Actuarial Valuation of the Québec Pension Plan as at 31 December PDF

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Actuarial Valuation of the Québec Pension Plan as at 31 December 2015 Layout Sabrina Vallée Graphic design Nicholas Grenier François De Courcy This document is available on Retraite Québec s website:

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Actuarial Valuation of the Québec Pension Plan as at 31 December 2015 Layout Sabrina Vallée Graphic design Nicholas Grenier François De Courcy This document is available on Retraite Québec s website: This publication may be reproduced in whole or in part, provided the source is mentioned. Direction des communications Retraite Québec The totals in the document s tables may not equal the sum of the figures, since figures have been rounded off. Disclaimer: This document is the English translation of the Évaluation actuarielle du Régime de rentes du Québec au 31 décembre It is provided as a courtesy to English speakers in Quebec and elsewhere. For any and all discrepancies between the English and French versions, the French version is deemed to be correct. For information, contact: Legal deposit 4th quarter 2016 Bibliothèque et Archives nationales du Québec ISBN (print version) (PDF) Retraite Québec Mr. Carlos Leitão Minister of Finance Gouvernement du Québec Sir: I have the honour of transmitting to you the actuarial valuation of the Québec Pension Plan as at 31 December 2015, which Retraite Québec has caused to be prepared in accordance with section 216 of the Act respecting the Québec Pension Plan. Very truly yours, Michel Després President and Chief Executive Officer Retraite Québec Mr. Michel Després President and Chief Executive Officer Retraite Québec Dear Sir: In accordance with the mandate entrusted to us, we are submitting to you the actuarial valuation of the Québec Pension Plan as at 31 December This actuarial valuation was prepared in accordance with section 216 of the Act respecting the Québec Pension Plan. It provides a projection of the Plan s cash inflows and outflows for the next 50 years along with their effect on the reserve. It also evaluates the steady-state contribution rate. Respectfully submitted, Jean-François Therrien, FCIA, FSA Chief Actuary Philippe Guèvremont, FCIA, FSA Actuary Valérie Carrier, FCIA, FSA Actuary Étienne Poulin, ACIA, FSA Actuary Summary Actuarial Valuation of the Québec Pension Plan as at 31 December 2015 Methodology 50-year projection Return Investment income Disability Administration costs Assumptions regarding: demographics the economy Plan experience Contributions Death Retirement Reserve Cash inflows Cash outflows Contributors and beneficiaries Projection of the population: by age and sex Plan contributors Plan beneficiaries For 2016 to 2065 Life expectancy at age 65 rises from 19.6 to 23.6 years for men and from 22.4 to 25.8 years for women. The proportion of the population age 65 or over increases from 18% to 29%. Québec s total population rises from 8.3 million to 9.8 million. The number of contributors increases from 4.1 million to 4.7 million. In 2016, there are 2.3 contributors for every retirement pension beneficiary. As of 2021, there are fewer than 2 contributors for each beneficiary Age Beneficiaries Contributors Population Population of Québec 2065 Contributions Contribution rate for employment earnings: as of $3500 to a maximum of $ in % 10.80% Cash inflows and outflows Projected cash inflows* and outflows until 2065 Billions of dollars Year Cash inflows Contributions Investment income Cash outflows Benefits Administration costs * We projected contributions using a contribution rate of 10.65% in 2016 and a rate of 10.80% for the following years. Contributions and investment income are sufficient to fund cash outflows until Reserve 2016: $60 G 4.3 times cash outflows 2040: $162 G 4.2 times cash outflows 2065: $356 G 3.8 times cash outflows Steady-state contribution rate: 10.87% Ratio of the reserve at the end of a given year to cash outflows for the following year Ratio reserve/cash outflows Projection using the steady-state contribution rate (10.87%) Projection using the contribution rate under the Act respecting the Québec Pension Plan (10.80%) Year The steady-state contribution rate maintains a constant ratio of the reserve to annual cash outflows on a long-term basis and ensures stable Plan funding for the next 50 years. No automatic adjustment of the contribution rate is anticipated in The rate will remain 10.80%. The automatic adjustment mechanism will be reevaluated as part of the next actuarial valuation as at 31 December 2018. Contents 1. INTRODUCTION METHODOLOGY Projecting cash inflows and outflows Projection period MAIN ASSUMPTIONS Demographic assumptions Economic assumptions Assumptions regarding Plan benefits RESULTS Contributions Benefits Reserve Steady-state contribution rate CONCLUSION ACTUARIAL OPINION ACKNOWLEDGEMENTS Appendix I Summary of the main provisions of the Québec Pension Plan 1. DATE OF PLAN S INCEPTION AMENDMENTS TO PLAN PROVISIONS SINCE THE