Towers Watson & Co. (TW)
September 14, 2012 10:00 am ET
John J. Haley - Chairman, Chief Executive Officer and President
Carl Hess - Director of Investment Consulting for North America
Bryce A. Williams - Head of Exchange Solutions Business Segment
Roger F. Millay - Chief Financial Officer and Vice President
Gene H. Wickes - Managing Director of the Benefits Business Segment
Paul G. Morris - Managing Director of EMEA
Julie J. Gebauer - Managing Director of Talent & Rewards
Patricia L. Guinn - Managing Director of the Risk & Financial Services Business Segment
James K. Foreman - Managing Director of North, Central and South America Regions
Gordon L. Gould - Head of Corporate Development Unit
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
John J. Haley
Good morning, everyone, and thanks for joining us for our 2012 Analyst Day. We're glad to have you all here with us. And we're excited to tell you about our plans for the coming year.
Let's see, before we get started, I have to remind you that we'll be making some forward-looking statements today and our actual results may be different than expected. In this presentation, we'll be using non-GAAP measures, which we believe are relevant for evaluating our operating results.
So, getting into it, this is the agenda for today and we're going to take a bit of a break from the traditional way we've done the Analyst Day. And instead of going through and providing a segment by segment profile, what we're going to try and do is give you a deeper look into some of the types of works we're doing. And we hope to give you, in that way, a little more context to our plans in the guidance and highlight some of the innovative new areas that we're working on. So this is the agenda for today. Let me start out by introducing the Towers Watson leaders who are here today. Some of them will be speaking, and some of the others you'll get to speak with at lunch. We have here our 3 segment leaders: Gene Wickes, who heads our Benefits segment; Patricia Guinn, who heads our Risk and Financial Services; and Julie Gebauer, the leader of Talent and Rewards. We have 2 of our regional leaders, Jim Foreman who heads the Americas; and Paul Morris from Europe, Middle East, Africa; and then we have Roger Millay, our CFO.
We also have with us today leaders from some of the most innovative and fast-growing parts of Towers Watson. They'll be giving you insight into the areas and some idea as to why we're so excited about the potential opportunities there. Carl Hess is going to be speaking on de-risking trends. Mark Maselli is going to be speaking on Health and Group Benefits; Bryce Williams, on our new segment, Exchange Solutions; and Ravin Jesuthasan, on Talent Management; Miriam Connaughton, our U.S. West division leader for the Client Development Group and David Dow, the LOB leader for TAS and EMEA, are also in the audience. And they'll be available for any questions that you might have and they'll also be with us for lunch.
So we're going to try real hard to keep to the schedule so we have plenty of time for questions at the end.
Let me get right into this. So first of all, FY '12. Overall, we had a very pretty good FY '12. We had 5% revenue growth and we had overall profit growth. We made some strategic acquisitions that are going to allow us to grow into adjacent complementary markets and are going to help position us for the future.
We also experienced some challenges this year. We saw a softening market in EMEA, we saw some cyclical slowing in some of our business. And of course, we saw some impacts from our ERP deployment stabilization activities in North America. Despite all these market challenges, for example particularly in EMEA, we had a stronger than expected performance in the region.
When we step back and look at where we're headed for fiscal 2013, we see a lot of signs indicating continued growth and the strengthening of our business, and we hope to give you a flavor for some of that today. We have strong positioning in the marketplace, we have good client relationships, we have experienced management and then we hope to see additional benefits from potential acquisitions. Roger's going to talk about this in more depth when we get to the FY '13 guidance.
Most of the time today is going to be spent talking about performance, but let me first talk a little bit about some of the recognitions that Towers Watson has received. And we like to look at these -- when we went out to market after bringing Towers Perrin and Watson Wyatt together as the Towers Watson brand, we always worry a little bit about that, about coming out with a new brand and everything. But we found that we were actually quickly able to establish ourselves as a leader in the marketplace. In December 2011, we were recognized as one of America's Greatest Brands by the American Brands Council. We were ranked #1 in the Diversified Outsourcing Services category on FORTUNE magazine's list of the World's Most Admired Companies, that's back in March of 2012. For the second year in a row, we were named to the Global Outsourcing 100 Lists by the International Association of Outsourcing Professionals. Again, that was in March of 2012. This is also significant. We actually don't play in the HRO space, but we provide our outsourcing services for a customized approach, but we were still on that Global Outsourcing 100 List. Our newly acquired Extend Health received 2 first-place awards from Coventry Health Care, Inc. for exceptional customer service performance. And at Towers Watson, we had firsthand knowledge of Extend and the quality service that they provide because we've been working with them for a long time being their largest referral partner prior to our acquisition.
Finally, Towers Watson Risk Consulting and Software, won the Transaction of the Year in the 2011 Insurance Day London Market Awards. And that was for the acquisition of EMB, and this award recognized the synergy between the 2 organizations, particularly in respect to the London insurance market.
So let me just touch briefly on some things that drive our business. We have a lot of factors that do drive it. I've got them listed here. I'm not going to go through all of them in detail, but I do want to highlight just a couple of examples. But first of all, anything that provides additional complexity or uncertainty, or any kind of complication is really a benefit to any consulting business, and in particular, ours. So legislative issues such as the health care reform, say-on-pay, amendments to the Pension Protection Act or Solvency II, all of these things helped build demand for our services.
Unit capital, that we have here, is a critical issue. The current employment market illustrates how important really capital is to our clients who depend on finding and retaining top talent in order to meet their growth needs. De-risking has made some news lately, with Ford and General Motors offering lump-sum payments to their retirees, and GM's selling off some of their pension liability. Again, Carl Hess is going to talk a little bit more about that later. The new legislation regarding contribution changes, which was just past July 6, 2012. And these kind of modifications to existing regulations about CFOs and the C-Suite to look at options to help balance their balance sheets. We actually took advantage of some of the exchanges that [indiscernible] when he goes through [indiscernible], but it's also the kind of thing that we consult with our client.
So our strategy for continued growth. This morning, I'm going to talk about our plans for FY '13. That's the real focus of this session. And as we think about FY '13, there are 2 objectives we're talking about. One is growth, and the other is innovation. And in both cases, these are things that we're looking to respond to client needs and strategize about how Towers Watson is going to develop into the future. As you can see here, the notion is our strategy is focused on profitable growth. And we really have a three-pronged approach to our profitable growth. One is the organic part, where we're looking to increase our market penetration, where we're looking at developing a lot more in emerging markets. Emerging markets are an area where we feel we've done pretty well, but we also feel there's a lot more that we could do. It's an area that we see a special interest in growth and [indiscernible] will talk a bit more about that in his presentation. And as we
we tend to be very much focused on what we call our target market. And we looked at organizations that are of a size and complexity that we can have good economic relationships with them. We invest a lot in our people, tools and processes so it doesn't make sense for us to be working for smaller organizations, or for -- even for large organizations, so much on smaller projects. We need one that actually tests the people and you get the benefit of all the investment we do. So we tend to look very much at that target market and measure and reward people for assignments there.
The inorganic one, we've -- first, we did the Extend Health acquisition in the last year. That's a real good example of something that we think will pay off quite handsomely in the future. And it's the kind of acquisition that we like a lot because it's got a great cultural fit. The Extend Health people are ones that, as I've mentioned, we've known for a long time by them being our referral -- by us being a referral partner for them. We knew they were people that shared our values and that had a common approach to client service and to the market. Strategically, it fit with a great adjacency to what we did, the business that we understood, the value proposition because we've been working with our clients to choose Extend Health. It's a business that we understood what you needed to do to be successful in. So again, that great strategic fit there. And then finally, we also want to look for acquisitions where there's a good financial return on that. Roger and Bryce are going to talk a little bit about that later. But we expect to get a good financial return on Extend Health. And I think we're -- that's the same kind of thing we'll be applying as we look at potential future acquisitions.
And then finally, innovation. We've been working a lot on innovation on opportunities to expand our client base that capitalize on our existing businesses like cross-selling. We have done -- we've conducted several activities to pursue this component in FY '13. We're going to continue with similar moves to reinforce our development into the emerging markets. Of the different opportunities that we see in the marketplace today, there's 4 that we're going to call out that we'd especially like to talk about today, that's pension de-risking and lump-sum, which is a very important development that affects our Benefits business and also our RFS business. It actually cut across all of our segments to a greater or lesser degree. U.S. health care and then the consulting and exchange market opportunities that kind of continue to be vested within emerging markets.
So let's take a deeper look at some of the growth areas we see. And I'm going to talk a little bit about each of the 4 segments, and where we stand with them. So first of all, revenues in the Benefits segment. They were up 1% last year on a pro forma basis. As organizations sought our help with ongoing benefit cost and risk pressures, an increasingly volatile economy coupled with persistent low-interest environment, and in many countries, a lot of changing regulations. In the Health and Group Benefits area, clients asked our Health and Group Benefits experts to help them efficiently manage their health plans. We responded to multinational companies, sharpened focus on global health and productivity. And we helped U.S. clients reshape their total reward program and make other changes in response to the Patient Protection and Affordable Care Act. This major piece of legislation affects virtually all U.S. employers, and requires them to make decisions that will significantly affect their employees on the bottom line. And we'll develop that a little bit further.
In TAS, revenues increased significantly. Our Technology and Administrative Solutions benefited from [indiscernible] this year. [Audio Gap] We also continue to benefit from the January 2011 acquisition of Aliquant, a U.S. outsourcing and administration company. The EMEA team, in particular, has had a series of strong wins, including securing a retirement fund administration contract with Barclay. That puts us in, really, a place of preferred supplier position for this scale of administration. We have the 2 largest outsourced -- private sector outsourcing contracts in the U.K. with HSBC and Barclay. And as I mentioned, David Dow, who heads up that operation is here, and if people would like to chat with him or catch him at lunch, I think he'd be glad to tell you more about that. We're particularly excited about, really, what's been a win over just a spring [ph] of years in this area.
In retirement, we benefited from steady recurring work with our long-term clients. So there's the environmental pressure, the low interest rates, other pressures on business led to opportunities to help clients manage their risks. This included consulting on pension de-risking, other the DC strategies such as lump-sum distribution and management. We also saw more clients begin to bundle their administration, outsourcing and actuarial services. As I've mentioned, pension de-risking has been big news in the last 6 months or so, with Ford and GM offering their lump-sum benefits to retirees. GM selling off some of their pension liabilities. This is in reaction to new legislation regarding contribution changes just passed on July 6, 2012. We're going to be talking more about this, but this whole de-risking market is one that does require a lot of consulting help and advice and administration, help and advice for employers who want to do this. So it creates lots of opportunities for us. And it's one that we feel we've been in the lead in this area, generally, and we're pretty excited about pursuing these opportunities.
Risk and Financial Services, the segment had 6% revenue growth on a pro forma basis last year. We helped clients tackle a host of changes that were regulatory changes. There was the euro prices and the low-interest environment, M&A activity. And in the insurance market
an insurance investment firm operating in Europe, the Middle East and Africa and North America to broaden our insurance consulting offering. In investment, delegated investment solutions, which is where we take on a lot more responsibility. We function almost as the Chief Investment Officer, say, for a pension fund. But we are seeing the demand for that growing in both the U.S. and the U.K. Assets under advice for Towers Watson's delegated business are in excess of $50 billion. So in the U.S. alone, the assets under advice using this approach have increased about $5 billion over the last 18 months. Again, we're seeing a lot of that. A lot of investors, but not the very largest [Audio Gap]
in operations, but some of the medium
forces, or the expertise, or the time to effectively meet all their investment objectives. And that's really when Delegated Investment Solutions can step in and provide a good service to them.
In RCS, our Risk Consulting and Software, a significant amount of the improvement that we've seen here is due to the acquisition of the EMB business. About a half year in, it's going very well, the integration is going well. This acquisition has helped us accelerate some of our software capabilities, and brought us into, really, a new market for us, for the most part, the property and casualty insurance market. We recently won a contract with Hughes Telematics to provide, end-to-end, the UBI predictive modeling with our analytics software, which is tapping into a growing trend of using algorithms to sort out the data and provide end-to-end analytics for property-casualty insurers. The EMB concept started it and then the acquisition enabled us to pursue this more quickly. Brokerage is facing a stabilizing price environment and that's good news because for a long time, it had been just softening year after year, after year. So while we might prefer to see it even hardening, somewhat more, stabilizing is pretty good from our standpoint.
In Talent and Rewards. Talent and -- revenues in Talent and Rewards declined 1% on a pro forma basis. And our clients are really looking to strike the right balance between managing talent and controlling costs. They're reexamining their executive compensation programs in response to legislation. In North America and Europe, we see concerns about the economy significantly influencing spending decisions. In Asia Pacific, we see the struggle to retain top talent is continuing. And clients in, really, all parts of the world are seeking our help in aligning pay and performance, mitigating risk and engaging shareholder opinion. One of the interesting things -- and Robin, who's going to talk about the emerging markets, is from our Talent and Rewards section. And we often talk about Talent and Rewards as being an area that we expect, over the business cycle, to grow faster than the rest of the business. And part of that is that just we think the whole Talent and Rewards Area and human capital is becoming more and more important. Another part of it is that Talent and Reward is really big in, particularly, the emerging markets. So Talent and Rewards is about 16%, 17% of our business, overall. It's about 43% of our business in the emerging markets. And so it's in the high-growth areas where Talent and Rewards is the biggest part of the operation. And so it's one of the reasons why we see this as a great opportunity. And Robin will develop that a little bit more.
