Preparation of Actuarial Reports for Defined Benefit Pension Plans

OSFI has issued this revised guide in draft form for consultation with pension plan stakeholders. Please see the accompanying letter for details. The October 2017 guide remains in effect until the revised guide is finalized.

Document properties

  • Type of publication: Draft Instruction Guide
  • Date: xxxxx 2020

Introduction

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 reportsFootnote 1 filed with the Superintendent by administrators of pension plans registered or having filed an application for registration under the PBSA.

Purpose

The purpose of this instruction guide (the Guide) is to set out the reporting requirements of actuarial reports filed with OSFI for defined benefit pension plans, including those with a defined contribution component. The Guide updates the previous one published in October 2017 to reflect

  • additional requirements with respect to plans having a flexible benefits feature, the discount rate assumption (including a modification to the maximum going concern discount rate), and assessment of the risks;
  • further clarifications of OSFI's position on mortality assumptions;
  • updated requirements for plans using a replicating portfolio approach;
  • further disclosure requirements with respect to membership data, stochastic modeling for indexation, and funding requirements for transfer deficiencies;
  • greater clarity on other expectations and addition of some references to legislation and guidance material; and
  • changes to accepted actuarial practice and other issues, if any, that have emerged since October 2017.

The Guide applies to actuarial reports with a valuation dateFootnote 2 on and after XXXX, 2020. Early adoption is permitted.

Actuarial reports must 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 the 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 relevant CIA Guidance material. 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.Footnote 4 It relies on, but reviews the work of actuaries. The Superintendent determines which assumptions or methods are appropriate for the preparation of actuarial reports.Footnote 5 OSFI may inform the plan administratorFootnote 6 to revise an actuarial report if, in the opinion of the Superintendent, the report has not been prepared in accordance with legislative requirements. When reviewing an actuarial report, OSFI may consider factors or require documentation not mentioned in the Guide.

Transparency and appropriate disclosure are part of good governance. OSFI expects actuaries to provide sufficient details in their actuarial reports to enable another actuary to assess the reasonableness of the data, assumptions and methods used.Footnote 7

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.

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 latter shall prevail.

1.0 Reporting Requirements

1.1 Frequency of Filing

1.1.1 Regular Filing

The administrator of a pension plan with defined benefit provisions registered or having filed an application for registration under the PBSA, or its agent, must generally fileFootnote 8 an actuarial report as at the effective date of the plan and annually thereafter as at the plan year-end. An administrator will be permitted to file an actuarial report as at the plan year-end that is not later than three years after the valuation date of the previous actuarial report if

  • the pension plan meets the definition of a designated planFootnote 9; or
  • the solvency ratioFootnote 10 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.Footnote 11 The administrator may also file an actuarial report to support an application for the authorization of a transaction by the Superintendent (e.g. plan termination or asset transfer).

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.Footnote 12

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, if the pension plan uses a replicating portfolio approach as an alternative settlement method for solvency valuation purposes.Footnote 13

The administrator of a pension plan must submit the actuarial report, AIS, and RPIS using the Regulatory Reporting System (RRS)Footnote 14.

The actuarial report must be submitted by uploading a copy of the document in RRS.

For further information on how to file using RRS, please consult the Manage Financial Returns User Guide for Insurance Companies and Private Pension Plans and other RRS training material available on the OSFI website. RRS training material can also be found in RRS in the Documents folder under Training and Support.

Where an actuarial report is intended to support an application for the authorization of a transaction by the Superintendent, it must be submitted directly to OSFI by electronic mail along with any required approval request form.

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. a collective bargaining agreement) and could increase or reduceFootnote 15 benefits, which may alter their cost and the financial position of the plan. The federal pension legislation requires that an actuarial report be prepared as at the effective date of such an amendment.Footnote 16 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 at 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 StandardsFootnote 17 and Guidance.

The 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 the effective date.

If the previous actuarial report showed an unfunded liability 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 solvency deficiency, as applicable. Actuarial assumptions and methods should not change from those used in the previous report.Footnote 18

An amendment which results in a solvency ratio below the prescribed level will be void unless authorized by the Superintendent.Footnote 19 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 to the pension fund required in order for the amendment not to be considered void. If such a payment is made or is expected to be made after the date of the amendment, the actuary should refer to section 2.6.2 of the Guide that 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 as 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 as at either the first day or the last day of the plan year (e.g. December 31 or January 1). OSFI does not object to this practice as long as it is applied consistently from one year to the other.

An 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 at the next regular reporting date for the plan.

1.3 Timeline for Filing

An actuarial report must generally be filed within six months after the end of the plan year to which it relates.Footnote 20 If the administrator does not file the actuarial report within this timeline, OSFI may request an explanation for the delay and may require that persons entitled to benefits under the plan be informed of the late filing.

The timing of the filing may be different if the administrator files an actuarial report to support an application for the authorization of a transaction by the Superintendent.

2.0 Content of the Actuarial Report

The actuarial report should include the valuation date and the report date, and would generally include discussion and disclosure on the following elements:

  • Highlights
  • 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 valuationFootnote 21
  • Funding requirements
  • Risk management

If the pension plan includes a defined contribution component in addition to a defined benefit component, OSFI generally expects the information on the defined contribution component to be included in the actuarial report. The disclosure of elements relating to the defined contribution component is optional if the defined benefit and defined contribution components do not interact with each other, for example when:

  • assets of the two components are not commingled;
  • funding of the defined contribution component by the defined benefit component is not permitted by the terms of the plan; and
  • liabilities and costs of the defined benefit component are not impacted by the defined contribution component.

If the pension plan includes a defined contribution component, the actuarial report should at a minimum disclose that such component exists. Where the report includes information with respect to a defined contribution component, the following elements are expected to be addressed:

  • Membership data
  • Summary of plan provisions
  • Reconciliation of assets
  • Funding requirements

If the pension plan is a flexible pension plan with optional contributions under the defined benefit provision, these contributions accumulated with interest and the liabilities for the corresponding benefits should be included in the going concern and solvency balance sheets.Footnote 22 Given that the underlying assumptions used to purchase the benefits from the flexible account will be different from the going concern or solvency valuation assumptions, it is not appropriate to realize the associated gain or loss at the time of retirement. 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.

The flexible feature of the pension plan may be included in a defined contribution component, in which case the plan would be considered an enhanced flex planFootnote 23. Such a plan allows for optional contributions to the defined contribution component that can be used to acquire or enhance ancillary benefits provided under the defined benefit component of the pension plan.

In order to reflect a realistic manner of settling benefits for an enhanced flex plan, OSFI expects the actuarial report to include an assumption as to the proportion of members' flexible money purchase contributions that will be transferred to the defined benefit component of the plan at retirement. The resulting amount and the liabilities for the corresponding benefits should then be reflected in the balance sheets of the defined benefit component of the pension plan. The assets and liabilities in the balance sheet of the defined contribution component should be reduced by this resulting amount. The nature of the assumption used or whether an assumption is needed will depend on materialityFootnote 24 for the purpose of the valuation.

2.1 Highlights

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 actuarial report that have a materialFootnote 25 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 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 eventsFootnote 26 that emerged between the valuation date and the report date, and whether these events were reflected in the valuation, as may be appropriate.Footnote 27 If there are no subsequent events of which the actuary is aware, the report should include a statement to that effect.Footnote 28

2.3 Actuarial Opinion

OSFI expects the actuary to express an opinion on all assumptions and methods used in the actuarial report.Footnote 29 OSFI will not accept a report in which 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 confirming that the actuarial report was prepared in accordance with applicable legislation. For multijurisdictional pension plans, a statement that minimum member benefits stipulated by all applicable provincial pension 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 employmentFootnote 30, whether or not other employees are also part of the plan. Minimum funding requirements for these plans apply to the plan as a whole, but individual entitlements and corresponding liabilities of members, former members with deferred vested pensions, retirees and survivors are determined with regard to the legislative requirements of their respective jurisdictions.

2.4 Membership Data

The following membership information should be includedFootnote 31 in the actuarial report:

  • Number of persons
  • Average age
  • Male and female distribution
  • For active members or former members with deferred vested pensions, depending on the benefit formula and type of plan, information such as the following:
    • average credited service and salary
    • average contributions accumulated with interest
    • average accrued pension benefit
    • average hours worked per year
  • For inactive members, average pension and bridge benefits, if applicable

The above membership information should be provided separately according to group, as applicable, for:

  • each category of persons, such as members (active members, disabled members, inactive members), former members with deferred vested pensions, retirees and survivors
  • each identifiable sub-group where the assumptions and methods used to value the entitlements of the group differ (e.g. disabled members receiving payments from the plan)
  • members subject to distinct benefit formulas (e.g. final average benefit vs. flat benefit)
  • retirees for whom a buy-in annuity has been purchased by the plan
  • members subject to different applicable pension legislations

If the actuarial report includes information with respect to a defined contribution component then the related membership data should be shown separately.

Membership information should be shown as at the valuation date of the actuarial report and of the previous actuarial report. The report should also include a reconciliation of membership by category from the previous actuarial report and an explanation of any large fluctuations in membership.

