1. Should Pensions Be Taken Out of the Equalization Regime?
For purposes of this report, the LCO has assumed continuation of the main features of the family property provisions of the FLA, including the exclusion of persons in common law relationships and adherence to the principles that the former spouses are presumed to have made an equal contribution to the assumption of household responsibilities, that on marriage breakdown they should 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.
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 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 would retain the entire pension because his net family property would be zero. (This is not to suggest that the non-member spouse, depending on the 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 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 RRSPs, are not excluded.
Accordingly, the LCO recommends as follows:
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….
As was noted above, while there appears to be some reason to think that the reference to rights under a pension plan that have vested was intended to indicate that unvested rights were not to be taken into account in determining the member spouse’s net family property, the courts have in fact held that the value of such rights is included. Although this holding may be at odds with 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 does not mean that they do not have value. 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:
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 or plan improvements. However, the hybrid method, unlike the termination method, does provide for inflation (where benefits are indexed) and it 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 90” qualification where, at the time of separation, the member’s age and service credits do not yet add up to 90.) 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, as well as enhancements to plan members’ rights that might be made in the future. As was noted above, Ontario courts generally seem 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.
In its 1995 Report, the OLRC argued that the retirement method should be prescribed as the only approach to valuation of rights under a defined benefit pension plan for family law purposes. However, the LCO observes that in doing so, the OLRC seems to have seen the choice as one solely between the termination method and the retirement method; the issuance of the Report appears to have preceded any general recognition of a third way, and it certainly preceded the Bascello case, which demonstrated that most of the judicial decisions that purported to apply the termination method were in fact not actually doing so and were instead using the hybrid method (although the Bascello court did not favour that label). Given that the two aspects of the termination method that might be seen as being particularly unfair to the non-member spouse (namely, the failures to take into account rights to unvested ancillary benefits and to allow for inflation) are not present with the hybrid method, it may well be that the OLRC would have seen that method as the most fitting had the choice been conceived as one between the three alternatives. In any case, the LCO is of the view that the hybrid method is the most appropriate; moreover it recommends that the FLA be amended to provide that it be used in valuing rights under a pension plan for family law purposes, thereby eliminating any lingering uncertainty in this area.
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. 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 it is assumed that there will be improvements to the pension plan or that the member will experience significant promotions subsequent to the marriage breakdown. With respect to the latter, 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. Further, it is far more speculative than either of the other two methods; indeed, in projecting plan improvements and future promotions, the retirement method employs conjecture at a profound level. On balance, the LCO believes that the hybrid approach strikes the fairest balance as between the parties.
Accordingly, the LCO recommends as follows:
3. 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
1. Assessing the Arguments
In the LCO’s view, many of the arguments made in support of or against the ISM or DSM overstate the case.
While there is no doubt that the ISM provides a “clean break”, it is simply incorrect to suggest that the DSM would force the former spouses to continue to have dealings with each other. The DSM model presumes that the non-member spouse becomes a quasi-member of the member’s pension plan; any communication regarding the plan in relation to this would be with the plan administrator — there would be absolutely no need for the former spouses to have contact with each other. Still, it must be acknowledged that with the DSM, the break is not complete. Obviously there would continue to be a financial link between parties, in that the amount of the pension received by the non-member or quasi-member spouse would be a function of the amount of the member’s pension when it came into pay. The link may be a silent one, but it is still a link.
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. (That is why it is the present value method, rather than the contributions method, that is used to assess the worth of the member’s rights.) On the other hand, it is surely incorrect to assert that no part of the post-separation increase in the value of the member’s pension can ever be attributed to the married years. Simply looking at the matter from a mechanical perspective, eligibility to take an unreduced pension would in many cases never have been attained (and certainly not attained as early as it was) had the pensionable service earned during marriage not been counted. And the economic and other contributions made by the non-member spouse to the marital partnership may well have been the foundation on which the member’s post-separation success was built.
One can, of course, devise scenarios in which the member only became an “achiever” after leaving the deadweight of her marriage behind, but one can equally devise other scenarios in which the member would never have become an achiever had it not been for material and other sacrifices made by her former spouse. The reality is that, while there are undoubtedly exceptions, it is likely that in most cases the origin of at least some of the post-separation increase in the value of the member’s pension lies in the period of marriage.
The contention that it would contribute to uniformity of the law if Ontario were to adopt the ISM is not convincing. While the ISM jurisdictions do outnumber the DSM jurisdictions, the fact that three provinces use the DSM obviously means that there is no national consensus in favour of the ISM. Further, there are numerous variations from jurisdiction to jurisdiction in the case of both the ISM and the DSM, and in some cases regimes that might be characterized principally as ISM or DSM offer alternative settlement options that exhibit elements of the other method. Although uniformity is not an irrelevant consideration, the LCO believes that ultimately the choice of solution for Ontario must be based on the intrinsic merits of the contending approaches, and not on a quest for a pan-Canadian template.
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 are also of the view 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 subsequent 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. Some DSM proponents might respond to thi