In Executive Compensation, we're seeing an increased demand across the globe for this service. We -- it's gotten a lot of play, of course, a lot of pressure on how the design packages and issues about what's equitable in both the U.S. and EMEA, especially the U.K. But even in, for example, Latin America, we're seeing increased attention paid to Executive Compensation. So this is truly a global phenomenon, and we don't see that abating over the course of the next year.
Unit capital, I alluded to that earlier. I think it's -- the major story that we will see out there is the headline about unemployment rate and things like that. As Julie Gebauer, our head of Talent and Rewards, in a speech she gave a couple months ago, she was talking about -- not about the general abundance of labor, but it's about the shortage of the right skill talent. And in fact, that's what we're continually hearing from our clients, the pressure of -- in a period even when the unemployment rate is high, not actually -- having a lot of shortage in some critical talent. So this leads to, really, a dual challenge. It's filling the open slots with individuals who possess the skills, experience, the outlook and the potential to successfully contribute to the company's growth. And then also at the same time, making sure that you don't lose your valuable employees to competitors. And it's one of the reasons why we continue to see some interest in Talent and Rewards, even at a time when there's some high unemployment that these other pressures are tending to drive that.
We opened up our Global Resource Center in the last year with our -- within our Data, Surveys and Technology business. We centralized most nonclient facing operations and the technology development into one center that's located in Manila in the Philippines. This approach, we expect to generate some internal efficiency, improve margins and it positions us to standardize our global processes, methodologies and tools and more consistently manage our technology platform. So the GRC's -- it's really an integrated, truly global operation, a center of excellence, and it's something that we think is going to be important for us as we build for the future.
We've talked a lot in the last few months about exchange solutions. We were particularly excited when we were able to agree on this acquisition back in May. We're more excited now than we've ever been about exchange solutions and the potential that we can realize by being the market leader, in what is, really, still a pretty unpenetrated market. Great potential for growth and we think there's some scalability of the technology.
The expand -- the Extend growth forecast. We expect to deliver about 30% growth for FY '13. And we expect, in the long run, to be north of 20% growth for -- indefinitely there. I talked earlier about the great strategic fit with Extend Health and with Towers Watson. And again, we felt really good about this, simply because we have worked so closely together for so long. And we could see the high-quality service and the client-first mentality that we had. We're going to be looking at leveraging this technology beyond, really, just what the segment is in now. We're looking at Extend exchange is being developed, which will use the existing Exchange platform and will allow states to offer Exchange based plans in accordance with the Patient Protection and Affordable Care Act without having to commence a high cost and high risk technology development exercise. The Extend exchange platform will also allow states to focus on deploying federal funds provided under the PPACA to revamp antiquated Medicare -- Medicaid and related systems, encouraging more efficient use of Federal funds. So Bryce is going to talk more about some developments that we see with Exchange solutions, but as I said, as excited as we were when we first did it, we're even more excited about it today.
So the strategic outlook that we have, first of all, one of the things we believe has been key to our success has indeed been our target market focus. And we very carefully think about who are the organizations that we define as target market opportunities. But over the last year or so, as we've been thinking about our strategy, we've also realized that there are some opportunities to expand that target market focus, partly for the existing organizations that we have defined as our target market and sort of renewing and redoubling some of our efforts that we're doing with them, but then also partly thinking about who are some of the upcoming firms in the emerging market that we can identify as, sort of, the global challengers, the ones who are the new ones in the future. So we're going to -- what we're going to be focusing on that expansion during this next year.
We continue to expand our Client Development Group globally. The Client Development Group has the oldest rates in the U.S. and Canada and the Americas generally. We've been operating in EMEA to a -- for a few years now, and we see more expansion of that and we're also looking to do that more in Asia Pacific. As you get into multicountry areas, it becomes a little more challenging to do the Client Development Group. It's obviously easier in the U.S. with just a single country. But what we've seen there, as we've rolled this out in EMEA, makes us feel pretty good about expanding it some more and deploying it in Asia Pacific.
Organic growth will continue from our core businesses as we continue to take care of clients, as well as through thought leadership, that's going to help our clients. And one of the important things here is -- that we continue to focus on is making sure that we service our clients and retain our clients. And we're particularly pleased with the relatively high retention rates that we have for our client work. And it's one of the keys to -- if you do that, then you have a great platform to build on as you're looking for new business.
Inorganic, we did the Extend Health acquisition. We are continuing to look at M&A activity. We're focusing, again, on targets that we have a great cultural fit, that we have a strategic fit and that provides enhancement for our service and product lines. The strong revenue stability that we have, the client-first discipline and our quality program as we call performance excellence, that focus ensures consistently high client experience, really, across the globe. In this economic environment, we understand that it's our priority to manage our costs and the business is even more disciplined than before. And looking at the environment and managing most effectively to be ahead of the curve is something that the whole management team is going to be focused on for this year.
So that's a little introduction to some of the themes we're talking about. Let's get into some of the areas we'd like to focus on. And let me start off with Carl Hess. Carl Hess heads our Investment line of business globally, and he's going to talk about de-risking trends. Carl?
Good morning, everyone. We are the largest provider of actuarial services to large pension plans in many of the geographies we operate in. If you sponsor a defined benefit pension plan, you inherit along with it a collection of risks. You've actually got an annuity company that's attached to your organization. And a number, but by no means all of these risks, are shown up in the slide above.
Now there are various ways you can try to mitigate these risks as you try and manage the size of the risk and the size of the plan compared to your organization. For instance, you can freeze the pension plan, which is an activity that's had a lot of publicity over the last 10 years, as we have seen a high proportion in various geographies of plans become either closed to new participants or frozen for new accruals. That solves certain issues. It solves the workforce demographic issues regarding the plan because no new people will be coming in and extinguishing any benefits. If you've frozen the plan to future accruals, there's no more salary growth. You've eliminated that risk and inflationary risks on benefits.
You can match assets and liabilities better, right? So don't invest in stocks if stocks don't behave like pension liabilities. Try and make your bond portfolio have similar interest rate sensitivity and inflation sensitivity to the plan liability. That, again, will solve some of the problem. And again, that's been a fruitful area for the organization over the last decade, both from the Retirement business as well as the Investment business, working together. We're very well situated to help people handle the asset/liability mismatch. But that still leaves a number of risks in the system. Those that you can't handle by precisely matching assets and liabilities, you may be in a jurisdiction where you don't have a deep long-term bond market but you have long-term pension promises. And in addition, you have to worry about things like longevity. People living longer than you hoped they would, a little bit morbid, that, but nonetheless, there you have it.
And benefit options. Typically, a member has a choice between a life annuity and some other forms of benefits to cover their surviving spouse. So to mitigate these risks you've got to actually transfer the liability to a third party and, essentially, get this off your balance sheet. This is a matter of reducing financial leverage. That's the motivation for a sponsor to do any of these.
How might you transfer that liability? There are 3 principal ways. And I'll talk a little bit about all 3 today. The first is to transfer the liability to the individual participant themselves, cashing out the current value of their benefit in the form of a lump sum. So it becomes the member's problem, not your problem, regarding the future financial performance of their retirement. You can purchase an annuity. Generally, in the U.S. it's going to have to be from an insurance company. In other jurisdictions, you might find other financial institutions willing to buy a lifetime guarantee to an individual member for these benefits. Or you can try and float something in the Capital Markets and that might not be for the entire obligation, it might be for a portion of the obligation. We've successfully worked with companies on transferring their interest rate risk to the Capital Markets, their inflation risks to Capital Markets and indeed their longevity risks to the Capital Markets. So these are all about ways to eliminate risk in the program.
Now this does cut across a number of our lines of business. The Benefits business, which is where the retirement actuaries dwell, has the principal set of opportunities, and indeed the principal points of contact for these. But indeed, this leads to investment work -- makes me smile, communication work, dealing with members and helping them understand the opportunities and pitfalls that may be involved in their individual decisions. So it's not just -- it's not a simple communication exercise. It actually demands tact and good skills. And it's an administrative exercise, especially with regard to lump sums at the end of the day. Some of that administrative work are close to the TAS practice, and David Terry[ph], you can talk to him about that. Someone who's with our administrative capability within Retirement. And in addition, we think that looking forward, there may be some interesting opportunities ahead with our new Exchange Solutions segment in terms of helping participants manage the host lump sum environment that they're going to find themselves in. So this really does cut across the organization. And we're highly enthusiastic about the way it makes us work together to be able to solve this challenge for our clients.
This involves, not just administrative opportunity, but consulting opportunities as well. I think that's just about barely big enough to read perhaps, but what we've helped clients do is recognize that there are not just 1 or 2 alternatives, but there are a multitude of alternatives available that may help them deal with the risks in their program. Some of them may be current opportunities, some of them may be future opportunities. So what we look to is helping to prioritize, understand the impact both on financial risk, as well as reward. What's the short-term impact move, what's the long-term impact move? Are you ready for these now? If not, what can you do to ready yourself going forward? So the financial markets may not be such that you have an opportunity to cash out people. Have you calculated their benefits so you're ready when the opportunity develops.
This particular scorecard here was developed by our U.K. business originally. We have the same opportunities in this market, as they are for the U.S. The legal environment's a bit different, so for instance, one of the things that was not ready at the time, this would -- enhance transfer values, essentially giving people some extra money to take the lump sum, instead of remaining with the plan. We've now had issuance of people with regulations in that marketplace, a code of practice. And so many planned sponsors there who'd said no, we want wait until we see some clarity will now have another option available going forward. This remains a very dynamic market and understanding all the alternatives available to de-risk your plan, and the wealth of impact which is important, the fact that we've got both benefits expertise, investment expertise, administrative expertise and insurance expertise helps us to prepare that sort of balanced scorecard to help our clients make the most financially effective decision.
Now where do we stand and where might this be going? Well, it's important to recognize that, unfortunately for our clients, many of them are dealing with pension funds that are recently underfunded. And in fact, if you have $100 of liabilities and only $60 of assets, and this is just a straight example, not everyone's work like that by any means, but if you then try and cash out $40 worth of assets and $40 worth liabilities, you'll have $20 remaining assets and $60 of remaining liabilities, you're now 30% funded. So you'll make the percentages look worse. So we do monitor a number of things that are going to determine whether the marketplace, as a whole, is going to be ready to transact, and thus, whether we have the resources in place ready to help our client transact. The 2 principal drivers are really the level of interest rates, which affects both the bonds in the portfolio plus the value of pension liabilities; and the equity markets, which is where most of the return seeking assets for our clients sit. In addition, we look at whether there is going to be vehicles ready to take on, plan liabilities, essentially insurance industry or Capital Markets capacity and whether we're seeing innovation in the markets, either external or internal Towers Watson that will help these things move along. We've put sort of traffic lights against those as of July. We obviously had an equity market rebound -- which I think we're all collectively a bit grateful for. That's put a stack in that, but not enough to move the Dow here. Interest rates remain low enough that we think that the volume of activity is going to remain relatively muted for large-scale transfers over the upcoming 12 months. However, where there has been movement, and we're going to continue to see movement, we think, is in the bulk lump-sum area where you've seen -- we've all seen the GM and Ford announcements. We have had significant opportunity, and the pipeline continues to remain very strong. But sort of contracts work with literally dozens of companies to help them cash out hundreds of thousands of participants in, sort of, the last 9 months of this year.
So it's been a strong area of growth for us. We think that will remain strong even as the interest rate opportunity, which was particularly good for 2012, may not be as good for 2013. It's still going to remain an opportunity for plan sponsors to take advantage of.
So one thing we do monitor is how ready the plan sponsors can be. Again, getting to that idea of funded status that I alluded to before. One way -- one slowing down of the cash out phenomenon is the fact that there was a change in legislation back -- effective in August called MAP-21, to the funding rules. What we had seen before MAP-21 was passed, was that plan sponsors were going to be forced to put in lots of money into their pension plans to drive their funded status up toward 100%. And that was going to be, sort of, about 92% of liabilities for people in frozen plans, were going to be in plans that were 90% funded by 2016. The MAP-21 requirements liberalized the funding obligations, so the period for making these plans whole has been stretched out. That is actually a -- there are good things about that for Towers Watson, as well as good things for our plan sponsors who are forced -- not forced to divert funds from their business. Looking forward, it does mean that far fewer funds will be fully funded if they just contribute minimum obligations over the next few years, but they can actually divert these funds into supporting the lump sum program looking forward. So making additional contributions on a tactical basis to be able to cash people out of the program.
So this doesn't stretch out the revenue potential, we think, from lump sums for a good part, but it also makes cashing out a portion of your pension funds. Not everybody, but just a particular targeted group, at a tactical point in time more attractive. From our point of view, that actually leaves us with the revenue for the ongoing valuations, the revenue for the administration, all those good source of revenue we have now, plus these opportunities to help people cash out during the meantime.
So I did allude to the fact that this lump sum activity cuts across lines of businesses. I think if you look at the process chart here, you'll see how that comes to be. There's strategy work going in, that typically involves the benefits practice and to a lesser degree, the investment practice in terms of helping understand the financial costs of these strategies and the opportunity loss you might have by transferring assets out to a third-party. There is a strategic part of designing the program, who to target and, of course, the administrative portion of carrying it out. The interesting thing, I think, and we've labeled as exploratory on the bottom is how might we help beyond just the transactional phase but help the plan participant to deal with an environment where they, in fact, are managing their own money rather than just receiving a guarantee income stream from the plan sponsor. So that's something we're actively working on. I think we'll see where the potential lies as these programs grow over time.
