Presentation to CIEBA: Trends in 2015 Pension Fund Data Webinar-Trends in 2015... · Trends in 2015 Pension Fund Data ... company reports; analysis based upon the US plans ... Ticker

Presentation to CIEBA:Trends in 2015 Pension Fund Data

Goldman Sachs Asset ManagementMay 2016

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.This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

1

Top 5 concerns of US corporate Defined Benefit (DB) Plan Sponsors in 1H 2016

Based on research and conversations with corporate defined benefit pension plans, the following themes surfaced:

1. How to achieve their return targets in a low return environment

2. Impact of higher plan costs from increased Pension Benefit Guaranty Corporation (PBGC) flat and variable rate premiums

3. Equity risk still dominates asset risk in their portfolios despite steady reductions to this asset class in recent years

4. Want to hedge more interest rate risk, but concerned about doing it at these levels as well as reallocating capital away from growth seeking assets when still underfunded

5. They have lots of good ideas, but have difficulty from a governance perspective getting them approved and implemented

Source: Goldman Sachs Asset Management, as of May 2016; Please see additional disclosures at the end of this presentation.

2

Low interest rates, mortality changes and negative cash flow have all contributed to low funded %s

Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies; as of April 2016; for illustrative purposes only. The figures here are estimated and are subject to potentially significant revisions over time. Actual figures may vary significantly from the information presented above.

84%

90%

92%93%

101%

108%

79%

82%

85%

79%78%

90%

83%82%

79%

70%

80%

90%

100%

110%

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16(E YTD)

Agg

rega

te G

AA

P Fu

nded

%

3

20%

31%29%

13%

7%

0%

5%

10%

15%

20%

25%

30%

35%

<70% 70%-80% 80%-90% 90%-100% >100%

Perc

enta

ge o

f Pla

ns in

Sam

ple

Median Funded %: 80%

2015 GAAP Funded Status

The distribution of funded ratios is leaning to the left

Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies; all data for fiscal year 2015; for illustrative purposes only. Please see additional disclosures at the end of this presentation.

4

Funded status attribution analysis: Various factors generally offset each other in 2015

Source: Goldman Sachs Asset Management; 2015 company reports; analysis based upon the US plans (when specified) of S&P 500 companies

82.8%

82.2%

3.5%

1.9%

80%

82%

84%

86%

88%

2014 Actuarial Gains Interest Cost Service Cost Contributions BenefitPayments

Actual AssetReturns

2015

S&P

500

Fund

ed %

, US

Plan

s O

nly

(Whe

n Sp

ecifi

ed)

(3.3%)

(1.5%)

(1.1%) (0.1%)

5

Majority of plans in 2015 had negative plan asset returns and were cash flow negative

Source: Goldman Sachs Asset Management; 2015 company reports; analysis based upon the US plans (when specified) of S&P 500 companies.

Plan Asset Returns Benefit Payments vs Contributions

Plan AssetLoss74%

Plan AssetGain 26%

Cash Flow

Positive 18%

Cash Flow

Negative 82%

6

The increase in discount rates in 2015 has already been erased YTD in 2016

Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies; analysis for each year only includes those companies with a December fiscal year-end. The 2016 YTD figure is estimated and is subject to potentially significant revisions over time. Actual figures may vary significantly from the information presented above.

7.2

6.7

6.1

5.85.6

5.8

6.2 6.2

5.8

5.4

4.7

4.0

4.8

4.0

4.3

3.9

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16(YTD E)

Aver

age

GAA

P D

isco

unt R

ate

7

71%

84%

77%

85%

76%

92%90%

83% 84% 83%

60%

65%

70%

75%

80%

85%

90%

95%

100%

Aggr

egat

e fu

nded

sta

tus

by s

ecto

r

Funded status varies notably across sectors…


8

4770 85

153

402

166

85127

80 8767 84

110

180

528

180

94

153

96 105

0

100

200

300

400

500

600

Assets Liabilities

Agg

rega

te U

S P

ensi

onA

sset

s an

d Li

abilit

ies

by S

ecto

r(in

$B

)

$B

…as does the size of pension plans


9

9.1%

12.9% 12.9%

8.5%6.0%

25.1%

6.1%

15.9%

10.4%

19.9%

0%

5%

10%

15%

20%

25%

30%

Con

tribu

tions

as a

% o

f def

icit

Contributions as a percentage of outstanding deficits appeared to be meaningful for many sectors


10

5.1%

3.8%

2.5%

3.9%

4.7%

3.5% 3.3%3.8% 3.9% 3.8%

0%

1%

2%

3%

4%

5%

6%

Sum

of s

ervi

ce a

nd In

tere

st c

osts

net

of

cont

ribut

ions

as

a pe

rcen

tage

of l

iabi

litie

s

However, the impact of contributions was generally insufficient to offset collective impact of yearly service and interest costs


11

Funding relief has contributed to relatively low contribution activity in recent years

Source: Goldman Sachs Asset Management; company reports; analysis based upon the US plans (when specified) of S&P 500 companies.

