Ryan ALM, Inc. - The Solutions Company 1-888-RyanALM The Pension Crisis Ryan ALM, Inc. - The Solutions Company 1-888-RyanALM www.ryanalm.com

(Copyright Ryan ALM, Inc. 2011 …All Rights Reserved)   Index Returns YTD 2011 Estimated Weights Liabilities : Market (Tsy STRIPS) FAS 158 (AA Corporates) PPA (3 Segment) PPA (Spot Rates) GASB /ASOP (8% ROA) 33.77 % 19.58 14.56 18.93 8.16 100 % Assets : Ryan Cash Lehman (Barclay)Aggregate S&P 500 MSCI EAFE Int’l Asset Allocation Model 0.31 % 7.85 2.10 -11.68 5 % 30 60 5 3.27 % Assets – Liabilities Market FAS 158 PPA (3 Segment) PPA (Spot Rates) GASB/ASOP (8% ROA) - 30.50% - 16.31 - 11.29 - 15.66 - 4.89 (Copyright Ryan ALM, Inc. 2011 …All Rights Reserved) Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Total Returns   2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Assets -2.50 -5.40 -11.41 20.04 8.92 4.43 12.25 6.82 -24.47 19.43 11.89 3.27 Liabilities 25.96 3.08 19.47 1.96 9.35 8.87 0.81 11.76 33.93 -19.52 10.13 33.77 Difference: Annual -28.46 -8.48 -30.89 18.08 -0.43 -4.44 11.44 -4.94 -58.40 38.95 1.76 -30.50 Cumulative -37.60 -73.40 -60.08 -66.13 -76.75 -64.60 -78.38 -181.57 -106.94 -115.67 -195.73 Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

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Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Actuarial Gain/Loss ___________________   Actual Return on Assets - ROA Forecast ____________________________________ Average Life of Pension (Duration) Actuarial Gain/Loss = Goes directly to EPS Since 12/31/99 = Heavy hit to EPS Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

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NYCERS Actuarial Report _______________________   “The financial objective of the New York City Employees Retirement System is to fund members’ retirement benefits during their active service and to establish employer normal contribution rates that, expressed as a percentage of active member annualized covered payroll, would remain approximately level over the future working lifetimes of those active members and together with members’ contributions and investment income, would ultimately be sufficient to accumulate assets to pay benefits when due.” Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

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Problem : Liability Valuation _________________________ Single Discount Rate Not market interest rates (GASB, ASOP = ROA, PPA = 2 year weighted average) Present Value calculated annually/triennially (Months delinquent) Liability Term Structure not transparent (Short, Intermediate, Long, Very Long) Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Problem : ROA (Return On Asset) ______________________________ FASB = Offset to Pension Cost (Actuarial G/L) GASB = Discount Rate on Liabilities Significantly undervalues liabilities ROA = 8% Long Treasury = 3% Yield Difference = 5% Yield Difference x Duration = PV $ Difference 5% x 10-15 years = 50% to 75% error Used as Hurdle Rate for assets Asset Allocation models used to validate ROA Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

ROA and Contributions ____________________________________________________________ ROA = Growth rate used to calculate Contributions (ONLY value) Contribution = Asset $ Growth – Liability $ Growth (if negative) Example: Funded Ratio = 60% (40% Deficit) Growth Rate = 8% ROA Contribution Assets $ Growth Liabilities $ Growth $ Cost % Increase Year 1 $60.00 $ 4.80 $100.00 $ 8.00 $ 3.20 Year 2 64.80 5.18 108.00 8.64 3.46 8.13% Year 3 69.98 5.60 116.64 9.33 3.73 16.56 Year 4 75.58 6.05 125.97 10.07 4.02 25.63 Year 5 81.63 6.53 136.05 10.88 4.36 36.25 Year 6 88.16 7.05 146.93 11.72 4.67 45.94 Note: Requires an ROA = 13.33% to not increase Contribution costs Assets > Liability growth by 5.33% per year (Level Contributions)

