Managing Pension Risk: A Global Perspective and Local Case Study

Transcription

1 Managing Pension Risk: A Global Perspective and Local Case Study Hosted by the May 11, 2017 Lawson Lundell LLP Calgary, Alberta

2 Global Pension Governance Rob Vandersanden Partner Aon Hewitt 2

3 Multinationals take many risk management actions locally to reduce costs and risks due to their retirement programs 3

4 however managing global retirement programs is challenging for many companies Multi dimensional costs and risks Complexities due to number of countries, types and number of plans Multiple stakeholders at corporate, regional and local levels, and businesses New EU requirements around governance Lack of ready access to data and information Missed opportunities to improve cost/risk profiles of local plans Oversight / control over local decisions Changes in legislation Lack of skilled resources at local levels Lean staffing models 4

5 Aon s second study of 200+ multinationals provides insights into the challenges and best practice for managing global retirement programs Drivers of Centralisation Key Challenges Best Practice Companies Senior management and finance concerned about costs/risks Corporate HR concerned about lack of appreciation and wellbeing Financial concerns, regulatory risks, and lean benefits staffing will continue to drive greater centralization Knowledge management: corporate lack access to information and insights for informed decision-making Execution of strategy: lack of operational discipline and infrastructure to execute their benefits strategy Report effectiveness across all five measures of governance Say their benefits are aligned with broader organizational and workforce objectives Demonstrate materially higher confidence levels in managing costs and risks 5

6 Second study with ABI since 2012 of how multinationals make and execute strategic benefits design, financial and operational decisions 3% 4% 4% 3% 16% 7% 5% 16% 8% 55% 21% 8% 16% 7% 3% 15% US CAN UK DE CH NL FR Other EU APAC Other More than 300, , ,000 50, ,000 25,000-50,000 10,000-25,000 Less than Operational complexity 70% with more than 4 business lines 44% in countries, and 30% in countries Most US companies have 50%+ employees in international locations More than a third of companies had more than 75% of their global workforce in international locations About the respondents 88% are HR leaders 70% have responsibilities for all benefits 55% of HR leaders manage benefits in HQ country as well as international locations 6

7 Most common drivers of corporate involvement in benefits management are costs and risks of benefits in mature markets Mature Markets Over 75% are concerned about medical cost increase 60% worry about healthcare legislation changes 70% say employees don t appreciate benefits 60% report concerns about DB risks and costs Emerging Markets Nearly Half are concerned about market competiveness 45% say employees don t appreciate benefits Important Very important 7

8 Companies continue to report a strong desire to increase the level of current corporate oversight and implement a centralized approach 8

9 however, without formal adoption of protocols centralised management of benefits is not effective Best Practice: Formally established governance protocols Representation of HR, finance and legal functions, and business leaders on their corporate committee Same committee managing their retirement, insured and other benefits such as allowances Governance protocols covering all countries and not just the large ones Governance apply to all countries and across all business lines 9

10 Defining best practice in global benefits governance: only 20% of companies follow best practice* across all five measures of effective governance 10

11 Companies that don t follow best practice report lack of access to benefits related data & information, and knowledge of risks and opportunities 11

12 Best Practice companies manage all their global benefit programs more centrally 12

13 Operations Financial mgmt. Design Does good governance achieve better outcomes? Best Practice companies report better alignment with organizational strategy Market competitiveness Emphasis on individual responsibility Harmonization Efficient design of benefit plans Efficient financing Investment management Pension de-risking Other companies 59% 39% 52% 33% 51% 68% 59% Best practice companies 90% 78% 92% 76% 73% 87% 75% Externalization of liabilities 69% 69% Administration 67% 86% Legal and regulatory compliance Employee communications 27% 67% 64% 83% Vendor management 41% 74% % report benefits aligned % report benefits not aligned 13

14 Does good governance achieve better outcomes? Best Practice companies report higher confidence levels in managing costs and risks 14

15 In Conclusion 15

16 Best Practice companies do a better job of knowledge management and execution of strategy Best Practice companies more commonly say They have effective oversight of their compensation and benefits plans in international locations. Their Benefit plans support broader organizational workforce and talent management strategies and initiatives. Local country benefit plans are aligned with company s design, financial and operational objectives. 16

