A number of employers in Canada offer defined benefit pension plans to their employees. A defined benefit (DB) plan provides a pre-defined income to retirees, normally based upon the employee’s income and years of service to the company. These pension amounts are typically payable for life, and may provide an income to a surviving spouse. They may also be subject to some form of indexing as protection against inflation. These differ from defined contribution (DC) plans, which specify the contribution amount as opposed to the benefit.
Because the cost of a DB plan is volatile and depends on future investment returns and life expectancy, there is a prominent role for actuaries to play in this area. Approximately 40% of the CIA’s members practice in the pension/retirement area. Pension plans can represent a significantly liability to the plan sponsor (the employer), who will also need to ensure that funding is in place to provide the promised benefits.
Actuaries are required by law to certify the valuation of the pension plan’s liabilities. As part of this function, actuaries must develop appropriate assumptions for life expectancy, future returns on invested assets, future changes in salaries, and other factors. Actuaries are normally involved in plan design discussions. They may also provide recommendations to the plan sponsor on funding strategies; consequently, actuaries are increasingly involved in the investments of DB plans and in ensuring that DC plans meet the future needs of Canadians.
A large number of public sector employees belong to a DB plan, but the prevalence of these plans in the private sector has been decreasing. Many employers have moved to a DC plan; therefore, a number of actuaries in the retirement area have been involved in alternate pension plan designs, which include target benefit plans (a hybrid between DB plans and DC plans).