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					December 1, 2010

Global Markets Institute

2011 pension preview:
challenges and changes
                                                                                                              Global Markets Institute

Challenges                                                                                       Michael A. Moran, CFA
#1: The downside of low interest rates                                                           (212) 357-3512 michael.moran@gs.com
Low interest rates raise the present value of pension obligations,                               Goldman Sachs & Co.

thereby lowering funded status and placing upward pressure on future
                                                                                                 Abby Joseph Cohen, CFA
reported pension expense. Liability losses hurt GAAP earnings faster                             (212) 902-4095 abby.cohen@gs.com
than asset losses.                                                                               Goldman Sachs & Co.
#2: Asset return assumptions under the microscope
Multiple forces are placing pressures on companies to lower their
expected return on assets assumptions. Such changes, at least under
current GAAP accounting rules, increase reported pension expenses.

Changes
#1: Asset allocation/investment policy continues to shift
An increasing number of companies are adopting dynamic investment
policies whereby asset allocation is shifting as funded status improves.
More plans will likely shift to these types of policies in 2011.
#2: Income statement changes loom under IFRS
Proposed changes by the IASB would notably alter the way companies
recognize expenses related to their plans. They also would likely lead
to even greater shifts by corporate defined benefit plans towards fixed
income in their asset allocations, regardless of asset valuation
considerations.
Funded status remains depressed despite equity rally and contributions
S&P 500 – US plans only

                110%                                             108%
                                                                                  Low interest
                                                                                     rates
                                                          101%                      keeping
                                                                                    funded
               100%
                                                                                     status
                                                                                   depressed
        GAAP funded %




                                                   93%
                                            92%
                                     90%
                        90%

                              84%
                                                                               82%     82%

                        80%                                             79%




                        70%
                              2002   2003   2004   2005   2006   2007   2008   2009    2010
                                                                                      YTD(E)

Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




The Global Markets Institute is the public policy research unit of Goldman Sachs Global Investment Research. Its mission is to provide
research and high-level advisory services to policymakers, regulators and investors around the world. The Institute leverages the expertise
of Research and other Goldman Sachs professionals, as well as highly-regarded thought leaders outside the firm, to offer written analyses
and host discussion forums.



The Goldman Sachs Group, Inc.                                                                                            Global Investment Research
December 1, 2010                                                                                                Global Markets Institute




Table of Contents

Looking ahead to year-end and 2011                                                                                              3 
Challenge # 1: All eyes on interest rates as year-end approaches                                                                4 
Low interest rates hampering pension accounting outcomes                                                                        4 
Liability losses hurt GAAP earnings faster than asset losses                                                                    5 
Challenge # 2: Asset expected return assumptions under pressure                                                                 6 
1. Corporate plans likely to continue to de-risk in future years                                                                7 
2. Large public pension plans cutting assumed rates of return                                                                   9 
3. Expected return assumptions for foreign plans below US plans                                                               10 
4. SEC always focused on critical pension accounting assumptions                                                              12 
Change # 1: Asset allocations continue to shift                                                                               12 
These are not passive shifts – active changes to target allocations                                                           12 
More and more companies disclosing these types of actions                                                                     14 
Change # 2: Income statement accounting likely to change                                                                      17 
IASB’s pension project has evolved over the past few years                                                                    17 
Most volatile elements of pension expense would be outside of P&L                                                             18 
Increase in the amount of recognized pension expense                                                                          19 
Two key takeaways from this proposed change                                                                                   21 
Disclosures                                                                                                                   23 


Exhibits
1. Funded status has risen during 4Q2010, but still around the 2009 level                                                       3

2. Lower discount rates have offset asset returns and sizable contributions                                                     4

3. Despite the recent rise, long-term interest rates still lower than the end of 2009                                           5

4. Average expected return assumption has fallen 100 bps since 2002                                                             6

5. Few companies still use an expected return assumption of 8.5% or higher                                                      7

6. Asset allocations began to shift in 2007                                                                                     8

7. Expected ROA should decline as exposure to risky assets is reduced                                                           9

8. Reductions by public DB plans has brought further scrutiny to this assumption                                               10

9. US expected return assumptions consistently exceed those of non-US plans                                                    11

10. Target allocation disclosures highlight multi-year shifts by corporate plans                                               13

11. Corporate pensions have lowered allocations to equities in recent years                                                    14

12. Recent examples of de-risking actions                                                                                      15

13. IASB’s pension project – from Preliminary Views to Exposure Draft                                                          18

14. Pension expense components would be presented separately                                                                   19

15. Upward pressure on reported pension expense at all funded levels                                                           20

16. Pro Forma effects of proposed IASB accounting – greater than $100 million pro forma increase in expense in 2009            22




The Goldman Sachs Group, Inc.                                                                                                         2
December 1, 2010                                                                                                                       Global Markets Institute




Looking ahead to year-end and 2011
There have been few             As the year comes to a close we take this opportunity to examine many of the issues that
stress-free moments             corporate pension plan sponsors face as they wrap up 2010 and enter 2011. Our theme for
in the corporate                2011 is challenges and changes. Many corporate plans face ongoing challenges on both
pension world in
                                the liability and asset side of their plans. We specifically highlight two challenges:
recent years.
                                1.   persistently low long-term interest rates that hamper many important pension
                                     reporting metrics, including funded status, pension expense, and contribution
                                     requirements, and

                                2.   scrutiny of asset expected return assumptions that will likely result in the lowering of
                                     these assumptions by some companies.

                                In addition, 2011 will likely continue to be a year of change for many sponsors, and we will
                                explore two areas within this report:

                                1.   continued adjustments in asset allocation and investment policy as the multi-year shift
                                     of increasing allocations to fixed income securities will likely continue as plans
                                     endeavor to better match plan assets with plan liabilities, and

                                2.   income statement accounting changes that could be finalized by the International
                                     Accounting Standards Board (IASB) in 2011 that may notably change the way
                                     companies recognize expense related to these plans and that could ultimately be
                                     adopted by companies in the United States. We identify the companies most likely to
                                     be affected in the last section of this report.
Median plan funded              To put these themes into context, aggregate funded status for the US plans of S&P 500
ratio is likely around          companies remains depressed. We estimate funded status as of late November 2010 to be
75% as it usually               approximately 82%, in-line with where it was at the end of 2009 despite the notable rise in
trails the aggregate
                                share prices in recent months and significant contributions made by some plan sponsors
funded ratio.
                                this year (see Exhibit 1).


                                Exhibit 1: Funded status has risen during 4Q2010, but is still around the 2009 level
                                And still below the 2002 level during the previous pension downturn

                                                             110%
                                                                                                                  108%
                                                                    GAAP Funded Status:
                                                                    2009: $210 billion underfunded
                                                                    2010 YTD(E): $228 billion underfunded
                                                                                                           101%
                                                                    Note: S&P 500, US plans only
                                                             100%




                                                                                                    93%
                                             GAAP funded %




                                                                                             92%
                                                                                 90%
                                                             90%



                                                                      84%
                                                                                                                                82%         82%

                                                             80%                                                         79%




                                                             70%
                                                                     2002        2003        2004   2005   2006   2007   2008   2009        2010
                                                                                                                                           YTD(E)


                                Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




The Goldman Sachs Group, Inc.                                                                                                                                3
December 1, 2010                                                                                                                                                             Global Markets Institute




Forecasting aggregate                            Exhibit 2 displays our year-to-date forecast, which essentially entails a rollforward of
funded status.                                   funded status from year-end 2009 through late 2010. As seen in the details below,
                                                 increases in the liability due to lower discount rates, driven by lower year-over-year long-
                                                 term interest rates, as well as new benefit accruals and interest on prior earned benefits
                                                 have placed downward pressure on funded levels.