Moving from lump sums to other potential risk transfers, as I said before, in the U.S. at least, the only other way to transfer risk at present is via a commercial annuity with a carrier. This is a market that's been essentially dormant for the last 20 years, sort of, volume has been about $1 billion a year until the GM deal announced earlier this year. We think that there is some capacity going forward, but it's actually relatively limited. Perhaps $20-plus billion of capacity, and remember, that's against a multitrillion dollar private pension plan asset base. So a very small percentage. These plans aren't going away anytime soon. As a result, mega transactions, like GM, can really affect capacity and pricing in this marketplace. We are looking at our opportunity, leveraging across the insurance industry, to be able to manufacture capacity for our clients --and this will actually potentially help clients spread out there credit risk against any one individual insurance company. In addition, we'll see whether our Capital Markets experience in the U.K., which is where most of our Capital Markets transactional regarding pensions have been, will be transplantable to other jurisdictions, where the particular investment vehicle may not exist, but perhaps we have a way of making this up.
So we've got a joint cost business task force working across these. We think that the opportunities will be there, and we're making sure we're not going to leave any on the table. We're particularly well-positioned for this.
So with that, it's my great pleasure to hand the microphone over to Mark Maselli, who is the North American Head of the Health and Group Benefits.
Thank you very much, Carl, and good morning, everybody. So I'm going to talk for the next 20 minutes about our Health and Group Benefits business, which is a business that is quite broad in terms of the number of things that we assist clients with. As a result, in 20 minutes, I'll only be able to touch on a certain number of topics within the business, but happy to spend more time with you on breaks, and at lunchtime if you would like to go into more detail.
I'll focus primarily on North America, that is primarily where this business resides. And I'll make sure that I spend some on healthcare reform as well because I know that, that's topical and have already had conversations with a number of you already, but with respect to what that portends for our business.
So let me start out with an overview, a financial overview of the business. Our Health and Group Benefits business is about a $300 million business that represents about 8% revenue growth over the past year, and about 13% over the past 2 years. So we felt good about our ability to grow this business over the past couple of years and since the merger. Most of the revenue in this business comes from so-called plan management activity. This is assisting clients with the design, the administration, the financing and the communication of their Health and Group Benefits plans. Now within that plan management, then, is also the ability to help them with special projects. So when something like health care reform comes along, and John referred to the fields of legislation, we have been in a position to help our clients with the modeling around that, the potential impacts and so we do that as health care reform legislation and regulation continues to percolate through the system. And so as we go to market, getting those plan management assignments is a key part of our strategy to grow the business.
From that plan management base, we're also able to execute on the other parts of our business, Specialty and High-Value Solutions. These are 2 businesses that each comprise about 10% of the revenue. So they're about $30 million businesses. Our Specialty business, we have physicians, nurses, pharmacists and other specialists who are helping our clients in these deeply complex and technical areas. So health management is an area where our clients have expressed a real significant interest in improving employee health and productivity. Our physicians and nurses will help clients with evaluation programs, implementation of those programs, measurement and communication of that, working closely with our colleagues from our Communications and Change Management business.
High-value Solutions represents an explicit product strategy that we use within the business. And the idea here is to take the projects that we do for our largest and most complex clients and figure out how we can take those solutions and package them in a way that delivers a similar amount of value at a significantly lower cost. So as an example, our Rx collaborative, it's a drug purchasing coalition, which by itself, is not different from what our competitors offer. Most have this type of drug purchasing coalition. But what we did here was, based on the work that we were doing with our largest clients who were frustrated with the PBM pricing models, which they viewed as very opaque and frankly working to the advantage of the PBM, we were able to reinvent that dynamic. We wound up partnering with Medco, now a part of PSI, to develop a collaborative that really produced much more transparent pricing so that our clients understood where things like drug rebates were going, which is not to their benefit, in exchange for much more explicit pricing mechanism. So this collaborative now has almost 200 clients representing more than $3 billion of drug spend and is producing annual revenue of about $20 million for Towers Watson via management fees for maintaining it. So I wanted to share this with you to give you a sense of the type of mix of how we go to market, and we believe it's been successful, and will continue to be so in driving revenue growth and profitability in this business.
So let me step back, then, to the core premise here about why this area is important, why we believe it will continue to resonate with clients who will need our assistance. Healthcare benefits are highly valued by employees. And as a result, employers value them because they want to attract employees and this is one way that they do it. We just completed the 2012 Towers Watson Global Workforce Study, which again showed that health benefits are a top 10 driver of attraction. By the way, that's not just in the United States. Of course in the U.S, the healthcare system for workers is primarily employer-driven. Outside the U.S. there are national systems that provide healthcare. But because of budgetary limitations and, in some ways, the sort of inchoate nature of those systems. There are gaps and it's creating a demand for private insurance, and employers are feeling some of that pressure. It's not nearly the size that it is in the U.S., but it does represent the growth opportunity as we believe that demand continues.
We also just did a recent survey asking employers about their commitment to offering health benefits in 2014 and beyond. And of course, the health care reform law now does provide an option for employers to exit if they would like and so-called pay the penalty. The result we got was that 88% of employers said that they remain committed to offering health care programs to their full time employees in 2014 and after. Similarly, 92% said that improved health and productivity are very important to their employee value proposition. So we're seeing a real continued commitment from employers to offering these health care benefits to their employees, at least, for the foreseeable future.
Now that's all great, but of course, the benefits need to be affordable. And affordability has emerged as a major concern for both employees and employers. And this is not a new issue. It's a nagging issue. Now if you look at the graph on the top here, it shows health care cost increases for health plans in the United States for U.S -- for employers. The gold bar is representing the annual increases. And you can see that it's moderated down from the double digits we were experiencing to more in the 5%, 6%, 7% range. And we actually expect that to continue over the next couple of years. But if you look at the gray line that's superimposed there, which is general inflation in the United States, we're still looking at health care cost increases. They're twice the rate of inflation or more, and that's a pretty difficult value proposition to sustain. And I'll talk some more in a minute about how employers have sustained it.
From an employee perspective, if you look at the bottom graph, the top line shows cumulative health care cost increases over the past 12 years. The bottom line shows cumulative wage increases and you can see that very large affordability gap that has occurred, making it difficult for individuals to be able to afford the benefits for themselves and their families.
And there's a real opportunity cost associated with this. This set of graphs is taken from a survey that we do each year with the National Business Group on Health and what the pie chart on the left shows, that yellow slice is the portion of total direct compensation. So base pay, bonus and retirement and health and other benefits, the portion attributable to active medical, which is 11% today. Not shown here, but that is up from about 6% or 7% 10 years ago, so there's already been a really significant increase on healthcare, which obviously has to come out of somewhere else. And employers are currently spending about $8,400 per employee.
If we project out the 2018, which is what the 2 charts to the right of the graph show, and we look at high performers and we look at low performers. High performers will be those who contain health care cost increases of 2%, whereas low performers, let's say, will average 10%. And I know that seems like a striking disparity, but we actually see this on a fairly regular basis. There are organizations who are effective in maintaining a low trend and others not so much. What we see happening is that the high performers actually maintain about that same ratio, right, where that healthcare cost as a portion of the pie actually shrink a little bit, whereas for the low performer, it balloons out to about 17% of the total pie. When you translate that to dollars, this could amount to a $7,000 difference by 2018. So the high performer has $7, 000 more to deploy to pay for other types of benefits. And so what's happening is that healthcare, based on its size and verticality in terms of the employee value proposition, has clearly emerged as a competitive advantage or disadvantage if not managed well. And so it's really raised the stakes as these numbers have gotten bigger.
So how does Towers Watson help our clients in that regard? I'll go briefly through this framework that we crafted to depict it called the Organizational Health Strategy. It starts with these 2 spheres in gray that their health benefits that organizations offer, the design of the programs, how they're communicated and administered. And then there's workforce, health and productivity, so independent of the benefits that are offered, how do we help to make our employees and their dependents healthier and more productive on the job? Within that, we then have this operational framework, which are all areas that Towers Watson is able to assist our clients. So health improvement, for example, what are the types programs that should be offered to improve health? How are they communicated, how are they measured? Engagement is really critical to the success of any program so that employees are empowered to make the right kinds of choices. And this has to do with incentives. It has to do with penalties and programs. How do we incorporate behavior-based design into our programs.
Accountability, very big issue. You're seeing more high deductible plans, which raises the stakes for individuals. They have more money in the game and it's one of the techniques that ensures that individuals will look to make the right kinds of decisions. Linking to provider strategies is an emerging area. Healthcare reform has really spawned a lot of activity in the provider community. We see physician practices merging, we see hospitals buying physician practices. There's all sorts of payment reform out there. You've heard about cannibal care organizations. There's other types of reforms as well, and our job is to help our clients understand that dynamic, take advantage of the market trends and then to actually drive the market trends themselves.
Technology. Healthcare has suffered from actually a lack of technology. That's changing quickly. In a healthy environment, what are the messages that an organization sends about having managed stress in the workplace, what they do in terms of their on-site strategy? Do they offer facilities more for health? Do they offer on-site gyms, and that kind of thing. And then of course measurement. So I want to share this as just kind of a bit of an overview on how we help clients in regard of that fundamental issue that we have.
So let me turn my attention, then, to healthcare reform for a little bit. As we said, this is very topical and a lot of you have asked about this. So this is clearly a major issue for employers and it's been a key growth driver for us in HGB, as well as in other parts of our organization because this does cut across all lines of benefits. So first off, we believe that it's for real. The Supreme Court, earlier this year, upheld the constitutionality of almost all of the law. And so we think that repeal is highly unlikely. We believe it will require a full Republican sweep in the November elections, taking both houses of Congress as well as the presidency, and probably requiring 60 seats in the Senate and that doesn't seem
all that likely. We expect that there will continue to be delays and obstacles around the implementation of it. But really, it's an issue that employers can't wait much longer to deal with. And many have already been looking at it, but we expect that trend to accelerate after we get past the elections. It is a real business risk and it requires proactive planning assessment. One of the reasons for that is that the requirements are ongoing. This is not just a 2014 event. There were things in 2010 that employers were required to do. They are a new crop of the things in 2013. So for example, there are new assessments and fees that are being applied to plans and to device manufacturers, all of which we expect will make its way into the cost of health care. Employers need to be prepared to budget for that.
There are also communication requirements. In March of 2013, employers need to communicate to their employees about the availability of public exchanges scheduled to be up and running in January of 2014. So how do you view them in a way that remains consistent with what you're trying to communicate about this really critical benefit on the new organization? And so again, we'll work collaboratively with our colleagues on the communications to help our clients do that. And then it's only 15 months until this so-called pay-or-play decision, which as we've said, we expect most organizations to continue to play. But for an organization that does want to exit, we expect that we'll see some irrelatively small number of them out of the box. You have to be ready in less than 12 months, in all aspects, to be able to do that. And that's a pretty big undertaking.
And then finally, it's a total business issue, this is not just isolated to the benefits department within HR, because as you look at health benefits, given its criticality in the employee value proposition, it impacts other benefits, it impacts other total rewards and then it impacts other parts of the business such as workforce planning, especially in those industries that have a lot of part-time or seasonal or temporary workers. They have to make decisions about how they want to structure their workforce to either have those individuals eligible for benefits, or potentially make them eligible for subsidies in the public exchanges, which may be to their advantage. And so it really is an entire corporate effort around this. And then there's the planning for the 2018 excise tax, which can't wait until 2017 to actually take action.
The bottom of this slide just providing you a graphic to get a little feel for how we consulted our clients around the pay-or-play decision. We don't really see it as just a binary pay-or-play. We really see a spectrum there, and as we're working with our clients around healthcare reform, we're not approaching it as simply as a mandate and a requirement, we're also looking for the opportunities for our clients so that they can drive decisions based on their strategy and the options they have available.
So I won't go through all the details on this slide. You probably can't read it. But it's intentionally dense to show you just the number of things that employers need to deal with over the next 5 or 6 years. And it hits on all sorts of areas -- administrative. Employers next year need to report the cost of health care on the W-2 form for all of their employees. There will be regulations around that, they'll need help implementing it. Communications, I talked about before, that will be ongoing. And then there's even a more strategic thrust around how do we want to position our health care program on an ongoing basis, while still allowing ourselves the flexibility to move in different directions as public exchanges develop and as private exchanges develop.
Financial, I talked about. That will also include things like -- in a world with an individual mandate, most companies have anywhere between 12% and 20% of their employees who opt out of the coverage that the employer offers. Well if I now had to get coverage or pay a penalty, more individuals are likely to join the employer plans. How do we model that, estimate the cost and then take action to stay consistent with the budgets of our clients?
So any number of things that will continue to go on, again, I can't emphasize enough on the excise tax. I was talking to Bryce Williams yesterday about this. A client that said I would never pay the excise tax, I'm also not likely to exit either. What that means is that they will manage their program to stay under that excise tax, and it's really represented by a newfound willingness to take bolder action. And that's a place that we'll really be able to help our clients as they look to control costs in this area.
So just to close out on healthcare reform. It's clearly been a significant issue for our employers and a key growth driver for us.
