H E A L T H W E A L T H C A R E E R

MERCER GLOBALPENSION BUYOUT INDEX

NOVEMBER 2017

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R i

EXECUTIVE SUMMARY

Mercer Global Pension Buyout Index monitors thegeneral trend in the pricing of bulk pension annuitytransactions in the US, UK, Ireland, Canada, Germanyand the Netherlands.

Pension risk transfer transactions increasingly involve an international element –for example, the sponsoring employer might be seeking to externalise pensionrisk in multiple countries. Pricing is subject to movements in global financialmarkets and domestic requirements for insurer reserving. However, country-specific pricing often trends in different directions due to domestic influences,leading to windows of opportunity in one country relative to another.

The chart shows estimated annuity prices from insurers as a percentage ofaccounting liability in the six countries monitored, for existing retirees in a sampledefined benefit pension plan. This is based on up-to-date pricing informationprovided regularly by insurers in each country.

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R i i

For example, where a line is at the 110% level, Mercer estimates the averageprice of a pension annuity transaction for current retirees to be broadly 10%higher than the equivalent accounting liabilities. The Global Index is representedby the solid line, showing the average price of pension annuity transactions as apercentage of accounting liability across the six countries and draws uponinformation such as country market size.

The Global Index has risen slightly during September, with the increaseresulting from movements in the UK, Canada and Germany (which morethan offset the downward movements in the indices of the US and Ireland).

Pension liability has been measured according to local standards. As anexample, the cost of insuring pension liabilities in the UK is higher than in the US(relative to accounting liabilities) partly because UK pension liabilities arecommonly indexed for inflation and partly due to generous attaching spousespensions, both of which increase the liability duration. Insurers also charge anadditional premium to take on inflation risk.

__________________

Mercer appreciates the assistance of more than 20 insurers, which providepricing data every month to allow this report to provide a good indication of thetrend in each country.

The information contained in this report is not based on information specific toyour circumstances and approximations have been used. Past experience is noguarantee of future pricing and experience may vary for your plan.

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 3

1.5%

2.5%

3.5%

R A N G E O F Y I E L D S I M P L I E D B YI N S U R E R A N N U I T Y P R I C E S

UNITED STATESThe cost of a buyout has been decreasing in recent years relative to PBOaccounting liabilities, although this relationship has remained relatively stableover the last 12 months. Price transparency allows for greater information fromwhich a plan sponsor can act. The chart on the left shows the relative price toPBO using average pricing received from insurers, and the chart on the rightshows the range of sample pricing received. At a single point in time pricingbetween insurers varies materially which may lead to a difference in cost of up to10%.

At the end of September 2017, if the accounting liability in respect ofplan pensioners only was US$100 million, the buyout cost would bebroadly US $4.2 million higher, as compared to August where thecost would have been US$4.7 million higher.

When insurer pricing rates increase relative to discount rates used tocalculate PBO, the premium for an annuity buyout decreases.

It should be noted that the above implied yield has increased morethan corporate bond yields over September, resulting in thedecrease in the ratio shown in the chart above and to the left.

UNI T ED STATE S MARKET NEW SIn mid-2015, Mercer launched Mercer Pension Risk Exchange®, agroundbreaking solution that both increases annuity price transparency byenabling plan sponsors to continuously monitor pricing and helps plan sponsorsexecute group annuity buyouts in a shorter timeframe and in a more competitivepricing environment. Given the current level of volatility, it is not surprising that wealready have over 110 clients in the US, representing over US$15 billion ofassets, signed up to Mercer Pension Risk Exchange to execute an annuityplacement. Please see the infographic at the end of this report for moreinformation.

100%

102%

104%

106%

108%

110%

R A T I O O F E S T I M A T E DA N N U I T Y C O S T T O

A C C O U N T I N G L I A B I L I T Y ( P B O )

Pensioners only

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 4

With rates increasing and plan sponsors reaching PBGC caps, we expect buyoutactivity to continue to increase in 2017. During the first half of the year, pensionrisk transfer premiums exceeded $6.1 billion according to statistics collected frominsurers by Mercer. We expect that by the end of the third quarter, premiumsplaced in 2017 will have exceeded $13 billion with a volume at year end ofapproximately $20 billion.

