A. Trade of Cash or Other Assets
Under the first option, sometimes labeled as “valuation and accounting”, the member spouse retains exclusive rights to the pension and defrays the equalization obligation with cash or other property owned by her. This option, where it can be taken, has some significant advantages over other approaches. Usually it presents little or no risk to either of the spouses, and it provides them with a “clean break”, which is generally desirable and particularly so where the marriage breakdown is accompanied by animosity; it also avoids the administrative burdens imposed on pension plan administrators by some of the other options (as to which, see below). However, this will not be a viable solution if the member spouse has insufficient money or other liquid assets to satisfy the equalization debt, which means that it is probably not an option if most of the value of her net family property resides in rights under a pension plan. Someone who is “pension rich but cash poor” will likely not have enough in the way of non-pension assets to make an equalizing swap.
As was noted above, the FLA does give a court the authority in cases of hardship to order that the equalization entitlement be paid in instalments over a period of not more than ten years or that all or part of the payment be delayed for such a period, but there are problems associated with such a course of action. It will not be viable if the member spouse does not have an adequate income unburdened by other obligations (such as, for example, support), to make the payments, and in any event, the other spouse may have concerns about the security of his entitlement to the instalment payments or deferred payment over such a lengthy period. Further, postponing the achievement of equalization in this way can hardly be said to provide a clean break, thus eliminating one of the primary benefits of the asset trade option.
Another problem with the valuation and accounting approach stems from the possibility of “double dipping”. This refers to the situation in which the member spouse was the equalization debtor and traded cash or other assets to satisfy the debt, only to find later that the non-member spouse is looking to the pension in pay for support. (Double dipping could also be said to exist where no such trades occur at equalization because the net value of the member’s pension and other family assets does not exceed the value of the non-member spouse’s net family property and where the non-member spouse subsequently applies for support on the basis of the pension income.) Understandably, the member may find this unfair, feeling that the pension was already taken into account in the family property settlement and should not later be regarded as income available for support purposes.
A majority of the Supreme Court of Canada in Boston v. Boston held that, as a general matter, double dipping was inappropriate and that only that part of the pension earned after separation should be taken into account in determining the member spouse’s support obligation; however, it also recognized exceptions to this principle, such as where a support order is rooted in need rather than compensation or where, despite the fact that the order is compensatory, the non-member spouse has made reasonable efforts to use his assets to produce income but still suffers from economic hardship as a result of the marriage breakdown. Of course, following the breakdown of a lengthy marriage, such grounds for spousal support are fairly common, and while the Court may have felt that it was pronouncing a quite limited exception to the general rule that double dipping was inappropriate, one commentator observed that the dispensation was “wide enough to almost eat the rule itself”. It may be that the exception is too broad and should be narrowed. But perhaps one should first consider whether double dipping vis-à-vis a pension really is wrong in principle.
The Supreme Court’s assertion that double dipping in respect of a pension, as opposed to other income-producing properties, should generally be avoided was based on its view that a pension is different from other assets, such as investments, because a pension, once it is in pay, is being “liquidated”, whereas an investment can pay out income without thereby causing depletion of the asset itself. The LCO respectfully suggests that this rationale is flawed. From an actuarial perspective it is true that a pension that is in pay is losing value, because at each payment the member is closer to death and so the present value of the pension is smaller. However, from the member’s perspective, the pension is not being depleted, because she will continue receiving the pension payments as long as she lives — the declining actuarial value has no impact on its real value to her. To say that the pension is being liquidated implies that there is a finite amount of capital which is getting smaller with every payment that is made, and that is simply not the case.
So far as double dipping is concerned, it is the LCO’s view that there is no difference in principle between a member spouse giving cash to meet an equalization debt in hopes of keeping her pension income intact and a shareholder spouse giving cash to meet an equalization debt in hopes of keeping his dividend income intact. It follows that the issue of double dipping is not unique to pensions; it is relevant in the case of any income-producing asset that has been taken into account in the equalization process. Accordingly, in this report the LCO will not be making recommendations as to whether double dipping should be prohibited or the exceptions to the “rule” against double dipping narrowed; these are issues for a project looking at generic family property law, and not one whose scope is limited to pensions.
