1

RISK MANAGEMENT FOR A PENSION FUND AFTER THE

CRISIS: A CASE STUDY

Global Interdependence Center - Italy Conference – April 2011

Presented by:

William Clark

Senior VP and Chief Investment OfficerFederal Reserve Office of Employee Benefits

A little information about the Federal

Reserve’s Retirement Plan2

Total Assets: 7,536 million (02/28/11)

PBO Funded Status: 88% (12/31/10)

Domestic Equity: 45%

Int’l Developed Equity: 13%

Domestic Fixed Income Long Duration: 26%

Domestic Fixed Income Intermediate: 15%

EROA: 7.25% (arithmetic)

Participants: 43K

Contributions 2010: 580 m/n

Contributions 2011: 420 m/n (projected)

Historically a pension fund’s view of risk

centered on the volatility of investment

returns3

Overall portfolio returns for the typical plan are heavily influenced by public equity

returns.

60

80

100

120

140

160

180

Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010

60/40 Asset Portfolio*

*Beginning value set to equal beginning value of Towers Watson Pension Index shown on next page.

Cumulative Returns in a Typical 60/40 Portfolio

Now, plans are focusing more on the volatility

of funded status (i.e. plan surplus)

4

The funded status of the typical defined benefit plan is even more volatile

because it is heavily influenced by both equity returns and long term interest

rates used to discount the liabilities.

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010

Towers Watson Pension Index 60/40 Portfolio

Cumulative Returns on a Typical 60/40 Portfolio vs. Returns on Plan Surplus

Why the volatility of plan surplus is the most

appropriate risk measure for pension plans?

5

1. Drives plan funding costs over time

2. Accounting changes are leading to greater

balance sheet/income statement impact

IFRS

US GAAP

3. Tightening regulatory environment focused on

funded status

4. Greater emphasis on pension plan funding by the

rating agencies

How are pension plan sponsors managing

funded status risk?

6

64%

74%

41%

55%61%

66%

38%

65%

49%55%

33%37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

US UK NETHERLANDS JAPAN

2000 2005 2010

II. Plans are derisking their Investment Portfolios

US plans have historically taken greater funded status risk (i.e. they have higher equity

exposures) than comparable plans in other developed markets. Pension plans globally

are reducing their exposure to “risky assets”.

Pension Plans’ Equity Exposure by Country

Source: Towers Watson

How are pension plan sponsors managing

funded status risk?7

59%

26%

15%

56%

28%

16%

48%

37%

20%

38%

32%

24%

40%

37%

24%

0%

10%

20%

30%

40%

50%

60%

70%

Public Equity Public Fixed Income Other

% of Portfolio

05 06 07 08 09

Corporate plans (particularly in the US) have increased their allocation to non-

traditional asset classes in an attempt to maintain their expected returns while

improving portfolio diversification

III. Diversifying into new asset classes

Source: CIEBA

The economic realities of defined benefit pension

costs, however, impact how far plans will/can go to

“Derisk”

8

Percent of salary while active needed to fund projected benefit for 35 year old* new hire

at the Federal Reserve for various realized investment returns

ANNUAL INVESTMENT RETURN

% OF SALARY NEEDED TO FUND PROJECTED

PENSION BENEFITS

10% 3.08%

9% 4.13%

8% 5.56%

7% 7.53%

6% 10.24%

5% 14.01%

0% 74.70%

*ASSUMES STARTING SALARY OF $75,000, 4% ANNUAL SALARY GROWTH, AND EMPLOYEE RETIRES AT AGE 60.

Typical assumed rate of

return for pension plans

The economic realities of defined benefit

pension costs for the Federal Reserve’s Plan9

0

1,000

2,000

3,000

4,000

5,000

6,000

4% 5% 6% 7% 8% 9% 10%

Future Investment Return

Present value of 20 yrs of Pension Contributions for given future investment returns

$MM

* All other actuarial assumptions are consistent with the Plan’s 12/31/09 actuarial valuation.

