1. 2008 General Meeting Assemblée générale 2008 Toronto, Ontario 2008 General Meeting Assemblée générale 2008 Toronto, Ontario Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. Pension Financial Management Developing a Strategy for Frozen Pension Plans

3. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 A pension risk management policy consistent with corporate financial objectives that ultimately leads to an exit from plan sponsorship while addressing the interim risk tolerances and constraints Defined benefit plans expose sponsors to cash flow, income statement and balance sheet risk Once a defined benefit plan is frozen, an implicit decision has been made to exit plan sponsorship (be it in 50 days or 50 years) Developing a dynamic exit strategy enables plan sponsors to: –Understand and quantify the accounting and economic costs of available exit strategies –Articulate a multi-year plan including… Explicit trigger points for partial or complete exit actions Dynamic investment strategies to achieve financial objectives along the way Desired Outcome Background

4. Risk Overview

5. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Pension Financial Management Strategy Overview of pension financial management The optimal pension financial management strategy addresses pension risks to ensure implications are understood and addressed The strategy must be consistent with corporate objectives to ensure proper management of the business implications Pension Implications Pension Risk Business Implications Risks manifest in this direction… …and should be managed in this direction

6. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Pension risk comes from a number of sources Market Risk  Market risk posed by investments held in pension fund (equity volatility, credit risk, currency risk, etc.) Interest Rate / Inflation Risk  Risk posed by inflation rates, changes in spreads and yield curve shapes Demographic Risk  Risk posed by longevity risk and embedded options (e.g., lump sums, early retirement subsidies) Regulatory Risk  Risk from regulatory changes  Asymmetric risk of surplus rules Operational Risk  Plan governance  Plan administration Pension Implications Pension Risk Business Implications

7. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 The implications of pension risk are far-reaching Funded status volatility Implications on pension contributions Implications on corporate balance sheet (US/Int’l GAAP, coming soon to Canada) Required contributions Aggressive funding of deficits Lack of control over emerging surpluses Pension expense Affects reporting to shareholders Different trends from other income statement items Pension Implications Pension Risk Business Implications

8. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 The business implications of pension financials are sponsor-specific Pension Implications Pension Risk Business Implications

9. Exit Strategy Decision Tree

10. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 End Game Approach Mid-Term Exit Short-Term Exit Overview of decision tree process — directional strategy Prepared operationally to exit today? Accept accounting implications of exit today? Prepared operationally to exit over 5 – 7 years? Accept accounting implications of exit over 5 – 7 years? No Yes No Long-Term Exit Yes Directional Strategies Accept economic implications of exit today? Accept economic implications of exit over 5 – 7 years? No Yes No

11. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Overview of decision tree process — alternative tactics Prepared operationally to exit today? Accept accounting implications of exit today? Prepared operationally to exit over 5 – 7 years? Accept accounting implications of exit over 5 – 7 years? No Yes No Yes Accept economic implications of exit today? Accept economic implications of exit over 5 – 7 years? No Yes No Short-Term Exit Annuitization / Termination Corporate Transaction Mid-Term Exit Partial exit Dynamic Allocation Immunize LDI Alternative Tactics (Examples) Long-Term Exit Alpha strategies Dynamic Allocation Tail risk reduction ALM / LDI strategies End Game Approach See example on next slide

12. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 If an immediate exit is not feasible, often a dynamic approach will optimally balance the desire to exit with the potential costs Liability Management Options Asset Allocation Strategy Current Keep all obligations Settle/transfer retiree obligations Settle/transfer TV obligations Settle/transfer active obligations Current allocation Reduce interest rate risk Reduce equity risk Goal The dynamic allocation process helps determine both the path(s) to follow and the triggers for each node Option A Option B

13. Process Outline

14. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Step 4 Monitor (if necessary) Step 3 Implement Approach Step 2 Assess Tactical Alternatives The appropriate process should separate solution development into two phases – a directional strategy followed by detailed tactical alternatives Step 1 Determine Directional Strategy  Determine the economic and accounting impact of potential strategies  Compare results to corporate financial objectives and constraints  Determine directional strategy  Begin preliminary exploration of tactics  Determine the financial impact of various tactics within determined strategy  Review risk/return trade- offs  Identify financial targets for dynamic plan management  Select specific tactical approach  Establish implementation plan and governance process  Implement tactical approach tied to stated trigger points  Periodic review of financial and economic conditions  Ongoing scanning of market developments  Ongoing monitoring of developing tactics

15. 2008 General Meeting Assemblée générale 2008 2008 General Meeting Assemblée générale 2008 Key Messages Identify key risks and their implications Think through and establish an exit strategy Establish process for ongoing monitoring of plan financial status Do not allow lack of planning to let the pension plan wreak havoc on corporate financial statements