FINAL RECOMMENDATIONS FOR THE COMPUTATION OF MINIMUM TRANSFER VALUES OF PENSIONS BY AUTHORITY OF COUNCIL EFFECTIVE DATE: NOVEMBER 14, 1988 Canadian Institute of Actuaries 1 Institut Canadien des Actuaires
SECTION I RECOMMENDATIONS FOR THE COMPUTATION OF MINIMUM TRANSFER VALUES 2
Part One TABLE OF CONTENTS Introduction 1.01 Application... 4 1.02 General Principles... 5 1.03 Actuarial Assumptions... 5 (a) Demographic Assumptions... 5 (b) Economic Assumptions... 6 1.04 Transfer after Date of Computation... 7 1.05 Exceptional Situations... 7 1.06 Disclosure... 7 3
PART 1 INTRODUCTION The Council of the Canadian Institute of Actuaries has approved the following Recommendations for conduct of a member (hereinafter called actuary) when engaged to compute, or recommend the basis to be used for the computation of the minimum transfer value of a pension. The values determined in accordance with these Recommendations are minimum values for transfer purposes, but do not represent the only method of determining the value of the entitlement of a plan member or a plan member s beneficiary (hereinafter collectively called plan member) and, under normal circumstances, larger transfer values would also be appropriate. 1.01 Application These Recommendations should be applied to the computation of minimum transfer values when the method of settlement is the payment of a cash transfer value in lieu of an annuity, except for specific circumstances which are described below. The Recommendations apply to immediate and deferred annuities resulting from deaths and individual terminations of membership: a. in a jurisdiction whether or not there is legislation in that jurisdiction which specifically provides for portability of pension benefit credits; b. in a jurisdiction which prescribes minimum transfer values where the minimum transfer value determined using these Recommendations exceeds the prescribed minimum transfer value; c. under a reciprocal pension agreement between plan sponsors where the result of the reciprocal agreement is either to establish a pension amount determined on a money purchase basis or to establish an account value for the plan member. The Recommendations do not apply: a. in a jurisdiction which prescribes minimum transfer values where the minimum transfer value determined using these Recommendations is less than the prescribed minimum transfer value; b. under a reciprocal pension agreement between plan sponsors where the result of the reciprocal agreement is to provide defined pension benefits for the plan member; c. to the valuation and distribution of the pension benefit credits of a spouse as a result of divorce, marriage annulment or legal separation. Under a partial or complete plan termination, or where a plan member terminates his membership after the age at which a plan member becomes eligible under the plan for an immediate pension, a bona fide annuity quotation applicable to the pension benefit may be substituted for the minimum transfer value calculated herein. When applying these Recommendations, the actuary should be aware of the content of any applicable pension standards legislation. 4
1.02 General Principles The underlying principle in these Recommendations is that the minimum transfer value should, to the extent possible, reflect financial market conditions. In view of the length of the period involved and the inherent complexities of financial markets, estimation of future market conditions is a difficult task and the transfer value arrived at by the actuary using these Recommendations may ultimately be proven to have been either insufficient to produce the desired benefit or excessive. The minimum transfer value computed by the application of these Recommendations does not take account of the solvency of the pension plan. The actuary should consider whether the payment of a portion of the minimum transfer value should be delayed when the plan is less than fully funded on a plan termination basis, taking into account any requirements of applicable pension legislation. The minimum transfer value should be computed as of the date on which the right to elect a transfer became effective (hereinafter called the computation date) or such later date as may be appropriate in the circumstances. The minimum transfer value must reflect the plan member s full benefit entitlement as a deferred or immediate pensioner, as may be applicable, determined under the terms of the pension plan in effect at the date of termination of membership. The death benefit which would have applied before commencement of a deferred pension should be reflected. Where, at the computation date, a plan member has the unconditional right as a deferred or immediate pensioner, as may be applicable, to optional forms of pension or optional commencement dates, the option which has the greatest value should be used in the determination of the minimum transfer value. 1.03 Actuarial Assumptions There are many types of immediate and deferred pensions but two distinct classes or types have to be considered separately. The two classes are: non-indexed pensions indexed pensions (a) Demographic Assumptions The demographic assumptions will be the same for all types of immediate and deferred pensions. Mortality: Unless a different table is considered more appropriate for a particular plan, a current universal table such as the GAM83 table should be used. While appropriate male and female rates would normally be applied, the actuary may be required to calculate transfer values that do not vary according to the sex of the plan member. In this case, a table should be adopted which incorporates a blend of male and female mortality rates, as the actuary considers appropriate. Retirement age: The current age of the plan member should be used when valuing an immediate pension. In most situations, the normal retirement age under the plan would be used when valuing deferred pensions. However, where the terminated plan member has the unconditional right to elect an earlier commencement date and the consequent early retirement pension exceeds the amount 5
