8R - Quiz Time

[Kenny]

So, I thought the quiz threads were pretty helpful for course 6. And since this forum is severely lacking in the 8R discussion area, I'm starting one for 8R. No rules, although a good way for it to flow is answer a question, then ask the next. Also, if you think your question is country specific please state it (i.e. 8RU vs 8RC, not Chile vs Japan). I'll start:

NOC just hired a new CFO. She is concerned about NOC's oversight of it's pension plans and has asked you to help her review NOC's policies. What items do you discuss with her? (10 points)

[billy idol]

Ok Kenny, real skeleton answer:

Focus on:
- Investment policy
- Funding policy
- Governance policy
- EE communications and awareness policy
- Policies on selection of service providers
- Co-ordination of policies

Investment policy for their DB plans
- Valuation of investments
- Asset mix policy & ranges
- Investment objectives for managers
- Purpose
- Securities lending
- Investment beliefs
- Policy review
- Rebalancing policy
- Derivative policy
- Plan overview and investment implications
- Soft dollar policy
- Conflict of interest policy
- Permitted investments and constraints
- Investment objectives of fund
- Governance
- Voting rights policy
- Investment manager structure and mandate

Investment policy for the DC plan
- Purpose
- Plan overview
- Governance
- Investment beliefs
- Other points as above for DB

Funding policy goals and criteria
- Ultimate goal & interim measuring plan
- Etc...

Criteria for establishing an adequate corporate retirement funding policy
- management review & committment
- Etc...

Governance policy
- 11 CAPSA guidelines

Employee communications policy
- combine some of CAP EE communication material with other parts in syllabus like sponsor having explicit position on things like purpose of plan, etc.

Selection of service providers
- e.g. investment managers

Ok, my question is (give it 9 points):

Taking into account the financial position of the Salaried Plan (i.e. surplus on a funding basis but deficit on an accounting basis) evaluate if this is an opportune time to convert the plan to a DC arrangement.

[flight643]

Ok I'll start:

Governnce:

2 main parts
Who does what and
Ensuring that the operation of the plan runs smoothly

Pricnicples a plan administrator should ensure gets done:

Fiduciary liability undesrtood
Establish governance objectives
Document everything - roles and responsibilities, code of conduct and conflict of interest policy
Be knowledgeable and have access to appropriate info
Establish controls to control plan's risks


Expand upon DC plans
Monitoring and implementation of invesmtent choice, managers, service providers
Fee disclosures, communications and record retrention

Document everything! Members responsibilities, funding and investment policy,

could expand further but I still need to finalize my memorization.

Ok My question:

Recommend a design to the Government of G/V to implement a Social Security System in their country.

[Kenny]

I'm dead meat but thank you for reiterating how little I know. Back to the books.

[qwyjiboChu]

Oof, yeah can someone please reassure me that I only need to write a fraction of what's in the model solutions in order to get full credit for the questions?

[Kenny]

Originally Posted by billy idol

Ok Kenny, real skeleton answer:

Focus on:
- Investment policy
- Funding policy
- Governance policy
- EE communications and awareness policy
- Policies on selection of service providers
- Co-ordination of policies

Investment policy for their DB plans
- Valuation of investments
- Asset mix policy & ranges
- Investment objectives for managers
- Purpose
- Securities lending
- Investment beliefs
- Policy review
- Rebalancing policy
- Derivative policy
- Plan overview and investment implications
- Soft dollar policy
- Conflict of interest policy
- Permitted investments and constraints
- Investment objectives of fund
- Governance
- Voting rights policy
- Investment manager structure and mandate

Investment policy for the DC plan
- Purpose
- Plan overview
- Governance
- Investment beliefs
- Other points as above for DB

Funding policy goals and criteria
- Ultimate goal & interim measuring plan
- Etc...

Criteria for establishing an adequate corporate retirement funding policy
- management review & committment
- Etc...

Governance policy
- 11 CAPSA guidelines

Employee communications policy
- combine some of CAP EE communication material with other parts in syllabus like sponsor having explicit position on things like purpose of plan, etc.

