1. Should Pensions Be Taken Out of the Equalization Regime?
For purposes of this report, the LCO has assumed continuation of the main features of the family property provisions of the FLA, including the exclusion of persons in common law relationships and adherence to the principles that the former spouses are presumed to have made an equal contribution to the assumption of household responsibilities, that on marriage breakdown they should share equally in the value of net family property (as opposed to each having a half interest in all items of family property) and that debt cannot reduce a spouse’s net family property below zero. Whether these aspects of family property law should be changed is an issue with implications far beyond pensions and it would be inappropriate to address that issue in the context of this project, which is limited to pensions. Thus, we have looked into the question of whether pensions should continue to be subject to the FLA equalization regime based on the current generic features of that regime.
Removing pensions from the equalization regime could lead to unfairness between spouses who are in the same net asset position. Consider a pension plan member who has debts of $200,000, a pension valued at $150,000 and other assets valued at $50,000 and whose spouse has assets of $10,000 and debts totaling $10,000. If the pension is divided outside the equalization regime, the member would lose half the value of his pension to the non-member spouse, even though both parties are in the same position so far as net family property is concerned, whereas if the pension rights are included in the equalization process, he would retain the entire pension because his net family property would be zero.[219] (This is not to suggest that the non-member spouse, depending on the circumstances, may not have a valid claim for support. However, the purpose of Part I of the FLA is to put the spouses in an equal position with respect to family property, not to address support needs. Support is dealt with in Part III of the FLA.)
The LCO also notes that dividing a pension outside the equalization regime may result in the parties having less flexibility in relation to other family property. For example, it is not unusual for a couple to have only two substantial assets, an interest under a pension plan on the part of one spouse and a matrimonial home owned jointly. In such a situation, dividing the pension outside the equalization regime would likely necessitate sale of the matrimonial home, whereas dealing with all family property under the equalization regime may make it more likely that the non-member spouse can keep the matrimonial home if he feels that that is preferable to selling it and dividing the proceeds.
Finally, the LCO observes that it is difficult to see a policy justification for excluding pensions from the equalization regime when other retirement vehicle assets, such as RRSPs, are not excluded.
Accordingly, the LCO recommends as follows:
1. The interest of a pension plan member whose rights have vested continue to be considered “family property” for purposes of the Family Law Act (FLA) and therefore subject to the FLA equalization regime.
2. Should Rights that Have Not Vested Be Treated as Property?
For purposes of calculating a spouse’s “net family property”, the FLA defines “property” as including
…in the case of a spouse’s rights under a pension plan that have vested, the spouse’s interest in the plan….
As was noted above, while there appears to be some reason to think that the reference to rights under a pension plan that have vested was intended to indicate that unvested rights were not to be taken into account in determining the member spouse’s net family property, the courts have in fact held that the value of such rights is included. Although this holding may be at odds with the original intention, the LCO sees no reason not to include unvested rights under a pension plan as “property” for purposes of the equalization regime — while such rights may be contingent, that does not mean that they do not have value.[220] An amendment to the FLA definition to eliminate any implication that rights that have not vested are not included (which could be achieved simply by deleting the words “that have vested”) would be desirable, as it would make the text of the Act consonant with the actual state of the law.
Accordingly, the LCO recommends as follows:
2. The FLA be amended to indicate that rights under a pension plan that have not vested are also “family property”.
B. Valuation of Rights Under a Defined Benefit Pension Plan
As was discussed above, there are three main methods of pension valuation for family law purposes: the termination method, the retirement method and the hybrid termination-retirement method (hereinafter referred to as the “hybrid method”). The termination method and the hybrid method both take as a starting point the dollar amount of the pension accrued to the valuation date (generally, the date of separation), that is, without assuming further service and without projection for future salary increases or plan improvements. However, the hybrid method, unlike the termination method, does provide for inflation (where benefits are indexed) and it assumes future service for purposes for rights to ancillary benefits that have not vested at the time of separation because the member has not accrued sufficient service but that will vest eventually if the member continues in employment. (An example would be a right to take early retirement on an unreduced pension if the member meets a “factor 90” qualification where, at the time of separation, the member’s age and service credits do not yet add up to 90.) The retirement approach assumes future service for purposes of these rights, but also projects future salary increases, including those not related to inflation, such as those stemming from promotion, as well as enhancements to plan members’ rights that might be made in the future. As was noted above, Ontario courts generally seem to favour the hybrid method (notwithstanding some inconsistency in the terminology used in many of the decisions), but as a matter of law the question cannot be regarded as entirely settled.