Steps that the Federal Reserve has already

taken to reduce plan surplus volatility10

1. Terminated active balanced account mandates that effectively

outsourced asset allocation decisions

2. Implemented an LDI strategy using TIPS to defease retired life

liabilities under the Board benefit structure (about 8% of plan)

3. Lowered the Plan’s public equity allocation from 65% to 55%;

reduction came from the US equity portfolio

4. Extended duration on approximately 50% of the remaining fixed

income portfolio by shifting benchmarks from the Barclays

Aggregate to the Barclays Long Gov’t / Credit

Even with these steps, however, this ten year surplus

backtest using the current asset allocation shows the

volatility of funded status during periods of market stress 11

-27.07%

16.05%

5.40%0.39%

15.05%

1.77%

-54.25%

53.68%

-3.00%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

0.00

20.00

40.00

60.00

80.00

100.00

120.00

Annual Surplus Return as % of Plan Assets (RHS) Cumulative Portfolio Surplus Return as % of Plan Assets (LHS)

73.2

Bar represents each year's

percentage return

Line is cumulative return

Determining the initial strategic asset allocation – What is

our desired asset allocation from traditional asset classes12

The underlying data for this efficient frontier for each assumed portfolio and the current

portfolio are presented on the following page.

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

0 200 400 600 800 1,000 1,200 1,400

CURRENT PORTFOLIO

POTENTIAL TO IMPROVE RISK/RETURN PROFILE

OF THE PLAN; MAIN ACTIONS WOULD BE TO

FURTHER EXTEND DURATION ON THE

BOND PORTFOLIO AND/OR TO SHIFT MORE

PUBLIC EQUITIES FROM US TO INTERNATIONAL

EFFICIENT FRONTIER PLAN ASSET ALLOCATION

$ MM Standard Deviation of Plan Surplus

$ MM

Projected

Return on

Plan surplus

Detailed metrics for portfolios on the Plan’s efficient frontier

13

Asset Current Portfolio A Portfolio B Portfolio C Portfolio D Portfolio E Portfolio F Portfolio G Portfolio H Portfolio I Portfolio J

Wilshire - 5000 Composite Index %

37.87 0.00 1.49 5.34 9.20 13.05 16.91 20.77 24.62 28.48 0.00

MSCI - EAFE Index % 11.44 0.00 8.37 14.50 20.64 26.77 32.91 39.04 45.18 51.31 88.00

Total Public Equity % 49.31 0.00 9.86 19.84 29.84 39.84 49.82 59.81 69.80 79.79 88.00

Barclays Capital - U.S. Aggregate Index %

14.07 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Barclays Capital - U.S. Long TIPS Index %

7.93 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Barclays Capital Long Gov/Credit %

16.70 88.00 78.14 68.15 58.16 48.17 38.18 28.19 18.20 8.21 0.00

Total Fixed Income % 38.69 88.00 78.14 68.15 58.16 48.17 38.18 28.19 18.20 8.21 0.00

Citigroup Global Markets -Pension Liability Index %

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Annual Surplus Return $ mm -52.56 -56.32 -38.57 -23.22 -10.22 0.47 8.89 15.09 19.12 21.06 18.84

Annual Surplus Risk $ mm 793.51 113.97 208.02 329.77 457.42 587.15 717.82 849.00 980.49 1,112.17 1,257.04

Return/Risk -0.07 -0.49 -0.19 -0.07 -0.02 0.00 0.01 0.02 0.02 0.02 0.01

Surplus VAR 95% Annual $ mm 1,305.32 187.48 342.19 542.47 752.46 965.86 1,180.81 1,396.61 1,612.90 1,829.52 2,067.83

PV of 20 years future contributions $ mm

3,709.93 4,199.53 3,994.23 3,787.46 3,598.12 3,408.79 3,177.67 2,945.66 2,725.95 2,507.73 2,334.71

For each Portfolio, the charts below depict the range of projected Plan surplus

using Monte Carlo simulations for five and ten years with planned annual

contributions for 2011 and 2012

14

Ten YearsFive Years

Notice: how the range of simulated surplus outcomes doesn’t widen until we reach thevery “high risk” asset allocations.

