FAQ - Pensions
1. What is the formula for calculating the lump sum present value of a pension?
There is no simple "formula" per se that will allow you to calculate the present value of a pension on your own. The key elements of the calculation - the terms of your pension plan, your personal situation and actuarial standards in effect at the time of the calculation – all get incorporated into the following basic formula:
- • Lump sum present value of pension = [pension amount] x [present value (PV) factor]
The components of the calculation formula are more fully described below, assuming that the pension has not yet started to be paid.
[Pension amount] is the annual pension payable without any reductions or adjustments for potential early commencement.
[PV factor] is determined using actuarial software that takes into account the following:
- • Ages of those involved at the calculation date
- • Genders of those involved
- • Assumed commencement date of the pension
- • Reduction factor, if applicable, for the pension starting before the earliest date when it can start to be paid without any reduction for early retirement
- • Form of payment (i.e., takes into account any guarantees and whether the pension continues in some form to someone else (typically a spouse) on the death of the pensioner)
- • Consideration for any automatic increases to the pension after it has started to account for increases in inflation
- • Interest rates and mortality rates in accordance with actuarial practice
- • Pension legislation at the time of the calculation.
The lump sum present value is usually determined assuming the pension commences at the date when it would have the highest value. The above formula applies to the main pension from a plan, payable for the lifetime of the pensioner and/or spouse. If you are also eligible for a temporary pension payable to your normal retirement age (typically called a bridge benefit), it would also form a part of the present value of the pension and would be determined on a similar basis.
2. Where can I find a description of the basis used to calculate the lump sum present value of a pension (commuted value) that can be transferred out of a pension plan upon termination of employment?
A full description of the methodology for commuted value factors used to determine pension transfer values can be found on the Actuarial Standards Board website (www.asb-cna.ca/), under “Standards of Practice”. Section 3500 of the Practice-Specific Standards for Pension Plans contains the Commuted Value Standards.
3. Where can I find a published list of interest rates used to calculate the present value of a pension?
A full description of the methodology for interest rates used in the commuted value factors used to determine pension transfer values can be found on the Actuarial Standards Board website (www.asb-cna.ca/), under “Standards of Practice”. Section 3500 of the Practice-Specific Standards for Pension Plans contains the Commuted Value Standards. As you will see, the description of the methodology is very technical and not that accessible to someone not familiar with financial concepts. There is a public site posted by a CIA member that lists the various commuted value interest rates at www.an-actual-actuary.com under the link "Pension Plan CANSIM rates."
The CIA cannot attest to the accuracy of information provided by this site, and providing the URL does not constitute an endorsement by the CIA of this website.
4. Where can I find a published list of interest rates used for solvency valuations?
The short answer is that there is no publicly available listing per se of solvency interest rates. But the matter is a bit more complicated than just "what is the rate?"
Solvency actuarial valuations for defined benefit pension plans in Canada generally have two solvency interest rates (i.e., discount rates), based on the expected form of settlement of the pension benefit: one for members eligible for a lump sum transfer out of the plan and another for members where an annuity purchase is expected. The basis for the solvency rate for transfers is dictated by standards produced by the Actuarial Standards Board (ASB) and is based on Government of Canada bond yields. The interest rate also varies depending on whether the pension plan provides post-retirement adjustments. The CIA provides guidance on the solvency rates to use for annuity purchases based on input from insurance companies that sell such annuities; however, the rates used can vary based on the average size of the annuity purchase premium (by individual plan member) and whether the pension payments will commence immediately or are delayed until some future date.
5. What is the standard fee for calculating the present value of a pension?
Certain services are provided automatically by the administrator of your pension plan. You should check first with your administrator to see if they can assist you. The balance of the response assumes that you need a calculation of the present value of your pension for personal purposes and cannot get it from your pension plan administrator.
It is difficult to comment on fee levels for services provided by our members as many factors come into play in setting fee levels. Fees for actuarial services are ultimately based on market conditions and the individual firm's or practitioner's pricing policy. If you have any concerns regarding fee levels for services being quoted to you by an actuary, or firm providing actuarial services, it is best bet is to seek comparable quotes from other providers.
