ACTUARIAL REPORT BENEFIT PLAN FINANCED THROUGH THE ROYAL CANADIAN MOUNTED POLICE (DEPENDANTS) PENSION FUND ON THE AS AT 31 MARCH PDF

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Published in 2005 ACTUARIAL REPORT ON THE BENEFIT PLAN FINANCED THROUGH THE ROYAL CANADIAN MOUNTED POLICE (DEPENDANTS) PENSION FUND AS AT 31 MARCH 2004 u Office of the Superintendent of Financial Institutions
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Published in 2005 ACTUARIAL REPORT ON THE BENEFIT PLAN FINANCED THROUGH THE ROYAL CANADIAN MOUNTED POLICE (DEPENDANTS) PENSION FUND AS AT 31 MARCH 2004 u Office of the Superintendent of Financial Institutions Canada Bureau du surintendant des institutions financières Canada qwewrt Office of the Chief Actuary Bureau de l actuaire en chef To obtain a copy of this report, please contact: Office of the Chief Actuary Office of the Superintendent of Financial Institutions Canada 16 th Floor, Kent Square Building 255 Albert Street Ottawa, Ontario K1A 0H2 Facsimile: (613) An electronic version of this report is available on our Web site, at AS AT 31 March February 2005 The Honourable Ralph Goodale, C.P., M.P. Minister of Finance House of Commons Ottawa, Canada K1A 0G5 Dear Minister: Pursuant to section 56 of the Royal Canadian Mounted Police Pension Continuation Act, I am pleased to submit the report on the actuarial review as at 31 March 2004 of the benefit plan established under Part IV of the Act. Yours sincerely, Jean-Claude Ménard, F.S.A., F.C.I.A. Chief Actuary Office of the Chief Actuary As At 31 March 2004 TABLE OF CONTENTS I. Executive Summary...7 A. Purpose of this Actuarial Report...7 B. Scope of the Report...7 C. Main Findings...7 D. Future of the Plan...8 Page II. Financial Position of the Plan...9 A. Balance Sheet as at 31 March B. Disposition of Actuarial Surplus...9 C. Sensitivity of Actuarial Liabilities to Variations in Key Assumptions...9 D. Reconciliation of Results with Previous Report...10 III. Demographic and Financial Projections...14 A. Membership Projections...14 B. Benefit Improvement Projections...14 C. Asset Projections...15 IV. Actuarial Opinion...16 APPENDICES Page Appendix 1 History of the Plan...17 Appendix 2 Summary of Plan Provisions...18 Appendix 3 Plan Assets...21 Appendix 4 Membership Data...22 Appendix 5 Methodology...24 Appendix 6 Economic Assumptions...26 Appendix 7 Demographic Assumptions...27 Appendix 8 Disposition of Actuarial Surplus...29 Appendix 9 Acknowledgements AS AT 31 March 2004 TABLES Table 1 Balance Sheet... 9 Table 2 Reconciliation of Financial Position Table 3 Experience Gains and Losses Table 4 Change in Actuarial Assumptions Table 5 Fund Balance Table 6 Reconciliation of Membership Table 7 Members Data Table 8 Widows Data Table 9 Economic Assumptions...26 Table 10 Assumed Mortality of Members Table 11 Assumptions for Prospective Widows Table 12 Assumed Mortality of Widows Table 13 Recommended Benefit Improvements Page 6 As At 31 March 2004 I. Executive Summary A. Purpose of this Actuarial Report This actuarial review of the benefit plan governed by Part IV of the Royal Canadian Mounted Police Pension Continuation Act (RCMPPCA) was made as at 31 March 2004 pursuant to section 56 of the Act. The previous review was made as at 31 March The date of the next periodic review is 31 March In accordance with accepted actuarial practice and the RCMPPCA, the main purposes of this actuarial report are: to show a reasonable and realistic estimate of the balance sheet (i.e. assets, actuarial liabilities, and actuarial surplus) as at the valuation date, and to recommend measures to deal with the actuarial surplus. B. Scope of the Report The history of the plan is given in Appendix 1. During the intervaluation period there were no changes to the plan provisions, which are summarized in Appendix 2. However, the Governor in Council made benefit improvements in accordance with the surplus distribution recommendations in the 2001 actuarial report on the plan. The major improvements were effective pension increases of 2.6% as at 1 April 2002, 1 April 2003 and 1 April There were also increases in the lump sum death benefit payable on the death of a member and in the residual amount payable on the early death of a widow. C. Main Findings As at 31 March 2004 (i.e. the end of the 2004 plan year 1 ), the plan had an actuarial surplus of $3.7 million, being the excess of assets of $30.9 million over actuarial liabilities of $27.2 million. Some $1.1 million of actuarial surplus should be used to provide the following benefit improvements: i) a pension increase for current and prospective widows and children of 1.5% as at 1 April 2005, 1 April 2006 and 1 April 2007; ii) an increase in the lump sum benefit payable upon the death of a member of 1.5% as at 1 April 2005, 1 April 2006 and 1 April 2007; and iii) an increased residual amount payable on the death of a widow of a member who dies in the 2006, 2007, or 2008 plan years, to be obtained by deeming the member s contributions to be increased by 1,035%, 1,052%, and 1,069% respectively. The remaining $2.6 million of actuarial surplus should be retained in the Fund to provide for benefit improvements in each subsequent year in accordance with the established methodology. 