comparison of De-Risking Action* * Note: All data provided based on publically available information G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

4. Pension Risk Management Aligns All Key Levers Effective at managing active liability risk profile and long-term plan cost Effective at managing long-term plan costand volatility BENEFIT STRATEGY INVESTMENT STRATEGY Effective at managing size of plan and overall risk exposure LIABILITY TRANSFER/ EXIT STRATEGY Effective at managing short-term plan costand volatility FUNDING STRATEGY ASSUMPTIONS AND METHODS Effective only for short-term issues and cost recognition timing G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

5. Lump Sum – Opportunity for 2012 • Many plans reset interest rates on an annual basis, using a permitted “look-back” to a date up to 5 months prior to the start of the year • Due to declines in interest rates since August 2011, many companies can offer lump sums in 2012 on a favorable basis (i.e., relative to plan liabilities) • TV lump sums could be 5% - 20% lower; retiree lump sums could be 3-5% lower • Value of accelerated lump sum windows will vary with market rates, thus illustrating the impact of preparation and monitoring G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

6. If Not 2012, When? Falling rates in 2012 suggest value in accelerating lump sum window Windows not opened in 2012 unlikely to be opened in 2013 (unless rates rise in 2012) Sponsors not moving forward are faced with at least 2 more years of financial risk and operating expense • The following would need to occur to imply waiting until 2014 (or beyond) is economically preferable to offering lump sums in 2012 • Rates rise enough to get back to 2011 levels plus enough to cover 2 years of operating cost and liability growth • Depending on plan profile, this could require 50-200bps increase in rates • Plan sponsor would also need to be comfortable with the exposure to financial risk during the delay period • Sponsors with moderate to high equity exposure (intended to outgrow assets) will need to address annual volatility • Sponsors with high fixed income exposure will be less likely to outearn obligations, thus increasing expected cost of implementation G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

7. Retiree Lump Sum Offer – Why or Why Not • In the absence of clear regulatory guidance on the permissibility of offering lump sums to retirees, there are several questions that a sponsor can ask to determine if the option could add enough value to warrant further consideration G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

8. Potential Regulatory Impediments – Threshold Issues • Current IRC § 401(a)(9) regulations appear to prohibit lump sums to retirees, at least for those beyond the required beginning date (RBD), specifically due to the following: • Potential issues with changing the annuity payment period, except in limited circumstances such as plan termination or in the event of increased benefits that arise from a plan amendment • The table below highlights potential options to address these regulatory considerations: G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

9. Other Regulatory Considerations Aside from the legal / regulatory considerations already discussed, offering lump sums to retirees may present additional issues that differ from those involved in a terminated vested offer • Lump sum determination • Plan subsidies (e.g., ERFs) in payments being made to retirees may need to be included in the lump sum value • Social Security supplements likely do not need to be included in the lump sum value, but may have a significant impact on lump sum take rates if eliminated • For many plans, the size of the retiree obligations will increase the importance of the interest rate basis (stability period / look-back month) in terms of a sponsor’s ability to assess the economic, financial and liquidity implications of a retiree offer • In general, there is only limited ability to change the stability period and look-back month • Structure of offer • In addition to a lump sum option, single participants will likely need to be offered SLA and married participants will likely need to receive option to elect QJSA / QOSA annuity forms • Rules for converting lump sum value determined at second annuity starting date to annuity forms unclear • Valid QJSA waiver would be required for the current spouse and potentially any former spouse, if applicable • Nondiscrimination issues may be more prevalent due to higher number of former HCEs in a retiree population compared to TV population (especially if the offer is not provided to all retirees) • Retiree offer may receive more attention from unions than TV offer and may require agreement/consultation • Issues with temporary offering • Potential significant detriment issues may dictate offer consideration period (may be longer than TV offer) • Retiree offers that are implemented on a phased approach may encounter “permanent feature” issues G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

10. Financial Considerations Compared to a terminated vested window offer, executing a lump sum offer has the potential to more significantly impact plan finances and liquidity needs if the acceptance rate is high • Accounting implications • Increased likelihood / magnitude of one-time settlement accounting entries • More pronounced ongoing P&L impact due to loss of “EROA arbitrage” on assets settled • More significant impact on balance sheet funded status (especially for plans funded <100%) • Remeasurement effect for residual plan liabilities (i.e., discount rate effect) • Funding implications • Leveraging effect on plans funded below 100% could greatly accelerate required funding • Assessment of plan amendment impact required for plans funded near 80% • Restrictions on accelerated payments for plans funded below 80% • Investment implications • Potential for significant liquidity requirements • Impact on overall plan investment strategy / post-transaction investment re-allocation as duration could potentially increase significantly • Transaction hedging and other interim investment strategies (from date interest rates are locked to the date lump sums are distributed to participants) G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

