2017 Pension Review First Take: It Should Be Different This Time

Transcription

1 Pension Solutions March Pension Review First Take: It Should Be Different This Time Executive Summary US Corporate Defined Benefit (DB) funded levels are at an important inflection point, having posted their first annual year-over-year increase since Funded levels have risen further year-to-date in We expect to see increases to fixed income allocations by some plans in 2018 given the rise in funded levels, some of which has been foreshadowed by changes to strategic target allocations. Whereas some plans did not shift asset allocation in the past when funded levels had risen, we believe it should be different this time. Such portfolio shifts could also help to facilitate risk transfer actions. Annuity purchase risk transfer strategies accelerated in 2017 and we expect this to continue in 2018 as part of broad de-risking actions. Key findings of our 16 th annual pension review include: Ninety percent of the plans in our First Take sample posted a year-over-year increase in their funded percentage, and the system as a whole saw a rise in aggregate funded status of over 4 percentage points (see Exhibit 1). Strong asset returns and voluntary contribution activity drove funded levels higher, although lower discount rates offset some of the gains. Actual allocations to fixed income were only marginally higher than the year before, indicating that 2018 may be the year that many plans undertake portfolio adjustments. Return assumptions continued to move lower, albeit at a somewhat slower pace. Disclosures around 2018 return assumptions suggest the trend may continue. Exhibit 1: Asset Returns and Contributions Carried the Day in 2017 Funded Status (%) Negative Contribution to Funded Status Positive Contribution to Funded Status Service Cost Actuarial Gains / Losses Interest Cost Contributions Benefit Payments Actual Asset Returns 2017 (P) Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies included in our First Take study. Past performance does not guarantee future results, which may vary. The 2017 figure is preliminary and is subject to potentially significant revisions over time. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. Past performance does not guarantee future results, which may vary.

2 Our First Take review focused on many of the largest plans in the US corporate DB universe. Funded status has been on the move. GSAM s 16 th Annual Pension Review We are pleased to present the results of our 16 th annual US corporate pension review. Each year, we perform a comprehensive review of the DB pension plans of every company in the S&P 500 based on the information they file in their annual 10-K reports with the Securities and Exchange Commission (SEC). As this is our 16 th annual review, we have developed a robust and consistent data set of information that enables us to draw detailed analysis on a broad range of pensionrelated issues. As in previous years, we focused our initial analysis on the 50 companies in the S&P 500 with the largest US DB plans by asset values. The goal of this First Take review is to provide initial impressions on the issues and factors impacting corporate DB plan sponsors. Most of the preliminary 2017 information in this report is derived from the results of this First Take review. The company-specific data underlying this analysis, including information on funded levels, asset allocation and actuarial assumptions, are included in the appendix. In this report we examine several aspects of the US corporate DB system. First, we review the funded status of the system, based on last year's results, as well as how things have developed in Second, we look at what plans did and did not do with asset allocation given the upward movement in funded levels last year. Finally, we outline how we think the rest of the current year may play out for corporate DB plans. I. First Annual Increase in Funded Status Since 2013 Last year's First Take report was titled On The Move, as it appeared funded levels were poised to move higher in 2017 given pro-growth policies that seemed supportive of risk asset valuations and higher interest rates, as well as regulatory factors that continued to encourage voluntary contributions. This generally proved to be the case. As seen in Exhibit 2, our preliminary forecast of system-wide 2017 year-end funded status was 85%, about 4 percentage points higher than yearend 2016 and the first year-over-year annual increase since This year-end funded level is also consistent with our year-end forecast in our recent outlook report. 1 Our model suggests that funded levels have risen further in For additional information, please see our note from January 2018 entitled US Corporate Pension Review and Preview: Inflection Points. Goldman Sachs Asset Management 2

3 Exhibit 2: System-Wide Funded Status Almost Back to the Taper Tantrum Levels of 2013 Aggregate GAAP Funded (%) (P) 2018 (E YTD) Source: Goldman Sachs Asset Management; company reports; 2017 preliminary figure based upon the US plans (when specified) of S&P 500 companies included in our First Take study; as of March 2018; for illustrative purposes only. The 2017 preliminary figure and 2018 YTD estimate are subject to potentially significant revisions over time. This is the seventh time in the last nine years that, in aggregate, actual returns have exceeded expected returns. As seen in Exhibit 1, strong asset returns were a notable part of the story for plan sponsors in Several companies in our sample disclosed the actual percentage return on their pension assets in For those that did not, we estimated the actual asset returns from last year based on the dollar disclosures around actual asset returns, contributions, benefit payments and other flows. As seen in Exhibit 3, both the mean and median actual return figures were just below 15%, which provided a notable upward boost to funded ratios. Exhibit 3: Actual Asset Returns Were Strong Across the Board Companies in Sample (%) Median: 14.9% Mean: 14.8% < > Actual Return (%) Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies included in our First Take study; all data for fiscal year Past performance does not guarantee future results, which may vary. Goldman Sachs Asset Management 3

