François Pellerin, CFA, FSA, EA, CERA,

LDI Strategist, Pyramis Global Advisors

The Importance of

Customization When

Designing A Pension

Risk Management

Framework

Question?

Which of the following statements best describes your view on pension de-risking?

1. Currently implemented via a glide path

2. Currently implemented, without a formal glide path

3. Will implement when rates are higher

4. Not sure if it’s a good strategy for my plan

5. Not a good strategy for my plan

For Institutional Use Only3

Table of Contents

1. Factors to Consider2. Dynamic Pension Risk Management3. Why Active Management and Diversification for Long

Duration Mandates4. Key Takeaways

See “Important Information” for a discussion of performance data, some of the principal risks related to any of the investment strategies referred to in this presentation and other informationrelated to this presentation.

Factors to Consider

First Thoughts

“The first step in the risk management process

is to acknowledge the reality of risk.

Denial is a common tactic that substitutes deliberate

ignorance for thoughtful planning.”

- Charles Tremper

“Risk management does not mean avoiding risk.

Risk management means embracing reasonable risk.”

- Todd Beaird

Source: Mercer Consulting. As of March 31, 2014.

Funded Status for Pension Plans: UncertaintyShould Not Be a CertaintyCanadian Pension Health Index

Predicting Interest Rates is Challenging

Source: FMRCo, Bloomberg, as at March 31, 2014.

Implied future rates based on pricing of GoC 10-year interest rate futures.

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

Yie

ld (

%)

Government of Canada 10-Year Yield:Implied Future Rates vs. Actual Rates

Government of Canada 10-Year Yield Implied Future Rate

4.5

13.0

0

2

4

6

8

10

12

14

2 Year 5 Year 7 Year 10 Year 20 year Total

Assets Liabilities

Sample Plan Risk Exposure: High Risk ToleranceSummary Metrics in $MillionAssets 750

Liability (PVFB) 1,000

Surplus/(Deficit) (250)

Funded Status 75%

Service Cost as % of Liability 2.5%

PBO as a % of Market Capitalization ~10%

Plan Liability Duration (yrs) 13.0

Plan Asset Duration (yrs) 4.5

Plan Fixed Income Duration (yrs) 15.0

Hedge Ratio ~25%

Asset AllocationLiability Hedging Assets 30%

• Corporate bonds 20%

• Provies/Gvt 10%

Return Seeking Assets 70%

• Equities 60%

• Other 10%

ASSET & LIABILITY KEY RATE EXPOSURE

Duration (Years)Assets vs. Liability

2-Year (0.1)

5-Year (0.3)

7-Year (0.3)

10-Year (1.7)

20-Year (6.1)

Total (8.5)

Yrs

Hedging program’s objectives

• Provide some protection against decrease in rates

• Recognize current rates level, therefore allow funded ratio appreciation if rates increase

• Allow for a healthy allocation to return seeking assets

• Focus on getting hedging “bang-for-the-buck” from fixed income (as opposed to hedging precision)

• Work in conjunction with dynamic risk management framework which will allow for de-risking over time

For illustrative purposes only

13.0 13.0

0

2

4

6

8

10

12

14

2 Year 5 Year 7 Year 10 Year 20 year Total

Assets Liabilities

Sample Plan Risk Exposure: High Risk ToleranceSummary Metrics in $MillionAssets 1,100Liability (PVFB) 1,000Surplus/(Deficit) 100Funded Status 110%

Service Cost as % of Liability 0%

PBO as a % of Market Capitalization ~50%

Plan Liability Duration (yrs) 13.0Plan Asset Duration (yrs) 13.0Plan Fixed Income Duration (yrs) 13.1Hedge Ratio ~100%

Asset AllocationLiability Hedging Assets 90%

• Corporate bonds 70%

• Provies/Gvt 20%

Return Seeking Assets 10%

• Equities 8%

• Other 2%

ASSET & LIABILITY KEY RATE EXPOSURE

Duration (Years)Assets vs. Liability

2-Year (0.0)

5-Year (0.1)

7-Year 0.2

10-Year (0.2)

20-Year 0.1

Total 0.0

Yrs

Hedging program’s objectives

• Minimize likelihood of future contributions• Grow at the same pace as the liability• Protect funded status against interest rates changes (parallel/non-parallel yield curve

shocks)• Produce cash flows needed to cover liquidity requirements• Avoid default and downgrades• Recognize real-life implementation dynamics• Recognize that cash flow projections are imprecise due to demographic experience

and other idiosyncratic events• Minimize likelihood of stranded surplus• Use liabilities as a benchmark

For illustrative purposes only

Factors Driving Hedging Strategy

• Size of plan relative to size of the company

• Risk tolerance

• Funding versus accounting measures of risk

• Plan design

• Level of rates

• Funded status

• Sophistication level of plan sponsor

• Available cash

• End-goal

Dynamic Pension Risk Management

Question?