B. “If and When” Arrangements
In most cases where an asset trade is not a practical solution, the parties will likely have to enter into what is commonly known as an “if and when” arrangement. Such an arrangement defers satisfaction of the equalization requirement until the pension is in pay, utilizing a trust imposed through the vehicle of a domestic contract or court order. The trust may be imposed on the plan member, requiring him to pay part of each pension payment received over to the non-member spouse; alternatively, it may be imposed directly on the plan administrator, who is obligated to divide the pension payments at source. The latter course avoids some of the drawbacks of the former, in that contact between the former spouses is not required and potential enforcement difficulties inherent in a trust that is personal to the member spouse are avoided. Unfortunately, however, there are numerous other problems attendant on both forms of an “if and when” arrangement.
The most obvious drawback to an “if and when” approach is that the non-member spouse loses the benefit of immediate satisfaction of her equalization entitlement. The view that this is necessarily unfair to the non-member spouse is perhaps not compelling, given that the “property” that led to the equalization entitlement is itself not immediately accessible and given as well that the FLA contemplates the possibility that equalization payments could be postponed for or spread out over as many as ten years in any event. Undeniably, however, the non-member spouse is disadvantaged by the fact that control as to when the entitlement finally is satisfied is outside of her control, for the pension will become payable only when the member spouse elects to receive it; the member may decide to retire at the “normal retirement date”, but he might also decide to retire at an earlier or a later date. This may have an adverse impact on the income that is eventually received, and in any case it obviously can complicate financial planning for the non-member spouse, as she does not know when the pension income (and thus her sharing of it) will commence.
Another concern is that “if and when” orders in the form in which they are often made do not appear to be entirely in accord with the intention behind the FLA equalization provisions. (The same concern does not arise with respect to domestic contracts requiring an “if and when” division, as parties are generally free to contract out of the FLA.) The requirement to value net family property, including pension rights, implies that where equalization is to be achieved through resort to the member spouse’s pension, payments to the non-member spouse should end once the equalization debt has been satisfied. But many “if and when” arrangements do not seem to do this, instead appearing to provide for indefinite sharing, dividing the pension according to the ratio of the present value of the rights at separation to the present value of the rights at retirement or to the ratio of pensionable time while the marriage was ongoing to total pensionable time. One might infer that the latter type of division is often being used to avoid, for both spouses, the risks associated with equalization valuations, which, as previously noted, employ numerous speculative assumptions about the future that virtually ensure that the present value attributed to the pension rights will significantly and perhaps even wildly overstate or understate their ultimate real value. However, it bears noting that the difference in results that arise from the application of time-based ratios and the application of present value-based ratios can be quite substantial, with the ratio of present values approach tending to yield a much lower entitlement. While the resulting smaller entitlement is, at least arguably, unfair to the non-member spouse, it is in some sense more consistent with what the FLA presumably intended, as otherwise the requirement to value rights under a pension plan as net family property would seem to serve no purpose at all. In Best v. Best, a majority of the Supreme Court of Canada, in discussing the many difficulties associated with “if and when” arrangements, appeared to allude to the possibility that they do not truly comport with the FLA, but ultimately refrained from making any ruling on that point.
A further difficulty stems from section 51 of the PBA, which provides that no more than 50 per cent of pension benefits that accrued during marriage can be assigned under a domestic contract or court order. For purposes of this limitation, the General regulation under the PBA essentially prescribes a strict termination method of valuation; this raises the possibility that a non-member spouse’s entitlement under an “if and when” agreement or order, at least where based on a time ratio, will exceed what can be paid out to her under the PBA. As a consequence, pension plan administrators upon whom a trust is imposed by such an agreement or order may find themselves unable fully to carry out the trust obligation, leaving the parties to determine how to satisfy the portion of the non-member spouse’s entitlement that exceeds the 50 per cent limit.
This points to another problem with “if and when” arrangements; they not only have drawbacks for the parties, but they also impose burdens on those responsible for administering pension plans that are subject to such arrangements. Administrators are effectively required to calculate the value of the non-member spouse’s share in accordance with the PBA regulation to determine whether the agreement or order creates a conflict with the PBA and, if it does, to advise the parties that they are bound to refuse to divide the pension payment in full conformity with what was agreed to or ordered. Other problems faced by administrators include orders and agreements that are unclear or that fail to deal comprehensively with potential issues or that purport to divide benefits in a way that is not consistent with the provisions of the pension plan. Avoiding or correcting these problems is likely to involve interaction with the spouses or their counsel, forcing administrators to expend time and often to incur legal expenses. Further, some “if and when” orders and agreements provide the non-member spouse with a right to continued payments only until a certain aggregate limit is reached, necessitating the setting up of some sort of tracking mechanism that would otherwise not have been needed.
