CIA Pension Seminar

1
CIA Pension Seminar April 15, 2009 Colloque sur
les régimes de retraite de LICA Le 15 avril 2009
2
PPFRC Update

• Agenda
• For the Record Changes in Standards
• PPFRC Current Projects
• Canadian Pension Mortality Experience
• Annuity Guidance
• SOP Exposure Draft and Educational Notes

3
PPFRC Update

• For the Record Changes in Standards
• Commuted Values, effective April 1, 2009 (or
  earlier for solvency valuations in accordance
  with regulatory requirements)
• Independently Reasonable Assumptions, effective
  March 1, 2009
• Clear Specification of Accepted Actuarial
  Practice, effective April 1, 2009

CIA Pension Seminar/Régimes de retraite de L'ICA
4
PPFRC Update

• Current Projects
• Annuity guidance
• Educational Notes re SOP Exposure Draft
• Educational Note re Commuted Values
• Member queries
• Discount rates for accounting valuations
• Measurement of duration for indexed plans

CIA Pension Seminar/Régimes de retraite de L'ICA
5
PPFRC Update

• Committee on Canadian Pension Mortality
  Experience
• To publish mortality table and projection scale
  for Canadian pension plans
• A good number of large plans have indicated they
  can contribute data
• RFP has been issued for a researcher to conduct
  the study
• Target for publication is March 2010
• Second project to look at C/QPP mortality

CIA Pension Seminar/Régimes de retraite de L'ICA
6
PPFRC Update

• Annuity Guidance
• Immediate non-indexed group annuities total
  premium over 15 million addition to CANSIM
  V39062
• February 29 October 30, 2009 1.1
• October 31, 2008 December 30, 2009 1.4
• subject to consideration of changing conditions

CIA Pension Seminar/Régimes de retraite de L'ICA
7
PPFRC Update

• Annuity Guidance
• Immediate non-indexed group annuities total
  premium over 15 million issues
• Substantial volatility and change seen from March
  2008 vs. prior guidance
• Spreads for corporate and provincial over Canada
  bonds increased dramatically and more later in
  year
• Limited data to confirm trend but supplemental
  data supports higher spread from October 31, 2008

CIA Pension Seminar/Régimes de retraite de L'ICA
8
PPFRC Update

• Annuity Guidance
• Immediate non-indexed group annuities total
  premium under 15 million
• Deduction from large group annuity interest rate
  grading from 0.4 at zero total premium to 0 at
  15 million
• Differential consistent with prior years and
  supported by 2008 survey data

CIA Pension Seminar/Régimes de retraite de L'ICA
9
PPFRC Update

• Annuity Guidance
• Deferred non-indexed group annuities
• Deduction from large group annuity interest rate
  of 0.4
• Differential consistent with prior years and
  supported by 2008 survey data

CIA Pension Seminar/Régimes de retraite de L'ICA
10
PPFRC Update

• Annuity Guidance
• Immediate indexed group annuities
• For total premium in excess of 15 million use
  CANSIM V39057 unadjusted
• For total premium under 15 million apply
  deduction grading from 0.4 at total premium of
  zero to 0 at total premium of 15 million
• Insufficient data to change guidance from prior
  years

CIA Pension Seminar/Régimes de retraite de L'ICA
11
PPFRC Update

• Annuity Guidance
• Individual Annuity Pricing
• May be considered where benefits could be settled
  with individual annuities and relevant quotes are
  available

CIA Pension Seminar/Régimes de retraite de L'ICA
12
PPFRC Update

• Annuity Guidance
• Large Plans
• Guidance unchanged from prior year except
  reference to fixed income investments

CIA Pension Seminar/Régimes de retraite de L'ICA
13
PPFRC Update

• Annuity Guidance
• Mortality
• Specified interest rates are all to be combined
  with the UP 1994 _at_ 2015 mortality table
• Demonstrated non-standard mortality may be
  reflected (same guidance as prior years)

CIA Pension Seminar/Régimes de retraite de L'ICA
14
PPFRC Update

• Annuity Guidance
• Retroactivity
• Revision of reports may be appropriate
• Likely not required to revise where solvency
  liabilities would be lower and there would be no
  change or lower funding if the actuarys client
  does not wish to have a report revised

CIA Pension Seminar/Régimes de retraite de L'ICA
15
PPFRC Update

• Annuity Guidance
• Possible future PPFRC guidance
• More frequent updates
• Large plans
• Application of individual vs. group annuity
  pricing

CIA Pension Seminar/Régimes de retraite de L'ICA
16
PPFRC Update

• Annuity Guidance
• Actuarys Considerations
• Reconsider automatic use of guidance if
  substantial changes in bond yields and spreads
  appear
• A retroactive change in guidance requiring lower
  interest rates may well require revision of past
  reports
• Advise PPFRC of any substantial observed change
  in annuity pricing

