Aspects of Risk

1. Aspects of Risk Risk Management Within The Investment Portfolio September 28, 2011 © 2011 Towers Watson. All rights reserved.

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3. Today’s Presenters • Jon Pliner, Investment Strategy Consultant • Mark Ruloff, Director of Asset Allocation

4. Today’s Discussion • Opening Thoughts • Payout/Liability Hedging • Better Diversification • Risk Steering • Risk Pricing • Long-Termism Risk Return Concepts • Beyond Investment Policy • Closing Thoughts 4

5. Opening Thoughts • Holistic • Many tools beyond diversification and liability hedging • Risk return management 5

6. Standard Efficient Frontier Most Desirable Efficient Frontier Point Labels represent % fixed income 6

7. Asset/Liability Efficient Frontier Most Desirable 7

8. Liability Hedging Desirable 8

9. An Eventful Couple of Months Consumer confidence indicators Sources: Thomson, Towers Watson EM: Emerging Markets DM: Developed Markets 9

10. Government Bonds Bond Yield Curves (As of August 31, 2011) Source: Bank of England, Deutsche Bundesbank, Federal Reserve, Bank of Japan 10

11. Diversified Portfolio: Risk/Return Buckets Source of returns as a percentage of total return Typical portfolio Well diversified portfolio Skill risk premium Insurance risk premium Equity risk premium Skill risk premium Equity risk premium Inflation risk premium Inflation risk premium Credit risk premium Credit risk premium Term risk premium Term risk premium 11

12. Sample DB Pension Fund Traditional Unconstrained Emerging wealth Emerging wealth Private markets Private markets Alternative beta Developed equities Liability hedging overlay Hedge funds Alternative beta Developed equities Alternative credit Corporate bonds Corporate bonds Treasuries and cash Treasuries and cash Source: Towers Watson 12

13. Equities Most markets look attractive based on simple valuation metrics Sources: Bloomberg LP, Towers Watson Markets have failed to rally significantly from the August lows Sources: Bloomberg LP, Towers Watson 13

14. Sample Analysis of Dynamic Asset Allocation: Cumulative Contributions plus Deficits Asset/Liability Frontier Year 2019 $200 6% 8% 4% 10% $210 2% 12% 4% 6% 14% 2% 8% 16% Combined: PV of Cumulative Contribution + TL Deficit ($M) 50th Percentile 20%FI (LGC) 30%FI (LGC) 18% 10% 40%FI (LGC) 20% 22% 12% 24% 26% 28% 14% 30% 50%FI (LGC) $220 16% 18% 20% 22% 24% 26% 28% 30% $230 $320 $330 $340 $350 $360 $370 $380 Combined: PV of Cumulative Contribution + TL Deficit ($M) 14 95th Percentile

15. Risk Steering • Dynamic Asset Allocation • Separating funded status trigger into interest rates, returns, and contributions • In declining markets • Enterprise Risk Management • Compare investment portfolio options with core operations • Consideration of investments compared to core business risks • Sponsor Beta • Commodities • Inflation • Cash contributions 15

16. Collared vs. Uncollared Domestic Equities: Annual Return 50th %ile – both 75th %ile – Collar 25th %ile – both 75th %ile – no Collar 5th %ile – Collar 5th %ile – no Collar 95th %ile – Collar 95th %ile – no Collar 16 16

17. Development of Liability Hedging Elements Sources: BarCap, Towers Watson 17

18. Risk Pricing • Puts, calls, and collars • Swaps, Swaptions, and Swaption collars • Generally would be a loss of value if done always and passively • Requires good governance to know when to use and how to implement • Could depend on connection with enterprise risks • Put on swaption to avoid “unbearable” situation, like breaking of bond covenants 18

19. Long-Termism Risk/Return Concepts in Model Portfolio • Risk framework • Risk return framework • Risk return management, not just measurement • Long-term risk return management framework • Risk scenarios • Theme investing • Extreme risks

20. Sustainability Universal Owner Social and Environmental Goals Return Goals Sustainable Investing Risk Management Goals 20

21. Beyond Investment Policy Effective at managing short-term plan cost and volatility Effective at managing active liability risk profile and long-term plan cost FUNDING STRATEGY BENEFIT STRATEGY PensionRisk Effective at managing long-term plan cost and volatility Effective only for short-term issues INVESTMENTSTRATEGY ASSUMPTIONS & METHODS 21

22. Closing Thoughts • Holistic • Many tools beyond diversification and liability hedging • Risk return management 22

23. Questions 23

24. Disclaimer • The information included in this presentation is general information only and should not be relied upon without further review by the appropriate professional advisors. Towers Watson is not a law firm or accounting firm, and we are not providing legal, accounting or tax services or advice. Some of the information included in this presentation might involve the application of law; accordingly, we strongly recommend that audience members consult with and involve their legal counsel and other professional advisors as appropriate to ensure that they are fully advised concerning such matters. Additionally, material developments may occur subsequent to this presentation rendering it incomplete and inaccurate. Towers Watson assumes no obligation to advise you of any such developments or to update the presentation to reflect such developments.

25. Contact Details • Jon Pliner • 335 Madison Avenue, New York, NY 10017-4605 • 212-309-3811 • jonathan.pliner@towerswatson.com • Mark Ruloff • 901 N. Glebe Road, Arlington, VA 22203 • 703.258.8058 • mark.ruloff@towerswatson.com 25