funding risks for federal public sector pension plans · 2020. 7. 21. · u.s. national vital...
TRANSCRIPT
Funding Risks for Federal Public Sector Pension Plans
Presentation to the Board of Directors of PSP Investments
Jean-Claude Ménard, Chief ActuaryLaurence Frappier, Senior Actuary
February 14, 2019
Office of the Chief Actuary Bureau de l’actuaire en chef
Office of the Chief Actuary• The OCA is an independent unit within Office of the Superintendent of Financial
Institutions (OSFI)
• The Chief Actuary reports to the Superintendent;
• however, the accountability framework of the OCA makes it clear that the Chief Actuary is solely responsible for content and actuarial opinions in reports prepared by the OCA
• Mandate: conduct statutory actuarial valuations on the
• Canada Pension Plan (CPP) –20M members
• Old Age Security Program (OAS) - 6M beneficiaries
• Federal public sector pension and insurance plans – 0.8M members
• Canada Student Loans Program – 0.6M loans
• Employment Insurance Program – 19M workers
• 14th Actuarial Report on the Old Age Security Program
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Office of the Chief Actuary Bureau de l’actuaire en chef
Responsibilities of the Chief Actuary with respect to federal public sector pension plans
• In accordance with the Public Pensions Reporting Act, each pension plan legislation requires that an actuarial valuation report be prepared, filed with the designated Minister and tabled before Parliament
• Actuarial valuations are conducted every three years• As part of the actuarial valuations, the Chief Actuary determines his
assumption for the expected return on plan assets
• TBS has been communicating this assumption to PSP as their target rate of return on plan assets
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Office of the Chief Actuary Bureau de l’actuaire en chef
Actuarial Reports - Membership
296,000 contributors 90,000 contributors 22,000 contributors 294,000 beneficiaries 122,000 beneficiaries 19,000 beneficiaries
PSSA (2017) CF (Regular) (2016) RCMP (2015)
Average Age Contributors/Retirement Pensioners 45/68 35/66 42/67
Average Service of Contributors 13 12 14
Average Salary of Contributors 79,000 70,000 89,000
Average Annual Pension of Retirement Pensioners 29,000 30,000 45,000
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Office of the Chief Actuary Bureau de l’actuaire en chef
For recent retirees, average working life is less than or equal to expected average retirement life
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About 2 more years in retirement for women
Age 33 Age 59 Age 86
Age 23 Age 55 Age 87
Age 24 Age 49 Age 85
Canadian Forces
25 years of service 36 years in retirement
Public Service of Canada
26 years of service 27 years in retirement
Royal Canadian Mounted Police
32 years of service 32 years in retirement
Office of the Chief Actuary Bureau de l’actuaire en chef
Actuarial Assumptions• The selection of the actuarial assumptions has a direct impact on the
results of the actuarial reports
• Actuarial reports are based on “best-estimate” assumptions over a long period of time
• Although secondary, recent trends are also taken into account
• The actuarial assumptions are reviewed and modified with each actuarial valuation
• In accordance with the Standards of Practice of the Canadian Institute of Actuaries (CIA), the actuary must certify that the assumptions used are appropriate for the purposes of the valuation• It is essential that the actuary has access to all the necessary information to
determine the assumptions
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Office of the Chief Actuary Bureau de l’actuaire en chef
The actuarial assumptions used in the actuarial reports affect the costs of the pension plans
• Demographic and economic environments determine the choice of assumptions used to calculate the cost of a plan• Short term experience vs. structural change
• Increases in longevity mean that pension benefits are paid for a longer period of time
• Fiscal and financial market environments affect the assets and the expected rate of return on assets
Experience gains and/or losses, including investment losses, affect the actuarial surplus/(deficit) and may result in additional costs
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Office of the Chief Actuary Bureau de l’actuaire en chef
Mortality Assumptions for Public Sector Pension Plans
• An assumption for the mortality of plan members is necessary to estimate the period of pension payments• Lower mortality results in higher costs for the pension plan
• Mortality assumptions in our actuarial valuations have two components:• Mortality rates as at the valuation date, which are based on the experience
of the plans
• Expected mortality improvement rates, which are developed for the CPP actuarial reports and are used to project the mortality rates into the future
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Office of the Chief Actuary Bureau de l’actuaire en chef
Life Expectancies at Age 65 as at 31 March 2019 (with future mortality improvements)
Plan and Year of Report Males Females
PS 2017 22.0 23.8
RCMP 2015 22.4 24.8
CF 2016 (Officers) 23.3 24.4
CF 2016 (Other Ranks) 20.9 24.4
Members of Parliament 2016 23.7 25.2
Judges 2016 24.3 25.2
CIA CPM Combined 22.5 24.8
CPP 27th 2015 21.5 23.9
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Office of the Chief Actuary Bureau de l’actuaire en chef
Mortality Rates have decreased over the last 80 years, more so over the last 40 years
U.S. National Vital Statistics Report, Volume 65 No.3 and Statistics Canada catalogue 84-215-xStandardized using 2015 Canadian population
Death Rate per 1,000Top 5 Causes
Canada 2012
U.S.2012
Ratio Can/US
Neoplasms 13.1 11.6 1.13
Diseases of the Heart 7.9 11.0 0.72
Cerebrovascular 2.5 2.7 0.93
Lower Respiratory 2.4 3.6 0.67
Diabetes 1.2 1.5 0.80
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Office of the Chief Actuary Bureau de l’actuaire en chef
Slowdown in Mortality Improvements in Recent Years: A Blip or a New Trend?
