TUESDAY 6 SEPTEMBER 2011 THE INTERCONTINENTAL HOTEL, LONDON, UK. LCP Annual Pensions Conference 2011: A pensions strategy for a new generation.

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1 TUESDAY 6 SEPTEMBER 2011 THE INTERCONTINENTAL HOTEL, LONDON, UK LCP Annual Pensions Conference 2011: A pensions strategy for a new generation.

2 2 Agenda In recent years, the baby boomer generation has started to reach retirement age. Rising stock markets, paternalistic employers and legislative changes have meant that their defined benefit pensions are more valuable and secure than ever. But what will the future hold for Generations X and Y? LCP 2011 annual pensions conference welcomes prestigious speakers from Government, the Pensions Policy Institute and NEST to help us consider topical issues such as: How might companies set a viable pensions policy? How does a legacy DB scheme fit into that policy? What are the implications for investment strategy? Registration and coffee 08:30-09:00 Session 1 09:00-10:40 Chairman s welcome Bob Scott Opening address Rt Hon Steve Webb MP Minister of State for Pensions An independent view of the impact Chris Curry of public policy on future pension Pensions Policy Institute and retirement provision Challenges for the private sector The good The bad and the ugly Mark Jackson Coffee break 10:40-11:00 Session 2 11:00-13:00 The role of NEST in future pensions policy What might the future hold Balancing defined benefit, defined contribution and other savings vehicles Lawrence Churchill CBE NEST Corporation Jeremy Dell and Michael Cranfield Preparing for a new generation of savings Chairman s conclusion and questions Ken Willis Bob Scott Lunch 13:00

3 3 Chairman Session 1 Chairman s welcome Bob Scott Partner +44 (0) bob.scott@lcp.uk.com Bob is author of LCP s Accounting for Pensions Report, which is now in its 18th year. He has been a partner at LCP since 1988 and became senior partner on 1 April Bob s primary role is in advising his portfolio of UK pension clients and he is a regular commentator on UK pensions issues in the media. The pensions landscape continues to change. As 2011 unfolded, companies and trustees saw their pension schemes in better health, as a combination of rising equity markets, continuing high levels of company contributions and the impact of the change from RPI to CPI saw funding deficits reduce significantly. However, the financial instability of recent months has undermined much of that good news and 2012 sees yet more significant pensions legislation coming into force. Tax changes, the abolition of DC contracting-out, the launch of NEST and the advent of auto-enrolment will mean further major upheaval in the private sector. European law will mean unisex annuities from December 2012 and we face the possibility of more stringent funding legislation, along the lines of Solvency II. Against this background, companies have continued to downgrade - and, in many cases, to close down - their defined benefit schemes, as they look to manage their liabilities (and assets) as effectively as possible. Many of these changes have prompted unrest amongst pension scheme members and we have seen industrial action over pension changes, both in the public and private sectors. What does the future hold for the average pension scheme member? Is their pension secure? How should employees save effectively for their retirement? And what is the Government doing? We are delighted to welcome to our annual pensions conference the Minister of State for Pensions, Steve Webb; Chris Curry, Research Director of the Pensions Policy Institute; and Lawrence Churchill, Chair of the NEST Corporation who, along with a panel of experienced LCP speakers will provide you with insight into these issues and a view of what the future might hold. At the end of the conference, I am sure that you will have a better view of the way forward for your own pension scheme and how the forthcoming changes might affect your scheme members. Bob Scott

4 4 Guest speaker Session 1 Opening address In 1997, Steve Webb became the Liberal Democrat MP for Northavon. Boundary changes in May 2010 created a new constituency of Thornbury and Yate. At the last election, Steve became the first MP for this new area, which includes most of his former Northavon constituency. Rt Hon Steve Webb MP Minister of State for Pensions Steve was appointed Minister of State for Pensions in May 2010, in the new Coalition Government. Prior to that, Steve was the Liberal Democrat spokesperson on Work and Pensions (1999 to 2005), Health (2005), Environment, Energy, Food and Rural Affairs (2007), Energy and Climate Change (2008), before returning to Work and Pensions in Steve also chaired the Liberal Democrat Manifesto Group in Guest speaker Session 1 An independent view of the impact of public policy on future pension and retirement provision Chris joined the PPI as Research Director in July Chris is responsible for the PPI research programme and since joining the PPI he has authored and presented a number of research reports analysing pensions (both state and private), pension reform and personal accounts. Chris Curry Research Director, Pensions Policy Institute Prior to this, Chris was Senior Economist at the Association of British Insurers where his pension background led to work on the analysis of stakeholder pensions, the Pension Credit and annuities. Chris started his career at the Department of Social Security (now the Department for Work and Pensions) as an Economic Adviser. Work at the DSS included analytical support for the Pension Provision Group, and working on the subsequent Pensions Green Paper published in December Guest speaker Session 2 The role of NEST in future pensions policy Before joining NEST Corporation, Lawrence was Chairman of the Pension Protection Fund. He is also a member of the Board for Actuarial Standards, the Board of BUPA and a trustee of the think tank International Longevity Centre, UK. Lawrence was awarded a CBE for Public Service in the 2010 New Year Honours List. Lawrence Churchill CBE Chair of the NEST Corporation

