- Type of publication: Instruction Guide
- Date: October 2016
The Office of the Superintendent of Financial Institutions (OSFI) is responsible for administering a number of federal statutes, including the statute applicable to the regulation of federal private pension plans, the Pension Benefits Standards Act, 1985(PBSA). As part of the regulatory process, OSFI reviews actuarial reports filed with the Superintendent by plan administrators.
This Instruction Guide (Guide) sets out the reporting requirements of actuarial reports filed with OSFI for pension plans with defined benefit provisions. The Guide updates the previous one published in December 2015 to reflect
- additional requirements with respect to the discount rate assumption, including modification to the maximum going concern discount rate;
- further clarifications of OSFI’s position on the mortality assumption, replicating portfolios, termination expenses, and Designated Plans;
- greater clarity on expectations and addition of some references to legislation and professional guidance; and
- changes to accepted actuarial practice and other issues, if any, that have emerged since December 2015.
The Guide applies to actuarial reports with a valuation date on and after October 31, 2016. Early adoption is permitted. From time to time, OSFI may require additional information not mentioned in the Guide.
Actuarial reports should be prepared in accordance with the federal pension legislation and directives, which includes the
OSFI expects actuaries to prepare their actuarial reports in accordance with accepted actuarial practice, i.e. to follow Canadian Institute of Actuaries (CIA) Standards of Practice – General and Practice-Specific for Pension Plans (CIA Standards) and to consider their application as illustrated in CIA Educational Notes (Guidance). Actuaries are expected to be familiar with the CIA Guidance material considered relevant in the preparation of actuarial reports. Research papers published from time to time by the CIA may also be of assistance to actuaries for the purpose of developing assumptions for their actuarial reports.
OSFI does not generally approve actuarial reports. It relies on but reviews the work of the actuary, and may direct the plan administrator to have an actuarial report revised if, in the opinion of the Superintendent, the report has not been prepared in accordance with legislative requirements.
Transparency and appropriate disclosure are part of good governance. OSFI expects plan actuaries to provide sufficient details in their actuarial report to enable another actuary to assess the reasonableness of the data, assumptions and methods used.
Stakeholders may consult the OSFI website for any future notices or the InfoPensions newsletter on pension issues related to the valuation of defined benefit pension plans. Additional information is also available in the Frequently Asked Questions.
The Guide does not address specific reporting requirements related to
- some transactions such as plan terminations, conversions, asset transfers or amendments reducing benefits which may lead to additional disclosure or funding requirements in the actuarial report. These transactions are subject to the authorization of the Superintendent and this should be mentioned in the actuarial report. Guidance detailing additional content requirements of the actuarial report for these events is available on the OSFI website;
- requirements related to the distressed pension plan workout scheme; and
- Solvency Funding Relief Regulations.
The PBSA and the PBSR are the authoritative sources for requirements applicable to actuarial reports filed with OSFI. In the event of discrepancies between the information included in the Guide and the federal pension legislation, the PBSA and PBSR shall prevail.
1.0 Reporting Requirements
1.1 Frequency of Filing
1.1.1 Regular Filing
The administrator of a pension plan registered or filed for registration under the PBSA, or its agent, shall generally file an actuarial report as of the effective date of the plan and annually thereafter as at the plan year-end. A plan administrator will be permitted to file an actuarial report every three years if
- the pension plan meets the definition of a Designated Plan; or
- the solvency ratio disclosed in the previous actuarial report filed with OSFI was 1.20 or greater.
An actuarial report may be filed at other intervals or times as the Superintendent may direct.
The Actuarial Information Summary (AIS) contains information set out in the actuarial report. The AIS should be completed and submitted to OSFI with any actuarial report required to be filed.
The Replicating Portfolio Information Summary (RPIS) also contains information set out in the actuarial report, but specific to a replicating portfolio. The RPIS should be completed and submitted to OSFI with any actuarial report required to be filed that uses a replicating portfolio for solvency valuation purposes.
The administrator of a pension plan must file the actuarial report, AIS, and RPIS using the Regulatory Reporting System (RRS). If the documents are also intended to support an application for the authorization of a transaction by the Superintendent (e.g. a plan termination or asset transfer), these documents must also be submitted directly to OSFI, either by email or in paper form, along with any required approval request form. This is to ensure that work can begin immediately on the approval request.
1.1.2 Plan Amendments that Alters the Cost of Benefits
An amendment to a pension plan may result from a modification to any plan related document (e.g. collective bargaining agreement) and increase or reduce benefits which may alter their cost under the plan. The federal pension legislation requires that an actuarial report be prepared as at the effective date of such amendment. Therefore, unless the amendment was reflected in the previous actuarial report or that report was subsequently modified to reflect the cost of the amendment, an actuarial report should be prepared as of the effective date of the amendment and filed with OSFI.
An interim actuarial report would normally satisfy this requirement. While its contents may be condensed, the actuary should still ensure that any interim report fully complies with the reporting requirements of the CIA Standards and Guidance.
An AIS should be completed and submitted with the interim actuarial report. Also, a copy of the amendment must be filed with OSFI within 60 days after it is made.
If only the current service cost is affected as a result of the amendment, and there is no impact on the assets or liabilities as of the amendment date, the interim actuarial report need only disclose the change in current service cost.
If the previous actuarial report showed an unfunded liability and/or solvency deficiency, and liabilities are increased as a result of the amendment, the interim actuarial report should disclose the new special payments required to amortize the new unfunded liability and/or solvency deficiency. Actuarial assumptions and methods should not change from those used in the previous actuarial report.
An amendment which results in a solvency ratio not meeting the prescribed solvency ratio levels will be void unless authorized by the Superintendent. Specifically, if the amendment would have the effect of reducing the solvency ratio to a level below 0.85, or if the solvency ratio is already below 0.85 when an amendment increasing accrued benefits is considered, then the interim actuarial report should disclose the payment that should be made to the pension fund for the amendment to not be considered void. If such a payment is or expected to be made after the date of the amendment, the actuary should refer to Section 2.6.2 – Receivables of the Guide which describes the circumstances under which receivable amounts may be included in plan assets for valuation purposes.
1.2 Valuation Date
An actuarial report should be prepared at the effective date of the plan and generally annually thereafter as at the plan year-end. Most plans have an established practice of preparing actuarial reports at either the first day or the last day of the plan year (e.g. December 31 or January 1st). OSFI accepts either practice as long as it is applied consistently from one year to the other.