The actuarial report should include information on the tests performed to ascertain the accuracy of membership data.Footnote 32 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 that have a material impact on the valuation results, such as the following:

  • member contributions formula
  • benefit formula
  • pensionable ageFootnote 33
  • normal retirement age (if different from pensionable age)
  • normal pension benefit
  • early retirement age and benefitFootnote 34
  • bridge benefit
  • benefits on cessation of membership , including whether portability is available after members reach early retirement age
  • pre-retirement death benefit
  • normal form of pension with a clear description of post-retirement death benefits, including the minimum legislated joint and survivor pension benefit if the member has a spouse or common-law partnerFootnote 35, and whether the spousal benefit is subsidized
  • disability benefit
  • maximum pension, including whether the maximum pension is calculated at cessation of employment, termination of the plan, or retirement
  • indexation benefit
  • ancillary benefits
  • 50% employer cost rule

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 former members with deferred vested pensions 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 costFootnote 36, and the solvency liabilities.

With respect to the 50% rule for former members with deferred vested pensions, the actuarial report should confirm that the accrued pension benefit was adjusted at the date of cessation of membership based on the amount of excess contributions determined as at that date. If a member ceases to be a member, the pension benefit in respect of the member is to be increased by the amount, if any, by which the aggregate of the member's contributions, other than additional voluntary contributions, together with interest, exceeds 50 per cent of the commuted valueFootnote 37 in respect of the member's membership in the plan.Footnote 38 Alternatively, the terms of the plan may include a provision forcing members to transfer their excess contributions on cessation of membership or death.Footnote 39 If this is the case, it should be disclosed in the actuarial report.

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; and
  • explain any material differences between the market value of assets reflected in the report and the market value reported in the CFS.

The actuarial report should include information on the tests performed to ascertain the sufficiency and reliability of the asset data.Footnote 40

2.6.2 Receivables

Receivables are any amounts owing to the pension fund as at the valuation date of the actuarial report, such as contributions and investment income. Amounts due to be remitted will generally be consistent with the CFS.

Future payments in part or in full of a deficit or transfer deficiency should not be included in the plan assets as at that valuation date, unless the amount was to be remitted prior to that date.

It is generally acceptable to adjust the assets 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 disclose the actual asset mix of the plan by major asset class at the valuation date. Pension fund assets held in investment funds, if any, should be allocated by major asset class and included in the asset mix of the plan.

The administrator must submit the Statement of Investment Policies and Procedures (SIP&P) to the actuary for a plan with defined benefit provisions.Footnote 41 The actuarial report should also disclose the following information included in the SIP&P of the plan:

  • target asset mix
  • range of permissible allocations to the major asset categories

The SIP&P might not include asset mix ranges if it provides for a periodic rebalancing of the assets on an automatic basis. If this is the case, the actuary should include a justification as to why asset mix ranges were not included in the actuarial report.

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 include separately the changes in assets from various material sources, which typically include the following:

  • member contributions
  • employer current service cost contributions
  • special payments
  • transfer deficiency payments
  • investment income
  • commuted value transfers
  • pension payments
  • administrative expenses
  • investment management expenses

Investment management expenses should be disclosed clearly and separately from investment income. This requirement applies to all plans, including those participating in a master trust or whose assets are invested in investment funds where investment management expenses are not paid directly from the pension fund, but indirectly through investment income being net of expenses.

If the actuarial report includes information with respect to a defined contribution component, 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 policyFootnote 42 of the administrator or employer provided to the actuary as part of the terms of engagement. The report should provide an explanation of the methodology used to determine the asset, liability, and current service cost values.

Methods are not expected to change from one report to another. Any modification to the actuarial methods should be clearly disclosed in the actuarial report and include the rationale for the modification and its financial impact.

The actuary should detail in the actuarial report any approximations and provide a rationale for why their use does not materially affect the results of the valuation. OSFI expects the actuary to exercise care in using approximations to ensure that the resulting sensitivities are reflective of a more accurate measurement of risk. If an approximation is used but the actuary is unable to assess the resulting error, the approximation becomes, in effect, an assumption.Footnote 43

2.7.1 Asset Valuation Method

Letters of Credit

Letters of credit may not be included in the assets for going concern valuation purposes.

For solvency valuation purposes, where letters of credit have been obtained in lieu of solvency special payments being made, assets should include the aggregate face value of letters of credit in effect on the valuation date, up to a maximum of 15% of the solvency liabilities of the plan as determined at that date.Footnote 44 The maximum limit for the face value of letters of credit applicable until the actuarial report is filed should be based on the solvency liabilities included in the previous actuarial report.

Letters of credit obtained under Solvency Funding Relief Regulations should not be included in solvency assets while the plan is being funded under these regulations, but should still be disclosed in the actuarial report.

The actuarial report should disclose the face value of any letters of credit included in the solvency assets. It should also show a reconciliation of the face value of letters of credit from the valuation date of the previous actuarial report. This reconciliation should include the amount of solvency special payments that were due during the year and replaced by a letter of credit, and employer contributions reducing the amount of letters of credit in force, as applicable.

Smoothing of Assets

The actuarial report should describe the methodology used to smooth going concern assets, if applicable. Smoothing of going concern assets is allowed, provided the asset valuation method is reasonableFootnote 45, 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. One method of smoothing is to spread the difference between actual investment income and expected investment income over a number of years. The expected investment income is determined based on an assumed rate of return, for the total portfolio or a class of assets, as the case may be. The assumed rate of return with this method 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 exposure to various risks related to retiree liabilities. Buy-in annuities are not considered immediate or deferred annuities (buy-out annuities) but are rather considered investments of the plan. The actuary should use an acceptable method for valuing buy-in annuities to be included in plan assets.Footnote 46

Buy-out annuities may also be used by pension plans to limit exposure to risks. OSFI expects any assets and liabilities related to buy-out annuities 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 an administrator of an ongoing plan purchases buy-in annuities, an 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.Footnote 47

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 to be 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). Annual special payments to liquidate the unfunded liability should be equal.Footnote 48

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 financial position of the pension plan on a solvency basis should not affect the selection of going concern assumptions, as each valuation basis is independent. Assumptions should not be based on facts that are unrelated to the expected experience of the plan with respect to the relevant assumption.

The nature of the assumptions used or whether an assumption is needed will 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, former members with deferred vested pensions, retirees and survivors are entitled and which have a material impact on the valuation results should be valued, including those provided by the plan that are over and above the minimum requirements of the PBSA. If the plan provides benefits where the inclusion of the liabilities associated with these benefits would not have a material impact on the valuation results, the report should include a statement to that effect.

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 StandardsFootnote 49. The forecast method is not appropriate to value plans where the benefit for current members, former members with deferred vested pensions, retirees and survivors are fully funded by the current service cost and special payments (i.e. where benefits of current members, retirees and survivors are not subsidized by future members).

Provision for Adverse Deviations

CIA Standards provide that assumptions for the going concern valuation can be best estimates modified to incorporate margins for adverse deviations to the extent required by law or the terms of engagement.Footnote 50 OSFI expects that a set of actuarial assumptions as a whole would include an appropriate provision for adverse experience arising from:

  • misestimation of the level of best estimate assumptions;
  • misestimation of the future trend of best estimate assumptions; and
  • volatility risk due to random fluctuations.

The actuary may setFootnote 51 individual margins for adverse deviations based on the administrator's or employer's funding policy, his or her knowledge of the risk tolerance of the administrator or employerFootnote 52, and any other applicable terms of engagement. The actuary should also consider that riskier investments and plan characteristics (e.g. mismatch of assets and liabilities, CPI linked indexation provision, mature plan) would generally translate into a higher provision for adverse deviations than would otherwise be required if the same funding objective of a plan with less risky characteristics 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 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.

Margins for adverse deviations should be explicitly disclosed. In particular, if additional margins for adverse deviations are included in economic assumptions other than the discount rate (e.g. salary increase), or in demographic assumptions (e.g. mortality), these margins should be explicitly stated in the actuarial report.

Discount rate

The discount rate is typically the most significant assumption used in the determination of the liabilities and current service cost in the going concern valuation.Footnote 53 OSFI does not prescribe a specific methodology for setting the discount rate, but believes that the rate should not exceed a certain level to ensure the assumption used by actuaries in their actuarial reports remains reasonable. While margins for adverse deviations may be included in the discount rate for some plans because of this approach, the intention is not necessarily that it provides the only source of margins included in the valuation.

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 the discount rate for a plan should not exceed 5.75%, before implicit margins for adverse deviations and expenses. Return and expenses related to a ctive investment management should be ignored for determining whether the discount rate used in the actuarial report satisfies this requirement.

The maximum rate should be adjusted by the actuary for a plan using an asset mix expected to generate a lower return than that obtained by using a 50% fixed-income allocation. In this case, the actuary should disclose the adjusted maximum rate in the actuarial report.

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 margins for the payment of expenses from the pension fund and any margin for adverse deviations. Any allowance for rebalancing and diversification should be consistent with the asset mix used with the approach. The equity risk premium should be reasonable and consistent with the expected return of each asset class. Economic assumptions should not be unduly influenced by short-term financial market volatility and interest rate fluctuations underlying the pricing of fixed-income securities.

