Current developments in Multi-Employer Pension Plans

1. Current developments in Multi-Employer Pension Plans CIA 2006 Pension Review Project Peter F. Morse, FCIA June 28, 2007

2. History • Previous Pension Review Project report issued in August 2005 • Board approved Second Review Project on June 27, 2005 (to focus on MEPPs) • Task Force appointed by Board January 27 and June 14, 2006 (Morse, Kutney, Hunter) • General announcement describing project sent to members June 12, 2006

3. Project Process • List of Multi-employer Pension Plans obtained from all Canadian regulators (190 plans in total) • Regulators provided Plan name, registration number, date of latest valuation, actuarial firm, and name of signing actuary for each plan • Subset of 60 Plans selected for study by a quasi-random process

4. Project Process (cont’d) • CIA President met with representatives of Actuarial firms active in MEPP practice and Independent Actuaries Network in July 2006 to explain project and obtain support • Request for reports sent to authors by CIA Secretariat in August, 2006 • Virtually all reports received by Secretariat by end of September, 2006

5. Selection of Plans for Review • Roughly proportionate distribution by jurisdiction • At least one report from each firm providing actuarial services to MEPPs • No more than 2 reports from any actuary (although multiple signatures blurred this criterion)

6. Jurisdiction Breakdown JurisdictionTotal MEPPsPlans Chosen • BC 33 12 • Alberta 20 7 • Saskatchewan 7 0 • Manitoba 2 0 • Ontario 82 24 • Federal 24 9 • Quebec 12 5 • New Brunswick 1 0 • Nova Scotia 9 3

7. Valuation Date Breakdown Valuation DateNumber of Reports • Jan 1/02 – Jun 30/03 6 • Jul 1/03 – Jun 30/04 16 • Jul 1/04 – Jun 30/05 36 • Jul 1/05 – Jan 1/06 2

8. Reviewers • Reviewers recruited during July, 2006 • Retired or substantially retired Pension Actuaries (some continue to do legal evidence/marriage breakdown work) • Several applicants were declined due to active employment status • Did not review former colleagues’ work or more than two reports from any firm

9. Doug Andrews Bill Cuthbert Paul Duxbury* John McKellar Mel Norton Cecil Van Bolhuis David Brown René Delsanne Chris Kutney* Peter Morse Bill Solomon* Reviewers (cont’d) * Also participated as Reviewer in 2005 Review Project

10. Confidentiality • All reports were sent by Authors to CIA Secretariat, which handled all distribution to/from Reviewers and Task Force • Actively employed TF member (Cameron Hunter) was not aware of plans selected for study or the Names/Authors/Actuarial Firms for any reports

11. Confidentiality (cont’d) • Valuation reports were seen only by Reviewers and Task Force Chair (Peter Morse) • Random numbering system used to identify reports and plans in Task Force discussions

12. Regulator Concerns • Input sought from regulators re their concerns with CIA members’ valuation reports, including specific concerns with MEPP valuation reports • These concerns were reflected in developing the ‘Reviewer Checklist’

13. Regulator Concerns (cont’d) • Actuaries trying to justify ‘best estimate’ assumptions – conservatism is being removed • Lack of consistency between asset mix and expected investment return • Use of overly aggressive investment return assumptions • Analysis of gain/loss not in enough detail to permit assessment of assumptions

14. Regulator Concerns (cont’d) • Trends in losses due to mortality and retirement experience without assumption changes • Inadequate justification for assumptions and methods and changes to these items • Inadequate provision for admin expenses • Use of unreasonable asset valuation methods and large deviations from MV

15. Regulator Concerns (cont’d) • Summary of plan provisions not always accurate • Selection of valuation date can be affected by external indices (e.g. Dec 31 vs Jan 1 and bond yields) • Use of accrued benefit cost method for mature plans or in declining industries • Optimistic assumptions re hours of work or future contributions

16. Reviewer’s Checklist Each review required the provision by Reviewer of • 11 pieces of basic information (plan name, author, valuation date, plan type, reviewers etc.), • responses to 163 questions (most had available responses of Yes, No or N/A), • 12 numerical items relating to data and valuation results, and • 17 additional specifics concerning valuation methods and assumptions.