A plan administrator who wants to change the reporting date of the plan from the expected valuation date should advise OSFI in writing at least 60 days prior to the plan year-end and explain the reason for the modification. An actuarial report with a valuation date earlier than the plan year-end may be accepted if contributions to the pension fund are increased as a result of the change in the valuation date. If the change in reporting date is not acceptable, OSFI may require the actuarial report to be revised using the reporting date that was initially scheduled in the previous actuarial report.
Filing of an interim actuarial report prepared as a result of an amendment does not impact the next reporting date. The next actuarial report should still be prepared as of the next regular reporting date for the plan.
1.3 Timeline for Filing
An actuarial report must be filed within six months after the end of the plan year to which it relates. If the plan administrator does not file the actuarial report within this timeline, OSFI may request explanations for the delay and may require that plan members be informed of the late filing.
2.0 Contents of the Actuarial Report
The actuarial report would generally include discussion and disclosure on the following elements:
- Subsequent events
- Actuarial opinion
- Membership data
- Summary of plan provisions
- Plan assets
- Actuarial basis – Assumptions and valuation methods
- Financial position – Going concern and solvency valuations
- Reconciliation of financial position – Going concern valuation
- Funding requirements
OSFI believes it is good practice for the actuary to provide a summary of the key findings of the actuarial report and significant events that have occurred since the previous report that have a material impact on funding requirements. The approach facilitates review by regulators and stakeholders. Actuarial report highlights would generally include
- amendments that were not included in the previous report;
- transactions subject to OSFI authorization such as asset transfers or amendments reducing benefits;
- benefit conversions;
- changes in methods and/or assumptions;
- date of the next actuarial report; and
- a description of subsequent events that have a material impact on the results of the valuation.
2.2 Subsequent Events
The actuarial report should disclose any subsequent events that emerged between the valuation date and the report date, and whether these events were reflected in the valuation, as may be appropriate. The actuarial report should specify if no subsequent events occurred.
2.3 Actuarial Opinion
OSFI expects an opinion to be expressed on all assumptions and methods used in the actuarial report, and in the format prescribed by the CIA. OSFI will not accept an actuarial report where the actuarial opinion with respect to the assumptions and methods is modified by a reservation. Any reservations, limitations, or deviations concerning other aspects of the report should be clearly disclosed.
The actuary should include a statement that the actuarial report was prepared in accordance with applicable legislation. For multijurisdictional pension plans, a statement that minimum member benefits stipulated by other jurisdictions’ legislation were taken into account in the valuation should also be included.
The PBSA is generally applicable to pension plans that provide benefits to employees in included employment, whether or not other employees are also members of the plan. Minimum funding requirements (e.g. average solvency ratio) for these plans apply to the plan as a whole, but individual entitlements and corresponding liabilities of plan members are determined based on the legislative requirements of their respective jurisdictions.
2.4 Membership Data
The following membership information should be included in the actuarial report:
- Number of members according to group:
- actives, deferreds, retirees and beneficiaries, etc.
- members of other identifiable sub-groups if the assumptions and methods used to value the entitlements of these groups differ (e.g. disabled members receiving payments from the plan)
- retirees whose benefits have been annuitized in lieu of being paid from the pension fund or who are receiving benefit payments via a buy-in annuity, if applicable
- distinct benefit formula (e.g. final average benefit vs. flat benefit), as applicable
- any members with defined contribution benefits
- For active members, the information to be included will depend on the benefit formula and/or type of plan, such as the following:
- average age, credited service and salary
- average contributions accumulated with interest
- average accrued pension benefit
- average hours worked per year
- For inactive members include the following:
- average age
- average pension and bridge benefit
For multijurisdictional pension plans, the above membership information should be provided separately for each applicable jurisdiction.
Membership information should be shown as at the valuation date of the actuarial report and of the previous actuarial report. A reconciliation of membership by category from the previous actuarial report and an explanation of large fluctuations in membership should also be included in the report.
The actuarial report should include information on the tests performed to ascertain the accuracy of membership data. If membership data is insufficient or unreliable, OSFI expects the actuary to opine on the impact on valuation results, justify this opinion, and state, as applicable, the steps being taken to correct this problem before the next actuarial report.
2.5 Summary of Plan Provisions
The actuarial report should include a detailed summary of the plan provisions applicable to each member category that have a material impact on valuation results, such as the following:
- member contributions formula
- benefit formula
- pensionable age
- normal retirement age (if different from pensionable age)
- normal pension benefit
- early retirement provisions
- bridge benefit
- termination of employment benefits, including whether portability is available after members reach early retirement age
- pre-retirement death benefits
- normal form of pension with a clear description of post-retirement death benefits, including the minimum legislative joint and survivor pension benefit if the member has a spouse or common-law partner, and whether the spousal benefit is subsidized
- disability benefits
- maximum pension provisions, including whether the maximum pension is calculated at termination of employment, termination of the plan, or retirement
- indexation provisions
- ancillary benefits
The benefits payable on individual or plan termination should be clearly described in the actuarial report. In particular, the report should define early retirement benefits payable to deferred vested members such as whether the early retirement pension is
- the actuarial equivalent of the benefit payable at pensionable age; or
- the benefit payable at pensionable age, reduced by the early retirement factors applicable to members choosing early retirement.
Where the plan provides for the use of early retirement reduction factors, the actuarial report should confirm that the resulting early retirement benefits are at least actuarially equivalent to the unreduced pension at pensionable age. OSFI expects the actuary to test for this minimum benefit when determining the going concern liabilities, the current service cost, and the solvency liabilities.
2.6 Plan Assets
2.6.1 Asset Data
The actuarial report should disclose the sources of the asset data used in the valuation, and to the extent possible, the actuary should
- use asset data that is consistent with the Certified Financial Statements (CFS) of the plan;
- explain any material differences between the market value of assets reflected in the report and the market value reported in the CFS; and
- include information on the tests performed to ascertain the accuracy of the data.
The inclusion of receivable amounts (usually contributions due to be remitted) in the assets should be consistent with the CFS to the extent possible. Such amounts should be included in the assets only where either
- the amount was paid into the fund after the valuation date but before the report date; or
- the payment of the amount is certain and has a known expected payment date that is shortly after the report date.