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0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2002 -2007
2007 -2012
2012 -2017
2002 -2007
2007 -2012
2012 -2017
2002 -2007
2007 -2012
2012 -2017
2002 -2007
2007 -2012
2012 -2017
2002 -2007
2007 -2012
2012 -2017
65 - 69 70 - 74 75 - 79 80 - 84 85 - 89
Canadian Mortality Improvement Rates from 2002 - 2017 for Various Ages by Sex
Males
Females
Source: OAS Mortality Fact Sheet – September 2018, OCA.
Office of the Chief Actuary Bureau de l’actuaire en chef
Evolution of PSSA Mortality Projections over 20 Years (Female)
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Without future mortality improvements, the average expected age at death of a healthy female aged 65 in 2017 is 87.7
87.0
87.5
88.0
88.5
89.0
89.5
90.0
90.5
91.0
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Age
Year
Average Age at Death of a 65 Year Old Female (with Future Mortality Improvements)
PSSA 1999
PSSA 2002
PSSA 2005
PSSA 2008
PSSA 2011
PSSA 2014
PSSA 2017
No Mortality Improvement
Office of the Chief Actuary Bureau de l’actuaire en chef
Evolution of PSSA Mortality Projections over 20 Years (Male)
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Without future mortality improvements, the average expected age at death of a healthy male aged 65 in 2017 is 85.9
83.5
84.0
84.5
85.0
85.5
86.0
86.5
87.0
87.5
88.0
88.5
89.0
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Age
Year
Average Age at Death of a 65 Year Old Male (with Future Mortality Improvements) PSSA 1999
PSSA 2002
PSSA 2005
PSSA 2008
PSSA 2011
PSSA 2014
PSSA 2017
No Mortality Improvement
Office of the Chief Actuary Bureau de l’actuaire en chef
The financial impact of future mortality improvements on the actuarial liability of the plans
is importantActuarial Liability as at 31 March 2018* ($ million)
* Actuarial liability for the Pension Plan for the Public Service of Canada, Pension Plan for the Royal Canadian Mounted Police and Pension Plan for the Canadian Forces – Regular Force estimated as at 31 March 2018 based on the mortality assumptions of the latestrespective actuarial reports and the economic assumptions of the 31 March 2017 actuarial report for the Pension Plan for the Public Service of Canada.
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Superannuation Account
Pension Fund Total
With mortality improvements 155,131 131,038 286,169
Without mortality improvements 149,184 126,858 276,042
Difference%
5,947(3.8%)
4,180(3.2%)
10,127(3.5%)
Office of the Chief Actuary Bureau de l’actuaire en chef
Real rate of return assumption for Public Sector Pension Plans
• The expected rates of return on the plans’ assets are required to determine the liability for service since 1 April 2000 and the current service costs
• In determining the real rate of return assumption, OCA follows the Canadian Institute of Actuaries Educational Note of December 2015
• Determine expected return for each asset class• Fixed income • Public equity• Private equity• Real assets• Credit
• Determine projected portfolio return using projected asset mix
• Subtract assumed allowance for investment expenses (20 bps)
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Office of the Chief Actuary Bureau de l’actuaire en chef
Government of Canada long-term marketable bond yields are very low
Nominal Yield on the Canada Long-Term Bonds (maturity 10 + years)
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Office of the Chief Actuary Bureau de l’actuaire en chef
Lower discount rate leads to higher pension plan costs
• The lower bond yields as well as the lower expected equity risk premium lead to a lower expected real rate of return on assets:
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Expected Real Rates of Return on Assets in Past Actuarial Reports (%)
2005 2008 2010 2011 2012 2013 2014 2015 2016 2017
First 5 Years 4.3 4.0 4.2 3.6 3.3 3.4 3.3 3.1 3.0 3.3
First 10 Years 4.3 4.2 4.2 3.9 3.7 3.7 3.6 3.5 3.3 3.5
Ultimate 4.3 4.3 4.2 4.1 4.1 4.1 4.1 4.1 4.0 4.0
Flat Equivalent Rate 4.3 4.2 4.2 4.0 3.9 3.9 3.9 3.8 3.7 3.7
A decrease of 0.6% in the expected rate of return on assets is estimated to increase the current service cost of the plans by approximately 3.5% of payroll and to increase the actuarial liabilities (for post-2000 service) of the plans by approximately 12.5%
Office of the Chief Actuary Bureau de l’actuaire en chef
• The rate of return objective is often stated as a long-term goal without enough consideration for the volatility of investment returns• The timing of investment gains and losses could have a significant impact on the funding
status of a pension plan
• Historical rates of return are often stated on an annualized basis (e.g. PSPIB achieved a net annualized return of 6.3% since inception).• It is also important to understand the context of a pension plan, for example its maturity,
cash flow requirements and funding status
Impact of the path of investment returns on funding status
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Office of the Chief Actuary Bureau de l’actuaire en chef
Multiple investment return paths can lead to the same average annualized rate of return at the end
of a specific period
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All paths generate the same geometrical average return of 6.3% over a 18-year period
Office of the Chief Actuary Bureau de l’actuaire en chef
However, with intermediate cash flows, different return paths lead to different funding ratios at the
end of a specific period
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6.0%
Office of the Chief Actuary Bureau de l’actuaire en chef
Strikingly different funding ratio outcomes arise in the case of a very mature plan
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Office of the Chief Actuary Bureau de l’actuaire en chef
Funding Ratios of a Mature Plan
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Office of the Chief Actuary Bureau de l’actuaire en chef
• The costs of the federal public sector pension plans are subject to upward pressure due to low interest rate environment and improved longevity
• The amendments made to the Pension Plan for the Public Service (introduction of Group 2) will somewhat alleviate this upward pressure
• The timing of investment gains and losses could have a significant impact on the funding status of the plans
• It is important to have the ability to accumulate surplus in anticipation of future downturns
Conclusion
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THANK YOU!
