Rising long-term interest rates and lower commuted values

It’s hard to miss the news about rising interest rates as central banks react to strong inflationary pressures around the world. Canada is no exception.

By GSU general secretary Hugh Wagner

While raises in the interest rates charged by central banks such as the Bank of Canada grab headlines, a less well-known fact is that interest rates on bonds have been ticking upwards in the markets for some time as investors hedge against inflation. In addition to a rising cost of borrowing, higher long-term interest rates also have a collateral effect on the commuted value of pension benefits in defined benefit pension plans. Higher long-term interest rates translate into lower commuted values for defined benefit pension plans since less money is needed to purchase or pay the monthly pension promised to the pensioner by the pension plan.

GSU members who have not retired and who have a deferred pension benefit in the defined benefit pension plan known as the Viterra Inc. Pension Plan for Grain Services Union (ILWU) Members (or by another name if administered for former Viterra employees on behalf of Nutrien Ag Solutions Ltd or Richardson International Limited) have experienced sticker shock recently as they’ve seen the commuted values of their deferred pension decline significantly, particularly in the last six to 12 months.

The monthly pension guaranteed to the deferred plan members hasn’t declined, but the amount of capital required to purchase their monthly pension benefit has declined in conjunction with rising long-term interest rates.

“Members who were expecting to take a transfer amount instead of a monthly pension when they retire have seen that transfer amount decline and this has caused considerable consternation,“ said GSU general secretary Hugh Wagner. “While long-term interest rates were at historic lows, commuted pension values and therefore transfer amounts were substantially higher than they are at the present time or will be for the foreseeable future.”

“It is hard to say with any certainty how long the upward trend in long term interest rates on bonds will continue, but it is likely to be with us until there is a significant decline in inflationary pressure on the prices we pay for goods and services,” said Wagner. “The best and the only advice I can give to members considering whether and when to cash out the commuted value of their defined pension benefit or to take the monthly pension is to talk to their financial planner.”