Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans

Document properties

  • Type of Publication: Letter
  • Date: November 27, 2020
  • To: Actuaries and other stakeholders of pension plans with defined benefit provisions registered or having filed an application for registration under the Pension Benefits Standards Act, 1985

The Office of the Superintendent of Financial Institutions (OSFI) is issuing the final version of the Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans (the Guide). The purpose of the Guide is to set out the reporting requirements of actuarial reports filed with OSFI. The Guide is a comprehensive document with the intent of facilitating the work of the actuary and the review of actuarial reports by OSFI by including legislative, regulatory and actuarial requirements and expectations in one document.

OSFI issued a revised Guide in draft form (the Draft Guide) for consultation with pension plan stakeholders on December 20, 2019. Consultation was suspended March 13, 2020, as a result of COVID-19. Consultation resumed on September 11, 2020 for a four week period and three additional responses were received. In total, OSFI received 15 responses: 2 from insurance companies, 5 from pension plan sponsors, 5 from pension consulting firms, 2 from pension plan organizations, and 1 from the Canadian Institute of Actuaries (CIA). The attached table in Annex 1 presents a summary of the comments that were received and how OSFI has addressed them. We thank those who participated in the consultation process.

OSFI’s mandate is to protect pension plan members and other beneficiaries by: developing guidance on risk management and mitigation, assessing whether private pension plans are meeting their funding requirements and managing risks effectively, and intervening promptly when corrective actions need to be taken. OSFI holds pension plan administrators ultimately responsible for sound and prudent management of their plans.

OSFI continues to believe that certain adjustments to the Guide are necessary at this time to protect pension benefits of pension plan members and beneficiaries. Several changes proposed in the Draft Guide were positively acknowledged by the industry respondents. The consultation also led OSFI to the postponement of certain other provisions of the Draft Guide until further review is conducted and enhancements are formulated. Notably, significant changes to the funding requirements for pension plans using a replicating portfolio approach have been postponed.

The new version of the Guide also includes the elimination of some duplication and the clarification of OSFI’s requirements over the CIA Standards of Practice - General and Practice-Specific for Pension Plans (CIA Standards) and CIA Educational Notes (Guidance), including new publications released so far in 2020.

Some of the comments that were received relate to the current legislation for federally registered private pension plans, which does not fall under OSFI’s responsibility. These comments have been forwarded to the Department of Finance.

Questions and comments concerning these changes or any of OSFI's other requirements or expectations set out in the Guide may be sent to Marc Sauvé, Senior Manager, Actuarial in the Private Pension Plans Division, by email at

Yours truly,

Tamara DeMos
Managing Director
Private Pension Plans Division

Annex 1: Summary of Comments Received and OSFI Response
ItemCommentOSFI Response

Plan amendments and interim actuarial reports

One respondent commented that the requirement to file plan documents with OSFI is not relevant to the preparation of actuarial valuation reports and, moreover, that the wording in the Draft Guide was inconsistent with subsection 10.1(1) of the Pension Benefits Standards Act, 1985 (PBSA).

There was also a comment on a sentence related to OSFI’s requirements in respect of interim actuarial reports that was deleted in the Draft Guide, and clarification was requested.

OSFI agrees with the comment and the text related to the filing of plan amendments in section 1.1.2 of the Guide was deleted.

The sentence on interim reports was deleted after OSFI had concluded that sufficient flexibility exists within the CIA Standards and CIA Guidance for the actuary to disclose in the interim report only those aspects of the amendment that have changed. Wording in the second paragraph of section 1.1.2 was added to clarify OSFI’s expectations.

Disclosure requirements

Several respondents noted that the Draft Guide includes disclosure requirements beyond what the CIA Standards require. It was suggested that these requirements be limited to items that are material to each plan and that certain disclosures be left to the actuary’s judgement. Specific examples were given about membership breakdowns, treatment of the 50% employer cost rule, justification of approximations and disclosures when a stochastic model is used.

One respondent suggested that wording taken from other publications not be used in the Guide, except as a direct quote.

OSFI agrees with this feedback. The concept of materiality, which was already referred to in sections 2.7.2 and 2.7.3 of the Guide, is now specified again in the introduction of section 2.0. Greater flexibility is also provided for under sections 2.4 - Membership Data, 2.5 - Summary of Plan Provisions and 2.7 - Actuarial Basis.

Additional disclosure requirements for stochastic modeling have been extended to the discount and indexation rates.