5 5 We give our clients insights and advice to put them in control when facing tough choices.

6 6 Session 1 Challenges for the private sector The good The bad...and the ugly Mark Jackson Partner +44 (0) mark.jackson@lcp.uk.com Mark has over 20 years industry experience of liability management, corporate restructuring, benefit design, and tailored funding strategies. He is the author of our report on Executive Pensions for FTSE 100 and FTSE 250 companies. Liability management, de-risking and the imminent arrival of autoenrolment all mean more change for trustees, employers and pension scheme members. But are these changes good, bad or downright ugly when viewed from the perspective of the various stakeholders? The session aims to highlight good practices, particularly those that can lead to a win-win situation for all parties; as well as to identify the pitfalls, in order to avoid falling into the bad or ugly category. This is increasingly important as decisions taken now will affect the retirement income of large numbers of individuals, and with the Government and the regulatory authorities now taking a keen interest in the measures employed.

7 7 Session 2 What the future might hold Balancing defined benefit, defined contribution and other savings vehicles One thing is clear - we face an uncertain future, particularly when it comes to pension policy with an increasing proportion of the population relying on their pensions and other savings. Will DC become the only form of pension provision in the private sector? Might DB make a comeback (in a modified form)? Or will we see pension savings rolled in with other forms of tax-effective saving. This session doesn t predict what the pensions landscape will look like in 10 years time but, by considering different scenarios, the speakers will identify some key issues and common themes. They will suggest actions that all trustees and employers need to take now - whatever the future holds. Jeremy Dell Partner +44 (0) jeremy.dell@lcp.uk.com Jeremy advises a wide range of clients including pension scheme trustees and sponsors on all aspects of pensions and employee benefits. He is a member of LCP s M&A team and has advised on a number of major corporate transactions. He is a regular speaker on a variety of pensions related topics. Michael Cranfield Partner +44 (0) michael.cranfield@lcp.uk.com Michael leads LCP s investment consulting team in our Winchester office. He has extensive experience in UK pensions work on both the asset and the liabilities side. He also has specialist knowledge in the field of international benefit provision and has worked with a number of major clients in this area.

8 8 Session 2 Preparing for a new generation of savings UK pension schemes have around 1 trillion in assets but this is not sufficient to meet the corresponding liabilities. This session will look at ways of bridging the gap and will show how, by tackling what appears to be a very large problem in a series of smaller manageable steps, you can guide your pension scheme - and its members - towards greater financial security. Ken Willis Partner +44 (0) ken.willis@lcp.uk.com As the world changes, new investment opportunities emerge. We will examine emerging market multi-asset funds, non-market cap indices, and the attractions of investment in smaller companies. We also look back at how investment ideas introduced in previous conferences have fared. Ken advises both trustees and corporate sponsors on all aspects of investment. Ken s understanding of pension scheme funding, the interaction with investment policy and how these fit into scheme sponsor financing discussions, ensures that he is well placed to assist trustees and sponsors implement effective investment arrangements.

