THE CONSULTING ACTUARY IN CANADA by F. LIVSEY (Published by kind permission of the Manchester Actuarial Society) INTRODUCTION THIS paper is intended to give a fairly complete picture of the actuary in Canada when read in conjunction with T. R. Suttie's paper, 'The Actuary in Canada' (J.S.S. 13, 199). Suttie concentrated on the life insurance business in his paper, and with this in mind, I shall refer mainly to consulting actuarial work. Consulting practice in Canada is very similar to that in Great Britain, where the major part of the actuary's time is devoted to pension funds. The main differences are that Canadian consulting firms may advertise, and may also include insurance brokerage as part of their business provided that they hold the necessary licences. The small amount of friendly society work in Canada is handled by actuaries who specialize in such work, and there is no market in reversions or life interests. SOCIAL SECURITY Before considering pension plans, reference must be made to the Canadian old age security system. The Old Age Security Act currently provides every Canadian resident who is 70 years of age or over with a monthly pension of $75. To qualify for a pension a person must have resided in Canada for the ten years immediately preceding the day on which his application for pension is approved. If absent during the ten-year period, a person may still qualify if he resided in Canada prior to the ten-year period for twice the period of absence and must have resided in Canada at least one year immediately preceding commencement of pension. Payment of pension may be continued for any period of residence outside Canada if the pensioner has resided
THE CONSULTING ACTUARY IN CANADA 389 in Canada for at least 25 years after attaining age 21, or if he has not, it may be continued for six consecutive months excluding the month of departure from Canada. The financing of the pension is through ear-marked sales tax, personal income and corporation income tax. The pension is not subject to any means test and is paid to anyone who fulfils the age and residence requirements irrespective of his wealth or other income. The pension is subject to income tax and is added to the recipient's other income for tax purposes. In July 1963, the federal government announced its intention to introduce a wage-related Canada pension plan. The plan as outlined provides quite generous benefits and will be funded on a payas-you-go basis. At the time of writing (October 1963) there is uncertainty regarding the final form which the federal plan will take since there are problems of adapting the Ontario portable pension legislation (referred to later in this paper) and other pension plans to the federal plan. Old age assistance and pensions to the blind and disabled are subject to a means test. The actual rates of pension are set by the provinces. Unemployment insurance is a federal responsibility. At the present time coverage does not apply to directors or officers of corporations nor to salaried employees earning more than $5460 per year unless such salaried employees elect to be covered. Certain occupations are also excluded from coverage, e.g. agriculture. The Unemployment Insurance Fund nearly went bankrupt and has recently been reviewed by a committee of enquiry which suggested that the programme be based on insurance principles, providing benefits for a limited time and more universal coverage, with an assistance programme dealing with residual employment on a test of needs basis. Family allowances are paid in respect of every child under the age of 16 who was born in Canada or has been a resident of Canada for one year, or whose father or mother was domiciled in Canada for three years immediately prior to the birth of the child. Each of the ten Canadian provinces has a Workmen's Compensation Board which provides compensation to a worker or his family if the worker is injured or killed in the course of his employment.
39 F. LIVSEY Hospital insurance is a provincial matter. In general, each plan covers all necessary costs incidental to in-patient hospitalization at the ward level. Other medical, surgical and hospital benefits can be arranged through insurance companies, doctor-sponsored plans and non-profit organizations. In 1962 the Saskatchewan government introduced a compulsory medical care programme and other provinces are considering medical care programmes. PENSION PLANS The most unusual feature of Canadian pension plans is the lack of federal or provincial government regulation at the present time. In the past, principles and rules for registering pension plans for income tax purposes have been introduced by the Department of National Revenue but later withdrawn so that there is now no guide as to what constitutes a registered pension plan. It is understood that since the withdrawal, officials of the Department of National Revenue continue to examine plans submitted for registration substantially on the basis of the principles and rules previously set out. In general, a pension plan will be registered only if the plan provides pensions to employees for life, the employer is a party and a contributor to the plan, the employer's contributions are paid irrevocably to the plan, and some funding programme is adopted. Provincial approval is nominal at present but may become more important. If a pension plan is a registered plan the following situation prevails: 1. 2. 3. 4. 5. The employee may deduct his contributions for tax purposes within the limits permitted. The employee is not taxed on his employer's payments to the fund. The employer may deduct his contributions for tax purposes within the limits permitted. The investment income of the pension fund (insured or trusteed) is tax free. Pension payments to retired employees are taxed as income. Lump sum payments out of the pension fund on the employee's death or withdrawal are subject to tax.