PREVIOUS ACTUARIAL VALUATION DEFINITIONS PLAN CONTRIBUTIONS RETIREMENT PENSION DISABILITY BENEFITS SURVIVORS BENEFITS PENSION INDEXATION PARTITION OF BENEFITS RETIREMENT PENSION SHARING Appendix II Assumptions and methods 1. INTRODUCTION DATA Data sources Benefits payable as at the valuation date DEMOGRAPHIC ASSUMPTIONS AND POPULATION PROJECTION Initial population as at 1 July Fertility Migration Mortality The projected population and its characteristics ECONOMIC ASSUMPTIONS Labour market Inflation rate Real rate of increase in average employment earnings and maximum pensionable earnings Rates of return PLAN CONTRIBUTIONS Determining Plan participation Calculating contributions PLAN BENEFITS Projecting sums for benefits in payment on the valuation date 6.2 Projecting new benefits: eligibility rates and amount of payable benefits Projecting new disability benefits Projecting new retirement pensions Projecting new retirement pension supplements Projecting the death benefit Projecting new surviving spouse s pensions Projecting new orphan s pensions and pensions for a disabled person s child Projecting social assistance reimbursements ADMINISTRATION COSTS PLAN RESERVE Initial reserve Investment income Appendix III Risks related to Plan funding and the uncertainty of results 1. INTRODUCTION Risks related to Plan funding SENSITIVITY ANALYSIS Description Demographic environment Economic environment Plan environment Sensitivity analysis summary STOCHASTIC ANALYSIS Description of the economic scenario generator Projecting the return on assets Projecting the unemployment rate and the inflation rate Projecting the reserve CONCLUSION Appendix IV Comparison and reconciliation with the projections in the previous actuarial valuation 1. INTRODUCTION COMPARISON OF THE PROJECTIONS IN THE PREVIOUS VALUATION WITH THE RESULTS FOR THE LAST THREE YEARS Initial reserve Contributions Investment income Benefits Administration costs Reserve as at 31 December RECONCILIATION OF THE STEADY-STATE CONTRIBUTION RATE IN THE VALUATION AS AT 31 DECEMBER 2015 WITH THE RATE IN THE PREVIOUS VALUATION Changes to the projection model Results for 2013 to Main changes to the assumptions Summary of the reconciliation with the previous actuarial valuation Tables Table 1 Summary of main assumptions used in this actuarial valuation and in the previous actuarial valuation Table 2 Projected contributions Table 3 Projected number of beneficiaries as at 31 December of a given year Table 4 Projected benefits Table 5 Projected reserve (in millions of dollars) Table 6 Projected reserve (in millions of constant dollars) Table 7 Funding sources for cash outflows Table 8 Pay-as-you-go contribution rate Table 9 Projected reserve (contribution rate of 10.87% as of 2018) Table 10 Summary of main assumptions Table 11 Estimate of benefits payable as at 31 December Table 12 Age-specific fertility rates, total fertility rate and average maternal age Table 13 Net migration in Québec Table 14 Annual reductions in mortality rates Table 15 Mortality rates for the population of Québec 2016, 2040 and Table 16 Life expectancy (in years) at various ages, excluding reductions in mortality after the year shown Table 17 Life expectancy (in years) at various ages, including reductions in mortality after the year shown Table 18 Projection of the population of Québec for various age groups Table 19 Components of Québec s demographic variation Table 20 Labour force participation rate by age group and sex 2016, 2040 and Table 21 Labour force changes and aggregate participation rates Table 22 Employed population and unemployment rate Table 23 Inflation rate, pension indexation rate as at 1 January, rate of increase in average employment earnings and rate of increase in the MPE Table 24 Allocation of Plan fund assets Table 25 Real rate of return by asset category Table 26 Return on Plan assets, net of management fees Table 27 Average real rate of return over 50 years Table 28 Plan participation by sex Table 29 Plan participation rates for the purpose of calculating contributions, by age and by sex 2016, 2040 and Table 30 Average employment earnings and average pensionable earnings by sex, and maximum pensionable earnings.. 79 Table 31 Average employment earnings by age and sex 2016, 2040 and Table 32 Average pensionable earnings for the purpose of calculating contributions, by age and by sex 2016, 2040 and Table 33 Projected number of beneficiaries as at 31 December, by sex Table 34 Eligibility rates for some benefits at age 60, by sex Table 35 Potential retirement pension as a percentage of the maximum pension for persons reaching age 60, by sex and year Table 36 Incidence rate according to the definition of disability Table 37 Projected new disability pension beneficiaries according to the definition of disability Table 38 Projected average monthly amount of new disability pensions Table 39 Cessation rate for total disability Table 40 Cessation rate for flexible disability Table 41 Retirement rate and average retirement pension starting age Table 42 Projected retirement pensions