Investments for the Target Benefit Plan

Transcription

1 Aon Hewitt Consulting Retirement Investments for the Target Benefit Plan Efficient strategies to empower pension plan sustainability Risk. Reinsurance. Human Resources.

2 I. Introduction Target benefit plans are rapidly becoming an integral part of the recognized solution set for addressing the sustainability of pension plans. Legislation to provide for target benefit plans is emerging across the country. Numerous articles and publications have been written on the topic. This is the fourth guide in Aon Hewitt s series of guides on target benefit pension plans. While Aon Hewitt s first three guides on target benefit plans provided the framework for defining target benefit plans, developing the benefits/funding policy and the governance surrounding these plans, this fourth guide focuses on the role of investment policy in target benefit plan design. We examine the characteristics of target benefit plans that impact investments and describe the risks and objectives that should be addressed in the investment policy. Moreover, we provide concrete suggestions to help target benefit plan sponsors establish their investment policy, in particular: considering the plan-specific details that impact investments; adapting asset-liability modelling to determine strategic asset allocation; and adopting a dynamic approach to managing the plan s assets. Aon Hewitt Investments for the Target Benefit Plan

3 Table of contents I. Introduction... ii II. Review What is a Target Benefit Plan?... 4 III. Plan Features that Impact Investment Policy... 5 Who supports the risk?...5 Plan design...6 Governance...6 Valuation and rules surrounding corrective measures...7 Comparison with defined benefit plans...7 IV. Performance Objectives...8 V. Risk Management Interest rate risk...10 Market risk...10 Risk management mechanisms related to plan design VI. Illustration VII. Dynamic Management of the Investment Policy Dynamic asset allocation Annuity purchases VIII. Conclusion Contributors References and Suggested Reading January 2015 Fourth in a series of Guides on Target Benefit Pension Plans published by Aon Hewitt Aon Hewitt Investments for the Target Benefit Plan iii

4 II. Review What is a Target Benefit Plan? Before discussing investment policy, we begin with a brief review of the essential characteristics of a target benefit plan: Employer and member contributions are fixed (e.g., a percentage of pensionable payroll) or are set within a limited range. Plan benefits are expressed using benefit formulas and are payable throughout the life of the retiree. The amount of the targeted benefit is not guaranteed. The payment of benefits depends on regular tests showing that the benefits are affordable. Benefits covering both past service and future service may be adjusted to ensure the financial balance of the plan is maintained. The plan s assets belong to its members. None of the plan assets can revert to participating employers, under any circumstances. The target benefit plan aims for a balance between benefits and funding, which increases the likelihood that the plan will be capable of paying the target benefits. Plan rules are established to stipulate trigger events (level of reserves and critical points) that cause benefit reductions or increases, and these rules, in large part, focus on the preservation of inter generational equity between plan members. As stated in our previous guides, we are seeing considerable variations in the definition of a target benefit plan and in the application of the principles that govern them, not to mention the various nomenclatures used to designate them: In Canada, we have considerable experience with negotiated cost multi-employer pension plans, where trustees are allowed to adjust the benefit calculation formula to manage the plan funding level (one of the essential features of a target benefit plan). Some defined benefit ( DB ) plans are evolving into managed DB plans in which the principles of target benefits are applied to certain defined benefits (for example, by replacing guaranteed indexing with indexing conditional upon the plan s financial position). Legislation is at different stages across Canada with regards to supporting target benefit plans. New Brunswick is the most advanced, having made a decisive move in the middle of 2012 to create a complete regulatory framework for shared risk plans, and provide for the conversion of many of its public sector plans to this shared risk model. For an up-to-date summary of target benefit plan legislation across Canada, go to targetbenefits.ca. Aon Hewitt Investments for the Target Benefit Plan 4