Which of the following statements best describes your pension plan’s “end-goal”?

1. None, plan expected to be ongoing in the long-term

2. De-risk over time, and manage internally

3. Execute a risk transfer to a third party

4. A combination of answers 2 and 3

Typical Glide Path JourneyDESCRIPTION CHARACTERISTICS

Early Stage

“Taking Off”

Glide Path Adoption

• Sponsor is beginning the formalization of a risk management program, typically through the adoption of a glide path

• Relatively low funded status

• Lower hedge ratio

• Hedging objective is to obtain duration which offers high “bang-for-the-buck”

• Relatively high allocation to return seeking assets

• Focus is on strategic positioning as opposed

to tactical precision

Mid-Stage

“In Flight”

Glide Path Execution

• Sponsor has adopted a glide path which leads to dynamic de-risking as the plan’s funded ratio improves

• Typically the longest stage of the journey

• As the plan becomes better funded (closer to end stage), the program shifts towards less return seeking assets and hedging assets

• Hedging precision become more important as the plan’s financial health improves

Late Stage

“Preparing for Landing”

Migration from Glide Path to Landing Pattern

• The end goal is in sight, which requires the de-risking program to be more precise and specific. Sponsor transitions from “flying a glide path” to “entering a landing pattern”

• Plan is well funded, approaching end-stage target

• Program needs to be nimble in order to act swiftly once the plan has reached the end-goal funded status

• Focus is on preparing for end-stage execution rather than on upside gains

End Stage

“Touching Down/Arrival”

End-Goal Execution

• Concrete steps are taken to implement final solution

End goal is sponsor-specific and may have many forms

• Retention/immunization

• Risk transfer such as lump sums and annuitization

• Mix of retention and risk transfer

For illustrative purposes only

For illustrative purposes only. Source: Pyramis Global Advisors.

• Important considerations are (1) the plan’s starting point and (2) the plan’s end goal, which will impact guidelines above

• The path must be flexible and will depend on your views and risk tolerance

• De-risking should be a function of pre-defined triggers (e.g., funded status, interest rates)

• The size and composition of the hedging allocation at each point will be dependent on several factors

• Alternative glide paths could be based on funded status only

Dynamic Pension Risk ManagementThe Roadmap to Your End Goal

Liability Discount Rate (Corporate Bond Basis)HedgingAssets

20 - 40%

25 - 45%

35 - 55%

45 - 65%

50 - 70%

60 - 90%

90 - 100%

Fu

nd

ing

Ra

tio

(C

orp

ora

te B

on

d B

as

is)

GLIDE PATH

(Hedge Ratio)

< 4% 4% – 5%

85% 40% 45% 45% 50% 55%

90% 40% 45% 50% 55% 60%

95% 45% 45% 50% 60% 65%

100% 50% 55% 60% 65% 70%

105% 55% 60% 65% 75% 80%

110% 65% 70% 75% 85% 90%

115% 85% 90% 100% 100% 100%

6% – 7% >7%5% – 6%

•Pension Committee flexibility

•Market conviction

•Sponsor risk tolerance

•Policy gap

•Potential friction costs

•Upcoming contribution timing

To Re-risk or Not to Re-riskMany factors come into play…

For Institutional Use Only15For illustrative purposes only.

Custom Client Solutions

For illustrative purposes only.

TRADITIONAL BENCHMARKCUSTOM STRATEGY BENCHMARK

CUSTOM LIABILITY BENCHMARK

Typical Hedging Allocation Less than 30% 30-70% Greater than 70%

Risk Objective Increase dollar duration Key rate and spread duration considerations

Greatest key rate and spread duration considerations

Typical Benchmark Typically FTSE TMX Canada Universe Bond Index

• Collection of traditional indices

• Allocated to mirror liability risk

• Individual securities further tighten fit (completion)

• Liability serves as benchmark

• Discounted using corporate or solvency rates

Tracking Error to Liability 10% – 15% 4% – 9% 1 – 4%

Less Liability Sensitive More Liability Sensitive

Importance of Managing to the Right ObjectivesDuration Matching Objective

Throughout this investment period, maintain the duration within +/ - 0.3 year of that of the overall Pension Liabilities for each key rate duration node.

