1. Pensions Under Pressure An Update for Global Organizations October 22, 2009 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e.

2. Todays presentersMarco Boschetti is a Principal in Towers Perrins London office, where he serves as the U.K. Market Leader and leads the Mergers, Acquisitions and Divestitures practice outside North America. He has experience on all issues relating to international HR, including program design, implementation, operation and monitoring. Marco has an honors degree from the London School of Economics and is a Fellow of the U.K. Institute of Actuaries. He is a frequent speaker at conferences, is part of the international editorial board of the Journal of Pensions Management, and regularly contributes articles to HR and M&A publications. Steve Allan is a Principal in Towers Perrins Tokyo office and leads the benefits and actuarial consulting practices across Japan, Korea, Hong Kong and Malaysia. He has over 15 years of experience working with large global organizations to ensure that their pension and benefit programs are designed and implemented in accordance with global business objectives and local market practices. Steve is a Fellow of both the Institute of Actuaries in the U.K. and the Society of Actuaries in the U.S. He has a bachelors and masters degree from the University of Bristol, U.K. 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 2 3. Todays discussion The global context accelerating pension change Close-up on two key markets United Kingdom Japan Q&A 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 3 4. The global context Retirement programs in countries around the worldface tremendous changes Many companies are moving away from providingretirement security to reduce risk, volatility and/or cost This evolution poses near-term challenges for employers defining a sustainable retirement deal for the future managing/mitigating the cost and risk of legacy plans managing the change process These challenges are especially complex for global organizations because the underlying context, solutions and change processare somewhat different in each country 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 4 5. U.K. pensions the context All major companies have supplemental pension plansbecause of relatively low levels of social securitypension provision basic state pension of about $8,000 a year target pension of 60% of basic salary is the norm Historically, most plans were defined benefit Key characteristics of company-provided plans indexation in deferment and payment plans are normally contributory trust law governs 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 5 6. The U.K.s rapid transformation Most new plans now defined contribution Defined benefit plans mostly closed to new entrants, but huge legacy issues remain inactives account for over two-thirds of plan liabilities many plans are heavily underfunded Wind-up is a big issue very expensive longevity costs higher than in the U.S. debt on employer Pensions Protection Fund (like PBGC) introduced in 2005 requires annual levy based on amount of underfunding and probability of insolvency of sponsoring employer The U.K. pension story:A 20-year history of over-interference by the government 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 6 7. The latest example: The governments 2009 budget introduced new pension tax changes Traditional pension provision for high-income (150,000+)individuals will become far less tax effective beginning 2011 possibly even tax ineffective (benefit will be taxed twice) Companies are rethinking their compensation andpension arrangements may give employees the choice of avoiding the newpensions tax and/or explore other alternatives also likely to seek other opportunities to help employeesmanage their tax bill Changes will impact broader reward strategies The U.K. view is that pensions are dead formost high earners/executives 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 7 8. The current U.K. pension landscape EmployerSummary of ChangeEffective DateBPClosing DB pension plan to all new hires April 2010BarclaysClosing DB pension plan to both new and existing Decemberemployees (employees will have choice of DC or hybrid plan)2009Fujitsu Closing DB pension plan to existing employeesDecember(closed to new hires in 2000)2009RBS Capping pensionable pay growth at CPI max 2% October 2009Morrisons Closing DB final-salary pension plan to existing employees June 2009(replaced by a career average DB plan and a DCstakeholder plan open to all other employees)Network RailAnnounced its pension fund deficit nearly doubled (to almost June 2009664 million) within the last 12 monthsAon UKProposed reduction in standard employer contribution April 2009from 10% to 6% (age-related)BAE Announced company will be forced to inject 500 millionFebruary 2009Systems into the pension fund to serve a growing 2.2 billion deficit 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e.8 9. Options being considered for defined benefit plans presently under review39% 35% 22%9%8%ChangingMove to careerMove to DC Changing Move to forward accrualaverage pension age mixed DB/DC Sourc e: Assoc iation of Consulting Ac tuaries, September 2009 Recent trends Overall benefit accruals tend to be reduced by around 20% Some companies now more aggressive Defined contribution terms are improving 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 9 10. Finding the right solutions involves balancing key workforce and financial goals Benefit Strategy Financial Strategies Related Reward Strategies Relatedto Cost and Risk Management to Workforce Management Addresses the cost Addresses whether and risk implicationsfuture benefits are at related to design, the right level and of investment and other the right form, based financing decisionsOptimal Solutionon