6. I have separated from my spouse and I need an actuary to calculate the present value of my pension. Where can I go to get help?
Certain services are provided automatically by the administrator of your pension plan. You should check first with your administrator to see if they can assist you. Please be aware that in some provinces (e.g., Québec) the procedures to follow on marriage breakdown are set out in law and pension plan administrators are required to provide specific information upon request. If you need to seek help from someone other than your pension plan administrator, then we suggest you go to the "Find an Actuary" page here and search for actuaries in your province who do "marriage breakdown" work.
7. I left my former employer and I just received my pension termination option form. I am not sure I agree with the calculation of the value of my pension. What should I do?
Your first recourse regarding any questions about your pension calculation is to contact the plan administrator. If you feel you aren't getting satisfaction there you can either go to the applicable provincial pension authority with your complaint or hire a qualified pension actuary to advise on the situation. Please note that the Canadian Institute of Actuaries does not comment on individual pension commuted value calculations.
8. If I give you all the details of my pension, can you provide me with its value?
This site only answers questions of a general nature. For the answer to specific questions such as this, you need to consult your own actuary. You can find one by going to the "Find an Actuary" page here and search for actuaries in your province who do "pension" work.
9. Can I use the value of my pension, determined as if I had terminated from the pension plan, for the purposes of determining the value of the pension for marriage breakdown?
The quick answer is, not likely. The Canadian Institute of Actuaries has different standards governing the calculation of a commuted value and the calculation of a capitalized value of a pension for matrimonial pension division purposes.
The standard of practice for determining pension commuted values is in section 3500 and is to be used when a registered pension plan member elects to receive a lump sum settlement from the plan in lieu of an immediate or deferred lifetime pension. The standard of practice for the capitalized value of pension plan benefits for a marriage breakdown is in section 4500 and is to be used when the parties settle the division of a pension as family assets on marriage breakdown. It usually involves the member spouse paying a lump sum equalization payment to the non-member spouse either on a before-tax basis (e.g., RRSP funds) or on an after-tax basis (e.g., equity in the principal residence) to compensate the non-member spouse so the member spouse can retain more or all of the pension benefits accrued during marriage. For situations where both spouses are pension plan members, this would allow both parties to retain their own respective pensions and the spouse having the higher capitalized value would make a lump sum compensation payment, either before-tax or after-tax, to the other spouse for 50% of the difference.
These standards involve different actuarial assumptions and methods and would therefore lead to the pension commuted value being different from the capitalized value of pension for matrimonial division purposes. Furthermore, the capitalized value of pension for matrimonial division purposes for a defined benefit pension plan depends on many other factors such as the assumed retirement age, the valuation method mandated by the jurisdiction, etc.
The commuted value may not be appropriate for matrimonial pension division purposes. Certain jurisdictions mandate the inclusion of future salary increases in the determination of the capitalized value for a pension plan when pension benefits are based on the final-average or best-average salaries at retirement. Commuted value is usually determined based on salaries accrued only up to the calculation date.
Please note that the commuted value is a present value of future pension benefits determined as at the calculation date, not a future value determined as at the pension commencement date assumed in the commuted value calculation.
Matrimonial pension division is a highly complex issue. We recommend that you seek advice and consultation from an actuary.
10. I did not submit all the required paperwork to effect the transfer of the commuted value of my pension within six months of my termination date. As a result, the commuted value was recalculated, and unfortunately for me, went down due to an increase in the interest rates used in the recalculation. Is this six-month recalculation date a standard of the CIA or would it be a standard that our company has chosen in consultation with our actuary?
The CIA Standards of Practice do not dictate the period after which a termination benefit commuted value must be recalculated. Paragraph 3550.01 of the CIA Standards of Practice specific to pensions simply indicates that a recalculation date must be part of the disclosure accompanying a termination benefit commuted value calculation. Except where the rules around recalculation are set by pension legislation (e.g., Québec), the recalculation date is typically set in discussion with the plan administrator and their actuarial adviser.