Employers with defined benefit pension plans take note. Starting October 1, 2015, there is a new mortality table for calculating the commuted values of defined benefit pension plans. The new mortality table, CPM (Canadian pensioners’ mortality), replaces the longstanding 1994 Uninsured Pensioner Mortality Table (UP-94). This is a significant milestone for pensions in Canada. It represents the first ever mortality tables and mortality improvement scales based on pensioner mortality.
History of Mortality Tables in Canada
For members who terminated before October 1, 2015, the UP-94 mortality table was used. Although useful, UP-94 had its shortcomings. Canadian pension plans were using U.S. mortality tables to arrive at their assumptions for Canadian members. Not only does UP-94 have the potential to be outdated, there’s no guarantee pensioner mortality is the same in the U.S. as it is in Canada. This prompted the Canadian Institute of Actuaries (CIA) to start collecting data to update the Canadian mortality tables and thus the 2014 Canadian Pensioner Combined Mortality Table (CPM2014) was born.
While UP-94 is projected with a one-dimensional mortality improvement scale, CPM2014 is projected using a two-dimensional mortality improvement scale (CPM-B). Two-dimensional scale projects a member’s life expectancy based on age and cohort (the year when the member attains a certain age). For example, CPM-B takes into account the fact that the life expectancy of a member turning age 60 in 2015 is different than a member turning age 60 in 2025.
Although there is one mortality improvement, there are three mortality tables to choose from: private sector, public sector and combined (a combination of the private and public sector tables). The updated CPM-B mortality tables also lets actuaries value defined benefit pension plans with further accuracy.
New Mortality Table and Commuted Values
What does the new mortality table mean for commuted values? Under CPM2014, commuted values are expected to be between 5 percent and 10 percent higher compared to UP-94. Commuted values are higher because Canadians are living longer with each passing year. In fact, Canadians are living longer than what was projected using U.S. mortality tables. This results in current mortality rates being lower than expected and mortality improvements in the future being higher than expected. Although commuted values will be impacted, the impact is minimal on solvency valuations.
The new mortality table will affect pension administration in a number of areas. The commuted value is provided for termination, active (pre-retirement) deaths and marriage breakdowns. As mentioned, CPM-B will result in higher commuted values and payouts for the plan sponsor.
In almost all provinces the new mortality tables must be used for calculations with an effective date on or after October 1, 2015. However, in New Brunswick, Ontario and Quebec, pension regulations must be amended before CPM can be adopted. Plan sponsors have the choice of adopting the new mortality table or sticking with the old mortality table. As a plan sponsor, if you decide to keep using the old mortality (UP-94), additional disclosure may be required on termination and retirement packages and annual statements depending on your province. A lot of changes are underway, so it’s important to keep up to date on your province’s pension legislation.