Pension Commuted Values
The Actuarial Standards Board (Canada) has now finalized the amendments to Section 3500 of the Practice-Specific Standards for Pension Plans – Pension Commuted Values.
These new standards are generally effective August 1, 2020. Early adoption is not permitted other than for Target Pension Arrangements (TPA’s). Some jurisdictions may need to amend their regulations to allow for the new commuted value standard to become effective. For non-TPA plans in Ontario, the standards should be effective August 1, 2020, given the recently filed Ontario Regulation 420/19.
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.
Different Rules depending on Type of Plan
If your plan qualifies as a Target Pension Arrangement (TPA) it will follow one set of rules, generally allowing the use of going concern valuation assumptions and potentially adjusting the value depending on the funded ratio of the plan. Broadly speaking, TPA’s are pension plans that allow a reduction of the accrued pensions of members while the pension plan is ongoing, to maintain the funded status of the plan. TPA’s then include certain multi-employer pension plans and target benefit plans.
If your plan is not a Target Pension Arrangement, then another set of rules apply. We discuss this below.
What are the key changes?
A key change is the move away from the “best age” approach for commuted values. Prior to August 1, 2020, 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 new rules, 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 can significantly reduce liabilities in plans with generous early retirement subsidy provisions.
Another change is to the way the discount rates are determined. Prior to August 1, 2020, the initial and ultimate discount rates are determined as a fixed spread over Government of Canada benchmark bond yields. The new rules will have the fixed spread replaced by a weighted spread of Provincial and Corporate index yields over Canada index yields. At a given point in time, this new method may produce discount rates greater than or less than those in the prior standard.