1 Any reference to a given plan year in this report should be taken as the 12-month period ending 31 March of the given year. 7 AS AT 31 March 2004 D. Future of the Plan The plan membership has been declining steadily since The growth of the Fund has come to an end and the Fund is estimated to decline steadily until the last dollar is paid to the last widow, estimated to occur in the plan year As At 31 March 2004 II. Financial Position of the Plan A. Balance Sheet as at 31 March 2004 The following balance sheet is based on the plan provisions described in Appendix 2, the cumulative dividends in effect as at 1 April 2004 (1,018% for pension and residual benefits, 556% for lump sums payable on member deaths), and the data and actuarial assumptions described in following sections. Table 1 Assets Balance Sheet as at 31 March 2004 ($ thousands) Fund balance 30,805 Actuarial present value of instalments in pay by members 53 Total Assets 30,858 Actuarial Liabilities Benefits accrued by members widow pensions 6,417 lump sums on death without a widow 3,506 Widow pensions in pay 16,391 Provision for adverse mortality deviation 742 Outstanding payments 116 Total Actuarial Liabilities 27,172 Actuarial Surplus 3,686 B. Disposition of Actuarial Surplus The established algorithm for the distribution of actuarial surplus, as described in Appendix 8, indicates that $1.1 million should be distributed over the next three years in the form of pension, residual and lump sum death benefit increases. By far the most costly of these increases are with respect to the widow pensions, which would rise by 1.5% on 1 April 2005, 1 April 2006 and 1 April Full details of the proposed distribution of actuarial surplus are found in Appendix 8. C. Sensitivity of Actuarial Liabilities to Variations in Key Assumptions The supplementary estimates shown below indicate the degree to which the actuarial liabilities of $27.2 million shown in the balance sheet depend on some key assumptions. The actuarial liability changes shown below can also serve to approximate the effect of other numerical variations in each key assumption, to the extent that such effects are linear. 1. Mortality of Widows If the mortality rates assumed for widows in each future year were reduced by onetenth, the actuarial liabilities would increase by $915,000 or 3.4%. 9 AS AT 31 March 2004 If the assumed improvements in longevity for widows after the 2005 plan year (see Appendix 7) were disregarded, the actuarial liabilities would decrease by $503,000 or 1.9%. 2. Mortality of Members If the mortality rates assumed for members in each future year were increased by one-tenth, the actuarial liabilities would increase by $356,000 or 1.3%. If the assumed improvements in longevity for members after the 2005 plan year (see Appendix 7) were disregarded, the actuarial liabilities would increase by $203,000 or 0.7%. 3. Proportion of Married Members If the proportion of members married at death were increased by one-tenth, then the actuarial liabilities would increase by $221,000 or 0.8%. 4. Widow Age Difference If the age of each future new widow were reduced by one-year, then the actuarial liabilities would increase by $222,000 or 0.8%. The investment yield assumption is no longer considered to be a key assumption. Per Appendix 5D, the Superannuation Accounts from which the Fund s quarterly interest rates are derived are now almost only credited with interest. That being the case, the credited interest rates are more predictable for at least the next decade and the risk to the plan has decreased accordingly. D. Reconciliation of Results with Previous Report This subsection describes the various factors reconciling the actuarial surplus of this valuation with the corresponding items of the previous valuation. Figures in brackets indicate negative amounts. Table 2 Reconciliation of Financial Position as at 31 March 2004 ($ thousands) Actuarial surplus as at 31 March ,818 Data corrections and refinement of methodology 294 Interest on corrected surplus 1,426 Cost of 2002, 2003 and 2004 benefit increases (2,175) Experience gains and losses (615) Change in actuarial assumptions (56) Change in provision for adverse mortality deviation 110 Outstanding Payments (116) Actuarial surplus as at 31 March ,686 10 As At 31 March Data Corrections and Refinements of Methodology The correction of data upon which the 2001 report was based resulted in an increase of $101,000 in the actuarial surplus. Refinements to the methodology resulted in an increase of $193,000 in the actuarial surplus. 