ldi benchmark construction rebrand - p&i events€¦ · benchmark to alternatives both to...

LDI Benchmark ConstructionBy: Jeffrey Passmore, CFA, EA, FSA

Senior Liability Strategist, LDI Strategies

August 2013

Executive SummaryAt Standish, we use separately managed accounts and customized benchmarks to implement LDI strategies1 on behalf of our clients. Across our client base2, we use three types of benchmarks: market indices, custom LDI benchmarks and liability benchmarks. Each type has advantages and we often recommend an evolution as our clients’ plans become better funded and seek tighter liability hedges.

Our benchmark recommendations are made in concert with any consultant recommendations; e.g. we will often start with a glidepath developed by our client’s investment consultant and supplement the liability benchmarks recommended in that glidepath or create benchmarks that match the risk metrics built into the glidepath. Our in-house pension investment actuaries follow a process that starts with a clear understanding of the plan liabilities and plan sponsor risk/return objectives and constraints. Our actuaries also monitor the effectiveness of the benchmark and provide monthly reporting using proprietary risk metrics. Finally, we conduct an annual reevaluation of the benchmark and make recommendations for changes when appropriate.

1We have included a graphic overview of our LDI investment process in the Appendix together with a page to describe how the Strategy Setting fits into the overall process.

2As of December 31, 2012 we had 39 LDI clients with more than $12.6B in assets.

GoalsThe goal of our benchmark setting process is to provide a benchmark that will:

• capture our client’s risk/return preferences and characteristics of the plan liabilities,

• facilitate communication between Standish and our LDI clients regarding risk tolerance and return expectations,

• be used to evaluate our investment performance,

• provide our portfolio managers a reference for investment decisions, and

• be practical and functional.

Benchmark recommendations must balance these goals; e.g. liability based benchmarks offer the tightest liability correlations and smallest tracking error, but are not practical in all situations as they are not available daily, nor widely available.

ProcessOur process begins with an understanding of our client’s risk/return objectives and constraints. In those cases where our client works with an investment consultant, these objectives and constraints are often already quantifi ed within a glidepath. Where this is not the case, we can help our clients quantify these in a glidepath.

We also develop a clear understanding of the liabilities. To accomplish this, we request benefi t projections from the plan actuary. We typically tailor our request for projected benefi ts based on our understanding of the client’s goals. For example, if our client wishes to minimize accounting P&L and balance sheet volatility, we will usually request projected benefi t obligation (PBO) cash fl ows. When our client wants to fund future service accruals with future contributions and use plan assets to defease accrued benefi ts, we will request target liability (ERISA TL) cash fl ows or in some cases we fi nd that accumulated benefi t obligation (ABO) cash fl ows are acceptable.

In addition to benefi t projections, we request a copy of the most recent actuarial valuations so that we can understand the benefi ts as they are being valued, looking in particular for embedded options or other features that might create liability volatility. These can include interest crediting minimums in cash balance plans or lump sum features with preserved minimum bases different than Internal Revenue Code Section 417(e) assumptions.

We use a combination of proprietary tools and third party software to develop a benchmark that has a high correlation to the liabilities and a low liability tracking error. We calculate these using both back testing (using 240 historical monthly returns) and mean-variance analysis using our forward looking capital market assumptions.3

-20%

-10%

0%

10%

20%

30%

40%

50%

Retu

rn

ABC Model Retirement Plan LiabilityBC Aggregate Fixed Income

Correlation = 0.84

Tracking Error = 8.1%Current Allocation 100% Barclays Aggregate

ABC Model Retirement 70% Barclays U.S. Long Corporate 30% Barclays U.S. Long Government

-20%

-10%

0%

10%

20%

30%

40%

50%

Retu

rn

ABC Model Retirement Plan Liability

70% BC Long Corporate / 30% BC Long Government Fixed Income

Correlation = 0.95

Tracking Error = 3.7%

Based on 20 years of monthly index returns through September 2012. Past performance is no guarantee of future results. The returns on the ABC Model Retirement Plan Liability are based on movements in Aa corporate bond yields with similar duration to the liability. Please see disclosures in Appendix. Source: Standish, Barclays

Rolling 12 Month Asset & Liability Returns

Once we have a preliminary recommended benchmark (or series of benchmarks as is sometimes the case with glidepaths) we then calculate the asset-liability surplus return and funded status volatility.

We also perform a fi ve-year Monte Carlo simulation that uses 2000 economically consistent projections to calculate a stochastic distribution of results for fi ve-year cumulative cash contributions, P&L pension expense by year and funded status by year. We use these to compare our recommended benchmark to alternatives both to ensure we have developed the optimal benchmark and to create tables and graphs that help us explain our recommended benchmark compared to alternatives.

3 We can use alternative capital market assumptions when that is appropriate, e.g. when our client has worked with a consultant to develop a glidepath and prefers that our work use consistent capital market assumptions.

