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Update from Pension Plan Financial
Reporting Committee
April 16, 2007
Toronto, Ontario
Agenda
• PPFRC Overview
• New Standards of Practice for Pension Funding
• Exposure Draft:
– Changes to Pension- Specific Standards of Practice
• Educational Notes
– Post-Calculation Date Events
– Expenses in Funding Valuations
– Asset Smoothing
– Wind-up / Solvency Guidance
PPFRC Overview
Current PPFRC Membership
• Stephen Butterfield (Chair) – Towers Perrin
• Phil Rivard (Vice Chair) – The Segal Company
• Michael Banks – Mercer Human Resource Consulting
• Paul Chang – Morneau Sobeco
• Andre Choquet – Watson Wyatt Worldwide
• Martin Cyrenne – Normandin Beaudry
• Derek Gerard – Eckler Ltd.
• Greg Heise – Leong & Associates
• Mario Marchard – Régie des Rentes du Québec
• Deborah McMillan – ACS/Buck Consultants
• Nicolas Morissette – Aon Consulting
• Marshall Posner – Watson Wyatt Worldwide
PPFRC Overview
Mandate
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.
New Standards of Practice
for Pension Funding
• Statement of Principles was issued in
March 2005
• Brief highlights included:
– Pure windup valuations would be required
– Going concern valuations would be required
• Report on best-estimate assumptions
• Report on Funder’s Funding Policy
– Required disclosure of the potential funding
risks, based on the Funding Policy
New Standards of Practice
for Pension Funding
• Feedback obtained from many sources
– Actuaries, Regulators, Plan Sponsors, Others
• Discussion document was prepared by
PPFRC released in October 2005
– Feedback was very limited
• However, feedback has been received
from many other sources
New Standards of Practice
for Pension Funding
• Examples of some of the concerns expressed:
– Ability to enforce / mandate a Funding Policy
– Appearance that actuaries are absolving themselves
of responsibility
• Actuaries are best qualified to determine appropriate
margins, not the Funder
– Concerns from public sector plans that have no
windup provisions
– Does a going concern valuation have any relevance?
New Standards of Practice
for Pension Funding
• PPFRC has spent much time discussing the
feedback
• A “Working Document” was published in March
• PPFRC believes that this Working Document
reflects a broad consensus
• This document is expected to form the basis for
proceeding with a formal Exposure Draft
• However, we continue to encourage feedback
– Deadline for submissions is May 15
New Standards of Practice
for Pension Funding
• Topics Addressed in Working Document:
– Goal of Funding
– Funding Policy
– Real Wind-up Valuation
– Wind-up Valuation Including Some Form of
Risk Analysis
– Going Concern Valuation
– Funding
New Standards of Practice
for Pension Funding
• Goal of Funding:
– “… is the systematic accumulation over time of
dedicated assets which, without recourse to the
funder’s assets, secure the plan’s promised benefits.”
• Funding Policy
– Not required, but encouraged
– If one exists, then the actuary will be guided by it
– If one does not exist, then the actuary would still be
able to proceed with the valuation
New Standards of Practice
for Pension Funding
• Real Wind-up Valuation
– Required disclosure of real wind-up position
• All benefit entitlements
• Market value of assets
• Incremental annual cost
• Simplified gain / loss
– Some limited exemptions are being
considered
• Wind-up position or likelihood of wind-up would not
be acceptable reasons for an exemption
New Standards of Practice
for Pension Funding
• Required disclosure of wind-up position on
defined adverse scenarios
– Affect on hypothetical wind-up liabilities
– Affect on incremental annual cost
• Sensitivity scenarios would vary by plan
• Expect to make use of the report from the “Task
Force on the Determination of Appropriate
Provisions for Adverse Deviations in
Hypothetical Wind-up and Solvency Valuations”
New Standards of Practice
for Pension Funding
• Going concern valuation would be required unless:
– Not required by legislation; and
– Funding Policy states that no going concern valuation is
required
• Selection of the assumptions would ultimately be the
responsibility of the actuary
– Guided by the Funding Policy
– Best-estimate assumptions would be permissible
• But only if stipulated in the Funding Policy
– Otherwise, assumptions would be required to contain
provision for adverse deviation
• Assets must be valued using market value
New Standards of Practice
for Pension Funding
• Special provisions for the selection of the going concern
Discount Rate
• Standards would stipulate that the Discount Rate be
determined in a reasonable manner taking into account
the investment policy of the plan
• The PPFRC would periodically prepare guidance for the
maximum and minimum recommended Discount Rates
• Guidance would likely define the maximum Discount
Rate as the rate obtained using a “building block
approach” and assuming specified risk premiums for
various asset classes
New Standards of Practice
for Pension Funding
• Funding
– It is the responsibility of the actuarial
profession to ensure appropriate disclosure of
financial information
– Contribution requirements would be
determined in accordance with funding policy
and regulatory requirements
– Asset smoothing would be permitted in
determining contribution requirements
New Standards of Practice
for Pension Funding
• Terminology
– We continue to search for better “terminology”
– Terms such as
• “Liabilities”
• “Surplus” / “Deficit”
• “Actuarial value of assets”
are problematic to many people and we believe the
profession would be well served if new terminologies
were developed
Exposure Draft – Changes to Pension
Specific Standards of Practice
• Exposure Draft issued in March
• Reflects Recommendations arising from
the Pension Review Project
• Deadline for comments is April 30
Exposure Draft – Changes to Pension
Specific Standards of Practice
• Exposure Draft reflects three changes:
– Justification of each individual assumption
– Reporting of wind-up position in all cases:
• Currently only required if the plan is in a wind-up
deficit position
– Explicit statement that there have been no
subsequent events
Educational Notes
• Educational notes are covered under Section
1220 of the Standards of Practice
– “The actuary should be familiar with relevant educational
notes and other designated educational material.”