There is a clear expectation on page 2 of the Guide that actuaries generally prepare their actuarial reports in accordance with accepted actuarial practice. A reference in a footnote is included whenever the Guide refers to a requirement coming from another source, such as the CIA Standards or the PBSA. Specific wording was removed from the Guide to avoid repeating text, for example with respect to disclosures required for stochastic modelling under the CIA Standards.

Flexible benefit features

One respondent pointed out that the conversion basis in a flexible pension plan will likely generate gains and losses from time to time and questioned whether the Draft Guide implies that it should not be the case.

For any pension plan, OSFI expects that pension benefits will 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. Gains or losses that are expected from the conversion of flexible benefits should be recognized at the valuation date and not at the time of retirement.

Expectations related to flexible benefit features have not been adjusted, but have been moved to sections 2.7.2 and 2.7.3 of the Guide.

50% rule

One respondent commented on the text that was added in the Draft Guide with respect to the 50% rule, requiring that a confirmation be included in the actuarial report that the accrued pension benefit was adjusted at the date of cessation of membership. It was noted that the actuary or even the plan administrator for former members might not be able to make this determination, the impact on the valuation results may not be material and this is a plan administrator issue.

The requirement was added as it has come to OSFI’s attention that not all plan administrators are correctly applying the 50% rule. This has been observed on more than one occasion upon plan termination where the impact on pension benefits was material. OSFI agrees that this is a plan administrator issue and that for some plans, the 50% rule may not have a material impact on the valuation results. Nevertheless, it is the actuary’s responsibility to ensure that the data are sufficient and reliable for the purposes of the valuation.

The Guide was adjusted to note that, with appropriate application of the 50% rule, deferred members included in the actuarial report would not be expected to have excess contributions.

Reconciliation of assets

Two respondents have brought up the common situation where investment management expenses are not paid directly by the pension fund but netted from investment income, making their disclosure problematic or costly. Questions were also raised about the relevance of that information to the actuarial work.

OSFI still believes that investment management expenses should be split from investment income in the actuarial report in order to assist the actuary in setting assumptions and OSFI in assessing their reasonableness. OSFI recognizes that the information may not be readily available where investment management expenses are not paid directly but netted against investment income (e.g. alternative asset classes or where the assets are invested through a master trust).

Section 2.6.4 of the Guide was adjusted to require, in these cases and except for alternative asset classes when the information is not available to the actuary, that investment management expenses be estimated based on the fee structure of the applicable trust or fund.

Going concern asset valuation method

Several respondents advised that OSFI should rely on the CIA Guidance on asset smoothing methods and need not prescribe any further restrictions in this regard, arguing that such guidance is sufficient to ensure that a method does not produce asset values that are systematically greater than the market value of the total portfolio.

OSFI agrees with those comments and has adjusted section 2.7.1 of the Guide to refer to the CIA Guidance without additional expectations.

In addition, OSFI has strengthened the expectations for smoothed assets by including a floor of 90% (a cap of 110% was already included), to ensure the smoothing approach is free of any bias, consistent with CIA Guidance.

Going concern assumptions - Provision for adverse deviations (PfAD)

A few respondents raised practical considerations in setting the PfAD which highlighted necessary adjustments to the Guide, namely to reflect that it is generally a plan administrator prerogative and to clarify the expectations about setting the PfAD when solvency payments are payable.

After further consideration, OSFI adjusted section 2.7.2 of the Guide to clarify the following:

  • That a margin is not required for each assumption, nor in respect of each source of adverse experience
  • Certain elements that OSFI expects the plan administrator or the actuary, as the case may be, to consider in setting margins for adverse deviations
  • That the existence of special payments determined by the solvency valuation should not affect the margins for adverse deviations for the going concern valuation, as each valuation basis is independent.

Going concern assumptions - Maximum going concern discount rate

Several respondents agree with a reduction in the maximum going concern discount rate and expressed a desire to better understand how OSFI determines the rate. Many respondents recommended that a plan’s investment policy be factored in the maximum rate determination, which would allow for an upward adjustment in circumstances where more risk is assumed under the investment policy adopted by the plan administrator. It was also argued that this flexibility would be welcome for plans using alternative asset classes which may lead to higher returns without necessarily increasing investment risk. Some respondents requested details as to how the maximum should be adjusted.

Comments were made about the short-term impact on plan sponsors of imposing a reduced maximum rate before the deduction of implicit margins for adverse deviations and expenses.