There are several other potential difficulties that have been identified with respect to “if and when” agreements and orders. The non-member spouse’s entitlement to share in the pension payments will, of course, end when the member spouse dies; some suggest that if that occurs prior to retirement, the non-member spouse could end up having received nothing. There is also the risk that other possible future occurrences, such as the winding up of the plan due to failure on the part of the plan sponsor to meet funding requirements, could significantly reduce the amount of pension benefits that both parties had assumed would be available (though payments from the Pension Benefits Guarantee Fund could mitigate the loss to some extent). Finally, there could be taxation issues; if the payments made to the non-member spouse come directly from the member spouse, they will be made from after-tax dollars; while adjustments could be made to reflect this, if the member spouse’s marginal tax rate is higher than that of the non-member, the tax that is paid will be greater than if the payments made to the non-member came directly from the pension plan.
C. Lump Sum Transfer on Termination
Generally speaking, there is under Ontario law at present no ability to effect an immediate transfer of a share of the member’s interest under a pension plan to her spouse in order to achieve a family property settlement following marriage breakdown; currently, where an asset trade is not an option, the parties will usually have to resort to an “if and when” arrangement, with all its drawbacks. However, there is one situation in which such a transfer of a share of the member’s interest to the non-member spouse can be effected — that being where the member’s employment is terminated — because in that situation subsection 51(5) of the PBA gives the non-member spouse rights that parallel those of a member entitled to a deferred pension.
Section 42 of the PBA provides that where the employment of a member of a pension plan 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 the pension fund of another pension plan (if the other plan will accept the transfer) or to a locked-in retirement savings arrangement or to be applied to the purchase of a deferred life annuity. In the case of marriage breakdown, if a domestic contract or court order requiring payment from the member’s pension plan is served on the plan administrator, subsection 51(5) gives the spouse of a member whose employment is terminated the same options that the member has. However, while this does allow for an immediate settlement through transfer of a share of the member’s interest, the availability of this option is obviously quite limited, as it can be accessed only where the employment of the member spouse has been terminated. Further, it may raise concerns for plan administrators, and, with respect to the annuity purchase option, some feel that there is a potential for conflict with section 147.4 of the ITA.
D. Settlement: Proposals for Reform
Obviously, the current situation is unsatisfactory; no one would disagree that it demands reform. But what form should reform take? Ideally, a pension division regime should treat parties to a broken marriage fairly, enable them to make a “clean break”, recognize that pensions are family property, recognize as well that they are a very atypical form of property, meet the social objective of ensuring that individuals have a reasonable income if and when they retire, take account of the view that pensions represent deferred compensation for wage-earners, offer flexibility according to differing needs and circumstances, provide certainty to the parties and contain costs, obviate to the extent possible the need for litigation and minimize financial and other burdens that may be placed on pension plan administrators. These are a diverse set of objectives, raising the possibility that a reform proposal that meets some of them may not meet others.
Among the Canadian jurisdictions that have enacted legislation to divide pensions upon marriage breakdown, a majority have favoured an approach that is usually called the “Immediate Settlement Method” (ISM), whereby there is an immediate (loosely speaking) determination of the non-member spouse’s share of the value of the member’s pension and an immediate transfer of an amount out of the fund of the member’s pension to a locked-in RRSP or other vehicle that will eventually provide a retirement income (in other words, the sort of settlement that is currently possible in Ontario only where the member’s employment is terminated).
Three provinces have adopted an alternative approach, the Deferred Settlement Method (DSM). Under this approach, the non-member spouse becomes a “kind of member” of the member’s pension plan, but actual division of the pension is postponed until some future point (generally, when the pension comes into pay), at which time the non-member spouse receives his share in the form of a separate pension from the plan.
It bears noting that the former OLRC had recommended in its 1995 Report on Pensions as Family Property: Valuation and Division adoption of a “division-at-source” scheme that would have given parties a choice of settlement options that essentially reflected the ISM and DSM approaches; however, the recommendation was not acted upon.
E. The Arguments: ISM v. DSM
Among the reasons offered in support of adopting the ISM approach are the following:
On the other hand, those who favour the DSM argue that
|First Page||Last Page|
|Table of Contents|