Longer Lives, Larger Lump Sums
New Commuted Value Assumptions Take Effect April 1, 2027
We now know when the new Canadian pensioner mortality tables will start affecting commuted values.
Effective April 1, 2027, actuaries calculating commuted values for most defined benefit pension plans will be required to use the CPM2024 Combined mortality table together with the MI-2024 mortality improvement scale, as set out in the Canadian Institute of Actuaries’ recent announcement.
This may sound like a fairly technical change to an actuarial assumption. And to be fair, it is. But it will generally increase commuted values, prompt some related valuation questions, and require updates to pension administration systems and processes.
The good news is that plan sponsors and administrators have some time to get ready. The less good news is that April 2027 will arrive rather quickly.
First, What Is Changing?
A commuted value is the lump sum value of a pension earned by a plan member. Depending on the pension plan and the applicable legislation, a departing member may be able to transfer that amount to a locked-in retirement vehicle instead of leaving the pension in the plan.
Calculating a commuted value requires assumptions about two particularly important things:
- the investment return that might be earned on the money; and
- how long the pension would otherwise have been paid.
The second item is where mortality assumptions enter the calculation. If people are expected to live longer, a pension is expected to be paid for longer. All else being equal, that makes the pension more valuable and increases its commuted value.
Why the Combined Table?
As discussed in our earlier article on CPM2024, the new research gives pension actuaries considerably more choice than they had under CPM2014.
Depending on a plan’s membership and experience, an actuary may conclude that the Heavy, Light or Combined table is the most appropriate basis for a going-concern funding or accounting valuation. The research also contains distinct mortality tables for surviving spouses.
That flexibility makes sense when valuing a particular pension plan. Different workforces have different mortality experience, and one table won’t be the best fit for every plan.
Commuted value calculations are a different matter.
Using different tables based on the characteristics of a plan or member would add subjectivity and administrative complexity, while making the resulting values harder for members to understand. The Actuarial Standards Board therefore selected the Combined table as the most broadly representative basis across affected pension plans.
In other words, the profession chose consistency and practicality over the last decimal place. That seems like a reasonable trade-off.
Mortality Improvement Is Doing Much of the Work
The base mortality table is only half the story.
A mortality table describes mortality at a particular point in time. A mortality improvement scale projects how mortality rates may decline in future years. That distinction matters because a 45-year-old plan member retiring two decades from now isn’t expected to experience the same mortality as a 65-year-old pensioner today.
The existing CPM-B improvement scale ultimately assumes annual mortality improvement of 0.8%. MI-2024 uses a long-term improvement rate of 1.3%.
Half a percentage point may not sound especially dramatic, but the difference compounds over many years, particularly for younger members. In fact, much of the expected increase in commuted values comes from the new mortality improvement scale rather than from the CPM2024 base table itself.
This is also the more uncertain part of the exercise. We can observe how long pensioners have lived. Predicting how quickly mortality will improve several decades from now requires considerably more judgment.
Medical developments, health trends, social policy and other factors could all affect the outcome. The Actuarial Standards Board nevertheless concluded that the MI-2024 mortality improvement scale is reasonable for a standardized commuted value calculation and encouraged regular monitoring as more experience becomes available.
As usual, the fact that we need to select an assumption doesn’t mean the future has agreed to cooperate.
How Much Will Commuted Values Increase?
The precise effect will depend on the member’s age, gender, pension form and indexing provisions, among other factors.
At a high level, our analysis indicates that moving from the current CPM2014 and CPM-B basis to CPM2024 Combined and MI-2024 could increase commuted values by approximately:
- 1.5% to 4.2% for non-indexed pensions; and
- 2.2% to 6.0% for fully indexed pensions.
The impact is generally larger for younger members because the higher assumed rate of future mortality improvement applies over a longer period. It is also generally larger for indexed pensions because more of the pension’s value relates to payments further into the future.
These ranges should be treated as illustrations, not predictions for every member or plan. Interest rates will continue to be a more important, and often more volatile, driver of commuted values. To put the mortality change in perspective, its effect is broadly comparable to a decrease of roughly 20 basis points in the discount rate – an interest-rate movement that would not be especially unusual from one month to the next. A member receiving a higher value after April 1, 2027 than before that date might therefore be seeing the effect of the new mortality basis, changing interest rates or both.
Plan sponsors shouldn’t assume that every commuted value will increase by a standard percentage. The actual calculation will still need to be performed.
A Note on Solvency Valuations
The change will also flow through to solvency liabilities, although that is unlikely to be the main concern for many plans today. Most defined benefit plans are currently well funded, and solvency funding has become less significant in several jurisdictions. Funded positions and economic conditions can change, of course, so the issue hasn’t disappeared.
Where solvency results still matter, the new basis will directly affect only the portion of the liabilities assumed to be settled through commuted value payments. The portion assumed to be settled through annuity purchases is based on insurers’ pricing, including their own mortality assumptions, and therefore won’t simply switch to CPM2024. The overall impact on a plan’s solvency liabilities will depend on its membership and on how much of the liability is assumed to be settled through lump sums rather than annuity purchases.
Funding and Accounting Remain a Matter of Judgment
The April 1, 2027 rule should not be mistaken for a general requirement to use CPM2024 Combined and MI-2024 for every pension valuation.
The promulgated basis applies to commuted values. It does not restrict an actuary’s selection of best-estimate assumptions for going-concern funding or an organization’s assumptions for financial reporting. In fact, a number of plans are already moving to CPM2024 and MI-2024 – or another basis informed by the new research – for going-concern funding and accounting valuations. We don’t need to wait until April 1, 2027, because those assumptions serve a different purpose and should reflect the plan’s circumstances at the valuation date.
For those valuations, the plan’s own experience and membership characteristics remain relevant, as do decisions about which CPM2024 table, survivor mortality basis and long-term mortality improvement assumption best fit the plan.
For a typical plan moving from CPM2014 with CPM-B to CPM2024 with MI-2024, liabilities might increase by roughly 2% to 4%. The result can fall outside that range, particularly if the plan has already updated its mortality improvement assumption or the Heavy or Light table is a better fit.
This creates the possibility that a plan will use one mortality assumption for commuted values and another for going-concern funding or accounting. That isn’t necessarily inconsistent. The calculations have different purposes: one is a standardized transfer value, while the others are intended to provide an appropriate measurement of the obligations of a particular plan.
The important point is that the assumptions and the reasons for selecting them should be understood and documented.
Why April 1?
The new basis was initially proposed to take effect on February 1, 2027.
During the consultation process, stakeholders expressed different views about the timing. The Actuarial Standards Board recognized that administration systems, practices and member communication materials would need to be updated and tested. It also recognized that December and January tend to be rather busy months for the organizations expected to do that work.
The effective date was therefore moved to April 1, 2027. This provides six months from the formal promulgation and nearly 11 months from the initial communication of the proposed change.
What Plan Sponsors and Administrators Should Do Now
This shouldn’t require a fundamental redesign of the commuted value calculation as the mortality tables and improvement scale work much like the current versions. The job is largely to update assumptions and systems, then confirm that the revised results flow through correctly.
Before April 1, 2027, plan sponsors and administrators should:
- Start with who is doing what. Confirm whether commuted values are calculated internally, by the plan’s actuary, by a third-party administrator or through some combination of people and systems.
- Work out where the change needs to be made. Calculation software and quotation tools are obvious places, but termination packages, administrative procedures and member communication templates may also need attention.
- Leave enough time to test the results. Run sample calculations using both bases. Loading the new table is only part of the job; the full calculation still needs to produce the expected result.
- Don’t overstate the solvency issue. If solvency results still matter for the plan’s funding or risk management, ask the plan actuary whether the effect on the commuted value component could be material. For many well-funded plans, this won’t warrant an elaborate exercise.
- Start the funding and accounting conversations sooner rather than later. The commuted value change does not dictate the mortality basis for either purpose, but it is a sensible prompt to revisit those assumptions. Auditors are already asking how organizations plan to reflect the new tables, so waiting until the next valuation is underway may leave less time than expected to consider the options and document the rationale.
- Be ready for member questions. Otherwise similar calculations may produce different values on either side of April 1, 2027. A short explanation of what changed—and why—will be more helpful than simply saying that “the standards changed.”
A note for ASI clients: We have updated our systems for the commuted value changes and are ready to implement the new mortality basis. We will also be in touch at the appropriate time to discuss what the new mortality research means for your plan’s going-concern funding and accounting assumptions.
The Bottom Line
CPM2024 draws on substantially more recent Canadian pensioner experience and considerably more data than its predecessor, while MI-2024 reflects a more current view of future mortality improvement. Applying them to commuted values is a logical next step.
For plan sponsors and administrators, however, the practical message is simpler: commuted values will generally increase, systems must be ready by April 1, 2027, and the broader mortality basis is worth discussing now rather than later.
For going-concern funding and accounting valuations, the answer remains less mechanical. Better mortality research gives actuaries and plan sponsors more information, but it also requires more judgment about which assumptions actually fit the plan.
So, April 1, 2027 is a firm deadline for commuted values. For everything else, it is a good reason to have the conversation.
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