9.1 9.0

-2

0

2

4

6

8

10

2 Year 7 Year 10 Year 20+ Year Total Benchmark Portfolio

Asset Performance Objective

Seeks to generate returns that exceed the Plan’s Liability by investing primarily in a well-diversified portfolio of Canadian debt securities.

MARKET VALUE ($Million) Performance (%)

Dec 31, 2013 Mar 31, 2014 Current Quarter YTD 1 YearSince Inception

AnnualizedCustom Client Portfolio (Gross) 120.0 125.0 0.7 0.9 1.1 4.4Liability Benchmark 0.5 0.6 0.6 3.8

Excess Return (Gross) 0.2 0.3 0.5 0.6

DECEMBER 31, 2013 MARCH 31, 2014

For illustrative purposes only.

9.1 8.8

-2

0

2

4

6

8

10

2 Year 7 Year 10 Year 20+ Year Total Benchmark Portfolio

Why Active Management and Diversification for Long Duration Mandates

Why Active Management for Long Duration Mandates

•Concentration Risk–Long corporate indices have high concentration to top names

–Active management helps avoid exposure to high profile blow-ups through diversification

•Liquidity Risk–Long duration bonds generally have lower liquidity and higher transaction costs

–Tactical trading strategies help reduce trading cost

–Active management also enhances access to new issues

•Bond Payoff Asymmetry–Bond have limited upside but full principle loss potential

–Active management helps avoid downgrades and defaults

•Long Duration Volatility–Long end risks are amplified due to high sensitivity to interest rate and credit risk

–Active management is also a risk management tool as it relates to long duration portfolio construction

•Source of Potential Alpha to Help Keep Pace With Liabilities–Liabilities are measured using theoretical discount curves which are not subject to defaults and downgrades. This may result in a gap between the

performance of the portfolio and the liabilities.

–Potential alpha resulting from active management may help bridge that gap

Top 10 IssuersAs of March 31, 2014

FTSE TMX Canada Long Term Corporate Bond Index (%)

Greater Toronto Airport Authority 6.3

Hydro One 6.3

Fortis Alberta 4.9

Canadian Utilities 4.8

TransCanada Pipelines 4.1

407 International 3.7

Spectra Energy 2.8

Bell Canada 2.7

Telus Corporation 2.7

Enbridge 2.6

Aggregate of Top 10 40.9

Long Indices Present Unique Investment RisksFTSE TMX Canada Long Term Corporate Bond Index

•High concentration in top names increases credit risk

•The long duration increases price volatility

•Credit events impact value

•“Event risk” is an emerging theme within credit markets which further highlights the benefit of fundamental research and active management

Source: PC Bond Analytics. All indices are unmanaged. Investing directly in an index is not possible. Past performance is no guarantee of future results.

Active Management Has Added Value During Volatile PeriodseVestment Alliance Canadian Long Duration Fixed Income Universe Performance

• More than 75% of managers have beaten the FTSE TMX Canada Long Term Bond Index over a 5-year annualized period

As of 3/31/2014 3 Year 5 Year

25th Percentile 7.90 8.90

Median 7.65 8.50

75th Percentile 8.36 8.04

FTSE TMX Canada Long Term Bond Index 7.51 7.73

eVestment Quartile Ranking 3 4

# of Observations 29 27

Data indicating the relative ranking of the index is from eVestment Alliance as of 03/31/2014 and is based on a total of 29 and 27 investment products within this category with at least 90 percent of investment managers reporting. Data

and information from third-party databases, such as those sponsored by eVestment Alliance and Allan, are self-reported by investment management firms that generally pay a subscription fee to use such databases, and the database

sponsors do not guarantee or audit the accuracy, timeliness or completeness of the data including any rankings. Rankings or similar data reflect information at the time rankings were retrieved from a third-party database, and such

rankings may vary significantly as additional data from managers are reported. Pyramis has not verified and cannot verify the accuracy of information from outside sources, and potential investors should be aware that such information is

subject to change without notice.

For illustrative purposes only.

Past performance is no guarantee of future results.

Source: eVestment Alliance.

