Al1961

Sorry to say I'm not learned in these areas of pension lingo. could you explain further this paragraph?

*T he discount rates (there is one for the first ten years of pension payments, and a higher one for pension that would be paid more than 10 years in the future) used for CV calculations are determined at the first of each month.*

I don't know if I can un-jargon this for you - but here goes.

The Canadian Institute of Actuaries has a standard that determines the interest (discount) rates to be used to calculate Commuted Values. The spreadsheet that I linked above shows the current and historical rates. The discount rates are derived from three different Government of Canada Bond Rates.

The CV calculation is a present value calculation in several parts, with two different interest (discount) rates used depending on when cash flows:The estimated pension cash flows are mapped out in a time sequence based on when you are eligible to start receiving the pension, and continue until the mortality tables indicate average date of death (so around age 86 for Canadian women).

In the first step, any cash flows that happen more than 10 years in the future from the Valuation date are discounted using the >10 year rate, but only to a date that is 10 years out from the Valuation date. Currently that discount rate is 1.2% for a fully indexed pension and 3.3% for a non indexed pension. (Rates for February 2015)

The second step is to discount the PV balance ten years out (determined in the first step) and any other pension payments in the first ten years to today using the <10 year discount rate. This rate is currently 1% for fully indexed pensions and 1.9% for non indexed pensions.

OK, that was probably hard to follow, so I'll try to lay this out a bit better using some arbitrary dates:

A. March 1, 2015 - CV Valuation date

B. March 1, 2020 unreduced pension payments would start

C. March 1, 2025 "10 year out measurement date"

D. March 1, 2051 Assumed Age 86, pension ends

Part I

All pension payments that would have been made between date C and D are discounted back to date C using the >10 year discount rate. The total of those discounted payments are then discounted back to date A using the <10 year rate.

Part II

All pension payments made between date B and Date C are discounted back to date A using the <10 year discount rate.

The total of Part I and Part II is the CV

I built a spreadsheet using this logic and was able to come within ~$2k of the payout calculated by my pension plan. I believe the difference was due to me using annual amounts rather than monthly amounts specified in the CIA standard.

Al