Basics Flashcards
Actuarial Valuation
An actuarial valuation is the determination by an actuary of the value of a pension plan’s assets and liabilities. The valuation is used to determine if the assets are adequate to fund the plan’s liabilities. It determines the minimum and maximum employer contributions for a pension plan. If the value of the assets is not adequate, the plan sponsor may have to increase its contributions to make up the deficiency; if the assets are more than adequate, the plan sponsor may be able to reduce contributions.
Actuarial Information Summary
The Actuarial Information Summary (AIS) is a document that must be filed with pension regulators (e.g., the Financial Services Commission of Ontario (FSCO), Régie des rentes du Québec, and Canada Revenue Agency (CRA)) whenever a new actuarial valuation report is filed. The AIS summarizes the key content of the valuation report.
Actuary
An actuary is a professional in the pension area who is responsible for calculating the liabilities of a pension plan and the costs of providing pension plan benefits. In Canada, a person must be a member of the Canadian Institute of Actuaries (CIA) to be recognized as a professional actuary and legislation requires that only an actuary may determine the cost of providing pension plan benefits.
Annual Information Return (AIR)
The Annual Information Return (AIR) is a document that must be filed annually with pension regulators (e.g., the Financial Services Commission of Ontario (FSCO) for plans registered in Ontario). The AIR summarizes the activity in each plan year (e.g., membership activity, contributions made, fund activity).
Beneficiary
A beneficiary is the person named by a participant in a pension plan to receive any benefits provided by the plan if the participant dies.
Canada Pension Plan/Québec Pension Plan (CPP/QPP)
The Canada Pension Plan (CPP) is a government-administered pension program providing retirement, death, and disability benefits for Canadians outside the province of Québec. Benefits are earnings-related and are financed solely by employee and employer contributions. The Québec Pension Plan (QPP) is a similar program that operates only in Québec.
Canada Revenue Agency (CRA)
The Canada Revenue Agency (CRA) administers tax laws for the federal Government of Canada, and for most provinces and territories. Plan sponsors must work with the CRA to ensure their registered pension plan complies with the requirements of the Income Tax Act (ITA).
Canadian Association of Pension Supervisory Authorities (CAPSA)
The Canadian Association of Pension Supervisory Authorities (CAPSA) is a national inter-jurisdictional association of pension supervisory authorities whose mission is to facilitate an efficient and effective pension regulatory system in Canada. It discusses pension regulatory issues of common interest and develops policies to further the simplification and harmonization of pension law across Canada. It does not provide actual legislation.
Canadian Institute of Actuaries (CIA)
The Canadian Institute of Actuaries (CIA) is the national organization of the actuarial profession in Canada.
Career Average Plan Design
A career average plan design refers to a defined benefit (DB) pension plan that provides a benefit based on the average earnings of a member over his or her entire career. It is common under this type of plan design to provide periodic earnings upgrades. An upgrade occurs when the plan specifies a specific year’s earnings on which to base all prior benefit accrual (e.g., pension benefit calculations for all years before and including 2015 will be based on the 2015 earnings).
Chartered Professional Accountants Canada (CPA Canada)
The Chartered Professional Accountants Canada (CPA Canada) is the national organization established to support unification of the Canadian accounting profession. It addresses the accounting rules that apply to all post-employment benefits provided to employees, including pension benefits. CPA Canada establishes standards for the recognition, measurement, and disclosure of the cost of employee future benefits. The CPA Handbook requires companies to recognize the cost of retirement benefits and certain post-employment benefits over the periods in which employees render services.
Commuted Value
The commuted value (also called actuarial present value) of a pension benefit is the lump sum amount of money that needs to be set aside today, at current market interest rates, to provide sufficient funds to pay for a pension benefit at retirement. An actuary calculates a commuted value following established actuarial standards.
Contribution Holiday
A contribution holiday refers to a period during which an employer is able to reduce or suspend contributions to a pension plan when the assets of the plan exceed the liabilities, if permitted by plan provisions and pension legislaton.
Current Service Cost
One of the reasons for an actuarial valuation is to determine the amount of money that must be contributed to the plan during the year following the valuation date. This amount is called the current service cost. It is the actuarial present value of projected benefits to be paid under a pension plan with respect to service accrued by members during the year following the actuarial valuation date.
Curtailment
According to amended International Accounting Standard 19 (IAS 19R), curtailment occurs when an enterprise either:
(a) is demonstrably committed to make a significant material reduction in the number of employees covered by a plan; or
(b) amends the terms of a defined benefit plan so such that a significant material element of future service by current employees will no longer qualify for benefits, or will qualify only for reduced benefits.
