Canadian Institute of Actuaries L Institut canadien des actuaires

Canadian Institute of Actuaries L’Institut canadien des actuaires • 2007 Annual Meeting ● Assemblée annuelle 2007 • Vancouver

• Canadian Institute of Actuaries • Vancouver, BC • June 28, 2007 PD-2 Current Developments in Multi-Employer Pension Plans Harry Satanove, FCIA

2007 Annual Meeting Assemblée annuelle 2007 Negotiated Cost Pension Plans The “Pension Deal” Contributions Collective agreement Fund Past service benefits Inflation adjustments Current service benefits Early retirement benefits Survivor’s benefits Satanove & Flood Consulting Ltd. Trustees 2

2007 Annual Meeting Assemblée annuelle 2007 Negotiated Cost Pension Plans The Pension Deal • Target benefit plan or defined benefit plan? • Does the solution to the solvency problem depend on the nature of the deal? Satanove & Flood Consulting Ltd. 3

2007 Annual Meeting Assemblée annuelle 2007 Consequences of the Solvency Rules Target Benefit Plan • Current service: the price of each unit of benefit increases as interest rates go down • Past service: if accumulated assets are no longer sufficient, benefits may have to be reduced Satanove & Flood Consulting Ltd. 4

2007 Annual Meeting Assemblée annuelle 2007 Consequences of the Solvency Rules – Defined Benefit Plan • Increase contributions at the next collective agreement • Revise existing collective agreements • Strip out ancillary benefits • Reduce benefits as a last resort Satanove & Flood Consulting Ltd. 5

2007 Annual Meeting Assemblée annuelle 2007 So why do the policy makers like the solvency rules? • • Members appear to be protected Prescribed valuation basis Minimize abuses Solves the problem of employer withdrawal Satanove & Flood Consulting Ltd. 6

2007 Annual Meeting Assemblée annuelle 2007 What are governments doing? • Temporary measures – Federal – Quebec (up to the end of 2009) – Alberta • Permanent measures – Quebec (from 2010) • Studying the issue – B. C. – Alberta – Ontario Satanove & Flood Consulting Ltd. 7

2007 Annual Meeting Assemblée annuelle 2007 Temporary measures Quebec (2005) • Rules expire in December 2009 • Applicable to the first valuation after December 30, 2004 Satanove & Flood Consulting Ltd. 8

2007 Annual Meeting Assemblée annuelle 2007 Temporary measures Quebec (2005) • Combine solvency deficiencies • Extend the solvency deficiency payment period to 10 years from 5 years with buy-in from members • Allow employers in MEPs to use letter of credit relief measures through apportioning • Benefit improvements for the next 5 years must be funded on the greater of the values on a solvency and funding bases Satanove & Flood Consulting Ltd. 9

2007 Annual Meeting Assemblée annuelle 2007 Temporary measures Federal (2006) • Application in respect of an actuarial valuation report filed after December 30, 2005, but not beyond 2007 • Substantial information to plan members required Satanove & Flood Consulting Ltd. 10

2007 Annual Meeting Assemblée annuelle 2007 Temporary measures Federal (2006) • Consolidate previously solvency payment schedules, and amortize the consolidated solvency deficiency over 5 years • Extend the solvency funding period from 5 years to 10 years provided no more than 1/3 of active members and 1/3 of non-active members and beneficiaries object • No plan improvements allowed in the first 5 years unless the improvements are prefunded to avoid worsening the solvency deficiency Satanove & Flood Consulting Ltd. 11

2007 Annual Meeting Assemblée annuelle 2007 Temporary measures Alberta (2006) • MEPs may apply to the Superintendent for permission to suspend the solvency deficiency payments for a period no longer than three years • Maximum one application • Requires a valuation report with a valuation date not earlier than December 31, 2005 Satanove & Flood Consulting Ltd. 12

2007 Annual Meeting Assemblée annuelle 2007 Temporary measures Alberta (2006) • Superintendent consent subject to: – No asset smoothing – Going concern unfunded liabilities funded over no more than 10 years – No benefit improvements allowed while there is a solvency deficiency • After the suspension, revert to the old rules, but the entire solvency deficiency may be funded over 5 years Satanove & Flood Consulting Ltd. 13

2007 Annual Meeting Assemblée annuelle 2007 Permanent Measures Quebec (2006) • • Effective January 1, 2010 Solvency focus is maintained Annual actuarial valuations required Substantial information required to be sent to the members Satanove & Flood Consulting Ltd. 14

2007 Annual Meeting Assemblée annuelle 2007 Permanent Measures Quebec (2006) • Must be funded on a solvency basis plus Provision for Adverse Deviation that depends on investment policy • Solvency deficiency amortization period – 5 years • Pf. AD to be funded from experience gains • Contribution holidays not allowed as long as the Pf. AD is not full • Plan improvements must be amortized over no more than 5 years, even if solvent, until the Pf. AD is fully funded • If a plan improvement would otherwise cause the solvency ratio to fall below 90%, the difference between 90% and the solvency ratio must be funded immediately Satanove & Flood Consulting Ltd. 15

2007 Annual Meeting Assemblée annuelle 2007 Studying the Issue • B. C. – Announced a review in February 2007 – Review limited specifically to solvency – Staff to consult with “a range of experts, stakeholders and other jurisdictions over the next few months” – Working closely with Alberta • Ontario – Expert Commission • Alberta Satanove & Flood Consulting Ltd. 16

2007 Annual Meeting Assemblée annuelle 2007 Are there alternatives to the current solvency rules? Satanove & Flood Consulting Ltd. 17

2007 Annual Meeting Assemblée annuelle 2007 What About Risk-Based Rules? • Keep the current solvency valuation – But allow the solvency deficiency amortization period to vary according to the risk of the pension plan – Will require the development of risk factors and risk scores Satanove & Flood Consulting Ltd. 18

2007 Annual Meeting Assemblée annuelle 2007 Risk Factors • • • Going concern surplus / deficit Contribution margin Changes in hours / contributions Number of employers in plan Investment policy Satanove & Flood Consulting Ltd. 19

Challenges of a Risk-Based Approach • Administratively complex – Potentially subjective – Regulators already stretched for resources Satanove & Flood Consulting Ltd. 20