It is generally acceptable to assume that active investment management will generate additional returnFootnote 54 only to the extent that management fees associated with active management exceed those for passive management. The assumed additional return due to active investment management should be disclosed in the actuarial report even where such return is assumed to be exactly offset by the additional associated expenses. 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.Footnote 55

Some plans use a select and ultimate approach to set the going concern discount rate resulting in rate variations from one year to another. The rate for some years could then be higher than the maximum going concern discount rate. The approach is acceptable to OSFI provided that the total plan liabilities and current service cost are not lower than they would have been had the maximum rate been applied to all years. Where a select and ultimate approach is used, the actuarial report should disclose the equivalent level discount rate that would result in the same total plan liabilities and current service cost.

Some de-risking strategies may result in different discount rates being used for some categories of persons or groups. The approach is acceptable to OSFI provided that total plan liabilities are not lower than they would have been had the maximum going concern discount rate been applied to all categories of persons or groups . Where the discount rate differs by category of persons or group, the actuarial report should disclose the equivalent level discount rate that would result in the same total plan liabilities.

Use of a discount rate in the calculation of the current service cost that is higher than that used in the calculation of the liabilities for retirees and survivors or some groups of retirees and survivors 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 liabilities for active members; and
  • the discount rates used for each category of persons or group are individually reasonable and consistent in the aggregate with the investment policy, which should still meet the requirements of the federal pension legislationFootnote 56.

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, for plans where the underlying assets for active members are expected to be subject to a different investment policy once they retire, OSFI expects that the rate of return on assets for active members on which the discount rate is based 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 sh ould be used.

The rationale for using different discount rates for some category of persons or group should be clearly described in the actuarial report. It may result in additional disclosure with respect to the investment policy and the assets associated with each rate.

Expenses

Provisions for expenses should cover administration, passive investment management, and active investment management expenses.Footnote 57 Expense margins 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, taking into account assets, membership, and other relevant factors for the period under consideration. The assumption for administrative expenses should represent a best estimate of all administrative expenses to be incurred by the plan, including any irregular expenses, which might be expected and would therefore be included in a best estimate assumption. The actuarial report should include the rationale for establishing an expense assumption that 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 based on the target asset mix stipulated in the plan's SIP&P, which would typically include investment administration, rebalancing, transaction, and custodial fees relating to the management of assets.

Investment returns for some alternative assets classes (e.g. infrastructure, real estate or hedge funds), may not be reasonably split between active and passive management. Generally, the actuary would not assume that the investment manager would outperform other managers with a similar mandate. As such, OSFI expects expenses related to these alternative asset classes to be treated as passive management expenses.

Some risk mitigation strategies (e.g. currency hedging, longevity swaps) are not expected to generate additional return over the long term. Expenses related to these strategies should be excluded from active management expenses and treated as passive management expenses.

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 expense provision.

Mortality

The mortality assumption includes two components: current mortality rates and adjustments for future improvements in mortality.Footnote 58

Selection of the mortality assumption requires professional judgement. OSFI expects the CPM2014 mortality table (and appropriate projection scale) to be used for going concern valuations, unless the actuary explains in the actuarial report why the use of the CPM2014 mortality table would not be appropriate. Where another base mortality table (i.e. CPM2014Publ or CPM2014Priv) is chosen or where adjustments are made in accordance with the CIA mortality study (e.g. for pension size or industry)Footnote 59, or in some instances where adjustments are not made, a detailed justification 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, or for groups with characteristics (e.g. type of employment or salary) that are different than those underlying the base mortality table.

The justification as to how the adjustments were determined should refer to relevant experience analysis, credible life-years of exposure, and plan characteristics considered. Very large plans with fully credible experience may choose to develop their own mortality table to reflect actual experience. Other plans may have only partially credible or insufficient experience to develop broad adjustments to a published table. The adjusted basis should still provide for future mortality improvement.

Employment sector (public vs. private) may not be sufficient basis for using another base table. The actuary should also consider the industry with which the plan is associated, and the fact that the nature of employment may change with time, for example with improvements in technology, which may affect mortality in the future. While the CIA report includes actual to expected (A/E) ratios for industries, it also warns that industry analysis has not proven to be conclusive and that A/E ratios used to adjust mortality should be used with caution. Mortality experience for larger and more homogeneous groups is expected to exhibit more credible results than that for smaller or diverse industries.

Where a mortality table is constructed based 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 appropriate projection scale) to allow for 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 appropriate 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 appropriate projection scale) should also be shown.

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, or other projection scale in accordance with relevant CIA guidance (e.g. MI-2017), using a full generational projection of the mortality table.

Retirement

While the actuary may assume that active members and former members with deferred vested pensions will retire at different ages, the pensionable age for each category of persons 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.Footnote 60

Members and former members are eligible to receive an immediate pension benefit commencing ten years before pensionable age.Footnote 61 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 and former members taking advantage of the plan's early retirement options.

Liabilities for former members with deferred vested pensions who are past pensionable age at the valuation date should include retroactive payments with interest from the later of the date of cessation of membership and the date they reached pensionable age.

Termination

OSFI expects the actuary to use withdrawal assumptions (withdrawal rates, commuted value take-up rates, interest and mortality rates) in the determination of commuted values, if these have a material impact on the liabilities and current service cost. Where the actuary assumes members might terminate before retirement, the actuarial report should state how benefit entitlements are expected to be settled. The proportion of members assumed to elect a commuted value transfer and a deferred pension should be stated. Other assumptions used should be clearly disclosed in the report.

Assumptions used to calculate the liability of members assumed to choose a commuted value transfer would generally be determined according to CIA Standards.Footnote 62 Alternatively, going concern assumptions could be used if the impact on the liabilities and current service cost, including experience gains or losses that might result from one report to another, is considered not material.

Benefits Subject to Consent

Some plans offer benefits that are subject to administrator or employer consentFootnote 63, such as unreduced early retirement benefits. In these cases, the actuary should make a reasonable assumption as to the proportion 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 valuationFootnote 64 is required to be prepared using actuarial assumptions and methods that are in accordance with accepted actuarial practice, and assuming the plan is terminated as at the valuation date. A solvency valuation would also be prepared as at the effective termination date of a plan.Footnote 65 The purpose of the solvency valuation is to determine the plan's assets and liabilities as at the valuation date and any additional funding requirements (special payments). Annual special payments to liquidate the solvency deficiency should be equal to the amount by which the solvency deficiency divided by 5 exceeds the amount of going concern special payments payable during the year.Footnote 66

The solvency valuation implicitly requires the hypothetical or effective full wind-up of the plan upon its termination, and therefore also the settlement of benefits.Footnote 67 The actuary should select a set of actuarial assumptions which are appropriate for the purpose of the valuation. The nature of the assumptions used or whether an assumption is needed will 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. Justification is not required for changes in commuted value and annuity purchase (annuity proxy) rates determined in accordance with CIA Standards or Guidance.

Actuarial Cost Method

All benefits to which members, former members with deferred vested pensions, retirees and survivors 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 actuarial 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 CPI increase to a fixed increase.

Termination Scenario

The postulated termination scenario should be clearly identified in the actuarial reportFootnote 68, for example as the result of voluntary termination of the plan or bankruptcy of the employer. OSFI expects this scenario to be based on a reasonable expectation of the most likely situation that would lead to the plan terminating at the valuation date.

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 the 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 includes continued employment after plan termination.

Where the pension amount is determined by taking into account a period of employment which continues after plan termination, OSFI expects 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 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 StandardsFootnote 69 to ensure that the assumed increases in salaries and in the average wage indexFootnote 70 are consistent.

The actuarial report should include a ppropriate disclosure and explanation. Where the termination scenario does not maximize the value of benefits, the actuarial report should nevertheless disclose the solvency liability that would have maximized the value of benefits.

Form of Benefit Settlement

The actuarial report should clearly identify how benefit entitlements would be expected to be settled (commuted value transfer or the purchase of an immediate or deferred annuity) for each category of persons:

  • active members eligible for early retirement
  • other active members
  • former members with deferred vested pensions eligible for early retirement
  • other former members with deferred vested pensions

Where it is expected that members and former members with deferred vested pensions 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 and former 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 and former members eligible for early retirement should be based on plan provisions. Even if portability is not available to them , the administrator could still choose to offer the option upon plan termination. The assumption made by the actuary with respect to the option elected by these members and former members should be supported by the decision of the administrator to grant the option, and should be disclosed in the actuarial report. The decision is not expected to change from one report to another, including the termination report should the plan effectively terminate.

OSFI believes that it would generally not be reasonable to assume that benefits of all former members with deferred vested pensions not entitled to an immediate pension would be settled by a commuted value transfer. These former members would be eligible to elect a deferred annuity upon plan termination. Although other portability options available to members could also be offered to former members with deferred vested pensions 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. Assuming that all benefits for these former members would be settled by annuity purchase may also not be reasonable.

