Actuarial Evidence for Dummies and Pension Actuaries Presentation at the Annual General Meeting

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Actuarial Evidence for Dummies and Pension
Actuaries Presentation at the Annual General
Meeting

• June 29, 2006
• Ottawa, Ontario

Presented by J.M. ("Mel") Norton, FCIA, FSA
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CIA Annul Meeting Ÿ Assemblée annuelle de lICA

• I Revise the Title

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Marriage Breakdown Valuations 101 for Pension
Actuaries Presentation at the Annual General
Meeting

• June 29, 2006
• Ottawa, Ontario

Presented by J.M. ("Mel") Norton, FCIA, FSA
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What Law?

• Family Law Act is Provincial, based on residence
• Pension Law may be Federal, Provincial or a
  'Statute Plan', based on Employee and Employer's
  location
• Income Tax Act

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What Law?

• Primary focus is for Ontario residents, impacted
  by Ontario's Family Law Act
• For residents of other provinces, PENSION
  legislation/regulation may dictate principles of
• Valuation and
• Division

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Family Law Act

• Each party to a dissolved marriage must
• Identify and
• Value
• All assets (and liabilities) at
• Separation
• Marriage

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Family Law Act

• Why?
• The party whose 'net worth' increased more during
  marriage must make an equalization payment of 50
  of the difference to the other party.

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Family Law Act

• Generally, we are talking only 'legal' marriages,
  not
• Common-law relationships
• Same-gender partners
• Arguably, 'equalization' does not apply to
  "other" relationships, although "spousal support"
  may still apply.

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Family Law Act

• Pension is an Asset that must be valued
• Rules for Valuing pensions are established by
  "case law", which recognizes the Standards of the
  CIA for "marriage breakdown"

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Family Law Act

• For valuation purposes, the 'Pension' Actuary's
  job should be limited to ensuring that the Plan's
  "Administrator" discloses, on a timely and
  accurate basis
• the plan member's data and
• relevant plan terms

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What data is required?

• For 'DC' schemes, generally the pension asset is
  valued as the 'account balance' Market Value
  (accumulated contributions plus investment
  yields) less a tax adjustment
• Usually, independent values are needed at
  separation and at marriage
• Note The Administrator does not address any
  applicable 'tax adjustment'

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What data is required? - DC

• It is usually sufficient to use a Member
  Statement (Annual, Semi-Annual, Quarterly or
  monthly)the shorter period, the better) for the
  period surrounding the Valuation Date (Date of
  Separation and Date of Marriage) or at least
  proximate to the valuation date

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What data is required? (DB)

• Technically, there is no legal obligation on the
  Administrator of a Pension Plan to provide any
  information beyond the Annual Member Statement
  and a Summary Plan Description or "Booklet", as
  required by PBA
• To meet CIA Standards, any "Booklet" needs to
  describe the 'presumptive' plan (i.e., it must
  principally provide a history of contractual or
  'ad hoc' increases and any 'top-hat' provisions)

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What data is required? (DB)

• The Statement immediately preceding or
  immediately following the separation date is
  usually sufficient
• Most responsible plans go beyond this minimum,
  and provide salary/service data to a specified
  separation date
• May be asked to partition accumulated
  contributions into "pre" and "post" components

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What data is required? (DB)

• Caveats
• OK to provide 'updated' "Best Average Earnings",
  but only if based on 'exact' service
• DON'T
• Provide termination or 'transfer' values
• Calculate 'accrued benefits' (most
  Administrators do this "wrong" for FLA
  valuations)
• Calculate 'service' where the 'separation date'
  is mid-month, if you would either 'truncate'
  service at prior month-end or include 100 of
  month as service

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What data is required? (DB)

• More "DON'TS"
• Calculate Final Average YMPE (unless it is based
  on 'exact' service)
• Merely include periods of 'credited service'
  which occurred during marriage...ALL service is
  needed
• Fail to reference any potential 'bridge'
  entitlements, notwithstanding that the member's
  entitlement may not yet have fully vested
• Fail to provide accumulated contributions, split
  pre- and post-transition
• Provide any "post-separation" adjustments

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How data is used

• Marriage Breakdown (MB) Actuary is responsible to
  compute 'accrued benefits' at separation
• MB Actuary uses the Mortality/Interest Rates
  specified in the CIA Standards (which are now
  'much' different than TV assumptionsand are
  never 'unisex'
• MB Actuary calculates the Present Value of
  accrued benefits based on a specified range of
  retirement dates Earliest Unreduced ltgt
  Normal
• ltgtThink of a 'full' grow-in calculation,
  disregarding interim termination

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How data is used

• Other notable items
• SERPs, funded or otherwise, vested or contingent,
  require valuation
• SMEPPs are valued as "DB", even though treated as
  DC for PA purposes
• Generally, 'case law' has evolved such that
  enhanced early retirement provisions providing
  REDUCED pensions, even where providing
  substantial added value, are ignored in a FLA
  valuation
• Since the value is essentially 'traded' against
  other assets, no post-separation adjustment or
  update is applied

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How data is used

• Value at separation requires a 'tax reduction'
• Value at marriage (as per 'case law') is the
  value at separation, multiplied by a ratio of
  pre-marriage/total credited service
• Note This may seem inconsistent with DC
  valuations, and inconsistent with actuarial
  principles "Best vs. Best"

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Who owns the Pension Asset?

• A Pension Asset is owned only by the Plan
  MEMBERlike most other assets (the matrimonial
  home being a special exception that by law is
  jointly owned)
• The 'theory' is that the Member retains the
  pension and uses 'cash' to meet any equalization
  obligation
• It is not unusual that the parties don't have
  other assets to affect 'equalization', and must
  therefore partition the pension at source
• Pension law allows this, usually subject to a
  "50 earned during marriage" limitation

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Separation after retirement

• Pension is still an Asset, requiring valuation
• Vested 'spousal survivor benefits' are an Asset
  of the non-member spouse
• 50 rule still applies
• Very conducive to an 'at source' division (must,
  upon receipt of a certified copy of a valid Court
  Order or Domestic Contract) Very tax effective!

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Non-Pension Financial Assets

• May include
• Retiring Allowances (incl. sick leave 'buy-outs')
• Stock
• Stock options (incl. RSUs)
• .
• Generally, not being pension, these assets may
  need valuation for 'equalization' purposes, but
  data and Plan terms are 'separate items'

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Advising the Pension Actuary's client

• Review what is currently being done.Most current
  actions are "wrong" (to a greater or lesser
  extent), including particularly for almost every
  Plan being administered by the 'outsourcing'
  departments of "major actuarial" firms, and
  virtually all 'public sector' Plans
• Put together a useful 'response package',
  addressing all info needed by a MB Actuary or
  'correct' current package!
• Respond in a timely manner (5 7 business days)

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Advising the Pension Actuary's client

• Review policy about providing PENSION
  ENTITLEMENTS to a (former) spouse, divorced or
  otherwise i.e., implement the CIA's Deferred
  Settlement Method, as an option available to
  Members)
• Cost does increase slightly (2 cheques instead of
  1 2 records linked instead of 1)but value to
  member increases exponentially