Exhibit 2: Lower discount rates have offset asset returns and sizable contributions
S&P 500 – US plans only

S&P 500 - US plans only
Analysis as of November, 2010
$ amounts in millions
                            Assets          Notes
         Beginning of 2010  $987,130        Total US plan assets of S&P 500 companies*
 Actual Plan Asset Returns     97,524       Assumes 10% YTD return
              Contributions    50,417       11/12 of $55 billion annual estimate*
              Benefits Paid   (74,191)      11/12 of company-reported expected benefit payments in 2010*
    End of November 2010 1,060,879

                              Liabilities
        Beginning of 2010      1,197,217    Total US plan liabilities of S&P 500 companies*
            Actuarial Loss        79,016    LT corporate interest rates have fallen YTD; we assume discount rates drop 60 bps (assumes plan duration of 11)
             Interest Cost        64,969    11/12 of projected full year interest cost (2009 end of year discount rate (5.92%) * BOY liabilities (above))
             Service Cost         22,388    11/12 of projected full year service cost (service cost was 2.04% of the pension obligation in 2009; apply that % to 2010's BOY liabilities (above))
             Benefits Paid       (74,191)   Same as above
    End of November 2010       1,289,399

             Funded Status     ($228,519)
              Funded Ratio           82%

* See our June 11, 2010 "Pension review" report for additional details.


Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




Challenge # 1: All eyes on interest rates as year-end approaches


                                                 Low interest rates hampering pension accounting outcomes
This is the downside                             Low interest rates are problematic for many pension accounting calculations,
of low interest rates.                           contributing to higher gross pension obligations, lower funded levels, and
                                                 potentially higher pension expenses and cash contribution requirements. The
                                                 accounting discount rate used to calculate the present value of pension liabilities is
                                                 benchmarked to high-quality corporate bond yields. While the recent rise in long-term
                                                 corporate interest rates may help to mitigate some of the pension-related
                                                 pressures that many sponsors have been experiencing since the summer, these
                                                 rates are still below 2009 year-end levels (see Exhibit 3). Consequently, many
                                                 sponsors will still likely need to lower their accounting discount rates at the end of
                                                 December, placing pressure on many of the pension-related metrics referenced above.1




                                                 1
                                                   Long-term high-grade corporate bond yields are also used as the benchmark for calculating funded
                                                 status for contribution requirement purposes under the ERISA regulations and the Pension Protection
                                                 Act, although these rates are commonly smoothed over two years.


The Goldman Sachs Group, Inc.                                                                                                                                                                      4
December 1, 2010                                                                                                  Global Markets Institute




                                Exhibit 3: Despite the recent rise, long-term interest rates still lower than the end of 2009
                                Added pressure on pension outcomes


                                                        6.1
                                                                     Moody's Aa yield has risen in recent weeks, but
                                                        5.9               still below the 2009 year-end level.

                                                        5.7



                                     Moody's Aa yield
                                                        5.5

                                                        5.3

                                                        5.1

                                                        4.9

                                                        4.7

                                                        4.5

                                                        4.3
                                                           12/09   02/10        04/10             06/10   08/10           10/10

                                Source: Bloomberg; Moody’s; Goldman Sachs Global Markets Institute.




All of the accounting           Plan sponsors and investors will be keeping a close eye on interest rates right through
comes down to one               December 31. All pension accounting calculations are based on the measurement day of
day for calendar year-          the plan, which is the last day of a company’s fiscal year. From a financial reporting
end companies:
                                perspective for a calendar year-end company it really does not matter what interest rates
December 31st.
                                are during the year, it matters what they are on December 31. If rates were to rise more
                                from current levels, this could further alleviate pressure on funded status and expense
                                calculations. However, if they were to decline back to levels seen in late summer, much of
                                the “pension palpitations” that have concerned investors (and plan sponsors) earlier this
                                year would return.



                                Liability losses hurt GAAP earnings faster than asset losses
Rising liability values         The rise in liabilities due to a lower discount rate will likely have more of an
may contribute to               affect on pension expense calculations in 2011 than strong asset returns during
higher pension                  2010. While many plans are enjoying solid asset returns given the notable rise in equity
expenses in 2011.
                                prices during the second half of 2010, the liability “losses” generated by lower year-over-
                                year interest rates hurts more from a profit and loss perspective than the gains help. This is
                                directly related to the mechanics of pension accounting under US GAAP.

                                Current US GAAP allows for the “smoothing” of asset gains and losses up to a maximum
                                amount of five years. For a company that smoothes up to the maximum period of five
                                years, this essentially means that any gain or loss in a given year works its way into the
                                pension expense calculation over five years.

                                For example, most of the outsized actual asset losses that plans experienced during 2008
                                are still working their way through pension expense calculations for sponsors that smooth
                                over five years. This is one of the reasons why some companies did not see an immediate,
                                notable rise in pension expense during 2009 despite posting, in some cases, actual asset
                                losses in excess of 20% during 2008. The same treatment will affect asset gains this year,



The Goldman Sachs Group, Inc.                                                                                                           5
December 1, 2010                                                                                                                                       Global Markets Institute




                                resulting in the slow integration of these positive asset returns into the expense
                                calculations over the next several years.
Immediate impact                Actuarial losses generated from a pension liability that increases due to the
from lower rates.               utilization of a lower discount rate, however, are not smoothed. This means that
                                any loss generated when a plan measures its pension at the end of December will be
                                immediately eligible for amortization in 2011.2




Challenge # 2: Asset expected return assumptions under pressure
The average                     The average equal-weighted expected return assumption for US plans has declined 100
assumption for the              basis points since 2002 (see Exhibit 4). Although over a quarter of all companies in the S&P
S&P 500 will likely             500 used an expected return assumption of 9% or higher in 2003, by 2009 that figure had
continue to drift
                                declined to fewer than 3% (see Exhibit 5). Many of the largest plans still use relatively high
lower.
                                expected return assumptions. The average expected return assumption for plans with at
                                least $1 billion in assets was 8.25% during 2009, a full quarter of a percentage point above
                                the average of the broader population.


                                Exhibit 4: Average expected return assumption has fallen 100 bp since 2002
                                S&P 500 – US plans only

                                                                                                   9.2%


                                                                                                          9.0%
                                  Equal-weighted expected return assumption (S&P 500 - US plans)




                                                                                                   9.0%



                                                                                                   8.8%



                                                                                                   8.6%
                                                                                                                 8.5%

                                                                                                   8.4%
                                                                                                                        8.3%   8.3%
                                                                                                                                      8.2%
                                                                                                   8.2%
                                                                                                                                             8.1%   8.1%
                                                                                                                                                               8.0%
                                                                                                   8.0%



                                                                                                   7.8%



                                                                                                   7.6%



                                                                                                   7.4%
                                                                                                          2002   2003   2004   2005   2006   2007   2008       2009


                                Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




                                2
                                  Note that this does not mean that the entire loss will be recognized through P&L in 2011, but rather
                                that the entire loss will be considered as part of the amortization calculation next year. For more
                                information regarding the technical aspects of pension accounting, please see our “Pension
                                accounting primer” report from December 10, 2008.


The Goldman Sachs Group, Inc.                                                                                                                                                6
December 1, 2010                                                                                                       Global Markets Institute




                                Exhibit 5: Few companies still use an expected return assumption of 8.5% or higher
                                S&P 500 – US plans only


                                                            160
                                                                                                               141
                                                            140              2003                   134




                                      Number of companies
                                                            120              2009
                                                                                                                            95
                                                            100                                                   84
                                                            80                                  67
                                                            60                       52
                                                                        45
                                                            40                  26
                                                                   21
                                                            20                                                                    8
                                                             0
                                                                  7.49% or 7.50% -            8.00% -          8.50% - 9.00% or
                                                                    lower  7.99%               8.49%           8.99%    higher
                                                                             Expected return assumptions
                                Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




Lower expected                  Despite these reductions there is likely to be continued pressure on companies
return assumptions              to lower this assumption for 2011 and in future years. Part of this relates to various
increase pension                economic and market forecasts that postulate that forward-looking expected returns for
expense, but do not
                                various asset classes may be lower than actual historical returns. However, setting aside
affect funded status
calculations.                   those arguments, we highlight four additional reasons why reductions to this assumption
                                by corporate plans will likely continue.