9 DC GOVERNANCE A 10 MINUTE CHECKLIST JULY 2011 Complete our checklist to identify any aspects of your scheme that may benefit from a review. A review could be very Unlikely to have many helpful concerns GOVERNANCE FOR DC SCHEMES JULY 2011 Providers 1 When did you last review your scheme provider? More than 3 years ago Within the last 3 years 2 Has the membership changed significantly since the scheme It s quite different now Not that different commenced? 3 What kind of service do members receive? It could be better We hear consistently good feedback 4 How confident are you that your provider remains We ve not checked Our scheme benefits from the competitive? latest service offerings 5 How up-to-date is your provider's technology? We ve not checked They clearly invest heavily in this area Contract changes What members receive when they retire from a DC scheme is not 6 Do you know what charges apply to your contract and how They re Victoria not that Nye transparent We have a clear guaranteed it will depend competitive on their they choices are? about how much to save, Chair of the Pensions understanding how to invest their funds and how to take their benefits. There s a lot to 7 Has your provider ever offered to reduce the level of No, we Regulator s don t know how Investment they Yes, and we ve benefited consider and it s too important charges? to get wrong. compare Governance Group through cost savings 8 Do you feel that your contract offers value for money? It could offer better value Yes, we ve benchmarked it But this isn t all the Pensions Regulator has been paying increased against other providers attention to how DC schemes are governed, highlighting four main areas Investments of risk in running DC schemes: 9 How many funds are offered in your scheme? More than 15 or less than 8 Between 8-15 Poor administration practices 10 Do you have a default option? No We ve recently reviewed our Poor investment practices default fund Lack of member understanding 11 When did you last review the fund range (including the More than 3 years ago Less than 3 years ago Unduly high charges default option)? 12 How confident are you that the fund choices address all the Talk me through the risks We recently reviewed the Whilst the legal and compliance risks members obligations face? are very different between investment strategy and funds trust and contract-based schemes, the Pensions Regulator is encouraging available employers and trustees to review their DC arrangements, irrespective 13 How would you characterise the scheme's default option? Lifestyle with high equity A modern, diversified of whether it is a trust or contract-based scheme, and to put in place a content in growth phase approach suitable mechanism to oversee them on an ongoing basis. In addition, 14 How does your scheme's investment performance compare? It could be better Consistently top quartile the Pensions Regulator expects to see compliance with the legislative Contribution/design requirements as a minimum standard and the adoption of good practice as the norm. 15 How generous is your scheme compared to your industry We ve not checked We've benchmarked it against peer group? our competitors and are wellpositioned Are you taking action? Governance 16 Will your scheme meet the auto-enrolment requirements? It s all very complex Yes, we've already looked at this Investment options Communications Contribution structure & default Provider review Member activity & engagement Benchmarking & monitoring Setting an appropriate investment strategy is one of the most difficult decisions for pension scheme trustees, balancing the search for return against the risk of asset underperformance relative to the scheme s funding target. An ideal low risk strategy would be to invest in matching assets (for example index-linked gilts), since these act as a hedge against those factors which cause changes in the assessed funding target (such as changes in interest rates and inflation expectations). The reality, however, is that most pension scheme trustees cannot afford the luxury of this approach. Schemes often have significant funding deficits. The size of contributions required to eradicate these deficits while holding matching investments only, is likely to be too large in most cases. Existing scheme assets must do some of the heavy lifting. They will therefore be invested, at least partly, in non-matching assets ie riskier assets that are expected to produce higher returns in an effort to close the funding gap. Recent market developments have led to ideas and products that aim to provide relatively high levels of liability matching while still offering the possibility of higher returns than a pure matching approach would provide. These usually involve the use of relatively complex investment instruments, such as swaps, and are known generically as Liability-Driven Investment or LDI options. Indexlinked Liability risks covered by index-linked gilts gilts Indexlinked risks taken No additional investment gilts Not affordable Equities for most schemes Ideal pension scheme strategy Administration & data Complex - many moving parts LDI strategy AUGUST 2011 Use swaps to add matching characteristics of gilts to equity holding Significant risk reduction in capital efficient manner Emerging markets In our view, emerging markets are an attractive investment prospect. These countries represent a very significant proportion of the world s population, resources and economic output (see chart opposite). Many emerging market countries have strong economic fundamentals. The demographic trends in a number of emerging market economies are more favourable than in their western counterparts. Emerging markets offer good opportunities to investors, increasingly so as their economies become more open and transparent, and as governance improves. While already significant, the overall size of these particular investment markets is expected to grow rapidly in the coming decades. Investing in emerging markets Investors can access emerging markets through local equities, bonds and currencies, as well as via other less direct methods (eg developed market companies with emerging market interests). The asset classes each offer distinct attractions: Emerging market equity markets provide exposure to strong rates of economic growth. While not necessarily translating directly into enhanced investment returns, there is significant potential, particularly for skilled investors. Emerging