funding risks for federal public sector pension plans · 2020. 7. 21. · u.s. national vital...

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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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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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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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



Canadian Forces

25 years of service 36 years in retirement

Public Service of Canada


Royal Canadian Mounted Police



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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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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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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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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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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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.


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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08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

20

36

20

38

20

40

20

42

20

44

20

46

20

48

20

50

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


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

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

20

26

20

28

20

30

20

32

20

34

20

36

20

38

20

40

20

42

20

44

20

46

20

48

20

50

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


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%)


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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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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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%


• 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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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


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%


Strikingly different funding ratio outcomes arise in the case of a very mature plan

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Funding Ratios of a Mature Plan

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• 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


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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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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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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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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funding risks for federal public sector pension plans · 2020. 7. 21. · u.s. national vital...

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