Any receivable amount included in the assets should relate to amounts that were due to be remitted at the valuation date. For example, the payment in part or in full of a deficit as at the valuation date should not be included in the plan assets at that date, unless the amount was to be remitted prior to that date based on the previous actuarial report.
It is generally acceptable to include in the assets adjustments for amounts to be transferred to or from other pension plans. However, where such amounts are material to the plan, the actuarial report should disclose the liabilities associated with these transfers and information on the transaction, such as the date of application for approval.
2.6.3 Asset Mix
The actuarial report should include information on the actual asset mix of the plan by major asset category at the valuation date. Pooled funds, if any, should also be allocated by major asset category. The target asset mix and ranges stipulated by the Statement of Investment Policies and Procedures (SIP&P) of the plan should also be disclosed.
2.6.4 Reconciliation of Assets
The actuarial report should include a reconciliation of assets, year by year, for each period since the valuation date of the previous actuarial report. This reconciliation should show changes in assets from various material sources, which typically include the following:
- member contributions
- employer contributions
- investment income
- commuted value payments
- pension payments
- investment expenses
- administrative expenses
If defined contribution elements are present, then the related assets and reconciliation should be shown separately.
2.7 Actuarial Basis
The CIA Standards and Guidance address the selection, appropriateness, and disclosure of going concern and solvency methods and assumptions. These documents also require the actuary to take into account the requirements of applicable legislation. This section of the Guide describes OSFI's requirements with respect to the valuation methods and assumptions used to determine the financial position of the plan for going concern and solvency valuation purposes.
The selection of asset valuation and actuarial cost methods is viewed as a fundamental element of the funding policy of the plan administrator/employer provided to the actuary as part of the terms of engagement. An explanation of the methodology used to determine the asset, liability, and current service cost values should be provided in the report.
Methods are not expected to change from one valuation to the other. Any modification should be clearly disclosed in the actuarial report and include the rationale for the modification and its financial impact.
2.7.1 Asset Valuation Method
Letters of Credit
Letters of credit may not be included for going concern valuation purposes.
For solvency valuation purposes, assets should include the face value of any letters of credit in effect on the valuation date, up to a maximum of 15% of the market value of plan assets.
Smoothing of Assets
Smoothing of going concern assets is allowed, provided the asset valuation method is reasonable, that is
- it does not result in a value of assets that deviates excessively from its market value. OSFI believes that the going concern asset value should not exceed 110% of the market value. The actuary may also, if desired, use a minimum percentage of the market value, such as 90%, to establish a corridor of acceptable values; and
- it does not produce asset values that are systematically greater than the market value of the total portfolio in the case of non-immunized portfolios or of the class of assets in the case of immunized portfolios, as applicable. As a result, where the difference between actual investment income and expected investment income in accordance with an assumed rate of return, for the total portfolio or a class of assets, as the case may be, is spread over a number of years, the assumed rate of return should be no greater than the discount rate used in the going concern valuation.
Smoothing of assets is prohibited for solvency valuation purposes.
Risk Mitigation Strategies
Some pension plans use buy-in annuity products to limit the pension plan’s exposure to various risks related to retiree liabilities. The actuary should use an acceptable method for valuing buy-in annuities to be included in the plan assets.
Buy-out annuities may also be used by pension plans to limit exposure to risks. While these plans remain accountable for the provision of the annuitized benefits should the insurer default on its obligations, unless such event arises, OSFI expects related assets and liabilities to be excluded from the going concern and solvency balance sheets.
Another risk mitigation strategy using longevity risk hedging contracts allows pension plans to focus more narrowly on longevity risk. As is the case when a plan administrator of an ongoing plan purchases buy-in or buy-out annuities, a plan administrator that enters into a longevity risk hedging contract retains the ultimate responsibility for paying pension benefits. OSFI expects the actuary to consider the actuarial valuation implications of these contracts in the actuarial report.
2.7.2 Going Concern Assumptions and Valuation Method
A going concern valuation is required to be prepared using actuarial assumptions and methods that are in accordance with accepted actuarial practice, and included in the actuarial report of a plan that is not terminating or winding-up. The purpose of this valuation is to determine the plan’s assets and liabilities on the valuation date, ongoing funding requirements (current service cost), and any additional funding requirements (special payments).
Actuarial assumptions developed by the actuary should be best estimates reflecting future expectations while taking into account pertinent observable experience and plan characteristics. The actuary should select a set of actuarial assumptions which are appropriate in aggregate for the purpose of the valuation as well as independently reasonable. The nature of the assumptions used will also depend on materiality for the purpose of the valuation.
The rationale for the selection of each assumption should be provided in the actuarial report. Any change in assumptions from the previous actuarial report should be clearly identified and justified in the report.
Actuarial Cost Method
OSFI does not prescribe a specific approach for allocating the actuarial present value of benefits and expenses to time periods provided it complies with CIA Standards. Notwithstanding the foregoing, OSFI will not accept the use of the forecast actuarial method in an actuarial report. This method requires that a highly subjective assumption be made with respect to those who are expected to become members in the future. Changes in this assumption can result in substantial differences in the cost of a pension plan. OSFI believes that status quo in the active membership is a best estimate assumption for valuation purposes.
Provision for Adverse Deviations
CIA Standards provide that assumptions for going concern valuations can be best estimates modified to incorporate margins for adverse deviations to the extent required by law or the terms of engagement. OSFI expects that a set of actuarial assumptions would, as a whole, include an appropriate provision for adverse deviations.
The actuary may set the extent of any individual margin for adverse deviations based on the plan administrator/employer’s funding policy, his or her knowledge of the risk tolerance of the plan administrator/employer, and any other applicable terms of engagement. The actuary should also consider that a riskier asset mix would generally translate into a higher provision for adverse deviations than would otherwise be required if the same funding objective of a plan with a less risky asset mix is to be maintained.
It is not necessary that each assumption include a margin for adverse deviations. It would be acceptable, for instance, to select best estimate assumptions for all contingencies except the discount rate. The necessary overall margin would then be included entirely in the discount rate assumption. Alternatively, the overall margin could be expressed as a multiplier to the liabilities and current service cost. In any event, margins should be explicitly disclosed.
The discount rate is typically the most significant assumption in determining the liabilities and current service cost in the going concern valuation. OSFI does not prescribe a specific methodology for selecting the discount rate but believes that the rate used by the actuary should not exceed a certain level in order to include adequate margins for adverse deviations.
