Actuarial report on the Government annuities as at 31 March 2023

1 Executive Summary

1.1 Purpose of report

In accordance with section 15 of the Government Annuities Improvement Act ("the Improvement Act") an actuarial valuation was conducted as at 31 March 2023 for purposes of determining the actuarial liabilities and financial position of the Government Annuities Account ("the Account"). Section 15 of the Improvement Act also states that any surplus or deficit emerging as a result of the actuarial valuation shall be reported and, in the case of a surplus, credited to the Federal Government's Consolidated Revenue Fund (CRF) and charged to the Account or, in the case of a deficit, charged to the Federal Government's CRF and credited to the Account.

1.2 Data, method and assumptions

Data on current retirees, beneficiaries, deferred members, premiums and benefit payments were provided by Employment and Social Development Canada (ESDC) and Service Canada. The Government Annuities Branch located in Bathurst administers the annuities. The data are from a reliable source. We have performed summary tests on the data, and have found that they are accurate, reliable and sufficient for the purposes of the valuation. A description of contract types and a summary of the data are shown in Appendix A and Appendix B of this report. The actuarial liabilities are the present value of expected future benefits, determined in accordance with accepted actuarial practice and statutory valuation assumptions. Subsection 3(4) of the Government Annuities Regulations ("the Regulations") states that the actuarial liability is to be determined using an interest rate of 7% per annum and the mortality rates of the Annuity Table for 1983, as modified by Projection Scale G.

1.3 Results

Tables 1 and 2 below summarize the results of the actuarial valuation as at 31 March 2023.

1.4 Conclusion

The surplus of $1,105,092 is credited to the Federal Government's CRF and charged to the Account. The next valuation will be performed as at 31 March 2024.

2 Introduction

The Canadian Government Annuities Act of 1908 was one of the earliest significant pieces of social legislation in Canada. Its purpose was to encourage Canadians to prepare financially for their retirement. Government Annuities were purchased either by individuals or by employers as pension plans for their employees.

By the 1960's, other social benefit plans, such as Old Age Security (OAS) and the Canada Pension Plan were introduced and began gaining importance in providing Canadians with basic retirement income. The government's recognition that retired Canadians could now be served by other social security programs as well as the private sector brought about the decision to disband the Annuities sales force. In 1975, an Act of Parliament formally ended the sale of Government Annuities. Employers, however, could register new employees under group contracts until 1979. The Government Annuities are not sponsored by the Government – meaning the Government has no fiduciary liability. Its responsibilities are limited to provide and secure benefits in accordance with each contract's provisions.

The Annuities Branch continues to administer contracts under payment and those due to become payable, on behalf of clients from across Canada and around the world. The Account is not subject to any federal or provincial pension legislation; it is only subject to the Government Annuities Act, the Improvement Act and the Regulations. The assets and liabilities are shown in the Public Accounts of Canada. The assets are notional and are not subject to any investment policy or performance goals and objectives.

The Office of the Chief Actuary (OCA), Office of the Superintendent of Financial Institutions Canada (OSFI), has the mandate of performing the annual actuarial valuation of the Account as of 31 March 2023. The purpose of the valuation is to establish the Account's liabilities, notional assets, and financial position, based on the statutory valuation assumptions.

3 Data

3.1 Data required

Since the actuarial valuation determines both the assets and the liabilities, full details on the members as well as on the cash flows that occurred within the year are needed.

3.2 Member data

Basic data on pensioners, beneficiaries and deferred members are provided by ESDC and Service Canada. The reports provided show the member data required to establish the liabilities: certificate number, maturity date, member, spouse and beneficiaries' gender and dates of birth, annual pension amounts, and form of pension.

The required data reports are VY4741 for vested members (pensioners) and GY5642 for deferred members (members with deferred rights).

Notes on VY4741 vested data

Additional pension amounts data are required from Service Canada concerning the continuing pensions for joint and survivor contracts with percentages other than 50% or 100%, as well as for reducing annuities. VY4741 data does not show the accurate continuing pension amounts for annuities of type 29, 37, and 70-79.

Moreover, manual additions must be done, as the VY4741 report excludes certain members due to internal validation controls at Bathurst. The data related to this limited number of members were extracted from the VY5141 report. There were 27 such members as at 31 March 2023.

