Module 7

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What is the main difference between funding and advance funding in the context of DB pension plans?

Funding involves creating a fund held by a third party, while advance funding requires contributions to be made before benefits are paid. (correct)

Funding allows for contributions to be made after benefits are paid, while advance funding does not.

Advance funding involves creating a fund held by a third party, while funding requires contributions to be made before benefits are paid.

Funding requires contributions to be made before benefits are paid, while advance funding involves paying out benefits as they are needed.

Why is 'Pay-as-you-go' approach not commonly used for private DB pension plans?

It offers significant tax benefits under the Income Tax Act.

It provides orderly cash management for employers.

It ensures employees receive promised benefits regardless of the sponsor's financial status.

It is prohibited by pension standards legislation. (correct)

What is the primary reason for advance funding a DB pension plan according to the text?

To ensure employees receive promised benefits regardless of the sponsor's financial status.

To benefit from significant tax advantages under the Income Tax Act.

To comply with legal requirements mandated by PSL and Federal legislation. (correct)

To allow contributions to be made after benefits are paid.

What role does cash flow management play in the context of advance funding a DB pension plan?

Prevents contribution requirements from spiraling out of control as the plan matures. Signup and view all the answers

What does GAAP necessitate regarding pension costs in financial statements?

Pension costs should be allocated over years of service to prevent large pension liabilities in financial statements. Signup and view all the answers

Why are tax advantages listed as a reason for advance funding a DB pension plan?

To benefit from significant tax benefits under the Income Tax Act. Signup and view all the answers

What is the main purpose of actuarial assumptions in a pension plan according to the text?

To estimate the plan's cost and sponsor's contributions Signup and view all the answers

In the scenario provided, what is the expected outcome of changing the plan design to include a bridge benefit before the age of 65?

Increased number of early retirements Signup and view all the answers

Which advice given by actuaries falls under Part 3000 of the CIA Standards of Practice in relation to pension plans?

All of the above Signup and view all the answers

Which type of pension plans are exceptions to the application of CIA Standards of Practice?

Defined contribution (DC) plans Signup and view all the answers

What is a key feature of an External User Report according to Part 3000 of CIA Standards of Practice?

Includes actuarial certification of costs and contributions needed Signup and view all the answers

What does a Going Concern Valuation Report focus on according to CIA Standards of Practice?

Actuarial certification of costs and contributions Signup and view all the answers

What sets a Solvency Valuation Report apart from a Hypothetical Wind Up Valuation Report?

Solvency Valuation Report ensures financial strength as per legal requirements Signup and view all the answers

What must be included in each actuarial valuation report for a pension plan according to CIA Standards of Practice?

Description of membership data, plan provisions, and assets Signup and view all the answers

'External User Reports' are prepared by actuaries for whom according to CIA Standards of Practice?

(C) Regulators or entities other than the client Signup and view all the answers

What is the role of actuarial assumptions in determining sponsor contributions for a pension plan, according to the text?

To help estimate the plan's cost and determine sponsor contribution levels. Signup and view all the answers

What is the main difference between forecast funding methods and traditional methods in assessing funding levels for pension plans?

Forecast methods take into account future membership changes, unlike traditional methods Signup and view all the answers

How does an increase in the interest rate affect the current service cost of a defined benefit pension plan?

Decreases current service cost Signup and view all the answers

Which economic assumption for DB pension plan funding relates to the expected growth in employees' paychecks each year?

Rate of wage and salary increases for plan members Signup and view all the answers

How do actuarial assumptions relate to the ultimate cost of a pension plan?

Actuarial assumptions have no direct impact on the ultimate cost Signup and view all the answers

Which factor increases the current service cost of a defined benefit pension plan?

Increase in proportion married Signup and view all the answers

What assumption influences how long employees work and impacts their pension benefits?

Number of hours worked by plan members Signup and view all the answers

How does an increase in the CPI affect the current service cost of a defined benefit pension plan?

Increases current service cost Signup and view all the answers

What is considered when determining benefit entitlement and benefit continuance assumptions for DB pension plans?

Incidence of early retirement and disability Signup and view all the answers

What is the main purpose of calculating commuted values for DB pension benefits?

To ensure portability of benefits upon death or termination Signup and view all the answers

According to CIA Standards of Practice, what is covered in calculations for commuted values?

Method, demographic and economic assumptions, and disclosures Signup and view all the answers

What is the purpose of IAS 19 in relation to accounting for pension costs?

To ensure comparability in financial statements across periods and entities Signup and view all the answers

What is the main difference between a Defined Contribution (DC) Plan and a Defined Benefit (DB) Plan as per IAS 19?

DB plans have obligations for future benefits while DC plans do not Signup and view all the answers

What are the requirements for determining expenses under IAS 19 for a Defined Contribution (DC) Plan?

Expenses are equal to the entity's contributions Signup and view all the answers

How is the discount rate determined for an accounting valuation of a Defined Benefit (DB) Plan according to IAS 19?

