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Current developments in Multi-Employer Pension Plans

CIA 2006 Pension Review Project

Peter F. Morse, FCIAJune 28, 2007

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History

Previous Pension Review Project report issued in August 2005

Board approved Second Review Project on June 27, 2005 (to focus on MEPPs)

Task Force appointed by Board January 27 and June 14, 2006 (Morse, Kutney, Hunter)

General announcement describing project sent to members June 12, 2006

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Project Process

List of Multi-employer Pension Plans obtained from all Canadian regulators (190 plans in total)

Regulators provided Plan name, registration number, date of latest valuation, actuarial firm, and name of signing actuary for each plan

Subset of 60 Plans selected for study by a quasi-random process

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Project Process (cont’d)

CIA President met with representatives of Actuarial firms active in MEPP practice and Independent Actuaries Network in July 2006 to explain project and obtain support

Request for reports sent to authors by CIA Secretariat in August, 2006

Virtually all reports received by Secretariat by end of September, 2006

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Selection of Plans for Review

Roughly proportionate distribution by jurisdiction

At least one report from each firm providing actuarial services to MEPPs

No more than 2 reports from any actuary (although multiple signatures blurred this criterion)

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Jurisdiction BreakdownJurisdiction Total MEPPs Plans Chosen BC 33 12 Alberta 20 7 Saskatchewan 7 0 Manitoba 2 0 Ontario 82 24 Federal 24 9 Quebec 12 5 New Brunswick 1 0 Nova Scotia 9 3

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Valuation Date Breakdown

Valuation Date Number of Reports Jan 1/02 – Jun 30/03 6 Jul 1/03 – Jun 30/04 16 Jul 1/04 – Jun 30/05 36 Jul 1/05 – Jan 1/06 2

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Reviewers

Reviewers recruited during July, 2006 Retired or substantially retired Pension

Actuaries (some continue to do legal evidence/marriage breakdown work)

Several applicants were declined due to active employment status

Did not review former colleagues’ work or more than two reports from any firm

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Reviewers (cont’d)

Doug Andrews Bill Cuthbert Paul Duxbury* John McKellar Mel Norton Cecil Van Bolhuis

David Brown René Delsanne Chris Kutney* Peter Morse Bill Solomon*

* Also participated as Reviewer in 2005 Review Project

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Confidentiality

All reports were sent by Authors to CIA Secretariat, which handled all distribution to/from Reviewers and Task Force

Actively employed TF member (Cameron Hunter) was not aware of plans selected for study or the Names/Authors/Actuarial Firms for any reports

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Confidentiality (cont’d)

Valuation reports were seen only by Reviewers and Task Force Chair (Peter Morse)

Random numbering system used to identify reports and plans in Task Force discussions

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Regulator Concerns

Input sought from regulators re their concerns with CIA members’ valuation reports, including specific concerns with MEPP valuation reports

These concerns were reflected in developing the ‘Reviewer Checklist’

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Regulator Concerns (cont’d)

Actuaries trying to justify ‘best estimate’ assumptions – conservatism is being removed

Lack of consistency between asset mix and expected investment return

Use of overly aggressive investment return assumptions

Analysis of gain/loss not in enough detail to permit assessment of assumptions

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Regulator Concerns (cont’d)

Trends in losses due to mortality and retirement experience without assumption changes

Inadequate justification for assumptions and methods and changes to these items

Inadequate provision for admin expenses Use of unreasonable asset valuation methods

and large deviations from MV

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Regulator Concerns (cont’d)

Summary of plan provisions not always accurate

Selection of valuation date can be affected by external indices (e.g. Dec 31 vs Jan 1 and bond yields)

Use of accrued benefit cost method for mature plans or in declining industries

Optimistic assumptions re hours of work or future contributions

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Reviewer’s Checklist

Each review required the provision by Reviewer of

11 pieces of basic information (plan name, author, valuation date, plan type, reviewers etc.),

responses to 163 questions (most had available responses of Yes, No or N/A),

12 numerical items relating to data and valuation results, and

17 additional specifics concerning valuation methods and assumptions.