The approach used by OSFI in setting the maximum going concern discount rate is not unduly influenced by short term financial market volatility and interest rate fluctuations underlying the pricing of fixed-income securities. OSFI monitors financial market conditions and future expected returns and is currently of the view that generally, excluding any active investment management return, the discount rate for a plan whose investments include no more than 50% of fixed-income securities should not exceed 6.00%, before all expenses other than those related to active investment management. The actuary is expected to adjust this maximum rate correspondingly for plans using an asset mix expected to generate a lower return than the one obtained using a 50% fixed-income allocation.
The actuarial report should include a description of the approach used to determine the discount rate, including quantification of the main components making up the discount rate, as appropriate. For instance, if a building-block approach is used by taking into account the target asset mix in the SIP&P, the actuarial report should disclose the inflation and real return assumptions, as well as any provision for the payment of expenses from the pension fund and any margin for adverse deviations. In some cases (e.g. where a plan buys units of an investment fund), investment management expenses might not all be paid directly by the pension fund, but rather indirectly when the associated investment income is net of expenses. These expenses should be clearly and separately disclosed in the actuarial report, and taken into consideration in the determination of the discount rate.
It is generally acceptable to assume that active investment management will generate additional return only to the extent that additional management fees associated with active management exceed those for passive management. If the discount rate includes a positive added value (net of active investment management expenses) due to employing an active investment management strategy, the actuary should provide relevant supporting data in the actuarial report that demonstrates that such additional return will be consistently and reliably earned over the long term.
Some plans use a select and ultimate approach to set the going concern discount rate resulting in rate variations from one year to the other. The rate for some years could then be higher than the maximum rate. The approach is acceptable to OSFI provided the liability and the current service cost obtained using the select and ultimate approach are not lower than the liability and current service cost that would be obtained using the maximum going concern discount rate approach.
De-risking strategies may result in a discount rate used for liabilities underlying some of the plan’s member categories exceeding that applicable to others. Use of multiple discount rates is acceptable to OSFI provided that total plan liabilities are not lower than what they would have been had the maximum discount rate been applied to all member categories of the plan. Use of a discount rate in the calculation of the current service cost that is higher than that used in the calculation of the retired members’ liabilities is acceptable, provided that
- the discount rate used in the calculation of the current service cost is consistent with that used in the calculation of the active members’ liabilities; and
- the discount rates used for each class of members (i.e., actives and retirees) are individually reasonable and consistent in the aggregate.
Pension benefits are expected to be valued using an actuarial cost method such that no future gains or losses will occur if the experience of the plan does not deviate from assumptions. As such, OSFI would expect that the rate of return for the active members group should be assumed during only those years when a member is expected to be active; for years during which a current active member is expected to be retired, the discount rate related to the retiree group would be used.
Provisions for expenses should cover administration, passive investment management, and active investment management expenses. These should be clearly and separately disclosed in the actuarial report, and quantified so that the appropriateness of expense provisions taken individually and as a whole may be assessed.
Expense assumptions should be developed based on actual and expected expenses to be paid by the pension fund. The actuarial report should include the rationale for establishing an expense assumption which is materially lower than expenses experienced by the plan over previous years.
For plans pursuing an active investment management strategy, the approach used for determining a reasonable split between passive and active investment management expenses should be explained in the actuarial report. Passive investment management expenses should reflect the costs of maintaining a passive investment portfolio, which would typically include investment administration, rebalancing, transaction, and custodial fees relating to the management of assets.
While investment management related expenses are often expressed as a percentage of assets, resulting in a discount rate net of investment expenses, administration expenses do not generally relate to the size of the assets. An implicit approach for administration expenses may result in an inappropriate discount rate assumption when compared to actual expense levels.
The actuary should apply judgment in selecting the appropriate mortality assumption, which includes two components: current mortality rates and adjustments for future improvements in mortality.
It is considered best practice to reflect future mortality improvements in the mortality basis as there is substantial evidence that mortality has improved continuously for an extended period and will likely continue to improve in the future. OSFI expects mortality improvements to be reflected by use of projection scale CPM-B using a full generational projection of an industry table such as the CPM2014 mortality table.
OSFI expects the CPM2014 mortality table (and related projection scale) to be used for going concern valuations, unless the actuary justifies a different table and explains in the actuarial report why the use of the CPM2014 mortality table (and related projection scale) would not be appropriate. Where another base mortality table is chosen and/or where adjustments are made in accordance with the CIA mortality study (e.g. for pension size or industry), a justification for the adjustments should be included in the actuarial report.
The resulting mortality tables of the CIA mortality study provide an industry standard of expected mortality with respect to Canadian pension plans. As such, other adjustments to the base mortality tables are generally not warranted but might be appropriate in certain cases, for example for groups with substandard or superior mortality. The justification of how the adjustments were determined should refer to relevant experience analysis, credible life-years of exposure, and each plan characteristic considered. Very large plans with fully credible experience may choose to develop their own mortality table to reflect actual experience. The adjusted basis should still provide for future mortality improvement.
Where a mortality table is constructed on plan experience or uses adjustments to a base table based on plan experience, the actuarial report should provide sensitivity information in comparison to the relevant CPM base mortality table (and related projection scale) to allow an assessment of the strength of the assumption. The life expectancy at age 65 using the valuation’s mortality table and the CPM table (and related projection scale) should be disclosed in the actuarial report. The financial impact on the going concern liabilities and current service cost of using a modified table and improvement scale, as the case may be, should also be shown.
While the actuary may assume that active and deferred members will retire at different ages, the pensionable age for each group of members should be the same. A vested member terminating before pensionable age is entitled to a deferred pension payable on the same terms and conditions as the immediate pension the member would have received upon attaining pensionable age.
Members and former members are eligible to receive an immediate pension benefit commencing ten years before pensionable age. For a plan that includes material early retirement subsidies, OSFI would not consider reasonable the use of a retirement age assumption that ignores the possibility of members taking advantage of the plan’s early retirement options.
Where the actuary assumes members might terminate before retirement, the actuarial report should state how benefit entitlements are expected to be settled. The proportions of members assumed to elect a commuted value transfer and a deferred pension should be stated.
Assumptions used should be clearly disclosed in the actuarial report. Assumptions to calculate the liability of members assumed to choose a commuted value transfer would generally be determined according to CIA Standards. Alternatively, the going concern assumptions could be used if the impact is not material.
