Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

Opening Remarks Focus of this presentation is on the: “Working Document: Proposed Changes to the Pension-Specific Standards for Pension Plans” Including the submissions that PPFRC has so far received We want this presentation to be interactive and encourage discussion We will also provide a brief overview of other PPFRC activities Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Background Statement of Principles was issued in March 2005 Brief highlights included: –Pure windup valuations would be required –Going concern valuations would be required Report on best-estimate assumptions Report on Funder’s Funding Policy –Required disclosure of the potential funding risks, based on the Funding Policy Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Background Feedback obtained from many sources –Actuaries, Regulators, Plan Sponsors, Others Discussion document was prepared by PPFRC released in October 2005 –Feedback was very limited However, feedback has been received from many other sources Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Background Examples of some of the concerns expressed: –Ability to enforce / mandate a Funding Policy –Appearance that actuaries are absolving themselves of responsibility Actuaries are best qualified to determine appropriate margins, not the Funder –Concerns from public sector plans that have no windup provisions –Does a going concern valuation have any relevance? Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Background PPFRC spent much time discussing the feedback Published the “Working Document” in March PPFRC believed that this Working Document reflected a broad consensus This document was expected to form the basis for proceeding with a formal Exposure Draft –Subject to submissions received To date PPFRC has received 13 submissions –We have been told verbally that others are on their way Although the deadline for submissions has officially passed, we encourage you to let us know your thoughts Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Working Document Topics Addressed in Working Document: –Goal of Funding –Funding Policy –Real Wind-up Valuation –Wind-up Valuation Including Some Form of Risk Analysis –Going Concern Valuation –Funding Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Goal of Funding “… is the systematic accumulation over time of dedicated assets which, without recourse to the funder’s assets, secure the plan’s promised benefits.” Submissions received include: –Pleased with the elimination of the “orderly and rational allocation of contributions among time periods” –Should modify to “… may reasonably secure …” –Should recognize that this is not the only goal Many plans have very different funding goals Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Goal of Funding Should take care that we don’t destroy the DB pension system by focusing too much on benefit security –Revert to the previous practice of annually purchasing deferred annuities The Working Document is too narrow in focus and the “Goal of Funding” reflects this narrow focus –More consideration should be given to “other” types of plans: Public sector plans Multi-employer plans IPPs Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Funding Policy Not required, but encouraged If one exists, then the actuary will be guided by it If one does not exist, then the actuary would still be able to proceed with the valuation Submissions have supported the concept of the Funding Policy being optional Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Real Wind-up Valuation Required disclosure of real wind-up position –All benefit entitlements –Market value of assets –Incremental annual cost –Simplified gain / loss Some limited exemptions are being considered –Wind-up position or likelihood of wind-up would not be acceptable reasons for an exemption Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Real Wind-up Valuation Submissions include the following comments: –There should be more exclusions Multi-employer plans Public sector plans Plans that are exempt from solvency regulations IPPs –We should not be unduly increasing costs by imposing this valuation on plans for which a wind-up valuation has no relevance –We need to define what scenario the wind-up valuation must be based upon –There should be exclusions for certain types of “work” based on the nature of the engagement Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Wind-up Position – Defined Adverse Scenarios Required disclosure of wind-up position on defined adverse scenarios –Effect on hypothetical wind-up liabilities –Effect on incremental annual cost Sensitivity scenarios would vary by plan Expect to make use of the report from the “Task Force on the Determination of Appropriate Provisions for Adverse Deviations in Hypothetical Wind-up and Solvency Valuations” Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Wind-up Position – Defined Adverse Scenarios Submissions on this aspect of the Working Document generally mirrored those received with respect to the wind-up valuation –When exclusions should be given –Is it worth the cost? We acknowledge that it is difficult to comment on this requirement until further details are available Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

Going concern valuation would be required unless: –Not required by legislation; and –Funding Policy states that no going concern valuation is required Selection of the assumptions would ultimately be the responsibility of the actuary –Guided by the Funding Policy –Best-estimate assumptions would be permissible But only if stipulated in the Funding Policy –Otherwise, assumptions would be required to contain provision for adverse deviation Assets must be valued using market value New Standards of Practice for Pension Funding Going Concern Valuation Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

