Throw away your crystal ball Speakers: Heather Wolfe Managing Director, Client Relationships, Defined Benefit Solutions Sun Life Financial Mathieu Tessier Director, Client Relationships, Defined Benefit Solutions Sun Life Financial
T H E S H O E M A K E R ’ S S T O R Y 2
O N C E U P O N A T I M E … 3
T I M E S W E R E D I F F I C U LT … Cash infusions Time and attention 4
T H E S H O E M A K E R D E C I D E D T O TA K E A C T I O N Put it in run-off Look for a buyer 5
A N A L L E G O R Y F O R … Company Pension Plan 6
W H AT T H E S H O E M A K E R L E A R N E D 7
RISK AND REWARD A C L O U D Y R E S U LT 8
W H AT ’ S Y O U R R E WA R D F O R TA K I N G R I S K ? C o r e b u s i n e s s r i s k P e n s i o n p l a n r i s k Grow th Volatility Trapped surplus Profit No competitive Competitive advantage advantage Management time Shareholder value and attention Risk budget 9
R E D U C I N G P E N S I O N R I S K PAY S O F F Reduced pension volatility Avoids trapped surplus Material rewards for reducing pension risk Potential tax savings Reduced investment management fees Additional reward: ensure benefit security for plan members 10
T H E M A R K E T R E WA R D S P L A N S T H AT D E - R I S K +0.1% +0.8% +2.3% +0.6% +2.6% Kimberly-Clark Bristol-Myers Motorola NCR Verizon Squibb 2015 2014 2013 2012 2014 Annuity purchase Annuity purchase Annuity purchase Annuity purchase Annuity purchase +6.4% +1.6% -2.50% +3.4% NCR General Motors Ford Honeywell 2012 2012 2012 2010 Lump sum Annuity purchase Lump sum Accelerated funding and lump sum Announcement day returns relative to the S&P 500 Index 11
W H AT ’ S T H E B E S T O P T I O N F O R F I X E D I N C O M E A S S E T S ? Universe bond portfolio Focus on fixed income assets Customized matching bond portfolio 12
I S WA I T I N G F O R I N T E R E S T R AT E S T O R I S E W O R T H I T ? Magic number is 2.5% over 5 years 13 Source: Sun Life analysis for a typical Canadian defined benefit pension plan
I S A 2 . 5 % R AT E I N C R E A S E R E A L I S T I C ? Rate increase anticipated over the next 5 years Bond market 1-year Government 1.49% expecting rate of Canada bond increases 10-year Government 0.98% of Canada bond Rates as of March 31, 2017 14
I S A 2 . 5 % R AT E I N C R E A S E R E A L I S T I C ? Bank of Canada rate hike history Change in Change in Total rate Period Yield curve 10-year spot 30-year spot Long-term hike rate rate rates may Nov. 8, 1996 – Aug. 26, 1998 2.75% Flattens -0.83% -1.34% not move Nov. 17, 1999- May 17, 2000 1.25% Flattens 0.17% -0.67% in line with Apr. 16, 2002 – Apr. 15, 2003 1.25% Flattens -0.52% -0.21% short-term Sep. 7, 2004 – Jul. 9, 2007 2.50% Flattens -0.13% -0.76% rates May 28, 2010 – Sep. 8, 2010 0.75% Flattens -0.30% -0.13% During the rate increase period, longer duration credit spreads typically increased only slightly, which was not enough to materially counterbalance the decrease in risk free rates noted above. 15
I S A 2 . 5 % R AT E I N C R E A S E R E A L I S T I C ? Demand for long duration assets may keep rates low 16
T O P T I P S T O AV O I D A C L O U D Y R E S U LT 17
Throw away your crystal ball Take action instead 18
W H AT W E ’ R E H E A R I N G F R O M S P O N S O R S – R E G R E T 120 % 102% 99% 97% 100 % 94% 93% 91% 97% 95% 86% 86% 94% 93% 80 % 86% 83% 76% 68% 69% 60 % 40 % 20 % 0 % Median solvency ratio Source: Aon Hewitt Median Solvency Index, February 1, 2017 19
W H AT W E ’ R E H E A R I N G F R O M S P O N S O R S – U N C E R TA I N T Y
T H E F U T U R E I S R E A L LY C L O U D Y 21
M A N Y H AV E D E C I D E D T O TA K E A C T I O N Loblaw (Canada) TRW (U.K., U.S., Canada) PPG (U.S.) Kimberly Clark (U.S.) British Airways (U.K.) Bell Canada (Canada) AstraZeneca (U.K.) Siemens (U.K.) General Motors (U.S.) Verizon (U.S.) Rolls Royce (U.K.) Bristol-Myers-Squibb (U.S.) 22
O P T I O N S F O R P E N S I O N P L A N S Pension Reduce Custom risk equities LDI transfer •Sell equities, •Custom portfolio •Wind up buy bonds •Custom •Buy annuities •Buy longer bonds benchmarking or longevity insurance 23
WHAT’S HOLDING YOU BACK? 24
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