Actuarial assumptions and methods

The following instructions are designed to help actuaries choose actuarial assumptions and methods for determining the value of pension plan commitments on a going-concern basis. Retraite Québec may request explanations from actuaries who use assumptions that would deviate from the instructions described below.

• Interest rate assumption
  • Maximum assumption
  • Best estimate and margins for adverse deviations
  • Methodology
  • Letter of credit
  • Active investment management
  • Fees
  • Rounding of figures
• Salary increase assumption
• Mortality assumption
• Assumption for expenses
• Statistics
• References

Interest rate assumption

Maximum assumption

Retraite Québec has analyzed the information regarding the interest rate assumptions used in actuarial valuation reports as at 31 December 2022, as well as return forecasts for the coming years. Further to this analysis, Retraite Québec expects the interest rate assumption of actuarial valuations as at 31 December 2023 to be established using a best estimate of the rate of return on investments (including the effects of rebalancing and diversification) that does not exceed 6.50%. This limit applies to plans with investment policies that provide for 50% of plan investments that are fixed-income investments, as defined in the first paragraph of section 60.8 of the Regulation respecting supplemental pension plans .

For other investment policies, the actuary chooses an interest rate assumption consistent with the limit.

For an actuarial valuation after 31 December 2023, but before 31 December 2024, Retraite Québec expects the important variations in markets that have an impact on the expected rate of return, if applicable, to be taken into account in the best-estimate of the rate of return on investments (including the effects of rebalancing and diversification), without however granting it undue importance.

Best estimate and margins for adverse deviations

According to the Canadian Institute of Actuaries' Standards of Practice , for valuations on a going-concern basis, actuaries must choose best-estimate assumptions that have been modified to include margins for adverse deviations to the extent required by legislation or by the terms of an appropriate engagement.

The Standards of Practice define a best-estimate assumption as an unbiased assumption. It must not be conservative or non-conservative. In cases where a stochastic model is used to determine the best estimate assumption of the expected rate of return, Retraite Québec considers the median of the distribution of returns on investments to be the best estimate.

In addition, Retraite Québec expects a margin for adverse deviations to be taken into account when the interest rate assumption on a going-concern basis is established for a pension plan or the component of a plan where

• either no stabilization contribution is required by law
• or the following 2 conditions are met:
  1. a stabilization provision is established.
  2. the interest rate assumption stems from an investment policy in which the target distribution of investments in variable-income securities is higher than the one used to establish the stabilization provision.

In the absence of such a margin, Retraite Québec could require that the valuation be revised or that a complete actuarial valuation be produced at the end of the fiscal year following the valuation date.

Methodology

In an actuarial valuation report, actuaries must describe the methodology used to establish the interest rate assumption. The description must take into account the following:

• best-estimate rate of return on investments
• the adjustment stemming from the zero return of letters of credit
• rebalancing and diversification
• value added returns from active investment management
• investment management fees
• plan administration fees
• rounding of figures
• margin for adverse deviations.

Letter of credit

An actuary cannot exclude certain elements from the plan's assets, such as a letter of credit, to determine the interest rate assumption, regardless of the funding level of the plan. The best-estimate assumption on the rate of return on investments must therefore be adjusted to take into account the letter of credit's zero return.

The adjustment applicable to the assumption used to determine the current service contribution and liabilities must be the same. It must be equal to the proportion that corresponds to the amount of the letter of credit included in the assets on the greater of the following amounts, determined on a going-concern basis:

• the plan's liabilities
• the plan's assets.

The adjustment could be less if a projection of the assets and liabilities, consistent with the going-concern basis assumptions and methods, shows that the proportion will reduce over time. In this situation, the actuary must describe, in the report, the methodology used to determine it.

Retraite Québec will accept an adjustment that only applies for periods during which the letter of credit is expected to be renewed, in accordance with the funding policy. In such cases, the interest rate assumption would be select and ultimate.

Active investment management

According to the educational note concerning the determination of best-estimate discount rates, it is generally reasonable to assume that active management will generate returns equivalent to the additional investment management fees associated with active management over those for passive management. Retraite Québec therefore expects the actuary to limit the added value of active management that is included in the interest assumptions to the fees incurred for active management.

Fees

The assumptions regarding the plan's administration fees and the pension fund's management fees must be listed separately.

Rounding of figures

Actuaries can, in a reasonable manner, round the interest assumption without exceeding the nearest 0.1%. Furthermore, this rounding of figures must be done consistently from year to year before applying the margin for adverse deviations (so that the margin chosen by the plan administrator is not changed by the rounding of figures).

Salary increase assumption

Where an actuarial valuation uses a salary increase assumption that is less than the assumption used in the previous valuation, actuaries should justify their choice of assumption by referring to plan experience, the interdependence of salary increase and inflation assumptions, economic conditions, the collective agreement, etc.

Mortality assumption

In his or her report, the actuary must provide a plan-specific explanation to support the choice of the mortality assumption used in the actuarial valuation.

When the choice is based on a study of the mortality experience, whether or not it involves plan specific data, Retraite Québec expects the actuary to present the following information:

• a brief description of the data and methodology used in the study
• the characteristics of the persons selected for the study and a justification of the selection
• the method used to weigh the results of the study when it is not fully credible
• if applicable, the single weighted adjustment factor for each gender, to be made to a published mortality table that replicates the liability obtained with the selected mortality assumption.

When the choice of the mortality assumption is based on the characteristics of the members and beneficiaries of the plan, Retraite Québec expects the actuary to identify them, justify why they were selected, and describe how the adjustments to the selected published mortality table were derived from them.

Assumption for expenses

As provided by the Canadian Institute of Actuaries' Standards of Practice , the actuarial valuation on a going-concern basis should take into account the expenses if they are expected to be paid from the plan's assets. The assumption for expenses should reflect the guidance provided in the educational note concerning expenses in funding valuations.

For a plan whose funding must be done separately by component, namely for a municipal sector plan, the actuary must choose and disclose the assumptions related to the expenses of each component.

Statistics

Best-estimate rate of return on investments

The following table presents the best-estimate rate of return on investments of pension plans as at 31 December 2022 established in the actuarial valuation reports sent to Retraite Québec. This table presents the data based on the target distribution of investments and shows, in general, that the best-estimate rate of return on investments increases according to the weight in variable-income securities.

References

Legal references

• Supplemental Pension Plans Act
  • Sections 38 and 38.1 
  • Section 122.2 
  • Section 246 
• Regulation respecting supplemental pension plans
  • Section 60.8 
  • Section 60.13 
• Sections 23, 26 and 42 of the Regulation respecting the funding of defined-benefit pension plans of the municipal and university sectors 

References from the Canadian Institute of Actuaries

• Standards of Practice  (subsection 1630 and paragraphs 1120.29, 1710.01, 3210.05, 3210.06 and 3230.01)
• Educational Note – Expenses in Funding Valuations for Pension Plans – June 2023 – Document 223110 
• Educational Note – Determination of Best-Estimate Discount Rates for Going-Concern Funding Valuations – April 2023 – Document 223077  
• Educational Note – Second Revision – Selection of Mortality Assumptions for Pension Plan Actuarial Valuations – December 2017 – Document 217128