statutory funding actuarial valuation method and ... · (elimination of cardio-vascular diseases,...

H E A L T H W E A L T H C A R E E R

S T R E A M L I N E D L O N G E V I T Y

I N S U R A N C E

A S O L U T I O N A C C E S S I B L E T O A L L

P L A N S P O N S O R S

B R A D L E Y B A K E R

S e n i o r A c t u a r y

C A N A D I A N B A N K N O T E C O M P A N Y

B E N O I T H U D O N

G l o b a l D e f i n e d B e n e f i t L e a d e r

M E R C E R

M A N U E L M O N T E I R O

H e a d o f C a n a d i a n F i n a n c i a l S t r a t e g y G r o u p

M E R C E R

December 5, 2016

© MERCER 2016 2

A G E N D A

Market context and background

Canadian Bank Note case study

What is to come next?

What is longevity risk and what can plan sponsors do about it?

Question & Answer period

© MERCER 2016 3


© MERCER 2016 3

MARKET CONTEXT

AND BACKGROUND

© MERCER 2016 4

W E L I V E I N I N T E R E S T I N G T I M E S . . .

U . S .

E L E C T I O N

P U B L I C

D E B T

A N T I ( ? )

G L O B A L I Z A T I O N

F U T U R E

O F E U R O Z O N E B R E X I T

A G E I N G

P O P U L A T I O N

© MERCER 2016 5

A N D T H E S E A R E A L L P U T T I N G P R E S S U R E O N T H E

E C O N O M Y … A S W E L L A S O N P E N S I O N P L A N S

Interest rates

Inflation

Equity risk

Regulatory Accounting

rules

Longevity

Operational

Currency Credit

© MERCER 2016 6

These strategies help

in managing longevity risk

Managing Pension Risk

Insurance Individual

Transfer Risk

Terminated vested

lump sums

Retiree

lump sums

Captives

Longevity hedging

Annuity buy-out

Annuity buy-in

Plan strategies Asset strategies

Retain Risk

Change asset mix

Optimize growth

portfolio

Interest rate

hedging

Alternative asset

classes

Tail risk protection

Dynamic de-risking

Plan redesign

Letters of credit

Funding strategies

Borrow to fund

1 S P O N S O R S H A V E A C C E S S T O A W H O L E S U I T E O F

R I S K M A N A G E M E N T T O O L S

© MERCER 2016 7

A N D P E N S I O N R I S K T R A N S F E R T R A N S A C T I O N S

C O N T I N U E T O H A P P E N A R O U N D T H E W O R L D

C U M U L A T I V E P E N S I O N R I S K T R A N S F E R T R A N S A C T I O N S S I N C E 2 0 0 7

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 11 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5

($ Billions)

Canada (annuities only)

UK (annuities only)

US

Canada (with longevity insurance)

UK (with longevity-only transactions)

2 0 1 6 E

© MERCER 2016 8

T H I S T R E N D I S A L S O O B S E R V E D I N C A N A D A

average deal

size increasing x 2 of transactions being

done by ongoing plans 50% More than

transactions in last

two years alone 200 Over

Sources: LIMRA and Mercer

0

5 0 0

1 , 0 0 0

1 , 5 0 0

2 , 0 0 0

3 , 0 0 0

2 0 1 0 2 0 1 5 2 0 11 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 6

($ M)

2 , 5 0 0

Record Year

Record Year

$ 1 , 5 00M

(year to date)

Record Year

Q1 Q2 Q3 Q4 Total

?

B E L L C B N P L U S L O N G E V I TY-ON LY T R AN S AC T I O N S :

$ 7 4 8M

$ 1 , 3 62M

$ 1 , 0 54M

$ 2 , 4 60M $ 2 , 5 67M $ 2 , 2 18M

© MERCER 2016 9


© MERCER 2016 9

WHAT IS LONGEVITY RISK?

AND WHAT CAN PLAN SPONSORS

DO ABOUT IT

© MERCER 2016 10

H I S T O R I C A L L O N G E V I T Y T R E N D S I N C A N A D A

• Life expectancy has consistently improved in the last 40 years

• Over time, the Canadian Institute of Actuaries has suggested the use of more

conservative mortality assumptions

0

5

1 0

1 5

2 0

2 5

GAM71

(1980’s) …2025

…2035

and beyond…

E X P E C T E D L O N G E V I T Y

( C A N A D I A N M A L E – A G E 6 5 )

GAM83

(1990’s)

UP94

(2000’s)

UP94 Gen AA

(2009)

CPMPublic

(2014)

?

© MERCER 2016 11

R M S A P P R O A C H : M O D E L F I V E F U N D A M E N T A L

D R I V E R S O F M O R T A L I T Y I M P R O V E M E N T S

© MERCER 2016 12

S O U R C E S O F L O N G E V I T Y R I S K

B AS E L I N E R I S K

C O N C E N T R AT I O N R I S K T R E N D R I S K

The current mortality

is mis-stated.

Future improvements are

different to those assumed.

Experience correct “on

average”, but individual

high earners create risk.