which is of actuarial equivalent value to the pension payable at normal retirement age, the minimum transfer value should reflect the full value of the subsidy. Proportion married and age of spouse: If the plan provides a contingent benefit to only the person who is the plan member s spouse at the date of termination of membership, the actual age of the spouse should be used in the computation. In the absence of this information, an appropriate age difference between the plan member and spouse should be assumed. Where the plan provides a contingent benefit to a plan member s spouse and a change in the member s marital status after the computation date is material to the determination of the minimum transfer value, the actuary should make an appropriate assumption concerning the likelihood of there being an eligible spouse, and the age of that spouse, at the time of death. (b) Economic Assumptions The economic assumptions will vary depending on whether the pension is fully indexed, partially indexed or non-indexed. The minimum transfer value of a fully or partially indexed pension should be at least equal to the minimum transfer value applicable to a non-indexed pension in the same amount and having similar characteristics. For non-indexed pensions, the interest rate for the first fifteen years from the computation date should be the month-end value of the nominal rate of interest on long-term Government of Canada bonds (CANSIM series B14013) in the second calendar month preceding the month in which the computation date falls, rounded up to the next multiple of 1/2%. After the first fifteen years, the rate should be 6%. For pensions which are fully indexed (i.e. where the pension increases by the same percentage as the Consumer Price Index) in both the deferral period and while in course of payment, the net rate of interest should be set initially as the difference, determined in the second calendar-month preceding the month in which the computation date falls, rounded up to the next multiple of 1/2%, between the month-end value of the typical chartered bank five-year nominal mortgage rate (CANSIM series B14051) for the month less 1/2%, and the rate of increase in the Consumer Price Index (CANSIM series D484000) during the 12-month period ending in the month. The initial rate should apply for the first year and should be reduced or increased in five level annual steps to a long-term net rate of 3 1/2% for the sixth and subsequent years. The assumption for pensions that are partially indexed should reflect the specific form of partial indexing. i. A pension that is indexed to a specified percentage of the Consumer Price Index should be valued by a geometric interpolation between the values that would apply if the pension was, respectively, a fully indexed pension and a non-indexed pension. ii. A pension that is indexed to the Consumer Price Index less a fixed percentage rate should be valued using interest rates applicable to a fully indexed pension, as set out above, increased by the applicable fixed percentage rate. iii. A pension that is indexed to the Consumer Price Index up to a fixed maximum should be valued using an interest rate that reflects the probability that the fixed maximum will apply. Thus if the fixed maximum is likely to be consistently attained, the pension should be valued as a non-indexed pension with fixed annual 6
increments. If the fixed maximum is unlikely to be reached on many occasions, the pension should be valued as a fully-indexed pension. iv. A pension that is indexed according to an excess interest approach, where increases are linked to a rate of return in excess of a base rate, should be valued using an interest rate equal to the base rate. The interest rate may be adjusted, or the pension valued partially as a non-indexed pension, if the pension is increased by only part of the excess interest or is subject to a maximum increase. v. A deferred pension that is indexed only after the expiry of the deferral period should be valued using the interest rate applicable to a non-indexed pension during the deferral period and the interest rate applicable to the particular type of indexed pension after the commencement date of the pension. vi. A deferred pension that is indexed only during the deferral period should be valued using the interest rate applicable to the particular type of indexing in the deferral period, and the interest rate applicable to a non-indexed pension after the pension commences. 1.04 Transfer after Date of Computation The minimum transfer value calculated in accordance with these Recommendations should be adjusted for a reasonable market rate of interest between the computation date and the date of payment. The requirements of applicable legislation should be taken into account in determining this adjustment. Where the period between the computation date and the date of payment exceeds four months, consideration should be given to recomputation of the transfer value as of the date of payment. 1.05 Exceptional Situations While the Recommendations are generally applicable, it is recognized that smaller transfer values may be adjusted in an exceptional situation. The actuary may accordingly modify the assumptions to reflect the unique nature of the situation. In such a case, the actuary should seek advice of the Committee of the Institute appointed by Council to counsel members in such circumstances. 1.06 Disclosure When communicating to the plan sponsor a transfer value which the actuary has computed, the actuary shall provide: (a) a description of the actuarial basis used in determining the transfer value; (b) when the payment of a portion of the transfer value has been delayed to reflect the solvency of the plan, the financial effect of this delay and the recommended schedule for payment of the balance of the transfer value; and (c) a statement as to whether the value has been computed in accordance with these Recommendations. When communicating to the plan sponsor an actuarial basis to be used in determining transfer values, the actuary shall provide a statement that the actuarial basis is in accordance with these Recommendations. 7