Pension De-Risking. De-risking your future: A structured plan.

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1 Pension De-Risking De-risking your future: A structured plan.

2 Planning for an uncertain future is a key aspect of pension scheme management. Over the past decade, a seemingly never-ending flow of developments have negatively affected defined benefit pension schemes poor equity returns, low bond yields, higher inflation, improved longevity, and onerous regulatory and accounting requirements to name a few. Planning for an uncertain future is a key aspect of pension scheme management. Corporate sponsors and trustees are increasingly demanding some of the risks of running a defined benefit pension scheme to be reduced or removed. This is known as pension de-risking. The de-risking of a scheme should be assessed on how its membership, benefits, size, and investment strategy can help reduce risk and accelerate progress towards set objectives. Our pension de-risking consulting services can help. Our Approach We promote a structured, long-term de-risking plan to achieve your and your trustees objectives of defined benefit pension schemes. We recognise that each scheme is different the liabilities, the sponsor covenant, and attitude to risk, which means that a tailored approach should be employed to meet the individual needs of each scheme. Not all de-risking measures will be required and the order may vary according to your scheme circumstances. For any option to be considered, there are three phases: Feasibility Design Implement The Plan You and your trustees should work together to agree the objectives for their scheme, i.e., is it to achieve a buy-out, self-sufficiency, or another goal? The agreed objectives will help you determine what steps should be taken next and in what order. Many sponsors see buy-out as the ultimate target but for most it may not be immediately affordable. We will ensure that any plan works towards a target timeframe, making allowances for the fact that your scheme may have already taken some steps to de-risk. The plan needs to be flexible to accommodate change over time. Legislation, market opportunity and affordability will ultimately determine how quickly your objectives can be reached.

3 Developing the Plan We can help you visualise and construct the right de-risking plan for your pension scheme according to your specific objectives, circumstances, and constraints. Our specialist de-risking team brings their extensive market knowledge, derisking modeling, and project management skills to enable you to: Consider all of your available options to mitigate risk Choose the most effective measures to take Obtain value for money Take more control over your pension scheme Our structured plan facilitates a comprehensive review of your de-risking options, through our four key stages of de-risking to achieve your target: Set Objectives Assess current position Analyse risks involved and attitude to risks Define short, medium, and longer-term objectives Incorporate affordability and timescales Get Ready Review costs, benefit design, and levies Governance Management information Decision processes Training Data quality and cleansing Action Relevant De-risking Measures Reduce scheme size Flexible retirements (TPIE) Enhanced transfer values (ETV) Reduce benefit risk/cost Scheme closure Pension Increase Exchange (PIE) Early retirements Risk removal insurance Pensioner buy-in Longevity swaps Manage investment risk Asset allocation strategy Asset management Hedging Manage the Plan Set and monitor triggers for action Review progress against target Review timeframe for objectives Target achieved! Using Triggers We can work with you to set agreed de-risking triggers. Most often triggers are defined as a funding level being reached. However, other triggers can also be set, such as the yields available on long-term gilts, market expectations of inflation, or the cost of insurance policies to trigger a buy-in or buy-out. After deciding upon the triggers, we can help you put a framework in place for monitoring and decision-making. This will ensure that changes are implemented quickly, without delay.

4 What is the result of this de-risking process? Over time, the de-risking measures are designed to have a beneficial impact on the progress towards the longer-term target and reduce financial volatility. Example de-risking plan (The order and timing of de-risking measures may vary) ETV reduces scheme size and improves buyout funding gap Buy-in reduces non-insured risk Buy-out TPIE - options at retirement Assets Liabilities Financial risk reduces over time Choosing De-risking Measures When planning de-risking measures, the costs, benefits, structure, and practicalities need to be considered. A feasibility study of any given measure based on your scheme and membership information will provide the information you need to allow decisions to be taken. Measure Relevance Key feature Benefit changes or closure Open to future accrual Reduce build-up of future risk Enhanced transfer values (ETV) Many deferred pensioners Reduce risk and scheme size Possible funding profit Early retirements A number of members aged 55 or over Reduce scheme risk Possible small funding profit Flexible retirements (TPIE) A number of members aged 55 or over Reduce no. of future pensioners Widens members choice Pension Increase Exchange (PIE) Non-statutory pension increases Reduce scheme risk Possible small funding profit Pensioner buy-in Longevity swaps A number of current pensioners + low risk assets Large schemes with many current pensioners Eliminates investment, inflation, and longevity risks Longevity risk insured but investment risk retained Investment strategy All schemes Optimum strategy to meet objectives and utilise all options Investment hedging Mitigating specific risks Eliminates specific risks e.g. inflation Buy-out Sufficient funding available All risks transferred to insurer

5 Achieving Your Objectives Most sponsors and trustees want to better understand and control the risks associated with their defined benefit pension scheme. A structured but flexible plan is the best way to achieve these objectives. We understand the relative importance of every risk and can advise you whether to accept, manage, or remove each risk. As a result, we can help you achieve your goals by implementing various de-risking measures that are appropriate, timely, and affordable. Our suite of tools will support you every step of the way: Risk-Reduction Coster looks at various options to reduce benefit costs, such as changing retirement ages, closing to accrual, and liability management exercises Dashboard provides a regular one page summary of key management information Risk Register is designed as a reference document identifying all areas of activity that are key to the successful operation of a pension scheme DataKEY analyses over 160 validation routines to test for exceptions according to the 45 tests set by the Pensions Regulator Asset-Liability Dynamic Risk Control helps to set the asset allocation strategy and can also be used to establish triggers to change future asset allocations based on funding levels ETV Modeller provides analysis on potential savings arising from the enhancements under consideration relative to the funding and accounting bases PIE and TPIE models analyse the risk reduction and funding changes from offers for pension increase exchanges or total flexible retirement programs Longevity Education Tool helps trustees and sponsors understand the impact on the scheme of people living longer Buy-in and Buy-Out Trackers monitor buy-in and buy-out prices relative to the funding position of the scheme to aid decision-making on the best time to transact

6 Next Steps For more information on how Xerox HR Consulting can assist you in putting together your de-risking plan or for more information, contact: Xerox HR Consulting and Xerox Benefit Administration Services are UK trading names of the following. Buck Consultants Limited (registered number ), Buck Consultants (Administration & Investment) Limited (registered number ) and Buck Consultants (Healthcare) Limited (registered number ) are private limited liability companies registered in England and Wales and all have their registered office at 160 Queen Victoria Street, London EC4V 4AN. Buck Consultants (Administration & Investment) Limited and Buck Consultants (Healthcare) Limited are authorised and regulated by the Financial Conduct Authority Xerox Corporation. All rights reserved. Xerox and Xerox and Design are trademarks of Xerox Corporation in the United States and/or other countries. BRP2825