I'll just mention one or 2 other things on this slide, and I have covered most of the others. The Early Retiree Reinsurance Program, this is a part of legislation that was intended to encourage employers to continue to offer medical benefits to their early retirees. And the way it took form was that the federal government would reinsure you effectively for claims above $15,000 for individuals, and up to $90,000 I think. In order to qualify for that, you had to fill out a complex application, you had a collect claims data, you had to collate it, you had to send it in to the federal government, you reconcile it on an ongoing basis. What we are able to help over 100 clients with respect to this, we then collected over $150 million of reinsurance proceeds, and we were able to produce about $15 million of consulting fees for us over that period of time. And some of that will continue as the program continues, though, not at that same level.
I also just want to touch on retiree health strategy and obviously, Bryce will talk some more about this. But we've been helping clients with their retiree health strategy since before healthcare reform came into law. There were already opportunities for employers to move their retirees from group coverage to the individual market, while still producing a positive situation for many, or most, or all retirees. That work has only continued as health care reform has been implemented because it actually produces a number of improvements to the Medicare programs that makes it even more attractive for individuals in the individual market. So we expect many more companies to look at their retiree health strategy in the coming years. We see that as a consulting play for us, which then potentially moves into an exit play, which was obviously a nice opportunity for us in the health segment as well. So we have expertise in all those areas and see them all as growth areas.
I've already touched on this throughout, but HGB works closely with other Towers Watson LOBs and segments, retirees medical strategy, I just mentioned we work closely with Extend, we work closely with our communicators, our retirement colleagues. And you can see in these other graphics that we work very collaboratively with our colleagues because we know our clients are looking for integrated solutions. And as I mentioned before, health benefits don't exist simply unto themselves, they're a key part of the whole rewards proposition.
So I'll close it by talking about the growth outlook for HGB which we see as really quite promising. And it comes back to that fundamental tension that's there. These are highly attractive benefits. Employers have indicated that they clearly want to continue to offer them, but the cost issue is real and it needs to be grappled with and resolved, frankly, in order for employers to feel that this is something that they can continue and to afford to do. And so while that tension is there, there will be a lot of opportunities for us to help our clients. And then health care reform, which I just went through in some level of detail will continue for a number of years as things like the excise tax play out, as public exchanges develop, as private exchanges develop. That should create a lot of opportunity.
I've already covered the other items on this slide, and hopefully I've gotten across this is a multidimensional business with some significant core issues and also a lot of transactional issues that we can help our clients with as well. So we remain very optimistic about the future growth of the business.
So I'm going to stop there, and I think that we're ready for a breakout. So 20 minutes, is that -- 15 minutes? Okay, be back here at 11:20. I bargained. I tried to get you more, but -- thank you.
John J. Haley
Hello, everyone. If we can get started again. So let me introduce the head of our newest segment, Exchange Solutions, Bryce Williams. Bryce?
Bryce A. Williams
Thanks, John. So my name is Bryce Williams and until 120 days ago I was the CEO of Extend Health and now we're part of the Towers Watson family. And I can report back what you do in these merger integrations, one of the key indicators that I've seen, previously, [ph] in my career is if the employees of the acquired company stay. And today I can report that we've not lost a single employee. Everybody in our organization feels like this is the second inning of the game. It's getting more exciting and our work with our friends in Towers Watson is increasing.
So what we'll focus on today is a couple of areas around which you can start to assess, as you go forward in learning more about where we are with the Exchange Solutions business, exactly how to value the business within the hands of Towers Watson. So we'll talk about the overall business market, we'll talk about our competitive differentiation, we'll talk about market size, which we think is really exciting for us, and we'll talk about our growth strategy. So across those 4 developments, we'll report and share some more information in the next few minutes.
So here is our business model. Many of you who are new to what we do, I'll simply tell you this. Previously, very large employers for the post 65 Medicare retirees typically array a group plan model to cover those folks. Many of these employers are self-insured. In our world, what happens is, an employer actually terminates the prior group plan and, instead, delivers dollars just like applying [ph] contribution via what's called an HRA, or a health reimbursement arrangement. HRAs have been in existence since 2002. They were created during the Bush administration and Treasury and actually HRA "accounts," even though it's a notional account, it's not like HSA, there are more HRA receiving members today than there are health savings account members. So they're very, very popular by employers. Because under a notational account, the employers control the dollars and they can deliver those tax-free dollars, for not only premiums, but also for whatever medical expenses a retiree or a person incurs are also tax-free under 213(d).
So what's interesting about our business model is we're both in the B2B space and in the B2C space. We work for employers, they're very demanding, they're used to a group plan enrollment type quality and yet we're also breaking down and delivering mass personalization and coverage to each individual retiree. So what happens is they terminate the group plan. Each individual retiree gets dollars, we help manage that via our TPA or outsourced TPAs that we use. We're excited. We do a little bit of work today with Towers Watson's internal TPA. We expect to do a whole lot more work as one of our areas of synergy between the 2 of us.
So when we start to process enrollments. That happens during the Medicare open enrollment season and that's coming up here just in the next few days. As you can imagine, we're really ramping up. This year, we're having a great year in terms of Medicare enrollments, in terms of number of clients. And so we start the enrollment process. And that happens at one of our 4 call centers. We have a call center in Salt Lake city that's been our legacy call center for 6 years and then we have added 2 call centers in Dallas, Texas. And this past year, one of our competitors had a call center in the Houston area that they terminated because they didn't get enough business and we actually hired all of those people including the manager. So they now work for us. That's our fourth call center down in North Houston.
Then what happens is we are appointed and licensed by 85 carriers on our Medicare exchange. We are selling their individual Medicare products, that's Medicare Part D, Medicare Advantage, Medicare supplement plans. And then when we enroll someone in the plan and we do have an individual conversation and have developed our own custom Web tools, have our own custom CRM tool that we constructed on the Microsoft.net platform, we then deliver the right plan to the right person and we get paid a commission by each individual carrier. Our commission schedules, typically the commission dollars are embedded in the price of the plan. So we're not going back and asking retirees for additional dollars. Those dollars are part of the actual plan itself. And the price of the plan would be the same if the retiree picked up the phone and called Humana directly. We can't discount our prices. We can't discount our commissions. Those are embedded in the plan regardless of the channel from which you buy.
So we like that because in our business model, that's a recurring, our annuity revenue stream. It just keeps coming in. We typically get paid over the life of someone being on the policy. And then what we deliver back, because we're now creating, for the first time, personalization of coverage, choice, competition amongst carriers, we deliver savings back to our employers that typical can range from between 15% and 30%. That's very significant. Because at that 15% to 30% subsidy level, they're actually delivering the same or better benefits and we'll show you an example of that to their Medicare retirees. So that's our business model.
Our timeline, I won't go over it, it's in your book. Suffice it to say, we built the first part-time worker exchange. We did it in partnership with Sam's Club, the Sam's Club division of Wal-Mart stores. It was wildly popular. This goes back 7.5 years ago now. We showed it to Chrysler and Chrysler said, "That looks interesting. We have a more dynamic problem that's costing us a lot of money with our Medicare retirees, would you please build for us the first Medicare plan exchange." We did that in 2006. It was enormously successful. Ford watched what Chrysler did. They moved 57,000 retirees with us in 2007 and then GM followed 119,000 retirees. And now, it's spread way beyond the auto industry. Our client base includes Honeywell, includes Caterpillar, includes Warehouser, almost any industry, you can pick an industry leader now is using the Medicare Exchange to deliver better value to their Medicare retirees.
Next up, this is our fully integrated solution. This is an overview of our Exchange. An Exchange isn't a website. An Exchange is not just a piece of technology. It's not just a phone bank. We have built an integrated system of technology and people and phones and the Internet to build a consolidated way to help Mrs. Smith in Auburn Hills pick the exact right plan for her that's the best value for her that optimizes GM subsidy. All 7 of these different activities have to go on in this sequence. However, underneath this, we have 32 custom captive systems that we've built to be able to deliver the excellence that John mentioned earlier and that now we're being recognized for in the industry. It's really challenging to do this because the bulk of our enrollments do happen in the 10 weeks of Medicare. An interesting dynamic that's happening right now, and coming up in just a few days is not only are we good, but we're fast. So we actually get all of the plans, there are 85 carriers in our exchange, we get their rates and benefits loaded even before medicare.gov by about 10 days.
So what happens is starting in October 1, let me repeat it again, in just a couple of weeks, our website gets bombarded with external traffic. It's okay, because we can manage 2 million concurrent users at once using our technology. However, it's not retirees. It's the carriers marketing departments across America scraping our site, looking at their plan pricing of their newly filed rates in all 54,000 zip codes to determine how competitive are we in each of those markets. And then that drives their marketing spend. So we built such an interesting exchange that we're not only used, of course, by the retirees, but now the carriers actually use us for determining their own internal marketing spend. And so we are again about 10 days ahead in our site, that's far easier to use than medicare.gov. So that's our technology solution.
There are a lot of synergy opportunities, I think Mark addressed quite a few of them in his remarks. We've been meeting, for last several weeks, across our Executive teams and across our operations and product development teams, and I would suggest that we have anywhere between 5 and 10, almost immediate synergy opportunities between the 2 organizations that we intend to continue to develop for the mutual benefit of our clients. We are always focused on how can we continue to drive better value to our clients, better client -- better value to their employees, better value to their retirees. And so that will always be the win through which we look at it. Currently on the left, you could see in terms of related consulting work, the FAS 106 valuation work is significant. You'll see in a minute that Ford Motor Company when they announced in November 2006 recognized an immediate $850 million plus FAS 106 adjustment. And then also in the other works across not only FAS but some of these other areas, we think, again, there are tremendous amount of synergies that we intend to go develop together.
So as many of you know, and these get back to some of Mark's slides, there is a storm happening, particularly in the retiree market, particularly in the Medicare market, where costs are going up, people are getting older, employers can no longer accept solely the inflation or the cost of their retirees that they cover. They're pushing that down to the individual recipient. Those individual recipients want more choice. They want to see hundreds of carrier options. They want to see and after our agents talk to them, the 3 or 4 most relevant options for them in their backyard. And they want to be guided, these folks, on average, that convert with us, are 72 years old. They're not used to solely using just the Internet to drive this. They need human help. And that's why, this year, we'll have over 1,400 benefit advisers across our 4 call centers.
So again the upper right slide, we think is probably the most important, which is the individual share of doing is only going to increase which, we believe, is just going to drive more consumer demand to have choice and have a helping hand to help guide them in making the right decision.
Here's the Ford example. This was not our work. This was actually The Wall Street Journal did a story on us back, I would say that was in late 2007, and they analyzed exactly what they felt -- if you look at our Exchange, the average retiree would purchase. And again, Ford Motor Company's saving and now this number, $80 million, is actually light. It's closer to $100 million in cash per year, and they're generating, again, this savings year-over-year so this is year-over-year cash and yet, you see it at the bottom far right, the average retiring couple with $500 is better using a Medicare Exchange. So you can see why we're so excited about our core opportunity.
Now on competitive advantage, many of you have asked, well, what is the barriers to entry in this business? Seems like you just hire some folks, you get a phone bank, you have an Internet website, you call a couple carriers, you try to get appointed. The barriers to entry are very different than the barriers to execution. And we'll show you an example of what happened when a very large competitor of ours, actually larger than us, tried to replicate what we do this past season. It ain't easy. And that's because without the technology systems, the people, the expertise, the willingness to do 140 in-person meetings like we did for General Motors and then the training, the licensing, appointment and certification with all 85 of our carriers and nanotechnology work that we've built, there's a lot of ice underneath the water that you can't see. And it's very deceptive to look at just what you can see above the waterline.
So across these different arrays, our client retention is excellent. We have only had 2 clients leave us in the history of the company and they didn't leave us with their retirees, they only left us with people turning 65. And actually one of them just called and we believe they're going to come back, because they don't like the vendor that's trying to help them do that with people turning 65 inside their organization. From a regulatory compliance perspective, that's another gigantic actual barrier to execution and entry. We are licensed and have to comply with CMS rules and regulations at a Federal level, and with all 50 state DOIs. We probably spend over $1 million, $1.5 million of just compliance just for our agents alone each year. This is not easy, again, to do at scale. And we were are the first and largest Medicare exchange, and therefore by -- because we've been doing this for 6 years, by far and away the most sophisticated private or corporate exchange out there, others are making announcements about their corporate exchange. It's all slide wear. We actually are on version 7 of our entire exchange ecosystem and it works great and works at scale. Again, 2 million concurrent users able to be supported at one time. It's very heavy duty. Again, built on the back of the Microsoft.net framework. And if you saw at our timeline, we actually signed a national marketing agreement with Microsoft. We are the largest installation not only for .NET and healthcare but also for their call center technology. So we actually use the Microsoft.net LINQ voice-over IP technology that gives us the flexibility to do what we do. And outside of Microsoft itself, we are the largest installation for the LINQ technology.
We talked about our delivery model. This past season, and we believe is on the heels of what happened when one of our competitors failed last year, we're roughly 10x the number of people that we're enrolling this year than our largest, closest competitor. So we feel like we have, again, very sustainable competitive advantage.
And here's the slide. So CenturyLink called us December 8 of last year. They had gone with another very large benefits consultant that thought they could step in and do this, they made a small acquisition and tried to compete with us. It failed spectacularly. And so we stepped in for CenturyLink and in the last 3 weeks of the year, we enrolled over 3,000 of their retirees in a total rescue operation, to try to get them their cards, to try to get them enrolled before January 1. This is very challenging. This was the actual letter that CenturyLink sent to their retirees apologizing for what happened. And then identifying us as the brand that was going to step in and take over. You could see some of our other names of our clients at the bottom that Caterpillar, Federal Express, Honeywell, Warehouser and again 250 other clients, including 41 of the Fortune 500.