Each bar represents the range between the 10th and 90th percentiles of funded status for each assumed portfolio. The simulation also incorporates expected benefit payments over the projection period. The detailed results of these simulations are presented on the following page.

Pla

n s

urp

lus

$000

Another approach is to look at the various factors that drive surplus

volatility. This factor analysis is based on ten year actual data (rather

than the normative assumptions presented earlier) and shows the

contribution to surplus volatility from four major factor groups.15

-500

0

500

1,000

1,500

2,000

Current A B C D E F G H I J

Su

rplu

s V

ola

tility

$M

M

Portfolio

Surplus Volatility Attribution

Other

Spreads

Rates

Equity

Current A B C D E F G H I J

Equity 520 0 82 188 301 417 534 651 769 888 956

Rates 694 269 337 396 453 510 565 621 676 731 744

Spreads -118 93 61 26 -9 -41 -72 -103 -133 -163 -189

Other 30 0 4 12 23 32 43 54 64 75 178

Total 1,126 363 484 622 768 918 1,069 1,223 1,377 1,532 1,688

We should also evaluate stress test results in order to

assess the exposure of plan surplus to shocks from

financial market factors

Stress Test Scenario Historical Period Description of event

1. Great RecessionDecember 3, 2007 – March 9,

2009

Starting date for this scenario is the official beginning of the

latest recession in the US. The end date is the lowest point of

S&P 500 in the recent decade.

2. Summer ’03 – Treasury

BackupJune 13 – Jul 31, 2003 Treasury sell-off.

3. Hypothetical Inflation N/A

Short-term US inflation and nominal rates increase

dramatically, mortgage spreads widen, S&P is unchanged.

Shocks for the other factors in the risk model were derived

using their historical correlations with the constrained factors.

4. Hypothetical Deflation N/A

Oil price is kept unchanged. The 10 year break even inflation

rate drops 200 bps. The 10 year nominal rate drops to historical

lows while short-term nominal rates are held constant. Agency

mortgage rate spreads tighten.

5. Long Term Capital

ManagementOct 2 – Oct 9, 1998

Credit & liquidity crisis stemming from the collapse of Long

Term Capital Management. Simultaneous increase in treasury

rates and credit spreads with significant jump in implied

volatility.

In order to calculate the hypothetical P&L that portfolios would sustain in scenarios where various aspects of the market environment may be shocked, we employ a similar methodology as is used in VAR models.

These sensitivities are then aggregated to give a portfolio-level view of exposures to each risk factor

Stress scenarios are defined as a set of shocks to these risk factors. By combining the factor exposures and shocks to each risk factor, we can derive the expected P&L from a given stress scenario

16

Great Recession stress test results

Rates Equity Spreads Inflation

Foreign Exchange FI Volatility

December 2007 – March 2009

Asset and liability portfolio attribution

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

Liability A 1 2 3 4 5 6 7 8 9 10

Portfolio

Ass

et a

nd

lia

bility

att

rib

utio

n

to s

urp

lus

(bp

s)

December 2007 – March 2009

Surplus portfolio attribution

Rates Equity Spreads Inflation

Foreign Exchange FI Volatility

Portfolio

-10,000

-8,000

-6,000

-4,000

-2,000

0

2,000

A 1 2 3 4 5 6 7 8 9 10Ass

et a

nd

lia

bility

att

rib

utio

n

to s

urp

lus

(bp

s)

Equity market performance was the reason that surplus fell significantly during this period. Liability values fell to a lesser extent as credit spread widening more than offset the impact of declining Treasury rates.