– “the practice which the notes describe for a situation is not
necessarily the only accepted practice for that situation
and is not necessarily accepted actuarial practice for a
different situation.”
– “educational notes are intended to illustrate the application
(but not necessarily the only application) of the standards,
so there should be no conflict between them.”
Educational Notes
Events Occurring After Calculation Date
• Issued in January 2007
• Provides guidance on preparing what are
typically referred to as “interim actuarial
opinions”
• Key Issues
– Our Standards do not contemplate anything
other than a full actuarial opinion
– Approaches being used in practice vary
considerably
Educational Notes
Events Occurring After Calculation Date
• Where an actuarial opinion on the financial
position of a pension plan is being provided,
whether it is a “regular” or “interim” actuarial
opinion, the actuarial opinion must state:
– The data are sufficient and reliable;
– The assumptions are, in aggregate,
appropriate; and
– The methods are appropriate
as at the Calculation Date
Educational Notes
Events Occurring After Calculation Date
• Therefore, it is NOT acceptable to prepare an
opinion about financial position where the
assets are valued at one date and the
liabilities are valued at another date
• Three typical approaches:
– Reflect event in original report
– Revalue the entire plan at a subsequent date
– Prepare an opinion on the impact of the event only
• Cannot opine about the funded status of the entire plan at the
event date
Educational Notes
Expense Assumptions
• Issued in January 2007
• Developed on the recommendation of the
Pension Review Project
– Observed many instances with seemingly
inadequate provision for expenses
– Observed many instances of inadequate
disclosure of the provision for expenses
• i.e., “discount rate is net of all expenses”
Educational Notes
Expense Assumptions
• Purposes
– Remind members of need to include adequate
provision for expenses in funding valuations
– Provide members with advice on best practices
• Estimating future expenses that may be paid from
the fund
• How to include appropriate provision for these
expected expenses
• Improve disclosure of allowances for future
expenses
Educational Notes
Expense Assumptions
• For a going concern valuation, the fundamental
actuarial equation is:
PVF(Benefits + Expenses)
=
Accrued Actuarial Liability
+
PVF (Normal Costs)
• Therefore, provision for expenses may be included
in either the accrued actuarial liability or in the future
normal costs (or a combination of both)
Educational Notes
Asset Valuation Methods
• Expect to be issued shortly
• Purposes
– Highlight the objectives of asset smoothing
– List the desirable characteristics of an asset smoothing
method
– Address changes to asset smoothing methods
– Improve disclosure
• SoP drafted in relation to going concern valuations
– From an actuarial perspective, asset smoothing has no
application in wind-up / hypothetical wind-up valuations
Educational Notes
Asset Valuation Methods
• Objectives of asset smoothing
– Smoothing results in moderation of volatility in
financial position of a pension plan, however the
true objective is generally to:
• Reduce volatility in funding contributions (going concern and
solvency)
• Reduce volatility in net benefit cost (accounting)
– Does not provide a “more rationale” measurement
of asset value
Educational Notes
Asset Valuation Methods
• Desirable characteristics of smoothing
method
– Achieves objectives
– Tracks to market value
– Reasonable and logical relationship to market value
– Free from bias
• Conservative bias acceptable if disclosed
– No undue influence on investment transactions
– Consistent with economic cycles
Educational Notes
Asset Valuation Methods
• Changing asset smoothing methods
– Revisions acceptable where appropriate
• Best practice is to disclose justification for change
– Changes to asset smoothing method,
especially repeated changes over a short
period, may instill a degree of bias
• For example, a combination of asset smoothing
approaches over time designed to minimize
funding contribution requirements is not a bona
fide asset smoothing method
Educational Notes
Asset Valuation Methods
• Disclosure best practices
– Detailed calculation of smoothed asset value
– Description of objective
– Rationale for method selected
– Type and degree of any bias inherent in method
– Rationale for any change in method
• Consider reporting financial position using
market values but determine contribution
requirements using smoothed values
Educational Notes
Asset Valuation Methods
• Solvency valuations
– Permissible approaches to solvency valuations
deviate significantly from Accepted Actuarial
Practice (“AAP”) for hypothetical wind-ups in certain
jurisdictions
– SoP 3750.02 permits use of asset smoothing
method where:
• Required by legislation, or
• Permitted by legislation and called for under the terms of the
engagement
– Valuations must comply with both AAP and
legislated requirements
Educational Notes
Hypothetical Wind-up / Solvency Assumptions
• Similar to previous years’ guidance, with two key
differences:
– Decreased spread for smaller annuities
• (i.e., 45 bps for >$15 Million grading to 0 bps)
– Decreased spread for deferred annuities
• (i.e., was 20 bps, is now 0 bps)
• Changed guidance was not only supported by the
data, but also through discussions with insurance
company representatives
• Investment Committee is in the midst of a project to
review settlement of large plans
Educational Notes
Hypothetical Wind-up / Solvency Assumptions
• Reports issued prior to guidance
– SoP 1820.33 states that a report may be invalidated if
additional information becomes available about the
entity as that entity was at the calculation date
– SoP 1520.07 provides examples of events
– SoP 1820.04 states that an actuary should withdraw a
report if information comes to hand after the report
date which invalidates the report
– Practitioners should consider these sections of our
Standards of Practice in determining how to proceed
Questions
