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Article | Global News Briefs

Canada: Final rules for calculating commuted values

Retirement|Investments|Total Rewards
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By Gavin Benjamin , Rohan Kumar and Evan Shapiro | February 21, 2020

The final rules could potentially have significant effects on DB pension plan member commuted value amounts and on plan administration.

Employer Action Code:  Act

The Canadian Institute of Actuaries has revised its standards of practice for calculating commuted values (CVs), including making changes to the interest rate and pension commencement age assumptions. This could significantly affect the CVs paid to defined benefit (DB) pension plan members, depending on the plan characteristics (specifically the early retirement provisions), prevailing bond yields and profile of the affected member. Additional changes are specific to target pension arrangements (i.e., certain target benefit and multi-employer plans). The effective date is August 1, 2020, with early implementation permitted for target pension arrangements. Further details can be found in our Client Advisory: Changes to pension commuted value standards released.

Key details

  • Interest rate assumption: The rates will continue to be determined monthly by adding a spread adjustment to government bond yields. Under the revised rules, the adjustment will be based on provincial and corporate market bond yields (and capped at 150 basis points), rather than the current fixed 0.9% adjustment. The effect of the change will depend on market conditions; in recent years, this change would have tended to produce higher interest rates and, as a result, lower CV amounts.
  • Pension commencement age assumption: The current assumption is that the member would start the pension at the age that maximizes the CV (optimal retirement age). The revised standards assume 50% probabilities that the member would start the pension at the optimal retirement age and at the earliest date that the pension would be unreduced. The effect of this change on CV amounts, if any, will depend on a number of factors. It will typically result in reduced CVs for members eligible for significant early retirement subsidies based on the plan provisions.
  • Target pension arrangements: The revised standards provide that the plan’s going concern funding assumptions are to be used to calculate CVs for plans that permit a reduction in the accrued pensions of members and beneficiaries while the plan is ongoing. However, in a number of jurisdictions (e.g., Ontario), regulations already prescribe a basis for calculating CVs payable from such plans, in which case the approach in the revised standards will not apply unless the applicable regulations are changed.

Employer implications

As well as having the potential to significantly affect member CV amounts and DB plan administration, the changes could reduce solvency liabilities for plans with valuation dates on or after August 1, 2020. There could also be a less pronounced effect on going concern funding and accounting obligations. Plans should assess the implications for pension communications, including any disclosure of CVs in member statements, termination estimates for active members and the use of CV estimates in retirement modeling tools. Employers should consider the impact on supplemental executive retirement plans (SERPs) using CV assumptions to calculate lump sums or (less commonly) to determine SERP funding amounts or the face amounts of letters of credit used to secure SERP obligations. The changes may provide an opportunity for employers to revisit the prospect of offering lump sums to deferred vested members as well as offering a CV option to retiring members within their DB pension plans.

Contacts

Gavin Benjamin



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