ROA and Contributions ____________________________________________________________ ROA = Growth rate used to calculate Contributions (ONLY value) Contribution = Asset $ Growth – Liability $ Growth (if negative) Example: Funded Ratio = 140% (40% Surplus) Growth Rate = 8% ROA Contribution Assets $ Growth Liabilities $ Growth $ Cost % Increase Year 1 $100.00 $ 8.00 $ 71.43 $ 5.71 $ NA Year 2 108.00 8.64 77.14 6.18 NA Year 3 116.64 9.33 83.32 6.66 NA Year 4 125.97 10.07 89.98 7.20 NA Year 5 136.05 10.88 97.18 7.77 NA Year 6 146.93 11.72 104.95 8.40 NA Note: Requires an ROA = 5.72% for NO Contribution costs Assets < Liability growth by -2.28% per year (NO Contribution) Surplus Strategy: Immunize… Asset Growth = Liability Growth (NO Contribution)

Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

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Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Asset Allocation ________________ Based on “Funded Ratio” (Assets/Liabilities) Separate Assets into Beta Assets and Alpha Assets Requires Custom Liability Index to Measure MV of Liabilities Large Deficit = Different Asset Allocation than Small Deficit Should be Responsive (Dynamic or Tactical) Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Contributions ____________ Contributions = Asset growth – Liability growth (if negative) Contributions = used to fund Liabilities Current Assets fund net Liabilities Enhances Funded Ratio Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Asset Allocation _____________ Market Value of Assets $ 560,000,000 Market Value of Liabilities $ 1,000,000,000 Funded Ratio % 56.00 Contributions (present value) $ 200,000,000 e. Net Liabilities $ 800,000,000 f. Net Funded Ratio % 70.00 Net Deficit ---------------------------- = Annual Target Alpha Duration of Liabilities 30% ------------ = 2.5% Annual Target Alpha 12 years Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Asset Allocation _____________ g. Annual Target Alpha = 2.5% h. YTM of Custom Liability Index (CLI) = 3.0% i. ROA of Alpha assets = 7.00% Annual Target Alpha / (ROA – YTM of CLI) = Allocation to Alpha assets 2.5% / (7.00% - 3.00%) = 2.5% / 4.00% = 62.5% Alpha Allocation 100% - Alpha Allocation = Beta Allocation = 37.5% Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Solution: Portable Alpha ___________________________ Transfer (Port) Excess Returns above Objective Index   from Alpha Portfolio(s) to Beta Portfolio Requires Custom Liability Index = Liability Objective Beta Portfolio = matches and funds Liabilities Secures Victory! Reduces Funded Ratio Volatility! Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Portable Alpha (Benefits) ___________ As Portable Alpha Transfers Excess Returns above Liability Index Beta Portfolio grows and grows… creating 4 Major Benefits : 1. Reduces Contribution Costs (Fully Funds Liabilities) 2. Reduces Interest Rate Risks (Hedges Liabilities) Increases Funded Ratio (Client Objective) Increases Certainty of Meeting Objective Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

Solution: Rates Go Up (5 Years) _______________________________ Liabilities: Interest Rates go up (+80 bps per year) 30-yr U.S. Treasury = 3.00% >> 7.00% Growth Rate = ( 5.00%) Annual Note: Liabilities behave like long bonds ------- Annual Growth Rate ------- Assets 5% 6% 7% 8% Liabilities - 5% -5% - 5% - 5% Alpha (Annual) 10% 11% 12% 13% Funding Ratio = 50% 89% 94% 98% 103% 60% 101% 109% 115% 120% ns Company 1- 888-Ryan-ALM www.RyanALM.com

Solution: Liability Alpha _____________________ Focus: Funded Ratio not the ROA Asset Growth > Liability Growth Example: Funded Ratio = 60% Asset Growth = 6% Liability Growth = - 5% Assets outgrow Liabilities by 11% per year (Alpha) Assets Liabilities Funded Ratio Contribution Start $ 60.00 $ 100.00 60.00% $3.20 Year 1 $ 63.60 $ 95.00 66.95% $2.41 Year 2 $ 67.42 $ 90.25 74.70% $1.64 Year 3 $ 71.46 $ 85.74 83.34% $1.03 Year 4 $ 75.75 $ 81.45 93.00% $0.43 Year 5 $ 80.29 $ 77.38 103.76% NA Note: Contribution calculated on Asset/Liability Growth = 8% (ROA)

Performance Measurement _______________________    Compares Assets vs. Objective Objective = Custom Liability Index   Requires CLI to Measure Performance vs. Liabilities Requires CLI to measure RISK and ALPHA Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com

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Ryan ALM, Inc. The Solutions Company 1- 888-Ryan-ALM www.RyanALM.com