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