THE CONSULTING ACTUARY IN CANADA 391 In view of the tax position, contributory plans are very popular. Approximately 80% of pension plan members are covered by contributory plans. Benefits under pension plans vary widely. The following table summarizes the types of benefit covered by a survey of the Dominion Bureau of Statistics in i960: Type of benefit Unit benefit Final earnings Average final earnings Average best earnings Career average earnings Money purchase Profit sharing pension Composite Flat amount Totals No. of plans Percentage Total members Percentage 28 270 117 2.37 5.392 211 121 411 8,920 03 30 1 3 266 604 2 4 1 4 46 100 0 10,793 283,720 632,295 468,247 242,127 23,616 24.824 I77.O59 1,862,681 0 6 15 2 34 O 25 1 13 0 1 3 1 3 95 100 0 The surprising feature of this table is the high percentage of plans which are money purchase. However, they cover only 13 % of the members. Career-average plans have proved very popular. In view of continuing inflation, however, there is a trend towards finalaverage earnings plans. Provision for widows has been mainly through group insurance. The need for continuing income to a widow in the event of the death of her husband is gradually being recognized and there is a trend towards incorporating widows' pensions in pension plans. Many plans provide pensions in the event of disability, the pension payments being subject to tax in the hands of the recipient. Insurance companies are currently offering long-term disability insurance contracts which provide an income of 50 % or 60 % of salary while a man is disabled, ceasing at normal retirement date or recovery if earlier. The proceeds of these contracts are tax free and consequently many pension plans are being integrated with longterm disability programmes in order to take advantage of this favourable tax feature. Variable annuities are available in Canada but have received 25 ASS 17
392 F. LIVSEY little response. A few plans do incorporate a variable pension but this feature has not become an established part of Canadian pension planning. Similarly, cost-of-living plans have not yet become established. Employees are permitted to make additional voluntary contributions in respect of future service and also in respect of past service before becoming contributors to the plan, within the limits permitted. Pension plans form a very important part of the fringe benefits negotiated bv unions. The typical union-negotiated plan provides a flat benefit based on service only. Negotiations are conducted on either a benefit basis or a cents-per-hour cost basis. Most union plans are non-contributory, reflecting the influence of pensions negotiated by unions in the United States where employees' contributions are not tax-deductible. The pension plan is subject to the bargaining agreement between the union and the employer which is usually negotiated for a three-year period. A registered pension plan can provide benefits for directors but cannot provide benefits for a partner or sole proprietor or their spouses. The self-employed person may make tax-deductible contributions to registered savings plans. In fact, individuals may make tax-deductible contributions to registered savings plans whether self-employed or not within the limits permitted. (Persons who are not contributing to an employee pension plan enjoy a higher limit.) Very few plans are integrated with the Old Age Security pension. However, employers are realizing that increases in the Old Age Security pension will result in added costs unless the pension benefits are cut back to allow for such increases, and there is no doubt that integration will become an important part of pension planning. The lack of federal government regulations has resulted in discriminatory plans being established and income tax loopholes are being exploited. It is difficult to forecast how long this situation will prevail. However, direct regulation of pension plans is a provincial responsibility, and it is likely that the provinces will exercise some form of supervision.