Forecast of Five-Year Cumulative Contributions Future Contributions: Minimum required contributions under Pension Protection Act of 2006

Note: The performance listed above is a forecast based upon simulations and is not the result of actual trading, nor is it based on actual historical performance. Percentiles are the results of stochastic (probabilistic) forecasts which take into account 2,000 sets of economic results for different pension plan metrics. The bar graphs represent a forecast of five year cumulative contributions. Please see Disclosures in Appendix.

.0

68.1

194.6

430.8

800.3

15.9

116.9

243.3

430.5

695.7

85.0

223.3

333.9

456.6

639.0

100

200

300

400

500

600

700

800

900

Best Case (95th) 75th Percentile Expected (50th) 25th Percentile Worst Case (5th)

$ in

Mill

ions

Phase 1 (50% / 40% / 10%)

Phase 3 (25% / 70% / 5%)

Phase 5 (0% / 100% / 0%)

Forecast of Pension Expense / (Income) Future Contributions: Minimum required contributions under Pension Protection Act of 2006

Note: The information listed above is a forecast based upon simulations and is not the result of actual trading, nor is it based on actual historical performance. Percentiles are the results of stochastic (probabilistic) forecasts which take into account 2,000 sets of economic results for different pension plan metrics. Pension (income) is shown as a negative number because the basic calculation of pension expense is viewed from the perspective of expenses being positive, offset by income items (negatives). Please see Disclosures in Appendix.

Phase 1 (50% / 40% / 10%) Phase 3 (25% / 70% / 5%) Phase 5 (0% / 100% / 0%)

$ in Millions $ in Millions $ in Millions

Scenario 2014 2015 2016 2017 2018 Scenario 2014 2015 2016 2017 2018 Scenario 2014 2015 2016 2017 2018

Best Case (95th) -75.1 -104.4 -127.2 -146.8 -168.2 Best Case (95th) -27.4 -43.0 -54.9 -64.6 -72.5 Best Case (95th) 17.4 4.5 -3.2 -9.9 -15.3

75th Percentile -46.8 -59.3 -66.8 -73.8 -81.5 75th Percentile -8.6 -13.7 -17.7 -20.2 -22.1 75th Percentile 34.3 31.8 31.5 30.3 29.9

Expected (50th) -30.6 -33.1 -34.0 -34.8 -34.6 Expected (50th) 2.6 2.2 3.0 4.3 5.5 Expected (50th) 44.7 46.8 47.9 50.2 50.9

25th Percentile -14.9 -9.5 -4.1 2.1 3.8 25th Percentile 12.6 16.6 20.7 24.9 28.0 25th Percentile 53.2 57.6 59.8 61.9 62.5

Worst Case (5th) 9.4 25.8 38.1 47.5 56.6 Worst Case (5th) 27.0 37.6 43.7 49.8 58.1 Worst Case (5th) 63.6 69.3 72.8 73.6 75.8

-$200

-$150

-$100

-$50

$0

$50

$100

2014 2015 2016 2017 2018-$200

-$150

-$100

-$50

$0

$50

$100

2014 2015 2016 2017 2018

-$200

-$150

-$100

-$50

$0

$50

$100

2014 2015 2016 2017 2018

We summarize our recommendations in a PowerPoint presentation and present these to our client and when appropriate to their consultants. Based on this presentation, from time to time we will perform additional analysis and revise our recommendations based on client/consultant requests. This does not happen often, but we are pleased to do this additional analysis when it is requested or if there is an opportunity to improve our recommendations. Once fi nalized, we manage the portfolio against this benchmark and report our performance relative to it in our monthly client LDI reports.

From time to time we will also recommend a secondary benchmark. For example, when using a liability benchmark that is only available monthly, we will often recommend a secondary benchmark that is available daily and a close proxy to the liability benchmark. When we have a secondary benchmark, we include this in our portfolio management and monthly client LDI reports.

ObservationsOur approach to managing long duration portfolios has evolved to meet the needs of our clients and the changing fi nancial and pension regulatory landscape. For example, although we have had clients using our long duration corporate bond strategies since the 1980’s, our approach to LDI evolved from a total return approach to a liability tracking (i.e. hedging) approach shortly after the enactment of the Pension Protection Act and adoption of FAS 158.