Benefits Subject to Consent
Some plans offer benefits that are subject to administrator or employer consent, such as unreduced early retirement benefits. In these cases, the actuary should make a reasonable assumption of members being granted consent and clearly disclose this assumption in the actuarial report. Unless plan experience justifies otherwise, it would generally not be acceptable to assume that no members will be granted consent.
2.7.3 Solvency Assumptions and Valuation Method
A solvency valuation is required to be prepared using actuarial assumptions and methods that are in accordance with accepted actuarial practice, and assuming the plan is terminated on the valuation date. A solvency valuation would also be prepared on the effective full termination date of a plan. The purpose of the solvency valuation is to determine the plan’s assets and liabilities on the valuation date and any additional funding requirements (special payments).
OSFI believes that a solvency valuation implicitly requires the hypothetical or effective full wind-up of the plan upon its termination, and therefore also the settlement of benefits. The actuary should select a set of actuarial assumptions which are appropriate for the purpose of the valuation. The nature of the assumptions used will also depend on materiality for the purpose of the valuation.
The rationale for the selection of each assumption should be provided in the actuarial report.
Any change in assumptions from the previous actuarial report should be clearly identified and justified in the report.
Actuarial Cost Method
All benefits to which members would be entitled upon plan termination should be valued, including those in the plan that are over and above the minimum requirements of the PBSA. The accrued benefit cost method should be used to calculate liabilities.
The approach developed by the actuary should not change the nature of the benefit entitlements or the plan provisions, for example, by modifying pension indexation from a full Consumer Price Index (CPI) increase to a fixed increase.
The postulated termination scenario should be clearly identified in the actuarial report, for example as the result of voluntary termination of the plan or bankruptcy of the employer.
The determination of solvency liabilities should be consistent with the selected scenario. If pension benefits depend on continued employment, an assumption for increases in future salaries and maximum pension limit defined in the Income Tax Act (ITA) may be required. A reasonable projection of salaries should be included for solvency valuation purposes if
- the plan provides benefits based on the final average earnings of a member and the plan defines final average earnings over a term that continues until employment ends, irrespective of whether the plan has been terminated; and
- the postulated scenario is that employment continues after plan termination.
Where the pension amount is determined by taking into account a period of employment which continues after plan termination, OSFI would expect its calculation to be consistent between options the member could elect. As such, the assumption for future salary increases should be the same for members electing a commuted value or a deferred pension.
If employment continues after plan termination, reasonable retirement and termination rates after plan termination may be used in recognition that members may not act so as to maximize the value of benefit or reach pensionable age. The determination of assumptions should comply with CIA Standards to ensure that the assumed increases in salaries and in the average wage index are consistent.
Appropriate disclosure and explanation should be provided in the actuarial report. Where the termination scenario does not maximize the value of benefits, the actuarial report should nevertheless disclose the solvency liability which would have resulted had such an approach been used.
Commuted Value Transfer versus Annuity Purchase
The actuarial report should clearly identify how benefit entitlements would be expected to be settled (commuted value transfer, purchase of an immediate or deferred annuity) for each category of members:
- active members eligible for early retirement
- other active members
- deferred vested members
Where it is expected that members eligible for early retirement would, upon plan termination, be offered the choice of an immediate annuity or the commuted value, the actuary should assume that at least 50% of the liability of each of those members is based on the option that creates the highest solvency liability. The actuary should disclose the assumption in the actuarial report.
Portability options offered to members eligible for early retirement should be based on plan provisions. Even if portability is not available to members eligible for early retirement, the plan administrator could still choose to offer the option upon plan termination. The assumption made by the actuary with respect to the election form chosen by these members should be supported by the decision of the plan administrator of granting the option, and should be disclosed in the actuarial report.
OSFI believes that it would generally not be acceptable to assume that benefits of all deferred members not entitled to an immediate pension would be settled by commuted value transfers. These deferred members would be eligible to a deferred annuity upon plan termination. Although other portability options available to active members could also be offered to deferred members by the administrator on plan termination, it is generally not reasonable to assume that all members who have already opted willingly or by default for a deferred pension will choose to receive a commuted value upon plan wind-up. The actuary is expected to consider this observation in setting and justifying the assumption used for the settlement of benefits for deferred members on plan termination.
Discount Rate and Mortality
The discount rate used to value benefits expected to be settled by a commuted value transfer should be determined according to CIA Standards using the latest mortality table and improvement scale promulgated by the Actuarial Standards Board for the purpose of the calculations. This usually includes the assumption that members will choose to start their pension at the age that maximizes the value of benefits. The actuary should disclose the retirement assumption in the actuarial report.
Benefits expected to be settled by the purchase of an annuity should be valued using an interest rate assumption (annuity proxy) that does not exceed the rate recommended in the most recently issued CIA Guidance relevant to the report date. Rounding-up the discount rate is not permitted. The mortality assumption to be used is provided in the same CIA Guidance.
OSFI expects the actuarial report to include appropriate explanations with respect to the setting of the discount rate and mortality assumptions. For example, if the annuity proxy for non-indexed annuities is used, the actuarial report should disclose the duration of the liabilities expected to be settled by the purchase of an annuity.
Some plans offer pension indexation which is not fully related to the CPI, i.e. partial indexation or indexation with a cap. The actuarial report should clearly explain the approach used to determine the indexation assumption or the net discount rate. In particular, the portion of the inflation risk premium considered in the determination of the discount rate is expected to be discussed by the actuary in the report.
OSFI does not object to the use of a stochastic approach to determine the impact of the cap on indexation. Relevant information on the model should be disclosed in the actuarial report such as
- details of the stochastic model including why this is a suitable model;
- a description of model controls to ensure results are robust and consistent with the model and parameters;
- parameters of the underlying inflation distribution used in the stochastic model including the mean or median, volatility, minimum value, and maximum value and rationale for the choice of parameters;
- the number of scenarios generated and the projection period including the rationale for choices; and
- pertinent sensitivity analysis for key parameters.
Alternative Settlement Methods
OSFI recognizes that it might not be possible to settle a large pool of immediate and deferred pension liabilities by means of a single group annuity purchase. The federal pension legislation does not preclude using alternative settlement methods for solvency valuation purposes, but such method cannot result in pension benefits being surrendered in any year or in aggregate. Therefore, in order to reflect a realistic manner of settling benefits, the actuary should assume that benefits in payment and deferred pensions would be settled by the purchase of annuities or use of a replicating portfolio.
