Module 7 Flashcards
What is the difference between ‘funding’ and ‘pay-as-you-go’ in the context of DB pension plans?
‘Funding’ involves creating a pension fund with contributions from employers (and sometimes employees), held by a third party to pay future benefits. ‘Pay-as-you-go’ pays benefits directly as they are due, without advance accumulation—this method is not permitted for RPPs.
Why is advance funding required for DB pension plans?
Reasons include CRA tax advantages, pension standards legislation requirements, increased benefit security, better cash flow management, compliance with accounting standards, and reducing intergenerational cost transfers.
What arguments are made against advance funding of DB plans?
Private employers may prefer to invest funds in the business for higher returns. Public employers cite government permanence and taxation powers, and concerns about market disruption from large pension assets.
What are possible consequences of overfunding a DB pension plan?
Overfunding may lead to member pressure for benefit increases, surplus ownership disputes, reduced flexibility, or lost opportunity to offset future downturns.
What is the purpose of a funding policy for a pension plan?
To document funding goals, contribution levels, corrective strategies for surplus/deficiency, risk management, actuarial assumptions, and review requirements.
Why are actuarial valuations performed for DB pension plans?
To satisfy pension regulators, estimate wind-up scenarios, support accounting requirements, and determine contribution schedules.
What are the two actuarial bases used in a triennial valuation for DB plans?
Going concern (ongoing plan operation) and solvency (as if plan wound up today), each using different assumptions and purposes.
What’s the difference between ‘fully funded on a wind-up basis’ and ‘fully funded on a going concern basis’?
Wind-up: enough assets for all earned benefits if the plan ends today. Going concern: assets + contributions are enough to fund benefits as they accrue into the future.
What is a ‘funding method’ in DB plan actuarial valuations?
A systematic way to allocate contributions over time to meet funding objectives like benefit security and intergenerational equity.
What are the two main DB pension plan funding methods and how do they differ?
Cost allocation (stable costs over time) and benefit allocation (increasing costs as members age). Both assess current members only.
Does the funding method affect the ultimate cost of a DB plan?
No. The ultimate cost is determined by actual benefits paid; the funding method only affects the timing and pattern of contributions.
How does the contribution pattern differ between cost and benefit allocation methods?
Cost allocation = level/stable costs; benefit allocation = costs rise steadily as members approach retirement.
How is total required DB plan funding calculated in an actuarial valuation?
By summing the current service cost plus any special payments for deficits identified under going concern or solvency assumptions.
How do forecast funding methods differ from other funding methods?
Forecast methods assess funding over time including future members, helping sponsors understand long-term funding impacts.
What are the typical economic assumptions used in determining the funding level of a DB pension plan? (3.1)
(a) Discount rate or rate of return on investments
(b) Rate of wage and salary increases of plan members
(c) Rate of increase in external indexes (e.g., CPI, industrial aggregate wage index, YMPE, pension limit under ITA)
(d) Number of hours worked by plan members, affecting benefits
What are the typical benefit entitlement and benefit continuance assumptions used in determining the funding level of a DB pension plan? (3.2)
(a) Incidence of early, normal, and deferred retirement
(b) Incidence of disability and disability recovery
(c) Incidence of death before and after retirement or after disability
(d) Incidence of termination of employment
(e) Propensity of members to elect among various optional benefit forms
(f) Future benefit adjustments
What are the usual effects on current service cost of increases in actuarial assumptions, assuming no other changes occur? (3.3)
(a) Increase in interest rate ➜ decreases current service cost
(b) Increase in mortality rate ➜ decreases current service cost
(c) Increase in termination rate ➜ decreases current service cost
(d) Increase in salary interest rate ➜ increases current service cost
(e) Increase in CPI ➜ increases current service cost
(f) Increase in early retirement rate ➜ increases current service cost
(g) Increase in disability rate ➜ increases current service cost
(h) Increase in proportion married ➜ increases current service cost
(i) Increase in age difference between spouses (male minus female) ➜ increases current service cost
How do actuarial assumptions and the design of a pension plan affect the ultimate cost of the plan? (3.4)
Actuarial assumptions do not affect the ultimate cost. The ultimate cost of a pension plan is determined by the plan’s design, member demographics, and actual experience (e.g., investment returns, mortality rates, member turnover). Assumptions are used to estimate costs and set sponsor contributions for regulatory purposes.
Provide an example of how a pension plan design can affect both the experience of a plan and the actuarial assumptions chosen. (3.5)
A plan that adds a bridge benefit before age 65 may increase early retirements. If early retirement rates rise, this changes the plan’s experience, leading the actuary to update the early retirement rate assumption for future valuations.
What types of advice do actuaries give under Part 3000 of the CIA Standards of Practice?
(a) Funded status or funding of a pension plan on a going concern or wind-up basis
(b) Financial reporting of a pension plan’s costs and obligations in the sponsor’s financial statements
(c) Computation of commuted values for settling plan benefits at death, termination, portability rights, or marital breakdown
What are the exceptions to the application of CIA Standards of Practice for pension plans?
(a) Defined contribution (DC) pension plans
(b) Plans whose benefits are guaranteed by a life insurer
(c) Social security programs, including CPP/QPP and Old Age Security
What are ‘external user reports’ as defined by Part 3000 of the CIA Standards of Practice, and what are the three types of valuation reports prepared by actuaries for pension plans?
An ‘external user report’ is a report prepared by the actuary whose users include someone other than the actuary’s client (e.g., a pension regulator).
Three types of valuation reports:
(a) Going concern valuation report: Certifies pension plan costs and contribution levels, considering contingent benefits.
(b) Hypothetical wind-up valuation report: Assumes the plan is wound up at the calculation date, including contingent benefits in the scenario.
(c) Solvency valuation report: A type of hypothetical wind-up valuation required by law, using prescribed assumptions and methods.
What basic information should be included in each type of external user actuarial valuation report of a pension plan according to CIA Standards of Practice?
(a) Calculation date, report date, next calculation date
(b) Membership data, plan provisions, and assets, including sources and compilation dates
(c) Tests to assess data sufficiency and reliability
(d) Summary of plan assets by category with market value
(e) Identification of pending plan amendments
(f) Disclosure of events after the valuation date that may affect projected benefits
(g) Statement of valuation types and significant terms of engagement with the plan sponsor
Why do actuaries calculate commuted values for DB pension benefits, and what guidance does the CIA Standards of Practice provide?
Purpose: To calculate lump-sum payments when benefits are settled rather than paid as immediate or deferred pensions, as required for portability.
Guidance includes:
(a) Method, including interest adjustment for payment timing
(b) Demographic assumptions
(c) Economic assumptions (e.g., discount rate from Statistics Canada index)
(d) Disclosures (e.g., benefit entitlement, actuarial assumptions, recalculation needs, funded status impact)