                                1. Corporate plans likely to continue to de-risk in future years
Higher fixed income             Corporate plan sponsors have been shifting asset allocation out of equities and
allocations equate to           into fixed income and, in some cases, alternative asset classes since 2007. This
lower long-term                 can clearly be seen in our historical series of asset-weighted asset allocations for the US
expected returns.
                                plans of S&P 500 companies in Exhibit 6. From 2004 through 2007, a period of rising share
                                prices, the asset-weighted allocation to equities declined to 56% from 64%. By the end of
                                2009 the actual allocation had fallen to 48% which was almost exactly in line with the target
                                allocation for these plans.




The Goldman Sachs Group, Inc.                                                                                                                7
December 1, 2010                                                                                                             Global Markets Institute




                                Exhibit 6: Asset allocations began to shift in 2007
                                S&P 500 – US plans only

                                                  70
                                                                          64                                                        Equity
                                                               63                   63
                                                                                              62
                                                        59                                                                          Debt
                                                  60                                                   56                           Other
                                                                                                                                    Real Estate
                                                  50                                                            45     48
                                                                     Stable allocation to equities took a
                                                                     sharp step down in 2007 despite
                                                                     rising share prices at that time.
                                     In percent   40
                                                                                                                41
                                                                                                                       35     Targets at 2009
                                                  30    31                                             32                     year-end:
                                                                27        28        28        28                              Equity - 49%
                                                                                                                              Debt - 35%
                                                  20                                                                          Other - 11%
                                                                                                                       14     Real Estate - 5%

                                                                                                        8       9
                                                  10    6                           6         6
                                                                6         5

                                                        4                                     4        4        5
                                                                4         3         3                                   3
                                                   0
                                                       2002   2003      2004      2005     2006      2007      2008   2009
                                    Funded %           84%    90%        92%       93%      101%      108%     79%    82%


                                Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




What’s different                Much of this shift has been driven by the stricter accounting and funding rules that have
today? The regulatory           been enacted over the past five years. These regulations make the “penalty” for having a
and accounting                  negative change in funded status much quicker and deeper than under previous
environment.
                                regulations. Specifically, they result in more immediate balance sheet recognition of a
                                decline in funded status (accounting – FAS 158) and faster contribution requirements
                                (funding – Pension Protection Act).
Matching of assets              This means that plan sponsors have a greater incentive to have assets with characteristics
and liabilities is              similar to the characteristics of the plan’s liabilities. As pension liabilities are bond-like in
encouraged.                     nature, this implies a greater allocation to fixed income securities. Future accounting rule
                                changes that are currently in progress, which we address later in this report, will likely
                                provide even greater incentive for plans to increase allocations to fixed income, especially
                                as funded status improves over time, in an effort to minimize funded status volatility.3

                                One would naturally expect that as the actual allocation to less risky assets is increased, the
                                long-term expected return on plan assets should be correspondingly reduced. In Exhibit 7
                                we have detailed the asset-weighted allocation to “risky” assets and “Level 3” assets for all
                                companies in each indicated expected return assumption range. For the purpose of this
                                analysis we have simplistically classified “risky” assets as all non-fixed income
                                investments. Level 3 assets represent assets classified as such by the plan sponsor under
                                the FASB’s fair value hierarchy. Level 3 securities tend to be illiquid securities and often
                                represent a plan’s holdings in hedge funds, private equity, and other alternative asset
                                classes.4



                                3
                                  For additional information on plan investment policy and how funding and accounting rule changes
                                have impacted this aspect of pension plan management, please see our March 16, 2010 report entitled
                                “Dynamic approach to investment policy for corporate pension plans.”
                                4
                                 There is overlap between these two classifications as most Level 3 assets would also be classified as
                                “risky” under our methodology.


The Goldman Sachs Group, Inc.                                                                                                                      8
December 1, 2010                                                                                                                    Global Markets Institute




                                Exhibit 7: Expected ROA should decline as exposure to risky assets is reduced
                                S&P 500 – US plans only


                                                                        80%
                                                                               Risky Assets                             73.0%
                                                                                                         68.2%
                                                                               Level 3 Assets
                                                                                              61.9%




                                           Percentage of Total Assets
                                                                        60%
                                                                              52.6%




                                                                        40%




                                                                        20%                                                 16.8%
                                                                                                              14.7%
                                                                                  9.2%            9.7%



                                                                        0%
                                                                               < 7.75%    7.75% - 8.24% 8.25% - 8.74%   => 8.75%
                                                                                         Expected Return Assumption

                                Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




                                As expected, plans with lower exposures to “risky” and Level 3 assets have, on
                                average, lower expected return assumptions. Of course, whether these assumptions
                                are low enough based on lesser exposure to return generating asset classes is an open
                                question. As more and more plans shift to more liability-driven investment strategies, their
                                expected return assumptions will correspondingly drift lower. We have not addressed the
                                potential “risk” of buying fixed income securities during a period of low yields.



                                2. Large public pension plans cutting assumed rates of return
Changes coming from             Many high profile public defined benefit plans have recently been lowering their expected
some of the nation’s            return assumptions, often to rates below 8%. This leads to questions as to why some
largest plans.                  corporate plans are not doing the same, especially as many private plans have moved to a
                                more conservative asset allocation in recent years.5

                                Public plans have long been hesitant to lower this assumption given that it is used to
                                calculate the present value of their liabilities. In other words, lowering the assumption
                                raises the present value of their pension obligation, thereby reducing funded status. The
                                fact that many public plans have lowered or are considering lowering these assumptions,
                                despite the significant negative reporting (and public relations) implications, speaks to the
                                seriousness of these decisions. This is not something public plans are taking lightly.




                                5
                                  Much of these cuts are linked to the aforementioned belief by some economists and market
                                strategists that future financial asset returns will be lower than historical returns. However, since in
                                this point we are referring to pressure on corporate plans to cut rates given the actions of their public
                                sector counterparts, we consider it a separate issue.


The Goldman Sachs Group, Inc.                                                                                                                             9
December 1, 2010                                                                                                           Global Markets Institute




Waiting to hear what            Exhibit 8 details several examples of public plans that have lowered their expected return
CalPERS and                     assumptions over the past year. At the top of this exhibit we have listed CalPERS and
CalSTERS say.                   CalSTERS, the two largest US public defined benefit pension plans. While neither of these
                                plans has announced reductions to their respective assumptions, both have been
                                undergoing a review of their assumed rates of return and final decisions on whether they
                                will be lowered will be made over the next few weeks/months.


                                Exhibit 8: Reductions by public DB plans has brought further scrutiny to this assumption
                                More public plans will likely also join this list over the next year

                                                                                                            New        Previous
                                                                                        Approximate       Expected     Expected
                                                                                            Assets         Return       Return         Date of
                                Public Pension System                                    (in billions)   Assumption   Assumption   Change/Decision

                                CalPERS                                                     $207               ?        7.75%       February 2011*

                                CalSTERS                                                    $132               ?        8.00%      December 2010*

                                Illinois State Employees Retirement System                   $9              7.75%      8.50%        October 2010

                                New York State Common Retirement Fund                       $125             7.50%      8.00%      September 2010

                                Virginia Retirement System                                   $48             7.00%      7.50%         June 2010

                                San Diego County Employees Retirement Association            $7              8.00%      8.25%         June 2010

                                Colorado Public Employees Retirement Association             $33             8.00%      8.50%      September 2009

                                * Anticipated

                                Source: Goldman Sachs Global Markets Institute; plan reports and releases.




