Canadian Institute of Actuaries finalizes new commuted value standards
In January 2020, the Actuarial Standards Board of the Canadian Institute of Actuaries (CIA) released its updated pension commuted value standards.
The new standards, which are effective as of August 1, 2020, largely reflect the second Exposure Draft of new rules for pension commuted value calculations that was published on November 23, 2018, and discussed in the January 2019 News & Views.
The original updated commuted value standard was released in 2017 for consultation. However, its implementation was delayed while the CIA working group prepared a revised draft following the responses that the Actuarial Standards Board received to the initial proposals (as discussed in the July 2017 and September 2018 News & Views).
Although the Actuarial Standards Board had originally proposed adopting a new mortality improvement scale in the updated commuted value standards, it announced on June 20, 2019 that it would not be moving forward with the new mortality improvement scale, as discussed in the August 2019 News & Views.
Summary of main changes
The new commuted value standards require an assumed retirement age to be based on a 50/50 blend of the most valuable age and the earliest unreduced age, rather than relying on the most valuable retirement age alone.
Under the new standards, interest rates will continue to be based on Government of Canada bond yields, with an adjustment that will vary between 0% and 1.5% depending on the relative yields of provincial and corporate bonds to Government of Canada bonds. The current standard uses a fixed adjustment of 0.90%.
Application to target pension arrangements
Target pension arrangements (TPAs) are plans that can reduce benefits to manage their funded status. In addition to target benefit pension plans, this can include negotiated cost or multi-employer pension plans in some cases. Under the new standards, commuted values for TPAs should be calculated based on the plan’s most recent going concern assumptions. However, the plan terms or applicable legislation may require that the funded status of the plan and/or any provision for adverse deviation be included or excluded from the calculation of commuted values.
In the event of any discrepancies between the new commuted value standards and the current rules, TPAs must continue to adhere to the legislation, until such time as the legislation is modified to conform to the new standards.
The new commuted value standards permit early adoption of the TPA standards if all of the sections of the standard applicable to TPAs are adopted at the same time. Early adoption is subject to legislative requirements.
The new commuted value standards are expected to slightly reduce the commuted values of defined benefit pension entitlements, while increasing the complexity of commuted value calculations. The new standards could also result in significantly reduced commuted values for TPAs, where the plan and applicable legislation permits the new commuted value calculations to be applied.