market bond markets offer relatively high yields. The range of opportunities is wide, with bonds available in both hard (ie the US$) and local currencies, government and corporate, fixed and inflation linked. Emerging market offer exposure to currencies which, in a number of cases, appear undervalued on a medium to longer term purchasing power value basis. Paul Gibney LCP AUGUST 2011 Source: The Economist, August 2011 Educating, informing and actively supporting engagement will raise LCP Communication Services awareness, promote individual ownership and increase the perceived value can fully support introducing: of pensions and employee benefits. Auto-enrolment Changes to existing benefits Promoting engagement and supporting change New pension plans and employee benefits At LCP we understand the need to tailor the messages and media used Plan mergers and bulk transfers to communicate with prospective, current and former employees. Our Salary sacrifice consultants work closely with employers and trustees from planning through to delivering communications and measuring success. We produce trustee communications including summary report and accounts, summary funding statements, newsletters, announcements and booklets. Trustee checklist: We have wide experience of communicating personalised messages. Our Ensure communications are paper and web-based benefit statements, together with education and on the agenda modelling tools, have supported thousands of employees to understand Work with the employer and make decisions about complex pension options. Review all communications periodically How can LCP help you? Seek member feedback Raise financial awareness We can provide a solution that meets your needs and budget using our Keep communicating with members technical expertise and communications experience. We can provide a full range of services: Getting the basics right Drafting informative and jargon-free member letters, statements, forms and booklets to meet trustees communication and disclosure requirements. Developing the look and feel Working closely within existing brand and design guidelines or creating a fresh approach. AUGUST 2010 AUGUST 2011 We believe that the case for global small cap equities is strong. Global small cap equities offer the potential for higher investment returns as well as a minor improvement in diversification when compared with a Paul Gibney broad based equity market alternative (which will typically include only a Partner modest allocation to small cap equities, if any at all). LCP What are global small cap equities and why invest? Small cap equities are a subset of a broader equity market universe and comprise the smallest constituents in that market, when ranked by market capitalisation. The global small cap universe as defined by the MSCI World Smaller Companies Index has over 4,500 smaller companies and includes companies ranging in size from 20m to 4.6bn. We believe the benefits of making an allocation to small cap equities follow from the general characteristics of smaller companies listed below: Smaller companies are much less extensively researched than larger companies. This lower level of coverage and analysis greatly increases the likelihood of smaller company shares being priced inefficiently and these opportunities can be exploited, particularly by a skilled active investment manager. Smaller companies are more nimble than their larger counterparts and on average their potential upside should be greater. For example, in some circumstances eg where it occupies a critical position in a supply Performance chain a smaller company could see its value increase several-fold in a The recent performance history of short space of time. The chance of this happening to a large established global small cap equities has been company is remote. encouraging. For example over the 10 years to 30 June 2011, global Smaller company senior management often own a material proportion of small cap equities have returned the company s equity stock, creating a strong alignment of management about 8.4% pa, 5.2% pa more than and investor interests. global equities. Small cap equity indices have a significantly different profile of sector Source: Bloomberg, MSCI weights than larger cap equivalents. An allocation to small cap equities can therefore introduce some modest sector, as well as size, diversification benefits. 9 Publications A selection of our publications can be found in the foyer. LCP ACCOUNTING FOR PENSIONS 2011 FTSE 100 companies have nearly 400 billion of UK pension liabilities. This report looks at the steps taken to manage those liabilities and to ensure that members receive their promised benefits. LCP Communication Services Employers and trustees have a key role as champions of effective communication. Pensions and employee benefits are valuable and important but often poorly understood by employees. LCP Accounting for Pensions 2011 LCP Auto-enrolment A-Z Guide 2011 LCP Communication Services Is your DC scheme fit for purpose? Is your DC scheme fit for purpose? The Defined Contribution ( DC ) pensions market is evolving rapidly. The majority of autoenrolled employees are likely to be in DC schemes from A quality governance process for every DC scheme is a key pillar in building members confidence in their pension provision. EMPLOYEE BENEFITS CONSULTING MARCH 2011 LCP s Employee Benefits Consulting team are problem solvers, advising companies and trustees on management and governance. LCP INVESTMENT MANAGEMENT FEES SURVEY 2011 Brave new world - time for investment managers to align fees with trustees interests. DC scheme Governance LCP Employee Benefits Consulting overview LCP Investment Management Fees Survey 2011 Equity-linked bonds Addressing the implementation challenges of LDI Investment strategy LDI/swap overlay Emerging Market Multi-Asset Funds Addressing the challenges and opportunities of emerging market investment. A multi-asset approach offers an attractive way to access the returns and manage the risks of emerging market investment. Global small cap equities Access to the potentially superior returns offered by smaller companies. Smaller companies have some very attractive characteristics, most notably the potential to enhance overall portfolio returns. Often ignored by investors, we would encourage investors to look closely at this investment opportunity. Equity-linked bonds Emerging Market Multi-Asset Funds Global small cap equities

