Pr

1
2006 PARIS
2
Demography (concerning pension schemes)
Chairman Ken Buffin US Presenters
Richard Verrall UK
Stuart Leckie China
1st June 2006 1415 1545
3
Mortality Assumptions Used in the Calculation of
Company Pension Liabilities in the EU
Prof Richard Verrall Cass Business School City
University, London
4
Background

• FRS17/IAS 19 has focused attention on the
  calculation of companies pension liabilities and
  also highlighted their significance in the
  balance sheet
• Attention has been paid to key economic
  assumptions such as the discount rate and assumed
  inflation, both in terms of absolute level and
  consistency between countries
• The Mortality assumption, although material, has
  not been hitherto subject to the same level of
  scrutiny. In particular the extent to which the
  assumptions used are consistent between countries
• In many cases Standard tables have been used,
  which it was felt reflected very different
  approaches to both level of mortality and
  allowance for future trends

5
Objectives of the Study

• Focus on assumptions used to measure liabilities
  for current pensioners
• Collect information on the mortality tables most
  commonly used for valuing occupational pension
  liabilities
• Compare the tables used both against population
  mortality in each country and between countries
• Identify the extent to which future improvements
  in mortality are being considered/allowed for
• Identify whether any conclusions could be drawn
  with a particular focus on the issues raised for
  a multinational corporation with significant
  pension liabilities in the countries considered
• Focus on the EU countries, but also include US
  and Canada

6
(No Transcript)
7
(No Transcript)
8
(No Transcript)
9
(No Transcript)
10
(No Transcript)
11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
15
(No Transcript)
16
(No Transcript)
17
(No Transcript)
18
The accounts of a multinational employer

• Must comply with international accounting
  standards
• Must be signed off by an auditor
• Accounts must present a true and fair view to
  investors and other stakeholders

19
Defined benefit pensions a significant issue

• Many UK companies UK pension schemes are larger
  than companies themselves
• UBS study Combined actuarial deficit in FTSE
  100 companies pension schemes is over 40
  billion
• Issue is not the size of this deficit (or
  surplus), but how it is measured
• Example UK pension scheme, assets 800m,
  liabilities 1000m

20
(No Transcript)
21
The mortality assumptionThe last great
uncertainty

• Close scrutiny and disclosure of discount rates
  and other financial assumptions
• Discount rates measured to nearer 0.25 (or 0.1)
• Change in mortality table potentially more
  significant than such a change in discount rate

22
(No Transcript)
23
What does this mean for multinational employers?

• Mortality does vary from country to country
• Underlying population mortality varies
• Pension scheme members may be a different subset
  of the population in different countries
• but not as much as the assumptions would
  suggest
• So are the figures really comparable?

24
What does this mean for multinational employers?

• Increased attention from auditors
• Disclosure to investors and other stakeholders
• Notes to accounts
• Discount rate single figure
• Inflation single figure
• Return on assets single figure
• Mortality ?

25
Conclusions

• Practice varies quite widely across the EU
• Different approaches taken to projection
• The effect on stated liabilities can be
  significant

26
Recommendations

• The mortality assumptions be included in the
  disclosure of pension expense in company accounts
  in as clear and informative a way as possible.
• Projected mortality tables allowing for future
  improvements of mortality rates be used in
  calculating pension liabilities for companies in
  all countries as far as possible
• Consideration should be given to the inclusion of
  a single figure to reflect the strength of the
  mortality assumptions used. We recommend that the
  disclosure be kept as simple as possible while
  remaining sufficiently informative for analysts
  and auditors to be able to have confidence in the
  results.

27
Cass Index of Mortality
28
(No Transcript)
29
Demography (concerning pension schemes)

Longevity in Asia
STUART H. LECKIE O.B.E., J.P., F.F.A., F.I.A.,
F.S.A. TEL [phone] FAX [phone]
2822 E-mail stuart.leckie_at_stirlingfinance.com 1
June 2006
30
Overview

• Map of Asia
• Population and demographics
• Overview Asia pensions
• Asia pension reform trends
• Funding trends
• Nature of benefits
• Insurance industry
• Conclusions

31
Map of Asia
32
Population Demographics
33
Population Demographics
34
Population Demographics
35
Overview Asian Pensions

• Diversity of economies
• Population size
• Lump sum benefits
• Unsophisticated
• Termination of Employment Indemnities
• World Bank influence (5 pillar model)

36
Pension assets
37
Asia Pension Reform Trends

• Conditions leading to reform
• Ageing demographics
• Rising burden on fiscal budget
• Limited existing social security coverage
• Principles objectives of reform
• Extend coverage
• Increase retirement incomes while reducing
  reliance on government
• Shift pension responsibility to private sector
• Long term sustainability

38
Pension Reforms
39
Funding Trends

• Move towards private sector
• Must then be funded
• Risks
• Biggest risk for pension plans is inflation
• Liquidity is not an issue but volatility may be
• Trends
• Invest in real assets equities, property, REITS
• International investments
• Optimise long-term returns
• Needs
• Annuity products to provide regular income

40
Nature of benefits

• Private sector schemes generally pay benefits as
  lump-sum or scheduled payments
• Lack of annuity products to provide regular
  income and longevity protection
• Shortage of medium-long term bonds
• Markets lack hedging instruments
• Insurers unwilling to take longevity risk
• Civil servants usually have generous DB schemes

41
Life insurance industry
42
Conclusions

• Need to develop bond markets
• Insurers must take on mortality risk
• Rationalise tax rules
• Education and communication