In its 1995 Report, the OLRC argued that the retirement method should be prescribed as the only approach to valuation of rights under a defined benefit pension plan for family law purposes.[221] However, the LCO observes that in doing so, the OLRC seems to have seen the choice as one solely between the termination method and the retirement method; the issuance of the Report appears to have preceded any general recognition of a third way,[222] and it certainly preceded the Bascello case, which demonstrated that most of the judicial decisions that purported to apply the termination method were in fact not actually doing so and were instead using the hybrid method (although the Bascello court did not favour that label). Given that the two aspects of the termination method that might be seen as being particularly unfair to the non-member spouse (namely, the failures to take into account rights to unvested ancillary benefits and to allow for inflation) are not present with the hybrid method, it may well be that the OLRC would have seen that method as the most fitting had the choice been conceived as one between the three alternatives. In any case, the LCO is of the view that the hybrid method is the most appropriate; moreover it recommends that the FLA be amended to provide that it be used in valuing rights under a pension plan for family law purposes, thereby eliminating any lingering uncertainty in this area.
Although some might object that in considering future service for purposes of rights to ancillary benefits such as an unreduced early retirement pension, the hybrid method effectively gives the non-member spouse a share in post-separation increases in the value of the member’s pension, the LCO notes that the accumulation of sufficient service credits to result in the vesting of such rights is in part the result of service credits that were earned during the period of marriage.[223] On the other hand, the retirement method plainly could result in the non-member spouse inappropriately sharing in post-separation increases in value, as is most obvious where it is assumed that there will be improvements to the pension plan or that the member will experience significant promotions subsequent to the marriage breakdown. With respect to the latter, while the LCO acknowledges the argument that post-separation career successes may, to some extent at least, have their genesis in decisions taken and roles assumed during the marriage, the retirement method makes no distinctions in that regard. Further, it is far more speculative than either of the other two methods; indeed, in projecting plan improvements and future promotions, the retirement method employs conjecture at a profound level. On balance, the LCO believes that the hybrid approach strikes the fairest balance as between the parties.
Accordingly, the LCO recommends as follows:
3. The FLA be amended to provide that for purposes of valuation, rights under a defined benefit pension plan should be assessed using the hybrid termination-retirement method.
C. Settlement: Defined Benefit Pension Not Yet in Pay
1. Assessing the Arguments
In the LCO’s view, many of the arguments made in support of or against the ISM or DSM overstate the case.
While there is no doubt that the ISM provides a “clean break”, it is simply incorrect to suggest that the DSM would force the former spouses to continue to have dealings with each other. The DSM model presumes that the non-member spouse becomes a quasi-member of the member’s pension plan; any communication regarding the plan in relation to this would be with the plan administrator — there would be absolutely no need for the former spouses to have contact with each other. Still, it must be acknowledged that with the DSM, the break is not complete. Obviously there would continue to be a financial link between parties, in that the amount of the pension received by the non-member or quasi-member spouse would be a function of the amount of the member’s pension when it came into pay. The link may be a silent one, but it is still a link.
The arguments about post-separation increases in pension value are also overstated, on both sides. Proponents of the DSM who argue that the value of a pension is paid for disproportionately through contributions made in the early part of the member’s career may be correct in that assertion, but this ignores the point that for family law purposes the value of a defined benefit plan pension (unlike that of a defined contribution plan pension) is not a matter of the amount of contributions and the yield on their investment. (That is why it is the present value method, rather than the contributions method, that is used to assess the worth of the member’s rights.) On the other hand, it is surely incorrect to assert that no part of the post-separation increase in the value of the member’s pension can ever be attributed to the married years. Simply looking at the matter from a mechanical perspective, eligibility to take an unreduced pension would in many cases never have been attained (and certainly not attained as early as it was) had the pensionable service earned during marriage not been counted. And the economic and other contributions made by the non-member spouse to the marital partnership may well have been the foundation on which the member’s post-separation success was built.
One can, of course, devise scenarios in which the member only became an “achiever” after leaving the deadweight of her marriage behind, but one can equally devise other scenarios in which the member would never have become an achiever had it not been for material and other sacrifices made by her former spouse. The reality is that, while there are undoubtedly exceptions, it is likely that in most cases the origin of at least some of the post-separation increase in the value of the member’s pension lies in the period of marriage.
The contention that it would contribute to uniformity of the law if Ontario were to adopt the ISM is not convincing. While the ISM jurisdictions do outnumber the DSM jurisdictions, the fact that three provinces use the DSM obviously means that there is no national consensus in favour of the ISM. Further, there are numerous variations from jurisdiction to jurisdiction in the case of both the ISM and the DSM, and in some cases regimes that might be characterized principally as ISM or DSM offer alternative settlement options that exhibit elements of the other method.[224] Although uniformity is not an irrelevant consideration, the LCO believes that ultimately the choice of solution for Ontario must be based on the intrinsic merits of the contending approaches, and not on a quest for a pan-Canadian template.
With respect to the argument that adoption of a DSM approach means that determination of the pension’s present value is rendered unnecessary, the LCO acknowledges that the assumptions used in determining present value will usually mean that the pension will turn out to have been undervalued or overvalued in comparison with what is ultimately paid out. However, we are also of the view that this ignores the fact that the value of virtually any property, as determined at the separation date, might turn out to be considerably more or less than its value at some subsequent point. While this may cause resentment on the part of one or the other spouse, the risk of its happening is inherent in a regime that requires family property to be valued for equalization purposes. Some DSM proponents might respond to this by arguing that pensions should in any event be removed from the equalization regime and dealt with separately, but for the reasons already given above, the LCO believes that rights under a pension plan should continue to be dealt with under that regime.
The LCO acknowledges the validity of the concern that that providing a lump sum to a non-member spouse for placement in an RRSP could be very daunting for someone untutored in investment matters (or perhaps, in light of recent events, even for individuals who consider themselves quite sophisticated when it comes to stocks and financial instruments). However, this same concern can arise in cases where resort to pension division is unnecessary because the member spouse is able to pay off his equalization debt by trading other assets — indeed, the concern may be all the greater, since in that scenario there is nothing that would require the non-member spouse to convert the asset that was traded into a vehicle that will provide income in later years. In our view, given that in most cases equalization is achieved through an asset swap rather than pension division,[225] the inexperienced investor concern, while not without validity, does not provide a compelling reason to reject the ISM. We note as well that the concern could in any event be addressed through the establishment of a new provincial retirement fund, as discussed in section E, below.
We are not persuaded that adoption of the ISM would exacerbate economic inequality as between the sexes. As was noted above (in section II, under the heading “Types of Pension Plans and Employee Coverage”), the number of males who are members of Ontario jurisdiction pension plans is only slightly greater than the number of female members, and male membership has not been growing while female membership has been increasing substantially; further, the percentage of pension plan members who are in a defined benefit plan is virtually the same for men and women. Choosing between the competing proposals for reform of the law relating to pension division upon marriage breakdown is thus unlikely to have a negative (or positive) effect on women particularly. This is not to say that other, broader aspects of the law relating to pensions and the Canadian retirement income system in general may not have an iniquitous impact. (In that regard, one might note the fact that pension income, whether from a private plan or the CPP, is largely a function of paid employment prior to retirement and that this tends disproportionately to disadvantage women.)[226] However, we are here concerned with the comparatively narrow question of how pensions should be divided where such division is required in order to resolve family property issues. In the LCO’s view, the choice between the ISM and the DSM is not one between a change in the law that is likely to promote economic equality between the sexes and a change that is likely to perpetuate or worsen existing inequalities.
