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Published byLindsey Reeves Modified over 6 years ago
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Pension De-Risking Robert Marchessault, FCIA, FSA
Director Pension & actuarial services May 16, 2018
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Canada’s largest communications company
Customer connections 22M+ Annual revenue $22B+ Enterprise value ~$78B Nationwide team 50,000 One of the most widely held stocks in Canada
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Canada’s largest private sector pension fund
Retiree and deferred 42,500 Active DB members 12,000 Solvency discount rate ~3.1% (Dec 31, 2017 prelim) Longevity swap notional: $5B Going concern status ~110%
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Bell’s de-risking context and history
STARTING POINT Plan design changes Bond portfolio changes Funding strategy adjustments De-risking strategy sophistication De-risking & “Lock-down” strategies END POINT: Target Risk Level Bell Initiatives Closed DB plans to new entrants Added DC component to existing DB plans for all new hires Align provisions on acquisitions Increased bond portfolio duration over several years Increased allocation: Fixed income grown from 40% of assets in 2008 to 70% of assets in 2017 Diversify to find spread Assess if advance contribution is desired Establish guidelines on deficit funding decision process Daily tracking of financial situation Split portfolio by Return Generating (RGP) and Low Risk (LRP) to better align investment strategy with liability Structure to progressively shift to ultimate asset mix with acceptable risk level (glide path) Risk transfer (longevity swap) Fixed income overlay strategy Keep abreast of emerging initiatives and legislation changes Regularly reassess to adapt to constantly changing environment and evolution of the plans
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Longevity risk
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Risks remain in the “end game” - longevity risk
Observations Life expectancy beyond age 65 has been increasing on an absolute basis and at an increasing rate Current life expectancy beyond age 65 is ~19 years (or 84 years at death) During the 80’s, life expectancy increased by ~1.0 years During the 90’s, life expectancy increased by ~1.5 years From 2002 to 2012, life expectancy increased by ~2 years
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First longevity insurance in North America
As per the pension plan provisions and not impacted by the longevity insurance Bell Pension Plan Variable Cash Flow = Unindexed Pension Payments Pension Payments Longevity Insurance Contract Partially re-insured with two global re-insurers Fixed Cash Flow = agreed monthly schedule ~17,000 Bell Retirees Sun Life Assurance Company
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Swap cash flows - example
$1M swap Pension Plan payments are fixed and known from day 1 Present value of Fixed Pension Plan payments is $1M under all scenarios Net present value of exchanged cash flows is minimal under expected longevity
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Swap cash flows - example
Pension Plan payments are fixed and known from day 1 - unchanged Present value of Fixed Pension Plan payments is $1M under all scenarios Net present value of exchanged cash flows is $70K payable form insurance company to pension plan Favourable MTM on swap offsets loss from improved longevity in pension plan (with basis risk)
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Interest rate risk
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Interest rate risk Projected DB solvency liability upon DB closure for new employee in 2004
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Interest rate risk Actual DB solvency liability upon DB closure for new employee in 2004 solvency DB liability since plan closure 2004
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Interest rate risk Actual DB solvency liability upon DB closure for new employee in 2004 solvency liability since plan closure 2004
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Interest rate protection with Overlay
Latest refinement of pension de-risking strategy to protect funded position Fixed income or “bond” overlays can reduce interest rate risk independent of allocation to growth investments in the portfolio With borrowing cost typically lower than the fixed income portfolio yield, the strategy is expected to generate positive carry Involves leverage, therefore, total asset portfolio returns are more volatile (i.e. there is a normal risk / return trade-off from using leverage) However, in the context of de-risking strategy the solvency liability and current portfolio position, it has the attributes of being solvency risk reducing and return generating Current portfolio Borrowing “Equities” “Matching assets” Overlay The use of leverage through fixed income overlays allows the plan to benefit from equity exposure while reducing solvency risk from the interest coverage gap
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Stochastic testing of results
Solvency ratio improvement with overlay vs current mix (5 year projection) The results of 1000 stochastic scenarios examined in three groups based on degree of interest rate change When the observation falls above the horizontal line, the overlay strategy has outperformed the current mix When the observation falls to the right of the vertical line, the plan is over 100% funded The scenarios where the overlay strategy has underperformed while the plan is under-funded (i.e. where the strategy has added to funding requirements) are in the bottom left, highlighted, quadrant Declining to modestly rising rates (<175bps) Significantly rising rates (175bps - 475bps) Extremely rising rates (>475bps) Overlay yields superior expected returns in most interest rate scenarios
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