Superintendent and Chief Actuary discuss pension plan ecosystem
Speech - Toronto -
Check against delivery
OSFI and OCA’s roles within the private pension plan ecosystem
Moderator:
OSFI regulates banks and other deposit-taking financial institutions, insurance companies, and federally regulated pension plans. What do you see as the commonalities and differences between the regulation of pension plans and the other pillars? How have your previous roles prepared you for working with pension plans?
Superintendent Peter Routledge:
OSFI is responsible for the regulation and supervision of private pension plans. We ensure they meet the minimum funding requirements and comply with legislative, regulatory, and supervisory requirements.
Unlike banks or insurance companies, private pension plans, as you know, are not standalone businesses. This fundamental difference shapes our regulatory approach, focusing on long-term viability and benefit security rather than day-to-day business operations.
Our mandate with respect to financial institutions requires us to balance the protection of the rights and interests of depositors, policyholders and creditors with the need for the institutions to compete effectively and take reasonable risks. On the other hand, our mandate with respect to pensions requires us to be more singularly focussed on protecting the interests of plan members and beneficiaries.
I’ve held a number of diverse leadership roles in the financial services industry which have prepared me for working with pension plans. For example, I lead a research team on equity, fixed income, and derivatives which provided me with valuable insights into the pension and investments world. Also, my international experiences helped me to develop the necessary skill for this role of coordinating groups with different objectives and expectations, including international counterparts.
Moderator:
The Office of the Chief Actuary (OCA) is described on your website as the independent, impartial and trusted actuarial centre of excellence of the Government of Canada. Can you please elaborate on your role as Chief Actuary and the mandate of the OCA? Also, what is (and isn’t) the OCA’s role in relation to the regulation of private pension plans?
Chief Actuary Assia Billig
My past experience has also prepared me for the role of Chief Actuary. I’ve worked in private pension consulting, prepared statutory actuarial reports for major national programs at the OCA, and held leadership positions in international actuarial associations. This diverse background gives me a comprehensive view of pension systems, from granular actuarial details to broad policy implications.
The Office of the Chief Actuary provides a range of independent actuarial valuation and advisory services to the federal government. This includes actuarial reports on the Canada Pension Plan (CPP), the Old Age Security Program, the Canada Student Financial Assistance Program, Employment Insurance Program and federal public sector pension and insurance programs including benefits provided to veterans. Our work is aimed at ensuring financial sustainability of plans and programs that form our mandate. The majority of our actuarial reports are statutory and these reports are tabled in Parliament by the appropriate minister.
My independence is ensured through the following:
- First, while I report to the Superintendent, I am solely responsible for the content and actuarial opinions in reports prepared by the Office of the Chief Actuary. Similarly, I am solely responsible for the for actuarial advice provided to relevant government departments, as well as to provincial and territorial governments, which are co-stewards of the CPP.
- Secondly, being situated outside the departments to which we provide services, to provides an additional layer of independence and objectiveness. Last but not least, the staff of the OCA are actuaries, and as such we are bound to follow actuarial standard of practice and rules of professional conduct.
Since last year, following the adoption of Bill C-228, the actuarial function of the supervision of the federal private pension plans has moved to OCA. This enables me to fulfill my new role of being consulted by the Superintendent in the preparation of his Annual Report to the Parliament on the operation of the Pension Benefits Standards Act and the success of pension plans in meeting minimum funding requirements.
Risk management and supervision
Moderator:
The environment in which retirement systems operate have grown significantly more complex and riskier (lack of coverage). Can you please describe some of the risks that those programs are facing and highlight their potential impacts on private pension plans?
Superintendent Peter Routledge:
Though individual pension plans may not pose the same systemic risk as the large banks or insurers, collectively they can impact the financial system through their investment activities.
Notably, the risks for pension plans are more specific to long term viability. Plans have a lot of assets, and those assets are longer term. We need to look further ahead when monitoring the risk environment of pension plans. Geopolitical and environmental, social, and governance, including climate, risks are more significant when you take a long-term view.
There is increasing complexity of pension plan investment strategies and of administration tools (e.g. the use of AI for plan administration or asset management), and increasing cyber risks, all of which contribute to increased risk for private pension plans. I’ll let Assia weigh-in more on the long-term risks.
Chief Actuary Assia Billig
Let me pick up on the point made by the Superintendent in respect to the long-term view on the risks for pension programs.
CPP is an excellent example when we are talking about long-term risks. For our valuation we do projections over a very long period – 75 years. So, when we develop assumptions for the CPP actuarial valuations and when we illustrate the uncertainty of results, we concentrate on the long-term risks such as demographic risks (fertility, immigration and mortality), labour market risks (for example impacts of AI and climate change), and investment risks. That is, we are looking at long-term risks on both sides of the balance sheet: liabilities and investments.
Of course, not all risks relevant to the CPP are relevant to private pension plans. However, there are notable overlaps. On the demographic side, mortality matters for both CPP and pension plans. Even if we recently saw slowdowns in the pace of mortality improvements, it is a risk that needs to be watched. From a macroeconomy point of view, inflation is another common risk. And of course, for both CPP and private pension plans, a lot of attention needs to be paid to the long-term expected rates of returns. In addition to the inherent volatility in capital markets, in the long-term they may be impacted by both physical and transition climate risks. It is an extremely difficult risk to quantify due to the unprecedented uncertainty associated with climate transition.
Moderator:
How does OSFI ensure that they have people with the necessary knowledge and skills to regulate pension plans, knowing how different they are than the other pillars?
Superintendent Peter Routledge:
Over the past decade, OSFI has built its capacity to operate in a highly complex, fast-evolving environment.