A specific question asked if OSFI would accept an actuarial report with no margin other than the one implied by the maximum discount rate.

OSFI believes that the discount rate assumption used in the actuarial report should not exceed a certain level to remain reasonable. The maximum going-concern discount rate indicated in the Draft Guide is based on the asset allocation of pension plans with defined benefit provisions filing an actuarial report with OSFI, and the expected rate of return for each asset class based on risk (volatility and correlation) provided by the Office of the Chief Actuary and pension consulting firms as part of CAPSA’s periodic survey on economic assumptions.

OSFI agrees that a plan’s asset mix should be considered in the process of setting the maximum discount rate and that plans should be permitted to adjust the rate to take into account an investment policy expected to generate a higher investment return than that assumed by an average plan. Section 2.7.2 of the Guide was modified to allow the maximum rate to be increased based on the investment policy of the plan and to assist actuaries in making any necessary adjustment to the maximum rate. Details were added as to how to calibrate the model to adjust the maximum.

The Guide was also adjusted to recognize that while it is generally acceptable to assume active investment management return and expenses to be the same, it may not be the case in some instances.

The maximum discount rate limits the asset return expectations of the plan before the application of margins. The approach better aligns with OSFI’s methodology for determining the maximum discount rate as it moves the comparison closer to the expected return on assets, which our model estimates.

OSFI considers that a report prepared using the maximum discount rate without an explicit provision for adverse deviations is not in accordance with the Guide. The Guide was adjusted to clarify that the application of the maximum going concern discount rate should not be considered to explicitly result in a higher margin for adverse deviations.

Going concern assumptions - Investment management expenses

Several respondents opined that the investment management expense assumption for alternative asset classes should be deemed all active management. The Draft Guide penalizes pension plans that have diversified their investment risk by requiring a reduction in the return expectation based on active management fees.

Investment management expenses are incurred for managing any asset class and OSFI believes that these should be recognized in determining future expected returns used in setting the discount rate, including for alternative investments. The current Draft Guide recognizes that investment returns for some alternative assets classes may not be easily split between active and passive management, and therefore investment management expenses should be recognized as passive. An unintended result of this is that pension plans may be discouraged from investing in alternative asset classes that could be used to enhance returns or diversify risk.

To address this, the Guide has been revised such that the actuary may not need to make an assumption for active investment management expenses (and returns) for alternative asset classes where information on investment management expenses is not readily available. OSFI still expects that an assumption for passive investment management expenses would be made. The Guide proposes that the assumption used in the actuarial report for alternative asset classes that are traditionally actively managed be based on a proxy. The actuary is expected to provide a rationale for the assumption used.

Going concern assumptions - Mortality

Several respondents commented on the selection of the CPM2014 mortality table for the going concern valuation, and argued that the Guide should not impose greater requirements on actuaries to justify the mortality assumption used in the actuarial report than what is provided for in CIA Guidance.

Also, adjustments were requested to clarify certain provisions of the Guide dealing with mortality table adjustments.

OSFI agrees that the Guide should simply refer to the CIA Guidance in selecting and justifying the mortality assumption. The Guide was also clarified as it relates to past changes in the nature of employment, adjustment based on the employment sector and the necessary caution in using actual to expected ratios for industries from the CIA Report on Canadian Pensioners’ Mortality as it relates to broad adjustments to a published table.

The sentence on partially credible experience was adjusted to clarify the intent.

Going concern assumptions - Termination

One respondent has indicated that professional judgment should be used to determine whether withdrawal rates and CIA commuted value rates should be used.

OSFI agrees with the comment. However, no changes to the Guide are required (except for unrelated minor edits) as flexibility for the actuary to set assumptions and address materiality concerns are already included in the current text.

Solvency assumptions

One respondent questioned the relevance of justifying changes in assumptions that are not material.

OSFI continues to believe that the actuary should be able to provide a rationale for all assumptions used in the actuarial report even those that may not have a material impact on valuation results.

Solvency actuarial cost method

One respondent proposed that OSFI clarify section 2.7.3 of the Guide dealing with the solvency valuation actuarial cost method and the nature of the benefit entitlements and plan provisions.

OSFI agrees with the suggestion and adjusted the Guide.

Solvency assumptions - Termination scenario

Some respondents asked why the actuary is not allowed to use any plausible scenario for the selection of a termination scenario in determining solvency liabilities, considering that in some cases it may be difficult to determine the most likely scenario.

