A. Present Value
To produce a figure that can appropriately be attached to a defined benefit pension for equalization purposes requires that its “present value” (sometimes called “present-day capitalized value”) be determined. The present value of a stream of payments that are to begin at some point in the future may be thought of as the amount that one would have to invest today so that as of the date the payments begin the original investment plus accumulated earnings would be exactly sufficient to cover all of the payments that are to be made as they come due. In the particular context of marriage breakdown and defined benefit pensions, the present value as of the valuation date is the amount that would have to have been invested on that 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. Of course, this figure is necessarily the product of conjecture. On the valuation date, the person performing the valuation does not know when the pension payments will begin (given that the date of retirement is unknown on that date) or even whether they ever will begin (given the possibility that the employee will die first) or if they do begin how long they will last (given that the date of death is unknown), nor does she know how much any given investment will ultimately earn (given that tomorrow’s interest rates and inflation levels are unknown); lacking omniscience concerning the future, the valuator must make speculative assumptions about all of these variables. As the Supreme Court of Canada has noted, ascertaining a present value is “a matter of educated guesswork, undertaken by actuaries”. 
B. Methods of Valuation
Although there seems to be little doubt today that the present value approach is to be preferred over the contributions approach in valuing rights under a defined benefit pension plan, at least some uncertainty regarding the methodology used to calculate a present value continues to exist. Neither the FLA nor the PBA provide any guidance as to how pension rights should be valued for purposes of calculating net family property, and so the question of how it should be done has been left to be answered by the parties, their lawyers, actuaries or other pension valuators and, ultimately, the courts. Debate on the issue has typically been framed as a matter of whether to use the “retirement method” or the “termination method”. However, there is some considerable ambiguity in these terms, and it is not always clear what a court means when it declares that one or the other method is being utilized. Indeed, it has been suggested that in many cases in which the termination method was ostensibly used, the method that was actually being employed was the “real interest method” (also known as the “hybrid termination-retirement method”).
C. Retirement Method v. Termination Method
The retirement method assumes that the employee will continue in her employment with the plan sponsor until reaching some specified retirement age selected by the valuator. Accordingly, the basis on which value is calculated includes projections as to future salary increases, both those that are rooted in inflation and those that are based on promotion or productivity increases, as well as future service credit accruals and possible future enhancements to members’ rights under the plan. 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 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 or plan improvements that may occur after that date.
If one goes strictly by the labels employed by Ontario courts to describe their preferences in valuation methodology, the termination method seems generally to have found much 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.)
Two main arguments have been advanced in support of the termination method over the retirement method. The first is that by projecting salary levels and service credits that might be earned after the valuation date, the retirement method gives the non-member spouse the “fruits” of the member spouse’s post-separation labours and is therefore in conflict with the FLA requirement that value be determined as of the valuation date. 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 (although the dollar multiplicand employed in the formula obviously would be based on 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 spouse’s salary and service credits will be and what plan improvements will have been made by the time he does retire. These assumptions will virtually never have a perfect correspondence with future facts as they unfold and they may not even be close. Still, the termination method also involves the making of many assumptions that may not be borne out by subsequent developments. In order to produce a present value, the termination method, like the retirement method, must employ assumptions about when (and if) the member spouse will retire and about how long he will collect the pension; assumptions are also made about future rates of interest and taxation. Any of these assumptions could turn out to be “incorrect”, in the sense that events might unfold differently than was assumed, and in fact they will in that sense almost certainly prove to be incorrect in any individual case, notwithstanding their validity from an actuarial point of view. And, if subsequent events do diverge significantly from what was assumed, the actual value of the pension benefit 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 collects 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.
D. Do the Courts Really Favour the Termination Method?
In Bascello v. Bascello, a number of previous decisions of Ontario courts purporting to apply the “termination method” were reviewed and the conclusion offered that most of those courts were not in fact using a true termination method but the “real interest method”. Under this approach, while the valuation is based on the pension entitlement accrued to the valuation date, allowance is made for inflation (at least in the case of fully-indexed plans, as most public sector plans are); it is only non-inflationary increases in salary, such as those stemming from promotions and productivity improvements, that are not taken into account. (The real interest method takes its name from the fact that it allows for inflation by employing a discount based on the difference between inflation rates and nominal interest rates, which over the long term has been relatively constant despite whatever fluctuations were occurring in the nominal rates.)
Another feature of the approach typically employed by Ontario courts that Bascello identified as being inconsistent with a pure termination approach lies in the treatment of rights that an employee may have under the pension plan to take early retirement without any reduction in the defined benefit. While courts that purport to apply the termination method do not take into account any actual or assumed post-valuation date employment for purposes of calculating the amount of the pension, in the majority of cases that have dealt with pension plans having an unreduced early retirement option the courts did assume that the employee’s employment would continue for the purpose of eligibility to exercise such an option in order to determine the date on which the employee would be most likely to retire.
The impact of this approach can be illustrated with the example of an employee who has twenty-one years of service and who is 45 years old as of the valuation date and whose pension plan establishes a normal retirement date of age 65 but also accords a right to take early retirement without penalty if the employee meets a “factor 90” qualification. A valuation based on a pure termination method would ignore the unreduced early retirement possibility, as the stated premise of the termination method is that the future pension entitlement is assessed as if the pension plan member had terminated her employment on the valuation date, and in that case the employee in our example would reach the normal retirement date before achieving factor 90. Nevertheless, although the amount of her pension entitlement for valuation purposes will be based on her years of service as of the valuation date, most courts will posit continued employment after the valuation date and eventual qualification for an unreduced early retirement pension (in the case of the employee in this example, at age 57) for the purpose of selecting the date on which the employee is most likely to retire. (Objections that the member spouse’s employment may terminate prior to retirement because of lay-off or other reasons are typically addressed by using a discount for that possibility.) This can have a very substantial impact on the valuation, because where an employee retires before the normal retirement date, the pension is likely to be in pay for a longer period than it otherwise would, thereby increasing the value.
The approach used in Bascello and in the majority of the other cases discussed in that decision appears to have become the dominant approach to pension valuation in Ontario. Although Bascello referred to this as the “real interest method”, some commentators have labelled it the “hybrid termination-retirement method”, as it combines elements of both the termination method (in that termination at the valuation date is assumed in order to determine the amount of the accrued pension benefit) and the retirement method (in that inflation is recognized where the plan is indexed and continued employment is assumed for purposes of eventual eligibility to take early retirement on an unreduced pension). The Bascello court was highly critical of this terminology, arguing that the expressions “termination method”, “retirement method” and “hybrid termination-retirement method” did not adequately convey the actuarial assumptions being utilized; it recommended instead that the method of valuation be described in terms of whether allowance was being made for full, partial or no indexing prior to retirement. With respect, however, a description of the sort espoused in Bascello is also inadequate, in that it fails to give any indication of how unvested unreduced early retirement rights are to be treated. Perhaps it is simply not