We recognize there have been challenges. Both in putting in place an organizational structure that reduces silos and maintains the specialized expertise needed. Meanwhile, we also face competition for our highly skilled labour from the private sector.
We have a human resource strategy in place that has identified some of these challenges and helped us respond. We’re now measuring these outcomes to ensure we can continue cultivate and retain the right people with the right skill set to meet organizational needs.
We have a great team of pension experts across the various pension specialty areas including supervision, policy, approvals, actuarial, investment risk, and more. In the long run, the new structure is intended to promote internal collaboration and expand the specialized expertise needed.
Chief Actuary Assia Billig
Much like the Superintendent, I rely on a highly skilled workforce to deliver on our mandate and to provide independent actuarial valuation and advisory services to the federal government.
Our workforce is made from actuarial professionals most of whom have achieved Fellowship or Associateship designations with the Canadian Institute of Actuaries and/or the Society of Actuaries or are working towards obtaining those designations. Since we work with social security, our actuaries have unique qualifications that are not easy to find in Canada as well as in the rest of the world.
To stay competitive, we put a lot of efforts in developing specialized knowledge and competencies of our actuaries.
Our Development Program for Actuaries develops high-caliber individuals through challenging work assignments, job coaching and formal and informal training. The program allows the staff to sharpen their knowledge, skills, and competencies and move to higher working level positions.
Another tool is internal Subject Matter Expert groups to enhance, maintain and share skills and knowledge amongst OCA employees. The example of such groups include climate, mortality, predictive analytics, etc.
Moderator:
The Canada Pension Plan (CPP) plays an integral part in the Canadian retirement system. Can you please explain the financing of the CPP, the federal pension arrangements (i.e. Public Service Superannuation Act) and describe the differences (and similarities) with the financing of private pension plans?
Chief Actuary Assia Billig
To explain the financing of the CPP let’s go back in history. When CPP was established in 1966 it was so called pay-as-you-go plan with a very small reserve. Pay-as-you-go means that the contributions collected during the year are used to pay the same year benefits. In 1990s it became clear that due to changing economic and demographic environment, the CPP was not sustainable under this type of financing. The major reform to CPP financing was implemented in 1997 that introduced partial funding of the CPP. The important part of this reform was the creation of the Canada Pension Plan Investment Board with the goal of investing excess contributions in the financial market.
In 2019, the CPP was amended by introducing the second CPP component – the additional plan. This component of the CPP is “fully funded” in the sense that the projected investment earnings and contributions are sufficient to cover projected expenditures taking into account the current and future participants.
Today, both components of the CPP are financed by employer and employee contributions and investment earnings. The OCA determines every three years the minimum contribution rates needed to sustain the CPP. If these minimum contribution rates are lower than the legislated contribution rates, the plan is deemed to be sustainable.
The difference in financing of the CPP and traditional defined benefit private pension plan is how we determine these minimum rates. We are doing it by considering the contributions and benefits of both current and future participants. On the other hand, for the traditional defined benefit private pension plan, its cost is usually determined by considering only accrued benefits of current contributors and beneficiaries.
The base CPP (that is the original pre-2019 CPP) relies heavily on contributions as a source of revenues. For example, today, contributions constitute 70% of the total CPP revenues and investment income accounts for 30%. Depending on the maturity of the plans, this relationship is generally inverse for the traditional private pension plans.
In respect of the major federal public sector pension plans such as public service, Canadian Forces, and RCMP, they are financed in the way that is similar to the private pension plans. The major difference is that the federal pension plans are not subject to solvency requirements.
Moderator:
Some risks, like liability-driven investment (LDI) and leverage, appear to cause volatility from an asset-only perspective but are a mitigator from an asset-liability perspective. How is this reflected in OSFI’s supervision?
Superintendent Peter Routledge:
We recognize the importance of looking at “both sides” of the equation when supervising pension plans. We would expect that policies and procedures with respect to the use of leverage would consider the plan’s overall and specific investment strategies, as well as the asset/liability interactions and funding objectives.
We track the estimated solvency ratio (ESR) of plans on a quarterly basis to identify solvency issues that could affect the security of pension benefits promised to plan members and beneficiaries. The ESR results also help us identify broader trends. This exercise looks at the evolution of both the assets and liabilities.
Our focus is on solvency rather than assets only. This is prominent in our new Supervisory Framework. It assesses, among other things, the strength of the plan’s solvency position as well as the appropriateness of investments and asset allocations in light of its liabilities.
Moderator:
How do the recently released CAPSA guidelines on risk management and CAP influence OSFI’s ongoing initiatives? What are OSFI’s expectations on ESG and climate change scenario analysis?
Superintendent Peter Routledge:
As a member of CAPSA, we are of the view that CAPSA guidelines provide useful guidance on best practices, and we generally expect and encourage plan administrators to follow CAPSA guidelines.
In September, shortly after the release of the CAPSA Risk Management Guideline, we published a letter confirming that we expect plan administrations to follow this guideline.
As previously communicated to the pensions industry, plan administrators and are not expected to follow OSFI’s Guideline B-15 on Climate Risk Management for financial institutions or to complete a Standardized Climate Scenario Exercise. Rather they are expected to follow the CAPSA Risk Management Guideline.
As stated in the CAPSA Risk Management Guideline, where appropriate to plan circumstances, climate risk scenario analysis can be a useful exercise for plan administrators (or investment managers) to assess the vulnerabilities of the pension fund. Or to an investment strategy under different plausible forward-looking risk scenarios, including over different periods of time.
Climate risk scenario analysis can also be used to incorporate and assess potential effects of changes in plan liabilities.