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

Liability Driven Investing A Practical Approach

Liability Driven Investing A Definition: A customized strategy in which a pension plan’s asset risk and return are directly linked with its liabilities 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

LDI Strategies LDI shifts the focus from return on the plan’s assets to controlling the volatility of the funded status 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

LDI Strategies Insured Group Annuity – an earlier approcach to LDI? 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

LDI Strategies Risk analysis Risk Budgeting “Value at Risk” 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Why LDI Today? Changes to international accounting standards Plan sponsors need to focus on volatility of surplus/deficit rather than optimizing return 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Implications of LDI Some shift in asset mix away from equities to fixed income Structure of fixed income – use of long bonds Alternative asset classes Use of derivative instruments 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

What Risks to Manage Liability Risks: Interest, inflation, longevity Asset Risks: Market and currency Risks are interrelated – not mutually exclusive 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

Implementing LDI Evaluate risk factors Consider actuarial assumptions Current economic situation Risk tolerance level of plan sponsor 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009

What LDI is Not Not a solution to the current pension crisis Will not reduce funding costs Not the same for all plan sponsors 2009 Annual Meeting Assemblée annuelle Annual Meeting Assemblée annuelle 2009