# Commuted Value Questions



## kbath (Feb 16, 2014)

Hi all - I've been reading the very informative posts in this forum and am now prepared to ask a few questions. I appreciate any and all feedback to help me make my CV decisions!

Background:

I will be receiving a CV from my previous employer's DB pension. I've weighed the pros and cons of keeping the DB and have decided to go ahead with the CV payout.

I am 46 years old and plan on drawing on my pension funds as early as 55 but may be a few years later.

I left my employer in July 2012 and had a choice to get a lump sum severance payout or 18 months of continued salary. I chose the latter for a number of reasons including a positive difference in my CV of $105,000. In July 2012, it was estimated to be $875K in January 2014 (my last date of employ/continued salary).

The July 2012 estimate could only use interest rates at that time with the understanding if they went up, the CV would go down.

The interest rates in July 2012 were 2.3% for the first 10 years, 3.7% for 1 year and 2.5% thereafter.

The interest rates in Jan 2014 are 3.1% for the first 10 years, 2.4% for 1 year and 3.5% thereafter. This reduced my overall CV from the July 2012 estimate to $783K.

In addition, the July 2012 estimate used the assumption that my retirement age would be 65. The Jan 2014 statement uses 55. There is a 15% reduction in benefits for early retirement (55 vs. 65).

The pension plan is half-indexed to the CPI (50% on a yearly basis).

Questions:

1. When calculating the CV, my understanding is all options available to the member have to be consider and the CV total has to be most favorable to me. In the original estimate, they used 65 as the retirement age and the Jan 2014 actual uses 55. Which is generally more beneficial to me - using age 55 (with the reduced benefits) or age 65?

2. Is the difference in interest rates (2.3%, 3.7% and 2.5% vs. 3.1% 2.4% and 3.5%) the main/only driver in the reduction of my CV by $92K?

3. I have found a couple of spreadsheets that show the CIA interest rates used in actuary estimates but I can't seem to get them to come out to the values above. What is the recommended tables/spreadsheets to use to identify the most recent interest rates? I'm asking because if I can get a solid table of interest rates, I believe Feb. 1, 2014 rates are lower than Jan. 1, 2014 and I *may* have the ability for my employer to recalculate the CV instead of using the Jan. 1, 2014 interest rates.

I apologize for the length of this post, I'm sure I will more questions based on the responses and will fill in any blanks required to get your expert assistance!

Thanks everyone in advance.


----------



## sags (May 15, 2010)

Sorry no one answered your post yet......but commuted values are very complicated and specific to each individual pension plan.

In general terms, the commuted value should reflect the pension benefit you would receive, factoring in all the benefits of the pension, until the actuarial lifetime average.........minus the expected investment return over the same time period.

Way too complicated for specific answers and it is too life altering a decision to give a "guess" as an answer.

I would suggest you contact an actuary who deals with pensions and provide them with a copy of your pension plan.


----------



## kbath (Feb 16, 2014)

Yes, it's unfortunate there's been a lot of views but no information for me yet on these questions.

I understand all you've mentioned and am quite aware this is forum is not meant to give legal/binding advice. That's why I worded my questions generally (not specifically) and was actually asking for opinions. I'd even take guesses if that's all that is being offered.

For anyone that is interested, I have received some information from other sources and will post here in hopes it will help someone else in the future.

1. Generally, it's more beneficial, to have the commencement date start at the early retirement date (as long as there isn't a huge penalty for early start). In my case, it's a 15% reduction from age 60 but does include a bridge benefit. The main reason is, though you would be paid less than if you started at 60/65, you would be paid longer.

2. The difference in the amounts above is mostly due to the change in interest rates. Yes, it can have that much of an impact.

3. I have located interest rates table elsewhere and can provide more information if anyone is interested.


----------



## Addy (Mar 12, 2010)

sags said:


> I would suggest you contact an actuary who deals with pensions and provide them with a copy of your pension plan.


The recent posts on Pension Plans has me thinking I should be doing my due diligance. I have three small pensions (military spouse, I move a lot) and it's a PITA to keep updating my address every time I move, and it seems every time I try the rules on how to update my address have changed - I'm not even sure they all have my current address, how pathetic is that!

sags how would I go about finding an actuary who deals with pensions? I live in small town Ontario, I imagine Ottawa would be the closest city where I may have a chance of finding such a person - but perhaps it can all be done via mail/email/fax?