Momentum is                     Even as we await final decisions from the two largest public plans, we see ample evidence
building.                       among other public plans that a shift is under way. The New York State Common
                                Retirement Fund, the third-largest public DB plan, lowered its assumption to 7.5% from
                                8.0% in late summer 2010. Earlier in 2010 the Virginia Retirement System, with almost $50
                                billion of assets, lowered its assumption to 7.0% from 7.5%. New York City Comptroller
                                John Liu recently indicated that the 8% assumed return assumption for the city’s plans,
                                which comprise approximately $100 billion in assets, may need to be lowered.

                                In some cases these reductions are not one-time events. Some plans that have recently
                                reduced their expected return assumption are already in the process of looking to lower it
                                again.
Lower assumed                   As large public plans reduce this assumption, often times to a number beginning with a
returns will mean               “7”, it raises questions as to why other plans believe they can attain returns of, for example,
higher contribution             8.5% or higher. We suspect that as more public plans reduce this assumption, especially if
requirements.
                                CalPERS and CalSTERS lower theirs, increasing pressure will be placed on corporate plans
                                to lower their assumptions too.



                                3. Expected return assumptions for foreign plans below US plans
US expected return              Many large US multinational companies have defined benefit plans for both their US and
assumptions often               their non-US operations. Expected return assumptions for the non-US plans of these
notably higher than             companies are frequently below those of their US counterparts, sometimes in excess of
non-US assumptions
                                100 basis points.
despite, at times,
similar investment              In the past it was difficult to discern why this may have been the case, and often it was
policies.                       simply assumed that the non-US plans had substantially different asset allocations which



The Goldman Sachs Group, Inc.                                                                                                                     10
December 1, 2010                                                                                                    Global Markets Institute




                                accounted for the difference in the return assumption. Certainly, local regulations, tax, and
                                financial considerations can influence asset allocation policy.

                                However, the mandating of disclosures around plan assets allocations, first under FAS
                                132(R) in 2003 and subsequently under FSP FAS 132(R)-1 in 2008, have provided a much
                                greater insight into the differences and, sometimes, similarities between the asset
                                allocations of US and non-US plans.

                                In some cases the asset allocations of the US and non-US plans for some companies
                                appear substantially similar, or perhaps even more risky on the non-US side. Despite this,
                                the US expected return assumption exceeds that of the non-US.

                                We compiled the 2009 US and non-US expected return assumptions for the 25 companies
                                in the S&P 500 that maintained the largest non-US plans, by asset size, that also had US
                                based plans. These 25 plans collectively represented almost 85% of the total non-US
                                pension assets for the entire S&P 500. On 23 occasions the expected return assumption for
                                their US plans exceeded that of their non-US plans. In only one instance was the US
                                assumption lower (see Exhibit 9).


                                Exhibit 9: US expected return assumptions consistently exceed those of non-US plans
                                Based on 25 company sample


                                                              25        23

                                                              20
                                       Number of Companies 




                                                              15

                                                              10


                                                              5
                                                                                                  1                   1
                                                              0
                                                                      Higher                  Lower             Not Disclosed
                                                                   US Plan Expected Return Assumption Compared to Non‐US Plan 
                                                                                    Expected Return Assumption 

                                Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




                                Differences in allocations within asset classes may certainly contribute to different ROA
                                assumptions. For example, one plan’s fixed income allocation could be heavily skewed
                                towards corporate bonds while another plan within the same company may have a debt
                                allocation tilted towards lower yielding government bonds. The same could be true for
                                other asset classes (e.g., developed market equity versus emerging market equity). The
                                asset allocation information disclosed by companies in their SEC filings often do not allow
                                for such a detailed review regarding the appropriateness of a plan’s expected return
                                assumption. Nonetheless, differences in these assumptions could raise additional
                                questions regarding the assumptions used by some US plans.




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                                4. SEC always focused on critical pension accounting assumptions
Small changes in                Pension accounting and reporting involves a dizzying array of actuarial assumptions. These
assumptions can have            include the expected return assumption on plan assets, the proper discount rate to
large financial                 calculate the present value of the pension liability, and estimates of mortality. Small
reporting
                                changes in these assumptions can often lead to large changes in funded status and the
implications.
                                recognition of pension expense. In addition, reasonable people can often disagree on the
                                appropriateness of an assumption, leading at times to wide disparity in practice.

                                Given the importance of assumptions to pension accounting, the Securities and Exchange
                                Commission (SEC or Commission) has often focused on these assumptions, either in
                                public speeches or in requesting specific information from registrants. Below we cite
                                several examples of the Commission’s interest in this area through the years:

                                   2004: SEC asked six leading companies for information regarding assumptions used
                                    for their defined benefit and retiree health care plans. Other companies used higher
                                    expected return assumptions and discount rates and lower health care cost trend rates
                                    assumptions, so it appeared the size of the plans for these sponsors relative to the
                                    overall size of the companies likely played a role in the SEC’s selection process.

                                   2003: The Commission indicated that plans using expected return assumptions of 9%
                                    or higher may be asked to justify the assumption.

                                   Early 1990s: SEC reviewed discount rate assumptions for many plans because the
                                    Commission was concerned that companies were using high rates that were not being
                                    adjusted to reflect the lower interest rate environment then prevailing.

                                The points we have highlighted earlier would seem to indicate that SEC interest in pension
                                assumptions could be especially acute this year. We note that the AICPA’s annual
                                conference on SEC and PCAOB developments will be held, as it is every year, in early
                                December in Washington, DC. This conference reviews many of the latest developments in
                                standard setting and enforcement. We would not be surprised if one or more speakers or
                                panelists referenced increased focus on pension accounting assumptions in their remarks.
Not just corporate              Keep in mind that earlier in 2010, in a rare foray into the municipal world, the Commission
plans under review.             charged the State of New Jersey with securities fraud for misrepresenting and failing to
                                disclose to investors in billions of dollars worth of municipal bond offerings that it was
                                underfunding the state’s two largest pension plans. It is safe to say that pension issues in
                                general are on the SEC’s radar screen.




Change # 1: Asset allocations continue to shift
Changing investment             Corporate plan sponsors continue to re-evaluate investment policy, often
policy often linked to          adopting dynamic investment policies that call for them to de-risk the plan as
stricter funding and            funded status improves. While some plans have already moved in this direction, and
accounting
                                may be in the position in 2011 to implement asset allocation adjustments that have already
regulations.
                                been mapped out, others may view 2011 as a time to change policy to a more dynamic
                                strategy if they have not done so already.



                                These are not passive shifts – active changes to target allocations
                                We previously demonstrated in Exhibit 6 that actual asset allocations, at an aggregate level,
                                have changed notably since 2007. This has resulted from conscious decisions by plan
                                sponsors to alter their allocations and can be seen in Exhibit 10 where we have detailed the




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                                asset-weighted target asset allocations for US plans. Note that the trends in actual
                                allocation in Exhibit 6 correspond with the trends in target allocations below.


                                Exhibit 10: Target allocation disclosures highlight multi-year shifts by corporate plans
                                Downward trend to equity has been in place for several years


                                               70
                                                                                                                             Equity
                                                     61      61         60                                                   Debt
                                               60                                   58
                                                                                                                             Other
                                                                                                   54
                                                                                                         51                  Real Estate
                                                                                                                49
                                               50


                                               40
                                  In percent




                                                                                                   34    36     35
                                               30                                   32
                                                     30      30         30

                                               20

                                                                                                                11
                                               10                                                  7     8
                                                     5       5           5           6
                                                                         5                         5     5      5
                                                     4       4                      4
                                                0
                                                    2003   2004       2005        2006        2007      2008   2009


                                Source: Goldman Sachs Global Markets Institute; company reports.




                                Looking strictly at the equity allocation for these plans in Exhibit 11, we can see a steady
                                and consistent decline in both the target and actual allocation to this asset class. By the end
                                of 2009 the actual allocation to equities was essentially in line with the target allocation to
                                these securities at that time. We would expect, nonetheless, for the target and actual
                                allocation to equities to continue to drift lower over time.