17. Reviewer’s Checklist (cont’d) • First Reviewer completed the Checklist, with additional comments where appropriate • Valuation Report and Checklist were then returned to Secretariat who forwarded it to Second Reviewer • Second Reviewer then reviewed responses of First Reviewer, indicating agreement or not and reasons therefor, including page references • Report and Checklist were then returned to Secretariat, and Checklist was forwarded to TF members

18. Reviewer’s Checklist (cont’d) • Where there were material disagreements between Reviewers, they were forwarded by the Secretariat to Task Force Chair for resolution • Ultimately, all reports were forwarded to TF Chair to assist in completion of the TF report

19. Findings (general comments) • Reporting period overlapped with that of the previous CIA Review Project • Many reports reviewed had been issued prior to issuance of Prior Project report • Thus many of the shortcomings identified in that report surfaced again • CIA has issued (2007) Research Paper on Contents of Pension Actuarial Reports which should address many shortcomings

20. Findings (general comments) • Section 3600.05 of SOP provides: ”The report should be detailed enough to enable another actuary to examine the reasonableness of the valuation.” This is not a new requirement. • 1981 Valuation Recommendations (Sec. 7.01) provided: “The report on a valuation . . . should contain information which will be sufficient to permit another actuary to make an objective appraisal of the valuation.” • A significant number of reports fell short of this goal in one or more areas.

21. Findings • 12 of 60 reports identified the intended users only indirectly • Very few authors made an explicit statement if there were no subsequent events (SOP revision has been drafted to require such a statement) • 13 reports did not include a reconciliation of plan membership. This restricts ability of another actuary to make informed judgment of report for purpose of SOP 3600.05 • 8 reports provided no detail re tests on data

22. Findings (cont’d) • Most data summaries included no info on gender. Actuary could include statement that all members are of same gender if this is the case. • Four reports did not have a reconciliation of plan assets, while 22 did not provide any detail concerning the investment mix of assets. Both are critical for purposes of SOP 3600.05 (again) • Half the reports did not identify check procedures used to verify asset information • Only rarely did report identify procedures used to verify plan provisions

23. Findings (cont’d) • All actuarial opinions contained the required disclosure statements • Presentation of results was very good, with breakdown of liabilities for membership classes • Only one report did not include reconciliation of results, but meaningful discussion of gain/loss items was found in less than 50% of reports

24. Findings (cont’d) • Two reports contained no description or numerical illustration of asset smoothing method (‘we used a smoothed value of assets and it is $xxx’) • Demonstration of adequacy of negotiated contribution rate was provided in 75% of reports

25. Findings (cont’d) • Benefit reductions were recommended in 8 of the 11 valuations where the negotiated contribution rate was insufficient to support current benefit level • Solvency position of one plan was reported in a separate report, at the request of the plan trustees

26. Solvency Valuations • 49 of 60 reports used market value for solvency assets, while 11 used a smoothed value (>MV in most cases) • 51 reports used market discount rates, while 9 used ‘smoothed’ discount rates • 36 plans showed a solvency deficit, while 26 of these plans also had a current solvency deficiency

27. Asset Valuation Methods • Market value used in 20 reports • Smoothing method used in 39 reports • Combination of BV and MV in 1 report • Market value disclosed in all reports • Method changed in 12 reports, but rationale provided in only 3 reports, and financial effect shown in only 8 reports

28. Asset Valuation Methods (cont’d)

29. Actuarial Cost Methods

30. Actuarial Cost Methods • Use of attained age or aggregate method may better assist in assessment of whether benefit levels can be supported in the longer term • Since TF reviewed only filed reports, we were unable to determine how frequently alternative methods were used for trustee discussions • There appears to be need for research into suitability of various actuarial cost methods to assess long-term financial stability of MEPPs

31. Discount Rates – Going Concern • Critical assumption for the valuation • Specific assumption re some plan expenses in 37 reports – various approaches • Indirect allowance in discount rate (“net of investment/all expenses”) • TF estimated gross discount rate actually assumed by reference to asset reconciliation

32. Discount Rates – Going Concern Actual Rate Est. Gross Rate • Less than 6% 7 plans 5 • 6% - 6.5% 23 7 • 6.5% - 7% 16 22 • 7% - 7.5% 14 24 • More than 7.5% 0 2 • Average Rate 6.35% 6.89%