THE CONSULTING ACTUARY IN CANADA 393 The whole cost of past service benefits may be deducted for tax purposes. Such costs must be certified by a Fellow of the Institute, Fellow of the Faculty, or Fellow of the Society of Actuaries. The working papers are submitted to the Department of Insurance for examination. The past service liability may be funded by means of a lump sum payment or amortized over a period of years. There is complete flexibili'ty.in funding the pension plan, and the employer is not required to make any minimum contributions. FUNDING MEDIA The main methods of underwriting Canadian pension plans are: 1. Canadian Government annuities. 2. Insured Contracts Group annuities. Deposit administration. Segregated funds. 3. Trust Funds. Canadian Government annuities The Canadian Government sells group contracts for pension plans and also individual immediate and deferred annuities. The group rates are currently not as competitive as those offered by insurance companies and consequently this method of underwriting is rarely used for new plans, although many old plans are funded by this medium. An employee who terminates his employment cannot receive a refund of his contributions but receives a paid-up annuity at normal retirement date. The maximum pension which may be purchased is $1oo per month. Insured contracts Group Annuities are available for groups of two lives or more. Some insured group annuity plans are for employees of large companies, but this funding medium is mostly used for plans of small and medium sized companies. Pension units are bought at definite costs, and all pensions purchased are guaranteed. Insurers offer participation in profits by way of experience rated refunds, immediate discounts based on new interest rates, or revised 25-2
394 F. LIVSEY premium rates. This is the most common method of underwriting a pension plan through an insurance company. Deposit administration is a compromise between the group annuity method of underwriting and the trusteed method. Deposits are made to an unallocated fund on the advice of the actuary. At retirement the single premium cost of a member's annuity is taken from the deposit fund and applied to purchase his benefit. The deposit fund is credited with interest at a guaranteed rate or according to a guaranteed formula. Excess interest is usually credited as a bonus. Under some contracts the retired lives' fund is experience rated. Recently, contracts have been issued on a 'new money' basis. ' New money' consists of net deposits made in a calendar year plus that portion of previous years' accounts which is assumed to 'rollover' and be reinvested. The 'new money' is credited with interest based on the yield from new investments. Segregated funds. Certain amendments were made in 1961 to the Canadian and British Insurance Companies Act which now permits insurance companies to establish separate investment funds with assets segregated from their regular operations. These funds are maintained in respect of policies under which the insurance company's liability varies with the investment results of the segregated funds. Insurance companies are therefore able to act as an investment medium in direct competition with the trust companies. The only qualification is that the new contracts must contain an insurance element. The segregated funds may be invested in fixed interest securities, mortgages or equities. Most employers participate in pooled funds but a large employer may have his own separate fund. Formerly, insurance companies were restricted in the amount of investments which could be made in equities but they are now able to offer something which is very similar to the trusteed type of plan. Trust funds In numbers of employees covered and in assets, most Canadian pension plans are underwritten on a trusteed basis. The funds are held by trust companies, individual trustees or pension fund
THE CONSULTING ACTUARY IN CANADA 395 societies. Trust funds have enjoyed greater opportunity to invest in equities, complete flexibility, and cost savings features but these advantages have almost been eliminated by the new contracts which insurance companies are now offering. Trust companies offer two types of service. They will either act as principals, in which case the employer or investment committee delegates responsibility for investment to the trust company subject to conference from time to time, or they may act as agents, merely holding the investments which they have been instructed to purchase by the employer or investment committee. Pooled pension funds have been established whereby units may be purchased in funds invested in mortgages, fixed interest securities or equities. Small employers are therefore able to participate in a wide diversification of investments by investing in pooled funds thereby reducing the investment 'risk'. These funds have proved very successful and the investment results have been good. Indeed, some large employers prefer to make use of pooled funds for at least part of their investment portfolio. Most union plans are trusteed and some industry-wide pension plans negotiated by unions with a group of employers have been established. INVESTMENTS The total assets of trusteed pension plans at the end of 1960 were $3616 million. Fixed interest securities accounted for 77% of these assets, stocks 9%, mortgages 8%, and other assets 6%. At least 90% of investments income must be derived from Canadian sources in order to obtain full tax exemption. At the time of writing, fixed interest securities are yielding approximately 5½%, stocks 3½%, and mortgages 6%. Most actuarial valuations are carried out on a 4% basis, although 4½% has been adopted for some cases. Yield performance closely follows that in the United States but the yield on fixed interest securities has been traditionally about 1 % above the corresponding American yield. It must not be construed from the above figures that Canadian trustees have lagged behind in the purchase of common stocks.