A commuted value may be recalculated where portability under the plan is offered beyond what is required under legislationFootnote 71. The assumption for the form of benefit settlement should be consistent with OSFI's policy on the recalculation of commuted values.Footnote 72

The actuary is expected to consider these observations in setting and justifying the assumption used for the settlement of benefits for former members with deferred vested pensions on plan termination.

Discount Rate

The discount rate used to value benefits expected to be settled by a commuted value transfer should be determined according to CIA StandardsFootnote 73.

Benefits expected to be settled by the purchase of an annuity should be valued using an interest rate assumption based on the rate recommended in the most recently issued CIA GuidanceFootnote 74 relevant to the report date. Unless the annuity proxy is used for full CPI-indexed annuities, the actuarial report should disclose the duration of the liabilities expected to be settled by the purchase of an annuity.

If the discount rate is rounded, the approach and rationale for rounding should be explained in the actuarial report. The decision to round and the approach used is not expected to change from one report to another, including the termination report should the plan effectively terminate.

Some plans offer pension indexation that is not fully related to the CPI, i.e. partial indexation or indexation with a cap. The actuary should clearly explain in the report 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.

A stochastic model may be used to determine the impact of the cap on indexation. OSFI expects the actuary to manage models such that their use follows good practice.Footnote 75 Relevant information on the model should be disclosed in the actuarial report such as

  • details of the stochastic model including why it is a suitable approach;
  • a description of model controls to ensure results are robust and consistent with the approach and parameters;
  • parameters of the underlying inflation distribution used in the stochastic model and a rationale for the choice of parameters;
  • the number of scenarios generated and the projection period, and a rationale for these choices; and
  • the mean, median, standard deviation, minimum value, maximum value, and for at least every five years of the projection period (at least every other year over the first 10 years), the following distribution information: percentiles 5%, 25%, 50%, 75%, 95%.

An actual quotation representing the cost of purchasing annuities provided by a life insurance company may serve as a better estimate of the solvency liabilities than that determined using the above annuity proxy approach. If an annuity quotation is used, the following information should be included in the actuarial report:

  • Confirmation that all relevant information that should be included in the quotation by the life insurance company has been provided to the actuary
  • Other information as stipulated in Guidance from CAPSAFootnote 76

Mortality

The mortality table 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 (ASB) for the purpose of the calculations.Footnote 77 Separate mortality rates should be used for males and females.Footnote 78 The PBSA does not require the use of a unisex mortality approach in the calculation of a commuted value transfer.Footnote 79

However, the terms of the plan or the administrator, if so empowered by the plan provisions, may require the determination of a commuted value that does not vary according to the sex of the person. For multijurisdictional plans, some provincial pension legislation may also require the use of a unisex mortality approach. The actuary would then use a mortality table based on a blend of the sex-distinct tables or a weighted average of the commuted values based on the sex-distinct tables.Footnote 80 The weights should be appropriate for the pension plan and only based on the value of benefits expected to be settled by a commuted value transfer.

Where a unisex mortality approach is used, the actuarial report should explain, based on the administration of the plan and using supporting data, how the mortality basis and weights were derived. OSFI expects the report to state that total liabilities for persons entitled to benefits under the plan subject to a unisex mortality approach is the same as the total liabilities that would have resulted had sex-distinct mortality been used.

The mortality assumption (i.e. mortality table and projection scale) used to value benefits expected to be settled by the purchase of an annuity is provided in CIA Guidance. Where a mortality table other than the CPM2014 is chosen or where adjustments are made in accordance with the CIA mortality study (e.g. for pension size or industry), a detailed justification should be included in the actuarial report.

The justification as to how the adjustments were determined should refer to relevant experience analysis, credible life-years of exposure, and plan characteristics considered. Very large plans with fully credible experience may choose to use their own mortality table to reflect actual experience. Other plans may have only partially credible or insufficient experience to develop broad adjustments to a published table. The adjusted basis should still provide for future mortality improvement.

The actuarial report should disclose the notional solvency liabilities and solvency ratio that would have resulted from using an unadjusted CPM2014 mortality table and the annuity proxy rate. If a mortality table other than the CPM2014 is used in the report, the underlying adjustment to the CPM2014 mortality table as a percentage of the CPM2014 mortality rates that would result in the solvency liabilities of the report should also be disclosed.

Any adjustment in mortality rates should reflect that it is uncertain how an insurer might view a particular plan's mortality and how this might be reflected in the actual mortality basis assumed for a given plan. A life insurance company would not normally use the same mortality basis for the purchase of annuities as is used for the going concern valuation. However, insurers generally do consider occupational, demographic, and other relevant factors in establishing mortality assumptions. OSFI expects the actuary to make adjustments for groups with demonstrated substandard or superior mortality, or where persons entitled to benefits under the plan are expected to experience different mortality than that of a typical group annuity purchase (e.g. "grey" collar).

Retirement

The assumed retirement age should be disclosed in the actuarial report.

For benefits expected to be settled by a commuted value transfer, this usually includes the assumption that members will choose to start their pension at the age that maximizes the value of benefits. For benefits assumed to be settled by annuity purchase, the retirement age should be a best estimate assumption. OSFI expects this would generally be the age that maximizes the liabilities.

Liabilities for former members with deferred vested pensions who are past pensionable age at the valuation date should include retroactive payments with interest from the later of the date of cessation of membership and the date they reached pensionable age.

Determining Benefits Payable at Pensionable Age

Members are assumed to grow into any minimum age requirement.Footnote 81 If there is no service component in the plan's pensionable age, members are entitled to any benefit payable at pensionable age. If there is 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 members and former members with deferred vested pensions . 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.Footnote 82

Benefits Subject to Consent

OSFI allows the exclusion from solvency liabilities of benefits genuinely subject to consentFootnote 83 of the administrator. If the plan includes such benefits, 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 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 is required if the plan automatically reflects future changes in the limit, and its determination for the purpose of pension benefit calculation is made at retirement rather than at termination of employment or plan termination.Footnote 84 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%.Footnote 85

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 disclose this assumption and explain the reason why including a projection would not have a material impact on the results of the solvency valuation.

Termination ExpensesFootnote 86

The solvency valuation should provide for expenses that may reasonably be expected to be paid from 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. OSFI expects the termination expense assumption to be based on historical expenses of the plan, adjusted to reflect that expectations might differ from the past given that the plan is terminating. The provision for termination expenses should be related to the termination scenario of the plan.

In order to provide for a realistic manner of settling benefits, the assumed termination date, settlement date, and wind-up date should not be the same. 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, allowing time to

  • prepare and file the termination report with OSFI;
  • have the termination report reviewed by OSFI and approved by the Superintendent ; and
  • effectively pay the benefits.

For plans using a replicating portfolio, the assumed timing of the settlement of benefits not subject to the replicating portfolio should be disclosed.

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 termination expense provision would usually include

  • actuarial, administrative, legal, and other consulting expenses incurred in terminating the plan up to its wind-up, including costs associated with locating individuals;
  • expenses associated with benefit settlement, and, if applicable, fees associated with a Replacement AdministratorFootnote 87 or Designated ActuaryFootnote 88;
  • 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 expense assumption. If a series of group annuity purchases until the full wind-up of the plan is assumed, an adjustment to the termination expense assumption would similarly be required.

Where it is assumed that the employer would pay some of the termination expenses, the assumption made by the actuary with respect to the proportion of termination expenses payable by the employer should be supported by the administrator and disclosed in the actuarial report. The assumption is not expected to change from one report to another, including the termination report should the plan effectively terminate. The actuary is expected to opine on the reasonableness of the assumption in consideration of the financial position of the employer at the valuation date.Footnote 89

2.7.4 Alternative Settlement Methods

For larger pension plans, OSFI recognizes that it might not be possible to settle a 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 methodsFootnote 90 for solvency valuation purposes, but the use of such methods cannot result in pension benefits being surrendered in any year or in aggregateFootnote 91.

The actuary may assume that benefits would be settled by the purchase of annuities regardless of any limitations of capacity in the market for group annuity contracts.Footnote 92 However, in order to reflect a realistic manner of settling benefits, the actuary may assume that benefits in payment and deferred pensions would be settled by the use of a replicating portfolio, the objective of which is to establish a series of cash flows that match the expected benefit payments to retirees and survivors.

For solvency valuation purposes, it is expected for all plans that the wind-up of assets would be considered first through a single group annuity purchase. If this is not possible due to capacity constraints of the annuity market, then settlement through a series of group annuity purchases may be considered, as contemplated under CIA Guidance.

OSFI expects benefits to be distributed without undue delay after the Superintendent has approved the termination report.Footnote 93 Therefore, only plans for which the capacity of the Canadian annuity market would not permit the settlement of pension liabilitiesFootnote 94 by a single or a series of group annuity purchasesFootnote 95 for the following persons entitled to benefits under the plan should use a replicating portfolio approach:

  • retirees and survivors
  • former members with deferred vested pensions not assumed to elect a commuted value transfer
  • members assumed to take an immediate or deferred pension

Liabilities under the Replicating Portfolio Approach

Given that the purpose of the replicating portfolio approach is to provide for benefits that would otherwise be payable by a life insurance company, OSFI expects that the associated assets would be sufficient to ensure that the likelihood of the plan being able to fully pay all benefits due is similar to that obtained from a group annuity purchase. The liabilities for benefits and expenses backed by the replicating portfolio should be equal to the sum of amounts A, B, C and D, minus E below, determined using a discount rate based on a best estimate assumption of the rate of return of the replicating portfolio reduced to account for expected asset defaults.

