1. For institutional use only. Not for public distribution. Client-specific data is considered CONFIDENTIAL. Frozen Pension Plans: Is immunization or termination the right choice? May 2013

2. 1 For institutional use only. Not for public distribution. Agenda Frozen pension plans today Cost factors for immunization Considerations and conclusions Assumptions and results Cost factors for termination Questions

3. 2 For institutional use only. Not for public distribution. Frozen pension plans today

4. 3 For institutional use only. Not for public distribution. Number of frozen plans has continued to increase over the past decade Frozen pension plans today PBGC data setFrozen - 2003Frozen – 2012 > 5000 total parts2%18% 100-5000 total parts9%38% 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. 4 For institutional use only. Not for public distribution. 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. 5 For institutional use only. Not for public distribution. Assumptions and analysis

7. 6 For institutional use only. Not for public distribution. 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 $500M using a PBO or PPA Full Yield Curve style measurement Assumptions ($ Millions)PLANS TypicalMatureYoung Active Liability $166.7 $100.0 $400.0 Terminated Vested Liability $166.7 $100.0 $50.0 Retiree Liability $166.7 $300.0 $50.0 Total Liability $500.0 *See appendix for liability assumptions.

8. 7 For institutional use only. Not for public distribution. 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. 8 For institutional use only. Not for public distribution. 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 Baseline results ($ Millions)PLANS TypicalMatureYoung Baseline Immunization Liability $537.6$536.9$540.0 Baseline Termination Liability $532.8$537.4$530.3 Termination/Immunization Ratio 99.1%100.1%98.2% Lower cost alternative Neutral Termination

10. 9 For institutional use only. Not for public distribution. Cost factors for immunization

11. 10 For institutional use only. Not for public distribution. Cost factors for immunization VariableBaseline Value/Assumption Bond underperformance relative to the liability 80 bps reduction in discount rate. Plan expenses10 bps reduction in discount rate. Lump sumsOffered to active and terminated vested participants in both immunization and termination alternatives.

12. 11 For institutional use only. Not for public distribution. Bond underperformance relative to the liability 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 Pension liabilities do not experience downgrades Corporate bond portfolios experience periodic losses relative to pension liabilities

13. 12 For institutional use only. Not for public distribution. Credit headwind illustration Matching corporate bonds don’t “keep up” with liability Bond A Bond B 5.0% 6.0% Bond A Bond B Discount rate = 5.0%Discount rate = 5.5% Bond A Bonds A & B make up liability universe Market sees more credit risk in Bond B Bond B is downgraded out of liability universe Discount rate = 5.0% Assets: lose value Liability: decreases Assets: no change in value Liability: increases Bond B YieldYield yield increases

14. 13 For institutional use only. Not for public distribution. Impact of increasing the annual underperformance of bonds relative to the liability from 0.8% to 1.0% Credit headwind impact on the immunization vs. termination decision ($ Millions)PLANS TypicalMatureYoung Baseline Immunization Liability 537.6536.9540.0 Change in Immunization Liability 8.88.69.4 Adjusted Immunization Liability 546.3545.5549.4 Baseline Termination Liability 532.8537.4530.3 Termination/Immunization Ratio 97.5%98.5%96.5% Lower cost alternative Termination Change in termination/immunization ratio (1.6%) (1.7%)

15. 14 For institutional use only. Not for public distribution. Cost factors for termination

16. 15 For institutional use only. Not for public distribution. Cost factors for immunization VariableBaseline Value/Assumption Annuity purchase costs110 bps reduction in discount rate for retirees and 150 bps reduction in discount rate for active and terminated vested participants. Lump-sum acceptance rates (affects both immunization and termination) 75% of active and terminated vested participants elect lump sum. Enhanced early retirement benefits (affects immunization and termination) No enhanced early retirement benefits. Offering retiree lump sums No lump sums are offered to retirees at termination.