Notes on GY5642 deferred data

Pursuant to the Improvement Act which granted annual accrual of contributions accounts at 7% from 1 April 1975, the following table shows the multipliers that must be applied to the annual original pension amounts.

These multipliers reflect the increase between the original interest rate applicable on the contracts and 7%. As the deferred members data only show the pension amounts prior to the enhancements, these multipliers are used to update the annual pensions.

It can be seen that the methodology used to derive these multipliers granted higher increases to contracts with lower interest rates, and vice-versa. The objective sought at the time was to distribute the increases as equitably as possible.

A reconciliation of pension amounts and membership status with last year's membership has been performed. A detailed summary of membership data is shown in the Appendix B of this report.

3.3 Asset data

Income consists of premiums received, funds reclaimed from the CRF for previously untraceable annuitants, notional earned interest and any transfer needed to cover the actuarial deficit. Payments and other charges represent matured annuities, commuted value of death benefits, premium refunds and withdrawals, and transfers to the CRF of actuarial surpluses and unclaimed annuities related to untraceable annuitants.

All reports used to determine the value of assets are provided by ESDC.

A list showing the names and short descriptions of the required reports is given in Appendix C of this report.

The data used are considered to be sufficient and reliable for the purposes of the actuarial valuation.

4 Methods and Assumptions

4.1 Liability Valuation Method

The actuarial liabilities are associated with two groups of members: vested and deferred. The vested group consists of the participants for whom the pensions are in payment as at 31 March 2023. The deferred group consists of members for whom payment of pensions will start in the future. The liabilities are the actuarial present value of future pension payments, the result of discounting the future expected benefits with interest and post-retirement mortality.

4.2 Assumptions

The interest and post-retirement mortality assumptions are statutory, as stated in section 15 of the Improvement Act and subsection 3(4) of the Regulations. Namely, the liabilities must be based on a rate of interest of 7% per annum and on the mortality rates of the Annuity Table for 1983, as modified by Projection Scale G, published in Transactions of the Society of Actuaries, Vol. XXXV (1983), at pages 882 and 883.

Accordingly, the 1983 individual annuity mortality table (IAM83) is used for individual contracts and the 1983 group annuity mortality table (GAM83) is used for group contracts. Both tables are sex-distinct, and are projected for 15 years with Projection Scale G. Furthermore, for consistency with the methodology used to develop these mortality tables, the liabilities were calculated based on the annuitants' attained age (age last) at the valuation date.

Extracts from these mortality tables as well as associated life expectancies can be found in Appendix D of this report.

4.3 Asset valuation method

Since section 14 of the Government Annuities Act states that the monies received or paid under this act form part of the CRF, the assets are notional. Each year, any difference with the liabilities calculated is either credited (in the case of a surplus) or charged (in the case of a deficit) to the CRF, with a corresponding charge or credit to the Account. Following these adjustments, the assets value as at 1 April 2022 is equal to the 31 March 2022 liabilities. The assets value as at 31 March 2023 prior to any charge or credit to the CRF is obtained by adding interest at 7% on the 1 April 2022 value and adjusting for cash inflows and outflows also at 7% annual interest rate.

5 Results

5.1 Balance sheet

The following table presents a summary of the balance sheet of the Account for the 2023 and 2022 fiscal years.

5.2 Calculation of interest

Tables 5, 6 and 7 below outline the calculation of the notional 7% annual interest credited to the Account for the 2023 and 2022 fiscal years.

5.3 Development of actuarial liabilities

Tables 8, 9 and 10 below outline the Account's actuarial liabilities by members' category as at 31 March of 2023 and 2022.

6 Experience

6.1 Analysis of experience

As there are no new contracts purchased under the Government Annuities Act, the main source of experience gains or losses is the mortality. It includes changes in expected future payments due to the death or survival of annuitants and the difference between actual and expected benefit payments during the year.

The table below presents a reconciliation of the surplus between 31 March 2022 and 31 March 2023.

6.2 Alternative assumptions for purposes of the account's financial statements, prepared in accordance with Section 4600 of Part IV of the CPA Canada handbook – Accounting

6.2.1 Mortality

Following an external audit of the Account as at 31 March 2014, ESDC management asked the OCA to conduct a mortality experience study and to include the amount of the actuarial liabilities under experience-adjusted mortality rates in future Actuarial Reports on the Government Annuities.

