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	InfoFlash is an electronic publication to keep you informed about emerging business news as it happens. Feedback? Related Publications Revised Standards of Practice for Pension Commuted Values (Section 3800) Actuarial Standards Board Revises Proposed Changes to Commuted Value Standard Revised Exposure Draft, Revised Standards of Practice for Pension Commuted Values (Section 3800) Pending Changes to Actuarial Standard for Calculating Commuted Values Watson Wyatt Response to the Actuarial Standards Board on the Exposure Draft – Revised Standards of Practice for Pension Commuted Values

On December 8, 2008, the Actuarial Standards Board (ASB) of the Canadian Institute of Actuaries approved the Final Standard of Practice for Pension Commuted Values (Final CV Standard). With minor exceptions, the Final CV Standard is identical to the Revised Exposure Draft published on October 28, 2008 (October Exposure Draft). The Final CV Standard will be effective April 1, 2009 and will govern the calculation of most lump-sum settlements paid from registered defined benefit pension plans in Canada. It will also affect pension plan solvency measures and other administrative calculations.

Notable Points

The Final CV Standard contains the following significant details:

• A generational mortality table and a one-month time lag (the time between the date the bond yield is observed and the date that it will be used to compute commuted values) will be implemented effective February 1, 2011. The October Exposure Draft suggested a January 1, 2011 implementation.
    
• Consistent with the October Exposure Draft, the discount rate will use Government of Canada benchmark bond yields plus a 90 basis point (bps) liquidity adjustment, up from the current standard of 50 bps. In addition, the inflation assumption will utilize the break-even inflation rate and the mortality table (until February 1, 2011) will be updated to the UP94@2020 table.

Impact of Changes

The Final CV Standard will result in reduced commuted values (CVs) for plan members, and therefore lower solvency and wind-up liabilities for plan valuations. Valuations as early as December 31, 2008 may use the Final CV Standard, if permitted by pension regulatory authorities. The changes made by the Final CV Standard effectively will reduce CVs from 5% or less for plan members who are eligible to retire, to 15% or more for younger plan members, when compared with the current CV standard.

For plan members who terminate and receive a statement based on the current CV Standard, failure to make an election before the date of the changeover to the Final CV Standard may result in a recalculated CV on the new basis. Plan sponsors may wish to ensure that this fact is clearly communicated to terminating members to avoid disputes and possible claims from plan members whose CVs are recalculated producing lower amounts. However, it should be noted that even the current CV basis varies from month-to-month as a result of changes in bond yields, and these routine fluctuations could easily be as large as the impact of implementing the Final CV Standard.

The ASB is specifically allowing actuaries to use the rules in the Final CV Standard for solvency valuations made as of a date after December 12, 2008 but before April 1, 2009, provided that pension regulatory authorities permit this early implementation and it is appropriate for the plan. Therefore, it may be possible to use the Final CV Standard for December 31, 2008 valuations.

The changes in the Final CV Standard that will take effect in April 2009 should create minimal disruptions for pension administration systems. However, the changes scheduled to take effect in February 2011 will likely require more extensive changes to pension administration systems and procedures.

Next Steps

Plan administrators should take steps immediately to update their pension administration systems to ensure they will be able to implement the Final CV Standard. Plan administrators should also begin planning for the more extensive administration system changes that will be required after February 1, 2011.

Pension regulations must be amended in Ontario, Quebec and New Brunswick to adopt the Final CV Standard. Amendments are not required in other jurisdictions, as their pension legislation is worded to automatically incorporate amendments to CV standards. Plan sponsors and administrators would find it helpful if regulators from these jurisdictions were to confirm that the new CV Standard can be used for determining solvency liabilities at December 31, 2008. For the three provinces where a regulatory change is required, the current standard will continue to apply until the necessary regulatory amendments are effective, although it remains to be seen whether this will occur before the Final CV Standard’s effective date of April 1, 2009.

The CV basis is often used by plan administrators for calculations other than lump-sum settlements paid from registered pension plans. These other calculations include optional forms of pension, reciprocal agreements, past service buybacks, and the conversion of flexible pension accounts into additional ancillary benefits. They may also include lump-sum settlements from unregistered supplementary pension plans (with or without tax adjustment). Plan administrators may wish to reconsider the continued appropriateness of the CV basis in these other situations, where in some cases, adopting the new CV basis would represent an increase in benefits.

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Please contact Doug Chandler, Marshall Posner or your Watson Wyatt consultant for additional information.

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