First I have to get copies of my pension plans, I doubt I was even really given much information to begin with, so I have my work cut out.


----------



## kbath (Feb 16, 2014)

Addy said:


> how would I go about finding an actuary who deals with pensions? I live in small town Ontario, I imagine Ottawa would be the closest city where I may have a chance of finding such a person - but perhaps it can all be done via mail/email/fax?


What I did is go to the Canadian Institute of Actuaries website (www.cia-ica.ca) and used the "Ask an Actuary" function. Someone responded in about 30 minutes and I've been able to call him directly a couple of times. Very helpful.


----------



## Beaver101 (Nov 14, 2011)

> *kbath:* Hi all - I've been reading the very informative posts in this forum and am now prepared to ask a few questions. I appreciate any and all feedback to help me make my CV decisions! ..
> 
> 3. I have found a couple of spreadsheets that show the CIA interest rates used in actuary estimates but I can't seem to get them to come out to the values above. What is the recommended tables/spreadsheets to use to identify the most recent interest rates? I'm asking because if I can get a solid table of interest rates, I believe Feb. 1, 2014 rates are lower than Jan. 1, 2014 and I *may* have the ability for my employer to recalculate the CV instead of using the Jan. 1, 2014 interest rates. ...


... the plan administrator who provided you with the C.V. numbers should be able to tell you precisely which CIA interest rates table were used. The C.V. is not based solely on interest rate rates but on specific Mortality assumption tables used. As sags mentioned, you'll require a pensions actuary/specialist to verify those numbers for you and even then they would use a specific "program" to calculate those numbers.


----------



## sags (May 15, 2010)

Addy said:


> The recent posts on Pension Plans has me thinking I should be doing my due diligance. I have three small pensions (military spouse, I move a lot) and it's a PITA to keep updating my address every time I move, and it seems every time I try the rules on how to update my address have changed - I'm not even sure they all have my current address, how pathetic is that!
> 
> sags how would I go about finding an actuary who deals with pensions? I live in small town Ontario, I imagine Ottawa would be the closest city where I may have a chance of finding such a person - but perhaps it can all be done via mail/email/fax?
> 
> First I have to get copies of my pension plans, I doubt I was even really given much information to begin with, so I have my work cut out.


There is a list of certified actuaries at the link. Click on "hire an actuary" and enter the information to see who is closest to you.

http://www.cia-ica.ca/about-us/actuaries/find-an-actuary


----------



## fraser (May 15, 2010)

I would definitely consult a pension expert on this. And make certain that you are aware of any tax consequences.

I was considering taking a CV when I retired. The CV looked attractive. But it became less attractive when I realized that a substantial portion of it could not be rolled over-1/3 had to be taken into income at the highest marginal rate. The other factor was the plan itself. By retiring, and then waiting three years to take the pension, an age and service provision kicked in that permitted me to take the pension with a much reduced annual penalty for taking the pension early. It was a combination of all of these that changed the financial equation for me.

Interest rates are always the risk. As rates go up, the CV goes down. I cannot remember if CV is based on when you retire or when you actually take the CV. In my situation, the values were very close so I did not have to concern myself with it.


----------



## carverman (Nov 8, 2010)

Beaver101 said:


> ... the plan administrator who provided you with the C.V. numbers should be able to tell you precisely which CIA interest rates table were used. The C.V. is not based solely on interest rate rates but on specific Mortality assumption tables used. As sags mentioned, you'll require a pensions actuary/specialist to verify those numbers for you and *even then they would use a specific "program" to calculate those numbers*.


How true Beav. My Nortel DB pension plan is in the process of wind up for the last 3 years. I cannot get any specifics from the Plan administrator on what the CV is going to be for me. 

In my case, the lengthy battle towards settlement of Nortel assets ( held in escrow) will take a few years longer..there are several pension plans and investors that want to get their fair share, so by the time it finally is settled through the courts, I may not even be around. :hopelessness: 
All I know so far, is that if things are settled someday, I have a couple options on my CV that will be offered to me..
either a annuity through an insurance company or a LIF (I believe).
I do not have the option of taking the CV lump sum as it's under the regulations of the Ontario Pension Plan legislation.


