Pension DeRisking Robert Marchessault FCIA FSA Director Pension
Pension De-Risking Robert Marchessault, FCIA, FSA Director Pension & actuarial services May 16, 2018 Page 1 | 2018 05 16
Canada’s largest communications company Customer connections Annual revenue Enterprise value Nationwide team 22 M+ $22 B+ ~$78 B 50, 000 Page 2 | 2018 05 16 One of the most widely held stocks in Canada
Canada’s largest private sector pension fund Bell Plan $ 0. 2 ($ Billions) Bell Aliant Plan MTS Plans ($ Billions) 1% $ 16. 0 99% Assets $ 0. 1 3% $ 3. 8 97% $ 3. 0 100% Other Plans BCE Plan ($ Billions) $ 0. 1 8% ($ Billions) Solvency Deficit $ 0. 5 100% $ 1. 1 92% Retiree and deferred Active DB members Solvency discount rate Longevity swap notional: Going concern status 42, 500 12, 000 ~3. 1% $5 B ~110% (Dec 31, 2017 prelim) Page 3 | 2018 05 16
Bell’s de-risking context and history Bell Initiatives STARTING POINT Plan design changes ü Closed DB plans to new entrants ü Added DC component to existing DB plans for all new hires ü Align provisions on acquisitions Bond portfolio changes Funding strategy adjustments De-risking strategy sophistication ü Increased bond portfolio duration over several years ü Assess if advance contribution is desired ü Daily tracking of financial situation ü Increased allocation: Fixed income grown from 40% of assets in 2008 to 70% of assets in 2017 ü Establish guidelines on deficit funding decision process ü Diversify to find spread ü Split portfolio by Return Generating (RGP) and Low Risk (LRP) to better align investment strategy with liability ü Structure to progressively shift to ultimate asset mix with acceptable risk level (glide path) De-risking & “Lock-down” strategies ü Risk transfer (longevity swap) ü Fixed income overlay strategy ü Keep abreast of emerging initiatives and legislation changes Regularly reassess to adapt to constantly changing environment and evolution of the plans Page 4 | 2018 05 16 END POINT: Target Risk Level
Longevity risk Page 5 | 2018 05 16
Risks 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 Page 6 | 2018 05 16
First longevity insurance in North America ~17, 000 Bell Retirees Fixed Cash Flow = agreed monthly schedule Pension Payments As per the pension plan provisions and not impacted by the longevity insurance Bell Pension Plan Variable Cash Flow = Unindexed Pension Payments Sun Life Assurance Company Longevity Insurance Contract Partially re-insured with two global re-insurers Page 7 | 2018 05 16
Swap cash flows - example $1 M swap Page 8 | 2018 05 16 § Pension Plan payments are fixed and known from day 1 § Present value of Fixed Pension Plan payments is $1 M under all scenarios § Net present value of exchanged cash flows is minimal under expected longevity
Swap cash flows - example - Page 9 | 2018 05 16 § Pension Plan payments are fixed and known from day 1 - unchanged § Present value of Fixed Pension Plan payments is $1 M under all scenarios § Net present value of exchanged cash flows is $70 K payable form insurance company to pension plan § Favourable MTM on swap offsets loss from improved longevity in pension plan (with basis risk)
Interest rate risk Page 10 | 2018 05 16
Interest rate risk Projected DB solvency liability upon DB closure for new employee in 2004 Page 11 | 2018 05 16
Interest rate risk Actual DB solvency liability upon DB closure for new employee in 2004 solvency DB liability since plan closure 2004 Page 12 | 2018 05 16
Interest rate risk Actual DB solvency liability upon DB closure for new employee in 2004 solvency liability since plan closure 2004 Page 13 | 2018 05 16
Interest 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 carry § Involves 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 Current portfolio Borrowing -20% “Matching assets” “Equities” 30% 70% 20% Overlay -20% 0% 20% 40% 60% 80% 100% 120% 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 Page 14 | 2018 05 16
Stochastic 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 mix § When the observation falls to the right of the vertical line, the plan is over 100% funded § The 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 (<175 bps) Significantly rising rates (175 bps - 475 bps) Extremely rising rates (>475 bps) Overlay yields superior expected returns in most interest rate scenarios Page 15 | 2018 05 16
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