The Goldman Sachs Group, Inc.                                                                                                              13
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                                Exhibit 11: Corporate pensions have lowered allocations to equities in recent years
                                Actual allocation at the end of 2009 more in line with target than in previous years


                                                                             70

                                                                                                                     Equity Target
                                                                             65




                                         Percentage allocation to equities
                                                                                                                     Equity Actual


                                                                             60


                                                                             55


                                                                             50


                                                                             45


                                                                             40
                                                                                  2003   2004   2005   2006   2007   2008        2009

                                Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.




                                More and more companies disclosing these types of actions
                                In addition to the macro-level historical data previously seen in Exhibit 6, we can also point
                                to company-specific examples where plans are either explicitly stating that they are shifting
                                allocation to greater fixed income as a means of reducing funded status volatility, or these
                                shifts are apparent through disclosed changes in their target asset allocations. Consistent
                                with the macro data above, many “micro” examples first emerged several years ago, some
                                of which we documented in our March 20, 2007 report entitled “LDI in 2007 – where do we
                                stand?” Exhibit 12 details more recent company-specific examples.
Honeywell the latest            This running list of companies in Exhibit 12 is rapidly becoming something akin to a
example.                        telethon tote board. As time passes, more and more companies are “on the board.” The
                                most recent addition was Honeywell which announced a number of pension-related
                                changes on November 16, 2010. The gray box on pages 16 and 17 examine some of the
                                important considerations related to these changes. We suspect this list will grow,
                                especially as funded status eventually improves either through contribution activity, rising
                                interest rates, or asset returns.




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                                Exhibit 12: Recent examples of de-risking actions
                                We suspect more companies will be joining this list in 2011

                                     Sorted by plan assets
                                     $ amounts in millions                                                           Plan Assets
                                     US plans only                                                                    as of last
                                                                                                                        Fiscal
                                     Ticker Company Name               Sector           Industry                      Year-End Comments
                                     HON    Honeywell Intl. Inc.       Industrials      Aerospace & Defense            $13,765   On its November 16, 2010 conference call, the company indicates that it will migrate, over several years, from its current strategy of 80%
                                                                                                                                 return seeking assets/20% fixed income to 20% return seeking assets/80% fixed income. This strategy was being implemented to "mitigate
                                                                                                                                 variability going forward" as "investment/liability matching reduces pension expense variability."


                                     FDX     FedEx Corp.               Industrials      Air Freight & Logistics        $13,295    From FDX's May 2010 10-K: "As part of our strategy to manage future pension costs and net funded status volatility, we have transitioned to a
                                                                                                                                  liability-driven investment strategy with a greater concentration of fixed-income securities to better align plan assets with liabilities."


                                     XOM     Exxon Mobil Corp.         Energy           Integrated Oil & Gas           10,277     The company's target allocation to debt securities increased to 40% as of the end of 2009 versus approximately 25% at the end of 2008.

                                     PCG     PG&E Corp.                Utilities        Multi-Utilities                 9,330     From PCG's 2009 10-K: "Over the last three years, target allocations to equity investments have generally declined in favor of longer-maturity
                                                                                                                                  fixed income investments as a means of dampening future funded status volatility." The company's target allocation to fixed income
                                                                                                                                  increased to 50% as of the end of 2009 versus 40% as of the end of 2008. The target allocation to equity decreased by the same amount
                                                                                                                                  over the same time period.


                                     JCP     J.C. Penney Co. Inc.      Consumer Disc.   Department Stores               4,314     From JCP's January 2010 10-K: "In conjunction with our policy, during 2009, we slightly rebalanced the target allocation mix to initiate our
                                                                                                                                  long−term goal to move from an equity−weighted to a fixed income−weighted investment strategy." The company had previously announced
                                                                                                                                  that it planned to redeploy company stock, real estate, private equity, and short-duration fixed income to long-duration fixed income.


                                     NCR     NCR Corporation           Information Tech. Computer Hardware              2,582     From NCR's 2010 Q1 earnings release: "During the first quarter of 2010, the Company completed a comprehensive analysis of its capital
                                                                                                                                  allocation strategy, with specific focus on its approach to pension management. As a result of this analysis, the Company plans to
                                                                                                                                  substantially reduce future volatility in the U.S. pension plan by rebalancing the asset allocation to a portfolio of entirely fixed income assets
                                                                                                                                  by the end of 2012." (emphasis added)


                                     XEL     Xcel Energy Inc.          Utilities        Multi-Utilities                 2,449     From XEL's 2009 10-K: "The investment strategy employed during 2009 is based on plan-specific investment recommendations that seek to
                                                                                                                                  minimize potential investment and interest rate risk as a plan's funded status increases over time. The investment recommendations result in
                                                                                                                                  a greater percentage of short-to-intermediate term and long-duration fixed income securities being allocated to specific plans having relatively
                                                                                                                                  higher funded status ratios, and a greater percentage of growth assets being allocated to plans having relatively lower funded status ratios."
                                                                                                                                  The company's target allocation to long duration fixed income increased to 34% as of the end of 2009 versus 0% as of the end of 2008.


                                     TWX     Time Warner Inc.          Consumer Disc.   Movies & Entertainment          2,092     From TWX's 2009 10-K: "As a result of the most recent review of asset allocations, the Company will transition its asset allocation from its
                                                                                                                                  current target of 75% equity investments and 25% fixed income investments toward a target of 50% equity investments and 50% fixed income
                                                                                                                                  investments to better match the assets’ characteristics with those of the Company’s pension liabilities."


                                     RF      Regions Financial Corp.   Financials       Regional Banks                  1,252     From RF's 2009 10-K: "The pension plan’s investment strategy is shifting from focusing on maximizing asset returns to minimizing funding
                                                                                                                                  ratio volatility, with an increase to the allocation to bonds." The company's target allocation to fixed income increased to 32% as of the end of
                                                                                                                                  2009 versus 25% as of the end of 2008.


                                     ETN     Eaton Corp.               Industrials      Industrial Machinery            1,205     The company's target allocation to debt securities increased to 25% as of the end of 2009 versus 15% at the end of 2008.

                                     SUN     Sunoco Inc.               Energy           Oil & Gas Refining & Mrkt.       804      From SUN's 2009 10-K: "During 2009, a shift in the targeted investment mix was approved which is resulting in a reallocation of 10 percent of
                                                                                                                                  plan assets from equity securities to fixed income securities. In addition, the duration of the fixed income portfolio will be increased to better




                                                                                                                                                                                                                                                                                       Global Markets Institute
                                                                                                                                  match the duration of the plan obligations. The objective of this strategy change is to reduce the volatility of investment returns, funded status
                                                                                                                                  of the plans and required contributions."


                                Source: Goldman Sachs Global Markets Institute; company reports and presentations.
15
December 1, 2010                                                                                                  Global Markets Institute




   A deeper examination of Honeywell’s pension changes
   Honeywell’s November 16, 2010 announcement regarding several changes to its pension plan received
   considerable attention from investors, other plan sponsors, and the financial media. The changes will affect
   how the company reflects the performance of its plan in its income statement as well as how it allocates plan
   assets in the future. Below we provide commentary on several key considerations with respect to the changes,
   as well as questions investors and plan sponsors may be contemplating post Honeywell’s announcement.


