Managing Pension Risk: A Global Perspective and Local Case Study - - PowerPoint PPT Presentation

Managing Pension Risk:

A Global Perspective and Local Case Study

Hosted by the Alberta Regional Council May 11, 2017 Lawson Lundell LLP Calgary, Alberta

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Global Pension Governance

Rob Vandersanden Partner Aon Hewitt

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Multinationals take many risk management actions locally to reduce costs and risks due to their retirement programs…

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…however managing global retirement programs is challenging for many companies

Multiple stakeholders at corporate, regional and local levels, and businesses Multi dimensional costs and risks Complexities due to number of countries, types and number of plans Lack of ready access to data and information Missed

• pportunities to

improve cost/risk profiles of local plans Oversight / control over local decisions Changes in legislation Lack of skilled resources at local levels Lean staffing models New EU requirements around governance

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Aon’s second study of 200+ multinationals provides insights into the challenges and best practice for managing global retirement programs

Drivers of Centralisation Key Challenges Best Practice Companies ▪ Senior management and finance concerned about costs/risks ▪ Corporate HR concerned about lack of appreciation and wellbeing ▪ Financial concerns, regulatory risks, and lean benefits staffing will continue to drive greater centralization ▪ Knowledge management: corporate lack access to information and insights for informed decision-making ▪ Execution of strategy: lack of operational discipline and infrastructure to execute their benefits strategy ▪ Report effectiveness across all five measures of governance ▪ Say their benefits are aligned with broader organizational and workforce objectives ▪ Demonstrate materially higher confidence levels in managing costs and risks

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Second study with ABI since 2012 of how multinationals make and execute strategic benefits design, financial and operational decisions

55% 3% 7% 8% 8% 5% 3% 4% 4% 3% US CAN UK DE CH NL FR Other EU APAC Other 7% 16% 16% 15% 21% 16% More than 300,000 100,000 - 300,000 50,000 - 100,000 25,000 - 50,000 10,000 - 25,000 Less than 10000

Operational complexity …

• 70% with more than 4 business lines
• 44% in 50 - 100 countries, and 30% in 25-50 countries
• Most US companies have 50%+ employees in international locations
• More than a third of companies had more than 75% of their global

workforce in international locations

About the respondents…

• 88% are HR leaders
• 70% have responsibilities for all benefits
• 55% of HR leaders manage benefits in HQ

country as well as international locations

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Most common drivers of corporate involvement in benefits management are costs and risks of benefits in mature markets

Over 75%

are concerned about medical cost increase

70%

say employees don’t appreciate benefits

60%

report concerns about DB risks and costs

60%

worry about healthcare legislation changes

Mature Markets

Nearly Half

are concerned about market competiveness

45%

say employees

don’t appreciate benefits

Emerging Markets

Important Very important

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Companies continue to report a strong desire to increase the level of current corporate oversight and implement a centralized approach…

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…however, without formal adoption of protocols centralised management of benefits is not effective

Best Practice:

• Formally established governance protocols
• Representation of HR, finance and legal functions, and business leaders on their corporate committee
• Same committee managing their retirement, insured and other benefits such as allowances
• Governance protocols covering all countries and not just the large ones
• Governance apply to all countries and across all business lines

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Defining best practice in global benefits governance: only 20% of companies follow best practice* across all five measures of effective governance

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Companies that don’t follow best practice report lack of access to benefits related data & information, and knowledge of risks and opportunities

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Best Practice companies manage all their global benefit programs more centrally

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Market competitiveness Emphasis on individual responsibility Harmonization Efficient design of benefit plans Efficient financing Investment management Pension de-risking Externalization of liabilities Administration Legal and regulatory compliance Employee communications Vendor management

59% 39% 52% 33% 51% 68% 59% 67% 69% 67% 27% 41%

Other companies

90% 78% 92% 76% 73% 87% 75% 86% 69% 83% 64% 74%

Best practice companies

Does good governance achieve better outcomes? Best Practice companies report better alignment with organizational strategy

Design Financial mgmt.

% report benefits not aligned % report benefits aligned

Operations 13

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Does good governance achieve better outcomes? Best Practice companies report higher confidence levels in managing costs and risks

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In Conclusion…

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Best Practice companies do a better job of knowledge management and execution of strategy

Best Practice companies more commonly say…

• They have effective oversight of their compensation and benefits

plans in international locations.

• Their Benefit plans support broader organizational workforce and

talent management strategies and initiatives.

• Local country benefit plans are aligned with company’s design,

financial and operational objectives.