So how are we going to drive growth? So one of the ways that we got to know Towers Watson well over a year ago is they became one of our partners. We still, to this day, post acquisition, have 4 of the top bank brokers in the U.S. continue to want to deliver this service to their clients through us, even though we're owned by a potential competitor. Why is that? Because they know how hard it is to do this. They still want the service. They still want to take care of their accounts and so they're certainly willing to work with us regardless of who owns us, because what we do is so challenging. Over on the far right, you can see we are also building out our next wave of our exchanges, working with all 85 of our carriers, identifying their plans and their strategies for what they're going to do going forward in the new private exchange or corporate exchange market. We're all over that and we're really excited about that. We have [indiscernible] announced today, but we are watching what's happening with government regulations, with the essential benefit levels that's going to be delivered to each state and what are the states going to do and then work in concert with each state exchange authority. As John mentioned at the top, we've worked with 7 states and responded to their RFPs for their actual public exchange. And we did that not because we want to become a large software job shop, but we have learned a titanic amount about how the public exchanges are going to work. And we are going to be able to link straight in with our electronic technology to these same carriers, using all the same carriers that we have today on those corporate changes and provide public exchange enrollment options for what we do, which we're really excited about.
So we talked a little bit about the market opportunity, but just lightly, in advance of filing our public offering this past January 6, last year, we were curious about the size of the market. We went out and engaged McKinsey on a gigantic study, the first of its kind, to identify which employers are subsidizing across both the private and public sector markets. These are the numbers that they came up with. A lot of this again is in our S-1, which is actually still out there on sec.gov, if you want to check this out. The private market, we believe, is about 6.2 million people. The public market, almost its equivalent. In fact, our public business, right now, is skyrocketing. Last year we enrolled all 10,000 of the state of Nevada's retirees for Medicare. This year, we're enrolling a part of the state of Louisiana's 40,000 retirees. We are now enrolling across school districts, counties, cities, municipalities, you name it. They get what's called a GAP B45 [ph] adjustment that looks like a FAS 106 adjustment. It's really big now that their credit ratings are all being judged by all of the rating agencies and looking at what are they doing to actually control for their open-ended obligations. We give them a huge solution that we're very excited about.
So we're actually just touching, we believe, in the public sector. And then you see, we feel like we're roughly 95% unpenetrated in terms of who's done a Medicare exchange conversion. And then if you look at our market share, we believe we're right around 75% to 80% of every life that's being converted, if not higher in this new year is going through our cap of exchange.
So growth opportunity, we talked about, that's our core. However, there's these other areas that when we talked about the public presence over there on the right, the private market, there's still 460 Fortune 500 companies, almost all of whom continue to fund those 65 retirees via group plan, and we're talking to a lot of them. We're really excited about that growth opportunity the private sector. In the public sector, the opportunity is actually just immense.
So they are looking forward in our growth. So here's our core. Really excited about that. We feel like we could build a great company just off our core market. Yet you have these folks called early retirees and the early retiree value proposition in 2014 is going to be dynamic for employers, all of whom want to look at what are my options for early retirees and how can I use your exchange. What's great is between Towers Watson's huge client base, which is roughly 80% of the Fortune 500, all 41 of the Fortune 500, all of them have early retirees. We feel like this is an immediate opportunity for us to attack, and that's something that we're absolutely strategically working on together. And then, of course, in the broader market, and Mark touched on it a little bit earlier, in the HGB slides, the broader market is about 155 million Americans receiving some sort of ESI, employer-sponsored insurance. Are they going to use an exchange either immediately or down the road? Potentially. We don't have any control over how they're going to react to reform, what's going to happen with the public exchanges, are the carriers going to able to get their dynamics together for private variations of what's on public exchanges? We can't control any of that. But we are really well-positioned in the client base that we have should any employer want, for all the part of their population, to do something unique and new, we feel like we're in the driver seat, and we will take advantage of that. So that's, again, as we think about our 3 drivers of our opportunities that...
So in summary, we love our current business model. We like that we save a ton of money for our clients. We never actually gathered the entire savings for our clients, it's in hundreds of millions, if not higher in terms of actual delivery of cash savings. The savings to our retirees has been a north. We have hundreds of thousands of happy retirees and they certainly talk in today's world and that's very important and we are now, it's not on this slide deck, but and also eyeing a retail opportunity, an ability to speak directly. We've shot a television commercial, we're testing it in the markets. We like the initial cost of acquisition. It's something, down the road, if we want to develop a direct to individual model. We're actually the best company in the world to do this, and we feel like we're well-positioned. We are proven at scale and that's huge in the Fortune 500 market. They're not going to trust anybody else to do this if you've not proven you could do it at this size of opportunity. This fall, if this is already announced, we're enrolling the retirees of Dupont Corporation. That is a massive corporation with a massive amount of retirees. They chose us because of our experience of doing this at large-scale. And as we showed in the last couple of slides, we feel like there's a huge and significant market opportunity. We feel like Extend Health, in the hands of Towers Watson, allows us to fulfill our dreams and we're roughly in the second or third inning of the game, we're excited about the rest of the game. Thank you for your time.
Now, for something completely different. So we know we spent a little bit of time talking about our emerging market strategy. I'll give you a sense of kind of our footprint in some of those markets, how our service and product portfolio uniquely aligns to the maturity curve that we're seeing having been in those markets for quite a period of time and the long-term outlook and opportunities we see.
Just a little bit of data to maybe around us in the opportunity. As we know, the emerging markets are increasingly accounting for a larger share of GDP. But what's been intriguing for us to watch is how that -- the traditional pathway to growth, which is largely export-driven, has started to change from many to being primarily about internal consumption and you can see that captured on the chart on the right as it relates to the growth in both population -- growth and population, consumption, retail and import data. And we think this bodes for a much more sustainable sort of future prospects in terms of sustainable growth for us over the mid-to long-term. I think one interesting statistic that is not on this chart is, if you look at the makeup of the Fortune 500, the global Fortune 500 today, 181 of those companies are from Asia Pacific, while only 143 are from the United States, which is a pretty dramatic shift over last 10 years or so.
As part of our growth strategy, exercise back in FY '12, we conducted a pretty thorough review of the emerging markets and developed some criteria as it relates to how we would organize and place our bets, if you will, going forward. So the 3 criteria starting with the economic ones, looking at, is there sufficient growth and demand for human capital on an ongoing basis. Maybe not now, but over the mid-to long-term. Followed by a more sort of micro look if you will at the business environment. John talked about TMOs, we have a unique position in serving large organizations with fairly complex risk, people and financial problems. It is that makeup of organizations that's going to create sustainable demand. Equally, understanding the implications of near-term volatility, and our ability to sort of manage that exposure on a go-forward basis. And then on a more detailed basis, looking at the consulting environment. What does the actual demand for the specific products and services within HR and RFS actually look like on a go-forward basis?
So from those criteria, we categorize the markets into 3 primary buckets, again focusing on their ability to deliver sustained revenue growth over the mid-to long-term. So starting on the left, the markets with significant opportunities, as you can see on the bottom 2 bullet points, the ones where the opportunity is here and now, and you've got a robust base of clients who would traditionally buy Towers Watson services, versus in the medium-term where the market for the consulting opportunities is perhaps evolving a little bit more, not quite there in terms of sustainable demand. Possibly getting there over the course of the next 24 to 36 months. And then lastly, what we would call the emerging opportunities, where the presence of multinationals and large domestic firms is perhaps not quite there in sufficient scale but potentially could get there over the course of the next 3 to 5 years.
And from that exercise of categorization, we arrived at the following sort of decisions, if you will, from an opportunity perspective. We saw significant opportunity in Brazil and China; medium-term opportunity in markets like the Middle East, India, Southeast Asia and Turkey; and then emerging opportunities in markets like Argentina, Chile and South Africa, where we just recently increased our ownership stake in Fifth Quadrant, our joint venture there. And you can see some of the growth rates we've had over the course of this last fiscal year. I think it's worth knowing that of the market you see up on that slide, they account for over $100 million in revenue in total. So it's a significant bet we placed. And China, Brazil and Southeast Asia each account for over $25 million in revenue.
So how does this translate into opportunity for our product portfolio? As you heard from Mark, from a benefits perspective, we're seeing public healthcare get stretched pretty thin in many markets, and this is particularly true in emerging markets and there seems to be more of a trend to enhance healthcare benefits by employers, particularly in Latin America. There's some specific opportunities for healthcare. In RCS and insurance, we're seeing markets mature and with more sophisticated regulation, driving a need for organizations to align products and channels, which present us with a unique revenue opportunity. And then as it relates to investments, as many of you are aware, there's been significant growth and activity on the part of the sovereign wealth funds from those markets as they diversify overseas, diversify into alternative products. And as they look to build up in-house investment expertise and capability, are looking for assistance with governance and asset allocation strategies. So some opportunities across these 3 parts of our business.
But as a John alluded to, we really see the significant growth opportunity over the long-term being in the talent and reward space. I think you're all familiar with our value proposition and you can see it up there. And how we deliver on that proposition through 3 interconnected lines of business. And these businesses are organized primarily on the basis of business model differences. So executive pay and rewards, talent and communication, primarily project-based consulting with some annuity features, while data surveys and technology are primarily products with significant annuity features. And what you'll see in a second is how the service portfolio that underpins each of these of 3 lines of business allows us to meet some unique demands on the part of organizations and emerging markets, not at a point in time, but over their lifespan, if you will, as they mature and grow and develop.
And so this is the maturity pathway that we've observed over the course of being in these markets for a number of years, and I'll highlight maybe some examples of where particular markets are as we talk through this. Starting with the inner core, if you will. Maturing markets, think Indonesia, if you will. Economies largely dominated by government-linked companies and family companies who are starting to open up, some are liberalized, and looking to increase their competitiveness within the local economy and looking for more structure in terms of how their businesses operate. Moving them into kind of what we would call the acquisition stage, where the primary emphasis, once we've got that structure, is really about growth and scale. How do we scale up? Malaysia is probably a great example and how that economy has evolved, because they're on the national investment arm of the government there, facilitating and driving the growth of their 20 government-linked companies. The third phase would be where, I think, we'd see many Chinese companies is that increased sophistication. How do we build sustainable scalable infrastructure to support growth as the economy starts to expand from a primary domestic focus to a global focus. And then lastly, what we're calling the market leaders, where you're seeing the more mature emerging economies, think Korea and Singapore for example. And the emphasis on really competing as best-in-class organizations across global industries.
So how do our products and services line up or juxtapose against this pathway? If you -- again going back to, this is slightly different, it's got 3 levels as opposed to 4. But if you look at the rapidly developing organizations, and think back to the Indonesia example I shared a second ago, the emphasis really is on -- is looking for quick product-tied solutions, where benchmarking and structure become really important. And we see strong demand for some of our services in global data services, in terms of compensation benchmarking data, services related to establishing organization structures, valuing jobs and putting structures in place that move beyond, perhaps, the sort of less structured way those organizations might have grown up when they were family companies. The position is, for longer-term growth, really is the imperative. And then as organizations move into the emerging phase, what we see are more sort of traditional consulting solutions in terms of new strategies, health -- human capital strategies, talent management and rewards strategies, increased need for governance, demand for executive pay as those markets sort of liberalize and there's greater transparency and more design work. And those are some of the traditional solutions we would see.
And the third phase where we see markets like Singapore, like Korea going is, what I would call the demand for third-generation solutions around perhaps talent management. Some of what we've written about over the course of the last couple of years in the manager redefined and then transformative HR, where demand for robust, more forward-looking solutions, where the element of planning becomes a key part of human capital management. So things like leadership development solutions, strategic workforce planning and driving a much more sophisticated view of how talent is managed through segmentation of the workforce.
All of that translates into a pretty intriguing sort of journey for these organizations. And as you can see through the integrated suite of solutions across talent and reward, across the 3 lines of business, it presents us with a unique opportunity to partner with these organizations over the course of that entire journey, not at a point in time but to partner with them over an extended period of time. And as you can see, a solution set that lines up quite well with their unique needs and demands.
Thank you. I'm going to hand it over to Roger now.
Roger F. Millay
Good morning. Thanks, Ravin. Let's talk some numbers. Not that quickly though. There we go. So really just starting out on what we see for fiscal year '13 in the context of the history, really the public company history of Towers Watson and this is going back into the days. So we closed the Towers Perrin and Watson Wyatt merger January 1 of 2010. Prior to that, the public company was Watson Wyatt. Watson Wyatt had a big step up in scale in the 2005, 2006 timeframe with the merger with its European partner. And so when you step back, I think there are 3 distinct phases. That premerger, 2005, 2006 when Watson Wyatt was a $700 million, $800 million company, with EBITDA margins around -- adjusted EBITDA margins around 13% or 14%. Second phase, post the European partners merger, when the company about doubled its revenue size and took margins up into the 16% or 17% level. And then again, with the merger of, again, Towers Perrin and Watson Wyatt to create Towers Watson, again roughly doubled the revenue size of the company and took margins up. And we're now running and have been running in that range of around 19%.
The last column on this slide, the column to the far right, represents at the highest level, how we're looking at guidance for fiscal '13. And you can see revenues of $3.5 billion to $3.6 billion and an adjusted EBITDA margin in the range of 18.5% to 19%.
