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Actuarial Evidence for Dummies and Pension Actuaries Presentation at the Annual General Meeting

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Title: Actuarial Evidence for Dummies and Pension Actuaries Presentation at the Annual General Meeting


1
Actuarial Evidence for Dummies and Pension
Actuaries Presentation at the Annual General
Meeting
  • June 29, 2006
  • Ottawa, Ontario

Presented by J.M. ("Mel") Norton, FCIA, FSA
2
CIA Annul Meeting Ÿ Assemblée annuelle de lICA
  • I Revise the Title

3
Marriage Breakdown Valuations 101 for Pension
Actuaries Presentation at the Annual General
Meeting
  • June 29, 2006
  • Ottawa, Ontario

Presented by J.M. ("Mel") Norton, FCIA, FSA
4
What Law?
  • Family Law Act is Provincial, based on residence
  • Pension Law may be Federal, Provincial or a
    'Statute Plan', based on Employee and Employer's
    location
  • Income Tax Act

5
What Law?
  • Primary focus is for Ontario residents, impacted
    by Ontario's Family Law Act
  • For residents of other provinces, PENSION
    legislation/regulation may dictate principles of
  • Valuation and
  • Division

6
Family Law Act
  • Each party to a dissolved marriage must
  • Identify and
  • Value
  • All assets (and liabilities) at
  • Separation
  • Marriage

7
Family Law Act
  • Why?
  • The party whose 'net worth' increased more during
    marriage must make an equalization payment of 50
    of the difference to the other party.

8
Family Law Act
  • Generally, we are talking only 'legal' marriages,
    not
  • Common-law relationships
  • Same-gender partners
  • Arguably, 'equalization' does not apply to
    "other" relationships, although "spousal support"
    may still apply.

9
Family Law Act
  • Pension is an Asset that must be valued
  • Rules for Valuing pensions are established by
    "case law", which recognizes the Standards of the
    CIA for "marriage breakdown"

10
Family Law Act
  • For valuation purposes, the 'Pension' Actuary's
    job should be limited to ensuring that the Plan's
    "Administrator" discloses, on a timely and
    accurate basis
  • the plan member's data and
  • relevant plan terms

11
What data is required?
  • For 'DC' schemes, generally the pension asset is
    valued as the 'account balance' Market Value
    (accumulated contributions plus investment
    yields) less a tax adjustment
  • Usually, independent values are needed at
    separation and at marriage
  • Note The Administrator does not address any
    applicable 'tax adjustment'

12
What data is required? - DC
  • It is usually sufficient to use a Member
    Statement (Annual, Semi-Annual, Quarterly or
    monthly)the shorter period, the better) for the
    period surrounding the Valuation Date (Date of
    Separation and Date of Marriage) or at least
    proximate to the valuation date

13
What data is required? (DB)
  • Technically, there is no legal obligation on the
    Administrator of a Pension Plan to provide any
    information beyond the Annual Member Statement
    and a Summary Plan Description or "Booklet", as
    required by PBA
  • To meet CIA Standards, any "Booklet" needs to
    describe the 'presumptive' plan (i.e., it must
    principally provide a history of contractual or
    'ad hoc' increases and any 'top-hat' provisions)

14
What data is required? (DB)
  • The Statement immediately preceding or
    immediately following the separation date is
    usually sufficient
  • Most responsible plans go beyond this minimum,
    and provide salary/service data to a specified
    separation date
  • May be asked to partition accumulated
    contributions into "pre" and "post" components

15
What data is required? (DB)
  • Caveats
  • OK to provide 'updated' "Best Average Earnings",
    but only if based on 'exact' service
  • DON'T
  • Provide termination or 'transfer' values
  • Calculate 'accrued benefits' (most
    Administrators do this "wrong" for FLA
    valuations)
  • Calculate 'service' where the 'separation date'
    is mid-month, if you would either 'truncate'
    service at prior month-end or include 100 of
    month as service

16
What data is required? (DB)
  • More "DON'TS"
  • Calculate Final Average YMPE (unless it is based
    on 'exact' service)
  • Merely include periods of 'credited service'
    which occurred during marriage...ALL service is
    needed
  • Fail to reference any potential 'bridge'
    entitlements, notwithstanding that the member's
    entitlement may not yet have fully vested
  • Fail to provide accumulated contributions, split
    pre- and post-transition
  • Provide any "post-separation" adjustments

17
How data is used
  • Marriage Breakdown (MB) Actuary is responsible to
    compute 'accrued benefits' at separation
  • MB Actuary uses the Mortality/Interest Rates
    specified in the CIA Standards (which are now
    'much' different than TV assumptionsand are
    never 'unisex'
  • MB Actuary calculates the Present Value of
    accrued benefits based on a specified range of
    retirement dates Earliest Unreduced ltgt
    Normal
  • ltgtThink of a 'full' grow-in calculation,
    disregarding interim termination

18
How data is used
  • Other notable items
  • SERPs, funded or otherwise, vested or contingent,
    require valuation
  • SMEPPs are valued as "DB", even though treated as
    DC for PA purposes
  • Generally, 'case law' has evolved such that
    enhanced early retirement provisions providing
    REDUCED pensions, even where providing
    substantial added value, are ignored in a FLA
    valuation
  • Since the value is essentially 'traded' against
    other assets, no post-separation adjustment or
    update is applied

19
How data is used
  • Value at separation requires a 'tax reduction'
  • Value at marriage (as per 'case law') is the
    value at separation, multiplied by a ratio of
    pre-marriage/total credited service
  • Note This may seem inconsistent with DC
    valuations, and inconsistent with actuarial
    principles "Best vs. Best"

20
Who owns the Pension Asset?
  • A Pension Asset is owned only by the Plan
    MEMBERlike most other assets (the matrimonial
    home being a special exception that by law is
    jointly owned)
  • The 'theory' is that the Member retains the
    pension and uses 'cash' to meet any equalization
    obligation
  • It is not unusual that the parties don't have
    other assets to affect 'equalization', and must
    therefore partition the pension at source
  • Pension law allows this, usually subject to a
    "50 earned during marriage" limitation

21
Separation after retirement
  • Pension is still an Asset, requiring valuation
  • Vested 'spousal survivor benefits' are an Asset
    of the non-member spouse
  • 50 rule still applies
  • Very conducive to an 'at source' division (must,
    upon receipt of a certified copy of a valid Court
    Order or Domestic Contract) Very tax effective!

22
Non-Pension Financial Assets
  • May include
  • Retiring Allowances (incl. sick leave 'buy-outs')
  • Stock
  • Stock options (incl. RSUs)
  • .
  • Generally, not being pension, these assets may
    need valuation for 'equalization' purposes, but
    data and Plan terms are 'separate items'

23
Advising the Pension Actuary's client
  • Review what is currently being done.Most current
    actions are "wrong" (to a greater or lesser
    extent), including particularly for almost every
    Plan being administered by the 'outsourcing'
    departments of "major actuarial" firms, and
    virtually all 'public sector' Plans
  • Put together a useful 'response package',
    addressing all info needed by a MB Actuary or
    'correct' current package!
  • Respond in a timely manner (5 7 business days)

24
Advising the Pension Actuary's client
  • Review policy about providing PENSION
    ENTITLEMENTS to a (former) spouse, divorced or
    otherwise i.e., implement the CIA's Deferred
    Settlement Method, as an option available to
    Members)
  • Cost does increase slightly (2 cheques instead of
    1 2 records linked instead of 1)but value to
    member increases exponentially
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