Appendix
Office of the Chief Actuary Bureau de l’actuaire en chef
Public Service of Canada Mortality Assumptions
Projected Life Expectancy at age 65 as at 31 March 2017 (with
future mortality improvements)
For the first time over the last 20 years, the mortality experience analysis of the Pension Plan for the Public Service of Canada showed that mortality did not improve in the intervaluationperiod (2014-2017)
Males Females
31 March 2014 Report 21.8 24.0
Slowdown in mortality improvements
-0.3 -0.5
Introduction of salary-weighted mortality
+0.4 +0.2
31 March 2017 Report 21.9 23.7
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Office of the Chief Actuary Bureau de l’actuaire en chef
PS 2017 CF 2016
First 5 years 3.3 3.0
First 10 years 3.5 3.3
Ultimate 4.0 4.0
Portfolio Real Rates of ReturnPS Actuarial Report – 31 March 2017
Plan Year
Public Equity
Private Equity
CreditFixed
Income Securities Cash
Real Assets Total
(%) (%) (%) (%) (%) (%) (%)
Asset Allocation
2022+ 30 13 7 18 2 30 100
Real rate of return before investment expenses
2018 4.8 5.6 3.7 (3.1) (0.8) 4.2 3.3
2023 4.8 5.6 3.7 0.3 0.2 4.2 3.7
2028 4.8 5.6 3.7 2.7 1.1 4.2 4.2
Asset Allocation and Real Rates of Return by Asset Type (before investment expenses)
Portfolio Real Rate of Return Net of Investment and Operating Expenses (%)
Total expected investment expenses of 0.6% are reduced by an additional rate of return due to active management of 0.4% for a net investment expenses assumption of 0.2% to reflect the expenses due to passive management.
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Office of the Chief Actuary Bureau de l’actuaire en chef
Assumed real rate of return for the PS 2017 is in line with assumptions of peers
Asset mix and real rate of return assumptions
The PS valuation report uses a streamed assumption for the real rate of return on Pension Fund assets. The expected real rate of return of 3.1% for plan year 2018 will gradually increase to the ultimate rate of 4.0% in plan year 2028. The equivalent flat real rate of return as at 31 March 2017 is 3.7%.
Due to current low interest rate environment, the OCA assumes a real rate of return of 3.3% over the next five years.
Equities Fixed IncomeAlternative
investments/RE&IReal rate of
return
PS 43% 20% 37% 3.70%
OTPP 38% 22% 40% 2.75%
HOOPP 34% 54% 13% 3.45%
ON PSPP 42% 25% 33% 3.70%
AB PSPP 55% 21% 24% 4.10%
RREGOP 49% 33% 18% 4.10%
OMERS 36% 23% 41% 4.20%
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Office of the Chief Actuary Bureau de l’actuaire en chef
Return paths used for illustrationYear PSPIB Net Returns Good Early Returns Bad Early Returns
1 -4.4% 15.9% -13.7%
2 2.5% 14.2% -4.4
3 -13.7% 0.7% 2.5%
4 25.9% 25.9% -23.1%
5 7.7% 7.7% 7.7%
6 18.8% 18.8% 18.8%
7 11.0% 11.0% 11.0%
8 -0.7% -0.7% -0.7%
9 -23.1% -23.1% 9.8%
10 21.1% 21.1% 21.1%
11 14.1% 14.1% 14.1%
12 2.6% 2.6% 2.6%
13 10.3% 10.3% 10.3%
14 15.9% 12.8% 15.9%
15 14.2% 9.8% 14.2%
16 0.7% -13.7% 0.7%
17 12.8% 2.5% 12.8%
18 9.8% -4.4% 25.9%
Average 6.3% 6.3% 6.3%
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