The decrease in margins from fiscal year '12 is driven by 2 things -- 2 main things. The first being the temporary impact of taking in the Exchange Solutions segment. We talked quite a bit about that in the earnings call in August. And given kind of the business pattern, and I'll talk more about this when I get to the Exchange Solutions slide, but Bryce really alluded to the main factors. Given the business pattern and given the accounting, the purchase accounting impacts of bringing Extend Health into the corporation this year, there's a diluted impact on margins of Exchange Solutions.
The second impact is our pension costs for this year. Given, I think, Carl alluded to the interest rate or the discount rate environment. And that's had an impact on us. We're going to have about a $20 million increase in pension costs in fiscal year '13. So again those are the 2 big factors driving margins down from the fiscal year 2012 level.
So this really, to start off, this is really the focus areas. And as we went through our planning process and talked about what are we going to focus on? What do we hold ourselves accountable to deliver in 2013, what are those main areas? The first area and, really, I think, turning back to the 4 presentations you've seen here earlier and, again, I think, the way, in the call in August, the way we set up the year, as we planned, we said, look, there are number of things we see in the company that are going very well where we think we see short and long-term growth. And those are areas we need to continue to invest in and to drive for long-term value creation. So that was a key part of our plan. But the second piece was really that the global economy, the way our business is reacting in the global economy, you saw more signs of pressure, and we wanted to position really the rest of the business, so the rest of the parts of the P&L, conservatively, relative to cost, to do the best job we can of containing margins.
So those are, I think, the 2 main balancing things as we went into the year. Other elements of the plan, certainly, we're very conscious of being at the end of the 3-year integration period that we spoke to the market about, starting with the announcement of the merger, back in 2009, June of 2009, as I recall. And we said at that point, we expected a 3-year integration period, that the cost of integration would take that long. That principally, the IT-related integration activities had a long-tail on them, driving that 3-year period, and that we were going to segregate transaction and integration costs in our P&L for that period, again, to isolate the impact of integration. Well in fiscal year '13, that period is ending and we need to transition and end that integration cost bucket. And we see that happening in the March quarter of 2013.
We need to deliver on Exchange Solutions, not a lot more to be said about that other than big investment for the company. And we're very conscious we need to deliver on that. And I think you now have a much better sense of why that investment was so appealing to us. The opportunities we see long-term and -- but we're very conscious that we need to deliver on that.
The next 2 bullets get into the whole kind of the IT area, the ERP, the impact of the ERP transition on the business and on the financials. First, we're near the end of the deployments. There are 2 more scheduled deployments. Those of you who we've spoken in more detail to about this, recall that we had kind of a quarter-by-quarter broken up the geographies around the world and we're just on a kind of step-by-step implementation. There's 2 more steps to go, one in the December quarter, one in the March quarter. We're on track. Quite frankly, I think, it is a great accomplishment of the company to have stayed on time with that and it's great for everyone because it really cleans up kind of the foundation of the company and I think will bring a lot of clarity for our associates, the operations of the company and cleanup the P&L as well.
We did have an impact as we've discussed starting in the March quarter of 2012. On the financials, driven by the receivables area, it was really the implementation of billing and receivables in the U.S. That's an issue that initially pushed the receivables levels up for what we call unbilled and billed. In the June quarter, the unbilled area was stabilized. So unbilled is just getting -- accumulating the time that people spend and executing the process of turning that actually into a bill. Once the bill is issued, then it goes in the billed receivables. So again unbilled was stabilized. But there was a legacy of reconciliation issues, just backlog of billing situations that we had to clean up in order to be effective in collections. And we have to work through that. We've been making progress on that. I think at this point, we're pretty much through the systems and process changes that we needed to make to adjust for the issues that we encountered in the U.S. deployment. And now, we need to move on. So we're stabilizing the ongoing operations and need to whittle down the issues that we have from a collections point of view. And we've been doing that, we've marshaled the energy in the company and we feel like, in a couple of quarters, we're going to see substantial progress against that.
Finally, really just monitor the cyclical elements of the business, those of you who followed the company for a while will recall that we both had cyclical downsides and cyclical upsides. And the talent and reward segment, more project driven, more sensitive on the cyclical downside, but there are other elements of the business, particularly in the retirement area, some of the investment area, there are other elements where projects are driven by downside and volatility in markets.
So moving more back into the numbers, we gave a page on first quarter guidance for fiscal '13 back in the August call. We've made a couple of adjustments to that guidance. We're looking for revenues in the range of $805 million to $825 million. That stayed the same. From an EPS point of view, now, we think we'll be at the bottom end of the range of $1.05 to $1.10 and the adjusted EBITDA margin will be in the 16.5% to 17% range rather than around 17.5%, which is what we said back in August. Other elements of the guidance remain the same.
This is the first quarter guidance recut by segment. So you get both margins here, as well as revenue growth. The revenue growth targets for both benefits and for Risk and Financial Services have stayed the same. For talent and rewards, we've gone from expecting low single-digit growth to expecting around a 5% decline. This is a result of us looking at the first couple of months of results and the trends that we see and we're seeing a decline in T&R and expect that to show in the results of the full quarter. From a margin point of view, we had said that however, talent and rewards would be in the 20% range, a little above 20%. We're now expecting around 10%.
Finally, for Exchange Solutions, none of the numbers have changed. So again our expectations for performance, which were consistent with the underwriting and the transaction, the impact for this year hasn't really changed. You see here we say a margin of around negative 55%. We said in August a $7 million NOI loss in the quarter. And that's still what we expect.
So now turning to the full year, again, I mentioned the margin and the revenue impacts. We're looking for EPS in the range of $5.10 to $5.20, stable tax rate. The integration spend, again, now talking about 3 quarters to the end of the integration period at the end of March of 2013 of around $30 million to $35 million. Again that will be principally IT-oriented, as well as the impacts of the completion, the rationalization impacts of the completion of the ERP project and the rollout.
We're expecting capital expenditures in the range of $80 million. Last year we were a little over $120 million. As we discussed then as a result of the integration projects, we had an abnormally high year in investment, particularly in IT, some in real estate as well. And again, so we expect that to be lower this year as we expected over the long term.
Share's about the same and the foreign exchange expectations are about what we expected in August.
So now let's talk about the individual segments, and I think John gave some preview of some of the numbers on the segments here, but talking about the individual segments from a guidance point of view. I'm not going -- these slides are all the same. They're really kind of our foundation slides for the industrial pitch. I'm not going to go through all the demographics, which are things that people have heard about pretty consistently, I'll highlight a couple of changes. But I'll focus on the guidance here in the segment pages.
First, the benefits segment. So 4% growth last year. That was a combination of organic growth as well as the impact, and again I think John mentioned this, the impact of the Alcalon (sic) [Aliquant] acquisition that was done back in fiscal year '11. The impact of that rolled over into the first half of fiscal year '12. The rate of growth now is just an organic growth level, so we're expecting low single-digit growth in the Benefits segment for fiscal '13.
Margins, again, this is our highest profit segment. And margins for the benefit segment staying in that 30% range for the year, we expect in the low 30% range. And for the long-term, we expect low- to mid-single-digit growth in the Benefits segment.
Growth in this segment, so Mark's talked about Health and Group Benefits. John alluded to some of the things going on that are successful market penetration in the TAS business, growth being driven by those 2 parts of the segment.
Risk and Financial Services, we had 10% constant currency growth in fiscal year '12 for Risk and Financial Services, again aided by an acquisition. So the EMB acquisition carried over into about half of the year, the growth carried over into about half of the year, fiscal year '12. So that drove a good portion of the 10% growth. We're expecting an organic growth level this year of 2% to 5% with margins in the mid-20% range, which is basically consistent with last year. And as we've expected in the past, longer-term growth rates in the mid- to high-single digits for RFS.
Talent and rewards, talent and rewards last year had a 5% organic growth rate. Was continuing to see some good organic trends. And again as we looked at the first couple of months of this year, July and August, trends had been slipping through last year. We talked about some of the pressures we saw particularly in Europe and again we saw more slippage early in this quarter. So hence, the guidance here to now see about 5% decline in the first quarter and for the year, we're expecting a decline of -- or results in roughly flat to mid-single digits decline. For margins, this business originally, again, would have been expected to be around the 20% margin. And we're now expecting low- to mid-teens for the talent and rewards segment. Again we expect this business -- we understand the volatility here, the economic cyclicality, mostly a project-driven business. But over the longer term, given some of the human capital trends like Ravin talked about, that John alluded to, we think this should be a highest growth business for the company over longer-term -- over the medium-term through a cycle.
Exchange Solutions, again, I think there's probably been more discussion already of some of the Exchange Solutions numbers, just given the acquisition and the first month of operations that we had in June. But we expect a 30% revenue growth rate. An NOI level for the year in the mid- to high-single digit range. That's very -- in fact, both the growth rate as well as the margin level are very driven by the fact that we had to defer $12 million of revenue as a result of just purchase accounting, deferred revenue that Extend Health had on their books at the time of the acquisition. Without that, the margin would be in the upper teens level. Growth would be above 40% on an apples-and-apples basis. You expect to see in Extend Health or in Exchange Solutions now, the kind of cyclic -- or seasonality and, cyclicality is probably the wrong word, but year-to-year comparisons that are greatly affected by the enrollment process that Bryce talked about. There are a lot of temporary workers that are brought on for that. That drives in the first half of the year and this is now illustrated in the bottom right here were we show the last couple of years of Extend Health patterns. In that first half of the year, you expect to have lower profitability. In this case, losses, NOI losses. In the second half of the year, profitability really spikes. The premium -- the commission revenue on the premiums come in, and then the temporary costs go away.
Just quickly on the balance sheet, we continue to have cash availability. It continues to be primarily outside of the U.S. This is the same number we talked about in the August call. John mentioned the pension impact and Carl mentioned again the discount rate impacts on other companies. The impacts to us again $20 million of additional pension expense. And we expect about $90 million additional cash funding, both in the qualified plans and the unqualified plans. Principally though, that $90 million is driven by contributions to qualified plans and principally in the U.S. and the U.K.
Over time, we've talked about the share unlock. We're about halfway through that process. The impact relative to outstanding shares of Towers Watson continues to diminish. But we have about 6.8 million shares to unlock in January of '13 and 5.4 million in January of '14. The RSU piece of that goes away after January of '13 and we continue to not see a big impact on the stock as a result of those unlocks.
Finally on the balance sheet, and uses of capital and free cash flow. Really, the view of how we think about investment-related uses of free cash flow, there really hasn't been a change. However, over the next couple of quarters, we are prioritizing debt pay down, we are towards the higher end of the level of debt that we look to carry or manage within, which is kind of up to 1x debt to EBITDA considering the actual debt level on the balance sheet. Again we're now up towards the high end of that. Part of that is seasonality. This is -- we pay bonuses in September. So we always peak -- the kind of net cash relationship to EBITDA always is diminished in this quarter. So the next couple of quarters, again, will be focused on debt pay down. Otherwise, the same kind of focus, which is, we think there are going to be opportunities. John talked about that from an inorganic point of view. To the extent we evaluate flexibility from a free cash point of view. On an investment point of view, we'll look at share repurchases.
So finally, kind of a strategic outlook more from a finance point of view. Disciplined operating management is at a high premium for us. We have some real strong elements, some stability in our business that give us the opportunity, I think, to really look at optimizing some of the margins. You particularly see that in the Benefits segment. And we feel our margins are industry-leading. Strong managing cash flow, generating cash flow is very important. Again, we have a model that if you manage margin well, you'll get good free cash flow. We want to use our availability of capital strategically to drive value enhancement and growth, leverage the broad portfolio that we've built and again continue to leverage off of the great stability that underlines the foundation of the company.
So with that, I think John is going to come back up. And we'll address questions. I think there are microphones available. We're open for questions.
Roger, can you be a more -- a little more specific on the free cash flow? Is there anyway you can give us a range just to better than...
Roger F. Millay
We're really not giving a range. And actually, we've kind of indicated here some of the influences, there are pluses and minuses. Generally what we're saying is we expect it to be higher. Last year was a diminished level because of the factors that I talked about, the spike in CapEx, but also the receivables.
And John, you mentioned early in the presentation about double-digit EPS growth. Is that from more of a longer-term view? Because certainly this year, it's not. So I'm just trying to understand your comments about double-digit EPS growth at the beginning of your presentation?
John J. Haley
I'm sorry, I mentioned what?
Double-digit EPS growth. Oh, sorry. Yes, I think in your opening remarks.
John J. Haley
Excuse me, double-digit EPS growth. Yes. I think over the longer run, if we can -- if we have our revenue growing in the mid-single digits as an organization, then we would expect our leverage can get us a few percentage points up there, and we'll be getting closer to double-digit EPS growth as you've observed. Note that, that's not what we see for this year. And -- But over the long run, we do think that's what we can achieve. And in fact, if you look at the whole history that Roger had, that's exactly what we were able to do. So we're just saying we think we can get back to that.
The discussion about longer-term expectations on the top line, the only one that really has changed is the Benefits segment, where before you were talking about mid-single digit, and now, you're talking about low- to mid-single digit growth. Can you just describe what's causing you to be more cautious, and about the longer-term view for that segment?
John J. Haley
Yes, I don't think that was a -- that we weren't -- that wasn't really a big change we were making there, I guess.
Roger F. Millay
I'd say -- so we use mid-single digit versus low. It's -- you're kind of parsing some numbers and so I think we didn't mean that to be a -- signal change. But kind of saying, I think we'd always said when we said mid-single digits that it was likely to be at the lower end of mid-single digits. And I think now, we see that not at the lowest of single digits, but in that if you'll think about it in kind of the 3 to 4, 2 to 4 kind of frame, I think that's what we meant to say there.