5 III. Plan Features that Impact Investment Policy The investment policy is the document that describes a pension plan s investment strategy. It contains, among other things, the investment objectives as well as the target asset allocation, the risk tolerance and the liquidity conditions. To establish all of these criteria, a pension plan s investment policy must take into account the details specific to the plan in question. Who supports the risk? Several features of a target benefit plan design will influence the investment policy, most notably the risk tolerance of the parties supporting the risk. In a traditional defined benefit plan, the sponsor is typically responsible for investment risk. Unfavourable experience translates into an increase in sponsor contributions (although, member contributions may also be affected). Risk tolerance is determined based on the sponsor s ability to pay those additional contributions. In a defined contribution plan, each member individually supports the risk. Unfavourable experience translates into reduced benefits, unless the member decides to increase his contributions and is permitted to do so by the plan provisions and tax rules. In the case of a target benefit plan, active members and/or employers can support a portion of the risk through a limited increase in contributions which may be set out in the plan. However, the majority of the risk is supported by benefit adjustments, either by not paying certain ancillary benefits, such as indexing, or, in extreme circumstances, by reducing the basic benefit. Given that the benefits of current retirees are in the process of being paid out, they are most affected by volatility in a target benefit plan. Active (and deferred vested) members are also affected if an unfavourable situation is not resolved before their retirement. Plan members are responsible for determining the level of risk they want and are able to support. Generally, it is reasonable to believe that retirees have a lower risk tolerance than active members and that active members have a lower risk tolerance than the typical DB plan sponsor. As such, the target benefit plan, where the risk is shared amongst members, may have a lower risk tolerance than a similar defined benefit plan where the sponsor bears all the risk. This would be especially true in the case of a mature plan (where a large portion of the liabilities is attributed to retirees). Aon Hewitt Investments for the Target Benefit Plan 5

6 Plan design Nonetheless, it would be premature to conclude that the investment policy of a target benefit plan should be overly conservative. Target benefit plans have design components that aim to reduce the risk to which members are exposed (unlike traditional DB plan designs). One of these components is generally a contribution rate that includes a healthy margin over the normal cost of basic plan benefits. These additional contributions have several functions: contributing to a reserve to reduce the likelihood of unfavourable experience leading to a reduction in benefits; restoring the plan s financial position in the event of poor experience; and funding ancillary benefits Several plans (and New Brunswick s shared risk legislation) have adopted a benefit structure that provides a basic benefit with a very high likelihood of being paid in full, while ancillary benefits, the cost of which were considered in determining the contribution level, have a slightly lower probability of being paid. As such, the value of those ancillary benefits acts as a buffer for the basic benefits. Another design feature that reduces risk is the target benefit plan s benefits/funding policy, which, as indicated in our previous guides, should include specific reserve levels and trigger points for benefit adjustments. Those reserves can vary based on the level of benefits typically in a counter-cyclical fashion (i.e., a higher reserve may be required before a benefit increase can be considered and the reserve may be reduced before benefits are cut back). Governance Another feature that will impact the investment policy is related to governance structure. Our third guide on target benefit plans discussed the following possibilities for the plan administrator: 1. An independent and autonomous board of trustees; 2. A pension committee; 3. An employer administrator; or 4. A commercial trustee. Some pension plan administrators have a high level of financial knowledge while others are more limited. The level of expertise will vary. Some pension plan administrators have a limited degree of comfort with complex investment structures, which limits their ability to use such structures both in the search for return and in the management of risk. Where the administrator does have extensive investment knowledge, or is able to access trusted advisors with that expertise, that knowledge can used to obtain a higher return for the level of risk incurred, by using alternative asset classes, derivatives, or dynamic investment policies to better cover the market and interest rate risks. The greater the depth of investment knowledge and expertise within the governance structure of a target benefit plan, the more complexity the investment policy will bear. Aon Hewitt Investments for the Target Benefit Plan 6