----------



## Addy (Mar 12, 2010)

Thanks kbath and sags. I was able to log online to view one of my pensions, none of my pensions is large, but added together, along with my husbands pension, we should be able to retire in Thailand quite comfortably in about 13 years


----------



## Beaver101 (Nov 14, 2011)

carverman said:


> How true Beav. *My Nortel DB pension plan is in the process of wind up for the last 3 years. I cannot get any specifics from the Plan administrator on what the CV is going to be for me. *
> 
> In my case, the lengthy battle towards settlement of Nortel assets ( held in escrow) will take a few years longer..there are several pension plans and investors that want to get their fair share, so by the time it finally is settled through the courts, I may not even be around. :hopelessness:
> All I know so far, is that if things are settled someday, I have a couple options on my CV that will be offered to me..
> ...


 ... so much for having *pensioner's rights (aka b.s.) *... if there is any consolation, I know a friend whose company's pension plan wind-up was held up in courts for 8+ years before being told of her c.v. and to add insult, her c.v. was unfairly low-balled.

I think you're better off with the LIF when your pension plan wind-up is settled. An annuity (think of longevity too) in this low interest environment only benefits the insurance company.


----------



## Brian Weatherdon CFP (Jan 18, 2011)

Dear KBath, congratulations for your study on this issue ...and I realize you've put tremendous work into the matter. Mathematical calculations and spreadsheets can eventually provide "some" clarity on comparative income streams but you would be wrongly assuming all variables remain stable. Just a few other pieces of information you would want to know include: (a) is the pension suitably funded (ie at least 95% or more funded against future pension liabilitiesl)? (b) are other attendant benefits to be considered such as future health coverage? (c) what is your calculation for the "estate value" of a pension asset ...which eventually becomes "0" from the pension plan yet may remain significant as a personal / family asset? (d) what is the lifestyle you are wishing to fund with such pension asset? (e) will you want what I call a "flat line" income from retirement until death, or rather prefer higher income in earlier years for lifestyle, and higher income in the final 5-8 years for personal comfort & care? Further discussion in chapter 1 of my book, A Lifetime Of Wealth.... if you wish (paper or ebook; Amazon) but realize ahead that the book won't answer your mathematical questions; it rather addresses the alignment of a pension decision with the Lifestyle you choose and matching Income flows with lifestyle expenditures amid the 3 or more horizons of retirement living.
Warm wishes and success!
BW


----------



## gwcanuck (Apr 27, 2009)

This thread has prompted me to investigate my pensions's CV. I had to twist some arms in our HR dept, but my CV is currently about $240k.

I also had calculate (under the same assumptions) the CV in just over 6 years time when I can retire with 30 years seniority. At that time the CV is $980k, or just over 4x.

If I do the calculation with retiring in 9 years when I'm 55, the CV only grew by another $50k, to $1030k, which I found surprising.

So, my question is, are these values unusual? Why would it grow 4x in the next 6 years and then plateau? Is that just the nature of 'pension math'?

Thanks


----------



## RBull (Jan 20, 2013)

^I am no expert but common sense tells me something is off. The value in 6 years seems much too high. In fact the 9 year one does too. How does it quadruple in 6 years?

This appears to support asking for a thorough check. I've read many times on here where there have been mistakes made by HR departments on these calculations.


----------



## carverman (Nov 8, 2010)

Beaver101 said:


> .
> I think you're better off with the LIF when your pension plan wind-up is settled. An annuity (think of longevity too) in this low interest environment only benefits the insurance company.


Thanks. I was thinking the same thing. If I opted for the annuity, the insurance company would take the CV value lump sum, discount it and then make a profit from investing it, while paying less per month
than what I'm getting now..which is already discounted 33% from 2003 when I first started drawing the DB pension. The reason is that the plan is underfunded by at least 30% and not sustainable in todays
investment market with the number of retirees drawing from it now and the number that are entitled to draw from it once they are eligible. So rather than just let the funds in the plan go bankrupt (if that\
is the word to use here,, they will come up with a commuted value lump sum that has only 2 options.

So..what is a LIF?..and is it only for a certain number of years until the fund runs out?..or will the payments continue until my death? (68 now)


----------



## Addy (Mar 12, 2010)

RBull said:


> This appears to support asking for a thorough check. I've read many times on here where there have been mistakes made by HR departments on these calculations.


I think this is the reason why gwcanuck had to twist some arms to get his HR dept to do the calculation. I bet they know it's prone to error and there's no recourse for gwcanuck if there is an error I bet.

All the more reason I want to find a pension expert to hire and give me the details, pros and cons about our pensions.


----------



## Eclectic12 (Oct 20, 2010)

carverman said:


> So..what is a LIF?..and is it only for a certain number of years until the fund runs out?..or will the payments continue until my death? (68 now)


http://www.fsco.gov.on.ca/en/pensions/lockedin/lif/Pages/default.aspx
http://www.sunlife.ca/Canada/sunlif...retirement+income+funds+LRIFs?vgnLocale=en_CA
http://www.investopedia.com/terms/l/life-income-fund.asp

Cheers


----------



## fraser (May 15, 2010)

I think that Job 1 is to keep all of your annual pension statements plus any and all communication from your employer regarding you pension plan. Especially important if, like I did, your original employer was merged/purchased a few times by other companies. Even if you don't read them....just stash them away as you will want them later. Keep all pension submissions if you have a hybrid DB plan.

Job 2 is to read the documents, and keep asking questions until you understand the plan. Do this well before your planned retirement...not after. You may also want to get hold of the actual pension plan, and just as importantly, any amendments to the plan. These are more difficult to get through but my experience is that the amendments can tell you as much or more about your plan benefits. As an example, my employer's outsourced pension dept. claimed that my annual performance bonus did not count as part of pensionable income. Yet, an amendment was made to our plan effective 2012 (after my retirement but prior to my taking the pension) that bonus were no longer part of pensionable income. So, that made me believe that prior to that date, they were included. I pressed the point, as did someone else to the comp. manager and corporate counsel. The result was a 35 percent increase in my pension/CV attributable to this one clause. I also was able to ensure that I rec'd the benefits of other provisions-especially a reduction in penalty for early pension based on age/service. Many of my colleagues who were in the plan had absolutely no knowledge of it. 

Job 3 is to compare the CV with annuity rates. CV will be lower but for me it was a good way to see if the number was in the ballpark. Understand how the formula works, ie better to take your CV in a period of low interest rates/interest rate predictions but this may cause an increase in the premium for having a survivor pension.

Job 4...if you are still unsure or if you are still having issues, hire a consultant to assist. Well worth the money to get an expert, third party ,opinion.

At least this is what worked for me, minus step 4. But I was prepared for step 4 if my employer and I could not agree. It took a good deal of time to do this but I felt that it was worthwhile simply to ensure that I was not leaving money on the table as it were. Especially since I decided on the monthly pension and hope to be drawing it for many years to come!


----------



## sags (May 15, 2010)

From a similar personal experience, I totally agree with you.


----------



## Addy (Mar 12, 2010)

And what do you do if you've left your job? My husband is military so I had little choice but to follow him from place to place, and it's left me with a few small pensions. I have contacted both organizations, and one has online access to statements, the other does not. Both have much as told me they don't deal with "non-members" to answer my questions.


----------



## Beaver101 (Nov 14, 2011)

fraser said:


> I think that Job 1 is to keep all of your annual pension statements plus any and all communication from your employer regarding you pension plan. ...
> 
> Job 2 is to read the documents, and keep asking questions until you understand the plan. Do this well before your planned retirement...not after. * You may also want to get hold of the actual pension plan, and just as importantly, any amendments to the plan. These are more difficult to get through but my experience is that the amendments can tell you as much or more about your plan benefits. * As an example, my employer's outsourced pension dept. claimed that my annual performance bonus did not count as part of pensionable income. Yet, an amendment was made to our plan effective 2012 (after my retirement but prior to my taking the pension) that bonus were no longer part of pensionable income. So, that made me believe that prior to that date, they were included. *I pressed the point, as did someone else to the comp. manager and corporate counsel. *The result was a 35 percent increase in my pension/CV attributable to this one clause. I also was able to ensure that I rec'd the benefits of other provisions-especially a reduction in penalty for early pension based on age/service. * Many of my colleagues who were in the plan had absolutely no knowledge of it. *
> 
> ...


