This article originally appeared in the CIA (e)Bulletin.
By Josephine Marks, FCIA
There is more activity related to Standards of Practice right now on the pension front than there has been since the days when pension standards were originally being developed. It is therefore appropriate that this Actuarial Standards Board (ASB) update focuses on activities related to pension plans.
The first ASB item to acknowledge in respect of pension initiatives is the long-awaited publication of the revised standards for the determination of commuted values (Section 3500). In a process that began back in October 2015 with the publication of a Notice of Intent, the Designated Group (DG) of the ASB, chaired by Gavin Benjamin, sought and thoughtfully perused input from a multitude of stakeholders, and in light of the volume of input received, issued two Exposure Drafts (in July 2017 and November 2018) before achieving a final consensus on publication. The final standards were published on January 24, 2020 and represent, in my opinion, a balanced compromise between addressing the various issues that were raised by our stakeholders and the overall objective of ensuring that our standards satisfy the ASB’s “prime directive” of serving the public interest.
The pension standard on commuted values (CVs) was revised to address a number of issues, some of the most noteworthy of which are listed below. It goes without saying that pension practitioners should refer to the actual standards to reference the exact wording and ensure the correct interpretation of these and other issues. It is also expected that educational guidance notes will be issued by the Actuarial Guidance Council (AGC) in this regard. Some of the notable changes incorporated into the new standard include:
- The discount rate spread approach being used to determine a “best estimate basis” for CVs has been revised. Under the new standards, the best estimate spreads to be added to the risk-free rate will be comprised of a 2/3 blend of provincial bond yield spreads and a 1/3 blend of corporate bond yield spreads.
- To reduce bias in the determination of the value of early retirement provisions for deferred pensions, a revised approach to defining the pension commencement age has been established. The new standard requires the determination of the value of an early retirement pension to be made on the basis that there is a 50% chance that the individual would commence his or her pension on the date that produces the highest CV and a 50% chance that the individual would commence his or her pension on the earliest date that he or she would be eligible for an unreduced pension.
- Where permissible under applicable legislation, a new approach for calculating CVs payable from target pension arrangements (TPAs) has been developed in subsection 3570. For these plans, CVs would be based on the actuarial present value of the former member’s pension using the plan’s going concern funded assumptions, with the possibility of adjusting the CV based on the funded status of the plan. Wording was inserted in the final iteration of this section to ensure that where the CV is so adjusted, there should be consistency between the going concern assumptions used to calculate the CV and the assumptions used to calculate the funded ratio of the plan.
The revisions to the Standards of Practice become effective on August 1, 2020. Early adoption is permitted for TPAs that fall under the new subsection 3570.
Although some of us might wish to take a brief hiatus from the challenges of pension matters, our current initiatives in the pension domain leave us in no danger of overlooking our future duties in this area. As part of our regular quinquennial review of all standards, the pension standards (Part 3000) came up for review, and this is not expected to be a cakewalk either. There is an unprecedented number of DGs currently looking at pension issues related to the quinquennial review – three, to be precise.
The first DG, chaired by James Koo, is looking at issues related to how our standards encourage benefit security in pension plans. While the group has identified some common ground as part of its initial discussions, there will be no shortage of challenges for it to consider, including the structure of our standards now that there is a reduced emphasis on solvency valuations in many jurisdictions, as well as concerns as to whether the role of the actuary in performing pension valuations constitutes a form of fiduciary duty.
The second DG, chaired by Dany Goraichy, is considering the role that our pension standards need to play in the definition and development of meaningful stress testing for pension plans. In an asset-liability context, challenges will include addressing the greater complexity associated with the use of alternative assets. The DG will also seek to develop standards that provide meaningful information to users, without being overly onerous in their application to smaller plans.
Finally, the third DG, chaired by Charly Pazdor, will look at all aspects of our pension standards that are not explicitly considered by either of the first two DGs. This entails consideration of a wide range of issues, such as the potential incorporation of annuity purchase guidance into the standards and the approach to be taken in the determination of CVs on plan wind-up for members of TPAs.
In addition to these initiatives, the quinquennial review of the actuarial evidence Standards of Practice is also underway, which will ensure that issues related to CV determinations (this time related to marriage breakdown calculations) remain near and dear to our hearts.
As always, we value your input and appreciate the trust that has been placed in us.
Josephine Marks, FCIA, is Chair of the Actuarial Standards Board.
This article reflects the opinion of the author and does not represent an official statement of the CIA.