CIA Annual Meeting LOOKING BACK…focused on the future

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Two Co-Presenters Wayne Berney Serge Charbonneau

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Agenda PPFRC Survey of Group Annuity Purchase Rates Recent Queries Statement of Principles

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future What is PPFRC? PPFRC is a Committee under the Practice Standards Council (PSC) Chair/Vice-Chair are appointed by PSC, others by Chair Although not mandated, membership is intended to be broadly distributed by: Region (West, Ontario, Quebec, Atlantic) Type of employment (large consulting, small consulting, plan sponsor, etc.) Employer (no more than two members from any one employer)

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Current Membership Serge Charbonneau (Chair until June 30) – Morneau Sobeco Stephen Butterfield (Vice Chair, Chair from July 1) – Towers Perrin Lorne Cohen (Vice Chair) - Mercer Wayne Berney – Aon Consulting, Inc. Mike Masuhara - Hewitt Normand Frenette - Buck Caroline Drouin – CN Jeff Kissack – Watson Wyatt Phil Rivard – The Segal Company Derek Gerard - Eckler Martin Cyrenne – Normandin Beaudry Paul Chang – Morneau Sobeco Nicolas Morissette – Aon Consulting, Inc. Andre Choquet – Thompson Actuarial, Ltd.

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Terms of Reference With respect to pension plan financial reporting, valuation of pension plans for any purpose, and benefit value determination other than those relating to actuarial evidence before the courts and those relating to credit-splitting as a result of marriage termination, the committee is to study, organize discussion of, propose revisions to, and, on request, advise members about standards of practice; and promote continuing education

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Priorities Respond to member queries and prepare Educational Notes where appropriate Provide annual guidance on group annuity purchase rates, for solvency valuations Organize annual pension seminar Prepare revisions to pension funding standards as indicated by recent CIA Task Forces and member discussion

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Group Annuity Purchase Rates PPFRC sought formal input from insurers this year PPFRC asked insurers to determine underlying interest rates for group annuities sold PPFRC did not obtain info on pricing methodologies (competitors keep it confidential) By reviewing actual annuity purchases, we are able to take account of the competitive nature of the industry

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Queries One of PPFRC’s responsibilities is to respond to the queries of actuaries (or non-actuaries) on how to apply pension actuarial standards PPFRC will respond directly to the person making the query If PPFRC believes that the issue has broad application, an Educational Note may also be prepared to inform the entire membership

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Queries Recent Queries Queries on new CV standard: Lump sum equivalents Disclosure requirements Calculation of “u”

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Queries New CV Standard – Lump Sum Equivalents Does the CV standard apply to lump sum equivalents of guaranteed payments (annuity certains)? In particular, the recalculation period? No. The CV standard applies only to pensions involving contingencies No specific CSOP applies

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Queries New CV Standard – Disclosure Requirements Section 5(d) requires disclosure of amount of transfer deficiency or the recommended schedule for payment Is this required when plan sponsor has a policy of paying the transfer deficiency with each transfer? Yes. Plan sponsor could change policy before full payment made

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Queries New CV Standard – Disclosure Requirements Under what circumstances do they apply? When you, as an actuary, are providing information directly to an individual, whether or not the individual is the participant, regarding a commuted value Plan sponsor cannot be required to follow CIA disclosure requirements Same applies when CVs included on annual statements Accessing of TPAs pension administration system does not necessarily imply that an actuary has communicated a CV

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Queries Determination of “u” Are CANSIM series (B14070, B14072, B14081) to be annualized to determine i 7, i L and r 7 ? How is “u” to be determined? Can the adjustment for indexed pensions (1 – 11/24 u) be ignored?

