2008 General Meeting Assemblée générale 2008 Toronto, Ontario 2008 General Meeting Assemblée générale 2008 Toronto, Ontario Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires

Enterprise Risk Management for Pension Plans

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 What are the key risks? “Mismatch”? Yields? Inflation? Demographic? What about the impact on the sponsor’s financial statements?

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Corporate Objectives Key measurement metrics? Commitments to financial community? Assessment of subsidiaries?

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Strategic Business Planning Time horizons? Short-term and long-term goals? Key factors preventing achievement of goals?

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Risks to Goal Achievement Changes in economy and competitive landscape? Degree of co-movement or natural hedge with pension plan? –Price inflation –Interest rates –Economic strength –Currency movement

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 How does the pension plan relate to the business? Most important form of cost management? How will pension plan affect view of financial community? Issues for subsidiaries?

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Financial Objectives and Risk Management Ranges for key metrics? Pain thresholds? Degree of year to year volatility? Impact on rest of business? Non-economic factors?

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Case Study I – The Business Subsidiary Global lines of business Canada self-sufficient in cash Lines of business measured by “productivity” –Revenue to Employment Costs

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Case Study I – The Pension Plan Combination DB and DC DB closed for over 10 years Pensioner liabilities roughly 80% of total At time of study, roughly 100% solvent

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Case Study I – The Key Action Existing equity allocation reduced from 64% to 50% Produced more level expected pattern of expense, with less volatility Annuity purchase needs to wait for smaller settlement impact

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Case Study II – The Business UK insurance company De-mutualized in late 90’s Follows UK GAAP –Pension surplus/deficit on balance sheet Desire to present stability to financial community

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Case II – The Pension Plan Very large relative to employer –Fund roughly 10x annual payroll Smallish deficit –95% - 100% funded Very long liabilities, indexed to inflation

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Case Study II – The Key Action Swaps to hedge yield and inflation exposure in two phases Reduced equity exposure Annuity contract to hedge longevity exposure of pensioners

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Case Study II – Monitoring Monthly summary of surplus/deficit –Ongoing funding –Windup –Accounting Reconciliation of funding surplus/deficit

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Case Study II – Monitoring Operating assumption changes Obsolescence of liability benchmark Effect of incomplete hedge Effectiveness of hedge Effectiveness of physical assets

2008 General Meeting Assemblée générale General Meeting Assemblée générale 2008 Key Messages Integrate pension and sponsor financial management Each sponsor is unique Techniques for risk management are continually evolving