competitivenessand other workforceconsiderations 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 10 11. Successfully managing the transition requires a well-thought-out change plan1. Exploring the 2. Approval/ 5. Communicating6. Education 7. Making Detailed OptionsDecision3. Announcement4. ConsultationDecisionCampaign ChoicesTimingMonth 1 Month 2 Mid-Month 3 Months 3 5Month 6 Month 7Months 8 9(approx) Develop Ensure Explain Understand Brief leadership Build Campaign to c onsultationstakeholder proposals and during 60-day Brief unions andunderstanding keep awareness strategy and support for businessc onsultation trusteesof pension Drive c ommunic ationproposals and rationale how c hoic es and partic ipation Play bac k the plan understanding Buildemployeeshelp people and use of toolsheadlines from Educ ateof c hange plan understandingview the make dec isionsthe c onsultation Provide stakeholders Confirm designof the c hanges Drive use ofproc esstargetedproposals and c onsultation the questions online tools Build data on Announc e/c onfir ac tivities toc ommunic ation proc ess they need likely m c hanges to respond toplan answers to employee Explain the employee perc eptions of Objectivesreac tions differenc es by pension/benefit questions and gains/losses employee employeeplans inform their emotional hot preferenc es groupspension c hoic es spots Clarify timeline for c hange Engage c redibility of for financ ial other programs employees in c ase foreduc ation and points ofexploring the c hangeenrollment sensitivityimplic ations of Dec ide on Establish the c hangesc hanges for spec ificimplementation employee relations objec tives 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e.11 12. and needs to educate plan participants about different forms of investment risk 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 12 13. Tips for effective redesign Never a better time than now Thorough due diligence is a must Right judgment on ultimate endpoint Plan your journey Work in context of the overall employment package Keep it as simple as possible Employee choice allows individual optimization How you change has more impact than design fine points 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 13 14. A possible pensions journey Current Identify objectives Futurestate State Cost savings andsimplificationIdentifymajor risksRiskmanagement Levers to pullobjectivesmetBenefitsInvestments Liabilitymanagement 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 14 15. Dont overlook the legacy issues 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 15 16. Dont overlook the legacy issues 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 16 17. What to do nextBudget 2009 Changes Identify who is affected Brief the remuneration committee Briefing Ensure that HR can respond to queries Plan what to do about itBenefit Design Changes Understand where you stand Design Assessment Understand potential for change and financial implications Consider action Benefit Risk Management Understand your risks Risk Assessment Understand potential solutions Consider action 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 17 18. Japanese pensions evolving legislative context1952: Retirement Allowance Plans (Tax Code incentives) End: March 31, 2012(no new after 2002) 1962: Qualified Pension Plans (Tax Act) 1966: Employee Pension Fund LegislationOctober 2001: DefinedContribution Pension ActApril 2002: Defined BenefitCorporate Pension Plan Act 1959: Small Enterprise RetirementAllowance LegislationLegend:Defined Benefit Legislation Defined Contribution LegislationSpecial Plans for Small Enterprises 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 18 19. and a growing range of retirement plan design options 3- to 5-year average Combination DB/DC final salary plan(hybrid plans)100% DC planPoints system(with cashout option) TraditionalModern Career Core DC with average salarytop-up DBFinal salary plan withCash balanceAdvance cashheavily backloadedbenefits 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 19 20. Pension plan conversions continueDissolutionDissolv ed Plans:461 (as of Mar 31, 2009)Future Dissolution Plans: 54 (as of Mar 31, 2009)Employee Pension Fund(EPF) EPFDaiko-henj oPlans: 1,737 (as of Mar 31, 2002)(Future Money) 869 Plans: 617 (as of Mar 31, 2009) On Peak:1,883 (as of Mar 31, 1997)(Past Money as w ell) 807 Participants: 4,740,000 (as of Mar 1, 2009)(Mar 31, 2009)Participants: 10,870,000 (as of Mar 31, 2002On Peak: 12,250,000 (as of Mar 31, 1998) 232* New DB (Feb 28, 2009)Plans: 5,008 (as of Mar 31, 2009)Participants: 6,000,000 (as of Mar 31, 2009) 6,363*(Mar 31, 2009)Qualified Pension Plan5,229* (Feb 28, 2009)DC(QPP)Employ ers:11,476 (as of Feb 28, 2009)Plans: 12,979 (as of Feb 28, 2009) (w ill be abolished on March 31, After Fiscal 2002 Participants: 3,100,000 (as of Jan 31, 2009) 2012)16,080 (Feb 28, 2009) Plans: 73,582 (as of Mar 31, 2002) Small Employer25,441 (as of Mar 31, 2009)Retirement Allowance Plan # of Decrease: 48,141Plans:374,869Participants: 2,970,000 (as of Feb 28, 2009)Participants:9,170,000(as of Mar 31, 2002) 3,480,000(as of Mar 31, 2009) Dissolution*The number of employer # of Decrease: 5,690,000 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 20 21. Decline in defined benefit plans Qualified Pension Plans (QPPs)Employee Pension Funds (EPFs) (Plans)(Participants: 000s) (Plans)(Participants: 000s)120,000 12,000 2,500 14,000 100,000 10,00012,000 2,00010,000 80,0008,0001,500 8,000 60,0006,0006,000 1,000 40,0004,000 4,000500 20,0002,000 2,000 -- --9294 96 98 00 02 04 06 08 9294 96 98 00 02 0406 08 Plans Participants PlansParticipants 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 21 22. and growth in new plansGrowth in New DB Plan MarketGrowth in New DC Plan Market6,500 4,000 6,0006,150 plans as