The LCO does agree with critics of the ISM that, as implemented in other Canadian jurisdictions, it tends to produce an artificially low value for the pension and is thus unfair to the non-member spouse (whether that person be male or female). However, we also agree with critics of the DSM that the DSM is much more complicated by comparison with the ISM and that it imposes burdens on pension plans and plan administrators that the ISM does not. (While arguably the weight of those burdens has been somewhat exaggerated, the problems posed for defined benefit plans by the current economic situation suggests a need to be very cautious about adding to the difficulties they face.)
This has led us to make a twofold recommendation:
o where the member is within ten years of the normal retirement date in the plan and both the member and the non-member spouse agree; and
o where, despite the fact that the member is not within ten years of the normal retirement date, the member, the non-member spouse and the pension plan administrator agree that the pension be divided using the DSM.
2. Some Alternative ISM Approaches
The reason that critics of the ISM argue that it is unfair to the non-member spouse is because it generally[227] uses the commuted value approach to value the member’s pension, and thus the transfer-out for the benefit of the non-member spouse. The commuted value approach, in assuming immediate termination of plan membership, ascribes no value to unvested ancillary benefits, such as a right to take an unreduced early retirement pension where the eligibility requirements have not yet been met; this may produce a lower value – and thus a lower transfer amount for the benefit of the non-member spouse – than a valuation utilizing some other method, such as the hybrid method discussed above (in section VI.B). In that regard, the LCO did consider whether an ISM using the hybrid method of valuation rather than the commuted value method would be feasible. However, such an approach could result in plans paying out more by way of transfer for the benefit of the non-member spouse than would be justified by the value that the member’s pension ultimately achieves (as where the member terminates employment shortly after separation without ever having qualified for an unreduced early retirement pension); the shortfall would either have to be absorbed by the plan or recovered from the member’s already diminished future pension.
The LCO also considered whether it would be practical to require that a second commuted value calculation and transfer-out be undertaken at the time that the member reaches a “trigger date” (retirement or pre-retirement death or termination of employment), with the aim of supplementing the amount originally transferred to the benefit of the non-member spouse based on any subsequent increase in the value of the member’s pension. However, we concluded that this approach would be overly complex and produce burdens for plan administrators, particularly in the case of members who ended up having more than one former spouse.
On balance, the LCO believes that the ISM with a transfer based on commuted value is the most appropriate solution. We also note that the commuted value does not always produce a lower value than the hybrid method, and we would point out that in any case under the LCO’s proposal the member would remain liable for any difference between the amount transferred from the fund of the plan for the benefit of the non-member spouse and her equalization debt. Finally, we believe that our proposal that a DSM option be available on a limited basis will provide an appropriate settlement for parties who do not experience marriage breakdown until fairly late in the member’s career. The DSM, which produces a financial result that is likely to be more in keeping with the expectations of both parties had they not separated, may be a particularly fitting solution (despite the burdens imposed on the plan administrator) when retirement is relatively close at hand, as that is when those expectations would be at their most definite and pronounced. (And the LCO sees no reason why the DSM should not be an option in other cases if the plan administrator is willing to shoulder the burdens that that approach involves.)
3. Transfer Destinations
The PBA gives a plan member who terminates employment and who is entitled to a deferred pension but who wishes to transfer his rights out of the plan three options: transfer to another pension plan (if the other plan is willing to accept the transfer), transfer to a “a prescribed retirement savings arrangement”[228] (essentially, a “locked-in” retirement vehicle) or purchase of a deferred annuity. The LCO believes that options corresponding to the first two of these should be available to the non-member spouse in the case of an ISM resolution. (The third option, purchase of a deferred annuity for someone who is not a pension plan member, may raise problems under section 147.4 of the ITA.)[229]
Transfer to a locked-in retirement vehicle may make sense for some non-member spouses who feel they have the expertise to manage their own investments or who feel that they can readily access such expertise from other sources. However, many non-member spouses who do not have their own pension plans may be lacking in the investment knowledge and experience that is required to self-administer an RRSP or even to choose someone else who is suitably skilled to administer it for them. Creation of a new public fund into which transfer moneys could be paid might provide a good alternative for non-member spouses in that position, in that it would give them some advantages comparable to those enjoyed through membership in a large pension plan, namely, the pooling of resources and risk, the power of substantial investment capital and professional, expert fund management and administration. This is discussed further in Section E, below.
Generally speaking, it seems unlikely that pension plan administrators would favour establishing a credit in the member’s pension plan for the non-member spouse, essentially making him or her a member. However, there may be cases where the plan administrator is willing to do this, and there is no reason not to allow it where that is the case.
Accordingly, the LCO recommends as follows:
4. Subject to the other recommendations in this section, where a member of a defined benefit pension plan is an equalization debtor to his or her spouse and wishes to satisfy the equalization debt through resort to his or her interest in the pension plan, legislation provide that the immediate settlement method of division applies, under which the member could require the plan administrator to transfer a pro rata share of the commuted value of the member’s pension as of the separation date from the fund of the member’s plan to
(a) the fund of a plan of which the non-member spouse is a member, if the administrator of that plan agrees;
(b) a retirement savings arrangement of the type prescribed for purposes of clause 42(1)(b) of the Pension Benefits Act;
(c) the fund of the member’s plan (that is, for credit to the non-member spouse’s account), if the administrator of the member’s plan agrees; or
(d) if the government considers it appropriate to establish a provincial retirement fund, that fund (see Section E, below).[230]
Where the amount that would otherwise be transferred exceeds the member’s equalization debt, the amount to be transferred shall be reduced to the amount of the equalization debt. If the amount that is transferred is less than the member’s equalization debt, the member remains liable for the difference.
Under specified circumstances, the DSM would be available, as set out in Recommendations 6 and 7.
5. Where the immediate settlement method applies, the non-member spouse’s pro rata share shall be based on the formula
½ X A/B X CV
where A is the pensionable service accrued while the parties were married, B is the member’s pensionable service and CV is the commuted value as of the separation date.
4. Limited Availability DSM Option
Because it poses greater burdens on pension plan administrators than the ISM by effectively creating two pensions to be administered, the LCO does not believe that a DSM solution should generally be available to the parties as of right.[231] However, where the marriage breakdown occurs at a point when the member’s retirement is likely to be fairly imminent, the LCO believes that the parties should have the option of sharing the pension when it comes into pay, as it is much more likely in that case that both parties had formed assumptions about their financial future that were predicated very firmly and specifically on receipt of income from the member’s pension. (The DSM would also be available in other cases if the pension administrator agrees, since in that case the administrator is obviously willing to take on the burdens.)
Strictly limiting the availability of this option would ensure that the imposition on plan administrators of the burden associated with having effectively to treat the non-member spouse as a member will be a relatively infrequent occurrence. The administrative burden can also be minimized by requiring the election of this option to be made using forms prescribed by regulation (or at any rate, provided by government) so that plan administrators would not have to bear the difficulties and risk involved in interpreting documents written in a wide variety of styles with a wide range of drafting skill. Administrators who acted in good faith in carrying out the direction given in the form could not be held liable for any resulting loss. Further, administrators would be allowed to charge a fee to the member and non-member spouse to offset the extra costs incurred as a result of the selection of the DSM option.[232]
Where the DSM option is selected, no survivor benefits should attach to the non-member’s entitlement unless the plan chooses to offer such benefits; in other words, the non-member’s “pension” would be a single life pension rather than a joint and survivor pension.
Generally, the non-member spouse’s pension would commence when the member retires and takes his pension; the non-member spouse should not have a right to have the pension begin at any time, as this could be burdensome for the plan administrator. However, the LCO has a concern that in some cases the member (whether out of spite or perceived need) may delay retirement inordinately, and so we believe that the non-member should be able to require that her pension begin once the member has attained normal retirement age, even if the member continues to work.
The division of the pension would be according to a simple formula based on the ratio of the period of marriage to the period of pensionable service. More complicated methods of division, such as payment to the non-member spouse until an amount equal to the equalization debt has been met, pose burdens on the administrator; therefore, the member should not be able to insist on such other methods of division unless the administrator agrees.
Where the DSM option is elected, the sharing between the former spouses of the member’s pension should be seen as having taken the place of the equalization debt. There is an inherent risk in this form of division that the total amount paid to the non-member spouse will prove either to be less than or in excess of what is owed to her as a result of the equalization obligation, and both parties should bear that risk equally.