7 Valuation and rules surrounding corrective measures Decisions and legislation regarding valuations and corrective measures will have a major impact on a target benefit plan s investment policy. Firstly, the type of actuarial valuation used will determine the plan s exposure to interest rate risk. If the valuation is based on an expected long-term return approach, such as the funding basis applicable to defined benefit plans, the plan will have a low exposure to interest rate risk. Conversely, if liabilities are valued using market interest rates, as for solvency valuations, the interest rate risk will be significant. Another factor in determining risk tolerance is the speed at which corrective measures are expected to restore the plan s financial position. If legislation, or the plan s benefits/funding policy, requires that the plan s financial position be restored over a relatively short period (for example, 5 years), any corrective measures will have a greater immediate impact than if the recovery were permitted over a longer period (for example, 15 years). A longer recovery period may allow the plan to take greater risks because unfavourable experience has a less immediate impact on members. For example, New Brunswick s legislation stipulates adding to the assets, the discounted value of expected contributions in excess of the cost of current service for the 15 years following the valuation. As such, small corrective measures impacting contributions and/or current service costs have a multiplying effect. If the period considered was significantly shorter, much higher benefit adjustments would be required, which would favour a safer asset allocation strategy. Comparison with defined benefit plans The following table shows a summary of the details specific to target benefit plans compared to defined benefit ( DB ) plans that would impact the development of the investment policy. Details Target Benefit plans Traditional DB plans Who supports the risk Members (Benefits) Sponsor (Contributions) Plan design Financing Plan design Reserves Governance Fixed contributions that exceed the expected costs (significant margin) Various levels of reserves to protect basic benefits and trigger benefit adjustments Level of investment expertise impacts ability of plan to use complex investment structures to increase return and reduce risk Normal actuarial cost (best estimate with a small margin) plus amortization payment (variable based on the level of past service deficit) Generally none Same Valuation and rules surrounding corrective measures Depends on plan s benefits/funding policy; legislation will also have an impact (not all jurisdictions have legislation yet) Governed by legislation which is generally consistent across the country Aon Hewitt Investments for the Target Benefit Plan 7

8 IV. Performance Objectives The investment policy will have an impact on the expected performance and the expected volatility of the portfolio, not to mention the volatility of the asset liability equation. Volatile results, with regard to performance and value of benefits, will have an impact on the level of reserves available and on the reserves required to ensure the long-term sustainability of target benefits. Naturally, it will be essential for the benefits/funding and investment policies to be closely coordinated for target benefit plans. While it is paramount that an investment policy focus on risk management, one should not lose sight of the fact that the primary goal is for the portfolio to yield returns that will balance the payment of the agreed upon contributions with the level of target benefits. Fixed (or variable within certain limits) Contributions Performance = Target, with possibility of increasing or reducing Benefits Administration Fees Needs to be sufficiently high Volatile element: variations need to be managed and contained Minimized, depending on the investment strategies used In a healthy balanced pension plan, contributions and investment income must equal benefits and expenses. In the case of a target benefit plan, with a few exceptions, the contributions are fixed. Assuming that the fees are minimized, the performance will determine if the target benefits can be paid. It will likely be necessary to take a certain level of risk to ensure an adequate benefit offer for members (i.e., provide a sufficient income replacement ratio). In the current low interest rate environment, a portfolio with a low allocation to growth assets (equities, alternative investments, etc.) will yield returns of 3 to 4%, meaning that unless a very high level of contributions is paid, the plan s affordable benefit level will also be low. Aon Hewitt Investments for the Target Benefit Plan 8

9 The following table illustrates the impact of the return on the funding of benefits. It shows the proportion of the pension funded by the contributions and the returns, respectively, based on the real rate of return obtained in a typical pension plan portfolio. If the real rate of return is 4%, contributions fund approximately one quarter of the pension. If the real rate of return is only 2%, that proportion is close to half. Basically, for the same contribution amount, the pension payable would be much lower as the real rate of return declines. Real rate of return % of pension funded by contributions % of pension funded by returns 2% 45% 55% 3% 33% 67% 4% 25% 75% The target benefit plan provisions will have been defined assuming a certain performance level. To be able to pay the target benefits, the portfolio must deliver that return. As such, one way to determine the asset allocation of a target benefit plan would be to find the portfolio that maximizes the likelihood of achieving the expected return, while minimizing risk. Aon Hewitt Investments for the Target Benefit Plan 9

