Revised standards of practice for calculating commuted values

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.

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

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.

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”.

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.

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 in situations where 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. However, if the amendment were to only permit adjustments to the commuted value to reflect the funded status of the pension plan in situations where the plan was fully funded (i.e. adjustments that would only apply if the plan’s funded ratio was at least 1.00), OSFI would not consider such a plan amendment void under subsection 10.1(2) of the PBSA.

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.

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.

OSFI has revised the Directives of the Superintendent pursuant to the Pension Benefits Standards Act, 1985 to account for the revised standards of practice. For more information, please refer to our Directives of the Superintendent – FAQs.

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.