Mercer continues to take a market-leading role in advising plan sponsors onjumbo buyout deals, having been the lead advisor in two jumbo transactionsannounced in June 2017. Mercer has led four of the largest five deals over thepast two years and led close to 40% of all deal volume transacted last year.

__________________

NOTES

The chart on the left is based on a set of liabilities with pension benefit obligations of US$50 million,cash flow duration of 9 years, and discounted using the Mercer Yield Curve.

The figures in the charts should be used as an indication of the market pricing for annuityplacements; actual pricing received will depend on plan-specific factors such as plan provisions,size, and age of the population. It is important to note that some of the insurers who provide pricingdo not reflect mortality sensitivity in their illustrative rates, or benchmark to a standard table.

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 5

100%

110%

120%

130%

140%

150%

R A T I O O F E S T I M A T E D A N N U I T YC O S T T O A C C O U N T I N G

L I A B I L I T Y ( I A S 1 9 )

Pensioners only Whole plan

UNITED KINGDOMThe charts track the cost of a buyout and buy-in of a representative pension planagainst accounting and typical funding liabilities. The plan has pensioner andnon-pensioner liabilities, with a weighting towards pensioners. Pensioner andnon-pensioner members receive a mixture of flat and increasing pensions inpayment, commensurate with an “average” UK pension plan.

At the end of September 2017, if the plan had accounting liabilitiesin respect of all members of £100 million, the buyout cost would bebroadly £40 million higher.

If the accounting liability in respect of plan pensioners only was£100 million, the buy-in cost of pensioners would be broadly £14million higher.

At the end of September 2017, if the plan had typical fundingliabilities (technical provisions) in respect of all members of £100million, the buyout cost would be broadly £28 million higher.

If the typical funding liability in respect of plan pensioners only was£100 million, the buy-in cost of pensioners would be broadly £8million higher.

UNI T ED KINGDO M MARKET NEW SDespite the low real yields in 2016, activity in the UK bulk annuity marketincreased dramatically in the second half of 2016, as sponsors became moredetermined to remove risk and insurers became more proficient at operatingwithin the new post 1 January 2016 Solvency II regime. Over the course of 2016some £10bn of UK pension liabilities was insured, plus a further £12 billion ofannuity back-books transferred between insurers.

Insurer capacity among the 7 or so insurers who are active in the bulk annuitymarket remains good and 2017 has been very busy, with high demand frompension schemes and from closed insurers who are considering transferring theirlegacy annuity books. Around £5bn of liabilities looks to have been insured in thefirst half of 2017, which is considerably higher than 2016 for the same period, butthe current outlook is that 2017 overall will see broadly similar levels of businesswritten to 2016.

100%

110%

120%

130%

140%

150%

R A T I O O F E S T I M A T E DA N N U I T Y C O S T T O F U N D I N G

L I A B I L I T Y

Pensioners only Whole plan

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 6

NETHERLANDSThe charts track the cost of a buyout of two representative pension plans againstaccounting and funding liabilities. Mercer uses up-to-date pricing information1

sourced directly from a key insurer and one multi-employer pension fund in orderto compare these against the benefit liabilities based on current marketconditions. The insurer price includes an estimate of the price of indexation at thesame level as in the corresponding DB accounting liability, which reflectsexpected discretionary indexation.

At the end of September 2017, if the less mature, Young plan hadaccounting liabilities in respect of all members of €100 million, thebuyout cost would be broadly €31 million higher.

At the end of September 2017, if the Mature plan had accountingliabilities in respect of all members of €100 million, the buyout costwould be broadly €13 million higher.

At the end of September 2017, if the less mature, Young plan hadfunding liabilities (technical provisions) in respect of all members of€100 million, the buyout cost would be broadly €11 million higher.

At the end of September 2017, if the Mature plan had fundingliabilities (technical provisions) in respect of all members of €100million, the buyout cost would be broadly €9 million higher.

NETHERLANDS MARKET NEW SThe increase during 2015 and 2016 of the buyout cost compared to theaccounting valuations is due to a slow but steady increase in credit spreadbetween the risk free rate used by the insurers for the buyout price and theinterest rate used for accounting valuations. This rise in credit spread peaked atthe end of March 2016. It should be noted that for a different subset of bondsthere was less of a peak that month. From April 2016 through to the end of April2017 the credit spread has generally been reducing, resulting in an overall drop inthe index. The trend over the second quarter of 2017 has been for slight upwardmovements in the index.

