[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]

[ I N S E R T C L I E N T N A M E ]

[Insert presenter name]

[Insert presenter name]

[Insert date of meeting]

sunlife.ca/DBSolutions

L O N G E V I T Y R I S K A N D

I N V E S T M E N T V E H I C L E S

Brent Simmons

S e n i o r M a n a g i n g D i r e c t o r D e f i n e d B e n e f i t S o l u t i o n s

CIA Investment Seminar November 5, 2014

A G E N D A

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1

3

2

The Canadian longevity risk transfer market

What’s longevity best practice in the U.K.?

What’s longevity best practice in Canada?

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

Page 3

Pension plan Insurer

Equity content Usually around 60% 0%

Liability cash flows Annually or triennially Monthly

Asset matching Typically, once every several

years Daily or weekly

Longevity Base table with CPM-B improvement scale

Base table with CLIFR improvement scale

Funded status <100% is okay (even desirable) 100% best estimate +PfADs of 4% to 6% of reserves

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 N o c a l l s b e i n g m a d e : 1 0 0 % h e d g e d

100%

60%

40%

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

Sources: The Purple Book, 2013 and 2014 KPMG LDI Survey

64%

36%

43%

57%

517

BILLION

U.K. pension assets managed with reference

to their liabilities

£

DB asset allocation in the U.K.

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

2013**

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

Retirees

Pension

plan

Insurer

Retirees

Pension

plan

• 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 accounting1 _{or require top up}

• Convertible to buy-out at any time

Monthly pensions Single

premium

Single

premium Monthly pensions

Monthly pensions

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 Page 7 1,182 1,012 1,314 748 1,362 1,054 2,218 1,049 500 1,000 1,500 2,000 2,500 2007 2008 2009 2010 2011 2012 2013 Q1 & Q2 2014 Group a nnuit y m a rk e t (in C$ mi ll ions ) Source: LIMRA

U S E O F A N N U I T Y B U Y - 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

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

• Convert annuity buy-in to annuity buy-out at any

time S I N C E 2 0 0 9 (Approximate)

1.1

B I L L I O N

$

26

A N N U I T Y

B U Y - I N S

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

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

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%

0.0% 0.5% 1.0% 1.5% 2.0% 2007 2008 2009 2010 2011 2012 2013 2014 A dditional a nnual y ie ld from a nnuit y purc has e (% )

Net Expected Return on Annuity Purchase less Net Expected Return on Matching Bond Portfolio

Source: PC Bond, a business unit of TSX Inc. and Sun Life estimates

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

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

Specialized research teams Continuous mortality investigation (CMI) Club Vita Longevity modelling software Postal code underwriting Continuous mortality investigation (CMI) Club Vita Longevity modelling software Postal code underwriting

Source: Analysis by London Health Observatory of ONS and GLA data for 2004-08. Diagram produced by Department of Health Source: Cub Vita website

Source: Institute and Faculty of Actuaries website Source: RMS LifeRisks

Travelling east from Westminster, every two tube stops represent over one year of life expectancy lost

C A N A D A I S C A T C H I N G U P S L O W L Y Specialized research teams Continuous mortality investigation (CMI) Club Vita Longevity modelling software Postal code underwriting Longevity modelling software Postal code underwriting Source: RMS LifeRisks

Male life expectancy at age 65 could be up to 3.5 years different within Toronto

(based on Sun Life’s estimates)

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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 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85-89 90-94 95-99

Canadian population historical mortality improvements (Females)

1990-2009 1980-2009 1960-2009 1930-2009

For age group 55 to 75, the average mortality improvement rates have been around 1.5%

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 %

Page 14 • Smoker prevalence

• Universal healthcare • Advances related to heart

disease & diabetes • Public education

Health care funding strain

Emergence of new or mutated pathogens Many past factors

are largely exhausted

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 %

Page 15

U.S. drugmaker AbbVie Inc and Calico will each

invest $250 million to help create Calico research

facilities (Reuters, September 3, 2014)

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

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

Page 17 12% 10.5% 8% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% CLIFR CCMI 1% LE = +0.3 yrs CCMI 1.5% LE = +0.8 yrs

Longevity risk transfer between insurers and

pension plans is growing in Canada

T H E T A K E A W A Y S …

1

3

2

New longevity assumptions are coming that

will likely increase reserves and liabilities

Differences in practice between pension and

insurance actuaries are getting more attention