2. Interest on corrected Surplus The expected interest to 31 March 2004 on the 31 March 2001 corrected surplus, i.e. taking into account the data corrections and the refinements of methodology, is $1,426, Cost of 2002, 2003 and 2004 Benefits Increases Benefit improvements in accordance with the surplus distribution recommendations resulted in an increase of benefits paid of $219,000 with interest since last valuation and in an increase of the liabilities of $1,956,000 for a total of $2,175, Experience Gains and Losses Since the previous valuation, the actuarial surplus decreased by $615,000 due to actuarial losses as described in the following table. Table 3 Experience Gains and Losses ($ thousands) Mortality of widows (650) Interest rates (54) Mortality of members (135) Proportion married (138) Withdrawals (30) Age of new widows 283 Actual versus expected benefit paid 109 Net experience losses (615) a) Mortality of Widows During the three years ended 31 March 2004, the 23 reported widow deaths amounted to 76% of the 30.2 deaths expected in accordance with the assumption in the previous valuation. As a result the plan recorded an experience loss of $650,000. b) Interest Rates In the previous valuation the Fund was assumed to earn interest at an average annual rate of 8.55% during the three years ended 31 March The actual interest rates were modestly lower (average 8.50%), causing an experience loss of $54,000. c) Mortality of Members During the three years ended 31 March 2004, the 31 reported member deaths amounted to 102% of the 30.5 deaths expected in accordance with the assumption in the previous valuation. As a result the plan recorded an 11 AS AT 31 March 2004 experience loss of $135,000. d) Proportion Married The 24 new widows during the three-year period ended 31 March 2004 were 2.6 more than expected. As a result the plan recorded an experience loss of $138,000. e) Withdrawals In the previous valuation each member was assumed to be subject to a future withdrawal rate of 0.15%. There was no withdrawal during the three years ended 31 March 2004, causing an experience loss of $30,000. f) Age of New Widows The 24 new widows during the three-year period ended 31 March 2004 were on average 1.0 year older than expected. As a result the plan recorded an experience gain of $283,000. g) Actual Versus Expected Benefit Paid According to financial statements, benefits paid during the three-year period ended 31 March 2004 were less than expected. As a result the plan recorded an experience gain of $109, Change in Actuarial Assumptions The actuarial surplus decreased by $56,000, due to the following revisions. Table 4 Change in Actuarial Assumptions ($ thousands) Interest rates (64) Improvements in longevity 141 Withdrawals (133) Net impact of revision (56) a) Interest Rates The interest rates for this valuation were developed by the procedure described in Appendix 5D. Adopting this revised interest assumption caused the actuarial surplus to decrease by $64,000. b) Improvements in Longevity Annual reduction factors, applying to mortality rates in subsequent years, were revised in this valuation, as a result the actuarial surplus increased by $141,000. c) Withdrawals For this valuation the withdrawal rate was deemed to be null, it was 0.15% in the previous valuation. This revised assumption caused the actuarial surplus to decrease by $133, As At 31 March Provision for Adverse Mortality Deviation In this valuation the provision for adverse mortality deviation is $742,000, which is $110,000 less than the previous provision of $852,000 (including interest to 31 March 2004). The provision is sufficient to withstand the mortality loss that would result if all widows survived the plan year immediately following the valuation date. The provision recognizes that the government will eventually (perhaps 10 years hence) have to assume the plan s mortality risk if the objective of paying the last dollar to the last widow is to be realized without special treatment for that widow. 7. Outstanding Payments For valuation purposes, the provision for outstanding payments is $116, AS AT 31 March 2004 III. Demographic and Financial Projections A. Membership Projections On the basis of the demographic assumptions described in Appendix 7, the member and widow populations were projected over the remaining lifetime of the plan. 250 Number of Members and Widows Members: Widows: Historical Projected Historical Projected Plan Year Over the last decade the number of members has fallen steadily so that only 155 remain at 1 April 2004; this trend is projected to continue until the death of the last member, which is expected in the plan year The number of widows reached 170 on 1 April A steady decline is expected thereafter, with the last widow expected to survive to the plan year Emerging mortality experience will be subject to random fluctuations. Consequently the actual membership statistics will deviate, perhaps materially due to the relatively small number of participants. B. Benefit Improvement Projections In accordance with the recommended disposition of actuarial surplus, the widow pensions and the lump sum benefit payable upon the death of a member were projected to increase at 1.5% per annum for plan years 2006, 2007, and The remaining $2.6 million of actuarial surplus should be sufficient to provide future increases of 2.0% a year from 1 April 2008 onward if the assumptions on which this valuation is based are realized. 