What is the Investment Return used to calculate Commuted Value?

7353 Views 11 Replies 3 Participants Last post by Saniokca, Oct 27, 2009

Eric

Discussion Starter · Oct 22, 2009

I have the spreadsheet to calculate Commuted Value of a pension, however I wonder what is the "official" Investment Return that should be used.

I presume an employer cannot just use his own estimate. I would think that there is some official value that employers must use. Right?

Is there a web site that give the current official value?

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Eric

Discussion Starter · #2 · Oct 23, 2009

I have found the answer to my question. It is now 3.7% for the first 10 years and 5.2% after that.

http://www.leong-associates.com/links.php?c=1

Has anyone seen a CV calculator that can use two rates? I realize that using something like 4.2% is probably a good approximation.

I wonder if annuities are also using the same rate or should one shop around.

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Eric

Discussion Starter · #4 · Oct 23, 2009 (Edited)

MoneyGal said:
1. Don't use a blended rate. Do PV calculations using the "correct" rate for two periods. However, note that the second period - after the first 10 years - is random. How are you going to choose a period?

I think CV calculators include a life expectancy of 83 for a man.

MoneyGal said:
2. Note that the CV rates you cited are for non-indexed pensions.

Good point. Do you have a reference for rates that include various levels of indexing?

I wonder if the impact on the CV is significant - a CV could be invested to provide some protection against inflation. I presume the non-indexed rates I quoted would give a minimum CV.

MoneyGal said:
3. Annuity rates are not calculated based on anything to do with pensions. There are lots of places to find current annuity quotes. Take a look at Cannex.

Thanks for the reference. I have not studied it yet, but I thought that I would be able to find an annuity that, with my CV, would match my present benefits. Am I optimistic?

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Eric

Discussion Starter · #8 · Oct 23, 2009

MoneyGal said:
On indexing: I highly recommend, if you are going to be creating scenarios like this, that you learn how to use a financial calculator or the finance add-ins in Excel. That will allow you to determine PV for various sums for various periods and various indexing assumptions.

Yes. I have been using some ready made spreadsheets but they do not have the flexibility I really need. I should roll-up my sleeve and make my own. I used to do a lot of that.

I am a Nortel pensioner so I am expecting to be offered a CV in the coming weeks - 31% reduced I am afraid. I would like to know the order of magnitude of what I should expect.

When I retired, I choose to take the pension rather than the CV. I am still glad I did, because we had a few market crashes since then and my investment style was not safe enough.

Now, I will be faced with the same decision. I think, I should not take an annuity now. However, my father lived to 92 and I am in much better health than he was at my age. We have good longevity genes, unfortunately. So, eventually, I might buy an annuity for peace of mind.

I must say also that I am not good at safe investments. I just sold a lot of my bond ETFs, worrying about rate rising. I bought some RRBonds ETF's (XRB) (lousy rates but better than cash) and some High Yield funds (PHN). I am siting on 15% cash not knowing what to do with it.

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Eric

Discussion Starter · #10 · Oct 23, 2009

MoneyGal said:
OK. Using mortality tables from the U.S. Society of Actuaries for healthy adults ages 50 and over, I get the result that a healthy male, aged 55, has a 39% chance of living to 83 -- and a 22% chance of living to 88, and a 16% chance of living to 90, etc.

Using these same input values, a healthy male aged 60 has a 41% chance of living to age 83, and a 23% chance of living to 88.

Disclaimer: I'm not an actuary.

Thank you for the info. I appreciate the time you take to dig this information out. I am 66, so I presume that they will use a life expectancy of much more than 83. This is good news.

With the low rates, the indexing and the bigger life expectancy, I think I will get over the $400k limit, despite the 31% Nortel drop. This will complicate my decision. I wonder if I can put $400k in a locked-in plan and the rest in an annuity - I don't think I can do that. The limit on the contribution to a locked-in plan is strange. Why do they care?

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