1. The National Society of Institutional Investment Professionals
15th Annual Summit
Panel Discussion:
LDI- Should we Hedge All or a Portion of Liabilities?
Mitch Stone, Fluor Corporation

2. Fluor Corporation
Fluor is a FORTUNE 500 company that delivers engineering, procurement, construction, maintenance, and project management services to clients around the world
Founded almost 100 years ago (1912)
Today: 60 global office locations employing over 40,000 employees
Fluor Business Segments: Energy & Chemicals, Industrial & Infrastructure, Government, Power and Global Services
Revenue: $5.4B (Q3-2009); Market Cap: $7.9B

3. Plan Overview Retirement Plans
Defined Contribution is Fluor’s prospective vehicle
Defined Benefit is legacy
All Plans are closed (freezing accruals is being considered)
Risk mitigation
Stick with our core business
US, UK, Holland, Australia, Germany
Total Assets = $1.2B
Funded Status = all in excess of US GAAP ABO
Investment Strategies are designed locally and confirmed by HQ
LDI is actively implemented in the US and Holland
Other countries are analyzing (UK - Triggers)

4. LDI – Can “all” be hedged?
Hedging “all” risk is difficult due to the following:
Liability Assumptions
Mortality and Salary Growth – even though the assumption itself can be hedged, the actual outcome may vary significantly from the initial assumption
Discount Rate – the liabilities will be valued on a pool of presumably high-grade bonds that never default; assets will be subject to defaults
Funding Status – fully hedging underfunded plans’ liability results in leverage
Benefit Accruals – frozen/closed plans are easier to hedge than open plans as the liabilities are somewhat easier to quantify

5. LDI – Optimal Level of Hedging
Optimal Hedging Level: 50-80% depending on
Plan being open or closed
Funding Status
Law of Diminishing Returns – benefits become spurious
Interest Rate Risk is easiest to hedge
Physical bond market and derivative markets are deep
Mortality swaps are gaining popularity in UK

6. US LDI Implementation 2006-2008 2009
Asset Allocation: 60% Equity, 40% Fixed Income
Hedged Plan’s duration via US Treasury Interest Rate Swaps, coupled with the natural duration provided by the physical Fixed Income securities
70% - 80% Target Hedge
2009
Liquidated Interest Rate Swaps – realized gains
Treasuries AAA-rating mismatched to AA-rated discount rate
New Asset Allocation: 30% Equity, 70% Fixed Income
Hedged interest rate risk via physical Long Credit (AA portfolio)