Session 23 - Lessons from NB s Shared Risk Plans: Updates and a Consulting Perspective

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1 Session 23 - Lessons from NB s Shared Risk Plans: Updates and a Consulting Perspective Angela Mazerolle Superintendent of Pensions, FCNB Paul T. Lai Fatt, FSA, FCIA Partner, Morneau Shepell

2 Disclaimer Note that presentation is not complete without associated commentary The views expressed herein are those of the presenters and do not necessarily represent the views of the Province of New Brunswick, Morneau Shepell Ltd. or the Canadian Institute of Actuaries 2

3 NB Shared Risk Plans A Regulator s Perspective Angela Mazerolle Superintendent of Pensions, Financial and Consumer Services Commission (New Brunswick) 3

4 A brief SRP history Government formed a pension Task Force as part of a 2010 campaign promise Mandated a solution to be sustainable, affordable and secure Additional principles of transparency and equity Much consultation and research into global pension models 4

5 The process was collaborative Collaborative process with the unions involved Provincial CUPE locals including local 1252 (hospital workers) NB Union NB Nurses Union Task Force made recommendations but solution ultimately owned by the Province and the unions involved Legislation introduced to facilitate similar solution for any other private or public sector employer in NB 5

6 New Brunswick s Shared Risk Plans Cross between defined contribution and defined benefit Stable contributions Secure base benefits (97.5%) Probable benefit intentions (75.0%) Robust risk management Stochastic testing Governance arm s length trust DC TBP DB 6

7 SRP has high security but no guarantees Two levels of benefits are defined: Base benefits and Benefit Intention BENEFITS Contribution rates set to provide very high security for base benefits and reasonable probability of achieving the benefit intention However, accrued base benefits can be reduced in very poor economic scenarios INTENTION There are no absolute guarantees BASE 7

8 Many DB plans within NB have converted to SRP Largest public sector plan in NB Public Service Shared Risk Plan Union locals representing a majority of bargaining employees signed the Memorandum of Understanding (MoU) Retiree coalition pursuing legal action New elected Liberal Government has made a final offer to retirees Still awaiting outcome 8

9 Two of the largest Municipalities have converted City of Saint John Effective Dec 31, 2012 Very poorly funded DB plan prior to conversion MoU signed by all four union locals City of Fredericton Effective March 31, 2013 MoU signed by 4 of the 6 union locals 9

10 Private sector conversions as well Saint John Energy DB plan was facing employer contributions of 54% of payroll prior to SRP conversion NB Pipe Trades Multi-employer DB plan And more Other smaller plans in process of conversion 10

11 And others Hospital workers Certain Bargaining Employees of NB Hospitals July 1, 2012 CUPE 1252 July 1, 2012 MLA`s Effective September 2014 coinciding with Provincial election 11

12 NB Teachers an interesting twist Not technically an SRP subject to SRP legislation Specific legislation written for Teachers with similar concepts Contribution caps for the Sponsor Cost of living increases fixed but ultimately subject to affordability MoU signed by the Teachers Federation With acknowledgement of consultation from the NB Society of Retired Teachers 12

13 Added complexity from Regulator s perspective More actuarial assumptions now explicitly subject to Superintendent approval including Mortality Asset / liability modeling assumptions Additional disclosure requirements to plan members Additional oversight for plan documents Funding policy Investment policy 13

14 Added attention as well Many questions both internal and external Stakeholders paying more attention to pension matters than ever before Much media attention both regionally and abroad 14

15 My perspective Generally speaking, most plan filings have been well prepared and presented Some issues we ve seen: Lack of communication between various plan advisors regarding plan filings (who has filed what) Member communications often not provided to us even though provided to members Internal changes we ve had to make: A new pension system to track SRPs in addition to our other plan types More staff resources utilized in review 15

