18 November 2004 Hôtel Fairmount le Reine Élizabeth Montréal, Québec Marc Queenton, FCIA CIA General Meeting H4-PD How to Make Commuted Values Work ? Point of View of a Plan Administrator

2 Agenda >Alcan Inc. and Alcan Adminco (2000) Inc. >Impact of greater volatility of the new SoP for determining CV >Disclosure requirements - our context, philosophy and approach >Disclosure requirements - in details

3 Alcan Inc. >Global leader in aluminium, packaging and aluminium recycling >Pro-forma 2003 revenues of US $25.7 billion >88,000 employees in 63 countries >100 pension plans in 25 countries, with PBO of US $11 billion

4 Alcan Adminco (2000) Inc. >Wholly-owned subsidiary of Alcan Inc. >Administers Alcan’s plans in Canada and Caribbean, including 2 DB plans registered in Quebec and 1 hybrid plan in Ontario –12,000 active members and 10,000 pensioners >Provides full spectrum of services –Actuarial and legal –Treasury –Asset management –Administration and retiree payroll >18 employees

5 Impact of greater volatility On Annual Statements >Higher Probability that CV (y+1) < CV (y) >Quebec: CV must be included for the first time in annual statements as at 31 December 2004 –Administrators might consider including the CV only once every three years as allowed but once automated, it’s easier to include the value every year on and off might create plan members dissatisfaction –or Administrators might consider providing the CV plus a range if the applicable interest rates vary by +/- 0.5% or 1.0% adds complexity to administration systems and to statements >Ontario: including the CV is not required –greater volatility of CV results in less incentive to include it –but less understanding (hence appreciation) of the plan by members

6 Impact of greater volatility On Termination Benefits >Higher Probability that CV differs significantly from one month to the other >Plan Sponsors offering the transfer of CV of deferred pensions on request at anytime (generally before age 55) might consider an amendment to limit the possibility to once every 5 years (Quebec) or less often (outside Quebec) –reduces the possibility of “timing” the transfer out, especially with the 2- month delay in the determination of interest rates –but closes the door to an option which decreases the long-term pension administration costs for example, deferred pensions constitute only 0.5% of the C$4 Billion liabilities of Alcan plans in Canada.

7 Impact of greater volatility If there is no constraint on the possibility of transferring >Administrators might want to provide a range of what would be the CV if applicable interest rates vary by +/- 0.5% or 1.0% after the period for which the original CV applies –more explanation in the benefits statements will be required –likely that it will not be enough and that explanations in person will be needed –more expertise required from the benefits officers

8 Impact of greater volatility On Transfer Deficiencies >Everything else being equal, greater volatility will result in more plans having a degree of solvency below 100% >Transfer deficiencies will arise more often and will be larger >More administration complexities

9 Disclosure requirements >SoP must be followed by actuaries... >… but not necessarily by Plan administrators, who must comply with disclosure requirements of the applicable legislation when communicating with members >So when are the disclosures required and to whom should they be provided ? >To consider: –Do the Plan administrator and actuary work for same firm ? –Is a software used so that an actuary is not directly involved in every calculation ?

10 Disclosure requirements - our context >Adminco is the delegated administrator of the Plans >The actuary of the Plans is also an employee of Adminco >To calculate benefits, Adminco uses internally a software developed and maintained by a consulting firm >The software is maintained based on the actuary’s specifications >The actuary is not involved in the day-to-day administration

11 Disclosure requirements - our philosophy >We want to comfort members that their CV is computed in accordance with actuarial standards and applicable legislation >We want to provide members with quality information so as they can make an enlightened decision (ex: sensitivity analysis) –We need to be in position to explain all the information we disclose (training of administration department and benefits officers) >We believe it is a good governance practice to document the details supporting a benefit calculation >We want to provide as simple and clear information as possible –especially in at-large communications to members (ex: annual statements)

12 Disclosure requirements - our approach Software >the actuary will send a letter to the consulting firm with details of the actuarial basis to be programmed in the system, along with a statement that it’s in accordance with SoP Benefits Statements >a section in the complementary notes will include a statement of conformity and all disclosures related to how the CV was computed Annual Statements >for the record, the actuary will provide the administration department with a statement of conformity and all disclosures related to how CV must be computed >this info will not be included in members’ annual statements

13 Disclosure requirements - our approach Transfer Deficiencies: disclosed to administrator only >it is unrelated to computation of CV >disclosures to members will be provided along with the option statements => there is no transfer deficiency if member opts for a deferred pension >even if member opts for a transfer, if benefits is fully paid because of an additional contribution by sponsor, only administrator must be advised so as to ensure that proper contributions are actually paid –useless to go through all those explanations to members, since there is no impact to him –but more of interest to remaining members => we provide the information in the annual statements

14 Disclosure requirements - in details Description of the benefits entitlement involved >An explanation that the value of the deferred pension assumes the payments will start at the age which produces the maximum value >The actual age that produces the maximum value >An explanation that the death benefit that would have applied before commencement of a deferred pension is reflected >Any options assumed to be elected by the employee and that are reflected in the CV >Complexities: benefits entitlement may not be the same for different periods of service => more disclosure required

15 Disclosure requirements - in details Description of the actuarial assumptions >Mortality tables for member and spouse >Proportion married and age of spouse >Economic assumptions >Rate of interest to be credited between the valuation date and the date of payment

16 Disclosure requirements - in details Other disclosures >Statement of the period during which the commuted value applies before recomputation is required >Transfer deficiencies >Statement that CV has been computed in accordance with SoP >For CV that must not vary by sex for benefits earned after a particular date (ex: Ontario), a statement that the requirement has been extended, if applicable

17 Disclosure requirements - in details Quebec - additional termination benefit >In order to determine that benefit, another CV calculation is required >Which means that another complete set of disclosures will be needed, even if the end-result is nil