Virtually everyone agrees that the confusion around the division of pensions upon marriage should be addressed legislatively, but unfortunately there is no unanimity as to the choice of solution.
Following a thorough review of the law and careful consideration of the policy issues and the submissions that were made to it, the LCO released recommendations in October of 2008. This report supplements those recommendations with background information, a detailed look at the problems surrounding pension division and a discussion of the issues and the reasons for our recommendations.
II. AN OVERVIEW OF PENSIONS IN ONTARIO
This section of the report covers types of pension plans, demographics, legal requirements, retirement age, death benefits, inflation, funding and plan wind-up.
III. ONTARIO’S FAMILY PROPERTY LEGISLATION
On marriage breakdown, spouses are entitled under Ontario’s Family Law Act (FLA) to share equally in the value of all property acquired by either spouse during the marriage. Following determination of the total value of each spouse’s assets (including pension rights) on the valuation date, the spouse with the assets of higher value must pay to the other spouse an equalization payment amounting to half the difference in value
IV. VALUATION OF RIGHTS UNDER A PENSION PLAN
Under a defined contribution plan the value of rights is the aggregate of the contributions and investment yield as of the valuation date. With a defined benefit plan, however, one must determine the “present value” — the amount that would have to have been invested on valuation date in order for the original investment and accumulated earnings to be just adequate to fund the monthly benefits when the pension comes into pay.
There is some uncertainty regarding the methodology used to calculate a present value. The retirement method assumes that the employee will continue to be employed, while under the termination method, pension value is assessed as if the member had terminated her employment on the valuation date. In most court decisions a preference is expressed for the termination method over the retirement method, although it appears that most courts were actually using a hybrid method.
The assumption that is made concerning likely retirement age can have a very substantial impact on valuation. (Other assumptions relevant to determining present value include the member’s date of death, future tax liability and future interest rates.) The Ontario Court of Appeal has held the retirement age is a question of fact, to be resolved on a balance of probabilities based on the evidence, an approach implicitly approved by the Supreme Court of Canada. While a statutory presumption of retirement at the mid-way point between the earliest date on which the member could take an unreduced pension and the normal retirement date might be seen as having some advantages, it does not appear feasible, given the complexity and diversity of pension plan options and the multitude of different scenarios that could arise.
If pensions are to remain within the equalization regime, they must be valued, and with that comes the risk (indeed, virtual inevitability) of post-equalization changes in value, as it does with any property.
If one spouse owes the other an equalization payment and is in that position because of the value of her rights under a pension plan, there are essentially three options.
Trade of Cash or Other Assets
The member spouse retains exclusive rights to the pension and defrays the equalization debt with cash or other property, if this is feasible.
A member who makes an asset trade may later encounter “double dipping”; after having paid the debt to keep her pension intact, she finds that the other spouse is looking to the pension income for support. However, this problem is not unique to pensions; it can occur with any income-producing asset, and therefore no recommendation concerning it is made in this report, the scope of which is limited to pensions.
“If and When” Arrangements
Where an asset trade is not practical, the parties will likely have to enter into an “if and when” arrangement; equalization is deferred until the pension comes into pay, utilizing a trust imposed by a court order or domestic contract. There are several problems associated with these arrangements. The non-member spouse loses the benefit of immediate satisfaction of her entitlement and has no control over when it will be satisfied. Many “if and when” orders do not appear to be in accord with the intention behind the FLA, and both orders and agreements can run into conflict with the “50 per cent rule” under the Pension Benefits Act (PBA), which provides that no more than half of the pension benefits that accrued during marriage can be assigned in satisfaction of family property claims. Pension plan administrators also face problems arising from the drafting of “if and when” agreements and orders, which may be unclear or inadequate. Other potential difficulties include the ending of the non-member spouse’s entitlement to share in the pension payments when the member spouse dies, reduction of the pension benefit because of the winding up of the plan and taxation issues.
Lump Sum Transfer on Termination
Where the member’s employment is terminated, the member can require the plan administrator to transfer an amount equal to the commuted value of the pension benefit out of the plan to another pension plan or a locked-in retirement savings arrangement or to be applied to the purchase of a deferred life annuity; in that situation the PBA gives the non-member spouse parallel rights to a share of the commuted value.
Settlement: Proposals for Reform
A majority of Canadian jurisdictions that have legislated in this area adopted the “Immediate Settlement Method” (ISM), in which there is an immediate transfer of a share of the value of the member’s pension to a locked-in RRSP or other vehicle that will later provide retirement income for the non-member spouse. Three provinces adopted the Deferred Settlement Method (DSM); pension division occurs at a future point, at which time the non-member spouse receives a separate pension from the member’s plan. The arguments favouring these different approaches are discussed in subsection C of section 7.