396 F. LIVSEY There is not a wide range of stocks available, e.g. there are no stocks in the chemical and automobile industries. Also, there has been a tendency to prefer fixed interest securities because of the yield differential even when allowing for the growth prospects of common stock. It is evident, however, that common stocks will play an increasing role in the investment portfolios of pension plans. Approximately 20 % of all new capital formation within Canada arises from the accumulation of pension reserves. PORTABLE PENSIONS The Ontario legislature has recently passed the Pension Benefits Act, described as 'An Act to provide for the extension, improvement and solvency of pension plans and for the portability of pension benefits'. Each employer in Ontario who employs fifteen or more employees must establish a 'standard' pension plan to become effective on or before 1 January 1965. The standard plan must provide, for employees who have attained age 30, benefits equal to the modest level set out in the Act. On termination prior to retirement the benefits accrued under the standard plan are fully vested in the employee. The vested deferred annuity may be provided by purchase of an annuity, or by a contractual undertaking by the employer to pay or purchase such annuity, or by transfer of the necessary pension benefit credit to a Central Pension Agency or the pension plan of the new employer or to a retirement savings plan. Under no circumstances will the employee be permitted to withdraw his contributions made after 1 January 1965 to the standard plan. All benefits not actually specified as standard benefit constitute a 'supplementary pension plan'. Supplementary benefits which accrue after 1 January 1965 must fully vest in the employee no later than by age 45 with 10 years of service. Employees' contributions on which these vested benefits are based must be 'locked in', except that a terminating employee may withdraw a cash sum up to 25 % of the value of the vested supplementary benefit. The vested deferred pensions may be provided in the same manner as those under the standard plan.
THE CONSULTING ACTUARY IN CANADA 39? A pension plan filed for registration under the Act must provide for funding in accordance with the tests for solvency prescribed by the regulations. At the time of writing, the regulations have not been finalized but the proposed regulations require standard plan benefits to be maintained in a fully funded position, supplementary plan benefits must reach a fully funded position within 25 years, and any deficiencies due to plan amendments or departure of actual experience from the valuation assumptions must be liquidated within the periods prescribed. The responsibility for enforcing the new law is placed with a Pension Commission. The chief administrative officer is to be the Superintendent of Pensions who will advise the Commission as to whether each plan meets the requirements of the law. The main attraction of the Ontario legislation is that it permits pension plans to comply with the legislation within their present framework. The Ontario legislation is, in effect, an extension of private pension plans. Existing pension plans in Ontario will have to be amended to comply with the vesting requirements and, in some circumstances, benefit levels. Pension plans which are on a pay-as-you-go or terminal funding basis must be fully funded within 25 years. It is apparent, however, that there will be a conflict between the Ontario legislation, which is law, and the proposed federal plan. Matters are further complicated by the fact that the province of Quebec intends to introduce its own pension legislation and does not want to take part in a federal plan. The Ontario legislation may be amended before coming into effect on 1 January 1965, in order to avoid a conflict. It seems probable, however, that the vesting and solvency features will be retained. The whole question of the federal-provincial conflict on pension plans remains to be settled at the conference table. THE ADVISERS Pension advice is available from consulting actuaries and pension consultants. Some firms of pension consultants have actuaries on their staff and others have no actuaries at all. In the case of firms of pension consultants, the negotiations with