4 Regulatory changes have made the economic benefits of contributions more attractive. The second notable factor which positively impacted funded ratios was the robust contribution activity we witnessed last year. Over the past several years we have written a number of pieces outlining the benefits of contributions, even if none were required, as a means for reducing or eliminating PBGC variable-rate premiums, which have been steadily increasing. 2 More recently, corporate tax reform has provided a strong incentive for sponsors to make contributions sooner rather than later in order to capture the benefits of a larger tax deduction. 3 This played out over the course of We estimate that actual contributions to US DB plans in the S&P 500 universe reached their highest level since 2012 (Exhibit 4), with much of the activity last year being of a voluntary nature. Several companies, including UPS, Lockheed Martin and FedEx, cited tax reform as a motivating factor in making voluntary contributions in 2017/2018. For the purpose of this analysis, the data in the bar chart reflects our estimate of contributions across all US DB plans of S&P 500 companies, not just those in the First Take sample. We expect strong voluntary contribution activity to continue this year. This view is based on disclosures around what companies expect to contribute in 2018 and our understanding of how actual contributions, in aggregate, tend to correlate with expected contribution disclosures. The ability to make a contribution through mid-september 2018 and potentially reap a tax deduction at the old, higher rates will likely play a role in that dynamic. Exhibit 4: Robust Contribution Activity Expected to Continue in 2018 Contributions ($ billions) GM AT&T * * (P) 2018 (E) Did discount rates bottom in 2017? *Sizable contributions by General Motors in 2003 ($18bn) and AT&T in 2013 ($9.4bn) upwardly skewed total S&P 500 contributions for those years. Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies. The 2017 preliminary figure and 2018 estimate are subject to potentially significant revisions over time. One way to think about the contribution activity in 2017 was that, at least at an aggregate systemwide level, contributions accounted for almost all of the year-over-year increase in funded status. As detailed in the attribution analysis in Exhibit 1, contributions positively influenced system-wide funded status by about 3.5 percentage points, while the overall increase in funded status was a little over four percentage points. In other words, most of the aggregate increase in funded status could be attributed to contributions. Much of the positive impact of asset returns simply offset the headwinds to funded status from interest cost, service cost, the drag from outflows for benefit payments and, importantly, actuarial losses from lower discount rates. Indeed, the average discount rate used by calendar year-end companies in our First Take sample fell to the lowest level ever in our series (see Exhibit 5). 2 See, for example, our report from October 2016 entitled Should Sponsors Borrow to Fund and De-Risk Their Plans? 3 For additional information, please see our note from January 2018 entitled US Tax Reform Impact on Corporate Pensions. Goldman Sachs Asset Management 4

5 Exhibit 5: Discount Rates Reached New Lows in 2017 Average GAAP Discount Rate (%) (P) Source: Goldman Sachs Asset Management; company reports; 2017 preliminary figure based upon the US plans (when specified) of S&P 500 companies included in our First Take study; only December year-end companies included in the population for each year; the 2017 figure is preliminary and is subject to potentially significant revisions over time. II. Work to Be Done: We Expect Plans to Make Asset Allocation Shifts in 2018 Some plans may be hitting glide path triggers for the first time in several years. We titled this year's report It Should Be Different This Time as higher funded levels, which have continued to move up in the first few months of 2018, could incentivize plans to make asset allocation shifts. Nonetheless, our preliminary tally of actual asset allocations would seem to indicate that not much movement had occurred as of the end of Indeed, actual allocations to fixed income increased only marginally last year (see Exhibit 6). 4 Exhibit 6: We Expect Increases to Fixed Income Allocations Given the Rise in Funded Status Asset-Weighted Actual Asset Allocations (%) 70 Equity Debt Other Real Estate (P) Source: Goldman Sachs Asset Management; company reports; 2017 preliminary figure based upon the US plans (when specified) of S&P 500 companies included in our First Take study; as of February 2017; the 2017 figures are preliminary and are subject to potentially significant revisions over time. The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 4 As we have observed in previous years, large plans, like those in this First Take sample, tend to make greater use of alternatives than mid-size and smaller plans. Consequently, once we have compiled this information for the entire S&P 500 universe, we would expect the actual 2017 allocation to equity to be slightly higher and the allocation to other, which includes alternative asset classes such as private equity and hedge funds, to be slightly lower. We would expect the sum of those two categories to be roughly consistent with the sum of the figures in this preliminary analysis. Goldman Sachs Asset Management 5

6 Funded status up, but not necessarily fixed income. This can also be observed on an individual plan basis. Our work on the First Take sample would suggest that almost all of the plans experienced a year-over-year increase in funded status in 2017, yet only 58% of the plans had any increase in actual fixed income allocations last year. The correlation between the change in funded status and the change in fixed income allocation was a relatively low It is even more notable when isolating those plans with at least a 5 percentage point increase in funded ratios since these may be the ones most likely to shift asset allocation in order to attempt to protect those gains. Of all the plans that had a year-over-year increase in funded status, in 28% of the cases the increase was in excess of 5 percentage points. Yet within that population, less than 1 in 3 increased the fixed income allocation by at least 5 percentage points (See Exhibit 7). Exhibit 7: Changes to Actual Asset Allocations Appear to Be Lagging Changes to Funded Levels >5 Percentage Point (PP) Increase in Funded Status (%) 0-5 PP Increase in Funded Status (%) At Least 5 PP Increase in Fixed Income Allocations (%) < 5 PP Increase in Fixed Income Allocations (%) Some portfolio shifts may have been delayed. Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies included in our First Take study; figures are preliminary and are subject to potentially significant revisions over time. Why may this dynamic have occurred? We can think of several potential reasons. First, some plans may be engaging in market timing. There may be a hesitancy to move into long duration fixed income during a period where the Federal Reserve is raising short-term interest rates, signs of inflation are finally emerging, and there is an expectation by some that long-term interest rates will rise, as they already have in Second, given outperformance of equities versus fixed income in 2017, some plans may have yet to rebalance their portfolios, let alone get around to increasing strategic allocations to fixed income. In some cases, it is possible that organizations may not yet have a governance structure in place that can effectuate such adjustments nimbly, potentially leaving them exposed if equity and interest rate volatility were to increase. Third, as discussed earlier, in some cases a notable upward move in funded status may have been driven by a large contribution from the sponsor. A large contribution may have been influenced, at least in part, by a desire to capture a larger tax deduction given tax reform. For some organizations they may still be working through how to allocate the new funds. Finally, some organizations may have elected to undergo a de-risking action via an annuity purchase risk transfer transaction as opposed to a shift in asset allocation. We address the increased activity in this area at the end of this paper. From our perspective, all of this means that there may likely be changes in actual asset allocations this year as plans hit triggers on their glide paths and execute portfolio de-risking actions. 5 To get a sense of the potential magnitude of these shifts, we resurrected the fixed income to funded status scatter plot that we first introduced around the time of the 2013 taper tantrum. 5 We acknowledge that some allocation shifts may have occurred post year-end after this reporting period had been finalized. Goldman Sachs Asset Management 6