10 V. Risk Management Any investment policy should aim to limit the risks to which the plan is exposed, while delivering the required return. Pension plans are subject to a multitude of risks. Interest rate and market risks are generally the two main risks to be addressed when developing an investment policy. Interest rate risk As previously stated, the type of actuarial valuation will determine the exposure to interest rate risk. This risk is not compensated (i.e., there is no expectation of reward associated with this risk). Therefore, if interest rate risk is significant, the plan should attempt to minimize it. The safest way to control interest rate risk is by investing in a bond portfolio where financial fluctuations match those of the actuarial liabilities, particularly through the use of long-term bonds. However, investing the majority of the plan s assets in that type of portfolio would yield a low return and would generally not allow the plan s objectives to be achieved. To maintain a relatively large allocation to return-seeking assets while controlling interest rate risk, the plan could consider using leverage. There are now a multitude of leveraged fixed income mutual funds that can be used to match the duration of the assets to that of a pension plan. Other solutions are also available, such as the use of interest rate swaps or forward and futures contracts. In addition to hedging interest rate risk, leverage can help increase returns (when long-term interest rates exceed the cost of funding). However, these products are more complex and require the plan administrator to have a higher level of expertise. Market risk As mentioned earlier, to achieve its objectives, a target benefit plan should aim for an adequate level of return, but this exposes the plan to market risk. Equities are typically the main asset class used to increase a portfolio s return. Equity risk, however, is high and could cause a significant reduction in reserves, thereby leading to significant benefit reductions in times of financial market crisis. Diversification is the most effective strategy for reducing market risk. Diversification can take place on various levels. Equities can be diversified geographically, by market capitalisation and by management style (value, growth, quality, momentum, low volatility). However, there are currently high correlations among returns across equity classes and, therefore, the benefit of diversification is relatively low. To obtain better diversification, it may be important to expose the plan to other asset classes. For example, if the plan has significant assets, is able to tolerate low liquidity, and is managed with the necessary level of knowledge and expertise, alternative asset classes, such as real estate, infrastructure and private investments, may offer substantial anticipated returns while having a low correlation with equity returns. In addition, some asset classes, such as hedge funds or other absolute return funds, also offer excellent diversification and may provide higher expected returns than bonds. Aon Hewitt Investments for the Target Benefit Plan 10

11 Risk management mechanisms related to plan design In a target benefit plan, the use of investment strategies to manage risk can be combined with the risk management mechanisms incorporated in the benefits/funding policy. One risk management mechanism in the benefits/funding policy is the reserve level. Target benefit plans have a contribution level that exceeds the expected cost of the plan. This excess will gradually create a reserve that will help absorb fluctuations in the funded ratio. The objective will be to balance the expected return of the plan s portfolio with the consequent risk to benefits. In particular, the reserves and the contribution margin should be determined based on the risk level of the portfolio (i.e., the asset allocation to equities and other growth investments). The speed with which excess funds are used would also impact the plan s risk. One example of being cautious in this regard is to restrict the application of excess funds to provide benefit improvements only if the funding available is sufficient to provide the improvement perpetually at that level for all active and retired members. Further caution would dictate that the improvement be granted only until the next actuarial valuation, at which point the funded status of the plan would again be reviewed. Taking these measures means that there will be a healthy reserve to help absorb funding ratio fluctuations. A provision for adverse deviations (PfAD) could also be used in the valuation assumptions to stabilize the funded ratio. The adequacy of the PfAD can be evaluated by comparing to a valuation based on a risk-free discount rate. Using financial economics principles, such a valuation provides an indication of the plan s ability to pay the target benefit. These risk mechanisms embedded in the plan design should be considered when setting the investment policy. For instance, a target benefit plan with many such risk mechanisms could sustain more risk in its investment policy. Moreover, the dynamic nature of these risk mechanisms could also favor the implementation of dynamic strategies within the investment policy, as we discuss further in section VII. Aon Hewitt Investments for the Target Benefit Plan 11