17

Hypothetical deflation stress test results

Hypothetical deflation

Asset and liability portfolio attributionHypothetical deflation

Surplus portfolio attribution

Rates Equity Spreads Inflation

Foreign Exchange FI Volatility

Rates Equity Spreads Inflation

Foreign Exchange FI Volatility

-2,000

-1,500

-1,000

-500

0

500

1,000

1,500

Liability A 1 2 3 4 5 6 7 8 9 10

Portfolio

Ass

et a

nd

lia

bility

att

rib

utio

n

to s

urp

lus

(bp

s)

-3,500

-3,000

-2,500

-2,000

-1,500

-1,000

-500

0

500

A 1 2 3 4 5 6 7 8 9 10

Portfolio

Ass

et a

nd

lia

bility

a

ttrib

utio

n to

su

rplu

s (b

ps)

Primary reasons that surplus is falling are that both Treasury interest rates and

equities are falling.

18

Evaluating the potential benefits of new asset classes,

hedging instruments and strategies19

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

0 200 400 600 800 1,000 1,200 1,400

Plan Surplus

Return $MM

Plan Surplus Risk $MM

Goal is to potentially improve risk/return trade off by:

- new asset classes

- new instruments (derivatives)

- new investment strategies

- efficient frontier

w/current asset

classes

How new hedging instruments could potentially improve

the plan’s risk/return profile

20

Efficient Frontier with and without fixed receiver swaps (25% overlay)

Example: Interest Rate Swaps

By entering into fixed receiver swaps, the risk/return profile is improved as a result of better hedging of the Plan’s liabilities. Assumes a maximum hedge of 25% of plan liabilities. Swaps are modeled as a long fixed rate bond and short cash position. Does not incorporate impact from collateral posting for margin requirements.

-80

-60

-40

-20

0

20

40

60

80

100

120

0 200 400 600 800 1,000 1,200 1,400

with maximum 25% overlay Current

This compares the historical performance of our

current allocation versus an assumed portfolio with a

maximum 25% swap overlay21

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

Swap Overlay Current Portfolio Surplus

99.1

73.2

The assumed portfolio modeled here is Portfolio F from the efficient frontier shown on the previouspage. The surplus risk level of this portfolio is closest to the surplus risk level of the current portfolio.

This compares the factor response curves to changes in

value of the pension liabilities for the current portfolio and

the assumed portfolio with a 25% swap overlay

22

-4.70%

-1.6%

0.97%

2.68%

6.03%

6.37%

2.36%

0.53%

-3.45%

-6.32%

3.71%

1.55%

0.61%

-2.13%

-3.49%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Worst 20% 2nd Quintile 3rd Quintile 4th Quintile Best 20%

Factor Quintile Average Value Current Portfolio Average Perf. Assumed with Swap Overlay Avg. Perf.

Another potential use of derivatives: Using the VIX as

a hedge for equity and credit risk in the portfolio

23

-20.40%

-8.84%-1.93%

7.11%

30.36%

3.70% 1.41%

0.59%-1.44%

-4.73%

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

Worst 20% 2nd Quintile 3rd Quintile 4th Quintile Best 20%

Factor Quintile Average Perf. Current Portfolio Average Perf.

Factor response curve to the VIX index for our current portfolio

Of all the factor response curves that we analyzed, the VIX provides the best hedge for plan surplus against adverse market movements in equities and credit spreads.

How new investment strategies could potentially improve

the plan’s risk/return profile

24

These hedge funds strategies could potentially improve returns by generating true

alpha, resulting in equity-like returns with fixed income volatility.

Example: Representative Basket of Hedge Fund Strategies

Efficient Frontier with and without a Diversified Basket of Hedge Fund Strategies

-70.00

-60.00

-50.00

-40.00

-30.00

-20.00

-10.00

0.00

10.00

20.00

30.00

0.00 200.00 400.00 600.00 800.00 1,000.00 1,200.00 1,400.00

with Hedge Fund Basket Current

This compares the historical performance of our

current allocation with an assumed portfolio

containing 18% in hedge funds25

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

With Hedgefunds Current Portfolio Surplus

86.7

73.2

The assumed portfolio being modeled here is Portfolio F from the efficient frontier on the previous page. This portfolio has a surplus risk level that is comparable to our current portfolio.