OSFI expects benefits to be distributed without undue delay after OSFI’s approval of the termination of a pension plan. Therefore, only pension plans for which annuities cannot be purchased due to group annuity limitations (i.e. large plans) should use a replicating portfolio approach. For solvency valuation purposes, it is expected for all plans to envision the wind-up of assets first through a single group annuity purchase. If not possible due to capacity constraints of the annuity market, then through a series of group annuity purchases as contemplated under CIA Guidance.
A replicating portfolio should only be established in cases where the capacity of the Canadian annuity market would not permit the settlement of a terminating plan’s retiree and deferred pension liabilities by a single or a series of group annuity purchases. It is expected that the actuary will discuss the capacity of the annuity market in the actuarial report, including whether it is sufficient to absorb a single or series of group annuity purchases for the plan, with the thresholds and manner specified in the CIA Guidance used as a reference. Notwithstanding the foregoing, the actuary could still assume that benefits would be settled by the purchase of annuities regardless of any limitations of capacity in the market for group annuity contracts.
If an alternative settlement method (i.e. series of group annuity purchases or replicating portfolio) is used, the actuarial report should disclose the notional solvency liabilities and solvency ratio that would have resulted if the single purchase of a group annuity had been assumed. Also, the actuarial report should disclose the underlying equivalent annuity proxy rate to be used to obtain the same solvency liability resulting from using an alternative settlement method. The mortality and the indexation rate assumptions used should also be disclosed, explained, and be the same as the ones provided for under CIA Guidance had the solvency valuation assumed the single purchase of a group annuity.
OSFI expects the actuary to discuss whether the capacity of the market would be sufficient for the fixed-income securities to be included in the establishment of the replicating portfolio. Simply assuming that market capacity is available to achieve the desired portfolio would not be acceptable.
The primary asset class of investment grade fixed-income investments of the portfolio would include a substantial allocation to high-quality fixed-income securities. For this purpose, OSFI considers that for a fixed-income investment to be deemed of high-quality, the rating should be comprised among the two highest credit rating categories given by at least one of the recognized rating agencies operating in Canada, i.e. DBRS (AA(low) or higher), Standard and Poor’s (AA- or higher), Fitch (AA- or higher), and Moody’s (Aa3 or higher).
Expected pension benefit payments should be covered by the assets of the replicating portfolio only. As such, it is expected that the actuary would establish margins assuming no recourse to additional sources of funds. Management and pension plan administrators are ultimately responsible for risk decisions. The plan administrator has fiduciary responsibilities to plan members and beneficiaries. Given that it is the plan administrator’s role under the PBSA to file the actuarial report with the Superintendent, the filing of the actuarial report implies that the administrator is in agreement with the assumptions used in the actuarial report. Among others, this includes using appropriate assumptions and sufficient margins for adverse deviations, determined in accordance with CIA Guidance to ensure a high probability that benefits will be paid.
The establishment of a replicating portfolio assumes that a portion of the pension fund will be maintained and not wound up on plan termination for the payment of pension benefits to retired members and members assumed to elect to receive a pension from the plan. Therefore, OSFI would expect economic and demographic assumptions to be consistent with those used under the going concern valuation, adjusted to include appropriate margins for adverse deviations.
The actuarial report should include appropriate disclosure and explanation of underlying assumptions and methods used to establish a replicating portfolio, such as
- expected real rate of return for and allocation to each major asset class;
- expected asset default and downgrade impact for each major asset class;
- expected inflation;
- expected indexation;
- investment management and administrative expenses associated with maintaining and administering the on-going pension plan; and
- explicit margin for adverse deviations.
Each of the key risks for which a margin should be identified is included below:
- mortality and longevity risks
- economic risks:
- asset default and downgrade risks over expected
- interest rate risk which includes, refinancing , reinvestment, and liquidity risks
- inflation risk
- other risks, as applicable
It is expected that the actuary will provide meaningful disclosures regarding the benefit security implications of using the replicating portfolio approach and that plans of this size would generally calculate these impacts based on stochastic modeling. Disclosures should, therefore, include
- the description of the model (e.g. matching of expected cash flows), including the assumed distribution of outcomes, i.e. the mean and range of variability;
- a quantification of the probability that the pension benefit promise will be met based on the size of the margins and actuarial assumptions used; and
- the average payout ratio in percentage of the full amount in cases where pension benefits are not expected to be fully paid, assuming the full funding requirement under the federal pension legislation does not apply.
Alternatively, for plans using a deterministic approach, the financial impact of adverse experience with respect to each of the risks should be disclosed separately in the actuarial report. In these cases, OSFI expects the actuary to perform stress testing when considering the impact of these risks, such as the expected loss associated with each one.
The solvency valuation should provide for expenses that may reasonably be expected to be paid by the pension fund, under the postulated termination scenario, between the valuation date and the wind-up of the plan, i.e. the date when all plan benefits are settled and assets are distributed. In order to provide for a realistic manner of settling benefits, OSFI expects the actuary to make and disclose the assumption as to when the wind-up of the plan might reasonably occur after the termination date, considering the delays incurred to
- prepare and file the termination report with OSFI;
- review the report by OSFI and to obtain the Superintendent’s approval; and
- effectively pay the benefits.
It should be clear from the actuarial report that the termination expense amount represents the actuary’s best estimate assumption.
Termination expenses should be deducted from the market value of assets in calculating the solvency ratio and not be netted from future investment income. The provision would usually include
- actuarial, administrative, legal, and other consulting expenses incurred in terminating the plan up to its wind-up;
- expenses associated with benefit settlement, and, if applicable, fees associated with a Replacement Administrator or Designated Actuary;
- regulatory fees;
- custodial and auditing related expenses;
- investment expenses, including management and transaction fees relating to the liquidation of assets; and
- expenses associated with revising the investment policy.
Where a replicating portfolio is assumed, expenses related to its establishment should be discussed in the actuarial report and reflected in the termination expenses. The assumption of a series of group annuity purchases until the full wind-up of the plan would also require an adjustment to termination expenses.
Determining Benefits Payable at Pensionable Age
Members are assumed to grow into any minimum age requirement. If there is no service component in the plan’s pensionable age, members are entitled to any benefit payable at pensionable age. If pensionable age has a service component, the benefit payable at pensionable age should be provided to members who have met the service requirement at the valuation date.
