Pension Plans of the Future

Transcription

1 Pension Plans of the Future Strategic Risk Management for Long-Term Sustainability SHARE 2009 BC Pension Forum December 10, 2009 Rosalind Gilbert Aon Consulting, Vancouver

2 Introduction Ê Plan "type" less important than strategic design of features and ongoing management / monitoring Ê Attain long-term plan sustainability through strategic design and monitoring Ê Be aware of risks and challenges to sustainability Ê Plan management proactive not reactive 2

3 Risk: Failing to meet Stakeholder Expectations Ê Failing to meet the benefit obligations Ê Requiring unacceptable increases to sponsor and member contributions Ê Poor performance, both absolute and relative to other plans Trustees should consider all three risk measures when overseeing the plan but assign priorities 3

4 Integrated View of Pension Risk Financial Risks Operational Risks Liabilities ÊAssumptions vs experience ÊFunding margins ÊActuarial methods ÊCurrent svc cost vs conts Funding Contributions Benefits Design ÊBenefit levels ÊMember elections ÊPlan guarantees ÊEquity + = + Assets ÊMarket / economy ÊAsset / liability mismatch ÊLiquidity ÊCurrency Investment Return Administrative Expenses Governance ÊDelegation ÊE&O ÊCompliance ÊAdministration ÊCommunications ÊFiduciary liability ÊIT ÊData ÊFees 4

5 Key Risks / Challenges: Asset Risks Ê Increasingly expensive to fund shortfalls as plan matures Ê So, asset returns, both magnitude and volatility, become all the more important Ê Volatility and magnitude of returns impacted by: Asset mix Market / economy Interest rates / Inflation 5

6 Key Risks / Challenges: Asset/Liability Risks Ê Limited ability to afford further increases in contributions Ê So, unpleasant surprises concerning liabilities become all the more unwelcome Ê Assumptions vs experience Demographic (e.g., termination & retirement rates) Longevity Salary inflation / Indexation / Interest rates 6

7 Key Risks / Challenges: Liability Risks Ê Funding margins What margins are required? Avoid having margins that are overly conservative, or inadequate Ê Actuarial methods Understand short-term implications of long-term smoothing methods Ê Current service cost vs contributions Want future contributions to cover true cost of benefit as it is accrued 7

8 Key Risks / Challenges: Design Risks Ê Member elections (potential antiselection) Early retirement Commuted value transfer Ê Plan guarantees Indexing Integrated benefit formula Bridge pension Minimum contribution refund Ê Equity issues Early vs delayed retirement Married vs single Intergenerational Optional forms of pension Highest average salary formula Integrated contribution formula ITA maximum 8

9 Key Risks / Challenges: Governance Risks Ê Delegation Ê E&O Ê Compliance Ê Administration Ê Communications Ê Fiduciary liability Ê IT / Data Ê Fees 9

10 Looking for Solutions 1. Asset / Liability Studies 2. Trends 3. Assumptions 4. Integration of benefits, funding, investment policies 5. Employer HR objectives 6. Plan design 10

11 Looking for Solutions - Asset/Liability Studies Ê Determine "optimal" asset mix for the Plan (minimum risk portfolio) Ê Minimize or stabilize contributions Ê Minimize worst case (95 th percentile results) contributions / maximize worst case surplus/funding ratio 11

12 Looking for Solutions - Trends Ê Continued trend to CAP conversion Not risk-free, just different risks Ê Plan design changes to reduce employer cost Early retirement incentive reduction Member contribution increases Inflation adjustments eliminated or reduced Ê May be some regulatory changes coming Solvency exemptions / extensions Pension reform legislation Harmonized legislation? 12

13 Looking for Solutions - Assumptions Ê Caution: Assumptions vs experience Investment Expected: Valuation interest rate Actual: Ê 30's depression Ê 90's heyday Ê 2002 perfect storm Mortality Expected: Standard table Actual: Ê Plagues Ê Pandemic Ê Human genome flow-through? 13

14 Looking for Solutions - Integrated Policies Ê Revisit pension deal and clarify benefits policy Ê Clarify funding policy Ê Integrate benefits/ investment/ funding policy 14

15 Looking for Solutions Link to HR Objectives Ê Demographic shortages Ê Early retirement programs Ê Flexible retirement programs 15

16 Looking for Solutions Assessing Design Ê Plan sponsors are reconsidering the value to stakeholders of costly design features, such as: Early retirement may not fit with aging workforce strategies Form of pension may be source of inequity amongst membership CV transfer may be costly; not always to members' advantage Indexing other plans are reconsidering the affordability of indexing Minimum contribution refund is the plan primarily for the benefit of retiring or terminating members? Ê Review normal retirement age Look ahead on "what if" basis 5-year increase in post-age-65 life expectancy of 20 years could increase plan costs by 25% Would retirement ages increase? Should normal retirement age increase? If appropriate, reserve appropriate powers 16

17 Looking for Solutions - Plan Design Features Ê Career-average earnings formula with ad hoc upgrades Ê Flat-benefit plan with negotiated or ad hoc increases Ê Hybrid benefits greater of DB & DC Ê Employer contributions capped at fixed % of pay Ê Ad-hoc indexing Ê Minimum DB accrual with shared investment gains Ê CPP Integration changes 17

18 Looking for Solutions - Plan Design Features Ê Fixed-cost variable-benefit plan (past service upgrades / current service accrual reductions) JEPPS Report :Specified Contribution Target Benefit Plan Ê Flex DB plan basic DB employer-paid; can buy ancillary benefits Ê Employee and employer contributions vary with funded status Ê Target benefit plan with integrated benefits / funding / investment policies Ê Member-funded pension plans 18

19 Integrated approach - long-term risk-reduction Traditional Approach Trustees are overloaded with uncoordinated information from various sources Narrow focus on asset return. Asset-liability modeling may fail to limit downside risk No consideration given to plan design to mitigate risks Pension risks managed in isolation Asset-driven performance monitoring No follow-up after ALM study Liability monitoring done once every 2-3 years Failure to link plan cycle life changes to evolving risk profile Short-term, reactive Integrated Approach Structured governance model reinforced by stress testing and integrated, customized education leading to well-informed decisions Broader focus - hedging of risks by designing and executing customized liability-based strategies Coordinate funding, investment and benefit (design) policies to de-risk Monitor and manage interdependencies of pension and enterprise risks Quarterly performance monitoring of risk metrics linked to assets and liabilities Monitor opportunities to settle liabilities as Plan matures Long-term, sustainable 19

20 Conclusion 1. Pension reform proposals likely to accomodate many more plan designs Ê Allow for pension "deal" to be designed strategically Ê Avoid slotting plans into compartments by type...look for more flexible legislation 2. Fiduciary focus on risk mitigation not plan design 3. Lessons from the past / new challenges for the future 4. Look at big picture and all factors strategic design and maintenance; proactive not reactive 20