1. Mercer Limited is authorised and regulated by the Financial Services Authority Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU Hertfordshire County Council Pension Fund Employing Bodies Meeting Pension Schemes and the Financial Crisis 20 March 2009 Nick Sykes

2. 1 Mercer Hertfordshire County Council Pension Fund Pension schemes and the financial crisis  What has happened  Where are we now  Implications for pension schemes  What happens next  Conclusion

3. 2 Mercer Pension schemes and financial crisis What has happened Calm before the storm

4. 3 Mercer Pension schemes and financial crisis What has happened Phase 1 Credit crunch US housing market correction Increasing defaults on mortgages Falls in mortgage-linked securities Concerns about bank’s solvency Wholesale money markets seizure

5. 4 Mercer Pension schemes and financial crisis What has happened Phase 2 Systemic Crisis Lehmans collapse Counterparty risks/losses Massive deleveraging Losses on toxic assets revealed Investors run for cover Banks bailed out

6. 5 Mercer Pension schemes and financial crisis What has happened Phase 3 Economic crisis Collapse of confidence in financial system Withdrawal of credit Collapse in asset values Consumer/corporate confidence disappears Real economies drop sharply Unemployment rising Further fall in confidence

7. 6 Mercer Pension schemes and financial crisis Where are we now  Economic activity falling rapidly  Corporate profits/dividends hit  Massive monetary/fiscal stimulus  Inflation falling sharply  Recession or depression?

8. 7 Mercer Pension schemes and financial crisis Where are we now  Equities down 40% in last year and c50% from their peak in 2000  Property weakest year on record, no recovery in sight  Other alternative assets hit by investor risk aversion  Government bonds the only ‘safe haven’ asset  Higher volatility and higher correlation of “growth” assets

9. 8 Mercer Pension schemes and financial crisis Where are we now  Gilt yields at 50 year lows  Equity yields well above gilt yields (implies no future growth)  Other growth assets at very depressed prices  What outlook is being priced into the markets?

10. 9 Mercer Implications for pension schemes  Pension schemes are very long term investors  Can withstand market volatility and illiquidity  Are net investors into lowly priced markets  Can take advantage of longer term opportunities e.g. corporate bonds currently

11. 10 Mercer Implications for pension schemes  Pension schemes have been hit by – Falling equity markets – Falling property markets – Weakness in alternative assets – Active investment managers’ struggles – Falling gilt yields  Funding levels have experienced a material deterioration  Implications for employer contributions post 2010 actuarial valuation

12. 11 Mercer What happens next?  Scenario 1 – Deep recession, but recovery triggered by massive stimulus measures and assisted by more robust growth in developing world  Economic growth in place by 2010  Investment markets anticipate this, plenty of scope for recovery  Scenario 2 – Deep recession, loss of confidence, difficulty of getting economies going again despite massive stimulus – Extended period of weak growth, risk of falling prices (deflation) further delaying consumer spending and undermining confidence – Investment markets pricing some of this in, but would fall further

13. 12 Mercer What happens next?  Depends on actions by the authorities  Effect of quantitative easing and other stimulus measures  Global not UK problem  Importance of consumer confidence  US likely to show first signs of recovery

14. 13 Mercer What happens next?  Economic outlook is more uncertain than at any time in the last 30 years  Will the stimulus work?  Will deflation gain a hold, or will inflation reappear?  Markets hate uncertainty more than bad news  Return to benign growth and moderate inflation combination of 1992-2007 seems extremely unlikely

15. 14 Mercer Conclusions – Reasons to be cheerful  Economic news is unremittingly bad, but this is priced into markets  Authorities have the commitment to turn economies around and get them growing again  Inflationary pressures have fallen right back for now (which helps pension scheme liabilities)  Pension schemes as long term investors may capture some attractive opportunities

16. Mercer Limited is authorised and regulated by the Financial Services Authority Registered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU