# Deferred Pension or Commuted Value Transfer?



## Toronto.gal (Jan 8, 2010)

Deferred Pension or Commuted Value Transfer?

I have asked a friend to join this forum, but until then, I'll post on her behalf hoping to hear some expert opinions.

*Background:*

- she's working and in her 40's [planning to retire at 55/60]

- is included in the partial wind-up of prior employer's Pension Plan [pensionable service = 12 years]

- is included in the distribution of the partial wind-up surplus 

- is entitled to a deferred unreduced pension of about $1400 monthly 
commencing in 2027, which is the earliest unreduced retirement age [60] 

My friend is inclined to go with the CV transfer, but she is not comfortable handling her own investments [yet], so would she not be better off electing a Deferred Pension instead? 

Her specific question is: how to get a reasonable estimate of a commuted value? She also said that her deferred pension is not enough to hire a professional actuary. 

Thanks in advance.


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## MoneyGal (Apr 24, 2009)

She should google for consulting actuaries in whatever city she lives in.

Whoops - missed the second sentence there. 

I think I am not understanding what she wants. What does she want? When you (she) say "commuted value," how does that differ for you (her) from cash transfer value? Is her pension plan administrator not providing her with the commuted value along with the cash transfer value?


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## Toronto.gal (Jan 8, 2010)

She got the figures MoneyGal, but I guess she wants to verify the calculation.


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## MoneyGal (Apr 24, 2009)

Hmmm. Well, who would verify the calculations if not an actuary? This is an actuarial calculation.

As a generic comment I would say that someone who does not manage their own investments should likely not take the option that requires her to do exactly that. In addition, as has just come up elsewhere in this board today, the cost of the same income stream in the open market is likely higher.


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## Toronto.gal (Jan 8, 2010)

I agree that option 2 is too much responsibility for someone who is not a DIY investor and exactly what I told her. Moreover, she's a conservative investor as well, so a guaranteed income is definitely better. 

As for determining/verifying the commuted value, I suppose an actuary will be needed then.

Thanks for the response MoneyGal.


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## MoneyGal (Apr 24, 2009)

Here is a site to get her started: http://www.an-actual-actuary.com/

Note the list of consulting actuaries (from the links on the left-hand side). She can find a list of actuaries who do this kind of work. Good luck!


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## sags (May 15, 2010)

I was told by our pension administrator, that unreduced early pension benefits are not included in commuted values. They use the age 65 lifetime pension benefit to determne the commuted value. 

That eliminated 10 years of early pension benefits @ 30,000 per year from the calculations. So, $300,000 of pension benefits wasn't included in the commuted value offered.

The explanation to me was, that in order to qualify for early retirement benefits, I had to be 55 years of age or older. In order to qualify for the commuted value, I had to be one day "less" than 55 years of age.

The commuted value was calculated prior to eligibility for early pension benefits, and therefore they weren't included in the commuted value.

If this is the case, wouldn't all commuted values be substantially less than the value of the pension benefits, if early unreduced pension benefits were available within the pension plan?


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## FrugalTrader (Oct 13, 2008)

Your friend also has to consider the value of group health insurance included with the deferred pension.  If she's not a DIY investor, what makes her think that she can do better than her deferred pension? Does she have a spouse who also has a DBP?


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## carverman (Nov 8, 2010)

sags said:


> I was told by our pension administrator, that unreduced early pension benefits are not included in commuted values. They use the age 65 lifetime pension benefit to determne the commuted value.





> The explanation to me was, that in order to qualify for early retirement benefits, I had to be 55 years of age or older. In order to qualify for the commuted value, I had to be one day "less" than 55 years of age.


That would appear to be the case..if you are less than 55 years of age at the time you inquire about what the commuted value is, it will come back with a substantially smaller amount than at age 55 or more.

For instance, at time of my divorce (1997), I was instructed to get commuted value for the court for division of joint assets,
my pension being one,after 22.5 years of marriage. 
The value provided to me by Nortel's personnel dept, was in the mid $40k was far less. Thankfully for me, an amount that I could still manage to pay off, since it was 50% of that commuted value (minus 50% of her commuted pension value), and I was on the hook to pay her the difference.

Now, what I didn't know at the time of my "forced" retirement from Nortel is that I had to go through with another actuarized estimate, and get the pension commuted value at Age 56 (at time of retirement) ($500 charge) to determine what the current value 
was in 2003, in terms of pension "growth" for support purposes. 

Even with double dipping and previous pension division already accounted for by the actuary/and the court's interpretation..I am still on the hook for paying support
payments, but not as much as I was paying when still working. 