39

47 47 47

37

26

29

55

58

55

58

40

35

30

20

25

30

35

40

45

50

55

60

65

70

2002 2003* 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014 2015

Con

tribu

tions

(in

$ bi

llions

)

* 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.

GM

65

50

AT&T

12

Fixed income allocations exceed equities as plans continue to pursue de-risking actions


Aging society moves more participants intoretiree status

Funded % 84% 90% 92% 101% 108% 79%93% 82% 85% 79% 78% 90% 83% 82%

0

10

20

30

40

50

60

70

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Asse

t-Wei

ghte

d Ac

tual

Ass

et A

lloca

tions

(%)

Equity Debt Other Real Estate

42%38%

15%

5%

13

Average US corporate DB pension plan expected return on assets assumption continues to decline


9.0%

8.5%

8.3% 8.3%8.2%

8.1% 8.1%8.0%

7.9%

7.7%

7.5%

7.3%7.2%

7.1%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

'02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Equa

l-wei

ghte

d av

erag

e ex

pect

ed re

turn

ass

umpt

ion

of

S&P

500

com

pani

es, U

S Pl

ans

only

(whe

n sp

ecifi

ed)

14

Every year from 2011 – 2015 has had more reductions than any year since 2003: no longer a barrier to de-risking?


0

10

20

30

40

50

60

70

80

0%

10%

20%

30%

40%

50%

60%

70%

80%

'03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Average Reduction in ER

OA Assum

ption in BPs%

of S

&P 5

00 C

ompa

nies

, US

Plan

s O

nly

Whe

n Sp

ecifi

ed

% of Companies Lowering EROA Assumption (LHS)

Average Decline in EROA Assumption in bps (RHS)

15

7.2% 7.4%7.7%

6.6%

7.7%

6.7%7.2% 7.3% 7.6% 7.7%

10.9%

7.0% 7.0%

6.0%

8.0%

5.9%

4.3%

7.7%

6.7%

8.6%

0%

2%

4%

6%

8%

10%

12%

EROA (Asset weighted) Service and Interest Costs as % of US Assets

In 2015, 4/10 sectors had service and interest costs which exceeded return assumptions


16

Sorted by Numerical Change Expected Data for US plans only (when specified) Month Return on Plan

of Fiscal Plan Assets Numerical Directional AssetsTicker Company Name Industry Year end 2016 2015 Change Change ($ Millions)FDX FedEx Corporation Air Freight and Logistics May 6.50% 7.75% -1.25% Lower 23,006IBM Intl. Business Machines Corp. IT Consulting and Other Services December 7.00% 7.50% -0.50% Lower 51,716DD E. I. du Pont de Nemours & Co. Diversified Chemicals December 8.00% 8.50% -0.50% Lower 17,497CAT Caterpillar Inc. Const. Mach. & Heavy Trucks December 6.90% 7.40% -0.50% Lower 11,440KMB Kimberly-Clark Corporation Household Products December 4.84% 5.21% -0.37% Lower 1,754MMM 3M Company Industrial Conglomerates December 7.50% 7.75% -0.25% Lower 13,966MET MetLife, Inc. Life and Health Insurance December 6.00% 6.25% -0.25% Lower 8,490FE FirstEnergy Corp. Electric Utilities December 7.50% 7.75% -0.25% Lower 5,338XEL Xcel Energy Inc. Electric Utilities December 6.87% 7.09% -0.22% Lower 2,884GM General Motors Company Automobile Manufacturers December 6.30% 6.38% -0.08% Lower 61,072BA The Boeing Company Aerospace and Defense December 7.00% 7.00% 0.00% Unchanged 56,514T AT&T, Inc. Integrated Tele. Services December 7.75% 7.75% 0.00% Unchanged 50,909GE General Electric Company Industrial Conglomerates December 7.50% 7.50% 0.00% Unchanged 45,720F Ford Motor Co. Automobile Manufacturers December 6.75% 6.75% 0.00% Unchanged 41,252LMT Lockheed Martin Corporation Aerospace and Defense December 8.00% 8.00% 0.00% Unchanged 32,096NOC Northrop Grumman Corp. Aerospace and Defense December 8.00% 8.00% 0.00% Unchanged 23,950RTN Raytheon Company Aerospace and Defense December 8.00% 8.00% 0.00% Unchanged 18,063HON Honeywell International Inc. Aerospace and Defense December 7.75% 7.75% 0.00% Unchanged 16,349EXC Exelon Corporation Electric Utilities December 7.00% 7.00% 0.00% Unchanged 14,347JPM JPMorgan Chase & Co. Diversified Banks December 6.50% 6.50% 0.00% Unchanged 14,125C Citigroup Inc. Diversified Banks December 7.00% 7.00% 0.00% Unchanged 12,137PRU Prudential Financial, Inc. Life and Health Insurance December 6.25% 6.25% 0.00% Unchanged 11,914PEP Pepsico, Inc. Soft Drinks December 7.50% 7.50% 0.00% Unchanged 11,397DE Deere & Company Agricultural and Farm Machinery October 7.30% 7.30% 0.00% Unchanged 11,164IP International Paper Company Paper Products December 7.75% 7.75% 0.00% Unchanged 10,923AA Alcoa Inc. Aluminum December 7.75% 7.75% 0.00% Unchanged 8,077D Dominion Resources, Inc. Multi-Utilities December 8.75% 8.75% 0.00% Unchanged 6,166DOW The Dow Chemical Company Diversified Chemicals December 7.87% 7.85% 0.02% Higher 13,517

