Getting control back on the vessel – some offloading required September 21, 2016 Eleanor Marshall , CPA, CA, CFA Vice-President, Pension & Benefits, BCE and Bell Canada Heather Wolfe , FIA, FCIA, FSA Managing Director, Client Relationships, Defined Benefit Solutions, Sun Life Financial Manuel Monteiro, FSA, FCIA, CFA Partner, Mercer 1
Agenda 1 De-risking overview Market update 2 3 Two case studies 2
1 De-risking overview Manuel Monteiro, FSA, FCIA, CFA Partner, Mercer 3
1 Composition of private sector DB plans Defined benefit plans open to new entrants have dropped from 70% in 2007 to 45% in 2015. Source: Mercer Pension Database (Canada), Base: 540 plans 4
1 Potential strategies for closed and frozen plans MAINTAIN PLAN MAINTAIN PLAN UNTIL SETTLE AS MAINTAIN PLAN UNTIL ACTIVE UNTIL LAST ACTIVE LAST ACTIVE DB SOON AS DB MEMBERSHIP FALLS BELOW A DB MEMBER RETIRES MEMBER DIES POSSIBLE THRESHOLD A P P R O X I M A T E T I M E F R A M E 2015 – 2020 2020 – 2040 2040 – 2055 2090 + 5
1 Key steps in establishing a risk management strategy Measure current Define organization’s risk/reward profile risk appetite Is current risk profile consistent with risk appetite? Yes No Consider alternatives Optimize current to adjust risk profile strategy Develop transition strategy and implement 6
1 Risk management – considerations 1 Is the DB plan open, Upside benefit to taking risk diminishes as size of closed or frozen? future accruals decreases For large mature plans: Size of plan relative to 2 • Downside risk has a larger impact size of sponsor • Upside benefit may be lower (unusable surplus?) Financial strength of plan 3 Stronger sponsors better able to bear risk sponsor Upside benefit to taking risk diminishes as the funded 4 Funded position of plan position improves Who bears the risk? Risk-shared plans more likely to take risk to keep 5 Who reaps the rewards? contributions at a reasonable level 7
1 Sponsors should consider the full suite of risk management tools in developing their strategy Managing Pension Risk Retain Risk Transfer Risk Plan strategies Asset strategies Insurance Individual Terminated vested Plan redesign Change asset mix Annuity buy-in lump sums Optimize growth Retiree Letters of credit Annuity buy-out portfolio lump sums Interest rate Funding strategies Longevity hedging hedging Alternative asset Borrow to fund Captives classes Tail risk protection The focus of this presentation is on Dynamic de-risking these strategies 8
2 Market update Manuel Monteiro, FSA, FCIA, CFA Partner, Mercer Heather Wolfe , FIA, FCIA, FSA Managing Director, Client Relationships, Defined Benefit Solutions, Sun Life Financial 9
2 Global risk transfer transactions are significant DB assets Cumulative annuities and longevity insurance transacted 300 U.K. annuities and longevity insurance U.K. annuities Total business transacted ($C billion) U.K. 250 250 Canadian annuities £2 trillion Canadian annuities and longevity insurance 200 U.S. annuities U.S. 150 $3 trillion 125 100 98 50 Canada $1.5 19 trillion 14 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Hymans Robertson, Lane Clark & Peacock LLP, LIMRA and Sun Life estimates and exchange rates at December 31, 2015. 10
2 Canadian annuity market Record Year Record Year Record Year Sources: LIMRA and Mercer More than Over x 2 200 50% average deal size transactions in last of transactions being increasing two years done by ongoing plans 11
2 Insurer pricing dynamics I N S U R E R H I T S S A L E S T A R G E T L E A D I N G T O R E D U C E D A P P E T I T E N E W E N T R A N T ’ S P R E M I U M “ N O R M A L I S E S ” P R I C E I N S U R E R K E E N T O W I N B U S I N E S S B E F O R E I T ’ S Y E A R - N E W E N T R A N T E N D P R I C I N G L O W E R T O A T T R A C T B U S I N E S S I N S U R E R H A S I N C R E A S E D A P P E T I T E F O R B U S I N E S S S E V E R A L M O N T H S ASSUMING NO CHANGES IN FINANCIAL CONDITIONS 12
2 Annuity transactions – challenges for plan sponsors To achieve an exceptional outcome in the annuity transactions market: Price transparency , Plan sponsors must be Speed in execution unique to their ready well in advance of in a fast-changing pension plan, seeking to transact market is essential must be available • Data and plan specifications shared • Insurers can prepare for binding • Obtained over a suitable monitoring with insurers quote in advance (less time needed period to provide insights into price • Decision-making process primed to prepare submission) drivers and decision makers ready to act • Plans that are ready to transact will • Monitoring identifies opportunities quickly secure desired pricing before prices • Deal triggers set in advance alert • Portfolio hedging, liquidation, and move sponsors to attractive pricing rebalancing actions identified and • Participant data and documents prepared for should be prepared in advance • Insurer due diligence must be carried out 13