12 VI. Illustration As previously stated, it is essential for the benefits/funding and investment policies to be coordinated for target benefit plans. The process of developing an investment policy will need to be based on the details specific to the target benefit plan. As for typical DB plans, an asset-liability modeling (ALM) exercise can provide valuable insights into the development of an investment policy for target benefit plans. An ALM consists of using a stochastic approach (projections using a multitude of economic scenarios) to project the plan s financial position. That projection should cover a sufficiently long period (minimum 10, even 20 to 30 years) to observe the development of the plan over time and to understand how the plan might be expected to mature. A longer period is not necessary because the projection then becomes too sensitive to certain assumptions, particularly that of new entrants into the plan. The ALM helps determine a portfolio that allows payment atthe target benefit level, while minimizing risk. The plan risk may be defined in various ways. For example, New Brunswick s legislation requires a test where the probability of reducing the basic benefit is very low. Optimization should then focus on that probability of reducing benefits. In terms of benefit reduction, two things are important. The first is the probability that the event will occur; the second is the amount of the reduction. The duration of the reduction is also important. Therefore, various statistics focusing on these elements should be considered to evaluate the most attractive investment strategies. Of course, risk cannot be totally eliminated. The ALM will allow stakeholders to quantify and take steps to minimize the risk taken to achieve their objectives. That information can also be used to educate members about their plan. Clearly, asset allocation for a target benefit plan is not determined based on the same financial criteria as that used by the typical DB plan. The following illustrates the key variables that are generally used for typical DB plans versus target benefit plans. Traditional DB plans Discounted value of contributions (normal actuarial cost and amortization payment) Solvency ratio Volatility of surplus Target Benefit plans Probability of maintaining basic benefits Level of basic benefit reductions/improvements Expected level of ancillary benefits While the main focus of DB plans is on the cost and the impact on the sponsor s balance sheet, optimization for target benefit plans will focus more on the plan s ability to pay basic benefits and eventually provide ancillary benefits. Moreover, because target benefit plans are generally designed to provide a contribution excess compared to the normal cost, it is important to take into account the impact of target asset allocation on the valuation discount rate and the resulting normal cost. Aon Hewitt Investments for the Target Benefit Plan 12

13 As previously mentioned, benefit risk can be mitigated through various strategies, such as the construction of a bond portfolio matched to liabilities, the addition of leverage to hedge against interest rate risk, and use of alternative investments to diversify the market risk. The following graph illustrates the result of an ALM that helped one target benefit plan optimize the risk reward relationship of its asset allocation. Here, the reward variable is the mean level of anticipated benefit improvements, while the risk variable is the likelihood of having to reduce benefits. Target Benefit Plan Risk/Reward Optimization Mean level of benefit improvment ($) Increase reward Reduce risk Inclusion of alternative assets Addition of leverage Current portfolio Probability of benefit reduction (%) Aon Hewitt Investments for the Target Benefit Plan 13

14 VII. Dynamic Management of the Investment Policy Dynamic asset allocation The need for a specific level of investment return on target benefit plans is not consistent between plans, or even from year to year for a single plan. For example: A plan in which benefits have been reduced would prefer to see a higher return to restore benefits to the target level. A plan that is funded just enough to pay the basic benefit might want to obtain the return used during the plan design phase to maintain the financial position and therefore the target benefit level. A plan that is sufficiently funded to pay a basic benefit and wants to improve its financial position enough to pay ancillary benefits may want to aim for a higher return. Conversely, a target benefit plan whose funding ratio is such that the benefits paid exceed the target level does not require as a high a return and may want to protect its position. Therefore, it appears that a dynamic asset allocation strategy may be beneficial for target benefit plans. Dynamic asset allocation involves adjusting the asset allocation based on achievement of funding milestones, for instance to reduce subsequent fluctuation risks as the financial position of the plan improves. Many defined benefit plans have adopted a dynamic de-risking strategy in recent years. A large number of those plans are frozen or closed to new members and will eventually be liquidated. In the case of target benefit plans, the objective of the dynamic allocation would not be the potential complete elimination of risk while awaiting wind-up, but rather the purpose would be to drive improvement of the financial position or protect gains, using these tools to reduce the likelihood of adverse benefit adjustments. Such a strategy may be automatic and based on the plan s affordability test results. However, the relationship is not simple. A policy may suggest that appetite for risk increases when the financial position deteriorates i.e., to achieve a return that will improve the financial position, the plan may be prepared to take more risk and vice versa. However, one should also keep in mind that ability to tolerate risk decreases as the financial position deteriorates. In addition, a dynamic strategy increases liquidity needs (liquidity is needed to make the asset mix adjustments), meaning that such a strategy should be considered with caution when a significant portion of the portfolio is invested in illiquid asset classes. Dynamic asset allocation could also take into account the maturity level of the plan. Some recently established target benefit plans or those which will be established in the upcoming years have the opportunity to start with a clean slate, without carrying over liabilities for past service. In the initial phase, those plans have few assets under management, they collect contributions in excess of the normal cost, are less sensitive to interest rate variations and to financial market performance, and they do not pay benefits. All of these factors make them very liquid. During that initial phase, it may be beneficial to allocate a very high allocation to growth assets. Over time, as the assets and liabilities increase compared to contributions, the plan will become more sensitive to interest rate variations and market risk. Eventually, some members will reach retirement and begin to receive benefits. Those factors will reduce the plan s liquidity and risk tolerance and corrective measures in case of loss become more painful. As a result, it would make sense to gradually reduce exposure to market risk and to increase hedging of the interest rate risk as the plan matures. Aon Hewitt Investments for the Target Benefit Plan 14

