1. 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 des actuaires L’Institut canadien des actuaires

2. 2008 Annual Meeting Assemblée annuelle 2008 2008 Annual Meeting Assemblée annuelle 2008 PD-27 Assumption Setting for Pension Plans What is Reasonable? A Regulator’s Perspective Jean-Claude Primeau Office of the Superintendent of Financial Institutions

3. 2008 Annual Meeting Assemblée annuelle 2008 Current Instruction Guide published in June 2000 Guide is in course of revision and revised Guide will consolidate policies published in PBSA Update since 2000 and address other issues that have emerged since Revised Guide expected to be posted in summer 2008 Reports should follow CIA Standards of Practice OSFI also expects actuaries to follow guidance from CIA Educational Notes OSFI Guidance

4. 2008 Annual Meeting Assemblée annuelle 2008 Asset Data OSFI expects reports to include following information: -Explanation of material differences between market value included in report and value disclosed in plan financial statements -Asset mix by major asset classes at valuation date and under investment policy -Reconciliation of assets by year showing major causes of movements Plan Assets

5. 2008 Annual Meeting Assemblée annuelle 2008 Reporting Receivables -Inclusion of receivable amounts should normally be consistent with plan financial statements -Receivables should be included only if amount was due at valuation date and either: - paid into fund before the report date or - payment is certain and expected payment date is known and is soon after the report date Plan Assets

6. 2008 Annual Meeting Assemblée annuelle 2008 Asset Valuation OSFI expects asset valuation methods to change infrequently but expects the following information when the method is changed: -quantification of impact of change on valuation date -explanation of reasons for change -actuary’s intentions for future valuations Plan Assets

7. 2008 Annual Meeting Assemblée annuelle 2008 Smoothing Methods Smoothing methods are allowed under the Regulations; OSFI has the following expectations: -method should be described in sufficient detail -value should not exceed 110% of market value -method should not be biased to produce values above market value Plan Assets

8. 2008 Annual Meeting Assemblée annuelle 2008 Margins for Adverse Deviations -Actuary should select independently reasonable actuarial assumptions - OSFI expects that assumptions, as a whole, would include appropriate margins for adverse deviations -Actuary would be guided by sponsor’s funding policy and risk tolerance of sponsor Going Concern Assumptions

9. 2008 Annual Meeting Assemblée annuelle 2008 Discount rates Discount rate selection should reflect the following factors: -reasonable expectations of future investment returns by asset class -investment policy -current asset mix -margins for adverse deviations -risk factors -provision for expenses Going Concern Assumptions

10. 2008 Annual Meeting Assemblée annuelle 2008 Discount rates - OSFI has been encouraging actuaries to moderate future return expectations - OSFI expects that the discount rate before expenses for plans invested at least 50% in variable securities should not exceed 6.5% - Many actuaries have reduced their discount rate assumptions in the last few years - We have compiled statistics of rates used in reports filed recently Going Concern Assumptions

11. 2008 Annual Meeting Assemblée annuelle 2008 Assumed Going-Concern Discount Rates

12. 2008 Annual Meeting Assemblée annuelle 2008 Expenses - Our assessment of the discount rate assumption looks at the gross rate before expenses - OSFI encourages setting explicit expense assumptions, especially for non-investment expenses, taking into account historical experience and expected future levels - CIA Educational Note on expenses sets best practice of disclosing expense assumption that is part of the discount rate assumption Going Concern Assumptions

13. 2008 Annual Meeting Assemblée annuelle 2008 Salary Escalation - It is useful to describe the components of the salary escalation assumption, i.e. base increases and merit and promotional scales - OSFI expects that this assumption should not include negative merit or promotional scales for any category of members Going Concern Assumptions

14. 2008 Annual Meeting Assemblée annuelle 2008 Mortality - OSFI believes it is best practice to reflect future mortality improvements in the mortality basis - As a minimum, the basis should be no less conservative than the table used in the Commuted Value Standard (currently UP94 with projection to 2015) - A less conservative assumption can be used if justified by an appropriate experience analysis relevant to the group Going Concern Assumptions

15. 2008 Annual Meeting Assemblée annuelle 2008 Retirement Age - The retirement age assumption should be consistent with the plan provisions, historical experience and future outlook for retirement experience - Where a plan contains early retirement benefits subject to consent, the actuary should assume that consent is granted or make a reasonable assumption about the probability of consent being granted Going Concern Assumptions

16. 2008 Annual Meeting Assemblée annuelle 2008 Termination Scenario - The termination scenario should be clearly identified in the report, such as voluntary termination of the plan by the employer or bankruptcy - The report should include the solvency liabilities under the scenario selected and the liabilities under the scenario that maximizes the liabilities, if different Solvency Assumptions

17. 2008 Annual Meeting Assemblée annuelle 2008 Discount Rate Assumptions - Active members who meet eligibility conditions for immediate retirement may have an option between an immediate pension or the commuted value if the plan terminates - In that situation, OSFI requires the actuary to assume that at least 50% of members will choose the most expensive option Solvency Assumptions

18. 2008 Annual Meeting Assemblée annuelle 2008 Discount Rate Assumptions - The CIA does not include a specific annuity proxy but includes general guidance in annual educational note - Actuaries of indexed plans must make reasonable assumptions for the price of indexed annuities, considering CIA guidance - A replicating portfolio approach could be acceptable if plan is very large and actuary provides sufficient information supporting an appropriate resulting rate Solvency Assumptions

19. 2008 Annual Meeting Assemblée annuelle 2008 Wind-up Expenses - OSFI’s analysis looks at the wind-up expenses expressed as a dollar amount per member - Some actuaries make wind-up expenses assumptions that appear unrealistically low - OSFI often raises this issue with plan actuaries Solvency Assumptions

20. 2008 Annual Meeting Assemblée annuelle 2008 Projection of Salaries and Maximum Pension A projection of salaries should be included if: - The plan provides final average benefits covering the period of employment and - The termination scenario is that employment continues after plan termination A projection of the maximum pension level is required if the maximum pension increases automatically under the plan Solvency Assumptions

21. 2008 Annual Meeting Assemblée annuelle 2008 Retirement Age - The actuary should assume retirement ages where the commuted value is maximized, based on CIA Standards of Practice - When a plan offers early retirement benefits subject to consent, the description of the assumptions should be clear on the assumption made with respect to consent being granted - The summary of plan provisions should include relevant details on early retirement provisions applicable to deferred vested members Solvency Assumptions