Broadly speaking, the subject of this report is the treatment of a spouse’s interest in a pension plan upon marriage breakdown. Our principal concern in that regard is with occupational pension plans that provide lifetime periodic (usually monthly) benefit payments to former employees following their retirement, with a particular focus on defined benefit plans, as it is in relation to interests under those types of plans that the main problems that have been identified arise. Generally, the report will not deal with other kinds of private arrangements aimed at providing an income on retirement, such as personal or group Registered Retirement Savings Plans (RRSPs), or with government-provided social welfare schemes, such as the federal Old Age Security program, although it will deal with certain matters related to the Canada Pension Plan (CPP).
A. Types of Pension Plans and Employee Coverage
Occupational pension plans are most commonly established by an employer, although in some cases, a plan may be established jointly by one or more employers and one or more trade unions. In the construction industry, where employer-employee relationships tend to be transient, the plan might be established solely by a union. Plans covering public sector employees are usually established by legislation.
In terms of the nature of the benefit provided, there are two main types of occupational pension plan, the defined benefit plan and the defined contribution plan. Under both kinds of plan the employer is required to make contributions, but both may also require employees to make contributions (in which case the plan is labelled “contributory”).
Under a defined contribution plan, the contributions made by the employer and by the employee, if any, are set at a fixed amount or rate; those contributions are invested and the sum of accumulated contributions and returns on their investment is used to purchase an annuity when the employee retires. (Because of this aspect, such plans are sometimes referred to as “money purchase plans”.) In contrast, the amount of the pension benefit under a defined benefit plan has no immediate relation to the contributions and investment yield, but rather is determined according to a set formula.
Defined benefit plans are generally seen as being superior from the perspective of an employee, in that the amount of income that she will have in retirement is more predictable than in the case of defined contribution plans, while the degree of security for the employee is perceived to be greater and the risk posed for her by poor investment returns to the plan lower (although any thought that the risks in the case of defined benefit plans are all borne by the employer is clearly erroneous).
A typical defined benefit formula might provide that the annual pension amount is equal to the product obtained when the employee’s number of years of service with the employer is multiplied by a specified percentage and then applied against the average salary earned by the employee during some specified number of years in which his employment income was the greatest or during some specified number of years immediately preceding retirement. For example, a plan might provide that the yearly pension income would be equal to years of service times two per cent times the average salary of the employee during his five highest years of earnings. A member of such a plan who had 25 years of service at retirement and who earned an average of $80,000 during his most remunerative years would have an annual pension income of $40,000.
The type of defined benefit plan described in the preceding paragraph is often referred to as a “best average” or “final average” earnings plan. Other common types include the flat benefit plan and the career earnings plan. In a flat benefit plan, the formula does not refer to earnings or percentages; rather, the multiplier is simply the years of service and the multiplicand is a flat dollar amount. (For example, if the flat dollar amount is $80 a month, an employee who retired after thirty years’ service would have a monthly pension of $2,400, or $28,800 annually.) Under a career earnings plan, the multiplier is a bare percentage (that is, it is not a function of years of service) and the multiplicand is the aggregate of the employee’s earnings during the entire period of her membership in the pension plan. (For example, if the percentage in the benefit formula is two per cent and the retiring employee had earned $1,250,000 over the course of her career with the employer, her pension income would be $25,000 per year.)
Benefits under defined benefit plans are usually “integrated” with the CPP, meaning that the pension amount that was calculated using the basic defined benefit formula is reduced to reflect the assumed receipt of CPP benefits. Effectively, in such cases, the basic formula indicates what the employee can expect to receive in total from both sources, the occupational pension and the CPP benefit.
There are some plans, called hybrid plans, which combine features of defined benefit and defined contribution plans. This type of plan may provide a retiring employee with a benefit equal to the greater of the amount determined under a defined benefit formula and the amount of contributions and investment yield, or it might provide a benefit equal to the total of the defined benefit amount and what was accumulated under the defined contribution part of the plan. In some cases, an employer might convert a defined benefit plan into a defined contribution plan, with the employee’s benefits earned up to the conversion date being determined under the defined benefit formula and benefits thereafter being the amount of subsequent contributions and returns on investment.
A study prepared for the Ontario Expert Committee on Pensions (OECP) cited a report prepared by Statistics Canada indicating that roughly 34% of employees in Ontario jurisdiction were members of an occupational pension plan as of 2005. Noteworthy, however, is the public sector-private sector divide on this score; while 80% of public sector employees were members of an occupational pension plan, only 25% of private sector employees had such coverage. Also interesting is the fact that while the number of defined contribution plans is slightly greater than the number of defined benefit plans, defined benefit plans collectively have far more members, although membership in defined contribution plans has been increasing at a much faster rate than membership in defined benefit plans.
