2006 PARIS

Demography (concerning pension schemes) Chairman: Ken Buffin US Presenters: Richard Verrall UK Stuart Leckie China 1 st June :15 – 15:45

Mortality Assumptions Used in the Calculation of Company Pension Liabilities in the EU Prof Richard Verrall Cass Business School City University, London

Background FRS17/IAS 19 has focused attention on the calculation of companies’ pension liabilities and also highlighted their significance in the balance sheet Attention has been paid to key economic assumptions such as the discount rate and assumed inflation, both in terms of absolute level and consistency between countries The Mortality assumption, although material, has not been hitherto subject to the same level of scrutiny. In particular the extent to which the assumptions used are consistent between countries In many cases “Standard” tables have been used, which it was felt reflected very different approaches to both level of mortality and allowance for future trends

Objectives of the Study Focus on assumptions used to measure liabilities for current pensioners Collect information on the mortality tables most commonly used for valuing occupational pension liabilities Compare the tables used both against population mortality in each country and between countries Identify the extent to which future improvements in mortality are being considered/allowed for Identify whether any conclusions could be drawn with a particular focus on the issues raised for a multinational corporation with significant pension liabilities in the countries considered Focus on the EU countries, but also include US and Canada

The accounts of a multinational employer Must comply with international accounting standards Must be signed off by an auditor Accounts must present a true and fair view to investors and other stakeholders

Defined benefit pensions: a significant issue Many UK companies’ UK pension schemes are larger than companies themselves UBS study : Combined actuarial deficit in FTSE 100 companies’ pension schemes is over £40 billion Issue is not the size of this deficit (or surplus), but how it is measured Example : UK pension scheme, assets £800m, liabilities £1000m

The mortality assumption: The “last great uncertainty” Close scrutiny and disclosure of discount rates and other financial assumptions Discount rates measured to nearer 0.25% (or 0.1%) Change in mortality table potentially more significant than such a change in discount rate

What does this mean for multinational employers? Mortality does vary from country to country… –Underlying population mortality varies –Pension scheme members may be a different subset of the population in different countries … but not as much as the assumptions would suggest –So are the figures really comparable?

What does this mean for multinational employers? Increased attention from auditors Disclosure to investors and other stakeholders Notes to accounts –Discount rate : single figure –Inflation : single figure –Return on assets : single figure –Mortality : …?

Conclusions Practice varies quite widely across the EU Different approaches taken to projection The effect on stated liabilities can be significant

Recommendations The mortality assumptions be included in the disclosure of pension expense in company accounts in as clear and informative a way as possible. Projected mortality tables allowing for future improvements of mortality rates be used in calculating pension liabilities for companies in all countries as far as possible Consideration should be given to the inclusion of a single figure to reflect the strength of the mortality assumptions used. We recommend that the disclosure be kept as simple as possible while remaining sufficiently informative for analysts and auditors to be able to have confidence in the results.

Cass Index of Mortality

Demography (concerning pension schemes) “Longevity in Asia” STUART H. LECKIE O.B.E., J.P., F.F.A., F.I.A., F.S.A. TEL: (852) FAX: (852) June 2006

Overview Map of Asia Population and demographics Overview – Asia pensions Asia pension reform trends Funding trends Nature of benefits Insurance industry Conclusions

Map of Asia Hong Kong:7mn Japan: 128mn Thailand: 64mn Singapore: 4mn India: 1,130mn Philippines: 83mn Indonesia: 223mn Korea: 48mn Malaysia: 25mn China: 1,300mn Taiwan: 23mn

Population & Demographics JPKOCHTWTW HKSGMYTHIN S PHID Total Population (mn) , ,10 0 Pop. aged (% total) Pop. aged 60 and over (% total) Dependency ratio (15-59/60+) Fertility rate Average life expectancy

Population & Demographics

Overview – Asian Pensions Diversity of economies Population size Lump sum benefits Unsophisticated Termination of Employment Indemnities World Bank influence (5 pillar model)

Pension assets JPKOTWCHHKSGMYTHINSPHID Public (US$ bn) Private (US$ bn)

Asia Pension Reform Trends Conditions leading to reform Ageing demographics Rising burden on fiscal budget Limited existing social security coverage Principles objectives of reform Extend coverage Increase retirement incomes while reducing reliance on government Shift pension responsibility to private sector Long term sustainability

Pension Reforms CountryReforms Japan  First DC introduced in 2001 – ‘Japanese 401(k)’  New DB in 2002 to ensure portability and preservation KoreaEmployee Retirement Benefit Security Act from 1 Dec 2005 to address failures of old system China‘Enterprise Annuity’ commencing in 3Q05 – Voluntary system but has full government support TaiwanMandatory DC from 1 July 2005 Hong KongMPF introduced in 2000, first mandatory retirement system ThailandLegislation for new mandatory system for private sector currently being debated in National Assembly IndonesiaNewly legislated National Social Security System includes mandatory DB & DC schemes for all formal and non-formal workers IndiaNew Pension System, a DC scheme to replace traditional DB system since Jan 2004

Funding Trends Move towards private sector Must then be funded Risks –Biggest risk for pension plans is inflation –Liquidity is not an issue but volatility may be Trends –Invest in real assets – equities, property, REITS –International investments –Optimise long-term returns Needs –Annuity products to provide regular income

Nature of benefits Private sector schemes generally pay benefits as lump-sum or scheduled payments Lack of annuity products to provide regular income and longevity protection –Shortage of medium-long term bonds –Markets lack hedging instruments –Insurers unwilling to take longevity risk Civil servants usually have generous DB schemes

Life insurance industry (2004 estimates) JPKOTWCHHKSGMYTHINSPHID Premium/GD P (%) Premium/capit a (US$) 3, ,050251,48 3 1, Average real growth (% p.a.) (1999 – 2004)

Conclusions Need to develop bond markets Insurers must take on mortality risk Rationalise tax rules Education and communication