Deferred pension benefits payable at pensionable age are fully vested, i.e. pensionable age must be the same for active and inactive members. OSFI considers indexing and bridge benefits payable at pensionable age to be part of the member’s pension benefit and, therefore, payable to a member or former member at pensionable age.
Benefits Subject to Consent
OSFI allows the exclusion from solvency liabilities of benefits genuinely subject to consent. If the plan provides benefits subject to the consent of the plan administrator, the actuarial report should specify whether consent to these benefits is assumed to be granted for solvency valuation purposes. When making this assumption the actuary should
- consider how the benefits are administered in practice; and
- obtain confirmation from the plan administrator of the treatment of consent benefits in the event of a plan termination.
Projection of the Maximum Pension Limit
A projection of the maximum pension limit defined in the ITA isrequired if the plan automatically reflects future changes in the limit,and its determination for purpose of pension benefit calculation is made at retirement instead of at termination of employment or plan termination. Since the increase in the ITA maximum is based on the increase in the average wage index, the appropriate projection assumption would be the implicit rate of inflation plus 1%.
The actuary may decide not to project the maximum pension amount when it should be projected because it is determined that the impact of doing so would not be material. The actuarial report should then disclose this assumption and explain the reason why including a projection would not have a material impact on the results of the solvency valuation.
2.8 Financial Position
2.8.1 Going Concern Valuation
The actuarial report should include a balance sheet showing the going concern assets and liabilities as at the valuation date and as at the date of the previous actuarial report. If defined contribution elements are present, then the related assets and liabilities should be shown separately.
Plan assets in the balance sheet should not include the present value of future special payments.
With respect to liabilities, the balance sheet should include the following items separately:
- liabilities broken down by category of members, i.e. active, deferreds, retired members and beneficiaries
- liabilities for transfer deficiencies
The actuarial report should also include in separate notes to the balance sheet
- the actuarial present value (in dollars) of future expenses payable by the pension plan and included in liabilities. The provisions for administration and passive investment management expenses should be clearly and separately disclosed; and
- the actuarial present value (in dollars) of the provision for adverse deviations included in liabilities.
2.8.2 Solvency Valuation
The actuarial report should include a balance sheet showing the solvency assets and liabilities as at the valuation date and as at the date of the previous actuarial report. If defined contribution elements are present, then the related assets and liabilities should be shown separately.
The balance sheet should include the following items separately:
- liabilities broken down by category of members, i.e. active, deferreds, retired members and beneficiaries
- liabilities for transfer deficiencies
If the plan is using a replicating portfolio, the actuarial report should include in separate notes to the balance sheet
- the actuarial present value (in dollars) of future expenses payable by the pension plan and included in liabilities. The provisions for administration and passive investment management expenses should be clearly and separately disclosed; and
- the actuarial present value (in dollars) of the provision for adverse deviations included in liabilities.
The solvency ratio for a plan with defined benefit provisions must not include defined contribution elements.
Solvency assets is defined as the sum of the market value of defined benefit assets at the valuation date and the face value of all letters of credit in effect on that date (excluding those under Solvency Funding Relief Regulations), less assumed termination expenses. The actuarial report should disclose the aggregate face value of the letters of credit included in solvency assets. This amount cannot exceed 15% of the market value of plan assets.
Average Solvency Ratio Used to Determine Funding Requirements
The actuarial report should include a solvency balance sheet showing the adjusted solvency asset amount and solvency liabilities at the valuation date and at the date of the previous actuarial report. If defined contribution elements are present, then the related assets and liabilities should be shown separately.
This balance sheet should include the following items separately:
- liabilities broken down by category of members, i.e. active, deferreds, retired members and beneficiaries
- liabilities for transfer deficiencies
With respect to the defined benefit assets and liabilities, the actuarial report should also
- show the solvency ratio;
- show the average solvency ratio which is used for funding purposes;
- show the amount of any solvency deficiency;
- discuss, as appropriate according to the financial position of the plan, all aspects of the restrictions that may apply to the transfer of commuted values and annuity purchases which may affect the portability of benefits, including a portability freeze, and result in additional funding requirements; and
- state whether assets would exceed liabilities in the event of a plan termination and indicate the amount of excess or shortfall.
If adjustments were made to solvency ratios to determine the average solvency ratio, the actuarial report should describe the calculation of these adjustments, which may include
- present value of special payments and underlying discount rate used;
- contribution holidays;
- plan amendments;
- plan mergers;
- additional payments made in advance and used to reduce special payments to be paid after the valuation date; and
- face value of letters of credit in effect on a valuation date, not to exceed 15% of the market value of the assets on that date.
2.9 Reconciliation of Financial Position
2.9.1 Going Concern Valuation
A reconciliation of the going concern valuation results is considered useful disclosure in an actuarial report, allowing the reader to understand the sources of changes in the financial position of the plan since the last valuation in the previous actuarial report and to assess the reasonableness of the actuarial assumptions. The reconciliation would generally show
- the expected interest on the opening surplus or deficit;
- any utilization of surplus;
- special payments made to the pension fund;
- the material sources of experience gains and losses;
- the impact of changes in actuarial assumptions;
- the impact of changes in methods; and
- the impact of plan amendments.
OSFI would expect the actuary to explain any significant or unusual gains or losses in the actuarial report.
The impact of each change in assumptions described in the actuarial report should be disclosed separately. However, it is acceptable to combine certain related assumptions for this purpose, for example, changes to different economic assumptions resulting from a modification in the underlying inflation assumption.
Consistent and material experience losses from year to year that relate to a given assumption would generally indicate that it is inadequate. OSFI expects the actuary to review and, if required, strengthen assumptions on a regular basis.
2.9.2 Solvency Valuation
A reconciliation of the solvency results from the last valuation in the previous actuarial report is generally not required. However, if the actuarial report does not include a going-concern valuation (i.e. termination report), OSFI expects gains and losses since the last valuation to be reconciled in the actuarial report.
2.10 Funding Requirements
The actuarial report should provide the following information with respect to the current service cost and special payments:
- the rule for determining the current service cost in respect of the period from the valuation date until the date of the next valuation. This rule should be expressed in dollars per member or in percentage of payroll or member contributions, as appropriate.
- the current service cost as at the valuation date and as at the date of the previous actuarial report
- the actuarial present value (in dollars) of future expenses and the provision for expenses in the year following the valuation date, payable by the pension plan and included in the current service cost. The provisions for administration and passive investment management expenses should be clearly and separately disclosed.
