The Canadian Institute of Actuaries (CIA) has updated its annuity purchase discount rate guidance for pension plan solvency and hypothetical wind-up valuations with effective dates between June 30, 2013 and December 30, 2013. The new guidance has significant cost implications for many plans that provide pension increases that are linked with inflation (“indexed plans”), and may also have moderate implications for non-indexed plans. The guidance may drive up required contributions for plans that are not exempt from solvency funding and result in annual valuation filing frequency requirements due to increased solvency liabilities.
Along with the new guidance, the CIA has also released an Educational Note on Alternative Settlement Methods for Hypothetical Wind-Up and Solvency Valuations (the ASM Note). The ASM Note recognizes the challenges the Canadian group annuity market poses for plans with large liabilities, and outlines four alternative settlement methods (ASMs) that could be used to develop different solvency and wind-up discount rates.
This Analysis summarizes the key implications of the new guidance and the reasons for the changes, as well as details regarding the new guidance and the ASM Note, and includes strategies plan sponsors can employ to mitigate the cost impact.