Update From PPFRC

1. Update From PPFRC Normand Frenette Stephen Butterfield June 30, 2006

2. Changes to Pension Specific Standards of Practice CSOP translation of new commuted value standard Educational Notes Commuted values Assumptions for windup / solvency valuations Additional Notes in progress Queries / responses Development of new Standards of Practice for funding valuations Agenda

3. Reports to the Practice Standards Council (PSC) Although not mandated, membership is intended to be broadly distributed by: Region (West, Ontario, Quebec, Atlantic) Type of employment (large consulting, small consulting, plan sponsor, regulators, etc.) Employer (no more than two members) Time since Fellowship About the PPFR Committee

4. Stephen Butterfield (Chair) – Towers Perrin Michael Banks – Mercer Paul Chang – Morneau Sobeco André Choquet – Watson Wyatt Worldwide Martin Cyrenne – Normandin Beaudry Normand Frenette – ACS/Buck Consultants Derek Gerard – Eckler Gregory Heise – Leong & Associates Mario Marchand – Régie des rentes du Québec Nicolas Morissette – Aon Consulting, Inc. Phil Rivard – The Segal Company Current Membership

5. With respect to pension plan financial reporting, valuation of pension plans for any purpose, and benefit value determination other than those relating to actuarial evidence before the courts, the committee is to study, organize discussion of, propose revisions to, and, on request, advise members about standards of practice; and promote continuing education Terms of Reference

6. CHANGES TO PENSION SPECIFIC STANDARDS OF PRACTICE

7. Changes to the commuted value standard began under the prior due process and prior to adoption of the Consolidated Standards of Practice (CSOP) As such, the new commuted value standard was not originally written or adopted in CSOP format Also, the Standard of Practice for Reduced Life Expectancy had not been translated into CSOP format New Section 3800 is the CSOP translation of these new Standards of Practice Section 3800 is intended to apply identically to the prior Standards of Practice Part of the prior Standard of Practice has moved to an Educational Note Changes to Pension Specific Standards of Practice Section 3800 – Pension Commuted Values

8. 3810.02: “The standards in this Section 3800 apply to the determination of a lump sum payment from the pension plan in lieu of an immediate or deferred pension to which a plan member’s former spouse is entitled after a division of the member’s pension on marital breakdown.” Implies that IF a pension has been split due to marriage breakdown, THEN the commuted value of the pension payable to the former spouse must be determined in accordance with Section 3800 Does not imply that the value of a former spouse’s share in a member’s pension must be determined in accordance with Section 3800 Changes to Pension Specific Standards of Practice Section 3800 – Pension Commuted Values: Clarifications

9. EDUCATIONAL NOTES

10. Educational Notes are additions to our Standards of Practice Educational Notes are intended to provide guidance to actuaries Actuaries are not compelled to follow this guidance, but should be prepared to justify any non-compliance Educational NotesGeneral

11. Portions of new commuted value Standard of Practice that relate to examples or interpretation are no longer in the Standards of Practic, but are in an Educational Note: E.g., calculation of unisex mortality rates, indexing adjustments, frequency of payment, etc. Two most common questions relate to: The determination of “u” Implicit vs. Explicit indexing Educational NotesPension Commuted Values

12. Determination of “u” (adjustment for indexing which applies less frequently than monthly) Suggested adjustment is 1 – 11/24 x “u”, where “u” is the implied indexing rate Relevant comments: The formula is prefaced by “For example” There is a different value for “u” in the first 10 years and after 10 years We would not expect actuaries to use this level of exactness in calculations Actuaries should use judgement in establishing one rate for “u” The adjustment “decreases” commuted values A greater commuted value is permissible if agreed to by the plan administrator With the plan sponsor’s approval, the adjustment can be ignored Educational NotesPension Commuted Values

13. Implicit vs. Explicit indexing “Alternatively, the actuary could use the explicit approach using the non-indexed interest rates and the applicable index” Rounding of rates should be applied such that the two approaches use consistent net discount rates For example (fully indexed plan): Unrounded non-indexed rate = 4.10% (rounded to 4.00%) Unrounded indexed rate = 2.55% (rounded to 2.50%) Assuming implicit indexing, net discount rate is 2.50%. Assuming explicit indexing, assumed inflation rate is: (1.040 / 1.025) – 1 = 1.46% (do not round) Project benefits at 1.46% per year and discount at 4.00% per year Educational NotesPension Commuted Values

14. Guidance is similar to last year’s guidance Non-indexed annuity proxy: long-term Gov’t of Can bond yield plus 45 bps 4.51% at Dec 31, 2005 / Jan 1, 2006 Most plans should use a 4.5% rate Other highlights: Deferred annuities Differentiation by size Indexed benefits Substandard mortality Large plans (say > $1 Billion) Educational NotesAssumptions for Windup / Solvency Valuations

15. Unlikely to be able to purchase annuities Even as a series of purchases Many hypotheses put forward for methods of settling benefits Most probable is some form of immunization How would the cost of an immunized fund differ from an annuity purchase? Access to higher yielding assets? Exclude provision for insurer profit margin? Lower expense ratios? PPFRC does not have enough information to provide more detailed guidance Investment Committee has been approached to assist in answering some of these questions Intention is that more specific guidance will be developed next year Educational NotesAssumptions for Windup / Solvency Valuations: Large Plans

