OSFI supervisory observations

Examinations

OSFI conducts examinations of a select number of pension plans each year (see InfoPensions 18). Desk reviews and on-site examinations performed in 2018 revealed some recurring areas of concern that resulted in similar recommendations for the plans examined. The areas of concern included the following:

1. Member statements did not contain all required information

   Some member statements (i.e. annual member statements and statements on, cessation of membership, death and retirement) did not contain all of the information required by the Pension Benefits Standards Regulations, 1985 (PBSR).

   The information that administrators must include in member statements on cessation of membership, death and retirement must be given in the prescribed forms found in Schedule IV of the PSBR. Please refer to InfoPensions 12 for an explanation of acceptable variances from a prescribed form. The annual member statement does not have a prescribed form but the information required to be provided in the statement is set out in subsections 23(1) of the PBSR. Variances similar to those described in InfoPensions 12 would generally be permitted.

2. Governance documents are not sufficiently detailed and no governance self-assessments are completed

   Some plans did not have comprehensive written documentation regarding the roles, responsibilities and accountabilities of those involved in the plan administration. Additionally, not all administrators were performing periodic self-assessments to determine the effectiveness of the administration of their plans.

   We understand that, depending on the size and type of the plan, governance documents and self-assessments may vary. Although OSFI does not require administrators to use a specific type of governance model or self-assessment technique, the Canadian Association of Pension Supervisory Authorities' Guideline No. 4: Pension Plan Governance and the Self-Assessment Questionnaire are recommended resources to help administrators meet their governance responsibilities.

Actuarial Reports

Actuarial reports submitted to OSFI are generally reviewed by the relationship manager in the Private Pension Plans Division assigned to the plan, and may be referred to the actuarial team for a more detailed review.

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

We would like to remind plan actuaries of OSFI's expectations relating to the following items that often cause concern in the actuarial reports that we review in more detail:

1. Going concern valuation – Continuous experience losses

OSFI expects actuarial assumptions to be best estimates reflecting future expectations while taking into account pertinent observable experience and plan characteristics. A set of actuarial assumptions should be appropriate in aggregate for the purpose of the valuation as well as independently reasonable.

The financial position of the pension plan on a solvency basis should not affect the selection of going concern assumptions, as each valuation basis is independent. Assumptions should not be based on facts that are unrelated to the expected experience of the plan with respect to the relevant assumption.

OSFI considers that consistent and material experience losses from year to year that relate to a given assumption would generally indicate that it might not be appropriate. Where a plan experiences continuous losses from year to year with respect to a particular assumption, OSFI expects the actuary to address the losses in the actuarial report by reviewing the assumption and related assumptions to ensure that they remain appropriate.

For example, where a plan experiences continuous losses attributed to termination of employment prior to retirement or death of the member, OSFI expects the actuary to review the assumed withdrawal rates, commuted value take-up rates, and the interest rates and mortality rates used in the determination of the commuted value, as applicable.

2. Going concern and solvency valuations – Unisex mortality assumption

An administrator or the provisions of the pension plan may require the actuary to calculate a pension benefit credit using mortality rates that do not vary according to the sex of the member. Where a unisex mortality table is used for the going concern or solvency valuations, the actuarial report should explain, using supporting data, how the mortality basis was derived. OSFI expects the actuarial report to state that total liabilities for members for which a unisex mortality table was used would have resulted in the same total liabilities had sex-distinct mortality been used. Such a statement confirms that the mortality blend used is a best estimate assumption.

For benefits expected to be settled by a commuted value transfer, the mortality table should be determined according to the CIA Standards of Practice. The Standards of Practice state that separate mortality rates should be used for male and female members, but allow for commuted values that do not vary according to sex in specified situations, where the actuary may use a mortality table based on a blend of the sex-distinct tables or a weighted average of the commuted values based on the sex-distinct tables. The weights should be appropriate for the pension plan.

The mortality assumption to be used to value benefits expected to be settled by the purchase of an annuity is provided in CIA Guidance.

While the administrator may choose to do so, the PBSA does not require the use of unisex mortality rates in the calculation of a pension benefit credit for a portability transfer. Subsection 27(3) of the PBSA states that "Notwithstanding subsection (1), amounts transferred pursuant to section 26 may vary according to the sex of the member if the variation is such that the pension benefit payable at pensionable age, based on the amount so transferred, does not vary materially according to the sex of the member."

3. Transfer and annuity purchase restrictions

a) Transfer deficiencies

Where the solvency ratio is less than one restrictions are placed on the transfer of pension benefit credits, which may affect the portability of benefits and result in additional funding requirements in accordance with the Directives of the Superintendent pursuant to the Pension Benefits Standards Act, 1985.

The full value of the pension benefit credit may be transferred where an amount equal to the transfer deficiency has been remitted to the fund. The full value may also be transferred if the transfer deficiency for any individual transfer is less than 5% of the Year's Maximum Pensionable Earnings for that year, provided that the aggregate value of all such transfer deficiencies transferred since the effective date of the most recent actuarial report does not exceed 5% of the assets of the plan at that date.

Transfer deficiency payments to the fund are not considered special payments because they do not improve the plan's solvency ratio. They restore the solvency ratio of the plan to its level prior to the payout of the commuted value to the member. Therefore, transfer deficiency payments to the fund should not be included in the present value of special payments for the purpose of calculating the average solvency ratio.

In cases where the member's full pension benefit credit has not been transferred, the transfer deficiency must be transferred no later than five years from the date of determination of the pension benefit credit. Transfer deficiency payments are not required to be remitted to the fund under this scenario since they are implicitly included in special payments made after the date of determination of the pension benefit credit. The transfer deficiency must be transferred before the end of that five-year period if the solvency ratio is determined to be at least one.

OSFI expects all aspects of the restrictions that may apply to the transfer of pension benefit credits, which may affect the portability of benefits and result in additional funding requirements, to be discussed in the actuarial report. The amount of transfer deficiencies owed to members should be disclosed in the actuarial report as a separate item in the balance sheet or in a note to the balance sheet.

b) Purchase of annuities

Some pension plans use immediate and deferred annuities (buy-out annuities) and buy-in annuity products to limit the plan's exposure to various risks related to retiree liabilities.

Funding requirements are not impacted if the solvency ratio following the purchase of an immediate or deferred annuity remains at 0.85 or above. Where the purchase reduces the solvency ratio of the plan below this level or where the solvency ratio of the plan in the most recent actuarial report is below this level, additional contributions may be required. An amount must be paid to the pension fund to maintain the solvency ratio following the purchase of an immediate or deferred annuity at the lesser of 0.85 and the solvency ratio of the plan set out in the most recent actuarial report. The solvency assets and liabilities that are attributable to benefits that are paid by means of immediate or deferred annuities should be excluded for purposes of calculating the plan's solvency ratio.

Buy-in annuities are not considered immediate or deferred annuities but are rather considered investments of the plan. Buy-in annuities are not subject to the restrictions noted above for immediate or deferred annuities.

OSFI expects assets and liabilities with respect to buy-in annuities to be included and shown separately in the going concern and solvency balance sheets. Information on the valuation approach to be used for buy-in annuities is included in the guidance published by OSFI on Buy-in Annuity Products.