Case for LDI diversificationDiversification is the only free lunch…

• Limit concentration to a single portfolio manager

• Diversification of management style

• Limited increased complexity

• Access to additional think tanks and resources

• Allows for completion management framework

• Potential fee increase can be minimal and mitigated by active management

• Deemed more prudent in a fiduciary context

The same arguments are valid for diversification of equity managers hold for bond managers

Case Study: Annuitization

INDUSTRY TECHNOLOGY: TELECOMMUNICATIONS

Announcement Date October 2012

Participants Affected41,000

Management retirees who began receiving payments before January 1, 2010

Settlement Strategy Annuity purchase

Annuity Provider Prudential

Approximate Liability Settled

$7.5 Billion

All settled via annuity purchase

Approximate % Settled 25%

Customized Solution• Construction of an $8B annuity-in-kind (AIK) Corporate & Treasury Bond portfolio

• Management of a fixed income dynamic hedge portfolio throughout the AIK build

Key Takeaways

Key Takeaways

• Pension risk has not gone away – it is time to learn something from history

• Having a thoughtful dynamic risk management strategy is key• How to be invested today may not be as important as to how your allocation should

move overtime• Risk management glide-path can be a great risk management tool

• Customization is important• Every sponsor’s plan is different, so should be the solution

• Active management and diversification are important

• There are many risk management solutions in the market, find the right ones for you

Thank You

Important InformationRead this important information carefully before making any investment. Speak with your relationship manager if you have any questions.

RISKS

Past performance is no guarantee of future results. An investment may be risky and may not be suitable for an investor's goals, objectives and risk tolerance. Investors should be

aware that an investment's value may be volatile and any investment involves the risk that you may lose money. Performance results for individual accounts will differ from

performance results for composites and representative accounts due to factors such as portfolio size, account objectives and restrictions, and factors specific to a particular investment

structure.

The value of a strategy's investments will vary day to day in response to many factors, including in response to adverse issuer, political, regulatory, market or economic developments.

The value of an individual security or a particular type of security can be more volatile than the market as a whole and can perform differently from the value of the market as a whole.

Stock markets and issuers of small and mid cap companies are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic

developments. Investments in smaller companies may involve greater risks than those in larger, better known firms. The value of securities of smaller issuers may be more volatile

than those of larger issuers. Smaller issuers can have more limited product lines, markets, and financial resources.

The performance of fixed income strategies will change daily based on changes in interest rates and market conditions and in response to other economic, political or financial

developments. Debt securities are sensitive to changes in interest rates depending on their maturity, and may involve the risk that their prices may decline if interest rates rise or,

conversely, if interest rates decline, their prices may increase. Debt securities carry the risk of default, prepayment risk and inflation risk. Changes specific to an issuer, which may

involve its financial condition or economic environment, can affect the credit quality or value of an issuer's securities. Lower-quality debt securities are often considered to be

speculative and involve greater risk, especially in periods of general economic difficulty. The value of mortgage securities may change due to shifts in the market's perception of

issuers and changes in interest rates, regulatory or tax changes.

Derivatives may be volatile and involve significant risk, such as credit risk, currency risk, leverage risk, counterparty risk and liquidity risk. Using derivatives can disproportionately

increase losses and reduce opportunities for gains in certain circumstances. Investments in derivatives may have limited liquidity and may be harder to value, especially in declining

markets.

The performance of international strategies depends upon currency values, political and regulatory environments, and overall economic factors in the countries in which they invest.

Foreign markets, particularly emerging markets, can be more volatile than the U.S. market due to increased risks of adverse issuer, political, regulatory, market, or economic

developments and can perform differently from the U.S. market. The risks are particularly significant for strategies that focus on a single country or region.

Important Information

Because a part of the 130/30 large cap core strategy involves short selling, the strategy is subject to the risk of additional volatility and decreased liquidity. Potential losses from an

uncovered short position in an equity security are unlimited. Losses could occur if short sales were poorly correlated with the strategy’s other investments, or if the manager was

unable to liquidate its positions because the market for securities subject to short sales is or becomes illiquid. Short sales may be restricted in response to market events.

Furthermore, additional costs may be incurred in connection with short sale transactions and the ability to continue to borrow a security is not guaranteed. Such restrictions and costs

may prevent the full implementation of such investment strategies and may have a material adverse effect on them. While the target long/short allocation is 130/30, the ratio will

fluctuate.

These materials contain statements that are “forward-looking statements,” which are based on certain assumptions of future events. Forward-looking statements are based on

information available on the date hereof, and Pyramis does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can

be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially

different or worse than those presented.

