Revised standards of practice for calculating commuted values

  1. Does Section 3500 of the revised Standards of Practice for Pension Plans – Pension Commuted Values (revised standards of practice) of the Canadian Institute of Actuaries apply to federally regulated pension plans?

    Yes. Subsection 18(1) of the Pensions Benefits Standards Regulations, 1985 (PBSR) provides that a pension benefit credit (the commuted value of a pension benefit) must be determined in accordance with the Recommendations for the Computation of Transfer Values from Registered Pension Plans effective September 1, 1993, issued by the Canadian Institute of Actuaries as amended from time to time. The revised standards of practice therefore automatically apply to the calculation of a commuted value under the PBSR.

  2. When are the revised standards of practice coming into effect?

    The revised standards of practice take effect on December 1, 2020.

  3. What are the key changes to Section 3500 of the revised standards of practice?

    The key changes to the revised standards of practice for calculating commuted values are:

    • changes to the methodology used to calculate the underlying interest rate assumption  
    • changes to the pension commencement age assumption
    • the addition of specific standards for target pension arrangements including the ability to use a pension plan’s going concern funding assumptions with certain adjustments

    Please see the website of the Canadian Institute of Actuaries for details on all the changes to Section 3500 of the revised standards of practice.

  4. What are target pension arrangements?

    A target pension arrangement is a new term that is defined in paragraph 3570.01 of the revised standards of practice as
    “a pension plan for which applicable legislation contemplates the reduction to the accrued pensions of plan members and beneficiaries while the pension plan is ongoing as one of the available options for maintaining the funded status of the pension plan, and where the reduction in accrued pensions is not necessarily caused by the financial distress of the plan sponsor or sponsors”.

  5. Are negotiated contribution plans considered target pension arrangements?

    Yes. A negotiated contribution plan as defined in subsection 2(1) of the Pension Benefits Standards Act, 1985 (PBSA), meets the Canadian Institute of Actuaries’ definition of a target pension arrangement. This is because section 10.11 of the PBSA provides that the administrator of a negotiated contribution plan may, subject to the Superintendent’s consent and despite the terms of the pension plan, make an amendment that has the effect of reducing pension benefits or pension benefit credits.

    The educational note issued in August 2020 by the Canadian Institute of Actuaries includes a confirmation that any pension plan that meets the definition, regardless of whether or not the plan is required to be funded on a solvency basis, and regardless of whether or not the contemplated reduction to accrued pensions is subject to any other conditions such as regulatory approval, is a target pension arrangement for purposes of Section 3500.

  6. Can a negotiated contribution plan be amended so that the determination of a commuted value be made using the adjustments contemplated in Subsection 3570 of the revised standards of practice?

    Subsection 3570 of the revised standards of practice provides that, if required by the terms of the plan or by applicable legislation, an actuary may adjust the assumptions used to calculate the commuted value of a pension benefit, or the actuarial value of the benefit entitlement

    • to include margins for adverse deviations;
    • to include administrative expenses; and
    • to reflect the funded status of the pension plan or to reflect the member’s share of the plan assets.

    These adjustments are not required by the Pension Benefits Standards Act, 1985 (PBSA) or the Pension Benefits Standards Regulations, 1985.

    An amendment to a negotiated contribution plan to permit adjustments to the assumptions used in the determination of commuted values to include margins for adverse deviations or reflect administrative expenses would not require the Superintendent’s authorization pursuant to subsection 10.1(2) of the PBSA.

    An amendment to a negotiated contribution plan that would permit adjustments to the commuted value to reflect the funded status of the pension plan would result in a reduction of an accrued benefit if the plan was not fully funded. Therefore, OSFI would consider such an amendment void under subsection 10.1(2) of the PBSA without the Superintendent’s authorization. Please refer to the instruction guide for the Authorization of Amendments Reducing Benefits in Defined Benefit Pension Plans for more information.

  7. Can the funded status of a negotiated contribution pension plan be used for the determination of commuted values for the solvency valuation included in an actuarial report?

    No adjustment to reflect the funded status of a pension plan should be made for the purpose of a solvency valuation included in an actuarial report. Please refer to the instruction guide for the Preparation of Actuarial Reports for Defined Benefit Pension Plans for more information.

  8. Is early adoption of the revised standards of practice for target pension arrangements permitted?

    While the Actuarial Standards Board (ASB) allows for early adoption of the revised standards of practice for target pension arrangements if all the revisions are adopted at the same time for a particular pension plan, the revised standards of practice do not come into effect until December 1, 2020.

    Subsection 18(1) of the Pension Benefits Standards Regulations, 1985 (PBSR) provides that a pension benefit credit (the commuted value of a pension benefit) must be determined in accordance with the Recommendations for the Computation of Transfer Values from Registered Pension Plans effective September 1, 1993 issued by the Canadian Institute of Actuaries as amended from time to time. Notwithstanding the ASB’s permissive stance on early adoption, prior to December 1, the standards would not yet be considered amended so the PBSR does not allow for early adoption of the revised standards of practice.

  9. How will the Directives of the Superintendent pursuant to the Pension Benefits Standards Act, 1985 apply to negotiated contribution plans?

    OSFI is currently reviewing the Directives of the Superintendent pursuant to the Pension Benefits Standards Act, 1985 to determine how they will apply to negotiated contribution plans.

  10. For a negotiated contribution plan that is also multi-jurisdictional, are the commuted values determined in the same manner for all members?

    A multi-jurisdictional pension plan is an employment-based pension plan with members in more than one jurisdiction, whether federal or provincial.

    Jurisdictions may have different legislative requirements that determine how to calculate commuted values for plans that meet the definition of a target pension arrangement, as defined in paragraph 3570.01 of the revised standards of practice. Therefore, the calculation of a commuted value may be different for members whose benefits are subject to the Pensions Benefits Standards Act, 1985 and those that are subject to provincial pension legislation.