Phase 1 (50% / 40% / 10%) Phase 3 (25% / 70% / 5%) Phase 5 (0% / 100% / 0%)

Scenario 2013 2014 2015 2016 2017 2018 Scenario 2013 2014 2015 2016 2017 2018 Scenario 2013 2014 2015 2016 2017 2018

Best Case (95th) 80% 110% 127% 143% 163% 189% Best Case (95th) 80% 99% 110% 119% 128% 139% Best Case (95th) 80% 91% 97% 101% 105% 110%

75th Percentile 80% 93% 102% 112% 120% 133% 75th Percentile 80% 89% 95% 101% 106% 112% 75th Percentile 80% 85% 89% 92% 95% 99%

Expected (50th) 80% 85% 90% 95% 101% 106% Expected (50th) 80% 84% 87% 91% 95% 99% Expected (50th) 80% 82% 85% 87% 90% 93%

25th Percentile 80% 78% 79% 82% 86% 89% 25th Percentile 80% 79% 81% 83% 86% 89% 25th Percentile 80% 80% 81% 83% 85% 87%

Worst Case (5th) 80% 68% 66% 67% 68% 70% Worst Case (5th) 80% 73% 73% 74% 75% 77% Worst Case (5th) 80% 76% 77% 78% 79% 81%

60%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

190%

2013 2014 2015 2016 2017 201860%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

190%

2013 2014 2015 2016 2017 201860%

70%

80%

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

190%

2013 2014 2015 2016 2017 2018

Note: The performance listed above is a forecast based upon simulations and is not the result of actual trading, nor is it based on actual historical performance. Percentiles are the results of stochastic (probabilistic) forecasts which take into account 2,000 sets of economic results for different pension plan metrics. Please see Disclosures in Appendix.

Fund

ed S

tatu

s R

atio

Forecast of Funded Status Ratio Future Contributions: Minimum required contributions under Pension Protection Act of 2006

Having worked with a number of clients over this period of time, we have accumulated experience which permits some observations. It is important to note that each observation while generally true, has important exceptions. Further, although we have experience with and opinions on these issues that we like to share to benefi t our clients, we pride ourselves in our customized approach and will deviate from these general approaches when the situation dictates.

• A corporate bond benchmark tends to be a better LDI benchmark than a credit bond benchmark for reasons of liability tracking, convexity, performance during periods of economic stress and liquidity.

• A customized LDI benchmark that is 70% Barclays Long Corporate and 30% Barclays Long Government is often the best fi t for clients with a funded ratio between 80% and 90% and a relatively high allocation to return seeking assets. This combination has signifi cant practical benefi ts and good liability tracking characteristics.

• We are seeing a trend in our client base towards the use of derivatives to hedge pension liabilities effi ciently; in particular for large plans with multiple LDI managers.

• We are seeing a trend towards expressing an explicit view regarding interest rates either in two dimensional glide paths or in tactical execution of a low interest rate hedge; we have strategies to help our clients in this regard.

.

Total return approach to long duration Impacted by lack of liquidity in ‘08/’09

Defensive positioning in early ‘09

Source: Standish as of June 30, 2013. Performance attribution data is to be considered supplemental information to the attached GIPS compliant composite presentation found in the Appendix.

Hedging approach post financial crisis ● Tracking error reduced

● Evolution of combining top-down and bottom-up capabilities

Quarterly Attribution U.S. Long Duration Corporate Composite vs. Barclays U.S. Long Corporate Index Performance Attribution for US Long Duration Corporate Composite

-4

3213

22

-23

41

119

141

-51

309

-136

131

-285

-31

-23

2837 44

-38

22 6

-44

55

36 25 33 47 48

-24

-350

-300

-250

-200

-150

-100

-50

0

50

100

150

200

250

300

350

400

Q2'06

Q3'06

Q4'06

Q1'07

Q2'07

Q3'07

Q4'07

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

Q3'10

Q4'10

Q1'11

Q2'11

Q3'11

Q4'11

Q1'12

Q2'12

Q3'12

Q4'12

Q1'13

Q2'13

Bas

is p

oint

s

Sector Allocation Security Selection Yield Curve Other

• We are seeing a trend towards explicit consideration of the pension endgame from both our existing clients and prospective clients. We are helping our clients in this regard by working with them and their consultants for example by having portfolios that are accepted in-kind by pension annuity insurers and by offering approaches to help “lock down” funded status volatility in borrow to fund/derisk situations.

• We are seeing a trend towards custom liability benchmarks both from clients and from consultants. For example we are in discussions with an actuarial consulting fi rm to track their yield curve methodology within our portfolio management systems to be able to provide daily tracking to the liability benchmark.

Monitoring and Re-evaluationWe believe that LDI best practice is to monitor funded status and asset-liability risk metrics periodically and to reevaluate LDI portfolio benchmarks annually and whenever there is a signifi cant event affecting the plan or plan sponsor.

For this purpose we have developed three proprietary risk metrics.

For many of our LDI clients, we provide monthly or quarterly reporting. For this purpose we have developed a fi ve-page report that we believe is both concise and complete. The fi rst page is a dashboard of the plan’s funded status with some historical context. We show funded status using two measures of the liability. We have signifi cant fl exibility regarding the approaches to discounting the pension benefi ts (i.e. liability measures) we use. In the past, these measures have included PPA Segment rates, PPA Spot Rates, BNY Mellon AA yield curve, Citigroup pension liability discount curve and our clients’ customized curves.

