PENSIONER BUY-IN MARKET MARCH 2011 The 2011 buy-in market - opportunities to reduce risk for UK pension plans of all sizes.

PENSIONER BUY-IN MARKET MARCH 2011 The 2011 buy-in market - opportunities to reduce risk for UK pension plans of all sizes.

2 LCP Pensioner buy-in market Find out more at www.lcp.uk.com LCP designed the first pensioner buy-in for Hunting PLC in 2007. 5m Minimum size for traditional buy-in contract 250m Minimum size for bespoke buy-in contract Pensioner buy-in market January 2011 saw the fourth anniversary of the buy-in contract - an insurance policy held by an ongoing pension plan to meet some or all of their pensions in payment. The buy-in market has come a long way since Hunting PLC implemented the first new style pensioner buy-in contract in January 2007. The market now caters for two distinct types of buy-in contract to de-risk a pension plan s liabilities: Traditional buy-in contracts relying on the strong protections within the UK insurance regime; alternatively Bespoke buy-in contracts with unique design features to meet particular security objectives. Two separate case studies give examples of each contract structure based on transactions led by LCP in 2010. Buy-in basics A buy-in can be an attractive solution for de-risking pension plans: it is a stepping stone on the way to full buy-out; it fully hedges longevity, inflation and investment risk; A pensioner buy-in treats all members equitably - it is simply an asset of the pension plan for the equal benefit of all plan members. the insurance framework in the UK provides a high level of certainty that pensions will be paid; back-up from the sponsoring company remains as an additional protection; all members are treated equitably, both on an ongoing basis and on wind-up; administration can be retained, so members see no change in the way their pensions are paid; and it has no material P&L impact for the sponsoring company. Equities 37% Equities Bonds Residual Liabilities Bonds Liabilities Insurance Policy Insured Liabilities Before After

LCP Pensioner buy-in market Find out more at www.lcp.uk.com 3 Buy-in pricing Relative to fundamentals, pricing at the end of 2010 looked at its most favourable since the onset of the financial crisis. The following chart shows typical pensioner buy-in pricing compared to funding and accounting measures. Funding measures for pensioner liabilities Pensioner liabilities index 130 120 110 100 90 Divergence in pricing Buy-in price 80 Lehman Funding reserve Brothers insolvency Company accounting cost 70 Dec 2007 Jun 2008 Dec 2008 Jun 2009 Dec 2009 Jun 2010 Dec 2010 0-5% Typical premium of buy-in price to funding reserve in early 2011. Source: LCP Affordability of a buy-in for many pension plans has also improved. Pension plans that negotiated new contribution plans when deficits reached their peaks in 2009 are likely to find themselves better funded than expected. This means that such plans may be able to de-risk without requiring any additional contributions, as shown by the chart below. Paying for de-risking 100% Funding level 90% 80% 70% Impact of de-risking Actual funding level Expected position Many plans are currently better funded than expected and can de-risk without requiring additional contributions. 60% Mar 2009 Mar 2010 Mar 2011 Mar 2012 Mar 2013 Mar 2014 Source: LCP analysis to 14 March 2011 Conclusion In normal conditions, plans might expect to pay a modest premium to the value of their funding reserve to complete a pensioner buy-in. However, timing is key and opportunities to secure more favourable pricing exist from time to time. Where plans have a specific target price, setting up a trigger-based execution mechanism can help to optimise timing by taking advantage of short term changes in price and insurer appetite.

Contact us For more information please contact Clive Wellsteed, Charlie Finch or the LCP partner who normally advises you on +44 (0)20 7439 2266 or visit our website www.lcp.uk.com. Clive Wellsteed Partner clive.wellsteed@ lcp.uk.com +44 (0)20 7439 2266 Charlie Finch Partner charlie.finch@ lcp.uk.com +44 (0)20 7439 2266 LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. Lane Clark & Peacock LLP London, UK Tel: +44 (0)20 7439 2266 enquiries@lcp.uk.com Lane Clark & Peacock LLP Winchester, UK Tel: +44 (0)1962 870060 enquiries@lcp.uk.com Lane Clark & Peacock Belgium CVBA Brussels, Belgium Tel: +32 (0)2 761 45 61 info@lcpbe.com Lane Clark & Peacock Ireland Limited Dublin, Ireland Tel: +353 (0)1 614 43 93 enquiries@lcpireland.com Lane Clark & Peacock LLP St Helier, Jersey* Tel: +44 (0)1534 887600 enquiries@lcp.uk.com Lane Clark & Peacock Netherlands B.V. Utrecht, Netherlands Tel: +31 (0)30 256 76 30 info@lcpnl.com LCP Libera AG Zürich, Switzerland Tel: +41 (0)43 817 73 00 info@libera.ch LCP Libera AG Basel, Switzerland Tel: +41 (0)61 205 74 00 info@libera.ch LCP Asalis AG Zürich, Switzerland Tel: +41 (0)43 344 42 10 info@asalis.ch All rights to this document are reserved to Lane Clark & Peacock LLP ( LCP ). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. LCP is part of the Alexander Forbes Group, a leading independent provider of financial and risk services. Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC301436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 30 Old Burlington Street W1S 3NN, the firm s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members (as defined under the Act) of the Institute and Faculty of Actuaries, a Designated Professional Body. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Lane Clark & Peacock LLP. *No regulated business is carried out from this location. UK c0311/0311