7 Potential increases to long-duration fixed income allocations could lead to notable demand for that asset class. Exhibit 8 simply plots companies based on their respective funded levels and fixed income allocations, and then contrasts that with a simple generic glide path. Every glide path is different, and not every plan utilizes one but, as a generalization, plans that are less well funded are likely to be more return-seeking and plans that are better funded tend to lean more towards liability hedging. This chart would suggest that not only may some plans be under-allocated to fixed income, they may be notably under-allocated. 6 Exhibit 8: Some Plans May Be Under-Allocated to Fixed Income Given the Rise in Funded Levels 2017 Actual Allocation to Fixed Income (%) Generic Glide Path Actual GAAP Funded (%) Target allocation changes may foreshadow actual adjustments in the future. Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies included in our First Take study. Another way to see the potential moves into fixed income is to examine not just actual asset allocations, but rather the strategic targets that companies must also disclose in their annual reports. Exhibit 9 details several examples in the large plan universe where we observed a greater than 5 percentage point increase in strategic target allocation to fixed income at the end of Note that several of the companies, including Caterpillar, United Technologies and PepsiCo, all announced sizable voluntary contributions over the past several months. In addition, there have been other companies, such as AT&T, that publicly disclosed in 2018 that they are planning to increase their allocation to fixed income. 7 The economic and market forecasts presented herein have been generated by GSAM for informational purposes as of the date of this presentation. They are based on proprietary models and there can be no assurance that the forecasts will be achieved. Please see additional disclosures at the end of this presentation. 6 The fixed income allocations for this exhibit are based on the actual asset allocations as disclosed by plan sponsors. Some plans may increase liability hedging through the use of derivative instruments in addition to the physical allocation to fixed income securities. Current rules do not require the disclosure of hedge ratios or how much derivatives may be increasing liability hedging activities. 7 AT&T 4 th quarter earnings conference call, January 31, Goldman Sachs Asset Management 7

8 Exhibit 9: Notable Increases to Fixed Income Target Allocations Plan Assets $13.4bn Target Fixed Income Allocations as of Indicated Fiscal Year (%) $12.8bn $52.7bn $11.4bn * $35.7bn ** $10.9bn * $12.6bn Reflecting on previous inflections. Note: All data for US plans only, except as noted. *Fixed income targets disclosed as a range; exhibit figures represent the mid-point of those ranges for each year. **United Technologies assets represent global plans. Its fixed income target allocation represents its allocation to income generating and hedging assets, which is disclosed in a range; exhibit figures represent the mid-point of those ranges for each year. Source: Goldman Sachs Asset Management; company reports; plan asset figures as of 2017; target allocation percentages as of indicated year. The US corporate DB system may be at an important inflection point as funded levels have risen significantly over the past 15 months and may be poised to increase further this year. There have certainly been moments in time when the system was well-funded and even over-funded. Overfunded periods such as 1999 and 2007, or periods of sharp rises in funded status, such as during 2013, come to mind. During those periods, some plans did not take actions to adjust asset allocation and correspondingly reduce funded status volatility in order to lock in funded status gains. It is usually unwise to say it will be different this time. Therefore, we will avoid saying that. What we will say is it should be different this time, because so much has changed in the US corporate DB system over the past two decades. In the past, many plans were open and accruing new benefits, thereby providing sponsors with a long investment time horizon as well as the reality of a growing liability. The accounting and regulatory framework allowed for significant smoothing of pension metrics, enabling plans to have asset/liability mismatches without much immediate negative impacts from funded status volatility. The variable-rate premiums paid to the PBGC were less than 1% of any deficit, perhaps not providing a large incentive to be concerned about protecting well-funded positions. Essentially, the environment may have encouraged risk-taking. Much has changed in the US corporate DB world. Many plans are now closed and frozen, at times resembling insurance companies that are no longer writing new business and are in run-off mode. Accounting rule changes have placed funded status on the balance sheet and have removed expected return income from operating income on the income statement. Variable-rate premiums paid on deficits have risen to almost 4% and may continue to rise. In short, a number of factors have coalesced to encourage sponsors to consider asset de-risking strategies (see Exhibit 10). Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. Goldman Sachs Asset Management 8