   Financial reporting considerations
   Honeywell is changing the way it accounts for its pension plans to a mark to market framework that is more in
   line with the international accounting for pension plans. All unrecognized actuarial gains and losses – that is,
   gains and losses due to (1) differences between actuarial assumptions and actual experience and (2) changes
   in actuarial expectations – outside of the accounting “corridor” would be recognized immediately in the fourth
   quarter of any given year. Between losses that the company expects to recognize in 4Q2010 and losses that
   will be restated to prior years, approximately $5.5 billion of the company’s $7.5 billion of unrecognized losses
   will be recognized through profit and loss. There will be no ongoing amortization of actuarial gains and losses
   in the future.
   Unrecognized actuarial losses like these have been an ongoing drag on reported earnings for many
   companies as they ultimately are recognized through reported earnings.a By changing the accounting
   treatment the company has removed the possibility of any ongoing earnings drag from the amortization of
   these losses.
   Note that Honeywell would still have approximately $2 billion of unrecognized losses related to its DB pension
   plan, an amount representing the total capacity of its accounting corridor (again, see footnote a). If the
   company were to generate actuarial gains in 2011, perhaps through a lower liability value if interest rates
   were to rise, then the net amount of unrecognized actuarial losses would decline and would likely remain
   within the corridor, resulting in no 4Q2011 charge. If additional actuarial losses were created in 2011, and the
   corridor was breached, any losses outside the corridor would be recognized immediately in 4Q2011 earnings.


   Valuation considerations
   The company’s accounting change did not affect the size of the pension liability, the funded status of the plan,
   or any future contribution requirements. In a theoretically pure way, the accounting change by itself should
   have no affect on the company’s valuation.
   However, it will make GAAP earnings higher in the future then they would have been absent the change.
   Consequently, some investors, perhaps unaware of the change or its implications, may be more positively
   inclined. In addition, the accounting change makes the performance of the pension plan easier to understand,
   thereby allowing the company, analysts, and investors to spend more time focusing on the operations of the
   company as opposed to arcane accounting regulations. These factors could collectively increase positive
   sentiment around the company.
   In addition, consider the two 2011 scenarios we outlined in the “Financial reporting considerations” section. In
   the first, actuarial gains generated in 2011 would keep the plan below the corridor and no 4Q earnings change
   would result. That is a good thing. In the second, actuarial losses in 2011 cause the plan to breach the corridor
   resulting in a 4Q2011 charge to earnings…that most investors would probably ignore. So in either case, the
   amount analysts and investors consider as pension expense in 2011 would likely be the amount recognized
   under scenario one, no matter what happens. This is what is usually known as a “win win.”
   It can be argued, however, that in a period of falling funded status, either due to poor asset returns or rising
   liability values due to falling interest rates, any large 4Q charge would shine an even brighter spotlight on the
   deterioration in funded status. This could, potentially, have negative valuation implications.
   However, we note that the accounting change Honeywell has implemented is closer to international rules
   today and closer to the way US companies may have to report these items in the future. Therefore, the
   company’s change will bring it more in line with future financial reporting anyway.
   _______________________________
   a
     We will not present here a detailed discussion of the corridor test and how unrecognized gains and losses are ultimately
   recognized through GAAP earnings. Those interested in learning about this highly complicated area of the GAAP
   accounting framework can refer to our “Pension accounting primer” report from December 10, 2008.




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   Will other companies follow the accounting change?
   Quite possibly. After all, the company has essentially taken $5.5 billion of its $7.5 billion of net unrecognized
   losses in its pension plan and either relegated them to prior periods or put them in a large 4Q2010 charge that
   many analysts and investors are likely to ignore. This removes a potentially large drag on GAAP earnings in
   future periods.b
   Keep in mind that S&P 500 companies had over $400 billion of unrecognized losses on their US defined
   benefit pension plans at the end of 2009.c That figure moves even higher when unrecognized losses on non-
   US DB plans and retiree health care plans are considered. Any future recognition of these losses would
   present an ongoing drag on reported earnings. Other plan sponsors may look at the accounting treatment
   adopted by Honeywell as a good way to avoid future recognition of previously unrecognized losses, as well as
   a way to potentially get investors to look through, by means of a pro forma adjustment, any large, lumpy 4Q
   charges that may emanate in the future.


   Will other companies follow the asset allocation shift?
   Undoubtedly yes. While Honeywell was ahead of the curve in moving its accounting closer to that used under
   international accounting standards, it certainly has not been the first to announce a shift in asset allocation to
   a more liability-driven strategy. The macro and micro level data in Exhibits 6, 10, 11, and 12 demonstrate that
   this has been an ongoing trend for several years. We expect more companies to follow suit, especially as the
   IASB’s pension accounting proposal is finalized and as companies increase funded status through
   contribution activity and/or market returns.
   _______________________________
   b
     Note that not all of a company’s net unrecognized losses (or gains) would necessarily be recognized in the future through
   GAAP pension expense. Nonetheless, the larger the figure, the greater the chance that a portion of it would have to be
   recognized.
   c
    For a detailed listing of these unrecognized losses for each company in the S&P 500, please see our June 11, 2010
   “Pension annual review” report.




Change # 2: Income statement accounting likely to change
The impact of                   The IASB has proposed changes to the way pensions would be accounted for
globalized                      through the income statement under International Financial Reporting Standards
accounting.                     (IFRS). These changes to international rules could eventually be mandated for US
                                companies irrespective of whether the SEC ultimately allows or requires IFRS in
                                this country. The changes would significantly change the expense recognition
                                for sponsors of these plans. Importantly, use of the expected return assumption
                                would be eliminated, removing a powerful incentive for some plans to maintain
                                exposure to equities and other risky asset classes, especially when funded
                                status approaches 100%.



                                IASB’s pension project has evolved over the past few years
Shift in the Board’s            Under current international and US GAAP accounting rules, companies recognize
thinking on where to            hypothetical income that they expect to earn, on average, each year. This is accomplished
account for actual              by applying an expected return assumption to plan assets. As we indicated in Exhibit 4 in
asset gains and
                                our “Challenge #2” section of this report, the average expected return assumption for the
losses.
                                US plans of S&P 500 companies was 8% during 2009. This hypothetical income is then
                                used to offset pension expenses, thereby lowering the amount of pension expense
                                recognized by the plan sponsor.

                                Note that given the mechanics of these calculations, plan sponsors have an incentive to
                                keep this assumption as high as possible. The higher the expected return assumption, the



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                                greater the amount of hypothetical expected return income and the lower the amount of
                                pension expense that is recognized.

                                This accounting treatment has, at times, been highly criticized. Earlier in the IASB’s project
                                the Board had tentatively decided that the expected return assumption would be
                                eliminated and actual asset gains and losses would be recognized directly in profit and loss
                                in the period that they were generated. This would have introduced a significant amount of
                                volatility to reported earnings and EPS for companies that maintain relative large DB plans.

                                The Board subsequently altered its view and officially proposed in its April 2010 Exposure
                                Draft that the expected return assumption would still be eliminated, but that actual asset
                                gains and losses would be recognized in other comprehensive income (OCI) outside of
                                profit and loss. Exhibit 13 summarizes some of these changes from the IASB’s “Preliminary
                                Views” document on pension-related changes in March 2008 to its Exposure Draft in April
                                2010.


                                Exhibit 13: IASB’s pension project – from Preliminary Views to Exposure Draft
                                Feedback on current proposal will be considered during re-deliberations

                                 March 2008                                            April 2010
                                  * IASB issues a “Preliminary Views” document          * IASB issues an “Exposure Draft” document 
                                    outlining the Board’s thoughts on potential            which is a formal proposal to change IFRS 
                                    changes to IAS 19, the current international           pension accounting
                                    accounting (IFRS) for pensions
                                                                                        * Proposal calls for gains and losses on assets 
                                  * The IASB tentatively decides that all changes         and liabilities to be recognized outside of 
                                    in benefit obligations and plan assets are to         P&L in other comprehensive income
                                    be recognized in net income immediately 
                                    when they occur                                     * These gains and losses would not be 
                                                                                          “recycled” into P&L
                                  * This would have introduced significant 
                                    volatility to the income statement                  * Use of the expected return assumption 
                                                                                          would be eliminated


                                Source: IASB.




