2008 General Meeting Assemblée générale 2008 Toronto, Ontario PD-11 Application of Enterprise Risk Management for Pension Plans Thursday, November 13, :15-15:45 TR-11 La gestion du risque d’entreprise appliquée aux régimes de retraite Jeudi le 13 novembre :15-15: General Meeting Assemblée générale 2008 Toronto, Ontario PD-11 Application of Enterprise Risk Management for Pension Plans Thursday, November 13, :15-15:45 TR-11 La gestion du risque d’entreprise appliquée aux régimes de retraite Jeudi le 13 novembre :15-15:45 Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

SURVEY REPORT: PENSION RISK MANAGEMENT- DERIVATIVES, FIDUCIARY DUTY AND PROCESS André Choquet, F.C.I.A., F.S.A. Chair Canadian Institute of Actuaries ERM Application Committee November 4, 2008

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 SOA – Pension Governance LLC Survey 162 senior retirement plan sponsors from US (120) and Canada (42) –44 USERS: use derivatives directly (may also have external managers using derivatives) –118 NON-USERS: do not use derivatives directly (but may have external managers using derivatives)

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Only 30% (20%) of USERS (NON-USERS) have a Chief Risk Officer

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Only 30% (20%) of USERS (NON-USERS) have a risk budget that addresses DB plan issues

2008 General Meeting Assemblée générale General Meeting Assemblée générale % of USERS do not benchmark risk management activities of their DB plans

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Only 21% of USERS believe FAS 158 has or will have cause them to change their current use of derivatives as part of DB plan risk management

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Economic Capital (EC) ERM tool of choice at Financial Institutions to measure risks and to allow efficient use of capital Applicable in any industry EC is the capital that the firm needs to ensure that its balance sheet stays solvent over a certain time period with a pre-specified probability (different from regulatory capital) = Net assets on a going concern basis less net assets on a stressed basis Computed for the firm as a whole using VAR method and then allocated to lines of business

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Where is the Pension Plan in Economic Capital? Pension Plan could be viewed as a stand alone line of business for EC purposes Riskiness of the plan on its own is not as important as contribution to the firm’s total EC Advantages of EC view inclusive of pension plan: 1.Better comparison of risk taken by different lines of business Risks in the pension plan are weighed against other enterprise risks 2.True enterprise wide risk budgeting and capital allocation 3.New pension design and funding strategies are evaluated based on impact on total enterprise wide EC, just like any new project

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Links Complete survey available online pen-risk-mngt.aspx CIA ERM Booklet “ERM Should you be doing it?” 8/ERM/208070e.pdf