Selection of service providers
- e.g. investment managers

I was shooting for mostly answers about governance since it is a new topic. But I like the investment policy stuff also.

Ok, my question is (give it 9 points):

Taking into account the financial position of the Salaried Plan (i.e. surplus on a funding basis but deficit on an accounting basis) evaluate if this is an opportune time to convert the plan to a DC arrangement.

I actually reviewed this last night so some of this will be coming from memory, but I will be adding from my notes as well.

Reasons for DB to DC conversion:
1) More stable/predictable costs
2) risk transfer from ER to EE
3) mirror competitors' plans
4) EE's don't understand value of DB plan
5) Might be more appropriate for mobile workforce vs single ER career (need to consider HR implications given current retention issues - DB plan ("golden handcuffs") may be better for retaining employees)

Questions to consider regarding conversion:
1) Will it be mandatory or voluntary?
2) Will some employees have choice regarding future service accruals?
3) Will some employees have choice regarding transfer of past service accruals?

Common approaches:
1) Apply to new hires only - when concerned about cost of converting or possible negative reactions from curent EEs
2) freeze current benefit and apply prospectively only (to all or a portion of current participants)
3) Grandfather based on age/svc - used when concerned about replacement ratios for older/long service employees
4) Convert entire accrued benefit to LS and transfer to DC plan - use when want to elminate DB plan entirely

Accounting implications
1) May have curtailment costs if eliminate future accruals (will not apply to NOC since no terminations associated with conversion)
2) May have settlement charges if convert DB benefits to DC benefits
3) May need to recognize Special termination benefits (may need to enhance current benefits if choose to completely eliminate DB plan since overfunded on ABO (US terminology) basis - will depend on how calculate LS amounts to be converted)

Communication is key! Otherwise EEs may misinterpret intent and how they are affected.

[Kenny]

I did a little better than I expected. Here are my additions from my notes:

Originally Posted by Kenny

I actually reviewed this last night so some of this will be coming from memory, but I will be adding from my notes as well.

Reasons for DB to DC conversion:
1) More stable/predictable costs
2) risk transfer from ER to EE
3) mirror competitors' plans
4) EE's don't understand value of DB plan
5) Might be more appropriate for mobile workforce vs single ER career (need to consider HR implications given current retention issues - DB plan ("golden handcuffs") may be better for retaining employees)

6)Believe compliance activities will be reduced

Originally Posted by Kenny

Questions to consider regarding conversion:
1) Will it be mandatory or voluntary?
2) Will some employees have choice regarding future service accruals?
3) Will some employees have choice regarding transfer of past service accruals?

Common approaches:
1) Apply to new hires only - when concerned about cost of converting or possible negative reactions from curent EEs

My notes say:
1) Apply to new hires if concerned about
a) Providing comparable cost to existing EEs
b) DC conversion values being too high (I got this one)
c) Short-term accounting implications of DC conversions

Originally Posted by Kenny

2) freeze current benefit and apply prospectively only (to all or a portion of current participants)

if concerned about cost of converting DB benefit to DC balance

Originally Posted by Kenny

3) Grandfather based on age/svc - used when concerned about replacement ratios for older/long service employees

or provide enhanced DC coverage

Originally Posted by Kenny

4) Convert entire accrued benefit to LS and transfer to DC plan - use when want to elminate DB plan entirely

5) If want to provide flexibility then give choice between DB and DC coverage

Originally Posted by Kenny

Accounting implications
1) May have curtailment costs if eliminate future accruals (will not apply to NOC since no terminations associated with conversion)
2) May have settlement charges if convert DB benefits to DC benefits
3) May need to recognize Special termination benefits (may need to enhance current benefits if choose to completely eliminate DB plan since overfunded on ABO (US terminology) basis - will depend on how calculate LS amounts to be converted)

Communication is key! Otherwise EEs may misinterpret intent and how they are affected.

