2009 AT&T Pension Asset Liability Study and Risk Budget L. Wayne Adams, CPA, CFA November 3, 2009

1. 2009 AT&T Pension Asset Liability Studyand Risk BudgetL. Wayne Adams, CPA, CFANovember 3, 2009

2. Agenda Discussion Agenda Foundation for success………………… 3 Asset allocation alternatives……. 4 thru 5 Risk budget………………….….. 6 thru 9 Page 2

3. Foundation for Success • The best portfolio solution has: • - a risk profile we can live with • - an asset mix we can execute consistently through market cycles • - an expected price we are willing to pay • Choose an asset allocation that allows the ability to stay invested through a full market cycle • Rebalancing is about buying low and selling high • Hasty responses can be our worst enemy • Judge returns over reasonable time horizons • Historical results often do not predict future results • Effective diversification means that not all investments will work at the same time Time-tested Principles: Page 3

4. Pension plan asset allocation review The AT&T Pension plan has 80% allocated to public asset classes and 20% to private markets. Hedge Funds are an active strategy overlaid with passive equity exposure. • There is no strategic allocation to cash. Cash generally is about 2% of plan assets • Hedge funds are not viewed as an asset class, rather as a form of active management. • When physical allocations do not meet policy benchmarks, cash and hedge funds are synthetically overlaid with futures to achieve policy compliance. Public Private (1) Hedge Funds are overlaid with passive equity exposure and are considered part of equity. We show them separately for discussion purposes. (2) Fixed Income private placements and other credit alternatives represented 11.6% of the fixed income portfolio. Page 4

5. Overview of active risk budgeting process Our active risk budget analysis was conducted through manager-by-manager performance assessment that included returns versus benchmarks, fees, allocation size,volatility and correlations with other managers. • Active risk budgeting for US Equity, International Equity and Fixed Income managers: • Historical returns versus benchmarks were analyzed to gross outperformance assumptions (gross alpha) • The fee schedules were loaded to estimate net outperformance (net alpha) • Tracking Risk, or return volatility versus the benchmark was estimated for each manager • Managers were placed in different layers based on their correlation with other managers (unlike returns, risks are not simply additive) • Aggregate asset class assumptions were made for private equity and real assets due to the large number of partnerships. • Active risk budgeting summary results are listed below: Page 5

6. Total return components Total return is composed of returns derived from market returns (beta) and those above or below the market (alpha). Total Return = ~85% Beta + ~15% Alpha Confidence Intervals 95% and 65% 35% 30% 25% Return% 20% 15% • Total expected return from our recent asset allocation was 7.8%. Adding our 1.2% expected net alpha derives a total return of 9.0%. • Asset allocation is the most important decision. • Active management is essential in achieving expected return of plan assets assumption of 8.5%. • Given the variability of markets and active management, a wide range of outcomes of total return is likely—from +29% to -11%. 10% 5% 2009: 7.8% 2008: 8.0% 0% 1.2% 1.3% 9.0% 9.3% -5% -10% -15% Beta + Alpha = Total Legend: 65% Confidence Interval 95% Confidence Interval Mean Page 6

7. Our recent decision to shift 5% from equities to fixed income modestly reduced portfolio return volatility, and our proposed active risk budget is slightly smaller than last year. Portfolio risk comparison Total Portfolio Risk 10.63 9.96 % Volatility • Consistent with the 2009 ALM, restating 2008 with current volatility assumptions • Current volatility assumptions (higher) were applied to 2008 asset allocation • Increased allocation to fixed income and modestly lower equity exposure drove lower portfolio volatility • Longer-duration fixed income benchmark added marginal beta volatility, but approaches our liability sensitivity Page 7

8. Risk budget recommendation The risk budget reflects our expectation that active management strategies will continue generating long-term value coupled with the understanding that strengthening our long-term alpha performance requires patience and investment discipline. Page 8