15 Another form of dynamic asset allocation consists of investing the reserve based on a different investment strategy than the base fund. Depending on the circumstances of the plan, a large reserve might be seen as a significant cushion that allows more risk to be taken so as to trigger additional gains and increase benefits. In such a situation, the reserve funds might be aggressively invested. Conversely, the reserve may need to account for a high probability of paying the basic benefit (such as the 97.5% probability required by New Brunswick s legislation). The advantage of adopting a safer asset allocation for the reserve could then be considered. An ALM study would allow plan stakeholders to assess the potential benefits of a dual asset allocation strategy. Annuity purchases A target benefit plan offers annuities payable until death and, as such, is exposed to the risk that members may live longer than expected. In such a situation, payments are made over a longer period of time and, therefore, become more expensive. This longevity risk is a non compensated risk. In light of this, the benefits/funding and investment policies of a target benefit plan could provide for the purchase of annuities. In this context, annuities could be thought of as a specific asset class for the purpose of the investment policy. A type of annuity purchase that could be considered for target benefit plans is the buy-in purchase. In such a case, the annuity purchased is paid into the plan and is considered an investment, and as such, offers greater flexibility for the target benefit plan. Should benefits need to be adjusted, the member whose annuity was purchased will see his benefits handled in the same manner as all of the other members, although the insurance payments would continue unchanged. This type of investment would be attractive for a plan that wishes to reduce the longevity, market and interest rate risks, while allowing the member to continue to participate in the plan s financial results, whether positive or negative. The annuity purchase may be opportunistic, i.e. it would be up to the administrator to determine when an annuity purchase is favourable, based on the plan s maturity, the prevailing interest rates and the plan s funding level. The annuity purchase can also be automatic. For example, a purchase may be made each time the funding level reaches a certain target. Whether the annuity purchase is opportunistic or automatic, if the intention is to periodically purchase annuities, it should be taken into account when establishing the benefits/funding policy. The liabilities would then be determined using an interest rate for the post-retirement period, which reproduces the cost of purchasing annuities from an insurer. That rate is generally lower than the assumption used on a funding basis and would generally result in a higher contribution for the plan. Ideally, that decision would be made when developing the target benefit plan design, because the normal actuarial cost would otherwise risk exceeding the negotiated contribution. With regard to a funding basis, the use of an annuity purchase rate might also increase the sensitivity of the liabilities to interest rate changes. Aon Hewitt Investments for the Target Benefit Plan 15

16 VIII. Conclusion Target benefit plans transfer most of the risk to members. As a result, the risk tolerance is generally lower than for a traditional defined benefit plan where the employer covers possible deficits. The plan s design and benefits/funding policy will have a significant impact on risk management and asset allocation. The governance structure will also impact the investment universe and the investment strategies used. The reserve created by the contributions exceeding the normal actuarial cost and subsequent actuarial gains will help stabilize the benefits. The risk level implied by the investment policy can therefore be based on the level of these excess contributions. The most comprehensive analysis for establishing the investment policy will be to perform an asset liability modeling study, which will take into account all of the parameters to be considered in determining the target asset allocation. That study should be conducted over a period long enough to project the plan into the future through a large number of economic scenarios in order to test the plan s behaviour and measure the success of each strategy in terms of benefit stability or likelihood of benefit reduction. Asset-liability modeling will help determine the optimal strategy based on the details specific to each target benefit plan. Unlike DB plans where there tend to be many similarities from one plan to the next, the target benefit plans introduced to date and the legislation being considered across the country differ considerably from one another. For example, each target benefit plan will have established its own level of target benefits, based on the negotiated contribution level, reserve levels and benefit adjustment trigger points. As such, the investment policy for a target benefit plan should be even more customized than what we have seen with DB plans. In short, there is no unique investment policy that applies to all target benefit plans. Each policy will need to be considered separately and established so as to maximize the likelihood of success and ensure the sustainability of each unique target benefit plan. The investment policy will need to strike a balance between achieving the competing objectives of generating a return sufficient to provide target benefits and minimizing the likelihood of having to reduce benefits. Therefore, the investment policy cannot avoid risk entirely or it could well risk missing the target! Aon Hewitt Investments for the Target Benefit Plan 16