These amounts, which are further described below, should be disclosed separately in the actuarial report:

  • A = best estimate liabilities for benefits
  • B = best estimate liabilities for expenses
  • C = total provision for adverse deviations to ensure a high probability that the pension promise will be met, shown separately for economic and non-economic risks
  • D = additional total provision to ensure the probability that the pension promise will be met is similar to that obtained from a group annuity purchase, shown separately for economic and non-economic risks
  • E = value of the available financial support from the employer

Assumptions

The establishment of a replicating portfolio assumes that a portion of the pension fund will be maintained and not wound up on plan termination . Therefore, OSFI expects economic and demographic assumptions under the replicating portfolio approach to be consistent, as applicable, with those used under the going concern valuation, notwithstanding differences in margins for adverse deviations used in each of the two valuations.

Plan assets under a replicating portfolio approach should be sufficient to provide for the payment of pension benefits to retirees, survivors and any other persons entitled to benefits under the plan assumed to receive a pension from the plan, and of expenses. As such, it is expected that amounts C and D, shown separately for economic and non-economic risks, will be determined assuming no recourse to additional sources of funds.

In the case of actual plan termination, an actuarial report filed after the termination date would set out the remaining payments required to liquidate the deficit as at the valuation date. Any new solvency deficit arising within the five-year period after the termination date would be funded by annual payments over the remainder of the five-year period beginning on the termination date.Footnote 96 Any solvency deficit that would arise five or more years after the termination date would be paid immediately.Footnote 97

Amount E may partially or totally offset amount D. Amount E represents the value of payments the employer would be required to make should a solvency deficit arise after the termination date, based on assets that are required at plan termination to ensure a high probability that the pension promise will be met (i.e. assets equal to the sum of amounts A, B and C at the termination date). Amount E cannot exceed amount D and is 0 if the termination scenario assumes the employer ceases operations.

The actuary should explain in the actuarial report how the value of the employer financial support was determined. OSFI expects the determination to be based on an assessment of the financial health of the employer under the underlying scenarios leading to the solvency deficits after the termination date. In assessing the long term prospects of the employer, the actuary should consider not only the immediate factors that affect the employer's business, but also the longer term macroeconomic and regulatory environment in which it operates.

The employer and administrator are ultimately responsible for risk management decisions. The administrator has fiduciary responsibilities to any persons entitled to benefits under the plan. Given that it is the administrator's role under the PBSA to file the actuarial report with the Superintendent, the filing of the actuarial report implies that the administrator supports the assumptions used in the actuarial report as determined by the actuary based on the terms of engagement. Among other things, this includes using appropriate assumptions not only to calculate the amount of assets required to ensure that the pension promise will be met but also to value the available financial support expected to be provided by the employer.

Economic Risks

OSFI expects economic risks to be evaluated using a system or process involving the use of stochastic simulation. An economic scenario generator should be used to model the economic environment to produce simulations of the joint behaviour of financial market values and economic variables.Footnote 98 The development of scenarios should also consider the selection of market indices and proxies, and calibration of risk-free interest rates and investment returns.Footnote 99

In many respects, running a stochastic model is similar to performing numerous runs of a deterministic model, and as such, CIA Guidance covers their use. However, when a stochastic model is used, additional consideration should be given to certain other elements.

When the model inputs or assumptions vary with each scenario, the actuary should ensure that their distribution is reasonable, paying particular attention to items such as the trend, mean, median, symmetry, skewness, and tails of such distributions. The actuary should also ensure that the correlation between each of the inputs or assumptions is appropriate. The potential change of the correlation between variables at the mean as compared to the tail ends of the respective distributions should be addressed.

While it is impractical to review the results from every simulation, OSFI expects the actuary to validate the results based on CIA Guidance. The actuary should be mindful that the result of a stochastic model is usually itself a statistical estimate that has its own mean and variance. The variance can be lessened by running more scenarios, but it cannot be eliminated.

The distribution of asset values will be required under a large number of scenarios, perhaps 10,000 or more. OSFI expects the number of scenarios to be commensurate with the level of the Conditional Tail Expectation (CTE)Footnote 100 over a time horizon of one year being calculated in the model. The actuary should test that the number of scenarios used to calculate the assets required to meet the pension promise yields an acceptable level of precision that meets the standard of materiality. To increase the precision of the calculation, it may be necessary to increase the number of scenarios significantly.

Each scenario should generate economic variables over a time period of one year. In order to ensure a high probability that the pension promise will be met, amount C for economic risks when added to amounts A and B should be such that the pension plan has a 90% probability of being fully funded. The objective is to align with a CTE of 80% over a one-year time horizon. Under this approach, the probability of a deficit within a 12-month period would be less than 10%.

In order to determine amount D for economic risks when added to amounts A, B and C, the pension plan should have a 99.5% probability of being fully funded. The objective is to align with a CTE of 99% over a one-year time horizon. Under this approach, the probability of a deficit within a 12-month period would be less than 0.5%.

Assets remaining after one year, according to the scenario tested, should be sufficient to allow the pension plan to fulfill all future benefit and expense obligations at the given level of confidence. It should be adequate for the risks remaining, reflecting experience along a given path and its resulting conditions at the end of the one-year time horizon.

In the case of actual plan termination, it is expected that the Superintendent would direct a terminated plan using a replicating portfolio approach to file an actuarial report annually. The asset level required to pay all pension benefits and expenses throughout the projection period should consider funding requirements based on the funded status of the pension plan when future actuarial reports will be filed. Therefore, the model should not assume that adverse experience in earlier time periods can be offset by positive experience in later time periods.

Non-economic Risks

Non-economic risks are the risks of loss arising from the obligation to pay out benefits and expenses in excess of expected amounts under the replicating portfolio approach. Non-economic risks include the following:

  • Longevity risk is the risk associated with the longer period of payment of pension benefits due to increase in life expectancy. This increase can result from changes in the level and trend of mortality rates.
  • Expense risk is the risk associated with the unfavourable variability of expenses incurred by the pension plan. The increase can result from changes in the level and trend of investment management and administrative expenses.

The total provision for longevity and expense risks is equal to the sum of the difference between the actuarial present value of the cash flows under each adverse scenario and the actuarial present value of the best estimate cash flows.

The adverse scenario is constructed by applying the following stresses to the best estimate assumptions:

  • Longevity risk for annuities that are exposed to this risk
    • Level: Decrease of 10% in the best estimate assumption for the mortality rate at each age, i.e. 90% of the best estimate assumption
    • Trend: Increase of 75% in the best estimate assumption for mortality improvement at each age, i.e. 175% of the best estimate assumption. The shock applies per year of mortality improvement in perpetuity.
  • Expense risk
    • Level: Increase of 10% in the best estimate assumption for expenses each year, i.e. 110% of the best estimate assumption
    • Level: Increased expenses as a result of stress testing applied to the mortality rate above
    • Trend: Increased expenses as a result of stress testing applied to mortality improvement above

The provision for non-economic risks included in amounts C and D, respectively, should be proportionate to the provision for economic risks included in amounts C and D.

Disclosure

If an alternative settlement method (i.e. a series of group annuity purchases or a 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, determined in accordance with CIA guidance. The report should also disclose the underlying equivalent annuity proxy rate that would result in the same solvency liability as that determined using the alternative settlement method. The mortality and the indexation rate assumptions used in these calculations should also be disclosed and should be the same as those obtained based on CIA Guidance had the solvency valuation assumed the single purchase of a group annuity.

The actuarial report should disclose the notional solvency liabilities and solvency ratio that would have resulted from using an unadjusted CPM2014 mortality table and the annuity proxy rate. If a mortality table other than the CPM2014 is used in the report, the underlying adjustment to the CPM2014 mortality table as a percentage of the CPM2014 mortality rates that would result in the solvency liabilities of the report should also be disclosed.

OSFI expects the actuary to discuss whether the capacity of the market would allow for the purchase of the fixed-income securities needed to establish the replicating portfolio. Simply assuming that market capacity is available to achieve the desired portfolio would not be sufficient.

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 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), Fitch Rating Services (AA- or higher), Kroll Bond Rating Agency (AA or higher), Moody's Investor Service (Aa3 or higher), and Standard and Poor's (AA- or higher). The actuarial report should disclose the proportion of the replicating portfolio assets for each credit rating. An explanation of how the ratings of non-public investments were determined should also be included.

