1 cia pension seminar april 15, 2009 colloque sur les régimes de retraite de l’ica le 15 avril...

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CIA Pension SeminarApril 15, 2009

Colloque sur les régimes de retraite de L’ICALe 15 avril 2009

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PPFRC Update

AgendaFor the Record – Changes in StandardsPPFRC Current ProjectsCanadian Pension Mortality ExperienceAnnuity GuidanceSOP Exposure Draft and Educational Notes

CIA Pension Seminar/Régimes de retraite de L'ICA

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PPFRC Update

For the Record – Changes in StandardsCommuted 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


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PPFRC Update

Current ProjectsAnnuity guidanceEducational Notes re SOP Exposure DraftEducational Note re Commuted ValuesMember queriesDiscount rates for accounting valuationsMeasurement of duration for indexed plans


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PPFRC Update

Committee on Canadian Pension Mortality ExperienceTo publish mortality table and projection

scale for Canadian pension plansA good number of large plans have

indicated they can contribute dataRFP has been issued for a researcher to

conduct the studyTarget for publication is March 2010Second project to look at C/QPP mortality


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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


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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


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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


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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


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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


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PPFRC Update

Annuity Guidance Individual Annuity Pricing

○ May be considered where benefits could be settled with individual annuities and relevant quotes are available


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PPFRC Update

Annuity GuidanceLarge Plans

○ Guidance unchanged from prior year except reference to “fixed income” investments


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PPFRC Update

Annuity GuidanceMortality

○ Specified interest rates are all to be combined with the UP 1994 @ 2015 mortality table

○ Demonstrated non-standard mortality may be reflected (same guidance as prior years)


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PPFRC Update

Annuity GuidanceRetroactivity

○ 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 actuary’s client does not wish to have a report revised


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PPFRC Update

Annuity GuidancePossible future PPFRC guidance

○ More frequent updates○ Large plans○ Application of individual vs. group annuity

pricing


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PPFRC Update

Annuity GuidanceActuary’s 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


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Questions?


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PPFRC Update – SOP Changes History

Current pension specific standards consolidated in 2002

Statement of Principles - 2005Working Document - 2007NOI and Draft Standard - Sept. 2008Exposure Draft (ASB) - April 1, 2009

○ Comment deadline: June 30, 2009


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SOP Changes

ProcessJoint 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


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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


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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


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SOP Exposure Draft – Highlights Role of SOP (cont’d)

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


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SOP Exposure Draft – Highlights Emphasis on Hypothetical Wind-up /

Solvency ConsiderationsComments

○ 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


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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-upRequirement to report unless plan and law does not

define benefits payable upon wind-up or designated plan for connected persons (unchanged)


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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


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SOP Exposure Draft – Highlights Incremental Service Cost on

Hypothetical Wind-up / Solvency BasisComments

○ Diverse opinions○ May be helpful or misleading

Alberta: required under solvency reliefChanges from NOI

○ None – requirement on one solvency or hypothetical wind-up valuation maintained


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SOP Exposure Draft – Highlights Simplified Hypothetical Wind-up /

Solvency Gain/Loss AnalysisComments

○ Diverse opinionsChanges 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


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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


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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


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SOP Exposure Draft – Highlights Miscellaneous

Consideration of Letters of Credit incorporatedRationale for change in methods requiredDefinition 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


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Educational Notes

To be approved by PPFRC and Practice Council

Drafts prepared/in preparation:Incremental Cost on a Hypothetical Wind-Up or

Solvency BasisSensitivity Analysis to Illustrate Effect of

Adverse DeviationsBest Estimate Discount Rates for Going

Concern Funding Valuations

No EN on gain/loss analysis


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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, lessHypothetical wind-up liability at current valuation

date, lessExcess expected asset return (optional and

separately reported)


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EN - Incremental Cost

ConsiderationsGoing-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 decrementsOther approaches allowed


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EN - Sensitivity Analysis

Type of ValuationOn basis most useful to usersPublic sector, jointly-sponsored, MEPPs

– may decide to use going-concernFor negotiated contribution rate plans,

may examine effect on benefit levels or minimum contribution rates


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EN - Sensitivity Analysis

Most basic analysisFunded status and incremental cost effect of

○ Discount rates 1% lower than under valuation○ 10% decrease in asset values used


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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


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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 plan’s dedicated assets


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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 plan’s 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


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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


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SOP Exposure Draft – Process Submit comments to Chris Fievoli

by June 30, 2009Comments requested on Exposure Draft

content and draft ENsComments requested on implementation timingASB will make final decision

○ Expected in 2009○ Implementation date will be set at that time


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Questions?


1 cia pension seminar april 15, 2009 colloque sur les régimes de retraite de l’ica le 15 avril...

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