FCIA FSA Director Pension amp actuarial services May 16 2018 Canadas largest communications company Annual revenue 22B Enterprise value 78B Nationwide team 50000 One of the most ID: 788020
Download The PPT/PDF document "Pension De-Risking Robert Marchessault," is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Pension De-Risking
Robert Marchessault, FCIA, FSADirector Pension & actuarial services
May 16, 2018
Slide2Canada’s largest communications company
Annual
revenue
$22B+
Enterprise
value
~$78B
Nationwide team
50,000
One of the most
widely held
stocks in Canada
Customer connections
22M+
Slide3Canada’s largest private sector pension fund
Active DB members
12,000
Solvency discount rate
~
3.1%
(Dec 31, 2017 prelim)
Longevity swap notional:
$5B
Going concern status
~110
%
Retiree and deferred
42,500
Slide4Bell’s de-risking context and history
Regularly reassess to adapt to constantly changing environment and evolution of the plans
END POINT: Target Risk Level
Plan design changes
Bond portfolio
changesFunding strategy adjustments
De-risking strategy sophistication
De-risking & “Lock-down” strategiesClosed DB plans to new entrantsAdded DC component to existing DB plans for all new hiresAlign provisions on acquisitions
Increased bond portfolio duration over several years
Increased allocation: Fixed income grown from 40% of assets in 2008 to 70% of assets in 2017Diversify to find spread
Assess if advance contribution is desired
Establish guidelines on deficit funding decision processDaily tracking of financial situation Split portfolio by Return Generating (RGP) and Low Risk (LRP) to better align investment strategy with liability Structure to progressively shift to ultimate asset mix with acceptable risk level (glide path)Risk transfer (longevity swap)Fixed income overlay strategyKeep abreast of emerging initiatives and legislation changes
STARTING POINT
Bell Initiatives
Slide5Longevity risk
Slide6Risks remain in the “end game” - 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
Slide7First longevity insurance in North America
As per the pension plan provisions and not impacted by the longevity insurance
Bell Pension Plan
Variable Cash Flow =
Unindexed
Pension Payments
Pension Payments
Longevity Insurance ContractPartially re-insured with two global re-insurers
Fixed Cash Flow =
agreed monthly schedule~17,000Bell RetireesSun Life AssuranceCompany
Slide8Swap cash flows - example
$1M swap
Pension Plan payments are fixed and known from day 1
Present value of Fixed Pension Plan payments is $1M under all scenarios
Net present value of exchanged cash flows is minimal under expected longevity
Slide9Swap cash flows - example
-
Pension Plan payments are fixed and known from day 1 - unchanged
Present value of Fixed Pension Plan payments is $1M under all scenarios
Net present value of exchanged cash flows is $70K payable form insurance company to pension plan
Favourable MTM on swap offsets loss from improved longevity in pension plan (with basis risk)
Slide10Interest rate risk
Slide11Interest rate riskProjected DB solvency liability upon DB closure for new employee in 2004
Slide12Interest rate riskActual DB
solvency liability upon DB closure for new employee in 2004solvency DB liability since plan closure 2004
Slide13Interest rate riskActual DB
solvency liability upon DB closure for new employee in 2004solvency liability since plan closure 2004
Slide14Interest rate protection with Overlay
Latest refinement of pension de-risking strategy to protect funded position
Fixed income or “bond” overlays can reduce interest rate risk independent of allocation to growth investments in the portfolio
With borrowing
cost
typically lower than the fixed income portfolio yield, the strategy is expected to generate positive carryInvolves leverage, therefore, total asset portfolio returns are more volatile (i.e. there is a normal risk / return trade-off from using leverage)However, in the context of de-risking strategy the solvency liability and current portfolio position, it has the attributes of being solvency risk reducing and return generating
The use of leverage through fixed income overlays allows the plan to benefit from equity exposure while reducing solvency risk from the interest coverage gap
Current portfolioOverlay“Equities”“Matching assets”Borrowing
Slide15Stochastic testing of results
Solvency ratio improvement with overlay vs current mix (5 year projection)
The results of 1000 stochastic scenarios
examined
in three groups based on degree of interest rate change
When the observation falls above the horizontal line, the overlay strategy has outperformed the current mixWhen the observation falls to the right of the vertical line, the plan is over 100% fundedThe scenarios where the overlay strategy has underperformed while the plan is under-funded (i.e. where the strategy has added to funding requirements) are in the bottom left, highlighted, quadrant
Declining to modestly rising rates (<175bps)
Significantly rising rates (175bps - 475bps)
Extremely rising rates (>475bps)
Overlay yields superior
expected
returns in most interest rate scenarios
Slide16