Unhedged (0% Hedge)

Partial Hedge (50% Hedge)

Full Hedge (100% Hedge)

Note: The capital market assumptions are Standish’s estimates based on historical performance and the current market environment. We do not present the capital market assumptions as actual or guaranteed future performance.

Unhedged (0% Hedge)



Unhedged (0% Hedge)



14%

(based on Aa Corporate curve)

Interest Rate Risk Hedged

14%

Asset Duration

Liability Duration

Funded Statusx

xyears

2.2 years

12.580%

6%

Quality Risk Hedged


6%

% FI x FI Duration x FI Spread

DurationL x Liability Spread

Funded Statusx

xx x

x

40% 5.5 61

12.5 13480%

13%

Yield Curve Risk Hedged


13%

0.00.51.01.52.02.53.03.54.04.55.0

6 Mo 2 Yr 5 Yr 10 Yr 20 Yr 30 Yr

Cont

ribut

ion

to D

urat

ion

(yea

rs)

Liabilities Assets

Rising Rates Hedge Spread Widening Hedge Yield Curve Twist/Tilt Hedge

We also show risk metrics (to track progress against goals) and asset/liability returns.

The model pension plan information presented is supplemental to a GIPS-compliant presentation found in the Appendix. A complete list and description of Standish’s composites is available upon request. Past performance is no guarantee of future results. Report given as sample of process only. Please see disclosures in Appendix.

2.75%3,356.1

70.0%

Source: Standish, Plan Custodian

Source: Standish

Source: Plan Custodian

ABC Model Retirement PlanAsset and Liability Report for the period ending June 30, 2013

Funded Status

6/30/2013 12/31/2012 YTD change

4.72%

Market Value of Assets ($m)

AA Corporate Liabilities ($m)AA Corporate Discount Rate

-296.70.79%

Strategic Asset Allocation

42.9

80.0%

2,000.0 1,957.1

2,500.0 2,796.73.93%

58.3%

Funded Status History

3.38%3,031.8

Discount Rate History (%)

Source: Standish

10.0%

-324.30.63%

7.7%

Treasury Liabilities ($m)Treasury Discount Rate

AA Corporate Funded Status

Treasury Funded Status 66.0%

4.03 3.68 3.76 3.82 3.76 3.80 3.93 4.17 4.09 4.13 3.874.34 4.72

2.64 2.46 2.53 2.67 2.68 2.61 2.75 3.00 2.93 2.94 2.71 3.14 3.38

Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

AA Corporate Treasury

69% 66% 68% 69% 68% 68% 70% 74% 74% 75% 74% 78% 80%

56% 54% 56% 58% 57% 57% 58% 62% 62% 63% 62% 65% 66%

Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

AA Corporate Treasury

US Large Cap Equity

15%

US Mid Cap Equity10%

US Small Cap Equity

5%

International Equity15%

Emerging Equity

5%

Core Fixed40%

Hedge Funds

5%

REIT5%

NominalDiscounted

Based on plan actuary cash f lows as of 12/31/2012

Interest Rate Risk Hedged

Quality Risk Hedged

Yield Curve Risk Hedged

Asset and Liability Duration

Source: Standish

Key Rate Durations

Liability Cash Flows ($)

Source: Standish Source: Standish

Liability Hedge Ratios (AA Corporate basis)

Source: Standish, Plan Actuary

Asset and Liability Report for the period ending June 30, 2013

ABC Model Retirement Plan

13%0% 100%

6%0% 100%

14%0% 100%

2.2

12.5

5.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Assets Liabilities (AA Corporate) Fixed Income

Dur

atio

n (y

ears

)

2012 2022 2032 2042 2052 2062

NominalDiscounted (AA Corporate)

0.00.51.01.52.02.53.03.54.04.55.0

6 Mo 2 Yr 5 Yr 10 Yr 20 Yr 30 Yr

Cont

ribut

ion

to D

urat

ion

(yea

rs)

Liabilities Assets

-8.0%YTD

5.1%

Source: Standish

10.7% -5.6%

-8.7%

Liabilities

Asset and Liability Returns (AA Corporate)

Asset and Liability Returns (Treasury)

The chart above shows the cumulative asset and liability returns of the Plan using the AA Corporate term structure for the liabilities.

Liabilities

-7.0%

-2.0%

-3.3%

1 Year

-0.8% -5.8%

-8.5%

-4.8%


YTD

1 Year

Source: Standish

Source: Standish

Assets

Jun 2013

3 month

Source: Standish

10.7%

Jun 2013 -2.0%

5.1%

3 month

The chart above shows the cumulative asset and liability returns of the Plan using the Treasury term structure for the liabilities.

