2006 general meeting assemblée générale 2006 chicago, illinois
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Canadian Institute of Actuaries. L’Institut canadien des actuaires. 2006 General Meeting Assemblée générale 2006 Chicago, Illinois. PD-3 Assumption Setting for Pension Plans What is Reasonable? A Regulator’s Perspective Jean-Claude Primeau - PowerPoint PPT PresentationTRANSCRIPT
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois
2006 General Meeting
Assemblée générale 2006
Chicago, Illinois
Canadian Institute
of Actuaries
Canadian Institute
of Actuaries
L’Institut canadien desactuaires
L’Institut canadien desactuaires
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PD-3 Assumption Setting for
Pension Plans
What is Reasonable?
A Regulator’s Perspective
Jean-Claude Primeau
Office of the Superintendent of Financial Institutions
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2006OSFI’s MandateOSFI’s Mandate
• Protect interests of pension plan members and beneficiaries
• How does the selection of actuarial assumptions fit into OSFI’s mandate?- adequate funding is a key aspect in the protection of
members’ interests- actuarial reports must comply with CIA Standards of
Practice- OSFI expects selection of assumptions to be reasonably
prudent, including adequate margins- Pension plans are voluntary arrangements and the regulators
recognize the delicate balance that exists between theinterests of plan members and employers
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Going Concern AssumptionsGoing Concern Assumptions
Discount rates
Discount rate selection should reflect the following factors:
- reasonable expectations of future investment
returns
- investment policy
- current asset mix
- margins for adverse deviations
- risk factors
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Going Concern AssumptionsGoing Concern Assumptions
Discount rates- OSFI has been encouraging actuaries to moderate
future return expectations- OSFI’s current view is that a discount rate before
expenses greater than 6.5% for plans invested in balanced portfolios does not contain adequate margins
- Many actuaries have reduced their discount rate assumptions in the last two years
- We have compiled statistics of rates used in reports filed recently
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Assumed Going-Concern Discount Rates
Assumed Going-Concern Discount Rates
0
5
10
15
20
25
30
35
% of Plans
Less than6.00%
6.00% -6.24%
6.25% -6.49%
6.50% -6.74%
6.75% -6.99%
Greaterthan 7.00%
Range
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Going Concern AssumptionsGoing Concern Assumptions
Expenses- Many actuaries state discount rate assumptions net of
all expenses- Our assessment of the discount rate assumption looks
at the gross rate before expenses- It may be reasonable to express the investment
expense assumption implicitly and reduce the discount rate appropriately
- OSFI encourages setting explicit expense assumptions, especially for non-investment expenses, taking into account historical experience and expected future levels
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Going Concern AssumptionsGoing Concern Assumptions
Salary Escalation- It is useful to describe the components of the
salary escalation assumption, i.e. base increases and merit and promotional scales
- OSFI has raised objections with assumptions that include negative merit or promotional scales
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Going Concern AssumptionsGoing Concern Assumptions
Mortality- OSFI expects the use of one of the 1994 mortality
tables unless justification is provided for using a less conservative table
- Close to 90% of plans have been using a 1994 table in recent reports filed with OSFI
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Going Concern AssumptionsGoing Concern Assumptions
Retirement Age- The retirement age assumption should be consistent
with the plan provisions and reasonable behavioral expectations
- Where a plan contains early retirement benefits subject to consent, the actuary should assume that consent is granted or make a reasonable assumption about the probability of consent being granted
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Solvency AssumptionsSolvency Assumptions
Discount Rate Assumptions- Active members who meet eligibility conditions for
immediate retirement may have an option between an immediate pension or the commuted value if the plan terminates
- In that situation, OSFI requires the actuary to assume that at least 50% of members will choose the most expensive option
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Solvency AssumptionsSolvency Assumptions
Discount Rate Assumptions- The CIA does not issue annuity proxy
recommendations for indexed annuities due to the lack of actual experience
- Actuaries of indexed plans must make reasonable assumptions for the price of indexed annuities
- OSFI does not have a set formula or approach for indexed annuities but the selected basis should not normally produce liabilities lower than the commuted value basis
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Solvency AssumptionsSolvency Assumptions
Wind-up Expenses- There is little available data on actual wind-up
expenses- OSFI would encourage industry studies on this
subject to provide assistance to actuaries in making reasonable assumptions
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Solvency AssumptionsSolvency Assumptions
Wind-up Expenses- OSFI’s analysis looks at the wind-up expenses
expressed as a dollar amount per member- Many actuaries make wind-up expenses assumptions
that appear very low- OSFI often raises this issue with plan actuaries- We have compiled statistics on assumptions used in
recent reports
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0
5
10
15
20
25
% of Plans
Lessthan$100
$100 -$149
$150 -$199
$200 -$249
$250 -$299
$300 -$399
$400 -$499
$500 -$999
Greaterthan
$1,000
Range
Average Solvency Expense Assumption (per member basis)
Average Solvency Expense Assumption (per member basis)
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Solvency AssumptionsSolvency Assumptions
Retirement Age- The actuary should assume retirement ages where the
commuted value is maximized, based on CIA Standards of Practice
- When a plan offers early retirement benefits subject to consent, the description of the assumptions should be clear on the assumption made with respect to consent being granted