17 Contributors Claude Lockhead Based in Aon Hewitt s Montreal office, Claude Lockhead is a Partner who plays a key role in Aon Hewitt s Investment Consulting and Retirement teams. He oversees the Eastern Retirement Team. Claude has extensive experience as a consulting actuary, primarily in the area of investment management and pension plan funding. He is also an authority in the negotiation of pension plans with risk-sharing. He has been chosen by the Government of Québec to serve as a specialized arbitrator in disputes involving pension plan surpluses. Claude holds a Bachelor s degree in Actuarial Sciences from the University of Laval. He is a Fellow of the Canadian Institute of Actuaries (FCIA) and a Fellow of the Society of Actuaries (FSA). Troy Milnthorp Troy Milnthorp is an Associate Partner in Aon Hewitt s Saskatoon office, providing pension and actuarial consulting services to our clients locally and across the country. Troy has extensive experience working with the public sector in Saskatchewan on all different aspects of retirement strategies and programs. Over the past several years, he has been instrumental in the design and development of new target benefit pension plans. Troy is a member of Aon Hewitt s national Target Benefit Task Force, as well as Aon Hewitt s Public Sector Pensions Team. Troy graduated from the University of Saskatchewan with a Bachelor of Science degree (Honours) majoring in Statistics. He is a Fellow of the Canadian Institute of Actuaries (FCIA), a Fellow of the Society of Actuaries (FSA). Tommy Perron Tommy is the national practice leader of Aon Hewitt s Financial Risk Consulting team and is located in Quebec City. Tommy is involved in the research and development of investment strategies and financial risk management for institutional investors. He also monitors investment performance for pension funds and investment managers, updates investment policy statements and implements investment structures. Tommy specializes in all areas related to asset management for institutional investors. In particular, he is a subject matter expert in investment policies, implementation of liability-driven investments and de risking strategies, presentation of asset-liability studies and setting of economic assumptions used in such studies. Tommy is a Fellow of the Society of Actuaries (FSA) and a CFA charterholder. He holds a Bachelor degree in actuarial sciences from Université Laval. Jocelyn Guérin Jocelyn Guérin is a senior consultant in the Financial Risk Consulting Practice of Aon Hewitt s Montreal office. He plays an active role in the research and development of investment strategies and financial risk management. Specialized in asset-liability studies, he has been responsible for the development and maintenance of the asset liability stochastic model since His fields of expertise include asset/liability studies, statistical analyses, stochastic simulations and development of capital market assumptions. Jocelyn is a CFA charterholder, a Fellow of the Society of Actuaries (FSA), a Fellow of the Canadian Institute of Actuaries (FICA), and he holds a Bachelor s Degree in Mathematics from the Université de Montréal. Aon Hewitt Investments for the Target Benefit Plan 17

18 References and Suggested Reading Aon Hewitt. Target Benefit Plans: The Future of Sustainable Retirement Programs, Aon Hewitt. Unpacking the Target Benefit Plan: Finding the Right Benefit/Funding Balance, Aon Hewitt. Delivering on the Target Benefit Plan: Governance and Risk Alignment, Canadian Institute of Actuaries, Task Force on the Determination of Provisions for Adverse Deviations in Going Concern Valuations. Provisions for Adverse Deviations in Going Concern Actuarial Valuations of Defined Benefit Pension Plans, January 2013, document Alberta Treasury Board and Finance. Position Paper on Target Benefit Funding Rules, March Aon Hewitt Investments for the Target Benefit Plan 18

19 Contacts Claude Lockhead Troy Milnthorp Tommy Perron Jocelyn Gérin About Aon Hewitt Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit aonhewitt.com. Aon Hewitt Investments for the Target Benefit Plan 19

20 About Aon Aon plc (NYSE:AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 66,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world s best broker, best insurance intermediary, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/ manchesterunited to learn about Aon s global partnership with Manchester United Aon Hewitt Inc. All Rights Reserved. The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Risk. Reinsurance. Human Resources.