OSFI expects the actuary to provide meaningful disclosures regarding the benefit security implications of using the replicating portfolio approach instead of assuming the purchase of annuities. Given the provision for economic risks is determined using a stochastic model, the actuarial report should include specific disclosures.Footnote 101

Disclosure on model inputs should include the following elements:

  • details of the stochastic model and a description of model controls to ensure results are robust and consistent with the approach and parameters
  • the approach to interest rate and inflation forecasting and development of the discount rate
  • calibration standards used to determine the parameters
  • the number of scenarios and the projection period
  • the frequency of valuations over the projection period, as applicable
  • assumed administration and investment management expenses, disclosed separately
  • confirmation that the discount rate is adjusted, as applicable, for consistency with the economic scenarios
  • a rationale for the variance in and relationships between economic variables, and other calibration parameters as applicable
  • a description of the methodology used to vary the standard deviations of, or correlations between, economic variables, as applicable
  • the assumed initial yield at 1-year, 10-year, and 30-year terms for the federal bond yield curve
  • the assumed initial credit spreads at the 1-year, 10-year, and 30-year terms for provincial and investment-grade corporate bonds, as applicable
  • a rationale to support any trend in bond yields
  • a rationale for material changes to model inputs from one report to the next

Disclosure on model outputs should include the following elements:

  • a quantification of the probability that the pension benefit promise will be met
  • 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
  • a summary of the projected economic variables, including at least the following:
    • the mean of the annualized compounded value, the average annual standard deviation, and the average correlation matrix, for the inflation assumption and assumed returns for all asset classes, over the projection period
    • the mean yield at the end of the projection period at the 1-year, 10-year, and 30-year terms for the federal bond yield curve
    • the mean credit spread at the end of the projection period at the 1-year, 10-year, and 30-year terms for the provincial and investment-grade corporate bonds, as applicable
    • the following statistics for at least every five years of the projection period (at least every other year for the first 10 years), with respect to the return on assets net of investment management fees: 5th, 25th, 50th, 75th, and 95th percentiles, the mean, and the standard deviation
    • the initial discount rate and the mean discount rate at the end of the projection period
  • average projected key demographic summary statistics for at least every five years of the projection period (at least every other year for the first 10 years), including at least the following: total number of persons, average age, total amount of annual pensions, and mean total liabilities
  • the following statistics for at least every five years of the projection period (at least every other year for the first 10 years), with respect to the projected assets, liabilities and funded status: 5th, 25th, 50th, 75th, and 95th percentiles, the mean, the average of those values in the worst 5% of scenarios, and the average of those values in the worst 2.5% of scenarios
  • the underlying adjustment to the discount rate that would result in the same provision for economic risks
  • Disclosure statements with respect to
    • reasonableness of model inputs;
    • compliance with the CIA Standards; and
    • consistency of the model inputs with the funding valuation assumptions.

For non-economic risks, the financial impact of each adverse scenario should be disclosed separately in the actuarial report. The underlying adjustment to the discount rate that would result in the same provision for each of the risks should also be disclosed separately.

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 of the actuarial report and of the previous actuarial report. If the actuarial report includes information with respect to a defined contribution component, the related assets and liabilities should be shown separately.

The balance sheet should include the following items separately:

  • assets broken down between the actuarial value of assets adjusted for receivables and payables, and buy-in annuities
  • liabilities broken down by category of persons, such as members, former members with deferred vested pensions, retirees, and survivors
  • liabilities for transfer deficiencies
  • liabilities for buy-in annuities
  • excess or deficit

Additional voluntary contributions, if any, should be excluded from the balance sheet of the defined benefit component. If the plan is an enhanced flex plan, the proportion of members' optional contributions assumed to remain in the plan at retirement should be reflected in the balance sheet of the defined benefit component. The remaining amount should be reflected in the balance sheet of the defined contribution component.

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 expensesFootnote 102 should be clearly and separately disclosed; and
  • the actuarial present value (in dollars) of the margin for adverse deviations included in liabilities.

If best estimate assumptions are selected for all contingencies except the discount rate, the provision for adverse deviations that should be disclosed in the actuarial report is the actuarial present value of the margin for adverse deviations included in the discount rate. If additional margins for adverse deviations are included in other economic or demographic assumptions, the provision should include the present value of these margins as well.

2.8.2 Solvency Valuation

Balance sheet

The actuarial report should include a balance sheet showing the solvency assets and liabilities as at the valuation date of the actuarial report and of the previous actuarial report. If the actuarial report includes information with respect to a defined contribution component then the related assets and liabilities should be shown separately.

The balance sheet should include the following items separately:

  • assets broken down between the market value of assets adjusted for receivables and payables, the face value of letters of credit, and termination expenses
  • liabilities broken down by category of persons, such as members, former members with deferred vested pensions, retirees, and survivors
  • liabilities for transfer deficiencies
  • liabilities for buy-in annuities
  • surplus or shortfall

Additional voluntary contributions, if any, should be excluded from the balance sheet of the defined benefit component. If the plan is an enhanced flex plan, the proportion of members' optional contributions assumed to remain in the plan at retirement should be reflected in the balance sheet of the defined benefit component. The remaining amount should be reflected in the balance sheet of the defined contribution component.

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 margin for adverse deviations included in liabilities.

Solvency Ratio

The actuarial report should show the solvency ratio of the plan as at the valuation date of the actuarial report and of the previous actuarial report. If the actuarial report includes information with respect to a defined contribution component then related assets and liabilities should not be included in the determination of the solvency ratio.

The actuarial report should state whether assets would exceed liabilities had the plan been terminated at the valuation date. Where the solvency ratio is less than 1.00, all aspects of the restrictions that may apply to the transfer of commuted values and the purchase of annuities which may affect the portability of benefits, including a portability freeze, and result in additional funding requirementsFootnote 103 should be discussed in the actuarial report. The funding approach with respect to transfer deficiencies elected by the administrator (i.e. lump sum or amortization payments) should be disclosed in the actuarial report.

Average Solvency Ratio Used to Determine Funding Requirements

The actuarial report should include a solvency balance sheet showing the adjusted solvency asset amount (i.e. the product of the average solvency ratio and the solvency liabilities), the solvency liabilities, and the excess or deficiency at the valuation date of the actuarial report and of the previous actuarial report. If the actuarial report includes information with respect to a defined contribution component then the related assets and liabilities should be shown separately.

The actuarial report should show the average solvency ratio used for funding purposes, which is the arithmetic average of the adjusted solvency ratiosFootnote 104 at the valuation date, prior valuation date and prior second valuation date.

If adjustments are made to the current and prior year solvency ratios to determine the average solvency ratio, the actuarial report should provide details of the calculation for each of those solvency ratios, which may include the following items:

  • present value of special paymentsFootnote 105 and underlying discount rate used
  • contribution holidays
  • plan amendments
  • plan mergers
  • additional payments made in advance
  • face value of letters of credit

Transfer deficiency payments are not considered special payments because they do not improve the plan's solvency ratio. They restore the solvency ratio of the plan to its level prior to the payout of the commuted value to the member. Therefore, transfer deficiency payments should not be included in the adjustments of prior solvency ratios to determine the average solvency ratio.

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 valuation date of the previous actuarial report and to assess the reasonableness of the actuarial assumptions. The reconciliation would generally show separately

  • the expected interest on the opening surplus or deficit;
  • any utilization of surplus;
  • special payments made to the pension fund;
  • transfer deficiency 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 actuarial methods; and
  • the impact of plan amendments.

Experience gains and losses should be shown separately for each assumption made in the actuarial report, unless the gain or loss related to the assumption is considered not material. Where gains and losses with respect to two or more assumptions are combined, the report should state that gains or losses for assumptions not shown separately are not considered material.

The actuary should explain any significant or unusual gains or losses in the actuarial report.

Consistent and material experience losses from year to year that relate to a given assumption would generally indicate that the assumption may not be appropriate. OSFI expects the actuary to review and, if required, strengthen assumptions on a regular basis.

The impact of each assumption changed in the actuarial report should be described and disclosed separately. However, it is acceptable to combine some assumptions for this purpose provided these are related (e.g. changes to several economic assumptions resulting from a modification in the underlying inflation assumption).

2.9.2 Solvency Valuation

If the actuarial report does not include a going concern valuation (e.g. a termination report), a reconciliation of the solvency position should be included in the report, showing the experience gains and losses since the valuation date of the previous actuarial report.

2.10 Funding Requirements

The actuarial report should provide the following informationFootnote 106 with respect to the current service costFootnote 107 and special payments:

  • the rule for determining the current service cost in respect of the period from the valuation date of the actuarial report until that of the next report. 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 of the actuarial report and of the previous actuarial report. The total current service cost should be split between the employer current service cost and estimated member contributions, as applicable.
  • 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 margin for adverse deviations included in the current service cost
  • the sources of any material change to the rule for determining the current service cost from that included in the previous actuarial report
  • each schedule of going concern special payments at the valuation date of the actuarial report and 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 of the actuarial report and of the previous actuarial report

The actuarial report should state that contributions and special payments are required to be remitted to the pension fund on a monthly basisFootnote 108. Outstanding contributions will accrue with interest.Footnote 109

Given the actuarial report is generally prepared after the beginning of the plan year to which the funding recommendation applies, the report should state that any adjustments to contributions and special payments applicable to the year should be made when the report is filed. As such, required funding amounts since the beginning of the plan year included in the actuarial report over those included in the previous actuarial report, accumulated with interest from the required payment date, are due at the time of filing.

