A. “Family Property” Definition under the Family Law Act

The LCO has assumed, for purposes of this report, continuation of the main features of the family property provisions of the FLA, including their inapplicability to persons in common law relationships and adherence to the principles that the former spouses share equally in the value of net family property (as opposed to each having a half interest in all items of family property) and that debt cannot reduce a spouse’s net family property below zero. Whether these aspects of family property law should be changed is an issue with implications far beyond pensions and it would be inappropriate to address that issue in the context of this project, which is limited to pensions. Thus, we have looked into the question of whether pensions should continue to be subject to the FLA equalization regime based on the current generic features of that regime.

 

1. Should Pensions Be Taken Out of the Equalization Regime?

In the LCO’s view, removing pensions from the equalization regime could lead to unfairness between spouses who are in the same net asset position. Consider a pension plan member who has debts of $200,000, a pension valued at $150,000 and other assets valued at $50,000 and whose spouse has assets of $10,000 and debts totaling $10,000. If the pension is divided outside the equalization regime, the member would lose half the value of his or her pension to the non-member spouse, even though both parties are in the same position so far as net family property is concerned, whereas if the pension rights are included in the equalization process, he or she would retain the entire pension because his or her net family property would be zero.[62] (This is not to suggest that the non-member spouse, depending on his or her circumstances, may not have a valid claim for support. However, the purpose of Part I of the FLA is to put the spouses in an equal position with respect to family property, not to address support needs. Support is dealt with in Part III of the FLA.)

The LCO also notes that dividing a pension outside the equalization regime may result in the parties having less flexibility in relation to other family property. For example, it is not unusual for a couple to have only two substantial assets, an interest under a pension plan on the part of one spouse and a matrimonial home owned jointly. In such a situation, dividing the pension outside the equalization regime would likely necessitate sale of the matrimonial home, whereas dealing with all family property under the equalization regime may make it more likely that the non-member spouse can keep the matrimonial home if he or she feels that that is preferable to selling it and dividing the proceeds. Finally, the LCO observes that it is difficult to see a policy justification for excluding pensions from the equalization regime when other retirement vehicle assets, such as RRSP’s, are not excluded.

Accordingly, the LCO recommends as follows:

A.1. The interest of a pension plan member whose rights have vested continue to be considered “family property” for purposes of the Family Law Act (FLA) and therefore subject to the FLA equalization regime.

 

2. Should Rights That Have Not Vested Be Treated as Property?

For purposes of calculating a spouse’s “net family property”, the FLA defines “property” as including

…in the case of a spouse’s rights under a pension plan that have vested, the spouse’s interest in the plan….

While some might infer that the reference to vesting means that a right to a pension that has not yet vested is not taken into account in determining the pension plan member’s net family property, the courts have in fact held that the value of such rights is included. Although that may not have been the original intention, the LCO sees no reason not to include unvested rights under a pension plan as “property” for purposes of the equalization regime; while such rights may be contingent, that is not to say that they do not have value.[63] An amendment to the FLA definition to eliminate any implication that rights that have not vested are not included (which could be achieved simply by deleting the words “that have vested”) would be desirable, as it would make the text of the Act consonant with the actual state of the law.

Accordingly, the LCO recommends as follows:

A.2. The FLA be amended to indicate that rights under a pension plan that have not vested are also “family property”.

 

B. Valuation of Rights Under a Defined Benefit Pension Plan

As was discussed above, there are three main methods of pension valuation for family law purposes: the termination method; the retirement method; and the hybrid termination-retirement method (hereinafter referred to as the “hybrid method”). The termination method and the hybrid method both take as a starting point the dollar amount of the pension accrued to the valuation date (generally, the date of separation), that is, without assuming further service and without projection for future salary increases (except in some cases for inflation). However, the hybrid method, unlike the termination method, assumes future service for purposes for rights to ancillary benefits that have not vested at the time of separation because the member has not accrued sufficient service, but that will vest eventually if the member continues in employment. (An example would be a right to take early retirement on an unreduced pension if the member meets a “Factor Ninety” qualification where, at the time of separation, the member’s age and service credits do not yet add up to ninety.) The retirement approach assumes future service for purposes of these rights, but also projects future salary increases, including those not related to inflation, such as those stemming from promotion. The approach in Ontario seems generally to favour the hybrid method (notwithstanding some inconsistency in the terminology used in many of the decisions), but as a matter of law the question cannot be regarded as entirely settled.

