295f92c75f3f76f19d94c465f325f7d3.ppt
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Actuarial Evidence for Dummies and Pension Actuaries Presentation at the Annual General Meeting June 29, 2006 Ottawa, Ontario Presented by J. M. ("Mel") Norton, FCIA, FSA
CIA Annul Meeting Ÿ Assemblée annuelle de l’ICA I Revise the Title
Marriage Breakdown Valuations 101 for Pension Actuaries Presentation at the Annual General Meeting June 29, 2006 Ottawa, Ontario Presented by J. M. ("Mel") Norton, FCIA, FSA
What Law? Family Law Act is Provincial, based on residence Pension Law may be Federal, Provincial or a 'Statute Plan', based on Employee and Employer's location Income Tax Act
What Law? Primary focus is for Ontario residents, impacted by Ontario's Family Law Act For residents of other provinces, PENSION legislation/regulation may dictate principles of: –Valuation; and –Division
Family Law Act Each party to a dissolved marriage must: ØIdentify; and ØValue All assets (and liabilities) at: ØSeparation ØMarriage
Family Law Act Why? The party whose 'net worth' increased more during marriage must make an equalization payment of 50% of the difference to the other party.
Family Law Act Generally, we are talking only 'legal' marriages, not –Common-law relationships –Same-gender partners Arguably, 'equalization' does not apply to "other" relationships, although "spousal support" may still apply.
Family Law Act Pension is an Asset that must be valued Rules for Valuing pensions are established by "case law", which recognizes the Standards of the CIA for "marriage breakdown"
Family Law Act For valuation purposes, the 'Pension' Actuary's job should be limited to ensuring that the Plan's "Administrator" discloses, on a timely and accurate basis üthe plan member's data; and ürelevant plan terms
What data is required? For 'DC' schemes, generally the pension asset is valued as the 'account balance' – Market Value (accumulated contributions plus investment yields) {less a tax adjustment} Usually, independent values are needed at separation and at marriage Note: The Administrator does not address any applicable 'tax adjustment'
What data is required? - DC It is usually sufficient to use a Member Statement (Annual, Semi-Annual, Quarterly or monthly)…the shorter period, the better) for the period surrounding the Valuation Date (Date of Separation; and Date of Marriage)… or at least proximate to the valuation date
What data is required? (DB) Technically, there is no legal obligation on the Administrator of a Pension Plan to provide any information beyond the Annual Member Statement and a Summary Plan Description or "Booklet", as required by PBA To meet CIA Standards, any "Booklet" needs to describe the 'presumptive' plan (i. e. , it must principally provide a history of contractual or 'ad hoc' increases and any 'top-hat' provisions)
What data is required? (DB) The Statement immediately preceding or immediately following the separation date is usually sufficient Most responsible plans go beyond this minimum, and provide salary/service data to a specified separation date May be asked to partition accumulated contributions into "pre" and "post" components
What data is required? (DB) Caveats § OK to provide 'updated' "Best Average Earnings", but only if based on 'exact' service § DON'T § Provide termination or 'transfer' values § Calculate 'accrued benefits' (most Administrators do this "wrong" for FLA valuations) § Calculate 'service' where the 'separation date' is mid-month, if you would either 'truncate' service at prior month-end; or include 100% of month as service
What data is required? (DB) § More "DON'TS" § Calculate Final Average YMPE (unless it is based on 'exact' service) § Merely include periods of 'credited service' which occurred during marriage. . . ALL service is needed § Fail to reference any potential 'bridge' entitlements, notwithstanding that the member's entitlement may not yet have fully vested § Fail to provide accumulated contributions, split pre- and post-transition § Provide any "post-separation" adjustments
How data is used Marriage Breakdown (MB) Actuary is responsible to compute 'accrued benefits' at separation MB Actuary uses the Mortality/Interest Rates specified in the CIA Standards (which are now 'much' different than TV assumptions…and are never 'unisex' MB Actuary calculates the Present Value of accrued benefits based on a specified range of retirement dates {Earliest Unreduced <*> Normal} <*>Think of a 'full' grow-in calculation, disregarding interim termination
How data is used Other notable items: • SERPs, funded or otherwise, vested or contingent, require valuation • SMEPPs are valued as "DB", even though treated as DC for PA purposes • Generally, 'case law' has evolved such that enhanced early retirement provisions providing REDUCED pensions, even where providing substantial added value, are ignored in a FLA valuation • Since the value is essentially 'traded' against other assets, no postseparation adjustment or update is applied
How data is used • Value at separation requires a 'tax reduction' • Value at marriage (as per 'case law') is the value at separation, multiplied by a ratio of pre-marriage/total credited service • Note: This may seem inconsistent with DC valuations, and inconsistent with actuarial principles {"Best vs. Best"}
Who owns the Pension Asset? • A Pension Asset is owned only by the Plan MEMBER…like most other assets (the matrimonial home being a special exception that by law is jointly owned) • The 'theory' is that the Member retains the pension; and uses 'cash' to meet any equalization obligation • It is not unusual that the parties don't have other assets to affect 'equalization', and must therefore partition the pension at source • Pension law allows this, usually subject to a "50% earned during marriage" limitation
Separation after retirement • Pension is still an Asset, requiring valuation • Vested 'spousal survivor benefits' are an Asset of the non-member spouse • 50% rule still applies • Very conducive to an 'at source' division (must, upon receipt of a certified copy of a valid Court Order or Domestic Contract) [Very tax effective!]
Non-Pension Financial Assets May include: • Retiring Allowances (incl. sick leave 'buy-outs') • Stock options (incl. RSUs) • …. Generally, not being pension, these assets may need valuation for 'equalization' purposes, but data and Plan terms are 'separate items'
Advising the Pension Actuary's client 1. Review what is currently being done. Most current actions are "wrong" (to a greater or lesser extent), including particularly for almost every Plan being administered by the 'outsourcing' departments of "major actuarial" firms, and virtually all 'public sector' Plans 2. Put together a useful 'response package', addressing all info needed by a MB Actuary {or 'correct' current package!} 3. Respond in a timely manner (5 – 7 business days)
Advising the Pension Actuary's client Review policy about providing PENSION ENTITLEMENTS to a (former) spouse, divorced or otherwise {i. e. , implement the CIA's Deferred Settlement Method, as an option available to Members) Cost does increase slightly (2 cheques instead of 1; 2 records {linked} instead of 1)…but value to member increases exponentially