2006 General Meeting Assemblée générale 2006 Chicago, Illinois 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 Office of the Superintendent of Financial Institutions

OSFI’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 the interests of plan members and employers

Going 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

Going 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

Assumed Going-Concern Discount Rates

Going 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

Going 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

Going 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

Going 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

Solvency 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

Solvency 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

Solvency 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

Solvency 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

Average Solvency Expense Assumption (per member basis)

Solvency 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