John J. Haley
Yes. I mean, just to say, I mean if mid-single digits is 4 to 6 and this is -- low- to mid-is 3 to 5 or something like that, I mean that's the kind of thing we weren't intending to, as Roger said, signal any big change there.
Okay. And then is there any way to talk about what your margins might be in fiscal '13, if not, for Extend and Pension? I'm wondering if they would be up in that case.
Roger F. Millay
They would be roughly comparable.
John J. Haley
Yes. I'd say where they have been...
Roger F. Millay
Maybe a little bit lower, but I think if you add back $20 million, I mean that's what 70 or 80 basis points, and I don't have off the top of my head what the Extend impact is but it's got to be pretty close. Probably not all the way there.
Okay. And then just last one, could you talk about how the effort to recoup the $20 million related to the ERP system is going? My sense coming out of the last quarter was whatever you're going to get back probably was going to come sooner rather than later. And you mentioned expecting to get that over the next couple of quarters. So I'm just wondering how that process has been going so far.
Roger F. Millay
Sure. I think so again the $20 million was a combination of reserves that have been posted and I think as we worked through the backlog of hours and what the realization of those hours were going to be, kind of what we call the write off process, that was a combination of those 2. It's hard to predict what we're going to get back. I mean clearly, we're pushing ourselves to get back as much of the reserve increase as we can. A part of that process of course is every month, as we continue to have issues with cash applications, kind of the backlog was building, you might collect some of the old money. But there's more aging every month. So -- and hence, kind of the comment, probably a little bit general, but the comment that I made about the importance now of seeing that the process and systems changes that we're making are substantially done. So I think again, that bleeding over process into aging buckets is -- should be pretty much done. I don't think in this quarter we're going to see a lot of change in the reserve levels and enhancement. Predicting what it's going to be ultimately I think is quite difficult but as we talk about it, we said we want to get through that backlog again substantially this year within the December quarter, so first half of the fiscal year.
John J. Haley
This calendar year, yes.
I want to get back to cash flow. Just to make sure I understand correctly, you're expecting an incremental $90 million of free cash to go out the door because of pension this year?
Roger F. Millay
Can you give us some of the other puts and takes that are going on through the year? Where I'm targeting going there with this question is that normally I'd have thought that the normalized free cash flow for your company is somewhere around the $400 million. A few years ago, you had done like $460 million or something like that. I'm just trying to figure out what the puts and takes are around that, and how long does it take you to get back to what -- and I think it was $400 million is normalized. And if I'm wrong, please correct me there.
Roger F. Millay
Yes. I think the puts and takes are receivables certainly and stabilizing that, if I remembered it correctly from the number from last year in the cash flow statement is about $140 million of absorption of cash in the build of receivables. You don't get that to 0 as long as you're growing. And we do aspire to be growing. But we need to bring that -- those levels down, so that's a source. And I mentioned earlier the lower CapEx level, which again is about $40 million. And the lower level of transaction and integration costs. And the offset to that again is pension costs. So $90 million. The broader question of where we expect to get, without picking a particular year, I think we should be up around the level of what we call adjusted EPS, which is the cash EPS level. Certainly, that's not at the $400 million level but it's getting up in that direction. But there's still a gap to that.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
I wanted to ask a little bit more about Extend Health. Two questions. One, can you just talk a little bit more about the competitive set? Who do you view as being the strongest player? Are there other potential players that you could go out and buy that would be good fits with your current business? And then secondly, the long-term target in terms of the NOI is getting to 20%. What's the time range to get there? And then I have some follow-up questions on the Benefits side.
Bryce A. Williams
Yes. So from a competitive standpoint, it's a lot of the same players we currently compete with in HGB and retirement and other things. Your Aon Hewitt, your ACS/Buck and some of those. In terms of who is the strongest player, I think you saw that with 75% to 80% of the wins of available deals this year, we're the strongest player. The next closest traditionally has been Aon Hewitt. This year, we have not seen as many wins for them. ACS/Buck would probably be the third, and there really is no fourth, not really. There are carriers trying to do this directly, but a carrier trying to do an exchange without choice is actually not working in the marketplace. So any of the other so-called exchange players that are out there that are pure plays, we never see them in an RFP. We've never lost an RFP to any of them.
Roger F. Millay
So to talk about margins. Again, as I talk about that 2 year kind of horizon and the impact of growth on the PL, it's early to say what the '14 and '15 margins would be. However, if you think about, again, if you think about that pattern, if we're in the upper-teens, let's forget the impact of deferred income, upper-teens NOI margin for this year. If we have another great growth year next year, we're probably not going to be at that mid-20s income. Properties Inc. NOI margin for this year and we have another great growth year next year, we'll probably not going to be at that mid-20s NOI margin. It's because of growth. So that level will be achieved at the time where kind of the growth rate kind of exposes enough of the revenue growth rate. And that's when we expect to be again at least at that mid 20% range.
Bryce A. Williams
Potential organic acquisition, there is none. Our growth is all going to be organic, there's not a follow on that helps us any way, shape or form that has any client base to speak of.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
So we're talking 2 years out?
John J. Haley
Mark, it depends. I mean, the point is that if we have extraordinary success in growth, it actually delays it because we get the cost upfront. So in some ways, the better off we are, the lower the margin will be for a while. But I mean if we get into a more normal growth rate relative to the size, it would probably be a couple of years out.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
And then with regards to Benefits, it looks like on the retirement side, derisking certainly seems like a growth opportunity but it seems like the guidance is also implying that the retirement portion overall is going to be fairly flattish. I was wondering if you could just -- is that right? Is that the right way to interpret the guidance? We're thinking about them, more of the long-term implications with regards to the retirement part of the business if we're thinking about 2% to 4% in terms of overall benefits with the other portions growing.
John J. Haley
So I guess I would say a couple things about that. I think first of all, the derisking does provide a -- we think there's some significant opportunities, obviously for us to do things, a couple of percent maybe. It does -- it's not just in retirement. So it will be in some other areas there, some of the other work that will be done. Some of it is administration, which would fall into the TAS area there. Some of it is project work that our folks will be doing, but maybe if they hadn't been doing that, they wouldn't be doing other project work. So we've been a little bit careful I think about how we factor that in to the increases. There may be a little upside to that, too.
Mark S. Marcon - Robert W. Baird & Co. Incorporated, Research Division
And then can you talk about the margin profile on TAS? And also on the health care side, particularly as those continue to ramp?
Roger F. Millay
Yes. So margins -- those are 2 good margin portions of our business. The TAS business does, if you go back into the days of so -- Mark, you've followed Watson Wyatt closely. Through those implementation periods. Sometimes has some volatility in the margins. But the margin profile of both of those in Health and Group Benefits is basically a consulting model. Those are margin businesses. We expect them to be high margin businesses. businesses. And there is no view of a change settlement.
John, last year you talked about instilling efforts and innovating internally the company. I was wondering if a year on, whether you've seen some impact on either retention of employees, keeping people interested or new products emerging?
John J. Haley
Yes, so we've been pushing on that. That's been one of the things we spend a fair amount of time on in this last year, and it will be something that we'll be working on this coming year and really indefinitely into the future. This is not something [indiscernible] we've been trying to do. As I think I mentioned last year when we're thinking we put something in and then all of a sudden we see a lot of projects. Our products are rolling out this year or next year. But the progress we've made, we've been delighted with. We did hire somebody who came in externally, who's a director of -- a head of the innovation that -- and has gotten off to a great start in doing that. We've put together a process for taking the ideation that our folks have dealing with clients, helping them to -- we've -- our new director of innovation has really helped us develop online tools that our people can use to build business cases for that and work to develop pilot testing of projects. And that's been rolled out to the group. We did a, for the first time, a global meeting of our -- all of our folks that are involved in research and market innovation from around the world. We had about 120 people that we got together in June of this year. We brought in some of the professors that we've worked with over the years from Stanford and Edinburgh and some other universities. And spent some time just talking about all the different research that we do around the organization, and how we might use that and deploy it. So we've done a lot of things that I think are the building for the future that we needed to do and it will really be another year or 2 where we'll start to see some of these ideas come to fruition. But we've accomplished, I think, everything we wanted to this last year.
On the delegated investment solutions, I was wondering if you could speak about mitigating any conflicts that you may have there? And then speak to something that was alluded to in the prepared remarks about an opportunity for a lump-sum recipients. I guess, you perhaps utilized the exchange?
John J. Haley
Yes. So let me call Carl, as I said heads our investment line of business. So I'll ask him to speak about the conflicts first.
Sure. That's an area we take very carefully because we have a growing delegated business, but a very large advisory business that still is growing very nicely as well. So we'd hardly like to cut off our nose to spite our face. There are a couple things we do to make sure that all clients are treated equally. For instance, if we are upgrading or downgrading a manager, that information is embargoed for 48 hours to the point where everyone can be contacted at the same time. There is no question to that delegated clients because we can operate in realtime, can act on that information quicker. But everyone's had the opportunity to act on that information. So what we do to manage the conflicts is sunshine. We try to make sure that all clients are aware of our commercial arrangement with other clients. They recognize that there may be an inherent disadvantage to the way they do business with us. They have the opportunity of course to do it in a different fashion. And we have that, I think, next to no client dissatisfaction. There was -- factor in different business models.
John J. Haley
Thanks, Carl. And on the -- Gene, would you want to comment just about the administration and for the derisking or the lump sums and how we might be able to use the exchange solutions?
Gene H. Wickes
Sure. We do a lot of administration. The one thing that we haven't done until the merger with Extend is talk to individual participants, and we're still thinking about how we deal with that. Our clients have been the companies. And then we have call centers so that participants will come in, but we're not giving advice. So it's something that we continue to think about. The exchange solutions model is one that we're very intrigued with. And one of the reasons we're so excited about Extend, because it gives us the ability to start talking to participants. So we don't have the model as to how we use it, but it's definitely something that we're considering in pursuing.
John, I was on the road last week with a company with a lot of operations in Europe and they said things were gradually getting worse. I know it's only been a month since the Investor Day, but I'm just wondering if you'd seen any change in trends or how does August look versus July for Europe as a whole?
John J. Haley
Yes. I think -- I would say at the top line if anything, were probably more cautious now than we were. And in fact, I think some of the Talent and Rewards, our outlook for that for the year probably is reflective of the concern about Europe. We have Paul Morris, who's our regional manager for EMEA. And I'll ask him maybe if he wants to comment, and then maybe Julie Gebauer from Talent and Rewards.
Paul G. Morris
Yes. Just a couple points. I don't think we've seen a material deterioration in July and August from where we were at the last call. So having said that, during the course of this calendar year, it has been softer in Europe. But there are also areas where the signs are very positive. For example in Benefits, we are doing and continue to do a lot of derisking work. The TAS business is, as we alluded to earlier, is growing very nicely. And in investment and risk consulting and things like Solvency II coming onboard, and there's some other legislative changes that are going to help us drive growth. So it's a mixed picture. There's some puts and takes. I think we're going to see a continuation of the softness that we've seen in the first half of this year for the rest of the calendar year. And then we'll see where we go from there.
Julie J. Gebauer
Yes. In Talent and Rewards segment, which is -- a number of people have said is the most cyclical of our businesses, we did see in the last quarter of last fiscal year a softening. As we thought about it, we think a number of clients put on their collective breaks and we saw a dip. But since then, we've seen it revert back to a new, a bit more challenging normal. So we expect where we are right now to be pretty steady as we -- as far as we can see, which is about a quarter or 2.
John J. Haley
I think Paul, just one other comment. This in some ways has been one of the most challenging years to think about providing guidance for that I can remember. And the part of it is that when we talk to our folks in the field and we look out, we can identify lots and lots of opportunities for growth. And so we have those. And then we have overlaid against that all of these macro concerns about what's going on in Europe and things like that. And if it's just everything is going one way or everything is going another, it's easy to put together the guidance. You may not like the answer sometimes, but it's easy enough to do it. But here, we're getting very mixed signals. And in putting together our guidance here, we've tended to our own side of caution perhaps in terms of what we might do or well -- but I mean I think what we -- as we talked about earlier, we still continue to see lots of opportunities out there. So it's a -- it is truly a mixed bag as Julie said.
John J. Haley
Well, it's hard to -- actually, let me ask Paul to answer that. I think we -- and maybe you'd want to talk about the fourth quarter of last year, Paul.
Paul G. Morris
In terms of?
John J. Haley
Just is it differ -- is the U.K. different than the rest of Europe?
Paul G. Morris
Our performance in the U.K. is a little more stable than the rest of Europe, just because of the critical mass and the significance of those benefits in the RFS segments. But if we look at the last quarter actually, Continental Europe performed pretty well. In fact, I'm not sure if it was better than the U.K., but it certainly was as good. So I don't think we're seeing material differences in either the growth rates or the margins that we're making in Continental Europe. The U.K. is affected by the economic environment just as much as a lot of the rest of Europe is.
John J. Haley
And do you think -- the one thing that's different is the mix? In other words, Benefits is a bigger part of the U.K. than it is of the rest of Europe. But I think what you're saying is when you get down to the level of a given segment in the U.K. versus the same segment in Europe, it's not so different.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Could you talk about when you looked at the guidance for Talent and Rewards, how did you come up with a number of flat to low single-digit? What were the different parts of it? In other words, where it's talents and communication, can you go through if something is going to be up a little, something's going to be down a little? Just give us an idea as to how you are thinking about that.
