[Insert presenter name] [ I n s e r t t i t l e ] Brent Simmons S e n i o r M a n a g i n g D i r e c t o r. [Insert presenter name]

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1 Updated March 6, 2014 [please remove from final presentation] [INSERT LONGEVITY CLIENT RISK NAME] AND INVESTMENT VEHICLES [Insert presenter name] [ I n s e r t t i t l e ] Brent Simmons S e n i o r M a n a g i n g D i r e c t o r [Insert presenter name] D e f i n e d B e n e f i t S o l u t i o n s [ I n s e r t t i t l e ] CIA Investment Seminar November 5, 2014 [Insert date of meeting] sunlife.ca/dbsolutions sunlife.ca/dbsolutions

2 A G E N D A The Canadian longevity risk transfer market What s longevity best practice in the U.K.? What s longevity best practice in Canada? 4 Key takeaways Page 2

3 D I F F E R E N T R I S K M A N A G E M E N T P H I L O S O P H I E S Pension plan Insurer Equity content Usually around 60% 0% Liability cash flows Annually or triennially Monthly Asset matching Longevity Funded status Typically, once every several years Base table with CPM-B improvement scale <100% is okay (even desirable) Daily or weekly Base table with CLIFR improvement scale 100% best estimate +PfADs of 4% to 6% of reserves Capital 0% 6% to 8% of best estimates Page 3

4 M A K I N G C A L L S O N E Q U I T I E S A N D I N T E R E S T R A T E S C a l l s b e i n g m a d e : L o n g 6 0 % e q u i t i e s + s h o r t 6 0 % bonds N o c a l l s b e i n g m a d e : % h e d g e d 60% equities 40% bonds 100% bonds Typ i c a l p e n s i o n p l a n Typ i c a l i n s u r e r Page 4

5 U. K. P E N S I O N P L A N S A R E T A K I N G A C T I O N DB asset allocation in the U.K. 2006* 2013** 64% Return seeking 36% Liability hedging 43% Return seeking 57% Liability hedging 517 B I L L ION U.K. pension assets managed with reference to their liabilities The U.K. is concluding that employers should make fewer calls on equities and interest rates Notes: * Return seeking: 61% equities and 3% other investments; Liability hedging: 29% gilts and fixed interest, 2% cash and deposits, 4% property and 1% insurance policies ** Return seeking: 35% equities and 8% other investments; Liability hedging: 45% gilts and fixed interest, 7% cash and deposits and 5% property Sources: The Purple Book, 2013 and 2014 KPMG LDI Survey Page 5

6 T R A N S F E R R I N G R I S K I S A N O T H E R O P T I O N Annuity buy-out Insurer Annuity buy-in Insurer Single premium Monthly pensions Single premium Monthly pensions Pension plan Retirees Pension plan Monthly pensions Retirees Plan pays single premium to insurer Insurer makes guaranteed payments to participants Insurer covers investment and longevity risk May trigger settlement accounting and require top-up Irrevocable Plan pays single premium to insurer Insurer makes guaranteed payments to plan Insurer covers investment and longevity risk Does not trigger settlement accounting 1 or require top up Convertible to buy-out at any time 1 Pension plans should confirm treatment with their auditors Page 6

7 Group annuity market (in C$ millions) R I S K T R A N S F E R I N C A N A D A I S G R O W I N G 2,500 2,218 2,000 1,500 1,000 1,182 1,012 1, ,362 1,054 1, Source: LIMRA Q1 & Q Page 7

8 U S E O F A N N U I T Y BUY- I N S H A S E X P L O D E D I N C A N A D A A N N U I T Y B U Y - I N C A N B E U S E D T O R I G H T S I Z E A P E N S I O N P L A N Can provide a higher yield than a FTSE TMX bond portfolio with duration of plan liabilities No top-up contribution required for under funded plans No settlement accounting impact (confirm with plan s auditor) Longevity and investment risk transferred to insurer S I N C E (Approximate) 26 A N N U I T Y B U Y - I N S IN CANADA A N N U I T Y B U Y - I N C A N B E U S E D D U R I N G W I N D - U P P R O C E S S Transfer longevity and investment risk before a wind-up report is approved $ 1.1 B I L L I O N LIABILITIES Convert annuity buy-in to annuity buy-out at any time Page 8