1 With effect from September 2017, insurer pricing will be provided quarterly. The indexwill be assumed to remain constant in the intervening months

100%105%110%115%120%125%130%135%140%

R A T I O O F E S T I M A T E D A N N U I T YC O S T T O A C C O U N T I N G

L I A B I L I T Y ( I A S 1 9 )

Mature plan Young plan

105%106%107%108%109%110%111%112%113%

R A T I O O F E S T I M A T E D A N N U I T YC O S T T O F U N D I N G L I A B I L I T Y

Mature plan Young plan

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 7

One of the likely reasons for this decrease is the expanded Quantitative Easingprogram of the European Central Bank, which now also includes corporatebonds.

The buyout cost compared to the funding liabilities was relatively stable during2015 and the first half of 2016. The second half of 2016 saw a slow and steadydecline in buyout costs. The only significant change was seen in July 2015 whichwas due to a change in the Ultimate Forward Rate (UFR) used to produce theyield curve (as published by the Dutch Central Bank) to be used by pensionfunds. Due to the decrease in discount rates in 2016, the UFR effect increases,hence the upward sloping ratio of annuity cost (based on mark-to market pricing)and funding liability (based on yield curve including UFR)

Within the Netherlands a new pension vehicle has been introduced – the so-called “Algemeen Pensioenfonds” – that could open up new possibilities tosecure buyouts. Five of these funds have now received a license to operate fromthe pensions regulator. A further 1 to 3 parties have applied for a license.

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 8

CANADAThe charts track the movement in the cost of a group annuity as a percentage ofthe associated accounting liabilities for a representative sample group of retirees.

During September 2017, the Index increased by 0.8% from 107.9%to 108.7%. This implies that, at the end of September, the cost ofsettling obligations through the purchase of annuities was between8% and 9% higher than the accounting liability.

It is also important to consider the absolute cost of settling planobligations. This can be best accomplished by looking at themovement of each component of the index in isolation. To do so, welook at the yields of long -term government bonds, which driveannuity pricing, and compare them to the yields on AA corporatebonds, which are used to calculate accounting liabilities.

Yields on long-term federal bonds, which are assumed to back annuitypurchases, and yields on corporate bonds, assumed to back accounting liabilities,both increased by around 20 basis points in September. However, the increase inyields on long-term federal bonds was slightly offset by a decrease in spreads ofthe new CIA annuity proxy intended to reflect less conservative insurer pricing, Inturn, annuity costs decreased less than accounting liabilities leading the Index toincrease from 107.9% to 108.7%. Following the early part of the year where theIndex decreased to levels as low as 3 years ago, the Index has since increasedmaterially over the remainder of 2017 and is now back to where it was at the startof the year.

85%

95%

105%

115%

125%

135%

A C C O U N T I N G L I A B I L I T Y I N D E XV S A N N U I T Y C O S T I N D E X

Annuity Cost Index Accounting Liability Index

100%

102%

104%

106%

108%

110%

R A T I O O F E S T I M A T E D A N N U I T YC O S T T O A C C O U N T I N G

L I A B I L I T Y ( I A S 1 9 )

Pensioners only

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 9

CANADA MARKET NEW SThe Canadian group annuity market continued on its record-setting pace throughthe third quarter of the year. Volume has been driven by several largetransactions. Estimates for the Q3 total are in the $800M range. Q4 demandappears to remain quite high, with insurers being constrained not by capacity butrather workforce limitations due to the sheer number of quote requests.

Having surpassed 200 plans in October 2017, the Mercer Pension RiskExchange® has established itself as a global tool to help clients meet their de-risking objectives in an efficient and cost-effective manner. Close to US$33B ofplan liabilities have been committed to the platform and more than US$14B hasbeen successfully secured with insurers. In Canada, 18 pension plans haveexecuted transactions through the Exchange with premiums above C$700M.