Pre-Existing Going Concern Special Payments

Pre-existing going concern special payments need to be considered when preparing an actuarial report. These 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 the going concern deficit.

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 or schedules to adjust. Once a schedule to be reduced has been identified, the remaining payments of that schedule should be reduced pro rata.Footnote 110

Where changes in going concern assumptions or methods occurred since the previous actuarial report, the actuary should consider the net effect of plan experience and changes in 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

Contribution holidays are limited by the going concern and solvency positions of the plan as at the valuation date. Employer contributions payable until the next actuarial report must be at least 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.Footnote 111

Additional Payments in Excess of Minimum Funding Requirements

If payments greater than the sum of the minimum required special payments are made in a plan year 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).Footnote 112 The actuarial report should include a reconciliation of the balance of unallocated additional payments since the valuation date of the previous actuarial report, showing new payments made and how required special payments have been reduced.

Additional payments should be included in assets for the balance sheet on a going concern and solvency basis. To determine funding requirements, going concern and solvency assets 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.Footnote 113

Solvency Relief Measures

Legislative provisions such as the use of letters of credit, ministerial reductionsFootnote 114 or the Distressed Pension Plan Workout SchemeFootnote 115 provide solvency relief measures that 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 another the impact of these provisions on special payments. As such, the report should provide a reconciliation of the amounts having an impact on the reduction of special payments since the valuation date of the previous actuarial report. Also, the interaction of these amounts to the extent they affect special payments should be disclosed.

Negotiated Contribution Plans

Negotiated contribution plansFootnote 116 are multi-employer, defined benefit pension plans with funding contributions that are limited. Where a pension plan is considered a negotiated contribution plan, the actuarial report should disclose, in addition to the membership data disclosure requirementsFootnote 117, the expected number of hours worked annually in each plan year until the next actuarial report, or any other information relevant to the plan's benefit structure. The report should also include a summary of any relevant provisions of the collective agreement and work contract that relate to contribution and pension credit amounts.

In comparison to other defined benefit plans, the generally more limited ability of negotiated contribution plans to increase funding levels in response to changing circumstances makes it especially important that these plans closely monitor their funded status. OSFI expects the minimum funding requirements under the PBSA to be met and disclosed in the actuarial report.

Also, the actuarial report should either

  • state that expected contributions in each plan year until the next actuarial report are adequate to fund the plan, i.e. show that the estimated contributions exceed the total current service cost plus any special payments; or
  • describe the increase in contributions in each plan year, the reduction in benefits or a combination thereof required to address the funding shortfall until the next actuarial report. Other options considered to address the shortfall may also be discussed .Footnote 118

OSFI expects the actuary to comment in the actuarial report on recent plan experience and trends, if relevant, relating to key indicators such as

  • number of active members;
  • average age of active members;
  • number of hours worked;
  • active versus retiree liability breakdown; and
  • other relevant factors, such as the financial position of employers participating in the plan and the outlook of the industry they operate in.

The administrator should strive to have the information necessary to perform their duty to monitor the risks facing the plan and assess how these risks may affect the likelihood that benefits will be paid.Footnote 119

In considering these factors and risks, and taking into account the duration of collective agreements in force, the actuary is expected to opine in the actuarial report on the likelihood that the plan will meet funding requirements for at least the next three years. The actuary should discuss possible adverse events that could have a significant impact on the funded status of the pension plan, supported by the results of stress testing or other risk management tools. The actuarial report should disclose the results that are relevant to the actuarial opinion.

2.11 Risk Assessment

Stress testing (e.g. sensitivity testing and scenario analysis) and stochastic modeling (e.g. asset-liability modeling) are key tools that can be used by the administrator to inform better risk management of a pension plan.Footnote 120 While OSFI expects that some form of stress testing or stochastic modeling will be considered for most pension plans, it is up to the administrator to assess what types and extent of risk management tools are appropriate for their plan. The sophistication of a pension plan's stress testing should be proportionate to the size and complexity of the plan's design and investment strategy (e.g. use of derivativesFootnote 121).

Other than as described in the Guide, OSFI does not require that results from stress testing or stochastic modeling be included in the actuarial report.

2.11.1 Going Concern Valuation

The actuarial report should include the impact on the going concern liabilities and current service cost of using a discount rate that is 1% lower than the rate used for the valuation.Footnote 122

In addition, the actuary should select plausible adverse scenariosFootnote 123 to identify and assess various risks that might reasonably be expected to occur, affecting a plan's ability to meet its future benefit obligations. OSFI expects that plausible adverse scenarios will be adjusted from one plan to another and over time, based on internal and external factors of the plan. As a result, the selection and application of a plausible adverse scenario is a stress-testing process on various risks to the funded status and service cost of the pension plan.Footnote 124 A deterministic or stochastic approach can be used in the assessment of the risks.

Plausible adverse scenarios should take into account, among other things,

  • interest rate risk;
  • deterioration of asset values;
  • longevity risk; and
  • lower contribution base level, for negotiated contribution plans.

For each plausible adverse scenario selected by the actuary for the assessment of the risks, the actuarial report should include

  • a description of the scenario;
  • a summary of any differences in the going concern assumptions compared to those used for the valuation;
  • a description of any effects of risks in combination;
  • a description and the impact of any compensating adjustments available to be utilized by the administrator that were reflected in the scenario; and
  • the impact on the going concern funded status, separating the effects on assets and liabilities, and current service cost.

2.11.2 Solvency Valuation

The actuarial report should include the impact on the solvency liabilities of using a discount rate that is 1% lower than the rate used for the valuation.Footnote 125

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), unless the Minister of National Revenue has waived the designated status of the plan.Footnote 126 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 necessarily 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 equal to the sum of the unfunded liability and current service cost until the date of the next actuarial report on the basis of the maximum funding valuation are considered eligible contributions under the ITR.

Notwithstanding section 2.6.2 of the Guide, contributions and special payments that have not been made prior to the actuarial report because of the ITR restriction and cannot be paid according to the actuarial report should not be included as receivables in the report. The unfunded liability resulting from these amounts will be amortized over future years.

Contact Details

For further information, please visit the OSFI website or contact us at:

Office of the Superintendent of Financial Institutions
255 Albert Street
Ottawa, Ontario
K1A 0H2
Telephone: (613) 943-3950 or 1-800-385-8647
E-mail: information@osfi.bsif.gc.ca.

Footnotes

Footnote 1

Subsection 2(1) of the Pension Benefits Standards Regulations, 1985 (PBSR).

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Footnote 2

Subsection 2(1) of the PBSR.

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Footnote 3

Introduced in 2006.

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Footnote 4

Termination reports require the approval of the Superintendent.

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Footnote 5

Subsection 9(2) of the PBSA.

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Footnote 6

Subsection 2(1) of the PBSA.

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Footnote 7

Paragraphs 3260.09 and 3330.04 of the CIA Standards.

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Footnote 8

Subsection 12(2) of the PBSA.

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Footnote 9

See section 8515 of the Income Tax Regulations for more information.

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Footnote 10

Subsection 2(1) of the PBSR.

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Footnote 11

Section 2 of the Directives.

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Footnote 12

See the OSFI Instruction Guide – Actuarial Information Summary for more information.

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Footnote 13

See the OSFI Instruction Guide – Replicating Portfolio Information Summary for more information.

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Footnote 14

Returns are not considered received at OSFI until the filing process is complete and the returns have been accepted in RRS. If the plan has not registered to use RRS, it should do so immediately. The administrator must contact the Bank of Canada, as host of the RRS system, to register for access to the Bank of Canada secure site and RRS. For assistance in registering, please contact RRS Support at the Bank of Canada by phone at 1-855-865-8636, or by e-mail at rrs-sdr@bank-banque-canada.ca.

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Footnote 15

See OSFI Instruction Guide – Authorization of Amendments Reducing Benefits in Defined Benefit Pension Plans for more information.

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Footnote 16

Paragraph 2(g) of the Directives.

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Footnote 17

Section 1700 and subsection 3260 of the CIA Standards.

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Footnote 18

Subsection 9(13) of the PBSR.

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Footnote 19

Subsection 10.1(2) of the PBSA and section 9.3 of the PBSR.

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Footnote 20

Subsection 12(4) of the PBSA.

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Footnote 21

A reconciliation of the solvency position might also be required if the actuarial report does not include a going concern valuation.

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Footnote 22

See OSFI Policy Paper – Flexible Pension Plans for more information.

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Footnote 23

See the Registered Pension Plans Glossary of the Canada Revenue Agency for more information.

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Footnote 24

See CIA Report – Materiality for more information.

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Footnote 25

See subsection 1240 of the CIA Standards for more information.

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Footnote 26

See subsection 1430 of the CIA Standards for more information.

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Footnote 27

See CIA Revised Educational Note – Events Occurring After the Calculation Date of an Actuarial Opinion for a Pension Plan for more information.

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Footnote 28

Paragraph 3260.01 of the CIA Standards.