VI. OTHER ISSUES
The Canada Pension Plan (CPP) provides for a division of credits upon marriage breakdown unless the spouses have agreed otherwise and provincial legislation permits such agreements. Ontario has not enacted permissive legislation of this nature.
The FLA property provisions do not apply to common law couples, but they may face the same problem of a lack of good settlement options as married couples face.
VII. THE LCO’S ASSESSMENT OF THE ISSUES
A. Pensions and the FLA Equalization Regime
Removing pensions from the equalization regime could lead to unfairness between spouses who would be in the same net asset position if the pension were not excluded, as well as less flexibility in relation to other family property that remains within the regime. Other retirement vehicle assets, such as RRSPs, are not excluded.
Despite the wording of the FLA, the courts have held that unvested rights are property for purposes of the equalization regime and there is no good reason to reverse this.
B. Valuation of Rights under a Defined Benefit Plan
The hybrid method is the valuation method that strikes the fairest balance between the parties; any lingering uncertainty in this area should be eliminated.
C. Settlement: Defined Benefit Pension Not Yet in Pay
Many of the arguments made in support of or against the ISM or DSM overstate the case.
The ISM provides a “clean break”, but under the DSM the former spouses would deal with the plan administrator, not each other.
The pro-DSM contention that the pension is paid for disproportionately through early-career contributions is not relevant in the case of defined benefit pensions. But ISM advocates are incorrect that no part of a post-separation increase in value can derive from the married years.
Although uniformity of the law is desirable, the contention that adoption of the ISM would contribute to uniformity is not convincing, given that there are three DSM provinces.
The argument that adoption of a DSM approach avoids the problems of ultimate actual value differing from valuation date value ignores the fact that the valuation date value of almost any property might be more or less than its value at some later point.
The anti-ISM argument that giving the non-member spouse a lump sum to invest could be problematic for those unsophisticated in financial matters is valid, but this same concern can arise where the pension is not divided because the member trades other assets; it can in any event be addressed through a new provincial retirement fund.
Many aspects of the pension and retirement system may be unfair to women, but neither the ISM nor the DSM is likely to have a particular impact on women.
Typically the ISM uses commuted value, which can produce an artificially low value for the pension and thus be unfair to the non-member spouse (whether that person be male or female). However, the DSM is much more complicated by comparison with the ISM and imposes greater burdens on plans and administrators. This has led us to make a recommendation that the ISM should be the main settlement mechanism (with a proviso that the equalization debt is satisfied only to the extent of the value transferred out of the plan), but that the DSM should also be available where the member is within ten years of normal retirement date or where the plan administrator consents.
The LCO considered other possibilities but concluded that ISM use of commuted value, with satisfaction of the equalization debt only to the extent of the amount transferred, was the best solution in most cases.
The settlement options being recommended should apply in respect of defined benefit plans registered under the PBA or supplementary unemployment plans that simply mirror such plans, and should also be available in the case of defined benefit plans registered in other jurisdictions where Ontario family property law or the substantive provisions of the PBA apply. For flexibility, there should be regulation-making authority to include other plans, to exclude otherwise-included plans and to deal with hybrid plans.
D. Defined Contribution Plans
The ISM should be available in the case of defined contribution plans.
E. A New Provincial Retirement Fund?
The LCO suggests that the government may wish to consider establishing a provincial retirement fund to receive ISM transfers on behalf of non-member spouses for whom other ISM transfer options are either not available or unattractive.
F. The 50 Per Cent Rule
The rule could in some cases prevent implementation of one or the other of the recommended settlement options. These options provide for a fair settlement and should be deemed to be in compliance.
G. Canada Pension Plan Credits
Allowing parties to agree to a CPP credit split waiver would eliminate an avenue for double dealing.
H. Common Law Relationships
Whether the FLA family property provisions should apply to common law relationships is a question extending well beyond pension interests and is not addressed here. However, there is no reason why common law partners who separate should not be able to access the recommended settlement mechanisms should they wish to do so.
The LCO recommends the following (a full listing is provided at Part VIII of this report):
1. Vested pension rights continue to be considered “family property” under the FLA.
2. The FLA be amended to indicate that unvested pension rights are also “family property”.
3. The FLA be amended to provide for use of the hybrid method in valuing rights under a defined benefit plan.
4. If a defined benefit plan member wishes to