Accordingly, the LCO recommends as follows:
6. If on the date of separation the member spouse is within ten years of the normal retirement date established under the plan, the parties may agree, as an alternative to settlement using the ISM, to have the member’s pension entitlements divided between the member and the non-member spouse so that each is entitled to receive a separate pension. The non-member spouse would become a quasi-member of the plan, with an ability to enforce his or her entitlements under the plan and a right to receive from the plan administrator information concerning the member’s pension and his or her share.
Generally, the non-member spouse would begin receiving a pension when the member retired and began receiving his or her pension, but where the member did not retire by the normal retirement date established under the plan, the non-member spouse would have the option of having his or her pension commence on the member’s normal retirement date.
Where the non-member spouse will be commencing his or her pension at the same time as the member, the member’s service credits shall be divided according to the formula
½ X A/B
where A is the pensionable service accrued while the parties were married and B is the member’s total pensionable service at retirement. The member’s pension would be calculated using the benefit formula provided by the plan and his or her service credits as reduced. To determine the amount of the non-member spouse’s pension, there would be an initial calculation using the benefit formula provided by the plan and the service credits transferred to him or her; that amount would then be adjusted to ensure that the actuarial present value of his or her pension, when added to the actuarial present value of the member’s pension, equals the actuarial present value of the member’s total pension before adjustment.
Where the member does not retire or otherwise begin receiving his or her pension by the normal retirement date established under the plan and the non-member spouse elects to have his or her pension commence without further delay, the non-member spouse’s pension shall be based on the accrued amount of pension computed as at the normal retirement date, using the formula
½ X A/C
where A is the pensionable service accrued while the parties were married and C is the member’s pensionable service as of the normal retirement date. There could be an actuarial adjustment for the non-member’s age.
When the member retires, he or she will receive a pension based on the plan’s benefit formula calculated at the actual retirement date less the dollar amount of the pension payable to the non-member spouse. [233]
Where the DSM option is selected, no survivor pension shall attach to the non-member spouse’s pension.
The election of the DSM option (and any election by the non-member spouse to commence his or her pension before the member retires) shall be accomplished using forms prescribed in regulation or otherwise authorized by government. Plan administrators could not be held liable for any loss resulting from an action taken by them in good faith in reliance on a form submitted to them. They would also be allowed to charge a fee to offset the initial and ongoing costs incurred by them as a result of the election of these options.
Legislation would provide that where this option is selected, the member’s equalization obligation, to the extent that it was based on the value of the pension, is deemed to have been satisfied (that is, even if the total amount that is ultimately paid out to the non-member spouse is less than the member’s equalization debt). It should also provide that the non-member spouse’s estate will owe nothing to the member or his or her estate if the total amount ultimately paid out to the non-member spouse exceeds the member’s equalization debt.
5. Where Administrator Agreeable to a Not-Otherwise-Available DSM Settlement
As was stated previously, the LCO is of the view that, because of the burdens that a DSM approach would impose on pension plan administrators, it should not be available as of right “across the board”, but rather, only where the member is within ten years of the normal retirement date in the plan. However, if otherwise ineligible parties wish to elect the DSM approach and the plan administrator is agreeable, there would seem to be no good reason not to allow it.
Accordingly, the LCO recommends as follows:
7. Where the member is not yet within ten years of the normal retirement date, the parties may elect the DSM option if the plan administrator agrees.
6. Defined Benefit Plan Coverage
The above recommendations regarding settlement are intended to apply only to defined benefit plans. The LCO notes, however, there may be some atypical types of defined benefit plans in respect of which the settlement options being recommended may not be appropriate. Accordingly, legislation to implement the recommended settlement regime should authorize the making of regulations that exempt defined benefit plans having certain specified characteristics where the government is of the view that such an exemption would be appropriate. In a similar vein, there should also be regulation-making authority to deal with so-called “hybrid plans”, that is, plans that combine features of defined benefit plans with features of defined contribution plans; the authority should make it clear that the rules that would otherwise apply in the case of a plan that is subject to the settlement regime can be varied.