14 As At 31 March 2004 C. Asset Projections Using the assumptions described in Appendix 6 and in Appendix 7 and the foregoing benefit improvement projections, the Fund assets were projected. It should be noted that the outstanding payments of $116,000 shown on the balance sheet were assumed to be made on 1 April Fund Assets ($ million) Historical Projected Plan Year Under this projection the Fund assets reached their maximum of $31.0 million on 31 March They are now expected to decline steadily until the Fund is exhausted in the plan year The actual progress of the Fund assets will be subject to several influences, most notably the random mortality fluctuations affecting the membership projections. 15 AS AT 31 March 2004 IV. Actuarial Opinion In our opinion, for the purposes of this report: the data upon which the calculations were based are sufficient and reliable; the assumptions used are, in aggregate, appropriate; and the valuation methodology employed is appropriate. This report has been prepared, and our opinions given, in accordance with accepted actuarial practice, and particularly with the Recommendations of the Canadian Institute of Actuaries for Actuarial Advice given with respect to Self-Insured Employee Benefit Plans. Mario Mercier Actuary Office of the Chief Actuary Fellow of the Canadian Institute of Actuaries Jean-Claude Ménard Chief Actuary Office of the Chief Actuary Fellow of the Canadian Institute of Actuaries Ottawa, Canada 25 February As At 31 March 2004 Appendix 1 History of the Plan The benefit plan associated with the Royal Canadian Mounted Police (Dependants) Pension Fund was established in 1934 when Part IV was added to the Royal Canadian Mounted Police Act (RCMP Act). Plan membership was optional for constables on active duty on 1 October 1934; however, it was mandatory for constables appointed to the Force thereafter. In 1948 Part V (a new pension arrangement) was added to the RCMP Act. Plan members who elected to become contributors under Part V were required to either suspend or terminate their participation in the plan. Moreover, the plan was then closed to any new entrants except certain constables whose continuous service dated back to 1 October 1934 or earlier. Lastly the plan was amended so that the government assumed responsibility for any deficit in the Fund. In 1959 the Royal Canadian Mounted Police Superannuation Act and the Royal Canadian Mounted Police Pension Continuation Act (RCMPPCA) were enacted to provide for all RCMP pension arrangements. The plan was transferred to the RCMPPCA, where it remains. In 1975 the age at which the eligibility of a son for survivor benefits expires was raised from 18 years to 21 years, which already applied to a daughter. In addition survivor benefits were extended to age 25 for unmarried sons and daughters still in school, subject to certain conditions. Lastly the 4% annual interest rate that had always been applied to the Fund balance was replaced by the rate applied to the three major Superannuation Accounts (Public Service, Canadian Forces, and Royal Canadian Mounted Police), which is derived from the yield on a notional long-term bond portfolio (see Appendix 2). The resulting higher interest credits have flowed through to members and survivors in the form of more generous benefit increases from 1975 onward. In 1989 marital status was eliminated in determining the eligibility for survivor benefits of a son or daughter between ages 21 and 25. Also eliminated was the provision for reducing the pension of a widow more than 20 years younger than her husband at the date of his death. In 1993 the plan was amended to allow the payment of pension to a widow cohabiting with a man to whom she is not married. 17 AS AT 31 March 2004 Appendix 2 Summary of Plan Provisions The current provisions of the benefit plan governed by Part IV of the RCMPPCA are summarized in this appendix. However, the Act shall prevail if there is a discrepancy between it and the summary. A. Membership As mentioned in Appendix 1, plan membership was compulsory for constables appointed to the Force from 1934 to Thereafter the plan was essentially closed to new entrants. The last plan member retired from active duty in B. Assets The plan is financed through the Royal Canadian Mounted Police (Dependants) Pension Fund, which forms part of the Accounts of Canada. The Fund is credited with all instalment payments made by the members, and charged with all benefit payments when they become due. The Fund is also credited with investment earnings as though net cash flows were invested quarterly in 20-year Government of Canada bonds issued at prescribed interest rates and held to maturity. No formal debt instrument is issued to the Fund by the government in recognition of the amounts therein. C. Contributions 1. Member Contributions a) Current Service To purchase current service benefits, a member on active duty contributed 5% of pay together with any supplementary amounts in accordance with the scale set out in the RCMPPCA. b) Past Service A member on active duty coul
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