April 25, 2006

1
Update from Pension Plan Financial Reporting
Committee

• April 25, 2006
• Montréal, Québec

Session PS-2
2
Update from Pension Plan Financial Reporting
Committee

• Background
• New Standards of Practice for Pension Plan
  Funding
• Educational Notes / Changes to Standards of
  Practice
• Query responses

3
BackgroundWhat is PPFRC?

• PPFRC is a Committee under the Practice Standards
  Council (PSC)
• Members are appointed by PSC, on recommendation
  from PPFRC Chairperson
• Although not mandated, membership is intended to
  be broadly distributed by
• Region (West, Ontario, Quebec, Atlantic)
• Type of employment (large consulting, small
  consulting, plan sponsor, regulator, etc.)
• Employer (no more than one member from any one
  employer)
• Length of time since fellowship

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BackgroundCurrent Membership

• Stephen Butterfield (Chair) Towers Perrin
• Lorne Cohen (Vice Chair) Mercer
• Wayne Berney Aon
• Normand Frenette Mellon
• Jeff Kissack Watson Wyatt
• Derek Gerard Eckler
• Martin Cyrenne Normandin Beaudry
• Paul Chang Morneau
• Phil Rivard Segal
• Andre Choquet Watson Wyatt
• Michael Banks Mercer
• Nicolas Morissette Aon
• Greg Heise - Leong

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BackgroundMandate

• With respect to pension plan financial
  reporting, valuation of pension plans for any
  purpose, and benefit value determination other
  than those relating to actuarial evidence before
  the courts, the committee is to study, organize
  discussion of, propose revisions to, and, on
  request, advise members about standards of
  practice and promote continuing education.

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New Standards of Practice for Pension Plan Funding

• Statement of Principles issued in March 2005
• Brief highlights include
• Pure windup valuations are required
• Going concern valuations are required
• Report on best-estimate assumptions
• Report on Funders Funding Policy
• Required disclosure of the potential funding
  risks, based on the Funding Policy

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New Standards of Practice for Pension Plan Funding

• Feedback obtained from many sources
• Actuaries
• Regulators
• Plan sponsors
• Others
• Discussion document prepared by PPFRC released in
  October
• Solicit further feedback from actuaries

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New Standards of Practice for Pension Plan Funding

• Examples of some of the concerns expressed
• Ability to enforce / mandate a Funding Policy
• Appearance that actuaries are absolving
  themselves of responsibility
• Actuaries are best qualified to determine
  appropriate margins, not the Funder
• Concerns from public sector plans that have no
  windup provisions
• Does a going concern valuation have any
  relevance?

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New Standards of Practice for Pension Plan Funding

• Next Steps
• PPFRC is now working on an Exposure Draft of the
  new Standard of Practice
• Likely wont be ready for release until the Fall
• Exposure Draft will reflect the proposed changes
  to our Standards of Practice
• i.e., formal wording, not concepts
• Exposure Draft will be based on the Statement of
  Principles, but will reflect feedback received
• PPFRC will then recommence dialogue with all
  affected parties

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Educational NotesWindup / Solvency Assumptions

• Guidance is similar to last years guidance
• Non-indexed annuity proxy
• long-term Govt of Can bond yield plus 45 bps
• 4.51 at Dec 31, 2005 / Jan 1, 2006
• Most plans should use a 4.5 rate

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Educational NotesWindup / Solvency Assumptions

• Other highlights
• Deferred annuities
• Differentiation by size
• Indexed benefits
• Substandard mortality
• Large plans

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Educational NotesWindup / Solvency Assumptions

• Large Plans (say gt 1 Billion)
• Unlikely to be able to purchase annuities
• Even as a series of purchases
• Many hypotheses put forward for methods of
  settling benefits
• Most probable is some form of immunization
• How would the cost of an immunized fund differ
  from an annuity purchase?
• Access to higher yielding assets?
• Exclude provision for insurer profit margin?
• Lower expense ratios?

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Educational NotesWindup / Solvency Assumptions

• Large Plans (cont)
• PPFRC does not have enough information to provide
  more detailed guidance
• Investment Committee has been approached to
  assist in answering some of these questions
• Intention is that more specific guidance will be
  developed next year

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Educational NotesExpense Assumptions

• Goal
• Assist actuaries in determining an appropriate
  provision for expenses
• Describe typical methods and the allowances they
  provide for
• Both going concern windup / solvency
• Improved disclosure
• Discourage implicit provision for expenses
• Encourage justification of assumptions
• Expect to release Educational Note by June

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Educational NotesAsset Valuation Methods

• Goals
• Remind actuaries of the purposes and objectives
  of asset smoothing
• Provide guidance on desirable properties of an
  asset smoothing method
• Improve disclosure of asset smoothing method and
  extent of differences between smoothed value and
  market value
• Expect to release Educational Note by end of 2006

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Educational NotesInterim Actuarial Opinions

• Goal
• Provide guidance on methods of preparing interim
  actuarial opinions
• Restate prior actuarial opinion
• Prepare interim opinion at a future date
• Proving to be a challenging exercise as Interim
  opinions do not exist in our Standards of
  Practice
• Expect to release Educational Note by mid 2006

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Statement of Principles

• Implement 3 recommendations from Pension Review
  Project
• Actuary should justify each individual assumption
• Reporting on subsequent events
• Reporting on windup status
• Statement of Principles should be released
  shortly
• Expect changes to Standards of Practice to be
  implemented effective December 1, 2006

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Queries

• One of the roles of the PPFRC is to respond to
  member queries
• Received 14 queries during 2005
• Many were similar in nature
• Some were very specific and not worthy of mention
  here

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QueriesCommuted Value Standard

• Various queries on details related to new
  Commuted Value Standard
• Implicit vs. explicit approaches
• Calculation of u
• Disclosure

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QueriesDesignated Plans

• Is it okay to only do an ITA 8515(7) valuation?
• (i.e., a maximum funding valuation)
• Basically, the answer is No
• Our Standards of Practice require a going concern
  valuation
• Exception under 3400.03 for connected person
  plans
• Under the ITA, a valuation must be done in
  accordance with accepted actuarial practice
• Therefore, a going concern valuation must be done
• A solvency / wind-up valuation may also be
  required depending on jurisdiction of registration

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QueriesBest Estimate Assumptions

• Can a going concern valuation use best-estimate
  assumptions?
• Section 3400.02 Actuary must take into account
  the objectives of funding and of the relationship
  between the plans assets and liabilities in
  providing advice on funding.
• Section 3400.05 the objectives of funding are
  the systematic accumulation over time of
  dedicated assets which, without recourse to the
  employers assets, secure the plans benefits ,
  and the orderly and rational allocation of
  contributions among time periods.

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QueriesBest Estimate Assumptions

• Sections 1740.02 and 1740.03 then together state
• if the related work requires an unbiased
  calculation then the calculation should not
  include a provision. Otherwise, if a provision
  promotes expectations of financial security, then
  the calculation should include a provision.
• Further, Section 1740.28 implies that pension
  plan funding valuations promote expectations of
  financial security amongst plan members as the
  section states two important examples of
  provisions for adverse deviations are in the
  valuation of the liabilities of a benefits plan
  if the actuary is giving advice on funding.

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QueriesBest Estimate Assumptions

• However, section 1740.27 states
• a provision of zero is appropriate in the
  following two situations
• work which requires an unbiased calculation
• where the actuary considers a provision but
  concludes that a provision does not promote
  expectations for financial security
• Therefore, best-estimate assumptions are only
  permissible in very limited situations

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Questions