Chief Actuary, Office of the Chief Actuary
Office of the Superintendent of Financial Institutions
255 Albert Street, 10th Floor
22 April 2014
The Office of the Chief Actuary (OCA) commissioned an external peer review of its 26th Actuarial Report on the Canada Pension Plan as at 31 December 2012 (AR26). The peer review is intended to ensure that the OCA is providing sound and relevant actuarial advice to Members of the Canadian Parliament and to the Canadian population.
In April 2013 the OCA asked the Government Actuary’s Department (GAD) of the United Kingdom to:
- Select on the basis of the comparative qualifications of the applicants the independent Canadian actuaries who will perform the peer review, and
- Provide an opinion on the work done by the reviewers once the peer review is completed.
The request for GAD to provide an opinion of the review is to further increase the credibility of the peer review.
1. GAD’s role
GAD fulfilled the first part of the OCA’s request, advising on the selection of the independent Canadian actuaries, in August 2013. GAD received six applications directly from individuals wishing to be appointed as peer reviewers and assessed their applications using weighted selection criteria. These criteria included the level of experience of the applicants in social insurance, pensions and investment policy, as well as the applicants’ qualifications and status within the Canadian Institute of Actuaries. GAD provided the Chief Actuary with a schedule setting out the results of our assessment, with a ranking of the six candidates. The Chief Actuary successfully entered into an agreement with the three highest ranking candidates to undertake the peer review.
This letter addresses the second part of the OCA’s request, providing our comments and opinion on the work done by the peer reviewers as detailed in the report, “Review of the 26th Actuarial Report on the Canada Pension Plan” (‘the Peer Review’) prepared by Robert L Brown, Mark W Campbell and Thomas D Levy, dated 7 March 2014.
2. Peer Review Terms of Reference
3. Summary of the Peer Review
The Peer Review addressed all of the items listed in the terms of reference and the peer reviewers were able to answer all five of the questions in the affirmative, noting that the three peer reviewers reached agreement on all of the opinions and recommendations set out in the report.
The report is very clear about the remit of the peer reviewers, noting that their focus was on the actuarial work done with reference to the data used, the major methodology issues, ten key actuarial assumptions and the quality of the reporting. It highlights that the peer review does not provide a detailed audit of the data nor verification of the accuracy of the model. Similarly, the peer reviewers have not made a detailed evaluation of the appropriateness of the response of the Chief Actuary to the findings of the prior actuarial review panel.
In the report, the peer reviewers acknowledge the difficulties in determining “best-estimate” assumptions, given that many of the assumptions are not amenable to precise prediction. They note that determining a best-estimate assumption is not based on absolute science and the most that can be achieved is to arrive at an estimate that is “reasonable”, or at least “not unreasonable”.
In the executive summary, the peer reviewers have complimented the Chief Actuary and his staff on their competence, commitment and professionalism, mentioning that they were unfailingly helpful in clarifying issues and in providing additional information. The peer reviewers have offered eight recommendations which they considered would enhance future actuarial reports.
4. GAD’s opinion on the peer reviewers’ work and report
There is nothing in the Peer Review that gives us any cause for concern or indicates that the peer reviewers have not carried out a sufficiently thorough review of AR26. We consider that the opinions of the peer reviewers adequately cover all the main issues and that it is reasonable, based on the contents of their report, for them to answer in the affirmative all five of the questions listed in the terms of reference.
We are also content that the terms of reference of the Peer Review are sufficient to enable the peer reviewers to address all of the relevant issues they need to in order to perform detailed review of the actuarial work underlying the AR26 and the contents of the AR26 itself.
Following our review, we have some comments on the peer reviewers’ report which you may find helpful.
Our understanding is that legislation (Section 113.1 of the Canada Pension Plan statute) provides for automatic increases in the contribution rate and/or freezing of benefits, if the minimum contribution rate is higher than the legislated rate. AR26 provides for a minimum contribution rate of 9.84% which is very close to the current legislated 9.9% contribution rate. This suggests that small differences in assumptions could have significant consequences. We think it would have been helpful for the peer reviewers to mention the potential significance of even small changes in the estimate of the minimum contribution rate.
In the Executive Summary the peer reviewers noted that in their opinion the assumptions used in AR26 were reasonable, both individually and in the aggregate. However, within the body of the report, the peer reviewers comment that they would have chosen slightly different assumptions for mortality, price inflation and investment returns to those chosen by the Chief Actuary. We believe it would have been helpful for the comment provided in Section 6.4 to have been reflected in the executive summary, noting that they were content that the assumptions were within a reasonable range and perhaps mentioning that there would be some offsetting effects arising from the use of alternative assumptions.
The minimum contribution rate is calculated by combining a steady-state funding contribution rate and a contribution rate in respect of full funding for post-1997 benefit improvements and is estimated to the nearest 0.01%. Section 1.7 of the report notes that the full funding rate in respect of the 2008 amendments is now deemed to be 0.0% because the value is less than 0.02%. At first glance this could raise questions about the consistency or reasonableness of this approach, particularly given the size of the difference between the minimum contribution rate and the current contribution rate. However, Section 5.4.2 highlights that the rounding of the full-funding contribution rate is pursuant to the Calculation of Contribution Rates Regulation, 2007. It would have been helpful to also have included this reference in Section 1.7.
We have noted the comment in Section 5.2 of the report that the experience adjustment factors used to calibrate the model to historical experience are “generally modest”. In the absence of any comment relating to this, it implies that the peer reviewers are content that these adjustments are reasonable. However, it may have been helpful to include an explicit comment noting this, or otherwise.
As mentioned above, the peer reviewers have noted that in their opinion the assumptions used in AR26 are reasonable, both individually and in the aggregate. In the body of the report information was provided about how the assumptions were determined, which gave some indication of how the peer reviewers came to their conclusion. However, we think some further commentary would have been helpful where the demographic assumptions used differ from the Statistics Canada medium assumptions.
We were pleased to read that the OCA re-ran the actuarial valuation, at the peer reviewers’ request, using the alternative assumptions they would have chosen and we have noted the comment that the resulting minimum contribution rate was not materially different from that reported in AR26. It would have been helpful to have included some explanation of what ‘not materially different’ means in this context. We have assumed that it is means that the minimum contribution rate would not exceed 9.9%.
We have not carried out an independent assessment of the eight recommendations made by the peer reviewers and therefore do not specifically agree or disagree with any of them. Generally, the nature and scope of the recommendations made by the reviewers appear to be reasonable.
I hope that you find these comments helpful. Please contact me if you would like to discuss them further.
Dr Dermot Grenham FIA
Chief Actuary, Insurance & Social Security