2008 Annual Meeting ● Assemblée annuelle 2008

Québec

2008 Annual Meeting ● Assemblée annuelle 2008

Québec

Canadian Institute

of Actuaries

Canadian Institute

of Actuaries

L’Institut canadien desactuaires

L’Institut canadien desactuaires

Agenda

• What is the PPFRC?• Commuted Value Standard• New Funding Standards

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What is the PPFRC?

• The PPFRC reports to and serves at the request of the Practice Council (PC)

• No formal relationship between the Actuarial Standards Board (ASB) and the PPFRC

– To date, the ASB has used the PPFRC as a resource for pension standard related issues

• Official mandate:– “With respect to pension plan financial reporting, valuation

of pension plans for any purpose, and benefit value determination other those relating to actuarial evidence before the courts and those relating to credit-splitting as a result of marriage breakdown, 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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What is the PPFRC?

• Typically, PPFRC has about 12 members• Current members are:

– Stephen Butterfield (Chair) – Towers Perrin– Michael Banks (Vice Chair) – Mercer– Gavin Benjamin – Towers Perrin– Ana Cacoilo – OMERS– Sophie Cournoyer – Morneau Sobeco– Pierre Girardin – Aon– Greg Heise – Leong– Mario Marchand – Regie– Deborah McMillan – Buck– Marshall Posner – Wyatt– Catherine Robertson – Eckler

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Commuted Value StandardProcess

• ASB issued a Notice of Intent (NOI) in March proposing changes to the CV Standard and the MB Standard

• PPFRC made a detailed submission to ASB on our recommendations for the new CV Standard, including:

– Rationale for suggested changes from the current CV Standard

– Rationale for differences from the recommendations in the Report by the TF on Pension Value Consistency

• ASB will be issuing formal Exposure Drafts shortly

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Commuted Value StandardPPFRC Submission

• The PPFRC disagrees with much of the underlying premises in the Report of the TF on Pension Value Consistency

• We firmly believe in the market approach and in strictly applying the underlying theory of this approach

• The PPFRC recommends 4 changes to the current CV Standard:

– Extend the mortality projection to 2025– Increase the “spread” on the interest rates to 100 bps– Decrease the time lag by one month – Round to the nearest 10 bps, rather than 25 bps

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Commuted Value StandardPPFRC Submission – Mortality

• The PPFRC “feels” that the UP94 Table projected to 2008 likely overstates current rates of mortality for the typical Canadian pension plan

– UP94 was developed based primarily on US data– CPP data indicates that recent mortality improvements are

generally greater than predicted by Scale AA– “Gut” feeling among the PPFRC members

• Nevertheless, there is no proof for our “feelings” and no universally accepted alternate mortality table

• Accordingly, we (grudgingly) accept UP94@2009 as an appropriate basis to reflect current rates of mortality

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Commuted Value StandardPPFRC Submission – Mortality

• The PPFRC strongly believes that mortality is going to continue to improve for the foreseeable future

• Provision should be included for improvements over the approximate duration of the liabilities

– Highly variable, but typically between 10 and 30 years

• We believe a projection to 2020 (i.e., including 11 years of improvement) is inadequate today and will become further outdated in the next few years

• Rather, projecting to 2025 (i.e., 16 years of improvement) is more appropriate

• We also are in favour of:– Moving to full generational mortality as soon as feasible– Developing a Canadian specific mortality table

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Commuted Value StandardPPFRC Submission – The “Spread”

• Many rationales have been put forward to justify the “spread” on the discount rate, including:

– Credit risk premium– Re-investment risk premium– Liquidity premium

• The PPFRC rejects the first two rationales and believes that the spread should consist entirely of a liquidity premium

• Based on information at our disposal, we believe that an appropriate liquidity premium is between 75 and 120 bps

• We have recommended a 100 bp “spread”

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Commuted Value StandardFuture Actions

• Future progress / changes in the CV Standard will be at the discretion of the ASB