9 Exhibit 10: Forces at Work Many Factors Encouraging Sponsors to Consider De-Risking Actions Not a call on interest rates a risk management exercise. Demand for liabilityhedging fixed income may rise as supply falls. Source: Goldman Sachs Asset Management. De-risking strategies should not be construed as providing any assurance or guarantee that as a result of applying the strategy an investor will reduce and/or eliminate risk, as there are many factors that may impact end results such as interest rates, credit risk and other market risks. We believe increasing hedging, given the rise in funded levels, may be appropriate for many of the reasons discussed above. Pension plan management today, for many organizations, has transitioned from a growth-oriented exercise to more of a risk management/volatility reduction project. This is one of the primary reasons that many plans put a glide path framework in place to reduce funded status volatility as funded status improves. Even for those organizations that hold a strong view that long-term interest rates are headed higher, we believe incremental hedging, which is what glide paths generally call for, can help balance the competing priorities of hedging more of the liability and reducing funded status volatility while also still leaving some room to benefit from a rising rate environment. Finally, another factor potentially arguing for increasing allocations to liability-hedging fixed income today is the potential for demand for that asset class to outstrip supply in the future. Our work indicates that US corporate DB plans could, by themselves, purchase around $150 billion of highquality, long-duration fixed income each year over the next several years. Over the past decade, a period of robust issuance, the supply of new 30-year high-quality corporate bonds has averaged about $165 billion per year. Future availability may be lower given outsized issuance in recent years. In addition, increased flexibility around foreign cash under the new repatriation rules may lessen the need for US multinationals to issue bonds to fund stock buybacks, capex and M&A. In other words, corporate plans may absorb all future supply over the next few years even before taking into account demand from insurance companies or other natural buyers of these securities. III. Our Outlook for 2018 Accelerated De-Risking Actions Increases to fixed income allocations will likely lead to lower return assumptions. Our outlook for 2018 is more of what we observed in 2017, except in many ways accelerated. As noted earlier, a number of plan sponsors will likely continue to make voluntary contributions in order to capture a tax deduction at the old, higher rate while also reducing PBGC variable-rate premiums. As the tax-related window of opportunity for many will close before the fall, we expect much of this to be front-loaded in the year. Higher contributions may also be needed if market expectations around future returns for financial assets come to fruition. During 2017, the average return assumption used by US corporate plans continued to fall, albeit at a slightly slower rate than previous years. Our estimate of the average return assumption for the entire US DB system for 2017 was 6.8% (See Exhibit 11). 8 Voluntary disclosures around assumptions to be used in 2018 indicate the average may fall again this year (See Exhibit 12). We would note, however, that we did observe some increases to return assumptions used by individual plans in both 2017 and The average return assumption for the First Take sample, as detailed in the appendix to this report, was 7.25%, about 5 basis points lower than the previous year s First Take sample. Large plans have historically tended to use higher return assumptions than smaller plans. Our 2017 preliminary estimate for the entire corporate DB universe represents a 5 basis point decline from the 2016 actual figure. Goldman Sachs Asset Management 9

10 Exhibit 11: Return Assumptions Continue to Move, Although Pace of Change May Be Slowing Equal-Weighted Average Expected Return Assumption of S&P 500 Companies, US Plans Only (When Specified, %) Sorted by Numerical Change, Data for US Plans Only (when specified) Ticker Company Name Sector Industry (P) Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies. The 2017 figure is preliminary and is subject to potentially significant revisions over time. Expected returns are estimates of hypothetical average returns of economic asset classes derived from statistical models. There can be no assurance that these returns can be achieved. Actual returns are likely to vary. Please see additional disclosures. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. Exhibit 12: Many Reductions to 2018 Assumptions Linked to Strategic Asset Allocation Changes Month of Fiscal Year End Expected Return on Plan Assets Numerical Change Directional Change Plan Assets ($ Millions) T AT&T Inc. Telecommunication Services Integrated Tele. Services December 7.00% 7.75% -0.75% Lower 54,618 GE General Electric Company Industrials Industrial Conglomerates December 6.75% 7.50% -0.75% Lower 50,361 IBM Intl Business Machines Corp. Information Technology IT Consulting and Other Svcs. December 5.25% 5.75% -0.50% Lower 52,694 PFE Pfizer Inc. Healthcare Pharmaceuticals December 7.50% 8.00% -0.50% Lower 14,284 DE Deere & Company Industrials Agricultural and Farm Mach. October 6.80% 7.30% -0.50% Lower 12,093 CAT Caterpillar Inc. Industrials Const. Mach. & Heavy Trucks December 6.30% 6.70% -0.40% Lower 13,416 PEP Pepsico, Inc. Consumer Staples Soft Drinks December 7.20% 7.50% -0.30% Lower 12,582 UTX United Technologies Corp. Industrials Aerospace and Defense December 7.00% 7.30% -0.30% Lower 35,689 MET MetLife, Inc. Financials Life and Health Insurance December 5.75% 6.00% -0.25% Lower 9,371 BA The Boeing Company Industrials Aerospace and Defense December 6.80% 6.80% 0.00% Unchanged 64,011 F Ford Motor Company Consumer Discretionary Automobile Manufacturers December 6.75% 6.75% 0.00% Unchanged 44,160 LMT Lockheed Martin Corporation Industrials Aerospace and Defense December 7.50% 7.50% 0.00% Unchanged 33,095 NOC Northrop Grumman Corp. Industrials Aerospace and Defense December 8.00% 8.00% 0.00% Unchanged 27,226 RTN Raytheon Company Industrials Aerospace and Defense December 7.50% 7.50% 0.00% Unchanged 20,075 HON Honeywell International Inc. Industrials Industrial Conglomerates December 7.75% 7.75% 0.00% Unchanged 18,985 EXC Exelon Corporation Utilities Electric Utilities December 7.00% 7.00% 0.00% Unchanged 18,573 MMM 3M Company Industrials Industrial Conglomerates December 7.25% 7.25% 0.00% Unchanged 15,686 PRU Prudential Financial, Inc. Financials Life and Health Insurance December 6.25% 6.25% 0.00% Unchanged 12,972 C Citigroup Inc. Financials Diversified Banks December 6.80% 6.80% 0.00% Unchanged 12,725 IP International Paper Company Materials Paper Packaging December 7.50% 7.50% 0.00% Unchanged 11,368 CTL CenturyLink, Inc. Telecommunication Services Integrated Tele. Services December 6.50% 6.50% 0.00% Unchanged 11,060 D Dominion Energy, Inc. Utilities Multi-Utilities December 8.75% 8.75% 0.00% Unchanged 8,062 FE FirstEnergy Corp. Utilities Electric Utilities December 7.50% 7.50% 0.00% Unchanged 6,704 GM General Motors Company Consumer Discretionary Automobile Manufacturers December 6.60% 6.23% 0.37% Higher 62,639 VZ Verizon Communications Inc. Telecommunication Services Integrated Tele. Services December 7.70% 7.00% 0.70% Higher 19,175 Source: Goldman Sachs Asset Management; company reports; as of March 2018; analysis represents companies where we observed a public disclosure of the EROA assumption to be used in fiscal 2018 for its US DB plans. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. Expected returns are estimates of hypothetical average returns of economic asset classes derived from statistical models. There can be no assurance that these returns can be achieved. Actual returns are likely to vary. Please see additional disclosures. These examples are for illustrative purposes only and are not actual results. If any assumptions used do not prove to be true, results may vary substantially. Goldman Sachs Asset Management 10

