Transcript SESSION H4-PD How to make commuted values work

Session H4-PD
How to make
commuted values work
Martin Cyrenne, FCIA
Normandin Beaudry, Consulting actuaries inc.
Agenda
• PPFRC
• Q&A
• Recent Queries
• Solvency valuations
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PPFRC
• PPFRC is a Committee under the Practice Standards
Council (PSC)
• CV Standard was developed by PPFRC
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Q&A
• A list of questions on commuted values will be posted
on the CIA website
• Q&A is intended to help pension administrators and
members on general issues related to the CV
Standard
• Q&A to be posted for a year
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Queries - Reflecting Indexing
Either Implicitly or Explicitly
• Under the new CV Standard, determining
commuted values of indexed annuities may be
done either implicitly or explicitly. Can this result
in two different commuted values for the same
pension?
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Queries - Reflecting Indexing
Either Implicitly or Explicitly
• Implicit indexing implies that future payments are
projected without indexing and are then discounted
using a net interest rate
• Explicit indexing implies that future payments are
projected including indexing and are then discounted
using the non-indexed interest rates
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Queries - Reflecting Indexing
Either Implicitly or Explicitly
• PPFRC’s view is that the two methods should
produce identical results
• The new CV Standard clearly describes how the
interest rates should be determined when assuming
implicit indexing
• Generally, identical results can be achieved using an
explicit approach if the underlying inflation rate is
calculated by reference to the rounded rates (and is
itself not rounded)
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Queries - Reflecting Indexing
Either Implicitly or Explicitly
• The new CV Standard appears to permit the use of
an explicit approach for fully indexed pensions
only (and not for partially indexed pensions)
• Given PPFRC’s view that the two approaches should
produce identical results, the use of an explicit
approach would be acceptable under the new CV
Standard
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Queries - Indexing Adjustment
Under the New CV Standard
• What rate of inflation should be used when
adjusting for annual indexing?
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Queries - Indexing Adjustment
Under the New CV Standard
• Sentence being questioned is:
 “For example, in the situation of monthly payments,
annual indexing, and with the first annual adjustment a
year from now, the resulting annuity factor could be
adjusted by multiplying it by
[1 – 11/24 * u]”
• Technically, the value of “u” should likely be
determined based on a weighted average of the
timing of future payments
• However, such an interpretation would require a
different “u” for each member
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Queries - Indexing Adjustment
Under the New CV Standard
• PPFRC believes actuaries should use judgment in
determining an appropriate value for “u”, keeping in
mind the immediately preceding sentence of the new
CV Standard, which states:
 “Reasonable approximations may be used …”
• Under the new CV Standard actuaries may also apply
“reasonable approximations” with any other type of
indexing formula
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Solvency valuations
• 31.12.2004 solvency valuations
Current Recommendation
New Standard
Rates
Non indexed
5.50% for 15 years
6.00% thereafter
4.75% for 10 years
6.00% thereafter
Full CPI
2.50% for 15 years
3.25% thereafter
2.50% for 10 years
3.00% thereafter
50% CPI
4.00% for 15 years
4.50% thereafter
3.50% for 10 years
4.50% thereafter
Mortality
GAM-83
UP-94@2015
Indexed
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