17 Risk-view of global benefits governance: knowing the why before defining the how of global governance and operations yields better business outcomes Governance of global benefits decisions is complex due to many factors such number of countries, business lines, types of benefits, local legal frameworks, and stakeholders Companies want to: Design benefit programs that are aligned with organizational, financial and talent strategies, and deliver economic value of scale to employees Minimize the cost of benefits through efficient financing and rewarded risk Reduce operating risks and deliver benefits efficiently to employees Our findings do not support the assertion that centralization in itself drives better governance The study provides strong evidence to support the why before the how argument: Definition of specific design, financial and operational objectives provides a context for systematically evaluating risks and identifying opportunities Implementing disciplined protocols to make and execute risk management decisions provides a framework for governing global benefit programs 17

18 Operations Financial Management Program Design How strategic objectives and principles can be used to improve governance of defined benefit plans worldwide Policy Metrics CAN DE NL CH UK US DB to DC Open union; closed salaried Several open DB plans Open DB plan CB plan established DB plans frozen 1 open, 1 closed DB plans Market competitiveness Below market: EE contributions Below market: EE contributions Above market FAP DB plan Market competitive N/A Above market FAP DB plans Consistency of benefits One plan each: salaried/union Multiple open plans One plan each: salaried/union One plan Two plans Two plans Employees cost sharing No EE contributions EE contributions EE contributions No EE contributions N/A No EE contributions Investment performance B/M+ N/A BM- B/M B/M+ B/M++ Efficient financing Pooled A/L N/A Cross-border financing opp. Pooled A/L A/L not pooled Pooled A/L Risk optimization De-risking glide path Unfunded plans Undue exposure to growth assets L hedge ratio not optimal L hedge maximised De-risking glide path Risk settlement Longevity risk exposure N/A N/A Subsidised annuity Longevity risk exposure Significant deferred liability Administration and compliance Compliance review in 2015 Insourced admin. (3 plans) Compliance review in 2012 Compliance review in 2014 Data not settlement ready Compliance review in 2015 Member communication Suboptimal. TR comm. TR comm. TR comm. TR comm. TR comm. Vendor consolidation and management Optimal Multiple vendors Optimal Optimal Multiple vendors One DB provider Effective governance and delegation Delegated fiduciary manager No admin. Committee High cost of trustee board Optimal Optimal Delegated Best practice Low risk Moderate risk High risk 18

19 Too many projects too few resources too little time: prioritizing actions over a three year period HIGH ECONOMIC IMPACT DB closure DB cross-border implementation DB closure DB freeze UK vendor consolidation Multi-employer DC DB Plans merger Fiduciary DC implementation Independent trustee appointment Data preparation Cross-border feasibility Review of DC management options Settlement of deferred liability Investment review Longevity risk settlement DC for high-earners DC communications upgrade DB compliance audit DB administration committee DC fund line up & performance review EASY TO IMPLEMENT Vendor consolidation DB freeze LOW ECONOMIC IMPACT 19

20 Lifecycle of the Employee and Executive Pension Plans Shelby Robertson Team Lead, Pension and Benefits NA Repsol Oil & Gas Canada Inc. 20

21 Our Roadmap 1/1/1966 Pension Plan for Employees of BP Canada Inc. and Participating Associated Companies (Registered Employee Plan) 1/1/1973 The BP Canada Inc. Supplementary Pension Plan for Executives (Registered Executive Plan) 1/1/1987 Provincial pension reform 1/1/ Income Tax Act and Regulations affecting registered pension plans 1/1/1993 Employee Plan DB provisions closed to new entrants New DC provisions 1/1/1994 to 12/1/1999 Mergers and acquisitions Encor Bow Valley Energy Pembina Corporation Rigel Oil & Gas 2009 Asset de-risking commences (Moved to 50% equities / 50% long bonds) 7/1/2007 New Executive Plan 6/30/2007 Old Executive Plan restricted to new entrants (Pre-July 1, 2007 Plan) 12/31/2010 Old and New Executive Plans merged 4/7/2014 to 11/30/2015 De-risking strategy targeting 70% long bonds / 30% equities (discussions started in 2011) 5/8/2015 Talisman Energy acquired by Repsol 9/1/2015 Last DB member retired 1/9/2016 Annuity buyout 5/1/2017 DB provisions removed Executive Plan wound up 21

22 Preparing for a Wind-up - Inactive Members Historical annuity cleanup Buy-in annuities Buy-out annuities Plan provision clean up Deferred member calculations Offered commuted values in addition to deferred / immediate pensions Search for missing members Mercer locator services (Equifax, investigative search firm) Internal resources Annual pensioner statements Pension payment confirmation forms (coordinated with Standard Life) Data confirmation (proof of age, spousal information, proof of life, power of attorney, etc.) 22

