Pension Commutation

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Evaluation

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.


Additional Knowledge Expected of CFP Professionals
  • Define a pension commutation. 
  • Identify reasons why a pension plan member may commute a pension.
    • Involuntary or voluntary termination of employment
    • Early retirement
    • Termination of pension plan
    • Termination of pension plan membership
  • Identify that the commuted value of a pension benefit entitlement is actuarially equivalent to the future income stream payable to the average member of a pension plan.
  • Identify factors that are taken into consideration in the actuarial calculation of a defined benefit pension entitlement, such as:
    • Interest rate expectations
    • Inflation expectations
    • Investment return expectations
    • Life expectancy based on mortality tables
    • Assumed retirement age
    • Assumed marital status
    • Assumed age difference between spouses
    • Allowance for taxation
    • Allowance for pension indexation
    • Discount rate
  • Explain that an individual’s personal circumstances may differ from the average pension plan member considered in the actuarial calculation of a defined benefit pension.
  • Identify factors that may cause the actuarial commutation assumptions to differ from the individual’s personal circumstances, such as:
    • Actual life expectancies
    • Actual retirement age
    • Amount of income needs
    • Timing of income needs
    • Marital status
    • Actual difference in ages between spouses / partners
    • Other income sources
    • Difference in growth rate of assets
    • Tax implications
    • Estate plan
  • Identify the components of a commuted value of a defined benefit pension.
    • Maximum Transferable Value, as allowed under the Income Tax Act
    • Taxable portion
  • Explain the options that may be available for the Maximum Transferable Value component of a defined benefit pension commuted value. 
  • Explain the options that may be available for the taxable portion of a defined benefit pension commuted value.
  • Estimate the tax impact resulting from the receipt of the taxable portion of a defined benefit commuted value.
  • Determine how each of these factors may impact the suitability of commuting a defined benefit pension plan:
    • Present value of the potential after-tax income streams from each option
    • Solvency of the pension plan
    • Solvency of the former employer
    • Statutory protection of pension income
    • Potential for post-retirement pension benefits
    • Control over timing the receipt of income
    • Control over investment decisions
    • Impact on assets / pension upon death of the plan member
    • Need for consistent and/or lump sum income
    • Other sources of income
    • Health of individual
    • Risk tolerance
    • Investment experience
    • Estate plan
    • Personal attitudes / preferences 
  • Evaluate how each of the factors may impact the suitability of commuting a defined benefit pension plan.
Arrow Left previous / Pension Buyback