Opinion of the United Kingdom Government Actuary's Department (GAD) on 31st CPP Report Peer Review

8 June 2023

Dear Assia

Subject: Review of the peer review of the 31st Actuarial Report on the CPP

The Office of the Superintendent of Financial Institutions Canada (OSFI) has commissioned an external peer review of its 31st Actuarial Report on the Canada Pension Plan (CPP) as at 31 December 2021 (AR31). The peer review is intended to ensure that the Office of the Chief Actuary (OCA) is providing sound and relevant actuarial advice to Members of the Canadian Parliament and to the Canadian population.

Under the contract dated May 2 2022, the OSFI asked the Government Actuary’s Department (GAD) of the United Kingdom to:

1. assist with the selection of the applicants who will perform the peer review by ranking them based on their comparative qualifications as independent actuaries; and
2. provide an opinion on the work performed by the reviewers once the peer review has been completed.

The objective for GAD’s role is to ensure impartiality and to enhance the credibility of the peer review.

1. GAD’s role

• 1.1 GAD fulfilled the first part of the OSFI’s request, advising on the selection of the independent actuaries, in August 2022. GAD received ten applications directly from individuals wishing to be appointed as peer reviewers and assessed their applications using weighted selection criteria. These criteria included the level of experience of the applicants in social insurance, pensions and investment and risk management, as well as the applicants’ qualifications, status in the actuarial profession and previous experience as a CPP reviewer. GAD provided the Chief Actuary with a schedule setting out the results of our assessment, with a ranking of the top six candidates. The Chief Actuary successfully entered into an agreement with three of the candidates to undertake the peer review.

• 1.2 This letter addresses the second part of the OSFI’s request, providing our comments and opinion on the work done by the peer reviewers as detailed in the report, “Review of the 31st Actuarial Report on the Canada Pension Plan” (‘the Peer Review’) dated May 5 2023 prepared by Stephen Butterfield, FCIA, Michel St. Germain, FCIA, FSA and Jill Wagman, FCIA, FSA.

2. Peer Review terms of reference

• 2.1 The terms of reference for the Peer Review were:

  “The peer reviewers will review the work performed by the Chief Actuary in completing the 31st Actuarial Report on the Canada Pension Plan as at 31 December 2021. Following their review, they will provide a report to the Chief Actuary and the UK Government Actuary’s Department (GAD). GAD will then provide its opinion of the peer review to the Chief Actuary.

  The review report must contain opinions on the following questions:

  1. Is the professional experience of the Chief Actuary and their staff who worked on the report adequate for carrying out the work required?
  2. Has the work been completed in compliance with the relevant professional standards of practice and statutory requirements?
  3. Did the Chief Actuary have access to the information required to perform the valuation, and were relevant tests and analysis on the data completed as might be expected?
  4. Were the actuarial methods and assumptions used in completing the report reasonable?
  5. Does the 31st Actuarial Report fairly communicate the results of the work performed by the Chief Actuary and their staff?

  In providing opinions on the questions listed above, the peer reviewers must also provide such recommendations as they deem appropriate with respect to future actuarial reports on the Canada Pension Plan prepared by the Office of the Chief Actuary.”

3. Summary of the Peer Review

• 3.1 The approach taken to the Peer Review appears appropriate and sufficiently detailed, given the terms of reference for the Peer Review.

• 3.2 The Peer Review addressed all of the items listed in the terms of reference and the peer reviewers were able to answer all five of the questions in the affirmative. We note that the three peer reviewers reached agreement on all of the opinions and recommendations set out in the report.

• 3.3 The report is very clear about the remit of the peer reviewers, noting that their focus was on the actuarial work done, with particular attention to the data used, the major methodology issues, the key actuarial assumptions and the quality of the reporting. It highlights that the Peer Review does not provide a detailed audit of the data nor verification of the accuracy of the models. Similarly, the peer reviewers have not made a detailed evaluation of the appropriateness of the response of the Chief Actuary to the findings of the previous peer review of the 30th Actuarial Report on the CPP.

• 3.4 In the report, the peer reviewers acknowledge the difficulties in determining “best-estimate” assumptions, given that the assumptions are not amenable to precise prediction and there will be differing points of view. They note that there is a range of assumptions that would be considered reasonable. They also comment that the range of reasonable assumptions is wide, which means that there is also a wide range of reasonable valuation results. Use of sensitivity tests and scenario analysis in the report helps to illustrate this.

• 3.5 In the executive summary, the peer reviewers have complimented the Chief Actuary and her staff on their competence, commitment and professionalism, mentioning that they were “very helpful in clarifying issues raised by the review panel and in providing additional information”. The peer reviewers have offered 17 recommendations which they considered would enhance future actuarial reports “in the spirit of seeking to help the Chief Actuary and their staff to continue improving their work”.

4. GAD’s opinion on the peer reviewers’ work and report

• 4.1 There is nothing in the Peer Review that gives us any cause for concern or indicates that the peer reviewers have not carried out a sufficiently thorough review of the AR31. We consider that the opinions of the peer reviewers adequately cover all the main issues and that it is reasonable, based on the contents of their report, for them to answer in the affirmative all five of the questions listed in the terms of reference.

• 4.2 We are also content that the terms of reference of the Peer Review are sufficient to enable the peer reviewers to address all of the relevant issues they need to in order to perform a detailed review of the actuarial work underlying the AR31 and the contents of the report itself.

5. Comment on recommendations made

• 5.1 The peer reviewers have made 17 recommendations, 8 more than the 9 made in the last review. Generally, the nature and scope of the recommendations made by the reviewers appear to be reasonable and in the spirit of supporting the Chief Actuary with further improvement. We have not carried out an independent assessment of the recommendations made by the peer reviewers.

• 5.2 Several of the recommendations were on a similar theme to those made in AR30. For example:

  1. Suggestions around ways data collection and analysis can be improved. Recommendation 12 suggests looking at how earnings vary around the mean.
  2. Accessibility and presentation of the reports. Recommendation 17 encourages the Chief Actuary to consider more visual representation of results for the non-technical audience of the report; and
  3. Employing appropriate expertise and reference data in the derivation of valuation assumptions. This was a major focus of the reviewers, and the first 7 recommendations make a number of points on different ways that the assumption setting process may be improved. There are a lot of valid suggestions, which the Chief Actuary should consider in terms of what improvements may add value at the next valuation, and be proportionate to the additional work required.

• 5.3 The reviewers place a lot of emphasis on being more forward looking in the assumption setting, considering how future experience may differ to past experience, and how likely current trends are to continue. Recommendations 2, 5, 6, 7 and 15 relate directly to being more forward looking, but it is a point mentioned frequently throughout the Peer Review.

• 5.4 Recommendations 13, 14 and 16 ask the Chief Actuary to consider alternative ways of illustrating sensitivity of results, in particular stress testing these to demonstrate the sort of circumstances which may lead to difficulties for the Plan.

I hope that you find these comments helpful. Please contact me if you would like to discuss them further.

Yours sincerely

Joanna Howlett
Actuary
UK Government Actuary’s Department