The LCO recommends that the FLA be amended to provide that the hybrid method be used in valuing rights under a pension plan for family law purposes. Although some might object that in considering future service for purposes of rights to ancillary benefits such as an unreduced early retirement pension, the hybrid method effectively gives the non-member spouse a share in post-separation increases in the value of the member’s pension, the LCO notes that the accumulation of sufficient service credits to result in the vesting of such rights is in part the result of service credits that were earned during the period of marriage.[64] On the other hand, the retirement method plainly could result in the non-member spouse inappropriately sharing in post-separation increases in value, as is most obvious where the member achieves significant promotions subsequent to the marriage breakdown. While the LCO acknowledges the argument that post-separation career successes may, to some extent at least, have their genesis in decisions taken and roles assumed during the marriage, the retirement method makes no distinctions in that regard, and, moreover, it is far more speculative than either of the other two methods. On balance, the LCO believes that the hybrid approach strikes the fairest balance as between the parties.

Accordingly, the LCO recommends as follows:

B. The FLA be amended to provide that for purposes of valuation, rights under a defined benefit pension plan should be assessed using the hybrid termination-retirement method.

 

C. Settlement: Defined Benefit Pension Not Yet in Pay

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),[65] whereby there is (loosely speaking) an immediate 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 the benefit of the non-member spouse. Three provinces have adopted an alternative approach, the Deferred Settlement Method (DSM),[66] whereby the formula for division of the pension is determined immediately but division is postponed until some future point.

 

1. ISM versus DSM

Among the reasons offered in support of adopting the ISM approach are the following:

  • the ISM provides a “clean break” between the parties;
  • the ISM represents a simple and easy-to-apply approach in comparison to the DSM;
  • the ISM is much less burdensome and costly for pension plans than the DSM;
  • the DSM allows the non-member spouse to share in post-separation increases in the value of the member’s pension.

    On the other hand, those who favour the DSM argue that

  • it is appropriate that the non-member spouse share in post-separation increases in the value of the member’s pension because the ultimate value of a pension is largely paid for by contributions made in the earlier part of the member’s career;
  • with the DSM, it is not necessary to calculate the present value of the member’s pension; thus, the “guesswork” inherent in determining present value – and thus the risk of significantly overvaluing or undervaluing the pension as a result of assumptions that have to be made in order to arrive at a present value – is avoided; and
  • the ISM, as it exists in almost all other Canadian jurisdictions, uses a commuted value approach in valuing the member’s pension entitlements, and hence produces a relatively low value for the transfer out of the fund to the benefit of the non-member spouse.

    In the LCO’s view, many of the arguments made in support of the ISM or DSM overstate the case.

    There is no doubt that the ISM provides a “clean break”, but the DSM does not require the former spouses to continue to have dealings with each other. (Rather, communication would be with the plan administrator, not with each other, although obviously there would continue to be a financial link between the spouses, in that the amount of the non-member’s pension would be a function of the value of the member’s pension when it came into pay.)

    The arguments about post-separation increases in pension value are also overstated, on both sides. Proponents of the DSM who argue that the value of a pension is paid for disproportionately through contributions made in the early part of the member’s career may be correct in that assertion, but this ignores the point that for family law purposes the value of a defined benefit plan pension (unlike that of a defined contribution plan pension) is not a matter of the amount of contributions and the yield on their investment. On the other hand, it is surely incorrect to assert that no part of a member’s post-separation success (and thus the increase in the value of his or her pension) can ever be attributed to what happened during the marriage.

    With respect to the argument that adoption of a DSM approach means that determination of the pension’s present value is rendered unnecessary, the LCO acknowledges that the assumptions used in determining present value will usually mean that the pension will turn out to have been undervalued or overvalued in comparison with what is ultimately paid out. However, we also believe that this ignores the fact that the value of virtually any property, as determined at the separation date, might turn out to be considerably more or less than its value at some future point. While this may cause resentment on the part of one or the other spouse, the risk of its happening is inherent in a regime that requires family property to be valued for equalization purposes.

    The LCO does agree with critics of the ISM that, as implemented in other Canadian jurisdictions, it tends to produce a low value for the pension and is thus unfair to the non-member spouse. It also agrees with critics of the DSM that the DSM is complicated by comparison with the ISM and imposes burdens on pension plan administrators that the ISM does not. This has led us to make a twofold recommendation:

    · the ISM should be the main pension division option, available in all cases of marriage breakdown, but with a proviso that the member’s equalization debt is satisfied only to the extent of the value transferred out of the plan to the benefit of the non-member spouse; and

    · a DSM option should be available on a strictly limited basis, namely,

    o where the member is within ten years of the normal retirement date in the plan and both the me