of new beneficiaries Table 43 Mortality rates for retirement pension beneficiaries 2016, 2040 and Table 44 Life expectancy of retirement pension beneficiaries, excluding reductions in mortality after the year shown Table 45 Projected new retirement pension supplements Table 46 Projected number of death benefit beneficiaries, by sex of the deceased contributor Table 47 Proportion of contributors with an eligible spouse at the time of death 2016 and Table 48 Projected new surviving spouse s pensions Table 49 Projected number of new beneficiaries of the orphan s pension and the pension for a disabled person s child Table 50 Sensitivity tests: effect of a variation in fertility Table 51 Sensitivity tests: effect of a variation in migration Table 52 Sensitivity tests: effect of a change in life expectancy Table 53 Sensitivity tests: effect of a change in the labour market Table 54 Sensitivity tests: effect of a change in inflation Table 55 Sensitivity tests: effect of a change in the increase in average employment earnings Table 56 Sensitivity tests: effect of a change in the real rate of return Table 57 Sensitivity tests: effect of a change in the average retirement pension starting age Table 58 Sensitivity analysis summary Table 59 Plan reserve from 31 December 2012 to 31 December Table 60 Annual increase in employment earnings according to various measures Table 61 Nominal rates of return for 2013, 2014 and Table 62 Benefits for 2013, 2014 and Table 63 Changes to valuation assumptions: effect on the steady-state contribution rate Table 64 Reconciliation of the steady-state contribution rate in the valuation as at 31 December 2015 with the rate in the previous valuation Charts Chart 1 Number of contributors vs. retirement pension beneficiaries 1970 to Chart 2 Ratio of the reserve at the end of a given year to cash outflows for the following year 1990 to Chart 3 Comparison of cash inflows and outflows under the Plan for various years in the projection period Chart 4 Pay-as-you-go contribution rate and contribution rate prescribed by law 1966 to Chart 5 Ratio of the reserve at the end of a given year to cash outflows for the following year 1990 to Chart 6 Distribution of fertility rates by age Chart 7 Total fertility rate and completed fertility rate of the generation of women born 50 years ago 1965 to Chart 8 Net migration in Québec as a proportion of the population 2000 to Chart 9 Life expectancy at age to Chart 10 Distribution by age of the Québec population 1966, 2015 and Chart 11 Total population of Québec and population aged 20 to to Chart 12 Retirement of baby boomers 2015 and Chart 13 Births, migrations and deaths in Québec per projection year Chart 14 Labour force participation rate and breakdown of the population aged 20 to 64 by labour force status 1976 to Chart 15 Average retirement pension starting age under the Plan, by year in which the cohort reaches age to Chart 16 Total fertility rate in Québec and variations used in the sensitivity tests 1970 to Chart 17 Net migration in Québec and variations used in the sensitivity tests 2000 to Chart 18 Life expectancy at age 65 and variations used in the sensitivity tests 1965 to Chart 19 Average retirement pension starting age and variations used in the sensitivity tests 1985 to Chart 20 Stochastic projection: distribution of 5000 simulated average rates of return over 50 years 2016 to Chart 21 Stochastic projection: distribution of the average simulated inflation rates over 50 years 2016 to Chart 22 Stochastic projection: distribution of the average simulated unemployment rates over 50 years 2016 to Chart 23 Stochastic projection: ratio of the reserve at the end of a given year to cash outflows for the following year 2015 to Chart 24 Projected reserve vs. actual reserve (as at 31 December of the year in question) 1. Introduction In accordance with section 216 of the Act respecting the Québec Pension Plan, Retraite Québec must prepare an actuarial valuation of the Québec Pension Plan at least once every three years. This valuation was carried out as at 31 December The previous valuation was carried out as at 31 December The actuarial valuation serves to inform the government, contributors and beneficiaries of financial changes in the Plan by projecting the Plan s cash inflows and outflows for the next 50 years (from 2016 to 2065) and their effect on the reserve. It also valuates the steady-state contribution rate. The data are updated in each actuarial valuation, and the demographic and economic assumptions are adjusted in accordance with any changes that have occurred within the Plan environment. This document is the report on the actuarial valuation. It discusses the valuation methodology, the main assumptions and the results obtained. It includes four appendices that summarize the main provisions of the Plan, provide a detailed description of the assumptions and methods used, analyze the risks related to Plan funding and the uncertainty of results, and reconcile the results with those of the previous actuarial valuation. Introduction 14 2. Methodology The purpose of this actuarial valuation is to project cash inflows and outflows under the Plan for the next 50 years in order to estimate the future reserve and valuate the steady-state contribution rate, which is the rate needed to maintain the long-term stability of the ratio of the reserve to annual cash outflows. 