New Commuted Value Regulatory Changes
Effective December 1, 2020, regulators will be making changes to how the commuted value of a Defined Benefit Pension Plan will be calculated.
The Canadian Institute of Actuaries (CIA) reviews and updates its guidance on a periodic basis. The last major update to the Commuted Value (CV) standards was in 2009.
There are 2 major factors used in determining the CV for a pension:
1. Interest Rate Assumption
The CV is a lump sum of money that represents the present value of the expected income stream that would be generated from the pension plan over the pensioner's lifetime. This number is discounted by the assumed growth rate of those funds over time. The current standards use Government of Canada bond yields (which vary on a monthly basis) plus a fixed 90 basis point (0.9%) spread adjustment to those yields.
Under the new standards, the CIA will replace the fixed spread adjustment with one that varies monthly based on provincial and corporate bond yields. This new spread adjustment will be capped at 150 basis points and cannot be less than zero.
The effect of this change will depend on bond yields and will vary over time. Based on the trend of yields rising over the last few years, this change would likely have resulted in decreased CV amounts.
2. Assumed Pension Commencement Age
When calculating a CV amount, assumptions around the age at which a former employee would have started drawing their pension must be made. Under the current standards, it is assumed that the pension would have started at the age that would maximize the CV for the former employee.
Under the new standards, it is assumed there is a probability of 50% of former employees would start at the optimal age and 50% probability that the former employee started at the earliest unreduced age.
This change in standards will typically lower the CV for plan members who are eligible for early retirement subsidies. For those employees that do not have heavily subsidized plans or are closer to (or already past) their earliest unreduced retirement date, there may be little or no impact to CV values. Any changes to the CV will vary depending on a number of factors, including age and accrued service, as well as the early retirement benefits provided by the pension plan.
Before making any decision to keep your pension or take the commuted value, you should seek the advice of a qualified professional to see how either fits into your retirement plan.