Subject to some exceptions, the LCO recommends that the settlement options apply only in respect of plans that are registered under the PBA. However, they should be available as well in the case of private sector plans in the federal employment law jurisdiction, as the federal PBSA, which applies to such plans, makes provincial family property law apply in respect of the division of pensions on marriage breakdown. (The federal Pension Benefits Division Act,[234] which has its own pension division scheme, applies to federal public sector plans.) As well, some Ontario employees will be members of a plan established by an employer who operates in more than one province and who has registered the plan under the statute of a province other than Ontario; in that case, while the registration requirements of the PBA would not apply, the substantive provisions of Ontario pension legislation would, and the settlement options being recommended here should be available.
While generally the LCO does not regard it as feasible to make the settlement regime being recommended here apply to supplementary employment retirement plans, we see no reason not to cover such plans where they simply mirror a plan that is registered under the PBA (differing only in providing for benefits or permitting contributions in excess of the Income Tax Act limits) and where the plan would, if the PBA applied to it, not be ineligible for registration because of the manner in which benefits accrued or because the employer had a discretion to vary the pension benefits or the formula governing employer contributions.
Finally, the LCO recognizes that the possibility that there may be plans that do not fall within the scope of coverage outlined above where the settlement options being recommended would not be inappropriate. Where the existence of such a plan comes to the attention of government, it should be possible to extend the application of the settlement regime to that plan by regulation.
Accordingly, the LCO recommends as follows:
8. Recommendations 4 to 7 apply to
(a) a defined benefit pension plan, other than any class of defined benefit plan that is prescribed by regulation;
(b) subject to the regulations, a hybrid plan, insofar as it provides a defined benefit;
if the pension is not in pay and
(c) the plan is registered under the Pension Benefits Act or the substantive provisions of that Act apply to it;
(d) the plan is registered under the federal Pension Benefits Standards Act;
(e) the plan is not registered under the Pension Benefits Act but it is supplemental to a plan that is so registered and
(i) it provides for the accrual of pension benefits in a gradual and uniform manner, and
(ii) neither the formula for the employer’s contributions to the plan fund nor the pension benefit provided is at the discretion of the employer; or
(f) the plan is a member of such other class of defined benefit plan as is prescribed.
D. Settlement Options and Defined Contribution Plans
While valuation of a member’s interest in a defined contribution plan generally does not raise problems, some stakeholders suggested that Ontario law should provide for immediate division as a settlement option regardless of whether the pension plan is a defined benefit plan or a defined contribution plan, and the LCO sees no reason why the ISM option it is recommending should not be available in the case of both types of plans. However, there would seem to be no advantages for either party in the non-member spouse becoming a quasi-member of his spouse’s defined contribution plan; given this, and the fact that a DSM approach does inevitably impose some burdens on plan administrators, the LCO is not recommending that the DSM option described in Recommendation C.3 be available in the case of defined contribution plans.
Accordingly, the LCO recommends as follows:
9. The ISM option discussed in Recommendations 4 and 5 also be available where a spouse is a member of a defined contribution plan, but the DSM option should not be available.
E. A New Provincial Retirement Fund?
As discussed in section C, the LCO is recommending in the case of ISM settlements three transfer options for non-member spouses who become entitled to a transfer following pension division, with a possible fourth option: transfer to a provincial retirement fund, if the government decides to establish such a fund. Where the non-member spouse has her own plan, or where the administrator of the member’s plan is willing to establish a pension account in that plan for the non-member spouse, a transfer to (or within) the plan will likely be the preferred option. However, for many of those who do not have their own plan (or who will not be offered an account in the member’s plan) transfer into an RRSP may not be attractive course, particularly for those who are unsophisticated or inexperienced in investment matters. For these persons, transfer to a large fund offering the pooling of resources and risk, the investment power of large amounts of capital and expert management may be preferable.
The LCO suggests that the government may wish to consider establishing a provincial retirement fund to receive transfers on behalf of non-member spouses who would choose that option if it were made available. The government would appoint the staff to administer the fund and make investments on behalf of fund members. We note that establishment of such a fund would also provide an opportunity to lessen burdens on pension plan administrators, in that the fund could also receive transfers in respect of “lost members” from other pension plans where the administrators wish to divest themselves of continuing responsibility for members with whom they have had no contact for some specified period despite reasonable efforts on their part to make contact. The government could charge administrative fees to the accounts of fund members (including transferred lost members). However, the LCO recognizes that even if fees are charged, establishment of a provincial retirement fund could be costly and may not be seen as a prudent measure at a time of economic uncertainty.
