Facing Threats of Defined Benefit Plan Closure in the Public and Private Sector 10 th Annual BC Pension Forum Vancouver SHARE

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1 Facing Threats of Defined Benefit Plan Closure in the Public and Private Sector 10 th Annual BC Pension Forum Vancouver SHARE Tony C.L. Williams, FCIA, FSA February 28,

2 What caused the PENSION CRISIS? 1

3 What Caused the Pension Crisis? Modern Portfolio Theory 1960s Prudent Person Rule ERISA 1975 Efficient Frontier 60% stocks, 40% bonds 2

4 What Caused the Pension Crisis? Commuted values standards mid 1980s Pension solvency funding rules mid 1980s Relative Performance Monitoring Universes 1980s 3

5 The Problem A Fall in Bond Yields Inflation Rising Interest Rates (22 Years) Disinflation Falling Interest Rates (30 Years) Yield Jan Median Pension Return ~ 6%p.a. Median Pension Return ~ 12%p.a. 0 Jan-61 Jan-63 Jan-65 Jan-67 Jan-69 Jan-71 Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Government of Canada Bonds (Average 10 Years+) Source: Bank of Canada. 4

6 The Problem Long Bond Yields Can Stay Low over Extended Period Historical U.S. Treasury Long Bond Yields to End of 2012 High yields of the 80s & 90s much higher than historical Annualized Monthly Yield Yield (%) years of low yields Year Source: PC Bond. 5

7 Is the pension crisis OVER? 6

8 The Problem What Happened from 1999 through 2013? Canadian Equity Market Annualized return 5.9% Annualized standard deviation 15.1% Canadian Fixed-Income Market Annualized return 7.6% Annualized standard deviation 6.5% S&P TSX Composite Index DEX Long Bond Index Canadian Equity Market represented by S&P TSX Total Return Index. Canadian Fixed-Income Market represented by DEX Long-Bond Index. Presented in Canadian dollar terms. Data to December 31,

9 The Problem PBI Pension Index Sample Solvency Ratio 130% 120% 110% PBI Canadian Pension Solvency Index Ending December 31, 2013 Without Solvency Payments With Solvency Relief Since 2010 With Solvency Payments 100% 90% 80% 70% 60% 50% Illustrative purposes only. The PBI Canadian Pension Solvency Index provides illustrative solvency positions for a sample standard pension plan with the following characteristics: 1. A 100% solvency ratio as at December 31, This assumption is based on historical data indicating that most pension plans in Canada were fully solvent in A membership demographic comprised of 50% active and 50% retired member liabilities at that same date. 3. Assets invested in a passive portfolio consisting of 40% Universe Bonds, 30% Canadian Equities, 12.5% U.S. Equities, 12.5% EAFE Equities and 5% Cash (rebalanced monthly). This portfolio was selected to mirror an industry standard asset mix and is not representative of PBI clients. 4. Contributions are assumed to equal benefit payments and amounts required to fund any solvency deficiencies. Liabilities are calculated using the prescribed basis from the Canadian Institutes of Actuaries, valuations are done annually and any identified deficiency is funded on a monthly basis over a five (5) year period. Improvements in the solvency ratio over time reduces outstanding payments on a pro-rata basis. 8

10 Is the Pension Crisis Over? Stock returns have recovered since 2008 lows Bond yields have risen a bit since March 2013 lows But, the risks remain (asset/liability mismatch) 9

11 Is the Pension Crisis Over? Private sector DC conversions and wind-ups continue Divergent Provincial Legislation limits options Deficits remain for many plans 10

12 Solutions Better environment for pensions New plan designs including Target Benefit Plans, Shared Risk Plans, and better Defined Contribution Plans Elimination of Solvency Funding rules (replaced by PfADs?) Investment Policy considering the impact of liabilities Funding Policy outlining risk management and funding structure of plans Master Trusts with separate Provincially registered pension plans Expand CPP to provide stronger base income and to provide pensions for more of the 60% of Canadians with no pensions Tax Incentive for employers to sponsor pension plans 11

13 Solutions Better Environment for Pensions Pensions are important to: Plan beneficiaries Capital markets The economy Be prepared to change your pension plan design to be sustainable in the long term Do not give up on pensions, the system can be fixed 12

Report on Pension Plans Registered in British Columbia AUGUST 2017

Report on Pension Plans Registered in British Columbia AUGUST 2017 FINANCIAL INSTITUTIONS COMMISSION 2800, 555 WEST HASTINGS STREET VANCOUVER, B.C. V6B 4N6 WWW.FIC.GOV.BC.CA RECEPTION: 604 660 3555 TOLL