OSFI considers that the selection of the termination scenario, similar to other assumptions used in the actuarial report, should be a best estimate. OSFI agrees that for some pension plans the actuary may have difficulty in justifying the scenario used given the unlikelihood of various potential termination scenarios. Owing to its mandate of protecting plan members and beneficiaries, the Guide was adjusted to clarify that the most pessimistic scenario as it relates to benefit security should be used in these cases.

Solvency assumptions - Form of benefit settlement

One respondent stressed the point that the cost of offering commuted values, relative to other forms of benefit settlement such as an annuity purchase, would likely be among the most important factors in the administrator's decision of whether to offer such an option upon the effective termination of a pension plan. It is argued that the actuary should not be restricted in making an assumption about the potential portability options in hypothetical wind-up and solvency valuations.

OSFI agrees that the cost of the various forms of benefit settlement may be a significant factor, for example, for pension plans in a deficit position, but it is not the only one. The changes introduced in the Draft Guide were made to address OSFI’s concerns about the subjectivity of this assumption and its impact on the valuation results. In reviewing this provision of the Guide further to the comment received, OSFI now considers that the approach of adjusting the plan provisions for the purpose of the solvency valuation is contrary to the objective of valuing the plan based on current plan provisions as at the valuation date. The Guide was adjusted accordingly.

Solvency assumptions - Use of annuity quotes to estimate solvency liabilities

The Draft Guide identifies illustrative quotes from life insurance companies as another option available to actuaries for estimating the cost of purchasing annuities. A concern was raised that pension plans may be requesting unnecessary illustrative quotes (given that the Canadian market is now large and active enough that pricing generally can be estimated effectively and accurately using the annuity proxy approach).

In adding the suggested text to Draft Guide, it was not OSFI’s intention to necessarily support a practice that would increase the number of illustrative quotes from life insurance companies without any probability of transacting. The objective was simply to state that OSFI would not object if this option, which is available to actuaries for estimating the cost of purchasing annuities based on CAPSA Guidance, was used. The Guide was modified to clarify this intent.

Solvency assumptions - Mortality

One respondent questioned why OSFI insists on the use of sex-distinct mortality rates, even in the case of multijurisdictional plans subject to certain provincial requirements for unisex rates, given that aggregate liabilities on a unisex basis would not be expected to be materially different. They noted the lack of value and the increased costs associated with the required disclosure.

Also, adjustments were requested to clarify certain provisions of the Guide dealing with mortality table adjustments and industry analysis.

In accordance with paragraph 3530.01 of the CIA Standards of Practice, separate mortality rates should be assumed for male and female members in the calculation of commuted values. Paragraph 3530.08 allows for a unisex mortality table to be used where required by applicable legislation or by the provisions of the plan or by the plan administrator if the administrator is so empowered by the provisions of the plan. It is not a requirement of the PBSA that a unisex mortality table be used in the determination of the commuted value. More information can be found in InfoPensions 21.

It is OSFI’s experience that some plan actuaries use unisex weights in the actuarial report that were developed several years ago and which do not represent current membership data. In such cases, using unisex rates could result in materially different liabilities than those based on a sex-distinct assumption.

The sentence on partially credible experience was adjusted to clarify the intent.

Solvency assumptions - Retirement

One respondent argued that the third (and last) paragraph under Retirement which deals with retroactive payments is contrary to the stipulations of the Income Tax Act.

OSFI’s role is to ensure that members receive their full benefit entitlements in accordance with the PBSA. As indicated in InfoPensions 17, it is OSFI’s expectation that deferred members past pensionable age are entitled to retroactive payments with interest, or a pension benefit that is actuarially increased from pensionable age. Paragraph 18(1)(b) of the PBSA provides that such benefits may not be surrendered during the former member’s lifetime. The PBSA does not require that an actuarially increased pension be offered as an alternative option to the former member but such an option is not prohibited under the PBSA. Questions regarding tax rules that may apply to such scenarios should be addressed to the Canada Revenue Agency.

A reference to InfoPensions 17 was inserted in the Guide under Retirement in section 2.7.2.

Solvency assumptions - Termination expenses

One respondent commented that ongoing historical expenses, even if adjusted, are not relevant in setting the expense assumption for a solvency valuation because of the different context.

One other respondent asked if experience data about the timeline required to obtain the Superintendent’s approval can be made publicly available by OSFI.