CIA Pension Seminar/Régimes de retraite de L'ICA
17
Questions?
CIA Pension Seminar/Régimes de retraite de L'ICA
18
PPFRC Update SOP Changes

• History
• Current pension specific standards consolidated
  in 2002
• Statement of Principles - 2005
• Working Document - 2007
• NOI and Draft Standard - Sept. 2008
• Exposure Draft (ASB) - April 1, 2009
• Comment deadline June 30, 2009

CIA Pension Seminar/Régimes de retraite de L'ICA
19
SOP Changes

• Process
• Joint ASB/PPFRC Working Group established by ASB
  as the designated group for the Standard
• The Working Group is supported by Chris Fievoli,
  CIA Resident Actuary to compile comments
• PPFRC responsible for developing Educational
  Notes for approval by Practice Council

CIA Pension Seminar/Régimes de retraite de L'ICA
20
Notice of Intent Draft SOP

• Generally consistent with PPFRC Working Document
  of March 2007
• Comments received in Nov. 2008
• Representation from
• members
• five consulting firms
• Trustees of three Public Pension Plans, and
• OSFI
• Comments shaped key changes from NOI to Exposure
  Draft

CIA Pension Seminar/Régimes de retraite de L'ICA
21
SOP Exposure Draft Highlights

• Role of SOP
• Consideration of
• diversity of views from cross-Canada expert
  panels
• funding relief measures
• Reinforced view that determination of
  minimum/maximum contributions should be the
  responsibility of legislators
• Plan sponsors have discretion for funding in
  excess of legal minimum

CIA Pension Seminar/Régimes de retraite de L'ICA
22
SOP Exposure Draft Highlights

• Role of SOP (contd)
• Result, SOP should
• enable determination of minimum/maximum funding
• Enable advice on funding in excess of minimum
• require enhanced disclosures regarding security
  of benefits and related sensitivities

CIA Pension Seminar/Régimes de retraite de L'ICA
23
SOP Exposure Draft Highlights

• Emphasis on Hypothetical Wind-up / Solvency
  Considerations
• Comments
• Representations - both for and against
• Cost of additional disclosures
• Going-concern remains a legal requirement
• Changes from NOI
• A number of changes to address varying
  circumstances
• Increased emphasis on hypothetical wind-up is
  from a disclosure perspective, not funding

CIA Pension Seminar/Régimes de retraite de L'ICA
24
SOP Exposure Draft Highlights

• Hypothetical Wind-Up Requirement
• Comments
• Solvency reporting should not be required (Public
  plans)
• Broad support for enhanced reporting also given
• Changes from NOI
• Contingent benefits excluded if not directly
  related to wind-up
• Requirement to report unless plan and law does
  not define benefits payable upon wind-up or
  designated plan for connected persons (unchanged)

CIA Pension Seminar/Régimes de retraite de L'ICA
25
SOP Exposure Draft Highlights

• Risk Analysis
• Comments
• Supported but with some conditions
• Why only on a solvency basis?
• Changes from NOI
• Re-phrased as sensitivity analysis
• On whichever basis (going-concern or solvency) is
  more appropriate

CIA Pension Seminar/Régimes de retraite de L'ICA
26
SOP Exposure Draft Highlights

• Incremental Service Cost on Hypothetical Wind-up
  / Solvency Basis
• Comments
• Diverse opinions
• May be helpful or misleading
• Alberta required under solvency relief
• Changes from NOI
• None requirement on one solvency or
  hypothetical wind-up valuation maintained

CIA Pension Seminar/Régimes de retraite de L'ICA
27
SOP Exposure Draft Highlights

• Simplified Hypothetical Wind-up / Solvency
  Gain/Loss Analysis
• Comments
• Diverse opinions
• Changes from NOI
• Full analysis required for one valuation (going
  concern or hypothetical wind-up / solvency)
• Actuary to consider which basis would be most
  useful to users
• Second simplified could be shown as well

CIA Pension Seminar/Régimes de retraite de L'ICA
28
SOP Exposure Draft Highlights

• Going-Concern Valuation Requirement
• Comments
• Diverse opinions
• Highlights - (unchanged from NOI)
• Only if required by engagement or law
• Permissibility of using smoothed assets confirmed
• Use of forecast method allowed for all plans

CIA Pension Seminar/Régimes de retraite de L'ICA
29
SOP Exposure Draft Highlights

• Going Concern Assumptions
• Comments
• Diverse opinions again regarding MfADs
• Changes from NOI reflect the following
• Where security not primary consideration, margins
  may be inappropriate
• Extent of margins for legal minimum funding
  should be set by legislators
• For funding beyond legal minimum, margins
  specified by terms of engagement
• May be appropriate to include provisions by means
  other than margins in assumptions

