April 15, 2008 Montréal, Québec Session SP-1 CIA Pension Seminar Update from PPFRC.

April 15, 2008Montréal, Québec

Session SP-1

CIA Pension SeminarUpdate from PPFRC

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Update From PPFRCAgenda

• Pension Specific Standards• Recent Educational Notes / Updates to Standards• Changes to Commuted Value Standard

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Pension Specific StandardsHistory

• Current pension specific standards were consolidated in 2002 to include– Valuation of Pension Plans 1981(updated 1994)– VTP on Wind-up and Solvency valuations 1999– Commuted Values (updated in 2005)

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Pension Specific Standards Current Rewrite

• Comprehensive review of all sections• Separate project regarding Commuted Values

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Pension Specific Standards Progress

• Statement of Principles – 2005• Feedback and responses – 2006• Working Document – 2007• Notice of Intent and draft standard – shortly• Exposure draft – later 2008

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Pension Specific Standards Draft Standard

• In most respects consistent with the 2007 Working Document

• More detailed refinements in many sections

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Pension Specific Standards Key Aspects of Draft Standard

• Reporting vs. Funding• Minimum External User Reporting Standards re:

Funding

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Pension Specific Standards Reporting vs. Funding

• Draft provides for enhanced reporting, particularly with regard to benefit security

• Contribution decisions are made by Funders subject to regulatory requirements

• No specific reference to Funding Policies but terms of engagement are referenced where appropriate

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Pension Specific Standards External User Reporting

• Hypothetical wind-up position, simplified gain/loss and service cost (unless wind-up benefits not defined)

• Going concern valuation funded status and service cost (likely only if required by terms of engagement)

• Risk analysis

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Pension Specific Standards Going Concern Valuations

• Assumptions may not be less conservative than best estimate

• PfAD likely only if required by terms of engagement• Smoothed asset valuations may be used but position

based on market value also reported

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Pension Specific Standards Risk Analysis

• Impact on hypothetical wind-up position of change in discount rate and change in asset value

• Impact of change in discount rate on hypothetical wind-up service cost

• At valuation date or effect on projected position at next valuation date

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Pension Specific Standards Related Educational Notes

• Going concern discount rates and PfADs• Hypothetical wind-up gain/loss and service cost• Risk analysis• Others?• All to be developed

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Pension Specific Standards Comments

• Opportunities for comment will be provided at the Notice of Intent and Exposure draft steps

• In the short term comments are also welcome – particularly on the bigger picture issues

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Pension Specific StandardsQuestions

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Update From PPFRCRecent Educational Notes / Updates to Standards

• Three Educational Notes have been issued in the past year:• Guidance on Asset Valuation Methods• Selection of Mortality Assumptions in Pension

Plan Valuations• Assumptions for Hypothetical Windup and

Solvency Valuations• Updates to Pension Specific Standards were adopted

by the ASB in December 2007

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Update From PPFRCEN on Mortality Assumptions

• Guidance is with respect to the selection of a “best estimate” assumption

• Any margin for adverse deviations would be at the actuary’s discretion

• Two key components to the selection of the appropriate assumption• Current best-estimate rates of mortality

• Adjustments for future mortality improvements

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• Current rates of mortality• Take account of experience of plan

• With appropriate provision for the credibility of the data

• Make use of standard tables that are readily available

• Take into account the make up of the pension plan membership

• Reflect mortality improvements from the date of data collection to the date of the valuation

• Assess historical gain/loss information for the plan• Be careful about mortality improvements in a static table

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• Future improvements in rates of mortality• Two common methods of reflecting improvements:

• Full generational projections

• Static projections

• Full generational projections are preferable

• Shortfalls in static projections include:• Requirement to regularly update the projection period

• Different durations between the pensioner population and the active population and between the liabilities and the normal cost

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Update From PPFRCHypothetical Windup / Solvency Assumptions

• This is the third year in which the Guidance has been based on information directly from insurance companies• We again want to publicly thank the insurers for their

assistance

• The data for non-indexed purchases is very credible• Particularly when we combine all 3 years of data

• We still have virtually no credible data with respect to purchases of indexed annuities

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• Guidance is quite similar to last year’s guidance• For immediate non-indexed annuities in excess of

$15 Million, the recommended spread over long Canadas has reduced from 45 bps to 40 bps• Gut feel is that this in fact reflects improvements in

mortality rather than a decrease in the interest rate spread

• Data again showed lesser spreads for smaller purchases (less than $15 Million) • Grading to a spread of 0 bps for small purchases

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• Additional guidance this year on the selection of the settlement method• Generally, members have a choice between a

commuted value and an annuity purchase• The actuary should be making an explicit assumption

on the settlement method and should be justifying this assumption

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Update From PPFRCUpdates to Standards

• Recommendations originally arose out of the 2004 Pension Review Project

• Exposure Draft was released in March 2007• Changes to the Standards were adopted by the ASB in

December 2007• Consult Section 1120.06 through 1120.11 for

guidance on the effective date of the changes

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Update From PPFRCUpdates to Standards

• 3 changes:• The actuary should justify all assumptions that are

material to the valuation• The actuary should report on subsequent events,

including the fact that there were no subsequent events

• The actuary must report the wind-up position of the plan in all instances

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Commuted Value StandardProcess

• In March, the Actuarial Standards Board issued a Notice of Intent

• Intention is to make changes to:• Standard of Practice for Pension Commuted Values

• Standard of Practice for Capitalized Values Upon Marriage Breakdown

• I am only going to talk about possible changes to the Commuted Value Standard

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• The ASB reports to the ASOC• Not to the Board or the Practice Council

