Actuarial reports – Items warranting review (May 2022)

Actuarial reports submitted to OSFI are generally reviewed by each plan’s Relationship Manager, who may refer the report to the actuarial team for a more detailed review.

The Instruction Guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans (Guide) sets out the reporting requirements for actuarial reports filed with OSFI. Based on the Standards of Practice of the Canadian Institute of Actuaries, it is expected that plan actuaries provide sufficient details in their actuarial report to enable another actuary to assess the reasonableness of the data, assumptions, and methods used.

OSFI would like to share with plan actuaries its expectations relating to the following item that warranted a more detailed review in some actuarial reports:

Going concern valuation – Adjustment of OSFI’s maximum going concern discount rate

In accordance with the Guide, the actuary should adjust the maximum rate for a plan using an asset mix expected to generate a lower return and may adjust the maximum rate for a plan using an asset mix expected to generate a higher return, than that obtained by using a 50% fixed-income allocation. The actuary should disclose the adjusted maximum rate in the actuarial report calculated based on the asset mix and expected return for each asset class of the plan.

Some pension plans use a target asset mix in accordance with their investment policy that includes derivative instruments for implementing risk management strategies to limit exposure to various risks related to assets and liabilities. This approach is different than a contingent immunization strategy where part of the pension fund is actively managed to potentially obtain higher returns over the immunized bond portfolio.

Generally, one of the objectives pursued by a pension plan when managing risks is to match more closely the interest rate sensitivity of the plan’s assets to that of its liabilities. A common approach is to increase the interest rate exposure of the assets by extending their duration. An overlay strategy allows a plan to achieve this objective without otherwise changing its investment holdings, including the fund’s exposure to return seeking assets such as equities.

For the purpose of adjusting the maximum rate, some actuaries use the plan’s allocation to fixed-income investments net of the overlay financing. However, this approach does not appear appropriate, as it effectively ignores the additional exposure of the plan to bonds through the overlay.

As an example, consider the following asset mix, which includes an overlay strategy used by the plan to manage duration exposures. For the purpose of adjusting the maximum rate, the allocation of 20% related to the overlay financing would not be reflected. Rather, the maximum discount rate would be based on a fixed-income allocation of 50% (60% / 120%).

Example of asset mix including an overlay strategy