A. Methods of Valuation
Unfortunately, neither the FLA nor the Pension Benefits Act[11] (“PBA”) provide any guidance as to how a present value for pension rights under a defined benefit plan should be determined for purposes of computing net family property,[12] and so the question has been left to be answered by the parties, their lawyers and their actuaries (and ultimately, the courts). Two main approaches have been utilized (although there are variations on each); they are commonly referred to as, respectively, the “termination method” and the “retirement method”.
The retirement method assumes that the employee will continue in his or her employment with the plan sponsor until reaching some specified retirement age; accordingly, the basis on which value is assessed includes projections as to future salary increases and service credit accruals. In contrast, under the termination method, the amount of the future pension entitlement is said to be assessed as if the pension plan member had terminated his or her employment on the valuation date. This means that only those service credits accrued to the valuation date are taken into account; it would also seem to imply that no consideration is given to the possibility of salary increases that may occur after that date. In practice, however, allowance is generally made for increases attributable to inflation (as opposed to those that might result from promotion or greater productivity), leading some to argue that the method that is actually being used is not a true termination method and that the label “termination method” is accordingly not appropriate. [13]
B. Which Method is Preferable?
The termination method seems generally to have found more favour than the retirement method, although the view that it represents the better approach is by no means universal. (Indeed, the Supreme Court of Canada has raised the possibility that the retirement method might provide an appropriate result in at least some circumstances.[14]) Two main arguments have been advanced in support of the termination method. The first is that by projecting salary levels and service credits that are earned after separation, the retirement method gives the non-member spouse the “fruits” of the member spouse’s post-separation labours and is in conflict with the FLA requirement that value be determined as of the valuation date.[15] How valid an objection this is can be debated; while the retirement method undeniably looks to post-separation events (or rather, assumptions about post-separation events), the “years of service” multiplier used in a defined benefit plan formula does not assign any greater weight to the final years of the member’s time with the plan sponsor than to the early years,[16] (although the dollar multiplicand employed in the formula obviously would be based on projected post-separation salary levels).
The second principal objection to the retirement method concerns its highly speculative nature, resulting from the fact that it requires the making of assumptions as to what the member’s salary and service credits will be when he or she does retire. These assumptions will virtually never have a perfect correspondence with future facts as they unfold and they may not even be close. However, valuation using the termination method also involves the making of many assumptions which may turn out to be wrong. In order to produce a present value, the termination method, like the retirement method, must employ assumptions about what future interest rates and tax rates will be, about when (and possibly if)[17] the member spouse will retire and about how long he or she will collect the pension. Any of those assumptions could turn out to be incorrect, and in fact they will almost certainly prove to be so in any individual case, notwithstanding their validity from an actuarial point of view. And, if the assumptions made do turn out to be wrong, the actual value of the pension benefit in receipt and the value it had been considered to have had for equalization purposes could deviate quite dramatically, to the great disadvantage of one or the other spouse. For example, if the member spouse ends up collecting the pension for a longer period than that on which the valuation was based, the actual value of the pension rights may end up exceeding, perhaps by a quite considerable amount, that which was attributed to them as net family property.
C. Pre-Marriage Accruals
Another valuation issue that has arisen concerns the situation in which the member spouse joined the pension plan prior to the marriage; this requires setting a value on the pension rights not only for the valuation date but also for the date on which the spouses married, because the FLA requires that the value of property owned on the date of marriage be deducted in calculating net family property. Two approaches for addressing this situation have been put forward, the “pro rata approach” and the “value added approach”. Under the former, the separation[18] date value is multiplied by the quotient obtained when the number of years of pensionable service during the marriage is divided by the number of years of pensionable service in total. In contrast, the value added approach involves separate actuarial valuations for the marriage date and the separation date. (In other words, the marriage date value is not simply a derivative of the separation date value.) The pro rata approach tends to produce a higher value as of the marriage date than the value added approach, which necessarily results in a lower value being attributed to the portion of the pension that accrued during the marriage, and some have argued that the failure to provide a separate actuarial valuation as of the marriage date is not in accord with what the FLA requires;[19] however, the pro rata method was approved by a majority of the Supreme Court of Canada as generally being the fairer approach in Best v. Best.[20]
| Previous | Next |
| First Page | Last Page |
| Table of Contents | |