• The PPFRC reports to the Practice Council• There is no requirement for the ASB to use the

services of the PPFRC• Or to listen to the advice of the PPFRC

• Nevertheless, the ASB has indicated that they value the input of the PPFRC and have asked for our assistance

• The ASB has appointed Rob Smithen to manage the process of adopting revised Standards

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• The PPFRC is to provide the following to Rob Smithen by early May:• An Exposure Draft of a revised Commuted Value Standard

• A document justifying / explaining any changes from the existing Commuted Value Standard

• A document justifying any deviation from the recommendations contained in the report of the Task Force on Transfer Value Consistency

• The recommendations made by the TF on Transfer Value Consistency generally are consistent with the existing Commuted Value Standard

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Commuted Value StandardBasis for Discussion

• The PPFRC is responsible for pensions• Our recommendations are what we believe are best

for the pension system, including:• Pension actuaries

• Pension plan administrators

• Pension plan members

• Our thoughts and recommendations ignore any issues that actuarial evidence practitioners may have

• The ASB may wish to override our recommendations for the sake of the profession as a whole

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Commuted Value StandardTopics of Discussion

• I will address the following topics today:• Mortality• Basis for determining non-indexed discount rates• Basis for determining inflation rate• Spread over Government bonds• Time lag• Rounding of discount rates

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Commuted Value StandardMortality

• TF recommendations:• Update to UP94@2020

• Commission a Canadian mortality study

• PPFRC thoughts:• Much evidence that mortality is continuing to improve

• Past improvements in mortality are likely to have been greater than predicted by Scale AA

• Projecting to 2020 only reflects 10 – 12 years of future improvement (depending on adoption date)• Probably inadequate for deferred pensions

• Nevertheless, pending release of better data, PPFRC is leaning toward agreeing to update to UP94@2020

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Commuted Value StandardBasis for Non-indexed Discount Rates

• TF recommendations:• Three tiers of discount rates

• First 5 years: based on 2 and 10 year bond yields

• Next 20 years: based on 25 and 10 year bond yields

• After 25 years: fixed rate

• PPFRC thoughts:• We strongly believe in the market approach

• We strongly believe that projecting the yield curve provides a far superior indicator of the market than a fixed rate

• We are strongly opposed to the use of a fixed ultimate discount rate

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Commuted Value StandardBasis for Non-indexed Discount Rates

• PPFRC thoughts (continued):• Adding a third tier is only required if one believes in a

fixed ultimate rate

• As we do not believe in a fixed ultimate rate, we do not believe that adding a third tier is justified• Especially considering the potential additional

administrative burden this would place on pension plan administrators

• PPFRC will be recommending that the current discount rate structure be retained

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Commuted Value StandardBasis for Determining Inflation Rate

• TF recommendations:• Use existing methodology inherent in the commuted value

standard

• Also develop short term and long term inflation rates based on economic forecasts

• The inflation rates would be a 50/50 blend of these two methods

• With a fixed long-term inflation rate of 3.0%

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• PPFRC thoughts:• Forecasted inflation rates:

• We are concerned about where the economic forecasts would come from

• How much time would be spent on such forecasts?

• Those making forecasts have no “money in the game”

• Those buying and selling real returns bonds are putting their money where their mouth is

• We trust the decisions and the forecasts of these people more than economists

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• PPFRC thoughts (continued):• Changes to tiers:

• Our thoughts mirror the thoughts on non-indexed annuities

• We do not agree with having a fixed ultimate rate

• Without a fixed ultimate rate, there is little justification to change the current two tier structure

• PPFRC will be recommending that the current structure for determining the underlying interest rate be maintained

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Commuted Value StandardSpread Over Government Bonds

• TF recommendation is to retain the current 50 bps spread above Government of Canada bond yields

• PPFRC thoughts:• Our Committee has a range of thoughts on what is an

appropriate spread

• Those thoughts are supported by a range of reasons for the supported spreads

• PPFRC will be likely recommend maintaining a 50 bps spread• We hope to publish further justification for the selection of

50 bps

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Commuted Value StandardTime Lag

• TF recommendation is to reduce the current time lag from 2 months to 1 month

• PPFRC thoughts:• The existing time lag is between 1 and 2 months, reducing

it will result in a time lag of 0 to 1 month

• We have sympathy for funding and investment purposes with reducing the time lag• It would address timing problems for plans employing

immunization strategies

• We also have sympathy for plan administrators• Many pension calculations are done in advance and many

calculations other than commuted values use the commuted value basis for determining actuarial equivalence

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Commuted Value StandardTime Lag

• PPFRC thoughts (continued):• Want to investigate the feasibility of our funding Standards

permitting hypothetical wind-up valuations to eliminate the time lag• Would likely be difficult to do

• PPFRC will likely be recommending retention of the 2 month time lag• If for no other reason than that there is no compelling

reason to make this change

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Commuted Value StandardRounding

• TF recommendation is to reduce the rounding to 10 bps from the current 25 bps

• PPFRC thoughts:• Our thoughts are very similar to our thoughts for the time

lag• Beneficial for funding and investment purposes

• Unnecessary extra work for pension administrators

• Though we are not “opposed” to this change, we question whether it is worth making

• PPFRC is unsure of whether to adopt or reject this recommendation

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Commuted Value StandardQuestions

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Session SP-1

April 15, 2008 Montréal, Québec Session SP-1 CIA Pension Seminar Update from PPFRC.

Documents

Transcript of April 15, 2008 Montréal, Québec Session SP-1 CIA Pension Seminar Update from PPFRC.