398 F. LIVSEY the client are often conducted by the consultants who have had little or no actuarial training. There may therefore be no direct contact between the actuary and the client and this would normally contravene the professional code of conduct of the Institute. In practice, it is generally considered that an actuary practising in Canada is bound by the corresponding code of the Society which is not specific on this point. There have been several instances of organizations calling themselves 'actuarial consultants' who have no actuaries associated with them. It must be very difficult for a layman to determine precisely who is an 'actuary'. In North America, an 'actuary' may be a member of the Institute of Actuaries, the Faculty of Actuaries, the Society of Actuaries, the Conference of Actuaries in Public Practice, the Fraternal Actuarial Association or the Casualty Actuarial Society. The actuarial profession in Canada has no legal status and the Canadian Association of Actuaries (C.A.A.) is currently considering the need for a national organization of actuaries with legal status and with only one membership classification denoting full qualification as an actuary. Fortunately, the C.A.A. encompasses almost all practising actuaries in Canada but in order to protect the public it is felt that there is a need for a national organization whose members would be solely recognized as fully qualified actuaries. The Society of Actuaries is also considering a similar problem in the United States. PROSPECTS FOR EMIGRANTS Anyone contemplating emigration to Canada would be advised to read Suttie's paper which, in addition to describing the role of the actuary in the insurance industry, gave some general impressions of the Canadian way of life. Another useful reference would be D. H. Miles's paper, 'The British actuary in the United States' (J.S.S. 15, 358). In reading Suttie's paper it must be remembered that the cost of living and salaries have continued to rise. A newly qualified fellow would currently earn a salary of $9000 to $11,000. As regards cost of living, it is impossible to determine a single figure applicable in all circumstances. The price structure is completely different from
THE CONSULTING ACTUARY IN CANADA 399 that in the United Kingdom and such items as services, entertainment and accommodation are more expensive while petrol and cigarettes, for example, are cheaper. The overall level of prices is higher and the standard of living is higher. In general, it is my opinion that a conversion rate of $4 or $5 to the would equate the cost of living for a married man with a family, whereas a higher conversion rate would apply to a single man because of the different expenditure pattern. These figures may seem surprisingly low but it must be remembered that the cost of living has increased at a greater rate in the United Kingdom than in Canada or the United States in recent years. The income tax position is more favourable than in the United Kingdom. As regards prospects, there is a definite shortage of actuaries in North America. It has been estimated that the numbers of actuaries qualifying each year are insufficient to meet present requirements without even considering future requirements. The progress of the individual depends, of course, on his capabilities. In general, an actuary would find himself in a senior position at a younger age than his counterpart in the United Kingdom and there are more opportunities available. The intending emigrant would be advised to consider emigration if he has either completed the early sections of the examinations of the Institute or qualified as a Fellow. A student would then gain credit for the sections which he has passed and complete his examinations with the Society. A Fellow may wish to complete the Society's examinations in order to learn North American practice, but this is perhaps only of real value to an insurance actuary since the final examinations of the Society include such items as life insurance law and accounting. A Fellow of the Institute may become an Associate of the Society without examination provided that he completed his examinations outside North America. A British actuary coming to reside in Canada should certainly apply to become a member of the C.A.A. which holds regular meetings throughout the winter. A consulting actuary would probably also join the Canadian Pension Conference which comprises actuaries, pension consultants and businessmen. The
400 F. LIVSEY Society of Actuaries holds regular meetings which are more in the way of conventions lasting for two or three days. These meetings afford actuaries one of the few occasions when they can meet and exchange ideas with actuaries from other parts of this vast continent. CONCLUSION Canada offers many opportunities to an actuary, and it is up to the individual himself what use he makes of these opportunities. The decision to emigrate is a difficult one to make, and no advice can be offered in this connexion but it is hoped that the information contained in this paper will prove useful to the intending emigrant. I would conclude that an actuary's stay in Canada whether permanent or for a limited period should prove to be valuable.