2 Annuity buy-ins are taking off SINCE 2009 A N N U I T Y B U Y - I N C A N B E U S E D T O R I G H T (Approximate) 1 S I Z E YO U R P L A N 41 • May provide a higher yield than an index bond portfolio with duration of your liabilities • No top-up contribution required for under funded plans ANNUITY • No settlement accounting impact (confirm with your auditor) BUY-INS • Longevity and investment risk transferred to insurer IN CANADA A N N U I T Y B U Y - I N C A N B E U S E D D U R I N G W I N D - U P P R O C E S S 3.1 $ • Transfer longevity and investment risk before a wind-up report is approved • Convert annuity buy-in to annuity buy-out at any time BILLION LIABILITIES 1 Sun Life estimates, as at June 30, 2016 14
2 What are the barriers to de-risking? Barriers Current trends Plan sponsors Many now changing focus to BENEFIT waiting for interest SECURITY and looking for opportunities to rates to rise / full get a GOOD PRICE funding Regulatory forces B.C., ALBERTA and QUEBEC have removed (annuity boomerang, BOOMERANG; expect others to follow solvency funding) Fear of being a “first Many plans are taking action but FEW mover” PUBLIC ANNOUNCEMENTS 15
2 Trend: plan sponsors are hedging different combinations of longevity and investment risk Longevity Alternatives Longevity Hedged Group insurance insurance + annuities + Full LDI Traditional Longevity risk Unhedged Alternatives Traditional Full LDI Hedged Unhedged Investment risk (discount rate, inflation, credit default, equity) 16
3 Case Study 1: Bell Canada Pension De-Risking Eleanor Marshall , CPA, CA, CFA Vice-President, Pension & Benefits, BCE and Bell Canada 17
3 About us Canada’s largest communications company One of Canada’s largest private sector pension sponsors with plan assets ~ $21.0b DB ~ $20.0b and DC ~ $1.0b o Bell DB plan closed since end of 2004 Other subsidiaries closed before and since o Plan is > 90% funded on solvency basis Surplus on going concern basis o Represents ~ 36% of BCE market capitalization 100 Plan members Actives accruing DC benefits Actives accruing DB service DB Retirees and survivors 5-year CAGR 80 +1.3% 60 40 -8.0% 20 +8.5% 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 18
3 De-risking context De-risk De-risk Manage De-risk De-risk Key Enterprise Risks: cash flow, balance sheet, benefit security, reputation Objective was to implement a liability driven investment framework to gradually reduce future surplus volatility in a disciplined manner 19
3 De-risking context Impact of a 25bp change in discount rate Impact of a 25bp Impact of a 1 year change in inflation change in age 65 rate life expectancy Impact of a 100bp difference in equity Before Hedging Assets returns After Hedging Assets Interest Rate Equity Risk Inflation Risk Longevity Risk Risk 20
3 De-risking investment framework The investment framework has been implemented to de-risk the pension plan assets over time in a disciplined fashion The framework is built around the solvency ratio in line with the objective to reduce contribution volatility Assets are moved from the Return Generating Portfolio to the Low Risk Portfolio as the solvency position improves Moves toward a targeted level of equity risk for the “end game” scenario of all retirees, 105% funded De-risking strategy is not static – it must adjust to changing plan characteristics, risk management objectives, cost constraints, capital market views. 21
3 Longevity risk Observations Life expectancy beyond age 65 has been increasing on an absolute basis and at an increasing rate − Current life expectancy beyond age 65 is ~19 years (or 84 years at death) During the 80’s, life expectancy increased by ~1.0 years During the 90’s, life expectancy increased by ~1.5 years From 2002 to 2012, life expectancy increased by ~2 years Increase in life expectancy after age 65 comes mainly from improvements in medical science, reduction in smoking and healthier lifestyles 22
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