6.2.2 Discount rate

To promote greater comparability with other public service pension plans that are part of the Public Account of Canada, the liabilities shown in the Account's financial statements is measured using a different discount rate than the prescribed interest rate of 7%. The alternative rate is established based on a yield curve approach. This yield curve is determined by reference to market yields at the end of the reporting period on Government of Canada Bonds and treasury bills.

The OCA has determined that the liabilities as at 31 March 2023 under experience-adjusted mortality rates and the alternative discount rate is $68.0 million, which is $9.2 million higher than under the prescribed assumptions. More details are presented in Appendix E.

7 Actuarial opinion

In our opinion, considering that this report was prepared pursuant to the Government Annuities Act and the Government Annuities Improvement Act:

• the data on which this report is based are sufficient and reliable for the purposes of this report;
• the assumptions used comply with legislative requirements;
• the methods employed are appropriate for the purposes of this report; and
• as at 31 March 2023, there is a surplus of $1,105,092 which is credited to the Federal Government's Consolidated Revenue Fund and charged to the Government Annuities Account.

This report has been prepared, and our opinion given, in accordance with accepted actuarial practice in Canada. As of the date of the signing of this report, we have not learned of any events that would have a material impact on the results presented in this report as at 31 March 2023.

Mathieu Désy
Fellow of the Canadian Institute of Actuaries
Office of the Chief Actuary, OSFI

Luc Léger
Associate of the Canadian Institute of Actuaries
Office of the Chief Actuary, OSFI

Ottawa, Canada
28 July 2023

Appendix A ― Contract types

The following describes the annuities provisions as specified by the contracts:

Ordinary Life: At maturity, this annuity is payable for as long as the annuitant lives, but at death the annuity ceases immediately and there are no death benefits.

Guaranteed: The annuity under this contract is payable for life but it is guaranteed for a minimum period of 5, 10, 15 or 20 years.

Contingent Survivor: This annuity is based on two lives. The annuity is payable to the principal annuitant for as long as he or she lives. At death, the annuity is payable to the survivor until his or her death.

Joint and Last Survivor: This contract differs from the Contingent Survivor contract in that the annuity instalments are payable to both parties. After the death of one partner, the annuity is made payable to the survivor as long as he or she lives.

Reducing Option: The Reducing Option is an arrangement whereby the level of the annuity purchased is paid at an increased amount from age 50 (or later) to age 65. At age 65, the annuity decreases by the amount of Old Age Security in effect at the date of maturity. The annuity is payable for life, with death benefits available for the duration of the guaranteed period, if there is one.
The following describes the contract types:

Single Life - No Guarantee (10 – 16)

• 10. Ordinary
• 11. Guarantee expired: on valuation change of 21 – 24
• 12. From last or contingent survivor: 30, 35, 36, 37
• 13. From last survivor guarantee expired: on first death of 31
• 14. From reducing ordinary: on reduction of 70
• 15. From reducing guaranteed: on reduction of 79, on valuation change of 29 or from 71-74 where reduction and end of guarantee coincide
• 16. From reducing survivor: 36, 37

Single Life with Guarantee (21 – 29)

• 21. Guaranteed 5 years
• 22. Guaranteed 10 years
• 23. Guaranteed 15 years
• 24. Guaranteed 20 years
• 29. From 71-74 after reduction still within guarantee

Joint Lives No Guarantee (30 – 37)

• 30. Ordinary Last Survivor (100%)
• 31. Last Survivor guarantee expired (100%)
• 35. Contingent Survivor (100%)
• 36. Contingent Survivor reducing by one half at death of Principal Annuitant (50%)
• 37. Contingent Survivor reducing by any other amount at death of Principal Annuitant

Annuities Certain (50 & 80)

• 50. Certain level amount (Includes from 80 after reduction)
• 80. Certain, reducing

Temporary Annuities (60)

• 60. Temporary

Reducing Annuities (70 – 79)

• 70. Ordinary, reducing
• 71. Guaranteed 5 years, reducing
• 72. Guaranteed 10 years, reducing
• 73. Guaranteed 15 years, reducing
• 74. Guaranteed 20 years, reducing
• 79. From 71-74, guarantee expired before reduction

Appendix B ― Membership data

B.1 Vested membersat 31 March 2023

Tables 12 to 17 summarize the vested member data as at 31 March 2023. Each table presents the average annual pension, member count and average age for both genders for each vested contract type. Additional information is included in certain tables when it is relevant for the particular contract type.