__________________

NOTES

The Index is based on an estimate of settling non-indexed pension obligations through the purchaseof annuities and an accounting discount rate based on a proprietary model developed by Mercer toassist our clients with selection of the discount rates used for the purpose of corporate financialreporting. It is provided for a sample group of non-indexed retired members and is only intended toillustrate general trends. The actual premium can vary significantly for individual plans based on anumber of factors that may include:

• The plan’s benefit structure and timing of its anticipated benefit payments.

• The demographic profile of the plan’s participants.

• Market conditions prevailing at the time benefits are distributed and annuities purchased.

$749 M

$1,363 M

$1,054 M

$2,218 M$2,460 M

$2,567 M $2,694 M

$ M

$500 M

$1,000 M

$1,500 M

$2,000 M

$2,500 M

$3,000 M

2010 2011 2012 2013 2014 2015 2016 2017

Q1 Q2 Q3 Q4 Total

$1,799 M(year-to-date)

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 1 0

• Insurer appetite and capacity for a transaction.

• Which employees, if any, receive and accept an offer to take a lump sum instead of an annuity.

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 1 1

IRELANDThe chart shows the relative cost of a buyout of pensioner liabilities of a sampledefined benefit plan versus the equivalent liabilities on a company accountingbasis.

IRELAND MARKET NEW SBond yields in core Eurozone countries increased over the month of September2017; leading to a decrease in the indicative cost of buying out pensionerliabilities. Corporate bond yields, which drive the equivalent accounting liabilities,also increased over the month. There was no change in the discount available viathe purchase of sovereign annuities (where payment terms are subject to theperformance of the reference bonds underlying the contract), compared toconventional annuities over the month of September. Activity in the bulk buyoutmarket in Ireland is largely driven by the winding up of pension plans which,under Irish legislation, requires the buyout of pensions in payment.

At the end of September 2017, if the Plan had accountingliabilities in respect of pensioners only of €100 million, the costof a traditional annuity would be broadly €17 million higher.

At the end of September 2017, if the Plan had accountingliabilities in respect of pensioners only of €100 million, the costof a sovereign annuity would be broadly €15 million higher.

110%

112%

114%

116%

118%

120%

R A T I O O F E S T I M A T E DA N N U I T Y C O S T T O

A C C O U N T I N G L I A B I L I T Y( D B O )

Traditional annuity Sovereign annuity

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 1 2

September 2017 proved to be a largely positive month for pension schemes onthe asset side with negative returns on core Euro government bond portfolios(given rising yields) more than offset by positive returns on equity portfolios overthe month.

__________________

NOTES

The index is provided for a sample mature pensioner population and is indicative only. The benefits secured(and valued as an accounting liability) are flat pensions, with no increases in payment.

The price differential identified above will also be affected by the nature of the assumptions adopted for theaccounting disclosures.

The accounting liabilities are valued using the Mercer Yield Curve, which is used by leading Irish andmultinational companies to set their discount rate for accounting purposes.

The index does not make any allowance for buyout costs for active or deferred members.

A sovereign annuity differs from a traditional annuity in so far as it is linked directly to reference bonds that backthe contract. Importantly, this means that pension payments will be reduced in the event of non-performance ofsome or all of the underlying reference bonds. This transfers the credit risk to the annuitant. The discountavailable on sovereign annuities has historically been estimated from ‘live’ pricing for Irish Amortising Bonds;this is no longer available, so the discount is now estimated from historic norms.

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 1 3

GERMANYThe chart focuses on transactions in which the underlying benefit payment isreinsured for a group of retirees, but does not include additional potentialliabilities from inflation indexation. It is built on a sample retiree population andcompares the accounting liabilities against the insurance premium in a buyout /buy-in transaction. The pricing for the insurance policies is based on a 0.9% p.a.guaranteed rate of return (1.25% p.a. dates prior to 01/01/2017 and 1.75% priorto 01/01/2015) whereas the discount rate is based on a liability with a 10 yearduration.

GERMANY MARKET NEW S· The guaranteed rate of return for annuity provided through insurance

companies has decreased from 1.25% to 0.9% as from 01/01/2017.· Benefit obligations of the 30 DAX companies reached a level of about €400

billion at the end of 2016.· The fair value of the corresponding plan assets was about €250 billion at the

end of 2016.· The New Occupational Pension reinforcement Law in Germany will be

introduced as of January 1st.