PERFORMANCE DATA

Performance data is generally presented gross of any fees and expenses, including advisory fees, which when deducted will reduce returns. See the GIPS® Composite Performance

Data for performance figures that are net of the maximum investment advisory fee charged any client employing this strategy. Some clients may request a performance fee

arrangement, which if imposed will also reduce returns when deducted. See Pyramis' Form ADV for more information about advisory fees if Pyramis Global Advisors, LLC is the

investment manager to the account. For additional information about advisory fees related to other Pyramis advisory entities, speak with your relationship manager. All results reflect

realized and unrealized appreciation and the reinvestment of dividends and investment income, if applicable. Taxes have not been deducted. In conducting its investment advisory

activities, Pyramis utilizes certain assets, resources and investment personnel of FMR Co., which does not claim compliance with the Global Investment Performance Standards (GIPS®).

Representative account information is based on an account in the subject strategy’s composite that generally reflects that strategy’s management and is not based on performance of

that account. An individual account’s performance will vary due to many factors, including inception dates, portfolio size, account guidelines and type of investment vehicle. Index or

benchmark performance shown does not reflect the deduction of advisory fees, transaction charges and other expenses, which if charged would reduce performance. Investing

directly in an index is not possible.

Important InformationThe business unit of Pyramis Global Advisors (Pyramis) consists of: Pyramis Global Advisors Holdings Corp. , a Delaware corporation; Pyramis Global Advisors Trust Company, a non-

depository limited purpose trust company (PGATC); Pyramis Global Advisors, LLC, a U.S. registered investment adviser (PGA LLC); Pyramis Global Advisors (Canada) ULC, an Ontario

registered investment adviser; Pyramis Global Advisors (UK) Limited, a U.K. registered investment manager (Pyramis-UK); Pyramis Global Advisors (Hong Kong) Limited, a Hong Kong

registered investment adviser (Pyramis-HK); Pyramis Distributors Corporation LLC, a U.S. registered broker-dealer; and Fidelity Investments Canada ULC, an Alberta corporation (FIC).

Investment services are provided by PGATC, PGA LLC, Pyramis Global Advisors (Canada) ULC, Pyramis-UK and/or Pyramis-HK.

"Fidelity Investments" refers collectively to FMR LLC, a U.S. company, and its subsidiaries, including but not limited to Fidelity Management & Research Company (FMR Co.), Fidelity

Management & Research Company, Inc. (FMR Co. Inc.) and Pyramis. “Fidelity” refers collectively to Pyramis and Fidelity Investments.

Products and services presented here are managed by the Fidelity Investments companies of Pyramis Global Advisors, LLC, a registered investment adviser, or Pyramis Global Advisors

Trust Company, a non-depository limited purpose trust company. Pyramis products and services may be presented by Fidelity Investments Institutional Services Company, Inc., Fidelity

Investments Canada ULC, Fidelity Brokerage Services, LLC, Member NYSE, SIPC, all non-exclusive financial intermediates that are affiliated with Pyramis.

Certain data and other information in this presentation have been supplied by outside sources and are believed to be reliable as of the date of this document. Data and information

from third-party databases, such as those sponsored by eVestment Alliance and Callan, are self-reported by investment management firms that generally pay a subscription fee to use

such databases, and the database sponsors do not guarantee or audit the accuracy, timeliness or completeness of the data and information provided including any rankings. Rankings

or similar data reflect information at the time rankings were retrieved from a third-party database, and such rankings may vary significantly as additional data from managers are

reported. Pyramis has not verified and cannot verify the accuracy of information from outside sources, and potential investors should be aware that such information is subject to

change without notice. Information is current as of the date noted.

Pyramis has prepared this presentation for, and only intends to provide it to, institutional, sophisticated and/or qualified investors in one-on-one or comparable presentations. Do not

distribute or reproduce this report.

All trademarks and service marks included herein belong to FMR LLC or an affiliate, except third-party trademarks and service marks, which belong to their respective owners. Pyramis

does not provide legal or tax advice and we encourage you to consult your own lawyer, accountant or other advisor before making an investment.

Certain investment strategies in this presentation may be offered to certain qualified investors in the form of interests in a privately-offered fund offered by Pyramis Distributors

Corporation LLC. Such interests will not generally be transferable, listed on any exchange and it is not anticipated that they will be tradable. Such interests may also be subject to

certain collateral risks. Before investing, any potential investors should receive and read a copy of such fund's confidential private placement memorandum.

François Pellerin, CFA, FSA, EA, CERA,

LDI Strategist, Pyramis Global Advisors

The Importance of

Customization When

Designing A Pension

Risk Management

Framework