Newsletter no. 95-3, Actuarial Report Content
May 12, 1995
In this newsletter we provide information about our requirements for processing actuarial reports filed with us in connection with employer funding of a defined benefit provision of a registered pension plan.
We remind you that we do not require actuarial reports for specified multi-employer plans or money purchase provisions. Generally, we also do not require an actuarial report for a defined benefit provision if an employer will not be making contributions to the provision. For example, this would be the case when the employer takes a contribution holiday because of a surplus in the plan. If we need an actuarial report in these cases, we will send a notice to the plan administrator requesting a report.
References to "the Act" mean the Income Tax Act, and references to "the Regulations" mean the Income Tax Regulations. The acronym RPP means Registered Pension Plan.
Application
The comments in this newsletter apply to actuarial reports filed with us after the date of this newsletter and when the effective date of the valuation is on or after May 1, 1994. However, we accept and encourage earlier compliance. Please note that most of the requirements outlined in this newsletter were in effect before its release.
This newsletter replaces paragraph 26 of Information Circular 72-13R8, Employees' Pension Plans, and those provisions in Pension Reform Updates Nos. 91-5 and 91-5 Special Release that dealt with actuarial report content and application for approval of contributions. We have cancelled Pension Reform Update No. 92-1.
Definitions
We use the following terms throughout this newsletter.
Actuary means a Fellow of the Canadian Institute of Actuaries.
Connected, as used in the expression "connected person", has the meaning in subsection 8500(3) of the Regulations.
Grandfathered plan has the meaning in subsection 8500(1) of the Regulations.
Pre-reform benefits are benefits that accrue in respect of a period of pre-reform service.
Pre-reform service means pre-1991 service for all plans except grandfathered plans. Pre-reform service for grandfathered plans means all service prior to the earlier of January 1, 1992, and the effective date of the amendment made to the plan to comply with the requirements of the Regulations.
50-50 rule refers to the restriction on the accrual of pre-reform defined benefits for connected persons. Pension Reform Update No. 91-1 fully describes the 50-50 rule.
Information we require in an actuarial report
Subsection 147.2(3) of the Act requires that an actuarial report be filed with us whenever the employer is seeking the Minister's approval, under subsection 147.2(2) of the Act, of the actuary's recommendation for contributions. The report has to be prepared by an actuary and has to contain all the information the Canada Revenue Agency requires. This section sets out the required information. In certain circumstances, the Department may require other information in addition to that outlined below. For example, we may ask the actuary to submit a copy of the valuation working papers for our review.
RPPs covered by the Canadian Institute of Actuaries (CIA) standard of practice
The actuarial report has to contain all information required by the CIA Standard of Practice for Valuation of Pension Plans, effective May 1, 1994, and any subsequent changes.
Defined Benefit RPPs not covered by the CIA standard of practice
The CIA standard of practice does not cover certain types of defined benefit RPPs. These include insured plans under which a licensed issuer of annuities underwrites and guarantees all benefits and contingencies. Actuarial reports for these types of plans have to contain the following information:
- the actuary's recommendation on employer contribution requirements
- the name of the actuary
- the effective date of the valuation and the date of the report
The report also has to include the following information for each active member under the defined benefit provision(s) of the plan:
- member identification by name or number
- sex
- date of birth
- number of years of pensionable service
- remuneration upon which the benefits are based, if applicable
- date and amount of pension being purchased
- cost of pension being purchased
- total amount of all defined benefits previously purchased
We require more information when an insured plan provides pre-reform benefits on a combination defined benefit and money purchase basis, unless the only money purchase component is additional voluntary contributions (AVCs). If the employer has added or upgraded pre-reform benefits for any plan member since the most recent actuarial report filed with us, the new report has to contain the balance in each affected member's money purchase account, excluding any AVCs, as at:
- December 31, 1990, if the plan is not a grandfathered plan
- the earlier of December 31, 1991, and the effective date the plan was amended to comply with the pension reform legislation, if the plan is a grandfathered plan
If the money purchase account balances were included in a previous report, you do not have to re-submit this information.
Additional requirements for actuarial reports for all RPPs
Actuarial reports have to reflect the pre-1990 past-service benefit restriction contained in subsection 8504(6) of the Regulations. If the limit does not apply to any member of the plan, the actuary has to include a statement to that effect in all reports filed with us.
If the employer has added or upgraded pre-reform benefits for connected persons since the previous valuation filed with us, the report has to include:
- a statement of each connected person's remuneration in each year of pre-reform service after 1980 credited under the plan
- a statement of each connected person's remuneration of the best three consecutive years prior to the later of 1981 and the first year of pensionable service under the plan
- a present value statement demonstrating compliance with the 50-50 rule
If the statements of remuneration were included in a previous report, you do not have to re-submit them. However, you have to include the present value statement each time the employer adds or upgrades pre-reform benefits for connected persons. If more than one employer participates in the plan, we need a separate present value statement for each employer.