Assets

-0.8%

-10%

-5%

0%

5%

10%

15%

Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13

Cum

ulat

ive

Retu

rns

AssetsAA Corporate Liability

-10%

-5%

0%

5%

10%

15%

Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13

Cum

ulat

ive

Retu

rns

AssetsTreasury Liability

We also include a projection page showing how funded status will improve under a set of assumptions and heat charts showing the impact on funded status of changes in discount rates and return seeking assets. The fi nal page of the report is a glossary that includes terms used in the report.

The model pension plan information presented is supplemental to a GIPS-compliant presentation found in the Appendix. A complete list and description of Standish’s composites is available upon request. Past performance is no guarantee of future results. Report given as sample of process only. Please see disclosures in Appendix.

2

94.9% 10%

100.4%

70.6% 108.4%

114.8%

Equi

ty /

Alte

rnat

ive

Retu

rn

95.6%

-20%

83.9%

10%

20% 74.5% 81.2%

84.8%

102.0%

55.5% 62.0%

73.9%

56.6% 62.4% 69.9%

82.8%

-100

89.2%

70.7%

Ten-Year Funded Status Forecast

63.0%

66.0%

58.1%

-20%64.1% 70.4%

Normal cost assumption: 0.0% of AA Corporate liability

80.0% 89.4%

$ 56.3

Source: Standish

-10%

59.1%

Equi

ty /

Alte

rnat

ive

Retu

rn

76.9%

89.6%

0%

68.4% 75.2%

78.5%

72.7%

52.0%

+200

66.8%

2015

79.9% 93.9%

20% 59.7% 65.9%

66.1%

99.5%

47.4%

88.4%

77.3%

75.3%0% 53.5% 59.0%

-10% 50.5%

84.5%

-200

Funded Status Sensitivity Analysis

Source: Standish

+100

Change in AA Corporate Discount Rate (bps)

0

Change in Treasury Discount Rate (bps)

-200 0

2017

2014

+100 +200

Forecast Assumptions


$ 46.2

2018-2022

$ 36.0

$ 0.0

2016

$ 66.2

2013 $ 75.8

Forecast AssumptionsEstimated Contributions (mil)

-100

80%85%

90%95%

99%104%

108%112%

117%123%

66%70%

75%79%

83%88%

91%95%

99%103%

50%

60%

70%

80%

90%

100%

110%

120%

130%

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

AA Corporate Funded StatusTreasury Funded Status

- Liability expected return based onBNY Mellon assumptions (reflects increasing interest rates)

- Normal cost remains a constant percentage of liabilities

- If not provided by sponsor, estimated contributions equal normal cost plus seven year amortization of unfunded liability

- Contributions paid at year-end

- Expected portfolio return based onBNY Mellon assumptions

- Asset return and discount ratechanges occur instantaneously

- Colors indicate severity of fundedstatus change (darker colors implya larger change)

- Fixed income assets and plan liabilities change based onduration

Glossary and Disclosures

Asset and Liability Report for the period ending June 30, 2013

ABC Model Retirement Plan

Market Value of Assets is from the Plan's custodial reports.

Present Value of Liabilities is calculated from the most recent benefit payment projection of liabilities, discounted using the appropriate term structure(see below). It is intended to be a reasonable proxy for the market value of the Plan's liabilities. Includes accrual of year-to-date expected normal (service) cost to ensure month-to-month consistency.

Term Structures for Aa Corporate and US Treasury bonds are fitted to actual bond yields as of month-end, using Barclays Capital data and BNY Mellon internal research. These term structures are used to calculate the discount rates and net present values of projected benefit liability streams.

Aa Corporate Basis Liabilities is the amount that could be reported on financial statements and for funding purposes using methods prescribed by the Financial Accounting Standards Board and the Pension Protection Act of 2006. It is estimated by discounting the liabilities at a fitted Aa Corporate spot curve.

Treasury Basis Liabilities is the fair market expected cost of transferring the liabilities to an annuity provider. It is estimated by discounting the liabilities at a fitted US Treasury spot curve.

PPA Segment Rate Liabilities are based on the IRS provided 24-month smoothed PPA segment rates. These rates are used to determine liabilities for funding purposes.

PPA Full Yield Curve Liabilities are based on the IRS provided PPA yield curve. The PPA yield curve approximates a market curve, but includes 30-day averaging.

Funded Status is the ratio of Market Value of Assets to the Present Value of Liabilities. It is an important measure of funding sufficiency.

Internal Rate of Return is the single discount rate that is equivalent to discounting at the term structure. IRR can be considered a form of "weighted average" discount rate, where the weights are the present values of projected benefit payments.

Asset Duration combines the effective duration of the bond-only portfolios with the estimated sensitivity of non-bond assets to changes in interest rates, using BNY Mellon capital market assumptions.

Liability Duration is the modified duration of the liability streams using the appropriate term structure.