LCP case studies GlaxoSmithKline 900m buy-in MARCH 2011 CASE STUDY 1 : BESPOKE BUY-IN CONTRACT In November 2010 two pension plans sponsored by GSK completed a 900m pensioner buy-in with Prudential. This covered approximately 15% of GSK s UK pensioner liabilities. The contract maintains the simplicity of a traditional buy-in contract and also includes robust additional protections to further enhance security. A key feature of the design is to hold assets in a ring-fenced account that is available to the trustees should Prudential get into financial difficulties. The innovative structure opens up new opportunities for larger pension plans looking to de-risk. CASE STUDY 1 Quick Summary Bespoke 900m pensioner buy-in contract in November 2010. Objective To combine the simplicity of a traditional annuity contract with bespoke additional protections. GSK pension plans Prudential Additional buffer Ring-fenced assets Buy-in premium Assets Top up or release of assets Free assets Reserves LCP advised GSK and the trustees of the GSK pension plans on the negotiation and structuring of the buy-in policy, alongside their existing actuarial, investment and legal advisers. The key protections of the arrangement are as follows: The 900m premium remains legally owned by the pension plans. The pension plans have exit options should Prudential find itself in financial difficulties. Prudential pays additional assets into the ring-fenced account to provide a further buffer. The assets are managed by Prudential in line with pre-agreed investment guidelines - providing comfort around the quality of the assets held to back the arrangement. Several insurance companies are now able to provide such arrangements. The minimum transaction size varies by insurer, ranging from 250m to 500m. For larger pension plans this offers a way to fully hedge pension liabilities with a high level of comfort around the security. Mark Ashworth Law Debenture This structure pushes back the boundaries of what can be achieved in the pensioner buy-in market.

Trigger-based approach CASE STUDY 2: STANDARDISED BUY-IN CONTRACT Insurer buy-in pricing is driven by two factors: changes in market conditions and changes in insurer appetite to write business. This pension plan put in place a streamlined mechanism to benefit from both, as follows: The Trustees and Company chose buy-in as their preferred strategy and agreed value for money measures. Detailed proposals were invited from four insurers and a competitive selection process was used to narrow the field to two insurers. Key commercial terms were agreed with the two insurers following review of their standard contracts. Buy-in pricing at that stage was a little higher than the desired level, so a trigger-based approach was put in place, with each insurer agreeing to monitor the target price on a daily basis. The transaction went ahead with the first insurer who could meet the target price - either through movements in market conditions or a change in appetite to transact, as shown in the chart below. This process provided the Trustees with a simple but effective mechanism to achieve the best market timing whilst still maintaining competitive tension for the pricing and legal terms. CASE STUDY 2 Quick Summary Traditional 100m buy-in contract Objective To use a streamlined process to benefit from short-term fluctuations in buy-in pricing. LCP put in place a mechanism to help the Trustees and Company take advantage of market volatility and execute when the target price was met. Importance of insurer appetite 112 110 Trustees target price Insurer buy-in price 108 106 104 102 100 Sep 2010 Oct 2010 Nov 2010 Buy-in executes Insurer bridges the gap Contact us For more information please contact Clive Wellsteed, Charlie Finch or the LCP partner who normally advises you on +44 (0)20 7439 2266 or visit www.lcp.uk.com. LCP is a firm of financial, actuarial and business consultants, specialising in the areas of pensions, investment, insurance and business analytics. All rights to this document are reserved to Lane Clark & Peacock LLP ( LCP ). This document may be reproduced in whole or in part, provided prominent acknowledgement of the source is given. LCP is part of the Alexander Forbes Group, a leading independent provider of financial and risk services. Lane Clark & Peacock LLP is a limited liability partnership registered in England and Wales with registered number OC301436. LCP is a registered trademark in the UK (Regd. TM No 2315442) and in the EU (Regd. TM No 002935583). All partners are members of Lane Clark & Peacock LLP. A list of members names is available for inspection at 30 Old Burlington Street W1S 3NN, the firm s principal place of business and registered office. The firm is regulated by the Institute and Faculty of Actuaries in respect of a range of investment business activities. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members (as defined under the Act) of the Institute and Faculty of Actuaries, a Designated Professional Body. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Lane Clark & Peacock LLP. UK c00111/0111