I used to be in pensions. There was a furor in pensions for years (decades?) over the idea that the pension valuation would give arbitrage to equity investments. Specifically, if a plan threw a bunch of cash in equities, they could use that to justify a higher rate of return (i.e. discount rate), and lower their liabilities. This led to pension obligation bonds for government plans, and just a general feeling that pension actuaries were out of touch with the rest of the financial world in general. In Canada, the only saving grace is the wind-up valuation (which will drive funding if results are worse), is done at actual market rates and doesn't care what you have invested in equities. So Canadian pensions are reasonably funded.
Lo and behold, Canadian insurance companies don't have the same restrictions. Somehow, we've managed to keep the concept that $1 of bonds does not equal $1 of stocks, because under CALM, which is still used for IFRS valuations in Canada, a higher NFI reinvestment assumption, and, indeed, even higher current NFI holdings, generate a decrease in liabilities (even after PfADs) compared to bonds due to higher assumed returns.
It took me a long time to really realize I wasn't missing something and this was the case.
So, what gives, why is this still acceptable?
Lo and behold, Canadian insurance companies don't have the same restrictions. Somehow, we've managed to keep the concept that $1 of bonds does not equal $1 of stocks, because under CALM, which is still used for IFRS valuations in Canada, a higher NFI reinvestment assumption, and, indeed, even higher current NFI holdings, generate a decrease in liabilities (even after PfADs) compared to bonds due to higher assumed returns.
It took me a long time to really realize I wasn't missing something and this was the case.
So, what gives, why is this still acceptable?
CALM = NFI arbitrage over bonds
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