1. 1 CIA Pension Seminar April 15, 2009 Colloque sur les régimes de retraite de L’ICA Le 15 avril 2009

2. 2 PPFRC Update  Agenda For the Record – Changes in Standards PPFRC Current Projects Canadian Pension Mortality Experience Annuity Guidance SOP Exposure Draft and Educational Notes CIA Pension Seminar/Régimes de retraite de L'ICA

3. 3 PPFRC Update  For the Record – Changes in Standards Commuted 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 CIA Pension Seminar/Régimes de retraite de L'ICA

4. 4 PPFRC Update  Current Projects Annuity guidance Educational Notes re SOP Exposure Draft Educational Note re Commuted Values Member queries Discount rates for accounting valuations Measurement of duration for indexed plans CIA Pension Seminar/Régimes de retraite de L'ICA

5. 5 PPFRC Update  Committee on Canadian Pension Mortality Experience To publish mortality table and projection scale for Canadian pension plans A good number of large plans have indicated they can contribute data RFP has been issued for a researcher to conduct the study Target for publication is March 2010 Second project to look at C/QPP mortality CIA Pension Seminar/Régimes de retraite de L'ICA

6. 6 PPFRC Update  Annuity Guidance Immediate non-indexed group annuities total premium over $15 million – addition to CANSIM V39062 February 29 – October 30, 20091.1% October 31, 2008 – December 30, 2009*1.4% * subject to consideration of changing conditions CIA Pension Seminar/Régimes de retraite de L'ICA

7. 7 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 CIA Pension Seminar/Régimes de retraite de L'ICA

8. 8 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 CIA Pension Seminar/Régimes de retraite de L'ICA

9. 9 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 CIA Pension Seminar/Régimes de retraite de L'ICA

10. 10 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 CIA Pension Seminar/Régimes de retraite de L'ICA

11. 11 PPFRC Update  Annuity Guidance Individual Annuity Pricing ○ May be considered where benefits could be settled with individual annuities and relevant quotes are available CIA Pension Seminar/Régimes de retraite de L'ICA

12. 12 PPFRC Update  Annuity Guidance Large Plans ○ Guidance unchanged from prior year except reference to “fixed income” investments CIA Pension Seminar/Régimes de retraite de L'ICA

13. 13 PPFRC Update  Annuity Guidance Mortality ○ 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) CIA Pension Seminar/Régimes de retraite de L'ICA

14. 14 PPFRC Update  Annuity Guidance Retroactivity ○ 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 CIA Pension Seminar/Régimes de retraite de L'ICA

15. 15 PPFRC Update  Annuity Guidance Possible future PPFRC guidance ○ More frequent updates ○ Large plans ○ Application of individual vs. group annuity pricing CIA Pension Seminar/Régimes de retraite de L'ICA

16. 16 PPFRC Update  Annuity Guidance Actuary’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 CIA Pension Seminar/Régimes de retraite de L'ICA

17. 17 Questions? CIA Pension Seminar/Régimes de retraite de L'ICA

18. 18 PPFRC Update – SOP Changes  History Current pension specific standards consolidated in 2002 Statement of Principles - 2005 Working Document - 2007 NOI and Draft Standard - Sept. 2008 Exposure Draft (ASB) - April 1, 2009 ○ Comment deadline: June 30, 2009 CIA Pension Seminar/Régimes de retraite de L'ICA

19. 19 SOP Changes  Process Joint 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 CIA Pension Seminar/Régimes de retraite de L'ICA

20. 20 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 CIA Pension Seminar/Régimes de retraite de L'ICA

21. 21 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 CIA Pension Seminar/Régimes de retraite de L'ICA

22. 22 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 CIA Pension Seminar/Régimes de retraite de L'ICA

23. 23 SOP Exposure Draft – Highlights  Emphasis on Hypothetical Wind-up / Solvency Considerations Comments ○ 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 CIA Pension Seminar/Régimes de retraite de L'ICA

24. 24 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-up Requirement to report unless plan and law does not define benefits payable upon wind-up or designated plan for connected persons (unchanged) CIA Pension Seminar/Régimes de retraite de L'ICA

25. 25 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 CIA Pension Seminar/Régimes de retraite de L'ICA

26. 26 SOP Exposure Draft – Highlights  Incremental Service Cost on Hypothetical Wind-up / Solvency Basis Comments ○ Diverse opinions ○ May be helpful or misleading Alberta: required under solvency relief Changes from NOI ○ None – requirement on one solvency or hypothetical wind-up valuation maintained CIA Pension Seminar/Régimes de retraite de L'ICA

27. 27 SOP Exposure Draft – Highlights  Simplified Hypothetical Wind-up / Solvency Gain/Loss Analysis Comments ○ Diverse opinions Changes 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 CIA Pension Seminar/Régimes de retraite de L'ICA

28. 28 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 CIA Pension Seminar/Régimes de retraite de L'ICA

29. 29 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 CIA Pension Seminar/Régimes de retraite de L'ICA

30. 30 SOP Exposure Draft – Highlights  Miscellaneous Consideration of Letters of Credit incorporated Rationale for change in methods required Definition 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 CIA Pension Seminar/Régimes de retraite de L'ICA

31. 31 Educational Notes  To be approved by PPFRC and Practice Council  Drafts prepared/in preparation: Incremental Cost on a Hypothetical Wind-Up or Solvency Basis Sensitivity Analysis to Illustrate Effect of Adverse Deviations Best Estimate Discount Rates for Going Concern Funding Valuations  No EN on gain/loss analysis CIA Pension Seminar/Régimes de retraite de L'ICA

32. 32 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, less Hypothetical wind-up liability at current valuation date, less Excess expected asset return (optional and separately reported) CIA Pension Seminar/Régimes de retraite de L'ICA

33. 33 EN - Incremental Cost  Considerations Going-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 decrements Other approaches allowed CIA Pension Seminar/Régimes de retraite de L'ICA

34. 34 EN - Sensitivity Analysis  Type of Valuation On basis most useful to users Public sector, jointly-sponsored, MEPPs – may decide to use going-concern For negotiated contribution rate plans, may examine effect on benefit levels or minimum contribution rates CIA Pension Seminar/Régimes de retraite de L'ICA

35. 35 EN - Sensitivity Analysis  Most basic analysis Funded status and incremental cost effect of ○ Discount rates 1% lower than under valuation ○ 10% decrease in asset values used CIA Pension Seminar/Régimes de retraite de L'ICA

36. 36 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 CIA Pension Seminar/Régimes de retraite de L'ICA

37. 37 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 CIA Pension Seminar/Régimes de retraite de L'ICA

38. 38 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 CIA Pension Seminar/Régimes de retraite de L'ICA

39. 39 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 CIA Pension Seminar/Régimes de retraite de L'ICA

40. 40 SOP Exposure Draft – Process  Submit comments to Chris Fievoli by June 30, 2009 Comments requested on Exposure Draft content and draft ENs Comments requested on implementation timing ASB will make final decision ○ Expected in 2009 ○ Implementation date will be set at that time CIA Pension Seminar/Régimes de retraite de L'ICA

41. 41 Questions? CIA Pension Seminar/Régimes de retraite de L'ICA