1. Engaged Investor Trustee Forum 21 May 2009 David Collinson Partner Pension Corporation

2. What is pension insurance (buyouts/buy-ins) Impact of financial turmoil It’s all about defaults! Outlook for the future

3. Copyright © 2008 Pension Corporation LLP. All rights reserved.3 Insurance in general  Pooling of risks to protect against extreme outcomes  Transfer of first responsibility for a risk  Payment of a premium in exchange for a promise to meet a future claim  Access to solvency capital to ensure that the insurer’s promise is met  Transfer of a profit margin From an employer/member perspective, a pension fund already meets some of the above features. The main exception being the capital and profit aspects.

4. Copyright © 2008 Pension Corporation LLP. All rights reserved.4 Pension Fund Risk Profile Pension Fund Corporate Credit Spreads/Defaults Equity Prices Inflation Rates Interest Rates Longevity Member Options Operational Risks Creditor Risk Covenant Support Member PPF Protection

5. Copyright © 2008 Pension Corporation LLP. All rights reserved.5 Buy-in / Buyout – Safe diversified investment or single unsecured loan? Insurer Capital Assets FSCS Protection Pension Fund Corporate Creditor Risk Covenant Support Member PPF Protection Credit Spreads/Defaults Equity Prices Inflation Rates Interest Rates Longevity Member Options Operational Risks

6. What is pension insurance (buyouts/buy-ins) Impact of financial turmoil It’s all about defaults! Outlook for the future

7. Copyright © 2008 Pension Corporation LLP. All rights reserved.7 Impact of financial turmoil  Insurers ► Capital impact of falling bond values/increased spreads ► Fewer active players quoting in the market ► Lack of availability of inflation hedges ► Pricing benefit of higher credit spreads ► Interesting investment opportunities ► Careful asset due diligence needed to transact  Pension Funds ► Equity exposure may have put insurance out of reach for some funds ► Some insurance processes put on hold ► “New world” for setting technical provisions

8. What is pension insurance (buyouts/buy-ins) Impact of financial turmoil It’s all about defaults! Outlook for the future

9. Default assumptions  Insurers have already had to grapple with technical provision setting post-September 2008  Many pension funds will need to grapple with this for the 2009 Funding Valuations  Gilts +0.5% or Gilts +60% of AA Spread; Similar in 2006, very different now!  AA spreads +300bps, A spreads +450bps Copyright © 2008 Pension Corporation LLP. All rights reserved.9

10. Default assumptions Comparison of default assumptions InsurerDefault assumptions 2008 Prudential Equivalent to 80bps pa for the lifetime of the asset portfolio Aviva Equivalent to 85bps pa for the lifetime of the asset portfolio L&G 130bps pa for the first 4 years; 30bps pa thereafter Pension Insurance Corporation 50% of current spread over lifetime of portfolio

11. Historical evidence Moody’s Historical Default Data – 86 years of data  Analysis of Moody’s data from 1920-2006 (more recent data not yet available) suggests that: ► average loss from defaults – 9bps ► the most stressed environment was the 1930’s -58bps per annum loss from defaults on average ► the single worst year for defaults was 1938 -170bps loss from defaults

12. Historical evidence Worst Decade Ever – Individual default rate in each year Rating1931193219331934193519361937193819391940 Aaa0.000 Aa0.0000.6700.0000.5990.0000.7840.0000.8330.000 A0.2810.8710.2650.3471.3330.5050.5391.7000.000 Baa1.0350.8921.8000.8111.8870.3411.0931.9720.9461.316 Ba2.9595.97311.1112.6324.8261.2250.6490.9760.5880.410 The following table shows the proportion of companies which defaulted on various grades of corporate bonds during the 1930s.

13. What is pension insurance (buyouts/buy-ins) Impact of financial turmoil It’s all about defaults! Outlook for the future

14. Copyright © 2008 Pension Corporation LLP. All rights reserved.14 Key characteristics of developments in 2008  Validation that a solvent buy out market exists  Wide range of providers at start of the year narrowing to only a few serious players at the end  Partial Buy-in / Buyout concept validated  Very aggressive pricing in first 6 months eased to more sustainable levels later in the year  Most deals were for “straightforward” insurance, rather than risk sharing  Security/collateral structures implemented on some buy in deals  “full risk transfer deals” came and went

15. Copyright © 2008 Pension Corporation LLP. All rights reserved.15 Buyout market - Outlook  When funding discussions on longevity get difficult, longevity insurance will become attractive - expect deals in this area  Will overall buyout / buy-in volume be at similar level to 2008? ► Opportunistic deals based on price – probably fewer but Plans are gearing up for this ► De-risking deals: Likely to continue, focused on pensioner buy–ins ► Distressed deals: Likely to rise

16. Disclaimer This publication has been prepared for general guidance on matters of interest only and are intended for professional/corporate recipients and not for individual/retail customers or pension scheme members and should not be passed on to such without our prior consent, and does not constitute professional advice of any kind. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, Pension Corporation LP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2009 Pension Corporation. All rights reserved. 'Pension Corporation' refers to the Pension Corporation LP and its affiliates each of which is a separate and independent legal entity.