16 NB Shared Risk Plans A Consulting Perspective Paul T. Lai Fatt, FSA, FCIA Partner, Morneau Shepell 16

17 My thoughts generally break down into 3 topics Risk and reward sharing Guaranteed benefits What I have learned 17

18 Risk and reward sharing 18

19 Risk sharing has decision points Risk sharing design needs to answer: What are the risks? Who bears them? In what proportion / allocation are they borne? Designs need also consider reward sharing Not just ownership of risk but symmetry of risk that matters I believe aligning risks and rewards is prudent 19

20 NB SRPs share risk in a number of ways Between the employer and active members Contributions can vary for both within a narrow pre-defined range to adjust to plan performance Employer pays a premium for cost certainty and forfeits rights to future surplus Between active members and retirees Both get conditional indexing at the same % at the same time Both must be reduced by equal % at the same time in very poor plan performance Between generations of active members 20

21 NB SRPs align risk and reward Employer risk and reward Employer risk is limited to a modest contribution increase Employer reward is limited to a modest contribution decrease Member risk and reward Member contributions fluctuate in the same range as employer contributions Benefit reductions in very poor scenarios but surpluses must be spent on member benefits 21

22 Guaranteed benefits 22

23 NB SRPs do not guarantee benefits Benefits can and must be reduced in certain scenarios As set forth in legislation and the plan s Funding Policy At most 2.5% of 20-year scenarios can contain a benefit reduction If such reductions occur, first priority for future surpluses is restoration of benefits to pre-reduction levels 23

24 What is the cost of a guarantee? DB plans and their sponsors are essentially selling annuities to their employees Insurance actuaries and pension actuaries value these annuities differently DB plans Don t often measure and hedge risk like insurance companies Allow future generations of annuitants to subsidize past generations 24

25 What if DB plans were treated like annuities? Benefits would be more expensive Regulatory oversight from OSFI Including minimum capital requirements (MCCSR) Including stochastic stress testing (DCAT) Subject to Assuris insurance for insolvency 25

26 Leads to some interesting questions Would DB plans continue to exist if subject to annuity company regulations and funding? Should insurance companies be allowed to sell guaranteed annuities in the absence of its current regulatory system? Why do such differences exist? 26

27 Practical realities exist Solvency funding rules fund DB plans more closely to guarantees Many stakeholders consider such costs prohibitively expensive Many Governments exempt themselves from these rules Current rules driving stakeholders away from DB Higher costs and more oversight likely further drives this trend DB plans become much less practically viable if treated like annuities 27

28 More questions than answers As a profession, do we need to agree on the cost of a guarantee? As a consultant, do my clients want to be in the business of selling annuities to their plan members? As a society, do we want to enable designs that better align with practical realities and limitations Enter the NB SRP and hybrid designs in general 28

29 What I have learned 29

30 Pension reform has been educational Last three years of my career talking to groups about pensions Organized labour Pensioners Sponsors Investment managers Regulators Administrators Actuaries Accountants Strangers 30

31 Taught me we could have done better Everyone What problem? Members My DB is guaranteed Let s make prospective / new hire changes only Sponsors Our actuary said we d be fully funded by now I didn t know our contributions could get so high As long as we don t have to pay more or get less Don t worry, markets and interest rates are coming back. 31

32 Not even SRPs measure all types of risk Based on stochastic simulation of economic scenarios But what about demographic scenarios? Probability of curing cancer in the next 20 years and impact on benefit security? Will outmigration (problem in NB) continue or not and what will it do to our labour force and pension plans? 32

33 It s not about measuring risk but planning for it We talk about stochastic modeling but only one scenario will emerge To me the real exercise isn t predicting the future, it s knowing what you re going to do when it does Funding policies, flexible benefit designs, flexible contribution structures, non-guaranteed benefits, etc. Need to know what scenarios are possible and have a plan 33

34 Where do we go from here? Educate and communicate openly and honestly Costs of guarantees Challenges of intergenerational equity Risks that can be measured and those that can t Measure the risks we can and understand possible futures Spend less time predicting the future and more time planning for it 34

35 Thank you Questions? 35

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