11. Implementation Considerations Retiree lump sum windows generally have the same implementation workstreams as a terminated vested window offer; however, there are special considerations for a retiree offer • Feasibility • Due to more complex nature of retiree offer, more rigorous feasibility assessment may be required (including adverse selection assessment) • Significant uncertainty regarding retiree take rates (very little experience, potential for more variation by age) • Greater opportunity for unintended consequences as retirees may have to receive the option to re-elect an annuity in an alternative form of payment • Window design / execution timing • Legal due diligence may require additional lead time (especially if pursuing PLR) • Phased implementation may be required for larger population due to execution capacity constraints (especially with respect to call center volumes) • Inclusion of a financial education component may be more prevalent • Data preparedness • Retiree data should generally be more complete than TV data (but may require more data elements than a TV offer – e.g., survivor benefit amounts, Social Security supplements, pop-up amounts, etc.) • Spousal information could be an issue for participants currently receiving an SLA (or with a non-spouse beneficiary) if QJSA / QOSA options need to be provided • Calculator development • Limited guidance regarding basis for determining QJSA / QOSA options (plan basis, 417e basis?) G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

12. Marketplace Activity DB Annuity Market Annuity Purchases 2000 – 2011 (estimated) 4.0 3.2 2.9 3.0 2.5 2.3 1.8 1.7 2.0 1.6 1.3 1.0 0.9 0.8 0.8 1.0 0.0 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 *Source: Estimated LIMRA Annuity Purchase Pricing Considerations Historical View • Marketplace for traditional buyouts has become smaller; number of major players has dropped from 12+ to about 5 to 7 • Fewer are competitive as size of buyout increases (beyond $25-50M) • Pricing remains competitive for certain structures of benefits (traditional annuity) • Only half of the current players will quote on cash balance plans • Annuity purchase pricing typically fell somewhere between duration-matched Treasuries and high-quality corporate bonds • Once adjusted for fully generational mortality and cohort-specific discount rate, led to a spread of 5-15% versus accounting liabilities • Competitiveness issues drove pricing by insurer • Recent lack of activity plus expectation of future market growth has led to more aggressive pricing, closer to 5-10% over liabilities Annuity Purchase Considerations Billions - G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

13. Annuity Purchase Pricing Considerations Emerging View • When annuity purchase activity begins to increase, there are concerns over the impact of capacity • Capacity can be viewed in short-term versus long-term perspective, covering financial and operational considerations Marketplace Statistics Marketplace Obligations $5.4T of public obligations, backed by $2.5T of assets – very little in long bonds $3.0T of private obligations, backed by $2.4T of assets – about $0.4T in long bonds Marketplace Instruments $10.0T of Treasuries – about $1.3T is long $3.3T of high-quality Corporate bonds – about $1.0T is long Private pensions currently hold 20% of available long corporate bond instruments and 15% of long Treasuries Source: Barclays Capital, TWIS, Department of the Treasury, BlackRock, PIMCO G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

14. $1,500 $30M $1,200 $10M $20M $50M $10M $900 Traditional Annuity Illustrative Purchase Cost ABO $600 $1,120 M $1,000 M $300 $0 ABO Provision Credit/Default Mortality Demographic Operating Costs Termination Adjustments & Profit Cost Risk Charges Components of Annuity Purchase PricingTraditional Retiree Pricing Approach G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

15. Fiduciary Considerations – Retiree Annuity Purchase • Implementing the decision to purchase annuities to cover plan benefits is subject to fiduciary standards under ERISA • DOL regulations outline criteria for selecting the annuity provider on behalf of participants, but it not fully prescriptive • Coordination with legal counsel is recommended to define process for selecting “safest available” annuity prior to selecting insurers and reviewing insurer bids • Partial settlements raise the issue of whether the decision to purchase annuities for some participants (not all) may result in disparate treatment among participants • Partial settlement results in separate financial backing for plan participants – the insurer vs. plan assets • Participant and PBGC concerns could be raised if the remaining plan’s funding levels decline in the future • The potential for this type of claim and the appropriate considerations of all participants should be reviewed with counsel throughout the process G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx

16. PBGC Considerations – Retiree Annuity Purchase • PBGC has raised some concerns regarding the distribution of plan assets prior to (but potentially in contemplation of) a broader plan termination • Could result in additional claims on PBGC or loss of non-guaranteed benefits in the eventual plan termination process • Concern that termination notices and disclosures would not be provided to participants for whom annuities were purchased • No ability for PBGC to audit benefit calculation processes • Guidance suggests PBGC will review these situations on a case-by-case basis, considering: • Length of period between annuity purchase and potential for full plan termination • Likelihood that distress termination would eventually occur • Inclusion of affected participants in termination notices and disclosures G:\Speier\PRESENTATIONS\P091312_MAAC Annual Mtg.pptx