 ... I too agree with several of your points, Job 1 & 3 since afterall, it is your pension monies that you will need for retirement. However comments on point (Job) 2, 1. wouldn't it be your HR department's job to make the company's pension readily available to employees who ask? including amendments? instead of relying on some "outsourced" pension dep't which I guess is only the pension plan administrator? In addition, how does the "average Joe employee" (ie. not a pension specialist) get hold of "corporate counsel" and try to "explain" what was "supposed" to been made known to their employees (if not explained), and 3. was your finding extended or made known to the other employees of your company eventually? What I'm getting here is whose fudiciary duty is it for the company pension plan provisions, et al? 

Also, on point (Job) 4, on hiring an expert / consultant, this can be an expensive proposition for a retiree getting a small pension (which probably represents the majority of the working force) and especially if he/she doesn't know what the eventual result will be.


----------



## fraser (May 15, 2010)

I got the plan document and the amendments from a colleague who got them soft copy from HR. I do know that this person asked in writing several times, the final request noting that he would approach the FSCO if necessary. Not certain what the issue was, my guess is the HR person was grossly overworked or simply did not care.

When I determined that there was an issue, and we had an impasse, I simply wrote a letter to the company's in house counsel, cc pension folks, describing the impasse and stating that I had two options. A complaint to FSCO, engaging my own counsel, or both. This did the trick and set the ball in motion. I was fortunate to work for a very ethical company. Once the 'logjam was broken, things ticked over. But I did have to break that logjam.

I do not believe for an instant that there was an attempt to deceive me in any way. Just a case of either a pension administrator (overworked?) who was ascribing the attributes of a larger DB plan within the company to the DB plan to which I belonged. It was also an anomaly, this situation only applied to two or three people in the plan. I just happened to be one of them.

I do not think that it would cost much to hire an actuary to review the CVnumbers or anything else for that matter. I was not truly certain that I was right but I would have been willing to pay in order to find out-and set my mind at ease. If you ball park it, and the numbers seem really off base then it may be worth getting a second independent opinion. After all, you only have one shot at this so make it count. Mine was a small plan, ie not many active members left. If you have a big plan, lots of members, lots of good HR or perhaps union knowledge then the situation would be very different.


----------



## carverman (Nov 8, 2010)

Eclectic12 said:


> http://www.fsco.gov.on.ca/en/pensions/lockedin/lif/Pages/default.aspx
> http://www.sunlife.ca/Canada/sunlif...retirement+income+funds+LRIFs?vgnLocale=en_CA
> http://www.investopedia.com/terms/l/life-income-fund.asp
> 
> Cheers


Thanks Eclectic12. I read and bookmarked these links. In my case, I have the option as the fund trustees will send me forms to sign as to which investment I chose to have them deposit my CV (at time of windup, I presume), since
I have been drawing from it for about 10 years now (Nov 2003-March 2014), so I expect them to factor that in as well. 

This is the information I was looking for, since I may have another 20 years to have to depend on pension income, so it's good to plan ahead with some "exit strategy" in mind. 



> 1) The ability to keep the New LIF past age 80. *If you choose to receive the maximum income payment each year, the money in your New LIF will be used up by age 90*.
> However, if any money remains in the New LIF at age 90, you may keep it and continue to withdraw income from it in the future.



This is good to know, since in my case I am divorced. 


> Q: What happens if I own a New LIF when I die?
> A: If you own a New LIF when you die, your surviving spouse is entitled to the full amount of money that is in your New LIF. *This money may be paid out as an unlocked lump sum after your death*, or may be transferred to your spouse’s own RRSP or RRIF, where it is permitted by the federal Income Tax Act. If you do not have a surviving spouse, or if your spouse has waived his/her entitlement to the death benefit payment on the date of your death, y*our named beneficiary or estate (if there is no named beneficiary) is entitled to receive the amount in your New LIF*


.


----------

