Presentation Slides - Setting Assumptions for Funding Actuarial Valuations

Document Properties

  • Type of Publication: Presentation
  • Subject: Presentation to the BC Public Sector Pension Conference
  • Date: 2013-04-25
  • Speaker: Jean-Claude Ménard, Chief Actuary

Office of the Chief Actuary

  • Mandate: conduct statutory actuarial valuations on the
    • Canada Pension Plan (CPP) – 19M members
    • Old Age Security Program (OAS) - 5M beneficiaries
    • Federal public sector pension and insurance plans (Canadian Forces, Royal Canadian Mounted Police, Public Service, Members of Parliament, Federally Appointed Judges) – 0.8M members
    • Canada Student Loans Program – 0.5M loans
    • Employment Insurance Program – 17M workers
  • OCA also prepares additional actuarial reports whenever Bill of material changes to CPP is introduced before Parliament or amendments are made to the OAS Program and public sector pension plans.

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Office of the Chief Actuary (cont’d)

  • Chief Actuary and the actuarial staff of the OCA are members of the Canadian Institute of Actuaries (CIA), and subject to CIA Standards of Practice and Rules of Professional Conduct
  • External and internal quality control tools:
    • External peer reviews of CPP actuarial reports (made public)
    • Audit by the Office of Auditor General
    • Internal OSFI audit
    • Internal peer reviews of valuation work.
  • The latest external CPP peer review panel confirmed that
    • the work performed by the OCA meets all professional standards of practice and statutory requirements
    • the assumptions, both individually and in the aggregate, are within a reasonable range, and are in accordance with the Canadian Institute of Actuaries’ standards.

The 25th CPP Actuarial Report as at 31 December 2009 confirmed that the CPP is financially sustainable over the long term

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Funding valuation of the DB plan sets future contributions requirements

  • Funding valuation deals with the ongoing cost of the plan
    • It provides a basis for determination of future employee and employer contributions
  • It is based on long-term demographic and economic assumptions that are likely to reflect future cash flows of the plan
  • Canadian Institute of Actuaries standards require an actuary
    • To assume that the plan continues indefinitely
    • To chose assumptions representing best judgement of actuary as to the future events. Depending on the plan’s funding policy assumptions may include provisions for adverse deviations
  • Predictable pattern of contributions is important for plan’s sponsor
    • It helps to avoid intergenerational transfers between different cohorts of stakeholders.

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Main Valuation Assumptions

Economic Assumptions

  • Inflation rate: OCA ultimate assumption 2.3%
  • Real wage increases: OCA ultimate assumption 1.3%
  • Real rate of return: OCA ultimate assumption 4.0% (4.1%)

Demographic and Other Assumptions

  • Mortality rates and life expectancies
  • Fertility rate
  • Migration rate
  • Promotional and seniority salary increases
  • Rates of retirement
  • Rates of termination / Rates of disability

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Contribution to increase in life expectancy at birth has gradually shifted to people over age 65

Males Females
Change attributable to (in years) 1925-1965 1965-1985 1985-2005 2005-2025 1925-1965 1965-1985 1985-2005 2005-2025
Infant mortality (<1) 5.8 1.2 0.2 0.1 4.6 1.0 0.2 0.1
Child mortality (1-14) 2.5 0.3 0.2 0.1 2.5 0.3 0.1 0.0
Young adult mortality (15-44) 2.1 0.6 0.6 0.5 3.9 0.4 0.2 0.2
Older adult mortality (45-64) 0.1 1.3 1.5 0.9 1.9 0.8 0.7 0.5
Elderly mortality (65+) 0.3 1.0 2.6 2.6 2.2 2.3 1.7 1.7
Estimated Multivariate Effect -0.1 -0.1 -0.2 -0.2 -0.4 -0.2 -0.1 -0.1
Total Change in Life Expectancy 10.7 4.3 4.8 4.0 14.7 4.6 2.8 2.5

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Elderly mortality rates have decreased over the last 80 years, more so over the last 40 years

 Decreasing Elderly mortality rates over the last 80 years

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The OCA continuously strengthens mortality improvement rates assumption

 Life Expectancy of Canadian Male at age 65

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Setting Real Rate of Return assumption is one of the biggest challenge in the current environment

Real rate of return assumption is derived using building block approach:

  • Government of Canada long-term bonds
  • Equity risk premium (additional return over bonds)
  • Real rate of return by asset class
  • Asset mix
  • No provision for adverse deviation

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Government of Canada long-term marketable bonds
What did we know at the end of 2009?

Real Yield on the Canada Long-Term Bonds

Forecasts for the Govt. Canada LT bonds with duration over 10 years are obtained by adjusting projections for 10-years Govt. Canada LT bonds by 0.4% for December 2009 average private sector forecasts published at :

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Government of Canada long-term marketable bonds
yields were at all time low in 2011

Real Yield on the Canada Long-Term Bonds

Forecasts for the Govt. Canada LT bonds with duration over 10 years are obtained by adjusting projections for 10-years Govt. Canada LT bonds : by 0.3% for PEAP, and by 0.4% for average private sector forecasts presented in Federal Budget 2013.

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The future ERP is expected to be lower than in the past (3.4% for Canada)

Equity premium vs. bonds over 113 years

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Real rate of return assumed by the OCA is in line with assumptions of peers

Ultimate asset mix and real rate of return assumptions

Equities Fixed Income Alternative investments/RE&I Real rate of return
CPP 42% 40% 18% 4.00%
QPP 57% 30% 13% 4.50%
PSSA 54% 18% 28% 4.10%
RREGOP 51% 35% 14% 4.50%
ON PSPP 47% 40% 13% 3.85%
OTPP 44% 18% 38% 2.85%
OMERS 39% 33% 28% 4.25%
HOOPP 34% 55% 11% 4.05%
AB PSPP 57% 28% 15% 4.00%
BC PSPP 52% 29% 19% 3.50%

Due to current low interest rates environment, the OCA assumes real rate of return of 3.6% for the next few years.

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  • Assumptions used by the OCA in statutory actuarial reports reflect our best-estimates of short- and long-term economic and demographic trends
  • There is an uncertainty inherent to the financing of pension plans. In our opinion it should not be replaced by a certainty that interest rates will remain at their current low point over the long term.
  • Retirement is expensive and could become even more expensive in the future with improved longevity and uncertain future global economic growth.

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