23 Preparing for a Wind-up Other Actions Assess options for future of the plans Buy time to prepare for wind-up Considered preparing application for the Executive Plan to become a suspended plan Amendments to the Supplemental DB Plans to provide timing and financial flexibility in the event of the wind-up of the Registered DB Plans Develop business case for the wind-up Estimated wind up financial positions Ongoing operating versus wind-up costs Request CRA remove designated plan status of Executive Plan to allow for proper funding Filed off-cycle actuarial valuations 23

24 Developing the Wind-up Strategy De-risking investment strategy Some preliminary resistance to further de-risk (i.e., give up potential incremental returns) Adopted 70% long bond / 30% equity asset portfolio that matched the duration of the liabilities Although the Registered and Supplemental DB Plans have no active members, PMC continues to: Have fiduciary responsibilities (funding, governance, administration) Retain pension risks (interest rate and longevity) Ongoing internal and external operating versus wind-up costs Information required to formulate the strategy: Estimates of wind-up financial positions Legal requirements to provide cost of living adjustments Legal opinion regarding surplus ownership upon wind-up 24

25 Preparing for an Annuity Purchase In June 2016, the PMC agreed to load membership data onto the Mercer Pension Risk Exchange TM (MPRE) to start receiving indicative annuity quotes The MPRE is a secure on-line platform which guides and supports plan sponsors throughout the buyout process A systematic and disciplined approach that provides reliable data and documents to the insurers well in advance of the transaction enabling swift execution Data tranching strategy to mitigate risk factors and obtain optimal pricing 1 st round of indicative annuity quotes received at the end of August insurers provided quotes One insurer wanted more data before quoting Job title, salary, postal codes, etc. 25

26 Board Decisions Sought 1. Which of the Registered and Supplemental DB Plans to Wind up? Significant ongoing operating costs Fiduciary liabilities and risks maintained until the plans are wound up Registered DB Plan assets to fund the wind-up liabilities; Supplemental DB Plans have significant wind-up deficit Triggers for transacting on annuities 2. Provision of pension increases upon wind-up 3. Delegate the implementation of the wind-up to the PMC More efficient Pricing of annuities varies significantly over time and quotes are only valid for a few hours Strong governance process in place with PMC 26

27 Annuity Purchase On December 5, 2016, the PMC reviewed indicative annuity quotes and as market conditions were favourable, requested binding annuity quotes On December 19, 2016, the PMC reviewed binding annuity quotes and agreed to transact Quotes valid for about 4 hours Asset transfer to occur in early 2017 Option to purchase additional pension increases in new year once plan assets liquidated and excess assets more certain Financial considerations Accounting (settlement) Capital (additional cash funding required for Executive Plan to be offset by reduction in DC contributions under Employee Plan) Assuris coverage (Canada Life able to insure up to $4,000 per month) 27

28 Premium ($CAD millions) Annuity Purchase % Shared additional data with insurers US Election Year-end pricing effect 0.75% 0.50% 0.25% Amount of Fixed Indexing from Surplus 66.0 Round 1 Round 2 Round 3 Binding Quote 0.00% Proxy Insurer 1 Insurer 2 Insurer 3 Fixed Indexing % 28

29 What Worked Well? Mercer Pension Risk Exchange Price visibility prior to execution supported PMC and Board decisions 3 weeks to execute initial annuity transaction (around Christmas!) Mercer s close working relationships with insurance companies Board delegated implementation of the wind-up to the PMC in advance of receiving the second round of indicative annuity quotes Membership data clean-up began a number of years prior to the annuity purchase Deferred members Pension payment confirmation statements and data confirmation Dedicated internal resources to assist with the wind-up Working with the Alberta pension regulator 29

30 Lessons Learned Start early! Asset liquidation considerations Two investment funds transacted only at month-end, which exposed Company to investment risk between the annuity purchase and month-end Transacting / contracting close to year-end more challenging due to vacation and Christmas shutdown Although more competitive pricing more than offset the challenges Requires significant internal resourcing to conduct membership data clean up and collect all required data Reviewing historical files / data sources Following up with deferred members Unlocatables where are / were they? o Different treatment in different provinces Coordination with other insurers (legacy annuities) 30

31 Questions? 31

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