A curtailment may arise from an isolated event, such as the closing of a plant, discontinuance of an operation or termination or suspension of a plan, or a reduction in the extent to which future salary increases are linked to the benefits payable for past service. An event is material enough to qualify as a curtailment if the recognition of a curtailment gain or loss would have a material effect on the financial statements. Curtailments are often linked with a restructuring. Therefore, When this is the case, an enterprise accounts for a curtailment at the same time as for a related restructuring.
Custodian
A custodian is the actual holder of pension plan assets and is responsible for the safekeeping of those assets. Custodial services are offered by most of the major trust and insurance companies.
Deferred Profit Sharing Plan (DPSP)
A deferred profit sharing plan (DPSP) is a savings plan registered under the Income Tax Act (ITA) into which an employer may make tax-deductible contributions on behalf of their employees. The contributions are often, but not always, determined by reference to profits. Any payments employees receive out of the plan are taxable. Employees are not permitted to contribute. An employee’s RRSP room is reduced by the amount of the company’s previous year’s DPSP contribution on the employee’s behalf.
Defined Benefit (DB)
A defined benefit (DB) pension plan specifies the benefits that the plan promises to pay to a plan participant upon retirement, with the benefits determined according to a specified formula. An actuary determines the amount of contributions that are required to fund the plan, based on an evaluation of the benefits expected to become payable in the future.
Defined Contribution (DC)
A defined contribution (DC) pension plan specifies the amount of annual contributions that the employer will make on behalf of a plan participant. A defined contribution plan does not guarantee a specific amount of retirement benefits. A participant’s benefits at retirement, termination, or death are based on the amount that has been contributed to the participant’s account, plus investment earnings.
Employee Profit Sharing Plan (EPSP)
An employee profit sharing plan (EPSP) is a savings plan into which an employer may make tax-deductible contributions on behalf of its employees. The contributions are often, but not always, determined by reference to profits. Unlike a DPSP, the plan members must pay tax each year on the contributions and plan income allocated to them in an EPSP. Employees are allowed to make non-deductible contributions to an EPSP. Participation does not impact an employee’s RRSP room.
Final Average Earnings Plan Design (or Highest Average Earnings Design)
A final average earnings plan design refers to a defined benefit (DB) pension plan that provides a benefit based on a member’s average earnings near retirement and the length of his or her service in the plan.
Financial Accounting Standards Board (FASB)
The Financial Accounting Standards Board (FASB) provides accounting standards for the United States. It addresses the accounting rules that apply to all post-employment benefits provided to employees, including pension benefits. FASB establishes standards for the recognition, measurement, and disclosure of the cost of employee future benefits. FASB requires companies to recognize the cost of retirement benefits and certain post-employment benefits over the periods during which employees render services.
Financial Services Commission of Ontario (FSCO)
The Financial Services Commission of Ontario (FSCO) is an agency of the Ministry of Finance that regulates pension plans in Ontario.
Flat Benefit Plan Design
A flat benefit plan design refers to a defined benefit (DB) pension plan that provides a benefit based on a specified flat dollar amount per month for each year of service in the plan. It is common to increase the flat dollar amount frequently.
Going-Concern Valuation
A going-concern valuation is an actuarial valuation performed to determine the financial position of a pension plan as if the plan were to be maintained indefinitely. The valuation also determines the company’s on-going contribution requirements.
Grow-In Benefit
If a plan provides enhanced early retirement benefits – for example, an unreduced early retirement pension – a member in Ontario may be entitled to the value of these enhanced benefits even though the age or service requirements for eligibility for these benefits has not been met as of the date of plan wind up.
To qualify for such grow-in benefits, the combination of an Ontario member’s age plus years of continuous employment or plan membership must equal at least 55 (sometimes called the “rule of 55”) as of the plan’s wind up date.
The 2012 Ontario Budget confirmed that effective July 1, 2012, grow-in benefits are payable not only on plan wind up but also for eligible Ontario members whose employment is terminated without cause by the employer.
Hybrid Plan
A hybrid plan is a pension plan that has both a defined benefit (DB) component and a defined contribution (DC) component.
Income Tax Act (ITA)
The Income Tax Act (ITA) is federal law governing tax collection and related benefit distribution, which is administered by the Canada Revenue Agency (CRA). It defines the types of plans that individuals can use to save for retirement on a tax-advantaged basis. It also sets maximum limits for the benefits a retirement plan can provide and the contributions that can be made on a tax-deferred basis into such plans.
International Accounting Standards Board (IASB)
The International Accounting Standards Board (IASB) is the international equivalent of the Chartered Professional Accountants Canada (CPA Canada) and the Financial Accounting Standards Board (FASB).
