VI. OPTIONS FOR REFORM

VI. OPTIONS FOR REFORM2017-03-03T18:30:50+00:00
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.

 

 

If pension rights are to continue to be dealt with within the FLA equalization scheme, it would seem highly desirable that the legislation be amended so as to specify how such rights are to be valued. This requires not only that a choice be made as between the termination method and the retirement method (or at least that direction be given as to when one method rather than the other should be used); it also requires that the statute (or regulations made under it) be quite explicit and detailed in describing the method, given that there is some degree of ambiguity about these terms. If pension rights are to be kept within the equalization regime, the inadequacy of the current array of settlement options should also be addressed. In that regard, Ontario might look to the “Immediate Settlement Method” (“ISM”) that has been adopted by several other provinces.[45] Under the ISM, the non-member spouse’s equalization entitlement would be satisfied by an immediate transfer from the member spouse’s accrued pension; the transfer, however, would not be directly to the non-member spouse, but rather to some sort of vehicle for funding eventual retirement, such as a locked-in RRSP, another pension plan (if the other plan is willing to accept the transfer) or a deferred annuity.

 

 

An alternative model for reform might be to remove pension rights from the FLA equalization scheme and instead divide a member spouse’s pension separately from other family property. Again, the ISM could be used; as a settlement method, it need not be tied to the equalization regime. However, excluding pensions from the FLA equalization provisions would also open the possibility of using an alternative approach, the Deferred Settlement Method (“DSM”),[46] which has found favour in three provinces.[47] Under the DSM, the non-member spouse becomes a “kind of member”[48] of the pension plan, eligible to receive his or her own lifetime pension commencing, in the most straightforward case, when the member spouse retires. The non-member spouse’s share of the total pension benefit (i.e., the amount that would be payable to the member in the absence of division) would be equal to half of the quotient obtained when the number of years of pensionable service during marriage is divided by the total number of years of pensionable service. In this situation, actual valuation would not be required; the DSM essentially reproduces the result that is achieved under an “if and when” settlement based on a time ratio, except that the stream of benefits payable to the non-member spouse does not end if the member spouse predeceases him or her.[49] However, under some DSM models, the non-member spouse could elect to commence receiving his or her pension at some point other than retirement of the member spouse, or could elect to have a lump sum transferred to a locked-in vehicle instead of taking a pension from the member spouse’s plan; where such an option was selected, valuation would still be required, albeit (in most cases other than lump sum transfers) at a later date than under the ISM.

 

 

On their face, both the ISM and the DSM enable spouses to cease to have dealings with each other, but otherwise they represent quite different solutions to the problems that exist under the current law. The ISM generally uses a strict termination method of valuation, which some critics argue is unfair to the non-member spouse and may result in a windfall to the pension plan; some ISM advocates, however, suggest that the termination method could be somewhat modified to produce a fairer result (while also asserting that whatever particular valuation approach is used, the same approach should be used for purposes of the fifty per cent rule under the PBA).[50] Undoubtedly, the ISM is clear and certain and “clean”; however, the need for an immediate valuation, possibly taking place many years before the pension comes into pay, means that there will continue to be discrepancies, possibly quite substantial, between what the pension is valued at and what the pension ultimately proves to be worth. That problem is much reduced in the case of the DSM, because valuation, where it is required, generally would occur at a later date than under the ISM. Where the non-member spouse does not take a benefit until the member spouse retires, the problem is eliminated completely; in that case, obviously, the non-member spouse also has the advantage of being a member of the pension plan, which many individuals may prefer to having to make their own investment decisions. On the other hand, critics of the DSM argue that it allows the non-member spouse to share in the increase in value of the pension that accrues after marriage breakdown;[51] clearly it also imposes burdens on pension plan administrators that they would not have under the ISM, as they would have to administer two pensions instead of one.[52]

 

 

As was noted at the beginning of this section of the paper, a pension division regime should, ideally, satisfy a number of diverse objectives. It would seem that the ISM may do a better job of meeting some of those objectives than the DSM, while the DSM may do a better job of meeting others. The reform approach one favours likely depends on what one sees as the relative importance of the various objectives and on where one thinks trade-offs should be made when those objectives seem to point in opposite policy directions.

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