33. Demographic Assumptions • Mortality – 1983 GAM in 27 reports, GAM 94 or UP-94 in 30 reports, RP-2000 in 2 reports, but only 13 reports justified mortality assumption • Early ret assumption in 45 reports, but justification in only 1/3 of them • Justification for termination assumption in less than 1/4 of reports • Disability assumption in 23 reports, and most were justified

34. Hours Worked/Contributions • Another important assumption • 34 reports included estimate of contrib hours • 13 anticipated a decrease, 7 no change and 14 anticipated an increase (7 of more than 10%) • 36 reports included estimate of contributions • 14 anticipated a decrease, 1 no change and 21 anticipated an increase (9 of more than 10%)

35. Provision for Adverse Deviation • An explicit description or quantification of a PfAD was provided in only 7 of the 60 reports • Implicit PfAD may have been used in others (e.g. more conservative discount rate) but impossible to assess or quantify

36. REGULATOR CONCERNS Actuaries removing conservatism from basis Lack of consistency between asset mix and assumed discount rate Use of overly aggressive investment return assumption T F OBSERVATIONS TF found few references to Best Estimate assumptions Few reports discussed this relationship and 22 omitted asset mix. But, narrow range of assumed discount rates TF found some evidence, especially where implicit investment return used Review of Regulator Concerns

37. REGULATOR CONCERNS Gain/loss analysis not in sufficient detail to permit assessment of assumptions Trends of losses in mortality and retirement ignored Inadequate justification of assumptions and changes Inadequate provision for admin expenses (funding) T F OBSERVATIONS Meaningful analysis of G/L in only 50% of reports, used to justify assumps. in 25% TF had only one report per plan, difficult to comment TF generally found insufficient justification Some instances observed. Educ. Note issued in 2007 Review of Regulator Concerns

38. REGULATOR CONCERNS Unreasonable asset val’n methods used, excessive deviation from MV noted Summary of plan provisions is not always accurate Selection of valdate may be affected by external indices Optimistic assumps. re future contributory hours T F OBSERVATIONS TF did not find a serious problem. 46 plans used MV or less and 12 others + <5% TF had no access to plan. Clear summaries in reports Only 5 of 60 reports had a date change, 3 by one day Justification in 50% of reports. No TF access to working papers Review of Regulator Concerns

39. REGULATOR CONCERNS Use of Accrued Benefit CM for mature plans and those in declining industries Understated incidence of retirement where industry patterns seem established Large variation in level of assumed plan termination expenses in solvency vals T F OBSERVATIONS Discussion of issue contained in TF report TF unable to assess this concern, without historical data and valuation reports Addressed in detail in the report, and discussed below Review of Regulator Concerns

40. Windup Expenses in Solvency Valuations Very wide range of assumed expenses As % of AssetsAs $ per member • Maximum 4.874% $1,145 • Median 0.320% $ 127 • Mean 0.599% $ 186 • Minimum 0.024% $ 16

41. Recommendations • Many of the TF concerns have already been addressed in previous Review Project report • Two Educational Notes and a Research Paper have subsequently been issued • Educational Note should be developed re the insufficiency of negotiated contributions and the resulting need for corrective action. Same EN could address hours worked/expected contributions assumption

42. Recommendations (cont’d) • All MEPP reports should contain statement as to whether negotiated contributions are, or are not, sufficient to support current benefit levels • SOP should include a requirement that actuarial reports disclose the discount rate used to amortize a solvency deficiency • Research should be undertaken to address suitability of ACMs for assessing long-term financial stability of a MEPP

43. Future Reviews • TF recommends that future CIA reviews of valuation reports be conducted only after all Educational Notes have been developed and SOP changes have been approved • Review uses a lot of volunteer resources and time. If reviews are to occur frequently, CIA should consider paid staff to conduct reviews and appropriate infrastructure • Appropriate timing for next Review is 3 – 5 years hence

44. Next Steps • Board release of TF report to members • TF to follow up with some authors re possible non-compliances • Secretariat to arrange for ultimate destruction of submitted reports, completed checklists and correspondence

45. Thanks To • Canadian Pension Regulators for sharing their internal checklists and providing plan universe • Mr. Davin Hall for coordinating collection of information on behalf of CAPSA • Report authors and their employers for their cooperation • Reviewers for their diligence, thoroughness and promptness in completing the reviews • Ms. Angelita Guevara and other Secretariat staff for their coordination efforts and help with logistics • Normand Gendron and Daniel Lapointe for their assistance and guidance throughout the project