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2008 Annual Meeting ● Assemblée annuelle 2008 Québec

Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2008 Annual Meeting ● Assemblée annuelle 2008 Québec. From Pension Risk Management to Enterprise Risk Management André Choquet, F.C.I.A., F.S.A. Chairperson ERM Applications Committee.

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2008 Annual Meeting ● Assemblée annuelle 2008 Québec

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  1. Canadian Institute of Actuaries L’Institut canadien des actuaires 2008 Annual Meeting ●Assemblée annuelle 2008 Québec

  2. From Pension Risk Management to Enterprise Risk Management André Choquet, F.C.I.A., F.S.A. Chairperson ERM Applications Committee PD-29 – ERM-Not Just for Insurance Companies TR-29 – La GRE – Utile dans d'autres secteurs que les assurancesJune 20, 2008 8:45AM

  3. Setting the Stage Inside Pension Risk Management Moving Toward Enterprise Risk Management From Pension Risk Management to Enterprise Risk Management

  4. Optimize human capital investment Attract and retain labour Ensure orderly transition of workforce Why do organizationshave pension plans? ! Both workforce and organizational life cycles drive decisions about pension plans

  5. Financial Management Portfolio Management Benefit Delivery Benefit Policy Compliance Pension Risk Managementinvolves multiple parties Finance GOVERNANCE Human Resources Source: Watson Wyatt Worldwide

  6. How large is the plan toshareholders’ equity? Pension Liability/Sharholders’ Equity Source: Watson Wyatt Worldwide

  7. The solvency ratio index rose to over 100% in middle of 2007 but is now 90.2% Source: Watson Wyatt Worldwide

  8. Achieving 100% solvency… Source: Watson Wyatt Worldwide

  9. With a new Bond Portfolio Using current portfolio with swaps and futures DB Buy-out, annuity purchase …And remaining 100% Solvent

  10. Pension Corporation LLP Telent plc transaction £398M (Sept 25th 2007) Goldman Sachs Rank transaction £700M (Feb 29th 2008) Occupational Pensions Trust expected to be 10% to 20% cheaper than the cost of a full buyout by an insurance company. DB Buy out? Look to the UK

  11. Longevity risk difficult to hedge Source: Watson Wyatt Worldwide

  12. Not all mature plans areshifting away from equities Plan Maturity % Compared to Equity % Source: Watson Wyatt Worldwide

  13. Risk budgeting: A framework to allocate risk Asset/Liability Stochastic Simulation $360 Policy (65% equity) and current structure $355 $350 Setting risk budget $345 55% equity, LB, +5% intl, +5% HY and current structure PV of Contributions (10 Years) Plus Solvency Deficit ($ Million) VaR95 $340 Decision 3 55% equity, LB and current structure $335 55% equity, LB, +5% intl and current structure $330 55% equity, LB, +5% intl, +5% HY and alt structure $325 $205 $210 $215 $220 $225 $230 $235 PV of Contributions (10 Years) Plus Solvency Deficit ($ Million) Source: Watson Wyatt Worldwide 50th Percentile

  14. Balanced Fund Present Value of Cumulative Net Expense ($M) - 2014 $30.0 $20.0 $10.0 $0.0 1.5% Non-Contrib DB 1.5% Contrib DB w 3% EE Contrib 1% DB + 3% DC 6% DC 5th-25th percentile 25th-50th 50th-75th 75th-95th Mean Risk shifts from employer… Source: Watson Wyatt Worldwide

  15. …to members 2.0% 1.8% Risk for Employee at Age 40 1.6% 1.4% 1.2% Annual Plan Accrual as a Percentage of Pay 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1.5% Non-Contrib DB 1.5% Contrib DB w 3% EE 1% DB + 3% DC 6% DC Contrib Plan Source: Watson Wyatt Worldwide 10% 25% 50% 75% 90% Mean

  16. Another looming mismatch?Labour needs vs benefit design Living Standards Improvement = 1.85% Source: Watson Wyatt Worldwide

  17. Use qualitative methodsto assess other risks Benefit Delivery Governance Compliance

  18. How much risk? Hedge or not? Is risk appropriate? From Pension Risk Management to Enterprise Risk Management PRM Measure Quantitative Risks Implement Monitor ERM Measure Qualitative Risks

  19. Understand Measure Manage The ERM risk management process “Risk comes from not knowing what you are doing” Warren Buffet

  20. PWC Saratoga Institute : 2006 Key Trends in Human capital Report http://www.pwc.com/extweb/service.nsf/docid/623831886DE2BC6A85256EBA0058B5C4 Mortality Derivatives and the Option to Annuitize: M. Milevski and D. Promislow http://papers.ssrn.com/sol3/papers.cfm?abstract_id=289551 DC Risks DC - a ticking time bomb? http://www.watsonwyatt.com/research/whitepapers/wprender.asp?id=RM-UK-32 SEI surveys on DC member investment behaviour. http://www.seic.com/institutions/cda/en/documents/EN_Research_Report_1104.pdf http://www.seic.com/institutions/cda/en/documents/DC_Members_Suffer_Consequences_of_Overconfidence.pdf Websites and references

  21. E&Y Study of risk: “Risk Management in Canada: Moving Beyond Assessment” Canadian Treasurer: “Pension Management: a job for the CFO” Feb 2006 2008 WW Conference Board of Canada survey: http://www.watsonwyatt.com/canada-english/news/press.asp?ID=19022 WW study on labour shortages: http://www.watsonwyatt.com/canada-english/pubs/specialmemoranda/showarticle.asp?ArticleID=16466&pdfURL=pdf/sm06-05.pdf&articledate=9/25/2006&Component=Memorandum On DB Buy-out in the UK http://www.pensioninsurancecorp.com/ Websites and references

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