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2008 Annual Meeting ● Assemblée annuelle 2008 Québec 2008 Annual Meeting ● Assemblée annuelle 2008 Québec Canadian Institute of Actuaries Canadian Institute of Actuaries L’Institut canadien des actuaires L’Institut canadien des actuaires
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PD-29 – ERM-Not Just for Insurance Companies TR-29 – La GRE – Utile dans d'autres secteurs que les assurances June 20, 2008 8:45AM From Pension Risk Management to Enterprise Risk Management André Choquet, F.C.I.A., F.S.A. Chairperson ERM Applications Committee
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From Pension Risk Management to Enterprise Risk Management Setting the Stage Inside Pension Risk Management Moving Toward Enterprise Risk Management
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Why do organizations have pension plans? Both workforce and organizational life cycles drive decisions about pension plans ! Optimize human capital investment Attract and retain labour Ensure orderly transition of workforce
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Pension Risk Management involves multiple parties Financial Management Financial Management Portfolio Management Portfolio Management Benefit Delivery Benefit Delivery Benefit Policy Benefit Policy Compliance Source: Watson Wyatt Worldwide
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How large is the plan to shareholders’ equity? Pension Liability/Sharholders’ Equity Source: Watson Wyatt Worldwide
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The solvency ratio index rose to over 100% in middle of 2007 but is now 90.2% Source: Watson Wyatt Worldwide
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Achieving 100% solvency… Source: Watson Wyatt Worldwide
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…And remaining 100% Solvent With a new Bond Portfolio Using current portfolio with swaps and futures DB Buy-out, annuity purchase
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DB Buy out? Look to the UK Pension Corporation LLP –Telent plc transaction £398M (Sept 25 th 2007) Goldman Sachs –Rank transaction £700M (Feb 29 th 2008) Occupational Pensions Trust –expected to be 10% to 20% cheaper than the cost of a full buyout by an insurance company.
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Longevity risk difficult to hedge Source: Watson Wyatt Worldwide
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Not all mature plans are shifting away from equities Plan Maturity % Compared to Equity % Source: Watson Wyatt Worldwide
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Risk budgeting: A framework to allocate risk Asset/Liability Stochastic Simulation Setting risk budget Decision 3 $205$210$215$220$225$230$235 PV of Contributions (10 Years) Plus Solvency Deficit ($ Million) 50 th Percentile PV of Contributions (10 Years) Plus Solvency Deficit ($ Million ) VaR95 55% equity, LB, +5% intl, +5% HY and alt structure 55% equity, LB, +5% intl, +5% HY and current structure 55% equity, LB, +5% intl and current structure 55% equity, LB and current structure Policy (65% equity) and current structure $325 $330 $335 $340 $345 $350 $355 $360 Source: Watson Wyatt Worldwide
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Risk shifts from employer… Balanced Fund Present Value of Cumulative Net Expense ($M) - 2014 $0.0 $10.0 $20.0 $30.0 1.5% Non-Contrib DB1.5% Contrib DB w 3% EE Contrib1% DB + 3% DC6% DC 5th-25th percentile25th-50th50th-75th75th-95thMean Source: Watson Wyatt Worldwide
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…to members 0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0% 1.5% Non-Contrib DB1.5% Contrib DB w 3% EE Contrib 1% DB + 3% DC6% DC Plan Annual Plan Accrual as a Percentage of Pay 10%25%50%75%90%Mean Risk for Employee at Age 40 Source: Watson Wyatt Worldwide
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Another looming mismatch? Labour needs vs benefit design GDP (%) Labour Productivity (%) Required Labour Input (%) Labour Supply (%) Estimated Labour Shortages End of Period (Mil) 2006– 20152.71.51.20.71.0 2016– 20252.61.51.10.12.9 2026– 20352.41.50.90.24.4 2036– 20452.21.50.70.25.7 Living Standards Improvement = 1.85% Source: Watson Wyatt Worldwide
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Use qualitative methods to assess other risks Compliance Governance Benefit Delivery
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From Pension Risk Management to Enterprise Risk Management Measure Quantitative Risks Measure Qualitative Risks Is risk appropriate? Hedge or not? How much risk? ERM Monitor Implement PRM
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The ERM risk management process Understand Manage Measure “ Risk comes from not knowing what you are doing” Warren Buffet
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Websites and references PWC Saratoga Institute : 2006 Key Trends in Human capital Report http://www.pwc.com/extweb/service.nsf/docid/6238 31886DE2BC6A85256EBA0058B5C4 http://www.pwc.com/extweb/service.nsf/docid/6238 31886DE2BC6A85256EBA0058B5C4 Mortality Derivatives and the Option to Annuitize: M. Milevski and D. Promislow http://papers.ssrn.com/sol3/papers.cfm?abstract_id =289551 http://papers.ssrn.com/sol3/papers.cfm?abstract_id =289551 DC Risks –DC - a ticking time bomb? http://www.watsonwyatt.com/research/whitepapers/wpren der.asp?id=RM-UK-32 http://www.watsonwyatt.com/research/whitepapers/wpren der.asp?id=RM-UK-32 –SEI surveys on DC member investment behaviour. –http://www.seic.com/institutions/cda/en/documents/EN_R esearch_Report_1104.pdfhttp://www.seic.com/institutions/cda/en/documents/EN_R esearch_Report_1104.pdf –http://www.seic.com/institutions/cda/en/documents/DC_M embers_Suffer_Consequences_of_Overconfidence.pdfhttp://www.seic.com/institutions/cda/en/documents/DC_M embers_Suffer_Consequences_of_Overconfidence.pdf
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Websites and references E&Y Study of risk: “Risk Management in Canada: Moving Beyond Assessment” Canadian Treasurer: “Pension Management: a job for the CFO” Feb 2006 2008 WW Conference Board of Canada survey: http://www.watsonwyatt.com/canada- english/news/press.asp?ID=19022 WW study on labour shortages: http://www.watsonwyatt.com/canada- english/pubs/specialmemoranda/showarticle.asp ?ArticleID=16466&pdfURL=pdf/sm06- 05.pdf&articledate=9/25/2006&Component=Mem orandum http://www.watsonwyatt.com/canada- english/pubs/specialmemoranda/showarticle.asp ?ArticleID=16466&pdfURL=pdf/sm06- 05.pdf&articledate=9/25/2006&Component=Mem orandum On DB Buy-out in the UK http://www.pensioninsurancecorp.com/ http://www.pensioninsurancecorp.com/
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