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Reviewer’s Checklist (cont’d)

First Reviewer completed the Checklist, with additional comments where appropriate

Valuation Report and Checklist were then returned to Secretariat who forwarded it to Second Reviewer

Second Reviewer then reviewed responses of First Reviewer, indicating agreement or not and reasons therefor, including page references

Report and Checklist were then returned to Secretariat, and Checklist was forwarded to TF members

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Reviewer’s Checklist (cont’d)

Where there were material disagreements between Reviewers, they were forwarded by the Secretariat to Task Force Chair for resolution

Ultimately, all reports were forwarded to TF Chair to assist in completion of the TF report

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Findings (general comments)

Reporting period overlapped with that of the previous CIA Review Project

Many reports reviewed had been issued prior to issuance of Prior Project report

Thus many of the shortcomings identified in that report surfaced again

CIA has issued (2007) Research Paper on Contents of Pension Actuarial Reports which should address many shortcomings

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Findings (general comments)

Section 3600.05 of SOP provides: ”The report should be detailed enough to enable another actuary to examine the reasonableness of the valuation.” This is not a new requirement.

1981 Valuation Recommendations (Sec. 7.01) provided: “The report on a valuation . . . should contain information which will be sufficient to permit another actuary to make an objective appraisal of the valuation.”

A significant number of reports fell short of this goal in one or more areas.

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Findings

12 of 60 reports identified the intended users only indirectly

Very few authors made an explicit statement if there were no subsequent events (SOP revision has been drafted to require such a statement)

13 reports did not include a reconciliation of plan membership. This restricts ability of another actuary to make informed judgment of report for purpose of SOP 3600.05

8 reports provided no detail re tests on data

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Findings (cont’d) Most data summaries included no info on gender.

Actuary could include statement that all members are of same gender if this is the case.

Four reports did not have a reconciliation of plan assets, while 22 did not provide any detail concerning the investment mix of assets. Both are critical for purposes of SOP 3600.05 (again)

Half the reports did not identify check procedures used to verify asset information

Only rarely did report identify procedures used to verify plan provisions

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Findings (cont’d)

All actuarial opinions contained the required disclosure statements

Presentation of results was very good, with breakdown of liabilities for membership classes

Only one report did not include reconciliation of results, but meaningful discussion of gain/loss items was found in less than 50% of reports

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Findings (cont’d)

Two reports contained no description or numerical illustration of asset smoothing method (‘we used a smoothed value of assets and it is $xxx’)

Demonstration of adequacy of negotiated contribution rate was provided in 75% of reports

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Findings (cont’d)

Benefit reductions were recommended in 8 of the 11 valuations where the negotiated contribution rate was insufficient to support current benefit level

Solvency position of one plan was reported in a separate report, at the request of the plan trustees

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Solvency Valuations

49 of 60 reports used market value for solvency assets, while 11 used a smoothed value (>MV in most cases)

51 reports used market discount rates, while 9 used ‘smoothed’ discount rates

36 plans showed a solvency deficit, while 26 of these plans also had a current solvency deficiency

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Asset Valuation Methods

Market value used in 20 reports Smoothing method used in 39 reports Combination of BV and MV in 1 report Market value disclosed in all reports Method changed in 12 reports, but rationale

provided in only 3 reports, and financial effect shown in only 8 reports

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Asset Valuation Methods (cont’d)

Relationship to MV where MV not used:

Less than 90% MV 0

90% - 95% MV 7

95% - 100% MV 19

100% - 105% MV 12

105% - 110% MV 1

More than 110% MV 1

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Actuarial Cost Methods

Method description No. of reports

Unit credit/accrued benefit 48

Entry age normal 3

Attained age normal/aggregate 6

Projected unit credit

(FAE plans)3

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Actuarial Cost Methods

Use of attained age or aggregate method may better assist in assessment of whether benefit levels can be supported in the longer term

Since TF reviewed only filed reports, we were unable to determine how frequently alternative methods were used for trustee discussions

There appears to be need for research into suitability of various actuarial cost methods to assess long-term financial stability of MEPPs

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Discount Rates – Going Concern

Critical assumption for the valuation Specific assumption re some plan expenses in

37 reports – various approaches Indirect allowance in discount rate (“net of

investment/all expenses”) TF estimated gross discount rate actually

assumed by reference to asset reconciliation

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Discount Rates – Going Concern

Actual Rate Est. Gross Rate Less than 6% 7 plans 5 6% - 6.5% 23 7 6.5% - 7% 16 22 7% - 7.5% 14 24 More than 7.5% 0 2 Average Rate 6.35% 6.89%

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Demographic Assumptions Mortality – 1983 GAM in 27 reports, GAM 94 or