Reductions to Expected Return on Assets (EROA) assumptions continuing in 2016

Source: Goldman Sachs Asset Management; company reports; as of May 2016; analysis represents companies where we observed a public disclosure of the EROA assumption to be used in fiscal 2016 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.

17

Larger plans tend to be better funded, utilize a more diversified asset allocation and anticipate higher expected return on assets

Source: Goldman Sachs Asset Management; company reports; all data for fiscal year 2015 population: S&P 500 (US plans only when specified); pie charts designated by plan asset size.

Aggregate funded ratio: 82%

Wtg Avg EROA:7.38%

# of companies: 35


Wtg Avg EROA:7.46%

# of companies: 62


Wtg Avg EROA:7.09%

# of companies: 86


Wtg Avg EROA:6.84%

# of companies: 100

> $10bn

FixedIncome

43%

Alts/Real Estate/Other

22% Equity35%

$3bn - $10bn

Equity41%

FixedIncome

38%


21%

$1bn - $3bn

Equity45%Fixed

Income44%


11%

$100mm - $1bn

Equity48%Fixed

Income43%


9%

18

Reviewing potential tools in the pension risk management toolbox:

Liability Management Corporate Finance

Source: Goldman Sachs Asset Management; as of April 2016.

Potential Tool Description Potential applicability may include, e.g.

ASSET ALLOCATION

Implement Glide Path Adjust asset allocation as funded status Plans that want to adjust asset allocation dynamicallychanges. and seek to ensure that improvements to funded

levels are locked in through better asset/liability management.

Extend Duration of Shift current fixed allocations away from May be a first step in a de-risking program. May beFixed Income Barclays Agg-type exposure to longer- helpful for plans that are notably underhedged interest

term benchmarks like Barclays Long rate risk.Gov/Credit.

Increase Allocation Reduce allocations to equities and other After extending duration of existing allocations, plansto Fixed Income return seeking assets in favor of liability may seek to increase the actual allocation to

hedging fixed income. physical long-duration bonds.

Diversify Away from Reduce allocations to equities in favor of Underfunded and/or open plans that still need Equity Beta alternative asset classes as well as other returns but which would like to reduce drawdown

means of sourcing growth. risk.

Annuity Buy-In Buying an annuity held within plan. May be a first step for plans, including those whoultimately transfer some obligations to an insurancecompany through the purchase of a group annuitycontract.

Super Majority Employ an asset allocation consisting May have the effect of linking performance of theBond Allocation almost entirely of fixed income. company's stock to its own operations (not the

equity values of other companies).

Rebalancing Risk management exercise designed to A typical practice for institutional investors.keep actual portfolio weights in line withstrategic targets.

19

Reviewing potential tools in the pension risk management toolbox:

Liability Management Corporate Finance



HEDGING POLICIES

Overlay & Leverage Interest rate swaps and other forms of Plans that want to hedge interest rate risk butleverage to extend duration and increase the also want to preserve return seeking assets.plan's hedge ratio.