Interest Rate Risk Hedged is the proportion of the liability interest rate risk that is hedged by the Plan assets. The hedging percentage depends on the durations of assets and liabilities as well as the Funded Status.

Quality Risk Hedged is the proportion of liability risk due to changes in corporate spreads that is hedged by the Plan assets. The hedging percentage depends on the durations of fixed income and liabilities, quality risk of fixed income and liabilities, the fixed income allocation and Funded Status.

Yield Curve Risk Hedged is the proportion of liability risk due to non-parallel shifts in the yield curve. The hedging percentage depends on the key rate durations of the fixed income portfolio and liabilities, as well as the funded status.

Disclaimer: The information contained in this report is based on certain assumptions and models which are created and maintained by The Bank of New York Mellon Corporation. It is not intended to be a substitute for an actuarial valuation, nor is it warranted to be in full compliance with existing regulations or accounting standards. The information provided should not be construed as an official record.

AppendixStandish LDI Investment Process

Standish LDI Investment Process: Strategy Specifi cation

Strategy Specification Liability Analysis

Benchmark Selection: Market or

Custom Liability

Tracking Error Volatility & Alpha

Target

Market Forecasting

Standish’s 35 Proprietary

Econometric Models

Economic Outlook: Construct Scenarios

& Fair Value

Credit Cycle Evaluation

Asset Allocation Relative Valuation Duration/Yield Curve Geography/Other

Industry Weights Mean Variance Analysis Quantitative ranking Qualitative

Assessment

Security Selection Fundamental Analysis

Proprietary Ratings & Credit Trend Model Portfolio

Portfolio Construction

Allocate Risk Budget

Set Key Risk Factors

Exploit Idiosyncratic Risk

Risk Management Portfolio

Performance Attribution

Sources of TEV Rebalancing & Sell Discipline

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.

Desired funded status Asset role in closing funded status gap Value (utility) of surplus assets

Desired funded status

Understanding of Risk/Return Investment Objectives

Back testing Asset Liability Stochastic Modeling Scenario and Stress Testing Deterministic (Best Estimate) forecasts

Back testingB k t ti

Economic Modeling of Liabilities and Hedging Assets

Glidepath development (if dynamic) Reserve/Surplus Strategy Development Time, funded status and market based approaches

Glid th d l t (if d

Strategy Development Reflecting Surplus Utility

Market or Custom Liability based benchmarks Pros/cons presented Tracking error estimated

M k t C t Li bilitk i bili

Benchmark Construction and Validation

Monthly or Quarterly funded status Liability and Asset Returns Proprietary Risk Indices tracked Projections/”What If?” calculations

hl Q l f d dhl l f d d

Measurement and Reporting for Plan

Interest Rate Sensitivity Duration, convexity, and embedded options

Liability Cash Flow Projection

Annual Remeasurement and Reevaluation

Key rate duration focus

Mix of corporate and government bonds

AA average quality while using full credit spectrum

Can exploit liquid parts of corporate bond curve

ABC Model Composition of Standish Custom LDI Bond Portfolio

30% Treasuries to match liability quality and duration

70% of portfolio are stable to improving corporate credits

This information is not provided as a sales or advertising communication. It does not constitute investment advice. It is not an offer to sell or a solicitation of an offer to buy any security. Past performance is not an indication of future performance. This information is not intended to provide specific advice, recommendations or projected returns of any particular Standish product. Some information contained herein has been obtained from third party sources and has not been verified by Standish Mellon Asset Management Company LLC. Standish makes no representations as to the accuracy or the completeness of any of the information herein. Views expressed are subject to change rapidly as market and economic conditions dictate. Portfolio composition is also subject to change.The Barclays U.S. Aggregate Bond Index is an unmanaged index considered representative of the U.S. Investment-grade, fixed-rate bond market.Barclays US Long Corporate Index, which is a subset of the broader Barclays US Long Credit Index, is representative of publicly issued, investment-grade, fixed rate, dollar-denominated, non-convertible, US corporate debt securities that have at least $250 million par amount outstanding and an average maturity greater than 10 years. To qualify, bonds must be registered with the U.S. Securities and Exchange Commission (SEC).The Trade Reporting and Compliance Engine® (TRACE®) is the FINRA developed vehicle that facilitates the mandatory reporting of over the counter secondary market transactions in eligible fixed income securities. All broker/dealers who are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE under an SEC approved set of rules.The strategy may use alternative investment techniques (such as derivatives) which carry additional risks. The low initial margin deposits normally required to establish a position in such instruments may permit a high degree of leverage. As a result, a relatively small movement in the price of a contract may result in a profit or loss that is high in proportion to the amount of funds actually placed as initial margin and may result in a disproportionate loss exceeding any margin deposited. Transactions in over-the-counter derivatives may involve additional risk as there is no exchange on which to close out a position, only the original counterparty. Such transactions may therefore be difficult to liquidate, to value, or to assess the exposure. The strategy may at times use certain types of investment derivatives, such as options, futures, forwards and swaps. These instruments involve risks different from, and in certain cases, greater than, the risks presented by more traditional investments. Hypothetical performance reflects performance an investor would have obtained had it invested in the manner shown and does not represent returns that any investor actually attained. The information presented is based upon the described hypothetical assumptions. Certain of the assumptions have been made for modeling purposes and are unlikely to be realized. No representation or warranty is made as to the reasonableness of the assumptions made or that all assumptions used in achieving the returns have been stated or fully considered. Changes in the assumptions may have a material impact on the hypothetical returns presented. Standish uses the various models presented as tools in implementing the LDI framework, but the management of a particular plan may be different than the models used to present the hypothetical backtested performance. These differences include the current status of the plan with respect to assets and liabilities, the particular plan structure, and other factors. Standish cannot assure that the hypothetical backtested performance results would be similar to what Standish’s experience would have been had it actually been managing accounts in this manner for the period presented. Standish believes that the backtested performance shown is reasonably representative of its implementation of the LDI framework and is sufficiently relevant for consideration

