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Transcript of PD-22 Risk Management Outside the Insurance Industry André Choquet, FSA, FCIA General...
PD-22 Risk Management Outside the Insurance Industry
André Choquet, FSA, FCIA
General Meeting/Assemblée générale 2007, Montréal, Québec
PD-22 Risk Management Outside the Insurance Industry
André Choquet, FSA, FCIA
General Meeting/Assemblée générale 2007, Montréal, Québec
Canadian Institute
of Actuaries
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
L’Institut canadien desactuaires
2007
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From Pension Risk Management to Enterprise Risk Management
• Setting the Stage• Inside Pension Risk Management• Moving Toward Enterprise Risk Management
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Why do organizationshave pension plans?
Both workforce and organizational life cycles drive decisions about pension plans
!
•Optimize human capital investment
•Attract and retain labour
•Ensure orderly transition of workforce
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Value at Risk
Risk is relative to expectations
Risk measurement is evolving
Unipolar Risk
Risk Volatility Greater volatility equals greater risk
Evolution
Compliance with regulations brings no rewards; non-compliance results in penalties
Bipolar RiskResearch expenditures lead to high returns or loss of capital
Fair Price of Risk
Protection offered through use of hedges
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From Pension Risk Management (PRM) to Enterprise Risk Management (ERM)
Measure Tangible
Risk
Illustrate Intangible
Risk
Is risk appropriate?
Hedge or not?
How much risk?
ERM MonitorImplement
PRM
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Pension Risk Managementinvolves multiple parties
Financial Financial ManagementManagement
Portfolio Portfolio ManagementManagement
Benefit Benefit DeliveryDelivery
Benefit Benefit PolicyPolicy
ComplianceCompliance
Source: Watson Wyatt Worldwide
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How large is the plan toshareholders’ equity?
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
All Companies Financial Services (Banking) Sample Bank Median Quartiles
Pen
sio
n L
iab
ility
/Sh
arh
old
ers’
Eq
uit
y
Source: Watson Wyatt Worldwide
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Solvency ratio stayed flatdespite good returns
Solvency: Growth Portfolio, 50% Active Liabilities
50
70
90
110
130
150
170
190
Month
Ind
ex V
alu
e
Liability Index MV Asset Index Asset/Liability Index
Source: Watson Wyatt Worldwide
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Achieving 100% solvency…Solvency: Growth Portfolio, 50% Active Liabilities
75
80
85
90
95
100
105
Dec-0
5
Mar
-06
Jun-
06
Sep-0
6
Dec-0
6
Mar
-07
Jun-
07
Sep-0
7
Dec-0
7
Mar
-08
Jun-
08
Month
Ass
et/L
iab
ility
Ind
ex V
alu
e
Historical 15.6% equity return
1.00% long term interest rate increase, 2.5% equity return 0.60% long term interest rate increase, 8.0% equity return
Source: Watson Wyatt Worldwide
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…And remaining 100% Solvent
• With a new Bond Portfolio
• Using current portfolio with swaps and futures
• DB Buy-out, annuity purchase
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How a DB Buy-out could work in Canada
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GA71 GAM83 UP94 UP94(2015) UP94G9.5
10.0
10.5
11.0
11.5
12.0
12.5
Pen
sio
n V
alu
e a
t A
ge 6
0
Longevity risk difficult to hedge
Source: Watson Wyatt Worldwide
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Not all mature plans areshifting away from equities
Plan Maturity % Compared to Equity %
10%
20%
30%
40%
50%
60%
70%
80%
90%
0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0 200.0
Liability Maturity Index (Total Liability / Total Service Cost)
Eq
uit
y %
Data Liability Median Equity Median
Source: Watson Wyatt Worldwide
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Risk budgeting: A framework to allocate risk
Asset/Liability Stochastic Simulation
Setting risk budget
Decision 3
$205 $210 $215 $220 $225 $230 $235
PV of Contributions (10 Years) Plus Solvency Deficit ($ Million)50th Percentile
PV
of
Co
ntr
ibu
tio
ns
(10
Yea
rs)
Plu
sS
olv
ency
Def
icit
($
Mill
ion
)
VaR
95
55% equity, LB, +5% intl, +5% HY and alt structure
55% equity, LB, +5% intl,+5% HY and current
structure
