1. Drake University – A Roundtable Discussion Longevity and Pensions March 26, 2012

2. PwC Retirement and Longevity Risk – Plan Sponsor Perspective Pension plan sponsors and their advisors have been focusing more and more on risk management techniques. With changes to accounting and funding rules and persisting market volatility over the last decade, volatility of funded status has driven volatility in the financial statement as well as cash flow volatility. The most immediate cause of volatility has been the emergence of the mark to market paradigm, and that is mostly about interest rate and investment risk. While there is awareness of longevity risk as a factor, its impacts tend to “creep up” on plans over time with no large financial shocks. Smaller shocks have occurred from mortality table updates, which actuaries typically do every 5 to 10 years to reflect improving longevity. The next phase is beginning with availability of the new mortality improvement Scale BB, which will have a 2% - 4% impact. A risk analysis for a typical DB plan would show that interest rate and investment risk drive most of the volatility. Slide 2

3. PwC Retirement and Longevity Risk – Plan Sponsor Perspective 3 Pension plans are exposed to a variety of financial, demographic and administrative risks Pension Risk Inflation Longevity Interest rates Regulatory Operational Fiduciary Correlation with Business Demographic Liquidity Reputational Equity returns

4. PwC Retirement and Longevity Risk – Plan Sponsor Perspective Corporate plan sponsors have been slow to adopt risk management practices in general, and longevity has not been the primary area of focus. As the move from DB to DC plans continues, longevity risk is likely to get higher billing as frozen plans mature and eventually become dominated by retiree liabilities. At that point, sponsors will be looking to control longevity risk, if they have not already annuitized (in which case the risk resident with insurance companies will be greater). Public plans and large union plans in certain industries will experience longevity risk more acutely. In pay-as-you-go plans, longevity risk is more significant because some other risks are not present, such as investment risk. Slide 4

5. PwC Retirement and Longevity Risk - Participant Perspective Trend over past two decades: decline in defined benefit plans, replacement by defined contribution plans. This has happened mostly as a backlash to the market risk; reducing longevity risk has not been a primary concern Market risks are being transferred to individuals Additional fallout is that longevity risk is transferred also It could be argued that it is reasonable to transfer investment risk to individuals, especially during the employment build-up phase. Also, interest rate volatility may not be as significant factor for individuals as it is for employers: The participant does not need to mark to the interest rate market annually, as employers do in the financials. Unless they are buying annuities at some point, interest rates may not factor into the equation for them at all, except for the indirect inflation factor. Slide 5

6. PwC Retirement and Longevity Risk - Participant Perspective However, it is far less efficient and feasible to ask employees to underwrite their own longevity risk. Consider the 25% chance of living past 90 for a 60 year old. Whereas wealthy individuals may want to leave wealth to heirs, rank and file employees do not have the resources to save enough to self-insure themselves against the chance of living to an advanced age. Retirees have historically had an aversion to buying annuities: They see them as too costly (because they don’t understand the cost of risk) They want flexibility of retaining assets and need resources for the other risks they face. They are concerned about transferring their assets and then dying young. Note this could change in the wake of recent market volatility. Slide 6

7. PwC Tools to Mitigate Longevity Risk in Retirement Annuities Buy-outs as in a plan termination Buy-ins as plan asset These are not likely to be widespread in the current interest rate environment Hedging - mortality swaps or matching offsetting risks (e.g. life insurance vs. pension risk) Longevity funds – uncorrelated asset choice Retirement income funds as 401(k) options Longevity annuities – deferred annuities to start at age 85 or later “DBify “ DC plans – add fund choices as above and more payout choices Plan design option – Hybrid pension plans that balance risks between employer and employee more sensibly Slide 7