Corporate Plans Seek to Limit Earnings Volatility
Health-Care Obligations a Rising Concern Among Public Plans

BOSTON, February 22, 2007 - A new comprehensive survey of large corporate and public defined benefit (DB) plans conducted by Pyramis Global Advisors found that against a backdrop of significant regulatory and accounting changes in 2006, many plans are considering new investment strategies to help them deliver on their obligations to employees. Pyramis' fifth annual defined benefit survey addressed issues with CIOs, treasurers and executive directors at more than 200 of the largest DB plans in the United States.

"In the face of new regulatory pressures, many plans were forced to re-examine their investment approaches," said Peter Chiappinelli, senior vice president, Pyramis Global Advisors. "The concerns we identified in this survey show a marked shift in attitudes toward any investment strategy that can reduce volatility or improve returns."

Corporate DB Plans

The survey, conducted after the emergence of new laws and accounting rules, such as the Pension Protection Act (PPA) and new standards from the Financial Accounting Standards Board (FASB), found that nearly 40% of executives from corporate DB plans cite "volatility to financials" as their top concern. Corporate DB plans now must adhere to faster and higher funding requirements. FASB is expected to require companies to report their pension plan deficits or surpluses on the income statement. To address their concerns with volatility to the financials, corporations have begun using or considering risk management strategies. For instance, half of all corporate DB plans claimed that they were using or considering liability-driven investing (LDI). And, for the first time ever, corporate DB plans' allocation to fixed income surpasses that of public DB plans.

According to the survey, to meet the goal of increasing returns, a large percentage of corporate DB plans are open to new investment approaches and reducing the past restrictions they placed on their investment managers. For example, results showed that many are looking beyond long-only stock portfolios, with 63% of corporate DB plans using or considering 130/30 equity portfolios, in which investment managers have limited ability to sell stocks short. In addition, 20% of corporate DB plans said they will be increasing allocations to non-U.S. equity and 19% of corporate DB plans said they will be increasing allocations to real estate.

Public DB Plans

The survey showed public DB plans are beginning to wrestle with new rules from the Government Accounting Standards Board (GASB), which, for the first time, will require them to account for future health-care liabilities. Chief among their rising concerns regarding costs are increasing life expectancies (e.g. new mortality assumptions) and rise in health-care costs. The majority of public DB plans estimate their health care liability (OPEB or other post-employment benefits) to be more than $1 billion. This has prompted them to focus more on investment performance, with 53% naming a low-return environment as their biggest concern.

"These new liabilities likely will need to be pre-funded, putting further stress on the system," said Chiappinelli. "This is another motivation for public DB plans to expand their universe of investment options."

In addition, the survey found that many plans were considering new ways of engineering their portfolios. For instance, survey results found that more than 80% of large public DB plans are either using or considering portable alpha programs. And, for the first time ever, the asset allocation to international equities for public DB plans actually exceeded the asset allocation to international equities for corporate DB plans.

"Public and corporate DB plans share a common need to find and employ new investment strategies and are loosening many of the historical constraints they've been under. They are interested in non-traditional strategies to help meet their return targets in a low-yielding, single-digit return environment," said Chiappinelli.

About the Survey

The fifth annual defined benefit survey was designed by Pyramis Global Advisors and was executed by Asset International, Inc, in October 2006. CIOs, treasurers and executive directors from 214 of the largest DB plans in the United States (124 corporate, 90 public) responded to an online questionnaire.

About Pyramis Global Advisors

Pyramis Global Advisors, a Fidelity Investments company, is an investment management firm focused on serving institutional investors such as corporate and public retirement funds, endowments, foundations and non-U.S. investors. Pyramis offers active and risk-controlled domestic equity, international equity, fixed-income, real estate, and alternative disciplines, which includes products using equity market neutral strategies. As of December 31, 2006, assets under management total approximately $149 billion.

About Fidelity Investments

Fidelity Investments is one of the world's largest providers of financial services, with custodied assets of more than $2.9 trillion, including managed assets of nearly $1.4 trillion as of December 31, 2006. Fidelity offers investment management, retirement planning, brokerage, and human resources and benefits outsourcing services to more than 23 million individuals and institutions as well as through 5,500 financial intermediary firms. The firm is the largest mutual fund company in the United States, the No. 1 provider of workplace retirement savings plans, the largest mutual fund supermarket and a leading online brokerage firm. For more information about Fidelity Investments, visit www.fidelity.com.

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