UP-94 in 30 reports, RP-2000 in 2 reports, but only 13 reports justified mortality assumption

Early ret assumption in 45 reports, but justification in only 1/3 of them

Justification for termination assumption in less than 1/4 of reports

Disability assumption in 23 reports, and most were justified

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Hours Worked/Contributions

Another important assumption 34 reports included estimate of contrib hours 13 anticipated a decrease, 7 no change and 14

anticipated an increase (7 of more than 10%) 36 reports included estimate of contributions 14 anticipated a decrease, 1 no change and 21

anticipated an increase (9 of more than 10%)

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Provision for Adverse Deviation

An explicit description or quantification of a PfAD was provided in only 7 of the 60 reports

Implicit PfAD may have been used in others (e.g. more conservative discount rate) but impossible to assess or quantify

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Review of Regulator Concerns

REGULATOR CONCERNS Actuaries removing

conservatism from basis Lack of consistency

between asset mix and assumed discount rate

Use of overly aggressive investment return assumption

T F OBSERVATIONS TF found few references to

Best Estimate assumptions Few reports discussed this

relationship and 22 omitted asset mix. But, narrow range of assumed discount rates

TF found some evidence, especially where implicit investment return used

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Review of Regulator Concerns

REGULATOR CONCERNS Gain/loss analysis not in

sufficient detail to permit assessment of assumptions

Trends of losses in mortality and retirement ignored

Inadequate justification of assumptions and changes

Inadequate provision for admin expenses (funding)

T F OBSERVATIONS Meaningful analysis of G/L

in only 50% of reports, used to justify assumps. in 25%

TF had only one report per plan, difficult to comment

TF generally found insufficient justification

Some instances observed. Educ. Note issued in 2007

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Review of Regulator Concerns

REGULATOR CONCERNS Unreasonable asset val’n

methods used, excessive deviation from MV noted

Summary of plan provisions is not always accurate

Selection of valdate may be affected by external indices

Optimistic assumps. re future contributory hours

T F OBSERVATIONS TF did not find a serious

problem. 46 plans used MV or less and 12 others + <5%

TF had no access to plan. Clear summaries in reports

Only 5 of 60 reports had a date change, 3 by one day

Justification in 50% of reports. No TF access to working papers

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Review of Regulator Concerns

REGULATOR CONCERNS Use of Accrued Benefit CM

for mature plans and those in declining industries

Understated incidence of retirement where industry patterns seem established

Large variation in level of assumed plan termination expenses in solvency vals

T F OBSERVATIONS Discussion of issue

contained in TF report

TF unable to assess this concern, without historical data and valuation reports

Addressed in detail in the report, and discussed below

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Windup Expenses in Solvency Valuations

Very wide range of assumed expenses

As % of Assets As $ per member

Maximum 4.874% $1,145 Median 0.320% $ 127 Mean 0.599% $ 186 Minimum 0.024% $ 16

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Recommendations

Many of the TF concerns have already been addressed in previous Review Project report

Two Educational Notes and a Research Paper have subsequently been issued

Educational Note should be developed re the insufficiency of negotiated contributions and the resulting need for corrective action. Same EN could address hours worked/expected contributions assumption

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Recommendations (cont’d)

All MEPP reports should contain statement as to whether negotiated contributions are, or are not, sufficient to support current benefit levels

SOP should include a requirement that actuarial reports disclose the discount rate used to amortize a solvency deficiency

Research should be undertaken to address suitability of ACMs for assessing long-term financial stability of a MEPP

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Future Reviews

TF recommends that future CIA reviews of valuation reports be conducted only after all Educational Notes have been developed and SOP changes have been approved

Review uses a lot of volunteer resources and time. If reviews are to occur frequently, CIA should consider paid staff to conduct reviews and appropriate infrastructure

Appropriate timing for next Review is 3 – 5 years hence

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Next Steps

Board release of TF report to members TF to follow up with some authors re possible

non-compliances Secretariat to arrange for ultimate destruction

of submitted reports, completed checklists and correspondence

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Thanks To

Canadian Pension Regulators for sharing their internal checklists and providing plan universe

Mr. Davin Hall for coordinating collection of information on behalf of CAPSA

Report authors and their employers for their cooperation Reviewers for their diligence, thoroughness and promptness in

completing the reviews Ms. Angelita Guevara and other Secretariat staff for their

coordination efforts and help with logistics Normand Gendron and Daniel Lapointe for their assistance

and guidance throughout the project