10 ARE YOU DOING ALL YOU CAN TO MINIMISE YOUR LEVY? The issue From the 2012/13 levy year onwards, investment risk will be incorporated explicitly into the calculation of the PPF s risk-based levy for the first time. This means that the riskier a scheme s investment strategy, the higher the Adam Michaels levy it will pay. However, where schemes have reduced their investment Partner risks, trustees and sponsors will need to ensure that they are getting the LCP appropriate credit for this in terms of PPF levy savings. Schemes have the option of providing a bespoke analysis of their investment risk to the PPF so that the PPF levy calculation better reflects the investment risk being run. Analysis of investment risk The PPF will perform a standard analysis of each scheme s investment risk, using data provided in the annual Scheme Return. Large schemes (with PPF liabilities above 1.5bn) will be required to perform a bespoke analysis of their investment risk. Other schemes can choose to do so. In many cases, we expect the bespoke approach will lead to significant savings (based on the PPF s proposals, which are currently under consultation). Performing a bespoke analysis is likely to be particularly beneficial for schemes that use liability-driven investment ( LDI ) approaches. But a much wider range of schemes also stand to benefit from carrying out a bespoke analysis including those that use long-dated gilt funds, for example. LCP has developed a streamlined approach to performing the bespoke analysis and can provide you with the information you need to benefit from potentially significant levy savings. We set out some of the key aspects of the standard and bespoke analysis on page 2 and include a case study showing the potential savings for an example scheme on page 3. JULY 2011 JULY 2011 The Annual Allowance ( AA ) tax Pensions are subject to income tax when paid. But a member or pension An additional tax charge scheme could face significant extra tax for IHER pensions awarded in the will arise if an IHER pension following scenario: is awarded in certain circumstances. the retiree does not meet the new HM Revenue & Customs ( HMRC ) severe ill health requirements; the pension awarded is an increase over the level counting as accrued to date, eg in a defined benefit ( DB ) scheme where IHER pension is calculated including potential service to normal pension age or a defined contribution ( DC ) scheme where there is a guaranteed minimum level of IHER pension; and the notional HMRC value of the member s pension increase is more than the standard AA of 50,000 (or higher if a carry-forward is available) within the relevant HMRC period (using a factor of 16 per 1 of annual pension). The same criteria would apply to an enhanced final contribution that some employers provide to supplement DC scheme members accounts on ill health. Lump sums paid instead of all other payments due to the member from the scheme as a result of serious ill health (ie terminal illness), are outside the AA tax. DEATH IN SERVICE, DISABILITY, HEALTHCARE BENEFITS AUGUST 2010 LCP s specialist department can help you ensure that your risk benefits package and insurance arrangements are appropriate, cost effective, and without unexpected gaps in cover. We help employers design and implement benefit packages that are Service areas include: consistent with their wider objectives and employment philosophy. benefit design consultancy; insurance and partial Our ability to advise on benefits from life assurance to healthcare insurance design; benefit audit; enables us to take a holistic approach and design integrated packages broking and market reviews; and and procedures. policy administration and maintenance. We can assist with programmes of full insurance, partial insurance or full self-insurance. Benefit areas include: registered life assurance; Combining our benefits knowledge and our broking expertise enables non-registered life assurance; us to ensure insurance coverage is placed at competitive prices whilst long-term disability insurance; still having regard for details such as minimising future administration, critical illness insurance; private medical insurance medical underwriting or other issues. and healthcare; and flexible and voluntarily benefits. Our extensive experience and expertise spans many types of organisation and scenarios. 10 New PPF levy framework - investment risk Trustees and sponsors of pension schemes could make significant savings in their PPF levy by carrying out a bespoke analysis of their investment risk. Schemes should not just rely on the PPF s standard analysis - for many schemes the bespoke approach will offer significant savings. Ill-health early retirement and Annual Allowance A potential Annual Allowance tax issue can arise on the award of an enhanced ill health early retirement ( IHER ) pension or the payment of special contributions in the event of ill health, if through a tax registered pension scheme. LCP FTSE 100 EXECUTIVE PENSIONS SURVEY 2011 New tax regime polarises executive pensions. New PPF levy framework - investment risk Ill health early retirement and the AA charge LCP Executive Pensions Survey 2011 LCP PENSION BUY-OUTS 2011 De-risking using buy-ins, buy-outs and longevity swaps has never looked more compelling. LCP PENSIONS COVENANT OUTLOOK JUNE 2011 Spending the profits as more companies begin to generate cash how do their spending decisions affect the pension covenant? LCP Risk Benefits Consulting Risk benefits are often a highly valued part of the employee benefit package and employers can require specialist assistance to ensure that they are relevant and insured effectively. LCP Pension Buy-outs 2011 LCP Pensions covenant outlook 2011 LCP Risk benefits consulting

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