CIA Pension Seminar/Régimes de retraite de L'ICA
30
SOP Exposure Draft Highlights

• Miscellaneous
• Consideration of Letters of Credit incorporated
• Rationale for change in methods required
• Definition of funded status expanded
  financial position and financial condition no
  longer referred to in Pension Specific Standards
• No reference to liabilities which are reflected
  in a statement of financial position
• Substantial reorganization for readability

CIA Pension Seminar/Régimes de retraite de L'ICA
31
Educational Notes

• To be approved by PPFRC and Practice Council
• Drafts prepared/in preparation
• Incremental Cost on a Hypothetical Wind-Up or
  Solvency Basis
• Sensitivity Analysis to Illustrate Effect of
  Adverse Deviations
• Best Estimate Discount Rates for Going Concern
  Funding Valuations
• No EN on gain/loss analysis

CIA Pension Seminar/Régimes de retraite de L'ICA
32
EN - Incremental Cost

• One method described in detail
• PV at valuation date using hypothetical wind-up /
  solvency discount rate of
• Expected benefit payments during inter-valuation
  period, plus
• Projected hypothetical wind-up liability at next
  valuation date, less
• Hypothetical wind-up liability at current
  valuation date, less
• Excess expected asset return (optional and
  separately reported)

CIA Pension Seminar/Régimes de retraite de L'ICA
33
EN - Incremental Cost

• Considerations
• Going-concern assumptions used to project benefit
  payments, decrements, during inter-valuation
  period
• Cost would reflect eligibility for grow-in
  benefits, early retirement subsidies
• Approximations may be used where appropriate
• e.g. no new entrants or decrements
• Other approaches allowed

CIA Pension Seminar/Régimes de retraite de L'ICA
34
EN - Sensitivity Analysis

• Type of Valuation
• On basis most useful to users
• Public sector, jointly-sponsored, MEPPs may
  decide to use going-concern
• For negotiated contribution rate plans, may
  examine effect on benefit levels or minimum
  contribution rates

CIA Pension Seminar/Régimes de retraite de L'ICA
35
EN - Sensitivity Analysis

• Most basic analysis
• Funded status and incremental cost effect of
• Discount rates 1 lower than under valuation
• 10 decrease in asset values used

CIA Pension Seminar/Régimes de retraite de L'ICA
36
EN - Sensitivity Analysis

• Other approaches
• Refine for effect of interest rate change on
  fixed income asset portfolio
• Illustrate other significant factors
• Inflation assumption 1 higher
• Salary assumption 1 higher
• Expected hours worked 10 lower
• More conservative mortality table
• More advanced
• Effect of changes at next valuation date
• Stochastic analysis

CIA Pension Seminar/Régimes de retraite de L'ICA
37
EN Best Estimate Discount Rates

• For a going concern valuation
• notwithstanding section 1740, the actuary should
  either select best estimate assumptions or should
  select best estimate assumptions modified to
  incorporate margins for adverse deviations to the
  extent, if any, required by the circumstances of
  the work,
• Discount rate may be selected based on a best
  estimate of expected investment returns on plans
  dedicated assets

CIA Pension Seminar/Régimes de retraite de L'ICA
38
EN Best Estimate Discount Rates (Preliminary
thinking)

• May be circumstances where it may not be
  appropriate to establish a discount rate that is
  reflective of the plans current assets
• e.g. full funding not intended
• Investment Policy
• May assume that investment of assets will be
  guided by policy indefinitely
• Asset Class Returns
• T-bills or bonds - best estimate may be
  reasonably viewed as the market yield
• Publicly-traded equities 2 - 4 over long GoC
  bonds

CIA Pension Seminar/Régimes de retraite de L'ICA
39
EN Best Estimate Discount Rates (Preliminary
thinking)

• Allowance for re-balancing
• 0.25 - 0.50 per annum
• Value added by active management
• Highly subjective
• Varies significantly by asset class
• Typical Canadian pension fund not more than 0.50
  per annum on total fund
• Asset smoothing
• Relationship between market and smoothed value
  should be considered
• Other methodologies
• Stochastic asset model statistical median viewed
  as best estimate

CIA Pension Seminar/Régimes de retraite de L'ICA
40
SOP Exposure Draft Process

• Submit comments to Chris Fievoliby June 30, 2009
• Comments requested on Exposure Draft content and
  draft ENs
• Comments requested on implementation timing
• ASB will make final decision
• Expected in 2009
• Implementation date will be set at that time

CIA Pension Seminar/Régimes de retraite de L'ICA
41
Questions?
CIA Pension Seminar/Régimes de retraite de L'ICA