With respect to the demographics of pension plan membership, while currently the number of males who are members of a pension plan (928,000) is slightly greater than the number of females (832,000), it appears that over the long term the number of males has not been growing, while the number of females has been increasing fairly dramatically; further, the percentage of pension plan members who are members of a defined benefit plan as opposed to some other type of plan is approximately 80% for both sexes.
This is not to suggest that a sanguine view of the position of women in our pensions and retirement income system is warranted. Occupational pensions are by their nature linked to income from employment, and women continue not only to have a lower labour market participation rate than men but also continue to earn less then men when they are employed. In comparison to men they are over-represented in so-called “non-standard” working arrangements, such as part-time employment, temporary employment, casual and seasonal employment and agency employment, where pay tends to be lesser and pension plans less likely to be on offer. Women also tend to perform more unpaid work in the home and in care-giving than do men, which is, of course, a factor both in their labour market participation rate and their greater propensity to be involved in non-standard work situations. The result is that on average pension income for females is substantially lower than that for males.
B. Jurisdictional and Legislative Framework
Under the Constitution Act, 1867, occupational pensions, like other aspects of employment and labour law, are a matter of property and civil rights and so generally their regulation would fall under provincial legislative jurisdiction. However, in the case of some industries, including atomic energy, banking, inter- and extra-provincial transportation on land or water, aviation and telecommunications, as well as the federal public service and employment in the three territories, Parliament has jurisdiction. With respect to most employees who are employed in Ontario and who are members of a pension plan within provincial regulatory jurisdiction, the province’s Pension Benefits Act (PBA) requires the plan to be registered and establishes minimum standards relating to, among other things, entitlements under the plan and plan administration and funding. (Section 6 of the PBA makes it illegal to administer a plan that has not been registered.) The federal counterpart to the PBA is the Pension Benefits Standards Act, 1985 (PBSA), although it does not apply to employees of the federal government.
In some cases, employers who carry on business in more than one province or territory have a single pension plan covering all of their employees rather than a separate plan for each jurisdiction, potentially making the pension benefits standards legislation of more than one jurisdiction applicable. Under subsection 95 of the PBA, the Financial Services Commission of Ontario (FSCO), which is responsible for the administration and enforcement of the PBA, may make agreements with the federal authorities or the authorities of another province (there is no reference to territories) to provide for the reciprocal application and enforcement of pension benefits legislation, and agreements relating to administration and enforcement were in fact entered into by the Pension Commission of Ontario (the predecessor body to FSCO) with the pension authorities of other provinces in 1968 and with the federal government in 1970. Subsection 23(1) of the General regulation under the PBA designates all of the other provinces (except Prince Edward Island) and the three territories as jurisdictions where “there is in force legislation substantially similar to [the PBA]”, while subsection 23(2) provides that where an agreement is made between the Ontario authorities and the authorities of a designated jurisdiction, a pension plan is exempted from the PBA registration and audit requirements if a plurality of members of the plan are employed in a jurisdiction so designated. It would appear, however, that provisions of the PBA other than those dealing with registration and audit requirements continue to apply in respect of Ontario members of a multi-jurisdictional plan even though the plan is registered in another jurisdiction and vice versa.
Putting aside federal jurisdiction plans (where registration, if required, would be under the PBSA) and those multi-jurisdictional plans registered under another jurisdiction, most pension plans covering Ontario employees are required to be registered under the PBA. However, some such plans are not required to be registered at all because they are exempted from the PBA, either directly or through exclusion from the PBA definition of “pension plan”. These include group RRSPs and the plans that cover members of the Legislative Assembly and the provincial judiciary, as well as plans that only provide benefits that exceed the maximum benefit limits applicable to plans registered under the federal Income Tax Act (ITA) or that only permit contributions in excess of the contribution limits for plans registered under the ITA. The latter type of plan is sometimes referred to as a “supplementary employee retirement plan” (SERP) because it supplements benefits provided for by another plan and membership in it is conditional on being a member of that other plan. Such plans are sometimes established by employers in order to provide relatively high income earners with a pension commensurate with the income they enjoyed before retirement, as the ITA limits mean that the plan to which the SERP is supplemental will pay a pension that is smaller than that which would otherwise result from the application of the basic defined benefit formula.
Registration of a pension plan under the ITA is not compulsory, but it does confer certain advantages. Contributions made by employers and employees are deductible in calculating income subject to taxation; further, plan earnings are exempt from