1. Evaluating the total reward package – practical aspects A presentation at the OME conference on valuing pensions and total reward in the public sector 24 September 2010 by Sue Field and Ilias Nanas © 2010 Towers Watson. All rights reserved.

2. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 2 Agenda Research for SSRB and DDRB Summary of results Practical problems encountered with this research Practical issues more generally when comparing total reward packages Valuing pensions

3. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Comparison of total reward – research for SSRB and DDRB 2009/10 Summary of results – comparators Base salary £95,000 (£80,001 to £110,000 band) 3 FinancialAccountingLegalPharma Total Remuneration above base salary (excluding pension) Lower quartile17.5%8.6%3.4%21.6% Median27.3%20.2%6.3%30.4% Upper quartile40.9%32.5%10.3%38.7% FinancialAccountingLegalPharma Pension Lower quartile9.6%6.4%8.0%9.3% Median11.3%13.5%9.7%9.8% Upper quartile13.5%18.3%13.1%9.8% FinancialAccountingLegalPharma Total Remuneration above base salary (including pension) Lower quartile28.0%18.5%11.3%22.9% Median38.1%30.5%16.3%36.8% Upper quartile52.6%47.9%20.9%48.3%

4. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Comparison of total reward – research for SSRB and DDRB 2009/10 Summary of results – remit groups Judiciary Senior Military Senior Civil Servants Doctors and dentists Total Remuneration above base salary (excluding pension) Median6.0%4.0%12.4%8.9% JudiciarySenior Military Senior Civil Servants Doctors and dentists Pension Median39.8%34.0%22.4%12.1% JudiciarySenior Military Senior Civil Servants Doctors and dentists Total Remuneration above base salary (including pension) Median45.8%38.0%34.8%21.0% Base salary £95,000 (£80,001 to £110,000 band)

5. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 5 Non-pension benefits – summary of results - comparators Base salary £95,000 (£80,001 to £110,000 band) The figures shown in the table illustrate the ranges for those organisations that offer the specific benefits. Not all organisations offer all of these benefits. In addition, companies who offer above median benefits for one component may be below median benefits for another component and vice versa. Therefore, the total non-pension benefits are less than the sum of the individual components.

6. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Comparison of total reward – research for SSRB and DDRB 2009/10 Comparison by salary band rather than job weighting caused some anomalies Significant differences in the level of seniority and job role between the sectors as well as with the remit groups £60,001 to £80,000£80,001 to £110,000£110,001 to £150,000 AccountingMid managementSenior managementSenior/pre-partner Legal Qualified lawyers with 5 or fewer years post qualification Qualified lawyers with 8 or fewer years post qualification Senior lawyers with 15 or fewer years post qualification Financial Services (Actuarial)Mid/senior managementSenior managementSenior/executive management PharmaceuticalMid/senior managementSenior managementSenior/executive management

7. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Looking beyond new hires Data available usually relates to new hires. This is a particular problem when comparing pensions as it is common for the pension benefits provided to new hires to differ from that provided to those who have been in service with an employer for a number of years.

8. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Valuing elements of reward Bonus – depends on economic environment. Decrease in bonus payout amounts in FY 2009 on the back of a healthy FY 2008 bonus payouts. Introduction of long- or medium-term elements into short-term incentives through deferral and clawback arrangements. Will add to the complexity of analysis year-on-year bonus amounts. LTIPs – performance periods and payouts likely to move towards greater long- or mid-term elements. 2009 LTIP grants below maximum level. Organisations are actively working on adjusting their long-term remuneration policies. Overall, more complex as not immediate reward with payout conditions depend on plethora of variables (both individual and organisation linked). Car provision – collected as lease cost, cash allowance or list price. Status and requirement provision are popular choices. Policy has moved from requirement to a status policy and it is now seen as a green initiative or as cash compensation.

9. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Comparing reward packages In addition to objective monetary differences, how do you take account of differences such as job security, performance demands, security of pension benefits? Our approach has generally been to look at differences in packages based on the career patterns, demands etc of the relevant remit group and not attempt to reflect other differences. Findings have been drawn on incumbent information for comparators and our approach does not attempt to reflect differences on policy for the remit groups Organisations offer a variety of benefits, each at a different market positioning. A total reward analysis does not lend itself in identifying such elements, rather observing at a higher level. Particularly difficult when comparing public and private sector

10. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Base pay Pay for performance Short-term incentives Long-term incentives Driving employee engagement through total reward Work Environment Healthcare Holiday entitlement Pension Life insurance Disability Benefits Learning & Development Pay TOTAL REWARD Competency / career framework Talent management Performance management Training Mentoring / coaching Recognition Manager effectiveness Communication Culture (collaboration, inclusion etc) Flexibility Key to attracting people into the organisation Satisfy “core” requirements + + + + Hygiene factors Drivers of engagement Key to building and maintaining commitment Strategic drivers Engagement

11. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Which elements of total reward are most highly valued? Top 3 reasons for leaving by age < 25Greater Career Advancement Opportunities Work Life BalanceFlexible Work Hours 25 - 34Job SecurityIncreased Compensation Greater Career Advancement Opportunities 35 - 44Increased Compensation Job SecurityAvailability of Better Pension 45 - 54Job SecurityAvailability of Better Pension Increased Compensation 55 +Job SecurityIncreased Compensation Availability of Better Pension

12. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Valuing pension benefits - DC Relatively straightforward Gives “cost to sponsor of provision” - doesn’t reflect variability of benefits received by members How to deal with employee choice: Chosing not to join plan Choice over contribution levels Contributions vary by age/service

13. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Dealing with member choice - examples Imagine a comparator scheme which provides identical benefits to the review scheme, but member participation rates are lower in the comparator scheme (say 60%). Should the value placed on the comparator scheme: — be the same as the review scheme, or — be lower than the value placed on the review scheme (ie 60% of the review scheme)? Imagine a comparator scheme which provides matching contributions up to a very high level (for example, 10%), but on average members only contribute, say, 3%. Is it reasonable to value the arrangement as being worth: — 10% of salary, or — 3% of salary?

14. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Valuing pension benefits - DB Depends on: Age Assumed investment return - Key Other financial assumptions – inflation, salary increases Demographic assumptions – especially life expectancy Should the same assumptions be used for the review scheme as for the comparators? AA corporate bond yields (2.0% pa) Best estimate global equity returns (5.25% pa) Best estimate returns for property (4.25% pa) Best estimate returns on a suitable portfolio of assets Gilt yields (0.75% pa) Best estimate global equity returns (5.25% pa) Best estimate returns on a suitable portfolio of assets

15. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. General framework for valuing pensions

16. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Actuarial methodologies Actuaries often make reference to the “funding method” used in valuing benefits. Examples you might hear are “entry age normal”, “projected unit credit” and “attained age” Basically, this is all about whether the valuation is looking at: The value of the benefits building up in the coming year (“projected unit”) The value of benefits building up over the future career of a current member (“attained age”) The value of the benefits building up over the whole career of a typical new joiner (“new entrant”)

17. towerswatson.com © 2010 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Limitations of reliance We have prepared this presentation under the terms of the Framework Agreement 2008-12 with the Office of Manpower Economics. We have prepared it to provide information to the Office of Manpower Economics and Review Bodies with regard to the practical aspects of valuing and comparing total reward packages. This presentation is not intended by Towers Watson to form a basis for any decision by a third party to do or omit to do anything, nor should any third party place any reliance on the contents of this document but should carry out its own investigations and obtain independent professional advice on all matters covered (or which ought to have been covered) by the report. Towers Watson accepts no duty of care or responsibility whatsoever for any consequences arising from any third party relying on the contents of this report.