                                Most volatile elements of pension expense would be outside of P&L
Plan sponsors had               The change in the IASB’s view means that the most volatile components of pension plans,
been concerned about            namely asset and liability gains and losses, would not be reflected in net income and
potential income                earnings per share. Only service cost, the benefits earned by current workers in the current
statement volatility.
                                period as well as prior service benefit enhancements, would be recognized in operating
                                earnings.

                                An interest component would be reflected as income or expense depending on whether
                                the plan was overfunded or underfunded. It would be calculated by multiplying the funded
                                status by the discount rate, resulting in interest income if the plan was overfunded and
                                interest expense if the plan was underfunded.6 This item would be included with other
                                financing related items.


                                6
                                  Note that this is the same treatment as if the discount rate had been applied to the gross pension
                                liability, resulting in interest expense, and the same discount rate had been applied to plan assets,
                                resulting in expected return income, with the two products netted against each other. Therefore,
                                another way to think of the proposal is that the expected return on plan assets assumption has been
                                linked to the discount rate as opposed to assumed long-term asset returns.

The Goldman Sachs Group, Inc.                                                                                                           18
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                                Re-measurements, which would include actual asset gains and losses as well as changes in
                                the present value of the pension liability due to fluctuations in long-term interest rates,
                                would be accounted for outside of profit and loss in OCI. Exhibit 14 summarizes the
                                proposed treatment in the IASB’s Exposure Draft.


                                Exhibit 14: Pension expense components would be presented separately
                                Split amongst operating, financing, and comprehensive income

                                                                           Service                      Recognized in
                                                                            Cost                       P&L (operating)

                                           Pension                      Net Interest                     Recognized in
                                             Cost                     Income/Expense                    P&L (financing)

                                                                                                          Recognized
                                                                     Remeasurements
                                                                                                            in OCI

                                Source: IASB.




Removing an ongoing             This proposed treatment would mean that those convoluted actuarial gains and losses that
drag to reported                are currently amortized into pension expense over a long period of time would be
earnings, but…                  relegated to OCI. This would, holding all else constant, lower pension expense in the
                                current environment as most companies are amortizing losses. However, not all else is
                                being held constant. As we examine in the next section of this report, the elimination of the
                                expected return assumption would result in an increase to reported net pension expense
                                for some plans.



                                Increase in the amount of recognized pension expense
…taking away                    While the elimination of the amortization of actuarial losses would benefit reported
hypothetical returns            pension expense in the current environment, the elimination of the expected return
that offset plan                assumption, and the hypothetical income it produces, would result in a net increase to
expenses.
                                reported expenses for many plan sponsors. The simplistic example in Exhibit 15
                                demonstrates that under various funded levels, the net amount of pension expense that a
                                company would recognize would rise. Instead of being able to use assumed hypothetical
                                plan asset returns as an offset to other plan expenses, a company would simply apply the
                                discount rate to the net funded status position.




The Goldman Sachs Group, Inc.                                                                                                  19
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                                Exhibit 15: Upward pressure on reported pension expense at all funded levels
                                Simplistic example

                                Discount Rate Assumption: 6%
                                Expected Return on Plan Assets Assumption: 8%                           Fully
                                                                                         Underfunded   Funded       Overfunded

                                Current                 Obligation                          $1,000      $1,000           $800
                                Accounting
                                                        Assets                                 800       1,000           1,000

                                                        Funded Status                         (200)         0             200

                                                        Interest Expense                        60         60              48

                                                        Expected Return on Plan Assets          64         80              80

                                                        Net Income/(Expense)                    $4        $20             $32




                                Potential Future        Obligation                          $1,000      $1,000           $800
                                Accounting
                                                        Assets                                 800       1,000           1,000

                                                        Funded Status                         (200)         0             200

                                                        Net Interest Income/(Expense)         ($12)        $0             $12


                                Source: Goldman Sachs Global Markets Institute; IASB.




                                Note that these changes to the income statement accounting would not change the gross
                                pension liability, the funded status of the plan, or any cash contribution requirements.
                                Nonetheless, they would make GAAP earnings lower, under certain conditions, which
                                could have negative implications for some companies.
Final changes still             We hasten to point out that the IASB’s proposal is still just that – a proposal. Even if
years away from                 finalized in current form, and if it were to work its way into the accounting for US
implementation.                 companies, that change would likely still be several years away. Consider that the IASB is
                                aiming to finalize its proposal by mid-2011 and any effective date under international rules
                                would not be before January 1, 2013.

                                In an effort to provide some clarity on how the proposed accounting would impact US
                                companies if finalized as currently contemplated, we took 2009 reported pension expense
                                for S&P companies and calculated on a pro forma basis what pension expense would look
                                like had the IASB’s proposed accounting been in effect at that time. In Exhibit 16 we have
                                detailed those companies that would have seen reported pension expense increase by over
                                $100 million during 2009 under the IASB’s proposed guidance.

                                The left side of the Exhibit details all of the individual components of as reported pension
                                expense. The “other” column represents amortized actuarial losses, amortized prior
                                service cost, as well as, at times, gains or losses from settlements and curtailments.

                                The right side of the exhibit carries over service cost from the left side since this amount
                                will still be reflected in pension expense.7 We then calculated what the interest


                                7
                                  The actual amount of service cost recognized would be even greater since prior service cost, which
                                under current guidance is amortized and is included in the “other” column, would be recognized and
                                included as service cost under the IASB’s proposed model. For simplicity, though, we have used the
                                as-reported service cost.


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                                expense/income component would have been by multiplying the company’s discount rate
                                set at the end of 2008 by its funded status as of the end of that year. The sum of those two
                                figures, service cost and interest expense/income, would represent the company’s annual
                                pension expense under the IASB’s proposal

                                As 2008 was a year when many plans were underfunded, this places upward pressure on
                                reported pension expense because interest expense is recognized (as opposed to interest
                                income if the plan had been overfunded). Note, however, that during overfunded periods,
                                while companies would be recording interest income as opposed to interest expense, they
                                also would no longer be recognizing the amortization of actuarial gains.



                                Two key takeaways from this proposed change
Reported earnings               First, reported pension expense would move higher for many plan sponsors, in
would look worse for            particular those that have sizable plan assets since they would be losing the benefit of
some companies.                 notable expected return income. It would also be significant for plans that have a large
                                spread between their discount rates and their existing expected return assumptions.

                                Note that it would still be possible for a company to generate pension income under the
                                proposed accounting, just as some companies do today. Consider, for example, a company
                                with a completely frozen plan that is overfunded. Service cost would be zero and the
                                company would recognize interest income by applying the discount rate to the overfunded
                                position, thereby resulting in net pension income.
Removing a barrier to           Second, a powerful incentive to maintain exposure to equities and other riskier
de-risking.                     asset classes would be removed. This would be especially true for plans that are at or
                                near a fully funded level, or have been frozen. Under the proposal, any expense or income
                                generated by the plan would be independent of the investing risks.

                                After the previous pension downturn during 2000-2002 there were many discussions
                                surrounding potential reforms to accounting and funding regulations. Those discussions
                                ultimately led to reforms to funding regulations under the Pension Protection Act and
                                balance sheet accounting under FAS 158.

                                However, many plan sponsors expressed at that time that the reform initiative that
                                concerned them the most were the ones that would potentially change the way they
                                account for the plan through the income statement. Despite the significant reforms
                                that have been enacted over the past several years, in many respects this reform
                                to the income statement accounting for these plans is the reform of greatest
                                significance from a plan sponsor perspective. It would likely give more
                                incentives for sponsors to engage in liability-driven investment strategies as
                                concerns about the financial reporting implications for a decline in the expected
                                return assumption would be eliminated. Indeed, some of the movements to greater
                                fixed income exposure in asset allocations that we have detailed throughout this report
                                may have at least been partially motivated by an anticipation of the change to income
                                statement accounting.




The Goldman Sachs Group, Inc.                                                                                                  21
                                                                                                                                                                                                                                                           December 1, 2010
The Goldman Sachs Group, Inc.