Custom Liability Shift fixed income benchmark from As funded status and the allocation to fixed income Benchmark publicly available benchmarks to one rises, shifting to such a benchmark can potentially

based on the plan's liability cash flows. increase the efficacy of the LDI program.

Completion Engage a fixed income manager to Can potentially increase liability hedging efficacyManager complete differences between all long and LDI accountability.

duration manager positions and the custom liability benchmark.

Longevity Transfer the risk of participants living Plans concerned about potential adverse actuarial Swap longer than expected to a third party. experience.

Long Corporate, Buy long corporate bonds and hedge Plans waiting for higher interest rates levels to hedgeDuration Hedged the interest rate risk using overlays. the interest rate risk but may want to purchase

corporate bonds before potential scarcity valueincreases, or find level of credit spreads attractive.

FIDUCIARY MANAGEMENT

Strategic Partnership Engage an external manager to advise Sponsors that may be resource constrainedthe plan and execute the investment and who are looking for a strategic partnermanagement strategy, including to help them through the various stages of helping with many of the tools noted their plan's life cycle.elsewhere such as liability hedging and preparing for risk transfer.

20

Reviewing potential tools in the pension risk management toolbox:Asset Management Corporate Finance



PLAN DESIGN

Close/Freeze Plan New hires do not enter the DB plan Plans that wish to slow the growth of the grossand/or new accruals cease for pension obligation.employees (new or existing).

Switch to Cash Change benefit accrual formula from one Sponsors that want to maintain a DB plan but Balance Formula based on final pay to one where accruals may view a cash balance formula as being

are based on crediting and interest rates less volatile and portable for the participant.and the value to the participant is expressedas a notional account balance.

RISK TRANSFER

Lump sum window Offer TV participants a one-time option Sponsors looking to reduce PBGC flat rate premiums for terminated vested (TV) to replace their lifetime pension annuity as well as those looking to reduce the gross sizeparticipants with a payment representing the of the pension liability. May be most applicable

present value of future pension payments. for plans with a large number of TV participants with small balances.

Annuitization of Purchase a group annuity contract for Sponsors looking to reduce PBGC flat rate premiums Retired Participants retired participants to transfer the risk as well as those looking to reduce the gross size

to a third party insurance company. of the pension liability. May be most applicable forplans with a high percentage of obligations residingin the retiree cohort.

21

Reviewing potential tools in the pension risk management toolbox:Asset Management Liability Management



CONTRIBUTION STRATEGIES

Revisit Existing Policy Consideration of a policy that is focused Plans looking to minimize costs by linking on reducing PBGC variable rate premiums. contribution policy to PBGC premiums.

Borrow to Fund Issue debt, contribute proceeds and Strategy that takes into account low interest ratesallocate the contribution to long duration while at the same time increasing funded levelsfixed income to increase the hedge given to reduce PBGC variable rate premiums.the higher funded status.

In-kind Contribution Contribute in-kind to plan subject to Increase funded levels to, among other things,regulatory constraints. reduce PBGC variable rate premiums.

FINANCIAL REPORTING

Mark to Market Adjust reporting whereby gains and losses Sponsors who would like to simplify the accounting, Accounting on plan assets and liabilities are recognized potentially make its reporting more comparable to

in full in the year when they are generated. peers, and align financial reporting with de-riskingstrategies. In the current environment, it also mayreduce or eliminate ongoing amortization expenses.

Pro Forma Rather than adjust actual GAAP accounting, Similar to companies that want to simplify the Accounting back out certain pension-related expenses reporting but without changing actual GAAP

from GAAP earnings to derive an adjusted accounting policies.EPS figure.

Spot Rate Method A more granular approach to calculating No change to plan economics, but generally mayfor Discount Rate the discount rate used to value service and lower recognized GAAP pension expense.

interest cost.

22

Disclosures

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.

THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.

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.

This material is provided at your request for informational purposes only. It is not an offer or solicitation to buy or sell any securities.

Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.

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.

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.

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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.

© 2016 Goldman Sachs. All rights reserved.

23

Disclosures

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 a product of Goldman Sachs Global Investment 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

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

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.

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Documents

Presentation to CIEBA: Trends in 2015 Pension Fund Data Webinar-Trends in 2015... · Trends in 2015 Pension Fund Data ... company reports; analysis based upon the US plans ... Ticker