InfoPensions – Issue 30 – May 2024

Estimated solvency ratio results

We regularly estimate the solvency ratio for federally regulated pension plans (FRPPs) with defined benefit provisions. The estimated solvency ratio (ESR) exercise assists us in identifying solvency issues that could affect the security of pension benefits promised to members and beneficiaries before a FRPP files their actuarial report. The ESR results also help identify broader trends.

We calculate the ESR using the most recent actuarial, financial, and membership information filed with us for each plan before the analysis date. Assets are projected based on either the rate of return provided on the solvency information return (SIR) or an assumed rate of return for the plan when no SIR has been filed. Solvency liabilities are projected using relevant commuted value and annuity proxy rates prescribed by the Canadian Institute of Actuaries. Expected contributions, benefit payments, and expenses are considered and an ESR based on the estimated adjusted market value of the fund and estimated liabilities is then calculated for each plan.

The solvency position of FRPPs with defined benefit provisions improved in 2023. The median ESR for the 308 plans included in the exercise (down from 324 last year) increased to 1.17 as at December 31, 2023, up from 1.13 at the end of 2022. The liability weighted average ESR for all plans is 1.21 as at December 31, 2023, up from 1.17 at the end of 2022. The main drivers of the variation from the SR at the end of 2022 to the ESR at the end of 2023 are the positive investment returns that largely offset any fluctuations in liabilities associated with minimal changes in solvency discount rates. The three-year estimated average solvency ratio (EASR), on which funding requirements are based, has increased to 1.16 as at December 31, 2023, up from a three-year average solvency ratio (ASR) of 1.08 at the end of 2022.

Graph 1 below shows the reported SRs, median SRs, and ASRs from December 2014 to December 2022. It also shows the ESR, median ESR, and the three-year EASR for December 2023.

Solvency position of pension plans as at December 31 - text description

Graph 1: Solvency position of pension plans

Year	Median SR/ESR	Average SR/ESR	3-Year ASR/EASR
2014	0.90	0.94	0.91
2015	0.89	0.95	0.95
2016	0.91	0.95	0.95
2017	0.96	1.00	0.97
2018	0.95	0.99	0.98
2019	0.98	0.99	0.99
2020	0.97	0.99	0.99
2021	1.08	1.09	1.02
2022	1.13	1.17	1.08
2023	1.17	1.21	1.16

The most recent ESR results show that nearly 90% of FRPPs with defined benefit provisions are fully funded. There was a reduction in the percentage of plans that were underfunded (11% in 2023 versus 17% in 2022). The number of plans that were significantly underfunded (SRs or ESRs below 0.80) also decreased (4% in 2023 down from 8% in 2022). It should be noted that all significantly underfunded plans are designated plans and therefore their funding is limited by the Income Tax Regulations. Graph 2 below illustrates the distribution of the SR/ESR results as at December 31 of each year since 2014.

Percentage distribution of the estimated solvency ratio of pension plans as at December 31 - text description

Graph 2: Distribution of the estimated solvency ratio of pension plans

Year	SR/ESR < 0.80	SR/ESR 0.80 to 0.90	SR/ESR 0.90 to 1.00	SR/ESR > 1.00
2014	17 %	30 %	33 %	20 %
2015	16 %	36 %	28 %	20 %
2016	16 %	26 %	33 %	25 %
2017	14 %	11 %	38 %	37 %
2018	14 %	10 %	44 %	32 %
2019	15 %	12 %	32 %	41 %
2020	16 %	15 %	26 %	43 %
2021	12 %	5 %	12 %	71 %
2022	8 %	3 %	6 %	83 %
2023	4 %	1 %	6 %	89 %

Frequently occurring regulatory findings

Actuarial reports

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 us. 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.

We would like to remind plan actuaries of our expectations relating to the following items that warranted a more detailed review in some actuarial reports:

1. Average solvency ratio

   The average solvency ratio used for funding purposes is the arithmetic average of the adjusted solvency ratios at the valuation date, prior valuation date, and prior second valuation date. Adjustments made to the current and prior solvency ratios should be determined in accordance with subsections 9(8) through 9(11) inclusively of the Pension Benefits Standards Regulations, 1985.

   Although actuaries generally adjust solvency ratios appropriately, we have noted that occasionally solvency ratios have not been adjusted for contribution holidays. Since many federally regulated pension plans (FRPPs) are currently in a surplus position on both going concern and solvency bases, we remind you that for the purpose of the average solvency ratio, the solvency ratios must be adjusted to reduce the solvency assets by the present value of any contribution holidays.

