Chief Actuary, Office of the Chief Actuary
Office of the Superintendent of Financial Institutions
255 Albert Street, 10th Floor
3 April 2017
The Office of the Chief Actuary (OCA) commissioned an external peer review of its 27th Actuarial Report on the Canada Pension Plan (CPP) as at 31 December 2015 (AR27). 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 January 2016 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 2016. GAD received seven 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 and risk management, as well as the applicants’ qualifications and status within the Canadian Institute of Actuaries and previous experience as a CPP reviewer. GAD provided the Chief Actuary with a schedule setting out the results of our assessment, with a ranking of the seven candidates. The Chief Actuary successfully entered into an agreement with three of the 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 27th Actuarial Report on the Canada Pension Plan” (‘the Peer Review’) prepared by Robert L Brown, Mark W Campbell and Pierre Plamondon, dated 7 March 2017.
2. Peer Review Terms of Reference
3. Summary of the Peer Review
The approach taken to the Peer Review would appear appropriate and reasonable, and sufficiently detailed, given the terms of reference for the Peer Review. However, the Peer Review mentions an updated edition of AR27 (with minor revisions) being received on 13 February 2017, very close to the end of the Peer Review process. It would be helpful for the Peer Review to include a comment, and to confirm that, the minor revisions did not have a material impact on the outcome of the Peer Review, if indeed this was the case.
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, except commenting that a forthcoming actuarial study on the Actuarial Adjustment Factors included in AR27 should also have been included in AR27 (see paragraph 4.5 below). We note 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, the 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 eleven 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 AR27. 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, noting the one exception applying to the provision of an actuarial study supporting the calculation of the Actuarial Adjustment Factors.
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 AR27 and the contents of the AR27 itself.
We have not carried out an independent assessment of the eleven 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.
Many of the recommendations and comments in the Peer Review deal with assumptions and the sensitivity tests. In practice, each review should build on previous reviews and the processes will evolve in line with changes in reporting requirements, greater sophistication and expertise in investment and risk modelling and the nature and range of tests that can be applied, and also changes in the circumstances of the fund.
We have the following specific comments to make on the Peer Review:
- Sensitivity Tests: We note the peer reviewers agree that sensitivity tests are a valuable tool giving the reader information that may be used to understand the financial impact of the choice of assumptions. They have suggested in section
5.4.7 the OCA consider introducing more “subjectivity while striving for greater comparability” in the tests and we are not sure in this context what this would mean and how it might better inform the reader regarding the risks underlying the choice of assumptions or the circumstances that could result in the plan
becoming unsustainable. Further, the peer reviewers also note in the same section that the approach to the individual sensitivity tests show variations with roughly equal plausibility with the possible exception of mortality.
Going forward, we suggest the OCA discuss with the peer reviewers how their comments could be incorporated into the sensitivity tests to be included in future actuarial reports to better inform users of the report regarding the inherent risks in the assumptions being made.
- Actuarial Balance Sheets: Recommendation 7 deals with the section of AR27 on actuarial balance sheets. We suggest the OCA discuss with the peer reviewers in more detail the intention of recommendation 7.
We have noted the reviewers’ comments on question 2 of the Terms of Reference that in order to comply with professional requirements, an actuarial study is required to be published to support the calculated Actuarial Adjustment Factors included in AR27. We have discussed this issue with the OCA and it is their intention to publish a study later in 2017. Although the Actuarial Adjustment Factors may have little impact on the long term sustainability of the CPP, we recommend that a supporting actuarial study is included in any future report that includes a review of the factors. It should be noted that we have not reviewed Appendix F of AR27 which specifically comments on the Actuarial Adjustment Factors.
Finally, we also note the Peer Review went beyond the scope of its Terms of
Reference to discuss AR28, although these comments may well be helpful.
I hope that you find these comments helpful. Please contact me if you would like to discuss them further.
Matt Gurden FIA
Chief Actuary, Advice to Government