John J. Haley
Sure. Let me ask Julie to take us through that.
Julie J. Gebauer
Sure. I look at it from a line of business perspective, starting with executive compensation. As was mentioned in the formal remarks, we expect that to be relatively stable, with demand driven by needs from compensation committees and the like around the world. And we don't see a dramatic change in the demand there. And we expect that to be relatively consistent region-to-region. In the other 2 segments, there are some greater amount of discretion, and it does vary by specific practice. You heard a lot in the prepared remarks, communication and change management support for things like pension derisking and healthcare reform. So we would expect some strength in that business. But there is more discretion and not as many organizations thinking about spending in the area of rewards consulting or HR functioned revamping. So we might see some little bit more softness there. So executive compensation, stable. The other 2, a little bit where we would expect to see some of the declines. In particular, focusing regionally in Europe relative to last year, even though I said a new normal, it's lower than last year. And Asia Pacific, where there are some concerns about how fast the economies are going to grow, we see some deceleration there impacting client buying decisions as well.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Given the change in guidance in the last basically in a month, what are the odds we come back here at the end of the next quarter and see another change down in this Talent and Rewards side, given what you're seeing here in Europe? And how do you feel about that?
John J. Haley
Yes. Well, Shlomo, I guess in some ways that's -- if Europe and the macro-economy is more or less the way we think it's going to be and the way we are projecting now, probably not a lot of change. But that's a very volatile situation. So I would say that who knows? There's -- we don't know any more about what -- how Europe is going to evolve, what's going to the euro, than everybody else does over the next few months. So there's obviously some chance that could occur. I mean that's the major impact though, is what happens on the macro level is what we're concerned about.
Just a general question for Tricia. Maybe some comments about what your insurance clients are talking about, their views on M&A and your general outlook for kind of the things that are either slowing down or picking up in your area?
Patricia L. Guinn
I'll talk about it in terms of first, the life industry and then secondly, the property casualty industry because the drivers in the 2 parts of insurance are -- there are some similarities and some differences. On the life side, we have seen a pick up in M&A activity. Balance sheets have recovered to the point where expectations of buyers and sellers are starting to find common ground, enough to give management teams and their boards the willingness to prepare for and put properties on the block. So you haven't seen a lot of completed transactions yet. But we have seen a pickup in our activity. And the outlook for that I'd say remains stable to positive for continuing M&A activity on the life side. On the property casualty side, the year is evolving to be a pretty good year in terms of loss ratios and performance. There haven't been a tremendous amount of catastrophic activities. So while calendar year '11 was one of the biggest loss years on record, the balance sheet has been rebuilt. We've alluded to more stable pricing conditions. And so there, we don't see so much -- you see a few M&A activities occurring. For example, it was just announced in the last week around Validus. But we had a number of companies preparing for IPO, they're pulling back because the pricing is still not strong enough. Talents reported yesterday that they were going to hold off on their IPO. So their companies are looking to grow organically. So we've seen a lot of interest in UBI. We're seeing the adoption of more modern predictive modeling pricing techniques by emerging companies in Asia. And that's another good growth area for us. And then finally our software. Both Life and P&C, but particularly P&C, companies are looking to strengthen their capital modeling. They're reserving processes, and our products are good for that.
John, could you give us an update on the client development group? What are some of the projects they're working on? What are some of the successes, areas of focus, et cetera?
John J. Haley
Sure. Let me ask -- Miriam, do you want to talk about some of the projects the client development group is working on?
Thank you. As I think you may have heard before, within pillar 1 of our growth strategy, we've been putting a lot of emphasis on selling integrated solutions. And we've just seen an increased success in that through last fiscal year. We've actually kicked off a pilot this year in 3 of our markets. One in Europe, one in my division, in the West division of San Francisco, and another in Asia region, which is about accelerating, piloting some new assets, which are also kind of under that umbrella of how do we accelerate integrated solutions selling. So that's just starting to get off the ground, but expect some new ideas that kind of ties to some of our innovation practices as well. So I'm expecting to see some good success there. The other thing we're continuing to do, we started doing this at the get-go with the merger, and it's an ongoing effort and it always will be, is educating our CDG about the new and emerging and evolving products. So for example, Extend, Bryce, his sales force, tremendously skilled, enabled sales force, we've been getting them together very aggressively with the CDG, with our colleagues in Health and Group Benefits. And just looking to capitalize on those opportunities where we do see growth in the market to leverage the scale that the CDG gives us from a sales force and a market coverage perspective. And we definitely believe that gives us a competitive advantage. Because to have folks who are at the level of experience and scale as our account directors, singularly accountable and focused on managing, developing, growing client relationships and partnering with our line of business colleagues to make opportunities happen, we think that brings us a tremendous competitive advantage.
John J. Haley
Jim, do you want to add anything?
James K. Foreman
Maybe just one other comment. In working with Paul and our counterpart in Asia, we've established a small group that focuses on our top 50 clients from a global account management perspective. These are our highest revenue-driven clients, probably our highest profitability because of the success we've had. And they are not growing certainly in the home country where we're managing them. They're growth is coming in China, Latin America, the UAE. So we've asked our sales force, our client development group, to get on airplanes and meet the buyers of our core home country clients. And we've started to see revenue growing in those countries outside the U.S. They rely on us to connect the dots within their own organization, and obviously from a revenue perspective, that benefits us as well.
I was wondering if you could comment on -- I know you're going to deploy cash to pay down debt for a while. But how do you think about M&A and buying and looking at technology and properties that are kind of more scalable and potentially more profitable than the time and materials traditional consulting businesses, now that you've put together 2 organizations and taken the margins more or less where they can be?
John J. Haley
Yes. Okay. Great. What I think I might do is ask Gordon Gould, who is our Head of Strategy and Corporate Development, to talk about what's a passion of his.
Gordon L. Gould
What we like to do with M&A is see where we can add value or the other group can add value to us, because investors can go out and get good returns just being a financial buyer. So we don't want to be a financial buyer. So the key for us is where can we take that technology and either deploy it and grow it more ourselves or vice versa. And I think Extend was a great example of that, because that's a combination of a technology business and a people business. And we think the combination of the 2 is going to be real powerful. So you have to be careful because short technology companies, and you look at some of the transactions like SuccessFactors and Taleo, I mean we're never going to kind of play in that arena. But we think there is a spot where we can leverage technology, take some of the things that we do well in, say in Julie's business for example, in Talent and Rewards and apply technology to bring some of our intellectual capital more to light and more productized. Companies are a lot more digital these days. So we think in those terms. How can we leverage and get synergy out of those types of capabilities, and maybe drive into new markets, like the individual space that we've got with Bryce's business.
John J. Haley
Do you want to add anything to that, Roger?
Roger F. Millay
To follow-up on that question. Does the location of your current cash balance impact your decision to focus more on acquisitions as opposed to share repurchases? And should we think about most of your acquisitions being international going forward?
Roger F. Millay
Well, certainly given that you buy back shares in the U.S. and if your cash is overseas and you have to pay tax to bring it back, it influences how you think about that balance. So when we talk about it, we do look at kind of cash generation expected in the U.S. versus outside of the U.S. when we talk about that equation. How you think about -- does that make it more likely that we would do deals internationally? I mean I think we're, as Gordon said, I mean we're looking at an array of possibilities and kind of weighing those. And we wouldn't do a deal just because the cash is there. We would do a deal because that was the best value creation opportunity that we had. But from a flexibility point of view, we have more flexibility to do things outside the U.S. because the cash is there.
John J. Haley
Yes. I mean I do think that's -- the bottom line is it's easier for us to do a deal outside there. So that probably makes it more likely than if the cash were equally distributed. But as Roger said, we're not going to pursue deals overseas just because of that.
On the retirement practice, in the past, you talked about the impact of freezing the pension plan in terms of your economics of that relationship where you see a near-term boost in project activity. And then you maintained 80% or so of that ongoing business. Can you talk about a similar framework of thinking about the lump sum trend, if we think about that, is it an emerging trend?
John J. Haley
Yes. So I'll mention that and then see if Gene wants to say anything else about that, too. But I mean basically, the lump sums in particular where the folks go out and offer them and those are really being offered to the -- Ford and GM did it to the existing retirees. A lot of times, it's to the terminated [indiscernible] or whatever. But if you think about that in terms of this long-run enterprise that's running out for the pension fund, that does almost nothing in terms of shortening the expend, either the lifetime or the pension fund. In fact in many times, it actually lengthens the duration of the liability to get rid of the short-term ones there. So a lot of the derisking activities are one that provide a lot of opportunity for us for work in the short run without at all changing what the long-term perspective is. The one thing I would say is that as the pension plans, if you settle a very large portion of them, as they become somewhat smaller, there may be -- although you still have to do all of the same hygiene things in terms of valuation and in terms of a lot of compliance work and everything, as they become less important relative to the overall enterprise, then maybe there's a little less spent on them. But there's certainly no immediate impact.
Gene H. Wickes
So John, I think that's true as we continue to look at these. Most of the lump sum activity over the last 6 to 8 months has been with divested terms, which is a fairly small piece of the liability for the plan, but it's a large number of the participants. So a big piece of it is dealing with the administration and helping our clients get a handle on the administration. Also a lot of the derisking work isn't just in how do I settle these liabilities but it's in the asset management and a lot of the other things which is ongoing activity. So it really is companies focusing on how do I best manage this right now, not how do I get out of it. And even the GM and Ford view wasn't moving away from this, but how do I best manage it from a balance sheet and an enterprise perspective.
John, back into the question about innovation, you talked about raising sort of through the cycle growth rate for TW through some organic investments in various businesses. Is that the -- is this the year to do that with a sort of difficult year to call? And I think in Talent and Rewards also, the headcount has been growing up -- going up, you're even building out a Philippine service center. But excluding that, would we expect Talent and Rewards headcount to be in line with revenue growth in fiscal '13?
John J. Haley
Yes, okay, thanks. So I think I'll let Julie talk about the Talent and Rewards headcount in just a second. But I think this is a year -- I think it was the last bullet I had on my last slide, was something about prudent management. And so as we come into this year, one of the things we see is this is a year with a lot more uncertainty and perhaps more difficulties. So we want to be pretty careful about what our expenses are. One of the things that happened for example is we had a lot of meetings in the first couple of years since we've brought the 2 firms together. Those are meetings that were absolutely needed, and it was important for us to knit the 2 organizations. But having done that, one can actually take advantage of the fact that we've done it now, we don't have to do quite so many of those. So we've talked about some discretionary expenses that we probably want to be more careful on this year than we have been in the past. But what we don't want to do is cut back on things that are really growing for the -- talking about building for the future and growing on that. So while we want to be prudent about everything we're doing, we don't see that as an area that we're going to cut at all. Julie?
Julie J. Gebauer
From a Talent and Rewards perspective, we moved into this fiscal year knowing that we had enough capacity to meet our forecasted revenue growth as we look at potential decline in revenue as well. As flat to potential decline, we're certainly ready to adjust that staffing mix to reflect that to be able to deliver the mid-teens margins, low- to mid-teens margins that Roger referred to.
Roger, do we want to take one more question?
Roger F. Millay
It's a good idea. One more, and then we'll move to lunch.
John J. Haley
I was about to ask who has a question, so good it should be the last one.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
John J. Haley
I'm not through with you, Shlomo.
Shlomo Rosenbaum - Stifel, Nicolaus & Co., Inc., Research Division
Can you just talk philosophically about the share repurchase opportunity over the longer period of time? The company does have the potential to repurchase a lot of stock. A lot of times, people talk about the opportunity for the company to do that. What we -- can you just talk about your philosophy in terms of, "Hey, I want to deploy this capital to drive the top line," vis-a-vis when it makes sense for you to go ahead and start buying back stock for the company. And just it's not a this year question, it's a next 3 to 5-year type of question.
John J. Haley
Yes. So I'll make a couple of comments about that, and then maybe Roger will want to jump in. But I think as we think about it, one of the things we liked about acquisitions, and we've been talking consistently for a decade now about acquisitions, good acquisitions would be our top priority. The advantage of that is it's something that -- it builds the company. And we think that if we do the right kind of acquisitions, we can give a return to our shareholders that is greater than the return we could get by buying back our stock. We think we can provide lots of opportunities then for our associates for career development, and we think we can offer a more compelling value proposition to our clients. So we think if we can do good acquisitions, it serves all of our stakeholders. And it ought to be our highest priority. Now one of the things we've -- that's implicit in that though is it's good acquisitions. And those -- not -- most acquisitions aren't good acquisitions. And so we try to be pretty careful about how we look at things and the kind of screening we go through as to which acquisitions we're going to pursue. If we can't find those, we think that actually tending to build up too much cash is probably something that might encourage you to do bad acquisitions in the future. So we actually like to return the cash to our shareholders, and buying back stock is probably the best way to do that. So that would be our secondary thing. But we would clearly be looking to find out if there are good acquisitions we can do as the primary focus.
Roger F. Millay
The only thing I'd add to that kind of the technical point is as we go through the acquisition process, we do consider our cost of capital. We consider the return that we expect to get. Gordon's group spends a lot of time doing that. And so those devaluations will be -- consider those factors. And obviously cost of capital takes into consideration where the stock is trading. So that's just an element of our process.
John J. Haley
But actually, I mean we could be -- And right now, where the stock is and even it could have quite an increase, it would still be accretive to buy it back, so we certainly have that as something that we're doing.
Okay. We have lunch scheduled. Thank you very much, everyone, for your participation here.
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