By reference to market yields on high-quality corporate bonds at reporting period end Signup and view all the answers

For accounting purposes, what must actuarial assumptions used in pension valuations be according to IAS 19?

Unbiased and mutually compatible Signup and view all the answers

Which financial reporting standards apply to Canadian companies with U.S. ownership for reporting Canadian pension plans?

ASC 715 Signup and view all the answers

What is the primary focus of the funding method 'fully funded on a going concern basis' for a defined benefit pension plan?

Ensuring there is enough money to cover future benefits if the plan continues to operate as usual Signup and view all the answers

Which characteristic is unique to Benefit Allocation Methods for DB pension plans?

Sharing rewards among plan members based on seniority and earnings Signup and view all the answers

How does the Cost Allocation Method differ from the Benefit Allocation Method in terms of current service costs for individual members in a DB pension plan?

Cost Allocation keeps costs stable while Benefit Allocation increases with retirement nearing Signup and view all the answers

Which statement accurately describes the relationship between funding method and the ultimate cost of a DB pension plan?

The funding method has no effect on the ultimate cost of the pension plan Signup and view all the answers

How do forecast funding methods differ from cost and benefit allocation methods for DB pension plans?

Forecast methods can provide insights to plan sponsors about potential future funding needs Signup and view all the answers

What is the primary purpose of a funding method in a DB pension plan according to the text?

To allocate contributions orderly over time for benefit security Signup and view all the answers

Which characteristic is an essential feature of Cost Allocation Methods for DB pension plans?

Maintaining stable costs over members' working lifetime Signup and view all the answers

What is the main difference between Benefit Allocation and Cost Allocation Methods for DB pension plans?

'Cost Allocation' determines current service costs based on seniority, while 'Benefit Allocation' focuses on individual earnings. Signup and view all the answers

What aspect of a DB pension plan does the 'going concern basis' funding method primarily address?

Covering future benefits if operations continue as usual. Signup and view all the answers

Which statement correctly describes how actuaries use different methods to express defined benefit pension plan funding requirements?

Actuaries use various approaches to allocate contributions over time ensuring benefits security and intergenerational equity. Signup and view all the answers

What is a possible argument made against the use of advance funding in the private sector?

Advance funding may result in lower after-tax returns for the business Signup and view all the answers

What is a possible consequence of overfunding a Defined Benefit (DB) pension plan?

Risk of using surplus funds leading to underfunding during market downturns Signup and view all the answers

What is the purpose of a funding policy for a pension plan?

To document level and timing of contributions committed by the plan sponsor Signup and view all the answers

Why are actuarial valuations performed in respect of a DB pension plan?

To ensure compliance with pension regulators' requirements Signup and view all the answers

What does the Going Concern Basis assume in a triennial valuation for a DB pension plan?

The plan will continue operating indefinitely Signup and view all the answers

How would you differentiate 'fully funded on a wind-up basis' from 'fully funded on a going concern basis'?

'Fully funded on a wind-up basis' covers all benefits only if the plan ceases operations, while 'fully funded on a going concern basis' covers all future benefits as they become due Signup and view all the answers

In the context of pension plans, what does 'actuarial assumptions prescribed by pension standards legislation, including grow-in benefits' refer to?

'Grow-in benefits' include assumptions about how benefits will increase over time Signup and view all the answers

Which component is NOT typically included in the funding policy for a pension plan?

'Hypothetical wind-up valuations' Signup and view all the answers

'Politically motivated interference in investment processes' is an argument made against advance funding in which sector?

'Politically motivated interference' is an argument against advance funding in the private sector Signup and view all the answers

'Annual valuations may be needed for underfunded plans' is listed as one reason for actuarial valuations. In what context does this statement apply?

'Annual valuations' may be required more frequently for plans lacking sufficient assets to cover liabilities Signup and view all the answers

What does IAS 19 define as the 'net defined benefit liability (asset)'?

The difference between the present value of obligations and the fair value of plan assets Signup and view all the answers

In the context of a pension plan, when does a net DB asset exist?

When the fair value of plan assets exceeds the present value of plan obligations Signup and view all the answers

What is the main difference between a net DB liability and a net DB asset in a pension plan?

Comparison of the fair value of assets and present value of obligations Signup and view all the answers

How is the net interest on DB liability (or asset) recognized in financial statements under IAS 19?

Recognized in entity's profit or loss Signup and view all the answers

What is one component of 'defined benefit cost for the period' under IAS 19?

Service cost Signup and view all the answers

Why does IAS 19 impose a limit on the net DB asset in a pension plan?

To prevent overstating assets not fully available to employer Signup and view all the answers

What are some complications related to the limit imposed on the net DB asset by Canadian pension standards legislation?

Enhancing pension benefit security Signup and view all the answers

Which financial statement does remeasurements of net DB liability (or asset) get recognized in under IAS 19?

'Other comprehensive income' Signup and view all the answers