Accordingly, while the LCO makes no definitive recommendation, it suggests that:
10. Ontario may wish to consider establishing a retirement fund into which non-member spouses who are entitled to a transfer pursuant to a pension division (see Recommendation 4, above) may place the transferred amount. The plan could also receive transfers from pension plans that wish to divest themselves of their “lost members”. The plan would be a capital accumulation fund, that is, the benefit ultimately paid out to the individual would be based on the amount originally paid into the fund plus the yield on the fund’s investment of that amount.
F. The 50 Per Cent Rule
The LCO acknowledges that the rule that a court order or domestic contract dealing with family property cannot entitle the non-member spouse to more than 50 per cent of the member’s pension benefits reflects a legitimate pension plan (and indeed, societal) objective, namely, to enhance the likelihood that plan members will have a reasonable income for retirement.[235] (We would note, however, that this objective is rather undermined by the fact that support orders can attach up to 50 per cent of the member’s pension income; this could result in the member losing 100 per cent of his pension, half to equalization and half to support, as occurred in Gauthier v. Gauthier.)[236] While we are not recommending abolition of the rule, we are concerned about the possibility that its unqualified application could in some cases prevent implementation of one or the other of the settlement options being recommended in Section C, even though (if the recommendations are adopted) the approach taken was in accordance with settlement mechanisms specifically made available to the parties by legislation. As the LCO believes that its recommendations concerning settlement will provide a fair method of dividing the pension asset where equalization cannot be achieved without resort to the pension, we believe that a settlement that is in accord with the legislated ISM or DSM approach should be deemed to be in compliance with the 50 per cent rule.
Accordingly, the LCO recommends as follows:
11. A settlement that is in accord with the ISM or DSM settlement regime be deemed to comply with the 50 per cent rule.
G. Canada Pension Plan Credits
There is little doubt that, as a matter of law, CPP credits constitute “family property” under the FLA, although it seems, as was indicated above, that the point is often ignored in practice. While some stakeholders suggested that the definition of “family property” should accordingly be amended so as to exclude CPP credits, the LCO can see no justification in principle for holding that rights under an occupational pension plan are “family property” while CPP credits are not. However, the LCO is of the view that parties should be able to waive the right to a split of such credits.
The CPP, which is federal legislation, permits the provinces to enact legislation allowing such a waiver, but Ontario has not thus far seen fit to do so. The LCO has noted that there have been instances in which a party to an equalization settlement agreed, in return for other consideration, not to apply for a credit split, only to make such an application at a later date; in the absence of Ontario legislation permitting a waiver, the federal authorities have no choice but to carry out the split where such an application is made. The LCO sees no reason why Ontario should not eliminate this avenue for double dealing.
Accordingly, the LCO recommends as follows:
12. Ontario enact legislation permitting parties to waive the right to a split of CPP credits.
H. Common Law Relationships
The LCO has assumed, for purposes of this report, that the family property provisions of the FLA will generally continue not to apply common law relationships. In doing so, we offer no opinion as to whether the exclusion of such relationships from coverage under Part I of that Act should continue. The question of whether the family property provisions should apply to common law relationships is one that extends well beyond pension interests, and generally speaking the LCO believes that it would be inappropriate to address it in the context of a project that is limited to pensions.
Having said that, however, we see no reason why common law partners who separate should not be able to access the settlement mechanisms that we are recommending be made available to married couples should they wish to do so. They may have property issues to deal with, notwithstanding their exclusion from Part I of the FLA, and to the extent that they see pension division as part of an appropriate resolution of their affairs, they should be able to effect that division through the recommended ISM approach or, where the member is within ten years of normal retirement date (or where he is not but the pension plan administrator is agreeable), through the DSM alternative.
Accordingly, the LCO recommends as follows:
13. Where a common law relationship ends and one or both spouses is a member of a defined benefit pension plan, they may agree to have one or both pensions divided in accordance with the regime described in section C.
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