9 A N N U I T I E S A R E N T E X P E N S I V E C O M P A R E D T O B O N D S Hypothetical pension plan Gross expected return on matching bond portfolio 2.92% Investment manager and administrative expenses -0.10% Net expected return on matching bond portfolio 2.82% Insurer Annuity pricing range (CIA proxy, based on UP94G) 2.96% Adjustment for life expectancy longer than UP94G 0.35% Net expected return on annuity purchase 3.31% For this hypothetical plan, a switch to annuities can increase yields by 0.49% Rates are at: September 30, 2014 Bond portfolio mix: 45% FTSE TMX Long, 55% FTSE TMX Universe (annualized yield) Bond portfolio duration: 10 years Source: PC Bond, a business unit of TSX Inc. and Sun Life estimates Page 9

10 Additional annual yield from annuity purchase (%) H I G H E R Y I E L D S + R I S K T R A N S F E R = S U P E R B O N D S 2.0% 1.5% 1.0% 0.5% 0.0% Source: PC Bond, a business unit of TSX Inc. and Sun Life estimates Net Expected Return on Annuity Purchase less Net Expected Return on Matching Bond Portfolio Page 10

11 U. K. L O N G E V I T Y P R A C T I C E S A R E Q U I T E E V O L V E D The London effect: Differences in male life expectancy within a small area in London Travelling east from Westminster, every two tube stops represent over one year of life expectancy lost Specialized research teams Continuous mortality investigation (CMI) Longevity modelling software Club Vita Postal code underwriting Source: Analysis Cub Institute RMS Vita LifeRisks and by website London Faculty Health of Actuaries Observatory website of ONS and GLA data for Diagram produced by Department of Health Page 11

12 C A N A D A I S C A T C H I N G U P S L O W L Y Already being applied in Canadian market by Sun Life Male life expectancy at age 65 could be up to 3.5 years different within Toronto (based on Sun Life s estimates) Specialized research teams Continuous mortality investigation (CMI) Longevity modelling software Club Vita Postal code underwriting Source: RMS LifeRisks Page 12

13 A C T U A L I M P R O V E M E N T R A T E S H A V E B E E N A B O U T D O U B L E T H E C P M - B L O N G T E R M I M P R O V E M E N T R A T E Canadian population historical mortality improvements (Females) 2.5% 2.0% For age group 55 to 75, the average mortality improvement rates have been around 1.5% 1.5% 1.0% 0.5% 0.0% Page 13

14 P E R H A P S T H E F U T U R E I M P R O V E M E N T R A T E W I L L B E L O W E R T H A N 1. 5 % Many past factors are largely exhausted Emergence of new or mutated pathogens Health care funding strain Smoker prevalence Universal healthcare Advances related to heart disease & diabetes Public education Page 14

15 P E R H A P S T H E F U T U R E I M P R O V E M E N T R A T E W I L L B E E Q U A L T O O R H I G H E R T H A N 1. 5 % U.S. drugmaker AbbVie Inc and Calico will each invest $250 million to help create Calico research facilities (Reuters, September 3, 2014) Significant resources are being devoted to extend lifespans Page 15

16 D E M O G R A P H E R S H A V E C O N S I S T E N T L Y U N D E R E S T I M A T E D L O N G E V I T Y I M P R O V E M E N T Source: J. Oeppen & J. Vaupel (2002) - highest female life expectancy at birth Page 16

17 I M P A C T O F U P D A T I N G A S S U M P T I O N I S M A T E R I A L ROI impact if a stronger industry table is adopted 14.0% 12.0% 10.0% 12% 10.5% 8.0% 8% 6.0% 4.0% 2.0% 0.0% CLIFR CCMI 1% LE = +0.3 yrs CCMI 1.5% LE = +0.8 yrs *Starting ROI of 12% is for illustrative purposes. Impact is calculated for a 65 year old as of 2014, and is about the same for males and females. Page 17

18 T H E T A K E A W A Y S Longevity risk transfer between insurers and pension plans is growing in Canada Differences in practice between pension and insurance actuaries are getting more attention New longevity assumptions are coming that will likely increase reserves and liabilities Page 18

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