Frozen Pension Plans: Is immunization or termination the right choice? May 2013

1. Frozen Pension Plans: Is immunization or termination the right choice? May 2013

2. Agenda Frozen pension plans today Cost factors for immunization Considerations and conclusions Assumptions and results Cost factors for termination Questions

3. Frozen pension plans today

4. Frozen pension plans today Number of frozen plans has continued to increase over the past decade Source for 2012: PBGC, Single-Employer DB Plan Freezes, May 2013. Source for 2003: PBGC, An Analysis of Frozen Defined Benefit Plans, December 2005

5. Frozen pension plans today Insured LDI Immunization Plan termination Lump sum windows Partial group annuity purchase Annuity buy-in An array of options are available to frozen pension plan sponsors:

6. Assumptions and analysis

7. Assumptions Immunization vs. termination decision is most relevant for well funded frozen pension plans • Underfunded plans can benefit from planning future objectives Look at 3 fully funded plans • Typical, Mature, and Young Baseline liability of $500M using a PBO or PPA Full Yield Curve style measurement *See appendix for liability assumptions.

8. Variables impacting cost Immunization cost factors Bond underperformance relative to the liability Administrative expenses Offering lump sums Termination cost factors Group annuity costs Lump sum acceptance rates Early retirement benefits and plan features Lump sum offer to retirees

9. Baseline results Cost for immunization or termination is generally close on a present value basis • Changes in the cost factors though can make one option more appealing Often the decision whether to immunize or terminate will come down to qualitative factors

10. Cost factors for immunization

11. Cost factors for immunization

12. Bond underperformance relative to the liability • Pension liabilities do not experience downgrades • Corporate bond portfolios experience periodic losses relative to pension liabilities Funded status based on assets using Barclays Long Credit Corp A or better index and liability using Barclays Long Credit Corp A or better index with adjustment for downgrades. Excess Treasury return based on the difference in rolling annual returns of Barclays Long Treasury Index and Barclays Long Credit Corp A or better Index. Source: Vanguard, Barclays

13. Credit headwind illustration Matching corporate bonds don’t “keep up” with liability Bonds A & B make up liability universe Market sees more credit risk in Bond B Bond B is downgraded out of liability universe Bond B Bond B 6.0% Yield Bond A Bond A Bond A Bond B yield increases 5.0% Discount rate = 5.0% Discount rate = 5.5% Discount rate = 5.0% Assets: lose value Liability: decreases Assets: no change in value Liability: increases

14. Credit headwind impact on the immunization vs. termination decision Impact of increasing the annual underperformance of bonds relative to the liability from 0.8% to 1.0%

15. Cost factors for termination

16. Cost factors for immunization

17. Lump sum acceptance rate impact on the immunization vs. termination decision Impact of decreasing the lump sum acceptance rate from 75% to 25%

18. Considerations and conclusions

19. Qualitative considerations Immunization Plan assets still under company’s control Can gradually phase out of the pension plan Can unfreeze plan in the future if desired Participants receive an annuity at retirement; goals of plan still in tact Termination No more decisions/time on pension required by management No more administrative or regulatory challenges Pension off the balance sheet and out of P&L Participants can choose own use for the money

20. Conclusions Quantitative analysis will generally result in similar all in costs Qualitative factors may become the deciding point Answers and approach will vary greatly between sponsors Assessing the impact of the variables and the current environment is important The full cost of immunization or termination will be higher than the baseline liability

21. QUESTIONS?

22. Appendix

23. Plan expenses impact on the immunization vs. termination decision Impact of increasing the discount rate adjustment for plan expenses from 0.1% to 0.3%

24. Offering lump sums impact on the immunization vs. termination decision Impact of not offering lump sums in an immunization strategy

25. Annuity cost impact on the immunization vs. termination decision Impact of decreasing the group annuity discount rate by 35 basis points

26. Early retirement benefit impact on the immunization vs. termination decision Impact of having special early retirement provisions in the plan

27. Offering lumps sums to retirees impact on the immunization vs. termination decision Lump sums are offered to retirees in a plan termination

28. Liability assumptions