1. Pension Plan “De-Risking”: What is it? Plan sponsor transfers the risk of meeting benefit obligations either to the retiree (lump sum) or an insurer (by purchasing an irrevocable annuity contract paying promised monthly benefit) Variations:  Traditional #1: Standard termination under ERISA -- annuity contracts fully replace promised monthly benefits  Verizon Variation: No plan termination, but purchase annuities to “satisfy” obligation to select subgroup of retirees  Traditional #2: Offer retiring employees a lump sum optional form of benefit distribution  Ford Variation: Offer select retirees in pay status option to take lump sum buyout  GM Variation: Standard termination, but also offering a lump sum option to a subset of retirees (all the rest annuitized)

2. Pension De-Risking: Why Do it? FASB: Reduces volatility since year-to-year changes in liability run through income statement/impact earnings  Magnified where DB plan is large relative to market cap  Ford: $74 B plan was 2X stock market value EOY 2011 Pension liability seen as debt by credit rating agencies Lump sums cheaper: Can use PPA corporate bond yield (previously used 30-year Treasury yield) Company no longer pays PBGC premiums

3. Pension De-Risking: Why We Care Retirees stripped of PBGC protection  For annuities, state ‘guaranty funds’ cover only a fraction of PBGC maximum: $100-to-$300K vs. $55,000 annually for life.  Lose the protection ERISA gives against claims of creditors (e.g., personal bankruptcy due to catastrophic health costs)  But for certain younger and higher wage retirees – who expect to lose non-guaranteed PBGC benefits – may be worth the risk Retirees lose other ERISA protections (disclosures, etc.)  No ERISA protection if insurance company converts to lump sum later GM/Ford Variation (optional lump sum):  Lump sum is less than cost of a replacement annuity  Investing as individual unlikely to yield same return (after fees)  Longevity Risk: If spend faster rate than annuity, could outlive assets (particular concern for women, who live longer on average)  These concerns magnified for older retirees (> 75?): for example, manipulation by financial advisers, pressure from relatives, ability to self-invest Verizon Variation (selective and partial: no plan termination):  Choice of annuity provider not approved by PBGC; remaining participants more underfunded Domino Effect: The trend weakens PBGC, weakens DB system

4. Pension De-Risking: What Can Retirees Do Litigation (longer term)  BellTel lawsuit pending  Downside: Even if win, other companies can work around (for example, by terminating the plan, as GM did) Regulatory Action (shorter term - potentially)  Provide lump sum cannot be offered to retirees already in pay status  DOL/EBSA: Can ‘clarify’ agency’s Interpretive Bulletin 95-1 re plan’s fiduciary duty to “obtain safest annuity available”, e.g., o If not plan termination, obligation to keep annuity in the plan (insured by PBGC) o Must purchase annuity with dedicated fund? Must purchase reinsurance? Legislation (longer term – probably)  Prohibit lump sum offers to retirees already in pay status  Require any ongoing plan to purchase back-up insurance from PBGC