Pension Commuted Values: new rules expected in 2018

The Canadian Institute of Actuaries (CIA) has provided an update regarding a review of their Commuted Value, or “CV”, Standard. This standard is used to determine the lump sum value of pension benefits payable from Registered Pension Plans. For a typical defined benefit pension plan, the new approach being considered remains similar, although the changes recommended would reduce the lump sums paid to members by as much as 5%. This would lead to lower solvency liabilities and could reduce contribution requirements.

For multi-employer plans, the impact is far more significant. The proposed changes would modify how lump sum payments for these members are calculated, so that they would receive their “proportionate share” of the plan assets on the same basis as used for funding purposes.

Impact for defined benefit plans

  • The current approach determines a value based on current yields of Government of Canada Bonds with a fixed spread of 0.9% added to the interest rates. As the yield of Government of Canada Bonds has dropped significantly over the past few years, the commuted value placed on pension benefits has increased dramatically.
  • The CIA is now expected to recommend that the yields of provincial bonds and corporate bonds, in addition to Government of Canada bonds, be taken into account when calculating lump sums. The proposed approach would lead to a reduction of lump sum amounts by up to 5%, based on current market conditions.
  • For plans whose investment policy reduced risk by attempting to immunize a portion of the assets to replicate the value of solvency liabilities, this change could lead to revisions in the investment policy, but the new rules could facilitate such immunization strategies.

Impact for Multi-employer plans

  • Currently, the same CV rules as for other defined benefit plans apply to multi-employer plans. Some provinces allow, if provided by the plan text, to pay out a lump sum that takes in consideration the funded status of the plan. The proposed changes would have such plans paying the members their proportionate share of the plan assets. This would be calculated as the liabilities for the members’ pension on the plan’s funding basis, either increased or decreased depending on whether the plan has a surplus or deficit.
  • This could significantly reduce the lump sums, possibly by as much as 50% of the current levels, although the exact level will vary a lot for different plans.

Conclusion

The updated Commuted Value standard is not expected to come into force until the spring of 2018 at the earliest, following consultation on the proposals.


News & Views - July 2017 (PDF)