How Pension Commuted Values can affect you

The Actuarial Standards Board (Canada) is in (hopefully) the final stages of amendments to Section 3500 of the Practice-Specific Standards for Pension Plans – Pension Commuted Values.

Why do we care?

For a member in a defined benefit pension plan, a commuted value is the lump sum amount they can transfer out of the plan on termination (or retirement in some cases) of employment.  The method used to determine commuted values is outlined in the Practice-Specific Standards for Pension Plans.

What are the key changes?

A key change is the move away from the “best age” approach for commuted values.  Currently, for purposes of determining a commuted value and, by extension, the solvency liability, an active member is assumed to retire at the retirement age which produces the largest commuted value.  Under the proposed changes, the commuted value will be based on a 50% weighting of the “best age” approach and a 50% weighting of the value based on the earliest unreduced retirement age.  This update could significantly reduce liabilities in plans with generous early retirement subsidy provisions.

Another change is to the way the discount rates are determined.  Currently, the initial and ultimate discount rates are determined as a fixed spread over Government of Canada benchmark bond yields.  The pending changes will have the fixed spread replaced by a weighted spread of Provincial and Corporate index yields over Canada index yields.  As the Designated Group that is working on the changes notes, this “…would be more consistent with a marked-to-market assessment of the economic value of the pension payable from the pension plan that the former member is forgoing by receiving a CV.”  At a given point in time, this method may produce discount rates greater than or less than those in the current standard.

When will these changes be effective?

The ASBC is meeting in early December to finalize the changes and set an effective date.  It is expected that these changes will be effective some time during 2020.  It is important to note that in order to be used for administration, payout and valuation purposes, the various Canadian jurisdictions’ regulatory bodies may first need to amend their regulations to refer to the latest version of the standards.  For example, Ontario Regulation 909, s.19.(1) refers to the standard “…as that section read upon being revised on March 31, 2015.”

We will update again as the standards are confirmed and as the regulations are updated.