16. Educational Notes: Development of expense assumptions Post calculation events Interim actuarial opinions Asset smoothing techniques Standards of Practice: Required disclosures in actuarial reports on funding To be issued shortly Additional Documents in Progress

17. QUERIES

18. Disclosure – new CV standards If full payment is subject to additional contribution, communication must contain a clause to that effect Even if plan sponsor always makes such contribution Requirement to file an actuarial report Responsibility of Plan Administrator Standards do not require Actuary to file a report, even if it has been prepared Multi-employer plans – Valuation using best estimate assumptions Typically not permitted May be permissible if both parties have agreed that no PfADs should be included in valuation Queries

19. CV Standard – Unusual indexation formula Excess interest: determine expected levels of future indexing based on formula and calculate Valuation of designated plans Advice on funding should be based on a going concern valuation subject to ITA maximum And solvency basis, if required by legislation Asset smoothing using 6 data points No requirement to limit number of points in AAP Queries

20. Some queries on which we are working- Optional form bases CV indexing methodology Wind-up basis Disclosure of PfADs or lack thereof Solvency valuations Queries – In Progress

21. DEVELOPMENT OF NEW STANDARDS OF PRACTICE FOR PENSION PLAN FUNDING

22. PPFRC issued a Statement of Principles in March 2005 Proposed changes to the Standards of Practice for funding valuations of pension plans We received submissions from various sources Actuaries Plan sponsors / trustees Regulators Other professionals (accountants, lawyers, etc.) Issued subsequent discussion documents in the Fall of 2005 New Pension Funding Standards of PracticeWhere Have We Been?

23. We have digested the submissions received We have had considerable internal discussions / debates We have rethought the direction we are taking On some issues: we remain convinced that our suggested approach is correct On other issues: we are moving in other directions Currently working on Exposure Draft of actual revised Standards of Practice New Pension Funding Standards of PracticeWhere Have We Going?

24. We remain convinced that we have the roles and responsibilities appropriately defined Plan sponsors / administrators (Funders) Set the funding policy Set investment policy Pension regulators Define minimum funding requirements Set investment constraints Tax authorities Define maximum funding constraints Establish certain investment constraints New Pension Funding Standards of PracticeRoles and Responsibilities

25. Actuaries Measurement and reporting of liabilities and costs Disclosure of pertinent risks It is NOT the role of the actuary: to establish acceptable levels of risk to establish how a plan should be funded Risk cannot be eliminated and the actuary’s role is not to eliminate risk, but to report on it Public Policy dictates the acceptable levels of risk New Pension Funding Standards of PracticeRoles and Responsibilities

26. Nevertheless, we acknowledge many of the submissions received which advocated a greater role for the actuary In many cases, we envision the Standards of Practice encouraging certain practices, subject to: The Funder’s Funding Policy; and Regulatory considerations More details to follow New Pension Funding Standards of PracticeRoles and Responsibilities

27. We continue to believe that there are two primary objectives: Benefit security Promoted primarily through a windup valuation Stability of cost recognition / budgeting Promoted primarily through a going concern valuation But … We acknowledge that benefit security is all that really matters Short-term Long-term New Pension Funding Standards of PracticeObjectives of Pension Plan Funding

28. Requirement to disclose the financial position on a true windup basis Market value of assets Full provision for all benefits payable upon windup Limited exceptions E.g., public sector plans with no windup provisions Incremental windup cost must be reported Simplified windup gain/loss required New Pension Funding Standards of PracticeWindup Valuation – Almost Always Required

29. Must disclose windup position including provisions for adverse deviation Extensive work needed to determine manner and extent of margins Would likely depend on plan’s investment policy and other factors CIA has established a Task Force to develop a Research Paper Important to note that the PPFRC is not advocating the funding of a windup liability with margins, but disclosure of the variability of the windup liability New Pension Funding Standards of PracticeWindup Valuation with Margins – Almost Always Required

30. Much debate about the need for going concern valuations Valuable budgeting tool? Is windup all that is really needed? Current thinking is that a going concern valuation must be undertaken, unless not required by the funding policy Currently, all jurisdictions require going concern valuations Most RPPs would be required to undertake going concern valuations New Pension Funding Standards of PracticeGoing Concern Valuation – Usually Required

31. Currently, our Standards of Practice require that going concern valuations include provision for adverse deviation PPFRC envisages that the Funder would determine whether provisions for adverse deviation would be included However, if the goal of a going concern valuation is to promote “contribution stability”, then varying provisions for adverse deviation must be used PPFRC envisages our actuarial Standards “encouraging” the inclusion of provisions for adverse deviation New Pension Funding Standards of Practice Going Concern Valuation – Margins for Adverse Deviation

32. Our Standards of Practice would provide the Funder and the regulators with information to assist in developing funding requirements True windup position Windup position, including some form of margin Going concern valuation Likely including provision for adverse deviation It is not up to actuaries to say whether these amounts should be funded or how fast they should be funded New Pension Funding Standards of Practice Funding

33. PPFRC is close to reaching consensus on underlying principles Meeting for a full day in July to further review positions Next step in the process is an Exposure Draft PPFRC has initiated a first draft of this document Hope is that an Exposure Draft will be issued in the Fall Next Steps would depend on the submissions received to this Exposure Draft Your comments will continue to be considered and appreciated New Pension Funding Standards of Practice Next Steps

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