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Footnote 29

Paragraphs 3260.08 and 3330.03 of the CIA Standards.

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Footnote 30

Subsection 4(4) of the PBSA.

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Footnote 31

Individual information may be left out to protect confidentiality, if necessary. Such information should be available to OSFI upon request.

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Footnote 32

Paragraph 3260.01 of the CIA Standards.

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Footnote 33

Subsection 2(1) of the PBSA.

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Footnote 34

Subsection 16(2) of the PBSA.

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Footnote 35

Section 22 of the PBSA.

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Footnote 36

Also referred to as normal cost.

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Footnote 37

Also referred to as pension benefit credit.

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Footnote 38

Subsection 21(1) of the PBSA. Effective July 1, 2011, the PBSA was amended to provide that the 50% rule applied to all years of plan membership.

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Footnote 39

Subsection 26(3) of the PBSA.

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Footnote 40

Paragraph 3260.01 of the CIA Standards.

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Footnote 41

Paragraph 7.1(3)(b) of the PBSR.

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Footnote 42

See  Pension Plan Funding Policy Guideline from the Canadian Association of Supervisory Authorities (CAPSA) for more information.

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Footnote 43

Subsection 1410 of the CIA Standards.

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Footnote 44

Subsection 2(1) of the PBSR.

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Footnote 45

See CIA Revised Educational Note – Guidance on Asset Valuation Methods for more information.

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Footnote 46

See OSFI Guidance – Buy-in Annuity Products for more information.

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Footnote 47

See OSFI Policy Advisory – Longevity Insurance and Longevity Swaps for more information.

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Footnote 48

Subsection 9(3) of the PBSR.

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Footnote 49

See paragraph 3210.15 of the CIA Standards for more information.

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Footnote 50

Paragraph 3230.01 of the CIA Standards.

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Footnote 51

See CIA Research Paper – Provisions for Adverse Deviations in Going Concern Actuarial Valuations of Defined Benefit Pension Plans and CIA Research Paper – Provisions for Adverse Deviations in Going Concern Actuarial Valuations for more information.

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Footnote 52

Financial risks of negotiated contribution plans are typically borne by persons entitled to benefits under the plan. See CIA Educational Note – Financial Risks Inherent in Multi-Employer Pension Plans and Target Benefit Pension Plans for more information.

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Footnote 53

See CIA Revised Educational Note – Determination of Best Estimate Discount Rates for Going ConcernFunding Valuationsfor more information.

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Footnote 54

i.e. provide returns above those obtained using a passive investment management strategy.

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Footnote 55

Paragraph 3230.03 of the CIA Standards.

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Footnote 56

Subsection 8(4.1) of the PBSA.

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Footnote 57

See CIA Revised Educational Note – Expenses in Funding Valuations for Pension Plans for more information.

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Footnote 58

See CIA Educational Note – Second Revision: Selection of Mortality Assumptions for Pension Plan Actuarial Valuations for more information.

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Footnote 59

See CIA Final Report – Canadian Pensioners' Mortality for more information.

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Footnote 60

Section 17 of the PBSA.

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Footnote 61

Subsection 16(2) of the PBSA.

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Footnote 62

See section 3500 of the CIA Standards for more information.

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Footnote 63

See OSFI Policy Advisory – Benefits Subject to Consent for more information.

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Footnote 64

Subsection 2(1) of the PBSA.

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Footnote 65

See OSFI Instruction Guide – Filing and Reporting Requirements for Defined Benefit Pension Plan Terminations for more information.

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Footnote 66

Paragraphs 9(4)(c) and 9(4)(d) of the PBSR.

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Footnote 67

Subsection 29(11) of the PBSA.

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Footnote 68

Paragraph 3240.03 of the CIA Standards.

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Footnote 69

Paragraph 3520.10 of the CIA Standards.

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Footnote 70

Paragraph 3540.11 of the CIA Standards.

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Footnote 71

Subsection 26(1) of the PBSA.

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Footnote 72

See article on the Recalculation of a Member's Pension Benefit Credit in Issue 12 of InfoPensions for more information.

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Footnote 73

See section 3500 of the CIA Standards for more information.

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Footnote 74

For example, the March 2019 CIA Educational Note – Assumptions for Hypothetical Wind-Up and Solvency Valuations with Effective Dates Between December 31, 2018 and December 30, 2019.

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Footnote 75

See CIA Educational Note – Use of Models for more information.

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Footnote 76

See CAPSA Guidance on Solvency or hypothetical wind-up liabilities based on actual life insurance company annuity quotation for more information.

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Footnote 77

See ASB Final Communication of a Promulgation of the Mortality Table Referenced in the Standards of Practice for Pension Plans (Subsection 3530) for more information.

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Footnote 78

Paragraph 3530.01 of the CIA Standards.

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Footnote 79

Subsection 27(3) of the PBSA.

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Footnote 80

Paragraph 3530.08 of the CIA Standards.

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Footnote 81

See OSFI Guidance – Pensionable Age and Early Retirement for more information.

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Footnote 82

Section 17 of the PBSA.

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Footnote 83

See OSFI Policy Advisory – Benefits Subject to Consent for more information.

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Footnote 84

See CIA Revised Educational Note – Reflecting Increasing Maximum Pensions Under the Income Tax Act in Solvency, Hypothetical Wind-Up and Wind-Up Valuations for more information.

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Footnote 85

Paragraph 3540.11 of the CIA Standards.

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Footnote 86

Also referred to as wind-up expenses.

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Footnote 87

Section 7.6 of the PBSA.

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Footnote 88

Section 9.01 of the PBSA.

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Footnote 89

Paragraph 3240.14 of the CIA Standards.

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Footnote 90

See CIA Educational Note – Alternative Settlement Methods for Hypothetical Wind-Up and Solvency Valuations for more information.

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Footnote 91

Subsection 36(4) of the PBSA.

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Footnote 92

Paragraph 3240.05.1 of the CIA Standards.

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Footnote 93

Subsection 29(11) of the PBSA.

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Footnote 94

Liabilities of other pension plans sponsored by the same corporate entity could also be considered in the analysis.

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Footnote 95

Thresholds specified in CIA Guidance should be used as a reference. Current liability thresholds above which a plan may have difficulty in effecting a series of group annuity purchases are $3.75B (5 x $750M) for non-indexed annuities and $1.25B (5 x $250M) for indexed annuities.

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Footnote 96

Subsection 24.1(6) of the PBSR.

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Footnote 97

Subsection 24.1(7) of the PBSR.

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Footnote 98

See Economic Scenario Generators – A Practical Guide for more information.

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Footnote 99

Where no calibration standards exist for pension plan valuations, the actuary may rely on insurance metrics as a comparator benchmark. CIA Guidance and criteria promulgated by the ASB for investment returns and risk-free interest rates used for the calibration of stochastic models should be consulted.

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Footnote 100

A CTE at X% level of confidence is the mean of all scenarios that represent the worst 1- X% of results.

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Footnote 101

Subsection 3270 of the CIA Standards.

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Footnote 102

Active management expenses are generally offset by active management return, therefore having no impact on the liabilities.

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Footnote 103

See sections 8 and 9 of the Directives for more information.

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Footnote 104

See subsections 9(8) through 9(11) inclusive of the PBSR for more information.

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Footnote 105

Unless the plan uses advance contributions in excess of minimum funding requirements, special payments for negotiated contribution plans are defined as the difference between negotiated contributions and total current service cost.

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Footnote 106

Section 9 of the PBSR.

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Footnote 107

Defined as the cost of providing the benefits and the provision for expenses, allocated to a time period by the actuarial cost method, excluding special payments.

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Footnote 108

Subsection 9(14) of the PBSR.

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Footnote 109

Section 10 of the PBSR.

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Footnote 110

Subsection 9(7) of the PBSR.

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Footnote 111

Subsection 9(5) of the PBSR.

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Footnote 112

Subsection 9(6) of the PBSR.

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Footnote 113

Paragraphs 9(8)(c) and 9(8)(d) of the PBSR.

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Footnote 114

Section 9.16 of the PBSA.

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Footnote 115

Subsection 29.03(1) of the PBSA.

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Footnote 116

Subsection 2(1) of the PBSA.

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Footnote 117

See section 2.4 of the Guide.

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Footnote 118

Paragraph 3260.07 of the CIA Standards.

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Footnote 119

See OSFI Guidance – Administration of Negotiated Contribution Plans for more information.

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Footnote 120

See OSFI Guideline – Stress Testing Guideline for Plans with Defined Benefit Provisions for more information.

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Footnote 121

See OSFI Guideline – Derivatives Sound Practices for Federally Regulated Private Pension Plans for more information.

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Footnote 122

Paragraph 3260.06.2 of the CIA Standards.

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Footnote 123

Paragraph 3260.06.5 of the CIA Standards.

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Footnote 124

See CIA Educational Note – Guidance on Selection and Disclosure of Plausible Adverse Scenarios for more information.

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Footnote 125

Paragraph 3260.06.3 of the CIA Standards.

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Footnote 126

Subsection 8515(2) of the ITR.

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