• Although they may again seek the opinions of the PPFRC, they will ultimately determine the appropriate course of action based on their deliberations and submissions from various stakeholders

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New Funding StandardsA Long and Winding Road

• Last official communication was the “Working Document” published in March 2007

• After a pause to gather comments, we have been working on actual revised wording of the Standard

• We have decided to not only revise the Standards to reflect the principles on the Working Document, but to extensively rewrite / reorganize the Standard

– Other than the CV portion of the Standard• ASB is responsible for distributing this in the form of

a Notice of Intent including actual suggested revised wording

• Generally, the concepts espoused in the NOI will be similar to those espoused in the Working Document

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New Funding StandardsStructure• Current:

– Scope– Methods– Assumptions– Funding– Accounting– Reporting– Wind-up, Hypothetical Wind-

up, Solvency• Scope• Actual Wind-up• Hypothetical Wind-up• Solvency

• Revised:– Scope– General– Advice on Funding,

Financial Condition, etc.• General• Types of Valuations

– Going Concern– Hypothetical Wind-up– Solvency

• Funding• Reporting

– Actual Wind-up• General• Assumptions• Reporting

– Accounting• General• Assumptions• Reporting

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New Funding StandardsTerminology

• italicized Standards vs. non-italicized Standards vs. Educational Notes

• “should” vs. “would”• “provision” vs. “margin”• “financial position” vs. “financial condition” vs.

“funded status”• “liabilities” vs. “present value of benefits”

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Advice on Funding, Financial Position, etc.General

• “Funding policy” is not defined, nor directly referenced in the proposed new Standard

• Rather references are made to:– “Circumstances of the work”– “Appropriate engagement”

• “Circumstances of the work” include:– Whether advice relates to financial position, financial

condition, funded status or funding– Terms of an appropriate engagement– Application of the law– If providing advice on funding, then the objectives of

funding

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Advice on Funding, Financial Position, etc. General – Objectives of Funding

• When providing advice on funding, the primary objective in accordance with accepted actuarial practice would be the systematic accumulation over time of dedicated assets which secure the pension plan’s benefits

• Other objectives may be applicable:– Inter-generational equity– Rational accumulation of assets over time

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Advice on Funding, Financial Position, etc. Types of Valuations

• Three types of valuations– Going concern– Hypothetical wind-up– Solvency

• Individual sections of the Standards will describe how the actuary selects assumptions, methods and determines entitlements “if” one of these valuations is undertaken

• These sections do NOT state whether one or all of these valuations are required20

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Advice on Funding, Financial Position, etc. Types of Valuations – Going Concern

• Select assumptions that are consistent with the circumstances of the work

– Includes considerations of the objectives of the valuation• For a going concern valuation, this is typically to develop a

long-term strategy for the funding of the plan– Actuary would consider whether including provision for

adverse deviation would promote expectations for financial security

• Is this being accomplished by a hypothetical wind-up valuation?

• Is this necessary for an IPP?• Is this necessary for public sector plans?

– Special consideration for the selection of the discount rate• Educational Note to be developed

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Advice on Funding, Financial Position, etc. Types of Valuations – Going Concern

• Treatment of “contingent benefits”• These include an employer’s right to waive early

retirement reductions, plant closure benefits, the granting of additional benefits at the discretion of the employer, trustee consent benefits, etc.

• The actuary should include all contingent benefits in the valuation, unless:

• The law requires that benefits be excluded; or• The law permits benefits to be excluded and the terms of an

appropriate engagement specifically call for the actuary to exclude such benefits20

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Advice on Funding, Financial Position, etc. Types of Valuations – Hypothetical Wind-up

• For each hypothetical wind-up valuation, the actuary must postulate a scenario for the wind-up, taking into account the circumstances of the work

– Must include all contingent benefits payable under the postulated scenario

• Must value assets at market value• Must include provision for wind-up expenses

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Advice on Funding, Financial Position, etc. Types of Valuations – Solvency