11 More contributions should lead to higher funded ratios which, again, should lead to increased allocations to long duration fixed income for plans implementing a liability hedging program. The aforementioned changes to strategic target allocations seem to confirm that this will be the case. Finally, higher funded ratios may also lead to more risk transfer activity. Recent activity has already been robust as evidenced by quarterly data as disclosed by LIMRA (see Exhibit 13). Quarterly activity reached the highest level at the end of last year since the fourth quarter of 2012, which included the jumbo-sized General Motors and Verizon deals. Activity has been robust in recent quarters despite the absence of larger, jumbo-size transactions. Exhibit 13: Risk Transfer Activity Through Annuitization Has Increased in Recent Years 2012 $36.0bn 2013 $3.8bn 2014 $8.5bn 2015 $13.6bn 2016 $13.7bn 2017 $23.0bn Sales ($MM) 12,000 10,000 34,582 11,100 8,000 6,000 4,000 2, Q12 2Q12 3Q12 4Q Q13 2Q13 3Q13 2,406 4Q Q14 2Q14 3Q14 6,940 4Q Q15 3,828 3,285 2Q15 3Q15 5,630 4Q15 1,084 1,035 1Q16 2Q16 5,938 5,675 3Q16 4Q16 1,415 1Q17 4,099 2Q17 6,376 3Q17 4Q17 Source: Group Annuity Transfer Survey (2017, 4 th Quarter), LIMRA Secure Retirement Institute; Based on 15 companies that provided single premium buy-out sales. For discussion purposes only. Conclusion Notable voluntary contributions, rising interest rates and strong equity returns have fueled a significant rise in corporate DB funded levels. Our First Take annual review of the corporate DB system confirms our previous expectation that the aggregate system-wide funded status ended 2017 around 85%, a four percentage point increase from year-end Our model would suggest that funded levels have risen further in 2018 to around 86% today, bringing the system-wide funded level close to the 90% level last seen during the taper tantrum period of Despite this increase, plans have not uniformly undertaken shifts in asset allocation to seek to protect those increases. While some plans had not shifted asset allocation in the past when funded status rose, we believe it should be different this time. We expect much of this activity may occur in Finally, higher funded ratios could also contribute to increased risk transfer activity, which had already experienced an uptick over the past several years. Goldman Sachs Asset Management 11