Submissions include: –Are we being realistic about empowering plan sponsors to determine whether margins are needed or not? We should undertake a communications blitz –Should require separate reporting of the best- estimate assumptions and the margins for adverse deviation –Should not require a gain/loss if a detailed gain/loss is done on a wind-up basis –Going concern valuation should still be required (not optional) Particularly for MEPPs New Standards of Practice for Pension Funding Going Concern Valuation Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Going Concern Discount Rate Special provisions for the selection of the going concern Discount Rate Standards would stipulate that the Discount Rate be determined in a reasonable manner taking into account the investment policy of the plan The PPFRC would periodically prepare guidance for the maximum and minimum recommended Discount Rates Guidance would likely define the maximum Discount Rate as the rate obtained using a “building block approach” and assuming specified risk premiums for various asset classes Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Going Concern Discount Rate Surprisingly few comments on this concept Certainly, there are concerns about how this Guidance will be prepared Also concern raised that actuaries will automatically gravitate to the maximum discount rate permitted Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Funding It is the responsibility of the actuarial profession to ensure appropriate disclosure of financial information Contribution requirements would be determined in accordance with funding policy and regulatory requirements Asset smoothing would be permitted in determining contribution requirements Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Funding Based on the submissions received, smoothing is still a controversial topic –In showing the financial position of the plan –In determining the contribution requirements Submissions were received supporting (in some cases very strongly) both sides of the debate Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Terminology We continue to search for better terminology Terms such as –“Liabilities” –“Surplus” / “Deficit” –“Actuarial value of assets” are problematic to many people and we believe the profession would be well served if new terminologies were developed Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

New Standards of Practice for Pension Funding Other Comments We should take care that the Standards are “minimum compliance” –Many of these principles belong in Education Notes not Standards We should require disclosure of the financial position of the plan on a minimum risk portfolio basis Separate the gain / loss on assets and liabilities Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

Changes to Pension Specific Standards External User Reporting Exposure Draft issued in March: –Justification of each individual assumption –Reporting of wind-up position in all cases: Currently only required if the plan is in a wind-up deficit position –Explicit statement that there have been no subsequent events 6 submissions were received Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

Changes to Pension Specific Standards External User Reporting Concerns raised that these changes should be in Education Notes, rather than Standards “Justify” has a negative connotation and should be replaced by “provide a rationale for” How to “justify” assumptions for small plans? There should be no exemptions from the requirement to undertake a hypothetical wind-up valuation There has been no justification for the requirement to justify the assumptions How to justify the extent of the margins inherent in the valuation? Distinguishing between “wind-up” and “termination” Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

Changes to Pension Specific Standards External User Reporting PPFRC agrees that “rationale for” is better than “justification” and has made that change The PPFRC has voted to adopt these changes to the Standards and will be recommending such to the ASB Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

Educational Notes Educational notes are covered under Section 1220 of the Standards of Practice –“The actuary should be familiar with relevant educational notes and other designated educational material.” –“A practice which the notes describe for a situation is not necessarily the only accepted practice for that situation and is not necessarily accepted actuarial practice for a different situation.” –“educational notes are intended to illustrate the application (but not necessarily the only application) of the standards, so there should be no conflict between them.” Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

Educational Notes 3 Education Notes have recently been issued by the PPFRC: –Events Occurring After the Calculation Date of an Actuarial Opinion for a Pension Plan –Expenses in Funding Valuations for Pension Plans –Guidance for 2007 Assumptions for Hypothetical Wind-Up and Solvency Valuations with Effective Dates Between December 31, 2006 and December 30, Other Educational Notes will be issued shortly: –Asset Valuation Methods –Selection of Mortality Assumptions for Going Concern valuations Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver

Questions Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver Update from Pension Plan Financial Reporting Committee June 28, 2007 Vancouver