U.S. Long Duration Composite

Composite performance started on July 1,1993; 1Composite contained 5 or fewer Portfolios;2Please note that from September 2003 to June 2005, Standish provided non-discretionary investment management advisory services for approximately $100 billion in securities lending collateral; 3Internal Asset Weighted Standard Deviation. Only includes accounts which were in composite for entire calculation period. Composite Dispersion figures for years containing 5 or fewer Portfolios are considered Not Meaningful or "N/M".

The U.S. Long Duration composite measures the total return of all fee-paying, discretionary,fixed income portfolios that are actively managed against broad, multi-sector indices such asthe Barclays Long Government/Credit Index. Minimum portfolio size for inclusion is $25million. Prior to January 1, 2009 the composite was called Long Duration. Portfolios mayinvest in sectors outside of the index which may involve higher risk and tracking errorrelative to the benchmark. The frequent use of derivatives (futures, options, forwards, shortpositions and other derivatives) is a significant characteristic of this investment strategy.Derivatives are used to create long and short positions, as well as to manage risk. Thecomposite was created on May 16, 2003. No portfolio with the same objectives, preferences,or constraints has been excluded unless it has not been under management for more thanone full measurement period or does not meet the minimum asset size. Results are based onfully discretionary accounts under management, including those accounts no longer with thefirm. Non-fee-paying portfolios are not included in this composite. The performance of thecomposite is expressed in U.S. Dollars. The firm maintains a complete list and description ofcomposites, which is available upon request.

The Firm is defined as Standish Mellon Asset Management Company LLC ("Standish"), aregistered investment advisor and wholly owned subsidiary of The Bank of New York MellonCorporation. The Firm also includes assets managed by Standish personnel acting as dualofficers of The Dreyfus Corporation and The Bank of New York Mellon, which are othersubsidiaries of The Bank of New York Mellon Corporation as well as assets managed byAlcentra NY, LLC personnel acting as dual officers of Standish.

4 Effective January 1, 2013, certain cash and stable value assets previously managed by BNYMellon Cash Investment Strategies, a division of The Dreyfus Corporation were transferred toStandish. Effective January 1, 2009, Standish assigned investment management capabilitiesfor clients of short duration, index and stable value strategies to The Dreyfus Corporation.Effective July 1, 2003, Standish, Mellon Bond Associates, and Certus Asset Advisors, all whollyowned subsidiaries of Mellon Financial Corporation, combined to form Standish MellonAsset Management Company LLC.

This composite’s benchmark is the Barclays Long Government/Credit Index. The BarclaysLong Government/Credit Index is comprised of dollar denominated, investment grade ratedcorporate and government bonds with at least $250 million par amount outstanding, amaturity of ten years or more and at least one year to final maturity. Through August 31,2008 the composite’s secondary benchmark was the Barclays Aggregate Index. Somecomposite participants may be measured against a client mandated benchmark differentfrom the composite benchmark. This has no impact on the implementation of theinvestment strategy. Composite participants are using a different pricing vendor than thecomposite's benchmark.

The standard management fee for this style is: 0.30% of assets on the first $50 million,0.25% of assets on the next $50 million, 0.20% of assets thereafter. Standish's standard feesare shown in Part 2A of its Form ADV. For historical fees, please contact Standish. Net resultsreflect the corresponding historical fee schedule for each measurement period, actual resultsmay vary for each individual portfolio.

