Actuarial reports – Items warranting review (May 2021)

Actuarial reports submitted to OSFI are generally reviewed by each plan’s Relationship Manager in PPPD, who may refer the report to the division’s actuarial team for a more detailed review.

The Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans sets out the reporting requirements for actuarial reports filed with OSFI. Based on the Canadian Institute of Actuaries (CIA) Standards of Practice, it is expected that plan actuaries provide sufficient details in their actuarial report to enable another actuary to assess the reasonableness of the data, assumptions, and methods used.

OSFI would like to share with plan actuaries its expectations relating to the following items that warranted a more detailed review in some actuarial reports:

Solvency valuation – Provision for termination expenses

In accordance with subsection 2(1) of the Pension Benefits Standards Regulations, 1985, solvency assets used in the determination of the solvency ratio for a pension plan with defined benefit provisions are equal to the market value of assets plus the face value of letters of credit minus the estimated expenses of winding-up the plan. OSFI expects the assumed termination expenses (also referred to as wind-up expenses) to be sufficient to provide for expenses that may reasonably be expected to be paid from the pension fund 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.

A comparison of the provision for termination expenses in recently filed termination reports to the assumed termination expenses in prior funding valuation reports for those plans shows that assumed termination expenses in the solvency valuation for an ongoing pension plan are often underestimated, sometimes by a significant amount.

While size can be a good indicator to assess the reasonableness of the provision for termination expenses, plan specific characteristics such as membership profile and the complexity of the plan’s provisions should also be considered. The determination of the provision should be consistent with the postulated termination scenario.

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 administrator or designated actuary;
• regulatory fees;
• custodial and auditing related expenses;
• investment expenses, including management and transaction fees relating to the liquidation of assets; and
• expenses associated with revising the investment policy.

In addition, the termination expense provision should allow 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.

Going concern valuation – Application of OSFI’s maximum discount rate

In accordance with the Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans, it is OSFI’s position that the best estimate rate of return on assets used in the determination of the going concern discount rate should not exceed a certain level to ensure the assumption used by actuaries in their actuarial reports remains reasonable. OSFI monitors financial market conditions and future expected returns and is currently of the view that generally the discount rate for a plan with a fixed-income allocation of no more than 50% should not exceed 5.75%, before implicit margins for adverse deviations and expenses.

The actuary should ignore the return and expenses related to active investment management for determining whether the discount rate used in the actuarial report satisfies this requirement. However, the actuary should adjust the maximum rate for a plan using an asset mix expected to generate a lower return, and may adjust the maximum rate for a plan using an asset mix expected to generate a higher return, than that obtained by using a 50% fixed-income allocation.

The following examples illustrate how to apply OSFI’s maximum in the determination of the going concern discount rate under three scenarios:

• Scenario 1: the actuary has applied the unadjusted maximum of 5.75%
• Scenario 2: the actuary has adjusted the maximum to 6.00% based on the plan’s asset mix
• Scenario 3: the actuary has applied the unadjusted maximum of 5.75%, and can justify an assumption for value-added return of 0.10% due to active management