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Queries Determination of “u” CANSIM rates as published are compound semi-annual rates and must be annualized to produce i 7, i L and r 7 “u” can be determined in various ways but always by unrounded rates Use initial rates Use ultimate rates Use blended rates Determine two u’s, one for first 10 years, one for ultimate period Adjustment for frequency can be ignored

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Statement of Principles - Pension Funding Reports Statement of Principles issued March 9, 2005 Proposing major changes to actuarial standards for reports on the funding of pension plans Comments requested by May 31, 2005 The CIA could adopt new standards in 2006 Note: Quebec’s Regie wants new CIA Standards Main objectives Clarify roles of parties involved Improve transparency of results and risks

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Statement of Principles - Consultation CIA announcement CIA list discussions (general & pension) CIA Pension Seminar in Toronto on April 19 Presentation to certain local actuarial groups Vancouver/Calgary/Montreal clubs, Toronto IAN Presentation to certain external stakeholders BC public sector trustees, CAPSA, CLC Mailing to external stakeholders Regulators, administrators, labour, other professions

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Statement of Principles - Submissions Approximately 50 written submissions Approx actuaries ( cc or cosign) in large consulting firms in small consulting firms A few non-pension actuaries Approx external stakeholders ( cc) From regulators From plan administrators From labour organizations From other professions

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Statement of Principles - Highlights Role of actuary, funder, regulators (pension/tax) Objectives of security & stability of costs Going concern basis & wind-up basis (new cost) Funding policy to describe risks, PfADs, AtUMs Report unbiased measurement, PfADs, AtUMs Contributions based on funding policy & laws Comments on risks

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Statement of Principles – Contentious Issues 1.What is actuary’s responsibility? 2.What basis to require: windup / going-concern? 3.How to determine “unbiased”, PfADs, AtUMs? 4.Why include PfADs and cost for wind-up basis? 5.How is Financial Economics addressed?  Need to draft guidance along with Exposure Draft

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Issue 1. What is actuary’s responsibility? Should our role be as calculator/advisor/decider? Can actuary force “funder” to adopt funding policy? Can funding policy be set without actuary? Can valuation actuary have limited role? How should actuary comment on risks in report? What does our public want and expect? Includes regulators, sponsors, administrators, members Should actuary decide on PfAD? Should actuary vouch for security?

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Issue 2. What basis to require? Why require both objectives : security & stability? What is actually meant by stability over long term? Unchanging? Predictable? Systematic pattern? Budgeting? Is stability really promoted by going concern basis? Why not focus solely on security with windup basis? Why not let legislators and funders decide? CIA could just state how it’s done, not when/whether Maybe legislators want exemptions for certain sectors Maybe windup benefits are not even defined for some Maybe IPPs or SERPs should not be imposed a basis

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Issue 3. Determine unbiased, PfAD, AtUM? What do we mean by unbiased? Is it actuary’s best estimate? Or FE’s market value? How narrow should be permissible range? How should we reflect equity risk premium? How should we determine PfADs? How should we measure adverse deviations? To what extent should we cover deviations? Should this be dictated by funding policy? By law? Should we show value based on min. risk portfolio? What AtUMs would be appropriate? Smoothing?

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Issue 4. Why PfAD and Cost for Wind-up? PfADs and cost are new for windup/solvency Why should they be required? Does it depend on whether going concern basis is required? Does it depend on requirements of funding policy and laws? Note: Quebec’s Regie proposed solvency PfAD How should wind-up incremental cost be determined? Is it ever useful, or is going-concern cost close enough? If cost is based on projected liabilities, how do we project? Should we project one year or more? Who decides? Can cost be negative sometimes? What happens then?

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Issue 5. How is FE addressed? Is pure windup basis totally consistent with FE? Is FE relevant only for windup basis? Can going concern basis disregard FE? Budgeting may have no use for pure economic value

CIA Annual Meeting Session 5307 – An Update From PPFRC LOOKING BACK…focused on the future Statement of Principles – Next Steps Summer 2005 (or fall?) PPFRC memo to all CIA members to explain contentious issues Electronic discussion groups, if feasible, or submissions Discussions with external stakeholders Review of comments Fall 2005 (or winter?) Draft outline of guidance and Exposure Draft Review of comments Maybe in 2006 New Standards of Practice and guidance