Standish Mellon Asset Management Company LLC claims compliance with the GlobalInvestment Performance Standards (GIPS®) and has prepared and presented this report incompliance with the GIPS standards. Standish Mellon Asset Management Company LLC hasbeen independently verified for the periods January 1, 1994 through December 31, 2011.The verification reports are available upon request. Verification assesses whether (1) the firmhas complied with all the composite construction requirements of the GIPS standards on afirm-wide basis and (2) the firm’s policies and procedures are designed to calculate andpresent performance in compliance with the GIPS standards. Verification does not ensure theaccuracy of any specific composite presentation. The CFA Institute has not been involvedwith the preparation or review of this report. Gross performance figures are time-weightedrates of return, which include the deduction of transaction costs. Both gross and netperformance returns include the reinvestment of dividends and other distributions. Pastperformance is not an indication of future performance. Additional information regardingpolicies and procedures for calculating and reporting returns is available upon request.

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003Asset-weighted Gross 14.50 21.05 16.87 17.89 -0.84 10.12 3.76 6.60 9.89 7.78Asset-weighted Net 14.27 20.81 16.63 17.65 -1.04 9.89 3.55 6.38 9.66 7.56Barclays Long Govt/Cred Index 8.78 22.49 10.16 1.92 8.44 6.60 2.71 5.33 8.56 5.87Composite 3-Yr St Dev 7.86 8.53 12.42 12.09 11.54 7.00 7.81 10.31 10.85 10.82Benchmark 3-Yr St Dev 8.19 8.98 12.18 11.65 10.94 6.47 7.38 9.60 9.80 9.75Number of Portfolios1 — — — — — — — — — —Composite Assets ($mm) 2,829 1,914 1,650 1,309 1,081 1,150 1,040 1,018 905 778Firm Assets ($mm)4 104,539 86,804 78,393 63,448 185,793 169,557 161,772 142,845 214,8342 200,7322

Composite Dispersion3 N/M N/M N/M N/M N/M N/M N/M N/M N/M N/M

BNY Mellon Center • 201 Washington Street • Boston, Massachusetts 02108-4408

For additional copies of this document, please contact [email protected].

by potential Fund investors. Standish uses the various models presented as tools in implementing the LDI framework, but the management of a particular plan may be different than the models used to present the hypothetical backtested performance. These differences include the current status of the plan with respect to assets and liabilities, the particular plan structure, and other factors. Standish cannot assure that the hypothetical backtested performance results would be similar to what Standish’s experience would have been had it actually been managing accounts in this manner for the period presented. Standish believes that the backtested performance shown is reasonably representative of its implementation of the LDI framework and is sufficiently relevant for consideration by potential Fund investors. Hypothetical backtested returns have many inherent limitations. Unlike actual performance, it does not represent actual trading. Since trades have not actually been executed, results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity, and may not reflect the impact that certain economic or market factors may have had on the decision-making process. Hypothetical backtested performance also is developed with the benefit of hindsight. Other periods selected may have different results, including losses. There can be no assurance that the Adviser will achieve profits or avoid incurring substantial losses. Similarly, projected and forecast returns and data are hypothetical in nature and are shown for illustrative, informational purposes only. This data is not intended to forecast or predict future events, but rather to demonstrate Standish’s investment process.In developing the capital market assumptions, we relied on the following benchmarks using data from February 2001 to September 2011:Long Duration: Barclays U.S. Long Corporate Bond IndexGlobal REIT: FTSE EPRA/NAREIT Developed IndexLarge Cap Equity: S&P 500 IndexMid-Cap Equity: S&P 400 IndexSmall Cap Equity: Russell 2000 IndexInternational Equity: MSCI EAFE IndexEmerging Equity: MSCI Emerging IndexHedge Funds: HFRI Fund of Funds IndexCorrelations and volatility based on historical data. Fixed income expected returns are based on benchmark yields as of March 31 2012. Equity/Alternative expected returns are based on historical risk premium plus a long term risk-free rate of return. Projected or forecast returns/data may not materialize.The information in this presentation may contain projections or other forward-looking statements regarding future events, targets, allocations or expectations and is only current as of the date indicated. There is no assurance that such events, allocations or projections will occur or be achieved, and may be significantly different than that shown here. The information in this presentation may be superseded by subsequent market events or for other reasons.Where indicated, performance shown is gross of fees. Actual fees may vary depending on, among other things, the applicable fee schedule and portfolio size. If the expenses were reflected, the performance shown would be lower. Actual fees will vary depending on, among other things, the applicable fee schedule and account size. For example, if $100,000 were invested and experienced a 10% annual return compounded monthly for 10 years, its ending value, without giving effect to the deduction of advisory fees, would be $270,704 with annualized compounded return of 10.47%. If an advisory fee of 0.95% of the average market value of the account were deducted monthly for the 10-year period, the annualized compounded return would be 9.43% and the ending dollar value would be $246,355. Actual fees are described in Standish’s Form ADV Part 2A and are available upon request. Past performance is no guarantee of future results. WPLDIq2052413PT

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