of 3,095 plans as ofSeptember 1, 2009 3,500July 31, 20095,500 (11,896 employers,5,000 3,0003.3 million participants)4,500 4,000 2,500 3,5002,0003,000 2,500 1,5002,0001,0001,500 1,000 500500- - Dec- Jun- Dec-Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun- Dec- Jun-02 03 0304 04 05 05 06 06 07 07 08 08 09 02 03 03 04 04 05 05 06 06 07 07 08 08 09Number of New DB Plans Number of DC Plans 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e.22 23. Key challenges in reviewing a defined benefit QPP Strong corporate preference for DC provision counter to historical Japanese practice difficult message given global and Japanese investment records Low DC contribution ceilings (monthly limit of JPY 51,000beginning January 2010; half this amount if funded DBplan also sponsored) thus, hybrid designs are common Traditional plan provided immediate lump-sum benefits no access to DC benefits prior to age 60 (and no DC participation for those over age 60) Employee consent required to change DB plans change based on prospective (i.e., total service) benefits two-thirds majority support required 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 23 24. Typical defined benefit plan review processPhase (1) Phase (2) Phase (3) Phase (4)Set Objectivesand Review Develop NewFinalize NewImplementationCurrentDesign Framework Plan DesignArrangements Business/HR Plan options: Design plan Selection of DCstrategy revised DB, DC, parameters plan Leadershiphybrid (cash Cost and administratorinterviews balance), etc.funding(if DC plan is Funding assessmentsimplemented) Retirementplan policiesstructure Scenario Selection of DC pros/cons testingfunds (if DC plan Current plan Benefit level/(winners/losers) is implemented)analysis accrual pattern Transition Employee Regulations and arrangements communication/ related legaleducation constraints EmployeeConsentRequired 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 24 25. DB governance and asset/liability management Local management becoming more proactive driven by Finance cash and accountingfocus on sensitivities and risk factorsfocus is on risk identificationrisk mitigation is not yet standard practicegrowth of ALM and manager monitoringconcern over funding levels lack of control of funding requirements lack of traction with trust banks But active plan governance is still a minority practice in Japan 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 25 26. Other risk-reduction opportunities Multi-employer defined benefit plans common contributions and ongoing participation subjectto governing committee withdrawal may be difficult depending on financialstatus of plan proactive monitoring of funding and contributionrequirements growing Growing interest in buyout options but limited local market for U.K.-style bulk buyouts individual cashouts of retirees possible often accompanied by review of retirement annuity options for current active employees 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 26 27. DC environment poses other challenges Actual investment returns of DC participants are extremely low about 60% of DC assets concentrated in time deposits could spell future problems and participant complaints More discussion and emphasis on fiduciary duties of plan sponsors established philosophy on DC investment selection and ongoing monitoring robust employee education as part of consent process ongoing employee education and behavior monitoringForeign Bond Foreign Equity 3% Time deposit Distribution of Investment Returns2% +GIC Japan Bond Assumed in Design Phase3% 80% Assumed Investment # %Returns0.0% 9 2.5%Distribution of Investment ReturnsJapan EquityActually Realized by Employees17%0.0% - 1.0%195.3% 2501.5% -1.0% - 1.5%287.8%3.0% is 200 1.5% - 2.0% 10529.4%popular,Mode Mode 0.1%Balanced Fund.5%2.0% - 2.5% 13738.4%and could 150reasonably be2.5% - 3.0%3710.4% pushed ev en3.0% - 5.0%205.6% higher100 Source: MHLWMore than 5.0% 2 0.6%50None127No answer 164 0 All 957100%-5.5% -3.5% -1.5% 0.5% 2.5% 4.5% 6.5% 8.5% 10.5% 12.5% 14.5% 16.5% 18.5% Data source: Pension Fund AssociationSourc e: Typic al Towers Perrin c lient sample 2009 Towers Perrin you Ifexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 27 28. What to do next Current Situation What is the current benefit promise?Understand current plan Are there any legacy arrangements? Cash funding and expense position and projections Consistency with global benefit policyMarket Practice in Japan Is Changing Comparison with local Is the 2012 QPP deadline relevant to you?market Understand current market position and trends Reaction to recent and pending DC legislative changesCommunication Can Be a Key Challenge Employee consent requirements Corporate and local management may have different Communicationperspectives Consent and agreement may not equate tounderstanding; ongoing communication and employeeeducation may be required 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 28 29. Key takeaways for global organizations As Japan and the U.K. illustrate, interventions andsolutions being pursued vary widely from country to country but, the drivers and ultimate direction of change aremuch the same Companies need to be sensitive to the local nuances of thechange journey to ensure successful execution Theres an important role for corporate leaders to play leading companies paying more attention to globalgovernance of rewards and retirement program first step often involves rearticulating the rewardphilosophy and governance structure with the local team 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 29 30. Questions? jp.provost@towersperrin.com marco.boschetti@towersperrin.com steve.allan@towersperrin.com 2009 Towers Perrin youIfexperienc e tec hnic al diffic ulties during the Webc ast, please c all tec h support at 954-917-6655 for assistanc e. 30