                                Exhibit 16: Pro forma effects of proposed IASB accounting – greater than $100 million pro forma increase in expense in 2009
                                S&P 500 – US plans only

                                Sorted by pro forma pension expense in excess of GAAP expense
                                $ amounts in millions                                                                                                                                                                             Pro Forma
                                US plans only                                                                                   2009 GAAP as Reported                                     2009 Pro Forma                           Pension
                                                                                                                                                           Total                  2008      Discount                    Total      Expense
                                                                                                        Month                                             Reported               GAAP         Rate         Interest   Pro Forma   in Excess
                                                                                                       of Fiscal   Service   Interest     Exp             Pension    Service   Funded      (as of year-   Expense/     Pension     of GAAP
                                Ticker   Company Name                   Industry                       Year end      Cost      Cost     Return    Other   Expense      Cost     Status      end 2008)     (Income)     Expense     Expense
                                GE       General Electric Co.           Industrial Conglomerates          12        1,609     2,669     (4,505)   774        547      1,609     (4,438)        6.11          271        1,880       1,333
                                IBM      Intl. Bus. Machines Corp.      Computer Hardware                 12           0      2,682     (4,009)   421       (906)        0      (2,838)        5.75          163         163        1,069
                                T        AT&T Inc.                      Integrated Tele. Services         12        1,081     3,495     (4,561)   729       744       1,081     (6,108)        7.00          428        1,509        765
                                LMT      Lockheed Martin Corp.          Aerospace & Defense               12         870      1,812     (2,028)   382      1,036       870     (11,882)        6.13          728        1,598        562
                                F        Ford Motor Co.                 Automobile Manufacturers          12         343      2,698     (3,288)   402        155       343      (5,695)        6.50          370         713         558
                                HON      Honeywell International Inc.   Aerospace & Defense               12         224       993      (1,322)   187         82       224      (3,526)        6.95          245         469         387
                                BA       Boeing Co.                     Aerospace & Defense               12        1,090     2,964     (3,738)   905      1,221      1,090     (8,420)        6.10          514        1,604        383
                                UPS      United Parcel Service Inc.     Air Freight & Logistics           12         689      1,130     (1,488)   231        562       689      (3,494)        6.75          236         925         363
                                DD       E.I. DuPont de Nemours         Diversified Chemicals             12         192      1,270     (1,603)   296        155       192      (5,297)        6.14          325         517         362
                                JNJ      Johnson & Johnson              Pharmaceuticals                   12         511       746       (934)    158        481       511      (4,246)        6.50          276         787         306
                                UTX      United Technologies Corp.      Aerospace & Defense               12         429      1,285     (1,634)   385       465        429      (5,571)        6.10          340         769         304
                                FDX      FedEx Corp.                    Air Freight & Logistics            5         499       798      (1,059)    (61)      177       499        489          6.96          (34)        465         288
                                DOW      Dow Chemical Co.               Diversified Chemicals             12         270      1,081     (1,254)   150       247        270      (4,000)        6.61          264         534         287
                                GD       General Dynamics Corp.         Aerospace & Defense               12         203       491       (575)     (11)     108        203      (2,922)        6.48          189         392         284
                                MMM      3M Co.                         Industrial Conglomerates          12         183       619       (906)    141         37       183      (1,152)        6.14           71         254         217
                                C        Citigroup Inc.                 Other Div. Financial Svcs.        12          18       649       (912)      56      (189)       18        (80)         6.10            5          23         212
                                ABT      Abbott Laboratories            Pharmaceuticals                   12         221       368       (506)      56       139       221      (1,544)        6.70          103         324         185
                                LLY      Eli Lilly & Co.                Pharmaceuticals                   12         242       418       (585)      93       167       242      (1,558)        6.70          104         346         179
                                MRK      Merck & Co Inc                 Pharmaceuticals                   12         398       450       (649)      90       289       398      (1,100)        5.75           63         462         173
                                SO       Southern Co.                   Electric Utilities                12         146       387       (541)      42        34       146       (786)         6.75           53         199         165
                                DUK      Duke Energy Corp.              Electric Utilities                12          87       267       (362)      27        19        87      (1,474)        6.50           96         183         164
                                EXC      Exelon Corp.                   Electric Utilities                12         178       651       (778)    217        268       178      (4,124)        6.09          251         429         161
                                ITT      ITT Corp.                      Aerospace & Defense               12          99       329       (433)      55        50        99      (1,711)        6.24          107         205         156
                                PTV      Pactiv Corp.                   Metal & Glass Containers          12          15       240       (342)      51       (36)       15      (1,201)        6.74           81          96         132
                                CI       CIGNA Corp.                    Managed Health Care               12          43       250       (239)     (16)       38        43      (1,853)        6.25          116         159         121
                                BK       Bank of NY Mellon Corp.        Asset Mgmt. & Custody Bks.        12          96       160       (295)       7       (32)       96        114          6.38           (7)         89         121
                                ALL      Allstate Corp.                 Property & Casualty Ins.          12         125       331       (398)      34        92       125      (1,167)        7.50           88         213         121
                                PEP      PepsiCo Inc.                   Soft Drinks                       12         238       373       (462)    109       258        238      (2,243)        6.20          139         377         119
                                D        Dominion Resources Inc.        Multi-Utilities                   12         106       250       (405)      46        (3)      106       (136)         6.60            9         115         118
                                AA       Alcoa Inc.                     Aluminum                          12         139       682       (758)    144       207        139      (2,857)        6.40          183         322         115
                                MMC      Marsh & McLennan Cos.          Insurance Brokers                 12          76       219       (293)       5         7        76       (650)         6.60           43         119         112
                                TXT      Textron Inc.                   Industrial Conglomerates          12         116       310       (386)      62       102       116      (1,514)        6.28           95         211         109
                                RRD      R.R. Donnelley & Sons Co.      Commercial Printing               12          70       178       (256)       4        (5)       70       (481)         6.80           33         103         108
                                PRU      Prudential Financial Inc.      Life & Health Insurance           12         163       462       (728)      59       (44)      163       1,657         6.00          (99)         64         108
                                RTN      Raytheon Co.                   Aerospace & Defense               12         401      1,031     (1,221)   435       646        401      (5,401)        6.50          351         752         106




                                                                                                                                                                                                                                              Global Markets Institute
                                Source: Goldman Sachs Global Markets Institute; Capital IQ; company reports.
22
 Disclosures
This report has been prepared by the Global Markets Institute, the public policy research unit of the Global Investment Research Division of The
Goldman Sachs Group, Inc. (“Goldman Sachs”). As public policy research, this report, while in preparation, may have been discussed with or
reviewed by persons outside of the Global Investment Research Division, both within and outside Goldman Sachs, and all or a portion of this report
may have been written by policy experts not employed by Goldman Sachs.
While this report may discuss implications of legislative, regulatory and economic policy developments for industry sectors, it does not attempt to
distinguish among the prospects or performance of, or provide analysis of, individual companies and does not recommend any individual security or
an investment in any individual company and should not be relied upon in making investment decisions with respect to individual companies or
securities.

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America by Goldman Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom
and European Union.
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connection with its distribution in the European Union and United Kingdom; Goldman Sachs & Co. oHG, regulated by the Bundesanstalt für
Finanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures in addition to specific disclosures required by certain jurisdictions
Goldman Sachs conducts a global full-service, integrated investment banking, investment management and brokerage business. It has investment
banking and other business relationships with governments and companies around the world, and publishes equity, fixed income, commodities and
economic research about, and with implications for, those governments and companies that may be inconsistent with the views expressed in this
report. In addition, its trading and investment businesses and asset management operations may take positions and make decisions without regard
to the views expressed in this report.
Copyright 2010 The Goldman Sachs Group, Inc.

No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written
consent of The Goldman Sachs Group, Inc.
December 1, 2010                                                                                                     Global Markets Institute




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The Goldman Sachs Group, Inc.                                                                                                             24

				
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