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					        Future of Defined-Benefit Pension Plans

                         Panel Discussion:

               Nilesh Patel, Towers Perrin, Moderator
     Bob Baldwin, National Director, Canadian Labour Congress
    Brian Fitzgerald, President, Canadian Institute of Actuaries
Claude Lamoureux, President & CEO, Ontario Teachers’ Pension Plan

                               to the

                   CIA/CAS Joint Meeting and
                      CIA General Meeting

                  Wednesday, November 17, 2004
                            2:30 p.m.
                Fairmont The Queen Elizabeth Hotel
            900 Rene Levesque Boulevard West, Montreal
Why do we have a problem with
defined-benefit plans?

 Low returns 2001, 2002

 Low expected returns

 Low equity premium

 High returns in the 1990s

 Ownership of surplus – in many provinces

 No surplus policy

 10% maximum surplus rule

 Lack of portability
                                             2
Laws/Regulations


 Maximum surplus 10%

 Minimum surplus    0%

 Defined-benefit plans governed by a
  fixed-cost shared arrangement




                                        3
Laws/Regulations

Funding Ratio:          Contributions:


Between 110% and 115%   75% of current service cost



Between 115% and 120%   50% of current service cost



Between 120% and 125%   25% of current service cost



Greater than 125%       Nil


                                                  4
Pension Deal


Who owns deficit/surplus when:
 Employer pays 100% of cost
 Employees pay x% of pay, employer pays
  the rest
 Employees/Employer pay 50/50

Partnership between Employees/Employer:
 Fairness to have risk borne only by active
  employees
 Need to think outside the box

                                           5
Funding Policy

 Regulator should ask clear definition of who bears
  risk

 Each plan should have a surplus policy which
  defines:
    How actuarial assumptions are arrived at
    Minimum surplus
    When benefits can be improved
    What happens when there is a deficit

 If employees bear a percentage of risk, there
  should be a maximum contribution specified up
  front
                                                  6
Teachers’ Funding Policy


 Valuation interest rate:
    More liberal when in “deficit”
    i.e., increase in valuation rate of 0.5%



 Benefit increase:
    To the extent that a surplus of 7.5% exists




                                                   7
Switch to defined-contribution

Why?

 Cost

 Uncertainty of cost

 Aging of working population
    Risk as a percentage of payroll:
    1970: 10 active versus 1 retiree
    1990: 4 active versus 1 retiree
    2015: 1 active versus 1 retiree

 Little resistance by employees

                                        8
 Individual Investors

Investment in mutual funds


1984 to 2002:                                      S&P: Individuals:

Annual Return                                     12.2%       8.6%

After Inflation                                   9.3%        5.7%




 Source: The Wall Street Journal March 31, 2004
                                                                  9
 The Future
 Employers and employees should present common
  solution to the government

 In public sector: defined-benefit here to stay

 In private sector : trend to defined-contribution

 Trend could accelerate

 All need to recognize that defined-benefit is a
  long term proposition

 There should be a minimum retirement age

 Better governance of pension plans
                                                      10
Future of Defined-Benefit Pension Plans




                                    11

				
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