Episode 385: A Case Study on Pension Benefits vs. Commuted Values

Episode Summary

Executive Summary: Episode 385 introduces Halifax-based EB Wealth advisors Trevor Daigle and Brett Watt, who joined PWL Capital after finding strong alignment in its client-first culture and planning approach. The episode’s central case follows a retired client who initially planned to take a pension’s commuted value. Phil Briggs compared that choice with keeping the pension, accounting for taxes, inflation, investment risk, and survivor benefits; the clients ultimately kept the pension and chose its higher monthly benefit.

Main Topics: EB Wealth joins PWL Capital: Trevor Daigle and Brett Watt explain why their Halifax-based independent practice joined PWL, describing the move as a way to grow their capabilities, strengthen client service, and expand PWL’s presence into Atlantic Canada. Culture and advisor alignment: The advisors say meetings with staff across PWL confirmed that its client-first culture was practiced throughout the organization, not just expressed by leadership. They also valued collaborative planning discussions over sales-target-focused meetings. Risks and trade-offs of a defined-benefit pension: Phil Briggs outlines reasons to keep a pension—lifetime income, risk pooling, and potential inflation adjustments—as well as concerns such as sponsor insolvency, investment outcomes, life expectancy, and survivor benefits. Comparing the commuted value with pension income: Briggs modeled both options using the clients’ spending needs, assets, income, taxes, inflation assumptions, and a shortened-life-expectancy scenario. The analysis found that retaining the pension offered a stronger floor of guaranteed income and better simulated plan reliability. Tax consequences of taking the commuted value: The transfer included a tax-deferred locked-in amount and a large excess amount taxable immediately. The client had no available RRSP room to shelter the excess, making the upfront tax cost an important factor in the comparison. Choosing the pension survivor option: After deciding to keep the pension, the client compared a higher pension with a two-thirds survivor benefit against a lower pension with a full survivor benefit. A break-even analysis helped the client select the higher pension, based on living beyond age 81.

Key Arguments: A pension decision should not be made solely from an initial preference or a rule of thumb; it should be tested against the household’s circumstances, goals, and values. Keeping a defined-benefit pension can reduce investment and longevity risk by providing lifetime income, sharing mortality risk across members, and potentially offering inflation adjustments. Taking a commuted value can create meaningful risks and costs: the client assumes investment risk, may lose survivor protection, and may face a large immediate tax bill on the amount above the tax-sheltered transfer limit. In the modeled early-death scenario, keeping the pension produced a 96% Monte Carlo success score, compared with 84% for a 60/40 portfolio and 83% for a 100% equity portfolio, while the 60/40 and pension scenarios had similar modeled legacy values. The higher equity allocation increased modeled retirement and legacy values but did not improve the Monte Carlo success score, illustrating the trade-off between expected wealth and exposure to a wider range of outcomes. Objective analysis can change a decision even when a client has already formed a conclusion. PWL recommended retaining the pension despite foregoing the opportunity to manage the commuted-value assets, emphasizing client interests over asset gathering. PWL’s appeal to EB Wealth was not only its infrastructure and research depth, but evidence that its collaborative, client-focused approach was consistent across the organization.

Data Points: EB Wealth advisors’ industry experience: Nearly 30 years - Trevor described his time in the financial-services industry while discussing the importance of a long-term succession plan for clients. Retiree’s age: 65 - The father had recently retired when the family sought advice on his defined-benefit pension. Locked-in commuted-value amount: $1.267 million - The maximum tax-sheltered amount was to be transferred to a locked-in retirement account. Taxable excess amount: Just over $740,000 - This amount exceeded the tax-sheltered transfer value and was taxable in the year received; the client had no RRSP room available to shelter it. Ontario top marginal tax rate cited: 53.8% - Briggs said most of the excess amount would be taxed at this rate for the client. Monthly pension benefit: $8,515 pre-tax - The modeled pension included a cost-of-living adjustment and a two-thirds survivor benefit. Pension adjustment and inflation assumptions: 2% annual pension adjustment; 2.5% inflation - The model assumed the pension adjustment would lag inflation, providing only a partial inflation hedge. Household retirement spending goal: $10,000 per month after tax - The goal was indexed to inflation for life; the plan also included a $50,000 after-tax lump-sum expense every seven years. Rental income: $60,000 per year - This income was included in the retirement plan alongside CPP, OAS, and registered and non-registered investments. Shortened-life scenario: Pensioner dies 10 years into retirement - The analysis tested this scenario because the client’s health concern and the spouse’s reduced survivor benefit motivated the original decision to take the commuted value. Commuted value invested 60/40: 113% retirement score; $5.5 million legacy value; 84% volatility score - Results were for the shortened-life scenario; legacy value was expressed in present-value dollars, and the volatility score reflected 1,000 Monte Carlo simulations. Commuted value invested 100% in equities: 139% retirement score; $6.4 million legacy value; 83% volatility score - The higher expected return increased modeled retirement and legacy values, while the simulated success score remained similar to the 60/40 case. Pension retained: 115% retirement score; $5.5 million legacy value; 96% volatility score - The pension scenario had a similar modeled legacy value to the 60/40 case and a higher Monte Carlo success score. Pension survivor-option break-even age: 81 - The client needed to live to about age 81 for the higher pension with a two-thirds survivor benefit to deliver more combined pension benefits than the lower pension with a 100% survivor benefit.

Pivotal Quotes: "We can't unsee that." — Trevor Daigle: He recalled deciding to join PWL after visiting Ottawa and seeing that the organization’s stated culture was reflected across its teams. "I love that this is a story about turning down a large sum of money that we could have managed and charged fees on." — Phil Briggs: He described why the case represented PWL’s commitment to advice in clients’ best interests, even when that meant not managing the pension commuted value. "The question is: is it more of the same?" — Trevor Daigle: He described the advisors’ concern that joining PWL might simply reproduce their existing business model, before concluding it offered a substantial step forward for their clients and practice.

Implications: For investors, a pension commutation decision requires integrated tax, risk, inflation, longevity, and survivor-benefit analysis—not just an investment proposal. For advisory firms, the episode highlights how client-first incentives and consistent culture can build trust and support long-term relationships.