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Commuted value
- Members
- Employment changes
- Commuted value
Understanding commuted values
One concept that often raises questions for members changing employment is the commuted value (CV) of their pension, also known as lump-sum value, and the ability to transfer it out of UPP. While it may seem like a straightforward number, CV calculations are complex and fluctuate based on various factors.
This article explains what a CV is, how it is calculated, and why it may not always be the best tool for financial planning. Whether you’re considering changing employers or simply exploring your options, here’s what you need to know to make the best decision for your future.
What is a CV?
A CV is the total estimated value in today’s dollars of the lifetime pension you have earned and would be payable at retirement. In other words, it is an estimate of the amount of money that must be set aside today to pay the pension you would begin to receive at retirement.
CV estimates, a point-in-time determination, are based on a number of assumptions and depend on various factors that fluctuate over time. This means that a CV estimate provided today will not likely be an accurate representation of the retirement income you will receive when you leave the plan because it is a current estimate of a future value.
How are CVs calculated?
CVs are determined in accordance with the Canadian Institute of Actuaries Standards of Practice, which sets out the actuarial methods and assumptions used in the calculation, like your age at the date of calculation, assumed retirement age, demographics and economic rates, among others.
The interest rates, which are based on government and corporate bond yields that vary monthly, have a particular impact on CV calculations as they have an inverse relationship: when interest rates increase, the CV decreases, and vice versa. This is because the CV represents the amount of money that would need to be invested today to pay your promised pension benefit in the future. When interest rates are high, it is assumed less money is needed to invest today, as it will earn more interest between now and at retirement.
Commuted value estimates from UPP
As your plan administrator, UPP is committed to providing you with estimates for your monthly lifetime pension, reflecting our defined benefit pension promise. CV calculations are only available once you terminate your membership, and if you are eligible. Here’s why CV estimates aren’t offered more broadly:
Accuracy
CV estimates are only representative of a lump sum payable in lieu of a future lifetime pension to a member terminating in the month of the calculation. The retirement income provided by the CV may be either greater or less than the pension payments you would have received if you retired from the plan. Since a CV calculation relies on many factors—including interest rates that change monthly—an estimate may not accurately represent the future value of your pension.
Intended use
Relying on an estimated CV can sometimes lead to making financial decisions that don’t align with the true long-term value of a lifetime pension. CV estimates can be misleading when used for financial planning or estate planning as the value isn’t guaranteed and could be significantly higher or lower, depending on the factors at the time of membership termination or death. Similarly, CV estimates should not be used for family law matters. The pension value calculated for equalization purposes when a marriage ends is based on regulatory requirements specific to family law.
Eligibility
While you are always entitled to receive a lifetime pension, you may not be eligible for a CV transfer when you terminate membership. Eligibility depends on variables such as age at the time of termination and the provisions of the plan.
Making an informed financial decision
Transferring your CV out of the Plan when you terminate your UPP membership is an irrevocable decision. That’s why it’s essential to carefully evaluate your options before making any decisions about your pension and retirement. Consider the following before deciding to transfer your CV out of the Plan:
- Your comfort level with making investment decisions, as this may impact the performance of your retirement savings.
- Your funds may be subject to market volatility depending on how they are invested.
- You may be required to pay additional fees to the receiving financial institution based on the parameters of your account.
- Transferring your benefit out of the Plan as a lump-sum amount can have significant tax implications that you should consider carefully.
- By keeping your pension with UPP you become a deferred member and retain the valuable benefits of a UPP pension in retirement. These include a pension paid for life, inflation protection adjustments to help your pension keep up with the rising cost of living in retirement, and comprehensive survivor benefits to protect your loved ones. These benefits are difficult to replicate when investing on your own.
Questions? UPP can help!
UPP’s pension experts can help you explore your options and support you through these important life decisions. If you have any questions about your pension, contact UPP Member Services to connect with a pension expert. Here’s how you can reach them:
Phone: 1-833-627-7877, Monday to Friday, 8:30 am to 5:00 pm, ET.
Online: Secure Messaging using the myUPP Member Portal
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