Deferred pension

Important Notice

Please consult Newsletter number 32, Amendments to the Regulation respecting supplemental pension plans effective 4 January 2018, as well as division V – Transfer of benefits between spouses This link will open in a new window. of the Regulation respecting supplemental pension plans, to find out the rules for partition applicable to spouses in a civil union, the changes to the payment methods applicable to the former spouse, and the calculation of member benefits after partition.

Valuation of a deferred pension 

Calculation of excess member contributions and an additional pension benefit when the deferred pension includes an early benefit 

Valuation of a deferred pension

The value of a deferred pension must be determined according to the standards of practice of the Canadian Institute of Actuaries, subject to an exception provided for by the Regulation respecting supplemental pension plans This link will open in a new window.: when an early benefit is related to a deferred pension, only half of the benefit is included in the value of the pension.

Examples

  1. A plan provides that the normal age of retirement is 65, but that a member who stops working after age 60 to take a retirement is entitled to an unreduced early pension. Moreover, the member whose active membership ends before age 60, but who does not take retirement, is entitled to an actuarially equivalent reduced pension, calculated according to the period between the beginning of payment and the normal age of retirement.

    In such a case, the early retirement subsidy is exclusive to the early pension. The value of the deferred pension must be determined as though payment will begin at age 65.

  2. A plan provides that the normal age of retirement is 65, but that a member is entitled to an unreduced pension as of age 60, regardless of the date on which the member stopped working or ceased to be an active member.

    In such a case, the early retirement subsidy is included in the deferred pension and its value will be equal to the average of the following 2 values:

    • Value according to the standards of practice of the Canadian Institute of Actuaries, calculated as though the payment of the pension will begin at the age that maximizes the value, that is, age 60 (for the member age 60 or under)
    • Value calculated as though the payment of the pension will begin at the normal age of retirement, that is, age 65.

The exception only applies to the calculation of a deferred pension (and not an early pension), regardless of whether or not the member is active at the date of the valuation. However, it does not apply if the member has begun receiving a pension, since, in that case, the beginning of payment is no longer an assumption.

Calculation of excess member contributions and an additional pension benefit, when the deferred pension includes an early benefit

Non-active member at the date of the valuation

Entitlement to any excess member contributions or an additional pension benefit is acquired at the end of active membership. In such a case, excess member contributions and the additional pension benefit to consider will be those which were determined as of that date, even if the deferred pension includes an early benefit.

Active member at the date of the valuation

In this case, excess member contributions and the additional pension benefit must be calculated by taking into account, as the pension provided for by the plan, the deferred pension including only half of the value of any early benefit. The pension must also be limited to the period that must be used for the calculation of excess member contributions or the additional pension benefit.

Example

Matthew and Catherine ended their conjugal relationship on 31 December 2004. Matthew was age 45 at that time and would be entitled, if his active membership ended, to a deferred pension of 12 000 $ a year, payable as of the normal retirement age of 65. If the pension begins being paid between age 60 and 65, the amount is then reduced 4% for each year before the member's 65th birthday. If the pension begins being paid before age 60, the amount is then adjusted to be an actuarially equivalent pension.

Matthew began membership in his employer's defined benefits plan on 1 January 1993, that is, after his marriage to Catherine.

What is the value of Matthew's pension benefits that must be taken into account for the purposes of partition?

In order to determine the value, the plan administrator has the following information:

For service from 1 Jan. 1993 to 31 Dec. 2000 For service from 1 Jan. 2001 to 31 Dec. 2004 For all service
Value of the deferred pension determined using the assumption that payment begins at age 65 26 467 $13 233 $ 39 700 $
Value of the deferred pension determined using the assumption that the member acts so as to maximize it.31 120 $15 560 $46 680 $
Value of the indexed pensionN/A*15 260 $N/A
Value of the member contributionsN/A N/A 41 500 $

* N/A: not applicable

For the purposes of partition, the value of Matthew's pension, excess member contributions and the additional pension benefit must be determined.

The value of Matthew's pension is equal to the average of 39 700 $ and 46 680 $, that is, 43 190 $.

For the calculation of excess member contributions, note that member contributions cannot provide more than half the value of the pension, that is, 50% × 43 190 $, or 21 595 $. The amount of excess contributions determined for the purposes of partition is thus 19 905 $ (41 500 $ − 21 595 $).

The value of the additional pension benefit is equal to the difference between the following 2 elements:

  • Element A, which is equal to the sum of the value of the indexed pension for service after 31 December 2000 and the excess member contributions. To determine the excess member contributions, the value of the pension for the period from 1 January 1993 to 31 December 2004 must be determined. For the period prior to 1 January 2001, the value is equal to the average of 26 467 $ and 31 120 $ (28 794 $), which is added to the value of the indexed pension for the period following that date (15 260 $), which gives a total value of 44 054 $. Since member contributions cannot provide more than half the value of the pension, (50% × 44 054 $, or 22 027 $), the amount of the excess member contributions is thus 19 473 $ (41 500 $ − 22 027 $). Element A is thus equal to the sum of the excess contributions (19 473 $) and the value of the indexed pension (15 260 $), that is, 34 733 $.
  • Element B, which is equal to the sum of the value of the deferred pension for service from 1 January 2001 to 31 December 2004, and the excess member contributions determined for the purposes of partition. The value of the deferred pension is equal to the average of 13 233 $ and 15 560 $, or 14 397 $. Element B is thus equal to sum of 14 397 $ and 19 905 $, that is, 34 302 $.

The value of the additional pension benefit is thus 431 $ (34 733 $ − 34 302 $).

The total value of benefits for the purposes of partition is thus determined as follows:

Value of the deferred pension:43 190 $
Excess member contributions: 19 905 $
Additional pension benefit:431 $
Total value of benefits: 63 526 $

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