Actuarial assumptions and methods

The following instructions are designed to help actuaries choose actuarial assumptions and methods for determining the value of pension plan commitments on the bases of solvency and funding. The Régie may request explanations from actuaries whose assumptions deviate from the instructions described below.

• Solvency basis
• Funding basis
• Statistics
• References

Solvency basis

Termination fees

The Practice-Specific Standards for Pension Plans of the Canadian Institute of Actuaries (CIA) list the elements that should normally be considered when establishing an assumption regarding the fees for termination of a pension plan. In addition, the CIA recommends establishing an explicit provision for all anticipated expenses associated with a hypothetical plan termination. Actuaries must refer to these documents in order to establish the assumption for pension plan termination fees..

For valuations where the termination fees assumption is less than the average assumption shown in the Statistics section with respect to both liabilities and the number of members and beneficiaries, the actuary must justify his or her choice of assumption in accordance with the Educational Note published by the CIA entitled Expenses in Funding Valuations for Pension Plans.

Funding basis

Interest rate assumptions

Maximum assumption

The Régie has analyzed the statistics regarding the interest rate assumptions used in actuarial valuation reports as at 31 December 2011. Following that analysis, the Régie maintains the maximum interest rate assumption recommended for actuarial valuations after 30 December 2012 at 6,00%.

Best estimate

According to the CIA's Practice-Specific Standards for Pension Plans, actuaries must choose best estimate assumptions that have been modified to include margins for adverse deviations to the extent required by legislation or appropriate to the terms of an engagement.

The Régie expects all actuarial valuations after 30 December 2011 to include a margin for adverse deviations in establishing the interest rate assumption on a funding basis. The Régie may request an explanation from the plan administrator if a margin seems inappropriate to the plan's situation.

Methodology

In an actuarial valuation report, actuaries must describe the methodology used to establish the interest rate assumption. The description must take into account the following:

• Best estimate
• Margin for adverse deviations
• Plan administration costs
• Pension fund management fees
• Added value of pension fund managers
• Effect of rebalancing and diversification
• Rounding of figures.

Actuaries can use a stochastic method to determine the best estimate of the expected rate of return. In such a case, the Régie expects the model not to rely unduly on short-term market returns.

Salary increase

Where an actuarial valuation uses a salary increase assumption that is less than the assumption used in the previous valuation, the actuary must justify his or her choice of assumption by referring to plan experience, the interdependence of salary increase and inflation assumptions, economic conditions, etc.

Statistics

Termination fees

The following tables present the average termination fees assumptions for actuarial valuation reports sent to the Régie and whose most recent actuarial valuation date falls between 31 December 2009 and 1 January 2012.

Average termination fees assumption according to liabilities on a solvency basis

Liabilities on a solvency basis (in million $) note 1			Number of plans	Average fees ($)
Less	than	0,7	61	6 100
0,7	to	2,1	59	24 400
2,1	to	5,2	62	43 400
5,2	to	8,6	60	57 900
8,6	to	13	62	76 700
13	to	18	60	80 600
18	to	26	60	80 700
26	to	35	61	110 700
35	to	52	62	138 500
52	to	93	59	212 100
93	to	150	49	293 800
150	to	250	42	402 700

Average termination fees assumption according to number of members and beneficiaries

Number of members and beneficiaries note 2			Number of plans	Average fees ($)
		1	69	4 100
2	to	19	58	28 900
20	to	44	56	45 200
45	to	67	58	58 900
68	to	99	60	69 000
100	to	139	60	72 200
140	to	194	60	90 800
195	to	274	60	121 000
275	to	399	62	138 000
400	to	724	60	176 700
725	to	1 399	59	307 500
1 400	to	2 499	49	469 200

Expected rates of return

The expected rates of return for pension funds presented in the following table are taken from the actuarial valuation reports as at 31 December 2011 that were sent to the Régie. Value added for active management, rebalancing and diversification have not been taken into account, nor have plan administration costs and pension fund management fees.

The table presents the expected rate of return according to the benchmark portfolio on which the actuarial valuation is based. It shows that the expected rate of return and the margin for adverse deviations increase in proportion to investments in equities.

For a pension plan with a portfolio consisting of 60% equities, the margin for adverse deviations chosen by the plan administrator as at 31 December 2011 was approximately 0,35%.

Expected rate of return according to the benchmark portfolio as at 31 December 2011 ^{note 3}

Expected rate of return note 4 (%)	Number of plans	Average equity allocation note 5 (%)	Average margin (%)
5,00 or less	31	29	0,20
5,50	55	45	0,28
6,00	146	52	0,30
6,50	212	58	0,34
over 6,50	60	63	0,47
Total	504

Margins for adverse deviations

The following tables present the distribution of margins for adverse deviations used in the actuarial valuation reports as at 31 December 2011 and 31 December 2010 that were sent to the Régie. The average margin for adverse deviations is 0,33% as at 31 December 2011 and 0,31% as at 31 December 2010.

Margin for adverse deviations as at
31 December 2011 ^{note 6 and note 7}

Margin for adverse deviations note 8 (%)	Number of plans
0,00	16
0,10	19
0,20	41
0,25	170
0,30	56
0,40	71
0,50	77
0,60	16
0,70	10
0,80 or over	15
not disclosed	13
Total	504

Margin for adverse deviations as at
31 December 2010 ^{note 6 and note 7}

Margin for adverse deviations note 8 (%)	Number of plans
0,00	99
0,10	28
0,20	46
0,25	128
0,30	47
0,40	78
0,50	77
0,60	30
0,70	18
0,80	14
0,90	10
1,00 or over	11
Total	586

 

Interest rate assumptions

The following tables present the interest rate assumptions used for the actuarial valuation reports as at 31 December 2011 and 31 December 2010 that were sent to the Régie. They show that an interest rate assumption less than or equal to 5,75% was used in reports as at 31 December 2011 for 85% of plans, while an interest rate assumption equal to or less than 6% was used in reports as at 31 December 2010 for over 80% of plans.

Interest rate assumptions as at 31 December 2011 ^{note 9}

Interest rate assumption note 10 (%)	Number of plans
4,00 or under	33
4,25	12
4,50	17
4,75	29
5,00	65
5,25	64
5,50	114
5,75	94
6,00	71
6,25	5
Total	504

Interest rate assumptions as at 31 December 2010 ^{note 9}

Interest rate assumption note 10 (%)	Number of plans in the municipal and university sectors note 11	Number of plans in the private sector note 12	Total number of plans
4,25 or less	0	10	10
4,50	0	16	16
4,75	0	8	8
5,00	2	20	22
5,25	2	51	53
5,50	15	68	83
5,75	17	97	114
6,00	43	122	165
6,25	8	72	80
6,50 or over	6	29	35
Total	93	493	586

References

Legal references

• Income Tax Regulations (section 8515) 
• An Act respecting the Pension Plan of Elected Municipal Officers (section 18) 

References from the Canadian Institute of Actuaries

• Practice-Specific Standards for Pension Plans (sections 3230.01 and 3720.28) 
• Expenses in Funding Valuations for Pension Plans – January 2007 – Document 207010 
• Determination of Best Estimate Discount Rates for Going Concern Funding Valuations – December 2010 – Document 210094