2. Overlay strategy

   Certain FRPPs have adopted an overlay strategy as part of their target asset mix provided in their Statement of Investment Policies and Procedures. As mentioned in the Guide, if the overlay strategy is expected to impact the long-term expected return on assets, an additional adjustment to OSFI's maximum going concern discount rate may be made. In such a case, the actuarial report should include the following elements with respect to the overlay:

   • description of the strategy;
   • target asset mix of the plan fund excluding and including the overlay;
   • expected cost of overlay financing; and
   • adjustment to the maximum rate due to the overlay strategy.
3. Actuarial Information Summary

   The Actuarial Information Summary (AIS) should be completed and submitted to us with any actuarial report required to be filed. We would like to remind you that the data collected on the AIS is important and useful to us, as it is used in many of our analysis projects. As a result, it is essential that the return filed contains accurate and adequate information about the pension plan.

Examinations

OSFI conducts examinations of a select number of pension plans each year. Desk reviews in 2023 revealed some recurring areas of concern that resulted in similar recommendations for the plans examined. These included the following:

1. Governance documents and self-assessments

   Some plans do not have comprehensive written documentation regarding the roles, responsibilities, and accountabilities of those involved in the administration of the plan. In addition, not all plan administrators are performing periodic self-assessments to determine the effectiveness of the administration of their plans. We understand that, depending on the size of the plan, governance documents and self-assessments may vary.

   Although OSFI does not require plan 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 (PDF) and the Self-Assessment Questionnaire (PDF) are recommended resources to help plan administrators meet their governance responsibilities.

2. Statement of Investment Policies and Procedures

   Some plan administrators have not been reviewing their Statement of Investment Policies and Procedures annually as required by section 7.2 of the Pension Benefits Standards Regulations, 1985. The results of this annual review should be documented.

3. Risk management

   For most plans, the risk management framework appears to be limited in scope to asset management activities and may not provide an appropriate level of information required for effective risk mitigation. In addition, some plan administrators were not able to provide evidence of review, discussions, or decisions regarding risks that could affect their plans. An effective framework to identify and manage risks, proportionate to the size and complexity of the plan, supports plan administrators in meeting their stated objectives.

Reminder regarding funding requirements for defined benefit pension plans

Normal cost contributions and special payments

As mentioned in OSFI's instruction guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans, under the section Funding Requirements, and in accordance with subsection 9(14) of the Pension Benefits Standards Regulations, 1985 (PBSR), normal cost contributions and special payments are required to be remitted to the pension fund on a monthly basis. Any payment that is not paid at the times set out in subsection 9(14) of the PBSR is subject to the interest adjustment described in subsection 10(2) of the PBSR. The actuarial report should state that normal cost contributions and special payments are required to be remitted to the pension fund on a monthly basis and that outstanding contributions will accrue with interest.

Given that the actuarial report is generally prepared after the beginning of the plan year to which the funding recommendation applies, we expect that, until a subsequent actuarial report is filed, normal cost contributions and special payments continue to be paid based on the most recent actuarial report. A subsequent actuarial report may reveal required normal cost contributions or special payment amounts that are greater than those paid to the plan since the beginning of the plan year. In this case, the amounts that were due 30 days after the end of the period in respect to which the installments would have been paid, accumulated with interest from the required payment date, are outstanding when the report is filed. The receivable amounts are due and continue to accrue with interest until the date of the remittance. The actuarial report should state that any adjustments to normal cost contributions and special payments applicable to the year should be made when the report is filed.

In cases where a subsequent actuarial report indicates a reduction in the amount of required contributions, the Pension Benefits Standards Act, 1985 (PBSA) does not allow the employer to withdraw the contributions already paid into the pension fund. Additionally, no interest adjustment should be made in the case where special payments were made in excess of those required.

If the employer wishes to withdraw the amounts in question from the pension fund, the only option would be to apply to us for a refund of the surplus to the employer in accordance with section 9.2 of the PBSA. For more information on OSFI's policies and procedures in this regard, please refer to OSFI's Instruction Guide on Refund of Surplus to the Employer. Although the employer is not permitted to withdraw these amounts, outside of the process referred to above, the employer may adjust the remaining required contributions for the plan year. For example, if an employer overpaid, they could use the extra funds towards normal cost or special payments for that year.

Contribution holiday

An employer's normal cost contributions may be reduced under subsection 9(5) of the PBSR if certain conditions are met and if a contribution holiday is permitted under the terms of the plan and other plan documents, including trust agreements, other agreements, and historical plan documents where relevant.