12 Appendix Largest US DB Plans in S&P 500 Sorted by 2016 (previous year) Plan Assets (All $ amounts in millions) US Plans US Plans YoY Funded Status Ticker Company Name Industry Month of Fiscal Year End Obligation Assets GAAP Funded Status GAAP Funded % Obligation Assets GAAP Funded Status GAAP Funded % $ Change % Change GM General Motors Company Automobile Manufacturers December 68,827 61,622-7,205 90% 68,450 62,639-5,811 92% 1,394 2% BA The Boeing Company Aerospace and Defense December 76,745 56,692-20,053 74% 80,393 64,011-16,382 80% 3,671 6% IBM Intl Business Machines Corp. IT Consulting and Other Services December 52,218 51, % 52,444 52, % 1,063 2% T AT&T Inc. Integrated Tele. Services December 58,561 51,087-7,474 87% 61,638 54,618-7,020 89% 454 1% GE General Electric Company Industrial Conglomerates December 71,501 45,893-25,608 64% 74,985 50,361-24,624 67% 984 3% F Ford Motor Company Automobile Manufacturers December 45,746 41,939-3,807 92% 46,340 44,160-2,180 95% 1,627 4% DWDP DowDuPont Inc. Diversified Chemicals December 46,330 31,926-14,404 69% 57,401 43,685-13,716 76% 688 7% LMT Lockheed Martin Corporation Aerospace and Defense December 45,064 31,417-13,647 70% 48,686 33,095-15,591 68% -1,944-2% UPS United Parcel Service, Inc. Air Freight and Logistics December 41,069 31,215-9,854 76% 45,847 41,932-3,915 91% 5,939 15% UTX United Technologies Corp. Aerospace and Defense December 34,923 30,555-4,368 87% 36,999 35,689-1,310 96% 3,058 9% NOC Northrop Grumman Corp. Aerospace and Defense December 30,409 24,384-6,025 80% 31,967 27,226-4,741 85% 1,284 5% FDX FedEx Corporation Air Freight and Logistics May 27,804 23,017-4,787 83% 27,870 24,933-2,937 89% 1,850 7% BAC Bank of America Corporation Diversified Banks December 18,029 20,983 2, % 18,753 22,432 3, % 725 3% RTN Raytheon Company Aerospace and Defense December 24,946 17,808-7,138 71% 27,661 20,075-7,586 73% % HON Honeywell International Inc. Industrial Conglomerates December 17,414 16, % 18,151 18, % 1,434 8% EXC Exelon Corporation Electric Utilities December 21,060 16,791-4,269 80% 22,337 18,573-3,764 83% 505 3% JNJ Johnson & Johnson Pharmaceuticals December 18,241 16,057-2,184 88% 21,909 18,681-3,228 85% -1,044-3% BRK.B Berkshire Hathaway Inc. Multi-Sector Holdings December 17,750 15,397-2,353 87% 18,824 17,014-1,810 90% 543 4% PCG PG&E Corporation Electric Utilities December 17,305 14,729-2,576 85% 18,757 16,652-2,105 89% 471 4% VZ Verizon Communications Inc. Integrated Tele. Services December 21,112 14,663-6,449 69% 21,531 19,175-2,356 89% 4,093 20% JPM JPMorgan Chase & Co. Diversified Banks December 12,216 14,272 2, % 12,900 15,703 2, % 747 5% MMM 3M Company Industrial Conglomerates December 16,202 14,081-2,121 87% 17,360 15,686-1,674 90% 447 3% XOM Exxon Mobil Corporation Integrated Oil and Gas December 19,960 12,793-7,167 64% 19,310 12,782-6,528 66% 639 2% PFE Pfizer Inc. Pharmaceuticals December 16,997 12,556-4,441 74% 18,197 14,284-3,913 78% 528 5% ED Consolidated Edison, Inc. Multi-Utilities December 14,095 12,472-1,623 88% 15,536 14,274-1,262 92% 361 3% C Citigroup Inc. Diversified Banks December 14,000 12,363-1,637 88% 14,040 12,725-1,315 91% 322 2% PRU Prudential Financial, Inc. Life and Health Insurance December 11,109 12,218 1, % 11,901 12,972 1, % -38-1% SO The Southern Company Electric Utilities December 12,385 11, % 13,808 12, % -14 1% PEP Pepsico, Inc. Soft Drinks December 13,192 11,458-1,734 87% 14,777 12,582-2,195 85% % Goldman Sachs Asset Management 12