DC Formula should reflect
1) ER's competitive position wrt contribution level and cost
2) Balance and view of total compensation package
3) underlying message conveyed by DC formula
4) EEs previously covered by DB plan are not significantly disadvantaged by new DC plan

Explicit position sponsor should ahve regarding DC plan
1) Purpose
2) Responsibilities of sponsor and member
3) Use of service providers
4) Criteria for vendor selction and monitoring
5) Criteria for investment selction and monitoring
6) Whether to provide investment advice vs education
7) Default investment option
8) Documentation policy

[billy idol]

Sounds good - got a gut feeling they may ask which plan design will you recommend given NOC's salaried plan's circumstances (i.e. which of (1) closing to new entrants, (2) DB past/DC future, (3) DC past & DC future, (4) a choice for the future).

I'd be inclined to go for (2) and note we have alot of members eligible for retirement so "grandfather" them and convert the rest to DC for future whilst we still have a funding surplus. Agree?

Ok, here is another question about the salaried plan (6 points):

NOC was bought out by a global company (shares only) but their plans have continued as per usual. NOC's CEO has just come back from a meeting with his head office in London - the London office has not seen the 1/1/2006 valuation report yet but their gut feeling is that there will be a surplus. Their instruction to him is to terminate the plan if this is so (he has only just seen your report but tells them he is still waiting for your report so is unsure about their statement). You receive a call from the NOC CEO who pleads with you to please change your assumptions or valuation method before the final report is submitted to head office. He says a 1% decrease in your interest rate assumption will result in a deficit anyway - we know actuarial science is not an exact science. What is your response?

You are to assume the NOC CEO has just been granted share options by head office.

[Kenny]

Originally Posted by flight643

Recommend a design to the Government of G/V to implement a Social Security System in their country.

I don't have any "lists" memorized for this one and I'm not really sure what is appropriate.

possible purposes/objectives of Social Security System:
1) Poverty alleviation - can help those unable or unwilling to save on their own
2) wealth transfer - a progressive or flat tax structure (% of pay), with capped or flat benefits transfers money from higher paid to lower paid workers

Need to consider:
1) DB vs DC
- DB places investment risk on government/taxpayers so spreads risk out among all citizens
- With DC investment risk is placed on individual's shoulders, but reward is also kept by indivdual
- DC has longevity risk (possibility of outliving money)
- DC can be used to develop financial markets (not needed in G/V)

2) Funded vs pay-go
- pay-go eliminates investment risk and financial mangement fees. All generations share in current economic condition of country, French argue it encourages social and inter-generational unity becuase of this. Requires at least as much inflow as outflow at all times to sustain so could incur financial problems if aging population. Also transfers economic gains from those producinging them to retirees
- pre-funding can present investment ownership issues. Too much government investment and companies become de facto government entities. Without strict oversight, particular companies can be "politically rewarded" by transfering money to their stock.

3) Mandatory vs opt-out
An opt-out provision can result in anti-selection, particularly if wealth transfer is a goal. Higher paid EEs will be contributing more, but getting less so will choose not to participate.

Can offer flat contribution/flat benefit or salary based contribution/benefit with an opt-out feature plus a wealth transfer benefit that does not allow opt-out (similar to Japan).

Should require both financial stability and at least an equal benefit to allow for companies to opt-out. Need provisions for EEs who work for opted-out company then terminate and move to company in the SS system.

UK allows EEs to opt out of company DC plan that has opted out of SS system.

4) Effects this will have on private pension plans and current/future salaries

ERs may choose to revise plans to integrate with SS system. May need to enhcance private benefit plans if they want to opt-out.

This effects costs for ER, so may reduce future salary increases to account for this, resulting in zero net gain for many.

[billy idol]

I'd say that given that there is a flat tax system in Gevrey/Vosne there is no wealth redistribution on that front.

So the social security plan chosen would not be a DC arrangement as presumably the primary goals of the social security system will be wealth redistribution and the alleviation of poverty.

On 8RC, you're left with describing OAS and C/QPP as a possible solution and the challenges and remedies in that plan. Could also combine this with contracting out possibly.

Probably a bit more information on the demographics of Gevrey/Vosne would be needed first, i.e. is the population aging, etc. Is it facing similar demographic problems to the US/Canada.