This compares the factor response curves of the current

portfolio and the assumed portfolio with an 18% allocation

to hedge funds

26

-4.70%

-1.58%

0.97%

2.68%

6.03%

6.37%

2.36%

0.53%

-3.45%

-6.32%

5.47%

2.14%

0.59%

-3.00%

-5.21%

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

Worst 20% 2nd Quintile 3rd Quintile 4th Quintile Best 20%

Factor Quintile Average Perf. Current Portfolio Average Perf. Portfolio with Hedge Funds Perf.

Factor response curves to changes in the value of the pension liabilities

Side bar: Are these hedge fund assumptions (particularly for alpha generation) realistic?

27

Based on one academic study they are, but investors are paying dearly for alpha

*Source: “The ABC’s of Hedge Funds: alphas, betas & costs”; Ibbotson, Chen and Zhu; July 2010; based on data from

Jan. 1995-Dec. 2009

Note: the return numbers presented here are adjusted by the researchers for survivor

bias and backfill bias.

Pre-Fee Fees* Post-Fee Systematic Alpha/Fee Info Sharpe

Strategy Returns* Return Alpha Beta Return Ratio Ratio Ratio

CV Arb 10.76 3.35 7.41 2.79 4.61 0.83 0.45 0.97

Emerging 12.51 3.70 8.81 4.66 4.15 1.26 0.39 0.64

Equity Market Neutral 10.34 3.27 7.08 2.86 4.21 0.88 1.01 2.24

Event Driven 11.91 3.58 8.33 3.94 4.39 1.10 0.96 1.41

Fixed Inc. Arb 9.72 3.14 6.57 2.91 3.67 0.92 0.67 1.43

Global Macro 11.08 3.42 7.67 2.54 5.13 0.74 0.39 1.14

L/S Equity 13.99 4.00 9.99 4.79 5.20 1.20 0.71 1.02

Managed Futures 7.79 2.76 5.03 0.57 4.46 0.21 0.06 0.52

Short 1.17 1.50 -0.34 1.91 -2.25 1.28 0.15 0.08

Overall Equally Weighted 11.13 3.43 7.70 3.00 4.70 0.88 0.60 1.13

The need for tactical asset allocation: risk

levels change over time, sometimes violently28

Example: Based on current “real time” assumptions that would have been used

based on market conditions in Dec 2008, the plan surplus efficient frontier would

have looked very different than using normative assumptions

29

Year End 2008

The charts on the following pages outline the differences between our normative risk and return assumptions and those that would have been used in Dec 2008.

-100.00

-50.00

0.00

50.00

100.00

150.00

200.00

250.00

0.00 500.00 1,000.00 1,500.00 2,000.00 2,500.00 3,000.00

SurplusReturn$MM

Surplus Risk $MM

Year End 2008 Current Using Normative Assumptions

The range of risk levels increased

significantly in late 2008, but there

was still the opportunity to

increase expected returns

at comparable levels of risk.

This compares the asset allocations along the

efficient frontier under both sets of assumptions30

Portfolio Allocations using 2008 Assumptions

Portfolio Allocations using Normative Assumptions

Asset Portfolio 1 Portfolio 2 Portfolio 3 Portfolio 4 Portfolio 5 Portfolio 6 Portfolio 7 Portfolio 8 Portfolio 9 Portfolio 10

Wilshire - 5000 Composite Index (Full Cap) 0.00 6.49 12.38 18.10 23.63 29.17 34.70 40.24 45.77 0.00

MSCI - EAFE Index ($Net) 0.00 3.02 6.62 10.97 16.13 21.29 26.46 31.62 36.78 88.00

Barclays Capital - U.S. Aggregate Index 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Barclays Capital - U.S. TIPS Index 0.69 26.34 51.12 58.93 48.24 37.54 26.84 16.14 5.45 0.00

Citigroup Global Markets - Pension Liability

Index

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Barclays Capital - U.S. Corporate Long Index* 87.31 52.14 17.88 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Return -0.72 0.18 0.98 1.67 2.22 2.64 2.94 3.12 3.19 2.59

