2008 Annual Meeting ● Assemblée annuelle 2008 Québec

1. L’actuariat dans un marché mondial Actuarial Practice in a Global Market 2008 Annual Meeting ●Assemblée annuelle 2008 Québec Yves Guérard

2. Because of Napoléon! • Napoléon brought the Civil Code to Holland • Holland brought the Civil Code to Indonesia • Indonesia asked the Harvard International Institute for Development (HIID) for an actuary combining North American expertise also familiar with civil code environment • Someone from Harvard I had met at the MOF in Ottawa persuaded me to make a short trip to assess the situation adding that Bali was only 90 minutes from Jakarta • I went to Bali but en route discovered a big country, 4th in the world by population and in need of lots of actuarial input ICA Québec - Yves Guérard

3. Pension Law & Regulations • Labour force: ± 100 million but 70% in informal sector • No basic social security system, developing financial markets • MOF wanted a private funded system to • avoid a burden of entitlements on the budget • reduce future dependency on the state • accumulate contractual savings to develop financial markets • Pay-outs as life pension to provide financial security throughout retirement • avoid risk that hard currency flows out of the country to the Middle-East if lump sum payments • Voluntary system to gradually build up a base premised on “Freedom to promise, obligation to deliver” ICA Québec - Yves Guérard

4. Timeline • Law discussed since 1985; voted in April 1992 • Inspired from Canadian legislation circa 1966-68 • Occupational DB, DC, profit-sharing, target plans • Individual & Group RRSPs from banks and insurers • No trust law but use of Custodian mandatory • Regulations drafted from 1992 to 1995 • Funding and two-tier solvency based on actuarial report • Pension standards: vesting, locking-in, portability, etc… • Investment guidelines to be filed annually • Growth stopped by monetary and political crisis of 1997-98 • Only about 2 million participants in private sector • Separate final pay DB for 3.5 million civil servants • Over-ambitious law adopted in 2004 to create a comprehensive National Social Security System but not yet implemented ICA Québec - Yves Guérard

5. From N to N+1 • 1995: implementation of IAS 19 • 1996-2001 CIDA* pension and insurance reform program (C$ 13 million) • 1997- Master degree program in Actuarial science at Universitas Indonesia • 1999- Integrated Risk Based Capital covering life and non-life; • follows Canadian life model • first in Asia • 2000 – Recommendation on the creation of an integrated supervisory authority * Canadian International Development Agency ICA Québec - Yves Guérard

6. From N+1 to N+2 • 2003 –Actuary defined as “ a qualified actuary from PAI* or overseas association full member of the IAA and recognized by PAI” • 2003 – IndependentActuary to conduct a 5 yr Dynamic Solvency Testing projection • 2003 – Independent Actuary to review liabilities at least every 3 years • 2004- Performance reviews of good pension governance • 2006-7- Actuarial review of pension and savings schemes for civil servants: 3.7 million participants plus 1.5 million beneficiaries • 2007- Harmonization with proposed Social Security • 2008 – Building local modeling capacity * PAI= Persatuan Aktuaris Indonesia ICA Québec - Yves Guérard

7. Migration • Initial assignment from HIID in Indonesia, then Hungary • Then CIDA funded technical assistance in Indonesia and Vietnam • Asian Development Bank projects in Indonesia and other countries: China, Korea, Cook Islands • UNDP projects in Sri Lanka, Kenya • World Bank/ FIRST Initiative projects • “Building Private Pension Systems: A Handbook”* => AFP reform in Bolivia • Study of implementation of new Social Security system in Indonesia • TAMF (Australia) projects in NBFI and micro-finance • Overall, involvement in a dozen of countries ICA Québec - Yves Guérard

8. Bolivia • Creation of a Chilean type of Social Security • Tender process to select two AFP*s to have competitive and cost effective private administrators • Conversion of privatization proceeds into “Bonasol” (demogrant like OAS) for existing and future retirees • Winding up of existing occupational programs, most of which insolvent *Admistradores de Fondo de Pensiones ICA Québec - Yves Guérard

9. China • Administrative consolidation of insolvent local DB programs into provincial, then national programs to adapt to the new market economy • Financing of accumulated pension debt through a combination of mandatory contributions and diversion from a newly established NDC* program • Support for a national Management Information System by building model for demographic and actuarial projections • Support for the development of a basic prudential regulatory and supervisory system for public and private pensions *Non-financial Defined Contributions ICA Québec - Yves Guérard

