1. Pension De-Risking Robert Marchessault, FCIA, FSA
Director Pension & actuarial services
May 16, 2018

2. 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

3. 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%

4. 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

5. Longevity risk

6. 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

7. 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

8. 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

9. 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)

10. Interest rate risk

11. Interest rate risk
Projected DB solvency liability upon DB closure for new employee in 2004

12. Interest rate risk
Actual DB solvency liability upon DB closure for new employee in 2004 solvency DB liability since plan closure 2004

13. Interest rate risk
Actual DB solvency liability upon DB closure for new employee in 2004 solvency liability since plan closure 2004

14. 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

15. 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