Expected changes to assumptions about mortality
Study on Canadian mortality
Historically, the mortality tables used in Canada for actuarial valuations of pension plan obligations have been based on a U.S. population. One table widely used in recent years is the UP-94 Table with generational projection using mortality projection Scale AA.
For some time now, the Canadian Institute of Actuaries (CIA) has been conducting research on Canadian mortality. In July 2013, the CIA published a draft report for comments on Canadian pensioner mortality. According to the report, Canadian mortality rates are lower than those anticipated by the UP-94 Table with generational projection. Furthermore, mortality improvement rates are higher than indicated by Scale AA. In the draft report, the CIA proposes Canadian mortality tables with mortality improvement scales. Following a review of the feedback received, the CIA will likely publish Canadian mortality tables in 2014.
Actuarial valuations for funding purposes
Further to this draft report, the CIA also issued an educational note supplement for actuaries on October 30, 2013, to help them in setting best-estimate mortality assumptions until the finalized research report as well as the new Canadian mortality tables and mortality improvement scales are released.
This educational note supplement indicates that the use of the UP-94 Table with generational projection using mortality projection Scale AA is no longer appropriate for best-estimate mortality assumptions, unless supported by an analysis of a plan’s actual credible experience. The document also specifies that until the Canadian pensioner mortality report is finalized, when credible experience of a plan is unavailable, it would be reasonable for actuaries to use the tables and improvement scales contained in the draft report.
Consequently, for actuarial valuations for funding purposes of pension plans as at December 31, 2013, actuaries responsible for selecting assumptions can be expected to use tables other than the UP-94 Table, unless a specific review was conducted for the plan to support using this table.
Actuarial valuations for financial reporting purposes
These tables will also likely be used for actuarial valuations of plans for the purposes of preparing the financial statements of plan sponsors or of the plans themselves.
When producing these valuations, the person in charge of preparing financial statements (the plan sponsor or administrator) is responsible for selecting the assumptions based on applicable guidance set out in Canadian generally accepted accounting principles.
However, Canadian generally accepted accounting principles, regardless of the applicable accounting framework, specify that pension plan obligations must be based on best-estimate assumptions (or on the best estimate possible). The educational note supplement recently published by the CIA, which indicates that the use of the UP-94 Table with generational projection using mortality projection Scale AA is no longer appropriate for best-estimate mortality assumptions, should be considered to assess the impact on financial statement preparation.
Therefore, auditors should begin to take steps now to inquire of those responsible for financial statement preparation and/or others involved in selecting assumptions, about their intensions to use the new mortality tables and interim improvement scales (or the final versions if they are available).
While we believe that this involves only isolated cases, some entities may not use the new interim assumptions proposed by the CIA. In these cases, auditors will have to ask management to demonstrate that it has used best-estimate assumptions based on actual credible experience of the plan. Auditors will then have to assess this evidence with the help of a consulting actuary, if needed.
Auditors should also watch for the publication of the finalized mortality tables and mortality improvement scales. If these tables are available after the actuarial valuation is performed, but before the financial statements are completed or authorized for issue, auditors will be required to assess the impact based on the standards dealing with subsequent events.
Working Group on Pension Plans