13 Appendix Largest US DB Plans in S&P 500 (continued) Sorted by 2016 (previous year) Plan Assets (All $ amounts in millions) US Plans US Plans YoY Funded Status Ticker Company Name Industry Month of Fiscal Year End Obligation Assets GAAP Funded Status GAAP Funded % Obligation Assets GAAP Funded Status GAAP Funded % $ Change % Change CAT Caterpillar Inc. Const. Mach. and Heavy Trucks December 16,218 11,354-4,864 70% 17,326 13,416-3,910 77% 954 7% DE Deere & Company Agricultural and Farm Machinery October 13,086 11,137-1,949 85% 13,166 12,093-1,073 92% 876 7% CTL CenturyLink, Inc. Integrated Tele. Services December 13,301 10,892-2,409 82% 13,122 11,060-2,062 84% 347 2% DIS The Walt Disney Company Movies and Entertainment October 14,480 10,401-4,079 72% 14,532 12,325-2,207 85% 1,872 13% IP International Paper Company Paper Packaging December 13,683 10,312-3,371 75% 13,264 11,368-1,896 86% 1,475 10% DAL Delta Air Lines, Inc. Airlines December 20,859 10,301-10,558 49% 21,696 14,744-6,952 68% 3,606 19% LLY Eli Lilly and Company Pharmaceuticals December 12,456 10,180-2,276 82% 15,098 11,845-3,254 78% % HPQ HP Inc. Tech. Hardware, Stg and Perips. October 12,144 10,176-1,968 84% 12,266 10,838-1,428 88% 540 5% WFC Wells Fargo & Company Diversified Banks December 11,404 10,120-1,284 89% 11,731 10,667-1,064 91% 220 2% AAL American Airlines Group Inc. Airlines December 17,238 10,017-7,221 58% 18,275 11,395-6,880 62% 341 4% MRK Merck & Co., Inc. Pharmaceuticals December 10,849 9,766-1,083 90% 11,904 10,896-1,008 92% 75 2% CVX Chevron Corporation Integrated Oil and Gas December 13,271 9,550-3,721 72% 13,580 9,948-3,632 73% 89 1% GD General Dynamics Corp. Aerospace and Defense December 13,022 8,980-4,042 69% 14,212 10,130-4,082 71% -40 2% MET MetLife, Inc. Life and Health Insurance December 10,078 8,876-1,202 88% 10,500 9,371-1,129 89% 73 1% DUK Duke Energy Corporation Electric Utilities December 8,463 8, % 8,779 9, % 156 2% ABT Abbott Laboratories Healthcare Equipment December 8,517 7, % 9,953 9, % 320 5% MO Altria Group, Inc. Tobacco December 8,312 7, % 8,510 8, % 342 4% D Dominion Energy, Inc. Multi-Utilities December 8,132 7,016-1,116 86% 9,052 8, % 126 3% TXT Textron Inc. Aerospace and Defense December 7,991 6,874-1,117 86% 8,563 7, % 431 6% FE FirstEnergy Corp. Electric Utilities December 9,426 6,213-3,213 66% 10,167 6,704-3,463 66% % KO The Coca-Cola Company Soft Drinks December 6,491 6, % 6,346 6, % 112 2% Totals $1,134,630 $919,963 -$214,667 81% $1,200,814 $1,025,713 -$175,101 85% $39,565 4% Note: DowDuPont 2016 results based on a pro forma combination of the two legacy companies. Source: Company reports; all data through fiscal year 2017; population includes the 50 largest DB plans in the S&P 500, Goldman Sachs Asset Management. THESE MATERIALS ARE PROVIDED SOLELY ON THE BASIS THAT THEY WILL NOT CONSTITUTE INVESTMENT ADVICE AND WILL NOT FORM A PRIMARY BASIS FOR ANY PERSON S OR PLAN S INVESTMENT DECISIONS, AND GOLDMAN SACHS IS NOT A FIDUCIARY WITH RESPECT TO ANY PERSON OR PLAN BY REASON OF PROVIDING THE MATERIAL OR CONTENT HEREIN. PLAN FIDUCIARIES SHOULD CONSIDER THEIR OWN CIRCUMSTANCES IN ASSESSING ANY POTENTIAL INVESTMENT COURSE OF ACTION. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Goldman Sachs Asset Management 13

14 Appendix Largest US DB Plans in S&P 500 Sorted by 2016 (previous year) Plan Assets (All asset allocations expressed in %) US Plans Only (When Specified) Ticker Company Name Industry Month of Fiscal Year End Equity Debt Target Asset Allocation Actual Asset Allocation Real Estate Other Equity Debt Real Estate Other Total Expected Return on Plan Assets (2017) Discount Rate (as of year-end 2017) GM General Motors Company Automobile Manufacturers December % 3.53% BA The Boeing Company Aerospace and Defense December % 3.60% IBM Intl Business Machines Corp. IT Consulting and Other Services December % 3.40% T AT&T Inc. Integrated Tele. Services December % 3.80% GE General Electric Company Industrial Conglomerates December % 3.64% F Ford Motor Company Automobile Manufacturers December % 3.60% DWDP DowDuPont Inc. Diversified Chemicals December % 3.66% LMT Lockheed Martin Corporation Aerospace and Defense December % 3.63% UPS United Parcel Service, Inc. Air Freight and Logistics December % 3.84% UTX United Technologies Corp. Aerospace and Defense December % 3.40% NOC Northrop Grumman Corp. Aerospace and Defense December % 3.68% FDX FedEx Corporation Air Freight and Logistics May % 4.08% BAC Bank of America Corporation Diversified Banks December % 3.68% RTN Raytheon Company Aerospace and Defense December % 3.72% HON Honeywell International Inc. Industrial Conglomerates December % 3.68% EXC Exelon Corporation Electric Utilities December % 3.62% JNJ Johnson & Johnson Pharmaceuticals December % 3.30% BRK.B Berkshire Hathaway Inc. Multi-Sector Holdings December NA NA NA NA % 3.30% PCG PG&E Corporation Electric Utilities December % 3.64% VZ Verizon Communications Inc. Integrated Tele. Services December % 3.70% JPM JPMorgan Chase & Co. Diversified Banks December % 3.70% MMM 3M Company Industrial Conglomerates December % 3.68% XOM Exxon Mobil Corporation Integrated Oil and Gas December % 3.80% PFE Pfizer Inc. Pharmaceuticals December % 3.80% ED Consolidated Edison, Inc. Multi-Utilities December % 3.70% C Citigroup Inc. Diversified Banks December % 3.60% PRU Prudential Financial, Inc. Life and Health Insurance December % 3.65% SO The Southern Company Electric Utilities December % 3.80% PEP Pepsico, Inc. Soft Drinks December % 3.70% Goldman Sachs Asset Management 14

