The Office of the Superintendent of Financial Institutions Canada has published a revised version of its instruction guide for the preparation of actuarial reports for defined benefit pension plans.
The update, published last week, includes a decrease in the maximum going-concern discount rate, from 6.25 per cent to six per cent. “That will directly impact any pension plans that are currently at the 6.25 rate,” says Tom Mudrinic, principal and consulting actuary in Xerox HR Services’ wealth practice. “They will have to figure out what impact moving to six will have on their costs.”
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The change will also impact plans sponsors that are already using a six per cent discount rate, notes Mudrinic. “They may have thought in the past they had a bit of a cushion within their guidelines. But now on the top end, they may have to review that as well. It’s going to have a trickle-down effect on a number of plan sponsors.”
Another update is around the use of mortality tables. In 2014, the Canadian Institute of Actuaries released its first study of mortality for Canadian pension plans, which resulted in three pension mortality tables that plan sponsors and actuaries can use: one for the private sector, one for the public sector and one combined table.
“Most pension plans aren’t big so they can’t really do their own study, so they have to rely on what the actuaries have issued,” says Mudrinic. “What OSFI seems to have done in the 2016 guidelines is clarified their view that they think the combined table is the preferred table and that plan sponsors have to have a really good justification for moving away from it.”
Read: New all-Canadian pension mortality tables, improvement scales released
Another update that will impact plan sponsors is around alternate settlement methods when a pension plan completes a solvency or windup valuation. This update is specifically for very large plans that are too big to settle by way of a single annuity purchase from an insurance company.
When these plan sponsors undertake solvency valuations, they will often create their own portfolio to match liabilities on a solvency basis, says Mudrinic.
“What’s changed in this guideline is that OSFI has come out and said, if you’re going to use that approach, for your fixed-income securities, you’re going to have to assume that the high quality investments are rated AA or better bonds … this is going to require plans that use this approach to reconsider their investments, in terms of creating the bond portfolio. Previously there wasn’t guidance on using AA bonds but now it’s clear that’s what they want you to use.”
Read: OSFI releases guide for preparation of actuarial reports
The updates also include that additional disclosure is required with respect to termination expenses and clarifications on required contributions for funding designated plans have been defined.
The revised guide applies to actuarial reports with a valuation date on and after Oct. 31, 2016.