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

PD-29 – ERM-Not Just for Insurance Companies TR-29 – La GRE – Utile dans d'autres secteurs que les assurances June 20, :45AM From Pension Risk Management to Enterprise Risk Management André Choquet, F.C.I.A., F.S.A. Chairperson ERM Applications Committee

From Pension Risk Management to Enterprise Risk Management Setting the Stage Inside Pension Risk Management Moving Toward Enterprise Risk Management

Why do organizations have pension plans? Both workforce and organizational life cycles drive decisions about pension plans ! Optimize human capital investment Attract and retain labour Ensure orderly transition of workforce

Pension Risk Management involves multiple parties Financial Management Financial Management Portfolio Management Portfolio Management Benefit Delivery Benefit Delivery Benefit Policy Benefit Policy Compliance Source: Watson Wyatt Worldwide

How large is the plan to shareholders’ equity? Pension Liability/Sharholders’ Equity Source: Watson Wyatt Worldwide

The solvency ratio index rose to over 100% in middle of 2007 but is now 90.2% Source: Watson Wyatt Worldwide

Achieving 100% solvency… Source: Watson Wyatt Worldwide

…And remaining 100% Solvent With a new Bond Portfolio Using current portfolio with swaps and futures DB Buy-out, annuity purchase

DB Buy out? Look to the UK Pension Corporation LLP –Telent plc transaction £398M (Sept 25 th 2007) Goldman Sachs –Rank transaction £700M (Feb 29 th 2008) Occupational Pensions Trust –expected to be 10% to 20% cheaper than the cost of a full buyout by an insurance company.

Longevity risk difficult to hedge Source: Watson Wyatt Worldwide

Not all mature plans are shifting away from equities Plan Maturity % Compared to Equity % Source: Watson Wyatt Worldwide

Risk budgeting: A framework to allocate risk Asset/Liability Stochastic Simulation Setting risk budget Decision 3 $205$210$215$220$225$230$235 PV of Contributions (10 Years) Plus Solvency Deficit ($ Million) 50 th Percentile PV of Contributions (10 Years) Plus Solvency Deficit ($ Million ) VaR95 55% equity, LB, +5% intl, +5% HY and alt structure 55% equity, LB, +5% intl, +5% HY and current structure 55% equity, LB, +5% intl and current structure 55% equity, LB and current structure Policy (65% equity) and current structure $325 $330 $335 $340 $345 $350 $355 $360 Source: Watson Wyatt Worldwide

Risk shifts from employer… Balanced Fund Present Value of Cumulative Net Expense ($M) $0.0 $10.0 $20.0 $ % Non-Contrib DB1.5% Contrib DB w 3% EE Contrib1% DB + 3% DC6% DC 5th-25th percentile25th-50th50th-75th75th-95thMean Source: Watson Wyatt Worldwide

…to members 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 1.5% Non-Contrib DB1.5% Contrib DB w 3% EE Contrib 1% DB + 3% DC6% DC Plan Annual Plan Accrual as a Percentage of Pay 10%25%50%75%90%Mean Risk for Employee at Age 40 Source: Watson Wyatt Worldwide

Another looming mismatch? Labour needs vs benefit design GDP (%) Labour Productivity (%) Required Labour Input (%) Labour Supply (%) Estimated Labour Shortages End of Period (Mil) 2006– – – – Living Standards Improvement = 1.85% Source: Watson Wyatt Worldwide

Use qualitative methods to assess other risks Compliance Governance Benefit Delivery

From Pension Risk Management to Enterprise Risk Management Measure Quantitative Risks Measure Qualitative Risks Is risk appropriate? Hedge or not? How much risk? ERM Monitor Implement PRM

The ERM risk management process Understand Manage Measure “ Risk comes from not knowing what you are doing” Warren Buffet

Websites and references PWC Saratoga Institute : 2006 Key Trends in Human capital Report DE2BC6A85256EBA0058B5C DE2BC6A85256EBA0058B5C4 Mortality Derivatives and the Option to Annuitize: M. Milevski and D. Promislow = = DC Risks –DC - a ticking time bomb? der.asp?id=RM-UK-32 der.asp?id=RM-UK-32 –SEI surveys on DC member investment behaviour. – esearch_Report_1104.pdfhttp:// esearch_Report_1104.pdf – embers_Suffer_Consequences_of_Overconfidence.pdfhttp:// embers_Suffer_Consequences_of_Overconfidence.pdf

Websites and references E&Y Study of risk: “Risk Management in Canada: Moving Beyond Assessment” Canadian Treasurer: “Pension Management: a job for the CFO” Feb WW Conference Board of Canada survey: english/news/press.asp?ID=19022 WW study on labour shortages: english/pubs/specialmemoranda/showarticle.asp ?ArticleID=16466&pdfURL=pdf/sm pdf&articledate=9/25/2006&Component=Mem orandum english/pubs/specialmemoranda/showarticle.asp ?ArticleID=16466&pdfURL=pdf/sm pdf&articledate=9/25/2006&Component=Mem orandum On DB Buy-out in the UK