Plans in which more than one employer participates
If there is more than one employer participating in the plan, the valuation has to reflect the requirement under subparagraph 147.2(2)(a)(vi) of the Act that the assets and actuarial liabilities be allocated in a reasonable manner among the employers. As a consequence of the allocation, there may be an unfunded liability for employees of one employer at the same time as there is an actuarial surplus for employees of another employer who participates in the same plan.
Duration of the report
As required under subparagraph 147.2(2)(a)(i) of the Act, our approval for an employer contribution to be an eligible contribution ends no later than four years after the effective date of the valuation upon which the actuary's recommendation is based. Only eligible contributions may be contributed to a defined benefit pension plan by the employer and, as a result, be deducted from taxable income.
Example 1
Based on a triennial valuation as of January 1, 1994, we approved the actuary's recommendation for current service contributions for three years starting January 1, 1994. We consider employer contributions made on the basis of the recommendation to be eligible contributions if they are made no later than December 31, 1997, and satisfy the requirements of subsection 147.2(2).
Any contributions made after December 31, 1997 have to be in accordance with a recommendation based on a new actuarial valuation. Also, since the actuary did not make a recommendation for contributions in respect of benefits accruing during the fourth year (1997), such contributions would have to be made on the basis of a new valuation.
Example 2
We approved the actuary's recommendation based on a valuation as of April 1, 1995, for the employer to make monthly contributions:
- in specified amounts towards the unfunded liability, for the next four years
- at a rate of 5% of covered payroll for current service costs, until the next valuation is prepared
The next valuation at April 1, 1998, the results of which only become available on November 1, 1998, reveals a small surplus and current service costs of only 4% of covered payroll. Since the new valuation was not yet available, the employer continued to contribute on the basis of the April 1, 1995 valuation until the end of October 1998. Are the contributions that were made during the interim period eligible?
If all of the requirements of subsection 147.2(2) were satisfied at the time the higher contributions were made, the contributions are eligible contributions. In particular, subparagraph 147.2(2)(a)(iii) requires that the assumptions made in the April 1, 1995 valuation continue to be reasonable at the time each contribution was made. All contributions made by the employer after October 1998 have to be based on the new valuation.
Supplementary approvals
You can request our approval for supplementary contributions if the actual experience of the plan differs from what was expected in the previous valuation, causing the previously recommended and approved amount to be insufficient. This could result, for example, from remuneration or hours worked exceeding expectations, from lower than expected investment returns, or from benefit improvements. In this case, an interim actuarial cost certificate or similar document that is supplementary to the full valuation will usually suffice. The document has to contain the actuary's contribution recommendation and all substantiating information relevant to the deviation. It is acceptable for such supplementary documents to refer to the data, assumptions, methods, and other information provided in the earlier report. Alternatively, you can submit a full actuarial report based on new data.
Administrative matters
Send actuarial reports to the address provided in the "Where to get help" section at the end of this newsletter. We will process the request for approval of the contribution recommendation based on the information provided in the report. Currently, we do not have any administrative requirements for the format of the approval request. However, when you submit an actuarial report, please make it clear in your covering letter whether the employer is seeking our approval.
Example 3
The triennial valuation reveals the employer's current service costs to be $200,000 per year and the surplus to be $1,200,000, $400,000 of which is an excess surplus determined using the rule in paragraph 147.2(2)(d) of the Act. The employer can take a contribution holiday by applying the surplus against its current service costs until the next valuation is prepared. If not, the employer can, after applying the excess surplus against the first two years current service costs, contribute $200,000 in the third year. Your indication of whether the employer wishes to make contributions will help us process your submission. If, after receiving our approval for making contributions in the third year, the employer instead elects to use the surplus to take a further contribution holiday, the tax rules do not compel the employer to make the contributions.
We will not give eligible contribution approvals until we have received any amendments we have requested that will affect the benefits provided under the plan.
Later this year, we expect to issue a newsletter on the impact of the proposed measures announced in the 1995 federal budget that affect the funding of defined benefit plans.
Where to get help
Registered Plans Directorate
You can find more information at Savings and pension plan administration.
By telephone
Toll-free in Canada and the United States: 1-800-267-3100.
If you are calling from outside of Canada or the United States, call us collect at 613-221-3105. The Registered Plans Directorate accepts collect calls.
By mail and courier
Due to a building refit spanning multiple years, the Registered Plans Directorate’s mailing address has been temporarily changed. Please use the following address for all correspondence until further notice:
Registered Plans Directorate
Canada Revenue Agency
2215 Gladwin Cres
Ottawa ON K1B 4K9
We welcome feedback on this bulletin. Send comments by email to RPD.LPRA2@cra-arc.gc.ca.
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