During late 2008 and early 2009, the Actuarial Standards Board promulgated several changes to the Standards of Practice for Pension Plans (SPPP) applicable for any pension commuted value (CV) calculation with an effective date after April 1, 2009. However, two elements of the targeted changes were not implemented at that date, primarily to allow plan administrators time to update their systems and processes for preparing the CVs. These deferred changes will take effect Feb. 1, 2011, and, as such, plan administrators will need to ensure that their pension administration systems are prepared.

Changes to the Commuted Value Standards

The first update is the selection of the mortality table. For the first time, generational mortality tables are required for CV calculations. Generational mortality tables project improvements in mortality from the year of the table’s creation to each future year, emulating the observed trend of gradual improvements in mortality rates over time. Prior to this change, the UP1994 mortality table, with a static projection of mortality improvements to 2020, was required. In most cases, this change will increase commuted values by 1% to 3% for members who are within 10 years of retirement age and by as much as 10% for members currently in their 20s.

The second change is a reduction of the lag period. The current CV standards prescribe the interest discount rates for calculations effective in a given month to be determined based on specified bond yields, in effect, near the end of the second prior month. Starting in February 2011, the interest discount rates for calculations effective in a given month will be based on the specified bond yields near the end of the immediately preceding month. While the change in the lag period could generate a larger or smaller CV than under the current standards, the financial effects should be neutral over time.

The change in the lag period will require plan administrators to promptly monitor and reflect changes in the monthly discount rates, particularly for calculations near the beginning of a month. This change may be of greater significance for plan administrators that prepare employee retirement packages (and, in some cases, termination packages) in advance of the effective date, if any element of the calculations is based on the CV standards.

For example, a member might plan to retire from a pension plan on the first day of an upcoming month and intend to elect an optional form of pension. If the plan administrator uses the CV basis for determining optional forms of pension payments and the member’s forms are prepared before the retirement date, there is a risk that the plan administrator will need to redetermine the final pension amount after the member’s retirement date.

Such an outcome would increase the administrative burden, as the plan administrator would be required to perform the work twice and undertake an extra round of communication with the member—clearly a difficult discussion if the redetermination results in a lower pension payable. As this may create a new source of communication headaches for administrators and members alike, administrators may need to review their policies around preparation of packages for employees in advance of their actual termination or retirement dates. A simpler solution in many cases will be for the plan administrator to adopt an appropriate basis for actuarial equivalence calculations that is independent of the CV standards.

Given the scope of the impending changes, defined benefit plan sponsors and administrators may wish to further consult with their plan actuaries to understand how the new actuarial standards will impact their pension plans.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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