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 a going concern basis. Retraite Québec may request explanations from actuaries whose assumptions deviate from the instructions described below.

Notethat...

As part of its supervisory mandate, Retraite Québec may also require any information that it deems necessary to verify that the actuarial valuation report complies with all legislative requirements.


Interest rate assumption

Maximum assumption

Retraite Québec has analyzed the statistics regarding the interest rate assumptions used in actuarial valuation reports as at 31 December 2017, as well as the most recent return forecasts for the coming years. Based on this analysis, Retraite Québec expects the interest rate assumption of actuarial valuations carried out after 30 December 2018 to be established using a best estimate of the rate of return on investments (including the effects of rebalancing and diversification) that does not exceed 6%. This limit applies to plans with investment policies that provide for 50% of plan investments to be fixed-income investments, as defined in the first paragraph of section 60.8 of the Regulation respecting supplemental pension plans This link will open in a new window..

For other investment policies, the actuary will establish the interest rate assumption of the actuarial valuation by taking into account the 6% limit as well as the risk premium limit presented below.

Risk premium

According to the educational note concerning the determination of best estimate discount rates, for publicly-traded Canadian securities, a reasonable risk premium should be between 3% and 5% over the yield on long-term Government of Canada bonds. As a result, Retraite Québec expects actuaries to stay within that range when determining the best estimate for the rate of return on investments, and that risk premiums for other asset categories be determined in a manner consistent with that range.

Best estimate and margins for adverse deviations

According to the Canadian Institute of Actuaries' Standards of Practice This link will open in a new window., for valuations on a going concern basis, actuaries must choose best-estimate assumptions that have been modified to include margins for adverse deviations to the extent required by legislation or by the terms of an appropriate engagement.

The Standards of Practice define a best-estimate assumption as an unbiased assumption. It must not be conservative or non-conservative. In cases where a stochastic model is used to determine the best estimate of the expected rate of return, Retraite Québec considers the median of the distribution of returns on investments to be the best estimate.

In addition, Retraite Québec expects actuarial valuations to include a margin for adverse deviations when the interest rate assumption on a going concern basis is established for a pension plan or the component of a plan where

  • no stabilization contribution is required by law

    OR
  • the following 3 conditions are met:
    1. a stabilization provision is calculated
    2. the investment policy is amended after the date of the valuation to increase the target for variable-yield investments
    3. the actuary takes the change into account in the valuation.

In the absence of such a margin, Retraite Québec could require that the valuation be revised or that a complete actuarial valuation be produced at the end of the fiscal year following the valuation date.

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 rate of return on investments
  • the adjustment stemming from the zero return of letters of credit
  • rebalancing and diversification
  • value added returns from active management
  • investment management fees
  • plan administration fees
  • rounding of figures
  • margin for adverse deviations.

Letters of credit

In the case of a plan whose assets include letters of credit, the best-estimate assumption on the rate of return on investments must be adjusted to take into account the letters of credit's zero return. The impact of the adjustment must be equal to the proportion that corresponds to the letters of credit included in the plan assets on the plan's liabilities on a going concern basis.

Nevertheless, Retraite Québec will accept an adjustment that only applies for periods in which the letters of credit are expected to be renewed, in accordance with the funding policy. In such cases, the interest rate assumption would be select and ultimate.

Active investment management

According to the educational note concerning the determination of best estimate discount rates, it is generally reasonable to assume that active management will generate returns equivalent to the additional investment management fees associated with active management over those for passive management. Retraite Québec therefore expects the actuary to limit the added value of active management that is included in the interest assumptions to the fees incurred for active management.

Fees

The plan's administration fees and the pension fund's management fees must be listed separately and reflect the advice provided in the educational note concerning expenses in funding valuations.

Rounding of figures

Actuaries can, in a reasonable manner, round the interest assumption to the nearest 0.1%. However, this rounding of figures must be done consistently from year to year before applying the margin for adverse deviations (so that the margin chosen by the plan administrator is not changed by the rounding of figures).

Salary increase assumption 

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

Statistics

Expected returns

The following table presents the best estimates for expected returns on investments set out in the complete actuarial valuation reports as at 31 December 2017 filed with Retraite Québec. The estimates do not take into account the value added returns from active management or the administration and investment management fees. Note that the median expected return is 5.70% for plans in the private sector and 6.15% for plans in the municipal and university sectors.

Expected returns as at 31 December 2017 note 1
Expected returns (%)  See note 2  Number of plans
Municipal and university sectors See note 3Private sector note 4Total
4.00 or under01414
4.25 077
4.50 077
4.75 044
5.00 011
5.25 21113
5.50 21315
5.75 43842
6.00 123042
6.25 131730
6.50 12618
6.75 6410
7.00 or over 112
Total 52153205

Notes :

  1. These statistics exclude designated plans within the meaning of section 8515 of the Income Tax Regulations This link will open in a new window..
  2. The expected return has been rounded up to the nearest 0.25%.
  3. Municipal-sector plans are those where the employer is a municipality, a body referred to in section 18 of the Act respecting the Pension Plan of Elected Municipal Officers This link will open in a new window. or a municipal housing bureau. Retraite Québec received 40 actuarial valuation reports as at 31 December 2017 for plans in the municipal and university sectors. In the 12 cases where different components of a single plan did not have the same expected returns, the data for each component are shown.
  4. Private-sector plans are not grouped with plans in the municipal and university sectors. They include the pension plans for Québec emergency medical technicians, accredited early childhood centres (CPEs) and private daycares. Retraite Québec received 152 actuarial valuation reports as at 31 December 2017 for plans in the private sector. In the only case where different components of a single plan did not have the same expected returns, the data for each component are shown.

Allocation of investments to variable income securities

The following table shows the allocation of investments to variable income securities used to establish the interest rate assumptions in the complete actuarial valuation reports as at 31 December 2017 filed with Retraite Québec. Note that the median allocation of investments in variable income securities is 55% for plans in the private sector and 65% for plans in the municipal and university sectors.

Allocation of investments to variable income securities See note 1
Allocation to variable income (%) See note 2 Municipal and university sectors note 3 
Private sector note 4
See Number of plansExpected average return (%)Number of plans Expected average return (%)
10 or under0-52.77
200-94.19
300-64.13
400-124.59
5035.36385.36
60145.91505.81
70236.15265.94
 80 or over126.4876.13
Total 52-153-

Notes:

  1. These statistics exclude designated plans within the meaning of section 8515 of the Income Tax Regulations This link will open in a new window..
  2. The allocation of variable income securities has been rounded up to the nearest 10%. The variable income securities include equities, infrastructure and real estate.
  3. Municipal-sector plans are those where the employer is a municipality, a body referred to in section 18 of the Act respecting the Pension Plan of Elected Municipal Officers This link will open in a new window. or a municipal housing bureau. Retraite Québec received 40 actuarial valuation reports as at 31 December 2017 for plans in the municipal and university sectors. In the 12 cases where different components of a single plan did not have the same expected returns, the data for each component are shown.
  4. Private-sector plans are not grouped with plans in the municipal and university sectors. They include the pension plans for Québec emergency medical technicians, accredited early childhood centres (CPEs) and private daycares. Retraite Québec received 152 actuarial valuation reports as at 31 December 2017 for plans in the private sector. In the only case where different components of a single plan did not have the same expected returns, the data for each component are shown.

References

Legal references

References from the Canadian Institute of Actuaries

 

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