1. 2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) 2009 Annual Meeting ● Assemblée annuelle 2009 Halifax, Nova Scotia ● Halifax (Nouvelle-Écosse) Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

2. IP-15 – Post-Retirement Benefits Valuation – What's New? Outline 1. Current situation 2. What is the CIA doing? 3. Convergence of accounting standards 4. Relationship with the Auditor 5. Unintended consequences 6. Related issues 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

3. Current Situation Scope Accounting standards apply to post-employment and post- retirement – discussion focuses on post-retirement Diverse accounting standards Canada – CICA 3461 (or PS 3250/55) USA – FAS 106 (modified by FAS 132 and FAS 158) International – IAS 19 (FRS 17) Similar in intent, but important differences: Treatment of unamortized gains/losses Treatment of plan amendments Accounting for curtailment or settlement Measurement date Discount rate (PS 3250/55 differs) Some differences in specific disclosure requirements 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

4. Current Situation (cont'd.) Ownership of assumptions As per accounting standards – "management's best estimate" In practice – how does/can management know? Development of assumptions No single standard exists (other than discount rate) Inflation and utilization are key – initial rate based on current renewals; inflation generally expected to decline to ultimate rate Rate of decline and ultimate rate vary by actuarial provider – how can they be justified? Guidance for actuaries CIA – SOP – Post-employment Benefit Plans Describes general methods to set assumptions – essentially does little more than articulate what would in any case be done – no safe harbour 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

5. Current Situation (cont'd.) Attitude of auditors Appear to be varying degrees of engagement and knowledge – no general practice of discussing/questioning Has this been sufficient? Valuations based on a range of assumptions No clear, generally recognized standard for the selection of assumptions Are the assumptions justified by experience? Risk for profession Possible risk for sponsors (if you change actuarial providers, you change "best estimate" assumptions) 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

6. What is the CIA Doing? CIA Task Force on Post-Employment Valuation Assumptions Charged with investigating the need for stronger CIA guidance in setting assumptions Supplementary mandate – identify the best type of guidance for each selected assumption Conclusions Industry studies supported by an Educational Note would be helpful in assessing trend, aging and the impact of large claim amounts Note that SOA has already conducted such research and published a paper detailing results and method to use 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

7. What is the CIA Doing? (cont'd.) Group Expected Experience Sub-Committee Drafted a Request for Proposal for industry studies to focus first on trend and aging RFP notification has been sent to the general mailing list and to the academic community Objective Clear method for setting current and future inflation and aging assumptions Reduced range of results; hence less risk for actuaries and sponsors 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

8. What is the CIA Doing? (cont'd.) Future studies may include: Trend – how can an "ultimate" trend rate be established? How many years until it is reached? Production of Educational Notes: Base claim costs Selection of trend Impact of provincial drug plans Impact of annual and lifetime maximums Margins – are they ever justified? If so, when? How should claim assumptions be set when active and retired employees are combined for rating purposes? 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

9. Convergence of Accounting Standards International Financial Reporting Standards (IAS 19) are to be adopted in Canada for fiscal years beginning in 2011 CICA 3461 will no longer exist for publicly accountable profit-oriented enterprises Companies required to disclose at least one year prior under IAS 19  two accountings needed Transition allows two options for recognition of gains and losses Option 1: Restatement of results since inception Option 2: An initial adjustment to retained earnings at transition date to fully recognize gains/losses (except unvested past service cost) Transition date is the beginning of the first year for which comparative information is shown e.g. option 2 above, the beginning of the year ending in 2010 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

10. Convergence of Accounting Standards (cont'd.) IAS 19 itself is changing Considering immediate balance sheet recognition of gains/losses  would result in significant balance sheet variability What does it all mean? Required accounting will change The new standard will no longer be driven by Canadian practitioners familiar with the Canadian environment Canadian influence on the standard will be limited The new standard itself is not static Client decisions needed: Treatment of gains/losses Which option for transition? 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

11. Relationship With the Auditor History Observation suggests that auditors may not all have been thoroughly familiar with the relevant accounting standards A common default position for an auditor was to accept those items certified to by an actuary Few questions were asked So how is this changing? Auditors becoming more diligent Questioning/discussion of assumptions Wish to understand the nature of changes to assumptions and how the accounting has been prepared This is a positive development More than ever, actuaries need a safe harbour and thorough familiarity with the accounting standard(s) 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

12. Unintended Consequences Before accounting standards were changed to require recognition of these liabilities Post-retirement life, medical or dental insurance were relatively common Sponsors paid for the coverage and recognized the costs of coverage on a pay as you go basis Impact of required recognition Sponsors became aware of the true cost of their commitments The accounting standards led to significant variability in the income statement, arising from recognition of gains/losses and changes in assumptions, (notably the discount rate) 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

13. Unintended Consequences (cont'd.) Impact of required recognition Drag on income  sponsors are cutting back or eliminating their coverage CIA is paying increased attention to the assumptions employed for such valuations Changes are unlikely to reduce liabilities and associated costs Impact of increased CIA attention Acceleration of sponsor efforts to reduce the coverage Is this a bad thing? Yes – retired individuals need insurance coverage and may be unable to afford it for themselves Net result – two professions, acting in compliance with their own standards, define enhanced standards that weaken the social safety net 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

14. Related Issues Recent financial turmoil Markets perceive corporate bonds as substantially riskier than government bonds  discount rates are very high (since linked to Corporate bonds) – Drives actuarial gains in valuations Are such high rates sustainable? – If not, can smoothing techniques be adopted? Private carriers Sponsors don't really want the risk. Post-retirement coverage very valuable for individuals. Insurance opportunity Obstacles Simply – risk! Lifetime inflation and aging are intimidating. Cannot be ignored, but potentially very expensive 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009

15. Related Issues (cont'd. Post-employment benefits Common benefit – maintenance of medical/dental coverage for disability claimants Issue – what monthly benefit should be valued? Is the monthly premium the appropriate benefit? Is utilization tracked separately for LTD claimants? If one thinks premium is not appropriate, but utilization is not separately tracked, how does on select assumptions? Suggests need for guidance 2009 Annual Meeting Assemblée annuelle 2009 2009 Annual Meeting Assemblée annuelle 2009