At the end of September 2017, if the plan had accountingliabilities under local German GAAP (HGB) in respect of allmembers of €100 million, the buyout cost would be broadly€44 million higher using the 10-year average rate andbroadly €34 million higher using the 7-year average rate.

If the plan had accounting liabilities under internationalaccounting standards (IFRS) in respect of all members of€100 million, the buyout cost would be broadly €20 millionhigher.

100%110%120%130%140%150%

R A T I O O F E S T I M A T E DA N N U I T Y C O S T T O

A C C O U N T I N G L I A B I L I T Y ( I A S 1 9& H G B )

Pensioners (IAS 19)

Pensioners (HGB 7-year average)

Pensioners (HGB 10-year average)

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 1 4

A bill that includes a modification of the method for determining the discount rateused for pension valuations under German-GAAP (Generally AcceptedAccounting Practice) passed parliament in 2016.

The new rules require companies to use a rolling average period of 10 years thatwill result in a reduction of the reported pension liabilities at the time of thechange previously a seven year rolling average of market rates was used.

Generally, larger organisations prefer funding through so-called Contractual TrustAgreements (CTAs), but buy-in solutions for annuities are also becoming morecommon. However, there remain a large proportion of companies with unfundedpension arrangements – with pensions being paid from operating cash flow.Alternatives to funding are also being considered to reduce benefit obligations, forexample by changing the plan design or by including lump sum options.

__________________

NOTES

The illustrations are based on values used by German life insurers, public information and arepresentative sample of a retiree population.

The performance of the Index reflects the changes in the valuation-related discount rates and theunderlying rates used by German life insurers.

Due to the applied approximation method the Index is not suitable for any company - and plan-specific pricing.

M E R C E R G L O B A L P E N S I O N B U Y O U T I N D E X

M E R C E R 1 5

CONTACTSUSMelissa Moore+1 212 345 0173melissa.moore@mercer.com

UKDavid Ellis+44 113 394 7591david.ellis@mercer.com

CANADARyan Kastner+1 514 841 7856ryan.kastner@mercer.com

IRELANDSean O’Donovan+353 1411 8360sean.o’donovan@mercer.com

NET HERLAND SVincent van Campenhout+31 20 4313 986vincent.van.campenhout@mercer.com

GERMANYGeorg Vieten+49 69 689 778 170georg.vieten@mercer.com

IMPORTANT NOTICES

References to Mercer shall be construed to include Mercer LLC and/or itsassociated companies.

© 2017 Mercer LLC. All rights reserved.

This contains confidential and proprietary information of Mercer and is intendedfor the exclusive use of the parties to whom it was provided by Mercer. Its contentmay not be modified, sold, or otherwise provided, in whole or in part, to any otherperson or entity, without Mercer’s prior written permission.

The findings, ratings, and/or opinions expressed herein are the intellectualproperty of Mercer and are subject to change without notice. They are notintended to convey any guarantees as to the future performance of theinvestment products, asset classes, or capital markets discussed. Pastperformance does not guarantee future results. Mercer’s ratings do not constituteindividualised investment advice.

Information contained herein has been obtained from a range of third-partysources. Although the information is believed to be reliable, Mercer has notsought to verify it independently. As such, Mercer makes no representationsor warranties as to the accuracy of the information presented and takes noresponsibility or liability (including for indirect, consequential, or incidentaldamages), for any error, omission, or inaccuracy in the data supplied by any thirdparty.

This does not contain regulated investment advice in respect of actions youshould take. No investment decision should be made based on this informationwithout obtaining prior specific, professional advice relating to your owncircumstances.

This does not constitute an offer or a solicitation of an offer to buy or sellsecurities, commodities, and/or any other financial instruments or products orconstitute a solicitation on behalf of any of the investment managers, theiraffiliates, products, or strategies that Mercer may evaluate or recommend.

For the most recent approved ratings of an investment strategy, and a fullerexplanation of their meanings, contact your Mercer representative. For Mercer’sconflict of interest disclosures, contact your Mercer representative or seewww.mercer.com/conflicts of interest.

Mercer’s universes are intended to provide collective samples of strategies thatbest allow for robust peer comparisons over a chosen timeframe. Mercer does notassert that the peer groups are wholly representative of and applicable to allstrategies available to investors.

7