# Beware Commuted Values..........



## sags (May 15, 2010)

A few months before I reached the age of 55, I was offered an unreduced DB pension.

I heard something about "commuted values", so I enquired about it........asking for a computation of what the amount would be.

I paid 200 to receive the calculations from Hewitt Associates, and when I received them, they didn't look anywhere near correct.

The number they offered was $230,000 to replace a 30,000 per year pension for 10 years until age 65, and 21,000 per year after. The pension also has a survivor payment of 15,000 per year, should I pass away first, had an insurance policy...........and it was indexed at the time

I was surprised to learn that on January 1, 2013, the company received approval from the government and started offering a choice of commuted values or pension payments, when a person retires.

I was shocked to learn the "commuted value" of a pension exactly like mine is now calculated at 550,000 to 600,000.

It doesn't matter to me now, as I took the pension payments and have already collected 210,000 in pension payments (almost all of the estimated commuted value........and I would now presumably be out of pension money at age 62), but the difference in the commuted value for the same pension makes me wonder just how accurate any commuted value calculations are.

We often have posts on the forum asking about commuted values vs pension payments.

My advice would be........................Beware of the commuted values and have them double checked by an independent actuary.

Had I taken the commuted value back then.........and some people did.........I doubt they would be giving me the difference now.


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## GoldStone (Mar 6, 2011)

Lots of lines and lots of dots................ but you failed to mention one key piece of information:

When did you turn 55? What were the interest rates back then?

The drop in the interest rates may explain the difference between 230K CV then and 550K CV now.

The higher the interest rates, the lower the CV.


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## MoneyGal (Apr 24, 2009)

The formula for calculating commuted value is complex. Here's a link which provides more detail: http://www.actuaries.ca/ask/faq_p_e.cfm#1

Interest rates are one important factor, but there are many other factors that can and do change the commuted value of a pension over time. Guarantees are expensive, and the cost of money is one big factor.


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## HaroldCrump (Jun 10, 2009)

As cost of money tends towards 0 (zero), CV tends towards infinity (∞).
We are approaching that situation, if not already there.


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## MoneyGal (Apr 24, 2009)

As length of life approaches infinity (not really...but averages keep trending UP), CV trends towards infinity.


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## Daniel A. (Mar 20, 2011)

This book is a good read on the topic.

Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers by Ellen E. Schultz

Commuted value is a great tool for companies looking to clean the books up.
Rarely is it in your best interest to take the CV, health of the company plan, terminal illness, what an annuity would pay.


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## fraser (May 15, 2010)

I do not think that there was an attempt to deceive you. Commuted values are based on interest rates. Currently, commuted values are high relative to a few years ago when interest rates were high. But now is not a good time to buy annuities for the exact same reason-interest rates are low. Commuted values for DB pensions have never been higher.

I am right in the middle of determining pension options. My DB pension will include a monthly benefit (or a commuted value but I have decided to take the monthly payment), and a lump sum cash payment based on the commuted value of my restoration pension. I could use that lump sum to buy an annuity and combine it with my monthly pension. I decided to take the cash, three payments in 13 months spread over 3 tax years, because the commuted value is high and the cost of annuities is high. I may buy an annuity with the money at some point but only when interest rates are higher and the cost of the annuity is lower.


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## MoneyGal (Apr 24, 2009)

and when you are OLDER and the cost of annuity income is LOWER as a result. :encouragement:


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## sags (May 15, 2010)

All in the timing I guess.

It was in 2005...............and I took the DB monthly payments, but it would be a much more difficult choice today........with over twice as much money offered.


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## MoneyGal (Apr 24, 2009)

So the overnight rate in 2005 was 2.5% - it's 1% now (note that annuities are not priced on short-term rates).


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## GoldStone (Mar 6, 2011)

Commuted Value Interest Rates, 2005-2013

Non-Indexed Pensions
http://www.eckler.ca/rates-2-view

Fully Indexed Pensions
http://www.eckler.ca/rates-6-view


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## MoneyGal (Apr 24, 2009)

nice find. 

Also note the use of FOUR different mortality tables from 2005-present.


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