10. What’s in it for the actuary? • The opportunity to build new systems and programs, to be creative rather than doing maintenance • Making a difference for millions of people that need a better life • Generally less legacy constraints, can go back to first principles, deal with decision makers • Better be an “International Expert” than a “Canadian has been” ICA Québec - Yves Guérard

11. But need to accept • Selling advice rather than giving orders • Best advice often ignored because of • Corruption • Decision makers too busy • Lack of political will • Low quality environment • Inadequate capacity • High quality advice is in competition with unqualified consultants from “mail box offices” that will bid on everything and occasionally be selected through bureaucratic processes • Even Donors may not use proper evaluation criteria and pursue ideological rather than professional solutions for lack of actuarial resources ICA Québec - Yves Guérard

12. Actuaries perceptions of economists • Economists approach retirement issues from the asset side • Pension plans are financial institutions • Retirement savings are long term assets that • help develop capital markets • can support economic development • Cash flows have an impact on fiscal and monetary policy • Government budget equilibrium • Sponsor solvency • Impact on labour markets • Potential distortions • Portability and mobility • Individual equity is important and ownership of assets protected by allocated funding in individual accounts • Wealth accumulation is an objective • Promises should be funded ICA Québec - Yves Guérard

13. Actuaries perceptions of actuaries • Actuaries approach retirement issues from the benefits side • Pension plans are a means to provide financial security during retirement • Security means protection against risks and volatility; for retirees peace of mind is also important • Mobilizing the Law of large numbers through pooling and risk sharing is beneficial • The product is lifetime retirement income • The target is the replacement ratio • Pension costs are part of total compensation • Benefit formula and conditions should support Human Resources policy objectives • Retirement income is deferred compensation; should be predictable • Optimizing financing path enhance future capacity to pay • Benefits should be paid as promised ICA Québec - Yves Guérard

14. Comparative views • Actuaries and economists agree that retirees ownership of « income generating assets » is a plus • For actuaries the important word is the first as they focus on the pay-out phase • For economists, it is the last as they focus on the accumulation phase • To link benefits more directly with earnings • actuaries think career indexed salary formula • Economists think notional defined contribution • Actuaries think of financing methods as ways to ensure the delivery of the promise; they watch the evolution of relevant critical ratios • Economists see benefit promises as creating a pension debt to be liquidated by funding and focus on market value of assets ICA Québec - Yves Guérard

15. 162-58=108 or 77 • The IAIS* has 162 member countries • The IAA has 58 full members but some countries have more than one member association • There is no association enforcing professional standards in about 108 countries • Some FQA**s work in 31 countries where there are no associations • thus in about 77 countries there is no actuarial presence • High probability that users in those countries cannot easily assess the quality of “actuarial” advice • The “void” is often filled by other professionals: risks experts, financial engineers, economists, technicians,… *International Association of Insurance Supervisors ** Fully Qualified Actuaries ICA Québec - Yves Guérard

16. Nescafé actuaries: just add water • The IAA mandatory syllabus comprises 10 subjects and compliance with the Guidelines requires a sustained effort spread over years • Scary to see some offerings of quick short and intensive actuarial courses that are perceived as producing qualified actuaries in a few months or even weeks • This retailing of education products as commodities to accommodate the traveling plans of the “teacher” can lead to disastrous decisions about large social programs • By increasing the availability of high quality actuarial service you can reduce the risks from pseudo-actuaries and expand the global reach of the actuarial profession ICA Québec - Yves Guérard

17. So get off the couch! • Actuaries serve the public interest when their advice improve decisions that affect the well being of the ultimate users of our services and reduce the adverse financial consequences of risks • You can make a positive difference but do not impose your values and priorities: • Be responsive to real local needs: you may pick those compatible with your philosophy and objectives but do not import constraints external to the country • Emerging economies are not laboratories, human beings live there • Money cannot buy love; same for public policy but you can help decision makers do what they want to do better! • There are many stimulating challenges and lots of opportunities to put actuarial expertise at work thus increasing the return on your investment in long hours of study • The exposure to a more diverse world will be a gratifying, rewarding and stimulating experience ICA Québec - Yves Guérard