The Canadian Institute of Actuaries (CIA) has stated that revised standards for pension plan commuted values will come into effect December 1, 2020. On that date, the calculation used by administrators will change. This change was mentioned in their latest memo (.PDF) as of July 20, 2020. The revisions affect Section 3500 of its Standards of Practice, which is used when determining commuted values for pension plans. For those who haven’t heard of The Canadian Institute of Actuaries before, it’s the national, bilingual organization and voice of the actuarial profession in Canada. Questions? Assess your options by calling us at 1-888-554-6661.
So what are these changes, and what do they mean in plain english?
There are two key changes, both affect those with defined benefit pension plans.
a) A change in the interest rate assumption
b) A change in the pension commencement age assumption used to calculate your commuted value.
Both of these changes could have a significant effect on the commuted value paid to you when you retire, especially if you have an early retirement provisions. The new calculation formula will likely result in lower commuted value amounts on or after December 1st 2020, therefore reducing the possibility of receiving a cash surplus.
Furthermore, this makes it more difficult for insurance companies to match copycat annuities.
So, if you are retiring soon and planning to take the commuted value option, we highly recommend doing so before November 1, 2020.
The rules that we’re living with right now, prior to the December changes, are good. So if you are able to retire, we advise that you do so before November.
We specialize in helping individuals prepare for retirement. and can help you minimize your tax. If you are retiring in the Fall, talk with us. There are ways to minimize your tax. Assess your options by calling us at 1-888-554-6661.
What We Know About The Commuted Value Changes for December 2020
What is a commuted value any why is this important?
- The commuted value is the lump sum value payable to a member of a defined benefit pension plan when they opt for a lump sum lieu of a pension payable for life.
- This calculation is used when determining the amount of money that can be used to buy a Payout Annuity for our copycat pension opportunities.
What is changing?
- The underlying pension date used in the calculation (. Ie blended earliest unreduced pension age/most valuable age vs. only most valuable age). and the spread assumption between provincial/corporate bonds vs Government of Canada bonds (market yields vs. flat 90bps estimate).
What does this mean for future incomes?
- These changes will typically lead to a lower commuted value which makes it more difficult for the financial institutions to offer a copycat annuity. And definitely more difficult to offer a cash surplus with the copycat.
Responses From The Big Financial Companies
What do the big insurance companies think of this new calculation change and how it will impact commuted value of pensions in Canada? We reached out to them for comments, and this is what they told us:
- Desjardins Financial: “Obviously, because it will likely have a downward impact on the commuted value, it will have an impact on the pricing of a copycat annuity. Currently, for most copycat annuities, we usually quote a premium that is between 5 and 10% lower than the commuted value of the RPP. If the CV drops by more than 10%, then we would have to reduce the bridge payments to make sure that the lifetime payments are the same as those guaranteed in the RPP.”
- Canada Life: “The Canadian Institute of Actuaries have changed the criteria for calculating commutation values. These calculations will be more conservative and likely lead to lower overall commuted value amounts. This will occur December 1, 2020 and will make it more difficult for Insurance companies to match the terms of the employer pensions. The changes include 1) move from using fixed rate of 90bps as a discount rate to a floating rate that is a mix of provincial/ federal bonds capped at 150bps and 2) using the average of the optimal pension age and the earliest possible age the pension can be taken. Pensions with good bridge benefits will be impacted most with overall commuted values expected to reduce, hence more challenging to replicate with a copycat annuity.”
- Sun Life: “Unfortunately, the impact is very hard to quantify due to the nature of the changes, the nuances of different plans, as well as some of the underlying assumptions used by pension plans. I have summarized some quick highlights below, let me know if this helps. There isn’t much more information I have available at this time. … Based on the above, it seems like that as a result of the recalculations, we can typically expect this to decrease the CVs resulting in lower incomes from the annuities. It also seems like information on this topic is limited but I am hoping this helps. If you do have any additional questions or would still like for a call, please let me know and I will arrange. Just wanted to share this with you first as it seems this is all we know right now.”
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