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Risk-view of global benefits governance: knowing the ‘why’ before defining the ‘how’ of global governance and operations yields better business outcomes

• Governance of global benefits decisions is complex due

to many factors such number of countries, business lines, types of benefits, local legal frameworks, and stakeholders

• Companies want to:

 Design benefit programs that are aligned with

• rganizational, financial and talent strategies, and

deliver economic value of scale to employees  Minimize the cost of benefits through efficient financing and rewarded risk  Reduce operating risks and deliver benefits efficiently to employees

• Our findings do not support the assertion that

centralization in itself drives better governance

• The study provides strong evidence to support the ‘why’

before the ‘how’ argument:  Definition of specific design, financial and operational

• bjectives provides a context for systematically

evaluating risks and identifying opportunities  Implementing disciplined protocols to make and execute risk management decisions provides a framework for governing global benefit programs

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How strategic objectives and principles can be used to improve governance of defined benefit plans worldwide…

Policy Metrics CAN DE NL CH UK US Program Design

DB to DC Open union; closed salaried Several open DB plans Open DB plan CB plan established DB plans frozen 1 open, 1 closed DB plans Market competitiveness Below market: EE contributions Below market: EE contributions Above market FAP DB plan Market competitive N/A Above market FAP DB plans Consistency of benefits One plan each: salaried/union Multiple open plans One plan each: salaried/union One plan Two plans Two plans Employees cost sharing No EE contributions EE contributions EE contributions No EE contributions N/A No EE contributions

Financial Management

Investment performance B/M+ N/A BM- B/M B/M+ B/M++ Efficient financing Pooled A/L N/A Cross-border financing opp. Pooled A/L A/L not pooled Pooled A/L Risk optimization De-risking glide path Unfunded plans Undue exposure to growth assets L hedge ratio not

• ptimal

L hedge maximised De-risking glide path Risk settlement Longevity risk exposure N/A N/A Subsidised annuity Longevity risk exposure Significant deferred liability

Operations

Administration and compliance Compliance review in 2015 Insourced admin. (3 plans) Compliance review in 2012 Compliance review in 2014 Data not settlement ready Compliance review in 2015 Member communication Suboptimal. TR comm. TR comm. TR comm. TR comm. TR comm. Vendor consolidation and management Optimal Multiple vendors Optimal Optimal Multiple vendors One DB provider Effective governance and delegation Delegated fiduciary manager No admin. Committee High cost of trustee board Optimal Optimal Delegated Low risk Moderate risk High risk Best practice

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Too many projects…too few resources…too little time: prioritizing actions over a three year period

EASY TO IMPLEMENT

DB compliance audit Cross-border feasibility Longevity risk settlement Investment review DC fund line up & performance review Settlement of deferred liability DB cross-border implementation UK vendor consolidation DB closure DB closure Independent trustee appointment Vendor consolidation Review of DC management options Fiduciary DC implementation DB freeze DB freeze Multi-employer DC DB Plans merger DB administration committee Data preparation DC communications upgrade DC for high-earners

HIGH ECONOMIC IMPACT LOW ECONOMIC IMPACT

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Lifecycle of the Employee and Executive Pension Plans

Shelby Robertson Team Lead, Pension and Benefits NA Repsol Oil & Gas Canada Inc.

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1/1/1966

• Pension Plan for

Employees of BP Canada

• Inc. and Participating

Associated Companies (Registered Employee Plan) 1/1/1993

• Employee Plan
• DB provisions

closed to new entrants

• New DC

provisions 1/1/1994 to 12/1/1999

• Mergers and acquisitions
• Encor
• Bow Valley Energy
• Pembina Corporation
• Rigel Oil & Gas

4/7/2014 to 11/30/2015

• De-risking strategy

targeting 70% long bonds / 30% equities (discussions started in 2011) 5/8/2015

• Talisman Energy

acquired by Repsol 9/1/2015

• Last DB

member retired 1/9/2016

• Annuity buy-
• ut

5/1/2017

• DB provisions

removed

• Executive Plan

wound up 1/1/1973

• The BP Canada Inc.

Supplementary Pension Plan for Executives (Registered Executive Plan) 6/30/2007

• “Old” Executive Plan restricted to new

entrants (Pre-July 1, 2007 Plan) 7/1/2007

• “New” Executive Plan

Our Roadmap

1/1/1987

• Provincial

pension reform 1/1/1990-1992

• Income Tax Act

and Regulations affecting registered pension plans 12/31/2010

• “Old” and “New” Executive

Plans merged 2009

• Asset de-risking commences

(Moved to 50% equities / 50% long bonds)

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Preparing for a Wind-up - Inactive Members

• Buy-in annuities
• Buy-out annuities

Historical annuity cleanup Plan provision clean up

• Offered commuted values in addition to deferred /

immediate pensions Deferred member calculations

• Mercer locator services (Equifax, investigative search firm)
• Internal resources

