Actuarial Notes

Guidance on Asset Valuation Methods

By Canadian Institute of Actuaries · 2024 · Document 224027

Study guide: Exam RET-201

A Canadian Institute of Actuaries educational note, dated February 14, 2024, intended to assist actuaries in selecting an appropriate asset valuation method when reporting a pension plan's financial position, determining its funding requirements, and advising on its costs and obligations for financial statement reporting. It was first published in November 2007, updated in September 2014, and updated in 2024 to refer to the standards of practice effective December 1, 2022. It was prepared by the Committee on Pension Plan Financial Reporting.

On the syllabus

Preamble

  • Process
  • Your feedback

1 Introduction

  • The asset valuation method potentially affects the timing and amount of future plan contributions or costs.
  • Quotes the Standards of Practice paragraphs 3210.03, 3210.17, 3210.18 and 3410.01 on the valuation of assets.
  • For going concern valuations, the note addresses only the case where a method is selected to moderate the volatility of the assets.

2 Objective

  • Assuming an efficient market, current market value is the best measure of an asset's value.
  • An asset value other than market value is usually a means to moderate the volatility of contributions in a going concern valuation, or of the net benefit cost recognized in financial statements.

3 Desirable characteristics of an asset valuation method

  • Achieves objectives
  • Tracks to market value
  • Does not unduly deviate from market value
    • Considers whether to restrict the asset value with a corridor, that is, within x% of market value.
  • Has a reasonable and logical relationship to market value
  • Is generally free of any bias
    • Gives four examples of bias generally considered inappropriate, including a corridor unbalanced in favour of a higher smoothed value of assets.
  • Has no undue influence on investment transaction decisions or vice versa
  • Is consistent with the length of typical economic cycles
    • A method that delays recognition of investment-related gains or losses over more than five years typically would not be appropriate.
  • Two characteristics that make a method's bias acceptable.

4 Other considerations

  • Conservatism
  • Corridors
  • Application of the method
  • Changing asset valuation methods

5 Disclosure

  • Quotes Standards of Practice paragraphs 1710.01, 3260.01 and 3260.27 on disclosing the asset valuation method.
  • Lists best-practice additional disclosures, and suggests considering disclosure of the plan's financial position with assets at market value.

6 Hypothetical wind-ups

  • For a hypothetical wind-up valuation the value of assets should be the market value of assets (paragraph 3240.07).

7 Solvency valuations

  • A solvency valuation is typically a form of hypothetical wind-up valuation required by law (paragraph 3250.01), and the actuary may consider an asset valuation method other than market value if permitted by law and stipulated by the terms of the engagement.

Sources