The UBC Board of Governors has approved the Pension Board’s recommendation to remove the Commuted Value (lump sum) option for members age 55 and older. This change is effective for members who retire on or after January 1, 2011.
Given today’s low interest rate environment, providing the commuted value lump sum option has been a concern for the Pension Board as greatly overinflated lump sum amounts are being paid by the Plan, with the largest amounts to retiring members. The payment of these large lump sum amounts has a direct impact on the Plan’s liabilities, and by way of how the Plan is designed and because University contributions are fixed, the cost of these higher benefits is implicitly borne by the remaining members. As it is a mandate of the Pension Board to provide retirement security and income for all members, careful consideration was given to all cost reducing options, and on the advice of the Plan’s Actuary and Legal Counsel, the Pension Board decided it was appropriate to recommend the removal of an option that is affected by external factors beyond members’ control such as timing of interest rate changes. The remaining pension options will continue for members age 55 and older and there will be no changes for members under age 55.
Although the Plan’s assets have been recovering since the market downturn of 2008, $169.3 million was lost in that year. The Plan must ensure that there are greater assets (in terms of money) at a certain level than liabilities (pension benefits promises) in order to continue to pay indexed pensions. It is a condition of the Plan that if there are not sufficient assets to support benefits, then future indexing is reduced. As the next Actuarial Valuation commences on January 1, 2011, it was important to recommend the implementation of this change in time for this date as it is an evaluation of the Plan’s ability to pay benefits for the following three years.
We have prepared some Q & As (Questions and Answers) to help you understand what this change means to you.
Questions and Answers
What is the Commuted Value Lump Sum Option?
When members leave employment with UBC, they have several options for receiving their pension benefits, one of these is known as the Commuted Value Lump Sum option. The commuted value is the lump sum present value of the pension benefits that an employee is entitled under the Plan. The value is calculated by an Actuary in accordance with the B.C. Pension Benefits Standards Act and takes into account several variables such as life expectancies and interest rates at the time.
For members who select this lump sum option at retirement and/or when they leave their employment with the University, part of the lump sum must be transferred to a locked-in retirement vehicle (unless it is a small pension) approved by pension legislation, such as a locked-in retirement account (LIRA), and the other non-locked in portion can be received as a taxable payment. A portion of this taxable payment may be transferred to a non-locked-in RRSP.
The choice between electing a pension option, lump sum, or combination of the two can be difficult and members, especially those approaching retirement, are encouraged to learn about the pros and cons of these options before making any decisions.
Why was the removal of the lump sum option recommended?
Removing the lump sum option for members age 55 and over was recommended for several reasons. A key consideration is the overall design of the Plan, which was created to provide retirement income for its members.
Given today’s low interest rate environment, providing the commuted value lump sum option has become an increasing concern for the Pension Board. Over-inflated lump sum amounts are being paid by the Plan, with the largest amounts paid to retiring members. Due to how the Plan is designed and because University contributions are fixed, these payments have a direct impact on the Plan’s liabilities with higher costs implicitly borne by the remaining members. Given the Pension Board’s mandate to provide retirement security and income for all members, all possible cost reducing options were carefully considered. On the advice of the Plan’s Actuary and Legal Counsel, the Pension Board, recommended the removal of the commuted value lump sum option, which is affected by external factors beyond members’ control, like the timing of interest rate changes. The remaining pension options will continue unchanged.
The actual dollar amount that liabilities will be reduced will not be known until the results of the next actuarial valuation in 2011. However, it is known that in the last actuarial valuation conducted as at January 1, 2008, the cost of providing the commuted value option added $16.8 million in liabilities over and above the expected cost because of the low interest rate environment.
Was the market downturn of 2008 a contributing factor?
Yes, the significant loss of assets in the Plan since the last Actuarial valuation prompted the Pension Board to look at ways to reduce the Plan’s liabilities without reducing pension benefits. One way to reduce the Plan’s liabilities, without reducing pensions, is to remove the commuted value option for members age 55 and over. Although the markets are showing signs of recovery and the Plan’s assets are recovering, recovery is gradual and as seen in the past, the markets are also unpredictable. The Pension Board wanted to recommend a change that would have long term impact on the Plan’s health going forward.
When will this change take effect?
It was explained in the November 2009 newsletter that in order to secure members’ pension benefits, including continuing full indexing (100% of inflation) in 2012 and beyond, some combination of cost reduction and increase of the Plan’s assets needs to occur in time for the January 1, 2011 Actuarial Valuation.
On December 3, 2009, the UBC Board of Governors approved the recommendation, and the removal of the commuted value lump sum option for members age 55 and over will be effective on January 1, 2011. An official announcement will be made on the Staff Pension Plan website. Members are encouraged to refer to the February 2010 newsletter which will feature an article on the subject.
Did the Pension Board consider making this change apply only to new members?
A reduction in the Plan’s liabilities must occur before the Actuarial Valuation on January 1, 2011. The removal of CV option for new plan members would not have an immediate impact on the Plan’s liabilities: in fact it would take fifty or more years for the change to be fully implemented. This long transition time would not help reduce Plan liabilities and in the long run would end up costing the Plan greater administrative and communication expenses.
Are there any legal entitlements in regards to providing a commuted value option?
Pension legislation requires CV option payment to members under age 55; however, there is no requirement in pension legislation to offer members age 55 and over a lump sum payment option.
Are there any exceptions?
There are exceptions made for members age 55 and over who either have small pensions or have a minimum refund benefit based on a Plan specified multiple of the member’s contributions with interest that is higher than the commuted value (see next question).
If the member’s commuted value is less than 20% of the YMPE (equal to $9,660 in 2011 dollars), then the Member cannot receive their benefit as a pension. A lump sum transfer of the Commuted Value will be made in full settlement of the Member’s rights under the Plan.
If you are approaching retirement and are unsure if either of these exceptions would apply to your pension, please contact the Staff Pension Plan through the Online Contact / Feedback form.
What happens if a member’s contribution refund is greater than their lump sum commuted value?
Members will receive a monthly pension equal in value to the commuted value and the difference between the commuted value and contribution refund will be paid as a lump sum. For example, a member with a contribution refund of $400,000 and a commuted value of $350,000 would receive a monthly pension with a value of $350,000 and $50,000 would be paid as a lump sum.
For members who considered taking the CV option on retirement, what are their options now?
Members concerned about the removal of this option should review all the options available to them. If you are approaching retirement and need to know more about the pension options available to you, please contact Margaret Leathley at (604) 822-8119 or through the Online Contact / Feedback form to arrange an appointment.
This material has been compiled by the Staff and Pension Board Members of the University of British Columbia Staff Pension Plan from information provided to them and is believed to be correct. If there is any inconsistency between the contents of this communication and the pension plan trust or legislation, the trust and legislation will prevail.