Update from Pension Plan Financial Reporting Committee

1. Update from Pension Plan Financial Reporting Committee April 16, 2007 Toronto, Ontario

2. 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 Agenda

3. 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 OverviewCurrent PPFRC Membership

4. 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. PPFRC OverviewMandate

5. 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 Practicefor Pension Funding

6. 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 Practicefor Pension Funding

7. 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 Practicefor Pension Funding

8. 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 Practicefor Pension Funding

9. 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 Practicefor Pension Funding

10. 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 Practicefor Pension Funding

11. 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 Practicefor Pension Funding

12. 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 Practicefor Pension Funding

13. 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 Practicefor Pension Funding

14. 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 Practicefor Pension Funding

15. 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 Practicefor Pension Funding

16. 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 New Standards of Practicefor Pension Funding

17. 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

18. 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 Exposure Draft – Changes to Pension Specific Standards of Practice

19. 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

20. 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 NotesEvents Occurring After Calculation Date

21. 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 NotesEvents Occurring After Calculation Date

22. 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 NotesEvents Occurring After Calculation Date

23. 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 NotesExpense Assumptions

24. 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 NotesExpense Assumptions

25. 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 NotesExpense Assumptions

26. 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 NotesAsset Valuation Methods

27. 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 NotesAsset Valuation Methods

28. 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 NotesAsset Valuation Methods

29. 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 NotesAsset Valuation Methods

30. 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 NotesAsset Valuation Methods

31. 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 NotesAsset Valuation Methods

32. 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 NotesHypothetical Wind-up / Solvency Assumptions

33. 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 Educational NotesHypothetical Wind-up / Solvency Assumptions

34. Questions