• Same as hypothetical wind-up except:– If otherwise required by law– If otherwise permitted by law and if called for by the terms

of an appropriate engagement

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Advice on Funding, Financial Position, etc. Funding

• “If” the advice includes advice on funding, then the advice should be determined in accordance with:

– Circumstances of the work– The law

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Advice on Funding, Financial Position, etc. Reporting: External User Report

• General reporting requirements• For each going concern valuation:

– Specified reporting requirements• Unless the benefits on wind-up are not defined:

– Description of contingent benefits and description of scenario that maximizes wind-up liabilities

• For each hypothetical wind-up / solvency valuation:– Specified reporting requirements

• For any one hypothetical wind-up / solvency valuation:

– Additional specified reporting requirements• If providing advice on funding:

– Specified reporting requirements• Standard actuarial opinion statements

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Advice on Funding, Financial Position, etc. Reporting: External User Report

• General reporting requirements:– State relevant dates– State source and verification of data, assets and plan

provisions– Describe membership data– Describe assets, including market value and summary by

major asset class– Describe plan provisions– Disclose any subsequent events, and whether they are

reflected in the valuation– State each valuation undertaken20

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Advice on Funding, Financial Position, etc. Types of Valuations• If a RPP and not designated plan:

– A going concern valuation, if required by law– The hypothetical wind-up valuation under the scenario that

maximizes the wind-up liabilities, unless the plan does not define benefits payable upon wind-up

– Any other hypothetical wind-up / solvency valuation required by law

• If a designated plan:– A going concern valuation, if required by law– The hypothetical wind-up valuation under the scenario that

maximizes the wind-up liabilities, unless the plan has only connected persons

– Any other hypothetical wind-up / solvency valuation required by law

• If not a RPP:– The hypothetical wind-up valuation under the scenario that

maximizes the wind-up liabilities, unless the plan does not define benefits payable upon wind-up

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Advice on Funding, Financial Position, etc. Contingent Benefits

• “The hypothetical wind-up valuation under the scenario that maximizes the wind-up liabilities”?

– May disregard scenarios that are extremely unlikely to occur

– May disregard wind-up benefits that are extremely unlikely to be paid

• Cannot justify either of the above based on ability to pay

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Advice on Funding, Financial Position, etc. Reporting: External User Report

• For each going concern valuation:– Describe actuarial cost method– Describe assumptions, including rationale for selection– State funded status and service cost– If assets are valued at other than market value, state

funded status using market value– Describe any contingent benefits and their inclusion /

exclusion– If the valuation includes no provision for adverse

deviation, so state and state the rationale for not including any provision

– Include a gain / loss analysis

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Advice on Funding, Financial Position, etc. Reporting: External User Report

• For each hypothetical wind-up / solvency valuation:– Describe actuarial cost method– Describe assumptions, including rationale for selection– State financial position– Describe postulated scenario– Describe the extent to which contingent benefits are

included / excluded in determining the financial position

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Advice on Funding, Financial Position, etc. Reporting: External User Report

• For any one hypothetical wind-up / solvency valuation:

– State the service cost– Include a description of an analysis to illustrate the effects

of adverse deviations on the financial position– Include a brief gain / loss analysis

• Educational Notes will be developed to further expand upon these three requirements

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Advice on Funding, Financial Position, etc. Reporting: External User Report

• If providing advice on funding:– Describe the contributions between the calculation date

and the next calculation date– If plan is a registered plan and contributions are fixed:

• Report that contributions are adequate to fund the plan; or• Report that contributions are not adequate to support the

benefits and that either:– Benefits must be reduced– Contributions must be increased; or– A combination of the two

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Actual Wind-up / Accounting

• Similar to existing standards, though somewhat reorganized

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Closing Remarks

• The proposed Standard is generally consistent with the Working Document

• Remain very open to submissions, feedback, etc.– On the underlying concepts; and– Actual wording / structure

QUESTIONS

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