OSFI believes that the basis for setting certain solvency valuation assumptions should be consistent with past experience. Current expenses form a baseline against which OSFI would expect the actuary to identify and deduct those expenses that would not be incurred under the termination scenario, and to add or adjust others as applicable.

No formal study of plan termination cases has been made by OSFI to reveal statistics on the time required to complete the termination approval process and the liquidation of pension funds. In any event, as the experience may vary significantly from one plan to another, the information may not be relevant for setting the termination expense assumption. We note that plans in the vast majority of cases use the full 90 days after the termination date to file their termination report. OSFI then reviews the termination report and all relevant information, which may take several months (or even years for complex cases).

Alternative settlement methods

Almost all respondents provided comments on section 2.7.4 of the Draft Guide. Given the extent of the changes outlined in the Draft Guide and comments received, OSFI has decided to postpone their introduction to a later date. OSFI will consult again on the adjustments that will be made to this section of the Guide.

Only changes required to clarify the current guide and OSFI expectations related to disclosure requirements have been made to the Guide; other changes to section 2.7.4 which may have an impact on plan liabilities will be finalized at a later date.

Solvency valuation - Transfer deficiencies

One respondent indicated that the funding approach for transfer deficiencies is a plan sponsor decision and should not be a required disclosure in the actuarial report.

OSFI agrees with the comment and the Guide was adjusted accordingly.

Funding requirements - New actuarial report

One respondent suggested that the Guide clarify the timeline for remitting contributions to adjust the current year contributions and special payments in accordance with the most recent actuarial report.

Additional current service contributions and special payments are already in arrears (i.e. beyond the 30-day period from the required payment date when a new actuarial report is filed. These additional amounts, plus interest, should be made when the report is filed. The Guide was clarified.

Funding requirements - Negotiated contribution plans

Several questions from one respondent were raised about the disclosure requirements pertaining to negotiated contribution plans which invited OSFI to explain its associated objective and clarify the wording used in the Guide.

OSFI needs contextual information around the results included in the actuarial report to better assess the benefit security of negotiated contribution plan members. Without context, the status quo or options developed by the actuary to meet minimum funding requirements might not be meaningful. The Draft Guide clarifies that the actuary is required to disclose the relevant provisions of the collective agreements and work contracts that they obtained from the plan administrator, other than those already included in the terms of the plan.

The Guide was adjusted. The expectation that the actuary would comment on the financial position of participating employers and the outlook of the industry was removed. OSFI still expects the actuary to comment (not to opine) on recent plan experience and trends relating to relevant economic and demographic factors that may impact the plan’s ability to meet minimum funding requirements.

The Guide maintains the requirement that the actuary opine in the actuarial report on the likelihood that the plan will meet funding requirements for at least the next three years after the valuation date, the 3-year reference being based on the going concern valuation cycle if the solvency ratio disclosed in the previous actuarial report is 1.20 or greater. The actuarial report should include a discussion of possible adverse events that could have a significant impact on the funded status of the plan, supported by stress testing or other risk management tools.

Risk assessment - Going concern valuation

Some respondents provided feedback about the new section of the Draft Guide on risk assessments. They requested clarification and a better correspondence with CIA Standards.

The Guide was adjusted to clarify that OSFI’s expectations are based on CIA Standards only.

Revised CIA Standards of Practice and new Guidance

Several respondents have signaled that section 3500 of the CIA's Standards of Practice has been amended (with effect no earlier than December 1, 2020) and that the Guide should be updated in respect of the retirement assumption related to pension commuted values.

OSFI issued the Draft Guide on December 20, 2019, before the Actuarial Standards Board published the revised section 3500 of the CIA Standards of Practice on January 24, 2020. The Guide has been updated in accordance with the revised section 3500 of the CIA Standards and the related Educational Notes that were released on August 13, 2020.

A separate section for negotiated contributions plans has been inserted in the Guide. The existing provisions have been complemented for OSFI expectations with respect to solvency assumptions to be used for commuted value transfers in light of the new subsection 3570 of the CIA Standards.Footnote 1

2020 Multilateral Agreement

The Guide has been updated to include information on the 2020 Agreement Respecting Multi-Jurisdictional Pension Plans, which came into effect July 1, 2020.


Footnote 1

Negotiated contribution plans as defined under subsection 2(1) of the Pension Benefits Standards Regulations, 1985 meet the definition of target pension arrangements in the CIA Standards.

Return to footnote 1