Risk 0.66 3.54 6.79 10.11 13.74 17.52 21.38 25.28 29.20 35.28

Surplus Return -52.56 13.14 71.54 121.91 162.06 192.72 214.62 227.76 232.87 189.07

Surplus Risk 48.18 258.42 495.67 738.03 1,003.02 1,278.96 1,560.74 1,845.44 2,131.60 2,575.44

Asset Portfolio A Portfolio B Portfolio C Portfolio D Portfolio E Portfolio F Portfolio G Portfolio H Portfolio I Portfolio J

Wilshire - 5000 Composite Index (Full Cap)

0.00 1.49 5.34 9.20 13.05 16.91 20.77 24.62 28.48 0.00

MSCI - EAFE Index ($Net) 0.00 8.37 14.50 20.64 26.77 32.91 39.04 45.18 51.31 88.00

Barclays Capital - U.S. Aggregate Index 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Barclays Capital - U.S. TIPS Index 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Barclays Capital - U.S. Corporate Long Index

88.00 78.14 68.15 58.16 48.17 38.18 28.19 18.20 8.21 0.00

Citigroup Global Markets - Pension Liability Index

100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Annual Surplus Return -56.32 -38.57 -23.22 -10.22 0.47 8.89 15.09 19.12 21.06 18.84

Annual Surplus Risk 113.97 208.02 329.77 457.42 587.15 717.82 849.00 980.49 1,112.17 1,257.04

Notice we added the Barclays US Corporate Long Index as an eligible sub asset class.

To show how changes in market conditions can influence plan

surplus risk, we calculated historical surplus VAR on the current plan asset mix based on assumed returns that would have been

used and actual trailing 12-month volatility and correlations

31

The surplus risk level of our current asset mix has fluctuated widely over the past ten years –demonstrating the need to continuously monitor risk and evaluate tactical shifts.

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

Retirement Plan Surplus VAR 95%

Surplus VAR 95%

Establish an approach for lowering plan risk

levels (i.e., a “derisking glide path”)32

Criteria Application

Passage of time Reduce surplus volatility or VAR by

a predetermined percentage

each year

Ratio based on funded status

requirements

Maintain constant ratio of surplus

volatility or VAR to plan surplus

Ratio based on funding

requirements to risk

Maintain a constant ratio of PV of

20 yrs. future contributions to

surplus VAR

Example : Derisking via a constant reduction

in surplus VAR33

This would result in an approximate reduction in public equity exposure from 55% at year end 2010 to 30% by year-end 2014.

Plan Surplus and actuarially –determined funding by year assuming a 10% annual reduction in surplus VAR; actual returns equal normative returns

11801062

944826

708

-1,500

-1,000

-500

0

500

1,000

1,500

2010 2011 2012 2013 2014

Surplus

Surplus VAR

Derived Plan Funding

2011 $420MM2012 $431MM2013 $446MM2014 $465MM

Some final macro thoughts: If pension funds collectively implemented a derisking strategy by buying long-duration bonds,

it would effectively serve as a “cap” on long-term interest rates

AAA Corporate Bonds A Corporate Bonds

Nominal Real Nominal Real

Yield Change -0.48% -0.55% -0.33% -0.46%

Adjusted

R-Squared

0.84 0.87 0.88 0.64

Change in Long-Term Corporate Bond Yields From a 1% Increase in Pension Fund

Allocation to Fixed Income

Source: Adequacy of Bond Supply and Cost of Pension Benefits: A Financial Economics Perspective; Y. Julia Xiao and Yinghin Xiao; SocietyOf Actuaries website

34

We believe the impact of pension fund derisking is

also being felt in the interest rate swap market,

where spreads have inverted35

45.25

52.2555.00

57.50

20.63 22.63 11.19

-24.06

-30

-20

-10

0

10

20

30

40

50

60

70

2 Years 5 Years 10 Years 30 Years

12/31/2005 Present (03/21/11)