- the actuarial present value (in dollars) of the provision for adverse deviations included in the current service cost
- any material change to the rule for determining the current service cost, from that in the previous actuarial report
- each schedule of going concern special payments at the valuation date and as at the date of the previous actuarial report, including for each
- unamortized balance,
- monthly payment, and
- beginning and expiry dates.
- the schedule of monthly solvency special payments at the valuation date and as at the date of the previous actuarial report
- estimated dollar amounts of required contributions by type (current service cost and special payments, if applicable) and source (employer contributions and member contributions, if applicable)
The actuarial report should state that contributions and special payments are required to be remitted to the pension fund on a monthly basis. Outstanding contributions will accrue with interest.
Pre-Existing Special Payments
Pre-existing special payments are present when a previous actuarial report disclosed a going concern unfunded liability. The remaining balance of any pre-existing going concern special payments
- should be considered to determine whether an unfunded liability exists at the valuation date;
- should be carried over from one report to the next; and
- should not be eliminated or reduced unless their present value exceeds going concern funding requirements.
The excess of the present value of all pre-existing going concern special payments over the going concern deficit shall be applied to reduce the outstanding balance of any unfunded liability. The amortization period of a schedule cannot be reduced but flexibility is available in choosing which schedule(s) to adjust. Once the schedule(s) to be reduced has(have) been identified, the remaining payments of this(these) schedule(s) should be reduced pro rata.
Where changes in going concern assumptions or methods occurred since the valuation date of the previous actuarial report, the actuary should consider the net effect of plan experience and changesin assumptions or methods to determine funding requirements. For instance, experience gains may not be applied to reduce payments if this is followed by a change in assumptions that leads to the introduction of a new special payment, as the net effect would be longer amortization than if the total net financial change was applied.
Contribution holidays are limited by the funding and solvency positions of the plan as at the valuation date. Employer contributions payable until the next actuarial report must at least be equal to
- the employer current service cost; minus
- the lesser of
- the going concern surplus at the valuation date; and
- the amount by which solvency assets exceed 105% of solvency liabilities.
Additional Payments in Excess of Minimum Funding Requirements
If payments greater than the sum of the minimum required special payments are made toward an unfunded liability or a solvency deficiency, these additional payments may be used to reduce the amount of a special payment in a subsequent plan year (consecutive or non-consecutive).
To determine funding requirements, going concern and solvency assets at the valuation date should be reduced by the amount of the additional payments that will be applied to reduce special payments in respect of periods after the valuation date. The actuarial report should disclose the balance of unallocated additional payments and show how additional payments have been used since the last valuation to reduce required special payments.
Other legislative provisions such as the use of letters of credit or solvency relief measures may impact funding requirements. OSFI expects the actuarial report to include sufficient details and explanations for the reader to be able to follow from one valuation to the next the impact of these provisions on special payments. As such, the actuarial report should provide a reconciliation of the amounts having an impact on the reduction of special payments since the last valuation. Also, the interaction of these amounts to the extent they affect special payments should be disclosed.
Negotiated Contribution Plans
Where a pension plan is considered a negotiated contribution plan, the actuarial report for that plan should state
- the estimated employer and employee contributions expected to be paid annually until the next actuarial report;
- the total current service cost split between the employer current service cost and estimated employee contributions; and
- any special payments.
In addition to the membership data disclosure requirements, the actuarial report should disclose the expected number of hours worked annually until the next actuarial report, if relevant to the plan’s benefit structure.
Also, the actuarial report should either
- state that expected contributions in each plan year are adequate to fund the plan, i.e. show that the estimated contributions exceed the total current service cost plus any special payments; or
- state the increase in contributions in each plan year, the reduction in benefits or a combination thereof required to address the funding shortfall. Additional options considered to address the shortfall may also be disclosed.
OSFI expects the actuary to comment in the actuarial report on recent plan experience, if relevant, relating to key indicators such as
- number of active plan members;
- average age of active members;
- active versus retiree liability breakdown; and
- other relevant factors, such as hours worked.
In considering these factors, and taking into account the duration of collective agreements in force, the actuary is expected to opine on the likelihood that the plan will meet funding requirements for the foreseeable future.
3.0 Designated Plans
In the case of a Designated Plan, an employer may not make contributions in excess of the amount of eligible contributions under the Income Tax Regulations (ITR). These contributions are determined based on a maximum funding valuation using actuarial assumptions prescribed under the ITR.
In spite of the funding limitations under the ITR, the actuarial report of a Designated Plan that is registered under the federal pension legislation should be prepared in accordance with OSFI expectations applicable to any other pension plan as outlined in the Guide. These expectations require that the usual information on going concern and solvency valuations be included in the actuarial report.
If contributions to the pension fund are constrained by the ITR, the balance sheet resulting from the maximum funding valuation of the plan and the amount of eligible contributions under the ITR should be clearly and separately disclosed in the actuarial report.
3.1 Going Concern Assumptions
The assumptions prescribed under the ITR for the maximum funding permitted under the ITR should not be used as the basis to value the going concern liabilities or current service cost of the plan under the federal pension legislation. OSFI expects the actuary to select reasonable going concern assumptions without regard to the fact that the plan is a Designated Plan. In particular, OSFI believes that the discount rate, mortality, and retirement age (if the plan includes early retirement subsidies) assumptions prescribed under the ITR are not appropriate assumptions for a going concern valuation.
3.2 Required Contributions
Current service contributions, as well as going concern and solvency special payments required under the PBSR, should be calculated regardless of the maximum funding permitted by the ITR. The information should be clearly and separately disclosed in the actuarial report.
OSFI expects the minimum required contributions under the PBSR to be paid to the pension fund unless these amounts do not qualify as eligible contributions under the ITR. Total contributions for the current service cost and to fully fund the deficit on the basis of the maximum funding valuation are considered eligible contributions under the ITR.
A contribution that has not been made since the previous actuarial report because of the ITR restriction should not be included as a receivable asset in the actuarial report.
Contact Details for Additional Information
All enquiries regarding the preparation of actuarial reports for defined benefit pension plans should be directed to:
Office of the Superintendent of Financial Institutions
255 Albert Street
Telephone: (613) 943-3950 or 1-800-385-8647
Fax : (613) 990-5591