© MERCER 2016 13

P E N S I O N L I A B I L I T I E S U N D E R V A R I O U S

L O N G E V I T Y S C E N A R I O S

Based on current expectations, longevity risk is asymmetrical and plan sponsors are

more exposed to downside than upside

-4% +14%

Current Expectation

“Medical breakthroughs” (elimination of cardio-vascular

diseases, cure for cancer and

modest impact of regenerative

medicine)

No future mortality

improvements

Current expected mortality

rates do not improve at all

Current mortality rates improve at

a long-term annual mortality

improvement rate of 4.5%

© MERCER 2016 14

LO

NG

EV

IT

Y R

IS

K

UN

HE

DG

ED

H

ED

GE

D

I N V E S T M E N T R I S K U N H E D G E D H E D G E D

Group

annuities

Status Quo

Longevity

insurance

+

Traditional

asset mix

Longevity

insurance

+

Liability

matching

bonds

Liability

matching

bonds

T R E N D : P L A N S P O N S O R S A R E H E D G I N G D I F F E R E N T

C O M B I N A T I O N S O F L O N G E V I T Y A N D I N V E S T M E N T

R I S K

Source: Sun Life Financial

© MERCER 2016 15

W H A T I S L O N G E V I T Y I N S U R A N C E

Potential cash flow range

The third party is exposed to fluctuations

in future mortality and longevity

experience and its payments may

exceed the fixed payments it receives

3

2015 2020 2025 2030 2035 2040 2045 2050

Best estimate cashflows

agreed to with the counterparty

Note: may be more or less than

current best estimate

1

Expected cash flow

Fixed payments that the plan

pays the counterparty

(e.g. 105% of “best estimate”)

2

Fixed leg

© MERCER 2016 16


© MERCER 2016 16

CANADIAN BANK NOTE

CASE STUDY

© MERCER 2016 17

C B N ’ S P E R S P E C T I V E O N L O N G E V I T Y R I S K

• A bit about CBN

• CBN sponsors a closed DB plan

• Approx. 220 retirees, $35 M liabilities

• Pension Committee identified longevity risk as one of the most important risks

• Very little upside benefit to longevity risk

• Mortality assumption improvements have led to increased liabilities

© MERCER 2016 18

L O N G E V I T Y D E - R I S K I N G P R O C E S S

• Starting point: Pension Committee meeting 3 years ago

• Annual governance meeting

• Risks affecting pension plan identified

• Reached out to all large Canadian insurers

• None were willing to quote on a longevity hedging solution initially

• Eventually three insurers provided quotes

• Selection process identified Canada Life as best option

• Flexible and patient

• Shared similar entrepreneurial spirit as CBN

• Dedicated, knowledgeable team

© MERCER 2016 19

O T H E R N O T E S

W H Y N O T A N N U I T I E S

Not ready to annuitize or wind-up plan

• 100+ Active members continue to accrue service

• Did not want to lock-in solvency obligation

• Comfortable managing the pension plan

• Comfortable with other risks, such as investment risk

P E R F O R M I N G D U E D I L I G E N C E

In-house pension actuary and legal counsel

Worked with Mercer on detailed contract review

© MERCER 2016 20

M E S S A G E T O P L A N M E M B E R S

Contract signed in October 2016

• Still in early stages of communication plan

Mediums: Press release, notice, annual statements, closer contact with our retirees

Messaging: Very positive

• Added an additional level of security for retiree pensions

Streamlined longevity solution for smaller plans

© MERCER 2016 22

S T R E A M L I N E D L O N G E V I T Y S O L U T I O N S F O R

S M A L L E R P L A N S

• Longevity swaps typically reserved for only the largest of plans

• The CBN deal with Canada Life proves the viability of a “small-scale” longevity

risk transfer solution

• How is it different than the traditional longevity swap?

– No collateral (rather the plan sponsor will be subject to credit underwriting)

– Cash flows settled on an annual basis

– Simplified contract

• The fixed leg will be expressed as a percentage loading to a standardized

accessible table

© MERCER 2016 23

M E R C E R M O R T A L I T Y M O D E L F O R C A N A D A

• New model to be launched in 2017

• Will apply the theory of survival models to Canadian mortality, allowing for detailed

analysis across numerous risk factors simultaneously

• Will introduce the concept of “geo-demographic” profiling similar to the postcode

analysis now commonly conducted in the UK

© MERCER 2016 24

M E R C E R M O R T A L I T Y M O D E L F O R C A N A D A

L O C A T I O N

Accessibility

Rural vs. Urban

Postal code

F I N A N C I A L

M E A S U R E S

Income

Credit behaviour

S O C I O -

E C O N O M I C S

A N D

C O N S U M P T I O N

Occupation

Industry

Employment status

Education

D E M O G R A P H I C

Household demographics

Population movement

Health

Background & beliefs

P R O P E R T Y

C H A R A C T E R I S T I C

Building

Tenure

Amenities

P R O P E R T Y

V A L U E

© MERCER 2016 25

Beginning in 2017, the Mercer Pension Risk Exchange will be expanded to monitor

longevity insurance pricing, bringing its unparalleled insight,

transparency and efficiency to the longevity swap market

M E R C E R P E N S I O N R I S K E X C H A N G E T M

M E R C E R ’ S G R O U N D - B R E A K I N G S O L U T I O N T O

A N N U I T Y T R A N S A C T I O N C H A L L E N G E S

READINESS MONITORING

EXECUTION

TRANSPARENCY

GLOBAL VIEW

© MERCER 2016 27

A N Y Q U E S T I O N S ?

Q U E S T I O N S

Please type your questions in the Q&A section of the toolbar

and we will do our best to answer as many questions as we

have time for.

To submit a question while in full screen mode, use the Q&A

button, on the floating panel, on the top of your screen.

CLICK HERE TO ASK A QUESTION

TO “ALL PANELISTS”

F E E D B A C K

Please take the time to fill out the

feedback form at the end of this

webcast so we can continue to improve.

The feedback form will pop-up in a new

window when the session ends.

Senior Actuary,

Canadian Bank Note Company

[email protected]

(613) 722 3421

Bradley Baker

Head of Canadian Financial Strategy

Group, Mercer

[email protected]

(416) 868 2927

Manuel Monteiro

Global Defined Benefit Leader,

Mercer

[email protected]

(579) 880 9182

Benoit Hudon

statutory funding actuarial valuation method and ... · (elimination of cardio-vascular diseases,...

Documents