2.1 Projecting cash inflows and outflows The valuation uses a demographic and economic projection model to estimate cash inflows and outflows under the Plan. The model requires a range of data particularly data on the Plan s contributors and beneficiaries as well as the setting of numerous assumptions. The actuarial analysis was carried out in accordance with the provisions of the Plan as at 31 December The provisions are described in Appendix I. The method used projects the population of Québec based on assumptions for fertility, migration and mortality. The projected population (broken down by age and sex) serves to determine both the population that contributes to the Plan and the population that receives benefits. Contributions and investment income make up the Plan s cash inflows. For each year in the projection period, total contributions are determined from the total contributory payroll and the contribution rate prescribed by law. The total payroll is estimated on the basis of the projected number of contributors and the assumption for the increase in earnings. Investment income is calculated on the basis of return assumptions for the different asset categories in the Plan fund. Cash outflows are made up of the benefits paid out and administration costs. Benefits are projected using assumptions based largely on Plan experience. Administration costs are projected on the basis of Retraite Québec s budgets and the agreement with Revenu Québec on the collection of contributions. The contribution rate used in the actuarial valuation is the rate prescribed under the Act. In 2016, the rate is 10.65% and will rise to 10.80% in As of 2018, an automatic contribution rate adjustment mechanism may apply. However, this actuarial valuation uses a stable contribution rate of 10.80% until the end of the projection period. This allows us to determine whether, based on the assumptions made, the contributions collected and the investment income generated are sufficient to fund cash outflows and ensure a sufficient reserve for the coming decades without requiring the application of the automatic contribution rate adjustment mechanism. 2.2 Projection period To properly evaluate the Plan s future financial situation, cash inflows and outflows must be projected over a sufficiently long period in order to fully understand the extent of the demographic transition that will occur in the future. Massive numbers of baby boomers will retire (Quebec s baby boom was from 1945 to 1965), which will place considerable strain on the Plan by substantially increasing the number of beneficiaries. Consequently, the projection period used for this actuarial valuation covers a 50-year period ending in This is the minimum projection period prescribed in the Act. Methodology 15 3. Main assumptions In preparing an actuarial valuation, numerous assumptions have to be made regarding the demographic and economic environment, and a smaller number of assumptions have to be made regarding Plan experience. This section describes the main assumptions used for this valuation. Appendix II provides more information on each assumption. Since the purpose of this actuarial valuation is to analyze the Plan s financial situation by projecting the Plan s cash inflows and outflows until 2065, the assumptions must take a long-term view. Recent situations resulting from a specific set of circumstances must be taken into consideration, without assigning them undue importance. This actuarial valuation uses assumptions that provide for no margins for adverse deviation. The assumptions are intended to be reasonable on an individual basis and coherent on an overall basis. Since many assumptions are interrelated, they must form a coherent whole that provides a reasonable projection over the long-term. Several factors are taken into account in establishing assumptions, including Plan experience, historical trends related to the main demographic, financial and economic factors, the opinion and forecasts of experts, comparisons with the assumptions made by other public plans at the national and international level as well as public policies on inflation and immigration. As Appendix IV shows, the assumptions made in the previous actuarial valuation did not always match actual results. This is the case with each actuarial valuation. Future differences will also occur. These differences may have an upward or downward effect compared with the results of this actuarial valuation. They will therefore be analyzed and taken into account in subsequent actuarial valuations. 3.1 Demographic assumptions The number of Plan contributors and beneficiaries is determined by projecting the Québec population.
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