B.2 Deferred members at 31 March 2023

Tables 18 and 19 summarize the deferred member data as at 31 March 2023. Each table presents the average annual pension, member count and average age for both genders for each deferred contract type. Table 19 also includes the average guarantee period.

B.3 Membership reconciliation

Appendix C ― Sources of data

C.1 Reports required

The following are the reports used in order to perform the Government Annuities Account valuation. The main reports are provided by ESDC and Service Canada.

C.2 Membership data

VY4741P1: Basic Vested Data
VY5141: Vested Annuitants to be added manually (Records to be completed using report VY4742P1)
GY5642: Basic Deferred Data

Service Canada also provides accurate pension amounts for plans 16, 37, 70-79, and 29, and additional data for plans 50 and 80. This data consists of pension amounts, reduced pension amounts where applicable, date of reduction and date of final payment. Even though the total actuarial liability is taken directly from VY5141 for plans 50 and 80, it must be individually calculated for purposes of gains and losses analysis.

C.3 Asset data

VM3942: Vested benefit payments and maturities by period

GY5646, GM4741, and GM4742: Data related to refunds

Premiums paid are provided by the Annuity Accounting Division of ESDC.

Benefit payments are provided by the Annuity Accounting Division of ESDC.

The monthly VM3942 reports are used to reconcile the Annuity Accounting Division's benefit payments. Ultimately, the Annuity Accounting Division's figures are used for balance sheet purposes. The monthly GM4741 and GM4742 reports are used for group and individual contracts.

C.4 Other data

ESDC also provides balances for suspense accounts (GY5644 and GR3442), refunds in progress (GY5941) and suspended payments (VY5443).

Appendix D ― Mortality tables

D.1 Projection of mortality

The mortality assumption is statutory, as stated in section 15 of the Improvement Act and subsection 3(4) of the Regulations. Mortality rates are to follow the Annuity Table for 1983, as modified by Projection Scale G published in Transactions of the Society of Actuaries, Vol. XXXV (1983), at pages 882 and 883. SOR/97-495, s. 2.

Accordingly, the IAM83 table is used for individual contracts and the GAM83 table is used for group contracts. Both tables are used on sex-distinct basis and are projected for 15 years with Projection Scale G. Furthermore, for consistency with the methodology used to develop these mortality tables, the liabilities were calculated based on the annuitants' attained age (age last) at the valuation date.

The following table shows the mortality rates as well as Projection scale G for selected attained ages.

D.2 Life expectancies

The following table shows life expectancies under the above-stated mortality assumption for selected attained ages.

Appendix E ― Alternative mortality and discount rate assumptions

E.1 Mortality rates

The experience-adjusted mortality rates are based on the Canada Pension Plan retirement beneficiaries' mortality assumptions, as developed for the 31st Actuarial Report on the Canada Pension Plan as at 31 December 2021. These rates are further adjusted using a 3% load for males and a 4% load for females.

E.2 Discount rates

The annual alternative discount rates used to calculate the liabilities are 3.05% as at 31 March 2023 and 2.38% as at 31 March 2022. They are determined using a yield curve approach. Under this approach, the discount rate corresponds to an equivalent flat discount rate based on a yield curve and the projected cash flows. The yield curve is based on market yields at the end of the reporting period on Government of Canada bonds and treasury bills. The Bank of Canada develops and publishes monthly a yield curve for Government of Canada zero-coupon bonds^{Footnote 1*}.

Tables 24, 25 and 26 show the development of actuarial liabilities under the experience-adjusted mortality rates and the alternative discount rates while Tables 27 and 28 provide sample experience‑adjusted mortality rates at different ages and for different years.

The table below presents a reconciliation of the actuarial liability between 31 March 2022 and 31 March 2023.

Tables 30, 31 and 32 below outline the calculation of interest for the 2023 and 2022 fiscal years.