55% equity, LB, +5% intl and current structure
55% equity, LB and current structure
Policy (65% equity) and current structure
$325
$330
$335
$340
$345
$350
$355
$360
Source: Watson Wyatt Worldwide
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Risk shifts from employer…
Balanced Fund
Present Value of Cumulative Net Expense ($M) - 2014
$0.0
$10.0
$20.0
$30.0
1.5% Non-Contrib DB 1.5% Contrib DB w 3% EE Contrib 1% DB + 3% DC 6% DC
5th-25th percentile 25th-50th 50th-75th 75th-95th Mean
Source: Watson Wyatt Worldwide
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…to members
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
1.5% Non-Contrib DB 1.5% Contrib DB w 3% EEContrib
1% DB + 3% DC 6% DC
Plan
An
nu
al P
lan
Acc
rual
as
a P
erce
nta
ge
of
Pay
10% 25% 50% 75% 90% Mean
Risk for Employee at Age 40
Source: Watson Wyatt Worldwide
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Relative pension after 20 years of contributionsas a percentage of the best outcome (Based on UK market data)
Pension as % of maximum - with lifecycle strategy
Pension as % of maximum - without lifecycle strategy
Maximum pension assuming no lifecycle strategy
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
1967 1972 1977 1982 1987 1992 1997 2002
Defined contribution risks:Investment decisions and annuitization
Source: Watson Wyatt Worldwide
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Another looming mismatch?Labour needs vs benefit design
GDP(%)
LabourProductivity
(%)
RequiredLabour Input(%)
LabourSupply
(%)
EstimatedLabour
Shortages End ofPeriod(Mil)
2006–2015 2.7 1.5 1.2 0.7 1.0
2016–2025 2.6 1.5 1.1 0.1 2.9
2026–2035 2.4 1.5 0.9 0.2 4.4
2036–2045 2.2 1.5 0.7 0.2 5.7
Living Standards Improvement = 1.85%
Source: Watson Wyatt Worldwide
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Use qualitative methodsto assess other risks
Compliance Governance Benefit Delivery
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Risk WorkshopsRisk WorkshopsResolver*Ballot manages risk assessment workshops Resolver*Ballot manages risk assessment workshops
to build consensus and provide results in real-timeto build consensus and provide results in real-time
Risk workshop Risk workshop participants participants evaluate and evaluate and
prioritize risks prioritize risks (and controls). (and controls).
Results are Results are viewed and viewed and
discussed to discussed to provide clarity, provide clarity,
then re-evaluated.then re-evaluated.
Risk workshop Risk workshop results are reviewed results are reviewed
by all. by all.
Source: Resolver Inc.
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A holistic framework: Moving towardenterprise risk management
Measure Tangible
Risk
Illustrate Intangible
Risk
Is risk appropriate?
Hedge or not?
How much risk?
ERM MonitorImplement
PRM
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The ERM risk management process
Understand
Manage Measure
“Risk comes from not knowing what you are doing”
Warren Buffet
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Websites and references• PWC Saratoga Institute : 2006 Key Trends in Human capital Report
http://www.pwc.com/extweb/service.nsf/docid/623831886DE2BC6A85256EBA0058B5C4
• Mortality Derivatives and the Option to Annuitize: M. Milevski and D. Promislow http://papers.ssrn.com/sol3/papers.cfm?abstract_id=289551
• Revisiting CAPMBill Sharpe "Investors and Markets: Portfolio Choices, Asset Prices and Investment Advice,"
• DC Risks– DC - a ticking time bomb?
http://www.watsonwyatt.com/research/whitepapers/wprender.asp?id=RM-UK-32
– SEI surveys on DC member investment behaviour.– http://www.seic.com/institutions/cda/en/documents/
EN_Research_Report_1104.pdf– http://www.seic.com/institutions/cda/en/documents/
DC_Members_Suffer_Consequences_of_Overconfidence.pdf
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Websites and references• E&Y Study of risk: “Risk Management in Canada:
Moving Beyond Assessment”• Canadian Treasurer: “Pension Management: a job for
the CFO” Feb 2006• 2006 WW Conference Board of Canada survey:
http://www.watsonwyatt.com/canada-english/topics/htrender.asp?ID=15104
• WW study on labour shortages: http://www.watsonwyatt.com/canada-english/pubs/specialmemoranda/showarticle.asp?ArticleID=16466&pdfURL=pdf/sm06-05.pdf&articledate=9/25/2006&Component=Memorandum
• On DB Buy-out in the UK http://www.pensioninsurancecorp.com/default.asp