Search for missing members

• Pension payment confirmation forms (coordinated with

Standard Life)

• Data confirmation (proof of age, spousal information,

proof of life, power of attorney, etc.) Annual pensioner statements

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Preparing for a Wind-up – Other Actions

Assess options for future of the plans

• Buy time to prepare for wind-up
• Considered preparing application for the

Executive Plan to become a suspended plan

• Amendments to the Supplemental DB Plans

to provide timing and financial flexibility in the event of the wind-up of the Registered DB Plans

Develop business case for the wind-up

• Estimated wind up financial positions
• Ongoing operating versus wind-up costs

Request CRA remove designated plan status of Executive Plan to allow for proper funding

• Filed off-cycle actuarial valuations

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• De-risking investment strategy

– Some preliminary resistance to further de-risk (i.e., give up potential incremental returns) – Adopted 70% long bond / 30% equity asset portfolio that matched the duration of the liabilities

• Although the Registered and Supplemental DB Plans have no active members, PMC

continues to: – Have fiduciary responsibilities (funding, governance, administration) – Retain pension risks (interest rate and longevity) – Ongoing internal and external operating versus wind-up costs

• Information required to formulate the strategy:

– Estimates of wind-up financial positions – Legal requirements to provide cost of living adjustments – Legal opinion regarding surplus ownership upon wind-up

Developing the Wind-up Strategy

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• In June 2016, the PMC agreed to load membership data onto the Mercer

Pension Risk ExchangeTM (MPRE) to start receiving indicative annuity quotes – The MPRE is a secure on-line platform which guides and supports plan sponsors throughout the buyout process – A systematic and disciplined approach that provides reliable data and documents to the insurers well in advance of the transaction enabling swift execution

• Data tranching strategy to mitigate risk factors and obtain optimal pricing
• 1st round of indicative annuity quotes received at the end of August 2016

– 3 insurers provided quotes – One insurer wanted more data before quoting

• Job title, salary, postal codes, etc.

Preparing for an Annuity Purchase

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• 1. Which of the Registered and Supplemental DB Plans to Wind up?
• Significant ongoing operating costs
• Fiduciary liabilities and risks maintained until the plans are wound up
• Registered DB Plan assets to fund the wind-up liabilities; Supplemental

DB Plans have significant wind-up deficit

• Triggers for transacting on annuities
• 2. Provision of pension increases upon wind-up
• 3. Delegate the implementation of the wind-up to the PMC
• More efficient
• Pricing of annuities varies significantly over time and quotes are only

valid for a few hours

• Strong governance process in place with PMC

Board Decisions Sought

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• On December 5, 2016, the PMC reviewed indicative annuity quotes and as

market conditions were favourable, requested binding annuity quotes

• On December 19, 2016, the PMC reviewed binding annuity quotes and

agreed to transact – Quotes valid for about 4 hours – Asset transfer to occur in early 2017 – Option to purchase additional pension increases in new year once plan assets liquidated and excess assets more certain

• Financial considerations

– Accounting (settlement) – Capital (additional cash funding required for Executive Plan to be offset by reduction in DC contributions under Employee Plan)

• Assuris coverage (Canada Life able to insure up to $4,000 per month)

Annuity Purchase

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Annuity Purchase

0.00% 0.25% 0.50% 0.75% 1.00% 66.0 68.0 70.0 72.0 74.0 76.0 78.0 80.0 Round 1 Round 2 Round 3 Binding Quote Amount of Fixed Indexing from Surplus Premium ($CAD millions)

Proxy Insurer 1 Insurer 2 Insurer 3 Fixed Indexing %

Shared additional data with insurers US Election Year-end pricing effect

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• Mercer Pension Risk Exchange

– Price visibility prior to execution supported PMC and Board decisions – 3 weeks to execute initial annuity transaction (around Christmas!) – Mercer’s close working relationships with insurance companies

• Board delegated implementation of the wind-up to the PMC in advance of

receiving the second round of indicative annuity quotes

• Membership data clean-up began a number of years prior to the annuity

purchase – Deferred members – Pension payment confirmation statements and data confirmation

• Dedicated internal resources to assist with the wind-up
• Working with the Alberta pension regulator

What Worked Well?

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• Start early!
• Asset liquidation considerations

– Two investment funds transacted only at month-end, which exposed Company to investment risk between the annuity purchase and month-end

• Transacting / contracting close to year-end more challenging due to vacation and

Christmas shutdown – Although more competitive pricing more than offset the challenges

• Requires significant internal resourcing to conduct membership data clean up and collect

all required data – Reviewing historical files / data sources – Following up with deferred members – Unlocatables – where are / were they?

• Different treatment in different provinces
• Coordination with other insurers (legacy annuities)

Lessons Learned

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Questions?

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