17. 16 For institutional use only. Not for public distribution. Impact of decreasing the lump sum acceptance rate from 75% to 25% Lump sum acceptance rate impact on the immunization vs. termination decision ($ Millions)PLANS TypicalMatureYoung Baseline Termination Liability532.8537.4530.3 Change in Termination Liability36.221.751.7 Adjusted Termination Liability569.0559.1581.9 Baseline Immunization Liability537.6536.9540.0 Change in Immunization Liability10.76.415.3 Adjusted Immunization Liability548.3543.3555.4 Termination/Immunization Ratio103.8%102.9%104.8% Lower cost alternative Immunization Change in termination/immunization ratio4.7%2.8%6.6%

18. 17 For institutional use only. Not for public distribution. Considerations and conclusions

19. 18 For institutional use only. Not for public distribution. 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. 19 For institutional use only. Not for public distribution. 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. 20 For institutional use only. Not for public distribution. QUESTIONS?

22. 21 For institutional use only. Not for public distribution. Appendix

23. 22 For institutional use only. Not for public distribution. Impact of increasing the discount rate adjustment for plan expenses from 0.1% to 0.3% Plan expenses impact on the immunization vs. termination decision ($ Millions)PLANS TypicalMatureYoung Baseline Immunization Liability 537.6536.9540.0 Change in Immunization Liability 8.88.69.4 Adjusted Immunization Liability 546.3545.5549.4 Baseline Termination Liability 532.8537.4530.3 Termination/Immunization Ratio 97.5%98.5%96.5% Lower cost alternative Termination Change in termination/immunization ratio (1.6%) (1.7%)

24. 23 For institutional use only. Not for public distribution. Impact of not offering lump sums in an immunization strategy Offering lump sums impact on the immunization vs. termination decision ($ Millions)PLANS TypicalMatureYoung Baseline Immunization Liability 537.6536.9540.0 Change in Immunization Liability 16.19.723.0 Adjusted Immunization Liability 553.7546.5563.0 Baseline Termination Liability 532.8537.4530.3 Termination/Immunization Ratio 96.2%98.3%94.2% Lower cost alternative Termination Change in termination/immunization ratio (2.9%)(1.8%)(4.0%)

25. 24 For institutional use only. Not for public distribution. Impact of decreasing the group annuity discount rate by 35 basis points Annuity cost impact on the immunization vs. termination decision ($ Millions)PLANS TypicalMatureYoung Baseline Termination Liability532.8537.4530.3 Change in Termination Liability9.711.88.3 Adjusted Termination Liability542.5549.1538.6 Baseline Immunization Liability537.6536.9540.0 Termination/Immunization Ratio100.9%102.3%99.7% Lower cost alternative Neutral Immunization Neutral Change in termination/immunization ratio1.8%2.2%1.5%

26. 25 For institutional use only. Not for public distribution. Impact of having special early retirement provisions in the plan Early retirement benefit impact on the immunization vs. termination decision ($ Millions)PLANS TypicalMatureYoung Baseline Termination Liability532.8537.4530.3 Change in Termination Liability(4.8)(2.9)(11.5) Adjusted Termination Liability528.0534.5518.8 Baseline Immunization Liability537.6536.9540.0 Change in Immunization Liability(13.3)(8.0)(31.9) Adjusted Immunization Liability524.3528.9508.1 Termination/Immunization Ratio100.7%101.1%102.1% Lower cost alternative Neutral Immunization Change in termination/immunization ratio1.6%1.0%3.9%

27. 26 For institutional use only. Not for public distribution. Lump sums are offered to retirees in a plan termination Offering lumps sums to retirees impact on the immunization vs. termination decision ($ Millions)PLANS TypicalMatureYoung Baseline Termination Liability532.8537.4530.3 Change in Termination Liability7.713.92.3 Adjusted Termination Liability540.6551.3532.6 Baseline Immunization Liability537.6536.9540.0 Termination/Immunization Ratio100.6%102.7%98.6% Lower cost alternative Neutral Immunization Termination Change in termination/immunization ratio1.4%2.6%0.4%

28. 27 For institutional use only. Not for public distribution. Liability assumptions Assumed liability durations Active liability15 Terminated vested liability13 Retiree liability8 Assumed starting discount rates Active liability5% Terminated vested liability4.5% Retiree liability4%