15 Appendix Largest US DB Plans in S&P 500 (continued) Sorted by 2016 (previous year) Plan Assets (All asset allocations expressed in %) US Plans Only (When Specified) Ticker Company Name Industry Month of Fiscal Year End Equity Debt Target Asset Allocation Actual Asset Allocation Real Estate Other Equity Debt Real Estate Other Total Expected Return on Plan Assets (2017) Discount Rate (as of year-end 2017) CAT Caterpillar Inc. Const. Mach. and Heavy Trucks December % 3.50% DE Deere & Company Agricultural and Farm Machinery October % 3.60% CTL CenturyLink, Inc. Integrated Tele. Services December % 3.57% DIS The Walt Disney Company Movies and Entertainment October % 3.88% IP International Paper Company Paper Packaging December % 3.60% DAL Delta Air Lines, Inc. Airlines December % 3.69% LLY Eli Lilly and Company Pharmaceuticals December % 3.40% HPQ HP Inc. Tech. Hardware, Stg and Perips. October % 3.80% WFC Wells Fargo & Company Diversified Banks December % 3.65% AAL American Airlines Group Inc. Airlines December % 3.80% MRK Merck & Co., Inc. Pharmaceuticals December % 3.70% CVX Chevron Corporation Integrated Oil and Gas December % 3.50% GD General Dynamics Corp. Aerospace and Defense December % 3.62% MET MetLife, Inc. Life and Health Insurance December % 3.65% DUK Duke Energy Corporation Electric Utilities December % 3.60% ABT Abbott Laboratories Healthcare Equipment December % 3.40% MO Altria Group, Inc. Tobacco December % 3.70% D Dominion Energy, Inc. Multi-Utilities December % 3.81% TXT Textron Inc. Aerospace and Defense December % 3.66% FE FirstEnergy Corp. Electric Utilities December % 3.75% KO The Coca-Cola Company Soft Drinks December % 3.50% Equal Weighted Average Asset Weighted Average % 3.65% Source: Company reports; all data through fiscal year 2017; population includes the 50 largest DB plans in the S&P 500, Goldman Sachs Asset Management. THESE MATERIALS ARE PROVIDED SOLELY ON THE BASIS THAT THEY WILL NOT CONSTITUTE INVESTMENT ADVICE AND WILL NOT FORM A PRIMARY BASIS FOR ANY PERSON S OR PLAN S INVESTMENT DECISIONS, AND GOLDMAN SACHS IS NOT A FIDUCIARY WITH RESPECT TO ANY PERSON OR PLAN BY REASON OF PROVIDING THE MATERIAL OR CONTENT HEREIN. PLAN FIDUCIARIES SHOULD CONSIDER THEIR OWN CIRCUMSTANCES IN ASSESSING ANY POTENTIAL INVESTMENT COURSE OF ACTION. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Goldman Sachs Asset Management 15

16 General Disclosures This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities. THIS MATERIAL IS FOR INFORMATIONAL PURPOSES ONLY AND IS PROVIDED SOLELY ON THE BASIS THAT IT WILL NOT CONSTITUTE INVESTMENT OR OTHER ADVICE OR A RECOMMENDATION RELATING TO ANY PERSON S OR PLAN S INVESTMENT OR OTHER DECISIONS, AND GOLDMAN SACHS IS NOT A FIDUCIARY OR ADVISOR WITH RESPECT TO ANY PERSON OR PLAN BY REASON OF PROVIDING THE MATERIAL OR CONTENT HEREIN INCLUDING UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974 OR DEPARTMENT OF LABOR REGULATIONS. PLAN SPONSORS AND OTHER FIDUCIARIES SHOULD CONSIDER THEIR OWN CIRCUMSTANCES IN ASSESSING ANY POTENTIAL COURSE OF ACTION. Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur. Confidentiality No part of this material may, without GSAM s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or its securities. It should not be assumed that investment decisions made in the future will be profitable or will equal the performance of the securities discussed in this document. Goldman Sachs does not provide accounting, tax, or legal advice. Notwithstanding anything in this document to the contrary, and except as required to enable compliance with applicable securities law, you may disclose to any person the US federal and state income tax treatment and tax structure of the transaction and all materials of any kind (including tax opinions and other tax analyses) that are provided to you relating to such tax treatment and tax structure, without Goldman Sachs imposing any limitation of any kind. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction. Goldman Sachs does not provide legal, tax or accounting advice to its clients. All investors are strongly urged to consult with their legal, tax, or accounting advisors regarding any potential transactions or investments. There is no assurance that the tax status or treatment of a proposed transaction or investment will continue in the future. Tax treatment or status may be changed by law or government action in the future or on a retroactive basis. Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only. This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by GSAM and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and GSAM has no obligation to provide any updates or changes. Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change, they should not be construed as investment advice. These materials are provided at your request and solely for your information, and in no way constitutes an offer, solicitation, advertisement or advice of, or in relation to, any securities, funds, or products by any of Goldman Sachs affiliates in Brazil or in any jurisdiction in which such activity is unlawful or unauthorized, or to any person to whom it is unlawful or unauthorized. This document has not been delivered for registration to the relevant regulators or financial supervisory bodies in Brazil, such as the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários CVM) nor has its content been reviewed or approved by any such regulators or financial supervisory bodies. The securities, funds, or products described in this document have not been registered with the relevant regulators or financial supervisory bodies in Brazil, such as the CVM, nor have been submitted for approval by any such regulators or financial supervisory bodies. The recipient undertakes to keep these materials as well as the information contained herein as confidential and not to circulate them to any third party. United Kingdom and European Economic Area (EEA): In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority. Switzerland: For Qualified Investor use only Not for distribution to general public. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law. Asia Pacific: Please note that neither Goldman Sachs Asset Management International nor any other entities involved in the Goldman Sachs Asset Management (GSAM) business maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore and Malaysia. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in Goldman Sachs Asset Management 16