> If this is the case, wouldn't all commuted values be substantially less than the value of the pension benefits, if early unreduced pension benefits were available within the pension plan?


Well everyone is different,....but in my case..yes. I had 10+ years of service by then and my DB pension was locked in..but I couldn't collect it until I had satisfied the magic number "85", which is a combo of age+years of service. 
Ie; age 57+25yrs=82, but I guess they pulled a few strings to get me pensioned off at that point.


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## MoneyGal (Apr 24, 2009)

Commuted value, cash transfer value, and actuarial present value are three different things (although the commuted value and the actuarial present value *may* result in the same dollar figure, but they may not, for various reasons). 

In addition, each pension will have specific features which may affect how any one of those values are derived. I'd be cautious about comparing one plan to another.


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## carverman (Nov 8, 2010)

MoneyGal said:


> Commuted value, cash transfer value, and actuarial present value are three different things (although the commuted value and the actuarial present value *may* result in the same dollar figure, but they may not, for various reasons).


yes, I know... and I was just relating to my experience with my DB company pension in 1997, then again in
2003...pension "growth" difference of about 6 years.

At time of divorce, the court made a decision based 
on an actuarized value of $50,xxx before taxes,
and $39,xxx after taxes. These values were consistent with the fact that I would have retired (in any case,
voluntary or company initiated) at age 60.

The actuary had to convert the pension accrued during the marriage and payable at age 60, into a pension amount that was in line with my actual
retirement date at age 57 rather than 60, for legal purposes. 

Then to avoid double dipping (SCC ruling) they had to subtract the earlier actuarized amount..$50K from the calculated amount based on my retirement in Nov 2003 into a new pension amount ..based on some Group Annuity Mortality Table 1983, (updated to male and discount rates applicable to end of Oct in 2003), 
to arrive at a "net" pension available for support payment purposes. 

So yes, you are correct in saying you cannot compare apples to apples as it can get complicated for each individual case. 



> In addition, each pension will have specific features which may affect how any one of those values are derived. I'd be cautious about comparing one plan to another.


Yes, as I mentioned, each case is different.


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## MoneyGal (Apr 24, 2009)

carverman said:


> yes, I know... and I was just relating to my experience with my DB company pension in 1997, then again in
> 2003...pension "growth" difference of about 6 years.


Changes in the long-term interest rate would also affect changes in the valuation. Choosing to take a cash transfer or commuted value is a form of interest-rate-timing, you could say.


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## Toronto.gal (Jan 8, 2010)

Hope my friend is reading and understanding all. I had to read some posts twice to understand it myself. 

*FT:* good point, I didn't even think of that given the forced retirement age was so early due to company takeover. I just thought that a deferred plan was better in my friend's case as it offered guaranteed lifetime income, inflation protection, etc. 

Thanks everyone for your responses & thanks M.gal for the link.


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## MoneyGal (Apr 24, 2009)

I was thinking that if she keeps the DB pension, she kind of has the ideal situation - a base of guaranteed income (CPP + DB pension income) and then she can get into investing with the rest of her savings between now and retirement. Kind of the best of both worlds, in a way.


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## Toronto.gal (Jan 8, 2010)

Ditto! And I'm trying to help a lil in the 'investing' part. 

Gals have to help each other, right?


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## MoneyGal (Apr 24, 2009)

Of course! 

You might potentially pitch it as "why don't you learn about investing with all the money you are going to START saving now that you are not going to be contributing to a DB pension plan any more?"

(She might also benefit from a quick glance through Pensionize Your Nest Egg...only because she is the exact target audience for that book, and I'm told its an easy read.)


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## Toronto.gal (Jan 8, 2010)

MoneyGal said:


> (She might also benefit from a quick glance through Pensionize Your Nest Egg...)


I did mention the book to her & in fact, I have mentioned your book to many friends.


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## jet powder (May 29, 2012)

I dont understand pensons fully but if she stays in with the pension plan will she get more money do to bridging & if she takes money out lose the bridging. ( extra income untill CPP & OAS kicks in)

Iam not sure if I understand but if she is being offered a lump sum. Check to see how much money she would recieve compared to her pension if the money was used to buy an annuity that started paying out the same time the pension started paying out. If the annuity paid more then the pension I would consider the annuity. 
I dont trust Canadian insurance companies & thier ability to pay when all the baby boomers start collecting I think Swiss Annuities in Canadian dollars are safer. I would be verry carefull so if money is transfered it is not all of a sudden taxed. If she is also able to get severence pay I think she might be able to tranfer it or part of into an RRSP. This has to be done carefully to avoid paying tax


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